SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ______________ to ______________
Commission File Number 1-12902
FRONTIER ADJUSTERS OF AMERICA, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Arizona 86-0477573
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
45 East Monterey Way, Phoenix, AZ 85012
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(Address of principal executive offices)
(602) 264-1061
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of shares of Common Stock outstanding on November 12, 1999 8,957,560
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1999 June 30, 1999
(unaudited) (*)
------------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,722,550 $ 6,892,851
Investments 12,866 --
Receivables 1,443,383 1,603,756
Prepaid expenses 278,651 344,041
Other 230,682 298,214
------------ ------------
TOTAL CURRENT ASSETS 3,688,132 9,138,862
------------ ------------
PROPERTY AND EQUIPMENT 2,632,457 2,540,219
Less accumulated depreciation and
amortization (966,320) (931,283)
------------ ------------
1,666,137 1,608,936
------------ ------------
OTHER ASSETS
Cost of subsidiary in excess of net
tangible assets acquired 213,817 213,817
Less accumulated amortization (182,018) (181,440)
------------ ------------
31,799 32,377
Receivables (Long term) 320,000 350,000
Investments (Long term) 685,254 685,148
Other 280,068 303,661
------------ ------------
$ 1,317,121 1,371,186
------------ ------------
TOTAL ASSETS $ 6,671,390 $ 12,118,984
============ ============
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 31,105 $ 28,005
Accrued expenses 152,417 404,325
Franchisee/licensee remittance payable 706,132 552,946
Accrued income taxes 150,427 --
Service fees due to UFAC 75,000 50,000
Distribution payable -- 5,918,475
Other 126,802 111,600
------------ ------------
TOTAL CURRENT LIABILITIES 1,241,883 7,065,351
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 90,191 90,191
Additional paid in capital 2,104,426 2,104,426
Treasury stock (184,368) (184,368)
Other 29,195 20,653
Retained earnings 3,390,063 3,022,731
------------ ------------
5,429,507 5,053,633
------------ ------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 6,671,390 $ 12,118,984
============ ============
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed statements.
2
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FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
----------- -----------
REVENUE
Continuing licensee and franchisee fees $ 1,312,607 $ 1,273,123
Adjusting and risk management fees 363,457 360,246
----------- -----------
1,676,064 1,633,369
----------- -----------
COST AND EXPENSES
Compensation and fringe benefits 586,377 717,766
Office 90,500 95,515
Advertising and promotion 41,434 40,587
Depreciation and amortization 57,522 62,475
Provision for doubtful accounts 52,840 48,000
Service fees paid to UFAC 75,000 --
Other 219,485 273,706
----------- -----------
1,123,158 1,238,049
----------- -----------
INCOME FROM OPERATIONS 552,906 395,320
----------- -----------
OTHER INCOME (EXPENSE)
Interest income 23,064 29,434
Other (net) 7,959 (1,491)
----------- -----------
31,023 27,943
----------- -----------
INCOME BEFORE INCOME TAXES 583,929 423,263
INCOME TAXES 216,597 167,347
----------- -----------
NET INCOME $ 367,332 $ 255,916
=========== ===========
EARNINGS PER SHARE
Basic $ .04 $ .06
=========== ===========
Diluted $ .04 $ .06
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 8,957,560 4,605,358
=========== ===========
Diluted 8,957,560 4,609,163
=========== ===========
The accompanying notes are an integral part of these condensed statements.
3
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FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
--------- ---------
NET INCOME $ 367,332 $ 255,916
--------- ---------
OTHER COMPREHENSIVE INCOME (NET OF TAX)
Foreign currency translation adjustments 448 --
Unrealized gain (loss) on securities 8,094 (27,897)
--------- ---------
8,542 (27,897)
--------- ---------
COMPREHENSIVE INCOME $ 375,874 $ 228,019
========= =========
The accompanying notes are an integral part of these condensed statements.
4
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FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
----------- -----------
NET INCOME $ 367,332 $ 255,916
----------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 57,522 63,021
Loss on disposition of property & equipment -- 4,979
Allowance for doubtful accounts 52,840 48,000
Change in assets and liabilities:
(Increase) decrease in:
Receivables 83,032 (26,000)
Prepaid expenses 65,390 16,666
Other 57,772 137,271
Increase (decrease) in:
Accounts payable 3,100 21,048
Service fees due to UFAC 25,000 --
Accrued expenses (101,481) (339,965)
Franchisee and licensee remittance payable 153,186 27,259
Other 10,166 (13,299)
----------- -----------
Total adjustments 406,527 (61,020)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 773,859 194,896
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment -- 21,510
Capital expenditures (92,238) (89,497)
Investment purchased -- (988,096)
Proceeds from sales of investments -- 1,000,000
Proceeds from sales of license 25,000 --
Payments on License acquisition (13,660) (6,935)
Advances to licensees and franchisees (1,020,525) (1,092,284)
Collections of advances to licensees
and franchisees 1,075,026 1,137,159
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (26,397) (18,143)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends (5,918,475) (172,701)
----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES (5,918,475) (172,701)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 712 --
----------- -----------
NET INCREASE (DECREASE) IN CASH (5,170,301) 4,052
Cash at beginning of the period 6,892,851 929,364
----------- -----------
Cash at the end of the period $ 1,722,550 $ 933,416
=========== ===========
Supplemental disclosures of Cash Flow information
Cash paid during the period
Income taxes $ 5,777 $ 3,215
Interest $ 774 $ 565
The accompanying notes are an integral part of these condensed statements.
5
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FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results of operations for the interim periods.
The results of operations for the three month period ended September 30,
1999 are not necessarily indicative of the results to be expected for the
full year.
(2) Reportable Segments
Financial information with respect to the Company's reportable segments
follows:
<TABLE>
<CAPTION>
Las Vegas/Henderson Corporate and
and Tucson Offices Phoenix Office Consolidated
------------------ -------------- ------------
<S> <C> <C> <C>
September 30, 1999
Revenue $ 129,335 $1,546,729 $1,676,064
Depreciation and Amortization 10,672 46,850 57,522
Interest Income -- 23,064 23,064
Segment Net Income 3,676 363,656 367,332
Expenditures for Segment Assets -- 92,238 92,238
Segment Assets $ 144,208 $6,527,182 $6,671,390
September 30, 1998
Revenue $ 119,735 $1,513,634 $1,633,369
Depreciation and Amortization 10,255 52,220 62,475
Interest Income -- 29,434 29,434
Segment Net Income (Loss) (914) 256,830 255,916
Expenditures for Assets 1,013 88,484 89,497
Segment Assets $ 156,686 $7,369,198 $7,525,884
</TABLE>
(3) Earnings Per Share
The effect of 129,629 stock options are not included in the earnings per
share calculation because they are antidilutive.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this Report on Form 10-Q that are not purely
historical are forward looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the
Company's "expectations", "anticipation", "hopes", "intentions", "beliefs",
or "strategies" regarding the future. Forward looking statements include
statements regarding revenue, margins, expenses, and earnings analysis with
regard to the Company or with regard to the Company's licensees and
franchisees for the remainder of fiscal 2000 and thereafter; improvement of,
and growth in the number of, licensees and franchisees; future spending on
marketing and product development strategy; statements regarding Year 2000
readiness; statements regarding the outcome of litigation; and liquidity and
anticipated availability of cash for operations and capital expenditures.
All forward looking statements included in this document are based on
information available to the Company on the date of this report, and the
Company assumes no obligation to update any such forward looking statements.
It is important to note that the Company's actual results could differ
materially from those in such forward looking statements. Among the factors
that could cause actual results to differ materially are the factors
discussed in this report and any other reports on file with the SEC,
including but not limited to the extent and nature of natural disasters in
geographic areas serviced by the Company or by its licensees and
franchisees; management decisions by insurance companies and self-insureds
to increase or decrease the degree to which they contract for services
offered by the Company, its licensees or franchisees; the Company's ability
to identify and attract new qualified licensees and franchisees; the success
of the Company's promotional and marketing programs; the Company's ability
to successfully manage offices reacquired from existing licensees and
franchisees; and uninsured liability for acts or omissions of the Company's
employees, licensees, or franchisees.
FINANCIAL CONDITION
The Company has historically financed its growth and on-going operations
with cash generated from operations. In the quarter ended September 30,
1999, the Company's operations generated $774,000 in cash.
During the three months ended September 30, 1999, the most significant items
affecting cash generated by the Company's operations are net income, the
$153,000 increase in franchisee and licensee remittance payable and the
$101,000 decrease in accrued expenses. The increase in remittance payable
reflects the timing difference of payout dates to the period end. The
decrease in accrued expenses results from the payout of employee benefits
and bonuses during the three months ended September 30, 1999.
The Company anticipates that during fiscal 2000 its operations will generate
sufficient cash to fund its operations and equipment acquisitions. Through
its capital investment program, the Company replaces obsolete or outdated
equipment and invests in new equipment and furnishings to maintain or
increase the productivity of the Company and its employees. The Company
anticipates investing $200,000 to $300,000 in fiscal 2000 for equipment and
furnishings pursuant to its capital investment program.
6
<PAGE>
In June 1999, a complaint was filed in United States District Court in
Nebraska against multiple defendants including the Company. The complaint
arises from the alleged embezzlement by a former licensee in connection with
claims services provided for the benefit of the plaintiff. The complaint
seeks damages of at least $1,800,000 from the Company. As the lawsuit is
still in its earliest phase, the Company cannot yet assess the merits of the
complaint or the effects this litigation will have on the Company. For
further discussion, see "Item 1 - Legal Proceedings".
The Company's ratio of current assets to current liabilities was 2.97 to 1
as of September 30, 1999 and 1.29 to 1 as of June 30, 1999.
RESULTS OF OPERATIONS - QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO 1998
REVENUE
The Company's revenue increased 2.6% or $43,000 to $1,676,000 in the current
quarter from $1,633,000 in the same period of the prior fiscal year. The
increase represents a $40,000 increase in continuing licensee and franchisee
fees and a $3,000 increase in adjusting and risk management fees.
The increase of $3,000 in adjusting and risk management fees from $360,000
in the quarter ended September 30, 1998 to $363,000 in the quarter ended
September 30, 1999 represents a 1% increase. The Company experienced an
increase of $28,000 in adjusting fees in its Las Vegas office, and decreases
of $6,000 and $19,000 in adjusting fees from the Phoenix and Tucson offices,
respectively. The increase in the Las Vegas office is primarily the result
of an increase in storms this quarter as compared to the same period of the
prior year.
The Company's revenue from continuing licensee and franchisee fees increased
3% or $40,000 from $1,273,000 in the quarter ended September 30, 1998 to
$1,313,000 in the quarter ended September 30, 1999. This increase reflects
the benefit to the Company's licensees and franchisees from an increase in
claims assignments from insurance companies and self insureds.
The Company's revenue is affected by numerous matters including the work
loads of other companies and claims presented by their clients. The Company,
therefore, is unable to project its future revenue. The Company has
historically seen growth in licensee and franchisee fees paid. However,
during fiscal 1998, the Company experienced a decrease in revenue due
primarily to the phase out of a business relationship with its then major
client. The Company has responded to the loss of revenue by continuing 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. The Company's revenue did recover in fiscal 1999,
to an amount comparable to that of fiscal 1997, which was prior to the loss
of the client, and the Company hopes to see continued growth in licencee and
franchisee fees paid from other sources.
COMPENSATION AND FRINGE BENEFITS
Compensation and fringe benefits represent approximately 52% of the
Company's cost and expenses and are the Company's largest single item of
expense. These expenses decreased 18.4% or $132,000 from $718,000 in the
three months ended September 30, 1998 to $586,000 in the current quarter.
This decrease is the result of the retirements of William J. Rocke, former
CEO and former Chairman of the Board, and Jean E. Ryberg, former President,
on June 30, 1999. Certain of the services provided by Mr. Rocke and Mrs.
Ryberg are now provided by United Financial Adjusting Company ("UFAC")
pursuant to a service agreement between the Company and UFAC. Charges for
these services are reflected in a monthly fee paid to UFAC. See discussion
below.
SERVICE FEES
On April 30, 1999, the Company entered into a service agreement with UFAC
whereby the Company pays a $25,000 monthly fee for certain services provided
by UFAC. Services included under this agreement are management, marketing,
technology, human resource support, and accounting and reporting. For the
three months ended September 30, 1999, the Company incurred $75,000 in
service fees. The Company did not incur any service fees related to this
agreement in the same quarter of the prior fiscal year.
7
<PAGE>
EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS AND SERVICE FEES
The Company's expenses other than compensation decreased $59,000 during the
three months ended September 30, 1999 as compared to the same quarter of the
prior fiscal year. The principal items affecting these expenses are
decreases in the following expenses: Directors fees of $13,500; general
insurance of $17,000; legal fees of $12,000; and computer consulting fees of
$11,000. The balance of the Company's costs and expenses have not
significantly changed from the same period of the prior fiscal year.
INCOME TAXES
The Company's income taxes were 37.1% and 39.5% of its income before taxes
for the three months ending September 30, 1999 and 1998, respectively. A
difference in these rates is due to a decrease in permanent differences in
book and tax income between the periods. The Company's income taxes have not
been significantly affected by any changes in the federal and state laws.
However, tax rates can be changed at any time based upon legislation.
OTHER INCOME
The Company's other income increased $3,000 or 10.7% from $28,000 in the
quarter ended September 30, 1998 to $31,000 in the current quarter. The most
significant items affecting other income include a $6,000 decrease in
interest income, a $5,000 increase in other income, and a $5,000 loss on the
sale of fixed assets for the quarter ended September 30, 1998.
NET INCOME
The Company's net income for the quarter ended September 30, 1999 increased
$111,000 or 43.4% from $256,000 in the quarter ended September 30, 1998 to
$367,000 in the current quarter. The most significant items affecting net
income were a $43,000 increase in revenue, a $132,000 decrease in
compensation and fringe benefits, a $75,000 increase in service fees, and a
$59,000 decrease in expenses other than compensation and fringe benefits and
service fees.
RESULTS OF OPERATIONS - QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO 1997
REVENUE
The Company's revenue increased 10% or $149,000 to $1,633,000 in the quarter
ended September 30, 1998, from $1,484,000 in the same period of the prior
fiscal year. The increase is a combined $96,000 increase in adjusting and
risk management fees and a $53,000 increase in continuing licensee and
franchisee fees.
The increase of $96,000 in adjusting and risk management fees from $264,000
in the quarter ended September 30, 1997 to $360,000 in the quarter ended
September 30, 1998 represents a 36% increase. The Company experienced an
increase of $120,000 in adjusting fees in its Phoenix office, and decreases
of $17,000 and $7,000 in adjusting fees from the Las Vegas/Henderson and
Tucson offices, respectively. The increase in fees from the Phoenix office
primarily reflects fees generated from a new client.
The Company's revenue from continuing licensee and franchisee fees increased
4% or $53,000 from $1,220,000 in the quarter ended September 30, 1997 to
$1,273,000 in the quarter ended September 30, 1998. This increase reflects
the benefit to the Company's licensees and franchisees due to an increase in
the use of their services by insurance companies and self-insureds resulting
from a larger volume of claims and from a greater demand for the Company's
services.
The Company's revenue is affected by numerous factors including the work
loads of other companies and claims presented by their clients. Therefore,
the Company is unable to project its future revenue. The Company has
8
<PAGE>
historically seen growth in licensee and franchisee fees paid. However,
during the prior fiscal year the Company experienced a decrease in revenue
due primarily to the phase out of its business relationship with its then
major client. The Company has responded to this loss by continuing 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. For the quarter ended September 30, 1998, the
Company successfully completed negotiations for national/regional
relationships with three new clients and with one existing client for
additional services. In addition, the Company believes that it will continue
to realize growth as it adds additional qualified licensees and franchisees.
Furthermore, the Company expects to continue to reflect revenue from its
Phoenix, Tucson, and Las Vegas/Henderson operations.
COMPENSATION AND FRINGE BENEFITS
Compensation and fringe benefits represent approximately 58% of the
Company's costs and expenses and represent the largest single item of
expense. These expenses increased 11% or $73,000 from $645,000 in the three
months ended September 30, 1997 to $718,000 in the quarter ended September
30, 1998. This increase is the result of the addition of a Marketing
Director in the second quarter of the last fiscal year, additional employees
hired including temporary employees to handle increased work loads in the
Corporate and Phoenix office, and cost of living and merit increases given
to employees.
EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS
The Company's expenses other than compensation and fringe benefits increased
$70,000 during the three months ended September 30, 1998 as compared to the
same quarter of the prior fiscal year. The principal items affecting these
expenses are a $40,000 increase in audit and accounting fees, a $15,000
increase in computer consulting fees, a $14,000 increase in directors fees,
a $12,000 increase in insurance costs, and a $19,000 decrease in advertising
and promotional expenses.
The increase in audit and accounting fees reflects the Company's decision to
outsource certain accounting functions that were previously performed
in-house. The Company believes that this will enable it to more efficiently
monitor compliance of the constantly changing state and federal laws and
regulations. Furthermore, the Company incurred increased auditing and
accounting and consulting fees in the current quarter. The increase in
computer consulting fees relates to the Company's planning for and
utilization of improved technology to provide better services to its
franchisees/licensees and clients. The increase in insurance costs results
from an increase in the cost of insurance as well as increased coverage. The
increase in directors fees reflects the greater number of directors meetings
in the first quarter of this fiscal year due to consideration by the Board
of the UFAC transaction. The decrease in advertising and promotional
expenses reflects the purchase of promotional items in the first quarter of
the prior fiscal year. The Company anticipates similar purchases in the
second quarter of the current fiscal year. The balance of the Company's
costs and expenses have not significantly changed from the same period of
the prior year.
INCOME TAXES
The Company's income taxes were 39.5% of its income before taxes, or
approximately the same as they were in the prior fiscal year. Changes made
in the tax laws by various states and by the federal government have not had
a material affect on the Company's current overall tax rates, however, this
could change at any time.
OTHER INCOME
The Company's other income decreased $10,000 or 26% from $38,000 in the
quarter ended September 30, 1997 to $28,000 in the quarter ended September
30, 1998. The most significant items affecting other income include a $7,000
decrease in interest income, and a loss on the sale of fixed assets of
$5,000.
9
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NET INCOME
The Company's net income for the quarter ended September 30, 1998, decreased
$3,000 or 1% from $259,000 in the quarter ended September 30, 1997 to
$256,000 in the quarter ended September 30, 1998. The most significant items
affecting net income were a $149,000 increase in revenue, a $73,000 increase
in compensation and fringe benefits, a $70,000 increase in expenses other
than compensation and fringe benefits.
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 examined both its information technology and
non-information technology systems. The Company determined that certain of
the software used by the Company is not Year 2000 compliant. The Company has
identified and purchased upgraded software that is Year 2000 compliant. In
addition, the Company is currently updating all custom software so that it
is Year 2000 compliant. A full-time programmer is dedicating all of her
efforts to this project. The Company expects to complete these upgrades by
November 30, 1999. The Company has had its computer servers tested
internally and by an external party. The external party has found all but
one operating system are compliant. Arrangements are currently being made to
upgrade the noncompliant server. The Company hopes to finish its testing of
internal systems by November 30, 1999.
All of the Company's personal computers that need to be Year 2000 compliant
have been upgraded. The Company has determined that its telephone, alarm,
heating, and air conditioning systems will not be affected by the Year 2000.
The Company has completed an analysis of the Company's operations to
identify the remaining Year 2000 issues embodied in its operations and
facilities and is developing a plan to resolve such issues. The Company
expects to complete the formal plan of resolution by November 30, 1999.
Certain software products sold by the Company to certain of its licensees
and franchisees in prior years are not Year 2000 compliant. A partial
upgrade to accommodate current policy dates on or after Year 2000 has
already been developed and distributed to franchisees free of charge. 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 November 30, 1999. 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. None of the
responses received thus far have indicated any major problems. As the
Company identifies these issues, it will determine the steps necessary to
minimize disruptions due to failures in Year 2000 compliance by its
customers
and/or vendors.
To date, the Company has paid approximately $240,000 in the analysis,
development, and implementation of a plan to address its Year 2000 issues,
and does not expect costs to exceed $325,000 in total. 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
10
<PAGE>
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.
In its reasonably likely worst case Year 2000 scenario, the Company
anticipates that the software which it uses, despite the completion
upgrades, will still fail to be Year 2000 compliant. In addition, it is
possible that the software sold by the Company to certain of its licensees
and franchisees will not become Year 2000 compliant despite the Company's
efforts to upgrade this software. Finally, the Company anticipates the
possibility that its customers' and vendors' systems will not be Year 2000
compliant. In the event that any of these scenarios materialize, the Company
expects that it would experience problems processing transactions and
remitting checks to licensees and franchisees. Licensees and franchisees
would experience a slow-down in their processing of paperwork.
In the event that the steps being implemented by the Company fail to avoid
problems associated with the Year 2000, the Company is currently developing
its contingency plans. Such plans may include the immediate purchase of
replacement hardware or software at the beginning of the Year 2000, the
switching of vendors who supply goods or services to the Company, or other
alternatives. In addition, the Company installed a back-up power generator
in August 1999 to prepare for the unlikely event of a power grid failure.
The Company anticipates that its contingency plans will be completed no
later than November 30, 1999.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss to future earnings, fair values, or future
cash flows due to potential changes in the price of a financial instrument.
A financial instrument's value may change as a result of changes in interest
rates, exchanges rates, commodity prices, equity prices, and other market
changes. Market risk is inherent in all market risk sensitive financial
instruments.
During the three months ended September 30, 1999, the Company owned an
immaterial number of common shares. However, in October 1999, the Company
sold these shares and is no longer exposed to any market risk associated
with this investment.
The Company has a book value of $668,000 invested in municipal bonds that it
carries as long term held to maturity investments. An increase in interest
rates would result in a decline in the market value of the bonds. These
bonds mature between 2005 and 2031. As the Company has the intent and
ability to hold these bonds to maturity, the market risk associated with
these bonds is insignificant and does not have a material effect on the
financial statements.
Although the Company wholly owns a Canadian subsidiary, the cash held by the
Canadian subsidiary is not material to the Company's operations. Therefore,
any foreign currency fluctuations would not have a material effect on the
Company's financial statements.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In June 1999, Safeway Inc. filed a complaint against multiple defendants
including the Company in the United States District Court in Nebraska. The
complaint arises from the alleged embezzlement of over $1,800,000 by a
former franchisee of the Company. The complaint alleges claims against the
Company in connection with claims services provided for the benefit of
Safeway, Inc., including breach of fiduciary duty, negligent failure to
monitor or supervise, vicarious liability, and breach of contract. The
complaint seeks an accounting and a recovery of compensatory damages of at
least $1,800,000. As the lawsuit is still in its earliest phase, the Company
cannot yet assess the merits of the complaint or the effects this litigation
will have on the Company. The Company has sought coverage under various
insurance policies it holds and has received denials of coverage from the
carriers. As of September 30, 1999, the Company has not accrued any
liability with respect to this lawsuit.
From time to time in the normal course of its business, the Company is named
as a defendant in lawsuits. With the exception of the complaint described
above, the Company does not believe that it is subject to any such lawsuits
or litigation or threatened lawsuits or litigation that will have a material
adverse effect on the Company or its business.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRONTIER ADJUSTERS OF AMERICA, INC.
Date: November 12, 1999 /s/ Troy Huth
----------------- -----------------------------------
Troy Huth, President and Chairman
of the Board, Director
Date: November 12, 1999 /s/ Jeffrey R. Harcourt
----------------- -----------------------------------
Jeffrey R. Harcourt, Chief Financial
Officer, Director
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999 (Unaudited) AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,722,550
<SECURITIES> 12,866
<RECEIVABLES> 1,845,816
<ALLOWANCES> 402,433
<INVENTORY> 0
<CURRENT-ASSETS> 3,688,132
<PP&E> 2,632,457
<DEPRECIATION> 966,320
<TOTAL-ASSETS> 6,671,390
<CURRENT-LIABILITIES> 1,241,883
<BONDS> 0
0
0
<COMMON> 90,191
<OTHER-SE> 5,339,316
<TOTAL-LIABILITY-AND-EQUITY> 6,671,390
<SALES> 0
<TOTAL-REVENUES> 1,676,064
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,070,318
<LOSS-PROVISION> 52,840
<INTEREST-EXPENSE> 774
<INCOME-PRETAX> 583,929
<INCOME-TAX> 216,597
<INCOME-CONTINUING> 367,332
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 367,332
<EPS-BASIC> .04
<EPS-DILUTED> .04
</TABLE>
