0000950147-01-501621.txt : 20011008
0000950147-01-501621.hdr.sgml : 20011008
ACCESSION NUMBER: 0000950147-01-501621
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 20010630
FILED AS OF DATE: 20010920
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: FRONTIER ADJUSTERS OF AMERICA INC
CENTRAL INDEX KEY: 0000735349
STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794]
IRS NUMBER: 860477573
STATE OF INCORPORATION: AZ
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-12902
FILM NUMBER: 1741439
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-K405
1
e-7466.txt
ANNUAL REPORT FOR THE YEAR ENDED 06/30/01
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, 2001
[ ] 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 85012
Phoenix, Arizona (Zip Code)
(Address of principal executive offices)
(602) 264-1061
(Registrant's telephone number, including area code)
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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $5,398,127 as of September 14, 2001.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, as of September 14, 2001, was 8,957,660.
Page 1
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,
certain of the Adjusters offer risk management services to their clients. As of
June 30, 2001, the Company had entered into 524 license and franchise agreements
("Agreements") with 390 entities, operating 482 offices with 681 advertised
locations in 50 states, the District of Columbia and Canada. In addition to
licensing and franchising Adjusters, the Company had owned and operated
independent insurance adjusting and risk management businesses in Arizona and
Nevada. These businesses were sold in the fourth quarter of the fiscal year
ended June 30, 2001.
As of June 30, 2001, the Company employed 20 full-time people. Two were
full-time officers of the Company, and 18 were full-time administrative staff.
Management believes that its relations with its employees are good.
In April 2001, the Company announced that United Financial Adjusting Company
("UFAC"), its majority shareholder, had sold its 5,258,513 shares in the Company
to Merrymeeting, Inc. ("MMI"), a company 50% owned by John M. Davies, the
Company's CEO, President and Chairman of the Board of Directors, for $1.58 per
share. As a result of the sale of the shares by UFAC to MMI, the service
agreement between the Company and UFAC was terminated effective April 30, 2001.
The Company still receives and pays for limited services provided by UFAC not
related to the terminated service agreement. In addition, the Company announced
that its Board of Directors had approved a proposal by MMI to take the Company
private through a cash-out merger at a price of $1.58 per share (referred to as
"Transaction"). Consummation of this Transaction is subject to approval by
certain regulatory agencies and by the Company's shareholders. The Company has
announced a Special Meeting of shareholders to be held at 9:00 a.m. Arizona time
on Friday, September 28, 2001 for a vote of shareholders on the Transaction. The
record date for the meeting was August 29, 2001.
GENERAL
For its fiscal year ended June 30, 2001, the Company's licensing and franchising
activities accounted for approximately 90% of gross revenue, and the Company's
adjusting and risk management businesses accounted for approximately 10% of
gross revenue. For the fiscal years ended June 30, 2000 and June 30, 1999, the
Company's licensing and franchising activities accounted for approximately 83%
and 78%, respectively, of gross revenue, and the Company's adjusting and risk
management businesses accounted for approximately 17% and 22%, 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 is based), are set forth in the following table:
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
Gross billings by Adjusters (approximate) $48,410,000 $45,810,000 $44,730,000
Revenue from licensing and franchising activities 5,555,722 5,170,592 4,936,349
Revenue from Company-owned adjusting and risk management businesses 628,120 1,086,304 1,405,235
For its fiscal year ended June 30, 2001, the Company's licensing and franchising
activities accounted for approximately $3,022,000 in income from operations and
the Company's adjusting and risk management businesses accounted for
approximately $103,000 in a loss from operations. For the fiscal years ended
June 30, 2000 and June 30, 1999, the Company's licensing and franchising
Page 2
activities accounted for approximately $2,372,000 and $1,051,000 respectively,
in income from operations, and the Company's adjusting and risk management
businesses accounted for approximately $ 88,000 and $221,000, 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 also are often referred to in the industry as "third
party 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.
LICENSE AND FRANCHISE AGREEMENTS
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 2001, the Company retained 11.3% of the Adjusters'
collections as royalty fees under all of its 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.
Page 3
LICENSE AND FRANCHISE AGREEMENTS (CONTINUED)
Before entering into an Agreement with a prospective licensee or franchisee, the
Company reviews the prospective licensee's or franchisee's background to
determine whether he or she is qualified and experienced in 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 Adjusters. 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 monthly
for invoices in excess of 60 days in age. 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.
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.
The Company frequently lends money to assist the Adjusters in meeting their
business and personal expenses. 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 $294,442 per month and has received reimbursement of an average of
$295,154 per month. At June 30, 2001, the Company had approximately $862,000 in
outstanding loans or advances. During the past four fiscal years, the Company
has written off an average of $146,616 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
Page 4
LICENSE AND FRANCHISE AGREEMENTS (CONTINUED)
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
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.
Page 5
LICENSE AND FRANCHISE AGREEMENTS (CONTINUED)
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
conducted independent insurance adjusting and risk management operations in
Arizona and Nevada. The Company sold these businesses in the fourth quarter of
the fiscal year ended June 30, 2001.
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".
Page 6
DEPENDENCE UPON KEY PERSONNEL
The Company gained the full-time services of John M. Davies, age 45, and Jeffrey
R. Harcourt, age 40, when UFAC sold its shares of the Company to MMI. Mr.
Davies, Mr. Harcourt, a marketing director and a CIO have replaced most of the
services previously provided to the Company by UFAC including managerial,
marketing, financial, technological and other services. Mr. Davies serves as the
Company's CEO, President and Chairman of the Board of the Directors, and Mr.
Harcourt serves as the Company's CFO, Treasurer and Secretary. Should the
Company lose the services of Mr. Davies and/or Mr. Harcourt, the Company would
be materially adversely affected.
VOTING CONTROL
The directors and officers of the Company own approximately 29% of the
outstanding voting stock of the Company. MMI's ownership constitutes
approximately 59% of the Company's outstanding voting stock. If the Transaction
is consummated, MMI will own 100% of the Company's outstanding voting stock.
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".
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.
The Company is aware of another entity in the insurance industry that 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.
Page 7
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-franchisee
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.
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 indirectly as a
licensor and franchisor 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, 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.
Payment of quarterly dividends was then suspended until a one-time dividend of
$1.60 per share was declared during the fourth quarter of fiscal 1999. The
Company has since ceased payment of dividends. The Company intends to retain its
earnings to finance the development, expansion and growth of the 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 8
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. The office building currently contains approximately 13,000 square
feet of office space. The Company also owns a parcel of real property across the
street from the Company's principal office, which is utilized for employee
parking. As the Company sold its Phoenix adjusting office in April 2001, and has
therefore reduced its staff located at its principal place of business, the
Company now has excess space. The Company has therefore placed its 45 East
Monterey Way location for sale as well as the parcel across the street. Upon the
sale of these properties, the Company plans to relocate to leased office space
in the Phoenix, Arizona area.
The Company owned a small building and property at 51 East Monterey Way which
contained two offices and was sold during the first quarter of fiscal 2002. The
combined offices contain approximately 1,500 square feet of office space and
were used for storage.
As a result of the Company's decision to sell these properties, the Company
adjusted the carrying value of these properties down by $172,600 to reflect
their estimated market value.
Additionally, the Company leases approximately 2,100 square feet of office space
in Independence, Ohio, 800 square feet of office space in Tucson, Arizona, and
1,000 square feet of office space in Las Vegas, Nevada. Four members of the
Company's executive management team are located in the office space leased in
Independence, Ohio. The Tucson, Arizona and Las Vegas, Nevada office spaces were
used for the adjusting businesses located in those cities that were previously
owned by the Company. As the Company sold its Tucson, Arizona adjusting business
in January 2000, the Company no longer uses the office leased there and has been
unsuccessful in its attempts to sublease it. The Las Vegas, Nevada adjusting
office was sold in June 2001 and the Company no longer uses the office leased
there. Although the Company remains the lessor, the franchisee now servicing
that territory has moved into the office space and is funding the lease
obligation.
ITEM 3 - LEGAL PROCEEDINGS
In June 1999, Safeway Inc. filed a complaint against multiple defendants
including the Company in the United States and District Court in Nebraska. The
complaint arose from the alleged embezzlement of over $1,800,000 by a former
franchisee of the Company. The complaint alleged 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 sought an accounting
and a recovery of compensatory damages of at least $1,800,000. In the fourth
quarter of fiscal 2001, this lawsuit was settled at no expense to the Company
and the Company received reimbursement of costs and expenses, including legal
fees, of approximately $40,000.
From time to time in the normal course of its business, the Company is named as
a defendant in lawsuits. The Company does not believe that it is subject to any
such lawsuits or litigation or threatened lawsuits or litigation that will have
a material adverse effect on the Company or its business.
ITEM 4 - SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
Matters were submitted to a vote of securities holders during the second quarter
of this fiscal year. Such matters were reported on the Company's Form 10-Q for
the period ended December 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 9
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 Volume
------------------ ------
High Low
---- ---
Fiscal Year Ended June 30, 2001
First Quarter $ 4.000 $ 2.625 120,800
Second Quarter 3.000 1.000 139,500
Third Quarter 1.750 1.000 84,600
Fourth Quarter 1.550 1.000 189,300
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
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, 2001
First Quarter $ .0000
Second Quarter .0000
Third Quarter .0000
Fourth Quarter .0000
Fiscal Year Ended June 30, 2000
First Quarter $ .0000
Second Quarter .0000
Third Quarter .0000
Fourth Quarter .0000
As of September 14, 2001, the Company has approximately 220 holders of record
and 800 beneficial holders of its 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 10
ITEM 6 - SELECTED FINANCIAL DATA
Year Ended June 30,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA
Operating revenue $ 6,183,842 $ 6,256,896 $ 6,341,584 $ 5,825,348 $ 6,164,603
Net income 1,575,240 1,240,369 546,452 612,475 979,198
Basic earnings per share .18 .14 .12 .13 .21
Diluted earnings per share .18 .14 .12 .13 .21
Weighted average number of shares
used in per share data:
Basic 8,957,660 8,957,586 4,569,049 4,605,358 4,607,709
Diluted 8,957,660 8,957,586 4,570,113 4,612,674 4,631,898
Cash dividends per share $ -- $ -- $ 1.638 $ .15 $ .15
BALANCE SHEET DATA
Working capital $ 7,442,147 $ 3,533,324 $ 2,073,511 $ 3,214,489 $ 3,261,953
Total assets 8,902,255 6,720,093 12,118,984 7,800,700 7,912,139
Long-term debt -- -- -- 4,953 33,462
Property and equipment, net 93,361 1,622,389 1,608,936 1,724,329 1,736,226
Stockholders' equity 7,877,489 6,300,340 5,053,633 6,452,241 6,564,193
Book value per common share .88 .70 .56 1.40 1.43
Retained earnings 5,838,340 4,263,100 3,022,731 4,735,935 4,814,266
Total shares outstanding 8,957,660 8,957,660 8,957,560 4,605,358 4,605,358
Page 11
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY AND FINANCIAL RESOURCES
In fiscal 2001, the Company's continuing operations generated $1,981,000 in
cash, which was sufficient for the Company's cash requirements. The most
significant items reconciling net income to cash provided by the Company's
operations are an increase in other liabilities of $151,000, depreciation and
amortization of $199,000, a decrease in income taxes payable of $184,000, a
write-down of fixed assets available for sale of $173,000 and bad debt expense
of $128,000.
Other liabilities increased by $151,000 primarily due to accrued legal fees
incurred in connection with the Transaction. The decrease of $184,000 in income
taxes payable results from estimated taxes paid by the Company based on
quarterly results being higher than actual taxes. During the fourth quarter of
fiscal 2001, the Company decided to sell two buildings and a parking lot.
Although these properties did not sell by June 30, 2001, the Company realized a
decline of $173,000 between the carrying value and market value of these
properties. 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, 2001, the Company's investing activities
generated $845,000 in cash. The most significant items affecting cash generated
from investing activities are $2,184,000 given as advances or loans to licensees
and franchisees, $2,394,000 in collections on advances or loans given to
licensees and franchisees and $620,000 in proceeds from the sale of
held-to-maturity investments.
For the fiscal year ended June 30, 2001, the Company's financing activities
generated $397,000 in cash. In the fourth quarter of fiscal 2001, the Company
entered into an obligation with a balance of $397,000 at June 30, 2001 in
connection with its purchase of errors and omissions insurance for the Company
and its franchisees and licensees.
The Company anticipates that during fiscal 2002 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
$100,000 in fiscal 2002.
The Company continues to maintain a strong cash position. As a result, the
Company's ratio of current assets to current liabilities is 8.26 to 1 as of June
30, 2001, compared to 9.42 to 1 as of June 30, 2000. The decrease is primarily
the result of the increase in the short-term payable.
RESULTS OF OPERATIONS 2001 COMPARED TO 2000
REVENUE
The Company's revenue decreased $73,000, or 1.2%, to $6,184,000 during the
fiscal year ended June 30, 2001 from $6,257,000 in the prior year. This decrease
consists of a $458,000 decrease in adjusting and other revenue and a $385,000
increase in continuing licensee and franchisee fees.
The decrease of $458,000 in adjusting and other fees to $628,000 in the current
fiscal year compared to $1,086,000 in the prior fiscal year represents a 42.2%
decrease. The Company experienced decreases in adjusting fees in its Phoenix,
Arizona, Las Vegas, Nevada, and Tucson, Arizona adjusting offices in the amounts
of $294,000, $90,000 and $72,000, respectively. The remainder of the decrease is
due to the discontinuation of risk management services. The Phoenix, Arizona and
Las Vegas, Nevada adjusting offices were sold in the fourth quarter of fiscal
2001, while the Tucson, Arizona adjusting office was sold in the third quarter
of fiscal 2000.
Prior to its sale, the adjusting revenue generated by the Phoenix, Arizona
adjusting office decreased due to a reduction in claims assigned by clients
during the fiscal year ended June 30, 2001 as compared to the prior year. As
this office was sold on April 30, 2001 to a new franchisee, the adjusting fees
for the last two months of the fiscal year were the result of run-off business
and were, therefore, minimal. The decrease in the Las Vegas, Nevada office was
largely due to a decrease in storms during this fiscal year as compared to the
Page 12
REVENUE (continued)
prior year. Furthermore, the Las Vegas, Nevada adjusting office was sold on June
1, 2001. The decrease in the Tucson, Arizona adjusting office is the result of
that office's sale on January 1, 2000. Finally, the Company ceased providing
risk management services within the Phoenix, Arizona adjusting office during the
prior fiscal year as it was not economical to provide such services. 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
$385,000, or 7.4%, from $5,171,000 in the prior year to $5,556,000 in the
current fiscal year. This increase reflects an increase in the number of
licensees and franchisees as well as an increase in claims assignments from
insurance companies and self-insureds.
The Company's revenue is affected by numerous matters including the workloads of
other companies and claims presented by their clients. Therefore, the Company is
unable to project its future revenue. The Company has historically seen growth
in the licensee and franchisee fees paid. To further enhance revenue growth, the
Company continues 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.
COMPENSATION AND EMPLOYEE BENEFITS
Compensation and employee benefits represent approximately 42.7% of the
Company's costs and expenses and represent the largest single item of expense.
These expenses decreased $430,000, or 21.7%, from $1,985,000 in the year ended
June 30, 2000 to $1,555,000 in the current year. This decrease is primarily
attributed to decreases in officers' salaries of $56,000, adjusters' salaries of
$145,000, health insurance of $45,000 and other compensation of $234,000 and an
increase of $43,000 in temporary staffing services.
The decrease in officers' salaries and in other compensation relates to the
resignation of and severance package payment to an executive officer in January
of 2000. Certain of the services provided by the executive officer had been
provided by UFAC pursuant to a service agreement between the Company and UFAC,
which terminated on April 30, 2001. Also included in officers' salaries is the
compensation paid to two officers the Company employed directly as a result of
MMI's purchase of the Company's stock from UFAC and subsequent cancellation of
the UFAC service agreement.
Adjusters employed in the company-owned adjusting businesses were paid a
commission based on adjusting revenue. As the revenue decreased in the adjusting
businesses, the compensation paid to the adjusters also decreased. Furthermore,
adjusters' compensation decreased as a result of the sale by the Company of its
adjusting businesses in Phoenix, Arizona and Las Vegas, Nevada in the fourth
quarter of this fiscal year. Services received from temporary staffing services
have increased as the Company is utilizing more of these services to handle
increased workload rather than hiring additional employees. As the number of
employees has decreased as compared to the prior year, the cost of providing
medical benefits has also decreased.
SERVICE FEES
From April 30, 1999 through April 30, 2001, the Company had a service agreement
with UFAC whereby the Company paid a $25,000 monthly fee for certain services
provided by UFAC. Services included under this agreement were management,
marketing, technology, human resource support and accounting and reporting
support. Services fees incurred under this agreement for the fiscal years ended
June 30, 2001 and 2000 were $250,000 and $300,000, respectively.
The Company also paid UFAC for services performed beyond the scope of the
service agreement. These services consist mainly of computer consulting fees and
telephone support for the Company's 24 hour hotline. For the fiscal years ended
June 30, 2001 and 2000, the Company paid $67,000 and $61,000, respectively, for
services provided by UFAC that were not within the scope of the service
agreement.
Page 13
SERVICE FEES (continued)
As a result of the sale of UFAC's shares to MMI, the service agreement with UFAC
was cancelled on April 30, 2001. At that time, the Company gained four employees
that replaced the majority of the services provided by UFAC. Therefore, the
Company does anticipate an increase in compensation expenses. For a fee per
call, UFAC continues to provide the Company with telephone support for the
Company's after-hour hotline.
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 $89,000, or 2.0%, from fiscal 2000 to fiscal 2001. The
principal items affecting these expenses are: decreases of $184,000 in bad debt
expense, $87,000 in office expenses and $87,000 in computer consulting expenses;
increases of $48,000 in accounting services, $42,000 in legal expenses; and a
write-down in fixed assets available for sale of $173,000.
The Company has traditionally advanced funds to franchisees and licensees to
assist them in the initial start-up and further growth of their business. The
Company reserves for such loans based upon historical experience and current
changes in circumstances. Particularly, loans are reserved for when the Company
determines that the loan is uncollectible or when collectability of the entire
loan balance becomes questionable. Collectability of a loan becomes questionable
when either the Company anticipates that the relationship between the Company
and the licensee or franchisee will be terminated, or the volume of the licensee
or franchisee is inadequate to repay the loan in a reasonable period.
As the Company has increased its loan criteria and collection efforts and has
significantly decreased the granting of such loans, the frequency of bad debt
has declined. Accordingly, bad debt has decreased this fiscal year as compared
to the prior fiscal year.
Office expenses decreased due to the greater than normal purchases during fiscal
2000 as the Company wanted to ensure ample inventory of supplies in the event of
any shortages due to Year 2000 problems. Furthermore, the Company no longer
incurs office expenses for the Tucson, Arizona, Phoenix, Arizona and Las Vegas,
Nevada adjusting offices. Computer consulting expenses decreased for the fiscal
year ended June 30, 2001 as the need for such services was greater in the prior
year due to preparation for the Year 2000.
Legal fees and accounting services have increased this fiscal year due to
preparation for the contemplated merger with UFAC that was later abandoned, and
the preparation for the Transaction.
OTHER INCOME
The Company's other income increased by $39,000, or 20.8%, from $187,000 in the
year ended June 30, 2000 to $226,000 for the year ended June 30, 2001. The
increase was primarily due to an increase of $62,000 in interest income, an
increase in gains on the sale of licenses of $16,000, an increase in the loss on
the disposition of assets of $22,000 and a decrease of $12,000 in realized gains
on the sale of investments.
INCOME TAXES
The Company's income taxes were 39.4% and 40.1% of the Company's income before
taxes for fiscal years 2001 and 2000, respectively. The Company's income taxes
have not been significantly affected by any changes in the federal or state tax
laws. However, tax rates can be changed at any time based upon legislation.
NET INCOME
The Company's net income increased $335,000 to $1,575,000 in the current fiscal
year from $1,240,000 in fiscal 2000, an increase of 27.0%. The most significant
items affecting net income were a $73,000 decrease in revenue, a $430,000
decrease in compensation and fringe benefits and a $89,000 decrease in expenses
other than compensation and fringe benefits and service fees. During the fourth
quarter of fiscal 2001, the Company recorded net income of $218,000.
Page 14
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 year
ended June 30, 2000 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
in 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 year ended June 30, 1999 to $5,170,000
in the year ended June 30, 2000. This increase reflects the benefit to the
Company's licensees and franchisees from an increase in claims assignments from
insurance companies and self-insureds.
The Company's revenue is affected by numerous matters including the work loads
of other companies and claims presented by their clients. Therefore, the Company
is unable to project its future revenue. The Company has historically seen
growth in the licensee and 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 year ended
June 30, 1999 to $1,985,000 in the year ended June 30, 2000. 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 2000 fiscal year, the Company paid
severance packages to Mr. Rocke and Mrs. Ryberg in the 1999 fiscal year, thereby
increasing compensation expense compared to fiscal 2000. 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 were provided by UFAC
pursuant to a service agreement between the Company and UFAC during the 2000
fiscal year. 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 paid a $25,000 monthly fee for certain services provided by
UFAC. Services included under this agreement were management, marketing,
Page 15
SERVICE FEES (continued)
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 paid 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. 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; 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.
Page 16
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.
The Company's net income increased $694,000 to $1,240,000 in fiscal 2000 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.
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 2001, the Company sold its investments in municipal bonds
and is therefore no longer exposed to any interest income risk or market value
risks associated with those investments.
Although the Company wholly owns a Canadian subsidiary, the cash and short-term
investments held by the Canadian subsidiary are 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)
----------- ------------------- --- --------
Eric J. Carlstrom** Mr. Carlstrom has been associated with the Company 42 2000
Director as a director since December 2000. Mr. Carlstrom
has served as Senior Vice President of AON Risk
Services, Inc. since 1997. Prior thereto, Mr.
Carlstrom served as Senior Vice President at
Alexander & Alexander, an insurance brokerage
firm, from 1994 to 1997. Mr. Carlstrom holds a
bachelors of arts degree from Hofstra University.
John M. Davies Mr. Davies has been associated with the Company as 45 1999
Director, Chairman of a director since April 1999, Chairman of the Board
the Board, President since January 2000 and Chief Executive Officer and
and CEO President since November 2000. Mr. Davies also
currently serves as Chairman of the Board,
President and Chief Executive Officer of MMI. From
June 1999 through April 2001, Mr. Davies served as
President of Netrex LLC, a financial services and
technology company. From November 1999 through
April 2001 Mr. Davies was the sole Director of
UFAC. 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 a
masters of business administration 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 Financial Officer 40 1999
Director, Chief Financial of the Company since August 1999, as a director of
Officer, Treasurer and the Company since April 1999, as Treasurer of the
Secretary Company since January 2000 and as Secretary since
April 2001. From November 1999 through April 2001,
Mr. Harcourt served as Chief Financial Officer of
Netrex. From November 1999 through April 2001, Mr.
Harcourt also served as Treasurer of UFAC, and
from March 1999 through April 2001, Mr. Harcourt
served as Treasurer and director of DBG
Technologies, Inc.. From October 1990 through
November 1999, Mr. Harcourt was employed by The
Page 18
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Served as Director
Since Year Listed
Name/Title Business Experience Age Below(1)
---------- ------------------- --- --------
Jeffrey R. Harcourt Progressive Corporation, most recently as the
(continued) Controller of the Diversified Business Group. Mr.
Harcourt also currently serves as the Chief
Financial Officer, Secretary and Treasurer of MMI,
and as Treasurer of JW Software, Inc., a software
company. Mr. Harcourt holds a bachelors of science
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.
Glenn P. Nagy Mr. Nagy has been associated with the Company as a 46 2001
Director** director since July 2001. Mr. Nagy has owned and
operated Purchasing Control Services, a food
purchasing and consulting company, since 1991. Mr.
Nagy holds a bachelors degree from Washington and
Jefferson College and a master's degree from the
University of Pittsburgh.
Kenneth A. Sexton Mr. Sexton was appointed as a director of the 47 2000
Director** 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 bachelors of
science degree in business from Ohio State
University and is a Certified Public Accountant.
----------
* The Board in its entirety acts as the Company's compensation committee.
** Member of the Company's audit committee
(1) Term will continue until next election of directors
Page 19
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the compensation
paid by the Company during its year ended June 30, 2001, to the chief executive
officer and each other executive officer whose aggregate compensation exceeded
$100,000.
SUMMARY COMPENSATION TABLE (1)
Annual Compensation
-------------------------------
Name and Principal Position Year Salary ($)(2) Bonus ($)(2)
--------------------------- ---- ------------- ------------
John M. Davies 2001 41,667 --
Director, Chairman, CEO 2000 -- --
and President 1999 -- --
----------
(1) Columns (e), (f), (g) and (h) have been omitted as no such compensation was
granted.
(2) From April 30, 1999 through April 30, 2001, Mr. Davies' services and the
services of other executive officers of the Company were provided to the
Company by UFAC under a contract whereby the Company paid $25,000 per month
for services consisting of management, marketing , technology, human
resource support and accounting and reporting services. This service
agreement was terminated April 30, 2001 as a result of the sale of the
Company's shares from UFAC to MMI. Upon completion of the sale, the Company
gained four full-time employees, including Mr. Davies.
OPTION/SAR EXERCISES AND HOLDINGS
The Company did not grant any stock options during fiscal 2001 nor were there
any options outstanding as of June 30, 2001 for any of the Named Executive.
DIRECTORS COMPENSATION
Directors who are not employees of the Company, UFAC or Netrex, are paid $1,000
per board meeting attended. During fiscal 2001, Mr. Sexton received $8,000 and
Mr. Carlstrom received $7,000 for attendance at board meetings.
EMPLOYMENT AGREEMENTS
The Company has no employment agreements in place at this time.
REPORT OF THE COMPENSATION COMMITTEE
For the fiscal year ended June 30, 2001, the Board, as a whole, acted as the
Compensation Committee. The Board establishes policies relating to the
compensation of employees. The following is a report submitted by the Board
members in their capacity as the Compensation Committee, addressing the
Company's compensation policy as it relates to the named executive officers in
fiscal 2001.
Page 20
COMPENSATION POLICY
The goal of the Company's executive compensation policy is to ensure that an
appropriate relationship exists between executive pay and the creation of
shareholder value, while at the same time motivating and retaining key
employees. To achieve this goal, during fiscal 2001 the Company implemented a
bonus program for all employees. For executive management, the bonus program is
designed to reward executive management for exceptional growth, return on
revenue and personal performance. For the remainder of the employees, the
program is designed to reward employees for personal performance and
accomplishments throughout the year. Disbursements under each program are made
at the discretion of the Board. In addition to the bonus program, all executive
officers and management are eligible to participate in the Company's 1996 Stock
Option Plan. Annual cash compensation, together with equity-based, incentive
compensation is designed to attract and retain qualified executives and to
ensure that such executives have a continuing stake in the long-term success of
the Company.
FISCAL 2001 EXECUTIVE COMPENSATION
The Company's fiscal 2001 executive compensation plan consisted of (i) a base
salary and (ii) bonus based on personal performance and revenue targets. On May
1, 2001, upon the cancellation of the UFAC service agreement, John M. Davies,
the Company's President and CEO, became a direct employee of the Company. Mr.
Davies' salary was set at approximately the same level as the Company's prior
CEO, however, Mr. Davies elected not to receive any bonus for fiscal 2001. No
stock options were granted by the Board during fiscal 2001.
The Board believes that linking executive compensation to corporate performance
(i.e. revenue targets) provides incentive to the executive to enhance corporate
performance and the shareholders' interests. It was with this in mind that the
bonus portion of executive compensation was revised to the current arrangement
with the Company's named executives.
ERIC J. CARLSTROM JOHN M. DAVIES JEFFREY R. HARCOURT
GLENN P. NAGY KENNETH A. SEXTON
COMPANY PERFORMANCE
The following graph reflects a five-year comparison of cumulative total returns
for the Common Stock, the AMEX Market Value Index, and the Company's Peer Group
of Stocks based on the four digit SIC Code Index. The total cumulative return on
investment (change in the year-end stock price plus reinvested dividends) for
each of the periods and indexes is based on the stock price or composite index
at the end of fiscal 1996. The graph compares the performance of the Company
with AMEX and Peer Group Indexes with the investment weighted based upon market
capitalization.
6/30/96 6/30/97 6/30/98 6/30/99 6/30/00 6/30/01
------- ------- ------- ------- ------- -------
Frontier Adjusters 100.00 93.86 115.15 163.36 192.77 73.19
Industry 100.00 137.31 179.95 190.45 231.17 278.52
AMEX Market Index 100.00 106.35 122.96 120.96 139.08 136.22
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, 2001, 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
----------------------------------
Name and Address Number of Shares (1) Percent (2)
---------------- -------------------- -----------
OFFICERS AND DIRECTORS
Eric J. Carlstrom (3) 1,800 *
John M. Davies (3) (4) 2,629,757 29.36%
Jeffrey R. Harcourt (3) -- *
Glenn P. Nagy (3) -- *
Kenneth A. Sexton (3) -- *
All officers and directors as a group 2,631,557 29.38%
(five persons) (4)
FIVE PERCENT SHAREHOLDERS
MMI (3) 5,258,513 58.70%
Patrick Enthoven (3) (5) 2,629,256 29.35%
----------
* Less than 1%
(1) 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. Also includes shares of Common Stock that the
identified person had the right to acquire within 60 days after June 30,
2001 by the exercise of stock options.
(2) The percentages shown include the shares of Common Stock that the person
had the right to acquire within 60 days after June 30, 2001. In calculating
the percentage of ownership, all shares of Common Stock that the identified
person had the right to acquire within 60 days after June 30, 2001 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 shareholders.
(3) Each of such persons may be reached through the Company at 45 East Monterey
Way, Phoenix, Arizona 85012.
(4) Includes 2,629,257 shares representing one-half of the shares owned by MMI.
Mr. Davies disclaims any beneficial interest for purposes of Section 13(d)
or (g) of the Securities Exchange Act of 1934, as amended, in the remaining
one-half of the shares owned by MMI.
(5) Includes 2,629,256 shares representing one-half of the shares owned by MMI.
Mr. Enthoven disclaims any beneficial interest for purposes of Section
13(d) or (g) of the Securities Exchange Act of 1934, as amended, in the
remaining one-half of the shares owned by MMI.
Based solely on a review of the copies of such forms received by the Company
during the fiscal year ended June 30, 2001, 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 MMI beneficially own more than five percent of the
Company's common stock (based upon present records of the transfer agent).
Page 22
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Old Frontier Investment, Inc. of Arizona, a shareholder, 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 $7,909, $14,448 and $13,382
for the fiscal years ended June 30, 2001, 2000 and 1999 respectively, in
connection with such 5% royalty agreement.
Included in other liabilities is $10,000 in accrued moving expenses for John M.
Davies, shareholder, President, CEO and the Company's Chairman of the Board.
George M. Hill, a former shareholder, Vice President and Director of the
Company, acted as outside counsel to the Company. The Company paid Mr. Hill's
law firm approximately $38,000 in fiscal 2001, $43,000 in fiscal 2000, $92,000
in fiscal 1999, for legal services and reimbursement of expenses.
UFAC, a shareholder through April 2001, had an agreement that terminated in
April 2001 whereby the Company had paid $25,000 per month for marketing,
managerial, technological, financial and other services and resources (see Note
14). As of June 30, 2001, the Company incurred $250,000 in service fees related
to this agreement and an additional $66,563 for services performed outside of
the agreement for an aggregate of $316,563. The Company incurred $360,741 and
$50,000 in similar fees for the fiscal year ended June 30, 2000 and 1999,
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.
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:
Independent Auditor's Report
Consolidated Balance Sheets - June 30, 2001 and 2000
Consolidated Statements of Income for the Years Ended June 30, 2001,
2000 and 1999
Consolidated Statements of Comprehensive Income for years ended
June 30, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 2001, 2000 and 1999
Notes to Consolidated Financial Statements - June 30, 2001, 2000
and 1999
(a) (2) Financial Statement Schedules
SCHEDULE
NUMBER
------
II Valuation and Qualifying Accounts Years Ended June 30, 2001,
2000 and 1999
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.**
3(c) Amended and First Restated Articles of Incorporation of Frontier
Adjusters of America, Inc.*******
3(d) Amended and First Restated 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) No longer Applicable
21 List of Subsidiaries of Frontier Adjusters of America, Inc.
23 Consent of Independent Accountants
----------
* 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 Registrant's Form 10Q for the quarter
ended December 31, 2000.
(b) The Company filed a Form 8-K with the Securities and Exchange Commission on
May 2, 2001 to report a change in control.
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/ John M. Davies
----------------------------------------
John M. Davies, Chairman of the Board,
President and Chief Executive Officer
September 14, 2001
------------------
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/ Eric J. Carlstrom September 14, 2001
-------------------------------------- ------------------
Eric J. Carlstrom, Director
/s/ John M. Davies September 14, 2001
-------------------------------------- ------------------
John M. Davies, Chairman of the Board,
President, Chief Executive Officer and
Director
/s/ Jeffrey R. Harcourt September 14, 2001
-------------------------------------- ------------------
Jeffrey R. Harcourt, Chief Financial
Officer, Principal Accounting Officer,
Secretary, Treasurer and Director
/s/ Glenn P. Nagy September 14, 2001
-------------------------------------- ------------------
Glenn P. Nagy, Director
/s/ Kenneth A. Sexton September 14, 2001
-------------------------------------- ------------------
Kenneth A. Sexton, Director
Page 26
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report F-2
Consolidated Balance Sheets - June 30, 2001 and 2000 F-3
Consolidated Statements of Income for the Years Ended
June 30, 2001, 2000 and 1999 F-4
Consolidated Statements of Comprehensive Income for
the Years Ended June 30, 2001, 2000 and 1999. F-5
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2001, 2000 and 1999 F-6
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 2001, 2000 and 1999 F-7
Notes to Consolidated Financial Statements - June 30, 2001,
2000 and 1999 F-8
Supplementary Data (unaudited) F-17
Schedule II - Valuation and Qualifying Accounts Years Ended
June 30, 2001, 2000 and 1999 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, 2001 and 2000, and
the related consolidated statements of income, comprehensive income, cash flows,
and stockholders' equity for each of the three years ended June 30, 2001, 2000
and 1999. 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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 2001, in conformity with accounting principles generally
accepted in the United States of America.
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, 2001, 2000, and 1999
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 10, 2001
F-2
CONSOLIDATED BALANCE SHEETS
Frontier Adjusters of America, Inc. and Subsidiaries
--------------------------------------------------------------------------------
June 30,
------------------------------
2001 2000
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,357,293 $ 2,132,297
Current portion of advances to licensees and franchisees (Notes 4 and 6) 362,921 535,472
Receivables, net (Note 3) 791,670 809,463
Income tax refund receivable 150,241 --
Unbilled adjusting fees -- 23,130
Other 308,013 211,108
Land and property available for sale (Note 5) 1,232,351 --
Deferred income taxes, current portion (Note 9) 264,424 241,607
----------- -----------
TOTAL CURRENT ASSETS 8,466,913 3,953,077
----------- -----------
PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation and
amortization (Note 5) 93,361 1,622,389
----------- -----------
OTHER ASSETS
Held to maturity investments (Note 7) -- 628,661
Advances to licensees and franchisees, net of current portion (Notes 4 and 6) 132,000 200,000
Licenses and franchises, net of accumulated amortization of $269,452 in
2001 and $261,789 in 2000 92,247 170,412
Deferred income taxes, net of current portion (Note 9) 117,734 115,488
Cost of subsidiary in excess of net identifiable assets acquired, net of
accumulated amortization of $0 in 2001 and $183,752 in 2000 -- 30,066
----------- -----------
341,981 1,144,627
----------- -----------
TOTAL ASSETS $ 8,902,255 $ 6,720,093
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 35,847 $ 25,835
Accrued expenses 175,074 41,594
Short term note payable 397,442 --
Salaries payable and related benefits 120,404 138,275
Service fees due to UFAC 1,103 15,000
Licensees' and franchisees' remittance payable 214,525 116,287
Income taxes payable -- 33,989
Other (Notes 10 and 13) 80,371 48,773
----------- -----------
TOTAL CURRENT LIABILITIES 1,024,766 419,753
----------- -----------
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 2,104,413
Retained earnings 5,838,340 4,263,100
----------- -----------
8,032,944 6,457,704
Add (deduct):
Treasury stock; 61,399 shares (184,068) (184,068)
Other 28,613 26,704
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 7,877,489 6,300,340
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,902,255 $ 6,720,093
=========== ===========
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,
-----------------------------------------------
2001 2000 1999
----------- ----------- -----------
REVENUE
Continuing licensee and franchisee fees (Note 8) $ 5,555,722 $ 5,170,592 $ 4,936,349
Adjusting and risk management fees (Note 8) 628,120 1,086,304 1,405,235
----------- ----------- -----------
6,183,842 6,256,896 6,341,584
COST AND EXPENSES
Compensation and employee benefits (Note 11) 1,554,522 1,984,581 3,248,276
Office 300,594 387,529 411,345
Advertising and promotion 230,929 210,441 385,372
Depreciation and amortization 198,529 218,615 271,884
Bad debt expense 127,584 311,820 237,601
Service fees to UFAC (Notes 10 and 14) 316,563 360,741 50,000
Legal fees paid to a shareholder (Note 10) 38,217 42,774 92,187
Write-down of fixed assets (Note 5) 172,600 -- --
Other 870,967 857,913 891,342
----------- ----------- -----------
3,810,505 4,374,414 5,588,007
----------- ----------- -----------
INCOME FROM OPERATIONS 2,373,337 1,882,482 753,577
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 217,299 155,038 165,272
Disposition of investments 896 1,000 --
Gain (loss) on sale of license (Note 6) 17,724 1,276 (14,500)
Gain (loss) on disposition of equipment (28,787) (7,066) 1,501
Realized gain (loss) (Note 7) -- 12,494 60,753
Other 18,827 24,231 15,539
----------- ----------- -----------
TOTAL OTHER INCOME 225,959 186,973 228,565
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,599,296 2,069,455 982,142
INCOME TAXES (Note 9) (1,024,056) (829,086) (435,690)
----------- ----------- -----------
NET INCOME $ 1,575,240 $ 1,240,369 $ 546,452
=========== =========== ===========
EARNINGS PER SHARE
Basic $ .18 $ .14 $ .12
=========== =========== ===========
Diluted $ .18 $ .14 $ .12
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 8,957,660 8,957,586 4,569,049
=========== =========== ===========
Diluted 8,957,660 8,957,586 4,570,113
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Frontier Adjusters of America, Inc. and Subsidiaries
--------------------------------------------------------------------------------
Years Ended June 30,
------------------------------------------------
2001 2000 1999
----------- ----------- -----------
NET INCOME $ 1,575,240 $ 1,240,369 $ 546,452
OTHER COMPREHENSIVE INCOME, NET OF TAX
Foreign currency translation adjustments 1,157 6,051 9,746
Unrealized (loss) on securities, net of
reclassification adjustment (see below) -- -- (38,693)
----------- ----------- -----------
OTHER COMPREHENSIVE INCOME: 1,157 6,051 (28,947)
----------- ----------- -----------
COMPREHENSIVE INCOME $ 1,576,397 $ 1,246,420 $ 517,505
=========== =========== ===========
Reclassifications adjustment
Unrealized gain (loss) on securities during the year $ -- $ 12,494 $ 22,060
Less reclassification adjustment included in net income -- (12,494) (60,753)
----------- ----------- -----------
Net unrealized (loss) on securities $ -- $ -- $ (38,693)
=========== =========== ===========
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,
------------------------------------------------
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,575,240 $ 1,240,369 $ 546,452
----------- ----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 198,529 218,615 272,430
(Gain) on sale of investments (896) (1,000) --
(Gain) loss on sale of license (17,724) (1,276) 14,500
Write-down of fixed assets 172,600 -- --
(Gain) loss on disposition of equipment 28,787 7,066 (1,501)
Bad debt expense 127,584 311,820 237,601
Deferred income taxes (25,063) (121,714) 53,891
Realized (gain)/loss on equity investments -- (12,494) (60,753)
Other 9,577 6,507 9,576
Change in assets and liabilities
(Increase) decrease in:
Receivables (77,912) (100,277) (91,235)
Unbilled adjusting fees 23,130 14,040 3,780
Prepaid expenses and other assets (90,303) 132,933 57,406
Increase (decrease) in:
Accounts payable 10,012 (2,170) (34,113)
Salaries payable and related benefits (17,871) (266,050) (204,788)
Income taxes payable/receivable (184,230) 133,215 73,722
Licensees' & franchisees' remittance payable 98,238 (436,659) 7,116
Other 151,181 (56,233) 63,664
----------- ----------- -----------
Total adjustment 405,639 (173,677) 401,296
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,980,879 1,066,692 947,748
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of fixed assets 7,000 1,550 93,512
Capital expenditures (34,592) (171,655) (324,416)
Investments purchased (6,602) -- (11,769,769)
Proceeds from maturity of held-to-maturity investments 619,980 51,000 13,124,869
Proceeds from sale of available-for-sale investments -- 12,494 --
Proceeds from sale of licenses 49,077 31,531 --
Payments on license acquisition -- (43,660) (33,462)
Advances to licensees' and franchisees' (2,184,222) (3,497,630) (4,183,647)
Collections of advances to licensees & franchisees 2,394,125 3,701,261 4,096,545
----------- ----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 844,766 84,891 1,003,632
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short term note payable 508,028 -- --
Payments on short term note payable (110,586) -- --
Cash dividends -- (5,918,475) (172,701)
Proceeds from sales of stock -- 287 6,992,308
Common stock repurchased -- -- (2,817,246)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 397,442 (5,918,188) 4,002,361
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,909 6,051 9,746
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,224,996 (4,760,554) 5,963,487
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 2,132,297 6,892,851 929,364
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 5,357,293 $ 2,132,297 $ 6,892,851
=========== =========== ===========
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, 2001, 2000 and 1999
--------------------------------------------------------------------------------
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, 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 -- --
Net income -- -- -- -- --
Foreign currency translation -- -- -- -- --
---------- -------- ----------- ---------- --------
Balance, June 30, 2001 9,019,059 $ 90,191 $ 2,104,413 -- $ --
========== ======== =========== ========== ========
Cumulative Unrealized
Retained Treasury Translation Gain (Loss) On
Earnings Stock Adjustment Investments
----------- --------- ----------- -----------
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 --
Net income 1,575,240 -- -- --
Foreign currency translation -- -- 1,909 --
----------- --------- ------- --------
Balance, June 30, 2001 $ 5,838,340 $(184,068) $28,613 $ --
=========== ========= ======= ========
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. The Company sold
its adjusting businesses in Phoenix, Arizona and Las Vegas, Nevada in April and
June of 2001, respectively. The Company grants credit to its licensees and
franchisees, all of whom operate within the insurance industry. Revenue from
claims adjusted by previously Company-owned adjusting offices was recognized as
the services were 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.
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 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.
During the fiscal year ended June 30, 2001 the Company determined the carrying
value of its cost of a subsidiary in excess of net identifiable assets to be in
excess of its future value, resulting in a decrease in the carrying value of the
asset to $0.
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 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 or premiums and accretion of discount,
computed by the interest method over their contractual lives.
During the fiscal year ended June 30, 2001, the Company sold its
held-to-maturity investments as the Company decided to change its investment
policy to increase its liquidity.
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.
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 dispositions of the Phoenix, Arizona and Las Vegas, Nevada offices, the
Company no longer reports its 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.
BUSINESS COMBINATIONS -- In July 2001, the Financial Accounting Standards Board
("FASB") issued Statement 141, BUSINESS Combinations. Statement 141 eliminates
the pooling method for accounting for business combinations, requires that
intangible assets that meet certain criteria be reported separately from
goodwill and requires negative goodwill arising from a business combination to
be recorded as an extraordinary gain. The Company has not yet completed its full
assessment of the effects of Statement 141 and is uncertain as to the impact.
The standard generally is required to be implemented by the Company in the 2002
fiscal year.
GOODWILL AND OTHER INTANGIBLES -- FASB also issued Statement 142, GOODWILL AND
OTHER INTANGIBLES, in July 2001. Statement 142 eliminates the amortization of
goodwill and other intangibles that are determined to have an indefinite life
and requires that, at minimum, annual impairment tests for goodwill and other
intangible assets that are determined to have an indefinite life. The Company
has not yet completed its full assessment of the effects of Statement 142 and is
uncertain as to the impact. The standard generally is required to be implemented
by the Company in the 2002 fiscal year.
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, 2001, the
Company has no dilutive potential common shares outstanding.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
2001 2000 1999
----------- ---------- -----------
Cash paid during the year:
Interest $ 5,270 $ 1,405 $ 1,369
Income taxes 1,237,504 838,099 315,659
Noncash investing activities:
Sale of licenses 240,000 242,629 --
Deferred gain on sale of licenses 232,417 231,021 --
Disposal of license (7,583) -- --
Noncash financing activities:
Accrued dividends -- -- 5,918,475
NOTE 3: RECEIVABLES
2001 2000
--------- ---------
Receivables consist of:
Accounts receivable trade $ 58,622 $ 165,377
Licensee and franchisee fees receivable 635,144 595,354
Errors and omissions insurance premium advanced 210,612 160,854
Other 8,722 30,964
--------- ---------
Total receivables 913,100 952,549
Less allowance for doubtful accounts (121,430) (143,086)
--------- ---------
$ 791,670 $ 809,463
========= =========
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:
2001 2000
--------- ----------
Advances to licensees and franchisees $ 861,598 $1,197,533
Less allowance for doubtful advances (366,677) (462,061)
--------- ----------
494,921 735,472
Less current portion (362,921) (535,472)
--------- ----------
Long term portion $ 132,000 $ 200,000
========= ==========
NOTE 5: PROPERTY AND EQUIPMENT
During the fourth quarter of the fiscal year ended June 30, 2001, the Company
placed for sale two buildings and a parking lot. At that time, the Company
adjusted its carrying value of these properties down by $172,600 to reflect
their estimated market values. Available for sale property and buildings consist
of:
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTE 5: PROPERTY AND EQUIPMENT (CONTINUED)
2001 2000
----------- -----------
Building and improvements $ 645,608 $ --
Land 586,743 --
----------- -----------
$ 1,232,351 $ --
=========== ===========
Property and equipment consist of:
2001 2000
----------- -----------
Building and improvements $ -- $ 1,390,166
Computers and software 263,940 314,716
Furniture and fixtures 280,612 348,596
Automobiles -- 16,494
----------- -----------
544,552 2,069,972
Less accumulated depreciation and amortization (451,191) (1,034,326)
----------- -----------
93,361 1,035,646
Land -- 586,743
----------- -----------
$ 93,361 $ 1,622,389
=========== ===========
NOTE 6: SALE OF LICENSES
The Company sold its Phoenix, Arizona adjusting office in April 2001 to a new
franchisee and its Las Vegas, Nevada adjusting office in June 2001 to a group of
existing franchisees. The sale of the offices resulted in an aggregate deferred
gain of $212,417. The Company also sold an office in the Chicago, Illinois area
and an office in the Allentown, Pennsylvania area during this fiscal year for an
aggregate deferred gain of $20,000. 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, 2001 and
2000, the aggregate deferred gain netted against receivables was $444,438 and
$229,745, respectively. The Company also sold a license in the San Jose,
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, 2001 and 2000:
Gross Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ------------ ----------
2001
-----------------------------------------------------
Held to maturity securities
Local government securities & other $ -- $ -- $ -- $ --
========== ========== ============ =========
2000
-----------------------------------------------------
Held to maturity securities
Local government securities & other $ 628,661 $ 1,010 $ 18,596 $ 611,075
========== ========== ============ =========
During the fiscal year ended June 30, 2001, the Company sold its
held-to-maturity securities due to a change in its investment policy. The
Company recognized a gain of $12,494 and $60,753 for the years ended June 30,
2000 and 1999 respectively, due to the realized gain 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, 2001, the Company has entered into 524 license and franchise
agreements with 390 entities, operating 482 offices with 681 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, 2001, 2000 and 1999
were approximately $48,410,000, $45,810,000 and $44,730,000, respectively.
The Company's main line of business is providing services through its 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
and and Corporate
Franchising Risk Management and Other Consolidated
----------- --------------- --------- ------------
2001
Revenue $ 5,555,722 $ 628,120 $ -- $ 6,183,842
Costs and expenses 2,533,709 731,206 545,590 3,810,505
----------- ----------- ----------- -----------
Income (loss) from operations $ 3,022,013 $ (103,086) $ (545,590) $ 2,373,337
=========== =========== =========== ===========
Identifiable assets $ 3,440,237 $ 136,213 $ 5,325,805 $ 8,902,255
=========== =========== =========== ===========
Number of advertised locations
Beginning of year 649 23 -- 672
Opened 17 -- -- 17
Closed (8) -- -- (8)
Ownership changes 2 (2) -- --
----------- ----------- ----------- -----------
End of year 660 21 -- 681
=========== =========== =========== ===========
Licensing Adjusting
and and Corporate
Franchising Risk Management and 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
=========== =========== =========== ===========
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTE 8: LICENSING AND FRANCHISING (CONTINUED)
Licensing Adjusting
and and Corporate
Franchising Risk Management and Other Consolidated
----------- --------------- --------- ------------
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
============ ============ ============ ============
NOTE 9: INCOME TAXES
The components of the provision for income taxes at June 30 are as follows:
2001 2000 1999
----------- ----------- -----------
Federal
Current $ 850,346 $ 762,200 $ 309,299
Deferred (19,899) (96,637) 42,788
State
Current 198,773 188,600 72,500
Deferred (5,164) (25,077) 11,103
----------- ----------- -----------
Income taxes $ 1,024,056 $ 829,086 $ 435,690
=========== =========== ===========
A reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate follows:
2001 2000 1999
---- ---- ----
Statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net 4.8 5.1 5.5
Non-deductible items .7 1.1 4.0
Non-taxable revenue (.5) (.6) (1.4)
Other (.6) (.5) 1.3
---- ---- ----
Effective rate 39.4% 40.1% 44.4%
==== ==== ====
Net deferred tax assets consist of the following components:
2001 2000
-------- --------
Deferred tax assets
Current:
Allowance for doubtful accounts $182,982 $224,301
Land and property available for sale 67,919 --
Other liabilities 13,523 17,306
-------- --------
264,424 241,607
-------- --------
Long term:
Property and equipment 103,930 84,714
Other liabilities 13,804 30,774
-------- --------
117,734 115,488
-------- --------
$382,158 $357,095
======== ========
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, a shareholder, 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 $7,909, $14,448 and $13,382
for the fiscal years ended June 30, 2001, 2000 and 1999 respectively, in
connection with such 5% royalty agreement.
Included in other liabilities is $10,000 in accrued moving expenses for John M.
Davies, shareholder, President, CEO and the Company's Chairman of the Board.
George M. Hill, a former shareholder, Vice President and Director of the
Company, acted as outside counsel to the Company. The Company paid Mr. Hill's
law firm approximately $38,000 in fiscal 2001, $43,000 in fiscal 2000, $92,000
in fiscal 1999, for legal services and reimbursement of expenses.
UFAC, a shareholder through April 2001, had an agreement that terminated in
April 2001 whereby the Company had paid $25,000 per month for marketing,
managerial, technological, financial and other services and resources (see Note
14). As of June 30, 2001, the Company incurred $250,000 in service fees related
to this agreement and an additional $66,563 for services performed outside of
the agreement for an aggregate of $316,563. The Company incurred $360,741 and
$50,000 in similar fees for the fiscal year ended June 30, 2000 and 1999,
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: EMPLOYEE BENEFIT PLANS
On June 14, 1984, the Company adopted a Profit Sharing Plan covering
substantially all employees of the Company who have completed one year of
service and have reached age 20. The Profit Sharing Plan provided for
contributions at the discretion of management not to exceed the amount permitted
under the Internal Revenue Code as a deductible expense. Participants' benefits
vested at the rate of 20% per year. Contributions to the Profit Sharing Plan
were made to trust accounts for investment at the discretion of the
participants. The Profit Sharing Plan was terminated by the Company on December
14, 2000 and was replaced with first a gainsharing program and 401(k) plan and
then a discretionary bonus plan. Profit sharing expenses were $17,726 and
$235,724 for the years ended June 30, 2000 and 1999, respectively. The Company
did not grant any contributions for the year ended June 30, 2001.
In fiscal 2000, the Company used a gainsharing program that was designed to
reward employees for exceptional growth and return on revenue. Disbursements
were only made if targets set by upper management were met. Gainsharing expense
for the year ended June 30, 2000 was $86,362. The Company did not incur any
expenses related to this program for the year ended June 30, 2001.
The Company also implemented a 401(k) plan during fiscal 2000 in which it
matched up to a maximum of 3% for those participants who contributed 5% or more
of their salary. The Company's employer match expense for the fiscal years ended
June 30, 2001 and 2000 were $14,261 and $7,883, respectively. The Company
terminated the 401(k) plan in April 2001.
During fiscal 2001, the Company terminated its gainsharing and 401(k) plans and
replaced them with a discretionary bonus plan. The discretionary bonus plan is
designed to reward employees for personal performance and accomplishments
throughout the year. For the fiscal year ended June 30, 2001, the expense
related to discretionary bonuses was $122,550.
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 2001,
2000 and 1999 would have decreased by $0, $0 and $18,000, respectively, with no
effect on earnings per share.
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTE 12: STOCK OPTIONS (CONTINUED)
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, 2001, the 1987 Plan has no shares outstanding and
134,847 available for granting.
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, 2001, 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
----------------------------------------------------------------------
2001 2000 1999
-------------------- ---------------------- ---------------------
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
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)
===== ===== ======== ===== ======== =====
2001 2000 1999
---- ---- ----
Exercisable at end of year -- -- 129,629
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computation for June 30:
2001 2000 1999
------------------------- ------------------------- -------------------------
Shares Per-share Shares Per-share Shares Per-share
(Denominator) Amount (Denominator) Amount (Denominator) Amount
------------- ------ ------------- ------ ------------- ------
Basic EPS 8,957,660 $0.18 8,957,586 $0.14 4,569,049 $0.12
===== ===== =====
Effect of Dilutive
Securities Options -- -- -- -- 1,064 --
--------- ----- --------- ----- --------- -----
Diluted EPS 8,957,660 $0.18 8,957,586 $0.14 4,570,113 $0.12
========= ===== ========= ===== ========= =====
NOTE 13: COMMITMENTS AND CONTINGENCIES.
The Company leases various office space and office equipment under various
noncancellable agreements. These leases expire between August 31, 2002 and
February 28, 2007 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, 2001 is due as follows:
During the year ending June 30:
2002 $ 41,413
2003 49,680
2004 47,190
2005 47,190
2006 47,190
2007 31,460
---------
$ 264,123
=========
The total rental expense included in the income statements for the years ended
June 30, 2001, 2000 and 1999 is $33,918, $34,426 and $35,633, respectively.
Included in Other liabilities is the Company's payable to franchisees/licensees
and clients at June 30, 2001 and June 30, 2000 of $68,242 and $37,593,
respectively.
During the year ended June 30, 2001 the Company settled a claim made against it
and a former franchisee at no expense to the Company and the Company received
reimbursement of costs and expenses, including legal fees, of approximately
$40,000.
From time to time in the normal course of business, the Company is named as a
defendant in lawsuits. The Company does not believe that it is subject to any
such lawsuits or litigation or threatened lawsuits or litigation that would have
a material adverse effect on the Company or its business.
NOTE 14: STOCK TRANSACTIONS
In April 2001, the Company announced that United Financial Adjusting Company
("UFAC"), its majority shareholder, had sold its 5,258,513 shares in the Company
to Merrymeeting, Inc. ("MMI"), a company 50% owned by John M. Davies, Chairman
of the Company's Board of Directors, for $1.58 per share. As a result of the
sale of the shares by UFAC to MMI, the service agreement between the Company and
UFAC was terminated effective April 30, 2001. The Company still receives and
pays for limited services provided by UFAC not related to the terminated service
agreement. In addition, the Company announced that its Board of Directors had
approved a proposal by MMI to take the Company private through a cash-out merger
at a price of $1.58 per share (referred to as "Transaction"). Consummation of
this Transaction is subject to certain regulatory agencies and by the Company's
shareholders.
F-16
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
SUPPLEMENTARY DATA
Selected Quarterly Financial Data
(Information for all periods shown below is unaudited)
2001
---------------------------------------------------------
Three Months Ended
---------------------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30
----------- ----------- ----------- -----------
Revenue $ 1,594,665 $ 1,471,297 $ 1,556,204 $ 1,561,676
Income from operations 676,408 672,667 671,953 352,309
Income before income taxes 740,045 740,734 713,765 404,752
Net income 476,996 426,891 453,594 217,759
Net income per share
Basic .05 .05 .05 .02
Diluted .05 .05 .05 .02
Weighted average shares outstanding
Basic 8,957,660 8,957,660 8,957,660 8,957,660
Diluted 8,957,660 8,957,660 8,957,660 8,957,660
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
F-17
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2001, 2000 AND 1999
Additions
Balance At Charged to Deductions Balance
Beginning Cost and From At End
of Period Expenses Reserves of Period
-------- -------- -------- --------
Year Ended June 30, 2001:
Allowance for doubtful accounts $605,147 $127,584 $244,624 $488,107
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 $262,454 $350,367
F-18
EX-21
3
ex21.txt
SUBSIDIARIES
Exhibit 21
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
4
ex23.txt
CONSENT OF MCGLADREY & PULLEN, LLP
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation of our report, dated August 10, 2001,
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 18, 2001