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, 1997
[ ] 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.
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(Exact name of registrant as specified in its charter)
ARIZONA 86-0477573
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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
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Common Stock $.01 Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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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 $4,605,358 as of August 15, 1997.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, as of August 15, 1997, was 11,513,395.
Page 1 of 37
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PART I
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1. Item 1 - Business
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The Company
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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 by policyholders. In addition, the Company
and certain of the Adjusters offer risk management services to their clients. As
of June 30, 1997, the Company had entered into 476 license and franchise
agreements ("Agreements") with 406 entities, operating 411 offices with 646
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 and
Nevada.
General
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For its fiscal year ended June 30, 1997, the Company's licensing and franchising
activities accounted for approximately 86% of gross revenues, and the Company's
Company-owned adjusting and risk management businesses accounted for
approximately 14% of gross revenues. For the fiscal years ended June 30, 1996
and June 30, 1995, the Company's licensing and franchising activities accounted
for approximately 89% and 91%, respectively, of gross revenues, and the
Company's Company-owned adjusting and risk management businesses accounted for
approximately 11% and 9%, 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.
Fiscal Year Ended June 30,
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1995 1996 1997
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Gross Billings by Adjusters $42,690,000 $46,830,000 $48,060,000
(approximate)
Revenues from Licensing and
Franchising Activities 4,783,941 5,044,028 5,278,967
Revenues from Company-owned
Adjusting and risk management Businesses 456,884 597,956 885,636
For its fiscal year ended June 30, 1997, the Company's licensing and franchising
activities accounted for approximately $1,710,000 in income from operations and
the Company's Company-owned adjusting and risk management businesses accounted
for approximately $63,000 in income from operations. For the fiscal years ended
June 30, 1996 and June 30, 1995, the Company's licensing and franchising
activities accounted for approximately $1,943,000 and $1,740,000 respectively,
in income from operations, the Company's Company-owned adjusting and risk
management businesses accounted for approximately $5,000 in income and $29,000
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 18.8%,
20.8% and 21.8% of continuing licensee and franchisee fees for the years ended
June 30, 1997, 1996 and 1995, respectively. In June 1997 this client elected to
cease purchasing adjusting services from the Company and its Adjusters. It is
anticipated that the transition will take approximately 60 to 90 days.
Claims Adjusting
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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.
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Claims Adjusting (continued)
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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 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
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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. In addition, an Adjuster is provided with a
computerized central collection and rebilling service and national advertising
referral by the Company. The Company receives a 10% or 15% royalty fee on all of
the Adjusters' collections depending upon the Agreement with the Adjuster. In
fiscal 1997, the Company retained 11.0% of the Adjusters' collections as royalty
fees from this arrangement.
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.
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Operation of Independent Adjusters
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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. 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 the
royalty fee 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.
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 $2,500. The number of Adjusters to whom semi-monthly advances are
being made typically varies between 15 and 25. 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 generally
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 $293,205 per month and has received reimbursement of an average of
$277,345 per month. At June 30, 1997, the Company had approximately $1,450,000
in outstanding loans or advances. During the past four fiscal years, the Company
has written off an average of $124,351 per year due to bad debts related to
these arrangements.
License and Franchise Agreements
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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.
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License and Franchise Agreements (continued)
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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. After the Company deducts its royalty fee from the Adjuster's
collections, the Company remits the balance to the Adjuster on a weekly basis.
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 an 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.
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License and Franchise Agreements (continued)
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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, 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 include 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
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In addition to its operations as a licensor and franchisor, the Company conducts
independent insurance adjusting and risk management operations in Arizona and
Nevada.
SPECIAL CONSIDERATIONS
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The following factors, in addition to those discussed elsewhere in this report,
should be carefully considered in evaluating the Company and its business.
The Insurance Adjusting Business
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The insurance adjusting business is dependent upon the volume of claims that
require adjusting services. Several factors, including among others, the climate
and the incidence of natural and manmade disasters, will impact the number of
claims that require adjusting services. In addition, the Company is dependent
upon its clients to direct their insurance adjusting business to the Company and
the adjusters. If a significant number of the Company's and the adjusters'
clients, which generally consist of insurance companies and self-insured
companies, adopt a policy and practice of establishing in-house adjusting
departments or increasing the existing staffing of their in-house adjusting
departments, the Company could be materially adversely effected. See "Special
Considerations - Uncertainty of Future Revenues". Further, the insurance
adjusting business is highly competitive. See "Special Considerations -
Competition" and Item 1, "Business - General".
Uncertainty of Future Revenue
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The Company's continuously increasing revenue stream and net income stream in
recent years has resulted primarily from the continuously increasing revenues of
the adjusters. Accordingly, the Company's future revenues and net income can be
expected to depend primarily upon the maintenance or increase in the average
revenues realized by the adjusters and the maintenance or increase in the number
of adjusters. As in any business, there can be no assurance that the Company or
the adjusters will maintain or increase their revenues. Further, although the
client base of the adjusters has historically continued to expand, there can be
no assurance that they will continue to do so or that the adjusters will retain
such companies as clients. See "Special Consideration - The Insurance Adjusting
Business", "Special Considerations - Competition" and Item 1, "Business -
General".
Further, although the number of licensees and franchisees has continued to
increase in recent years, the Company does not actively solicit new adjusters.
Moreover, it has no predetermined growth targets within any projected period.
The
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Uncertainty of Future Revenue (continued)
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Company's plan is to continue to add qualified insurance adjusters as licensees
and franchisees. The Company's ability to increase the number of adjusters will
depend upon its continued ability to attract and retain qualified insurance
adjusters as licensees and franchisees. See "Special Considerations -
Competition".
Dependence Upon Key Personnel
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The Company is, and will continue to be, dependent to a material extent on the
abilities of William J. Rocke, the Chairman of the Board and Chief Executive
Officer of the Company, and Jean E. Ryberg, the President of the Company. The
Company has purchased and maintained key man life insurance with respect to Mr.
Rocke, who is 73 years old, and Mrs. Ryberg, who is 65 years old, in the amounts
of $200,000 and $250,000 respectively. Both Mr. Rocke and Mrs. Ryberg have
entered into employment agreements with the Company that expire on June 30,
2000. In addition, the Company has hired Francis J. LaPallo, age 49, as
Executive Vice President. There can be no assurance that Mr. Rocke or Mrs.
Ryberg will continue to provide services for the Company. If the Company were to
lose the services of Mr. Rocke and Mrs. Ryberg, the Company would be materially
adversely affected, notwithstanding the above-noted key man life insurance and
new management personnel.
Voting Control
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The directors and officers of the Company own in excess of 37% of the
outstanding voting stock of the Company. The Company anticipates that such
percentage ownership will enable the directors and officers of the Company to
continue to control the business and affairs of the Company.
Dependence Upon Significant Clients
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Although the Company generally considers its client base broad and
well-diversified, the collections received by adjusters from one insurance
company provided the Company with 18.8% of the license and franchise fees it
received during the fiscal year ended June 30, 1997. See Item 1, "Business -
General" and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations 1997 Compared to
1996 - Revenues". In June 1997 this client elected to discontinue purchasing of
adjusting services from the Company and its Adjusters. It is anticipated that
the transition will take approximately 60 to 90 days. The Company is developing
and implementing a comprehensive marketing strategy to take advantage of its
broad geographic coverage as well as the unique strengths of its individual
licensees and franchisees. There is no assurance, however, that the Company will
be successful in procuring nationwide accounts on terms as favorable as it has
in the past or will be the successful bidder on new or existing accounts, which
would materially adversely affect the Company's business.
Service Mark
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The Company has been granted a service mark for the name Frontier (R) by the
United States Patent and Trademark Office. If the Company is not able to
effectively protect itself against the use of similar trade names, trademarks or
service marks, or if the Company's use of its service mark is found to infringe
upon the proprietary rights of third parties, the Company's business could be
materially adversely affected.
Tort Liability and Insurance
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The Company and the adjusters may be the subject of litigation based on errors
and omissions of their respective adjusters. Historically, clients of the
adjusters and others have also sued the Company in connection with such claims
against the adjusters. Generally, the Company has successfully defended such
claims based upon the fact that the adjusters are independent contractors of the
Company, for whose conduct the Company is not liable. Further, although the
Company and the adjusters maintain insurance (in the amounts of $5,000,000 and
$1,000,000, respectively) to minimize their exposure to related losses, it may
become increasingly difficult or costly to maintain insurance against these and
other risks. In such event, the Company's operations could be adversely
affected. Costs of insurance may escalate beyond those anticipated, or certain
types of losses may be uninsurable or may exceed available coverage. In
particular, claims against the Company and the adjusters may be based upon an
insured's claim that the insurance adjusting operations of the Company and/or
the
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Tort Liability and Insurance (continued)
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adjusters contributed to a client's "bad faith" in processing a claim. Any
punitive or multiple damages arising from any such claim, and any compensatory
damages exceeding the coverage limitations, would be excluded from coverage
under the insurance policy maintained for the benefit of the Company and the
adjusters, and, therefore, could adversely affect the financial condition of the
Company. The Company recently settled litigation against it related to a former
franchisee of the Company in the amount of $525,000 net of insurance proceeds.
See Item 3, "Legal Proceedings".
Ability to Rely Upon License and Franchise Agreements
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The license and franchise agreements currently in effect between the Company and
the adjusters may be terminated by the adjusters at any time upon a thirty (30)
day prior written notice to the Company. Further, franchise and other laws of
certain states limit or prohibit the enforceability of certain provisions
contained in the license and franchise agreements, including the covenant not to
compete. See Item 1, "Business - License and Franchise Agreements".
Government Regulation
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Franchising
The Company is subject to various federal, state and local laws affecting its
business. The Company's licensing and franchising business involves the sale of
a franchise under the United States Federal Trade Commission's rules and the
laws and regulations of certain states. Many states have adopted laws regulating
franchise operations in a franchisor-franchisee relationship, and similar
legislation may be adopted in the remaining states. Existing laws range from
filing and disclosure requirements in the offer and sale of franchises to the
application of statutory standards regulating the franchisor-franchisee
relationship. The most common provisions of these laws that regulate substantive
matters in the franchisor-franchisee relationship establish restrictions on the
ability of franchisors to terminate or to refuse to renew franchise agreements.
Other laws contain provisions designed to ensure the fairness of the franchise
agreements to franchisees. A number of these laws include prohibitions or
restrictions pertaining to the assignability of the rights of franchisees,
franchisee ownership of interests in other businesses and franchisee membership
in trade associations. In addition, decisions of several states limit or
prohibit the enforceability of covenants not to compete. Accordingly, certain of
the provisions contained in the Company's license and franchise agreements may
not be enforceable under certain circumstances. Further, the disclosure
statements and franchise agreements in connection with future franchisees may be
subject to review by state administrators who may require the Company to make
certain changes and accommodations in the way it does business with its
franchisees that the Company would not otherwise make. There can be no assurance
that the Company will be able to obtain necessary regulatory approvals on a
timely basis. Delay in obtaining or failure to obtain such approvals could
adversely affect the growth of the Company's franchising operations.
Historically, however, the Company has not experienced significant delays in
obtaining such approvals.
As the law applicable to franchise operations and relationships is a rapidly
developing one, the Company is unable to predict the effect on its operations of
additional requirements or restrictions which may be enacted or promulgated or
of court decisions which may adversely affect the franchise industry generally.
Insurance Adjusting
The laws and regulations of several states require that insurance adjusters be
licensed and/or comply with certain substantive requirements with respect to
their operations. Additional requirements that may be enacted or promulgated
could impact the conduct of the insurance adjusting business by the Company and
the adjusters. Any such additional requirements may have materially adverse
financial or other consequences and adversely affect the growth of the Company's
franchising and insurance adjusting operations.
Competition
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The insurance adjusting business in which the Company is engaged, both
indirectly as a licensor and franchisor and directly as an insurance adjuster,
is highly competitive. The Company competes with insurance companies and with
other independent insurance adjusting companies for qualified adjusters to
become licensees and franchisees. In addition,
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Competition (continued)
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through the adjusters and the Company-owned adjusting businesses, the Company
competes as a provider of insurance adjusting services with other insurance
adjusting companies and with in-house insurance adjusting staffs. See "Special
Considerations - Uncertainty of Future Revenue", and "Special Considerations -
Dependence Upon Significant Clients".
Dividends
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Although the Company has paid quarterly dividends with respect to shares of
Common Stock since the third quarter of the Company's 1985 fiscal year,
declaration and payment of dividends are subject to the discretion of the
Company's board of directors and may be made only from funds legally available
therefor. The Company's ability to pay dividends will be subject to the
Company's financial status and requirements. There can be no assurance that the
Company will be able to, or will continue to declare and pay dividends with
respect to shares of Common Stock.
Cautionary Statement Regarding Forward-Looking Statements
- ---------------------------------------------------------
Certain statements and information contained in this Report under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and Item 1, "Business" concerning future, proposed, and anticipated
activities of the Company, certain trends with respect to the Company's
operating results, capital resources, and liquidity or with respect to the
insurance adjusting industry in general, and other statements contained in this
Report regarding matters that are not historical facts are forward-looking
statements, by their very nature, include risks and uncertainties. Accordingly,
actual results may differ, perhaps materially, from those expressed in or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include the foregoing and those discussed elsewhere
under this Item 1, "Special Considerations".
Item 2 - Properties
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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. Adjacent to the main office, the Company also owns a small building
and property at 51 East Monterey Way which contains two offices. One office is
currently occupied by a tenant and the second office is being used for storage.
The combined offices contain approximately 1,500 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.
Additionally, the Company leases approximately 800 square feet of office space
in Tucson, Arizona for its claims adjusting services and 1,000 square feet in
Las Vegas, Nevada for its office.
Item 3 - Legal Proceedings
- --------------------------
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 arose from the alleged
embezzlement of over $700,000 by the former franchisee. The complaint alleged
claims against the Company including breach of contract, breach of fiduciary
duty, negligence, negligent supervision, negligent misrepresentation and
negligent licensing.
In June 1997 the Company entered into an agreement to settle the litigation at a
cost to the Company of $525,000 net of insurance proceeds with mutual releases
by all parties.
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.
Page 9
<PAGE>
PART II
-------
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.
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, 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
Fiscal Year Ended June 30, 1997
First Quarter $3.25 $2.5625 153,600
Second Quarter $3.875 $3.00 132,600
Third Quarter $3.625 $2.9375 93,700
Fourth Quarter $3.5625 $2.625 157,400
The following shows per share cash dividends declared for each quarter during
the Company's two most recent fiscal years.
Cash Dividends Declared
-----------------------
Fiscal Year Ended June 30, 1996
First Quarter............................. $.035
Second Quarter............................ $.035
Third Quarter............................. $.035
Fourth Quarter............................ $.035
Fiscal Year Ended June 30, 1997
First Quarter............................. $.0375
Second Quarter............................ $.0375
Third Quarter............................. $.0375
Fourth Quarter............................ $.0375
As of August 15, 1997, there were 255 shareholders of record (approximately 900
including beneficial owners) of the Company's Common Stock.
Page 10
<PAGE>
Item 6 - Selected Financial Data
- --------------------------------
<TABLE>
<CAPTION>
Year Ended June 30
--------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Income Statement Data
Operating Revenues $4,487,091 $4,590,270 $5,240,825 $5,641,984 $6,164,603
Net Income 909,053 1,018,160 1,026,848 1,134,519 979,198
Earnings Per Common Share .19 .22 .22 .25 .21
Weighted Average Number of
Shares Used in Per Share
Data 4,780,980 4,730,597 4,662,679 4,620,101 4,607,709
Cash Dividends Per Share .0875 .11 .115 .14 .15
Balance Sheet Data
Working Capital $2,571,073 $2,749,531 $2,946,748 $3,196,562 $3,301,276
Total Assets 5,981,298 6,491,066 6,597,050 6,875,752 7,912,139
Long-Term Debt -- -- 84,655 59,983 33,462
Property and Equipment, Net 1,549,227 1,460,601 1,484,545 1,554,401 1,736,226
Stockholders' Equity 5,250,138 5,487,999 5,838,651 6,230,799 6,564,193
Book Value Per Share 1.10 1.17 1.26 1.35 1.43
Retained Earnings 3,053,848 3,552,194 4,042,588 4,526,419 4,814,266
Total Shares Outstanding 4,782,010 4,690,898 4,640,898 4,619,658 4,605,358
</TABLE>
Page 11
<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 such funds it had generated to increase its
cash dividends, acquire certain license rights and add new
licensees/franchisees.
In fiscal 1997 the Company's continuing operations generated $1,854,198 in cash
which was sufficient for the Company's cash requirements. This cash was used to
pay cash dividends of $691,351, acquire 14,300 shares of treasury stock at a
cost of $44,365, purchase equipment and property at a cost of $302,102 and to
acquire operations from one licensee and certain rights from another for a total
of $85,500
The Company has continued its policy to pay cash dividends to its shareholders
with payments totaling 15 cents per share in the 1997 fiscal year. The Board of
Directors has declared a 3.75 cent dividend payable on September 10, 1997 to
shareholders of record on August 20, 1997. Additionally, in October 1996 the
Company acquired a parcel of land and a building adjacent to its Corporate
offices for storage and parking. The purchase price was $170,000 and was paid
during the second quarter of the Company's current fiscal year. The Company
presently has approximately one third of this building rented until it will be
needed for corporate purposes.
The Company anticipates that during fiscal 1998 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 $200,000 to $300,000 in fiscal 1998.
The Company's policy is to maintain a solid financial position. This policy has
resulted in the Company's ratio of current assets to current liabilities being
3.52 to 1 as of June 30, 1997 compared to 6.46 to 1 as of June 30, 1996.
RESULTS OF OPERATIONS 1997 COMPARED TO 1996
REVENUES
The Company's revenues increased to $6,165,000 from $5,642,000 in fiscal 1996,
resulting in a 9.3% increase as compared to the prior fiscal year. The increase
consists of a $288,000 increase in adjusting and other revenues and a $235,000
increase in continuing licensee and franchisee fees.
The increase of $288,000 in adjusting and other fees reflects a 48.2% increase
to $886,000 in the current fiscal year compared to $598,000 in the prior fiscal
year. The increase reflects $57,000 in revenues from the Las Vegas/Henderson,
Nevada office which was acquired by the Company, April 1, 1997. Additionally,
the Tucson adjusting office had an increase of $93,000 reflecting the fact that
the Company operated the office for the full fiscal year, the office was
acquired early in fiscal 1996. The Phoenix operations of the Company had an
increase of $142,000 in revenues of which approximately $100,000 was the result
of a major storm that occurred in mid August 1996. The balance of the increase
represents an increase in the demand for the services of the Company's Phoenix
office.
The Company's revenues from continuing licensee and franchisee fees increased
4.7% or $235,000 from $5,044,000 in the prior fiscal year to $5,279,000 in the
current fiscal year. The increase reflects the benefit to the Company's
licensees and franchisees from an increase in claims assignments from insurance
companies and self insureds due to the increase in volume of claims. The
increase also reflects new territories opened by 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 as well as claims presented by their clients. The Company
has, however, seen growth in licensee and franchisee fees paid. The Company is
committed to continue its work to improve existing and to add qualified
licensees. The Company has seen increased competition with respect to nationwide
purchasers of the Company's licensees and franchisees services and in the fourth
quarter of the current fiscal year was advised by a significant client that it
would cease purchasing adjusting services from the Company and its Adjusters.
The effect of this change will be seen in the coming fiscal year with the
transition period expected to be completed within approximately 60 to 90 days.
Page 12
<PAGE>
RESULTS OF OPERATIONS 1997 COMPARED TO 1996 (Continued)
REVENUES (continued)
To meet the growing competition, the Company is in the process of developing and
implementing a comprehensive marketing strategy to take advantage of its
geographic diversity as well as the unique strengths of its individual licensees
and franchisees. There is no assurance, however, that the Company will be
successful in procuring nationwide accounts on terms as favorable as it has in
the past or will be the successful bidder on new or existing accounts, which
could materially adversely affect the Company's results of operations.
COMPENSATION AND EMPLOYEE BENEFITS
Compensation and employee benefits represent approximately 52% of the Company's
costs and expenses and are the Company's largest expense item. These expenses
increased 22% or $440,000 to $2,415,000 in the current fiscal year from
$1,975,000 in the prior fiscal year. 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 and cost of living and merit increases given to employees.
The cost of compensation and fringe benefits was reduced $35,000 as a result of
the decline in the Company's income and a corresponding decline in related
bonuses.
EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS
The Company's expenses other than compensation and fringe benefits increased
$307,000 or 16% from fiscal 1996 to fiscal 1997. The most significant items
related to this increase were a $525,000 settlement (see Item 3 - Legal
Proceedings), a $109,000 decrease in advertising and promotion and a $50,000
increase in depreciation expense. The increase in depreciation reflects the fact
that in the last quarter of the prior fiscal year and the current fiscal year
the Company replaced computer equipment which had been fully depreciated as well
acquired significant other capital assets. The $109,000 decrease in advertising
and promotion expense reflects the Company's election to not place certain
advertisements in the current year that had been placed in prior years, as part
of its overall review of its marketing program.
The balance of the Company's costs and expenses have not changed significantly
from the prior fiscal year.
OTHER INCOME
The Company's other income decreased $34,000 or 22% from fiscal 1996 to fiscal
1997. The most significant items related to this decrease were a $75,000
permanent decline in the value of an equity security, a $20,000 gain on the
disposition of fixed assets and a $10,000 increase in interest income.
INCOME TAXES
Income taxes were 38.7% and 38.9% of the Company's income before taxes for
fiscal year 1997 and 1996 respectively. The Company's income taxes have not been
significantly affected by any changes in the federal or state tax laws. However,
tax rates can be changed at any time based upon legislation.
NET INCOME
The Company's net income decreased $156,000 to $979,000 in current fiscal year
from $1,135,000 in fiscal 1996, a decrease of 13.7%. The most significant items
affecting net income were the $523,000 increase in revenues, the $525,000
settlement of litigation and the $440,000 increase in compensation and fringe
benefits.
Page 13
<PAGE>
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 1996 fiscal year compared to $457,000 in the prior
fiscal year. The increase reflects an increase of $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 1995 fiscal year to $5,044,000 in the
1996 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 fiscal 1995 fees from
this licensee contributed $112,000 to the revenues of the Company. 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 increase also reflects the fact that the Company's
licensees and franchisees benefited 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 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.
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 1996 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 fiscal year 1996 as compared to fiscal year 1995. The
principal items affecting these expenses were 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 Company's 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 1996
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.
Page 14
<PAGE>
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.
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%.
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.
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 accountant 42 1994
Director, and has been with the Company as the
Controller, Controller since 1985. Mr. Greer was
Chief Financial Officer appointed Chief Financial Officer in
January 1997. 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 an officer of the
Company through June 30, 2000.
George M. Hill Mr. Hill has been associated with the 89 1978
Director, Company in an advisory capacity for more
Vice President, than 25 years, has been a Vice President
Assistant of the Company since 1985 and has been
Secretary the Assistant Secretary of the Company
since 1990. He is a senior partner in the
Phoenix law firm of George M. Hill &
Associates and has been a practicing
attorney in Arizona for over 50 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.
</TABLE>
Page 15
<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>
Francis J. LaPallo Mr. LaPallo joined the Company on June 24, 49 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 76 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.
James S. Rocke Mr. Rocke has been employed by the 29 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 73 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 65 1975
Director, President Company and its predecessors since 1962.
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.
</TABLE>
Page 16
<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>
Merlin J. Schumann Mr. Schumann has been a certified public 53 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 71 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.
R. Scott Younker Mr. Younker has been a licensee of the 61 1992
Director 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 10, 1997.
Item 11 - Executive Compensation
- --------------------------------
The following table sets forth certain information concerning the compensation
paid by the Company during its year ended June 30, 1997 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, 1997 231,300 51,559 -- 23,569
Chairman, Director 1996 225,000 71,981 -- 22,719
1995 206,636 50,000 -- 23,670
Jean E. Ryberg, 1997 164,480 51,559 -- 29,568
President, Director 1996 160,000 71,981 -- 29,266
1995 145,861 50,000 -- 29,168
Francis J. LaPallo, 1997 180,000 -- -- 29,568
Executive Vice President, 1996 692 -- -- --
Director
Patric R. Greer 1997 92,520 17,187 -- 21,876
Chief Financial Officer, 1996 90,000 11,224 -- 17,364
Director 1995 68,116 12,703 -- 14,756
</TABLE>
Page 17
<PAGE>
Item 11 - Executive Compensation (continued)
- --------------------------------------------
(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 $3,750, $2,250 and
$3,000 for Mr. Rocke in years ended June 30, 1997, 1996 and 1995
respectively; $3,750, $3,000 and $3,000 for Mrs. Ryberg in years ended June
30, 1997, 1996 and 1995 respectively; $3,750 for Mr. LaPallo for fiscal
1997 and $3,750, $3,000 and $2,250 for Mr. Greer in years ended June 30,
1997, 1996, and 1995 respectively; (ii) profit sharing contributions of
$19,819, $20,469 and $20,670 for Mr. Rocke in years ended June 30, 1997,
1996 and 1995 respectively; $25,818, $26,266 and $26,168 for Mrs. Ryberg in
years ended June 30, 1997, 1996 and 1995 respectively; $25,818 for Mr.
LaPallo in fiscal year 1997; $18,126, $14,364 and $12,506 for Mr. Greer for
years ended June 30, 1997, 1996 and 1995, respectively.
Excluded from all other compensation is the increase and the amortization
of the June 30, 1995 cash surrender value of life insurance policies that
will transfer to Mr. Rocke and Mrs. Ryberg upon termination of their
employment. The amount excluded is $18,119 and $18,203 for Mr. Rocke for
the years ended June 30, 1997 and 1996 and $13,678 and $13,511 for Mrs.
Ryberg for the years ended June 30, 1997 and 1996.
Option/SAR Exercises and Holdings
- ---------------------------------
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------
% of Total
Options/SARs Potential Realization
Number of Granted Value at
Securities to All Exercise Assumed Annual Rates of Stock
Underlying Employees or Base Expiration Price Appreciation for Options Term
Name Options/SARs in fiscal 1997 Price ($/SH) Date 5% 10%
- --------------------- ------------ -------------- ------------ ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Francis J. LaPallo 100,000 100.00 $2.875 July 1, 2006 180,807 458,201
</TABLE>
The following table shows Company stock options that were exercised during
fiscal 1997 and the number of shares and value of grants outstanding as of June
30, 1997 for each Named Executive.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1997 AND YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised,
Underlying Unexercised In-The-Money Options/SARs
Options/SARs at 6/30/97 (#) at 6/30/97 ($)(a)
Shares --------------------------- -----------------------------
Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- ---------------- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William J. Rocke -- -- 48,654 -- -- --
Jean E. Ryberg -- -- 51,347 -- 2,715 --
Francis J. LaPallo -- -- -- 100,000 -- --
Patric R. Greer -- -- 51,346 -- 2,715 --
</TABLE>
(a) Value of unexercised, in-the-money Company options based on a fair market
value of the Company's common stock of $2.625 per share as of June 30,
1997.
Directors Compensation
- ----------------------
Each director, including employees of the Company, is paid $750 per Board
meeting attended. During fiscal 1996, each director, except for Mr. Louis T.
Mastos and Mr. William W. Strawther, Jr., received $3,750 for attendance to
Board Meetings. Mr. Mastos and Mr. Strawther each received $3,000 for attendance
to Board Meetings.
Page 18
<PAGE>
Item 11 - Executive Compensation (continued)
- --------------------------------------------
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 was effective June 23, 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, 1% in year two and 1.5% in years 3, 4 and 5 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.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Name and Address Amount of Beneficial Ownership
Common Stock $.01 Par Value
- ------------------------------------ ---------------------------
Number of Shares (1) Percent (2)
-------------------- -----------
Patric R. Greer (3) 66,316 1.42%
George M. Hill (4) 150,000 3.26%
Francis J. LaPallo
and Wendy J. Harrison, his wife (5) 54,782 1.19%
Louis T. Mastos
and Eva B. Mastos, his wife (6) 208,703 4.53%
William J. Rocke
and Garnet Rocke, his wife (7) 442,268 9.50%
P. O. Box 7641
Phoenix, Arizona 85011
James S. Rocke (8) 471,803 10.14%
P. O. Box 7641
Phoenix, Arizona 85011
Jean E. Ryberg (9) 160,589 3.45%
Merlin J. Schumann
and Donna L. Schumann, his wife 20,114 *
Page 19
<PAGE>
Item 12 - Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------------
(continued)
-----------
Name and Address Amount of Beneficial Ownership
- ------------------------------------- Common Stock $.01 Par Value
---------------------------
Number of Shares (1) Percent (2)
-------------------- -----------
William W. Strawther, Jr.
and Marjorie A. Strawther,
his wife (10) 444,138 9.60%
7108 North 15th Street
Phoenix, Arizona 85020
R. Scott Younker
and Sandra L. Younker, his wife 90,669 1.97%
All officers and directors as a group
(ten persons) (11) 1,819,382 37.55%
- -------------------------------------
*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, 1997 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, 1997. 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, 1997 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 $3.005 per share.
(4) Excludes 50,000 shares held by Nell S. Hill, Mr. Hill's wife, and 134,258
shares held by Mr. Hill's children and grandchildren, in which shares he
disclaims any beneficial interest.
(5) Includes 34,782 shares subject to a currently exercisable stock option at
an average of $2.875 per share.
(6) 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 Mr. Mastos is a
trustee and the majority beneficial owner.
(7) Includes 290,000 shares held by Old Frontier Investment, Inc., of Arizona,
of which William J. and Garnet Rocke hold 51% of the outstanding stock.
Includes 48,654 shares subject to a currently exercisable stock options at
$3.2829 per share.
(8) Includes 290,000 shares held by Old Frontier Investment, Inc. of Arizona of
which James S. 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.
(9) Includes 51,347 shares subject to a currently exercisable stock options at
an average of $3.005 per share.
(10) 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.
(11) 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).
Page 20
<PAGE>
Item 12 - Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------------
(continued)
-----------
Based solely on a review of the copies of such forms received by the Company
during the fiscal year ended June 30, 1997, 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 complies with all Section 16(a)
filing requirements during such fiscal year, except that R. Scott Younker filed
a late Form 4 covering five transactions for a total of 2,800 shares.
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 certain other licensees in other Arizona
cities and towns. The Company paid that corporation $15,944 during fiscal year
1997 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 1997, the Company paid
Mr. Hill $91,572 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 1997 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 21
<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, 1997 and 1996
Consolidated Statements of Income for the Years Ended June 30, 1997,
1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended June 30,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements - June 30, 1997, 1996 and
1995
(a) (2) Financial Statement Schedules
Schedule
Number
--------
II Valuation and Qualifying Accounts Years Ended June 30, 1997, 1996
and 1995
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 22
<PAGE>
EXHIBIT LIST
------------
Exhibit No. Description of Exhibit
- ----------- ----------------------
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
* 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
**** Incorporated by reference to the Registrant's Form 10-Q for the quarter
ended September 30, 1996.
***** Incorporated by reference to the Registrant's Form 10-K for the year
ended June 30, 1996.
(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, 1997
Page 23
<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 /s/ Patric R. Greer
- ---------------------------------- ----------------------------------
William J. Rocke Patric R. Greer
(Chief Executive Officer, (Chief Financial Officer)
Chairman of the Board)
August 21, 1997 August 21, 1997
- ---------------------------------- ----------------------------------
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 21, 1997
- --------------------------------------------- ------------------
William J. Rocke, Director
/s/ Jean E. Ryberg August 21, 1997
- --------------------------------------------- ------------------
Jean E. Ryberg, President, Director
/s/ Francis J. LaPallo August 21, 1997
- --------------------------------------------- ------------------
Francis J. LaPallo, Exec. V.P., Director
/s/ George M. Hill August 21, 1997
- --------------------------------------------- ------------------
George M. Hill, V.P., Director
/s/ James S. Rocke August 21, 1997
- --------------------------------------------- ------------------
James S. Rocke, Secretary/Treasurer, Director
/s/ Merlin J. Schumann August 21, 1997
- --------------------------------------------- ------------------
Merlin J. Schumann, Director
- --------------------------------------------- ------------------
William W. Strawther, Jr., Director
/s/ Lou Mastos August 21, 1997
- --------------------------------------------- ------------------
Lou Mastos, Director
/s/ R. Scott Younker August 21, 1997
- --------------------------------------------- ------------------
R. Scott Younker, Director
/s/ Patric R. Greer August 21, 1997
- --------------------------------------------- ------------------
Patric R. Greer, Director
Page 24
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets - June 30, 1997 and 1996 F-3
Consolidated Statements of Income for the Years Ended June
30, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the Years Ended June 30,
1997, 1996 and 1995 F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements - June 30, 1997, 1996 and 1995 F-7
Supplementary Schedule F-15
Schedule II - Valuation and Qualifying Accounts Years Ended
June 30, 1997, 1996 and 1995 F-16
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, 1997 and 1996, and
the related consolidated statements of income, cash flows, and stockholders'
equity for each of the three years in the period ended June 30, 1997. 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. Those 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1997, 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, 1997, 1996, and 1995 included on page F-16 of this form
10-K is presented for purposes of complying with the Securities and Exchange
Commission's rules and is 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 states 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
/s/ McGladrey & Pullen, LLP
Phoenix, Arizona
August 4, 1997
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
Frontier Adjusters of America, Inc. and Subsidiaries
<TABLE>
<CAPTION>
June 30, 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,012,233 $ 534,540
Securities available for sale (Note 6) 1,288,976 1,249,463
Current portion of advances to licensees and franchisees (Note 4) 872,527 794,561
Receivables net (Note 3) 740,572 754,624
Unbilled adjusting fees 26,700 16,100
Prepaid expenses 268,192 288,893
Deferred income taxes (Note 9) 406,560 143,351
--------------------------
TOTAL CURRENT ASSETS 4,615,760 3,781,532
--------------------------
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation and amortization (Note 5) 1,736,226 1,554,401
--------------------------
OTHER ASSETS
Held to maturity Investments (Notes 1 and 6) 714,872 750,730
Advances to licensees and franchisees, net of current portion (Note 4) 431,000 327,000
Licenses and franchises, net of accumulated amortization of
$226,240 in 1997 and $138,816 in 1996 246,253 298,177
Cost of subsidiary in excess of net identifiable assets acquired, net of
accumulated amortization of $176,819 in 1997 and $174,508 in 1996 36,999 39,309
Other 131,029 124,603
--------------------------
1,560,153 1,539,819
--------------------------
TOTAL ASSETS $ 7,912,139 $ 6,875,752
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 33,793 $ 11,666
Accrued expenses 169,032 238,215
Income taxes payable 84,989 57,305
Licensees' and franchisees' remittance payable 396,991 135,518
Current portion of long term liability (Note 7) 26,521 24,672
Other (Note 13) 603,158 117,594
--------------------------
TOTAL CURRENT LIABILITIES 1,314,484 584,970
--------------------------
LONG TERM LIABILITY (Note 7) 33,462 59,983
--------------------------
COMMITMENTS AND CONTINGENCIES (Note 13) -- --
STOCKHOLDERS' EQUITY (Note 12)
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 4,814,266 4,526,419
--------------------------
7,010,556 6,722,709
Add (deduct):
Treasury stock 176,652 shares in 1997: 162,352 shares in 1996 (529,584) (485,219)
Other 83,221 (6,691)
--------------------------
TOTAL STOCKHOLDERS' EQUITY 6,564,193 6,230,799
--------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,912,139 $ 6,875,752
==========================
</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, 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Continuing licensee and franchisee fees (Note 8) $ 5,278,967 $ 5,044,028 4,783,941
Adjusting and risk management fees (Note 8) 885,636 597,956 456,884
----------------------------------------
6,164,603 5,641,984 5,240,825
----------------------------------------
COST AND EXPENSES
Compensation and employee benefits (Note 11) 2,414,582 1,975,028 1,635,289
Office 379,287 372,788 308,783
Advertising and promotion 347,396 459,329 360,878
Depreciation and amortization 240,246 190,044 136,428
Provision for doubtful accounts 149,392 151,847 169,640
Other (Notes 10 and 13) 1,155,630 791,299 1,127,138
----------------------------------------
4,686,533 3,940,335 3,738,156
----------------------------------------
INCOME FROM OPERATIONS 1,478,070 1,701,649 1,502,669
----------------------------------------
OTHER INCOME (Expense)
Interest income 154,860 144,677 134,136
Disposition of investments 343 -- --
Gain on sale of licensee -- 5,000
Gain on disposition of equipment 24,875 -- 19,416
Unrealized loss (Note 6) (74,914) -- --
Other 15,107 4,498 22,867
----------------------------------------
TOTAL OTHER INCOME 120,271 154,175 176,419
----------------------------------------
INCOME BEFORE INCOME TAXES 1,598,341 1,855,824 1,679,088
INCOME TAXES (Note 9) 619,143 721,305 652,240
----------------------------------------
NET INCOME $ 979,198 $ 1,134,519 $ 1,026,848
========================================
Earnings per common share $ .21 $ .25 $ .22
========================================
Weighted average number of shares
of common stock outstanding 4,607,709 4,620,101 4,622,679
========================================
</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, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 979,198 $ 1,134,519 $ 1,026,848
---------------------------------------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 241,884 190,044 136,428
Gain on sale of investments (343) -- --
Gain on sale of license -- (5,000) --
Gain on disposition of equipment (24,875) -- (19,416)
Allowance for doubtful accounts 149,392 151,847 168,222
Deferred income taxes (263,209) (42,242) (47,004)
Unrealized loss on investments 74,914 -- --
Change in assets and liabilities
(Increase) decrease in:
Receivables 12,364 181,133 (282,028)
Unbilled adjusting fees (10,600) (1,875) (2,375)
Prepaid expenses 20,701 (30,728) (31,108)
Other (52,893) (50,029) (59,522)
Increase (decrease) in:
Accounts payable 22,127 (1,003) (33,877)
Accrued expense (69,183) (59,758) 167,408
Income taxes payable 27,684 (7,415) 34,647
Licensees' & franchisees' remittance payable 261,473 (86,102) (497,735)
Other 485,564 63,783 (22,657)
---------------------------------------------
Total adjustment 875,000 302,655 (489,017)
---------------------------------------------
NET CASH PROVIDED
BY OPERATING ACTIVITIES 1,854,198 1,437,174 537,831
---------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (302,102) (170,057) (127,195)
Investments purchased (1,958,743) (2,970,057) (3,968,431)
Collection on receivable from licensee -- -- 3,154
Proceeds from maturity of investments 2,000,000 3,000,000 4,000,000
Payments on license acquisition (110,172) (136,951) (110,306)
Advances to licensees' and franchisees' (3,979,135) (3,964,357) (3,358,235)
Collections of advances to licensees & franchisees 3,703,132 3,695,280 3,241,491
---------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (647,020) (546,142) (319,522)
---------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (691,351) (647,147) (536,454)
Proceeds from sale of treasury stock -- 55,547 --
Common stock repurchased (44,365) (129,438) (136,377)
---------------------------------------------
NET CASH USED IN
FINANCING ACTIVITIES (735,716) (721,038) (672,831)
EFFECT OF EXCHANGE RATE CHANGES
ON CASH 6,231 5,586 8,702
---------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 477,693 175,580 (445,820)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF THE PERIOD 534,540 358,960 804,780
---------------------------------------------
CASH AND CASH EQUIVALENTS AT
END OF THE PERIOD $ 1,012,233 $ 534,540 $ 358,960
=============================================
</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, 1997, 1996 and 1995
- ---------------------------------------------------------------------------------------------------------------------------
Numbers of Par Value Additional Cumulative Unrealized
Shares of Common Contributed Retained Treasury Translation gain (loss) on
Issued Stock Capital Earnings Stock Adjustments Investments
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 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)
Cash dividends -
$.15 per share -- -- -- (691,351) -- -- --
Net income -- -- -- 979,198 -- -- --
Treasury stock purchase
14,300 shares -- -- -- -- (44,365) -- --
Foreign currency translation -- -- -- -- -- (15,351) --
Unrealized gain -- -- -- -- -- -- 105,263
- ---------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 4,782,010 $ 47,820 $2,148,470 $4,814,266 $( 529,584) $ 16,944 $ 66,277
===========================================================================================================================
</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 and Las Vegas, Nevada 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 $990,000 or 18.8%,
$1,047,000 or 20.8% and $1,044,000 or 21.8% of the continuing licensee and
franchisee fees during the years ended June 30, 1997, 1996 and 1995
respectively. Outstanding licensee and franchisee fees receivable related to
this customer were approximately $95,000 at June 30, 1997 and $123,000 at June
30, 1996. In June of 1997 this client elected to place its adjusting service
needs with other vendors. The transition will take place over the following
60-90 days.
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 taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts and assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation allowance when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in the tax laws and rates on the date of enactment.
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.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments held-to-maturity securities (continued)
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.
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.
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.
Current accounting developments -- Effective for financial statements issued
after December 15, 1997, the Company will be required to implement FASB
Statement No. 128, Earnings per Share. The Statement establishes standards for
computing and presenting earnings per share (EPS) and applies to entities with
publicly held common stock or potential common stock. It replaces the
presentation of primary EPS with a presentation of basic EPS and also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures. The Company has not determined
what effect the adoption of this Statement will have on its earnings per share
calculations.
The FASB has issued Statement No. 130, Reporting Comprehensive Income. Statement
No. 130 requires that an enterprise (a) classify items of other comprehensive
income (as defined in the Statement) by their nature in a financial statement
and (b) display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section of
the statement of financial position. Management does not believe the application
of this Statement will materially affect the Company's financial position and
statement of operations.
The FASB has issued Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information. Statement No. 131 modifies the disclosure
requirements for reportable segments and is effective for the Company's year
ending June 30, 1998. The Company has not determined the effect of the adoption
of this Statement would have on the Company's financial statements.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
NOTE 2: SUPPLEMENTAL CASH FLOW INFORMATION
1997 1996 1995
----------------------------------------------
Cash paid during the year:
Interest $ 7,259 $ 8,056 $ 6,745
Income taxes $ 854,741 $ 794,454 $ 668,427
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:
1997 1996
---------------------------
Accounts receivable trade $ 145,902 $ 65,098
Licensee and franchisee fees receivable 538,601 568,216
Errors and omissions insurance premium advanced 105,953 124,671
Other 50,616 28,139
---------------------------
Total receivables 841,072 786,124
Less allowance for doubtful accounts 100,500 31,500
---------------------------
$ 740,572 $ 754,624
========== ==========
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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:
1997 1996
---------------------------
Advances to licensees and franchisees $1,453,164 $1,335,061
Less allowance for doubtful advances 149,637 213,500
---------------------------
1,303,527 1,121,561
Less current portion 872,527 794,561
---------------------------
Long term portion $ 431,000 $ 327,000
===========================
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consist of:
1997 1996
---------------------------
Building and improvements $1,269,288 $1,170,656
Computers and software 171,661 373,419
Furniture and fixtures 285,878 268,147
Automobiles 140,249 123,802
---------------------------
1,867,076 1,936,024
Less accumulated depreciation and amortization 717,593 881,766
---------------------------
1,149,483 1,054,258
Land 586,743 500,143
---------------------------
$1,736,226 $1,554,401
==========================
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, 1997 and 1996:
<TABLE>
<CAPTION>
Gross Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------------------------------------------------------
1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale Securities
U.S. government securities $ 992,787 $ -- $ -- $ 992,787
Equity securities 304,826 67,388 76,025 296,189
-------------------------------------------------------
Total available for sale securities 1,297,613 67,388 76,025 1,288,976
Held to maturity securities
Local government securities & other 714,872 11,817 1,552 725,137
-------------------------------------------------------
$2,012,485 $ 79,205 $ 77,577 $2,014,113
=======================================================
1996
-------------------------------------------------------
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
=======================================================
</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.
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 (continued)
The Company recognized a loss of $74,914 for the year ended June 30, 1997 due to
the permanent impairment in value of its available for sale securities.
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:
1997
--------
Balance Due $ 65,000
Imputed interest @ 7.25% 5,017
--------
59,983
Less Current Portion 26,521
--------
Long Term Portion $ 33,462
========
Interest paid on outstanding debt amounted to $7,110 in 1997 and $7,049 in 1996.
Aggregate payments for the term of the agreement are as follows:
Year Ending June 30,
1998 26,521
1999 28,509
2000 4,953
--------
$ 59,983
========
NOTE 8: LICENSING AND FRANCHISING
As of June 30, 1997, the Company has entered into 476 license and franchise
agreements with 406 entities, operating 411 offices with 646 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, 1997, 1996 and 1995
were approximately $48,060,000, $46,830,000 and $42,690,000, respectively.
The Company's main line of business is providing services, directly and through
licensees and franchisees, 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
--------------------------------------------------------------
1997
- ----
<S> <C> <C> <C> <C>
Revenues $ 5,278,967 $ 885,636 $ 6,164,603
Costs and expenses 3,569,310 822,683 294,540 4,686,533
--------------------------------------------------------------
Income (loss) from operations $ 1,709,657 $ 62,953 $ (294,540) $ 1,478,070
==============================================================
Identifiable assets $ 4,274,227 $ 609,188 $ 3,028,724 $ 7,912,139
==============================================================
Number of advertised locations
Beginning of year 618 20 638
Opened 45 -- 45
Closed (20) (5) (25)
Ownership changes 3 (3) --
--------------------------------------------------------------
646 12 658
==============================================================
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 8: LICENSING AND FRANCHISING (Continued)
<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
Cost 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
Costs 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
==============================================================
</TABLE>
NOTE 9: INCOME TAXES
The components of the provision for income taxes are as follows:
1997 1996 1995
---------------------------------------------
Federal
Current $ 695,946 $ 600,407 $ 544,580
Deferred (208,979) (34,540) (36,491)
State
Current 186,406 163,140 154,664
Deferred (54,230) (7,702) (10,513)
---------------------------------------------
Income taxes $ 619,143 $ 721,305 $ 652,240
=============================================
A reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate follows:
1997 1996 1995
----------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net 5.5 5.5 5.7
Non-deductible items 1.6 1.1 1.1
Non-taxable revenues (1.1) (1.0) (1.0)
Other (2.3) (1.7) (1.9)
---------------------------------------------
Effective rate 38.7% 38.9% 38.9%
=============================================
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 9: INCOME TAXES (Continued)
Net deferred tax assets consist of the following components at June 30, 1997 and
1996:
1997 1996
---------------------------
Deferred tax assets
Allowance for doubtful accounts $ 94,443 $ 94,410
Property and equipment 39,323 22,004
Unrealized loss on investments 29,479 --
Other liabilities 243,315 26,937
---------------------------
$ 406,560 $143,351
===========================
The deferred tax amounts mentioned above have been classified as current assets
in the accompanying balance sheets as of June 30, 1997 and 1996.
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 $92,000 in
fiscal 1997, $90,500 in fiscal 1996 and $88,500 in fiscal 1995 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' 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 $217,601, $175,390 and $160,717 for the years ended June 30, 1997,
1996 and 1995 respectively.
NOTE 12: STOCK OPTIONS
The Company applies APB Option 25, Accounting for Stock Issued to Employees, and
related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized. The Company has elected not to adopt FASB
Statement No. 123, Accounting for Stock-based Compensation. Had compensation
cost for the Company's stock option plan been determined based on the fair value
at the grant dates for awards under this plan consistent with the method of
Statement No. 123, there would not be a material difference from the Company's
reported net income.
On October 9, 1987, the shareholders approved an Incentive Stock Option Plan
(1987 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.
On October 11, 1996, the shareholders approved a Stock Option Plan (1996 Plan)
which had been adopted by the Board of Directors on May 21, 1996 and effective
July 1, 1996, 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. 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, the fair value at the
grant date.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 12: STOCK OPTIONS (continued)
Outstanding options become exercisable in varying amounts beginning one year
after grant. Information regarding these option plans are as follows:
Number of Shares
--------------------------------------------
1997 1996 1995
--------------------------------------------
Outstanding July 1 200,000 200,000 113,130
Granted 100,000 -- 86,870
Exercised -- -- --
--------------------------------------------
Outstanding June 30 300,000 200,000 200,000
============================================
Options were outstanding at June 30, 1997, 1996 and 1995 at average prices per
share of $3.05, $3.14 and $3.14 respectively. At June 30, 1997, there are no
remaining options available for issuance under the 1987 Plan and the 1996 Plan
had options available for granting of 200,000 shares.
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 $788,605, $635,436 and
$452,497 for the years ended June 30, 1997, 1996 and 1995, respectively. The
aggregate commitment for future salaries at June 30, 1997, excluding bonuses and
cost of living increases, is $2,140,956 as follows:
Year ended June 30,
-------------------
1998 $ 687,012
1999 651,972
2000 651,972
2001 150,000
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
--------------------------------------
1998 $ 37,960
1999 39,477
----------
$ 77,437
==========
During the year ended June 30, 1997, the Company settled a claim made against it
and a former franchisee at a cost to the Company of $525,000 net of insurance
reimbursement.
F-14
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
SUPPLEMENTARY DATA
------------------
Selected Quarterly Financial Data
(Information for all periods shown below is unaudited)
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
Three Months Ended
-------------------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $1,663,529 $1,505,195 $1,485,765 $1,510,114
Income from operations 520,451 469,744 391,257 96,618
Income before income taxes 563,995 546,913 437,238 50,194
Net income 342,263 329,847 265,137 41,951
Net income per share .07 .07 .06 .01
Weighted average shares outstanding 4,614,684 4,605,358 4,605,358 4,605,358
1996
-------------------------------------------------------
Three Months Ended
-------------------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30
---------- ---------- ---------- ----------
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
</TABLE>
F-15
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
For the Years Ended June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additions
Balance at Charged to Deductions Balance
Beginning Cost and From at End
of Period Expenses Reserves of Period
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Year Ended June 30, 1997:
Allowance for doubtful accounts $ 245,000 $ 149,392 $ 144,255 $ 250,137
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
</TABLE>
F-16
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 4, 1997, 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, 1997.
McGLADREY & PULLEN, LLP
/s/ McGladrey & Pullen, LLP
Phoenix, Arizona
August 4, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 1,012,233
<SECURITIES> 1,288,976
<RECEIVABLES> 2,294,236
<ALLOWANCES> 250,137
<INVENTORY> 0
<CURRENT-ASSETS> 4,615,760
<PP&E> 2,453,819
<DEPRECIATION> 717,593
<TOTAL-ASSETS> 7,912,139
<CURRENT-LIABILITIES> 1,314,484
<BONDS> 33,462
0
0
<COMMON> 47,820
<OTHER-SE> 6,516,373
<TOTAL-LIABILITY-AND-EQUITY> 6,564,193
<SALES> 0
<TOTAL-REVENUES> 6,164,603
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,686,533
<LOSS-PROVISION> 149,392
<INTEREST-EXPENSE> 7,110
<INCOME-PRETAX> 1,598,341
<INCOME-TAX> 619,143
<INCOME-CONTINUING> 979,198
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 979,198
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
