FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period _______________________ to _________________________
Commission File Number 1-12902
- --------------------------------------------------------------------------------
FRONTIER ADJUSTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
Arizona 86-0477573
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
45 East Monterey Way, Phoenix, AZ 85012
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(602) 264-1061
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares of Common Stock outstanding on February 2, 1996 4,609,658
----------
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 1995 June 30, 1995
----------------- -------------
(unaudited) (*)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 369,235 $ 358,960
Investments 1,237,599 1,255,627
Receivables 1,531,603 1,632,406
Prepaid expenses 191,473 258,165
Other 139,784 115,334
---------- ----------
TOTAL CURRENT ASSETS 3,469,694 3,620,492
---------- ----------
PROPERTY AND EQUIPMENT 2,296,174 2,269,110
Less accumulated depreciation and
amortization 827,807 784,565
---------- ----------
1,468,367 1,484,545
---------- ----------
OTHER ASSETS
Cost of subsidiary in excess of net
tangible assets acquired 213,817 213,817
Less accumulated amortization 173,352 172,196
---------- ----------
40,465 41,621
Receivables (Long term) 308,000 302,000
Investments (Long term) 764,411 764,090
Other 427,314 384,302
---------- ----------
1,540,190 1,492,013
---------- ----------
TOTAL ASSETS $6,478,251 $6,597,050
========== ==========
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 95,914 $ 12,669
Accrued expenses 207,157 362,693
Franchisee/licensee remittance payable 73,230 221,620
Current portion long term liability 23,796 22,951
Other 69,154 53,811
---------- ----------
TOTAL CURRENT LIABILITIES 469,251 673,744
---------- ----------
LONG TERM LIABILITY 72,542 84,655
---------- ----------
STOCKHOLDERS' EQUITY
Common stock 47,820 47,820
Additional paid in capital 2,148,470 2,148,470
Treasury stock (510,686) (414,869)
Other (25,599) 14,642
Retained earnings 4,276,453 4,042,588
---------- ----------
5,936,458 5,838,651
---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $6,478,251 $6,597,050
========== ==========
*Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed statements.
2
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<CAPTION>
Six Months Ended Three Months Ended
December 31, December 31,
----------------------- ------------
1995 1994 1995 1994
----- ----- ----- -----
<S> <C> <C> <C> <C>
REVENUES
Continuing licensee and
franchisee fees $ 2,442,228 $ 2,314,690 $ 1,195,333 $ 1,157,879
Adjusting fees 318,768 213,451 156,997 99,477
--------- ---------- --------- ----------
2,760,996 2,528,141 1,352,330 1,257,356
--------- ---------- --------- ----------
COST AND EXPENSES
Compensation and employee benefits 948,640 799,959 480,271 400,979
Office 204,830 144,309 94,885 62,681
Advertising and promotion 185,936 94,324 112,119 44,463
Depreciation and amortization 88,557 60,085 45,066 31,927
Provision for doubtful accounts 70,000 80,000 35,000 45,000
Other 430,314 533,341 189,420 256,347
--------- --------- --------- ----------
1,928,277 1,712,018 956,761 841,397
--------- --------- --------- ----------
INCOME FROM OPERATIONS 832,719 816,123 395,569 415,959
--------- --------- --------- ----------
OTHER INCOME (EXPENSE)
Interest income 70,123 63,041 38,610 35,001
Other (Net) 16,298 43,555 13,172 31,276
--------- --------- -------- ---------
TOTAL OTHER INCOME (EXPENSE) 86,421 106,596 51,782 66,277
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 919,140 922,719 447,351 482,236
INCOME TAXES 361,507 362,242 175,756 189,289
--------- --------- --------- ---------
NET INCOME $ 557,633 $ 560,477 $ 271,595 $ 292,947
========= ========= ========= =========
Weighted Average Shares
outstanding 4,623,800 4,684,105 4,609,658 4,677,311
========== ========== =========== ==========
NET INCOME PER COMMON SHARE $ .12 $ .12 $ .06 $ .06
============ =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
3
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Six Months Ended December 31, 1995 and 1994
1995 1994
------ ------
NET INCOME $ 557,633 $ 560,477
-------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 88,557 60,085
(Gain) on disposition of property and
equipment (1,667) (19,416)
Allowance for doubtful accounts 16,144 80,140
Change in assets and liabilities:
(Increase) decrease in:
Receivables 276,260 3,136
Prepaid expenses 66,692 33,837
Other (63,187) (11,109)
Increase (decrease) in:
Accounts payable 83,245 (38,093)
Accrued expenses (155,536) 80,877
Franchisee and licensee remittance payable (148,390) (618,951)
Other 15,343 (42,844)
-------- --------
Total adjustments 177,461 (472,338)
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 735,094 88,139
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (27,064) (68,481)
Investments purchased (986,675) (1,031,946)
Proceeds from sales of investments 1,000,000 1,000,000
License acquisition (64,000) (25,000)
Payments on License acquisition (11,268) (7,437)
Advances to licensees and franchisees (1,949,046) (1,578,767)
Collections of advances to licensees
and franchisees 1,732,821 1,645,308
---------- ----------
NET CASH PROVIDED (USED IN) BY INVESTING ACTIVITIES (305,232) (66,323)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends (323,770) (258,000)
Common stock repurchased (95,817) (136,377)
--------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (419,587) (394,377)
---------- ----------
NET INCREASE (DECREASE) IN CASH 10,275 372,561
Cash at beginning of the period 358,960 804,780
--------- ---------
Cash at the end of the period $ 369,235 $ 432,219
========= =========
Supplemental disclosures of Cash Flow information
Cash paid during the period
Income taxes $ 455,788 $ 351,188
Interest $ 3,741 $ 2,563
The accompanying notes are an integral part of these condensed statements.
4
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results of operations for the interim periods.
The results of operations for the six month period ended December 31, 1995
are not necessarily indicative of the results to be expected for the full
year.
(2) Supplemental Cash Flow Information
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 purchase loan
(Net of imputed interest of $22,926) (57,626)
Outstanding advance to licensee (22,455)
--------
Net cash $ 36,000
========
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
The Company has historically financed its growth and on going operations with
cash generated from operations. In the six months ended December 31, 1995, the
Company's operations generated $735,000 in cash.
In July 1993 the Company's Board of Directors authorized the purchase of shares
of the Company's common stock. In September 1995 the Company acquired 31,240
shares of the Company's common stock at a cost of $ 95,817. This purchase
completed the repurchase plan resulting in total purchases of 122,352 shares.
The repurchases were instituted by the Board of Directors as they believed that
at the current price level the Company's common stock was an excellent
investment.
The Company's Board of Directors in July 1995, approved an increase in the
Company's annual dividend rate from 12 cents per share to 14 cents per share
effective with the 3.5 cents per share cash dividend paid on September 8, 1995.
Through its capital investment program, the Company replaces obsolete or
outdated equipment and invests in new equipment to maintain or increase the
productivity of the Company and its employees. The Company anticipates investing
$100,000 to $200,000 in fiscal 1996 for computers and software pursuant to its
capital investment program.
Management believes that the Company will be able to fund all of its cash
requirements (i.e. current operations, capital asset acquisition and the payment
of dividends) from its current available cash, as well as funds generated by its
operations.
The Company's ratio of current assets to current liabilities was 7.39 to 1 as of
December 31, 1995 and 5.37 to 1 as of June 30, 1995. The ratio of current assets
to current liabilities was most significantly affected by the fact that the
Company's accrued liabilities at June 30, 1995 consisted mostly of accrued
income taxes and
5
<PAGE>
Financial Condition (continued)
accrued profit sharing expense which were paid early in the current fiscal year.
This effect on the ratio of current assets to current liabilities is the result
of timing and not the Company's underlying financial performance.
Results of Operations - Six Months Ended December 31, 1995 Compared to Six
Months Ended December 31, 1994
Revenues
The Company's revenues increased 9% or $233,000 to $2,761,000 in the current six
months from $2,528,000 in the same period of the prior fiscal year. The increase
represents a $105,000 increase in adjusting and other fees and a $128,000
increase in continuing licensee and franchisee fees.
The increase of $105,000 in adjusting and other fees of Company owned offices
from $214,000 in the six months ended December 31, 1994 to $319,000 in the six
months ended December 31, 1995 representing a 49% increase. The increase
reflects an increase in the demand for the Company's services as well as $63,000
in revenues as a result of the acquisition of the operations of the Company's
former Tucson licensee on August 1, 1995.
The Company's revenues from continuing licensee and franchisee fees increased 6%
or $128,000 from $2,314,000 in the six months ended December 31, 1994 to
$2,442,000 in the six months ended December 31, 1995. A significant factor
affecting the Company's revenue from continuing licensee and franchisee fees is
the termination of one of the Company's licensees in California in January 1995.
During the six months ended December 31, 1994 this licensee contributed $98,000
to the revenues of the Company.
The Company has granted nine new licenses during the current quarter within the
territory of its prior licensee and received $4,200 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 as insurance companies and
self-insureds use them due to an 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,
seen 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.
Compensation and Fringe Benefits
Compensation and fringe benefits represent approximately 49% of the Company's
costs and expenses and represent the largest single item of expense. Since 1992
the compensation has ranged from 44% to 57% of the Company's cost and expenses.
These expenses increased 19% or $149,000 from $800,000 in the six months ended
December 31, 1994 to $949,000 in the six months ended December 31, 1995. This
increase is the result of the Company hiring additional employees to staff the
recently acquired Tucson location ($50,000) and to handle the increased work
load in the corporate office ($35,000) and for cost of living and merit raises
given to employees ($64,000).
Expenses Other Than Compensation and Fringe Benefits
The Company's expenses other than compensation and fringe benefits increased
$68,000 during the six months ended December 31, 1995 as compared to the same
period of the prior fiscal year. The principal items affecting these expenses
are a $153,000 decrease in legal expenses primarily related to the Company's
litigation in California, a $92,000 increase in advertising and promotion, and a
$61,000 increase in office
6
<PAGE>
Expenses Other Than Compensation and Fringe Benefits (continued)
expenses primarily related to integration of the Tucson office.
The most significant item in the $92,000 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 at the publisher's 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.
The balance of the Company's costs and expenses have not significantly changed
from the same period of the prior year.
Income Taxes
The Company's income taxes for the six months ended December 31, 1995 were 39%
of its income before taxes, or approximately the same as they were for the six
months ended December 31, 1994. Changes made in the tax laws by various states
and by the federal government have not had a material effect on the Company's
overall tax rates; however, this could change at any time.
Other Income
The Company's other income decreased $20,000 from $106,000 in the six months
ended December 31, 1994 to $86,000 in the six months ended December 31, 1995.
The most significant decreases in other income were the decline in the sales of
computer software to the Company's licensees of $5,000 and a $19,000 decrease in
gain on disposition of fixed assets from the prior year.
Net Income
The Company's net income for the six months ended December 31, 1995, decreased
$2,000 from $560,000 in the period ended December 31, 1994 to $558,000 in the
current period. The most significant items affecting net income were the
$233,000 increase in revenues, the $149,000 increase in compensation and fringe
benefits and the $68,000 increase in other expenses.
Results of Operations - Three Months Ended December 31, 1995 Compared to Three
Months Ended December 31, 1994
Revenues
The Company's revenues increased 8% or $95,000 to $1,352,000 in the quarter
ended December 31, 1995 from $1,257,000 in the same period of the prior fiscal
year. The increase represents a $58,000 increase in adjusting and other fees and
a $37,000 increase in continuing licensee and franchisee fees.
The increase of $58,000 in adjusting and other fees of the Company owned offices
from $99,000 to $157,000 in the comparable period of the prior year represents a
59% increase. The increase reflects an increase in the demand for claims
services by the Company's clients as well as $37,000 in revenues as a result of
the acquisition of the operations of the Company's former Tucson license on
August 1, 1995.
The Company's revenues from continuing licensee and franchisee fees increased 3%
or $37,000 from $1,158,000 in the three months ended December 31, 1994 to
$1,195,000 in the three months ended December 31, 1995. A significant factor
affecting the Company's revenue from continuing licensee and franchisee fees is
the termination of one of the Company's licensees in California in January 1995.
During the three months ended December 31, 1994 this licensee contributed
$48,000 to the revenues of the Company.
The Company granted nine new licenses during the current quarter within the
territory of its prior licensee and received $4,200 in continuing licensee and
franchisee fees from the new licensees. The Company anticipates growth in these
revenues. The increase also reflects the facts that the Company's licensees and
7
<PAGE>
Revenues (continued)
franchisees are benefiting from an increase in claim services as insurance
companies and self-insureds use the Frontier Adjuster's licensees and
franchisees for increased volumes of claims, as well as the increase in the
number of licensees and franchisees that were established in the preceding
fiscal year.
The Company's revenues are affected by the number of new licensees and
franchisees and client companies' staff work loads as more corporations become
self-insured and are outsourcing to meet their needs for claims management
services. The client companies' staff work loads are affected by, among other
things, natural disasters which can create intense short term demands for claims
services.
Compensation and Fringe Benefits
Compensation and employee benefits represent approximately 50% of the Company's
costs and expenses and are its largest expense item. These expenses increased
20% or $79,000 in the quarter ended December 31, 1995 from $401,000 in the three
months ended December 31, 1994 to $480,000. The increase is principally the
result of additional employees to staff the recently acquired Tucson location
and to handle the increased work load in the corporate office.
Expenses Other Than Compensation and Fringe Benefits
The Company's expenses other than compensation and employee benefits increased
$36,000 in quarter ended December 31, 1995. The principal items affecting these
expenses are an $88,000 decrease in legal expense primarily related to the
Company's litigation in California, a $68,000 increase in advertising and
promotion, and a $33,000 increase in office expense primarily related to
integration of the Tucson office.
The most significant item in the $68,000 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 billing and
printing practice 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.
The balance of the Company's costs and expenses other than compensation and
employee benefits have not significantly changed from the same period of the
prior fiscal year.
Income Taxes
The Company's income taxes for the three months ended December 31, 1995 were 39%
of its income before taxes, or approximately the same as they were for the three
months ended December 31, 1994.
Other Income
The Company's other income decreased $14,000 from $66,000 in the three months
ended December 31, 1994 to $52,000 in the three months ended December 31, 1995.
The most significant decrease in other income reflects a $19,000 gain from
trading in automobiles in the second quarter of the prior year.
Net Income
The Company's net income for the quarter ended December 31, 1995, decreased from
$293,000 in the three months ended December 31, 1994 to $272,000 in the three
months ended December 31, 1995, a decrease of $21,000 or 7%. The most
significant items which affected net income are the $95,000 increase in
revenues, the $79,000 increase in compensation and fringe benefits and the
$36,000 increase in other expenses.
8
<PAGE>
PART II: OTHER INFORMATION
Item 1 - Legal Proceedings
A Declaratory 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 U.S. District Court and raised
certain counterclaims 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. 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 licensee fees and approximately $24,000 for court costs. The Company from
time to time in its normal course of business is named as a defendant in
lawsuits. The Company does not believe that it is subject to any lawsuits or
litigation or threatened lawsuits or litigation that will have a material
adverse effect on the Company or its business.
Response to items one through five not listed above are omitted since these
items are either inapplicable or the response thereto would be negative.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRONTIER ADJUSTERS OF AMERICA, INC.
Date: 2/8/96 /s/ William J. Rocke
--------------------------------------------------------
William J. Rocke, Chief Executive Officer/Chairman of the
Board, Director, Principal Financial Officer
Date: 2/8/96 /s/ Jean E. Ryberg
---------------------------------------------------------
Jean E. Ryberg, President, Director
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE
SHEET AT DECEMBER 31, 1995 (Unaudited) AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 369,235
<SECURITIES> 1,237,599
<RECEIVABLES> 1,738,459
<ALLOWANCES> 206,856
<INVENTORY> 0
<CURRENT-ASSETS> 3,469,694
<PP&E> 2,296,174
<DEPRECIATION> 827,807
<TOTAL-ASSETS> 6,478,251
<CURRENT-LIABILITIES> 469,251
<BONDS> 72,542
<COMMON> 47,820
0
0
<OTHER-SE> 5,888,638
<TOTAL-LIABILITY-AND-EQUITY> 6,478,251
<SALES> 0
<TOTAL-REVENUES> 2,760,996
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,858,277
<LOSS-PROVISION> 70,000
<INTEREST-EXPENSE> 3,673
<INCOME-PRETAX> 919,140
<INCOME-TAX> 361,507
<INCOME-CONTINUING> 557,633
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 557,633
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
