FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _____________ to _____________
Commission File Number 1-12902
FRONTIER ADJUSTERS OF AMERICA, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
ARIZONA 86-0477573
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
45 East Monterey Way, Phoenix, AZ 85012
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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 February 5, 1999 4,605,358
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 1998 June 30, 1998
----------------- -------------
(unaudited) (*)
ASSETS
CURRENT ASSETS
Cash $ 644,423 $ 929,364
Investments 1,295,206 1,289,519
Receivables 1,529,915 1,582,020
Prepaid expenses 265,820 317,454
Other 378,105 439,638
----------- -----------
TOTAL CURRENT ASSETS 4,113,469 4,557,995
----------- -----------
PROPERTY AND EQUIPMENT 2,600,205 2,543,631
Less accumulated depreciation and
amortization (872,214) (819,302)
----------- -----------
1,727,991 1,724,329
----------- -----------
OTHER ASSETS
Cost of subsidiary in excess of net
tangible assets acquired 213,817 213,817
Less accumulated amortization (180,285) (179,129)
----------- -----------
33,532 34,688
Receivables (Long term) 400,000 431,000
Investments (Long term) 694,937 694,724
Other 314,215 357,964
----------- -----------
1,442,684 1,518,376
----------- -----------
TOTAL ASSETS $ 7,284,144 $ 7,800,700
=========== ===========
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 56,188 $ 62,118
Accrued expenses 293,128 513,365
Franchisee/licensee remittance payable -- 545,830
Current portion long term liability 19,465 28,509
Other 200,248 193,684
----------- -----------
TOTAL CURRENT LIABILITIES 569,029 1,343,506
----------- -----------
LONG TERM LIABILITY -- 4,953
STOCKHOLDERS' EQUITY
Common stock 47,820 47,820
Additional paid in capital 2,148,470 2,148,470
Treasury stock (529,584) (529,584)
Other 49,760 49,600
Retained earnings 4,998,649 4,735,935
----------- -----------
6,715,115 6,452,241
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 7,284,144 $ 7,800,700
=========== ===========
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed statements.
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FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Six Months Ended Three Months Ended
December 31, December 31,
--------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUE
Continuing licensee and
franchisee fees $2,458,500 $2,341,906 $1,185,377 $1,121,804
Adjusting and Risk Management
fees 698,982 553,044 338,736 289,438
---------- ---------- ---------- ----------
3,157,482 2,894,950 1,524,113 1,411,242
---------- ---------- ---------- ----------
COST AND EXPENSES
Compensation and employee
benefits 1,417,784 1,324,151 700,018 679,103
Office 202,925 182,419 107,410 88,270
Advertising and promotion 108,790 124,583 68,203 64,582
Depreciation and amortization 127,487 125,097 65,012 63,740
Provision for doubtful accounts 96,000 96,000 48,000 48,000
Other 548,752 334,770 275,046 147,701
---------- ---------- ---------- ----------
2,501,738 2,187,020 1,263,689 1,091,396
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 655,744 707,930 260,424 319,846
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 57,275 69,850 27,841 33,384
Other (Net) 6,333 35,108 7,824 33,429
---------- ---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) 63,608 104,958 35,665 66,813
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 719,352 812,888 296,089 386,659
INCOME TAXES 283,937 319,855 116,590 152,268
---------- ---------- ---------- ----------
NET INCOME $ 435,415 $ 493,033 $ 179,499 $ 234,391
========== ========== ========== ==========
EARNINGS PER SHARE
Basic $ .09 $ .11 $ .04 $ .05
========== ========== ========== ==========
Diluted $ .09 $ .11 $ .04 $ .05
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic 4,605,358 4,605,358 4,605,358 4,605,358
========== ========== ========== ==========
Diluted 4,607,261 4,616,702 4,605,358 4,628,045
========== ========== ========== ==========
The accompanying notes are an integral part of these condensed statements.
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FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Six Months Ended Three Months Ended
December 31, December 31,
--------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
NET INCOME $ 435,415 $ 493,033 $ 179,499 $ 234,391
--------- --------- --------- ---------
Other Comprehensive Income,
net of tax:
Foreign currency translation
adjustments -- 75 -- --
Unrealized gain (loss) on
securities 160 (32,640) 28,131 (38,071)
--------- --------- --------- ---------
160 (32,565) 28,131 (38,071)
--------- --------- --------- ---------
COMPREHENSIVE INCOME $ 435,575 $ 460,468 $ 207,630 $ 196,320
========= ========= ========= =========
The accompanying notes are an integral part of these condensed statements
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FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
---- ----
NET INCOME $ 435,415 $ 493,033
----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization:
Operations 127,487 125,048
Other 546 1,092
Gain on sale of investments -- (4,042)
Loss (Gain) on disposition of property
and equipment 3,640 (120)
Bad Debt Expense 96,000 96,000
Change in assets and liabilities:
(Increase) decrease in:
Receivables (9,142) 90,342
Prepaid expenses 51,634 35,944
Other 33,725 (71,656)
Increase (decrease) in:
Accounts payable (5,930) (864)
Accrued expenses (220,237) 139,833
Franchisee and licensee remittance payable (545,830) 21,960
Other 6,461 (506,972)
----------- -----------
Total adjustments (461,646) (73,435)
----------- -----------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (26,231) 419,598
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (117,191) (60,183)
Investments purchased (1,977,829) (989,627)
Proceeds from sales of investments 2,000,000 1,040,000
Proceeds on sale of fixed assets 26,761 200
License acquisition -- --
Payments on License acquisition (13,997) (13,021)
Advances to licensees and franchisees (2,237,113) (2,048,708)
Collections of advances to licensees
and franchisees 2,233,360 1,875,642
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES (86,009) (195,697)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends (172,701) (345,403)
Common stock repurchased -- --
----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES (172,701) (345,403)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- 125
NET INCREASE (DECREASE) IN CASH (284,941) (121,377)
Cash at beginning of the period 929,364 1,012,233
----------- -----------
Cash at the end of the period $ 644,423 $ 890,856
=========== ===========
Supplemental disclosures of Cash Flow information
Cash paid during the period
Income taxes $ 221,060 $ 377,887
Interest $ 1,003 $ 1,980
The accompanying notes are an integral part of these condensed statements.
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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 dilutive effect on weighted average shares outstanding is due to stock
options in the amounts of 43,435 and 186,870 for the six months ended
December 31, 1998 and 1997, respectively and 0 and 186,870 for the three
months ended December 31, 1998 and 1997, respectively.
The results of operations for the three and six month periods ended December
31, 1998 are not necessarily indicative
of the results to be expected for the full year.
(2) PREFERRED STOCK
During November 1998, the Board of Directors approved the issuance of up to
6,000,000 shares of convertible preferred stock.
(3) FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 130, REPORTING
COMPREHENSIVE INCOME
Effective September 30, 1998, the Company adopted Financial Accounting
Standards Board (FASB) Statement No. 130, REPORTING COMPREHENSIVE INCOME.
Statement No. 130 establishes standards for reporting and displaying
comprehensive income and its components in the full set of financial
statements. Accordingly, the Company's comprehensive income was $436,000 and
$460,000 for the six months ended December 31, 1998 and 1997, respectively,
and $208,000 and $196,000 for the three months ended December 31, 1998 and
1997, respectively.
ITEM2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this Report on Form 10-Q that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the Company's
"expectations", "anticipation", "intentions", "beliefs", or "strategies"
regarding the future. Forward looking statements include statements regarding
revenue, margins, expenses, and earnings analysis with regard to the Company or
with regard to the Company's licensees and franchisees for the remainder of
fiscal 1999 and thereafter; improvement of, and growth in the number of,
licensees and franchisees; future spending on marketing and product development
strategy; the transaction with United Financial Adjusting Company described
below; statements regarding Year 2000 readiness; and liquidity and anticipated
availability of cash for operations, acquisitions, or payment of dividends. All
forward looking statements included in this document are based on information
available to the Company on the date of this report, and the Company assumes no
obligation to update any such forward looking statement. It is important to note
that the Company's actual results could differ materially from those in such
forward looking statements. Among the factors that could cause actual results to
differ materially are the factors discussed in this Report and any other reports
on file with the SEC, including but not limited to the extent and nature of
natural disasters in geographic areas serviced by the Company or by its
licensees and franchisees; management decisions by insurance companies and
self-insureds to increase or decrease the degree to which they contract for
services offered by the Company, its licensees or franchisees; the Company's
ability to identify and attract new qualified licensees and franchisees; the
Company's ability to successfully manage offices reacquired from existing
licensees and franchisees; and uninsured liability for acts or omissions of the
Company's employees, licensees, or franchisees.
In November 1998, the Company entered into a definitive agreement (the
"Agreement") with United Financial Adjusting Company ("UFAC"), a wholly owned
subsidiary of the Progressive Corporation ("Progressive"), whereby UFAC will
purchase newly issued stock representing a minimum of 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
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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 in the Agreement 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.
FINANCIAL CONDITION
The Company has historically financed its growth and ongoing operations with
cash generated from operations. In the six months ended December 31, 1998, the
Company's operations used $26,000 in cash.
During the six months ended December 31, 1998, the most significant items
affecting cash used by the Company's operations are the decreases of $220,000 in
accrued expenses and $546,000 in franchisee and licensee remittance payable. The
decrease in accrued expenses results from the payout of employee benefits and
bonuses in the first quarter of this fiscal year. The decrease in remittance
payable reflects the timing difference of payout dates to the period end. The
six months ended December 31, 1998 fell on the date of remittance payout to the
franchisees and licensees.
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 1999 for equipment and
furnishings pursuant to its capital investment program.
Without giving effect to any extraordinary dividend payable should the Company
consummate the transaction with UFAC in connection with the Agreement,
management believes that the Company will be able to fund all of its cash
requirements (i.e. current operations, capital asset acquisition, and the
payment of dividends) from its current available cash as well as funds generated
by its operations.
The Company's ratio of current assets to current liabilities was 7.23 to 1 as of
December 31, 1998 and 3.39 to 1 as of June 30, 1998.
RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO
SIX MONTHS ENDED DECEMBER 31, 1997
REVENUE
The Company's revenue increased 9% or $262,000 to $3,157,000 during the six
months ended December 31, 1998 from $2,895,000 in the same period of the prior
fiscal year. This increase represents a combined $146,000 increase in adjusting
and risk management fees and a $116,000 increase in continuing licensee and
franchisee fees.
The increase of $146,000 in adjusting and risk management fees from $553,000 in
the six months ended December 31, 1997 to $699,000 for the six months ended
December 31, 1998 represents a 26% increase. The Company experienced an increase
of $211,000 in adjusting fees in its Phoenix office, and decreases of $49,000
and $16,000 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 5%
or $116,000 from $2,342,000 in the six months ended December 31, 1997 to
$2,458,000 in the six months ended December 31, 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-insured 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 matters 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 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 six months
ended December 31, 1998, the Company successfully completed negotiations for
7
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national/regional relationships with three new clients and with one existing
client for additional services. 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 57% of the Company's
costs and expenses and represent the largest single item of expense. These
expenses increased 7% or $94,000 from $1,324,000 in the six months ended
December 31, 1997 to $1,418,000 in the current six month period. This increase
is the result of the additional employees hired including temporary employees to
handle increased work loads in the Corporate and Phoenix office as well as cost
of living and merit increases given to employees. Furthermore, certain adjusters
in the Phoenix office are compensated by commission based on their adjusting
services. As the adjusting fees in the Phoenix office increase, the wages paid
to these adjusters also increase.
EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS
The Company's expenses other than compensation and fringe benefits increased
$221,000 during the six months ended December 31, 1998 as compared to the same
period of the prior fiscal year. The principal items affecting these expenses
are an $86,000 increase in legal fees, a $69,000 increase in audit and
accounting fees, a $27,000 increase in insurance costs, and a $21,000 increase
in office expenses.
The increase in legal fees reflects the Company's increased need for legal
services in preparation for the proposed UFAC transaction. The increase in audit
and accounting fees reflects the Company's decision to outsource certain income
tax and financial reporting functions that were previously performed in-house.
The Company believes this will enable it to more efficiently monitor compliance
of the constantly changing state and federal laws and regulations. Furthermore,
the Company has incurred additional accounting fees in preparation for the
proposed UFAC transaction. The increased insurance costs reflect an increase in
the cost of insurance as well as expanded coverage. The balance of Company's
costs have not changed significantly from the same period of the prior year.
INCOME TAXES
The Company's income taxes for the six months ended December 31, 1998 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 effect on the Company's current overall tax
rates; however, there is no assurance that such changes will not occur in the
future.
OTHER INCOME
The Company's other income decreased $41,000 or 39% from $105,000 in the six
months ended December 31, 1997 to $64,000 in the current six month period. The
most significant items affecting other income are decreases in dividend and
interest income of $23,000 and $13,000, respectively.
NET INCOME
The Company's net income for the six months ended December 31, 1998 decreased
$58,000 or 12% from $493,000 in the six months ended December 31, 1997 to
$435,000 in the current period. The most significant items affecting net income
were a $262,000 increase in revenue, a $94,000 increase in compensation and
benefits, a $221,000 increase in expenses other than compensation and fringe
benefits, and a decrease of $41,000 in other income.
COMPREHENSIVE INCOME
Effective September 30, 1998, the Company adopted Financial Accounting Standards
Board (FASB) Statement No. 130, REPORTING COMPREHENSIVE INCOME. Statement No.
130 establishes standards for reporting and displaying comprehensive income and
its components in the full set of financial statements. Accordingly, the
Company's comprehensive income for the six months ended December 31, 1998 and
1997 was $436,000 and $460,000, respectively.
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RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO
THREE MONTHS ENDED DECEMBER 31, 1997
REVENUE
The Company's revenue increased 8% or $113,000 to $1,524,000 in the current
quarter from $1,411,000 in the same period of the prior fiscal year. This
increase is a combined $50,000 increase in adjusting and risk management fees
and a $63,000 increase in continuing licensee and franchisee fees.
The increase of $50,000 in adjusting and risk management fees from $289,000 in
the three months ended December 31, 1997 to $339,000 in the three months ended
December 31, 1998 represents a 17% increase. The Company experienced an increase
of $91,000 in adjusting fees in its Phoenix office and decreases of $32,000 and
$9,000 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 6%
or $63,000 from $1,122,000 in the three months ended December 31, 1997 to
$1,185,000 in the three months ended December 31, 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 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. 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 55% of the Company's
costs and expenses and represent the largest single item of expense. These
expenses increased 3% or $21,000 from $679,000 in the three months ended
December 31, 1997 to $700,000 in the current quarter. This increase is the
result of the additional employees hired including temporary employees to handle
increased work loads in the Corporate and Phoenix office as well as cost of
living and merit increases given to employees. Furthermore, certain adjusters in
the Phoenix office are compensated by commission based on their adjusting
services. As the adjusting fees in the Phoenix office increase, the wages paid
to these adjusters also increase.
EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS
The Company's expenses other than compensation and fringe benefits increased
$152,000 during the three months ended December 31, 1998 as compared to the same
quarter in the prior fiscal year. The principal items affecting these expenses
are an $80,000 increase in legal fees, a $29,000 increase in audit and
accounting fees, a $19,000 increase in office expenses, and a $15,000 increase
in insurance costs.
The increase in legal fees reflects the Company's increased need for legal
services in preparation for the proposed UFAC transaction. The increase in audit
and accounting fees reflects the Company's decision to outsource certain income
tax and financial reporting functions that were previously performed in-house.
The Company believes this will enable it to more effectively monitor compliance
of the constantly changing state and federal laws and regulations. Furthermore,
the Company has incurred additional accounting fees in preparation for the
proposed UFAC transaction. The increased insurance costs reflect an increase in
the cost of insurance as well as expanded coverage. The balance of Company's
costs have not changed significantly from the same period of the prior year.
INCOME TAXES
The Company's income taxes were 39.4% 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 federal government did not have a material
effect on the Company's current overall tax rates; however, this could change at
any time.
OTHER INCOME
The Company's other income decreased $31,000 or 46% from $67,000 in the quarter
ended December 31, 1997 to $36,000 in the current quarter. The most significant
items affecting other income include a decrease in dividend income of $23,000
and a $6,000 decrease in interest income.
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NET INCOME
The Company's net income for the quarter ended December 31, 1998, decreased
$55,000 or 24% from $234,000 in the quarter ended December 31, 1997 to $179,000
in the current quarter. The most significant items affecting net income were a
$113,000 increase in revenue, a $152,000 increase in expenses other than
compensation and fringe benefits, a $31,000 decrease in other income, and a
$21,000 increase in compensation and fringe benefits.
COMPREHENSIVE INCOME
Effective September 30, 1998, the Company adopted Financial Accounting Standards
Boards (FASB) Statement No. 130, REPORTING COMPREHENSIVE INCOME. Statement No.
130 establishes standards for reporting and displaying comprehensive income and
its components in the full set of financial statements. Accordingly, the
Company's comprehensive income for the three months ended December 31, 1998 and
1997 was $208,000 and $196,000 respectively.
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 has 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 June 30, 1999.
The Company has also tested its computer servers internally, and an external
party will test these systems shortly. The Company hopes to finish its testing
of internal systems by April, 1999.
All of the Company's personal computers that need to be Year 2000 compliant have
been updated. The Company's phone system has also been updated to be Year 2000
compliant. The Company has determined that its 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 March 31, 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 the 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 final Year 2000 compliant
version of its software by March 31, 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 have sent Year 2000 readiness surveys to
the Company's customers and vendors to determine the status of such customers'
and vendors' computer systems for Year 2000 compliance. None of the responses
received thus far have indicated any major problems. As the Company identifies
potential problems, it will determine the steps necessary to minimize
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 $225,000. 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.
10
<PAGE>
In its reasonable likely worst case Year 2000 scenario, the Company anticipates
that the software which it uses, despite the completion of 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 plans to purchase a back-up power generator in 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 July 1999.
PART II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
From time to time in the normal course of its business, the Company is named as
a defendant in lawsuits. The Company does not believe that it is subject to any
such lawsuits or litigation or threatened lawsuits or litigation that will have
a material adverse effect on the Company or its business.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRONTIER ADJUSTERS OF AMERICA, INC.
Date: February 12, 1999 /s/ William J. Rocke
-----------------------------------------------------
William J. Rocke, Chief Executive Officer/Chairman of
the Board, Acting Chief Financial Officer, Director
Date: February 12, 1999 /s/ Jean E. Ryberg
-----------------------------------------------------
Jean E. Ryberg, President, Director
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998 (Unaudited) AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 644,423
<SECURITIES> 1,295,206
<RECEIVABLES> 1,883,771
<ALLOWANCES> 353,856
<INVENTORY> 0
<CURRENT-ASSETS> 4,113,469
<PP&E> 2,600,205
<DEPRECIATION> 872,214
<TOTAL-ASSETS> 7,284,144
<CURRENT-LIABILITIES> 569,029
<BONDS> 0
47,820
0
<COMMON> 0
<OTHER-SE> 6,667,295
<TOTAL-LIABILITY-AND-EQUITY> 7,284,144
<SALES> 0
<TOTAL-REVENUES> 3,157,482
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,501,738
<LOSS-PROVISION> 96,000
<INTEREST-EXPENSE> 919
<INCOME-PRETAX> 719,352
<INCOME-TAX> 283,937
<INCOME-CONTINUING> 435,415
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 435,415
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
