FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period _______________________ to _________________________
Commission File Number 1-12902
--------------
FRONTIER ADJUSTERS OF AMERICA, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Arizona 86-0477573
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
45 East Monterey Way, Phoenix, AZ 85012
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(602) 264-1061
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares of Common Stock outstanding on January 29, 1998 4,605,358
-----------
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1997
----------------- -------------
(unaudited) (*)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 890,856 $ 1,012,233
Investments 1,262,554 1,288,976
Receivables 1,618,823 1,613,099
Prepaid expenses 232,248 268,192
Other 447,600 433,260
----------- -----------
TOTAL CURRENT ASSETS 4,452,081 4,615,760
----------- -----------
PROPERTY AND EQUIPMENT 2,513,902 2,453,819
Less accumulated depreciation and amortization (792,858) (717,593)
----------- -----------
1,721,044 1,736,226
----------- -----------
OTHER ASSETS
Cost of subsidiary in excess of net tangible assets acquired 213,817 213,817
Less accumulated amortization (177,974) (176,818)
----------- -----------
35,843 36,999
Receivables (Long term) 412,000 431,000
Investments (Long term) 694,643 714,872
Other 331,405 377,282
----------- -----------
1,473,891 1,560,153
----------- -----------
TOTAL ASSETS $ 7,647,016 $ 7,912,139
=========== ===========
LIABILITIES
-----------
CURRENT LIABILITIES
Accounts payable $ 32,929 $ 33,793
Accrued expenses 330,343 190,510
Franchisee/licensee remittance payable 418,951 396,991
Current portion long term liability 27,497 26,521
Other 159,697 666,669
----------- -----------
TOTAL CURRENT LIABILITIES 969,417 1,314,484
----------- -----------
LONG TERM LIABILITY 19,465 33,462
----------- -----------
STOCKHOLDERS' EQUITY
Common stock 47,820 47,820
Additional paid in capital 2,148,470 2,148,470
Treasury stock (529,584) (529,584)
Other 29,532 83,221
Retained earnings 4,961,896 4,814,266
----------- -----------
6,658,134 6,564,193
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 7,647,016 $ 7,912,139
=========== ===========
*Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed statements.
</TABLE>
2
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
December 31, December 31,
---------------------- ---------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Continuing licensee and
franchisee fees $2,341,906 $2,688,729 $1,121,804 $1,300,431
Adjusting fees 553,044 479,995 289,438 204,764
---------- ---------- ---------- ----------
2,894,950 3,168,724 1,411,242 1,505,195
---------- ---------- ---------- ----------
COST AND EXPENSES
Compensation and employee benefits 1,324,151 1,262,882 679,103 611,726
Office 182,419 202,359 88,270 101,995
Advertising and promotion 124,583 140,088 64,582 58,891
Depreciation and amortization 125,097 114,168 63,740 58,213
Provision for doubtful accounts 96,000 90,000 48,000 45,000
Other 334,770 369,032 147,701 159,626
---------- ---------- ---------- ----------
2,187,020 2,178,529 1,091,396 1,035,451
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 707,930 990,195 319,846 469,744
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 69,850 74,176 33,384 37,985
Other (Net) 35,108 46,537 33,429 39,184
---------- ---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) 104,958 120,713 66,813 77,169
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 812,888 1,110,908 386,659 546,913
INCOME TAXES 319,855 438,798 152,268 217,066
---------- ---------- ---------- ----------
NET INCOME $ 493,033 $ 672,110 $ 234,391 $ 329,847
========== ========== ========== ==========
Weighted Average Shares
outstanding 4,605,358 4,610,021 4,605,358 4,605,358
========== ========== ========== ==========
NET INCOME PER COMMON SHARE $ .11 $ .15 $ .05 $ .07
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
3
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
Six Months Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
NET INCOME $ 493,033 $ 672,110
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Operations 125,048 114,168
Other 1,092 546
(Gain) on sale of investments (4,042) --
(Gain) on disposition of property and equipment (120) (24,775)
Allowance for doubtful accounts 96,000 (50,295)
Change in assets and liabilities:
(Increase) decrease in:
Receivables 90,342 220,935
Prepaid expenses 35,944 86,760
Other (71,656) (45,959)
Increase (decrease) in:
Accounts payable (864) 20,993
Accrued expenses 139,833 13,170
Franchisee and licensee remittance payable 21,960 258,363
Other (506,972) 14,304
----------- -----------
Total adjustments (73,435) 608,210
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 419,598 1,280,320
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (60,183) (275,599)
Investments purchased (989,627) (974,115)
Proceeds from sales of investments 1,040,000 1,000,000
Proceeds on sale of fixed assets 200 --
License acquisition -- (25,000)
Payments on License acquisition (13,021) (18,113)
Advances to licensees and franchisees (2,048,708) (1,914,581)
Collections of advances to licensees and franchisees 1,875,642 1,825,397
----------- -----------
NET CASH PROVIDED (USED IN) BY INVESTING ACTIVITIES (195,697) (382,011)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends (345,403) (345,949)
Common stock repurchased -- (44,365)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (345,403) (390,314)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 125 --
NET INCREASE (DECREASE) IN CASH (121,377) 507,995
Cash at beginning of the period 1,012,233 534,540
----------- -----------
Cash at the end of the period $ 890,856 $ 1,042,535
=========== ===========
Supplemental disclosures of Cash Flow information
Cash paid during the period
Income taxes $ 377,887 $ 515,344
Interest $ 1,980 $ 4,442
</TABLE>
The accompanying notes are an integral part of these condensed statements.
4
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
---------------------
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results of operations for the interim periods.
The results of operations for the three and six month periods ended December
31, 1997 are not necessarily indicative of the results to be expected for
the full year.
(2) Supplemental Cash Flow Information
----------------------------------
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The statements contained in this Report on Form 10-Q that are not purely
historical are forward looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
Company's "expectations", "anticipation", "intentions", "beliefs", or
"strategies" regarding the future. Forward looking statements include
statements regarding revenue, margins, expenses, and earnings analysis with
regard to the Company or with regard to the Company's licensees and
franchisees for the remainder of fiscal 1998 and thereafter; improvement of,
and growth in the number of, licensees and franchisees; future spending on
marketing and product development strategy; and liquidity and anticipated
availability of cash for operations, acquisitions, or payment of dividends.
All forward looking statements included in this Report are based on
information available to the Company on the date of this Report, and the
Company assumes no obligation to update any such forward looking statement.
It is important to note that the Company's actual results could differ
materially from those in such forward looking statements. Among the factors
that could cause actual results to differ materially are the factors
discussed in this Report and any other reports on file with the SEC,
including but not limited to the extent and nature of natural disasters in
geographic areas serviced by the Company or by its licensees and
franchisees; management decisions by insurance companies and self-insureds
to increase or decrease the degree to which they contract for services
offered by the Company, its licensees or franchisees; the Company's ability
to identify and attract new qualified licensees and franchisees; the
Company's ability to successfully manage offices reacquired from existing
licensees and franchisees; the Company's ability to attract and retain
national and regional clients for the services of the Company and its
licensees; and uninsured liability for acts or omissions of the Company's
employees, licensees, or franchisees.
Financial Condition
-------------------
The Company has historically financed its growth and on going operations
with cash generated from operations. In the six months ended December 31,
1997, the Company's operations generated $420,000 in cash.
Compared to the last fiscal year, the most significant item affecting cash
provided by the Company's operations is the $507,000 decrease in other
liabilities. This decrease results from a $525,000 payment during the first
quarter of fiscal 1998 pursuant to an agreement the Company had entered in
June 1997 to settle litigation.
Through its capital investment program, the Company replaces obsolete or
outdated equipment and invests in new equipment and furnishings to maintain
or increase the productivity of the Company and its employees. The Company
anticipates investing $200,000 to $300,000 in fiscal 1998 for equipment and
furnishings pursuant to its capital investment program.
Management believes that the Company will be able to fund all of its cash
requirements (i.e. current operations, capital asset acquisition and the
payment of dividends) from currently available cash generated from
operations.
The Company's ratio of current assets to current liabilities was 4.59 to 1
as of December 31, 1997 and 3.51 to 1 as of June 30, 1997.
5
<PAGE>
Results of Operations - Six Months Ended December 31, 1997 Compared to Six
- --------------------------------------------------------------------------------
Months Ended December 31, 1996
- ------------------------------
Revenues
- --------
The Company's revenues decreased 8.6% or $274,000 to $2,895,000 during the six
months ended December 31, 1997 from $3,169,000 in the same period of the prior
fiscal year. This decrease represents a combined $73,000 increase in adjusting
and risk management fees and a $347,000 decrease in continuing licensee and
franchisee fees.
The increase of $73,000 in adjusting and risk management fees from $480,000 in
the six months ended December 31, 1996 to $553,000 for the six months ended
December 31, 1997 represents a 15.2% increase. A significant portion of this
increase is related to the Company's Las Vegas/Henderson, Nevada office, which
was acquired in the last quarter of the prior fiscal year from a former
licensee. This office generated $191,000 in adjusting fees for the six months
ended December 31, 1997.
The Company's revenues from continuing licensee and franchisee fees decreased
12.9% or $347,000 from $2,689,000 in the six months ended December 31, 1996 to
$2,342,000 in the six months ended December 31, 1997. This decrease reflects the
loss of revenues attributed to a client which contributed 18.8% to the
continuing licensee and franchisee fees in fiscal 1997. In June 1997, this
client elected to place its adjusting service needs with other vendors. The
effects of this decision will be reflected in the Company's revenues during the
remainder of 1998 fiscal year.
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. During the current fiscal
year, the Company has experienced a decrease in revenues due primarily to the
phase out of its business relationship with a client which accounted for 18.8%
of continuing licensee and franchisee fees. The Company has responded to this
loss of revenue by investing substantial resources to establish a new
promotional and marketing program and anticipates that over time the lost
business will be replaced. As a result, the Company hopes to see growth in
licensee and franchisee fees paid from other sources. During December 1997, the
Company successfully completed negotiations for national/regional agreements,
with one new client and with three existing clients for additional services. In
addition, the Company believes that it will continue to realize growth as it
adds additional qualified licensees and franchisees.
Compensation and Fringe Benefits
- --------------------------------
Compensation and fringe benefits represent approximately 61% of the Company's
costs and expenses and represent the largest single item of expense. These
expenses increased 5% or $61,000 from $1,263,000 in the six months ended
December 31, 1996 to $1,324,000 in the current six month period. This increase
is the result of the addition of a Marketing Director to the Company's corporate
staff, the new employees in Las Vegas/Henderson, Nevada, as a result of that
acquisition, 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.
Expenses Other Than Compensation and Fringe Benefits
- ----------------------------------------------------
The Company's expenses other than compensation and fringe benefits decreased
$53,000 during the six months ended December 31, 1997 as compared to the same
period of the prior fiscal year. The principal items affecting these expenses
are a $34,000 decrease in legal expenses, a $11,000 increase in depreciation
expense due to capital expenditures in the prior fiscal year, $20,000 decrease
in office expenses, and a $15,000 decrease in advertising and promotion expense.
The balance of the Company's costs and expenses have not significantly changed
from the same period of the prior year.
Income Taxes
- ------------
The Company's income taxes for the six months ended December 31, 1997, were 39%
of its income before taxes, or approximately the same as they were in the same
period of the prior fiscal year. Changes made in the tax laws by various states
and by the federal government have not had a material effect on the Company's
current overall tax rates, however, there is no assurance that such changes will
not occur in the future.
6
<PAGE>
Other Income
- ------------
The Company's other income decreased $16,000 or 13.2% from $121,000 in the six
months ended December 31, 1996 to $105,000 in the current six month period. The
most significant items affecting other income are a $4,000 decrease in
investment income, a $25,000 decrease in gains on the disposition of capital
equipment and an $18,000 increase in dividend income.
Net Income
- ----------
The Company's net income for the six months ended December 31, 1997, decreased
$179,000 or 26.6% from $672,000 in the six months ended December 31, 1996 to
$493,000 in the current period. The most significant items affecting net income
were a $274,000 decrease in revenues, a $61,000 increase in compensation and
fringe benefits and a $53,000 decrease in expenses other than compensation and
fringe benefits.
Results of Operations - Three Months Ended December 31, 1997 Compared to Three
- --------------------------------------------------------------------------------
Months Ended December 31, 1996
- ------------------------------
Revenues
- --------
The Company's revenues decreased 6.2% or $94,000 to $1,411,000 in the three
months ended December 31, 1997 from $1,505,000 in the same period of the prior
fiscal year. This decrease represents a combined $84,000 increase in adjusting
and risk management fees and a $178,000 decrease in continuing licensee and
franchisee fees.
The increase of $84,000 in adjusting and other fees of Company owned offices
from $205,000 in the three months ended December 31, 1996 to $289,000 in the
three months ended December 31, 1997 represented a 41% increase. The increase
reflects an increase in the demand for the Company's services in the Phoenix
area as well as revenues from the Company's Tucson, Arizona and Las
Vegas/Henderson, Nevada operations.
The Company's revenues from continuing licensee and franchisee fees decreased
13.7% or $178,000 from $1,300,000 in the three months ended December 31, 1996 to
$1,122,000 in the three months ended December 31, 1997. This decrease reflects
the loss of revenues attributed to a client which contributed 18.8% to the
continuing licensee and franchisee fees in fiscal 1997. In June 1997, this
client elected to place its adjusting service needs with other vendors. The
effects of this decision will be reflected in the Company's revenues during the
1998 fiscal year.
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. During the current fiscal
year, the Company has experienced a decrease in revenues due primarily to the
phase out of its business relationship with its major client. The Company has
responded to this loss of revenue by investing substantial resources to
establish a new promotional and marketing program and anticipates that over time
the lost business will be replaced. As a result, the Company hopes to see growth
in licensee and franchisee fees paid from other sources. During December 1997,
the Company successfully completed negotiations for national/regional
agreements, with one new client and with three existing clients for additional
services. In addition, the Company believes that it will continue to realize
growth as it adds additional qualified licensees and franchisees.
Compensation and Fringe Benefits
- --------------------------------
Compensation and fringe benefits represented approximately 62% of the Company's
costs and expenses and represent the largest single item of expense. These
expenses increased 10.9% or $67,000 from $612,000 in the three months ended
December 31, 1996 to $679,000 in the three months ended December 31, 1997. The
increase is the result of the addition of a Marketing Director to the Company's
corporate staff, the new employees in Las Vegas/Henderson, Nevada, as a result
of that acquisition, the addition of employees to handle the increased work load
in the Corporate office, and for cost of living and merit raises given to
employees.
Expenses Other Than Compensation and Fringe Benefits
- ----------------------------------------------------
The Company's expenses other than compensation and fringe benefits decreased
$12,000 during the three months ended December 31, 1997 as compared to the same
quarter of the prior fiscal year. The principal items affecting these expenses
were a $6,000 decrease in legal expenses, a $6,000 increase in advertising and
promotion expenses, a $14,000 decrease in office expenses and a $6,000 increase
in depreciation and amortization.
The balance of the Company's costs and expenses did not significantly changed
from the same period of the prior fiscal year.
7
<PAGE>
Income Taxes
- ------------
The Company's income taxes for the three months ended December 31, 1997, were
39% of its income before taxes, or approximately the same as they were in the
same period of the prior fiscal year. Changes made in the tax laws by various
states and by federal government did not have a material effect on the Company's
overall tax rates.
Other Income
- ------------
The Company's other income decreased $10,000 or 13% from $77,000 in the three
months ended December 31, 1996 to $67,000 in the three months ended December 31,
1997. The most significant items affecting other income are the decrease in
gains on disposition of fixed assets of $24,000, an $18,000 increase in dividend
income, and a $5,000 decrease in interest income.
Net Income
- ----------
The Company's net income for the three months ended December 31, 1997, decreased
$96,000 or 29.1% from $330,000 in the three months ended December 31, 1996 to
$234,000. The most significant items affecting net income were the $94,000
decrease in revenues, the $67,000 increase in compensation and fringe benefits
and the $12,000 decrease in other expenses.
PART II: OTHER INFORMATION
Item 1 - Legal Proceedings
From time to time in the normal course of its business, the Company is named as
a defendant in lawsuits. The Company does not believe that it is subject to any
such lawsuits or litigation or threatened lawsuits or litigation that will have
a material adverse effect on the Company or its business.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRONTIER ADJUSTERS OF AMERICA, INC.
Date: 1/29/98 /s/ William J. Rocke
------------ ----------------------------------------------------
William J. Rocke, Chief Executive Officer/Chairman
of the Board, Director, Principal Financial Officer
Date: 1/29/98 /s/ Patric R. Greer
------------ ----------------------------------------------------
Patric R. Greer, Chief Financial Officer, Controller
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997
(Unaudited) AND THE CONDENSED CONSOLIDATED
STATEMENT OF INCOME FOR THE SIX MONTHS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 890,856
<SECURITIES> 1,262,554
<RECEIVABLES> 1,952,322
<ALLOWANCES> 333,499
<INVENTORY> 0
<CURRENT-ASSETS> 4,452,081
<PP&E> 2,513,902
<DEPRECIATION> 792,858
<TOTAL-ASSETS> 7,647,016
<CURRENT-LIABILITIES> 969,417
<BONDS> 19,465
<COMMON> 47,820
0
0
<OTHER-SE> 6,610,314
<TOTAL-LIABILITY-AND-EQUITY> 7,647,016
<SALES> 0
<TOTAL-REVENUES> 2,894,950
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,187,020
<LOSS-PROVISION> 96,000
<INTEREST-EXPENSE> 1,900
<INCOME-PRETAX> 812,888
<INCOME-TAX> 319,855
<INCOME-CONTINUING> 493,033
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 493,033
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
