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, 1999
[ ] 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
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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
incorporation or organization) Identification Number)
45 East Monterey Way 85012
Phoenix, Arizona (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (602) 264-1061
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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
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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 $4,652,648 as of August 26, 1999.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, as of August 26, 1999, was 8,957,560.
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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 in 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, 1999, the Company had entered into 494 license and
franchise agreements ("Agreements") with 391 entities, operating 407 offices
with 678 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.
As of June 30, 1999, the Company employed 42 people: 40 full-time and two
part-time. Twelve employees provided adjusting services full-time, one employee
provided adjusting services part-time, four were full-time officers of the
Company, 24 were full-time administrative staff, and one employee provided
part-time administrative support. Management believes that its relations with
its employees are good.
On April 29, 1999, at the annual shareholders' meeting, the Company's
shareholders approved the November 20, 1998, agreement between the Company and
United Financial Adjusting Company ("UFAC"), a wholly owned subsidiary of The
Progressive Corporation ("Progressive"). Pursuant to the agreement, on April 30,
1999, UFAC purchased 5,258,513 shares of the Company's newly issued shares of
Series A Convertible Voting Preferred Stock at a price of $1.30 per share.
UFAC's purchase represented approximately 53% of the Company's outstanding
voting securities at the time of purchase. Following the purchase by UFAC, the
Company issued a tender offer to purchase up to 1,000,000 common stock shares at
$2.90 per share from existing shareholders. The tender offer expired on June 12,
1999, and resulted in the purchase of 971,464 common stock shares. Subsequent to
the tender offer, UFAC's shares represented approximately 59% of the Company's
outstanding voting securities. On June 15, 1999, the Company declared a cash
distribution of $1.60 per share for shareholders of record on June 25, 1999,
payable to the holders of the rights to the distribution on July 12, 1999. Those
shares tendered in the tender offer were not eligible for the cash distribution.
UFAC was not eligible to participate in the tender offer, nor was UFAC entitled
to the cash distribution.
In accordance with the agreement with UFAC, William J. Rocke, the Company's
Chairman of the Board and CEO, and Jean E. Ryberg, the Company's President,
retired from their positions with the Company on June 30, 1999. Mr. Rocke and
Mrs. Ryberg each received retirement packages valued at $382,316 and $291,201,
respectively (includes amounts expensed in prior years). Furthermore, UFAC's
shares converted into common shares on June 30, 1999, representing approximately
59% of the Company's outstanding voting securities.
Pursuant to a management services agreement with UFAC, the Company pays a
$25,000 monthly service fee to UFAC for marketing, managerial, technological,
financial, and other services and resources. As of June 30, 1999, the Company
had incurred $50,000 in service fees pursuant to this agreement.
GENERAL
For its fiscal year ended June 30, 1999, the Company's licensing and franchising
activities accounted for approximately 78% of gross revenue, and the Company's
adjusting and risk management businesses accounted for approximately 22% of
gross revenue. For the fiscal years ended June 30, 1998 and June 30, 1997, the
Company's licensing and franchising activities accounted for approximately 79%
and 86%, respectively, of gross revenue, and the Company's adjusting and risk
management businesses accounted for approximately 21% and 14%, 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.
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GENERAL (CONTINUED)
Fiscal Year Ended June 30,
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1999 1998 1997
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Gross billings by Adjusters $44,730,000 $42,050,000 $48,060,000
(approximate)
Revenue from licensing and
franchising activities 4,936,349 4,596,657 5,278,967
Revenue from Company-owned adjusting
and risk management businesses 1,405,235 1,228,691 885,636
For its fiscal year ended June 30, 1999, the Company's licensing and franchising
activities accounted for approximately $1,051,000 in income from operations and
the Company's adjusting and risk management businesses accounted for
approximately $221,000 in income from operations. For the fiscal years ended
June 30, 1998 and June 30, 1997, the Company's licensing and franchising
activities accounted for approximately $1,152,000 and $1,710,000 respectively,
in income from operations, and the Company's adjusting and risk management
businesses accounted for approximately $106,000 and $63,000, respectively, in
income from operations.
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 1.6%,
9.2% and 18.8% of continuing licensee and franchisee fees for the years ended
June 30, 1999, 1998 and 1997, respectively. In June 1997 this client elected to
purchase the majority of its adjusting services from other vendors, and
thereafter, the revenue generated from this client substantially diminished.
For further disclosure regarding the Company's accounting segments, see Note 8
on the accompanying financial statements.
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
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CLAIMS ADJUSTING (CONTINUED)
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 1999, the Company retained 10.7% of the Adjusters'
collections as royalty fees under the Agreements.
The Company generally does not advertise for or solicit potential licensees or
franchisees. The Company believes that through the financial flexibility it
offers and the established and dependable services it provides to Adjusters, the
Company is generally 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.
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.
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OPERATION OF INDEPENDENT ADJUSTERS - CONTINUED
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 1 and 5. 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 $341,559 per month and has received reimbursement of an average of
$322,300 per month. At June 30, 1999, the Company had approximately $1,399,000
in outstanding loans or advances. During the past four fiscal years, the Company
has written off an average of $182,683 per year due to bad debts related to
these arrangements.
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
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LICENSE AND FRANCHISE AGREEMENTS (CONTINUED)
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 a 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.
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.
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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", "Special Considerations - Dependence Upon
Significant Clients", and Item 1, "Business - General".
Further, although the number of licensees and franchisees has continued to
increase in recent years, the Company does not actively solicit new Adjusters.
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
In April 1999, the Board of Directors appointed Jeffrey C. Jordan of
Progressive, age 43, as an Executive Vice President. Francis J. LaPallo, age 51,
was hired by the Company in 1996 as an Executive Vice President and has an
employment agreement with the Company that expires on June 30, 2001. The Company
has purchased and maintained key man life insurance with respect to Mr. LaPallo
in the amount of $500,000. In connection with the agreement with UFAC, William
J. Rocke, the Company's Chairman of the Board and Chief Executive Officer, and
Jean E. Ryberg, the Company's President, resigned from their positions on June
30, 1999. Both Mr. Rocke and Mrs. Ryberg, however, may provide up to 40 hours a
month of consulting services until June 30, 2000. Following their resignations,
the Board of Directors appointed Troy Huth of Progressive, age 39, as the
Company's Chairman of the Board and President. Mr. Jordan and Mr. LaPallo are
located in the Company's home office and manage the daily operations of the
Company, whereas Mr. Huth is located off-site and does not participate in the
daily operations. The Company also receives certain managerial, marketing,
financial, technological, and other services provided by UFAC. Should the
Company lose the services of Mr. Jordan, Mr. LaPallo, and/or UFAC, 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 11% of the
outstanding voting stock of the Company. UFAC's ownership constitutes 57.9% of
the Company's outstanding voting stock. The Company anticipates that UFAC's
ownership will enable UFAC, and therefore Progressive, to control the business
and affairs of the Company. In April 1999, eight Progressive nominees were
appointed to the board of directors, while two previously existing members of
the board resigned. In August 1999, the board amended the Company's bylaws to
fix the number of directors at nine. At the same time, six members resigned;
three from the Progressive nominees and three from the Company's original board.
The board currently consists of nine members; five nominated by Progressive and
four prior members of the Company's board of directors.
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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 1.6%, 9.2%, and 18.8% of the license and
franchise fees it received during the fiscal year ended June 30, 1999, 1998, and
1997, respectively. 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 purchase a majority of its adjusting services from other vendors,
virtually diminishing the business received by this client. 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. 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. Failure to procure such accounts may have a material adverse
affect on 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.
Recently, it has come to the Company's attention that another entity in the
insurance industry has been granted registration by the United States Patent and
Trademark Office of a service mark for the name "Frontier." The Company is
presently in the process of evaluating this matter. If the Company determines
that action should be taken to protect its service mark, but fails to take such
action, or such action is not successful, 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
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. In June 1999, a client of a former franchisee filed a complaint
against multiple defendants, including the Company, alleging losses of at least
$1,800,000. See "Legal Proceedings".
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, provincial, 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 or
provinces. 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
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FRANCHISING (CONTINUED)
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.
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
From the third quarter of the Company's 1985 fiscal year through September 1998,
the Company paid quarterly dividends with respect to shares of Common Stock.
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. Payment of quarterly dividends was suspended during the last three
quarters of fiscal 1999, pending the sale of stock by the Company to UFAC and
subsequent to the tender offer. The board declared a cash distribution of $1.60
per share payable to the holders of the rights to the distribution on July 12,
1999, to shareholders of record on June 25, 1999. 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. The Company's ability to pay dividends will
be subject to the Company's financial status and requirements. The board does
not expect to declare any dividends for fiscal year ending June 30, 2000.
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".
Page 9
<PAGE>
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. The office building currently contains approximately 13,000 square
feet of office space. Adjacent to the main office, the Company also owns a small
building and property at 51 East Monterey Way which contains two offices. Both
offices are currently being used for storage. The combined offices contain
approximately 1,500 square feet of office space.
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.
Management believes the facilities owned and leased by the Company are adequate
for its current and foreseeable future operations.
ITEM 3 - 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 the former
licensee. 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. The litigation is in the early
stages of discovery; therefore, the Company cannot yet assess the merits of the
complaint or the effects this litigation will have on the Company. The Company
is also taking steps to determine whether and to what extent it has insurance
coverage for any adverse result in this litigation. As of June 30, 1999, the
Company has not accrued any amounts for potential losses.
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.
ITEM 4 - SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
Matters were submitted to a vote of securities holders during the fourth quarter
of this fiscal year. Such matters were reported on the Company's Form 10-Q for
the period ended March 31, 1999.
Page 10
<PAGE>
PART II
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
--------------------
High Low Volume
------- ------- -------
Fiscal Year Ended June 30, 1999
First Quarter $ 3.375 $ 2.375 260,900
Second Quarter $ 2.563 $ 2.000 254,200
Third Quarter $ 2.750 $ 2.375 240,800
Fourth Quarter $ 4.375 $ 2.375 354,400
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
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, 1999
First Quarter $.0375
Fourth Quarter $ 1.60
Fiscal Year Ended June 30, 1998
First Quarter $.0375
Second Quarter $.0375
Third Quarter $.0375
Fourth Quarter $.0375
As of August 27, 1999, there were 225 shareholders of record (approximately 960
including beneficial owners) of the Company's Common Stock.
Page 11
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended June 30
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating revenue $ 6,341,584 $ 5,825,348 $ 6,164,603 $ 5,641,984 $ 5,240,825
Net income 546,452 612,475 979,198 1,134,519 1,026,848
Basic earnings per share .12 .13 .21 .25 .22
Diluted earnings per share .12 .13 .21 .25 .22
Weighted average number of
shares used in per share data:
Basic 4,569,049 4,605,358 4,607,709 4,620,101 4,662,679
Diluted 4,570,113 4,612,674 4,631,898 4,627,606 4,664,258
Cash dividends per share $ 1.638 $ .15 $ .15 $ .14 $ .115
BALANCE SHEET DATA
Working capital $ 2,073,511 $ 3,214,489 $ 3,261,953 $ 3,196,562 $ 2,946,748
Total assets 12,118,984 7,800,700 7,912,139 6,875,752 6,597,050
Long-term debt -- 4,953 33,462 59,983 84,655
Property and equipment, net 1,608,936 1,724,329 1,736,226 1,554,401 1,484,545
Stockholders' equity 5,053,633 6,452,241 6,564,193 6,230,799 5,838,651
Book value per common share .56 1.40 1.43 1.35 1.26
Retained earnings 3,022,731 4,735,935 4,814,266 4,526,419 4,042,588
Total shares outstanding 8,957,560 4,605,358 4,605,358 4,619,658 4,640,898
</TABLE>
Page 12
<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 1999, the Company's continuing operations generated $947,748 in cash
which was sufficient for the Company's cash requirements. This cash was used to
pay cash dividends of $172,701 and purchase equipment and property at a cost of
$324,416.
The Company paid cash dividends to its shareholders during the first quarter of
fiscal 1999; however, the policy of quarterly dividends was suspended during the
remaining three quarters due to the pending sale of stock by the Company to UFAC
and the subsequent tender offer. The board declared a cash distribution of $1.60
per share payable to the holders of the rights to the distribution on July 12,
1999 to shareholders of record on June 25, 1999. The board does not expect to
declare any dividends during the fiscal year ending June 30, 2000.
In June 1999, a complaint was filed 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
Company is still in the discovery phase of this litigation, 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 3 - Legal Proceedings".
The Company anticipates that during fiscal 2000 its operations will generate
sufficient cash to fund its operations and equipment acquisitions. The Company
projects that its capital expenditures for equipment will be approximately
$200,000 to $300,000 in fiscal 2000.
RESULTS OF OPERATIONS 1999 COMPARED TO 1998
REVENUE
The Company's revenue increased to $6,342,000 from $5,825,000 in fiscal 1999,
resulting in a 8.9% increase as compared to the prior fiscal year. The increase
consists primarily of a $176,000 increase in adjusting and other revenue and a
$339,000 increase in continuing licensee and franchisee fees.
The increase of $176,000 in adjusting and other fees to $1,405,000 in the
current fiscal year compared to $1,229,000 in the prior fiscal year represents
an increase of 14.3%. The Company experienced an increase of $198,000 in its
Phoenix office and decreases of $8,000 and $14,000 in adjusting fees from its
Las Vegas/Henderson and Tucson offices, respectively. The increase in fees from
the Phoenix office primarily reflects fees generated from a client acquired in
November of 1997.
The Company's revenue from continuing licensee and franchisee fees increased
7.4% or $339,000 from $4,597,000 in the prior fiscal year to $4,936,000 in the
current fiscal year. The 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 the prior
fiscal year, 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 this 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. Through these
efforts and the addition of UFAC's marketing resources, the Company anticipates
that over time the lost business will be replaced and hopes to see continued
growth in licensee and franchisee fees paid from other sources. There is no
assurance, however, that the Company will be successful in replacing the lost
business.
Page 13
<PAGE>
COMPENSATION AND EMPLOYEE BENEFITS
Compensation and employee benefits represent approximately 58.1% of the
Company's costs and expenses and are the Company's largest expense item. These
expenses increased 15.3% or $431,000 to $3,248,000 in the current fiscal year
from $2,817,000 in the prior fiscal year. This increase is primarily the result
of the retirement packages paid to Mr. Rocke and Mrs. Ryberg of $327,827 and
$249,940, respectively. 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. However, the Company has reduced the amount of compensation paid to
its administrative staff due to the departure and non-replacement of certain
salaried personnel.
EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS
The Company's expenses other than compensation and fringe benefits increased
$233,000 or 11.1% from fiscal 1998 to fiscal 1999. Significant changes included
the following increases: legal expenses of $162,000; auditing and accounting
fees of $81,000; UFAC service fees of $50,000; computer consulting fees of
$27,000; general insurance of $22,000; miscellaneous expenses of $30,000, and a
decrease in bad debt expense of $115,000.
The increase in legal fees reflects the Company's increased need for legal
services in connection with the transaction with UFAC. The increase in audit and
accounting fees reflects the Company's decision to out-source 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 with
the constantly changing state and federal tax and reporting laws and
regulations. Furthermore, the Company has incurred additional accounting fees in
connection with the transaction with UFAC.
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 $102,000 or 80.3% from fiscal 1998 to
fiscal 1999. The principal items affecting this increase included a $32,000
increase in interest income, a $61,000 increase in realized gain on equity
securities primarily due to the redemption of the Company's mutual funds, a
decrease in interest expense of $30,000; and a decrease in dividend income of
$10,000.
INCOME TAXES
Income taxes were 44.4% and 40.4% of the Company's income before income taxes
for fiscal year 1999 and 1998 respectively. A difference in these rates is due
to permanent differences and is reflected in the reduction of the deferred tax
asset of $54,000 from $289,000 at June 30, 1998, to $235,000 at June 30, 1999.
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 $66,000 to $546,000 in current fiscal year
from $612,000 in fiscal 1998, a decrease of 10.8%. The most significant items
affecting net income were the $516,000 increase in revenue, a $431,000 increase
in compensation and fringe benefits, a $233,000 increase in expenses other than
compensation and fringe benefits, and a $102,000 increase in other income.
During the fourth quarter of fiscal 1999, the Company recorded a net loss of
$97,179. The most significant item contributing to this loss was a one time
charge of $577,767 for severance pay to former employees.
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
consisted of a $343,000 increase in adjusting and other revenue and a $683,000
decrease in continuing licensee and franchisee fees.
Page 14
<PAGE>
REVENUE (continued)
The increase of $343,000 in adjusting and other fees to $1,229,000 in the fiscal
year ended June 30, 1998, 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.
COMPENSATION AND EMPLOYEE BENEFITS
Compensation and employee benefits represented approximately 57.2% of the
Company's costs and expenses and are the Company's largest expense item. These
expenses increased 16.6% or $402,000 to $2,817,000 in the fiscal year ended June
30, 1998, 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.
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<PAGE>
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.
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 October 31,
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 October
31, 1999.
All of the Company's personal computers that need to be Year 2000 compliant have
been upgraded. 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. Except as noted herein, the Company expects to complete
the formal plan of resolution by September 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 October 1, 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 $150,000 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 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
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<PAGE>
YEAR 2000 COMPLIANCE (CONTINUED)
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 October 1999.
ITEM 7A - 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 fiscal year, the Company invested in $1,000,000 U.S. treasury bills.
However, the Company ceased investing in treasury bills upon the expiration of a
treasury bill on May 20, 1999. The Company retained the funds to provide
additional cash for the cash distribution related to the UFAC transaction.
Therefore, the Company is no longer exposed to any interest income risk and
market value risks on these investments.
The Company also invested in various mutual funds throughout the fiscal year
that it held as short-term available for sale investments. However, in June
1999, the Company sold all its mutual funds to provide additional cash to fund
the cash distribution related to the UFAC transaction. Therefore, the Company is
no longer exposed to market risk associated with these investments.
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. Any foreign
currency fluctuations would not have a material effect on the Company's
financial statements.
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.
Page 17
<PAGE>
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> <C>
Milo C. Bolender Mr. Bolender has been employed by The 47 April 1999-August 1999
Progressive Corporation since 1987 and (Mr. Bolender resigned as
currently manages the Claims Services a director in August 1999)*
Marketing Group within Progressive's
Diversified Business Group. In previous
positions within Progressive, Mr.
Bolender served as Product Manager for
both private passenger auto and
commercial auto programs. Prior to
joining Progressive, he was employed in
the commercial banking industry,
including senior positions in the
commercial lending groups of Union Bank
California and Lloyds Bank California.
Mr. Bolender has an MBA from Loyola
Marymount University.
Charles B. Chokel Mr. Chokel graduated from Williams 46 April 1999-August 1999
College and received his MBA from the (Mr. Chokel resigned as
University of Chicago. He worked for a director in August 1999)*
three years as a commercial property
underwriter for Chubb and Son before
joining Progressive in 1978. He has held
many different positions at Progressive,
including National Sales Manager, Auto
Product Manager, California Division
President and Chief Financial Officer,
and, is currently Progressive's CEO of
Investments and Capital Management.
John M. Davies Effective June 1, 1999, Mr. Davies 43 1999
Director became President of Netrex, LLC, a
startup financial services and
technology company. Mr. Davies was
employed by The Progressive Corporation
from 1990 to 1999. His last position
with Progressive was managing
Progressive's Diversified Business
Group. Prior to joining Progressive, he
was employed at Coopers & Lybrand, an
international accounting and consulting
firm. Mr. Davies has an MBA from the
University of Pittsburgh and has earned
numerous professional designations,
including being a Certified Public
Accountant, a Chartered Property and
Casualty Underwriter and a Chartered
Life Underwriter.
Jeffrey R. Harcourt Mr. Harcourt has been employed by The 38 1999
Chief Financial Officer Progressive Corporation since 1990 and
and Director currently is the Controller for
Progressive's Diversified Business
Group. Prior to joining Progressive, he
was employed by KPMG Peat Marwick, an
international accounting and consulting
firm. Mr. Harcourt holds a BS degree
from Miami University and has earned
numerous designations, including being a
Certified Public Accountant, a Chartered
Property and Casualty Underwriter, a
Certified Internal Auditor and a
Certified Information systems Auditor.
</TABLE>
Page 18
<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> <C>
George M. Hill Mr. Hill has been associated with the 91 1978-1999
Company in an advisory capacity for more (Mr. Hill resigned as a
than 25 years, was a Vice President of director in April 1999)
the Company and an Assistant Secretary
of the Company. 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.
Troy Huth Mr. Huth has been employed by The 39 1999
Director, President and Progressive Corporation since 1986 and
Chairman of the Board currently manages Progressive's
Diversified Technologies Group, the
Progressive Vehicle Inspection Services
Group, and the Progressive Diversified
Business Group Claims Organization.
Prior to joining Progressive, he held
several information technology
management positions in manufacturing
and service businesses and has been in
the technology field since 1979. Mr.
Huth has a BA from Baldwin Wallace
College.
Jeffrey C. Jordan Mr. Jordan has been employed by The 43 1999
Director and Executive Progressive Corporation from 1978-1980
Vice President and from 1984 through the present. He
began his career with Progressive as an
adjuster trainee and has held numerous
technical and managerial positions
within the Progressive claims
organization. Mr. Jordan holds a BA
degree from Rutgers University and a JD
from UCLA. Prior to his return to
Progressive in 1984, Mr. Jordan was an
attorney in private practice in Los
Angeles.
Francis J. LaPallo Mr. LaPallo joined the Company on June 51 1996
Director and Executive 24, 1996. From 1977 until joining the
Vice President 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
Angeles, 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 he will be
an executive officer of the Company
through June 30, 2001.
Louis T. Mastos Mr. Mastos has been the President of 78 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. Mr. Mastos was the
Insurance Commissioner of the State of
Nevada from 1965 to 1971.
</TABLE>
Page 19
<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> <C>
James S. Rocke Mr. Rocke has been employed by the 31 1993-1999
Secretary/Treasurer Company since 1982 and currently is an (Mr. Rocke resigned as
adjuster in the Company's Phoenix a director in August 1999)*
office. Mr. Rocke was elected
secretary/treasurer of the Company in
1993. Mr. Rocke graduated from Arizona
State University in 1991 with a BS
degree in Finance. Mr. Rocke is the son
of William J. Rocke.
William J. Rocke Mr. Rocke founded the Company in 1957 75 1975
Director and served as an Executive Officer of
the Company and its predecessor
entities. 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. Mr. Rocke
retired as Chairman of the Board and
Chief Executive Officer of the Company
on June 30, 1999.
Jean E. Ryberg Mrs. Ryberg held several positions with 67 1975
Director** the Company since 1962. She also managed
the Company's insurance adjusting and
risk management operations in the
Phoenix and Tucson, Arizona and Las
Vegas, Nevada offices. She was elected
President of the Company in 1993 and
served in that capacity until retiring
on June 30, 1999.
Merlin J. Schumann Mr. Schumann has been a Certified Public 55 1984-1999
Accountant with the firm of Murray & (Mr. Schumann resigned as
Murray, P.C., located in Phoenix, a director in August 1999)*
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.
Dane A. Shrallow Mr. Shrallow has been practicing 52 April 1999-August 1999
corporate and business law since 1971. (Mr. Shrallow resigned as
Mr. Shrallow joined the Progressive a director in August 1999)*
organization in 1988 and currently
serves as Associate General Counsel of
Progressive and its subsidiaries. Prior
to joining Progressive, Mr. Shrallow
served as Assistant General Counsel of
Leaseway Transportation Corp., a company
engaged in the truck transportation,
leasing and physical distribution
industries. Mr. Shrallow has a BS in
Commerce from Washington and Lee
University and a JD from Cornell
University.
</TABLE>
Page 20
<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> <C>
R. Scott Younker Mr. Younker has been a licensee of the 63 1992-1999
Company in Prescott, Arizona since 1979. (Mr. Younker resigned as
He has been engaged in the insurance a director in August 1999)*
adjusting business for 33 years.
William A. White Mr. White has been employed by The 45 1999
Director Progressive Corporation since 1985 and
currently manages Progressive's
Diversified Claims Business Group. Prior
to joining Progressive, Mr. White served
as a commissioned officer in the United
States Army. Mr. White holds a master's
degree from the University of Southern
California and undergraduate degree in
Business Administration from John
Carroll University in Cleveland, Ohio.
</TABLE>
(1) Term will continue until next election of directors.
* These directors resigned in connection with a board determination to fix the
number of directors at nine.
** Member of the Company's audit committee.
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the compensation
paid by the Company during its year ended June 30, 1999, to each executive
officer whose aggregate compensation exceeded $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
---------------------------------------
Other Annual All Other
Compensation Compensation
Name and Principal Position Year Salary ($) Bonus ($) ($)(2) ($)(3)(4)
- --------------------------- ---- ---------- --------- ------ ---------
<S> <C> <C> <C> <C> <C>
William J. Rocke, CEO, 1999 241,105 32,914 -- 412,830
Chairman, Director 1998 237,776 39,794 -- 29,898
1997 231,300 51,559 -- 23,569
Jean E. Ryberg 1999 171,453 32,914 -- 321,715
President, Director 1998 169,085 39,794 -- 29,898
1997 164,480 51,559 -- 29,568
Francis J. LaPallo, 1999 156,359 32,914 - 29,801
Executive Vice President 1998 185,040 -- -- 29,898
Director 1997 180,000 -- -- 29,568
</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.
Page 21
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION (CONTINUED)
(3) "All Other Compensation" includes (i) directors' fees of $3,000, $2,250,
and $3,750 for Mr. Rocke in years ended June 30, 1999, 1998 and 1997
respectively; $3,000, $2,250, and $3,750 for Mrs. Ryberg in years ended
June 30, 1999, 1998 and 1997 respectively; $3,000, $2,250, and $3,750 for
Mr. LaPallo in years ended June 30, 1999, 1998, and 1997 respectively; (ii)
profit sharing contributions of $27,514, $27,648, and $19,819 for Mr. Rocke
in years ended June 30, 1999, 1998 and 1997 respectively; $27,514, $27,648,
and 25,818 for Mrs. Ryberg in years ended June 30, 1999, 1998, and 1997
respectively; $26,801, $27,648, and $25,818 for Mr. LaPallo in years ended
June 30, 1999, 1998, and 1997 respectively; and (iii) retirement packages
for Mr. Rocke and Mrs. Ryberg in the amounts of $382,316 and $291,201,
respectively, for the fiscal year ended June 30, 1999.
Excluded from all other compensation is the increase and the amortization
of the June 30, 1995 cash surrender value of these life insurance policies.
The amount excluded is $18,391, $18,166, and $18,119, for Mr. Rocke for the
years ended June 30, 1999, 1998, and 1997, respectively, and $14,173,
$14,070, and $13,678 for Mrs. Ryberg for the years ended June 30, 1999,
1998, and 1997, respectively.
(4) On June 30, 1999, William J. Rocke and Jean E. Ryberg terminated their
employment with the Company. Mr. Rocke received a severance package with a
total value of $382,316 and Mrs. Ryberg received a severance package with a
value of $291,201. Included in these amounts were their company cars and
the life insurance policies previously owned by the Company.
OPTION/SAR EXERCISES AND HOLDINGS
During 1999 the Company did not grant any stock options.
The following table shows the number of shares and value of grants outstanding
as of June 30, 1999 for each Named Executive.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised,
Underlying Unexercised In-The-Money Options/SARs
Shares Options/SARs at 6/30/99 (#) at 6/30/99 ($)(a)
Acquired Value --------------------------- ---------------------------
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William J. Rocke 21,718 2,715 -- -- -- --
Jean E. Ryberg 21,718 8,144 29,629 -- -- --
Francis J. LaPallo -- -- 100,000 -- 25,000 --
</TABLE>
(a) Value of unexercised, in-the-money Company options based on a fair market
value of the Company's common stock of $3.125 per share as of June 30,
1999.
DIRECTORS COMPENSATION
During fiscal 1999, each director (other than those employed by
Progressive), but including employees of the Company, was paid $750 per Board
meeting attended. In total, each director received $3,000 for attendance at
Board Meetings.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Mr. LaPallo for a five-year
term. Mr. LaPallo's agreement was effective June 23, 1996 and expires June 30,
2001. In addition, the services of Mr. Jeffrey Jordan are provided to the
Company pursuant to the service agreement with UFAC.
Page 22
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION (CONTINUED)
EMPLOYMENT AGREEMENTS (CONTINUED)
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
The following table sets forth certain information with respect to beneficial
ownership of the Company's common stock on August 24, 1999, by (1) each
director, (2) each executive officer, (3) all directors and executive officers
of the Company as a group, (4) each person, known by the Company, to be the
beneficial owners of more than 5% of the common stock.
<TABLE>
<CAPTION>
Amount of Beneficial Ownership
Common Stock $.01 Par Value
----------------------------------
Name and Address** Number of Shares (1) Percent (2)
- ------------------ -------------------- -----------
<S> <C> <C>
John M. Davies 500 *
Francis J. LaPallo and Wendy J. Harrison, his wife (3) 122,000 1.35%
Louis T. Mastos and Eva B. Mastos, his wife (4) 207,103 2.31%
William J. Rocke and Garnet Rocke, his wife (5) 415,332 4.64%
P. O. Box 7641
Phoenix, Arizona 85011
James S. Rocke (6) 444,867 4.97%
P. O. Box 7641
Phoenix, Arizona 85011
Jean E. Ryberg (7) 140,589 1.56%
All officers and directors as a group 1,040,391 11.45%
(six persons) (8)
United Financial Adjusting Company 5,258,513 57.87%
</TABLE>
* Less than 1%
** Addresses not shown are those of the Company.
(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 24, 1999 by the exercise of stock options.
(2) The percentages shown include the shares of Common Stock which the person
will have the right to acquire within 60 days of August 24, 1999. 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 24, 1999 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.
Page 23
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(CONTINUED)
(3) Includes 100,000 shares subject to a currently exercisable stock option at
$2.875 per share.
(4) 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.
(5) 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.
(6) Includes 290,000 shares held by Old Frontier Investment, Inc. of Arizona of
which James S. Rocke holds 49% of the outstanding stock.
(7) Includes 29,629 shares subject to a currently exercisable stock options at
$3.375 per share. Excludes 15,000 held by Mrs. Ryberg's sons in which she
disclaims any beneficial interest.
(8) Excludes all duplicate reporting of holdings.
Based solely on a review of the copies of such forms received by the Company
during the fiscal year ended June 30, 1999, 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 4 covering two transactions totaling 18,000 shares. James S. Rocke
filed a late Form 4 regarding 2,000 shares purchased in 1995, and William J.
Rocke filed a late Form 4 regarding 100 shares purchased March 24, 1994.
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 $13,382 during fiscal year
1999 in connection with such 5% royalty agreement.
George M. Hill, former Vice President and former Director of the Company,
acts as General Counsel to the Company. During the fiscal year 1999, the Company
paid Mr. Hill $92,187 for services rendered and disbursements. Such fees will
continue to accrue, pursuant to a retainer agreement, at the rate of $3,000 per
month effective June 1, 1999.
The Company paid its former Vice Chairman, William W. Strawther, Jr.,
$20,000 during fiscal year 1999 for business and financial consulting services.
In April 1999, in conjunction with the transaction with UFAC, the Company
entered into an agreement with UFAC whereby the Company will pay a $25,000
monthly fee for marketing, managerial, technological, financial, the full time
services of Jeffrey Jordan, and other services and resources. As of June 30,
1999, the Company has incurred $50,000 in service fees related to this
agreement.
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 24
<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 Auditor
Consolidated Balance Sheets - June 30, 1999 and 1998
Consolidated Statements of Income for the Years Ended June 30,
1999, 1998 and 1997
Condensed Consolidated Statements of Comprehensive Income for
years ended June 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended June
30, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements - June 30, 1999, 1998
and 1997
(a) (2) Financial Statement Schedules
Schedule
Number
II Valuation and Qualifying Accounts Years Ended June 30, 1999,
1998 and 1997
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 25
<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*****
10(l) Stock Purchase Agreement between Frontier Adjusters of America,
Inc. and United Financial Adjusting Company, dated as of November
20, 1998, including the following attachments******
Terms of Preferred Shares, Registration Rights Agreement,
Service Agreement, William Rocke Agreement, and
Jean Ryberg Agreement
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.
****** Incorporated by reference to the Exhibits to Frontier Adjusters of
America, Inc., Notice of Annual Meeting, and Proxy Statement on Form 14A
as filed with the SEC in definitive form on March 26, 1999.
(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, 1999
Page 26
<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/ Troy Huth
----------------------------------------
Troy Huth, President
and Chairman of the Board
September 3, 1999
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/ John M. Davies September 3, 1999
- ----------------------------------------
John M. Davies, Director
/s/ Jeffrey R. Harcourt September 3, 1999
- ----------------------------------------
Jeffrey R. Harcourt, Chief
Financial Officer and Director
/s/ Troy Huth September 3, 1999
- ----------------------------------------
Troy Huth, Chairman of the
Board, President, Director
/s/ Jeffrey C. Jordan September 3, 1999
- ----------------------------------------
Jeffrey C. Jordan, Exec.
Vice President, Director
/s/ Francis J. LaPallo September 3, 1999
- ----------------------------------------
Francis J. LaPallo, Exec.
Vice President, Director
/s/ Lou Mastos September 3, 1999
- ----------------------------------------
Lou Mastos, Director
/s/ William J. Rocke September 3, 1999
- ----------------------------------------
William J. Rocke, Director
/s/ Jean E. Ryberg September 3, 1999
- ----------------------------------------
Jean E. Ryberg, Director
/s/ William A. White September 3, 1999
- ----------------------------------------
William A. White, Director
Page 27
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditor F-2
Consolidated Balance Sheets - June 30, 1999 and 1998 F-3
Consolidated Statements of Income for the Years Ended June 30,
1999, 1998 and 1997 F-4
Condensed Consolidated Statements of Comprehensive Income
for the Years F-5 Ended June 30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1999, 1998 and 1997 F-6
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 1999, 1998 and 1997 F-7
Notes to Consolidated Financial Statements - June 30, 1999,
1998 and 1997 F-8
Supplementary Schedule F-19
Schedule II - Valuation and Qualifying Accounts Years Ended
June 30, 1999, 1998 and 1997 F-20
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, 1999 and 1998, and
the related consolidated statements of income, comprehensive income, cash flows,
and stockholders' equity for each of the three years in the period ended June
30, 1999. 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, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1999, 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, 1999, 1998, and 1997
included on page F-20 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 6, 1999
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
Frontier Adjusters of America, Inc. and Subsidiaries
<TABLE>
<CAPTION>
June 30, 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,892,851 $ 929,364
Securities available for sale (Note 6) -- 1,289,519
Current portion of advances to licensees
and franchisees (Note 4) 859,515 900,190
Receivables, net (Note 3) 744,241 681,830
Income tax refund receivable 99,226 172,948
Unbilled adjusting fees 37,170 40,950
Prepaid expenses 344,041 317,454
Deferred income taxes, current portion (Note 9) 161,818 225,740
------------ ------------
TOTAL CURRENT ASSETS 9,138,862 4,557,995
------------ ------------
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation and amortization (Note 5) 1,608,936 1,724,329
------------ ------------
OTHER ASSETS
Held to maturity investments (Note 6) 685,148 694,724
Advances to licensees and franchisees,
net of current portion (Note 4) 350,000 431,000
Licenses and franchises, net of accumulated
amortization of $303,605 in 1999 and $256,654 in 1998 226,015 155,838
Deferred income taxes, net of current portion (Note 9) 73,563 63,532
Cost of subsidiary in excess of net identifiable assets
acquired, net of accumulated amortization of $181,441
in 1999 and $179,130 in 1998 32,377 34,688
Other 4,083 138,594
------------ ------------
1,371,186 1,518,376
------------ ------------
TOTAL ASSETS $ 12,118,984 $ 7,800,700
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 28,005 $ 62,118
Salaries payable and related benefits 404,325 609,113
Service fees due to UFAC 50,000 --
Distributions payable (Note 14) 5,918,475 --
Licensees' and franchisees' remittance payable 552,946 545,830
Current portion of long term liability -- 28,509
Other (Note 13) 111,600 97,936
------------ ------------
TOTAL CURRENT LIABILITIES 7,065,351 1,343,506
------------ ------------
LONG TERM LIABILITY -- 4,953
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 13) -- --
STOCKHOLDERS' EQUITY
Preferred stock, authorized 100,000,000 shares,
par value $.01, none issued or outstanding -- --
Common stock, authorized 100,000,000 shares,
par value $.01, issued 9,019,059 shares in
1999 and 4,782,010 shares in 1998 90,191 47,820
Additional contributed capital 2,104,426 2,148,470
Retained earnings 3,022,731 4,735,935
------------ ------------
5,217,348 6,932,225
Add (deduct):
Treasury stock; 61,499 shares in 1999 and 176,652 in 1998 (184,368) (529,584)
Other 20,653 49,600
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,053,633 6,452,241
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,118,984 $ 7,800,700
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Frontier Adjusters of America, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended June 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE
Continuing licensee and franchisee fees (Note 7) $ 4,936,349 $4,596,657 $ 5,278,967
Adjusting and risk management fees (Note 7) 1,405,235 1,228,691 885,636
----------- ----------- -----------
6,341,584 5,825,348 6,164,603
----------- ----------- -----------
COST AND EXPENSES
Compensation and employee benefits (Notes 11 and 13) 3,248,276 2,817,168 2,414,582
Office 411,345 404,554 379,287
Advertising and promotion 385,372 395,210 347,396
Depreciation and amortization 271,884 253,667 240,246
Bad debt expense 237,601 352,132 149,392
Service fees to UFAC 50,000 -- --
Legal fees paid to a director (Note 10) 92,187 92,510 91,572
Other 891,342 609,111 1,064,058
----------- ----------- -----------
5,588,007 4,924,352 4,686,533
----------- ----------- -----------
INCOME FROM OPERATIONS 753,577 900,996 1,478,070
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 165,272 133,067 154,860
Disposition of investments -- 4,042 343
(Loss) on sale of license (14,500) (13,000) --
Gain on disposition of equipment 1,501 6,352 24,875
Realized gain (loss) (Note 6) 60,753 (93) (74,914)
Other 15,539 (3,497) 15,107
----------- ----------- -----------
TOTAL OTHER INCOME 228,565 126,871 120,271
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 982,142 1,027,867 1,598,341
INCOME TAXES (Note 9) 435,690 415,392 619,143
----------- ----------- -----------
NET INCOME $ 546,452 $ 612,475 $ 979,198
=========== =========== ===========
EARNINGS PER SHARE
Basic $ .12 $ .13 $ .21
=========== =========== ===========
Diluted $ .12 $ .13 $ .21
=========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic 4,569,049 4,605,358 4,607,709
=========== =========== ===========
Diluted 4,570,113 4,612,674 4,631,898
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Frontier Adjusters of America, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended June 30, 1999 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME $ 546,452 $ 612,475 $ 979,198
OTHER COMPREHENSIVE INCOME, NET OF TAX
Foreign currency translation adjustments 9,746 (6,037) (15,351)
Unrealized gain (loss) on securities,
net of reclassification adjustment
(see below) (38,693) (27,584) 105,263
----------- ----------- -----------
OTHER COMPREHENSIVE INCOME: (28,947) (33,621) 89,912
----------- ----------- -----------
COMPREHENSIVE INCOME $ 517,505 $ 578,854 $ 1,069,110
=========== =========== ===========
Reclassifications adjustment
Unrealized gain (loss) on securities
during the year $ 22,060 $ (27,584) $ 105,263
Less reclassification adjustment for
gain (loss) included in net income (60,753) -- --
----------- ----------- -----------
Net unrealized gains on securities $ (38,693) $ (27,584) $ 105,263
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Frontier Adjusters of America, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended June 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 546,452 $ 612,475 $ 979,198
------------ ------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 272,430 255,852 241,884
(Gain) on sale of investments -- (4,042) (343)
Loss on sale of license 14,500 13,000 --
(Gain) on disposition of equipment (1,501) (6,352) (24,875)
Bad debt expense 237,601 352,132 149,392
Deferred income taxes 53,891 117,288 (263,209)
Realized (gain)/loss on equity investments (60,753) 93 74,914
Change in assets and liabilities
(Increase) decrease in:
Receivables (91,235) (1,665) 12,364
Unbilled adjusting fees 3,780 (14,250) (10,600)
Prepaid expenses (26,587) (49,262) 20,701
Other 93,569 (65,575) (52,893)
Increase (decrease) in:
Accounts payable (34,113) 28,325 22,127
Salaries payable and related benefits (204,788) 440,081 (69,183)
Income taxes payable/receivable 73,722 (257,937) 27,684
Licensees' & franchisees' remittance payable 7,116 148,839 261,473
Other 63,664 (505,222) 485,564
------------ ------------ ------------
Total adjustment 401,296 451,305 875,000
------------ ------------ ------------
NET CASH PROVIDED
BY OPERATING ACTIVITIES 947,748 1,063,780 1,854,198
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of fixed assets 93,512 16,200 --
Capital expenditures (324,416) (167,078) (302,102)
Investments purchased (11,769,769) (1,993,019) (1,958,743)
Proceeds from maturity of investments 13,124,869 2,040,000 2,000,000
Payments on license acquisition (33,462) (26,521) (110,172)
Advances to licensees' and franchisees' (4,183,647) (4,267,700) (3,979,135)
Collections of advances to licensees & franchisees 4,096,545 3,948,312 3,703,132
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 1,003,632 (449,806) (647,020)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (172,701) (690,806) (691,351)
Proceeds from sales of stock 6,992,308 -- --
Common stock repurchased (2,817,246) -- (44,365)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 4,002,361 (690,806) (735,716)
EFFECT OF EXCHANGE RATE CHANGES
ON CASH 9,746 (6,037) 6,231
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 5,963,487 (82,869) 477,693
CASH AND CASH EQUIVALENTS AT
BEGINNING OF THE PERIOD 929,364 1,012,233 534,540
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF THE PERIOD $ 6,892,851 $ 929,364 $ 1,012,233
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Frontier Adjusters of America, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Years Ended June 30, 1999, 1998 and 1997
- --------------------------------------------------------------------------------------------------------------------
Number of
Number of Par Value of Additional Preferred Par Value of
Common Shares Common Contributed Shares Preferred
Issued Stock Capital Issued Stock
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1996 4,782,010 $ 47,820 $ 2,148,470 -- --
Cash dividends -
$.15 per share -- -- -- -- --
Net income -- -- -- -- --
Treasury stock purchase
14,300 shares -- -- -- -- --
Foreign currency translation -- -- -- -- --
Unrealized gain -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 4,782,010 $ 47,820 $ 2,148,470 -- --
Cash dividends -
$.15 per share -- -- -- -- --
Net income -- -- -- -- --
Foreign currency translation -- -- -- -- --
Unrealized loss -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 4,782,010 $ 47,820 $ 2,148,470 -- --
Cash dividends -
$.0375 per share -- -- -- -- --
Sale of shares to UFAC (Note 14) -- -- 6,765,982 5,258,513 52,585
Stock options exercised from
65,153 shares of treasury
stock -- -- (21,580) -- --
Retirement of 971,464 common shares
shares repurchased in tender
offer (Note 14) (971,464) (9,714) (2,807,531) -- --
Distributions declared
$1.60 per share (Note 14) -- -- (3,958,451) -- --
Retirement of 50,000 treasury
shares (50,000) (500) (22,464) -- --
Conversion of preferred shares
into common shares (Note 14) 5,258,513 52,585 -- (5,258,513) (52,585)
Net income -- -- -- -- --
Foreign currency translation -- -- -- -- --
Unrealized gain -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 9,019,059 90,191 2,104,426 -- --
====================================================================================================================
- ---------------------------------------------------------------------------------------------------
Cumulative Unrealized
Retained Treasury Translation Gain (loss) on
Earnings Stock Adjustment Investments
- ---------------------------------------------------------------------------------------------------
Balance, June 30, 1996 $ 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 $ 4,814,266 $ (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 $ 4,735,935 $ (529,584) $ 10,907 $ 38,693
Cash dividends -
$.0375 per share (172,701) -- -- --
Sale of shares to UFAC (Note 14) -- -- -- --
Stock options exercised from
65,153 shares of treasury
stock -- 195,321 -- --
Retirement of 971,464 common shares
shares repurchased in tender
offer (Note 14) -- -- -- --
Distributions declared
$1.60 per share (Note 14) (1,960,024) -- -- --
Retirement of 50,000 treasury
shares (126,931) 149,895 -- --
Conversion of preferred shares
into common shares (Note 14) -- -- -- --
Net income 546,452 -- -- --
Foreign currency translation -- -- 9,746 --
Unrealized gain -- -- -- (38,693)
- ---------------------------------------------------------------------------------------------------
Balance, June 30, 1999 3,022,731 (184,368) 20,653 --
===================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<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 in 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 is
recognized as the services are performed; revenue from claims adjusted by
independent licensees and franchisees is recognized when they become due under
the terms of the license and franchise agreements (Note 8).
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 for the two buildings. The
buildings are 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 a period of five years.
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.
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.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
REPORTING COMPREHENSIVE INCOME -- Effective July 1, 1998, the Company adopted
Financial Accounting Standards Board (FASB) 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.
SEGMENT REPORTING -- Effective June 30, 1999, the Company adopted Statement No.
131, Disclosures about Segments of an Enterprise and Related Information.
Statement No. 131 modifies the disclosure requirements for reportable segments
and establishes standards in the way public businesses report information about
operating segments in financial statements and interim reports issued to
shareholders. Statement 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers.
EARNINGS PER COMMON SHARE -- 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.
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.
NOTE 2: SUPPLEMENTAL CASH FLOW INFORMATION
1999 1998 1997
----------------------------------------
Cash paid during the year:
Interest $ 1,369 $ 30,898 $ 7,259
Income taxes $ 315,659 $ 607,170 $ 854,741
Noncash financing activities:
Accrued dividends $5,918,475 -- --
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 3: RECEIVABLES
1999 1998
----------- -----------
Receivables consist of:
Accounts receivable trade $ 209,049 $ 187,846
Licensee and franchisee fees receivable 601,518 532,202
Errors and omissions insurance premium advanced 90,992 114,028
Other 3,469 7,398
----------- -----------
Total receivables 905,028 841,474
Less allowance for doubtful accounts 160,787 159,644
----------- -----------
$ 744,241 $ 681,830
=========== ===========
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:
1999 1998
----------- -----------
Advances to licensees and franchisees $ 1,399,095 $ 1,546,766
Less allowance for doubtful advances 189,580 215,576
----------- -----------
1,209,515 1,331,190
Less current portion 859,515 900,190
----------- -----------
Long term portion $ 350,000 $ 431,000
=========== ===========
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consist of:
1999 1998
----------- -----------
Building and improvements $ 1,273,023 $ 1,269,288
Computers and software 269,724 231,810
Furniture and fixtures 359,235 312,565
Automobiles 51,494 143,225
----------- -----------
1,953,476 1,956,888
Less accumulated depreciation and amortization 931,283 819,302
----------- -----------
1,022,193 1,137,586
Land 586,743 586,743
----------- -----------
$ 1,608,936 $ 1,724,329
=========== ===========
F-10
<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, 1999 and 1998:
<TABLE>
<CAPTION>
Gross Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
-------------------------------------------------
1999
-------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity securities
Local government securities & other $ 685,148 $ 17,886 $ 2,992 $ 700,042
---------- ---------- ---------- ----------
$ 685,148 $ 17,886 $ 2,992 $ 700,042
========== ========== ========== ==========
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
========== ========== ========== ==========
</TABLE>
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 recognized a gain (loss) of $60,753, ($93), and ($74,914) for the
years ended June 30, 1999, 1998, 1997, respectively, due to the realized gain or
permanent impairment in value of its available for sale securities.
NOTE 7: LICENSING AND FRANCHISING
As of June 30, 1999, the Company has entered into 494 license and franchise
agreements with 391 entities, operating 407 offices with 678 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, 1999, 1998 and 1997
were approximately $44,730,000, $42,050,000 and $48,060,000, 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:
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 7: LICENSING AND FRANCHISING (continued)
<TABLE>
<CAPTION>
Licensing Adjusting Corporate
and and and
Franchising Risk Management Other Consolidated
----------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
1999
Revenue $ 4,936,349 $ 1,405,235 $ -- $ 6,341,584
Costs and expenses 3,885,586 1,184,289 518,132 5,588,007
------------ ------------ ------------ ------------
Income (loss) from operations $ 1,050,763 $ 220,946 $ (518,132) $ 753,577
============ ============ ============ ============
Identifiable assets $ 4,231,025 $ 637,680 $ 7,250,279 $ 12,118,984
============ ============ ============ ============
Number of advertised locations
Beginning of year 652 10 -- 662
Opened 23 -- -- 23
Closed (7) -- -- (7)
Ownership changes (9) 9 -- --
------------ ------------ ------------ ------------
End of year 659 19 -- 678
============ ============ ============ ============
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) $ 900,996
============ ============ ============ ============
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) -- --
------------ ------------ ------------ ------------
End of year 652 10 -- 662
============ ============ ============ ============
1997
Revenue $ 5,278,967 $ 885,636 $ -- $ 6,164,603
Cost 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) -- --
------------ ------------ ------------ ------------
End of year 646 12 -- 658
============ ============ ============ ============
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 8: SEGMENT REPORTING
The Company's reportable segments are determined by the physical location of the
segment. Each segment is managed separately due to its physical location.
The Company has two reportable segments: (1) the Las Vegas/Henderson, Nevada and
the Tucson, Arizona adjusting offices; and (2) the corporate home office and
Phoenix adjusting office. The Las Vegas/Henderson and Tucson offices provide
claims adjustment services to insurance companies and to self-insured clients.
Both the Las Vegas/Henderson and Tucson offices have a manager onsite who
oversees the daily activities of that office and reports to the Company's home
office. The corporate home office and Phoenix adjusting office are located on
the same property. The corporate home office maintains the business derived from
the Company's franchisees/licensees, as well as supervises and manages the
Phoenix location.
The accounting policies applied to determine the segment information are the
same as those described in the summary of significant accounting policies.
However, for the purposes of segment reporting, only direct expenses are
reflected in the financial information for the Las Vegas/Henderson and Tucson
offices. Any overhead incurred at the Company's home office for that segment
locations has not been allocated.
Management evaluates the performance of each segment based on profit or loss
from operations before income taxes. Management bases its decisions on monthly
financial statements which report profit or loss from the Las Vegas/Henderson
and Tucson locations, and balance sheet and income statements for the Company on
a consolidated basis.
Financial information with respect to the reportable segments follows:
<TABLE>
<CAPTION>
Las Vegas/Henderson Corporate and
1999 And Tucson Offices Phoenix Office Consolidated
- ---- ------------------ -------------- ------------
<S> <C> <C> <C>
Revenue $ 503,002 $ 5,838,582 $ 6,341,584
Depreciation and Amortization 43,395 228,489 271,884
Interest Income -- 165,272 165,272
Segment Net Income 46,709 499,743 546,452
Expenditures for Segment Assets 19,298 305,118 324,416
Segment Assets $ 112,008 $12,006,976 $12,118,984
Las Vegas/Henderson Corporate and
1998 And Tucson Offices Phoenix Office Consolidated
- ---- ------------------ -------------- ------------
Revenue $ 524,779 $ 5,300,569 $ 5,825,348
Depreciation and Amortization 43,433 210,234 253,667
Interest Income -- 133,067 133,067
Segment Net Income 1,487 610,988 612,475
Expenditures for Segment Assets 9,225 157,853 167,078
Segment Assets $ 89,501 $ 7,711,199 $ 7,800,700
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 8: SEGMENT REPORTING (continued)
<TABLE>
Las Vegas/Henderson Corporate and
1997 (a) And Tucson Offices Phoenix Office Consolidated
- ---- ------------------ -------------- ------------
<S> <C> <C> <C>
Revenue $ 271,264 $ 5,893,339 $ 6,164,603
Depreciation and Amortization 33,328 206,918 240,246
Interest Income -- 154,860 154,860
Segment Net Income 14,939 964,259 979,198
Expenditures for Segment Assets 22,487 279,615 302,102
Segment Assets $ 76,379 $ 7,835,760 $ 7,912,139
</TABLE>
(a) The Las Vegas/Henderson office began operations 4/1/97.
The Company earns franchise fees from franchisees in the United States and
Canada. All long-lived assets are located at the Company's home office in the
United States. The following table presents information about the Company's
revenue by geographic area:
1999 1998 1997
----------- ----------- -----------
United States $ 6,315,790 $ 5,785,503 $ 6,116,089
Canada 25,794 39,845 48,514
----------- ----------- -----------
Total Revenue $ 6,341,584 $ 5,825,348 $ 6,164,603
=========== =========== ===========
NOTE 9: INCOME TAXES
The components of the provision for income taxes at June 30 are as follows:
1999 1998 1997
----------- ----------- -----------
Federal
Current $ 309,299 $ 241,232 $ 695,946
Deferred 42,788 93,123 (208,979)
State
Current 72,500 56,872 186,406
Deferred 11,103 24,165 (54,230)
----------- ----------- -----------
Income taxes $ 435,690 $ 415,392 $ 619,143
=========== =========== ===========
A reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate follows:
1999 1998 1997
----------- ----------- -----------
Statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net 5.5 5.1 5.5
Non-deductible items 4.0 3.4 1.6
Non-taxable revenue (1.4) (1.4) (1.1)
Other 1.3 (1.7) (2.3)
----------- ----------- -----------
Effective rate 44.4% 40.4% 38.7%
=========== =========== ===========
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 9: INCOME TAXES (continued)
Net deferred tax assets consist of the following components:
1999 1998
-------- --------
Deferred tax assets
Current:
Allowance for doubtful accounts $129,858 $143,631
Other liabilities 31,960 82,109
-------- --------
161,818 225,740
Long term:
Property and equipment 73,563 63,532
-------- --------
$235,381 $289,272
======== ========
NOTE 10: RELATED PARTY 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 $13,382 during fiscal year
1999 in connection with such 5% royalty agreement.
George M. Hill, former Vice President and former Director of the Company, acts
as General Counsel to the Company. The Company paid the law firm approximately
$92,000 in fiscal 1999, $93,000 in fiscal 1998, $92,000 in fiscal 1997 for legal
services and reimbursement of expenses. Such fees will continue to accrue,
pursuant to a retainer agreement at the rate of $3,000 per month.
The Company paid its former Vice Chairman, William W. Strawther, Jr., $20,000
during fiscal year 1999 for business and financial consulting services.
In April 1999, in conjunction with the transaction with UFAC, the Company
entered into an agreement with UFAC whereby the Company pays $25,000 per month
for marketing, managerial, technological, financial, the full-time services of
Jeffrey Jordan, and other services and resources. As of June 30, 1999, the
Company had incurred $50,000 in service fees related to this agreement.
The Company believes that the cost to the Company for all of the foregoing were
competitive with charges for similar services and facilities available from
third parties.
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 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 $235,724, $258,272, and $217,601 for the years ended June 30, 1999,
1998, and 1997 respectively.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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 1999, 1998, and 1997 would
have decreased by $18,000, $20,000 and $20,000, 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:
<TABLE>
<CAPTION>
Number of Shares
-----------------------------------------------------------------
1999 1998 1997
-------------------- ------------------- -------------------
Number of Weighted Number of Weighted Number of Weighted
Shares Average Shares Average Shares Average
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding July 1 300,000 $ 3.05 300,000 $ 3.05 200,000 $ 3.14
Granted -- -- -- -- 100,000 2.88
Exercised (65,153) (2.67) -- -- -- --
Expired (105,218) (3.37) -- -- -- --
-------- -------- -------- -------- -------- --------
Outstanding June 30 129,629 $ 2.99 300,000 $ 3.05 300,000 $ 3.05
======== ======== ======== ======== ======== ========
</TABLE>
1999 1998 1997
-------- -------- --------
Exercisable at end of year 129,629 234,782 200,000
Weighted-average fair value per option $ .60
of options granted during the year
At June 30, 1999, 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.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 12: STOCK OPTIONS (continued)
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Contractual Life Price Exercisable Price
----- ----------- ---------------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$2.88 100,000 7.0 2.88 100,000 2.88
$3.38 29,629 4.6 3.38 29,629 3.38
-------- --------
129,629 129,629
======== ========
</TABLE>
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
The Company entered into five-year employment agreements with three key
executive officers. Two of these agreements were to expire on June 30, 2000,
however, were terminated on June 30, 1999, due to the employees' early
retirement. Severance packages related to their retirement resulted in an
expense of $577,767 for the fiscal year ended June 30, 1999. For the remaining
agreement, which expires June 30, 2001, the employee receives a base salary in
addition to a bonus based upon the Company's pre-tax earnings and annual cost of
living increases. Total compensation under the three employment agreements was
$662,020, $786,497, and $788,605 for years ended June 30, 1999, 1998 and 1997,
respectively.
The aggregate commitment for future salaries at June 30, 1999, excluding bonuses
and cost of living increases, is $318,034 as follows:
Year ending June 30,
--------------------
2000 159,017
2001 159,017
The Company leases various office space and office equipment under various
noncancellable agreements. These leases expire between August 31, 1999 and
August 31, 2002 and require various minimum annual rental payments. Each office
lease also requires the payment of taxes.
The total minimum rental commitment at June 30, 1999 is due as follows:
During the year ending June 30:
2000 $ 34,006
2001 15,065
2002 14,823
2003 2,490
--------
$ 66,384
========
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
NOTE 13: COMMITMENTS AND CONTINGENCIES (continued)
The total rental expense included in the income statements for the years ended
June 30, 1999, 1998, and 1997 is $35,633, $34,365, and $28,829, respectively.
During the year, a claim was filed against multiple defendants including the
Company. The complaint arises from the alleged embezzlement by a former licensee
in connection with the provision of claims services. The complaint seeks
compensatory damages of at least $1,800,000. The litigation is in the early
phases of discovery, therefore, the Company cannot yet assess the merits of the
complaint or the effects this litigation will have on the Company. As of June
30, 1999, the Company has not accrued any amounts for potential losses.
Included in Other Liabilities is the Company's payable to franchisees/licensees
and clients at June 30, 1999 and June 30, 1998 of $37,065 and $47,807,
respectively.
NOTE 14: STOCK TRANSACTIONS
On April 29, 1999, at the annual shareholders' meeting, the Company's
shareholders approved the November 20, 1998, agreement between the Company and
United Financial Adjusting Company ("UFAC"), a wholly owned subsidiary of The
Progressive Corporation ("Progressive"). Pursuant to the agreement, on April 30,
1999, UFAC purchased 5,258,513 shares of the Company's newly issued shares of
Series A Convertible Voting Preferred Stock at a price of $1.30 per share.
UFAC's purchase represented approximately 53% of the Company's voting
securities. Following the purchase by UFAC, the Company issued a tender offer to
purchase up to 1,000,000 common stock shares at $2.90 per share from existing
shareholders. The tender offer expired on June 12, 1999, and resulted in the
purchase of 971,464 common stock shares. Also pursuant of UFAC's purchase, the
Company declared a cash distribution of $1.60 per share for shareholders of
record on June 25, 1999, and payable to the holders of the rights of the
distribution on July 12, 1999. Those shares tendered in the tender offer were
not eligible for the cash distribution. UFAC was not eligible to participate in
the tender offer, nor was UFAC entitled to the cash distribution. On June 30,
1999, UFAC's preferred shares were converted into common stock shares,
representing 59% of the Company's voting securities.
F-18
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
SUPPLEMENTARY DATA
Selected Quarterly Financial Data
(Information for all periods shown below is unaudited)
<TABLE>
<CAPTION>
1999
--------------------------------------------------
Three Months Ended
--------------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue $1,633,369 $1,524,113 $1,572,172 $1,611,930
Income from operations 395,320 260,424 312,573 (214,740)
Income before income taxes 423,263 296,089 347,951 (85,161)
Net income (loss) 255,916 179,499 208,216 (97,179)
Net income (loss) per share
Basic .06 .04 .05 (.02)
Diluted .06 .04 .05 (.02)
Weighted average shares outstanding
Basic 4,605,358 4,605,358 4,605,358 4,459,723
Diluted 4,609,163 4,605,358 4,605,784 4,459,723
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 (loss) 258,642 234,391 166,817 (47,375)
Net income (loss) 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
</TABLE>
F-19
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Additions
Balance at Charged to Deductions Balance
Beginning Cost and From at End
of Period Expenses Reserves of Period
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended June 30, 1999:
Allowance for doubtful accounts $ 375,220 $ 237,601 $ 244,435 $ 350,367
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
</TABLE>
F-20
EXHIBIT 21
LIST OF SUBSIDIARIES OF
FRONTIER ADJUSTERS OF AMERICA, INC.
State of
Name Incorporation Parent Company
- --------------------------------------------------------------------------------
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.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation of our report, dated August 6, 1999,
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 3, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 6,892,851
<SECURITIES> 0
<RECEIVABLES> 2,304,123
<ALLOWANCES> 350,367
<INVENTORY> 0
<CURRENT-ASSETS> 9,138,862
<PP&E> 2,540,219
<DEPRECIATION> 931,283
<TOTAL-ASSETS> 12,118,984
<CURRENT-LIABILITIES> 7,065,351
<BONDS> 0
0
0
<COMMON> 90,191
<OTHER-SE> 4,963,442
<TOTAL-LIABILITY-AND-EQUITY> 12,118,984
<SALES> 0
<TOTAL-REVENUES> 6,341,584
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,588,007
<LOSS-PROVISION> 237,601
<INTEREST-EXPENSE> 1,369
<INCOME-PRETAX> 982,142
<INCOME-TAX> 435,690
<INCOME-CONTINUING> 546,452
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 546,452
<EPS-BASIC> .12
<EPS-DILUTED> .12
</TABLE>
