CONFORMED
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period _______________________ to _________________________
Commission File Number 1-12902
-------
FRONTIER ADJUSTERS OF AMERICA, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Arizona 86-0477573
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
45 East Monterey Way, Phoenix, AZ 85012
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(602) 264-1061
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares of Common Stock outstanding on May 6 , 1998 4,605,358
------------- ---------
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1998 June 30, 1997
-------------- -------------
(unaudited) (*)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 1,081,714 $ 1,012,233
Investments 1,284,344 1,288,976
Receivables 1,561,664 1,613,099
Prepaid expenses 216,944 268,192
Other 451,200 433,260
----------- -----------
TOTAL CURRENT ASSETS 4,595,866 4,615,760
----------- -----------
PROPERTY AND EQUIPMENT 2,537,663 2,453,819
Less accumulated depreciation and amortization (776,693) (717,593)
----------- -----------
1,760,970 1,736,226
----------- -----------
OTHER ASSETS
Cost of subsidiary in excess of net tangible assets acquired 213,817 213,817
Less accumulated amortization (178,552) (176,818)
----------- -----------
35,265 36,999
Receivables (Long term) 431,000 431,000
Investments (Long term) 694,748 714,872
Other 310,702 377,282
----------- -----------
1,471,715 1,560,153
----------- -----------
TOTAL ASSETS $ 7,828,551 $ 7,912,139
=========== ===========
LIABILITIES
-----------
CURRENT LIABILITIES
Accounts payable $ 73,689 $ 33,793
Accrued expenses 412,300 190,510
Franchisee/licensee remittance payable 436,036 396,991
Current portion long term liability 27,998 26,521
Other 180,642 666,669
----------- -----------
TOTAL CURRENT LIABILITIES 1,130,665 1,314,484
----------- -----------
LONG TERM LIABILITY 12,275 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 62,893 83,221
Retained earnings 4,956,012 4,814,266
----------- -----------
6,685,611 6,564,193
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 7,828,551 $ 7,912,139
=========== ===========
</TABLE>
*Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed statements.
2
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
March 31, March 31,
----------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUE
Continuing licensee and
franchisee fees $3,436,123 $3,993,862 $1,094,217 $1,305,133
Adjusting fees 899,259 660,627 346,215 180,632
---------- ---------- ---------- ----------
4,335,382 4,654,489 1,440,432 1,485,765
---------- ---------- ---------- ----------
COST AND EXPENSES
Compensation and employee benefits 2,036,412 1,854,557 712,261 591,675
Office 299,019 283,675 116,600 81,316
Advertising and promotion 240,281 261,176 115,698 121,088
Depreciation and amortization 192,083 173,974 66,986 59,807
Provision for doubtful accounts 144,000 135,000 48,000 45,000
Other 481,800 564,655 147,030 195,622
---------- ---------- ---------- ----------
3,393,595 3,273,037 1,206,575 1,094,508
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 941,787 1,381,452 233,857 391,257
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 101,405 113,738 31,555 39,562
Other (Net) 44,596 52,956 9,488 6,419
---------- ---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) 146,001 166,694 41,043 45,981
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,087,788 1,548,146 274,900 437,238
INCOME TAXES 427,938 610,899 108,083 172,101
---------- ---------- ---------- ----------
NET INCOME $ 659,850 $ 937,247 $ 166,817 $ 265,137
========== ========== ========== ==========
Weighted Average Shares
outstanding 4,605,358 4,608,489 4,605,358 4,609,358
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ .14 $ .20 $ .04 $ .06
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ .14 $ .20 $ .04 $ .06
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
3
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
NET INCOME $ 659,850 $ 937,247
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization:
Operations 192,083 173,974
Other 1,639 1,092
(Gain) on sale of investments (4,042) --
(Gain) on disposition of property and equipment (6,708) (24,775)
Allowance for doubtful accounts 144,000 (7,542)
Change in assets and liabilities:
(Increase) decrease in:
Receivables 131,763 228,903
Prepaid expenses 51,248 106,769
Other (59,949) (57,130)
Increase (decrease) in:
Accounts payable 39,896 18,051
Accrued expenses 221,790 121,172
Franchisee and licensee remittance payable 39,045 272,274
Other (486,027) 79,437
----------- -----------
Total adjustments 264,738 912,225
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 924,588 1,849,472
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (151,434) (283,171)
Investments purchased (1,992,855) (1,948,737)
Proceeds on Sale of Fixed Assets 16,200 --
Proceeds from sales of investments 2,040,000 2,000,000
License acquisition (5,000) (85,500)
Advances to licensees and franchisees (3,092,505) (2,883,089)
Collections of advances to licensees and franchisees 2,868,177 2,756,041
----------- -----------
NET CASH PROVIDED (USED IN) BY INVESTING ACTIVITIES (317,417) (444,456)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends (518,104) (518,650)
Common stock repurchased -- (44,365)
Payments on long-term liability (19,710) (68,336)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (537,814) (631,351)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 124 --
----------- -----------
NET INCREASE (DECREASE) IN CASH 69,481 773,665
Cash at beginning of the period 1,012,233 534,540
----------- -----------
Cash at the end of the period $ 1,081,714 $ 1,308,205
=========== ===========
Supplemental disclosures of Cash Flow information
Cash paid during the period
Income taxes $ 506,413 $ 632,349
Interest $ 2,833 $ 6,095
</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 nine month periods ended March
31, 1998 are not necessarily indicative of the results to be expected for
the full year.
Change of Accounting Principles
-------------------------------
Effective December 31, 1997, the Company adopted Financial Accounting
Standards Board (FASB) Statement No. 128, "Earnings Per Share", which
supersedes Accounting Principles Board (APB) Opinion No. 15. Statement No.
128 requires the presentation of earnings per share by all entities that
have common stock or potential common stock, such as options, warrants and
convertible securities outstanding that trade in a public market. Under
Statement No. 128, the Company is required to present basic and diluted
earnings per share amounts. Diluted per share amounts assume the conversion,
exercise, or issuance of all potential common stock instruments unless the
effect is to reduce a loss or increase the income per share from continuing
operations. The Company initially applied Statement No. 128 for its interim
period ending December 31, 1997 and all prior periods presented with no
material effect.
The weighted average shares outstanding for computing basic and diluted
earnings per share were 4,605,358 and 4,673,590, respectively, for the three
months ended March 31, 1998, and 4,608,489 and 4,676,631 for the nine months
ended March 31, 1998. The difference in the weighted average shares
outstanding for computing basic and diluted earnings per share is due to
43,435 dilutive stock options.
(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 document are based on
information available to the Company on the date of this Report, and the
Company assumes no obligation to update any such forward looking statement.
It is important to note that the Company's actual results could differ
materially from those in such forward looking statements. Among the factors
that could cause actual results to differ materially are the factors
discussed in this Report, including but not limited to the extent and nature
of natural disasters in geographic areas serviced by the Company or by its
licensees and franchisees; management decisions by insurance companies and
self-insureds to increase or decrease the degree to which they contract for
services offered by the Company, its licensees or franchisees; the Company's
ability to identify and attract new qualified licensees and franchisees; the
success of the Company's promotional and marketing programs; the Company's
ability to successfully manage offices reacquired from existing licensees
and franchisees; and uninsured liability for acts or omissions of the
Company's employees,
5
<PAGE>
licensees, or franchisees.
Financial Condition
-------------------
The Company has historically financed its growth and on going operations
with cash generated from operations. In the nine months ended March 31,
1998, the Company's operations generated $925,000 in cash.
Compared to the last fiscal year, the most significant item affecting cash
provided by the Company's operations is the $486,000 decrease in other
liabilities. The 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 between $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 funds generated from
operations.
The Company's ratio of current assets to current liabilities was 4.06 to 1
as of March 31, 1998 and 3.51 to 1 as of June 30, 1997.
Results of Operations - Nine Months Ended March 31, 1998 Compared to Nine
----------------------------------------------------------------------------
Months Ended March 31, 1997
---------------------------
Revenue
-------
The Company's revenue decreased 6.9% or $320,000 to $4,335,000 during the
nine months ended March 31, 1998 from $4,655,000 in the same period of the
prior fiscal year. This decrease represents a combined $238,000 increase in
adjusting and risk management fees and a $558,000 decrease in continuing
licensee and franchisee fees.
The increase of $238,000 in adjusting and risk management fees from $661,000
in the nine months ended March 31, 1997 to $899,000 for the nine months
ended March 31, 1998 represents a 36% increase. A significant portion of
this increase is related to the Company's Las Vegas/Henderson, Nevada office
which was acquired during the last quarter of the prior fiscal year from a
former licensee. This office generated $270,000 in adjusting fees for the
nine months ended March 31, 1998.
The Company's revenue from continuing licensee and franchisee fees decreased
14% or $558,000 from $3,994,000 in the nine months ended March 31, 1997 to
$3,436,000 in the nine months ended March 31, 1998. This decrease reflects
the loss of revenue attributed to a client that contributed 18.8% to the
continuing licensee and franchisee fees in 1997. In June 1997, this client
elected to purchase its adjusting services from other vendors. The effects
of this decision will be reflected in the Company's revenue during the
remainder of the 1998 fiscal year.
The Company's revenue is 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 revenue. During the current
fiscal year, the Company has experienced a decrease in revenue due primarily
to the phase out of its business relationship with a client that accounted
for 18.8% of continuing licensee and franchisee fees. The Company has
responded to this loss of revenue by establishing 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 relationships with
one new client and with three existing clients for additional services. In
addition, the Company entered into three relationships with new clients in
the third quarter of this
6
<PAGE>
fiscal year.
Compensation and Fringe Benefits
--------------------------------
Compensation and fringe benefits represent approximately 60% of the
Company's costs and expenses and represent the Company's largest single item
of expense. These expenses increased 10% or $182,000 from $1,855,000 in the
nine months ended March 31, 1997 to $2,036,000 in the current nine 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
$61,000 during the nine months ended March 31, 1998 as compared to the same
period of the prior fiscal year. The principle items affecting these
expenses are an $87,000 decrease in legal expense, an $18,000 increase in
depreciation expense due to capital expenditures in the current fiscal year,
a $21,000 decrease in advertising and promotion expense, and a $15,000
increase in office 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 nine months ended March 31, 1998 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 affect
on the Company's current overall tax rates; however, this could change at
any time.
Other Income
------------
The Company's other income decreased $21,000 or 13% from $167,000 in the
nine months ended March 31, 1997 to $146,000 in the current nine month
period. The most significant items affecting other income are a $12,000
decrease in interest income, an $18,000 decrease in gains on the disposition
of capital equipment, an $18,000 increase in dividend income, a $6,000
decrease in rental income and a $6,000 decrease in miscellaneous income.
Net Income
----------
The Company's net income for the nine months ended March 31, 1998, decreased
$277,000 or 30% from $937,000 in the nine months ended March 31, 1997 to
$660,000 in the current period. The most significant items affecting net
income were the $320,000 decrease in revenue, the $181,000 increase in
compensation and fringe benefits, and the $61,000 decrease in expenses other
than compensation and fringe benefits.
Results of Operations - Three Months Ended March 31, 1998 Compared to Three
----------------------------------------------------------------------------
Months Ended March 31, 1997
---------------------------
Revenue
-------
The Company's revenue decreased 3% or $46,000 to $1,440,000 in the three
months ended March 31, 1998 from $1,486,000 in the same period of the prior
fiscal year. This decrease represents a combined $165,000 increase in
adjusting and risk management fees and a $211,000 decrease in continuing
licensee and franchisee fees.
The increase of $165,000 in adjusting and other fees of Company owned
offices from $181,000 in the three
7
<PAGE>
months ended March 31, 1997 to $346,000 in the three months ended March 31,
1998 represents a 91% increase. The increase reflects an increase in the
demand for the Company's services in the Phoenix area as well as revenue
from the Company's Tucson, Arizona and Las Vegas/Henderson, Nevada
operations.
The Company's revenue from continuing licensee and franchisee fees decreased
16% or $211,000 from $1,305,000 in the three months ended March 31, 1997 to
$1,094,000 in the three months ended March 31, 1998. 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 purchase its adjusting services from other vendors. The
effects of this decision will be reflected in the Company's revenue during
the remainder of 1998 fiscal year.
The Company's revenue is 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 revenue. During the current
fiscal year, the Company has experienced a decrease in revenue 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 establishing 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 relationships with
one new client and with three existing clients for additional services. In
addition, the Company entered into three relationships with new clients in
the third quarter of this fiscal year.
Compensation and Fringe Benefits
--------------------------------
Compensation and fringe benefits represented approximately 59% of the
Company's costs and expenses and represent the largest single item of
expense. These expenses increased 20% or $120,000 from $592,000 in the three
months ended March 31, 1997 to $712,000 in the three months ended March 31,
1998. 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, 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
$9,000 during the three months ended March 31, 1998 as compared to the same
quarter of the prior fiscal year. The principle items affecting these
expenses were a $53,000 decrease in legal expense, a $36,000 increase in
office expense, and a $7,000 increase in depreciation and amortization.
The balance of the Company's costs and expenses did not change significantly
from the same period of the prior fiscal year.
Income Taxes
------------
The Company's income taxes for the three months ended March 31, 1998, 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 affect on
the Company's overall tax rates; however, this could change at any time.
Other Income
------------
The Company's other income decreased $5,000 or 11% from $46,000 in the three
months ended March 31, 1997 to $41,000 in the three months ended March 31,
1998. The most significant items affecting other income was an $8,000
decrease in interest income and a $3,000 increase in miscellaneous income.
Net Income
----------
The Company's net income for the three months ended March 31, 1998 decreased
37% or $98,000 from $265,000 in the three months ended March 31, 1997 to
$167,000. The most significant items affecting net income were the $46,000
decrease in revenue, the $120,000 increase in compensation and fringe
benefits, and the $9,000 decrease in expenses other than compensation and
fringe benefits.
8
<PAGE>
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: 5/14/98 /s/ William J. Rocke
-------------------------- ----------------------------------------
William J. Rocke, Chief Executive
Officer/Chairman of the Board, Director
and Acting Chief Accounting Officer
Date: 5/14/98 /s/ Jean E. Ryberg
-------------------------- ----------------------------------------
Jean E. Ryberg, President, Director
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1998
(Unaudited) AND THE CONDENSED CONSOLIDATED
STATEMENT OF INCOME FOR THE NINE MONTHS
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,081,714
<SECURITIES> 1,284,344
<RECEIVABLES> 1,959,421
<ALLOWANCES> 397,757
<INVENTORY> 0
<CURRENT-ASSETS> 4,595,866
<PP&E> 2,537,663
<DEPRECIATION> 776,693
<TOTAL-ASSETS> 7,828,551
<CURRENT-LIABILITIES> 1,130,665
<BONDS> 12,275
0
0
<COMMON> 47,820
<OTHER-SE> 6,637,791
<TOTAL-LIABILITY-AND-EQUITY> 7,828,551
<SALES> 0
<TOTAL-REVENUES> 4,335,382
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,249,595
<LOSS-PROVISION> 144,000
<INTEREST-EXPENSE> 2,714
<INCOME-PRETAX> 1,087,788
<INCOME-TAX> 427,938
<INCOME-CONTINUING> 659,850
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 659,850
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
