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, 1998
[ ] 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
__________________
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 $7,291,235 as of September 23, 1998.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, as of September 23, 1998, was 4,605,358.
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PART I
ITEM 1 - BUSINESS
THE COMPANY
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 collectively 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, 1998, the Company had entered into 480 license and
franchise agreements ("Agreements") with 434 entities, operating 439 offices
with 662 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.
In August 1998, subsequent to the period covered by this Report, the Company
entered into a letter of intent (the "Letter of Intent") with United Financial
Adjusting Company ("UFAC"), a wholly owned subsidiary of the Progressive
Corporation ("Progressive"), whereby UFAC will purchase newly issued stock
representing approximately 52% of the Company's voting securities. Following the
purchase by UFAC, the Company's shareholders will be given the option to retain
their shares and receive a cash distribution of $1.60 per share or to surrender
their shares for a price of $2.90 per share. Up to an aggregate of 1,000,000
shares will be accepted for repurchase. UFAC will purchase the newly issued
securities of the Company at a price of $1.30 per share and will not be entitled
to receive the cash distribution of $1.60 per share. If the transaction
contemplated by the Letter of Intent is consummated, UFAC, and therefore
Progressive, will be able to elect a majority of the board of directors and
therefore, will be able to control the business and affairs of the Company.
Consummation of this transaction is subject to shareholder approval. The Company
will provide its shareholders with a proxy statement containing a detailed
description of the proposed transaction prior to the Company's next
shareholders' meeting.
GENERAL
For its fiscal year ended June 30, 1998, the Company's licensing and franchising
activities accounted for approximately 79% of gross revenue, and the Company's
Company-owned adjusting and risk management businesses accounted for
approximately 21% of gross revenue. For the fiscal years ended June 30, 1997 and
June 30, 1996, the Company's licensing and franchising activities accounted for
approximately 86% and 89%, respectively, of gross revenue, and the Company's
Company-owned adjusting and risk management businesses accounted for
approximately 14% and 11%, respectively, of gross revenue. The revenue derived
from the Company's operations, as well as the gross billings by Adjusters (upon
which the Company's revenue from licensing and franchising activities are
based), are set forth in the following table.
FISCAL YEAR ENDED JUNE 30,
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1998 1997 1996
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Gross billings by Adjusters $42,050,000 $48,060,000 $46,830,000
(approximate)
Revenue from licensing and
franchising activities 4,596,657 5,278,967 5,044,028
Revenue from Company-owned
adjusting and risk management
businesses 1,228,691 885,636 597,956
For its fiscal year ended June 30, 1998, the Company's licensing and franchising
activities accounted for approximately $1,152,000 in income from operations and
the Company's Company-owned adjusting and risk management businesses accounted
for approximately $106,000 in income from operations. For the fiscal years ended
June 30, 1997 and June 30, 1996, the Company's licensing and franchising
activities accounted for approximately $1,710,000 and $1,943,000 respectively,
in income from operations, the Company's Company-owned adjusting and risk
management businesses accounted for approximately $63,000 and $5,000,
respectively, in income from operations.
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GENERAL (CONTINUED)
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 9.2%,
18.8% and 20.8% of continuing licensee and franchisee fees for the years ended
June 30, 1998, 1997 and 1996, respectively. In June 1997 this client elected to
cease purchasing adjusting services from the Company and its Adjusters.
CLAIMS ADJUSTING
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.
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 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 with respect to
their claims 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 self-insured clients often play
a significant role in the selection and retention of providers of risk
management or third party administration and related services.
LICENSING AND FRANCHISING
The major part of the Company's revenue is 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
and referrals 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 1998, the Company retained 10.9% of the Adjusters'
collections as royalty fees under the Agreements.
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 the
Adjusters have been providing insurance adjusting services, on a Company-wide
basis, is approximately 20 years.
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LICENSING AND FRANCHISING (CONTINUED)
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.
OPERATION OF INDEPENDENT ADJUSTERS
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, that Adjusters 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 and the
general reputation 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 on a
45-60 day cycle. The Company's arrangements with Adjusters located in Canada
differ from the foregoing in that clients of Canadian Adjusters send their
remittances to the Company's Canadian P. O. Box or to the Company's franchisee
in Regina, Saskatchewan, Canada. Remittances received by the Company's
franchisee are deposited by the franchisee directly 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, or at the suggestion of the Adjuster, 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 per month. The number of Adjusters to whom semi-monthly
advances are 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 insurance companies or other adjusting firms to becoming
the owners of their own businesses and, therefore, aid the Company to attract
qualified individuals as Adjusters.
In addition to advancing funds to new Adjusters, the Company frequently lends
money to Adjusters. 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 $324,363 per month and has received reimbursement of an average of
$303,921 per month. At June 30, 1998, the Company had approximately $1,547,000
in outstanding loans or advances. During the past four fiscal years, the Company
has written off an average of $144,385 per year due to bad debts related to
these arrangements.
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LICENSE AND FRANCHISE AGREEMENTS
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.
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 with the exception of payments by clients of certain Canadian
franchisees where payment is made through the Canadian franchisee. 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, or at the suggestion of the Adjuster, relinquish to a new prospective
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.
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LICENSE AND FRANCHISE AGREEMENTS (CONTINUED)
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.
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
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
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
The insurance adjusting business is dependent upon the volume of claims that
require adjusting services. Several factors, including, among others, the
weather 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 affected. See
"Special Considerations - Uncertainty of Future Revenue". Further, the insurance
adjusting business is highly competitive. See "Special Considerations -
Competition" and Item 1, "Business - General".
UNCERTAINTY OF FUTURE REVENUE
The Company's future revenue and net income depends primarily upon the
maintenance or increase in the average revenue 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 revenue. Further, although the client base of the Adjusters has
historically continued to expand, there can be no assurance that it 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".
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UNCERTAINTY OF FUTURE REVENUE (CONTINUED)
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 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
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 74 years old, and Mrs. Ryberg, who is 66 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 50, 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
The directors and officers of the Company own in excess of 36% 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. In addition, in
August 1998, the Company entered into the Letter of Intent with UFAC whereby
UFAC will purchase newly issued stock representing approximately 52% of the
Company's voting securities. If the transaction contemplated by the Letter of
Intent is consummated, UFAC, and therefore Progressive, will be able to elect a
majority of the board of directors, and therefore, will be able to control the
business and affairs of the Company.
DEPENDENCE UPON SIGNIFICANT CLIENTS
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 9.2% of the license and franchise fees it
received during the fiscal year ended June 30, 1998. See Item 1, "Business -
General" and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations 1998 Compared to
1997 - Revenue". In June 1997 this client elected to discontinue purchasing
adjusting services from the Company and its Adjusters. The Company continues to
develop and implement sales and marketing efforts to take advantage of its broad
geographic coverage as well as the unique strengths of its individual licensees
and franchisees. During fiscal 1998, the Company successfully completed
negotiations for national/regional relationships with seven new clients and with
three existing clients for additional services. 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
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
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
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TORT LIABILITY AND INSURANCE (CONTINUED)
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 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. In June 1997, the Company settled litigation against it related to a
former franchisee of the Company in the amount of $525,000 net of insurance
proceeds.
ABILITY TO RELY UPON LICENSE AND FRANCHISE AGREEMENTS
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
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.
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COMPETITION
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, 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
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, and 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
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 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 and 1,000 square feet in Las Vegas, Nevada for its claims
adjusting offices in those cities.
ITEM 3 - 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.
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, 1998
First Quarter $2.8125 $2.125 364,300
Second Quarter $3.50 $2.375 699,800
Third Quarter $3.3125 $2.50 320,600
Fourth Quarter $3.25 $2.375 293,500
Fiscal Year Ended June 30, 1997
First Quarter $3.25 $2.5625 153,600
Second Quarter $3.875 $3.00 132,600
Third Quarter $2.625 $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, 1998
First Quarter................................ $.0375
Second Quarter............................... $.0375
Third Quarter................................ $.0375
Fourth Quarter............................... $.0375
Fiscal Year Ended June 30, 1997
First Quarter................................ $.0375
Second Quarter............................... $.0375
Third Quarter................................ $.0375
Fourth Quarter............................... $.0375
As of August 14, 1998, there were 251 shareholders of record (approximately 908
including beneficial owners) of the Company's Common Stock.
Page 10
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating revenue $5,825,348 $6,164,603 $5,641,984 $5,240,825 $4,590,270
Net income 612,475 979,198 1,134,519 1,026,848 1,018,160
Basic earnings per share .13 .21 .25 .22 .22
Diluted earnings per share .13 .21 .25 .22 .22
Weighted average number of
shares used in per share
data: Basic 4,605,358 4,607,709 4,620,101 4,662,679 4,727,537
Diluted 4,612,674 4,631,898 4,627,606 4,664,258 4,727,732
Cash dividends per share .15 .15 .14 .115 .11
BALANCE SHEET DATA
Working capital $3,214,490 $3,261,953 $3,196,562 $2,946,748 $2,749,531
Total assets 7,800,700 7,912,139 6,875,752 6,597,050 6,491,066
Long-term debt 4,953 33,462 59,983 84,655 -
Property and equipment, net 1,724,329 1,736,226 1,554,401 1,484,545 1,460,601
Stockholders' equity 6,452,242 6,564,193 6,230,799 5,838,651 5,487,999
Book value per share 1.40 1.43 1.35 1.26 1.17
Retained earnings 4,735,935 4,814,266 4,526,419 4,042,588 3,552,194
Total shares outstanding 4,605,358 4,605,358 4,619,658 4,640,898 4,690,898
</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 to pay cash dividends, acquire
certain license rights, and add new licensees/franchisees.
In fiscal 1998 the Company's continuing operations generated $1,063,780 in cash
which was sufficient for the Company's cash requirements. This cash was used to
pay cash dividends of $690,806 and purchase equipment and property at a cost of
$167,077.
The Company has continued its policy to pay cash dividends to its shareholders
with payments totaling 15 cents per share in the 1998 fiscal year. The Board of
Directors has declared a 3.75 cent dividend payable on or before September 10,
1998 to shareholders of record on August 20, 1998.
Without giving effect to any extraordinary dividend payable should the Company
consummate the transaction with UFAC contemplated in the Letter of Intent, the
Company anticipates that during fiscal 1999 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 1999.
The Company's policy is to maintain a strong cash position. This policy has
resulted in the Company's ratio of current assets to current liabilities being
3.39 to 1 as of June 30, 1998 compared to 3.48 to 1 as of June 30, 1997.
RESULTS OF OPERATIONS 1998 COMPARED TO 1997
REVENUE
The Company's revenue decreased to $5,825,000 from $6,165,000 in fiscal 1997,
resulting in a 5.5% decrease as compared to the prior fiscal year. The decrease
consists of a $343,000 increase in adjusting and other revenue and a $683,000
decrease in continuing licensee and franchisee fees.
The increase of $343,000 in adjusting and other fees to $1,229,000 in the
current fiscal year compared to $886,000 in the prior fiscal year represents an
increase of 38.7%. 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
$340,000 in adjusting fees for fiscal 1998.
The Company's revenue from continuing licensee and franchisee fees decreased
12.9% or $683,000 from $5,280,000 in the prior fiscal year to $4,597,000 in the
current fiscal year. This decrease reflects lower demand for adjusting services
in fiscal 1998 due to the relatively fewer incidences of natural and manmade
disasters in that fiscal year. Furthermore, the decrease reflects the loss of
revenue attributed to a client that contributed 9.2% and 18.8% to the continuing
licensee and franchisee fees in fiscal years ended June 30, 1998 and June 30,
1997, respectively. The loss of this client represents a loss of approximately
$564,000 in revenue for this fiscal year as compared to the prior fiscal year.
In June 1997, this client elected to purchase its adjusting services from other
vendors.
The Company's revenue is affected by numerous matters including the weather, the
incidents of natural and manmade disasters, and the work load of other companies
and claims presented by their insureds. 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 lower incidences of
natural and manmade disasters and to the phase out of its business relationship
with a client that accounted for 9.2% and 18.8% of continuing licensee and
franchisee fees in fiscal years ended June 30, 1998 and June 30, 1997,
respectively.
To meet the growing competition in fiscal 1998, the Company continued to develop
and implement sales and marketing efforts to take advantage of its geographic
diversity as well as the unique strengths of its individual licensees and
franchisees. During fiscal 1998, the Company successfully completed negotiations
for national/regional relationships with seven new clients and with three
existing clients for additional services. 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.
Page 12
<PAGE>
COMPENSATION AND EMPLOYEE BENEFITS
Compensation and employee benefits represent approximately 57% of the Company's
costs and expenses and are the Company's largest expense item. These expenses
increased 17% or $402,000 to $2,817,000 in the current fiscal year from
$2,415,000 in the prior fiscal year. This increase is the result of the addition
of a Marketing Director to the Company's corporate staff, twelve months of
salary for the employees in Las Vegas/Henderson, Nevada as a result of the April
1997 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. In addition, the cost of compensation and
fringe benefits was reduced $21,000 as a result of the decline in the Company's
income and a corresponding decline in related bonuses. Furthermore, the Company
paid $85,000 in severance pay to a former employee.
EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS
The Company's expenses other than compensation and fringe benefits decreased
$165,000 or 7.3% from fiscal 1997 to fiscal 1998. The most significant item
related to this is a $525,000 settlement paid in the prior fiscal year. This
decrease was offset by an increase in several items including, among others:
provision for doubtful accounts of $203,000; advertising expense of $48,000;
audit and accounting fees of $31,000; computer consulting fees of $16,000; and
depreciation and amortization of $13,000. The increase in the provision for
doubtful accounts represents an increase in the allowance percentage for
doubtful accounts of franchisee fees receivables due to an increase of aged
receivables, as well as a historical increase in the incidents of bankrupt
debtors to the Company. Furthermore, the increase in the expense due to the
provision for doubtful accounts represents an increase in receivables from the
Las Vegas/Henderson, Nevada office. Receivables in the Las Vegas/Henderson,
Nevada office increased significantly due to twelve months of operations in the
current fiscal year as compared to three months of operations in the prior
fiscal year.
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 increased $6,600 or 5.5% from fiscal 1997 to fiscal
1998. Significant items affecting this increase were decreases in unrealized
losses on equity securities of $75,000 and interest income of $22,000 and
increases in interest expense of $24,000. Additionally, the disposal of fixed
assets during 1998 resulted in a loss of $6,648 as opposed to a gain of $24,875
in 1997.
INCOME TAXES
Income taxes were 40.4% and 38.7% of the Company's income before income taxes
for fiscal year 1998 and 1997 respectively. The Company's income taxes have not
been significantly affected by any changes in the federal and state tax laws.
However, tax rates can be changed at any time based upon legislation.
NET INCOME
The Company's net income decreased $367,000 to $612,000 in current fiscal year
from $979,000 in fiscal 1997, a decrease of 37.5%. The most significant items
affecting net income were the $339,000 decrease in revenue, a $402,000 increase
in compensation and fringe benefits, and a $165,000 decrease in expenses other
than compensation and fringe benefits. During the fourth quarter of fiscal 1998,
the Company recorded a net loss of $47,000. The most significant items
contributing to this loss were a one time charge of $85,000 for severance pay to
a former employee and the writeoffs of old receivables from clients and advances
to former franchisees/licensees.
RESULTS OF OPERATIONS 1997 COMPARED TO 1996
REVENUE
The Company's revenue increased to $6,165,000 in fiscal 1997 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 revenue 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 fiscal 1997 compared to $598,000 in the prior fiscal year. The
increase reflects $57,000 in revenue from the Las Vegas/Henderson, Nevada office
which was
Page 13
<PAGE>
REVENUE (continued)
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
revenue 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 revenue 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
fiscal 1997. 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 revenue is 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 was seen in the 1998 fiscal year.
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, 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 as 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.
Page 14
<PAGE>
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 revenue, the $525,000
settlement of litigation, and the $440,000 increase in compensation and fringe
benefits.
CURRENT ACCOUNTING DEVELOPMENTS -- 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 and
is effective for the Company's year ending June 30, 1999. 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, 1999. The Company has not determined the effect of the adoption
of this Statement would have on the Company's financial statement disclosure.
YEAR 2000 COMPLIANCE - The "Year 2000" issue creates risk for the Company from
unforeseen problems in its own computer systems and from third parties with whom
the Company deals. Many currently installed computer systems and software
products are coded to accept two digit entries in the date code field. These
date code fields will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. Left uncorrected, time sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000,
resulting in a computer shutdown or incorrect calculations. Failures of the
Company's and/or third parties' computer systems could have a material adverse
effect on the Company's ability to conduct its business.
To date, the Company has determined that certain of the software used by the
Company is not Year 2000 compliant. The Company has identified upgraded software
that is Year 2000 compliant. The Company expects to complete these upgrades by
December 31, 1998.
The Company is finalizing arrangements with a consulting firm to undertake a
complete analysis of the Company's operations to identify the remaining Year
2000 issues embodied in its operations and facility, and to develop a plan to
resolve such issues. The Company expects this analysis to begin during the
second quarter of this fiscal year and to be completed by December 31, 1998.
Thereafter, the Company will resolve such issue.
Certain software products sold by the Company to certain of its licensees and
franchisees in prior years are not Year 2000 compliant. The Company's computer
staff is developing an upgrade of the software that will be Year 2000 compliant.
The Company expects to complete development of the Year 2000 compliant version
of its software by December 31, 1998. The Company will distribute this version
to purchasers of the non-compliant version, free of charge. The Company does not
anticipate that the cost of this upgrade will be material to the Company's
operations.
Members of the Company's computer staff are undertaking the task of contacting
the Company's customers and vendors to determine the status of such customers'
and vendors' software for Year 2000 compliance. As the Company identifies these
issues, it will determine the steps necessary to avoid disruptions due to
failures in Year 2000 compliance by its customers and/or vendors.
The Company expects that the cost of analysis and development and implementation
of a plan to address its Year 2000 issues, will not exceed $175,000. The
Company's estimate reflects assumptions regarding the extent of the Year 2000
issues embodied in the Company's operations and facilities, the availability and
cost of personnel trained in this area, the compliance plans of third parties,
and similar uncertainties. However, due to the complexity and pervasiveness of
the Year 2000 issue, and in particular, the uncertainty regarding the compliance
programs of third parties, no assurance can be given that these estimates will
be achieved, and actual results could differ materially from those anticipated.
If the Company is unable to address the Year 2000 issues successfully, or in a
timely fashion, the Company may need to devote more resources to the process and
additional costs may be incurred. This could have a material adverse effect on
the Company's results of operations. The Company has purchased insurance that
may offset certain losses to the Company for claims based upon non-compliance
with Year 2000 issues.
Page 15
<PAGE>
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>
George M. Hill Mr. Hill has been associated with the 90 1978
Director, Company in an advisory capacity for
Vice President, more than 25 years, has been a Vice
Assistant President of the Company since 1985
Secretary and has been 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.
Francis J. LaPallo Mr. LaPallo joined the Company on 50 1996
Director, June 24, 1996. From 1977 until joining
Executive Vice President the Company 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.
</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>
Louis T. Mastos Mr. Mastos has been the President of 77 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 30 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 74 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 66 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 and Tucson,
Arizona, and Las Vegas, Nevada. 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.
Merlin J. Schumann Mr. Schumann has been a Certified Public 54 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.
</TABLE>
Page 17
<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>
William W. Strawther, Jr. Mr. Strawther was the President and 72 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 62 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, 1998.
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the compensation
paid by the Company during its year ended June 30, 1998 to each executive
officer whose aggregate compensation exceeded $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
------------------------------------------------------
a b c d e f
- --------------------------- ---- ---------- --------- ------------ ------------
Other Annual All Other
Compensation Compensation
Name and Principal Position Year Salary ($) Bonus ($) ($) (2) ($) (3)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
William J. Rocke, CEO, 1998 237,776 39,794 -- 29,898
Chairman, Director 1997 231,300 51,559 -- 23,569
1996 225,000 71,981 -- 22,719
Jean E. Ryberg, 1998 169,085 39,794 -- 29,898
President, Director 1997 164,480 51,559 -- 29,568
1996 160,000 71,981 -- 29,266
Francis J. LaPallo, 1998 185,040 -- -- 29,898
Executive Vice President, 1997 180,000 -- -- 29,568
Director 1996 692 -- -- --
Patric R. Greer, (4) 1998 95,111 19,897 -- 103,421
1997 92,520 17,187 -- 21,876
1996 90,000 11,224 -- 17,364
</TABLE>
(1) Columns 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 $2,250, $3,750,
and $2,250 for Mr. Rocke in years ended June 30, 1998, 1997 and 1996
respectively; $2,250, $3,750, and $3,000 for Mrs. Ryberg in years ended
June 30, 1998, 1997 and 1996 respectively; $2,250 and $3,750 for Mr.
LaPallo in years ended June 30, 1998 and 1997 respectively; and $1,500,
$3,750, and $3,000 for Mr. Greer in years ended June 30, 1998, 1997, and
1996 respectively; (ii) profit sharing contributions of $27,648, $19,819,
and $20,469 for Mr. Rocke in years ended June 30, 1998, 1997 and 1996
respectively;
Page 18
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION (CONTINUED)
$27,648, $25,818, and $26,266 for Mrs. Ryberg in years ended June 30, 1998,
1997, and 1996 respectively; $27,648 and $25,818 for Mr. LaPallo in years
ended June 30, 1998 and 1997 respectively; $16,921, $18,126, and $14,364
for Mr. Greer for years ended June 30, 1998, 1997, and 1996, respectively,
and (iii) an $85,000 severance package for Mr. Greer for the year ended
June 30, 1998.
(4) Mr. Greer resigned from his position with the Company effective June 30,
1998. In connection with Mr. Greer's resignation, termination of Mr.
Greer's employment agreement, and as consideration of a Settlement and
Release Agreement between Mr. Greer and the Company, Mr. Greer received an
aggregate severance payment of $85,000.
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 $18,166, $18,119, and $18,203 for Mr.
Rocke for the years ended June 30, 1998, 1997, and 1996, respectively, and
$14,070, $13,678, and $13,511 for Mrs. Ryberg for the years ended June 30,
1998, 1997, and 1996, respectively.
OPTION/SAR EXERCISES AND HOLDINGS
During 1998 the Company did not grant any stock options.
The following table shows the number of shares and value of grants outstanding
as of June 30, 1998 for each Named Executive.
AGGREGATED OPTION/SAR YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised,
Underlying Unexercised In-The-Money Options/SARs
Options/SARs At 6/30/98 (#) At 6/30/98 ($)(A)
Shares ---------------------------- ----------------------------
Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ------------------- --------------- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William J. Rocke -- -- 48,654 -- 8,253 --
Jean E. Ryberg -- -- 51,347 -- 13,682 --
Francis J. LaPallo -- -- 34,782 65,218 8,696 16,304
Patric R. Greer (b) -- -- 51,346 -- 13,682 --
</TABLE>
(a) Value of unexercised, in-the-money Company options based on a fair market
value of the Company's common stock of $3.13 per share as of June 30, 1998.
(b) Mr. Greer resigned from his position with the Company effective June 30,
1998.
DIRECTORS COMPENSATION
Each director, including employees of the Company, is paid $750 per Board
meeting attended. During fiscal 1998, each director, except for Mr. Patric R.
Greer, received $2,250 for attendance to Board Meetings. Mr. Greer received
$1,500 for attendance at Board Meetings.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Mr. Rocke, Mrs.
Ryberg, and Mr. LaPallo each for five-year terms. Mr. Rocke's and Mrs. Ryberg'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.
Page 19
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION (CONTINUED)
EMPLOYMENT AGREEMENTS (CONTINUED)
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. 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
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT OF BENEFICIAL OWNERSHIP
- ------------------------------------------------- COMMON STOCK $.01 PAR VALUE
---------------------------
NUMBER OF SHARES (1) PERCENT (2)
-------------------- -----------
<S> <C> <C>
George M. Hill (3) 155,000 3.37%
Francis J. LaPallo and Wendy J. Harrison, his wife (4) 91,564 1.99%
Louis T. Mastos and Eva B. Mastos, his wife (5) 206,703 4.49%
William J. Rocke and Garnet Rocke, his wife (6) 442,268 9.50%
P. O. Box 7641
Phoenix, Arizona 85011
James S. Rocke (7) 471,803 10.14%
P. O. Box 7641
Phoenix, Arizona 85011
Jean E. Ryberg (8) 150,589 3.23%
Merlin J. Schumann and Donna L. Schumann, his wife 20,114 *
William W. Strawther, Jr. and Marjorie A. Strawther,
his wife (9) 444,138 9.64%
7108 North 15th Street
Phoenix, Arizona 85020
R. Scott Younker and Sandra L. Younker, his wife 67,819 1.47%
All officers and directors as a group
(nine persons) (10) 1,759,998 36.49%
</TABLE>
- -----------------------------------------
*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.
Page 20
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT (CONTINUED)
(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) Excludes 52,000 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.
(4) Includes 69,564 shares subject to a currently exercisable stock option at
$2.875 per share.
(5) 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 23,523 shares which are held by the Louis T. Mastos in an
Individual Retirement Account.
(6) 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
a weighted average of $3.2829 per share.
(7) 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 a weighted
average of $3.2829 per share.
(8) Includes 51,347 shares subject to a currently exercisable stock options at
a weighted average of $3.005 per share. Excludes 5,000 held by Mrs.
Ryberg's son in which she disclaims any beneficial interest.
(9) 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
140,000 shares beneficially owned by Mr. and Mrs. Strawther's son, in which
shares Mr. and Mrs. Strawther disclaim any beneficial interest.
(10) 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).
Based solely on a review of the copies of such forms received by the Company
during the fiscal year ended June 30, 1998, 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 5 covering five transactions totaling 14,600 shares and a
discrepancy of 8,250 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 revenue
derived from services provided by certain other licensees in other Arizona
cities and towns. The Company paid that corporation $13,142 during fiscal year
1998 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 1998, the Company paid
Mr. Hill $92,510 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 1998 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, 1998 and 1997
Consolidated Statements of Income for the Years Ended June 30,
1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended June 30,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements - June 30, 1998, 1997
and 1996
(a) (2) Financial Statement Schedules
Schedule
Number
------
II Valuation and Qualifying Accounts Years Ended June 30, 1998,
1997 and 1996
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.
Page 22
<PAGE>
(a) (3) EXHIBITS FILED WITH THIS REPORT
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 Independent Accountants
27 Financial Data Schedule
* 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, 1998
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, hereunto duly authorized.
FRONTIER ADJUSTERS OF AMERICA, INC.
/s/ WILLIAM J. ROCKE /s/ JEAN E. RYBERG
- ------------------------------------------ ---------------------------
William J. Rocke (Chief Executive Officer, Jean E. Ryberg (President)
Chairman of the Board, Acting Chief
Financial Officer)
SEPTEMBER 25, 1998 SEPTEMBER 25, 1998
- ------------------------------------------ ---------------------------
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 SEPTEMBER 25, 1998
- ---------------------------------------- ----------------------
William J. Rocke, CEO, Chairman
of the Board, Acting CFO, Director
/s/ JEAN E. RYBERG SEPTEMBER 25, 1998
- ---------------------------------------- ----------------------
Jean E. Ryberg, President, Director
/s/ FRANCIS J. LAPALLO SEPTEMBER 25, 1998
- ---------------------------------------- ----------------------
Francis J. LaPallo, Exec. V.P.,
Director
/s/ GEORGE M. HILL SEPTEMBER 25, 1998
- ---------------------------------------- ----------------------
George M. Hill, V.P., Director
/s/ JAMES S. ROCKE SEPTEMBER 25, 1998
- ---------------------------------------- ----------------------
James S. Rocke, Secretary/Treasurer,
Director
/s/ MERLIN J. SCHUMANN SEPTEMBER 25, 1998
- ---------------------------------------- ----------------------
Merlin J. Schumann, Director
/s/ WILLIAM W. STRAWTHER, JR. SEPTEMBER 25, 1998
- ---------------------------------------- ----------------------
William W. Strawther, Jr., Director
/s/ LOU MASTOS SEPTEMBER 25, 1998
- ---------------------------------------- ----------------------
Lou Mastos, Director
R. SCOTT YOUNKER SEPTEMBER 25, 1998
- ---------------------------------------- ----------------------
R. Scott Younker, 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, 1998 and 1997 F-3
Consolidated Statements of Income for the Years Ended June 30,
1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1998, 1997 and 1996 F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements - June 30, 1998,
1997 and 1996 F-7
Supplementary Schedule F-16
Schedule II - Valuation and Qualifying Accounts Years Ended
June 30, 1998, 1997 and 1996 F-17
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, 1998 and 1997, and
the related consolidated statements of income, cash flows, and stockholders'
equity for each of the three years in the period ended June 30, 1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1998, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
supplemental schedule II for the years ended June 30, 1998, 1997, and 1996
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
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
McGLADREY & PULLEN, LLP
/s/ McGladrey & Pullen, LLP
Phoenix, Arizona
August 4, 1998, except for Note 14 as to which the date is August 28, 1998
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
Frontier Adjusters of America, Inc. and Subsidiaries
June 30, 1998 1997
- -------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 929,364 $ 1,012,233
Securities available for sale (Note 6) 1,289,519 1,288,976
Current portion of advances to licensees
and franchisees (Note 4) 900,190 872,527
Receivables, net (Note 3) 681,830 740,572
Income tax refund receivable 172,948 --
Unbilled adjusting fees 40,950 26,700
Prepaid expenses 317,454 268,192
Deferred income taxes, current portion (Note 9) 225,740 367,237
-------------------------
TOTAL CURRENT ASSETS 4,557,995 4,576,437
-------------------------
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation and amortization (Note 5) 1,724,329 1,736,226
-------------------------
OTHER ASSETS
Held to maturity investments (Note 6) 694,724 714,872
Advances to licensees and franchisees, net of
current portion (Note 4) 431,000 431,000
Licenses and franchises, net of accumulated
amortization of $256,654 in 1998 and
$226,240 in 1997 155,838 246,253
Deferred income taxes, net of current portion
(Note 9) 63,532 39,323
Cost of subsidiary in excess of net identifiable
assets acquired, net of accumulated amortization
of $179,130 in 1998 and $176,819 in 1997 34,688 36,999
Other 138,594 131,029
-------------------------
1,518,376 1,599,476
-------------------------
TOTAL ASSETS $ 7,800,700 $ 7,912,139
=========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 62,118 $ 33,793
Salaries payable and related benefits 609,113 169,032
Income taxes payable -- 84,989
Licensees' and franchisees' remittance payable 545,830 396,991
Current portion of long term liability (Note 7) 28,509 26,521
Other (Note 13) 97,936 603,158
-------------------------
TOTAL CURRENT LIABILITIES 1,343,506 1,314,484
-------------------------
LONG TERM LIABILITY (Note 7) 4,953 33,462
-------------------------
COMMITMENTS AND CONTINGENCIES (Notes 13 and 14) -- --
STOCKHOLDERS' EQUITY (Note 12 and 13)
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 4,735,935 4,814,266
-------------------------
6,932,225 7,010,556
Add (deduct):
Treasury stock 176,652 shares in 1998 and 1997 (529,584) (529,584)
Other 49,600 83,221
-------------------------
TOTAL STOCKHOLDERS' EQUITY 6,452,241 6,564,193
-------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,800,700 $ 7,912,139
=========================
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Frontier Adjusters of America, Inc. and Subsidiaries
Years Ended June 30, 1998 1997 1996
- --------------------------------------------------------------------------------
REVENUE
Continuing licensee and franchisee
fees (Note 8) $ 4,596,657 $ 5,278,967 $ 5,044,028
Adjusting and risk management
fees (Note 8) 1,228,691 885,636 597,956
-----------------------------------------
5,825,348 6,164,603 5,641,984
-----------------------------------------
COST AND EXPENSES
Compensation and employee benefits
(Notes 11 and 13) 2,817,168 2,414,582 1,975,028
Office 404,554 379,287 372,788
Advertising and promotion 395,210 347,396 459,329
Depreciation and amortization 253,667 240,246 190,044
Provision for doubtful accounts 352,132 149,392 151,847
Legal fees paid to a director
(Note 10) 92,510 91,572 90,376
Other (Note 13) 609,111 1,064,058 700,923
-----------------------------------------
4,924,352 4,686,533 3,940,335
-----------------------------------------
INCOME FROM OPERATIONS 900,996 1,478,070 1,701,649
-----------------------------------------
OTHER INCOME (EXPENSE)
Interest income 133,067 154,860 144,677
Disposition of investments 4,042 343 --
Gain (loss) on sale of license (13,000) -- 5,000
Gain on disposition of equipment 6,352 24,875 --
Unrealized loss (Note 6) (93) (74,914) --
Other (3,497) 15,107 4,498
-----------------------------------------
TOTAL OTHER INCOME 126,871 120,271 154,175
-----------------------------------------
INCOME BEFORE INCOME TAXES 1,027,867 1,598,341 1,855,824
INCOME TAXES (Note 9) 415,392 619,143 721,305
-----------------------------------------
NET INCOME $ 612,475 $ 979,198 $ 1,134,519
=========================================
EARNINGS PER SHARE
Basic $ .13 $ .21 $ .25
=========================================
Diluted $ .13 $ .21 $ .25
=========================================
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic 4,605,358 4,607,709 4,620,101
=========================================
Diluted 4,612,674 4,631,898 4,627,606
=========================================
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, 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 612,475 $ 979,198 $ 1,134,519
-----------------------------------------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 255,852 241,884 190,044
(Gain) on sale of investments (4,042) (343) --
(Gain) loss on sale of license 13,000 -- (5,000)
(Gain) on disposition of equipment (6,352) (24,875) --
Provision for doubtful accounts 352,132 149,392 151,847
Deferred income taxes 117,288 (263,209) (42,242)
Unrealized loss on investments 93 74,914 --
Change in assets and liabilities
(Increase) decrease in:
Receivables (1,665) 12,364 181,133
Unbilled adjusting fees (14,250) (10,600) (1,875)
Prepaid expenses (49,262) 20,701 (30,728)
Other (65,575) (52,893) (50,029)
Increase (decrease) in:
Accounts payable 28,325 22,127 (1,003)
Salaries payable and related benefits 440,081 (69,183) (59,758)
Income taxes payable/receivable (257,937) 27,684 (7,415)
Licensees' & franchisees' remittance
payable 148,839 261,473 (86,102)
Other (505,222) 485,564 63,783
-----------------------------------------------
Total adjustment 451,305 875,000 302,655
-----------------------------------------------
NET CASH PROVIDED
BY OPERATING ACTIVITIES 1,063,780 1,854,198 1,437,174
-----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of fixed assets 16,200 -- --
Capital expenditures (167,078) (302,102) (170,057)
Investments purchased (1,993,019) (1,958,743) (2,970,057)
Proceeds from maturity of investments 2,040,000 2,000,000 3,000,000
Payments on license acquisition (26,521) (110,172) (136,951)
Advances to licensees' and franchisees' (4,267,700) (3,979,135) (3,964,357)
Collections of advances to licensees &
franchisees 3,948,312 3,703,132 3,695,280
-----------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (449,806) (647,020) (546,142)
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (690,806) (691,351) (647,147)
Proceeds from sale of treasury stock -- -- 55,547
Common stock repurchased -- (44,365) (129,438)
-----------------------------------------------
NET CASH USED IN
FINANCING ACTIVITIES (690,806) (735,716) (721,038)
EFFECT OF EXCHANGE RATE CHANGES
ON CASH (6,037) 6,231 5,586
-----------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (82,869) 477,693 175,580
CASH AND CASH EQUIVALENTS AT
BEGINNING OF THE PERIOD 1,012,233 534,540 358,960
-----------------------------------------------
CASH AND CASH EQUIVALENTS AT
END OF THE PERIOD $ 929,364 $ 1,012,233 $ 534,540
===============================================
</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, 1998, 1997 and 1996
- -----------------------------------------------------------------------------------------------------------------------------
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, 1995 4,782,010 $ 47,820 $ 2,148,470 $ 4,042,588 $ (414,869) $ 26,709 $ (12,067)
Cash dividends -
$.114 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
Cash dividends -
$.15 per share -- -- -- (690,806) -- -- --
Net income -- -- -- 612,475 -- -- --
Foreign currency
translation -- -- -- -- -- (6,037) --
Unrealized loss -- -- -- -- -- -- (27,584)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 4,782,010 $ 47,820 $ 2,148,470 $ 4,735,935 $ (529,584) $ 10,907 $ 38,693
=============================================================================================================================
</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 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. Revenue from claims adjusted by employees of the Company are
recognized as the services are performed; revenue 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
revenue are collections received from one customer which provided the Company
with revenue representing approximately $426,000 or 9.2%, $990,000 or 18.8%, and
$1,047,000 or 20.8% of the continuing licensee and franchisee fees during the
years ended June 30, 1998, 1997 and 1996, respectively. Outstanding licensee and
franchisee fees receivable related to this customer were approximately $6,800 at
June 30, 1998 and $95,000 at June 30, 1997. In June of 1997 this client elected
to place its adjusting service needs with other vendors. This transition has
caused revenue from this client to decrease by $564,000, or 60%, in this fiscal
year.
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 carry-forwards 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 revenue 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
equity securities and 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 -- 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 -- 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 and
is effective for the Company's year ending June 30, 1999. 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, 1999. The Company has not determined the effect of the adoption
of this Statement would have on the Company's financial statement disclosure.
EARNINGS PER COMMON SHARE -- 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 have been
restated with no material effect.
The weighted-average number of shares of common stock used to compute the basic
earnings per share was increased by 7,316, 24,189, and 7,505, respectively, for
the dilutive effect of the employee stock options.
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.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION - Certain items on the financial statements for the years ended
June 30, 1997 and 1996 have been reclassified, with no effect on net income, to
be consistent with classifications adopted for the year ended June 30, 1998.
NOTE 2: SUPPLEMENTAL CASH FLOW INFORMATION
1998 1997 1996
--------------------------------------------
Cash paid during the year:
Interest $ 30,898 $ 7,259 $ 8,056
Income taxes $ 607,170 $ 854,741 $ 794,454
NOTE 3: RECEIVABLES
Receivables consist of: 1998 1997
-------------------
Accounts receivable trade $187,846 $145,902
Licensee and franchisee fees receivable 532,202 538,601
Errors and omissions insurance premium advanced 114,028 105,953
Other 7,398 50,616
-------------------
Total receivables 841,474 841,072
Less allowance for doubtful accounts 159,644 100,500
-------------------
$681,830 $740,572
===================
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:
1998 1997
-----------------------
Advances to licensees and franchisees $1,546,766 $1,453,164
Less allowance for doubtful advances 215,576 149,637
-----------------------
1,331,190 1,303,527
Less current portion 900,190 872,527
-----------------------
Long term portion $ 431,000 $ 431,000
=======================
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consist of:
1998 1997
-----------------------
Building and improvements $1,269,288 $1,269,288
Computers and software 231,810 171,661
Furniture and fixtures 312,565 285,878
Automobiles 143,225 140,249
-----------------------
1,956,888 1,867,076
Less accumulated depreciation and amortization 819,302 717,593
-----------------------
1,137,586 1,149,483
Land 586,743 586,743
-----------------------
$1,724,329 $1,736,226
=======================
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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, 1998 and 1997:
Gross Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------------------------------------------
1998
---------------------------------------------
Available for Sale Securities
U.S. government securities $ 993,148 $ -- $ -- $ 993,148
Equity securities 257,678 68,311 29,618 296,371
---------------------------------------------
Total available for sale
securities 1,250,826 68,311 29,618 1,289,519
Held to maturity securities
Local government securities
& other 694,724 26,766 1,138 720,352
---------------------------------------------
$1,945,550 $ 95,077 $ 30,756 $2,009,871
=============================================
1997
---------------------------------------------
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
=============================================
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.
The Company recognized a loss of $93 and $74,914 for the years ended June 30,
1998 and 1997, respectively, 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:
1998 1997
------- -------
Balance Due $35,000 $65,000
Imputed interest @ 7.25% 1,538 5,017
------- -------
33,462 59,983
Less Current Portion 28,509 26,521
------- -------
Long Term Portion $ 4,953 $33,462
======= =======
Interest paid on outstanding debt amounted to $3,681 in 1998 and $7,110 in 1997.
Aggregate payments for the term of the agreement are as follows:
Year Ending June 30,
1999 28,509
2000 4,953
-------
$33,462
=======
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FRONTIER ADJUSTERS OF AMERICA, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTE 8: LICENSING AND FRANCHISING
As of June 30, 1998, the Company has entered into 480 license and franchise
agreements with 434 entities, operating 439 offices with 662 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, 1998, 1997 and 1996
were approximately $42,050,000, $48,060,000 and $46,830,000, 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
---------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Revenue $ 4,596,657 $ 1,228,691 $ -- $ 5,825,348
Costs and expenses 3,444,402 1,123,172 356,778 4,924,352
--------------------------------------------------------
Income (loss) from operations $ 1,152,255 $ 105,519 $ (356,778) $ 990,996
========================================================
Identifiable assets $ 4,520,408 $ 540,212 $ 2,740,080 $ 7,800,700
========================================================
Number of advertised locations
Beginning of year 646 12 -- 658
Opened 23 -- -- 23
Closed (19) -- -- (19)
Ownership changes 2 (2) -- --
--------------------------------------------------------
652 10 -- 662
========================================================
1997
Revenue $ 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
========================================================
1996
Revenue $ 5,044,028 $ 597,956 $ -- $ 5,641,984
Cost and expenses 3,101,217 592,467 246,651 3,940,335
--------------------------------------------------------
Income (loss) from operations $ 1,942,811 $ 5,489 $ (246,651) $ 1,701,649
========================================================
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
========================================================
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 9: INCOME TAXES
The components of the provision for income taxes at June 30 are as follows:
1998 1997 1996
----------------------------------
Federal
Current $ 241,232 $ 695,946 $ 600,407
Deferred 93,123 (208,979) (34,540)
State
Current 56,872 186,406 163,140
Deferred 24,165 (54,230) (7,702)
----------------------------------
Income taxes $ 415,392 $ 619,143 $ 721,305
==================================
A reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate follows:
1998 1997 1996
----------------------------------
Statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net 5.1 5.5 5.5
Non-deductible items 3.4 1.6 1.1
Non-taxable revenue (1.4) (1.1) (1.0)
Other (1.7) (2.3) (1.7)
----------------------------------
Effective rate 40.4% 38.7% 38.9%
==================================
Net deferred tax assets consist of the following components:
1998 1997
----------------------
Deferred tax assets
Current:
Allowance for doubtful accounts $ 143,631 $ 94,443
Other liabilities 82,109 272,794
----------------------
225,740 367,237
Long term:
Property and equipment 63,532 39,323
----------------------
$ 289,272 $ 406,560
======================
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 $93,000 in
fiscal 1998, $92,000 in fiscal 1997 and $90,500 in fiscal 1996 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
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 11: PROFIT SHARING PLAN (CONTINUED)
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 $258,272,
$217,601, and $175,390 for the years ended June 30, 1998, 1997, and 1996
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 for grants in which the fair value per
share exceeds the exercise price per share. No compensation expense has been
charged to expense for any period presented. 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, reported net income for 1998, 1997, and 1996 would
have decreased by $20,000, $20,000 and $0, respectively, with no effect on
earnings per share.
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.
Outstanding options become exercisable in varying amounts beginning one year
after grant. Information regarding these option plans are as follows:
Number of Shares
-----------------------------------------------------------
1998 1997 1996
-----------------------------------------------------------
Number of Weighted Number of Weighted Number of Weighted
Shares Average Shares Average Shares Average
-----------------------------------------------------------
Outstanding July 1 300,000 $ 3.05 200,000 $ 3.14 200,000 $ 3.14
Granted -- -- 100,000 2.88 -- --
Exercised -- -- -- -- -- --
-----------------------------------------------------------
Outstanding June 30 300,000 $ 3.05 300,000 $ 3.05 200,000 $ 3.14
===========================================================
1998 1997 1996
-------------------------------
Exercisable at end of year 234,782 200,000 200,000
Weighted-average fair value per option
of options granted during the year $ .00 $ .60 $ .00
At June 30, 1998, 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.
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Contractual Life Price Exercisable Price
- ---------- ----------- ---------------- -------- ----------- --------
$2.50-2.75 86,870 6.6 2.62 86,870 2.62
$2.88 100,000 8.0 2.88 34,782 2.88
$3.38-3.71 113,130 5.7 3.60 113,130 3.60
------- -------
300,000 234,782
======= =======
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 12: STOCK OPTIONS (CONTINUED)
In determining the proforma amounts above, the value of each grant was estimated
at the grant date using the Black-Scholes option pricing model with the
following assumptions for grants in 1997: a dividend rate of 5%, a price
volatility of 28%, a risk free rate of 6%, and an expected life of six years.
NOTE 13: COMMITMENTS AND CONTINGENCIES
Subsequent to June 30, 1998, the Board of Directors approved payment of 3.75
cents per share common stock dividend, to be paid on September 10, 1998, to all
shareholders of record on August 20, 1998.
The Company entered into five-year employment agreements with three key
executive officers, two 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 $786,497, $788,605, and
$635,436 for the years ended June 30, 1998, 1997, and 1996, respectively.
The aggregate commitment for future salaries at June 30, 1998, excluding bonuses
and cost of living increases, is $1,294,193 as follows:
Year ended June 30,
-------------------
1999 568,917
2000 568,917
2001 156,359
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
------------------------------------------
1999 39,477
The Company has leased office space and postage meters for its Las
Vegas/Henderson, Nevada and Tucson, Arizona operations and storage space for its
Las Vegas/Henderson operation under various noncancellable agreements. These
leases expire between December 31, 1998 and June 30, 2001 and require various
minimum annual rental payments. Each office lease also requires the payment of
taxes.
The total minimum rental commitment at June 30, 1998 is due as follows:
During the year ending June 30:
1999 $35,633
2000 22,293
2001 948
-------
$58,874
=======
The total rental expense included in the income statements for the years ended
June 30, 1998, 1997, and 1996 is $34,365, $28,829, and $15,230, respectively.
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.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 13: COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
Included in Other Liabilities is the Company's payable to franchisees/licensees
and clients at June 30, 1998 and June 30, 1997 of $47,800 and $19,700,
respectively.
NOTE 14: SUBSEQUENT EVENTS
In August 1998, the Company entered into a letter of intent (the "Letter of
Intent") with United Financial Adjusting Company ("UFAC"), a wholly owned
subsidiary of the Progressive Corporation ("Progressive"), whereby UFAC will
purchase newly issued stock representing approximately 52% of the Company's
voting securities. Following the purchase by UFAC, the Company's shareholders
will be given the option to retain their shares and receive a cash distribution
of $1.60 per share or to surrender their shares for a price of $2.90 per share.
Up to an aggregate of 1,000,000 shares will be accepted for repurchase. UFAC
will purchase the newly issued securities of the Company at a price of $1.30 per
share and will not be entitled to receive the cash distribution of $1.60 per
share. If the transaction contemplated by the Letter of Intent is consummated,
UFAC, and therefore Progressive, will be able to elect a majority of the board
of directors and therefore, will be able to control the business and affairs of
the Company.
F-15
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
SUPPLEMENTARY DATA
Selected Quarterly Financial Data
(Information for all periods shown below is unaudited)
1998
--------------------------------------------------
Three Months Ended
--------------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30
----------- ----------- ----------- -----------
Revenue $ 1,483,708 $ 1,411,242 $ 1,440,432 $ 1,489,966
Income from operations 388,084 319,846 233,857 (40,791)
Income before income taxes 426,229 386,659 274,900 (59,921)
Net income 258,642 234,391 166,817 (47,375)
Net income per share
Basic .06 .05 .04 (.01)
Diluted .06 .05 .04 (.01)
Weighted average shares
outstanding
Basic 4,605,358 4,605,358 4,605,358 4,605,358
Diluted 4,605,358 4,628,045 4,611,934 4,605,358
1997
--------------------------------------------------
Three Months Ended
--------------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30
----------- ----------- ----------- -----------
Revenue $ 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
Basic .07 .07 .06 .01
Diluted .07 .07 .06 .01
Weighted average shares
outstanding
Basic 4,614,684 4,605,358 4,605,358 4,605,358
Diluted 4,626,202 4,638,337 4,635,531 4,627,521
1996
--------------------------------------------------
Three Months Ended
--------------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30
----------- ----------- ----------- -----------
Revenue $ 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
Basic .06 .06 .06 .06
Diluted .06 .06 .06 .06
Weighted average shares
outstanding
Basic 4,637,943 4,609,658 4,609,658 4,623,065
Diluted 4,639,614 4,612,875 4,609,607 4,648,326
F-16
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
Additions
Balance at Charged to Deductions Balance
Beginning Cost and From at End
of Period Expenses Reserves of Period
---------- ---------- ---------- ---------
Year Ended June 30, 1998:
Allowance for doubtful
accounts $ 250,137 $ 352,132 $ 227,049 $ 375,220
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
F-17
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.
</TABLE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation of our report, dated August 4, 1998,
included in this Form 10-K in the previously filed Registration Statement of
Frontier Adjusters of America, Inc.
on Form S-8 filed on April 16, 1992.
McGLADREY & PULLEN, LLP
/s/ McGladrey & Pullen, LLP
Phoenix, Arizona
September 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 929,364
<SECURITIES> 1,289,519
<RECEIVABLES> 2,388,240
<ALLOWANCES> 375,220
<INVENTORY> 0
<CURRENT-ASSETS> 4,557,995
<PP&E> 2,543,631
<DEPRECIATION> 819,302
<TOTAL-ASSETS> 7,800,700
<CURRENT-LIABILITIES> 1,343,506
<BONDS> 4,953
0
0
<COMMON> 47,820
<OTHER-SE> 6,404,421
<TOTAL-LIABILITY-AND-EQUITY> 7,800,700
<SALES> 0
<TOTAL-REVENUES> 5,825,348
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,924,352
<LOSS-PROVISION> 352,132
<INTEREST-EXPENSE> 30,738
<INCOME-PRETAX> 1,027,867
<INCOME-TAX> 415,392
<INCOME-CONTINUING> 612,475
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 612,475
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
