CONFORMED
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 September 30, 1996
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
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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
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(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 October 15, 1996 4,605,358
---------
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
------------------ -------------
(unaudited) (*)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $1,110,529 $ 534,540
Investments 1,248,130 1,249,463
Receivables 1,504,923 1,549,185
Prepaid expenses 268,166 288,893
Other 171,351 159,451
---------- ----------
TOTAL CURRENT ASSETS 4,303,099 3,781,532
---------- ----------
PROPERTY AND EQUIPMENT 2,251,868 2,436,167
Less accumulated depreciation and amortization 650,395 881,766
---------- ----------
1,601,473 1,554,401
---------- ----------
OTHER ASSETS
Cost of subsidiary in excess of net tangible assets acquired 213,817 213,817
Less accumulated amortization 175,085 174,508
---------- ----------
38,732 39,309
Receivables (Long term) 368,000 327,000
Investments (Long term) 750,890 750,730
Other 425,666 422,780
---------- ----------
1,583,288 1,539,819
---------- ----------
TOTAL ASSETS $7,487,860 $6,875,752
========== ==========
LIABILITIES
-----------
CURRENT LIABILITIES
Accounts payable $ 80,117 $ 11,666
Accrued expenses 374,540 263,806
Franchisee/licensee remittance payable 377,301 135,518
Current Portion Long Term Liability 25,122 24,672
Other 209,021 149,308
---------- ----------
TOTAL CURRENT LIABILITIES 1,066,101 584,970
---------- ----------
LONG TERM LIABILITY 53,532 59,983
---------- -----------
STOCKHOLDERS' EQUITY
Common stock 47,820 47,820
Additional paid in capital 2,148,470 2,148,470
Treasury stock (529,584) (485,219)
Other 6,087 (6,691)
Retained earnings 4,695,434 4,526,419
---------- ----------
6,368,227 6,230,799
---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $7,487,860 $6,875,752
========== ==========
</TABLE>
*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
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
REVENUES
Continuing licensee and franchisee fees $1,388,298 $1,246,895
Adjusting and risk management fees 275,231 161,771
---------- ----------
1,663,529 1,408,666
---------- ----------
COST AND EXPENSES
Compensation and fringe benefits 651,156 468,369
Office 100,364 109,945
Advertising and promotion 81,197 73,817
Depreciation and amortization 55,955 43,491
Provision for doubtful accounts 45,000 35,000
Other 209,406 240,894
---------- ----------
1,143,078 971,516
---------- ----------
INCOME FROM OPERATIONS 520,451 437,150
---------- ----------
OTHER INCOME (EXPENSE)
Interest income 36,191 31,513
Other (Net) 7,353 3,126
---------- ----------
TOTAL OTHER INCOME (EXPENSE) 43,544 34,639
---------- ----------
INCOME BEFORE INCOME TAXES 563,995 471,789
INCOME TAXES 221,732 185,751
---------- ----------
NET INCOME $ 342,263 $ 286,038
========== ==========
Weighted Average Shares outstanding 4,614,684 4,637,943
========== ==========
NET INCOME PER COMMON SHARE $ .07 $ .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)
Three Months Ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
NET INCOME $ 342,263 $ 286,038
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 55,955 43,491
(Gain) on disposition of property & equipment (905) --
Allowance for doubtful accounts 45,930 36,222
Change in assets and liabilities:
(Increase) decrease in:
Receivables 60,444 284,664
Prepaid expenses 20,727 33,535
Other (23,834) (52,229)
Increase (decrease) in:
Accounts payable 68,451 12,602
Accrued expenses 110,734 (57,984)
Franchisee and licensee remittance payable 241,783 (108,924)
Other 59,713 33,509
----------- -----------
Total adjustments 638,998 224,886
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 981,261 510,924
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
License Acquisition (25,000) (61,000)
Capital expenditures (78,195) (23,584)
Investment purchased (974,115) --
Proceeds from sales of investments 1,000,000 --
Payments on License acquisition (6,001) (5,583)
Advances to licensees and franchisees (1,021,884) (908,318)
Collections of advances to licensees and franchisees 917,536 878,359
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (187,659) (120,126)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends (173,248) (162,432)
Common stock repurchased (44,365) (95,817)
----------- -----------
NET CASH PROVIDED BY(USED IN)FINANCING ACTIVITIES (217,613) (258,249)
----------- -----------
NET INCREASE IN CASH 575,989 132,549
Cash at beginning of the period 534,540 358,960
----------- -----------
Cash at the end of the period $ 1,110,529 $ 491,509
=========== ===========
Supplemental disclosures of Cash Flow information
Cash paid during the period
Income taxes $ 72,130 $ 68,257
Interest $ 1,498 $ 1,917
</TABLE>
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 three month period ended September 30,
1996 are not necessarily indicative of the results to be expected for the
full year.
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 quarter ended September 30,
1996, the Company's operations generated $981,000 in cash.
Compared to the last fiscal year, the most significant item affecting cash
provided by the Company's operations is the $242,000 increase in franchisee
and licensee remittance payable. The Company, pursuant to agreements with
its licensees and franchisees, acts as a collection agent for all of its
licensees. The Company remits to its licensees the collections, less the
on-going license fee and any amounts due the Company, i.e., loan repayments,
errors and omissions insurance premium. The date of the week that the
Company's fiscal period ends, therefore, can have a significant effect on
the reported amount that is due to licensees and franchisees. The Company's
financial statements as of September 30, 1996 reflect collections for two
days of $377,000 and June 30, 1996 reflect collections for one day of
$136,000.
In August 1996 the Company acquired 14,300 shares of the Company's common
stock at a cost of $44,365. The repurchase was authorized 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 May 1996, approved an increase in the
Company's annual dividend rate from 14 cents per share to 15 cents per share
effective with the 3.75 cents per share cash dividend paid on June 10, 1996.
The increase reflects the Board's policy that shareholders participate in
the Company's growth.
Through its capital investment program, the Company replaces obsolete or
outdated equipment and invests in new equipment and furnishings to maintain
or increase the productivity of the Company and its employees. The Company
anticipates investing $100,000 to $200,000 in fiscal 1997 for equipment and
furnishings pursuant to its capital investment program. The Company,
additionally, entered into an agreement in October 1996 to acquire a parcel
of land and building adjacent to its Corporate offices. The purchase price
is $170,000 and will be paid during the second quarter of the Company's
current fiscal year.
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 4.04 to 1
as of September 30, 1996 and 6.46 to 1 as of June 30, 1996.
5
<PAGE>
Results of Operations - Quarter Ended September 30, 1996 Compared to 1995
-------------------------------------------------------------------------
Revenues
--------
The Company's revenues increased 18% or $255,000 to $1,664,000 in the
current quarter from $1,409,000 in the same period of the prior fiscal year.
The increase is a combined $113,000 increase in adjusting and risk
management fees and a $141,000 increase in continuing licensee and
franchisee fees.
The increase of $113,000 in adjusting and risk management fees from $162,000
in the quarter ended September 30, 1995 to $275,000 in the quarter ended
September 30, 1996 represents a 70% increase. A substantial portion of this
increase is related to a major storm that occurred in mid August 1996 in the
Phoenix, Arizona metropolitan area where the Company's main offices are
located. Claims resulting from this storm provided the Company with $80,000
in adjusting services revenues in the current quarter and will provide
additional revenues in the following quarter as not all the claims received
had been concluded and billed during the current quarter. Additionally, the
Company had a $22,000 increase in fees in its Tucson office as this office
was acquired from a licensee in the first quarter of the prior fiscal year.
The balance of the increase represents an increase in the demand for the
services provided by Company owned offices.
The Company's revenues from continuing licensee and franchisee fees
increased 11% or $141,000 from $1,247,000 in the quarter ended September 30,
1995 to $1,388,000 in the quarter ended September 30, 1996. This increase
reflects the fact that the Company's licensees and franchisees are
benefiting from an increase in claims as insurance companies and
self-insureds use their services due to an increase in volume of claims.
Also, to a greater degree, this increase reflects the effect of new
licensees and franchisees and rate increases. 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 revenues from the recently purchased
Tucson operation.
Compensation and Fringe Benefits
--------------------------------
Compensation and fringe benefits represent approximately 57% of the
Company's costs and expenses and represent the largest single item of
expense. These expenses increased 39% or $183,000 from $468,000 in the three
months ended September 30, 1995 to $651,000 in the current quarter. This
increase is the result of the addition of an Executive Vice President to the
Company's management team, additional employees hired including temporary
employees to handle increased work loads in the Corporate office, increased
bonus related to the Company's rising income and cost of living and merit
increases given to employees.
Expenses Other Than Compensation and Fringe Benefits
----------------------------------------------------
The Company's expenses other than compensation and fringe benefits decreased
$11,000 during the three months ended September 30, 1996 as compared to the
same quarter of the prior fiscal year. The principal items affecting these
expenses are a $37,000 decrease in legal expenses and a $12,000 increase in
depreciation expense due to capital expenditures in the prior fiscal year.
The balance of the Company's costs and expenses have not significantly
changed from the same period of the prior year.
Income Taxes
------------
6
<PAGE>
The Company's income taxes were 39% of its income before taxes, or
approximately the same as they were in the prior fiscal year. Changes made
in the tax laws by various states and by the federal government have not had
a material affect on the Company's current overall tax rates, however, this
could change at any time.
Other Income
------------
The Company's other income increased $9,000 or 25% from $35,000 in the
quarter ended September 30, 1995 to $44,000 in the current quarter. The most
significant items affecting other income a $4,000 increase in the sales of
computer software to the Company's licensees and franchisees and a $5,000
increase in interest income.
Net Income
----------
The Company's net income for the quarter ended September 30, 1996, increased
$56,000 or 20% from $286,000 in the quarter ended September 30, 1995 to
$342,000 in the current quarter. The most significant items affecting net
income were the $255,000 increase in revenues, the $183,000 increase in
compensation and fringe benefits and the $11,000 decrease in other expenses.
Results of Operations - Quarter Ended September 30, 1995 Compared to 1994
-------------------------------------------------------------------------
Revenues
--------
The Company's revenues increased 11% or $138,000 to $1,409,000 in the
quarter ended September 30, 1995 from $1,271,000 in the same period of the
prior fiscal year. The increase was a combined $48,000 increase in adjusting
and risk management fees and a $90,000 increase in continuing licensee and
franchisee fees.
The increase of $48,000 in adjusting and other fees of Company owned offices
from $114,000 in the quarter ended September 30, 1994 to $162,000 in the
quarter ended September 30, 1995 represented a 42% increase. The increase
reflects an increase in the demand for the Company's services as well as
$29,000 in revenues as a result of the acquisition on August 1, 1995 of the
operations of the Company's former Tucson licensee.
The Company's revenues from continuing licensee and franchisee fees
increased 10% or $129,000 from $1,271,000 in the quarter ended September 30,
1994 to $1,400,000 in the quarter ended September 30, 1995. This increase
reflects the fact that the Company's licensees and franchisees benefited
from an increase in claims as insurance companies and self-insureds used
their services due to an increase in volume of claims. Also, to a greater
degree, this increase reflects the effect of new licensees and franchisees
and rate increases.
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.
Compensation and Fringe Benefits
--------------------------------
Compensation and fringe benefits represented approximately 48% of the
Company's costs and expenses and represent the largest single item of
expense. These expenses increased 17% or $69,000 from $399,000 in the three
months ended September 30, 1994 to $468,000 in the quarter ended September
30, 1995. The increase was the result of the Company hiring additional
employees to staff the recently acquired Tucson location and to handle the
increased work load in the corporate office and for cost of living and merit
raises given to employees.
Expenses Other Than Compensation and Fringe Benefits
----------------------------------------------------
7
<PAGE>
The Company's expenses other than compensation and fringe benefits increased
$32,000 during the three months ended September 30, 1995 as compared to the
same quarter of the prior fiscal year. The principal items affecting these
expenses were a $65,000 decrease in legal expenses primarily related to the
Company's litigation in California with a former licensee, a $24,000
increase in advertising and promotion expenses, and a $28,000 increase in
office expenses primarily related to integration of the Tucson office.
Expenses Other Than Compensation and Fringe Benefits (continued)
----------------------------------------------------------------
The balance of the Company's costs and expenses did not significantly
changed from the same period of the prior fiscal year.
Income Taxes
------------
The Company's income taxes were 39% of its income before taxes, or
approximately the same as they were in the prior fiscal year. Changes made
in the tax laws by various states and by federal government did not have a
material affect on the Company's overall tax rates.
Other Income
------------
The Company's other income decreased $5,000 or 13% from $40,000 in the
quarter ended September 30, 1994 to $35,000 in the quarter ended September
30, 1995. The most significant decrease in other income was the decline in
the sales of computer software to the Company's licensees.
Net Income
----------
The Company's net income for the quarter ended September 30, 1995, increased
$18,000 or 7% from $268,000 in the quarter ended September 30, 1994 to
$286,000 in the quarter ended September 30, 1995. The most significant items
affecting net income were the $138,000 increase in revenues, the $69,000
increase in compensation and fringe benefits and the $32,000 increase in
other expenses.
PART II: OTHER INFORMATION
Item 1 - Legal Proceedings
A Declaratory Judgment 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 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 Judgement
regarding all outstanding claims by the plaintiff. On June 19, 1995, the
Court granted the Company's Summary Judgement motion regarding its claims
against the former licensee including $204,144 in unpaid licensee 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 Brockband 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 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 plaintiff'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.
8
<PAGE>
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 3 - Submission of Matters to a Vote of Security Holders
On October 11, 1996, the Company held its annual shareholders meeting.
The Company's Board of Directors were reelected with 4,327,851 shares being
cast and 200 shares abstaining. The Directors elected and the numbers of
votes each received are as follows:
Patric R. Greer 4,290,104
George M. Hill 4,292,835
Francis J. LaPallo 4,294,346
Louis T. Mastos 4,292,585
James S. Rocke 4,294,596
William J. Rocke 4,306,911
Jean E. Ryberg 4,307,671
Merlin J. Schumann 4,294,596
William W. Strawther, Jr. 4,607,835
Scott R. Younker 4,294,896
The Company's shareholders approved the adoption of the Frontier Adjusters
of America, Inc. 1996 Stock Option Plan with 3,196,454 affirmative votes,
142,197 against and 3,350 abstaining.
The Company's shareholders ratified the appointment of McGladrey & Pullen,
LLP, Certified Public Accountants, as the auditors of the Company for the
Company's fiscal year ending June 30, 1997, with 4,301,901 affirmative
votes, 400 against and 25,550 abstaining.
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.
<TABLE>
<CAPTION>
FRONTIER ADJUSTERS OF AMERICA, INC.
<S> <C>
Date: October 24, 1996 /s/ William J. Rocke
----------------------- -----------------------
William J. Rocke, Chief Executive Officer/Chairman of the
Board, Director, Principal Financial Officer
Date: October 24, 1996 /s/ Jean E. Ryberg
----------------------- ----------------------
Jean E. Ryberg, President, Director
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE
SHEET AT SEPTEMBER 30, 1996 (Unaudited) AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,110,529
<SECURITIES> 1,248,130
<RECEIVABLES> 1,795,853
<ALLOWANCES> 290,930
<INVENTORY> 0
<CURRENT-ASSETS> 4,303,099
<PP&E> 2,251,868
<DEPRECIATION> 650,395
<TOTAL-ASSETS> 7,487,860
<CURRENT-LIABILITIES> 1,066,101
<BONDS> 53,532
0
0
<COMMON> 47,820
<OTHER-SE> 6,320,407
<TOTAL-LIABILITY-AND-EQUITY> 7,487,860
<SALES> 0
<TOTAL-REVENUES> 1,663,529
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,098,078
<LOSS-PROVISION> 45,000
<INTEREST-EXPENSE> 1,462
<INCOME-PRETAX> 563,995
<INCOME-TAX> 221,732
<INCOME-CONTINUING> 342,263
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 342,263
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
