CONFORMED
---------
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, 1996
[] 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)
Registrant's telephone number, including area code (602) 264-1061
---------------
Securities registered pursuant to Section
12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock $.01 Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $13,570,245 as of August 13, 1996.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, as of August 13, 1996, was 4,619,658.
Page 1 of 34
<PAGE>
PART I
------
1. 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 as the "Adjusters") throughout the United
States and 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/or, in the case of insurance carriers, by
policyholders. In addition, the Company and certain of the Adjusters offer risk
management services to their clients. As of June 30, 1996, the Company had
license or franchise agreements ("Agreements") with 411 owner-operator Adjusters
operating 417 offices, with 618 advertised locations in 50 states, the District
of Columbia and Canada. In addition to licensing and franchising Adjusters, the
Company owns and operates independent insurance adjusting and risk management
businesses in Arizona.
General
- -------
For its fiscal year ended June 30, 1996, the Company's licensing and franchising
activities accounted for approximately 89% of gross revenues, and the Company's
Company-owned adjusting and risk management businesses accounted for
approximately 11% of gross revenues. For the fiscal years ended June 30, 1995
and June 30, 1994, the Company's licensing and franchising activities accounted
for approximately 91% and 92%, respectively, of gross revenues, and the
Company's Company-owned adjusting and risk management businesses accounted for
approximately 9% and 8%, respectively, of gross revenues. The revenues derived
from the Company's operations, as well as the gross billings by Adjusters (upon
which the Company's revenues from licensing and franchising activities are
based), are set forth in the following table.
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
------------------------------------------------------------
1994 1995 1996
------------------------------------------------------------
<S> <C> <C> <C>
Gross Billings by Adjusters $39,710,000 $42,690,000 $46,830,000
(approximate)
Revenues from Licensing and
Franchising Activities 4,205,245 4,783,941 5,044,028
Revenues from Company-owned
Adjusting and risk management Businesses 385,025 456,884 597,956
</TABLE>
For its fiscal year ended June 30, 1996, the Company's licensing and franchising
activities accounted for approximately $1,943,000 in income from operations and
the Company's Company-owned adjusting and risk management businesses accounted
for approximately $5,000 in income from operations. For the fiscal years ended
June 30, 1995 and June 30, 1994, the Company's licensing and franchising
activities accounted for approximately $1,740,000 and $1,846,000, respectively,
in income from operations, the Company's Company-owned adjusting and risk
management businesses accounted for approximately $29,000 and $107,000 in
losses, respectively, from operations.
Although the Company generally considers its client base broad and well
diversified, collections received by adjusters from one insurance company,
Scottsdale Insurance Company, represented royalty fees to the Company of 20.8%,
21.8% and 23% of continuing licensee and franchisee fees for the years ended
June 30, 1996, 1995 and 1994, respectively. The loss of this client could
materially adversely affect the Company's results of 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.
Page 2
<PAGE>
Claims Adjusting (continued)
- ----------------------------
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 the 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 in coverage disputes against
insurance companies.
Risk management related services are part of the claims adjusting services
provided by the Company and the Adjusters. They 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 the self-insured
clients often play a significant role in the selection and retention of risk
management or third party administration and related services.
Licensing and Franchising
- -------------------------
The major part of the Company's revenues are 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. The Company receives a 10% or 15% royalty fee on
all of the Adjusters' collections depending upon the Agreement with the
Adjuster. In fiscal 1996, the Company retained 10.6% of the Adjusters'
collections as royalty fees from this arrangement. An Adjuster is provided with
a computerized central collection and rebilling service and national advertising
referral by the Company.
The Company does not advertise for or solicit potential licensees or
franchisees. Instead, the Company believes that through the financial
flexibility it offers and the established and dependable services it provides to
Adjusters, the Company is 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 its
Adjusters have been providing insurance adjusting services, on a Company-wide
basis, is approximately 20 years.
Before entering into an Agreement with a prospective licensee or franchisee, the
Company reviews the prospective licensee's or franchisee's background in order
to determine that he or she is qualified and capable of rendering professional
insurance adjusting services. In evaluating a potential licensee or franchisee,
the Company considers the length of time the potential licensee or franchisee
has been involved in insurance adjusting and such other factors as his or her
(i) experience and the types of claims that he or she is capable of adjusting;
(ii) ability to act independently without supervision by the Company; (iii)
prior and current associations in the insurance adjusting business and (iv)
reputation in the insurance adjusting business and in the community in which he
or she will provide insurance adjusting services.
Page 3
<PAGE>
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, Adjusters to devote at least 80% of their time during any 45 day period
to the conduct of the defined business. The Agreements are subject to
termination by the Company upon an Adjuster's failure to meet minimum gross
billing volumes. The Adjusters retain the right to make independent decisions
regarding the management and operation of their businesses, subject to the terms
of the license or franchise agreements.
The Company has a national advertising program in major trade journals. The
advertising is designed to promote the Company's operations and to generate new
accounts for its licensees and franchisees. Adjusters receive claims from both
local referrals developed by the Adjusters and from referrals by the Company.
The latter referrals are generally obtained through advertising efforts 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 or, sometimes in the case of an appraisal, a flat
fee. 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 a royalty fee equal to either 10%
or 15% of the gross amount of the collection, 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 itself and licensees and franchisees. The
Company's arrangements with Adjusters located in Canada differ from the
foregoing in that those Adjusters' clients send their remittance to the
Company's franchisee in Regina, Saskatchewan, Canada, who then deposits the
amount remitted 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, relinquish to a new prospective licensee or franchisee a portion of the
designated area covered by his or her Agreement. As a result of these
arrangements, the Company redirects to the relinquishing Adjuster 5% of
collections derived from services provided by the new Adjuster.
To assist new Adjusters in meeting their business and personal expenses during
their initial period as Adjusters, the Company may advance funds to them against
future billings. Typically such advances are made semi-monthly and average
approximately $1,250. The number of Adjusters to whom semi-monthly advances are
being made typically varies between 15 and 30. The Company believes that these
arrangements provide new Adjusters assistance in making the transition from
being employees of other adjusting firms to becoming the owners of their own
businesses and, therefore, aid the Company to attract highly qualified
individuals as Adjusters.
In addition to advancing funds to new Adjusters, the Company frequently lends
money to Adjusters who have been with the Company for a longer period. These
loans may either be loans that are repaid on a weekly basis out of their
collections, or advances against accounts receivable. The Company 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 $293,000 per month and has received reimbursement of an average of
$276,000 per month. At June 30, 1996, the Company had approximately $1,335,000
in outstanding loans or advances. During the past four fiscal years, the Company
has written off an average of $129,000 per year due to bad debts related to
these arrangements.
License and Franchise Agreements
- --------------------------------
The current forms of license and franchise agreements used by the Company are
largely identical except that the form of license agreement refers to the
Adjuster as a licensee, and the form of the franchise agreement refers to the
Adjuster as a franchisee. The difference between the licensee and franchisee
characterizations is primarily historical, dating from the period when the
Company's arrangements with Adjusters did not constitute a "franchise" under the
United States Federal Trade Commission's rules as they now do. If the
arrangement was subject to state franchise laws, the Adjuster was referred to as
a franchisee; if not, the Adjuster was referred to as a licensee. The Company
currently distinguishes between licensees and franchisees in the same manner.
Page 4
<PAGE>
License and Franchise Agreements (continued)
- --------------------------------------------
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's address. After the Company deducts its royalty fee from the
Adjuster's collections, the Company remits the balance to the Adjuster on a
weekly basis. The Company's arrangements with Adjusters located in Canada differ
from the foregoing in that those Adjusters' clients send their remittances to
the Company's franchisee in Regina, Saskatchewan, Canada, who then deposits the
amount remitted into Frontier's bank account. 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, relinquish a prospective new 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 a general liability and 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
<PAGE>
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 and 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 are: the Adjuster's failure to provide the Company with copies of
invoices for services performed by the Adjuster; the failure to instruct a
customer to make payments to the Company; and the failure to keep and maintain a
telephone listing and service.
Company-owned Insurance Adjusting Business
- ------------------------------------------
In addition to its operations as a licensor and franchisor, the Company conducts
independent insurance adjusting and risk management operations in Arizona.
Item 2 - Properties
- -------------------
The Company owns the office building and property located at 45 East Monterey
Way, Phoenix, Arizona, where it conducts its licensing and franchising
operations and its Phoenix claims adjusting and risk management-related services
business. The office building currently contains approximately 13,000 square
feet of office space.
The Company also owns a parcel of real property across the street from the
Company's principal executive office, which is utilized for employee parking.
The Company leases 480 square feet of office space in Tucson, Arizona where it
conducts its Tucson claims adjusting services. The current lease expires August
20, 1996, however, the Company does not anticipate any difficulty in replacing
the lease space under similar terms and conditions.
Item 3 - Legal Proceedings
- --------------------------
A Declaratory Judgment action was filed in May 1994 against the Company in the
Superior Court of Los Angeles, California, regarding the interpretation of
certain sections of the Company's license agreement with the plaintiff, a
licensee. In June 1994, the Company removed the case to the U.S. District Court
and raised certain counter claims for violation of the Company's license
agreement. The Company terminated the licensee's agreement effective January 1,
1995. Subsequent to the termination, the plaintiff amended his complaint to
include wrongful termination of his license agreement. On May 1, 1995, the U.S.
District Court granted the Company's motion for Summary Judgment regarding all
outstanding claims by the plaintiff. On June 19, 1995, the Court granted the
Company's Summary Judgment motion regarding its claims against the former
licensee including $204,144 in unpaid license fees and for court costs which
amounted to approximately $24,000. In July 1995, the plaintiff appealed this
judgment and that appeal is currently pending before the U.S. Court of Appeals
for the Ninth Circuit.
In August, 1995, Mark Brockbank and Alan Bird individually and on behalf of
certain Underwriters at Lloyd's, London, a client of a former franchisee of the
Company, filed a complaint against multiple defendants including the Company in
the District Court of Dallas County, Texas. The complaint arises from the
alleged embezzlement of over $700,000 by the
Page 6
<PAGE>
Item 3 - Legal Proceedings (Continued)
- --------------------------------------
former franchisee. The complaint alleges claims against the Company including
breach of contract, breach of fiduciary duty, negligence, negligent supervision,
negligent misrepresentation and negligent licensing. The complaint seeks
unspecified damages from the Company. The Company's insurance carrier is
defending the suit. The Company is vigorously contesting the plantiff's
allegations as to the Company and believes that its defenses are meritorious.
The Company does not believe that the results of this litigation will have a
material adverse effect on the Company's results of operations.
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
- -----------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
Page 7
<PAGE>
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, 1995
First Quarter $3.0625 $2.50 99,800
Second Quarter $3.125 $2.375 125,500
Third Quarter $2.875 $2.375 74,500
Fourth Quarter $3.125 $2.50 108,900
Fiscal Year Ended June 30, 1996
First Quarter $3.125 $2.1875 452,800
Second Quarter $3.00 $2.4375 159,300
Third Quarter $2.9375 $2.75 110,800
Fourth Quarter $3.4375 $2.625 436,600
The following shows per share cash dividends declared for each quarter during
the Company's two most recent fiscal years.
<TABLE>
<CAPTION>
Cash Dividends Declared
-----------------------
<S> <C>
Fiscal Year Ended June 30, 1995
First Quarter........................................................... $.0275
Second Quarter.......................................................... $.0275
Third Quarter........................................................... $.03
Fourth Quarter.......................................................... $.03
Fiscal Year Ended June 30, 1996
First Quarter........................................................... $.035
Second Quarter.......................................................... $.035
Third Quarter........................................................... $.035
Fourth Quarter.......................................................... $.035
</TABLE>
As of August 13, 1996, there were 246 shareholders of record (approximately 800
including beneficial owners) of the Company's Common Stock.
Page 8
<PAGE>
Item 6 - Selected Financial Data
- --------------------------------
<TABLE>
<CAPTION>
Year Ended June 30
---------------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Income Statement Data
Operating Revenues $4,273,806 $4,487,091 $4,590,270 $5,240,825 5,641,984
Net Income 793,437 909,053 1,018,160 1,026,848 1,134,519
Earnings Per Common Share .17 .19 .22 .22 .25
Weighted Average Number of
Shares Used in Per Share
Data 4,617,955 4,780,980 4,730,597 4,662,679 4,620,101
Cash Dividends Per Share .075 .0875 .11 .115 .14
Balance Sheet Data
Working Capital $2,281,789 $2,571,073 $2,749,531 $2,946,748 $3,196,562
Total Assets 5,268,996 5,981,298 6,491,066 6,597,050 6,875,752
Long-Term Debt -- -- -- 84,655 59,983
Property and Equipment, Net 1,635,991 1,549,227 1,460,601 1,484,545 1,554,401
Stockholders' Equity 4,621,613 5,250,138 5,487,999 5,838,651 6,230,799
Book Value Per Share .98 1.10 1.17 1.26 1.35
Retained Earnings 2,627,719 3,053,848 3,552,194 4,042,588 4,526,419
Total Shares Outstanding 4,711,114 4,782,010 4,690,898 4,640,898 4,619,658
</TABLE>
Page 9
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial
- ----------------------------------------------------------
Condition and Results of Operations
-----------------------------------
FINANCIAL CONDITION
The Company continues to finance its growth from funds generated by its current
operations. The Company also used funds it had generated to increase its cash
dividends, acquire certain license rights and add new licensees/franchisees.
In fiscal 1996 the Company's continuing operations generated $1,437,174 in cash
and this together with $55,547 received on the sale of treasury stock was
sufficient for the Company's cash requirements. This cash was used to pay cash
dividends of $647,147, acquire 41,240 shares of treasury stock at a cost of
$129,438, purchase equipment at a cost of $170,057 and acquire certain rights
from two licensees for $114,000.
Effective with its September 10, 1996 dividend, the Company has increased its
cash dividend to fifteen cents per share annually from fourteen cents per share.
During the fiscal year ended June 30, 1996, the Company paid fourteen cents per
share for a total distribution of $647,147. The increase on September 10, 1996,
will represent a 7.1% increase in the dividend rate.
The Company anticipates that during fiscal 1997 its operations will generate
sufficient cash to fund its operations, dividend payments and equipment
acquisitions. The Company projects that its capital expenditures for equipment
will be approximately $150,000 to $250,000 in fiscal 1997.
The Company policy is to maintain a solid financial position. This policy has
resulted in the Company's ratio of current assets to current liabilities being
6.46 to 1 as of June 30, 1996 compared to 5.37 to 1 as of June 30, 1995.
RESULTS OF OPERATIONS 1996 COMPARED TO 1995
REVENUES
The Company's revenues increased to $5,642,000 from $5,241,000 in fiscal 1995,
resulting in a 7.7% increase when compared to the prior fiscal year. The
increase consists of a $141,000 increase in adjusting and risk management
revenues and a $260,000 increase in continuing licensee and franchisee fees.
The increase of $141,000 in adjusting and risk management fees reflects a 31%
increase to $598,000 in the current period compared to $457,000 in the
comparable period of the prior year. The increase reflects a $120,000 in
revenues as a result of the acquisition of the operations of the Company's
former Tucson licensee on August 1, 1995 as well as an increase in the demand of
claims services by the Company's clients.
The Company's revenues from continuing licensee and franchisee fees increased
5.4% or $260,000 from $4,784,000 in the prior fiscal year to $5,044,000 in the
current fiscal year. A significant factor affecting the Company's revenue from
continuing licensee and franchisee fees was the termination of one of the
Company's licensees in California in January 1995. During the fiscal year ended
June 30, 1995 fees from this licensee contributed $112,000 to the revenues of
the Company. During fiscal 1996, the Company granted nine new licenses during
fiscal 1996 within the territory of this prior licensee and received $28,000 in
continuing licensee and franchisee fees from the new licensees. The Company
anticipates growth in these revenues. The increase also reflects the fact that
the Company's licensees and franchisees are benefiting from an increase in
claims assignments from insurance companies and self-insureds due to a general
increase in volume of claims, and, to a greater degree, the indicated increase
reflects the effect of new licensees and franchisees and rate increases as a
result of inflation.
The Company's revenues are 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 revenues. The Company has, however,
experienced growth in licensee and franchisee fees paid, and management believes
that the Company will continue to realize growth in continuing licensing and
franchising fees in the future as it adds qualified licensees and franchisees.
Additionally, the Company will continue to reflect revenue from the recently
purchased Tucson operation which the Company intends to operate as a Company
owned location.
Page 10
<PAGE>
RESULTS OF OPERATIONS 1996 COMPARED TO 1995 (Continued)
COMPENSATION AND EMPLOYEE BENEFITS
Compensation and employee benefits represent approximately 50% of the Company's
costs and expenses and are its largest expense item. These expenses increased
21% or $340,000 to $1,975,000 in the current fiscal year from $1,635,000 in the
prior fiscal year. This increase is the result of the Company hiring additional
employees to staff the recently acquired Tucson location ($90,000) and to handle
increased work load in the corporate office ($60,000) and for cost of living and
merit raises for employees and incentive bonuses ($190,000).
EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS
The Company's expenses other than compensation and employee benefits decreased
$138,000 during the year ended June 30, 1996 as compared to fiscal year 1995.
The principal items affecting these expenses are a $443,000 decrease in legal
expenses primarily related to the Company's litigation in California, a $98,000
increase in advertising and promotion, and a $90,000 increase in office expenses
primarily related to the Tucson office.
The most significant item in the $98,000 increase in advertising and promotion
was $60,000 relative to listings in a publication directed at the claims
industry. This expense was historically paid in the fourth quarter of the
Company's fiscal year. However, due to changes in the publisher's printing and
billing cycles this expense was incurred in the second quarter of the current
fiscal year rather than in the fourth quarter of the fiscal year ended June 30,
1995.
OTHER INCOME
The Company's other income decreased $22,000 or 13% from fiscal 1995 to fiscal
1996. The most significant items related to this decrease were a $19,000
decrease in gain on disposition of equipment, a $6,900 decrease in the sale of
computer equipment, and a decrease of $3,000 in dividends.
INCOME TAXES
Income taxes were 38.9% of the Company's income before taxes for fiscal year
1996 and 1995. The Company's income taxes have not been significantly affected
by any changes in the federal or state tax laws. However, the Company could be
affected by change in federal or state income tax rates at any time.
NET INCOME
The Company's net income increased $108,000 from $1,027,000 in fiscal 1995 to
$1,135,000 in the current fiscal year, an increase of 10.5%.
RESULTS OF OPERATIONS 1995 COMPARED TO 1994
REVENUES
The Company's revenues increased to $5,241,000 from $4,590,000 in fiscal 1994,
resulting in a 14.2% increase when compared to the prior fiscal year.
The increase consisted of a $72,000 increase in adjusting and risk management
revenues and a $579,000 increase in continuing licensee and franchisee fees.
Continuing licensee and franchisee fees increased to $4,784,000 from $4,205,000
an increase of 14% from the prior fiscal year. This increase reflects the fact
that the Company continued to benefit from an increase in claims, as insurers
and self-insureds use the Company's licensees and franchisees to handle claims,
and the increase in Company licensees and franchisees.
The Company-owned offices' revenues increased $71,859 from the prior year. This
increase is partially due to an increase in the number of claims being assigned
to the offices as a result of a change in staff.
Page 11
<PAGE>
RESULTS OF OPERATIONS 1995 COMPARED TO 1994 (Continued)
REVENUES (Continued)
The Company's revenues are affected by many matters such as work loads of other
companies and claims presented by their clients. The Company, however, saw
growth in the franchisee and licensee's fees paid, the most significant of which
are from offices established in the preceding fiscal year. Approximately
$374,000 of the $579,000 increase in continuing licensee and franchisee fees in
fiscal year 1995 as compared to fiscal 1994 was the result of growth in the
number of licensees and franchisees. The balance of the increase or $204,000 is
the result of the judgement rendered on June 19, 1995 in the Company's lawsuit
in California with a former licensee for unpaid licensee fees.
COMPENSATION AND FRINGE BENEFITS
The most significant of the Company's expenses are those related to the
compensation of its employees. The Company's compensation expense increased
$110,000 in fiscal 1995 when compared to fiscal 1994. This represents a 7%
increase in overall cost due to the inflation and merit raises given to
employees and an additional employee hired to handle increased work load in the
corporate office.
EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS
The Company's expenses other than compensation and fringe benefits increased
$549,000 from fiscal 1994 to fiscal 1995. The most significant items affecting
these expenses were a $624,000 increase in legal fees, a $140,000 decrease in
expenses related to the Company's London operations and a $50,000 advertising
item that was incurred in fiscal 1994 and not incurred in fiscal 1995. The
$624,000 increase in legal fees is a result of the lawsuit filed by a now former
licensee for which the Company received a Summary Judgement in its favor on June
19, 1995. The $140,000 reduction in expenses related to the London franchise is
a result of the expiration of the Company's agreement to subsidize the
franchisee effective June 30, 1994. The $50,000 decrease in advertising is
principally related to the Company's listings in a publication directed at the
claims industry. This expense was historically paid in the fourth quarter of the
Company's fiscal year. However, due to changes in the publisher's printing and
billing cycles, this expense was not incurred in fiscal 1995, but was incurred
in the second quarter of the fiscal year ended June 30, 1996. No other item of
expense had a significant affect on the increase in expenses other than
compensation and fringe benefits.
OTHER INCOME
The Company's other income increased $67,000 or 62% from fiscal 1994 to fiscal
1995. The most significant items related to this increase were a $36,000
increase in interest income, an $8,000 increase in dividend income related to
the Company's investments and a $19,000 gain on the sale of fixed assets. These
increases were largely the result of increased interest rates as well as the
increase in funds for investment generated by the Company's operations.
INCOME TAXES
Income taxes were 38.9% of the Company's income before taxes for the 1995 fiscal
year, an increase from 37.1% in fiscal 1994. The Company's income taxes were not
significantly affected by any changes in the federal and state tax laws.
NET INCOME
The Company's net income increased $9,000 from $1,018,000 in fiscal 1994 to
$1,027,000 in fiscal 1995, an increase of .9%.
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 12
<PAGE>
PART III
--------
Item 10 - Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Served as Director
Since Year Listed
Name/Title Business Experience Age Below (1)
- ---------- ------------------- --- ------------------
<S> <C> <C> <C>
Patric R. Greer Mr. Greer is a certified public 41 1994
Director, Controller accountant and has been with the
Company as the Controller since 1985.
Mr. Greer was appointed a Director of
the Company in October 1994. Mr.
Greer graduated from Northern Arizona
University with a degree in accounting.
An employment agreement between
Mr. Greer and the Company provides
that Mr. Greer will be Controller of the
Company through June 30, 2000.
George M. Hill Mr. Hill has been associated with the 88 1978
Director, Company in an advisory capacity for
Vice President, more than 25 years, has been a Vice
Assistant President of the Company since 1985
Secretary and has been the Assistant Secretary of
the Company since 1990. He has been
a senior partner in the Phoenix law firm
of Hill & Savoy for over 30 years. Mr.
Hill is a Director and Secretary of
National Car Rental, Phoenix, Denver
and Colorado Springs, and Director and
Vice President of Precise Metal Products
Co., Phoenix and Salt Lake City.
Francis J. LaPallo Mr. LaPallo joined the Company on June 24, 48 1996
Director, 1996. From 1977 until joining the Company
Executive Vice President he practiced law in Maryland, the District of
Columbia and California. From 1990 until
joining the Company he was a partner with
the law firm of Manatt, Phelps & Phillips in
Los Angles, California. He represented the
Company in various legal matters from 1994
until joining the Company. An employment
agreement between the Company and Mr.
LaPallo provides that Mr. LaPallo will be an
executive officer of the Company through
June 30, 2001.
Louis T. Mastos Mr. Mastos has been the President of 75 1978
Director Louis T. Mastos & Associates, Inc.,
a managing general agency located in Reno,
Nevada, since 1971. He is past President of
the American Association of Managing General
Agents. He was the Insurance Commissioner of
the State of Nevada from 1965 to 1971.
</TABLE>
Page 13
<PAGE>
Item 10 - Directors and Executive Officers of the Registrant (Continued)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Served as Director
Since Year Listed
Name/Title Business Experience Age Below (1)
- ---------- ------------------- --- ------------------
<S> <C> <C> <C>
James S. Rocke Mr. Rocke has been employed by the 28 1993
Director, Company since 1982 and currently is
Secretary/Treasurer an adjuster in the Company's Phoenix
office. Mr. Rocke was elected
secretary/treasurer of the Company in
1993. Mr. Rocke graduated from
Arizona State University in 1991
with a B.S. degree in Finance. Mr.
Rocke is the son of William J. Rocke.
William J. Rocke Mr. Rocke is the founder of the Company 72 1975
Director, Chairman of and has served as an Executive Officer of the
the Board, Chief the Company and its predecessor entities since
Executive Officer 1957. Mr. Rocke has been in the insurance
adjusting business since 1952. He has a law
degree from the University of Denver and is a
member of the Colorado Bar Association.
The employment agreement between Mr.
Rocke and the Company provides that Mr.
Rocke will be the Chief Executive Officer
of the Company through June 30, 2000.
Mr. Rocke is the father of James S. Rocke.
Jean E. Ryberg Mrs. Ryberg has been employed by the 64 1975
Director, Company and its predecessors since 1962.
President She has held several positions with the
Company and has been the President of the
Company since 1993. She also manages the
Company's insurance adjusting and risk
management operations in Phoenix, Arizona.
The employment agreement between Mrs. Ryberg
and the Company provides that Mrs. Ryberg
will be an executive officer of the Company
through June 30, 2000.
Merlin J. Schumann Mr. Schumann has been a certified public 52 1984
Director accountant with the firm of Murray &
Murray, P.C., located in Phoenix,
Arizona, for over 20 years. Since
December, 1990, Mr. Schumann has also
held the position of General Securities
Representative with H. D. Vest Investment
Securities, Inc., a stock brokerage and
investment counseling firm located in
Irving, Texas.
William W. Strawther, Jr. Mr. Strawther was the President and 70 1978
Director, Vice Chairman principal shareholder of Continental
of the Board American Securities, Inc., located in
Phoenix, Arizona from 1970 through 1982. He
is a former member of the National Board of
Governors of the National Association of
Securities Dealers, Inc. He has been an
independent business consultant since 1982.
</TABLE>
Page 14
<PAGE>
Item 10 - Directors and Executive Officers of the Registrant (Continued)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Served as Director
Since Year Listed
Name/Title Business Experience Age Below (1)
- ---------- ------------------- --- ---------
<S> <C> <C> <C>
R. Scott Younker Mr. Younker has been a licensee of 60 1992
Director the Company in Prescott, Arizona since 1979.
He has been engaged in the insurance
adjusting business for 32 years.
</TABLE>
(1) Term will continue through October 11, 1996.
Based solely on a review of the copies of such forms received by the Company
during the fiscal year ended June 30, 1996, 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 complied with all Section 16(a)
filing requirements during such fiscal year.
Item 11 - Executive Compensation
- --------------------------------
The following table sets forth certain information concerning the compensation
paid by the Company during its year ended June 30, 1996 to each executive
officer whose aggregate compensation exceeded $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------------------------------------------
a b c d e i
- --------------------------- ---- --------- -------- ------------- ------------
Other Annual All Other
Compensation Compensation
Name and Principal Position Year Salary ($) Bonus ($) ($) (2) ($) (3)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
William J. Rocke, CEO, 1996 225,000 71,981 -- 22,719
Chairman, Director 1995 206,636 50,000 -- 23,670
1994 196,796 50,000 -- 32,250
Jean E. Ryberg, 1996 160,000 71,981 -- 29,266
President, Director 1995 145,861 50,000 -- 29,168
1994 138,915 50,000 -- 32,250
Patric R. Greer 1996 90,000 11,224 -- 17,364
Controller, Director 1995 68,116 12,703 -- 14,756
1994 65,075 5,414 -- 11,205
</TABLE>
(1) Columns f, g and h have been omitted as there has been no long term
compensation awarded to, earned by or paid to any of the named executives
in any fiscal year covered by these columns.
(2) No perquisites were received by any person named above greater than the
lesser of $50,000 or 10% of salary plus bonus.
(3) "All Other Compensation" includes (i) directors fees of $2,250, $3,000 and
$2,250 for Mr. Rocke in years ended June 30, 1996, 1995 and 1994; $3,000,
$3,000 and $2,250 for years ended June 30, 1996, 1995 and 1994 for Mrs.
Ryberg and $3,000 in fiscal 1996 and $2,250 in fiscal 1995 for Mr. Greer;
(ii) profit sharing contributions of $20,469, $20,670 and $30,000 for years
ended June 30, 1996, 1995 and 1994 for Mr. Rocke; $26,266, $26,168 and
$30,000 for year ended June 30, 1996, 1995 and 1994 for Mrs. Ryberg;
$14,364, $12,506 and $11,205 for Mr. Greer for years ended June 30, 1996,
1995 and 1994, respectively.
Page 15
<PAGE>
Item 11 - Executive Compensation (Continued)
- --------------------------------------------
Option/SAR Exercises and Holdings
- ---------------------------------
During 1996 the Company did not grant any stock options.
The following table shows Company stock options that were exercised during
fiscal 1996 and the number of shares and value of grants outstanding as of June
30, 1996 for each Named Executive.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1996 AND YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised,
Underlying Unexercised In-The-Money Options/SARs
Options/SARs at 6/30/96 (#) at 6/30/96 ($)(a)
Shares --------------------------- ---------------------------
Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- ---------------- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William J. Rocke -- -- 48,654 -- 5,430 --
Jean E. Ryberg -- -- 51,347 -- 10,859 --
Patric R. Greer -- -- 51,346 -- 10,859 --
</TABLE>
(a) Value of unexercised, in-the-money Company options based on a fair market
value of the Company's common stock of $3.00 per share as of June 30,
1996.
Directors Compensation
- ----------------------
Each director, including employees of the Company, is paid $750 per Board
meeting attended. During fiscal 1996, each director, except for Mr. William J.
Rocke, received $3,000 for attendance at Board meetings. Mr. William J. Rocke
received $2,250 for attendance at Board Meetings.
Employment Agreements
- ---------------------
The Company has entered into employment agreements with Mr. Rocke, Mrs.
Ryberg, Mr. Greer and Mr. LaPallo each for five-year terms. Mr. Rocke's, Mrs.
Ryberg's and Mr. Greer's agreements were effective July 1, 1995 and expire June
30, 2000. Mr. LaPallo's agreement is effective July 1, 1996 and expires June 30,
2001.
Mr. Rocke's agreement provides for an annual salary of $225,000 with annual
cost of living increases based upon the U.S. Department of Labor's cost of
living index, plus a bonus of three percent (3%) of the Company's income before
taxes and bonuses and 5% of the increase in the Company's income before taxes
and bonuses from the prior year.
Mrs. Ryberg's agreement provides for an annual salary of $160,000 with
annual cost of living increases based upon the U.S. Department of Labor's cost
of living index, plus a bonus of three percent (3%) of the Company's income
before taxes and bonuses and 5% of the increase in the Company's income before
taxes and bonuses from the prior year.
Mr. Greer's agreement provides for an annual salary of $90,000 with annual
cost of living increases based upon the U.S. Department of Labor's cost of
living index, plus a bonus of .5% of the Company's income before taxes and
bonuses in year 1 and 1% in year two and 1.5% in years 3 and 4 and .5% of the
increase in the Company's income before taxes and bonuses from the prior year in
year one and increasing .5% annually to 2.5% in year five of the agreement.
Mr. LaPallo's agreement provides for an annual salary of $180,000 with
annual cost of living increases based upon the U.S. Department of Labor's cost
of living index for the first two years. For the remaining three years, the
agreement provides for an annual salary of $150,000 with annual cost of living
increases based upon the U.S. Department of Labor's cost of living index, plus a
bonus of three percent (3%) of the Company's income before taxes and bonuses and
3% of the increase in the Company's income before taxes and bonuses from the
prior year. In connection with the Company's employment of Mr. LaPallo, the
Company sold Mr. LaPallo 20,000 shares of common stock from the treasury for an
aggregate of $ 55,547.
Page 16
<PAGE>
Item 12 - Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Name and Address Amount of Beneficial Ownership
- ------------------------------------------------- ------------------------------
Common Stock $.01 Par Value
---------------------------
Number of Shares (1) Percent (2)
-------------------- -----------
<S> <C> <C>
Patric R. Greer and Nancy S. Greer, his wife (3) 66,316 1.42%
George M. Hill (4) 153,565 3.32%
Francis J. LaPallo and Wendy J. Harrison, his wife 20,000 *
Louis T. Mastos and Eva B. Mastos, his wife (5) 208,703 4.52%
William J. Rocke and Garnet Rocke, his wife (6) 446,268 9.56%
P. O. Box 7641
Phoenix, Arizona 85011
James S. Rocke (7) 469,803 10.06%
P. O. Box 7641
Phoenix, Arizona 85011
Jean E. Ryberg (8) 160,589 3.44%
Merlin J. Schumann and Donna L. Schumann, his wife 20,114 *
William W. Strawther, Jr. and Marjorie A. Strawther,
his wife (9) 442,138 9.57%
7108 North 15th Street
Phoenix, Arizona 85020
R. Scott Younker and Sandra L. Younker, his wife 93,469 2.02%
All officers and directors as a group
(ten persons) (10) 1,790,965 37.16%
</TABLE>
- ----------------------------------------
*Less than 1%
(1) The number of shares shown in the table, including the notes thereto, have
been rounded to the nearest whole share. Includes, when applicable, shares
owned of record by such person's minor children and spouse and by other
related individuals and entities over whose shares of Common Stock such
person has custody, voting control or power of disposition. Also includes
shares of Common Stock that the identified person had the right to acquire
within 60 days of August 1, 1996 by the exercise of stock options.
(2) The percentages shown include the shares of Common Stock which the person
will have the right to acquire within 60 days of August 1, 1996. In
calculating the percentage of ownership, all shares of Common Stock which
the identified person will have the right to acquire within 60 days of
August 1, 1996 are deemed to be outstanding for the purpose of computing
the percentage of the shares of Common Stock owned by such person, but are
not deemed to be outstanding for the purpose of computing the percentage of
shares of common stock owned by any other stockholders.
(3) Includes 51,346 shares subject to a currently exercisable stock options at
an average of $3.2829 per share.
(4) Excludes 50,000 shares held by Nell S. Hill, Mr. Hill's wife, and 131,693
shares held by Mr. Hill's children and grandchildren, in which shares he
disclaims any beneficial interest.
(5) Includes 183,180 shares which are held in a trust under an agreement dated
February 10, 1981, in which Mr. and Mrs. Mastos hold equal beneficial
interests, and 25,523 shares which are held by the Louis T. Mastos &
Associates, Inc. Employees Profit Sharing Plan, of which he is a trustee
and the majority beneficial owner.
Page 17
<PAGE>
Item 12 - Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(continued)
-----------
(6) Includes 290,000 shares held by Old Frontier Investment, Inc., of Arizona,
of which Mr. Rocke holds 51% of the outstanding stock. Includes 48,654
shares subject to a currently exercisable stock options at $3.2829 per
share.
(7) Includes 290,000 shares held by Old Frontier Investment, Inc. of Arizona of
which Mr. Rocke holds 49% of the outstanding stock. Includes 48,653 shares
subject to a currently exercisable stock options at an average of $3.2829
per share.
(8) Includes 51,347 shares subject to a currently exercisable stock options at
an average of $3.005 per share.
(9) Held as trustees under Trust Agreement, dated June 7, 1989, establishing
the William W. Strawther, Jr. and Marjorie A. Strawther Living Trust, of
which Mr. and Mrs. Strawther are beneficiaries. Excludes an aggregate of
200,000 shares beneficially owned by Mr. and Mrs. Strawther's son, in which
shares Mr. and Mrs. Strawther disclaim any beneficial interest.
(10) Excludes all duplicate reporting of holdings.
To the best of knowledge of the Company, no person or groups of persons, other
than officers and directors, beneficially own more than five percent of the
Frontier Adjusters of America, Inc. Common Stock (based upon present records of
the transfer agent).
Item 13 - Certain Relationships and Related Transactions
- --------------------------------------------------------
Old Frontier Investment, Inc. of Arizona, of which William J. Rocke and
Garnet Rocke, his wife, are owners of 51% of the issued and outstanding stock of
said corporation and James S. Rocke owns the remaining 49%, has entered into a
license agreement with the Company pursuant to which it operates, under standard
terms and conditions, an insurance adjusting and risk management business
located in Scottsdale, Arizona, and is paid a 5% royalty on gross revenues
derived from services provided by others in certain other Arizona cities and
towns. The Company paid that corporation $15,910 during fiscal year 1996 in
connection with such 5% royalty agreement.
George M. Hill, Vice President and Director of the Company, acts as
General Counsel to the Company. During the fiscal year 1996, the Company paid
Mr. Hill $90,376 for services rendered and disbursements. Such fees will
continue to accrue, pursuant to a retainer agreement, at the rate of $6,650 per
month effective September 1, 1995.
The Company paid its Vice Chairman, William W. Strawther, Jr., $20,000
during fiscal year 1995 for business and financial consulting services.
The Company believes that the cost to the Company for all of the foregoing
were and are competitive with charges for similar services and facilities
available from third parties.
Page 18
<PAGE>
PART IV
-------
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) (1) Financial Statements
The following Financial Statements are included at page F-1:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets - June 30, 1996 and 1995
Consolidated Statements of Income for the Years Ended June 30,
1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended June 30,
1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements - June 30, 1996, 1995
and 1994
(a) (2) Financial Statement Schedules
Schedule
Number
------
II Valuation and Qualifying Accounts Years Ended June 30, 1996,
1995 and 1994
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.
(a) (3) Exhibits filed with this report.
Page 19
<PAGE>
EXHIBIT LIST
------------
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
3(a) Articles of Incorporation of Frontier Adjusters of America, Inc.*
3(b) By-Laws of Frontier Adjusters of America, Inc.**
10(a) Frontier Adjusters of America, Inc. Incentive Stock Option Plan*
10(b) Profit Sharing Plan, as amended***
10(c) Employment Agreement, dated August 10, 1995 between the Registrant and
William J. Rocke***
10(d) Employment Agreement, dated August 10, 1995 between the Registrant and
Jean E. Ryberg***
10(e) Incentive Stock Option Plan, dated October 10, 1987*
10(f) Form of Franchise Agreement between the Registrant and franchisees*
10(g) Form of License Agreement between the Registrant and licensees*
10(h) Agreement, dated June 1, 1990, between the Registrant and Scottsdale
Insurance Company*
10(i) Form of Software Purchase Agreement and Order Form*
10(j) Frontier Adjusters of America, Inc., Stock Option Plan, dated May 21, 1996
10(k) Employment Agreement, dated April 23, 1996, between the Registrant and
Francis J. LaPallo
21 List of Subsidiaries of Frontier Adjusters of America, Inc.
23 Consent of McGladrey & Pullen, LLP
</TABLE>
* 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
(b) The Company filed no reports on Form 8-K with the Securities and
Exchange Commission during the last quarter of the fiscal year June
30, 1996
Page 20
<PAGE>
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, thereunto duly authorized.
FRONTIER ADJUSTERS OF AMERICA, INC.
/s/ William J. Rocke
- --------------------------------------------------- ---------------------------
William J. Rocke (Chief Executive Officer, Chairman Jean E. Ryberg, (President)
of the Board, Principal Financial Officer)
August 19, 1996
- --------------------------------------------------- ---------------------------
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/ William J. Rocke August 19, 1996
- --------------------------------------------------- --------------------
William J. Rocke, Director
/s/ Jean E. Ryberg August 19, 1996
- --------------------------------------------------- --------------------
Jean E. Ryberg, Director
/s/ Francis J. LaPallo August 19, 1996
- --------------------------------------------------- --------------------
Francis J. LaPallo, Exec. V.P., Director
/s/ George M. Hill August 19, 1996
- --------------------------------------------------- --------------------
George M. Hill, V.P., Director
/s/ James S. Rocke August 19, 1996
- --------------------------------------------------- --------------------
James S. Rocke, Secretary/Treasurer, Director
/s/ Merlin J. Schumann August 19, 1996
- --------------------------------------------------- --------------------
Merlin J. Schumann, Director
/s/ William W. Strawther, Jr. August 19, 1996
- --------------------------------------------------- --------------------
William W. Strawther, Jr., Director
/s/ Lou Mastos August 19, 1996
- --------------------------------------------------- --------------------
Lou Mastos, Director
/s/ R. Scott Younker August 19, 1996
- --------------------------------------------------- --------------------
R. Scott Younker, Director
/s/ Patric R. Greer August 19, 1996
- --------------------------------------------------- --------------------
Patric R. Greer, Controller
Page 21
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets - June 30, 1996 and 1995 F-3
Consolidated Statements of Income for the Years Ended June 30,
1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the Years Ended June 30, 1996,
1995 and 1994 F-5
Consolidated Statements of Stockholders' Equity for the Years Ended June 30,
1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements - June 30, 1996, 1995 and 1994 F-7
Supplementary Schedule F-16
Schedule II - Valuation and Qualifying Accounts Years Ended
June 30, 1996, 1995 and 1994 F-17
</TABLE>
F-1
<PAGE>
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, 1996 and 1995, and
the related consolidated statements of income, cash flows, and stockholders'
equity for each of the three years in the period ended June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1995, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement Schedule II for
the years ended June 30, 1996, 1995 and 1994 included on page F-17 of this form
10-K is presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth herein in relation to the
basic financial data taken as a whole.
McGLADREY & PULLEN, LLP
Phoenix, Arizona
August 1, 1996
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
Frontier Adjusters of America, Inc. and Subsidiaries
<TABLE>
<CAPTION>
June 30, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 534,540 $ 358,960
Securities available for sale (Note 6) 1,249,463 1,255,627
Current portion of advances to licensees and franchisees (Note 4) 794,561 706,739
Receivables net (Note 3) 754,624 925,667
Unbilled adjusting fees 16,100 14,225
Prepaid expenses 288,893 258,165
Deferred income taxes (Note 9) 143,351 101,109
----------------------------------------
TOTAL CURRENT ASSETS 3,781,532 3,620,492
----------------------------------------
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation and amortization (Note 5) 1,554,401 1,484,545
----------------------------------------
OTHER ASSETS
Held to maturity investments (Note 6) 750,730 764,090
Advances to licensees and franchisees, net of current portion (Note 4) 327,000 302,000
Licenses and franchises, net of accumulated amortization of
$138,816 in 1996 and $63,284 in 1995 298,177 214,628
Cost of subsidiary in excess of net identifiable assets acquired, net of
accumulated amortization of $172,196 in 1995 and $169,885 in 1994 39,309 41,621
Receivable from licensee -- 50,762
Other 124,603 118,912
----------------------------------------
1,539,819 1,492,013
----------------------------------------
TOTAL ASSETS $6,875,752 $6,597,050
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 11,666 $ 12,669
Accrued expenses 238,215 297,973
Income taxes payable 57,305 64,720
Licensees' and franchisees' remittance payable 135,518 221,620
Current portion of long term liability (Note 7) 24,672 22,951
Other 117,594 53,811
----------------------------------------
TOTAL CURRENT LIABILITIES 584,970 673,744
----------------------------------------
LONG TERM LIABILITY (Note 7) 59,983 84,655
----------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 13) -- --
STOCKHOLDERS' EQUITY
Common stock, authorized 100,000,000 shares, par value $.01,
issued 4,782,010 shares 47,820 47,820
Additional contributed capital 2,148,470 2,148,470
Retained earnings 4,526,419 4,042,588
----------------------------------------
6,722,709 6,238,878
Add (deduct):
Treasury stock 162,352 shares in 1996: 141,112 shares in 1995 (485,219) (414,869)
Other (6,691) 14,642
----------------------------------------
TOTAL STOCKHOLDERS' EQUITY 6,230,799 5,838,651
----------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,875,752 $6,597,050
========================================
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Frontier Adjusters of America, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended June 30, 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Continuing licensee and franchisee fees (Note 8) $5,044,028 4,783,941 $4,205,245
Adjusting and risk management fees 597,956 456,884 385,025
------------------------------------
5,641,984 5,240,825 4,590,270
------------------------------------
COST AND EXPENSES
Compensation and employee benefits 1,975,028 1,635,289 1,525,217
Office 372,788 308,783 266,030
Advertising and promotion 459,329 360,878 384,868
Depreciation and amortization 190,044 136,428 113,945
Provision for doubtful accounts 151,847 169,640 148,017
Other 791,299 1,127,138 641,434
------------------------------------
3,940,335 3,738,156 3,079,511
------------------------------------
INCOME FROM OPERATIONS 1,701,649 1,502,669 1,510,759
------------------------------------
OTHER INCOME
Interest income 144,677 134,136 98,150
Disposition of investments -- -- 1,700
Gain on sale of licensee 5,000 -- --
Gain on disposition of equipment -- 19,416 525
Other 4,498 22,867 8,706
------------------------------------
TOTAL OTHER INCOME 154,175 176,419 109,081
------------------------------------
INCOME BEFORE INCOME TAXES 1,855,824 1,679,088 1,619,840
INCOME TAXES (Note 9) 721,305 652,240 601,680
------------------------------------
NET INCOME $1,134,519 $1,026,848 $1,018,160
====================================
Earnings per common share $ .25 $ .22 $ .22
====================================
Weighted average number of shares
of common stock outstanding 4,620,101 4,622,679 4,730,597
====================================
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Frontier Adjusters of America, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended June 30, 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,134,519 $ 1,026,848 $ 1,018,160
-----------------------------------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 190,044 136,428 113,945
Gain on sale of investments -- -- (1,700)
Gain on sale of license (5,000) -- --
Gain on disposition of equipment -- (19,416) (525)
Allowance for doubtful accounts 151,847 168,222 148,018
Deferred income taxes (42,242) (47,004) (11,120)
Change in assets and liabilities
(Increase) decrease in:
Receivables 181,133 (282,028) (232,130)
Unbilled adjusting fees (1,875) (2,375) 2,325
Prepaid expenses (30,728) (31,108) 20,219
Other (50,029) (59,522) 139,750
Increase (decrease) in:
Accounts payable (1,003) (33,877) 30,758
Accrued expense (59,758) 167,408 12,186
Income taxes payable (7,415) 34,647 (18,088)
Licensees' & franchisees' remittance payable (86,102) (497,735) 233,387
Other 63,783 (22,657) 13,604
-----------------------------------------
Total adjustment 302,655 (489,017) 450,629
-----------------------------------------
NET CASH PROVIDED
BY OPERATING ACTIVITIES 1,437,174 537,831 1,468,789
-----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (170,057) (127,195) (12,083)
Investments purchased (2,970,057) (3,968,431) (3,543,038)
Collection on receivable from licensee -- 3,154 16,622
Proceeds from disposition of equipment -- -- 600
Proceeds from maturity of investments 3,000,000 4,000,000 3,106,824
Payments on license acquisition (136,951) (110,306)
Advances to licensees' and franchisees' (3,964,357) (3,358,235) (2,772,088)
Collections of advances to licensees & franchisees 3,695,280 3,241,491 2,672,815
-----------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (546,142) (319,522) (530,348)
-----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (647,147) (536,454) (519,814)
Proceeds from sale of treasury stock 55,547 -- --
Common stock repurchased (129,438) (136,377) (278,492)
-----------------------------------------
NET CASH USED IN
FINANCING ACTIVITIES (721,038) (672,831) (798,306)
EFFECT OF EXCHANGE RATE CHANGES
ON CASH 5,586 8,702 18,007
-----------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 175,580 (445,820) 158,142
CASH AND CASH EQUIVALENTS AT
BEGINNING OF THE PERIOD 358,960 804,780 646,638
-----------------------------------------
CASH AND CASH EQUIVALENTS AT
END OF THE PERIOD $ 534,540 $ 358,960 $ 804,780
=========================================
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Frontier Adjusters of America, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended June 30, 1996, 1995 and 1994
- ----------------------------------------------------------------------------------------------------------------------------------
Numbers of Par Value Additional Cumulative Unrealized
Shares of Common Contributed Retained Treasury Translation loss on
Issued Stock Capital Earnings Stock Adjustments Investments
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993 4,782,010 $ 47,820 $2,148,470 $3,053,848 $ -- $ -- $ --
Cash dividends -
$.11 per share -- -- -- (519,814) -- -- --
Net income -- -- -- 1,018,160 -- -- --
Treasury stock purchase
91,112 shares -- -- -- -- (278,492) -- --
Foreign currency translation -- -- -- -- -- 18,007 --
- -----------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1994 4,782,010 47,820 2,148,470 3,552,194 (278,492) 18,007 --
Cash dividends -
$.115 per share -- -- -- (536,454) -- -- --
Net income -- -- -- 1,026,848 -- -- --
Treasury stock purchase
50,000 shares -- -- -- -- (136,377) -- --
Foreign currency translation -- -- -- -- -- 8,702 --
Unrealized loss -- -- -- -- -- -- (12,067)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 4,782,010 47,820 2,148,470 4,042,588 (414,869) 26,709 (12,067)
Cash dividends -
$.14 per share -- -- -- (647,147) -- -- --
Net income -- -- -- 1,134,519 -- -- --
Treasury stock purchase
41,240 shares -- -- -- -- (129,438) -- --
Treasury stock sold
20,000 shares -- -- -- (3,541) 59,088 -- --
Foreign currency translation -- -- -- -- -- 5,586 --
Unrealized loss -- -- -- -- -- -- (26,919)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 4,782,010 $ 47,820 $2,148,470 $4,526,419 $( 485,219) $ 32,295 $(38,986)
=============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation -- These financial statements include the accounts
of Frontier Adjusters of America, Inc. (Company) and its subsidiaries, all of
which are wholly-owned. Intercompany accounts and transactions have been
eliminated.
Business -- The Company's operations consist of the licensing and franchising of
independent adjusters throughout the United States and Canada and the operation
of an independent adjusting business in Arizona and a risk management division
out of its Phoenix and Tucson, Arizona offices. The Company grants credit to its
licensees and franchisees, all of whom operate within the insurance industry.
Revenues from claims adjusted by employees of the Company are recognized as the
services are performed; revenues from claims adjusted by independent licensees
and franchisees are recognized when they become due under the terms of the
license and franchise agreements (Note 8). Included in the revenues are
collections received from one customer which provided the Company with revenues
representing approximately $1,047,000 or 20.8%, $1,044,000 or 21.8% and $968,000
or 23% of the continuing licensee and franchisee fees during the years ended
June 30, 1996, 1995 and 1994 respectively. Outstanding licensee and franchisee
fees receivable related to this customer were approximately $123,000 at June 30,
1996 and $95,000 at June 30, 1995.
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 -- 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 the building. The building is
depreciated using the straight-line method over 30 years. The cost of a
subsidiary in excess of net tangible assets acquired is being amortized over 40
years.
Licenses and franchises -- Licenses and franchises represent Company owned
adjusting operations and are stated at cost less amortization. Amortization is
computed using the straight-line basis over the period of the relevant contract.
Income taxes -- Deferred income taxes result from temporary differences between
book and tax bases of assets and liabilities. The principal sources of these
differences are different depreciation rates for property and equipment, the
difference between the book provision for doubtful accounts and the specific
charge-off method used for income tax purposes, and the tax effect of the net
unrealized loss on investment.
Use of estimates in the preparation of financial statements -- The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Investments held-to-maturity securities -- Securities classified as
held-to-maturity are those debt securities the Company has both the intent and
ability to hold to maturity regardless of changes in market conditions,
liquidity needs or changes in general economic conditions. These securities are
carried at cost adjusted for amortization of premiums and accretion of discount,
computed by the interest method over their contractual lives.
The sale of a security within three months of its maturity date or after at
least 85 percent of the principal outstanding has been collected is considered
held to maturity for purposes of classification and disclosure.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Available-for-sale securities -- Securities classified as available-for-sale are
those debt securities that the Company intends to hold for an indefinite period
of time, but not necessarily to maturity. Any decision to sell a security
classified as available-for-sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Company's investments, liquidity needs, and other similar factors. Securities
available-for-sale are carried at fair value. Unrealized gains or losses, net of
the related deferred tax effect, are reported as increases or decreases in
stockholders' equity. Realized gains or losses, determined on the basis of the
cost of specific securities sold, are included in earnings.
Transfers -- Transfers of debt securities into the held-to-maturity
classification from the available-for-sale classification are made at fair value
on the date of transfer. The unrealized holding gains or losses on the date of
transfer are retained as a separate component of stockholders' equity and in the
carrying value of the held-to-maturity securities. Such amounts are amortized
over the remaining contractual lives of the securities by the interest method.
Fair value of financial instruments -- Effective July 1, 1995, the Company
adopted FASB Statement No. 107, Disclosures About Fair Value of Financial
Instruments, which requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value.
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 6 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.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting by Creditors for Impairment of a loan -- On July 1, 1995, the Company
adopted Financial Accounting Standards Board (FASB) Statement No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by FASB Statement
No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures. There was no effect on the Company's financial statements for
this change, which generally requires impaired loans to be measured on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or as an expedient at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. A loan is
impaired when it is probable the creditor will be unable to collect all
contractual principal and interest payments due in accordance with the terms of
the loan agreement.
Accounting for Stock-Based Compensation - In October 1995, the FASB issued
Statement No. 123, Accounting for Stock- Based Compensation. Statement No. 123
establishes financial accounting and reporting standards for stock-based
compensation plans such as a stock purchase plan. The statement generally
suggests, but does not require, employee stock-based compensation transactions
be accounted for based on the fair value of the consideration received or the
fair value of the equity instrument issued, whichever is more reliably
measurable. An enterprise may continue to follow the requirements of Accounting
Principles Board (APB) Opinion No. 25, which does not require compensation to be
recorded if the consideration to be received is at least equal to its fair value
of the measurable date. If an enterprise elects to follow APB Opinion No. 25, it
must disclose the proforma effects on net income as if the compensation were
measured in accordance with the guidelines of Statement No. 123. All stock based
transactions with non-employees must be accounted for at the fair value of the
instrument. The Company has determined it will continue to follow the APB
Opinion No. 25.
Earnings per common share -- Earnings per common share are based on the weighted
average number of shares outstanding during the year. The effect of stock
options (Note 12) as common stock equivalents is less than 3% dilutive and,
therefore, is not included in the computation.
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.
Reclassification -- Certain items on the financial statements for the years
ended June 30, 1995 and 1994 have been reclassified, with no effect on net
income, to be consistent with the classifications adopted for the year ended
June 30, 1996.
NOTE 2: SUPPLEMENTAL CASH FLOW INFORMATION
1996 1995 1994
------------------------------------------
Cash paid during the year:
Interest $ 8,056 $ 6,745 $ 458
Income taxes $ 794,454 $ 668,427 $ 631,141
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 2: SUPPLEMENTAL CASH FLOW INFORMATION (Continued)
On August 1, 1995, the Company reacquired its Tucson, Arizona licensee. The
purchase price was $139,807 gross or $116,081 net of the imputed interest. The
purchase price was paid as follows:
Purchase price $116,081
Outstanding loan to licensee
(Net of imputed interest of $22,926) (57,626)
Outstanding advance to licensee (22,455)
--------
Net cash $ 36,000
========
NOTE 3: RECEIVABLES
Receivables consist of:
1996 1995
---------------------------
Accounts receivable trade $ 65,098 $ 51,955
Licensee and franchisee fees receivable 568,216 722,122
Errors and omissions insurance premium advanced 124,671 138,544
Other 28,139 40,546
---------------------------
Total receivables 786,124 953,167
Less allowance for doubtful accounts 31,500 27,500
---------------------------
$ 754,624 $ 925,667
===========================
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:
1996 1995
---------------------------
Advances to licensees and franchisees $1,335,061 $1,204,239
Less allowance for doubtful advances 213,500 195,000
---------------------------
1,121,561 1,008,739
Less current portion 794,561 706,739
---------------------------
Long term portion $ 327,000 $ 302,000
===========================
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consist of:
1996 1995
---------------------------
Building and improvements $1,170,656 $1,127,852
Computers and software 373,419 300,380
Furniture and fixtures 268,147 251,933
Automobiles 123,802 88,802
---------------------------
1,936,024 1,768,967
Less accumulated depreciation and amortization 881,766 784,565
---------------------------
1,054,258 984,402
Land 500,143 500,143
---------------------------
$1,554,401 $1,484,545
===========================
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 6: 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, 1995 and 1994:
<TABLE>
<CAPTION>
Gross Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
-------------------------------------------------
1996
-------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale Securities
U.S. government securities $ 993,631 $ -- $ -- $ 993,631
Equity securities 294,818 37,892 76,878 255,832
-------------------------------------------------
Total available for sale securities 1,288,449 37,892 76,878 1,249,463
Held to maturity securities
Local government securities & other 750,730 9,300 25,834 734,196
-------------------------------------------------
$2,039,179 $ 47,192 $ 102,712 $1,983,659
=================================================
1995
-------------------------------------------------
Available for sale securities
U.S. government securities $ 981,197 $ -- $ -- $ 981,197
Equity securities 286,496 10,967 23,033 274,430
-------------------------------------------------
Total available for sale securities 1,267,693 10,967 23,033 1,255,627
Held to maturity securities
Local government securities & other 764,090 11,794 23,994 751,890
-------------------------------------------------
$2,031,783 $ 22,761 $ 47,027 $2,007,517
=================================================
</TABLE>
The Company's investment in local government securities is concentrated in Salt
River Project Agricultural Improvement and Power District Municipal Bonds which
mature between 2006 and 2031.
The Company's investments available for sale all have contractual maturities of
less than one year.
NOTE 7: LONG TERM DEBT
On August 1, 1994, the Company acquired, from a licensee, certain rights under
his license agreement. Those rights were acquired for $25,000 cash and sixty
monthly payments of $2,500. The balance is as follows:
1996
----------
Balance Due $ 125,000
Imputed interest @ 7.25% 40,345
----------
84,655
Less Current Portion 24,672
----------
Long Term Portion $ 59,983
==========
Interest paid on outstanding debt amounted to $7,049 in 1996 and $6,694 in 1995.
Aggregate payments for the next five years are as follows:
Year Ending June 30,
1997 $ 24,672
1998 26,521
1999 28,509
2000 4,953
--------
$ 84,655
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 8: LICENSING AND FRANCHISING
As of June 30, 1996, the Company has entered into 456 license and franchise
agreements with 411 entities, operating 417 offices with 618 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, 1996, 1995 and 1994
were approximately $46,830,000, $42,690,000 and $39,710,000, respectively.
The Company operates one business, providing services 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:
<TABLE>
<CAPTION>
Licensing Adjusting Corporate
and and and
Franchising Risk Management Other Consolidated
--------------------------------------------------------
<S> <C> <C> <C> <C>
1996
- ----
Revenues $ 5,044,028 $ 597,956 $ -- $ 5,641,984
Costs and expenses 3,101,217 592,467 246,653 3,940,337
--------------------------------------------------------
Income (loss) from operations $ 1,942,811 $ 5,489 $ (246,653) $ 1,701,647
========================================================
Identifiable assets $ 3,553,856 $ 563,204 $ 2,758,692 $ 6,875,752
========================================================
Number of advertised locations
Beginning of year 590 21 -- 611
Opened 47 1 -- 48
Closed (19) (2) -- (21)
Ownership changes -- -- -- --
--------------------------------------------------------
618 20 -- 638
========================================================
1995
- ----
Revenues $ 4,783,941 $ 456,884 $ -- $ 5,240,825
Cost and expenses 3,043,680 485,739 208,737 3,738,156
--------------------------------------------------------
Income (loss) from operations $ 1,740,261 $ (28,855) $ (208,737) $ 1,502,669
========================================================
Identifiable assets $ 3,638,623 $ 457,380 $ 2,501,047 $ 6,597,050
========================================================
Number of advertised locations
Beginning of year 569 4 -- 573
Opened 47 -- -- 47
Closed (9) -- -- (9)
Ownership changes (17) 17 -- --
--------------------------------------------------------
590 21 -- 611
========================================================
1994
- ----
Revenues $ 4,205,245 $ 385,025 $ -- $ 4,590,270
Costs and expenses 2,359,352 492,512 227,647 3,079,511
--------------------------------------------------------
Income (loss) from operations $ 1,845,893 $ (107,487) $ (227,647) $ 1,510,759
========================================================
Identifiable assets $ 3,831,994 $ 262,838 $ 2,396,174 $ 6,491,006
========================================================
Number of advertised locations
Beginning of year 541 4 -- 545
Opened 41 -- -- 41
Closed (13) -- -- (13)
--------------------------------------------------------
569 4 -- 573
========================================================
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 9: INCOME TAXES
The components of the provision for income taxes are as follows:
1996 1995 1994
-------------------------------------------
Federal
Current $ 600,407 $ 544,580 $ 499,308
Deferred (34,540) (36,491) (9,196)
State
Current $ 163,140 154,664 113,492
Deferred (7,702) (10,513) (1,924)
-------------------------------------------
Income taxes $ 721,305 $ 652,240 $ 601,680
===========================================
A reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate follows:
1996 1995 1994
---------------------------------
Statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net 5.5 5.7 4.5
Non-deductible items 1.1 1.1 .7
Non-taxable revenues (1.0) (1.0) (.9)
Other (1.7) (1.9) (2.2)
---------------------------------
Effective rate 38.9% 38.9% 37.1%
=================================
Net deferred tax assets consist of the following components at June 30, 1996 and
1995:
1996 1995
-------------------------
Deferred tax assets
Allowance for doubtful accounts $ 94,410 $ 87,104
Property and equipment 22,004 21,301
Other 26,937 12,735
Deferred tax liabilities
Installment sale -- (20,031)
-------------------------
$ 143,351 $ 101,109
=========================
The deferred tax amounts mentioned above have been classified as current assets
in the accompanying balance sheets as of June 30, 1996 and 1995.
NOTE 10: RELATED PARTY TRANSACTIONS
A director/officer of the Company is a partner in a law firm that renders legal
services to the Company. The Company paid the law firm approximately $90,500 in
fiscal 1996, $88,500 in fiscal 1995 and $84,600 in fiscal 1994 for legal
services and reimbursement of expenses.
NOTE 11: PROFIT SHARING PLAN
On June 14, 1984, the Company adopted a Profit Sharing Plan (Plan) covering
substantially all employees of the Company who have completed one year of
service and have reached age 20. The Plan provides for contributions at the
discretion of management not to exceed the amount permitted under the Internal
Revenue Code as a deductible expense. Participants'
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 11: PROFIT SHARING PLAN (Continued)
benefits vest at the rate of 20% per year. Contributions to the Plan are made to
trust accounts for investment at the discretion of the individual participants.
Profit sharing expense was $175,390, $160,717 and $165,980 for the years ended
June 30, 1996, 1995 and 1994 respectively.
NOTE 12: STOCK OPTIONS
On October 9, 1987, the shareholders approved an Incentive Stock Option Plan
(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 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.
Options become exercisable in varying amounts beginning one year after grant.
Information regarding these option plans are as follows:
Number of Shares
----------------------------
1996 1995 1994
----------------------------
Outstanding July 1 200,000 113,130 --
Granted -- 86,870 113,130
Exercised -- -- --
----------------------------
Outstanding June 30 200,000 200,000 113,130
============================
Options were outstanding at June 30, 1996 and 1995 at average prices per share
of $3.14. At June 30, 1996, there are no remaining options available for
issuance under the 1987 Plan.
On May 21, 1996, the Board of Directors approved a Stock Option 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. This plan is subject
to shareholder approval. Options under the 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.
NOTE 13: COMMITMENTS AND CONTINGENCIES
The Company entered into five-year employment agreements with four key executive
officers, three of which expire June 30, 2000 and one that expires June 30,
2001. In addition to a base salary, the agreements provide for bonuses based
upon the Company's pre-tax earnings and annual cost of living increases. Total
compensation under those employment agreements was $635,436, $452,497 and
$435,711 for the years ended June 30, 1996, 1995 and 1994, respectively. The
aggregate commitment for future salaries at June 30, 1996, excluding bonuses and
cost of living increases, is $2,763,200 as follows:
Year ended June 30,
-------------------
1997 $ 668,300
1998 668,300
1999 638,300
2000 638,300
2001 150,000
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 13: COMMITMENTS AND CONTINGENCIES (Continued)
The Company has entered into an agreement with a customer to share a suite in
the America West Arena in Phoenix, Arizona for client development purposes. The
agreement provides that the Company is responsible for 50% of the costs and
expenses of the suite. The Company's commitment began in June, 1992. The
Company's minimum required payments are as follows:
Year ended June 30, Amount
---------------------------------------------------
1997 $ 36,500
1998 37,960
1999 39,477
----------
$ 113,937
==========
During the year, a claim was filed against the Company by a client of a former
franchisee. The complaint arises from the alleged embezzlement by the former
franchisee. The complaint seeks unspecified damages from the Company. The
Company is vigorously defending the claim and believes its defenses are
meritorious. The Company does not believe that the outcome of this litigation
will result in a material adverse effect on the Company's financial statements.
F-15
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
SUPPLEMENTARY DATA
------------------
Selected Quarterly Financial Data
(Information for all periods shown below is unaudited)
<TABLE>
<CAPTION>
1996
-------------------------------------------------
Three Months Ended
-------------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $1,408,666 $1,352,330 $1,396,634 $1,484,354
Income from operations 437,150 395,569 420,995 447,932
Income before income taxes 471,789 447,351 460,416 476,265
Net income 286,038 271,595 278,941 297,942
Net income per share .06 .06 .06 .07
Weighted average shares outstanding 4,637,943 4,609,658 4,609,658 4,623,065
1995
-------------------------------------------------
Three Months Ended
-------------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30
---------- ---------- ---------- ----------
Revenues $1,270,785 $1,257,356 $1,232,935 $1,479,749
Income from operations 400,164 415,959 198,670 487,876
Income before income taxes 440,483 482,236 242,891 513,478
Net income 267,530 292,947 146,708 319,663
Net income per share .06 .06 .03 .07
Weighted average shares outstanding 4,690,943 4,677,311 4,640,898 4,640,898
1994
-------------------------------------------------
Three Months Ended
-------------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30
---------- ---------- ---------- ----------
Revenues $1,155,528 $1,118,361 $1,146,805 $1,169,576
Income from operations 423,888 414,824 344,927 327,120
Income before income taxes 454,474 444,191 358,630 362,545
Net income 277,762 272,037 233,510 234,851
Net income per share .06 .06 .05 .05
Weighted average shares outstanding 4,763,280 4,719,310 4,719,310 4,708,249
</TABLE>
F-16
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
For the Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additions
Balance at Charged to Deductions Balance
Beginning Costs and From at End
of Period Expenses Reserves of Period
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Year Ended June 30, 1996:
Allowance for doubtful accounts $ 223,000 $ 151,847 $ 129,847 $ 245,000
Year Ended June 30, 1995:
Allowance for doubtful accounts 116,000 169,640 62,640 223,000
Year Ended June 30, 1994:
Allowance for doubtful accounts 119,000 148,018 151,017 116,000
</TABLE>
F-17
EXHIBIT 10(J)
FRONTIER ADJUSTERS OF AMERICA, INC.
FORM OF 1996 STOCK OPTION PLAN
ARTICLE I
General
1.1 Purpose of Plan; Term
(a) Adoption. On May 21, 1996, the Board
of Directors (the "Board") of Frontier Adjusters of America, Inc., an Arizona
corporation (the "Company"), adopted a stock option plan to be known as the 1996
Stock Option Plan (the "Plan").
(b) Defined Terms. All initially
capitalized terms used hereby shall have the meaning set forth in Article V
hereto.
(c) General Purpose. The purpose of the
Grant Program is to further the interests of the Company and its shareholders by
encouraging key persons associated with the Company (or Parent or Subsidiary
Corporations) to acquire shares of the Company's Stock, thereby acquiring a
proprietary interest in its business and an increased personal interest in its
continued success and progress. Such purpose shall be accomplished by providing
for the granting of options to acquire the Company's Stock ("Options"), the
direct granting of the Company's Stock ("Stock Awards"), the granting of stock
appreciation rights ("SARs"), or the granting of other cash awards ("Cash
Awards") (Stock Awards, SARs and Cash Awards shall be collectively referred to
herein as "Awards").
(d) Character of Options. Options granted
under this Plan to employees of the Company (or Parent or Subsidiary
Corporations) that are intended to qualify as an "incentive stock option" as
defined in Code section 422 ("Incentive Stock Option") will be specified in the
applicable stock option agreement. All other Options granted under this Plan
will be nonqualified options.
(e) Rule 16b-3 Plan. If the Company
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, the Plan is thereafter intended to comply with all applicable conditions
of Rule 16b-3 (and all subsequent revisions thereof) promulgated under the 1934
Act. In such instance, to the extent any provision of the Plan or action by a
Plan Administrator fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by such Plan Administrator. In
addition, the Board may amend the Plan from time to time as it deems necessary
in order to meet the requirements of any amendments to Rule 16b-3 without the
consent of the shareholders of the Company.
(f) Duration of Plan. The term of the
Plan is 10 years commencing on the date of adoption of the original Plan by the
Board as specified in Section 1.1(a) hereof. No Option or Award shall be granted
under the Plan unless granted within 10 years of the adoption of the Plan by the
Board, but Options or Awards outstanding on that date shall not be terminated or
otherwise affected by virtue of the Plan's expiration.
<PAGE>
1.2 Stock and Maximum Number of Shares Subject to Plan.
(a) Description of Stock and Maximum
Shares Allocated. The shares of stock subject to the provisions of the Plan and
issuable upon the grant of Stock Awards or upon the exercise of SARs or Options
granted under the Plan are shares of the Company's common stock, $0.001 par
value per share (the "Stock"), which may be either unissued or treasury shares.
The Company may not issue more than 300,000 shares of Stock pursuant to the
Plan, unless the Plan is amended as provided in Section 1.3 or the maximum
number of shares subject to the Plan is adjusted as provided in Section 3.1.
(b) Calculation of Available Shares. The
number of shares of Stock available under the Plan shall be reduced: (i) by any
shares of Stock issued (including any shares of Stock withheld for tax
withholding requirements) upon exercise of an Option and (ii) by any shares of
Stock issued (including any shares of Stock withheld for tax withholding
requirements) upon the grant of a Stock Award or the exercise of an SAR.
(c) Restoration of Unpurchased Shares. If
an Option or SAR expires or terminates for any reason prior to its exercise in
full and before the term of the Plan expires, the shares of Stock subject to,
but not issued under, such Option or SAR shall, without further action or by or
on behalf of the Company, again be available under the Plan.
1.3 Approval; Amendments.
(a) Approval by Shareholders. The Plan
shall be submitted to the shareholders of the Company for their approval at a
regular or special meeting to be held within 12 months after the adoption of the
Plan by the Board. Shareholder approval shall be evidenced by the affirmative
vote of the holders of a majority of the shares of the Company's Common Stock
present in person or by proxy and voting at the meeting. The date such
shareholder approval has been obtained shall be referred to herein as the
"Effective Date."
(b) Commencement of Programs. The Grant
Program is effective immediately, but if the Plan is not approved by the
shareholders within 12 months after its adoption by the Board, the Plan and all
Options and Awards made under the Grant Program will automatically terminate and
be forfeited to the same extent and with the same effect as though the Plan had
never been adopted.
(c) Amendments to Plan. The Board may,
without action on the part of the Company's shareholders, make such amendments
to, changes in and additions to the Plan as it may, from time to time, deem
necessary or appropriate and in the best interests of the Company; provided, the
Board may not, without the consent of the applicable Optionholder, take any
action which disqualifies any Option previously granted under the Plan for
treatment as an Incentive Stock Option or which adversely affects or impairs the
rights of the Optionholder of any Option outstanding under the Plan, and further
provided that, except as provided in Article III hereof, the Board may not,
without the approval of the Company's shareholders, (i) increase the aggregate
number of shares of Stock subject to the Plan, (ii) reduce the exercise price at
which Options may be granted or the exercise price at which any outstanding
Option may be exercised, (iii) extend the term of the Plan, (iv) change the
class of persons eligible to receive Options or Awards under the Plan, or (v)
materially increase the benefits accruing to participants under the Plan.
Notwithstanding the foregoing, Options or Awards may be granted under this Plan
to purchase shares of Stock in excess of the number of shares then available for
issuance under the Plan if (A) an amendment to increase the maximum number of
<PAGE>
shares issuable under the Plan is adopted by the Board prior to the initial
grant of any such Option or Award and within one year thereafter such amendment
is approved by the Company's shareholders and (B) each such Option or Award
granted does not become exercisable or vested, in whole or in part, at any time
prior to the obtaining of such shareholder approval.
ARTICLE II
Grant Program
2.1 Participants; Administration.
(a) Eligibility and Participation.
Options and Awards may be granted only to persons ("Eligible Persons") who at
the time of grant are (i) key personnel (including officers and directors) of
the Company or Parent or Subsidiary Corporations, or (ii) consultants or
independent contractors who provide valuable services to the Company or Parent
or Subsidiary Corporations; provided that (1) if a Senior Committee exists, the
members of that Senior Committee shall be ineligible, during their tenure on the
Senior Committee, to be granted Options or Awards under the Plan or to be
granted or awarded equity securities of the Company pursuant to any other plan
of the Company or its affiliates except as otherwise allowed by Rule
16b-3(c)(2)(i) promulgated under the 1934 Act, and (2) Incentive Stock Options
may only be granted to key personnel of the Company (and its Parent or
Subsidiary Corporation) who are also employees of the Company (or its Parent or
Subsidiary Corporation), and (3) the maximum number of shares of stock with
respect to which Options or SARs may be granted to any employee during the term
of the Plan shall not exceed 50 percent of the shares of stock covered by the
Plan. A Plan Administrator shall have full authority to determine which Eligible
Persons in its administered group are to receive Option grants under the Plan,
the number of shares to be covered by each such grant, whether or not the
granted Option is to be an Incentive Stock Option, the time or times at which
each such Option is to become exercisable, and the maximum term for which the
Option is to be outstanding. A Plan Administrator shall also have full authority
to determine which Eligible Persons in such group are to receive Awards under
the Grant Program and the conditions relating to such Award.
(b) General Administration. The Eligible
Persons under the Grant Program shall be divided into two groups and there shall
be a separate administrator for each group. One group will be comprised of
Eligible Persons that are Affiliates. For purposes of this Plan, the term
"Affiliates" shall mean all "officers" (as that term is defined in Rule 16a-1(f)
promulgated under the 1934 Act) and directors of the Company and all persons who
own ten percent or more of the Company's issued and outstanding equity
securities. Initially, the power to administer the Grant Program with respect to
Eligible Persons that are Affiliates shall be vested with the Board. At any
time, however, the Board may vest the power to administer the Grant Program with
respect to Persons that are Affiliates exclusively with a committee (the "Senior
Committee") comprised of two or more Disinterested Directors which are appointed
by the Board. The administration of all Eligible Persons that are not Affiliates
("Non- Affiliates") shall be vested exclusively with the Board. The Board,
however, may at any time appoint a committee (the "Employee Committee") of two
or more persons who are members of the Board and delegate to such Employee
Committee the power to administer the Grant Program with respect to the
Non-Affiliates. In addition, the Board may establish an additional committee or
committees of persons who are members of the Board and delegate to such other
committee or committees the power to administer all or a portion of the Grant
program with respect to all or a portion of the Eligible Persons. Members of the
Senior Committee, Employee Committee or any other committee allowed hereunder
shall serve for such period of time as the Board may
<PAGE>
determine and shall be subject to removal by the Board at any time. The Board
may at any time terminate all or a portion of the functions of the Senior
Committee, the Employee Committee, or any other committee allowed hereunder and
reassume all or a portion of powers and authority previously delegated to such
committee. The Board in its discretion may also require the members of the
Senior Committee, the Employee Committee or any other committee allowed
hereunder to be "outside directors" as that term is defined in any applicable
regulations promulgated under Code section 162(m).
(c) Plan Administrators. The Board, the
Employee Committee, Senior Committee, and/or any other committee allowed
hereunder, whichever is applicable, shall be each referred to herein as a "Plan
Administrator." Each Plan Administrator shall have the authority and discretion,
with respect to its administered group, to select which Eligible Persons shall
participate in the Grant Program, to grant Options or Awards under the Grant
Program, to establish such rules and regulations as they may deem appropriate
with respect to the proper administration of the Grant Program and to make such
determinations under, and issue such interpretations of, the Grant Program and
any outstanding Option or Award as they may deem necessary or advisable. Unless
otherwise required by law or specified by the Board with respect to any
committee, decisions among the members of a Plan Administrator shall be by
majority vote. Decisions of a Plan Administrator shall be final and binding on
all parties who have an interest in the Grant Program or any outstanding Option
or Award.
(d) Guidelines for Participation. In
designating and selecting Eligible Persons for participation in the Grant
Program, a Plan Administrator shall consult with and give consideration to the
recommendations and criticisms submitted by appropriate managerial and executive
officers of the Company. A Plan Administrator also shall take into account the
duties and responsibilities of the Eligible Persons, their past, present and
potential contributions to the success of the Company and such other factors as
a Plan Administrator shall deem relevant in connection with accomplishing the
purpose of the Plan.
2.2 Terms and Conditions of Options
(a) Allotment of Shares. A Plan
Administrator shall determine the number of shares of Stock to be optioned from
time to time and the number of shares to be optioned to any Eligible Person (the
"Optioned Shares"). The grant of a Option to a person shall neither entitle such
person to, nor disqualify such person from, participation in any other grant of
Options or Stock Awards under this Plan or any other stock option plan of the
Company.
(b) Exercise Price. Upon the grant of any
Option, a Plan Administrator shall specify the option price per share. If the
Option is intended to qualify as an Incentive Stock Option under the Code, the
option price per share may not be less than 100 percent of the fair market value
per share of the stock on the date the Option is granted (110 percent if the
Option is granted to a shareholder who at the time the Option is granted owns or
is deemed to own stock possessing more than 10 percent of the total combined
voting power of all classes of stock of the Company or of any Parent or
Subsidiary Corporation). The
<PAGE>
determination of the fair market value of the Stock shall be made in accordance
with the valuation provisions of Section 3.5 hereof.
(c) Individual Stock Option Agreements.
Options granted under the Plan shall be evidenced by option agreements in such
form and content as a Plan Administrator from time to time approves, which
agreements shall substantially comply with and be subject to the terms of the
Plan, including the terms and conditions of this Section 2.2. As determined by a
Plan Administrator, each option agreement shall state (i) the total number of
shares to which it pertains, (ii) the exercise price for the shares covered by
the Option, (iii) the time at which the Options vest and become exercisable and
(iv) the Option's scheduled expiration date. The option agreements may contain
such other provisions or conditions as a Plan Administrator deems necessary or
appropriate to effectuate the sense and purpose of the Plan, including covenants
by the Optionholder not to compete and remedies for the Company in the event of
the breach of any such covenant.
(d) Option Period. No Option granted
under the Plan that is intended to be an Incentive Stock Option shall be
exercisable for a period in excess of 10 years from the date of its grant (five
years if the Option is granted to a shareholder who at the time the Option is
granted owns or is deemed to own stock possessing more than 10 percent of the
total combined voting power of all classes of stock of the Company or of any
Parent or any Subsidiary Corporation), subject to earlier termination in the
event of termination of employment, retirement or death of the Optionholder. A
Option may be exercised in full or in part at any time or from time to time
during the term of the Option or provide for its exercise in stated installments
at stated times during the Option's term.
(e) Vesting; Limitations. The time at
which Options may be exercised with respect to an Optionholder shall be in the
discretion of that Optionholder's Plan Administrator. Notwithstanding the
foregoing, to the extent a Option is intended to qualify as an Incentive Stock
Option, the aggregate fair market value (determined as of the respective date or
dates of grant) of the Stock for which one or more Options granted to any person
under this Plan (or any other option plan of the Company or its Parent or
Subsidiary Corporations) may for the first time become exercisable as Incentive
Stock Options during any one calendar year shall not exceed the sum of $100,000
(referred to herein as the "$100,000 Limitation"). To the extent that any person
holds two or more Options which become exercisable for the first time in the
same calendar year, the foregoing limitation on the exercisability as an
Incentive Stock Option shall be applied on the basis of the order in which such
Options are granted.
(f) No Fractional Shares. Options shall
be exercisable only for whole shares; no fractional shares will be issuable upon
exercise of any Option granted under the Plan.
(g) Method of Exercise. To exercise a
Option, an Optionholder (or in the case of an exercise after an Optionholder's
death, such Optionholder's executor, administrator, heir or legatee, as the case
may be) must take the following action:
<PAGE>
(i) execute and deliver to the
Company a written notice of exercise signed in writing by the person exercising
the Option specifying the number of shares of Stock with respect to which the
Option is being exercised;
(ii) pay the aggregate Option
Price in one of the alternate forms as set forth in Section 2.2(h) below; and
(iii) furnish appropriate
documentation that the person or persons exercising the Option (if other than
the Optionholder) has the right to exercise such Option.
As soon as practical after the Exercise Date, the Company will mail or deliver
to or on behalf of the Optionholder (or any other person or persons exercising
this Option under the Plan) a certificate or certificates representing the Stock
acquired upon exercise of the Option.
(h) Payment Price. The aggregate Option
Price shall be payable in one of the alternative forms specified below:
(i) Full payment in cash or check
made payable to the Company's order; or
(ii) Full payment in shares of
Stock held for the requisite period necessary to avoid a charge to the Company's
reported earnings and valued at fair market value on the Exercise Date (as
determined in accordance with Section 3.5 hereof); or
(iii) If a cashless exercise
program has been implemented by the Board, full payment through a sale and
remittance procedure pursuant to which the Optionholder (A) shall provide
irrevocable written instructions to a designated brokerage firm to effect the
immediate sale of the Optioned Shares to be purchased and remit to the Company,
out of the sale proceeds available on the settlement date, sufficient funds to
cover the aggregate exercise price payable for the Optioned Shares to be
purchased and (B) shall concurrently provide written directives to the Company
to deliver the certificates for the Optioned Shares to be purchased directly to
such brokerage firm in order to complete the sale transaction.
(i) Rights of a Shareholder. An
Optionholder shall not have any of the rights of a shareholder with respect to
Optioned Shares until such individual shall have exercised the Option and paid
the Option Price for the Optioned Shares. No adjustment will be made for
dividends or other rights for which the record date is prior to the date such
stock certificate is issued.
(j) Repurchase Right. The Plan
Administrator may, in its sole discretion, set forth other terms and conditions
upon which the Company (or its assigns) shall have the right to repurchase
shares of Stock acquired by an Optionholder pursuant
<PAGE>
to a Option. Any repurchase right of the Company shall be exercisable by the
Company (or its assignees) upon such terms and conditions as the Plan
Administrator may specify in the Stock Repurchase Agreement evidencing such
right. The Plan Administrator may also in its discretion establish as a term and
condition of one or more Options granted under the Plan that the Company shall
have a right of first refusal with respect to any proposed sale or other
disposition by the Optionholder of any shares of Stock issued upon the exercise
of such Options. Any such right of first refusal shall be exercisable by the
Company (or its assigns) in accordance with the terms and conditions set forth
in the Stock Repurchase Agreement.
(k) Termination of Service. If any
Optionholder ceases to be in Service to the Company for a reason other than
permanent disability or death, such Optionholder must, within 90 days after the
date of termination of such Service, but in no event after the Option's stated
expiration date, exercise some or all of the Options that the Optionholder was
entitled to exercise on the date the Optionholder's Service terminated;
provided, that if the Optionholder is discharged for Cause or commits acts
detrimental to the Company's interests after the Service of the Optionholder has
been terminated, then the Option will thereafter be void for all purposes.
"Cause" shall mean a termination of Service based upon a finding by the
applicable Plan Administrator that the Optionholder: (i) has committed a felony
involving dishonesty, fraud, theft or embezzlement; (ii) after written notice
from the Company has repeatedly failed or refused, in a material respect, to
follow reasonable policies or directives established by the Company; (iii) after
written notice from the Company, has willfully and persistently failed to attend
to material duties or obligations; (iv) has performed an act or failed to act,
which, if he were prosecuted and convicted, would constitute a theft of money or
property of the Company; or (v) has misrepresented or concealed a material fact
for purposes of securing employment with the Company. If any Optionholder ceases
to be in Service to the Company by reason of permanent disability within the
meaning of section 22(e)(3) of the Code (as determined by the applicable Plan
Administrator), the Optionholder will have 12 months after the date of
termination of Service, but in no event after the stated expiration date of the
Optionholder's Options, to exercise Options that the Optionholder was entitled
to exercise on the date the Optionholder's Service terminated as a result of the
disability.
(l) Death of Optionholder. If an
Optionholder dies while in the Company's Service, any Options that the
Optionholder was entitled to exercise on the date of death will be exercisable
within three months after such date or until the stated expiration date of the
Optionholder's Option, whichever occurs first, by the person or persons
("successors") to whom the Optionholder's rights pass under a will or by the
laws of descent and distribution. As soon as practicable after receipt by the
Company of such notice and of payment in full of the Option Price, a certificate
or certificates representing the Optioned Shares shall be registered in the name
or names specified by the successors in the written notice of exercise and shall
be delivered to the successors.
(m) Other Plan Provisions Still
Applicable. If a Option is exercised upon the termination of Service or death of
an Optionholder under this Section 2.2, the other provisions of the Plan will
continue to apply to such exercise, including the requirement that the
Optionholder or its successor may be required to enter into a Stock Repurchase
Agreement.
<PAGE>
(n) Definition of "Service". For purposes
of this Plan, unless it is evidenced otherwise in the option agreement with the
Optionholder, the Optionholder is deemed to be in "Service" to the Company so
long as such individual renders continuous services on a periodic basis to the
Company (or to any Parent or Subsidiary Corporation) in the capacity of an
employee, director, or an independent consultant or advisor. In the discretion
of the applicable Plan Administrator, an Optionholder will be considered to be
rendering continuous services to the Company even if the type of services
change, e.g., from employee to independent consultant. The Optionholder will be
considered to be an employee for so long as such individual remains in the
employ of the Company or one or more of its Parent or Subsidiary Corporations.
2.3 Terms and Conditions of Stock Awards
(a) Eligibility. All Eligible Persons
shall be eligible to receive Stock Awards. The Plan Administrator of each
administered group shall determine the number of shares of Stock to be awarded
from time to time to any Eligible Person in such group. Except as provided
otherwise in this Plan, the grant of a Stock Award to a person (a "Grantee")
shall neither entitle such person to, nor disqualify such person from
participation in, any other grant of options or awards by the Company, whether
under this Plan or under any other stock option or award plan of the Company.
(b) Award for Services Rendered. Stock
Awards shall be granted in recognition of an Eligible Person's services to the
Company. The grantee of any such Stock Award shall not be required to pay any
consideration to the Company upon receipt of such Stock Award, except as may be
required to satisfy any applicable Arizona corporate law, employment tax and/or
income tax withholding requirements.
(c) Conditions to Award. All Stock Awards
shall be subject to such terms, conditions, restrictions, or limitations as the
applicable Plan Administrator deems appropriate, including, by way of
illustration but not by way of limitation, restrictions on transferability,
requirements of continued employment, individual performance or the financial
performance of the Company, or payment by the recipient of any applicable
employment or withholding taxes. Such Plan Administrator may modify or
accelerate the termination of the restrictions applicable to any Stock Award
under the circumstances as it deems appropriate.
(d) Award Agreements. A Plan
Administrator may require as a condition to a Stock Award that the recipient of
such Stock Award enter into an award agreement in such form and content as that
Plan Administrator from time to time approves.
2.4 Terms and Conditions of SARs
(a) Eligibility. All Eligible Persons
shall be eligible to receive SARs. The Plan Administrator of each administered
group shall determine
<PAGE>
the SARs to be awarded from time to time to any Eligible Person in such group.
The grant of an SAR to a person shall neither entitle such person to, nor
disqualify such person from participation in, any other grant of options or
awards by the Company, whether under this Plan or under any other stock option
or award plan of the Company.
(b) Award of SARs. Concurrently with or
subsequent to the grant of any Option to purchase one or more shares of Stock,
the Plan Administrator may award to the Optionholder with respect to each share
of Stock, underlying the Option, a related SAR permitting the Optionholder to be
paid any appreciation on that Stock in lieu of exercising the Option. In
addition, a Plan Administrator may award to any Eligible Person an SAR
permitting the Eligible Person to be paid the appreciation on a designated
number of shares of the Stock, whether or not such Shares are actually issued.
(c) Conditions to SAR. All SARs shall be
subject to such terms, conditions, restrictions or limitations as the applicable
Plan Administrator deems appropriate, including, by way of illustration but not
by way of limitation, restrictions on transferability, requirements of continued
employment, individual performance, financial performance of the Company, or
payment by the recipient of any applicable employment or withholding taxes. Such
Plan Administrator may modify or accelerate the termination of the restrictions
applicable to any SAR under the circumstances as it deems appropriate.
(d) SAR Agreements. A Plan Administrator
may require as a condition to the grant of an SAR that the recipient of such SAR
enter into an SAR agreement in such form and content as that Plan Administrator
from time to time approves.
(e) Exercise. An Eligible Person who has
been granted a SAR may exercise such SAR subject to the conditions specified in
the SAR agreement by the Plan Administrator.
(f) Amount of Payment. The amount of
payment to which the grantee of an SAR shall be entitled upon the exercise of
each SAR shall be equal to the amount, if any, by which the fair market value of
the specified shares of Stock on the exercise date exceeds the fair market value
of the specified shares of Stock on the date the Option related to the SAR was
granted or became effective, or, if the SAR is not related to any Option, on the
date the SAR was granted or became effective.
(g) Form of Payment. The SAR may be paid
in either cash or Stock, as determined in the discretion of the applicable Plan
Administrator and set forth in the SAR agreement. If the payment is in Stock,
the number of shares to be paid to the participant shall be determined by
dividing the amount of the payment determined pursuant to Section 2.4(f) by the
fair market value of a share of Stock on the exercise date of such SAR. As soon
as practical after exercise, the Company shall deliver to the SAR grantee a
certificate or certificates for such shares of Stock.
(h) Termination of Employment; Death.
Sections 2.2(k) and (l), applicable to Options, shall apply equally to SARs.
<PAGE>
2.5 Other Cash Awards
(a) In General. The Plan Administrator of
each administered group shall have the discretion to make other awards of cash
to Eligible Persons in such group ("Cash Awards"). Such Cash Awards may relate
to existing Options or to the appreciation in the value of the Stock or other
Company securities.
(b) Conditions to Award. All Cash Awards
shall be subject to such terms, conditions, restrictions or limitations as the
applicable Plan Administrator deems appropriate, and such Plan Administrator may
require as a condition to such Cash Award that the recipient of such Cash Award
enter into an award agreement in such form and content as the Plan Administrator
from time to time approves.
ARTICLE III
Miscellaneous
3.1 Capital Adjustments. The aggregate number of shares of
Stock subject to the Plan, the number of shares of Stock covered by outstanding
Options and Awards, and the price per share stated in all outstanding Options
and Awards shall be proportionately adjusted for any increase or decrease in the
number of outstanding shares of Stock of the Company resulting from a
subdivision or consolidation of shares or any other capital adjustment or the
payment of a stock dividend or any other increase or decrease in the number of
such shares effected without the Company's receipt of consideration therefor in
money, services or property.
3.2 Mergers, Etc. If the Company is the surviving corporation
in any merger or consolidation (not including a Corporate Transaction), any
Option or Award granted under the Plan shall pertain to and apply to the
securities to which a holder of the number of shares of Stock subject to the
Option or Award would have been entitled prior to the merger or consolidation.
Except as provided in Section 3.3 hereof, a dissolution or liquidation of the
Company shall cause every Option or Award outstanding hereunder to terminate.
3.3 Corporate Transaction. In the event of shareholder approval
of a Corporate Transaction, the Plan Administrator shall have the discretion and
authority, exercisable at any time, to provide for the automatic acceleration of
one or more of the outstanding Options or Awards granted by it under the Plan.
Upon the consummation of the Corporate Transaction, all Options shall, to the
extent not previously exercised, terminate and cease to be outstanding.
3.4 Change in Control.
(a) Grant Program. In the event of a
Change in Control, a Plan Administrator shall have the discretion and authority,
exercisable at any time, whether before or after the Change in Control, to
provide for the automatic acceleration
<PAGE>
of one or more outstanding Options or Awards granted by it under the Plan upon
the occurrence of such Change in Control. A Plan Administrator may also impose
limitations upon the automatic acceleration of such Options or Awards to the
extent it deems appropriate. Any Options or Awards accelerated upon a Change in
Control will remain fully exercisable until the expiration or sooner termination
of the Option term.
(b) Incentive Stock Option Limits. The
exercisability of any Options which are intended to qualify as Incentive Stock
Options and which are accelerated by the Plan Administrator in connection with a
pending Corporation Transaction or Change in Control shall, except as otherwise
provided in the discretion of the Plan Administrator and the Optionholder,
remain subject to the $100,000 Limitation and vest as quickly as possible
without violating the $100,000 Limitation.
3.5 Calculation of Fair Market Value of Stock. The fair market
value of a share of Stock on any relevant date shall be determined in accordance
with the following provisions:
(a) If the Stock is not at the time
listed or admitted to trading on any stock exchange but is traded in the
over-the-counter market, the fair market value shall be the mean between the
highest bid and lowest asked prices (or, if such information is available, the
closing selling price) per share of Stock on the date in question in the
over-the-counter market, as such prices are reported by the National Association
of Securities Dealers through its Nasdaq system or any successor system. If
there are no reported bid and asked prices (or closing selling price) for the
Stock on the date in question, then the mean between the highest bid price and
lowest asked price (or the closing selling price) on the last preceding date for
which such quotations exist shall be determinative of fair market value.
(b) If the Stock is at the time listed or
admitted to trading on any stock exchange, then the fair market value shall be
the closing selling price per share of Stock on the date in question on the
stock exchange determined by the Board to be the primary market for the Stock,
as such price is officially quoted in the composite tape of transactions on such
exchange. If there is no reported sale of Stock on such exchange on the date in
question, then the fair market value shall be the closing selling price on the
exchange on the last preceding date for which such quotation exists.
(c) If the Stock at the time is neither
listed nor admitted to trading on any stock exchange nor traded in the
over-the-counter market, then the fair market value shall be determined by the
Board after taking into account such factors as the Board shall deem
appropriate, including one or more independent professional appraisals.
3.6 Use of Proceeds. The proceeds received by the Company from
the sale of Stock pursuant to the exercise of Options or Awards hereunder, if
any, shall be used for general corporate purposes.
3.7 Cancellation of Options. Each Plan Administrator shall have
the authority to effect, at any time and from time to time, with the consent of
the affected
<PAGE>
Optionholders, the cancellation of any or all outstanding Options granted under
the Plan by that Plan Administrator and to grant in substitution therefore new
Options under the Plan covering the same or different numbers of shares of Stock
as long as such new Options have an exercise price per share of Stock no less
than the minimum exercise price as set forth in Section 2.2(b) hereof on the new
grant date.
3.8 Regulatory Approvals. The implementation of the Plan, the
granting of any Option or Award hereunder, and the issuance of Stock upon the
exercise of any such Option or Award shall be subject to the procurement by the
Company of all approvals and permits required by regulatory authorities having
jurisdiction over the Plan, the Options or Awards granted under it and the Stock
issued pursuant to it.
3.9 Indemnification. In addition to such other rights of
indemnification as they may have, the members of a Plan Administrator shall be
indemnified and held harmless by the Company, to the extent permitted under
applicable law, for, from and against all costs and expenses reasonably incurred
by them in connection with any action, legal proceeding to which any member
thereof may be a party by reason of any action taken, failure to act under or in
connection with the Plan or any rights granted thereunder and against all
amounts paid by them in settlement thereof or paid by them in satisfaction of a
judgment of any such action, suit or proceeding, except a judgment based upon a
finding of bad faith.
3.10 Plan Not Exclusive. This Plan is not intended to be the
exclusive means by which the Company may issue options or warrants to acquire
its Stock, stock awards or any other type of award. To the extent permitted by
applicable law, any such other option, warrants or awards may be issued by the
Company other than pursuant to this Plan without shareholder approval.
3.11 Company Rights. The grants of Options shall in no way
affect the right of the Company to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
3.12 Assignment. The right to acquire Stock or other assets
under the Plan may not be assigned, encumbered or otherwise transferred by any
Optionholder except as specifically provided herein. No Option or Award granted
under the Plan or any of the rights and privileges conferred thereby shall be
assignable or transferable by an Optionholder or grantee other than by will or
the laws of descent and distribution, and such Option or Award shall be
exercisable during the Optionholder's or grantee's lifetime only by the
Optionholder or grantee. Notwithstanding the foregoing, any Options or Awards
granted pursuant to the Grant Program may be assigned, encumbered or otherwise
transferred by the Optionholder or grantee if specifically allowed by the Plan
Administrator upon the grant of such Option or Award. The provisions of the Plan
shall inure to the benefit of, and be binding upon, the Company and its
successors or assigns, and the Optionholders, the legal representatives of their
respective estates, their respective heirs or legatees and their permitted
assignees.
<PAGE>
3.13 Securities Restrictions
(a) Legend on Certificates. All
certificates representing shares of Stock issued under the Plan shall be
endorsed with a legend reading as follows:
The shares ofCommonStock evidenced by
this certificate have been issued to
the registered owner in reliance upon
written representations that these
shares have been purchased solely for
investment. These shares may not be
sold, transferred or assigned unless in
the opinion of the Company and its
legal counsel such sale, transfer or
assignment will not be in violation of
the Securities Act of 1933, as amended,
and the rules and regulations
thereunder.
(b) Private Offering for Investment Only.
The Options and Awards are and shall be made available only to a limited number
of present and future key executives, directors and employees who have knowledge
of the Company's financial condition, management and its affairs. The Plan is
not intended to provide additional capital for the Company, but to encourage
ownership of Stock among the Company's key personnel. By the act of accepting an
Option or Award, each grantee agrees (i) that, any shares of Stock acquired will
be solely for investment not with any intention to resell or redistribute those
shares and (ii) such intention will be confirmed by an appropriate certificate
at the time the Stock is acquired if requested by the Company. The neglect or
failure to execute such a certificate, however, shall not limit or negate the
foregoing agreement.
(c) Registration Statement. If a
Registration Statement covering the shares of Stock issuable under the Plan as
filed under the Securities Exchange Act of 1933, as amended, and as declared
effective by the Securities Exchange Commission, the provisions of Sections
3.13(a) and (b) shall terminate during the period of time that such Registration
Statement, as periodically amended, remains effective.
3.14 Tax Withholding.
(a) General. The Company's obligation to
deliver Stock under the Plan shall be subject to the satisfaction of all
applicable federal, state and local income tax withholding requirements.
(b) Shares to Pay for Withholding. The
Board may, in its discretion and in accordance with the provisions of this
Section 3.14(b) and such supplemental rules as it may from time to time adopt
(including the applicable safe-harbor provisions of SEC Rule 16b-3), provide any
or all Optionholders or Grantees with the right to
<PAGE>
use shares of Stock in satisfaction of all or part of the federal, state and
local income tax liabilities incurred by such Optionholders or Grantees in
connection with the receipt of Stock ("Taxes"). Such right may be provided to
any such Optionholder or Grantee in either or both of the following formats:
(i) Stock Withholding. An
Optionholder or Grantee may be provided with the election, which may be subject
to approval by the Plan Administrator, to have the Company withhold, from the
Stock otherwise issuable, a portion of those shares of Stock with an aggregate
fair market value equal to the percentage of the applicable Taxes (not to exceed
100 percent) designated by the Optionholder or Grantee.
(ii) Stock Delivery. The Board
may, in its discretion, provide the Optionholder or Grantee with the election to
deliver to the Company, at the time the Option is exercised or Stock is awarded,
one or more shares of Stock previously acquired by such individual (other than
pursuant to the transaction triggering the Taxes) with an aggregate fair market
value equal to the percentage of the taxes incurred in connection with such
Option exercise or Stock Award (not to exceed 100 percent) designated by the
Optionholder or Grantee.
3.15 Governing Law. The Plan shall be governed by and all
questions hereunder shall be determined in accordance with the laws of the State
of Arizona.
ARTICLE IV
Definitions
The following capitalized terms used in this Plan shall have
the meaning described below:
"Affiliates" shall mean all "executive officers" (as that term
is defined in Rule 16a- 1(f) promulgated under the 1934 Act) and directors of
the Company and all persons who own ten percent or more of the Company's issued
and outstanding Stock.
"Annual Grant Date" shall mean the date of the Company's annual
shareholder meeting.
"Award" shall mean a Stock Award, SAR or Cash Award under the
Grant Program.
"Board" shall mean the Board of Directors of the Company.
<PAGE>
"Cash Award" shall mean an award to be paid in cash and granted
under Section 2.5 hereunder.
"Change in Control" shall mean and include the following
transactions or situations:
(i) A sale, transfer, or other
disposition by the Company through a single transaction or a series of
transactions of securities of the Company representing 30 percent or more of the
combined voting power of the Company's then outstanding securities to any
"Unrelated Person" or "Unrelated Persons" acting in concert with one another.
For purposes of this Section, the term "Person" shall mean and include any
individual, partnership, joint venture, association, trust corporation, or other
entity (including a "group" as referred to in Section 13(d)(3) of the 1934 Act).
For purposes of this Section, the term "Unrelated Person" shall mean and include
any Person other than the Company, a wholly-owned subsidiary of the Company, or
an employee benefit plan of the Company.
(ii) A sale, transfer, or other
disposition through a single transaction or a series of transactions of all or
substantially all of the assets of the Company to an Unrelated Person or
Unrelated Persons acting in concert with one another.
(iii) A change in the ownership
of the Company through a single transaction or a series of transactions such
that any Unrelated Person or Unrelated Persons acting in concert with one
another become the "Beneficial Owner," directly or indirectly, of securities of
the Company representing at least 30 percent of the combined voting power of the
Company's then outstanding securities. For purposes of this Section, the term
"Beneficial Owner" shall have the same meaning as given to that term in Rule
13d-3 promulgated under the Act, provided that any pledgee of voting securities
is not deemed to be the Beneficial Owner thereof prior to its acquisition of
voting rights with respect to such securities.
(iv) Any consolidation or merger
of the Company with or into an Unrelated Person, unless immediately after the
consolidation or merger the holders of the common stock of the Company
immediately prior to the consolidation or merger are the Beneficial Owners of
securities of the surviving corporation representing at least 50 percent of the
combined voting power of the surviving corporation's then outstanding
securities.
(v) During any period of two
years, individuals who, at the beginning of such period, constituted the Board
of Directors of the Company cease, for any reason, to constitute at least a
majority thereof, unless the election or nomination for election of each new
director was approved by the vote of at least two-thirds of the directors then
still in office who were directors at the beginning of such period.
(vi) A change in control of the
Company of a nature that would be required to be reported in response to item
6(e) of Schedule 14A of Regulation 14A promulgated under the 1934 Act, or any
successor regulation of similar import, regardless of whether the Company is
subject to such reporting requirement.
<PAGE>
Notwithstanding any provision hereof to the contrary, the
filing of a proceeding for the reorganization of the Company under Chapter 11 of
the General Bankruptcy Code or any successor or other statute of similar import
shall not be deemed to be a Change of Control for purposes of this Plan.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Company" shall mean Frontier Adjusters of America, Inc., an
Arizona corporation.
"Corporate Transaction" shall mean (a) a merger or
consolidation in which the Company is not the surviving entity, except for a
transaction the principal purposes of which is to change the state in which the
Company is incorporated; (b) the sale, transfer of or other disposition of all
or substantially all of the assets of the Company and complete liquidation or
dissolution of the Company, or (c) any reverse merger in which the Company is
the surviving entity but in which the securities possessing more than 50 percent
of the total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such securities
immediately prior to such merger.
"Disinterested Directors" shall mean those Directors who
satisfy the definition of "Disinterested Person" under Rule 16b-3(c)(2)(i)
promulgated under the 1934 Act.
"Effective Date" shall mean the date that the Plan has been
approved by the shareholders as required by Section 1.3(a) hereof.
"Eligible Persons" shall mean, with respect to the Grant
Program, those persons who, at the time that the Option or Award is granted, are
(i) key personnel (including officers and directors) of the Company or Parent or
Subsidiary Corporations, or (ii) consultants or independent contractors who
provide valuable services to the Company or Parent or Subsidiary Corporations;
provided that if a Senior Committee is formed pursuant to Section 2.1(b) hereof,
the members of that Committee shall not be included as "Eligible Persons" under
the Grant Program during their tenure on the Senior Committee.
"Employee Committee" shall mean that committee appointed by the
Board to administer the Plan with respect to the Non-Affiliates and comprised of
one or more persons who are members of the Board.
"Exercise Date" shall be the date on which written notice of
the exercise of an Option is delivered to the Company in accordance with the
requirements of the Plan.
"Grantee" shall mean an Eligible Person or Eligible Director
that has received an Award.
<PAGE>
"Grant Program" shall mean the program described in Article II
of this Agreement pursuant to which certain Eligible Persons are granted Options
or Awards in the discretion of the Plan Administrator.
"Incentive Stock Option" shall mean a Option that is intended
to qualify as an "incentive stock option" under Code section 422.
"Non-Affiliates" shall mean all persons who are not Affiliates.
"$100,000 Limitation" shall mean the limitation in which the
aggregate fair market value (determined as of the respective date or dates of
grant) of the Stock for which one or more Options granted to any person under
this Plan (or any other option plan of the Company or any Parent or Subsidiary
Corporation) may for the first time be exercisable as Incentive Stock Options
during any one calendar year shall not exceed the sum of $100,000.
"Optionholder" shall mean an Eligible Person to whom Options
have been granted.
"Optioned Shares" shall be those shares of Stock to be optioned
from time to time to any Eligible Person.
"Option Price" shall mean the option price per share as
specified by the Plan Administrator or by the terms of the Plan.
"Options" shall mean options granted under the Plan to acquire
Stock.
"Parent Corporation" shall mean any corporation in the unbroken
chain of corporations ending with the employer corporation, where, at each link
of the chain, the corporation and the link above owns at least 50 percent of the
combined total voting power of all classes of the stock in the corporation in
the link below.
"Plan" shall mean this stock option plan for Frontier Adjusters
of America, Inc.
"Plan Administrator" shall mean (a) either the Board, the
Senior Committee, or any other committee, whichever is applicable, with respect
to the administration of the Grant Program as it relates to Affiliates and (b)
either the Board, the Employee Committee, or any other committee, whichever is
applicable, with respect to the administration of the Grant Program as it
relates to Non-Affiliates.
"Registration Date" shall have the meaning set forth in Section
1.3(b) hereof.
"SAR" shall mean stock appreciation rights granted pursuant to
Section 2.4 hereof.
<PAGE>
"Senior Committee" shall mean that committee appointed by the
Board to administer the Grant Program with respect to the Affiliates and
comprised of two or more Disinterested Directors.
"Service" shall have the meaning set forth in Section 2.2(n)
hereof.
"Stock" shall mean shares of the Company's common stock, $.001
par value per share, which may be unissued or treasury shares, as the Board may
from time to time determine.
"Stock Awards" shall mean Stock directly granted under the
Grant Program.
"Subsidiary Corporation" shall mean any corporation in the
unbroken chain of corporations starting with the employer corporation, where, at
each link of the chain, the corporation and the link above owns at least 50
percent of the combined voting power of all classes of stock in the corporation
below.
EXECUTED as of the 21st day of May , 1996.
FRONTIER ADJUSTERS OF AMERICA, INC.
By : /s/ Jean E. Ryberg
------------------
Name : Jean E. Ryberg
------------------
Its : President
------------------
ATTESTED BY:
/s/ James S. Rocke
- ----------------------------------
Secretary
EXHIBIT 10(K)
EMPLOYMENT AGREEMENT
AGREEMENT made between FRANCIS J. LaPALLO, hereinafter referred to as
LaPALLO, and FRONTIER ADJUSTERS OF AMERICA, INC., an Arizona corporation, and
its wholly-owned subsidiary, FRONTIER ADJUSTERS, INC., a Colorado corporation,
both hereinafter referred to as FRONTIER.
RECITALS
WHEREAS Frontier is engaged in the insurance adjusting and franchising
business and maintains its principal office and place of business at 45 East
Monterey Way, City of Phoenix, County of Maricopa, Arizona; and
WHEREAS LaPallo is a practicing Los Angeles attorney with long and
varied business, legal and executive experience; and
WHEREAS the parties believe it would be in the best interest of
Frontier and LaPallo to enter into this employment agreement; and
WHEREAS the parties are willing and desirous of entering into this
agreement on the terms, covenants and conditions hereinafter set forth.
NOW, THEREFORE, the parties do hereby covenant and agree as follows:
SECTION ONE
EMPLOYMENT
Frontier hereby employs, engages and hires LaPallo as its Executive
Vice President and LaPallo hereby accepts and agrees to such hiring, engagement
and employment subject to the general supervision and pursuant to the orders,
advice and direction of the respective Boards of Directors. The Board of
Directors are approving and authorizing the execution of this Agreement and
acknowledges that the age and health conditions of its principal executives are
such that it anticipates, expects and plans to at some point during the term of
this agreement
<PAGE>
arrange for LaPallo to become the Chief Executive Officer of Frontier in
administering and carrying out the policy, plans and directions of the Board of
Directors. LaPallo also agrees to serve in such other executive capacities of
Frontier and its direct and indirect subsidiaries, including Frontier Adjusters,
Inc. as may be requested by the respective Boards of Directors.
SECTION TWO
BEST EFFORTS OF EMPLOYEE
LaPallo agrees that he will at all times faithfully, industriously, and
to the best of his ability, experience, and talents, perform all of the duties
that may be required of and from him pursuant to the express and implicit terms
hereof, to the reasonable satisfaction of Frontier. Such duties shall be
rendered at 45 East Monterey Way, City of Phoenix, State of Arizona, and at such
other place or places as employer shall in good faith require or as the
interest, needs, business, or opportunity of Frontier shall require.
SECTION THREE
TERM OF EMPLOYMENT
The term of this agreement shall be for a period commencing June 23,
1996 and terminating June 30, 2001, subject, however, to prior termination as
hereinafter provided.
SECTION FOUR
COMPENSATION OF EMPLOYEE
For each of the years involved the following annual salaries are to be
paid in semi-monthly installments:
For the Year Beginning June 23, 1996 and ending June 30, 1997 -
$180,000.
For the Year Beginning July 1, 1997 and ending June 30, 1998 -
$180,000.
<PAGE>
For the Year Beginning July 1, 1998 and ending June 30, 1999 - $150,000
plus a bonus of 3% of net income before taxes and bonus plus 3% of income before
taxes and bonus which is in excess of prior year's income before taxes and
bonus.
For the Year Beginning July 1, 1999 and ending June 30, 2000 - $150,000
plus a bonus of 3% of net income before taxes and bonus plus 3% of income before
taxes and bonus which is in excess of prior year's income before taxes and
bonus.
For the Year Beginning July 1, 2000 and ending June 30, 2001 - $150,000
plus a bonus equal to 3% of net income before taxes and bonus plus 3% of income
before taxes and bonus which is in excess of prior year's income before taxes
and bonus.
In addition to the base compensation as set forth in this Agreement,
the base salary shall be increased on a cumulative basis in the amount of the
increase in the United States Department of Labor All Commodities Cost of Living
Index between March 31 of 1996 and March 31 of 1997 and shall be increased
annually thereafter to the extent that the cost of living has increased in the
ensuing twelve months.
Frontier shall reimburse LaPallo for all necessary expenses incurred by
LaPallo while traveling or otherwise performing services pursuant to Frontier's
direction.
The term "net income before taxes" as used herein shall mean the
earnings of Frontier for the years ending June 30 during the life of this
agreement as determined by the auditors then employed by Frontier. Such
computation to be made in accordance with the generally accepted accounting
practice and shall be computed prior to the deduction of the bonus provided for
herein and prior to the deduction of any income taxes.
The compensation set forth herein shall be made with respect to all of
LaPallo's employment services hereunder in any and all capacities with Frontier
and its direct or indirect subsidiaries, as provided in Section
<PAGE>
One hereof; provided, however, that LaPallo may be entitled to receive
additional compensation for his service as a director of Frontier and its
subsidiaries, subject to the discretion of the respective Boards of Directors of
such corporations.
SECTION FIVE
OTHER EMPLOYMENT
LaPallo shall devote all of his time, attention, knowledge and skills
solely to the business and interest of Frontier and its subsidiaries, and
Frontier shall be entitled to all of the benefits, profits or other issues
arising from or incident to all work, services, and advice of LaPallo, and
LaPallo shall not, during the term hereof, be interested directly or indirectly,
in any manner, as partner, officer, director, stockholder, advisor, employee or
in any other capacity in any other business similar to Frontier's business or
any of its subsidiaries' businesses or any allied trade; provided, however, that
nothing herein contained shall be deemed to prevent or limit the right of
LaPallo to invest any of his surplus funds in the capital stock of other
securities of any corporation whose stock or securities are publicly owned or
are regularly traded on any public exchange, nor shall anything herein contained
be deemed to prevent LaPallo from investing or limit LaPallo's right to invest
his surplus funds in real estate or other assets.
SECTION SIX
RECOMMENDATIONS FOR IMPROVING OPERATIONS
LaPallo shall make available to Frontier all information of which
LaPallo shall have any knowledge and shall make all suggestions and
recommendations that will be of benefit to Frontier.
SECTION SEVEN
ADDITIONAL COMPENSATION
LaPallo shall be entitled to participate in the employer's profit
sharing and medical maintenance plans to the extent provided by the Board
<PAGE>
of Directors, provided, however, that the Board of Directors at all times during
the term of this agreement retain the right subject to statutory limits to
increase, reduce or terminate the amount of profit sharing or medical
maintenance plans.
SECTION EIGHT
COMPLETE AGREEMENT
This contract contains the complete agreement concerning the employment
agreement between the parties and shall, as of the effective date hereof,
supersede all other agreements between the parties. The parties stipulate that
neither of them has made any representation with respect to the subject matter
of this agreement or any representations including the execution and delivery
thereof except such representations as are specifically set forth herein and
each of the parties hereto acknowledge that each party has relied on their
respective judgment and discretion in entering into this agreement.
SECTION NINE
No waiver or modification of this agreement or of any covenant,
condition, or limitation herein contained shall be valid unless in writing and
duly executed by the parties to be charged therewith and no evidence of any
waiver or modification shall be offered or received in evidence of any
proceeding, arbitration, or litigation between the parties hereto arising out of
or affecting this agreement, or the rights or obligations of the parties
hereunder, unless such waiver or modification is in writing, duly executed as
aforesaid, and the parties further agree that the provisions of this section may
not be waived except as herein set forth.
SECTION TEN
TERMINATION FOR DISABILITY
Notwithstanding anything in this agreement to the contrary, Frontier is
hereby given the option to terminate this agreement in the event that
<PAGE>
LaPallo shall, during the term hereof, become permanently disabled as the term
permanently disabled is hereinafter fixed and defined. Such option shall be
exercised by Frontier by giving notice to LaPallo by registered mail, addressed
to him in care of Frontier at 45 East Monterey Way, City of Phoenix, State of
Arizona, or at such other address as LaPallo shall designate in writing of
Frontier's intention to terminate this agreement on the last day of the month
during which such notice is mailed. On the giving of such notice, this agreement
shall cease on the last day of the month in which the notice is so mailed, with
the same force and effect as if such last day of the month were the date
originally herein set forth as the termination date hereof.
For the purposes of this agreement LaPallo shall be deemed to have
become permanently disabled if, during any year of the term hereof, because of
ill health, physical or mental disability or for other cause beyond his control
he shall have been continuously unable or unwilling or shall have failed to
perform his duties hereunder for three hundred sixty-five (365) days,
irrespective of whether or not such days are consecutive. For the purposes
hereof the term "any year of the term hereof" is defined to mean any 12 calendar
month period commencing on July 1, 1996 and terminating on June 30, 2001, during
the term of this agreement.
In the event of the termination for disability of LaPallo, Frontier
shall provide monthly payments until he attains the age of 65 of $6,000 per
month after such termination. If Frontier elects to insure the obligation,
LaPallo may elect to pay the difference in insurance premiums between the $6,000
in benefits and a higher monthly benefit requested and negotiated for by
LaPallo.
SECTION ELEVEN
SEVERABILITY
<PAGE>
All agreements and covenants contained herein are severable, and in the
event any of them, with the exception of those contained in Sections One and
Four hereof, shall be held to be invalid by any competent court, this contract
shall be interpreted as if such invalid agreements or covenants were not
contained herein.
SECTION TWELVE
ARBITRATION
Neither party shall institute any action involving the performance of
the terms and conditions of this Agreement and if controversies arise between
the parties which cannot be negotiated and settled by them, then the parties
hereto covenant and agree to submit any and all existing controversies to
arbitration concluding any threatened controversy arising between the parties
involving the performance of the terms, conditions and warranties of this
agreement, such arbitration to be carried on and conducted pursuant to the
provisions of Sections 12-1501 and 12-1518 of the Arizona Revised Statutes.
SECTION THIRTEEN
STOCK AND STOCK OPTIONS
Frontier acknowledges that it has notice of the intention of LaPallo to
purchase up to 20,000 shares of Frontier stock at the fair market value at the
start of employment and Frontier agrees to sell and LaPallo agrees to purchase
up to 20,000 shares of common stock of Frontier (the "Purchased Shares") at a
price equal to the average closing price for the stock on the American Stock
Exchange over the 90 day period preceding the date of this Agreement. In
connection therewith LaPallo agrees to execute a Subscription Agreement
substantially in the form attached hereto as Exhibit A. Should LaPallo purchase
all or any part of such 20,000 shares, Frontier hereby covenants and agreed to
provide LaPallo with registration rights as set forth in Exhibit B attached
hereto.
<PAGE>
Furthermore Frontier covenants and agreed to use its best efforts to
cause Frontier's Board of Directors and Frontier's shareholders to adopt an
Employee Stock Option Plan by or before July 1, 1996 and to grant to LaPallo an
option to purchase 100,000 shares of common stock of Frontier (the "Option
Shares") at an exercise price equal to the market value of such shares on July
1, 1996, the date of grant (the "Option"). The Option shall be first exercisable
on July 1, 1997 in an amount of Option Share such that their exercise price
shall not exceed $100,000. Any remaining unexercisable Options shall become
exercisable on each subsequent July 1 in an amount of Option Shares such that
their exercise price shall not exceed $100,000 in any one year. The Option shall
terminate ten years from the date of grant. Frontier hereby covenants and agrees
to provide LaPallo with registration rights with regard to the Option Shares as
set forth in Exhibit B attached hereto.
All unvested options shall vest upon the occurrence of any of the
following: a controlling interest in the stock of Frontier is sold or otherwise
transferred; all or substantially all of the assets of Frontier are sold or
otherwise transferred; Frontier is merged or consolidated, or engages in a share
exchange, in which Frontier is not the sole surviving entity; any other
transaction or series of transactions occurs in which there is a substantial
change in the ownership of Frontier.
SECTION FOURTEEN
MOVING EXPENSES
Frontier shall reimburse LaPallo for the actual total cost and expense
of moving household goods from Los Angeles to the greater Phoenix area.
SECTION FIFTEEN
AUTOMOBILE EXPENSES
<PAGE>
Frontier shall provide a company car for the exclusive use of LaPallo
and provide the maintenance, fuel and insurance costs with relation to the
operation of the said vehicle.
SECTION SIXTEEN
GENERAL PROVISIONS
Notice shall be complete when sent by telegram, facsimile transmission
or written notice at the address set forth above and deposited in the United
States Mail, postage prepaid, return receipt requested for either certified or
registered mail.
In the event of litigation involving this Agreement, the Court, in
addition to all other remedies, shall award a reasonable attorney fee to the
prevailing party.
The terms and conditions of this Agreement shall extend to and be
binding on the heirs, successors and assigns of the parties hereto.
The headings are inserted for convenience only and no attempt has been
made other than to indicate completely or accurately the contents of any section
they introduce. The headings shall have no bearing whatsoever upon the meaning
and construction of this Agreement.
This Agreement and each provision hereof may be amended, modified,
supplemented or waived only by a written document specifically identifying this
Agreement and duly executed by each party hereto or the authorized
representative of such party.
All rights, powers and remedies of the parties are separate and
cumulative, and no one of them, whether exercised or not, shall be deemed to be
to the exclusion of or to limit or prejudice any other legal or equitable
rights, powers or remedies which the parties may have. The parties shall not be
deemed to waive any of their rights, powers or remedies under this Agreement
unless such waiver is in writing and signed by the party to be bound. No delay
or omission on the part of any part in exercising any right, power or remedy
shall operate as a waiver of,
<PAGE>
or otherwise prejudice, such right, power or remedy or any other right, power or
remedy. A waiver on any one occasion shall not be construed as a bar to or
waiver of any right, power or remedy on any future occasion.
DATED at Phoenix, Arizona, this 23__ day of April_______, 1996.
FRONTIER ADJUSTERS OF AMERICA, INC.
an Arizona corporation,
FRONTIER ADJUSTERS, INC.
a Colorado corporation,
By /s/ William J. Rocke
---------------------------------------------
William J. Rocke, Chairman/CEO
/s/ Francis J. LaPallo
---------------------------------------------
Francis J. LaPallo
<PAGE>
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this the 23__ day of April_______, 1996, before me, the undersigned
Notary Public, personally appeared FRANCIS J. LaPALLO, known to me to be the
person whose name is subscribed to the foregoing Employment Agreement, and
acknowledged that he executed the same for the purpose and consideration therein
expressed.
IN WITNESS WHEREOF I hereunto set my hand and official seal.
/s/ Sharon Taraci
----------------------------------------
Notary Public
My commission expires:
Jan. 14, 1998
- -----------------------
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this the 23__ day of April__________, 1996, before me, the
undersigned Notary Public, personally appeared WILLIAM J. ROCKE, who
acknowledged himself to be the Chairman/CEO of FRONTIER ADJUSTERS OF AMERICA,
INC., an Arizona corporation, and of FRONTIER ADJUSTERS, INC., a Colorado
corporation, and that he, as such officer, being duly authorized so to do,
executed the foregoing Employment Agreement for and on behalf of the said
corporations for the purpose and consideration therein expressed.
IN WITNESS WHEREOF I hereunto set my hand and official seal.
/s/ Sharon Taraci
----------------------------------------
Notary Public
My commission expires:
Jan. 14, 1998
- -----------------------
<PAGE>
EXHIBIT A
---------
Board of Directors Dated as of
FRONTIER ADJUSTERS OF AMERICA, INC. _____________, 1996
Subscription Agreement
----------------------
Ladies/Gentlemen:
The undersigned hereby offer to purchase __________________(_____)
shares of common stock (the "Shares") of Frontier Adjusters of America, Inc., an
Arizona corporation (the "Corporation"), payable in cash, against delivery of
the certificate representing the Shares.
This offer is subject to the conditions that the Shares will, when
issued, be validly issued, fully paid and non-assessable, and that the
Corporation is duly organized, validly existing, and in good standing under the
laws of Arizona.
To induce the Corporation to issue the Shares, the undersigned warrant
and represent that:
1. They have the ability to bear the economic risk of the purchase of
the Shares, including the complete loss of their investment.
2. They have sufficient knowledge and experience in business and
financial matters (or have received from a person of their selection sufficient
advice with respect to such matters) to be capable of evaluating the merits and
risks of the purchase of the Shares.
3. They have knowledge of, and have been provided the opportunity to
acquire information with respect to, the business affairs, financial condition,
plans and prospects of the Corporation which they deem relevant in making a
fully informed decision with respect to the purchase of the Shares.
4. They have been encouraged and have had the opportunity to rely upon
the advice of their legal counsel and other advisers with respect to the
purchase of the Shares.
<PAGE>
5. They have had the opportunity to ask questions and receive
information with respect to, among other things, the business affairs, financial
condition, plans and prospects of the Corporation and the terms and conditions
of the purchase of the Shares, as they have requested so as to more fully
understand their investment.
6. Neither the Corporation nor any person representing or acting on
behalf of the Corporation, or purportedly representing or acting on behalf of
the Corporation, has made any representations, warranties, agreements or
statements other than those contained herein which influenced or affected their
decision to purchase the Shares.
7. They are acquiring the Shares for their own account without any view
to the transfer, sale, assignment or other distribution thereof.
The undersigned further acknowledge, understand and agree that the
Shares have not been and may not be registered under any federal or state
securities law including but not limited to the Securities Act of 1933, as
amended, or the Arizona Securities Act, and that no federal or state
governmental agency or authority has approved or passed upon the issuance of the
Shares. They understand that the Shares must be held by them for an indefinite
period of time, absent registration or qualification of the Shares under the
applicable laws or the receipt of an opinion of counsel satisfactory to the
Corporation that registration or qualification is not required. They acknowledge
that the certificate representing the Shares to be issued to them will bear a
legend restricting the transferability thereof to the foregoing effect.
Very truly yours,
--------------------------------------
Francis J. LaPallo
--------------------------------------
(Spouse)
EXHIBIT B
---------
<PAGE>
Registration Rights
-------------------
1.1 Definitions.
As used in this Exhibit B, the following terms shall have the following
meanings:
(a) The term "Company" means Frontier Adjusters of America,
Inc., an Arizona Corporation.
(b) The term "register", "registered", and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Act, and the declaration or
ordering of effectiveness of such registration statement or document;
(c) The term "Registrable Securities" means collectively, the
Purchased Shares and the Option Shares excluding, in all cases, however, any
Registrable Securities which may be sold pursuant to Rule 144.
(d) The term "Holder" means Francis J. LaPallo.
(e) The term "Act" means the Securities Act of 1933, amended.
(f) Other capitalized terms shall have the meanings ascribed
to them in the Employment Agreement to which this Exhibit B is attached.
1.2 Request for Registration on Form S-3 and/or Form S-8.
(a) In case the Company shall receive from the Holder a
written request or requests that the Company affect registration on Form S-3 or
Form S-8 (or any successor forms thereto) and any related qualification or
compliance with respect to all or a part of the Registrable Securities held by
such Holder, the Company will use its best efforts to cause such Registrable
Securities to be registered on such form(s); provided, however, that the Company
shall not be obligated to take any action to affect such registration,
qualification or compliance pursuant to this Section 1.2:
(i) if the Company is not qualified as a registrant
entitled to use Form S-3 or Form S-8, as the case may be;
(ii) in any particular jurisdiction in which the
Company would be required to execute a general consent to service of process in
affecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act; or
(iii) with regard to the Purchased Shares, if the
Company has affected one such registration pursuant to this Section 1.2 and with
regard to the Option Shares, if the Company has affected one such registration
pursuant to this Section 1.2.
(b) subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities as soon as
practicable after receipt of the request or requests of the Holder.
<PAGE>
(c) Notwithstanding the foregoing, if the Company shall
furnish to the Holder requesting a registration statement pursuant to this
Section 1.2, a certificate signed by the President of the Company stating that
in the good faith judgment of the Board of Directors of the Company it would be
seriously detrimental to the Company and its stockholders for such registration
statement to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer such filing
for a period of not more than 90 days after receipt of the request of the
Holder; provided, however, that the Company may not utilize this right more than
once in any twelve month period.
(d) All expenses incurred in connection with a registration
requested pursuant to this Section 1.2, including (without limitation) all
registration, filing, qualification, printer's and accounting fees shall be
borne by the Company.
1.3 Obligations of the Company. Whenever required under this Section 1
to affect the registration of any registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement on
such form as the Company deems appropriate with respect to such Registrable
Securities and use its best efforts to cause such registration statement to
become effective, and, upon the request of the Holder of the Registrable
Securities registered thereunder, keep such registration statement effective for
up to one hundred twenty (120) days, or such shorter period as is required to
dispose of all securities covered by such registration statement.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(c) Furnish to the Holder such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as he may reasonably request
in order to facilitate the disposition of Registrable Securities owned by him.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holder, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions or to agree to any
restrictions as to the conduct of its business in the ordinary course thereof.
(e) Notify the Holder of Registrable Securities covered by
such registration statement, at any time when a prospectus relating thereto
covered by such registration statement is required to be delivered under the
Act, of the happening of any event as a result of which the prospectus included
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state material facts required to be stated
therein or necessary to make the
<PAGE>
statements therein not misleading in the light of the circumstances then
existing.
1.4 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement that
the selling Holder shall furnish to the Company such information regarding
himself, the Registrable Securities held by him, and the intended method of
disposition of such securities as shall be required to affect the registration
of his Registrable Securities.
1.5 Delay of Registration. The holder shall not have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Agreement.
1.6. Indemnification. In the event any Registrable Securities are
included in a registration statement under this Agreement;
(a) The Company will indemnify and hold harmless the Holder
against any losses, claims, damages, or liabilities (joint or several) to which
they may become subject under the Act, the 1934 Act or other federal or state
law, insofar as such losses, claims, damages, or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein no misleading, or (iii) any violation
or alleged violation by the Company of the Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Act, the 1934 Act
or any state securities law; and the Company will reimburse the Holder, officer
or director, underwriter or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this subsection 1.6(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or action
if such settlement is affected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
loss, claim, damage, liability, or action to the extent that it arises out of or
is based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by the Holder.
(b) The Holder will indemnify and hold harmless the Company,
each of its directors, each of its officers who have signed the registration
statement, each person, if any, who controls the Company within the meaning of
the Act, any underwriter and any other individual or entity selling securities
in such registration statement or any of its directors or officers or any person
who controls such individual or entity, against any losses, claims, damages, or
liabilities (joint or several) to which the Company or any such director,
officer, controlling person, underwriter or controlling person, or other
individual or entity may become subject, under the Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon any Violation, in
each
<PAGE>
case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by the Holder
expressly for use in connection with such registration; and the Holder will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer, controlling person, underwriter or controlling person,
or other individual or entity, officer, director, or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this subsection 1.6(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or action if such settlement is affected
without the consent of the Holder, which consent shall not be unreasonably
withheld. Notwithstanding anything to the contrary herein contained, the
Holder's indemnity obligation shall be limited to the net proceeds received by
such holder from the offering out of which the indemnity obligation arises.
(c) Promptly after receipt by an indemnified party under this
Section 1.6 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.6, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interest between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 1.6, but the omission so to deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 1.6.
EXHIBIT 21
LIST OF SUBSIDIARIES OF
FRONTIER ADJUSTERS OF AMERICA, INC.
-----------------------------------
<TABLE>
<CAPTION>
Name State of Incorporation Parent Company
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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.
Frontier Adjusters Corp. Puerto Rico Frontier Adjusters, Inc.
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the April 6, 1992
Registration Statement on Form S-8 of our report, dated August 1, 1996, which
appears on page F-2 of the annual report on Form 10-K of Frontier Adjusters of
America, Inc. and subsidiaries for the year ended June 30, 1996.
McGLADREY & PULLEN, LLP
Phoenix, Arizona
August 1, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 534,540
<SECURITIES> 1,249,463
<RECEIVABLES> 1,794,185
<ALLOWANCES> 245,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,781,532
<PP&E> 2,436,167
<DEPRECIATION> 881,766
<TOTAL-ASSETS> 6,875,752
<CURRENT-LIABILITIES> 584,970
<BONDS> 59,983
0
0
<COMMON> 47,820
<OTHER-SE> 6,182,979
<TOTAL-LIABILITY-AND-EQUITY> 6,875,752
<SALES> 0
<TOTAL-REVENUES> 5,641,984
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,940,335
<LOSS-PROVISION> 151,847
<INTEREST-EXPENSE> 7,917
<INCOME-PRETAX> 1,855,824
<INCOME-TAX> 721,305
<INCOME-CONTINUING> 1,134,519
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,134,519
<EPS-PRIMARY> .25
<EPS-DILUTED> .25
</TABLE>
