-----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, Qf8/WETqwI7YRBsaGGrwCzo583IRWXq9gxhccDjTyzrT8cX3oYWI9FRoMdTkc8j/ qgBgOLUu4iSENdXj1tcSmQ== /in/edgar/work/20000912/0000950147-00-001421/0000950147-00-001421.txt : 20000922 0000950147-00-001421.hdr.sgml : 20000922 ACCESSION NUMBER: 0000950147-00-001421 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000912 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRONTIER ADJUSTERS OF AMERICA INC CENTRAL INDEX KEY: 0000735349 STANDARD INDUSTRIAL CLASSIFICATION: [6794 ] IRS NUMBER: 860477573 STATE OF INCORPORATION: AZ FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12902 FILM NUMBER: 721383 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-K 1 0001.txt ANNUAL REPORT FOR THE FISCAL YEAR ENDED 6/30/2000 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 1-12902 FRONTIER ADJUSTERS OF AMERICA, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) ARIZONA 86-0477573 ------------------------------- ---------------------- (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 45 East Monterey Way Phoenix, Arizona 85012 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (602) 264-1061 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange On Which Registered ------------------- ----------------------------------------- Common Stock $.01 Par Value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant was $10,587,694 as of September 5, 2000. The number of shares outstanding of the registrant's Common Stock, $.01 par value, as of September 5, 2000, was 8,957,660. PART I ITEM 1 - BUSINESS THE COMPANY Frontier Adjusters of America, Inc., an Arizona corporation (together with its subsidiaries, the "Company"), licenses and franchises independent insurance adjusters (the independent insurance adjusters licensed or franchised by the Company are hereinafter referred to collectively as the "Adjusters") throughout the United States and in Canada and provides support services to the Adjusters. The Adjusters are engaged by insurance carriers and self-insured companies to adjust claims made against them by claimants and by policyholders. In addition, the Company, and certain of the Adjusters, offer risk management services to their clients. As of June 30, 2000, the Company had entered into 499 license and franchise agreements ("Agreements") with 394 entities, operating 382 offices with 672 advertised locations in 50 states, the District of Columbia and Canada. In addition to licensing and franchising Adjusters, the Company owns and operates independent insurance adjusting and risk management businesses in Arizona and Nevada. As of June 30, 2000, the Company employed 34 people: 32 full-time and two part-time. Nine employees provided adjusting services full-time, one employee provided adjusting services part-time, two were full-time officers of the Company, 24 were full- time administrative staff, and one employee provided part-time administrative support. Management believes that its relations with its employees are good. In March of 2000, the Company's board of directors agreed in principle to enter into a transaction (the "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"). Upon consummation of the proposed Transaction, the Company will merge with UFAC and will become the parent of UFAC's two subsidiaries, JW Software, Inc. ("JW") and DBG Technologies, Inc. ("DBG"). In May 2000, JW acquired 100% of the stock of Vedder Software Group, Inc. ("Vedder"). Vedder will therefore be included in the Transaction. The Transaction will be accounted for in a manner similar 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, DBG develops and markets internet-based systems and websites, and Vedder develops property estimating software and tools. 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 Transaction is consummated, Netrex will own approximately 16.4 million shares of the Company's stock, representing approximately 82% of the Company's outstanding common stock. The Transaction is subject to the approval of certain regulatory agencies and the American Stock Exchange, the stock exchange on which the Company's shares are currently traded, as well as the approval by shareholders of the Company and UFAC. In connection with this Transaction, the Company is proposing to change its name to "Netrex Business Services, Inc.". The Company will, however, continue to operate the franchised and licensed claims adjusting business under the Frontier name even if the Transaction is consummated and the name change effected. GENERAL For its fiscal year ended June 30, 2000, the Company's licensing and franchising activities accounted for approximately 83% of gross revenue, and the Company's adjusting and risk management businesses accounted for approximately 17% of gross revenue. For the fiscal years ended June 30, 1999 and June 30, 1998, the Company's licensing and franchising activities accounted for approximately 78% and 79%, respectively, of gross revenue, and the Company's adjusting and risk management businesses accounted for approximately 22% and 21%, respectively, of gross revenue. The revenue derived from the Company's operations, as well as the gross billings by Adjusters (upon which the Company's revenue from licensing and franchising activities are based), are set forth in the following table: Page 2 GENERAL (CONTINUED) FISCAL YEAR ENDED JUNE 30, --------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Gross billings by Adjusters $45,810,000 $44,730,000 $42,050,000 (approximate) Revenue from licensing and franchising activities 5,170,592 4,936,349 4,596,657 Revenue from Company-owned adjusting and risk management businesses 1,086,304 1,405,235 1,228,691 For its fiscal year ended June 30, 2000, the Company's licensing and franchising activities accounted for approximately $2,372,000 in income from operations and the Company's adjusting and risk management businesses accounted for approximately $88,000 in income from operations. For the fiscal years ended June 30, 1999 and June 30, 1998, the Company's licensing and franchising activities accounted for approximately $1,051,000 and $1,152,000 respectively, in income from operations, and the Company's adjusting and risk management businesses accounted for approximately $221,000 and $106,000, respectively, in income from operations. CLAIMS ADJUSTING A claims adjuster conducts the business of providing claims adjustment services to insurance companies and to self-insured clients. The major elements of claims adjusting consist of the following: 1. Investigation - the development of information necessary to determine the cause and origin of the loss. 2. Evaluation - the determination of the extent and value of damage incurred and the coverage, liability, and compensability relating to the parties involved. 3. Disposition - the resolution of the claim, whether by payment, negotiation and settlement, by denial, or by other resolution. 4. Management - the coordination of all parties involved in the claims process and the supervision of the claims process including risk management related services. Insurance companies, which represent the major source of revenue to adjusters, customarily manage their own claims management function, and require defined services from adjusters, such as field investigation and settlement services. Self-insured clients typically require a range of risk management services including claims adjustment, claims management, statistical reporting, and loss control, among other services. Insurance companies usually make claims adjusting assignments on a claim by claim basis. Self-insured clients typically retain adjusting firms like the Company and the Adjusters to handle all of their claims, such as workers compensation, general liability claims, and other claims. Neither the Company nor any of the Adjusters engages in public adjusting, which consists of representing individual insureds with respect to their claims against insurance companies. Risk management related services consist primarily of providing services to in-house risk managers of self-insureds whose internal resources do not include expertise in claims adjusting or other aspects of claims management. Risk management services, which are often referred to in the industry as "third party Page 3 CLAIMS ADJUSTING (CONTINUED) administration" include administering claims, working with self-insurers to decide whether certain claims need external investigation, coordinating the efforts of the field investigation with internal claims review activities, generating necessary statistical reports, and paying losses. The insurance companies responsible for the excess coverage of self-insured clients often play a significant role in the selection and retention of providers of risk management or third party administration and related services. LICENSING AND FRANCHISING The major part of the Company's revenue is derived under its license and franchise agreements (the "Agreements") with the Adjusters. Pursuant to the terms of the Agreements, an Adjuster is authorized to use, within a designated geographic area, the Company's service mark in providing adjusting and risk management-related services. In addition, an Adjuster is provided with a computerized central collection and rebilling service and national advertising and referrals by the Company. The Company receives a 10% or 15% royalty fee on all of the Adjusters' collections depending upon the Agreement with the Adjuster. In fiscal 2000, the Company retained 10.7% of the Adjusters' collections as royalty fees under the Agreements. The Company generally does not advertise for or solicit potential licensees or franchisees. The Company believes that through the financial flexibility it offers and the established and dependable services it provides to Adjusters, the Company is generally capable of attracting qualified licensees and franchisees. The philosophy of the Company is to enter into Agreements with licensees and franchisees who are highly qualified and capable of adjusting all types of claims. The Company estimates that the average length of time during which the Adjusters have been providing insurance adjusting services, on a Company-wide basis, is approximately 20 years. Before entering into an Agreement with a prospective licensee or franchisee, the Company reviews the prospective licensees' or franchisee's background in order to determine that he or she is qualified and capable of rendering professional insurance adjusting services. In evaluating a potential licensee or franchisee, the Company considers the length of time the potential licensee or franchisee has been involved in insurance adjusting and such other factors as his or her (i) experience and the types of claims that he or she is capable of adjusting; (ii) ability to act independently without supervision by the Company; (iii) prior and current associations in the insurance adjusting business and (iv) reputation in the insurance adjusting business and in the community in which he or she will provide insurance adjusting services. OPERATION OF INDEPENDENT ADJUSTERS Each Adjuster is required to maintain an office within a designated geographic area defined in his or her Agreement. The Agreements require, among other things, that Adjusters devote at least 80% of their time during any 45 day period to the conduct of the defined business. The Agreements are subject to termination by the Company upon an Adjuster's failure to meet minimum gross billing volumes. The Adjusters retain the right to make independent decisions regarding the management and operation of their businesses, subject to the terms of the license or franchise agreements. The Company has a national advertising program in major trade journals. The advertising is designed to promote the Company's operations and to generate new accounts for its licensees and franchisees. Adjusters receive claims from both local referrals developed by the Adjusters and from referrals by the Company. The latter referrals are generally obtained through advertising efforts, national account marketing programs and the general reputation of the Company. In addition, Adjusters are permitted, but not required, to advertise within their designated geographic areas. Upon providing services to a client, the Adjuster prepares a bill to the client for the Adjuster's services. The form of invoice, which is supplied by the Company, indicates that remittance is to be made directly to the Company's address. Upon receipt of payment from the client, the Company withholds the royalty fee together with any reimbursements due to the Company for liability and errors and omissions insurance premiums the Company may have paid on behalf of the Adjuster and repayments for any credits, loans, or advances the Company may have made to the Adjuster. The Company rebills uncollected invoices on a 45-60 day cycle. The Company's arrangements with Adjusters located in Canada differ from the foregoing in that clients of Canadian Adjusters send their remittances to the Company's Canadian P. O. Box or to the Company's franchisee in Regina, Saskatchewan, Canada. Remittances received by the Company's franchisee are deposited by the franchisee directly into the Company's bank account. Page 4 OPERATION OF INDEPENDENT ADJUSTERS - CONTINUED If a particular geographic area produces claims volume greater than the Adjuster in that area is capable of servicing, the Adjuster may, at the request of the Company, or at the suggestion of the Adjuster, relinquish to a new prospective licensee or franchisee a portion of the designated area covered by his or her Agreement. As a result of these arrangements, the Company redirects to the relinquishing Adjuster 5% of collections derived from services provided by the new Adjuster. To assist new Adjusters in meeting their business and personal expenses during their initial period as Adjusters, the Company may advance funds to them against future billings. Typically such advances are made semi-monthly and average approximately $2,500 per month. The number of Adjusters to whom semi-monthly advances are made typically varies between 1 and 5. The Company believes that these arrangements provide new Adjusters assistance in making the transition from being employees of insurance companies or other adjusting firms to becoming the owners of their own businesses and, therefore, aid the Company in attracting qualified individuals as Adjusters. In addition to advancing funds to new Adjusters, the Company frequently lends money to Adjusters. These loans may either be loans that are repaid on a weekly basis out of their collections, or advances against accounts receivable. The Company generally requires that advances against receivables be repaid in full within 45 days. The Company does not charge interest on any loans or advances made to Adjusters. During the past four fiscal years, the Company has loaned or advanced an average aggregate of $331,836 per month and has received reimbursement of an average of $322,425 per month. At June 30, 2000, the Company had approximately $1,198,000 in outstanding loans or advances. During the past four fiscal years, the Company has written off an average of $147,554 per year due to bad debts related to these arrangements. LICENSE AND FRANCHISE AGREEMENTS The current forms of license and franchise agreements used by the Company are largely identical except that the form of license agreement refers to the Adjuster as a licensee, and the form of the franchise agreement refers to the Adjuster as a franchisee. The difference between the licensee and franchisee characterizations is primarily historical, dating from the period when the Company's arrangements with Adjusters did not constitute a "franchise" under the United States Federal Trade Commission's rules as they now do. If the arrangement was subject to state franchise laws, the Adjuster was referred to as a franchisee; if not, the Adjuster was referred to as a licensee. The Company currently distinguishes between licensees and franchisees in the same manner. The franchise and other laws of certain states limit or prohibit the enforceability of covenants not to compete and require or prohibit other types of provisions contained in franchise agreements. Accordingly, certain of the provisions contained in the Agreement, including, among others, the covenant not to compete, may not be enforceable under certain circumstances. The forms of Agreement currently in effect between the Company and the Adjusters do not necessarily contain all of the terms in the manner disclosed below. For example, the risk management provisions, the indemnity provisions, certain of the termination provisions, and the minimum gross billings provisions discussed below, may have been excluded or revised in some of the forms of Agreement currently in effect. Pursuant to the Agreement, the Adjuster is entitled, and obligated, to use the Frontier service mark in connection with the conduct of the Adjuster's claims adjusting business and risk management-related services. The current form of Agreement provides that the Adjuster may participate in the risk management business. If the Adjuster declines to participate in the risk management business, the Adjuster is required to consent to the handling of such matters in the Adjuster's territory by other Adjusters or by the Company. The Agreement provides that each Adjuster is an independent contractor. Accordingly, each Adjuster has virtually complete control over all matters involving discretion and judgement in the operation of the Adjuster's business. However, before instituting any legal action against any client, the Adjuster must obtain the Company's consent. In addition, the Company has the discretionary right to investigate, settle, and satisfy any billing dispute with any clients of the Adjuster. The Agreement requires the Adjuster to devote at least 80% of his or her time during any 45 day period to the operation of the business and prohibits the Adjuster from accepting any employment for compensation from any person. The Agreement sets forth a minimum performance standard. The current form of Page 5 LICENSE AND FRANCHISE AGREEMENTS (CONTINUED) Agreement provides that if at any time after the first three months of the Agreement, the Adjuster's gross billings are less than $4,000 for any three-month period, then either party will have the right to terminate the Agreement. Pursuant to the Agreement, the Adjuster is required to pay to the Company a royalty fee equal to 10% or 15% of the Adjuster's collections. The Adjuster is required to prepare initial billings to his or her clients and to send a copy of each invoice to the Company. Each invoice states that the payment is to be made to the Company with the exception of payments by clients of certain Canadian franchisees where payment is made through a Canadian franchisee. After the Company deducts its royalty fee from the Adjuster's collections, the Company remits the balance to the Adjuster on a weekly basis. In addition to deducting its royalty fee, the Company also deducts from the amounts remitted to the Adjuster, the Adjuster's general liability and errors and omissions insurance premiums, and the periodic repayment of credits, loans, and advances. If a particular geographic area produces claims volume greater than the Adjuster in the area is capable of servicing, the Adjuster may, at the request of the Company, or at the suggestion of the Adjuster, relinquish to a new prospective licensee or franchisee a portion of the designated area covered by his or her Agreement. In such case, the relinquishing Adjuster will receive 5% of collections derived from services provided by the new Adjuster. The Adjuster is required to reimburse the Company for the premiums and other costs and expenses necessary to keep in force an errors and omissions insurance policy. The Agreement also requires the Adjuster to hold the Company harmless from, and to indemnify the Company for, any acts of the Adjuster. This indemnification includes paying the errors and omissions deductible or any other amounts that the Company is obligated to pay on an errors and omissions claim arising out of a transaction handled by the Adjuster. The Agreement contains a covenant not to compete. This clause provides that during the term of the Agreement the Adjuster will not participate nor accept employment with any business that is engaged in services that could be or are in competition with the Company. In addition, the Agreement provides that upon a termination of the Agreement, for any reason, the Adjuster may not, within the two year period after termination, compete with the Company or any of the other Adjusters within the territory assigned to the Adjuster or within a 100-mile radius of that territory. The Agreement provides that an Adjuster may not sell or transfer his or her interest in the license or franchise without first receiving the consent of the Company, which consent may not be unreasonably withheld. In addition, the Company has a right of first refusal to purchase the Adjuster's interest in the license or franchise in connection with any intended transfer to a third party. The term of the Agreement is generally ten years, with a ten-year renewal option exercisable by the Adjuster. The form of the renewal agreement will generally be the form of the Agreement being used by the Company at the time of renewal. The Adjuster may terminate the Agreement upon 30 days' prior written notice to the Company. The Company may terminate the Agreement upon the occurrence of, among other things, any of the following: the voluntary abandonment of the business by the Adjuster, the conviction of the Adjuster for certain offenses, the failure of the Adjuster to cure a default under the Agreement, any action that materially impairs the goodwill associated with the Company's service mark, and the failure to meet performance goals. In addition, the Company may terminate the Agreement for good cause, which includes, among other things, the bankruptcy or insolvency of the Adjuster, a lack of response on the telephone, and a failure to pick up the mail by the Adjuster for a period of 12 days. Other actions by the Adjuster that would entitle the Company to terminate the Agreement include the Adjuster's failure to provide the Company with copies of invoices for services performed by the Adjuster, the failure to instruct a customer to make payments to the Company, and the failure to keep and maintain a telephone listing and service. COMPANY-OWNED INSURANCE ADJUSTING BUSINESS In addition to its operations as a licensor and franchisor, the Company conducts independent insurance adjusting and risk management operations in Arizona and Nevada. Page 6 SPECIAL CONSIDERATIONS The following factors, in addition to those discussed elsewhere in this report, should be carefully considered in evaluating the Company and its business. THE INSURANCE ADJUSTING BUSINESS The insurance adjusting business is dependent upon the volume of claims that require adjusting services. Several factors, including, among others, the weather and the incidence of natural and manmade disasters, will impact the number of claims that require adjusting services. In addition, the Company is dependent upon its clients to direct their insurance adjusting business to the Company and the Adjusters. If a significant number of the Company's and the Adjusters' clients, which generally consist of insurance companies and self-insured companies, adopt a policy and practice of establishing in-house adjusting departments, or increasing the existing staffing of their in-house adjusting departments, the Company could be materially adversely affected. See "Special Considerations - Uncertainty of Future Revenue". Further, the insurance adjusting business is highly competitive. See "Special Considerations - Competition" and Item 1, "Business - General". UNCERTAINTY OF FUTURE REVENUE The Company's future revenue and net income depends primarily upon the maintenance or increase in the average revenue realized by the Adjusters and the maintenance or increase in the number of Adjusters. As in any business, there can be no assurance that the Company or the Adjusters will maintain or increase their revenue. Further, although the client base of the Adjusters has historically continued to expand, there can be no assurance that it will continue to do so or that the Adjusters will retain such companies as clients. See "Special Consideration - The Insurance Adjusting Business", "Special Considerations - Competition", "Special Considerations - Dependence Upon Significant Clients", and Item 1, "Business - General". Further, although the number of licensees and franchisees has continued to increase in recent years, the Company does not actively solicit new Adjusters. The Company's plan is to continue to add qualified insurance Adjusters as licensees and franchisees. The Company's ability to increase the number of Adjusters will depend upon its continued ability to attract and retain qualified insurance Adjusters as licensees and franchisees. See "Special Considerations - Competition". DEPENDENCE UPON KEY PERSONNEL In April 1999, the Board of Directors appointed Jeffrey C. Jordan of Netrex, age 44, as Vice President of the Company. In August 1999, the Board of Directors appointed Troy M. Huth of Netrex, age 40, as President and, in January 2000, CEO of the Company. Mr. Jordan is located in the Company's home office and manages the daily operations of the Company, whereas Mr. Huth is located at the UFAC corporate office in Cleveland, Ohio, and oversees the direction of the Company. Pursuant to an agreement with UFAC, the Company also receives certain managerial, marketing, financial, technological, and other services provided by UFAC. Should the Company lose the services of Mr. Jordan and/or UFAC, the Company would be materially adversely affected. VOTING CONTROL The directors and officers of the Company own in excess of 9% of the outstanding voting stock of the Company. UFAC's ownership constitutes 58.7% of the Company's outstanding voting stock. The Company anticipates that UFAC's ownership will enable UFAC, and therefore Netrex, to control the business and affairs of the Company. If the Transaction is consummated, Netrex will continue to be able to elect a majority of the Board of Directors, and therefore, will be able to continue to control the affairs of the Company. DEPENDENCE UPON SIGNIFICANT CLIENTS The Company generally considers its client base broad and well-diversified, and does not have any clients that generate 10% or more of consolidated revenue. To avoid dependence on any one client, the Company continues to develop and implement sales and marketing efforts to take advantage of its broad geographic coverage as well as the unique strengths of its individual licensees and franchisees. There is no assurance, however, that the Company will be successful in procuring nationwide accounts on terms as favorable as it has in the past or will be the successful bidder on new or renewing accounts. Failure to procure or maintain such accounts may have a material adverse affect on the Company's business. See "Special Considerations - Competition". Page 7 SERVICE MARK The Company has been granted a service mark for the name Frontier(R) by the United States Patent and Trademark Office. If the Company is not able to effectively protect itself against the use of similar trade names, trademarks or service marks, or if the Company's use of its service mark is found to infringe upon the proprietary rights of third parties, the Company's business could be materially adversely affected. Recently, it has come to the Company's attention that another entity in the insurance industry has been granted registration by the United States Patent and Trademark Office of a service mark for the name "Frontier." The Company continues to monitor and evaluate this matter. If it is determined that action should be taken to protect its service mark, but the Company fails to take such action, or such action is not successful, the Company's business could be materially adversely affected. TORT LIABILITY AND INSURANCE The Company and the Adjusters may be the subject of litigation based on errors and omissions of their respective Adjusters. Historically, clients of the Adjusters and others have also sued the Company in connection with such claims against the Adjusters. Generally, the Company has successfully defended such claims based upon the fact that the Adjusters are independent contractors of the Company, for whose conduct the Company is not liable. Further, although the Company and the Adjusters maintain insurance (in the amounts of $5,000,000 and $1,000,000, respectively) to minimize their exposure to related losses, it may become increasingly difficult or costly to maintain insurance against these and other risks. In such event, the Company's operations could be adversely affected. Costs of insurance may escalate beyond those anticipated, or certain types of losses may be uninsurable or may exceed available coverage. In particular, claims against the Company and the Adjusters may be based upon an insured's claim that the insurance adjusting operations of the Company and/or the Adjusters contributed to a client's "bad faith" in processing a claim. Any punitive or multiple damages arising from any such claim, and any compensatory damages exceeding the coverage limitations, would be excluded from coverage under the insurance policy maintained for the benefit of the Company and the Adjusters, and, therefore, could adversely affect the financial condition of the Company. In June 1999, a client of a former franchisee filed a complaint against multiple defendants, including the Company, alleging losses of at least $1,800,000. See "Item 3 - Legal Proceedings". ABILITY TO RELY UPON LICENSE AND FRANCHISE AGREEMENTS The license and franchise agreements currently in effect between the Company and the Adjusters may be terminated by the Adjusters at any time upon a thirty (30) day prior written notice to the Company. Further, franchise and other laws of certain states limit or prohibit the enforceability of certain provisions contained in the license and franchise agreements, including the covenant not to compete. See Item 1, "Business - License and Franchise Agreements". GOVERNMENT REGULATION FRANCHISING The Company is subject to various federal, state, provincial, and local laws affecting its business. The Company's licensing and franchising business involves the sale of a franchise under the United States Federal Trade Commission's rules and the laws and regulations of certain states. Many states have adopted laws regulating franchise operations in a franchisor-franchisee relationship, and similar legislation may be adopted in the remaining states or provinces. Existing laws range from filing and disclosure requirements in the offer and sale of franchises to the application of statutory standards regulating the franchisor- franchisee relationship. The most common provisions of these laws that regulate substantive matters in the franchisor relationship establish restrictions on the ability of franchisors to terminate or to refuse to renew franchise agreements. Other laws contain provisions designed to ensure the fairness of the franchise agreements to franchisees. A number of these laws include prohibitions or restrictions pertaining to the assignability of the rights of franchisees, franchisee ownership of interests in other businesses, and franchisee membership in trade associations. In addition, decisions of several states limit or prohibit the enforceability of covenants not to compete. Accordingly, certain of the provisions contained in the Company's license and franchise agreements may not be enforceable under certain circumstances. Further, the disclosure statements and franchise agreements in connection with future franchisees may be subject to review by state administrators who may require the Company to make certain changes and accommodations in the way it does business with its franchisees that the Company would not otherwise make. There can be no assurance that the Company will be able to obtain necessary regulatory approvals on a timely basis. Delay in obtaining or failure to obtain such approvals could adversely affect the growth of the Company's franchising operations. Historically, however, the Company has not experienced significant delays in obtaining such approvals. Page 8 FRANCHISING (CONTINUED) As the law applicable to franchise operations and relationships is a rapidly developing one, the Company is unable to predict the effect on its operations of additional requirements or restrictions which may be enacted or promulgated or of court decisions which may adversely affect the franchise industry generally. INSURANCE ADJUSTING The laws and regulations of several states require that insurance adjusters be licensed and/or comply with certain substantive requirements with respect to their operations. Additional requirements that may be enacted or promulgated could impact the conduct of the insurance adjusting business by the Company and the Adjusters. Any such additional requirements may have materially adverse financial or other consequences and adversely affect the growth of the Company's franchising and insurance adjusting operations. COMPETITION The insurance adjusting business in which the Company is engaged, both indirectly as a licensor and franchisor and directly as an insurance adjuster, is highly competitive. The Company competes with insurance companies and with other independent insurance adjusting companies for qualified adjusters to become licensees and franchisees. In addition, through the Adjusters and the Company-owned adjusting businesses, the Company competes as a provider of insurance adjusting services with other insurance adjusting companies and with in-house insurance adjusting staffs. See "Special Considerations - Uncertainty of Future Revenue", "Special Considerations - The Insurance Adjusting Business", and "Special Considerations - Dependence Upon Significant Clients". DIVIDENDS From the third quarter of the Company's 1985 fiscal year through September 1998, the Company paid quarterly dividends with respect to shares of Common Stock. Declaration and payment of dividends are subject to the discretion of the Company's board of directors and may be made only from funds legally available therefor. Payment of quarterly dividends was suspended during the last three quarters of fiscal 1999, until the board declared a cash distribution of $1.60 per share payable to the holders of the rights to the distribution on July 12, 1999, to shareholders of record on June 25, 1999. The Company intends to retain its earnings to finance development, expansion and growth of its business. Consequently, the Board of Directors does not currently anticipate the payment of any dividends to the Company's shareholders in the foreseeable future. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain statements and information contained in this Report under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and Item 1, "Business" concerning future, proposed, and anticipated activities of the Company, certain trends with respect to the Company's operating results, capital resources and liquidity, or with respect to the insurance adjusting industry in general, and other statements contained in this Report regarding matters that are not historical facts, are forward-looking statements, and by their very nature, include risks and uncertainties. Accordingly, actual results may differ, perhaps materially, from those expressed in or implied by such forward-looking statements. Factors that could cause actual results to differ materially include the foregoing and those discussed elsewhere under this Item 1, "Special Considerations". ITEM 2 - PROPERTIES The Company owns the office building and property located at 45 East Monterey Way, Phoenix, Arizona, where it conducts its licensing and franchising operations and its Phoenix claims adjusting and risk management-related services business. The office building currently contains approximately 13,000 square feet of office space. Adjacent to the main office, the Company also owns a small building and property at 51 East Monterey Way which contains two offices. Both offices are currently being used for storage. The combined offices contain approximately 1,500 square feet of office space. The Company also owns a parcel of real property across the street from the Company's principal executive office, which is utilized for employee parking. Additionally, the Company leases approximately 800 square feet of office space in Tucson, Arizona and 1,000 square feet in Las Vegas, Nevada for its claims adjusting offices in that city. As the Company sold it's Tucson, Arizona adjusting office in January 2000, the Company no longer uses the office leased there and is currently attempting to sublease it. Management believes the facilities owned and leased by the Company are adequate for its current and foreseeable future operations. Page 9 ITEM 3 - 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 the former licensee. 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 affect on the Company. The Company has sought coverage under various insurance policies it holds and has received denials of coverage from the carriers. The Company is continuing to attempt to obtain coverage and defense from these carriers. As of June 30, 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 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 4 - SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS Matters were submitted to a vote of securities holders during the third quarter of this fiscal year. Such matters were reported on the Company's Form 10-Q for the period ended March 31, 2000. No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. Page 10 PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDERS MATTERS The Company's Common Stock is listed on the American Stock Exchange (AMEX) under the symbol "FAJ". The following table sets forth the range of high and low prices, and the trading volume, during each quarterly period within the Company's two most recent fiscal years. PRICE ------------------ HIGH LOW VOLUME ------ ------ ------- Fiscal Year Ended June 30, 2000 First Quarter $3.250 $1.500 308,800 Second Quarter 2.125 1.000 370,900 Third Quarter 4.500 1.250 397,600 Fourth Quarter 4.000 2.500 240,500 Fiscal Year Ended June 30, 1999 First Quarter $3.375 $2.375 260,900 Second Quarter 2.563 2.000 254,200 Third Quarter 2.750 2.375 240,800 Fourth Quarter 4.375 2.375 354,400 The following shows per share cash dividends declared for each quarter during the Company's two most recent fiscal years. CASH DIVIDENDS DECLARED ----------------------- Fiscal Year Ended June 30, 2000 First Quarter......................................... $ .0000 Second Quarter........................................ .0000 Third Quarter......................................... .0000 Fourth Quarter........................................ .0000 Fiscal Year Ended June 30, 1999 First Quarter......................................... $ .0375 Second Quarter........................................ .0000 Third Quarter......................................... .0000 Fourth Quarter........................................ 1.6000 As of June 30, 2000, there were 220 shareholders of record (approximately 1,020 including beneficial owners) of the Company's Common Stock. The Company intends to retain its earnings to finance development, expansion and growth of its business. Consequently, the Board of Directors does not currently anticipate the payment of any dividends to the Company's shareholders in the foreseeable future. Page 11 ITEM 6 - SELECTED FINANCIAL DATA
YEAR ENDED JUNE 30 ------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- INCOME STATEMENT DATA Operating revenue $ 6,256,896 $ 6,341,584 $ 5,825,348 $ 6,164,603 $ 5,641,984 Net income 1,240,369 546,452 612,475 979,198 1,134,519 Basic earnings per share .14 .12 .13 .21 .25 Diluted earnings per share .14 .12 .13 .21 .25 Weighted average number of shares used in per share data: Basic 8,957,586 4,569,049 4,605,358 4,607,709 4,620,101 Diluted 8,957,586 4,570,113 4,612,674 4,631,898 4,627,606 Cash dividends per share $ -- $ 1.638 $ .15 $ .15 $ .14 BALANCE SHEET DATA Working capital $ 3,533,324 $ 2,073,511 $ 3,214,489 $ 3,261,953 $ 3,196,562 Total assets 6,720,093 12,118,984 7,800,700 7,912,139 6,875,752 Long-term debt -- -- 4,953 33,462 59,983 Property and equipment, net 1,622,389 1,608,936 1,724,329 1,736,226 1,554,401 Stockholders' equity 6,300,340 5,053,633 6,452,241 6,564,193 6,230,799 Book value per common share .70 .56 1.40 1.43 1.35 Retained earnings 4,263,100 3,022,731 4,735,935 4,814,266 4,526,419 Total shares outstanding 8,957,660 8,957,560 4,605,358 4,605,358 4,619,658
Page 12 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION In fiscal 2000, the Company's continuing operations generated $1,067,000 in cash, which was sufficient for the Company's cash requirements. The most significant items affecting cash generated by the Company's operations are net income of $1,240,000, a $437,000 decrease in franchisee and licensee remittance payable, a decrease of $266,000 in salaries payable and related benefits, and the bad debt expense of $312,000. 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 premiums. 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 June 30, 2000 fell one day after the collections were remitted to licensees and franchisees, the Company's remittance payable was $116,000. In comparison, the Company's financial statements as of June 30, 1999, reflect collections for four days of $553,000. The decrease in salaries payable and related benefits results from the payout of employee benefits and bonuses during the first quarter of fiscal 2000. The bad debt expense relates to the reserves for aged larger balance loans given to franchisees and licensees. For the fiscal year ended June 30, 2000, the Company's investing activities generated $85,000 in cash. The most significant items affecting cash generated from investing activities are $3,498,000 given as advances or loans to licensees and franchisees, $3,701,000 in collections on advances or loans given to licensees and franchisees, $172,000 in capital expenditures, and $51,000 received on a called bond held by the Company. For the fiscal year ended June 30, 2000, the Company's financing activities used $5,918,000 in cash. The most significant item affecting cash used in financing activities is the $5,918,000 dividend declared in fiscal 1999 but not paid until the first quarter of fiscal 2000. This dividend was a one-time $1.60 per share dividend in conjunction with UFAC's purchase of 5,258,513 of the Company's shares in April of 1999. Without giving effect to the operations added as a result of the proposed Transaction with UFAC, the Company anticipates that during fiscal 2001 its operations will generate sufficient cash to fund its operations and equipment acquisitions. The Company projects that its capital expenditures for equipment will be approximately $200,000 to $300,000 in fiscal 2001. The Company continues to maintain a strong cash position. As a result, the Company's ratio of current assets to current liabilities is 9.42 to 1 as of June 30, 2000, compared to 1.29 to 1 as of June 30, 1999. The increase is primarily the result of the decreases in payables for dividends, franchisee/licensee remittances, and salaries and related benefits. In June 1999, a complaint was filed 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. The Company has denied 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. For further discussion, see "Item 3 - Legal Proceedings". Page 13 RESULTS OF OPERATIONS 2000 COMPARED TO 1999 REVENUE The Company's revenue decreased $85,000, or 1.3%, to $6,257,000 during the fiscal year ended June 30, 2000 from $6,342,000 in the prior fiscal year. This decrease consists primarily of a $319,000 decrease in adjusting and other revenue and a $234,000 increase in continuing licensee and franchisee fees. The decrease of $319,000 in adjusting and other fees to $1,086,000 in the current fiscal year compared to $1,405,000 in the prior fiscal year represents a 22.7% decrease. The Company experienced decreases of $209,000 in adjusting fees its Phoenix office, $7,000 in adjusting fees in its Las Vegas/Henderson office, and $99,000 in adjusting fees in its Tucson office. The remainder of the decrease, $4,000, is due to the discontinuation of risk management services provided by the Company's home office. The decline in the Las Vegas/Henderson office is primarily the result of a decrease in storms towards the end of the 2000 fiscal year as compared to the prior year. The decrease in the Phoenix office mainly relates to a client the Phoenix office acquired in November 1997 and lost in early fiscal 2000. 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. Finally, the Company ceased providing risk management services within the home office during fiscal 2000 as it was not economical to continue providing such services. Fees generated from the risk management services were $2,000 and $5,000 for the years ended June 30, 2000 and 1999, respectively. The decision to have franchisees and licensees provide risk management services for clients continues to remain with the individual franchisees and licensees. The Company's revenue from continuing licensee and franchisee fees increased $234,000, or 4.7%, from $4,936,000 in the prior fiscal year to $5,170,000 in the current fiscal year. 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 franchisees paid, with exception to the loss of a major client in 1997. To further enhance revenue growth, the Company continues to develop and implement sales and marketing efforts that take advantage of its geographic diversity as well as the unique strengths of its individual licensees and franchisees. In addition to the marketing resources provided by UFAC, the Company hopes to see continued growth in licensee and franchisee fees paid. COMPENSATION AND EMPLOYEE BENEFITS Compensation and employee benefits represent approximately 45.3% of the Company's cost and expenses and represent the largest single item of expense. These expenses decreased $1,263,000, or 38.8%, from $3,248,000 in the prior fiscal year to $1,985,000 in the current fiscal year. 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. In addition to the absence of their salaries in the current fiscal year, the Company had paid severance packages to Mr. Rocke and Mrs. Ryberg in the 1999 fiscal year, thereby increasing compensation expense compared to this fiscal year. Furthermore, compensation decreased as a result of 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 support. For the fiscal year ended June 30, 2000, the Company incurred $300,000 in services fees under this agreement as compared to $50,000 for the prior year (as the agreement was in affect for only two months during fiscal 1999). The Company also pays UFAC for services performed beyond the scope of the service agreement. For the fiscal year ended June 30, 2000, the Company incurred $51,000 in computer consulting fees and $10,000 in telephone support for the Company's after-hour hotline, for an aggregate of $61,000 in services provided by UFAC that were not within the scope of the service agreement. Page 14 SERVICE FEES (continued) The Company believes that the charges for the services provided under the service agreement are competitive with charges for similar services and facilities available from third parties. 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 $261,000, or 11.4%, from fiscal 1999 to fiscal 2000. The principal items affecting these expenses are decreases of $175,000 in advertising and promotion, $110,000 in legal fees, $53,000 in depreciation, $24,000 in office expenses, and increases of $74,000 in bad debt and $25,000 in insurance coverage costs. 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 fiscal year 2000. 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. 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. Furthermore, the Company has reduced the legal services it receives from the Company's outside counsel, a current shareholder of the Company and former officer and director of the Company, by $49,000 from $92,000 in fiscal 1999 to $43,000 in fiscal 2000. The decrease in depreciation expense is a result of a decline in capital purchases as well as an increase in fully depreciated assets as compared to the prior fiscal year. The Company has traditionally advanced funds to franchisees and licensees to assist them in the initial start-up and further growth of their businesses. Throughout the years, the Company has loaned significant amounts of money to various franchisees and licensees. The Company reserves for such loans based upon historical experience and current changes in circumstances. Loans are reserved for under the following circumstances: (1) the Company determines that the loan is uncollectible and (2) the collectability of the entire loan balance is questionable. Based upon historical experience, a loan is determined to be uncollectible when notice is given by the Company or by a franchisee or licensee that the relationship with the Company is being terminated. Collectability of a loan becomes questionable when either the Company anticipates that the relationship between the Company will become terminated, or the volume of the franchisee or licensee is inadequate to repay the loan in a reasonable period. As of June 30, 2000, the Company carried loans with certain franchisees or licensees that had sizable loan balances which accumulated over a number of years. As the franchisees' or licensees' volume has diminished, or their loans age, the Company has provided for reserves on these loans as appropriate. The likelihood of collecting 100% of such loans was determined to be questionable, based on the Company's past experience, and therefore the Company found it appropriate to reserve for these loans. The Company is currently more conservative in lending funds to franchisees and licensees today; however, older loans are affecting current reserves for bad debt. As of June 30, 2000, the Company carried older, large balance loans as compared to the prior year and therefore increased its reserves for bad debt, consequently increasing the bad debt expense for fiscal 2000. The increase in insurance costs relates to increased coverage as well as increases in the premiums during fiscal 2000 for the various insurance policies the Company carries. OTHER INCOME The Company's other income decreased $42,000 or 18.4% from fiscal 1999 to fiscal 2000. The principal items affecting this decrease include a $49,000 decrease in realized gain on equity securities primarily due to the redemption in fiscal 1999 of mutual funds owned by the Company as investments, an increase of $16,000 in the gain on sale of a license, an increase of $13,000 in miscellaneous revenue, a decrease of $10,000 in interest income, and a decrease of $9,000 in the disposition of fixed assets. INCOME TAXES Income taxes were 40.1% and 44.4% of the Company's income before income taxes for fiscal year 2000 and 1999 respectively. A difference in these rates is due to permanent differences and is reflected in the increase of the deferred tax asset of $122,000 from $235,000 at June 30, 1999, to $357,000 at June 30, 2000. The Company's income taxes have not been significantly affected by any changes in the federal and state tax laws. However, tax rates can be changed at any time based upon legislation. Page 15 NET INCOME The Company's net income increased $694,000 to $1,240,000 in the current fiscal year from $546,000 in fiscal 1999, an increase of 127.1%. The most significant items affecting net income were the $85,000 decrease in revenue, a $1,263,000 decrease in compensation and fringe benefits, a $250,000 increase in service fees, a $261,000 decrease in expenses other than compensation and fringe benefits and service fees, and a $42,000 decrease in other income. During the fourth quarter of fiscal 2000, the Company recorded net income of $369,000. RESULTS OF OPERATIONS 1999 COMPARED TO 1998 REVENUE The Company's revenue increased to $6,342,000 from $5,825,000 in fiscal 1998, resulting in a 8.9% increase as compared to fiscal 1998. The increase consists primarily of a $176,000 increase in adjusting and other revenue and a $339,000 increase in continuing licensee and franchisee fees. The increase of $176,000 in adjusting and other fees to $1,405,000 in fiscal 1999 compared to $1,229,000 in fiscal 1998 represents an increase of 14.3%. The Company experienced an increase of $198,000 in its Phoenix office and decreases of $8,000 and $14,000 in adjusting fees from its 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. The Company's revenue from continuing licensee and franchisee fees increased 7.4% or $339,000 from $4,597,000 in fiscal 1998 to $4,936,000 in fiscal 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 1998 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. There is no assurance, however, that the Company will be successful in replacing the lost business. COMPENSATION AND EMPLOYEE BENEFITS Compensation and employee benefits represent approximately 58.1% of the Company's costs and expenses and are the Company's largest expense item. These expenses increased 15.3% or $431,000 to $3,248,000 in fiscal 1999 from $2,817,000 in the fiscal 1998. This increase is primarily the result of the retirement packages paid to Mr. Rocke and Mrs. Ryberg of $327,827 and $249,940, respectively. 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. However, the Company has reduced the amount of compensation paid to its administrative staff due to the departure and non-replacement of certain salaried personnel. EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS The Company's expenses other than compensation and fringe benefits increased $233,000 or 11.1% from fiscal 1998 to fiscal 1999. Significant changes included the following increases: legal expenses of $162,000; auditing and accounting fees of $81,000; UFAC service fees of $50,000; computer consulting fees of $27,000; general insurance of $22,000; miscellaneous expenses of $30,000, and a decrease in bad debt expense of $115,000. The increase in legal fees reflects the Company's increased need for legal services in connection with the transaction in fiscal 1999 with UFAC. The increase in audit and accounting fees reflects the Company's decision to out-source 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 with the constantly changing state and federal tax and reporting laws and regulations. Furthermore, the Company has incurred additional accounting fees in connection with the transaction in fiscal 1999 with UFAC. The balance of the Company's costs and expenses have not changed significantly from the 1998 fiscal year. Page 16 OTHER INCOME The Company's other income increased $102,000 or 80.3% from fiscal 1998 to fiscal 1999. The principal items affecting this increase included a $32,000 increase in interest income, a $61,000 increase in realized gain on equity securities primarily due to the redemption of the Company's mutual funds, a decrease in interest expense of $30,000; and a decrease in dividend income of $10,000. INCOME TAXES Income taxes were 44.4% and 40.4% of the Company's income before income taxes for fiscal year 1999 and 1998 respectively. A difference in these rates is due to permanent differences and is reflected in the reduction of the deferred tax asset of $54,000 from $289,000 at June 30, 1998, to $235,000 at June 30, 1999. The Company's income taxes have not been significantly affected by any changes in the federal and state tax laws. However, tax rates can be changed at any time based upon legislation. NET INCOME The Company's net income decreased $66,000 to $546,000 in fiscal 1999 from $612,000 in fiscal 1998, a decrease of 10.8% The most significant items affecting net income were the $516,000 increase in revenue, a $431,000 increase in compensation and fringe benefits, a $233,000 increase in expenses other than compensation and fringe benefits, and a $102,000 increase in other income. During the fourth quarter of fiscal 1999, the Company recorded a net loss of $97,179. The most significant item contributing to this loss was a one time charge of $577,767 for severance pay to former employees. ITEM 7A - 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 fiscal year 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 interest income risk and market value risks associated with this investment. At June 30, 2000, 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. Any foreign currency fluctuations would not have a material effect on the Company's financial statements. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the Consolidated Financial Statements, the Notes thereto and Report of Independent Public Accountants thereon commencing at page F-1 of this Report, which Consolidated Financial Statements, Notes and Reports are incorporated herein by reference. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not applicable. Page 17 PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
SERVED AS DIRECTOR SINCE YEAR LISTED NAME/TITLE BUSINESS EXPERIENCE AGE BELOW (1) - ---------- ------------------- --- --------- Peter I. Cavallaro Mr. Cavallaro was appointed Secretary of 38 Secretary the Company in January 2000. Mr. Cavallaro joined Netrex LLC, a newly organized financial services and technology company, in November 1999. From May 1990 to March 1999, Mr. Cavallaro was employed by NationsBanc Auto Leasing, Inc. (formerly named Oxford Resources Corp.), most recently serving as Senior Vice President and General Counsel. From June 1999 to November 1999, Mr. Cavallaro was a partner at the New York Law Firm of Rivkin, Radler & Kremerer LLP. Mr. Cavallaro continues as Of Counsel to that law firm. Mr. Cavallaro holds a J.D. degree from St. John's University School of Law, and a BA from St. John's University. John M. Davies Mr. Davies has been associated with the 44 1999 Director and Chairman Company as a director since April 1999 of the Board and Chairman of the Board since January 2000. Since June 1999, Mr. Davies has also served as President of Netrex LLC, a newly organized financial services and technology company. From September 1989 to June 1999, Mr. Davies was employed by The Progressive Corporation, most recently as Division President of Progressive's Diversified Business Group. Mr. Davies has an MBA from the University of Pittsburgh and has earned numerous professional designations, including being a Certified Public Accountant, a Chartered Property and Casualty Underwriter and a Chartered Life Underwriter. Jeffrey R. Harcourt Mr. Harcourt has served as Chief 39 1999 Director, Chief Financial Financial Officer of the Company since Officer and Treasurer August 1999, as a director of the Company since April 1999 and as Treasurer of the Company since January 2000. From October 1990 through November 1999, Mr. Harcourt was employed by The Progressive Corporation, most recently as the Controller of the Diversified Business Group. Mr. Harcourt currently also serves as the Chief Financial Officer of Netrex. Mr. Harcourt holds a BS degree from Miami University and has earned numerous designations, including being a Certified Public Accountant, a Chartered Property and Casualty Underwriter, a Certified Internal Auditor and a Certified Information systems Auditor.
Page 18 ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
SERVED AS DIRECTOR SINCE YEAR LISTED NAME/TITLE BUSINESS EXPERIENCE AGE BELOW (1) - ---------- ------------------- --- --------- Troy M. Huth Mr. Huth has served as President and a 40 1999 Director, director of the Company since April 1999 CEO and President and as the Company's CEO since January 2000. Mr. Huth was also appointed President of UFAC in June 1999, Chairman of the Board and director of JW in November 1999 and President and director of DBG in November 1999. From April 1986 until November 1999, Mr. Huth was employed by The Progressive Corporation in various technology and management positions. Mr. Huth has a BA from Baldwin Wallace College. Jeffrey C. Jordan Mr. Jordan has been Vice President and a 44 1999 Director and director of the Company since April Vice President 1999. From September 1984 through November 1999, Mr. Jordan was employed by The Progressive Corporation in numerous capacities, most recently as claims division manager. Mr. Jordan holds a BA degree from Rutgers University and a JD from UCLA. Louis T. Mastos Mr. Mastos has been the President of 79 1978 Director* Louis T. Mastos & Associates, Inc., a managing general agency located in Reno, Nevada, since 1971. He is past President of the American Association of Managing General Agents. Mr. Mastos was the Insurance Commissioner of the State of Nevada from 1965 to 1971. Laurel A. Park Ms. Park has been employed by the 28 Assistant Secretary Company since June 1995 and currently serves as Controller. In January 2000, Ms. Park was appointed as the Company's Assistant Secretary. Ms. Park holds a BS degree in accounting from Arizona State University. James S. Rocke Mr. Rocke has been employed by the 32 Vice President Company since 1982 and has served in various positions including Secretary and Treasurer of the Company from January 1993 to January 2000. In January 2000 Mr. Rocke was elected as Vice President of the Company and currently serves in that capacity. Mr. Rocke graduated from Arizona State University in 1991 with a BS degree in Finance. Mr. Rocke is the son of William J. Rocke.
Page 19 ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
SERVED AS DIRECTOR SINCE YEAR LISTED NAME/TITLE BUSINESS EXPERIENCE AGE BELOW (1) - ---------- ------------------- --- --------- William J. Rocke Mr. Rocke founded the Company in 1957 76 1975 Director and served as an executive officer of the Company and its predecessor entities from May 1957 through June 1999. Mr. Rocke has been in the insurance adjusting business since 1952. He has a law degree from the University of Denver and is a member of the Colorado Bar Association. Mr. Rocke retired as Chairman of the Board and Chief Executive Officer of the Company on June 30, 1999. Mr. Rocke is the father of James S. Rocke Jean E. Ryberg Mrs. Ryberg held several positions with 68 1975 Director* the Company from October 1962 through June 1999, most recently as President of the Company from January 1993 through June 1999, when she retired. Kenneth A. Sexton Mr. Sexton was appointed as a director 46 2000 Director* of the Company in January 2000, Mr. Sexton currently serves as Senior Vice President of Finance and Administration and Chief Financial Officer of Merant a world-wide technology and software company. Mr. Sexton has served in various positions with Merant and its related companies since 1991. Mr. Sexton holds a BS degree in business from Ohio State University and is a Certified Public Accountant William A. White Mr. White has served as a director of 46 1999 Director and the Company since April 1999 and was Vice President appointed Vice President of the Company in January 2000. Mr. White was also appointed as a director of JW and DBG in March 1999. From May 1985 to November 1999, Mr. White was employed by The Progressive Corporation, managing the Diversified Claims Business Group. Mr. White holds a master's degree from the University of Southern California and undergraduate degree in Business Administration from John Carroll University.
* Member of the Company's audit committee (1) Term will continue until next election of directors Page 20 ITEM 11 - EXECUTIVE COMPENSATION The following table sets forth certain information concerning the compensation paid by the Company during its year ended June 30, 2000, to the chief executive officer and each other executive officer whose aggregate compensation exceeded $100,000. Summary Compensation Table (1) a b c d e - -------------------------------------------------------------------------------- Annual Compensation All Other ---------------------- Compensation Name and Principal Position Year Salary ($) Bonus ($) ($) - --------------------------- ---- ---------- --------- ------------ Troy M. Huth 2000 Director, CEO and 1999 (3) (3) (3) President 1998 (1) Columns (e), (f), (g) and (h) have been omitted as no such compensation was granted. (2) No perquisites were received by any person named above greater than the lesser of $50,000 or 10% of salary plus bonus. (3) Mr. Huth's services and the services of other executive officers of the Company are provided to the Company by UFAC under a contract where the Company pays $25,000 per month for services consisting of management, marketing, technology, human resource support and accounting and reporting services. OPTION/SAR EXERCISES AND HOLDINGS The Company did not grant any stock options during fiscal 2000 nor were there any options outstanding as of June 30, 2000 for any of the Named Executive. DIRECTORS COMPENSATION Each Director, including employees of the Company, but excluding employees of UFAC or Netrex, is paid $1,000 per board meeting attended ($750 per meeting prior to March 1, 2000). During fiscal 2000, each such director, except for Kenneth A. Sexton, received $2,750 for attendance at board meetings. Mr. Sexton received $2,000 for attendance at board meetings. EMPLOYMENT AGREEMENTS The Company had an employment agreement with Mr. LaPallo for a five-year term. Mr. LaPallo's agreement was effective June 23, 1996 and was terminated on January 3, 2000, due to Mr. LaPallo's resignation. In addition, the services of Mr. Jeffrey Jordan are provided to the Company pursuant to the service agreement with UFAC. See "Item 11 - Executive Compensation - Summary Compensation Table". ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information with respect to beneficial ownership of the Company's common stock on June 30, 2000, by (1) each director, (2) each executive officer, (3) all directors and executive officers of the Company as a group, (4) each person, known by the Company, to be the beneficial owners of more than 5% of the common stock. Unless otherwise indicated in the footnotes, all of such interests are owned directly, and the indicated person has sole voting and investment power. The number of shares represents the number of shares of the Company's common stock the person holds. Information presented in the table and related notes has been obtained from the beneficial owner and/or from reports filed by the beneficial with the Securities and Exchange Commission pursuant to Section 13 of the Exchange Act. Page 21 ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (CONTINUED) AMOUNT OF BENEFICIAL OWNERSHIP COMMON STOCK $.01 PAR VALUE ------------------------------ NUMBER OF NAME AND ADDRESS SHARES (1) PERCENT (2) - ---------------- ---------- ----------- OFFICERS AND DIRECTORS Peter I. Cavallaro (3) -- * John M. Davies (3) (6) 500 * Jeffrey R. Harcourt (3) -- * Troy M. Huth (3) -- * Jeffrey C. Jordan (3) -- * Louis T. Mastos and Eva B. Mastos, his wife (3) (7) 207,103 2.31% Laurel A. Park (3) -- * William J. Rocke and Garnet Rocke, his wife (3) (8) 415,332 4.64% James S. Rocke and Kelly Rocke, his wife (3) (9) 444,867 4.97% Jean E. Ryberg (3) (10) 97,960 1.09% Kenneth A. Sexton (3) -- * William A. White (3) -- * All officers and directors as a group 875,762 9.78% (twelve persons) (11) FIVE PERCENT SHAREHOLDERS United Financial Adjusting Company (4) (12) 5,258,513 58.70% NETREX HOLDINGS, LLC (5) (13) -- -- - ---------- * Less than 1% (1) The number of shares shown in the table, including the notes thereto, have been rounded to the nearest whole share. Includes, when applicable, shares owned of record by such person's minor children and spouse and by other related individuals and entities over whose shares of Common Stock such person has custody, voting control or power of disposition. (2) The percentages shown include the shares of Common Stock which the person will have the right to acquire within 60 days of June 30, 2000. In calculating the percentage of ownership, all shares of Common Stock which the identified person will have the right to acquire within 60 days of June 30, 2000 are deemed to be outstanding for the purpose of computing the percentage of the shares of Common Stock owned by such person, but are not deemed to be outstanding for the purpose of computing the percentage of shares of Common Stock owned by any other stockholders. (3) Each of such persons may be reached through the Company at 45 East Monterey Way, Phoenix, Arizona 85012. (4) May be reached at 31500 Solon Road, Solon, Ohio 44139. (5) May be reached at 270 South Service Road, Suite 45, Melville, New York 11747. (6) Does not include 5,258,513 shares owned by UFAC to which Mr. Davies disclaims any beneficial interest for purposes of Section 13(d) or (g) of the Securities Exchange Act of 1934, as amended. Page 22 ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (CONTINUED) (7) Includes 183,180 shares which are held in a trust under an agreement dated February 10, 1981, in which Mr. and Mrs. Mastos hold equal beneficial interests, and 23,523 shares which are held by the Louis T. Mastos in an Individual Retirement Account. (8) Includes 290,000 shares held by Old Frontier Investment, Inc., of Arizona, of which William J. and Garnet Rocke hold 51% of the outstanding stock. (9) Includes 290,000 shares held by Old Frontier Investment, Inc. of Arizona of which James S. Rocke holds 49% of the outstanding stock. (10) Excludes 28,000 held by Mrs. Ryberg's sons and grandchildren, in which she disclaims any beneficial interest. (11) Excludes all duplicate reporting of holdings required to be reported by more than one officer or director. (12) Includes 5,258,513 shares owned by UFAC. These shares were purchased directly from Frontier in April 1999. As a result there was a change in control of Frontier. UFAC is a wholly-owned subsidiary of Netrex. Netrex is owned 51.4% by The Progressive Corporation and 48.6% by Netrex Capital Group LLC ("NCG") which is wholly-owned by Netrex LLC. The Progressive Corporation is a large publicly-traded corporation. According to certain insurance regulatory filings dated March 30, 2000 of The Progressive Corporation, Peter B. Lewis, President and Chief Executive Officer of The Progressive Corporation, owns approximately 13.1% of the outstanding common stock of that company. Netrex LLC is a limited liability company, the manager of which is Duck Pond Corp., which is a privately-held corporation having voting control and investment power of Netrex LLC. Each of Michael C. Pascucci, Christopher S. Pascucci and Ralph P. Pascucci owns one- third of the outstanding stock of and each is a director of (together constituting all of the directors of) Duck Pond Corp. The Progressive Corporation, NCG, Netrex LLC, Netrex, Duck Pond Corp., Peter B. Lewis, Michael C. Pascucci, Christopher S. Pascucci and Ralph P. Pascucci each disclaims that it is the beneficial owner of Frontier's shares owned by UFAC for purposes of Section 13(d) or (g) of the Securities Exchange Act of 1934, as amended. (13) Does not include 5,258,513 shares owned by UFAC prior to the Transaction and cancelled upon the Transaction being affected. The Progressive Corporation, NCG, Netrex LLC, Netrex, Duck Pond Corp., Peter B. Lewis, Michael C. Pascucci, Christopher S. Pascucci and Ralph P. Pascucci each disclaims that it is the beneficial owner of Frontier's shares owned by Netrex for purposes of Section 13(d) or (g) of the Securities Exchange Act of 1934, as amended. Based solely on a review of the copies of such forms received by the Company during the fiscal year ended June 30, 2000, and written representations that no other reports were required, the Company believes that each person who, at any time during such fiscal year, was a director, officer or beneficial owner of more than 10% of the Company's Common Stock complies with all Section 16(a) filing requirements during such fiscal year. To the best knowledge of the Company, no person or groups of persons, other than officers, directors and UFAC beneficially own more than five percent of the Company's common stock (based upon present records of the transfer agent). ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Old Frontier Investment, Inc. of Arizona, of which William J. Rocke and Garnet Rocke, his wife, are owners of 51% of the issued and outstanding stock of said corporation and of which James S. Rocke owns the remaining 49%, has entered into a license agreement with the Company pursuant to which it operates, under standard terms and conditions, an insurance adjusting and risk management business located in Scottsdale, Arizona, and is paid a 5% royalty on gross revenue derived from services provided by certain other licensees in other Arizona cities and towns. The Company paid Old Frontier Investment, Inc. $14,448 during fiscal year 2000 in connection with such 5% royalty agreement. George M. Hill, a shareholder and a former Vice President and Director of the Company, acts as outside counsel to the Company. During the fiscal year ended June 30, 2000, the Company paid Mr. Hill's law firm $42,774 for services rendered and disbursements. Such fees will continue to accrue, pursuant to a retainer agreement, at the rate of $3,000 per month effective June 1, 1999. In April 1999, the Company entered into an agreement with UFAC whereby the Company pays a $25,000 monthly fee for marketing, managerial, technological, human resource support, financial and reporting support, the full-time services of Jeffrey C. Jordan, and other services and resources. As of June 30, 2000, the Company had incurred $300,000 in service fees related to this agreement, as well as an additional $60,741 for services performed outside the agreement, for an aggregate of $360,741. The Company believes that the cost to the Company for all of the foregoing were and are competitive with charges for similar services and facilities available from third parties. Page 23 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements The following Financial Statements are included at page F-1: Report of Independent Auditor Consolidated Balance Sheets - June 30, 2000 and 1999 Consolidated Statements of Income for the Years Ended June 30, 2000, 1999 and 1998 Condensed Consolidated Statements of Comprehensive Income for years ended June 30, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the Years Ended June 30, 2000, 1999 and 1998 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2000, 1999 and 1998 Notes to Consolidated Financial Statements - June 30, 2000, 1999 and 1998 (a) (2) Financial Statement Schedules Schedule Number ------ II Valuation and Qualifying Accounts Years Ended June 30, 2000, 1999 and 1998 Schedules I through XIV not listed above have been omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. Page 24 (a) (3) Exhibits Filed With This Report EXHIBIT NO. DESCRIPTION OF EXHIBIT - ----------- ---------------------- 3(a) Articles of Incorporation of Frontier Adjusters of America, Inc.* 3(b) By-Laws of Frontier Adjusters of America, Inc.** 10(a) Frontier Adjusters of America, Inc. Incentive Stock Option Plan* 10(b) Profit Sharing Plan, as amended*** 10(c) Employment Agreement, dated August 10, 1995 between the Registrant and William J. Rocke*** 10(d) Employment Agreement, dated August 10, 1995 between the Registrant and Jean E. Ryberg*** 10(e) Incentive Stock Option Plan, dated October 10, 1987* 10(f) Form of Franchise Agreement between the Registrant and franchisees* 10(g) Form of License Agreement between the Registrant and licensees* 10(h) Agreement, dated June 1, 1990, between the Registrant and Scottsdale Insurance Company* 10(i) Form of Software Purchase Agreement and Order Form* 10(j) Frontier Adjusters of America, Inc., Stock Option Plan, dated May 21, 1996**** 10(k) Employment Agreement, dated April 23, 1996, between the Registrant and Francis J. LaPallo***** 10(l) Stock Purchase Agreement between Frontier Adjusters of America, Inc. and United Financial Adjusting Company, dated as of November 20, 1998, including the following attachments****** Terms of Preferred Shares, Registration Rights Agreement, Service Agreement, William Rocke Agreement, and Jean Ryberg Agreement 10(m) 2000 Stock Option Plan 21 List of Subsidiaries of Frontier Adjusters of America, Inc. 23 Consent of Independent Accountants 27 Financial Data Schedule * Incorporated by reference to the Registrant's Form S-2 filed July 9, 1991 ** Incorporated by reference to the Registrant's Form 10-K for the year ended June 30, 1993 *** Incorporated by reference to the Registrant's Form 10-K for the year ended June 30, 1995 **** Incorporated by reference to the Registrant's Form 10-Q for the quarter ended September 30, 1996. ***** Incorporated by reference to the Registrant's Form 10-K for the year ended June 30, 1996. ****** Incorporated by reference to the Exhibits to Frontier Adjusters of America, Inc., Notice of Annual Meeting, and Proxy Statement on Form 14A as filed with the SEC in definitive form on March 26, 1999. ******* Incorporated by reference to the Exhibits to Frontier Adjusters of America, Inc., Notice of Annual Meeting, and Proxy Statement on Form 14A as filed with the SEC in preliminary form on September 6, 2000. (b) The Company filed no reports on Form 8-K with the Securities and Exchange Commission during the last quarter of the fiscal year June 30, 2000 Page 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. FRONTIER ADJUSTERS OF AMERICA, INC. /s/ Troy Huth ---------------------------------------- Troy Huth, President and Chief Executive Officer September 6, 2000 ---------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates included: /s/ John M. Davies September 6, 2000 - -------------------------------------------------- ----------------- John M. Davies, Chairman of the Board and Director /s/ Jeffrey R. Harcourt September 6, 2000 - -------------------------------------------------- ----------------- Jeffrey R. Harcourt, Chief Financial Officer, Treasurer and Director /s/ Troy Huth September 6, 2000 - -------------------------------------------------- ----------------- Troy Huth, Chief Executive Officer, President and Director /s/ Jeffrey C. Jordan September 6, 2000 - -------------------------------------------------- ----------------- Jeffrey C. Jordan, Vice President and Director /s/ Lou Mastos September 6, 2000 - -------------------------------------------------- ----------------- Lou Mastos, Director /s/ William J. Rocke September 6, 2000 - -------------------------------------------------- ----------------- William J. Rocke, Director /s/ Jean E. Ryberg September 6, 2000 - -------------------------------------------------- ----------------- Jean E. Ryberg, Director /s/ Kenneth A. Sexton September 6, 2000 - -------------------------------------------------- ----------------- Kenneth A. Sexton, Director /s/ William A. White September 6, 2000 - -------------------------------------------------- ----------------- William A. White, Director Page 26 FRONTIER ADJUSTERS OF AMERICA, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Auditor F-2 Consolidated Balance Sheets - June 30, 2000 and 1999 F-3 Consolidated Statements of Income for the Years Ended June 30, 2000, 1999 and 1998 F-4 Condensed Consolidated Statements of Comprehensive Income F-5 for the Years Ended June 30, 2000, 1999 and 1998. Consolidated Statements of Cash Flows for the Years Ended June 30, 2000, 1999 and 1998 F-6 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2000, 1999 and 1998 F-7 Notes to Consolidated Financial Statements - June 30, 2000, 1999 and 1998 F-8 Supplementary Data (unaudited) F-17 Schedule II - Valuation and Qualifying Accounts Years Ended June 30, 2000, 1999 and 1998 F-18 F-1 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Frontier Adjusters of America, Inc. Phoenix, Arizona We have audited the accompanying consolidated balance sheets of Frontier Adjusters of America, Inc. and subsidiaries as of June 30, 2000 and 1999, and the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity for each of the three years ended June 30, 2000, 1999 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Frontier Adjusters of America, Inc. and subsidiaries as of June 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2000, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The consolidated supplemental schedule II for the years ended June 30, 2000, 1999, and 1998 included on page F-18 of this form 10-K is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole. McGLADREY & PULLEN, LLP /s/ McGladrey & Pullen, LLP Phoenix, Arizona August 2, 2000 F-2 CONSOLIDATED BALANCE SHEETS Frontier Adjusters of America, Inc. and Subsidiaries
June 30, 2000 1999 - -------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 2,132,297 $ 6,892,851 Current portion of advances to licensees and franchisees (Notes 4 and 6) 535,472 859,515 Receivables, net (Note 3) 809,463 744,241 Income tax refund receivable -- 99,226 Unbilled adjusting fees 23,130 37,170 Prepaid expenses 211,108 344,041 Deferred income taxes, current portion (Note 9) 241,607 161,818 ------------ ------------ TOTAL CURRENT ASSETS 3,953,077 9,138,862 ------------ ------------ PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation and amortization (Note 5) 1,622,389 1,608,936 ------------ ------------ OTHER ASSETS Held to maturity investments (Note 7) 628,661 685,148 Advances to licensees and franchisees, net of current portion (Note 4) 200,000 350,000 Licenses and franchises, net of accumulated amortization of $261,789 in 2000 and $303,605 in 1999 170,412 226,015 Deferred income taxes, net of current portion (Note 9) 115,488 73,563 Cost of subsidiary in excess of net identifiable assets acquired, net of accumulated amortization of $183,752 in 2000 and $181,441 in 1999 30,066 32,377 Other -- 4,083 ------------ ------------ 1,144,627 1,371,186 ------------ ------------ TOTAL ASSETS $ 6,720,093 $ 12,118,984 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 25,835 $ 28,005 Salaries payable and related benefits 138,275 404,325 Service fees due to UFAC 15,000 50,000 Distributions payable (Note 14) -- 5,918,475 Licensees' and franchisees' remittance payable 116,287 552,946 Income Taxes Payable 33,989 -- Other (Note 13) 90,367 111,600 ------------ ------------ TOTAL CURRENT LIABILITIES 419,753 7,065,351 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 13) -- -- STOCKHOLDERS' EQUITY Preferred stock, authorized 100,000,000 shares, par value $.01, none issued or outstanding -- -- Common stock, authorized 100,000,000 shares, par value $.01, issued 9,019,059 shares 90,191 90,191 Additional contributed capital 2,104,413 2,104,426 Retained earnings 4,263,100 3,022,731 ------------ ------------ 6,457,704 5,217,348 Add (deduct): Treasury stock; 61,399 shares in 2000 and 61,499 in 1999 (184,068) (184,368) Other 26,704 20,653 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 6,300,340 5,053,633 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,720,093 $ 12,118,984 ============ ============
The accompanying notes are an integral part of these statements. F-3 CONSOLIDATED STATEMENTS OF INCOME Frontier Adjusters of America, Inc. and Subsidiaries
Years Ended June 30, 2000 1999 1998 - --------------------------------------------------------------------------------------------------- REVENUE Continuing licensee and franchisee fees (Note 8) $ 5,170,592 $ 4,936,349 $ 4,596,657 Adjusting and risk management fees (Note 8) 1,086,304 1,405,235 1,228,691 ----------- ----------- ----------- 6,256,896 6,341,584 5,825,348 ----------- ----------- ----------- COST AND EXPENSES Compensation and employee benefits (Note 11) 1,984,581 3,248,276 2,817,168 Office 387,529 411,345 404,554 Advertising and promotion 210,441 385,372 395,210 Depreciation and amortization 218,615 271,884 253,667 Bad debt expense 311,820 237,601 352,132 Service fees to UFAC (Note 10) 360,741 50,000 -- Legal fees paid to a shareholder (Note 10) 42,774 92,187 92,510 Other 857,913 891,342 609,111 ----------- ----------- ----------- 4,374,414 5,588,007 4,924,352 ----------- ----------- ----------- INCOME FROM OPERATIONS 1,882,482 753,577 900,996 ----------- ----------- ----------- OTHER INCOME (EXPENSE) Interest income 155,038 165,272 133,067 Disposition of investments 1,000 -- 4,042 Gain (loss) on sale of license (Note 6) 1,276 (14,500) (13,000) Gain (loss) on disposition of equipment (7,066) 1,501 6,352 Realized gain (loss) (Note 7) 12,494 60,753 (93) Other 24,231 15,539 (3,497) ----------- ----------- ----------- TOTAL OTHER INCOME 186,973 228,565 126,871 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 2,069,455 982,142 1,027,867 INCOME TAXES (Note 9) 829,086 435,690 415,392 ----------- ----------- ----------- NET INCOME $ 1,240,369 $ 546,452 $ 612,475 =========== =========== =========== EARNINGS PER SHARE Basic $ .14 $ .12 $ .13 =========== =========== =========== Diluted $ .14 $ .12 $ .13 =========== =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING Basic 8,957,586 4,569,049 4,605,358 =========== =========== =========== Diluted 8,957,586 4,570,113 4,612,674 =========== =========== ===========
The accompanying notes are an integral part of these statements. F-4 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Frontier Adjusters of America, Inc. and Subsidiaries
YEARS ENDED JUNE 30, 2000 1999 1998 - ---------------------------------------------------------------------------------------------------- NET INCOME $1,240,369 $ 546,452 $ 612,475 OTHER COMPREHENSIVE INCOME, NET OF TAX Foreign currency translation adjustments 6,051 9,746 (6,037) Unrealized gain (loss) on securities, net of reclassification adjustment (see below) -- (38,693) (27,584) ---------- ---------- ---------- OTHER COMPREHENSIVE INCOME: 6,051 (28,947) (33,621) ---------- ---------- ---------- COMPREHENSIVE INCOME $1,246,420 $ 517,505 $ 578,854 ========== ========== ========== Reclassifications adjustment Unrealized gain (loss) on securities during the year $ 12,494 $ 22,060 $ (27,584) Less reclassification adjustment for gain (loss) included in net income 12,494 60,753 -- ---------- ---------- ---------- Net unrealized gains on securities $ -- $ (38,693) $ (27,584) ========== ========== ==========
The accompanying notes are an integral part of these statements. F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS Frontier Adjusters of America, Inc. and Subsidiaries
Years Ended June 30, 2000 1999 1998 - ------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,240,369 $ 546,452 $ 612,475 ------------ ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 218,615 272,430 255,852 (Gain) on sale of investments (1,000) -- (4,042) (Gain) loss on sale of license (1,276) 14,500 13,000 (Gain) loss on disposition of equipment 7,066 (1,501) (6,352) Bad debt expense 311,820 237,601 352,132 Deferred income taxes (121,714) 53,891 117,288 Realized (gain)/loss on equity investments (12,494) (60,753) 93 Other 6,507 9,576 (355) Change in assets and liabilities (Increase) decrease in: Receivables (100,277) (91,235) (1,665) Unbilled adjusting fees 14,040 3,780 (14,250) Prepaid expenses 132,933 (26,587) (49,262) Other -- 83,993 (65,220) Increase (decrease) in: Accounts payable (2,170) (34,113) 28,325 Salaries payable and related benefits (266,050) (204,788) 440,081 Income taxes payable/receivable 133,215 73,722 (257,937) Licensees' & franchisees' remittance payable (436,659) 7,116 148,839 Other (56,233) 63,664 (505,222) ------------ ------------ ------------ Total adjustment (173,677) 401,296 451,305 ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 1,066,692 947,748 1,063,780 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of fixed assets 1,550 93,512 16,200 Capital expenditures (171,655) (324,416) (167,078) Investments purchased -- (11,769,769) (1,993,019) Proceeds from maturity of held-to-maturity investments 51,000 13,124,869 2,040,000 Proceeds from sale of available-for-sale investments 12,494 -- -- Proceeds from sale of licenses 31,531 -- -- Payments on license acquisition (43,660) (33,462) (26,521) Advances to licensees' and franchisees' (3,497,630) (4,183,647) (4,267,700) Collections of advances to licensees & franchisees 3,701,261 4,096,545 3,948,312 ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 84,891 1,003,632 (449,806) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Cash dividends (5,918,475) (172,701) (690,806) Proceeds from sales of stock 287 6,992,308 -- Common stock repurchased -- (2,817,246) -- ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (5,918,188) 4,002,361 (690,806) EFFECT OF EXCHANGE RATE CHANGES ON CASH 6,051 9,746 (6,037) ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,760,554) 5,963,487 (82,869) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 6,892,851 929,364 1,012,233 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 2,132,297 $ 6,892,851 $ 929,364 ============ ============ ============
The accompanying notes are an integral part of these statements. F-6 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Frontier Adjusters of America, Inc. and Subsidiaries Years Ended June 30, 2000, 1999 and 1998
Number of Number of Par Value of Additional Preferred Par Value of Common Shares Common Contributed Shares Preferred Issued Stock Capital Issued Stock ----------- ----------- ----------- ----------- ----------- Balance, June 30, 1997 4,782,010 $ 47,820 $ 2,148,470 -- -- Cash dividends - $.15 per share -- -- -- -- -- Net income -- -- -- -- -- Foreign currency translation -- -- -- -- -- Unrealized loss -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Balance, June 30, 1998 4,782,010 47,820 2,148,470 -- -- Cash dividends - $.0375 per share -- -- -- -- -- Sale of shares to UFAC (Note 14) -- -- 6,765,982 5,258,513 52,585 Stock options exercised from 65,153 shares of treasury stock -- -- (21,580) -- -- Retirement of 971,464 common shares shares repurchased in tender offer (Note 14) (971,464) (9,714) (2,807,531) -- -- Distributions declared $1.60 per share (Note 14) -- -- (3,958,451) -- -- Retirement of 50,000 treasury shares (50,000) (500) (22,464) -- -- Conversion of preferred shares into common shares (Note 14) 5,258,513 52,585 -- (5,258,513) (52,585) Net income -- -- -- -- -- Foreign currency translation -- -- -- -- -- Unrealized gain -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Balance, June 30, 1999 9,019,059 90,191 2,104,426 -- -- Stock options exercised from 100 shares of treasury stock -- -- (13) -- -- Net income -- -- -- -- -- Foreign currency translation -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Balance, June 30, 2000 9,019,059 $ 90,191 $ 2,104,413 -- -- =========== =========== =========== =========== =========== Cumulative Unrealized Retained Treasury Translation Gain (loss) on Earnings Stock Adjustment Investments ----------- ----------- ----------- ----------- Balance, June 30, 1997 $ 4,814,266 $ (529,584) $ 16,944 $ 66,277 Cash dividends - $.15 per share (690,806) -- -- -- Net income 612,475 -- -- -- Foreign currency translation -- -- (6,037) -- Unrealized loss -- -- -- (27,584) ----------- ----------- ----------- ----------- Balance, June 30, 1998 4,735,935 (529,584) 10,907 38,693 Cash dividends - $.0375 per share (172,701) -- -- -- Sale of shares to UFAC (Note 14) -- -- -- -- Stock options exercised from 65,153 shares of treasury stock -- 195,321 -- -- Retirement of 971,464 common shares shares repurchased in tender offer (Note 14) -- -- -- -- Distributions declared $1.60 per share (Note 14) (1,960,024) -- -- -- Retirement of 50,000 treasury shares (126,931) 149,895 -- -- Conversion of preferred shares into common shares (Note 14) -- -- -- -- Net income 546,452 -- -- -- Foreign currency translation -- -- 9,746 -- Unrealized gain -- -- -- (38,693) ----------- ----------- ----------- ----------- Balance, June 30, 1999 3,022,731 (184,368) 20,653 -- Stock options exercised from 100 shares of treasury stock -- 300 -- -- Net income 1,240,369 -- -- -- Foreign currency translation -- -- 6,051 -- ----------- ----------- ----------- ----------- Balance, June 30, 2000 $ 4,263,100 $ (184,068) $ 26,704 -- =========== =========== =========== ===========
The accompanying notes are an integral part of these statements. F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Frontier Adjusters of America, Inc. and Subsidiaries - -------------------------------------------------------------------------------- NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION -- These financial statements include the accounts of Frontier Adjusters of America, Inc. (Company) and its subsidiaries, all of which are wholly-owned. Intercompany accounts and transactions have been eliminated. BUSINESS -- The Company's operations consist of the licensing and franchising of independent adjusters throughout the United States and Canada and the operation of an independent adjusting business and a risk management division in its Phoenix, Arizona and Las Vegas, Nevada offices. The Company grants credit to its licensees and franchisees, all of whom operate within the insurance industry. Revenue from claims adjusted by employees of the Company is recognized as the services are performed; revenue from claims adjusted by independent licensees and franchisees is recognized when they become due under the terms of the license and franchise agreements (Note 8). CONSOLIDATED STATEMENTS OF CASH FLOW -- Short term investments which have original maturities of 90 days or less are considered cash equivalents. CASH CONCENTRATION -- The Company maintains amounts on deposit in financial institutions in excess of federal deposit insurance limits. DEPRECIATION AND AMORTIZATION -- Property and equipment is stated at cost. Depreciation is computed using straight-line and accelerated methods over estimated useful lives, which range from three to ten years for all property and equipment except for the two buildings. The buildings are depreciated using the straight-line method over a period no less than 31 years and six months. The cost of a subsidiary in excess of net tangible assets acquired is being amortized over 40 years. LICENSES AND FRANCHISES -- Licenses and franchises represent Company owned adjusting operations and are stated at cost less amortization. Amortization is computed using the straight-line basis over a period of five years. IMPAIRMENT OF LONG-LIVED ASSETS -- The Company reviews its long-lived assets and intangibles related to those assets periodically to determine potential impairment by comparing the carrying value of the long-lived assets and identified goodwill with the estimated future net undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition. Should the sum of the expected future net cash flows be less than the carrying value, the Company would recognize an impairment loss at that date. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value (estimated discounted future cash flows) of the long-lived assets and identified goodwill. Goodwill not identified with impaired assets is evaluated to determine whether events or circumstances warrant a write-down or revised estimates of useful lives. The Company determines impairment by comparing the carrying value of goodwill with the estimated future net undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition. Should the sum of the expected future net cash flows be less than the carrying value, the Company would recognize an impairment loss at that date. Impairment losses are measured by comparing the amount by which the carrying value exceeds the fair value (estimated discounted future cash flows) of the goodwill. To date, management has determined that no impairment of long-lived assets and goodwill exists. INCOME TAXES -- Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry-forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts and assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in the tax laws and rates on the date of enactment. F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Frontier Adjusters of America, Inc. and Subsidiaries - -------------------------------------------------------------------------------- NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENTS HELD-TO-MATURITY SECURITIES -- Securities classified as held-to-maturity are those debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premiums and accretion of discount, computed by the interest method over their contractual lives. The sale of a security within three months of its maturity date or after at least 85 percent of the principal outstanding has been collected is considered held to maturity for purposes of classification and disclosure. FAIR VALUE OF FINANCIAL INSTRUMENTS -- Management uses its best judgment in estimating the fair value of the Company's financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction at June 30 of the reporting year. The estimated fair value amounts have been measured as of June 30 of the reporting year and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to that date. As such, the estimated fair values of these financial instruments subsequent to the reporting date may be different than the amounts reported at each year end. The information in Note 7 should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a limited portion of the Company's assets and liabilities. This disclosure of fair value amounts does not include the fair values of any intangibles, licensees and franchisees. The carrying amounts of all financial instruments approximate fair values. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - - In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is required to be adopted in all fiscal quarters of all fiscal years beginning after June 15, 2000. The Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Company will adopt the new Statement effective July 1, 2000. The Statement will require the Company recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivative will either be offset against the change in fair value of the hedges assets, liabilities or firm commitment through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Because of the Company's minimal use of derivatives, management does not anticipate that he adoption of the new Statement will have a significant effect on the Company's earnings or financial position. REVENUE RECOGNITION -- In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 REVENUE RECOGNITION IN FINANCIAL STATEMENTS. SAB No. 101 summarizes some of the staff's interpretations of the application of generally accepted accounting principles to revenue recognition. The Company will adopt SAB No. 101 in fiscal year 2001. Management believes the adoption of SAB No. 101 will not have a significant affect on it's financial statements. SEGMENT REPORTING -- Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, modifies the disclosure requirements for reportable segments and establishes standards in the way public businesses report information about operating segments in financial statements and interim reports issued to shareholders. Statement No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. Management has determined the Company to have one reportable segment. With the disposition of the Tucson, Arizona office, the Company no longer reports it's operations by geographic segments due to immateriality and accordingly, the Company has only one segment. The Company still provides the same services to the same markets and clients. F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Frontier Adjusters of America, Inc. and Subsidiaries - -------------------------------------------------------------------------------- NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EARNINGS PER COMMON SHARE -- The Company is required to present basic and diluted earnings per share amounts. Basic earnings per common share is computed by dividing net income by the weighted average of common shares outstanding. Diluted per share amounts assume the conversion, exercise, or issuance of all potential common stock instruments unless the effect is to reduce a loss or increase the income per share from continuing operations. At June 30, 2000, the Company has no dilutive potential common shares outstanding. FOREIGN CURRENCY TRANSLATION -- The functional currency of the Company's foreign operations is the applicable local currency. The foreign currencies are translated to U.S. dollars using applicable exchange rates at the end of each period. The gains or losses resulting from such translations are included in Stockholders' Equity. ADVERTISING EXPENSE -- Advertising expenditures are expensed when incurred. NOTE 2: SUPPLEMENTAL CASH FLOW INFORMATION 2000 1999 1998 ---------- ---------- ---------- Cash paid during the year: Interest $ 1,405 $ 1,369 $ 30,898 Income taxes 838,099 315,659 607,170 Noncash investing activities: Sale of licenses 242,629 -- -- Deferred gain on sale of licenses (231,021) -- -- Disposal of license (11,608) -- -- Noncash financing activities: Accrued dividends -- 5,918,475 -- NOTE 3: RECEIVABLES 2000 1999 ---------- ---------- Receivables consist of: Accounts receivable trade $ 165,377 $ 209,049 Licensee and franchisee fees receivable 595,354 601,518 Errors and omissions insurance premium advanced 160,854 90,992 Other 30,964 3,469 ---------- ---------- Total receivables 952,549 905,028 Less allowance for doubtful accounts 143,086 160,787 ---------- ---------- $ 809,463 $ 744,241 ========== ========== NOTE 4: LONG-TERM RECEIVABLES Long-term receivables consist of non-interest bearing advances to licensees and franchisees which are repayable in the amount equal to a percentage of the monthly licensee and franchisee revenue. Estimated current and long-term maturities are as follows: 2000 1999 ---------- ---------- Advances to licensees and franchisees $1,197,533 $1,399,095 Less allowance for doubtful advances 462,061 189,580 ---------- ---------- 735,472 1,209,515 Less current portion 535,472 859,515 ---------- ---------- Long term portion $ 200,000 $ 350,000 ========== ========== F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Frontier Adjusters of America, Inc. and Subsidiaries - -------------------------------------------------------------------------------- NOTE 5: PROPERTY AND EQUIPMENT Property and equipment consist of: 2000 1999 ---------- ---------- Building and improvements $1,390,166 $1,273,023 Computers and software 314,716 269,724 Furniture and fixtures 348,596 359,235 Automobiles 16,494 51,494 ---------- ---------- 2,069,972 1,953,476 Less accumulated depreciation and amortization 1,034,326 931,283 ---------- ---------- 1,035,646 1,022,193 Land 586,743 586,743 ---------- ---------- $1,622,389 $1,608,936 ========== ========== NOTE 6: SALE OF LICENSES 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. The Company also sold three franchises located in the Chicago, Illinois area in the third quarter of fiscal 2000 for $25,000 per franchise that resulted in an aggregate deferred gain of $75,000. The Company is collecting 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 current portion of advances to licensees and franchisees for balance sheet presentation and are recorded as a gain on sale of assets when received. On June 30, 2000, the aggregate deferred gain netted against receivables was $229,745. As of June 30, 2000, total collected in payment of these loans was $6,531 and the gain recognized was $1,276. The Company also sold a license in the Oakland, California area for cash proceeds of $25,000. NOTE 7: INVESTMENTS IN DEBT AND MARKETABLE EQUITY SECURITIES The following is a summary of the Company's investment in debt and marketable equity securities as of June 30, 2000 and 1999:
2000 ------------------------------------------------ Gross Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ---- ----- ------ ---------- Held to maturity securities Local government securities & other $ 628,661 $ 1,010 $ 18,596 $ 611,075 ========= ========= ========= ========= 1999 ------------------------------------------------ Held to maturity securities Local government securities & other $ 685,148 $ 17,886 $ 2,992 $ 700,042 ========= ========= ========= =========
The Company's investment in local government securities is concentrated in Salt River Project Agricultural Improvement and Power District Municipal Bonds which mature between 2006 and 2031. The Company recognized a gain (loss) of $12,494, $60,753, and ($93) for the years ended June 30, 2000, 1999, and 1998, respectively, due to the realized gain or permanent impairment in value of its available for sale securities. F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Frontier Adjusters of America, Inc. and Subsidiaries - -------------------------------------------------------------------------------- NOTE 8: LICENSING AND FRANCHISING As of June 30, 2000, the Company has entered into 499 license and franchise agreements with 394 entities, operating 382 offices with 672 advertised locations, whereby the Company grants exclusive ten-year licenses or franchises for the right to use the name "Frontier Adjusters" in a particular area. There is no initial license or franchise fee except where the Company resells a previously acquired license or franchise in which case the Company seeks to recover some or all of its acquisition cost. The Company performs advertising, collection and remittance services, and provides the licensees and franchisees with supplies. As compensation for the above, the Company receives a fee based on a percentage of the licensees' or franchisees' gross billings. Gross billings by licensees and franchisees for the years ended June 30, 2000, 1999 and 1998 were approximately $45,810,000, $44,730,000 and $42,050,000, respectively. The Company's main line of business is providing services, directly and through licensees and franchisees, to the insurance industry and to self-insureds. The revenue and cost components along with identifiable assets and number of advertised locations are as follows.
Licensing Adjusting Corporate and and and Franchising Risk Management Other Consolidated ----------- --------------- ----- ------------ 2000 Revenue $ 5,170,592 $ 1,086,304 $ -- $ 6,256,896 Cost and expenses 2,798,397 998,078 577,939 4,374,414 ------------ ------------ ------------ ------------ Income (loss) from operations $ 2,372,195 $ 88,226 $ (577,939) $ 1,882,482 ============ ============ ============ ============ Identifiable assets $ 3,346,286 $ 494,756 $ 2,879,051 $ 6,720,093 ============ ============ ============ ============ Number of advertised locations Beginning of year 659 19 -- 678 Opened 5 -- -- 5 Closed (11) -- -- (11) Ownership changes (4) 4 -- -- ------------ ------------ ------------ ------------ End of year 649 23 -- 672 ============ ============ ============ ============ 1999 Revenue $ 4,936,349 $ 1,405,235 $ -- $ 6,341,584 Costs and expenses 3,885,586 1,184,289 518,132 5,588,007 ------------ ------------ ------------ ------------ Income (loss) from operations $ 1,050,763 $ 220,946 $ (518,132) $ 753,577 ============ ============ ============ ============ Identifiable assets $ 4,231,025 $ 637,680 $ 7,250,279 $ 12,118,984 ============ ============ ============ ============ Number of advertised locations Beginning of year 652 10 -- 662 Opened 23 -- -- 23 Closed (7) -- -- (7) Ownership changes (9) 9 -- -- ------------ ------------ ------------ ------------ End of year 659 19 -- 678 ============ ============ ============ ============
F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Frontier Adjusters of America, Inc. and Subsidiaries - -------------------------------------------------------------------------------- NOTE 8: LICENSING AND FRANCHISING (CONTINUED) 1998 Revenue $ 4,596,657 $ 1,228,691 $ -- $ 5,825,348 Costs and expenses 3,444,402 1,123,172 356,778 4,924,352 ----------- ----------- ----------- ----------- Income (loss) from operations $ 1,152,255 $ 105,519 $ (356,778) $ 900,996 =========== =========== =========== =========== Identifiable assets $ 4,520,408 $ 540,212 $ 2,740,080 $ 7,800,700 =========== =========== =========== =========== Number of advertised locations Beginning of year 646 12 -- 658 Opened 23 -- -- 23 Closed (19) -- -- (19) Ownership changes 2 (2) -- -- ----------- ----------- ----------- ----------- End of year 652 10 -- 662 =========== =========== =========== ===========
NOTE 9: INCOME TAXES The components of the provision for income taxes at June 30 are as follows: 2000 1999 1998 --------- --------- --------- Federal Current $ 762,200 $ 309,299 $ 241,232 Deferred (96,637) 42,788 93,123 State Current 188,600 72,500 56,872 Deferred (25,077) 11,103 24,165 --------- --------- --------- Income taxes $ 829,086 $ 435,690 $ 415,392 ========= ========= ========= A reconciliation of the statutory Federal income tax rate to the Company's effective tax rate follows: 2000 1999 1998 --------- --------- --------- Statutory rate 35.0% 35.0% 35.0% Increase (decrease) resulting from: State income taxes, net 5.1 5.5 5.1 Non-deductible items 1.1 4.0 3.4 Non-taxable revenue (.6) (1.4) (1.4) Other (.5) 1.3 (1.7) ----- ----- ----- Effective rate 40.1% 44.4% 40.4% ===== ===== ===== Net deferred tax assets consist of the following components: 2000 1999 --------- --------- Deferred tax assets Current: Allowance for doubtful accounts $ 224,301 $ 129,858 Other liabilities 17,306 31,960 --------- --------- 241,607 161,818 --------- --------- Long term: Property and equipment 84,714 73,563 Other liabilities 30,774 -- --------- --------- 115,488 73,563 --------- --------- $ 357,095 $ 235,381 ========= ========= F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Frontier Adjusters of America, Inc. and Subsidiaries - -------------------------------------------------------------------------------- NOTE 10: RELATED PARTY TRANSACTIONS Old Frontier Investment, Inc. of Arizona, of which William J. Rocke and Garnet Rocke, his wife, are owners of 51% of the issued and outstanding stock of said corporation and James S. Rocke owns the remaining 49%, has entered into a license agreement with the Company pursuant to which it operates, under standard terms and conditions, an insurance adjusting and risk management business located in Scottsdale, Arizona, and is paid a 5% royalty on gross revenue derived from services provided by certain other licensees in other Arizona cities and towns. The Company paid that corporation $14,448, $13,382 and $13,142 for the fiscal years ended June 30, 2000, 1999 and 1998 respectively, in connection with such 5% royalty agreement. George M. Hill, a shareholder, former Vice President and former Director of the Company, acts as outside counsel to the Company. The Company paid Mr. Hill's law firm approximately $43,000 in fiscal 2000, $92,000 in fiscal 1999, $93,000 in fiscal 1998 for legal services and reimbursement of expenses. Such fees will continue to accrue, pursuant to a retainer agreement at the rate of $3,000 per month. In April 1999, in conjunction with UFAC's purchase of 5,258,513 shares of the Company's stock, the Company entered into an agreement with UFAC whereby the Company pays $25,000 per month for marketing, managerial, technological, financial, the full-time services of Jeffrey Jordan, and other services and resources. As of June 30, 2000, the Company had incurred $300,000 in service fees related to this agreement, and an additional $60,741 for services performed outside of the agreement, for an aggregate of $360,741. The Company incurred $50,000 and $0 in service fees for the fiscal years ended June 30, 1999 and 1998 respectively. The Company believes that the cost to the Company for all of the foregoing were competitive with charges for similar services and facilities available from third parties. NOTE 11: PROFIT SHARING PLAN AND GAINSHARING PLAN On June 14, 1984, the Company adopted a Profit Sharing Plan (Plan) covering substantially all employees of the Company who have completed one year of service and have reached age 20. The Plan provides for contributions at the discretion of management not to exceed the amount permitted under the Internal Revenue Code as a deductible expense. Participants' benefits vest at the rate of 20% per year. Contributions to the Plan are made to trust accounts for investment at the discretion of the individual participants. Profit sharing expense was $17,726, $235,724, and $258,272 for the years ended June 30, 2000, 1999, and 1998 respectively. With the intent to eventually terminate the Profit Sharing Plan, the Company implemented a gainsharing program for its employees during fiscal 2000. The program is designed to reward employees for exceptional growth and return on revenue. Disbursements are only made if targets set by upper management are met. Gainsharing expense for the year ended June 30, 2000 was $86,362. NOTE 12: STOCK OPTIONS The Company applies APB Option 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for grants in which the fair value per share exceeds the exercise price per share. No compensation expense has been charged to expense for any period presented. The Company has elected not to adopt FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION for employee awards. Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under this plan consistent with the method of Statement No. 123, reported net income for 2000, 1999 and 1998 would have decreased by $0, $18,000 and $20,000, respectively, with no effect on earnings per share. On October 9, 1987, the shareholders approved an Incentive Stock Option Plan (1987 Plan) which provides for the granting of options to acquire up to 300,000 shares of common stock to certain officers and key employees of the Company at no less than 100% of the fair market value of the stock on the date of the grant. Options under the 1987 Plan are intended to be Incentive Stock Options (ISOs) pursuant to Section 422A of the Internal Revenue Code. Such options may have a maximum term of ten years and are exercisable one year after they are granted. As of June 30, 2000, the 1987 Plan has no shares outstanding and 134,847 available for granting. F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Frontier Adjusters of America, Inc. and Subsidiaries - -------------------------------------------------------------------------------- NOTE 12: STOCK OPTIONS (CONTINUED) On October 11, 1996, the shareholders approved a Stock Option Plan (1996 Plan) which had been adopted by the Board of Directors on May 21, 1996 and effective July 1, 1996, which provides for the granting of options to acquire up to 300,000 shares of common stock to certain officers and key employees of the Company. Options under the 1996 Plan may be incentive stock options "ISO" pursuant to Section 422A of the Internal Revenue Code. On July 1, 1996, the Company granted ISO's for 100,000 shares of stock at $2.875 per share, the fair value at the grant date. As of June 30, 2000, the 1996 Plan has no shares outstanding and 299,900 available for granting. Outstanding options become exercisable in varying amounts beginning one year after grant. Information regarding these option plans are as follows:
Number of Shares --------------------------------------------------------------------- 2000 1999 1998 ------------------- ------------------- ------------------- Number of Weighted Number of Weighted Number of Weighted Shares Average Shares Average Shares Average --------- ----- --------- ----- --------- ----- Outstanding July 1 129,629 $2.99 300,000 $3.05 300,000 $3.05 Granted -- -- -- -- -- -- Exercised (100) (2.88) (65,153) (2.67) -- -- Expired (129,529) (2.99) (105,218) (3.37) -- -- --------- ----- --------- ----- --------- ----- Outstanding June 30 -- -- 129,629 $2.99 300,000 $3.05 ========= ===== ========= ===== ========= =====
2000 1999 1998 ---- ---- ---- Exercisable at end of year -- 129,629 234,782 At June 30, 2000, there are no remaining options outstanding under the 1987 Plan or the 1996 Plan. The 1987 Plan and 1996 Plan have available for granting up to 134,847 and 299,900 shares, respectively. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computation for June 30:
2000 1999 1998 ------------------- ------------------- ------------------- Shares Per-share Shares Per-share Shares Per-share (Denominator) Amount (Denominator) Amount (Denominator) Amount --------- ----- --------- ----- --------- ----- Basic EPS 8,957,586 $0.14 4,569,049 $0.12 4,605,358 $0.13 ===== ===== ===== Effect of Dilutive Securities Options -- -- 1,064 -- 7,316 -- --------- ----- --------- ----- --------- ----- Diluted EPS 8,957,586 $0.14 4,570,113 $0.12 4,612,674 $0.13 ========= ===== ========= ===== ========= =====
NOTE 13: COMMITMENTS AND CONTINGENCIES The Company entered into five-year employment agreements with three key executive officers. Two of these agreements were terminated on June 30, 1999, due to the employees' early retirement. The third agreement was terminated on January 31, 2000 due to the resignation of Francis J. LaPallo, a former Executive Vice President. There are no liabilities relating to these agreements as of June 30, 2000. The Company leases various office space and office equipment under various noncancellable agreements. These leases expire between August 31, 2000 and August 31, 2003 and require various minimum annual rental payments. Each office lease also requires the payment of taxes. F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Frontier Adjusters of America, Inc. and Subsidiaries - -------------------------------------------------------------------------------- NOTE 13: COMMITMENTS AND CONTINGENCIES (CONTINUED) The total minimum rental commitment at June 30, 2000 is due as follows: During the year ending June 30: 2001 36,115 2002 36,473 2003 35,291 --------- $ 107,879 ========= The total rental expense included in the income statements for the years ended June 30, 2000, 1999, and 1998 is $34,426, $35,633, and $34,365, respectively. During the year, a claim was filed against multiple defendants including the Company. The complaint arises from the alleged embezzlement by a former licensee in connection with the provision of claims services. The complaint seeks compensatory damages of at least $1,800,000. The Company has denied allegations of liability contained in the complaint. The litigation is in the early phases of discovery, therefore, the Company cannot yet assess the merits of the complaint or the effects this litigation will have on the Company. As of June 30, 2000, the Company has not accrued any amounts for potential losses. Included in Other Liabilities is the Company's payable to franchisees/licensees and clients at June 30, 2000 and June 30, 1999 of $37,593 and $37,065, respectively. NOTE 14: STOCK TRANSACTIONS On April 29, 1999, at the annual shareholders' meeting, the Company's shareholders approved the November 20, 1998, agreement between the Company and United Financial Adjusting Company ("UFAC"), a wholly owned subsidiary of The Progressive Corporation ("Progressive"). Pursuant to the agreement, on April 30, 1999, UFAC purchased 5,258,513 shares of the Company's newly issued shares of Series A Convertible Voting Preferred Stock at a price of $1.30 per share. UFAC's purchase represented approximately 53% of the Company's voting securities. Following the purchase by UFAC, the Company issued a tender offer to purchase up to 1,000,000 common stock shares at $2.90 per share from existing shareholders. The tender offer expired on June 12, 1999, and resulted in the purchase of 971,464 common stock shares. Also pursuant of UFAC's purchase, the Company declared a cash distribution of $1.60 per share for shareholders of record on June 25, 1999, and payable to the holders of the rights of the distribution on July 12, 1999. Those shares tendered in the tender offer were not eligible for the cash distribution. UFAC was not eligible to participate in the tender offer, nor was UFAC entitled to the cash distribution. On June 30, 1999, UFAC's preferred shares were converted into common stock shares, representing 59% of the Company's voting securities. In March of 2000, the Company's board of directors agreed in principle to enter into a transaction (the "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 UFAC. Upon consummation of the proposed Transaction, the Company will merge with UFAC and will become the parent of UFAC's two subsidiaries, JW Software, Inc. ("JW") and DBG Technologies, Inc. ("DBG"). In May 2000, JW acquired 100% of the stock of Vedder Software Group, Inc. ("Vedder"). Vedder will therefore be included in the Transaction. The Transaction will be accounted for in a manner similar 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, DBG develops and markets internet-based systems and websites, and Vedder develops property estimating software and tools. 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 Transaction is consummated, Netrex will own approximately 16.4 million shares of the Company's stock, representing approximately 82% of the Company's outstanding common stock. The Transaction is subject to the approval of certain regulatory agencies and the American Stock Exchange, the stock exchange on which the Company's shares are currently traded, as well as the approval by shareholders of the Company and UFAC. In connection with this Transaction, the Company is proposing to change its name to "Netrex Business Services, Inc.". The Company will, however, continue to operate the franchised and licensed claims adjusting business under the Frontier name even if the Transaction is consummated and the name change effected. F-16 FRONTIER ADJUSTERS OF AMERICA, INC. AND SUBSIDIARIES SUPPLEMENTARY DATA Selected Quarterly Financial Data (Information for all periods shown below is unaudited)
2000 ----------------------------------------------------- Three Months Ended ----------------------------------------------------- SEPT. 30 DEC. 31 MAR. 31 JUNE 30 ----------- ----------- ----------- ----------- Revenue $ 1,676,064 $ 1,566,992 $ 1,482,098 $ 1,531,742 Income from operations 552,906 289,886 467,744 571,946 Income before income taxes 583,929 345,257 509,423 630,846 Net income 367,332 199,068 304,497 369,472 Net income per share Basic .04 .02 .03 .04 Diluted .04 .02 .03 .04 Weighted average shares outstanding Basic 8,957,560 8,957,560 8,957,564 8,957,660 Diluted 8,957,560 8,957,560 8,957,564 8,957,660 1999 ----------------------------------------------------- THREE MONTHS ENDED ----------------------------------------------------- SEPT. 30 DEC. 31 MAR. 31 JUNE 30 ----------- ----------- ----------- ----------- Revenue $ 1,633,369 $ 1,524,113 $ 1,572,172 $ 1,611,930 Income from operations 395,320 260,424 312,573 (214,740) Income before income taxes 423,263 296,089 347,951 (85,161) Net income (loss) 255,916 179,499 208,216 (97,179) Net income (loss) per share Basic .06 .04 .05 (.02) Diluted .06 .04 .05 (.02) Weighted average shares outstanding Basic 4,605,358 4,605,358 4,605,358 4,459,723 Diluted 4,609,163 4,605,358 4,605,784 4,459,723 1998 ----------------------------------------------------- THREE MONTHS ENDED ----------------------------------------------------- SEPT. 30 DEC. 31 MAR. 31 JUNE 30 ----------- ----------- ----------- ----------- Revenue $ 1,483,708 $ 1,411,242 $ 1,440,432 $ 1,489,966 Income from operations 388,084 319,846 233,857 (40,791) Income before income taxes 426,229 386,659 274,900 (59,921) Net income (loss) 258,642 234,391 166,817 (47,375) Net income (loss) per share Basic .06 .05 .04 (.01) Diluted .06 .05 .04 (.01) Weighted average shares outstanding Basic 4,605,358 4,605,358 4,605,358 4,605,358 Diluted 4,605,358 4,628,045 4,611,934 4,605,358
F-17 FRONTIER ADJUSTERS OF AMERICA, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
Additions Balance at Charged to Deductions Balance Beginning Cost and From at End of Period Expenses Reserves of Period ----------- ----------- ----------- ----------- Year Ended June 30, 2000: Allowance for doubtful accounts $ 350,367 $ 311,820 $ 57,040 $ 605,147 Year Ended June 30, 1999: Allowance for doubtful accounts $ 375,220 $ 237,601 $ 244,435 $ 350,367 Year Ended June 30, 1998: Allowance for doubtful accounts $ 250,137 $ 352,132 $ 227,049 $ 375,220
F-18 EX-21 2 0002.txt SUBSIDIARIES LIST OF SUBSIDIARIES OF FRONTIER ADJUSTERS OF AMERICA, INC.
Name State of Incorporation Parent Company - ---- ---------------------- -------------- Frontier Adjusters of Arizona, Inc. Arizona Frontier Adjusters of America, Inc. Frontier Adjusters, Inc. Colorado Frontier Adjusters of Arizona, Inc. Frontier Adjusters Co., Ltd. Alberta, Canada Frontier Adjusters, Inc.
EX-23 3 0003.txt CONSENT OF MCGLADREY & PULLEN, LLP CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation of our report, dated August 2, 2000, included in this Form 10-K in the previously filed Registration Statement of Frontier Adjusters of America, Inc. on Form S-8 filed on April 16, 1992. McGLADREY & PULLEN, LLP /s/ McGladrey & Pullen, LLP Phoenix, Arizona September 12, 2000 EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-2000 JUL-01-1999 JUN-30-2000 2,132,897 0 2,150,082 605,147 0 3,953,077 2,656,715 1,034,326 6,720,093 419,753 0 0 0 90,191 6,210,149 6,720,093 0 6,256,896 0 0 4,374,414 311,820 1,405 2,069,455 829,086 1,240,369 0 0 0 1,240,369 .14 .14
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