-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LGLNj6D/y2eoqCMV38qSKVtM1QXS+hRFSfdetYVZjMuAXurHyjBhIKx4660fVhBQ Vn/sfCPw2hVLsZ+v9r7yZQ== 0000950147-99-001249.txt : 19991115 0000950147-99-001249.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950147-99-001249 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRONTIER ADJUSTERS OF AMERICA INC CENTRAL INDEX KEY: 0000735349 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 860477573 STATE OF INCORPORATION: AZ FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12902 FILM NUMBER: 99751226 BUSINESS ADDRESS: STREET 1: 45 E MONTEREY WAY STREET 2: STE 202 CITY: PHOENIX STATE: AZ ZIP: 85012 BUSINESS PHONE: 6022641061 MAIL ADDRESS: STREET 1: P O BOX 7610 CITY: PHOENIX STATE: AZ ZIP: 85011 FORMER COMPANY: FORMER CONFORMED NAME: FRONTIER FINANCIAL CORP /AZ DATE OF NAME CHANGE: 19861114 10-Q 1 QUARTERLY REPORT FOR THE QTR ENDED 9/30/99 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ______________ to ______________ Commission File Number 1-12902 FRONTIER ADJUSTERS OF AMERICA, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Arizona 86-0477573 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 45 East Monterey Way, Phoenix, AZ 85012 --------------------------------------- (Address of principal executive offices) (602) 264-1061 ---------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares of Common Stock outstanding on November 12, 1999 8,957,560 --------- PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS FRONTIER ADJUSTERS OF AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET September 30, 1999 June 30, 1999 (unaudited) (*) ------------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,722,550 $ 6,892,851 Investments 12,866 -- Receivables 1,443,383 1,603,756 Prepaid expenses 278,651 344,041 Other 230,682 298,214 ------------ ------------ TOTAL CURRENT ASSETS 3,688,132 9,138,862 ------------ ------------ PROPERTY AND EQUIPMENT 2,632,457 2,540,219 Less accumulated depreciation and amortization (966,320) (931,283) ------------ ------------ 1,666,137 1,608,936 ------------ ------------ OTHER ASSETS Cost of subsidiary in excess of net tangible assets acquired 213,817 213,817 Less accumulated amortization (182,018) (181,440) ------------ ------------ 31,799 32,377 Receivables (Long term) 320,000 350,000 Investments (Long term) 685,254 685,148 Other 280,068 303,661 ------------ ------------ $ 1,317,121 1,371,186 ------------ ------------ TOTAL ASSETS $ 6,671,390 $ 12,118,984 ============ ============ LIABILITIES CURRENT LIABILITIES Accounts payable $ 31,105 $ 28,005 Accrued expenses 152,417 404,325 Franchisee/licensee remittance payable 706,132 552,946 Accrued income taxes 150,427 -- Service fees due to UFAC 75,000 50,000 Distribution payable -- 5,918,475 Other 126,802 111,600 ------------ ------------ TOTAL CURRENT LIABILITIES 1,241,883 7,065,351 ------------ ------------ STOCKHOLDERS' EQUITY Common stock 90,191 90,191 Additional paid in capital 2,104,426 2,104,426 Treasury stock (184,368) (184,368) Other 29,195 20,653 Retained earnings 3,390,063 3,022,731 ------------ ------------ 5,429,507 5,053,633 ------------ ------------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 6,671,390 $ 12,118,984 ============ ============ * Condensed from audited financial statements. The accompanying notes are an integral part of these condensed statements. 2 FRONTIER ADJUSTERS OF AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 1999 1998 ----------- ----------- REVENUE Continuing licensee and franchisee fees $ 1,312,607 $ 1,273,123 Adjusting and risk management fees 363,457 360,246 ----------- ----------- 1,676,064 1,633,369 ----------- ----------- COST AND EXPENSES Compensation and fringe benefits 586,377 717,766 Office 90,500 95,515 Advertising and promotion 41,434 40,587 Depreciation and amortization 57,522 62,475 Provision for doubtful accounts 52,840 48,000 Service fees paid to UFAC 75,000 -- Other 219,485 273,706 ----------- ----------- 1,123,158 1,238,049 ----------- ----------- INCOME FROM OPERATIONS 552,906 395,320 ----------- ----------- OTHER INCOME (EXPENSE) Interest income 23,064 29,434 Other (net) 7,959 (1,491) ----------- ----------- 31,023 27,943 ----------- ----------- INCOME BEFORE INCOME TAXES 583,929 423,263 INCOME TAXES 216,597 167,347 ----------- ----------- NET INCOME $ 367,332 $ 255,916 =========== =========== EARNINGS PER SHARE Basic $ .04 $ .06 =========== =========== Diluted $ .04 $ .06 =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING Basic 8,957,560 4,605,358 =========== =========== Diluted 8,957,560 4,609,163 =========== =========== The accompanying notes are an integral part of these condensed statements. 3 FRONTIER ADJUSTERS OF AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 1999 1998 --------- --------- NET INCOME $ 367,332 $ 255,916 --------- --------- OTHER COMPREHENSIVE INCOME (NET OF TAX) Foreign currency translation adjustments 448 -- Unrealized gain (loss) on securities 8,094 (27,897) --------- --------- 8,542 (27,897) --------- --------- COMPREHENSIVE INCOME $ 375,874 $ 228,019 ========= ========= The accompanying notes are an integral part of these condensed statements. 4 FRONTIER ADJUSTERS OF AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 1999 1998 ----------- ----------- NET INCOME $ 367,332 $ 255,916 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 57,522 63,021 Loss on disposition of property & equipment -- 4,979 Allowance for doubtful accounts 52,840 48,000 Change in assets and liabilities: (Increase) decrease in: Receivables 83,032 (26,000) Prepaid expenses 65,390 16,666 Other 57,772 137,271 Increase (decrease) in: Accounts payable 3,100 21,048 Service fees due to UFAC 25,000 -- Accrued expenses (101,481) (339,965) Franchisee and licensee remittance payable 153,186 27,259 Other 10,166 (13,299) ----------- ----------- Total adjustments 406,527 (61,020) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 773,859 194,896 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equipment -- 21,510 Capital expenditures (92,238) (89,497) Investment purchased -- (988,096) Proceeds from sales of investments -- 1,000,000 Proceeds from sales of license 25,000 -- Payments on License acquisition (13,660) (6,935) Advances to licensees and franchisees (1,020,525) (1,092,284) Collections of advances to licensees and franchisees 1,075,026 1,137,159 ----------- ----------- NET CASH (USED IN) INVESTING ACTIVITIES (26,397) (18,143) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends (5,918,475) (172,701) ----------- ----------- NET CASH (USED IN) FINANCING ACTIVITIES (5,918,475) (172,701) EFFECT OF EXCHANGE RATE CHANGES ON CASH 712 -- ----------- ----------- NET INCREASE (DECREASE) IN CASH (5,170,301) 4,052 Cash at beginning of the period 6,892,851 929,364 ----------- ----------- Cash at the end of the period $ 1,722,550 $ 933,416 =========== =========== Supplemental disclosures of Cash Flow information Cash paid during the period Income taxes $ 5,777 $ 3,215 Interest $ 774 $ 565 The accompanying notes are an integral part of these condensed statements. 5 FRONTIER ADJUSTERS OF AMERICA, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (1) Basis of Presentation The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of results of operations for the interim periods. The results of operations for the three month period ended September 30, 1999 are not necessarily indicative of the results to be expected for the full year. (2) Reportable Segments Financial information with respect to the Company's reportable segments follows:
Las Vegas/Henderson Corporate and and Tucson Offices Phoenix Office Consolidated ------------------ -------------- ------------ September 30, 1999 Revenue $ 129,335 $1,546,729 $1,676,064 Depreciation and Amortization 10,672 46,850 57,522 Interest Income -- 23,064 23,064 Segment Net Income 3,676 363,656 367,332 Expenditures for Segment Assets -- 92,238 92,238 Segment Assets $ 144,208 $6,527,182 $6,671,390 September 30, 1998 Revenue $ 119,735 $1,513,634 $1,633,369 Depreciation and Amortization 10,255 52,220 62,475 Interest Income -- 29,434 29,434 Segment Net Income (Loss) (914) 256,830 255,916 Expenditures for Assets 1,013 88,484 89,497 Segment Assets $ 156,686 $7,369,198 $7,525,884
(3) Earnings Per Share The effect of 129,629 stock options are not included in the earnings per share calculation because they are antidilutive. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in this Report on Form 10-Q that are not purely historical are forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the Company's "expectations", "anticipation", "hopes", "intentions", "beliefs", or "strategies" regarding the future. Forward looking statements include statements regarding revenue, margins, expenses, and earnings analysis with regard to the Company or with regard to the Company's licensees and franchisees for the remainder of fiscal 2000 and thereafter; improvement of, and growth in the number of, licensees and franchisees; future spending on marketing and product development strategy; statements regarding Year 2000 readiness; statements regarding the outcome of litigation; and liquidity and anticipated availability of cash for operations and capital expenditures. All forward looking statements included in this document are based on information available to the Company on the date of this report, and the Company assumes no obligation to update any such forward looking statements. It is important to note that the Company's actual results could differ materially from those in such forward looking statements. Among the factors that could cause actual results to differ materially are the factors discussed in this report and any other reports on file with the SEC, including but not limited to the extent and nature of natural disasters in geographic areas serviced by the Company or by its licensees and franchisees; management decisions by insurance companies and self-insureds to increase or decrease the degree to which they contract for services offered by the Company, its licensees or franchisees; the Company's ability to identify and attract new qualified licensees and franchisees; the success of the Company's promotional and marketing programs; the Company's ability to successfully manage offices reacquired from existing licensees and franchisees; and uninsured liability for acts or omissions of the Company's employees, licensees, or franchisees. FINANCIAL CONDITION The Company has historically financed its growth and on-going operations with cash generated from operations. In the quarter ended September 30, 1999, the Company's operations generated $774,000 in cash. During the three months ended September 30, 1999, the most significant items affecting cash generated by the Company's operations are net income, the $153,000 increase in franchisee and licensee remittance payable and the $101,000 decrease in accrued expenses. The increase in remittance payable reflects the timing difference of payout dates to the period end. The decrease in accrued expenses results from the payout of employee benefits and bonuses during the three months ended September 30, 1999. The Company anticipates that during fiscal 2000 its operations will generate sufficient cash to fund its operations and equipment acquisitions. Through its capital investment program, the Company replaces obsolete or outdated equipment and invests in new equipment and furnishings to maintain or increase the productivity of the Company and its employees. The Company anticipates investing $200,000 to $300,000 in fiscal 2000 for equipment and furnishings pursuant to its capital investment program. 6 In June 1999, a complaint was filed in United States District Court in Nebraska against multiple defendants including the Company. The complaint arises from the alleged embezzlement by a former licensee in connection with claims services provided for the benefit of the plaintiff. The complaint seeks damages of at least $1,800,000 from the Company. As the lawsuit is still in its earliest phase, the Company cannot yet assess the merits of the complaint or the effects this litigation will have on the Company. For further discussion, see "Item 1 - Legal Proceedings". The Company's ratio of current assets to current liabilities was 2.97 to 1 as of September 30, 1999 and 1.29 to 1 as of June 30, 1999. RESULTS OF OPERATIONS - QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO 1998 REVENUE The Company's revenue increased 2.6% or $43,000 to $1,676,000 in the current quarter from $1,633,000 in the same period of the prior fiscal year. The increase represents a $40,000 increase in continuing licensee and franchisee fees and a $3,000 increase in adjusting and risk management fees. The increase of $3,000 in adjusting and risk management fees from $360,000 in the quarter ended September 30, 1998 to $363,000 in the quarter ended September 30, 1999 represents a 1% increase. The Company experienced an increase of $28,000 in adjusting fees in its Las Vegas office, and decreases of $6,000 and $19,000 in adjusting fees from the Phoenix and Tucson offices, respectively. The increase in the Las Vegas office is primarily the result of an increase in storms this quarter as compared to the same period of the prior year. The Company's revenue from continuing licensee and franchisee fees increased 3% or $40,000 from $1,273,000 in the quarter ended September 30, 1998 to $1,313,000 in the quarter ended September 30, 1999. This increase reflects the benefit to the Company's licensees and franchisees from an increase in claims assignments from insurance companies and self insureds. The Company's revenue is affected by numerous matters including the work loads of other companies and claims presented by their clients. The Company, therefore, is unable to project its future revenue. The Company has historically seen growth in licensee and franchisee fees paid. However, during fiscal 1998, the Company experienced a decrease in revenue due primarily to the phase out of a business relationship with its then major client. The Company has responded to the loss of revenue by continuing to develop and implement sales and marketing efforts to take advantage of its geographic diversity as well as the unique strengths of its individual licensees and franchisees. The Company's revenue did recover in fiscal 1999, to an amount comparable to that of fiscal 1997, which was prior to the loss of the client, and the Company hopes to see continued growth in licencee and franchisee fees paid from other sources. COMPENSATION AND FRINGE BENEFITS Compensation and fringe benefits represent approximately 52% of the Company's cost and expenses and are the Company's largest single item of expense. These expenses decreased 18.4% or $132,000 from $718,000 in the three months ended September 30, 1998 to $586,000 in the current quarter. This decrease is the result of the retirements of William J. Rocke, former CEO and former Chairman of the Board, and Jean E. Ryberg, former President, on June 30, 1999. Certain of the services provided by Mr. Rocke and Mrs. Ryberg are now provided by United Financial Adjusting Company ("UFAC") pursuant to a service agreement between the Company and UFAC. Charges for these services are reflected in a monthly fee paid to UFAC. See discussion below. SERVICE FEES On April 30, 1999, the Company entered into a service agreement with UFAC whereby the Company pays a $25,000 monthly fee for certain services provided by UFAC. Services included under this agreement are management, marketing, technology, human resource support, and accounting and reporting. For the three months ended September 30, 1999, the Company incurred $75,000 in service fees. The Company did not incur any service fees related to this agreement in the same quarter of the prior fiscal year. 7 EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS AND SERVICE FEES The Company's expenses other than compensation decreased $59,000 during the three months ended September 30, 1999 as compared to the same quarter of the prior fiscal year. The principal items affecting these expenses are decreases in the following expenses: Directors fees of $13,500; general insurance of $17,000; legal fees of $12,000; and computer consulting fees of $11,000. The balance of the Company's costs and expenses have not significantly changed from the same period of the prior fiscal year. INCOME TAXES The Company's income taxes were 37.1% and 39.5% of its income before taxes for the three months ending September 30, 1999 and 1998, respectively. A difference in these rates is due to a decrease in permanent differences in book and tax income between the periods. The Company's income taxes have not been significantly affected by any changes in the federal and state laws. However, tax rates can be changed at any time based upon legislation. OTHER INCOME The Company's other income increased $3,000 or 10.7% from $28,000 in the quarter ended September 30, 1998 to $31,000 in the current quarter. The most significant items affecting other income include a $6,000 decrease in interest income, a $5,000 increase in other income, and a $5,000 loss on the sale of fixed assets for the quarter ended September 30, 1998. NET INCOME The Company's net income for the quarter ended September 30, 1999 increased $111,000 or 43.4% from $256,000 in the quarter ended September 30, 1998 to $367,000 in the current quarter. The most significant items affecting net income were a $43,000 increase in revenue, a $132,000 decrease in compensation and fringe benefits, a $75,000 increase in service fees, and a $59,000 decrease in expenses other than compensation and fringe benefits and service fees. RESULTS OF OPERATIONS - QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO 1997 REVENUE The Company's revenue increased 10% or $149,000 to $1,633,000 in the quarter ended September 30, 1998, from $1,484,000 in the same period of the prior fiscal year. The increase is a combined $96,000 increase in adjusting and risk management fees and a $53,000 increase in continuing licensee and franchisee fees. The increase of $96,000 in adjusting and risk management fees from $264,000 in the quarter ended September 30, 1997 to $360,000 in the quarter ended September 30, 1998 represents a 36% increase. The Company experienced an increase of $120,000 in adjusting fees in its Phoenix office, and decreases of $17,000 and $7,000 in adjusting fees from the Las Vegas/Henderson and Tucson offices, respectively. The increase in fees from the Phoenix office primarily reflects fees generated from a new client. The Company's revenue from continuing licensee and franchisee fees increased 4% or $53,000 from $1,220,000 in the quarter ended September 30, 1997 to $1,273,000 in the quarter ended September 30, 1998. This increase reflects the benefit to the Company's licensees and franchisees due to an increase in the use of their services by insurance companies and self-insureds resulting from a larger volume of claims and from a greater demand for the Company's services. The Company's revenue is affected by numerous factors including the work loads of other companies and claims presented by their clients. Therefore, the Company is unable to project its future revenue. The Company has 8 historically seen growth in licensee and franchisee fees paid. However, during the prior fiscal year the Company experienced a decrease in revenue due primarily to the phase out of its business relationship with its then major client. The Company has responded to this loss by continuing to develop and implement sales and marketing efforts to take advantage of its geographic diversity as well as the unique strengths of its individual licensees and franchisees. For the quarter ended September 30, 1998, the Company successfully completed negotiations for national/regional relationships with three new clients and with one existing client for additional services. In addition, the Company believes that it will continue to realize growth as it adds additional qualified licensees and franchisees. Furthermore, the Company expects to continue to reflect revenue from its Phoenix, Tucson, and Las Vegas/Henderson operations. COMPENSATION AND FRINGE BENEFITS Compensation and fringe benefits represent approximately 58% of the Company's costs and expenses and represent the largest single item of expense. These expenses increased 11% or $73,000 from $645,000 in the three months ended September 30, 1997 to $718,000 in the quarter ended September 30, 1998. This increase is the result of the addition of a Marketing Director in the second quarter of the last fiscal year, additional employees hired including temporary employees to handle increased work loads in the Corporate and Phoenix office, and cost of living and merit increases given to employees. EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS The Company's expenses other than compensation and fringe benefits increased $70,000 during the three months ended September 30, 1998 as compared to the same quarter of the prior fiscal year. The principal items affecting these expenses are a $40,000 increase in audit and accounting fees, a $15,000 increase in computer consulting fees, a $14,000 increase in directors fees, a $12,000 increase in insurance costs, and a $19,000 decrease in advertising and promotional expenses. The increase in audit and accounting fees reflects the Company's decision to outsource certain accounting functions that were previously performed in-house. The Company believes that this will enable it to more efficiently monitor compliance of the constantly changing state and federal laws and regulations. Furthermore, the Company incurred increased auditing and accounting and consulting fees in the current quarter. The increase in computer consulting fees relates to the Company's planning for and utilization of improved technology to provide better services to its franchisees/licensees and clients. The increase in insurance costs results from an increase in the cost of insurance as well as increased coverage. The increase in directors fees reflects the greater number of directors meetings in the first quarter of this fiscal year due to consideration by the Board of the UFAC transaction. The decrease in advertising and promotional expenses reflects the purchase of promotional items in the first quarter of the prior fiscal year. The Company anticipates similar purchases in the second quarter of the current fiscal year. The balance of the Company's costs and expenses have not significantly changed from the same period of the prior year. INCOME TAXES The Company's income taxes were 39.5% of its income before taxes, or approximately the same as they were in the prior fiscal year. Changes made in the tax laws by various states and by the federal government have not had a material affect on the Company's current overall tax rates, however, this could change at any time. OTHER INCOME The Company's other income decreased $10,000 or 26% from $38,000 in the quarter ended September 30, 1997 to $28,000 in the quarter ended September 30, 1998. The most significant items affecting other income include a $7,000 decrease in interest income, and a loss on the sale of fixed assets of $5,000. 9 NET INCOME The Company's net income for the quarter ended September 30, 1998, decreased $3,000 or 1% from $259,000 in the quarter ended September 30, 1997 to $256,000 in the quarter ended September 30, 1998. The most significant items affecting net income were a $149,000 increase in revenue, a $73,000 increase in compensation and fringe benefits, a $70,000 increase in expenses other than compensation and fringe benefits. YEAR 2000 COMPLIANCE The "Year 2000" issue creates risk for the Company from unforeseen problems in its own computer systems and from third parties with whom the Company deals. Many currently installed computer systems and software products are coded to accept two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. Left uncorrected, time sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, resulting in a computer shutdown or incorrect calculations. Failures of the Company's and/or third parties' computer systems could have a material adverse effect on the Company's ability to conduct its business. To date, the Company has examined both its information technology and non-information technology systems. The Company determined that certain of the software used by the Company is not Year 2000 compliant. The Company has identified and purchased upgraded software that is Year 2000 compliant. In addition, the Company is currently updating all custom software so that it is Year 2000 compliant. A full-time programmer is dedicating all of her efforts to this project. The Company expects to complete these upgrades by November 30, 1999. The Company has had its computer servers tested internally and by an external party. The external party has found all but one operating system are compliant. Arrangements are currently being made to upgrade the noncompliant server. The Company hopes to finish its testing of internal systems by November 30, 1999. All of the Company's personal computers that need to be Year 2000 compliant have been upgraded. The Company has determined that its telephone, alarm, heating, and air conditioning systems will not be affected by the Year 2000. The Company has completed an analysis of the Company's operations to identify the remaining Year 2000 issues embodied in its operations and facilities and is developing a plan to resolve such issues. The Company expects to complete the formal plan of resolution by November 30, 1999. Certain software products sold by the Company to certain of its licensees and franchisees in prior years are not Year 2000 compliant. A partial upgrade to accommodate current policy dates on or after Year 2000 has already been developed and distributed to franchisees free of charge. The Company's computer staff is developing an upgrade of the software that will be Year 2000 compliant. The Company expects to complete development of the Year 2000 compliant version of its software by November 30, 1999. The Company will distribute this version to purchasers of the non-compliant version, free of charge. The Company does not anticipate that the cost of this upgrade will be material to the Company's operations. Members of the Company's computer staff are undertaking the task of contacting the Company's customers and vendors to determine the status of such customers' and vendors' software for Year 2000 compliance. None of the responses received thus far have indicated any major problems. As the Company identifies these issues, it will determine the steps necessary to minimize disruptions due to failures in Year 2000 compliance by its customers and/or vendors. To date, the Company has paid approximately $240,000 in the analysis, development, and implementation of a plan to address its Year 2000 issues, and does not expect costs to exceed $325,000 in total. The Company's estimate reflects assumptions regarding the extent of the Year 2000 issues embodied in the Company's operations and facilities, the availability and cost of personnel trained in this area, the compliance plans of third parties, and similar uncertainties. However, due to the complexity and pervasiveness of the Year 2000 issue, and in particular, the uncertainty 10 regarding the compliance programs of third parties, no assurance can be given that these estimates will be achieved, and actual results could differ materially from those anticipated. If the Company is unable to address the Year 2000 issues successfully, or in a timely fashion, the Company may need to devote more resources to the process and additional costs may be incurred. This could have a material adverse effect on the Company's results of operations. The Company has purchased insurance that may offset certain losses to the Company for claims based upon non-compliance with Year 2000 issues. In its reasonably likely worst case Year 2000 scenario, the Company anticipates that the software which it uses, despite the completion upgrades, will still fail to be Year 2000 compliant. In addition, it is possible that the software sold by the Company to certain of its licensees and franchisees will not become Year 2000 compliant despite the Company's efforts to upgrade this software. Finally, the Company anticipates the possibility that its customers' and vendors' systems will not be Year 2000 compliant. In the event that any of these scenarios materialize, the Company expects that it would experience problems processing transactions and remitting checks to licensees and franchisees. Licensees and franchisees would experience a slow-down in their processing of paperwork. In the event that the steps being implemented by the Company fail to avoid problems associated with the Year 2000, the Company is currently developing its contingency plans. Such plans may include the immediate purchase of replacement hardware or software at the beginning of the Year 2000, the switching of vendors who supply goods or services to the Company, or other alternatives. In addition, the Company installed a back-up power generator in August 1999 to prepare for the unlikely event of a power grid failure. The Company anticipates that its contingency plans will be completed no later than November 30, 1999. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss to future earnings, fair values, or future cash flows due to potential changes in the price of a financial instrument. A financial instrument's value may change as a result of changes in interest rates, exchanges rates, commodity prices, equity prices, and other market changes. Market risk is inherent in all market risk sensitive financial instruments. During the three months ended September 30, 1999, the Company owned an immaterial number of common shares. However, in October 1999, the Company sold these shares and is no longer exposed to any market risk associated with this investment. The Company has a book value of $668,000 invested in municipal bonds that it carries as long term held to maturity investments. An increase in interest rates would result in a decline in the market value of the bonds. These bonds mature between 2005 and 2031. As the Company has the intent and ability to hold these bonds to maturity, the market risk associated with these bonds is insignificant and does not have a material effect on the financial statements. Although the Company wholly owns a Canadian subsidiary, the cash held by the Canadian subsidiary is not material to the Company's operations. Therefore, any foreign currency fluctuations would not have a material effect on the Company's financial statements. 11 PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS In June 1999, Safeway Inc. filed a complaint against multiple defendants including the Company in the United States District Court in Nebraska. The complaint arises from the alleged embezzlement of over $1,800,000 by a former franchisee of the Company. The complaint alleges claims against the Company in connection with claims services provided for the benefit of Safeway, Inc., including breach of fiduciary duty, negligent failure to monitor or supervise, vicarious liability, and breach of contract. The complaint seeks an accounting and a recovery of compensatory damages of at least $1,800,000. As the lawsuit is still in its earliest phase, the Company cannot yet assess the merits of the complaint or the effects this litigation will have on the Company. The Company has sought coverage under various insurance policies it holds and has received denials of coverage from the carriers. As of September 30, 1999, the Company has not accrued any liability with respect to this lawsuit. From time to time in the normal course of its business, the Company is named as a defendant in lawsuits. With the exception of the complaint described above, the Company does not believe that it is subject to any such lawsuits or litigation or threatened lawsuits or litigation that will have a material adverse effect on the Company or its business. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRONTIER ADJUSTERS OF AMERICA, INC. Date: November 12, 1999 /s/ Troy Huth ----------------- ----------------------------------- Troy Huth, President and Chairman of the Board, Director Date: November 12, 1999 /s/ Jeffrey R. Harcourt ----------------- ----------------------------------- Jeffrey R. Harcourt, Chief Financial Officer, Director 12 EX-27 2 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999 (Unaudited) AND THE CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS 3-MOS JUN-30-2000 JUL-01-1999 SEP-30-1999 1,722,550 12,866 1,845,816 402,433 0 3,688,132 2,632,457 966,320 6,671,390 1,241,883 0 0 0 90,191 5,339,316 6,671,390 0 1,676,064 0 0 1,070,318 52,840 774 583,929 216,597 367,332 0 0 0 367,332 .04 .04
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