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, 1997
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 October 23, 1997 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, 1997 June 30, 1997
------------------ -------------
(unaudited) (*)
ASSETS
------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 650,999 $ 1,012,233
Investments 1,285,125 1,288,976
Receivables 1,813,745 1,613,099
Prepaid expenses 302,271 268,192
Other 446,660 433,260
----------- -----------
TOTAL CURRENT ASSETS 4,498,800 4,615,760
----------- -----------
PROPERTY AND EQUIPMENT 2,470,027 2,453,819
Less accumulated depreciation and amortization (754,024) (717,593)
----------- -----------
1,716,003 1,736,226
----------- -----------
OTHER ASSETS
Cost of subsidiary in excess of net tangible assets acquired 213,817 213,817
Less accumulated amortization (177,396) (176,818)
----------- -----------
36,421 36,999
Receivables (Long term) 389,000 431,000
Investments (Long term) 730,479 714,872
Other 352,408 377,282
----------- -----------
1,508,308 1,560,153
----------- -----------
TOTAL ASSETS $ 7,723,111 $ 7,912,139
=========== ===========
LIABILITIES
-----------
CURRENT LIABILITIES
Accounts payable $ 10,602 $ 33,793
Accrued expenses 341,139 190,510
Franchisee/licensee remittance payable 479,586 396,991
Current Portion Long Term Liability 27,005 26,521
Other 179,003 666,669
----------- -----------
TOTAL CURRENT LIABILITIES 1,037,335 1,314,484
----------- -----------
LONG TERM LIABILITY 26,527 33,462
----------- -----------
STOCKHOLDERS' EQUITY
Common stock 47,820 47,820
Additional paid in capital 2,148,470 2,148,470
Treasury stock (529,584) (529,584)
Other 92,336 83,221
Retained earnings 4,900,207 4,814,266
----------- -----------
6,659,249 6,564,193
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 7,723,111 $ 7,912,139
=========== ===========
</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, 1997 and 1996
1997 1996
---------- ----------
REVENUES
Continuing licensee and franchisee fees $1,220,102 $1,388,298
Adjusting and risk management fees 263,606 275,231
---------- ----------
1,483,708 1,663,529
---------- ----------
COST AND EXPENSES
Compensation and fringe benefits 645,048 651,156
Office 94,149 100,364
Advertising and promotion 60,001 81,197
Depreciation and amortization 61,357 55,955
Provision for doubtful accounts 48,000 45,000
Other 187,069 209,406
---------- ----------
1,095,624 1,143,078
---------- ----------
INCOME FROM OPERATIONS 388,084 520,451
---------- ----------
OTHER INCOME (EXPENSE)
Interest income 36,466 36,191
Other (Net) 1,679 7,353
---------- ----------
TOTAL OTHER INCOME (EXPENSE) 38,145 43,544
---------- ----------
INCOME BEFORE INCOME TAXES 426,229 563,995
INCOME TAXES 167,587 221,732
---------- ----------
NET INCOME $ 258,642 $ 342,263
========== ==========
Weighted Average Shares outstanding 4,605,358 4,614,684
========== ==========
NET INCOME PER COMMON SHARE $ .06 $ .07
========== ==========
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, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
NET INCOME $ 258,642 $ 342,263
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 61,903 55,955
(Gain) on disposition of property & equipment (120) (905)
Allowance for doubtful accounts 49,038 45,930
Change in assets and liabilities:
(Increase) decrease in:
Receivables (122,262) 60,444
Prepaid expenses (34,079) 20,727
Other (26,537) (23,834)
Increase (decrease) in:
Accounts payable (23,191) 68,451
Accrued expenses 150,629 110,734
Franchisee and licensee remittance payable 82,595 241,783
Other (487,666) 59,713
----------- -----------
Total adjustments (349,690) 638,998
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES (91,048) 981,261
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 200 --
License Acquisition -- (25,000)
Capital expenditures (16,308) (78,195)
Investment purchased (989,627) (974,115)
Proceeds from sales of investments 1,000,000 1,000,000
Payments on License acquisition (6,451) (6,001)
Advances to licensees and franchisees (1,029,663) (1,021,884)
Collections of advances to licensees and franchisees 944,241 917,536
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (97,608) (187,659)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends (172,701) (173,248)
Common stock repurchased -- (44,365)
----------- -----------
NET CASH PROVIDED BY(USED IN)FINANCING ACTIVITIES (172,701) (217,613)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 123 --
----------- -----------
NET INCREASE (DECREASE) IN CASH (361,234) 575,989
Cash at beginning of the period 1,012,233 534,540
----------- -----------
Cash at the end of the period $ 650,999 $ 1,110,529
=========== ===========
Supplemental disclosures of Cash Flow information
Cash paid during the period
Income taxes $ 86,910 $ 72,130
Interest $ 1,048 $ 1,498
</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,
1997 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
---------------------
The statements contained in this Report on Form 10-Q that are not purely
historical are forward looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
Company's "expectations", "anticipation", "intentions", "beliefs", or
"strategies" regarding the future. Forward looking statements include
statements regarding revenue, margins, expenses, and earnings analysis with
regard to the Company or with regard to the Company's licensees and
franchisees for the remainder of fiscal 1998 and thereafter; improvement of,
and growth in the number of, licensees and franchisees; future spending on
marketing and product development strategy; and liquidity and anticipated
availability of cash for operations, acquisitions, or payment of dividends.
All forward looking statements included in this document are based on
information available to the Company on the date of this report, and the
Company assumes no obligation to update any such forward looking statement.
It is important to note that the Company's actual results could differ
materially from those in such forward looking statements. Among the factors
that could cause actual results to differ materially are the factors
discussed in this Report, including but not limited to the extent and nature
of natural disasters in geographic areas serviced by the Company or by its
licensees and franchisees; management decisions by insurance companies and
self-insureds to increase or decrease the degree to which they contract for
services offered by the Company, its licensees or franchisees; the Company's
ability to identify and attract new qualified licensees and franchisees; the
Company's ability to successfully manage offices reacquired from existing
licensees and franchisees; and uninsured liability for acts or omissions of
the Company's employees, licensees, or franchisees.
Financial Condition
-------------------
The Company has historically financed its growth and on-going operations
with cash generated from operations. In the quarter ended September 30,
1997, net cash used in the Company's operations exceeded cash provided by
operations by $91,000.
Compared to the last fiscal year, the most significant item affecting cash
used by the Company's operations is the $488,000 decrease in other
liabilities. This decrease results from a $525,000 payment during the
current quarter pursuant to an agreement the Company had entered in June
1997 to settle litigation.
The Company's Board of Directors on October 10, 1997 approved the Company's
quarterly cash dividend of 3.75 cents per share to be paid on December 10,
1997 to shareholders of record on November 20, 1997.
Through its capital investment program, the Company replaces obsolete or
outdated equipment and invests in new equipment and furnishings to maintain
or increase the productivity of the Company and its employees. The Company
anticipates investing $200,000 to $300,000 in fiscal 1998 for equipment and
furnishings pursuant to its capital investment program.
5
<PAGE>
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 4.34 to 1
as of September 30, 1997 and 3.51 to 1 as of June 30, 1997.
Results of Operations - Quarter Ended September 30, 1997 Compared to 1996
-------------------------------------------------------------------------
Revenues
--------
The Company's revenues decreased 10.8% or $180,000 to $1,484,000 in the
current quarter from $1,664,000 in the same period of the prior fiscal year.
The decrease is a combined $12,000 decrease in adjusting and risk management
fees and a $168,000 decrease in continuing licensee and franchisee fees.
The decrease of $12,000 in adjusting and risk management fees from $275,000
in the quarter ended September 30, 1996 to $263,000 in the quarter ended
September 30, 1997 represents a 4.4% decrease. A substantial portion of this
decrease 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 quarter ended September 30, 1996. The
Company did, however, experience a $5,000 increase in fees in its Tucson
office as compared to the same period in the previous fiscal year.
Furthermore, the Company's Las Vegas/Henderson office, which was acquired in
the last quarter of the prior fiscal year from a former licensee, provided
$87,000 in adjusting fees this quarter.
The Company's revenues from continuing licensee and franchisee fees
decreased 12% or $168,000 from $1,388,000 in the quarter ended September 30,
1996 to $1,220,000 in the quarter ended September 30, 1997. This decrease
reflects the loss of revenues attributed to a client which contributed 18.8%
to the continuing licensee and franchisee fees in fiscal 1997. In June 1997,
this client elected to place its adjusting service needs with other vendors.
This will be reflected in the Company's 1998 fiscal year.
The Company's revenues are affected by numerous factors including, the work
loads of other companies and claims presented by their clients. Therefore,
the Company is unable to project its future revenues. The Company has
historically seen growth in licensee and franchisee fees paid. However,
during the current fiscal year the Company has seen a decrease in revenues
due primarily to the phase out of its business relationship with its major
client. The Company has responded to this loss of revenue by investing
substantial resources to establish a new promotional and marketing program,
and anticipates that over time the lost business will be replaced. In
addition, the Company believes that it will continue to realize growth as it
adds additional qualified licensees and franchisees. Furthermore, the
Company expects to continue to reflect revenues from its Tucson and Las
Vegas operations.
Compensation and Fringe Benefits
--------------------------------
Compensation and fringe benefits represent approximately 59% of the
Company's costs and expenses and represent the largest single item of
expense. These expenses decreased 1% or $6,000 from $651,000 in the three
months ended September 30, 1996 to $645,000 in the current quarter.
Expenses Other Than Compensation and Fringe Benefits
----------------------------------------------------
The Company's expenses other than compensation and fringe benefits decreased
$41,000 during the three months ended September 30, 1997 as compared to the
same quarter of the prior fiscal year. The principal items affecting these
expenses are a $28,000 decrease in legal expenses and a $21,000 decrease in
advertising and promotional expenses.
6
<PAGE>
The balance of the Company's costs and expenses have not significantly
changed from the same period of the prior year.
Income Taxes
------------
The Company's income taxes were 39% 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.
Due to the decrease in the Company's net income, income taxes decreased by
$54,000.
Other Income
------------
The Company's other income decreased $6,000 or 14% from $44,000 in the
quarter ended September 30, 1996 to $38,000 in the current quarter. The most
significant items affecting other income include a $3,000 decrease in the
sales of computer software to the Company's licensees and franchisees and a
$1,000 increase in expenses related to rental property.
Net Income
----------
The Company's net income for the quarter ended September 30, 1997, decreased
$83,000 or 24% from $342,000 in the quarter ended September 30, 1996 to
$259,000 in the current quarter. The most significant items affecting net
income were the $180,000 decrease in revenues, the $41,000 decrease in
expenses other than compensation and fringe benefits and the $54,000
decrease in income taxes.
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
quarter ended September 30, 1996 from $1,409,000 in the same period of the
1995 fiscal year. This increase resulted from 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 quarter ended September 30, 1996 and
provided additional revenues in the following quarter as not all the claims
received had been concluded and billed prior to September 30, 1996.
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 were
benefiting 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.
Compensation and Fringe Benefits
--------------------------------
Compensation and fringe benefits represented approximately 57% of the
Company's costs and expenses and represented the largest single item of
expense. These expenses increased 39% or $183,000 from $468,000 in the
7
<PAGE>
three months ended September 30, 1995 to $651,000 in the quarter ended
September 30, 1996. This increase was 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 did not significantly change
from the same period of the prior 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 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 quarter ended September
30, 1996. The most significant items affecting other income include 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 quarter ended September 30, 1996. 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.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
--------------------------
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 3 - Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
On October 10, 1997, the Company held its annual shareholders meeting.
The Company's Board of Directors were reelected with 4,192,874 shares being
cast and 188,427 shares abstaining. The Directors elected and the numbers of
votes each received are as follows:
8
<PAGE>
Patric R. Greer 4,011,099
George M. Hill 3,984,197
Francis J. LaPallo 4,011,099
Louis T. Mastos 4,001,933
James S. Rocke 4,010,766
William J. Rocke 4,004,516
Jean E. Ryberg 3,996,724
Merlin J. Schumann 4,011,099
William W. Strawther, Jr. 4,001,933
Scott R. Younker 4,011,099
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, 1998, with 4,167,113 affirmative
votes, 15,170 against and 10,591 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.
FRONTIER ADJUSTERS OF AMERICA, INC.
Date: October 30, 1997 /s/ Jean E. Ryberg
----------------------- ---------------------------------------------
Jean E. Ryberg, President and Director
Date: October 30, 1997 /s/ Patric R. Greer
----------------------- ---------------------------------------------
Patric R. Greer, Chief Financial Officer,
Controller, Director
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997
(Unaudited) AND THE CONDENSED CONSOLIDATED
STATEMENT OF INCOME FOR THE NINE MONTHS
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 650,999
<SECURITIES> 1,285,125
<RECEIVABLES> 2,112,920
<ALLOWANCES> 299,175
<INVENTORY> 0
<CURRENT-ASSETS> 4,498,800
<PP&E> 2,470,027
<DEPRECIATION> 754,024
<TOTAL-ASSETS> 7,723,111
<CURRENT-LIABILITIES> 1,037,335
<BONDS> 26,527
0
0
<COMMON> 47,820
<OTHER-SE> 6,611,429
<TOTAL-LIABILITY-AND-EQUITY> 7,723,111
<SALES> 0
<TOTAL-REVENUES> 1,483,708
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,098,078
<LOSS-PROVISION> 48,000
<INTEREST-EXPENSE> 1,009
<INCOME-PRETAX> 426,229
<INCOME-TAX> 167,587
<INCOME-CONTINUING> 258,642
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 258,642
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
