SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _____________ to ____________
Commission File Number 1-12902
--------
FRONTIER ADJUSTERS OF AMERICA, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Arizona 86-0477573
- --------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
45 East Monterey Way, Phoenix, AZ 85012
----------------------------------------
(Address of principal executive offices)
(602) 264-1061
---------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Number of shares of Common Stock outstanding on February 7, 2000 8,957,560
---------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 1999 June 30, 1999
----------------- -------------
(unaudited) (*)
ASSETS
CURRENT ASSETS
Cash $ 1,541,141 $ 6,892,851
Receivables 1,243,758 1,603,756
Prepaid expenses 187,210 344,041
Other 336,637 298,214
----------- -----------
TOTAL CURRENT ASSETS 3,308,746 9,138,862
----------- -----------
PROPERTY AND EQUIPMENT 2,655,895 2,540,219
Less accumulated depreciation
and amortization (1,002,453) (931,283)
----------- -----------
1,653,442 1,608,936
----------- -----------
OTHER ASSETS
Cost of subsidiary in excess of net
tangible assets acquired 213,817 213,817
Less accumulated amortization (182,596) (181,440)
----------- -----------
31,221 32,377
Receivables (Long term) 312,000 350,000
Investments (Long term) 685,360 685,148
Other 269,654 303,661
----------- -----------
1,298,235 1,371,186
----------- -----------
TOTAL ASSETS $ 6,260,423 $12,118,984
=========== ===========
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 30,843 $ 28,005
Accrued expenses 171,787 404,325
Franchisee/licensee remittance payable -- 552,946
Service fees due to UFAC 75,000 50,000
Distribution payable -- 5,918,475
Other 359,130 111,600
----------- -----------
TOTAL CURRENT LIABILITIES 636,760 7,065,351
----------- -----------
STOCKHOLDERS' EQUITY
Common stock 90,191 90,191
Additional paid in capital 2,104,426 2,104,426
Treasury stock (184,368) (184,368)
Other 24,283 20,653
Retained earnings 3,589,131 3,022,731
----------- -----------
5,623,663 5,053,633
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 6,260,423 $12,118,984
=========== ===========
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed statements.
2
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
December 31, December 31,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE
Continuing licensee and franchisee fees $2,585,686 $2,458,500 $1,273,079 $1,185,377
Adjusting and Risk Management fees 657,370 698,982 293,913 338,736
---------- ---------- ---------- ----------
3,243,056 3,157,482 1,566,992 1,524,113
---------- ---------- ---------- ----------
COST AND EXPENSES
Compensation and employee benefits 1,286,001 1,417,784 699,624 700,018
Office 217,526 202,925 127,026 107,410
Advertising and promotion 65,807 108,790 24,373 68,203
Depreciation and amortization 114,951 127,487 57,429 65,012
Provision for doubtful accounts 135,838 96,000 82,998 48,000
Service fees paid to UFAC 150,000 -- 75,000 --
Other 430,141 548,752 210,656 275,046
---------- ---------- ---------- ----------
2,400,264 2,501,738 1,277,106 1,263,689
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 842,792 655,744 289,886 260,424
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income 56,373 57,275 33,309 27,841
Other (Net) 30,021 6,333 22,062 7,824
---------- ---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) 86,394 63,608 55,371 35,665
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 929,186 719,352 345,257 296,089
INCOME TAXES 362,786 283,937 146,189 116,590
---------- ---------- ---------- ----------
NET INCOME $ 566,400 $ 435,415 $ 199,068 $ 179,499
========== ========== ========== ==========
EARNINGS PER SHARE
Basic $ .06 $ .09 $ .02 $ .04
========== ========== ========== ==========
Diluted $ .06 $ .09 $ .02 $ .04
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 8,957,560 4,605,358 8,957,560 4,605,358
========== ========== ========== ==========
Diluted 8,957,560 4,607,261 8,957,560 4,605,358
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
3
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
December 31, December 31,
-------------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET INCOME $ 566,400 $ 435,415 $ 199,068 $ 179,499
--------- --------- --------- ---------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency translation adjustments 3,630 -- 3,182 --
Unrealized gain (loss) on securities -- 160 (8,094) 28,131
--------- --------- --------- ---------
3,630 160 (4,912) 28,131
--------- --------- --------- ---------
COMPREHENSIVE INCOME $ 570,030 $ 435,575 $ 194,156 $ 207,630
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed statements
4
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
1999 1998
----------- -----------
NET INCOME $ 566,400 $ 435,415
----------- -----------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization:
Operations 114,951 127,487
Other -- 546
Gain on sale of investments (12,494) --
Loss on disposition of property and equipment -- 3,640
Bad Debt Expense 135,838 96,000
Change in assets and liabilities:
(Increase) decrease in:
Receivables 75,298 (9,142)
Prepaid expenses 156,831 51,634
Other (57,494) 33,725
Increase (decrease) in:
Accounts payable 2,838 (5,930)
Accrued expenses (232,538) (220,237)
Franchisee and licensee remittance payable (552,946) (545,830)
Service fees due to UFAC 25,000 --
Other 244,934 6,461
----------- -----------
Total adjustments (99,782) (461,646)
----------- -----------
NET CASH PROVIDED BY (USED) OPERATING ACTIVITIES 466,618 (26,231)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (117,132) (117,191)
Investments purchased -- (1,977,829)
Proceeds from sales of investments 12,494 2,000,000
Proceeds on sale of fixed assets 337 26,761
Proceeds from sales of license 25,000 --
Payments on license acquisition (13,660) (13,997)
Advances to licensees and franchisees (1,875,385) (2,237,113)
Collections of advances to licensees
and franchisees 2,062,267 2,233,360
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 93,921 (86,009)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends (5,918,475) (172,701)
----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES (5,918,475) (172,701)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 6,226 --
NET (DECREASE) IN CASH (5,351,710) (284,941)
Cash at beginning of the period 6,892,851 929,364
----------- -----------
Cash at the end of the period $ 1,541,141 $ 644,423
=========== ===========
Supplemental disclosures of Cash Flow information
Cash paid during the period
Income taxes $ 421,877 $ 221,060
Interest $ 1,097 $ 1,003
The accompanying notes are an integral part of these condensed statements.
5
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results of operations for the interim periods.
The results of operations for the three and six month periods ended December
31, 1999 are not necessarily indicative of the results to be expected for
the full year.
(2) Reportable Segments
Financial information with respect to the Company's reportable segments for
the six and three months ended December 31, 1999 and 1998 is as follows:
Six months ended Las Vegas/Henderson Corporate and
December 31, 1999 and Tucson Offices Phoenix Office Consolidated
- ----------------- -------------------- -------------- ------------
Revenue $ 247,139 $2,995,917 $3,243,056
Depreciation and Amortization 21,357 93,594 114,951
Interest Income -- 56,373 56,373
Segment Net Income 5,632 560,768 566,400
Expenditures for Segment Assets -- 117,132 117,132
Segment Assets $ 124,694 $6,135,729 $6,260,423
Six months ended
December 31, 1998
- -----------------
Revenue $ 229,541 $2,927,941 $3,157,482
Depreciation and Amortization 20,789 106,698 127,487
Interest Income -- 57,275 57,275
Segment Net Income (Loss) (6,759) 442,174 435,415
Expenditures for Assets 18,545 98,646 117,191
Segment Assets $ 164,733 $7,119,411 $7,284,144
Three months ended
December 31, 1999
- -----------------
Revenue $ 117,804 $1,449,188 $1,566,992
Depreciation and Amortization 10,685 46,744 57,429
Interest Income -- 33,309 33,309
Segment Net Income 1,956 197,112 199,068
Expenditures for Segment Assets -- 24,894 24,894
Three months ended
December 31, 1998
- -----------------
Revenue $ 109,806 $1,414,307 $1,524,113
Depreciation and Amortization 10,534 54,478 65,012
Interest Income -- 27,841 27,841
Segment Net Income (Loss) (5,845) 185,344 179,499
Expenditures for Assets 17,532 10,162 27,694
(3) Earnings Per Share
The effect of 100,000 stock options are not included in the earnings per
share calculation because they are antidilutive.
6
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Report on Form 10-Q that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements regarding the Company's
"expectations", "anticipation", "hopes", "intentions", "beliefs", or
"strategies" regarding the future. Forward looking statements include statements
regarding revenue, margins, expenses, and earnings analysis with regard to the
Company or with regard to the Company's licensees and franchisees for the
remainder of fiscal 2000 and thereafter; improvement of, and growth in the
number of, licensees and franchisees; future spending on marketing and product
development strategy; statements regarding the outcome of litigation; and
liquidity and anticipated availability of cash for operations and capital
expenditures. All forward looking statements included in this document are based
on information available to the Company on the date of this report, and the
Company assumes no obligation to update any such forward looking statements. It
is important to note that the Company's actual results could differ materially
from those in such forward looking statements. Among the factors that could
cause actual results to differ materially are the factors discussed in this
report and any other reports on file with the SEC, including but not limited to
the extent and nature of natural disasters in geographic areas serviced by the
Company or by its licensees and franchisees; management decisions by insurance
companies and self-insureds to increase or decrease the degree to which they
contract for services offered by the Company, its licensees or franchisees; the
Company's ability to identify and attract new qualified licensees and
franchisees; the success of the Company's promotional and marketing programs;
the Company's ability to successfully manage offices reacquired from existing
licensees and franchisees; and uninsured liability for acts or omissions of the
Company's employees, licensees, or franchisees.
FINANCIAL CONDITION
The Company has historically financed its growth and on-going operations with
cash generated from operations. In the six months ended December 31, 1999, the
Company's operations generated $467,000 in cash.
During the six months ended December 31, 1999, the most significant items
affecting cash generated by the Company's operations are net income, a $553,000
decrease in franchisee and licensee remittance payable and the $233,000 decrease
in accrued expenses. The Company, pursuant to agreements with its licensees and
franchisees, acts as a collection agent for all of its licensees and
franchisees. The Company remits to its licensees and franchisees the
collections, less the ongoing license/franchise fee and any amounts due the
Company, such as loan repayments and errors and omissions insurance premium. The
day of the week that the Company's fiscal period ends, therefore, can have a
significant effect on the reported amount that is due to licensees and
franchisees. As December 31, 1999 fell on the day that collections were remitted
to licensees and franchisees, the Company did not have a remittance payable. In
comparison, the Company's financial statements as of June 30, 1999 reflects
collections for four days of $553,000. The decrease in accrued expenses results
from the payout of employee benefits and bonuses during the first quarter of
fiscal 2000.
The Company anticipates that during fiscal 2000 its operations will generate
sufficient cash to fund its operations and equipment acquisitions. Through its
capital investment program, the Company replaces obsolete or outdated equipment
and invests in new equipment and furnishings to maintain or increase the
productivity of the Company and its employees. The Company anticipates investing
$200,000 to $300,000 in fiscal 2000 for equipment and furnishings pursuant to
its capital investment program.
In June 1999, a complaint was filed in United States District Court in Nebraska
against multiple defendants including the Company. The complaint arises from the
alleged embezzlement by a former licensee in connection with claims services
provided for the benefit of the plaintiff. The complaint seeks damages of at
least $1,800,000 from the Company. As the lawsuit is still in its earliest
phase, the Company cannot yet assess the merits of the complaint or the effects
this litigation will have on the Company. For further discussion, see "Item 1 -
Legal Proceedings".
7
<PAGE>
The Company's ratio of current assets to current liabilities was 5.20 to 1 as of
December 31, 1999 and 1.29 to 1 as of June 30, 1999. The increase is primarily
the result of the decreases in distribution payable and franchisee/licensee
remittance payable at December 31, 1999 as compared to June 30, 1999.
RESULTS OF OPERATIONS - SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO SIX
MONTHS ENDED DECEMBER 31, 1998
REVENUE
The Company's revenue increased 2.7% or $86,000 to $3,243,000 during the six
months ended December 31, 1999 from $3,157,000 in the same period of the prior
fiscal year. This increase represents a $41,000 decrease in adjusting and risk
management fees and a $127,000 increase in continuing licensee and franchisee
fees.
The decrease of $41,000 in adjusting and risk management fees from $699,000 in
the six months ended December 31, 1998 to $658,000 for the six months ended
December 31, 1999 represents a 5.9% decrease. The Company experienced an
increase of $29,000 in adjusting fees in its Las Vegas/Henderson office, and
decreases of $11,000 and $59,000 in adjusting fees from the Tucson and Phoenix
offices, respectively. The increase in Las Vegas/Henderson office is primarily
the result of an increase in storms this fiscal year as compared to the same
period of the prior year. The decrease in the Phoenix office mainly relates to
the loss of a client.
The Company's revenue from continuing licensee and franchisee fees increased
5.2% or $127,000 from $2,459,000 in the six months ended December 31, 1998 to
$2,586,000 in the six months ended December 31, 1999. This increase reflects the
benefit to the Company's licensees and franchisees from an increase in claims
assignments from insurance companies and self-insureds.
The Company's revenue is affected by numerous matters including the work loads
of other companies and claims presented by their clients. Therefore, the Company
is unable to project its future revenue. The Company has historically seen
growth in licensee and franchisee fees paid. However, during fiscal 1998, the
Company experienced a decrease in revenue due primarily to the phase out of a
business relationship with its then major client. The Company has responded to
the loss of revenue by continuing to develop and implement sales and marketing
efforts to take advantage of its geographic diversity as well as the unique
strengths of its individual licensees and franchisees. The Company's revenue did
recover in fiscal 1999, to an amount comparable to that of fiscal 1997, which
was prior to the loss of the client, and the Company hopes to see continued
growth in licensee and franchisee fees paid from other sources.
COMPENSATION AND FRINGE BENEFITS
Compensation and fringe benefits represent approximately 53.6% of the Company's
costs and expenses and represent the largest single item of expense. These
expenses decreased 9.3% or $132,000 from $1,418,000 in the six months ended
December 31, 1998 to $1,286,000 in the current six month period. The decrease is
the result of the retirement of William J. Rocke, former CEO and former Chairman
of the Board, and Jean E. Ryberg, former President, on June 30, 1999. Certain of
the services provided by Mr. Rocke and Mrs. Ryberg are now provided by United
Financial Adjusting Company ("UFAC") pursuant to a service agreement between the
Company and UFAC. Charges for these services are reflected in a monthly fee paid
to UFAC. For further discussion, see "Service Fees" below.
Compensation and Fringe Benefits were also affected by the resignation of
Francis J. LaPallo on January 31, 2000. In connection with his resignation, Mr.
LaPallo received a severance package with a net of tax affect on net income of
approximately $106,000 for the six months ended December 31, 1999. Had the
Company not incurred this expense, compensation and fringe benefits for the six
months ended December 31, 1999 would have experienced a greater decrease
compared to the same period of the prior fiscal year.
8
<PAGE>
SERVICE FEES
On April 30, 1999, the Company entered into a service agreement with UFAC
whereby the Company pays a $25,000 monthly fee for certain services provided by
UFAC. Services included under this agreement are management, marketing,
technology, human resource support, and accounting and reporting. For the six
months ended December 31, 1999, the Company incurred $150,000 in service fees.
The Company did not incur any service fees related to this agreement in the same
period of the prior fiscal year.
EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS AND SERVICE FEES
The Company's expenses other than compensation and fringe benefits and service
fees decreased $120,000 during the six months ended December 31, 1999 as
compared to the same period of the prior fiscal year. The principal items
affecting these expenses are decreases of $103,000 in legal fees, $43,000 in
advertising and promotion, $20,000 in Directors fees, $12,000 in depreciation
and amortization, which were partially offset by increases of $40,000 in
provision for doubtful accounts, $15,000 in office expenses, and $13,000 in
computer consulting expenses.
Legal fees decreased significantly due to the increased need for legal services
during the first six months of fiscal 1999 in preparation of the UFAC
transaction that was later consummated in April of 1999. As a portion of the
monthly service fee paid to UFAC includes marketing resources, the Company has
decreased similar services previously paid to external sources. Furthermore, a
portion of this reduction is due to the non-renewal of the Company's share of a
luxury suite at a sporting facility. Accordingly, advertising and promotional
expenses have decreased this fiscal year as these services were provided by UFAC
and recorded under Service Fees for the current period. Provision for doubtful
accounts increased primarily due to the aging of larger balanced loans given to
franchisees or licensees as compared to the same period of the prior fiscal
year.
INCOME TAXES
The Company's income taxes for the six months ended December 31, 1999 were 39.0%
of its income before taxes, or approximately the same as they were in the prior
fiscal year. Changes made in the tax laws by various states and by the federal
government have not had a material effect on the Company's current overall tax
rates; however, there is no assurance that such changes will not occur in the
future.
OTHER INCOME
The Company's other income increased $22,000 or 34.4% from $64,000 in the six
months ended December 31, 1998 to $86,000 in the current six month period. The
most significant items affecting other income are increases in the gain on sale
of investments and miscellaneous income of $12,000 and $11,000, respectively.
NET INCOME
The Company's net income for the six months ended December 31, 1999 increased
$131,000 or 30.1% from $435,000 in the six months ended December 31, 1998 to
$566,000 in the current period. The most significant items affecting net income
were an $86,000 increase in revenue, a $132,000 decrease in compensation and
benefits, a $150,000 increase in service fees, a $120,000 decrease in expenses
other than compensation and fringe benefits and service fees, and an increase of
$22,000 in other income.
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THREE
MONTHS ENDED DECEMBER 31, 1998
REVENUE
The Company's revenue increased 2.8% or $43,000 to $1,567,000 during the three
months ended December 31, 1999 from $1,524,000 in the same period of the prior
fiscal year. This increase represents a $45,000 decrease in adjusting and risk
management fees and an $88,000 increase in continuing licensee and franchisee
fees.
The decrease of $45,000 in adjusting and risk management fees from $339,000 in
the three months ended December 31, 1998 to $294,000 in the three months ended
December 31, 1999 represents a 13.3% decrease. The Company experienced a
9
<PAGE>
decrease of $53,000 in adjusting fees in its Phoenix office and increases of
$1,000 and $7,000 in adjusting fees from the Las Vegas/Henderson and Tucson
offices, respectively. The decrease in fees from the Phoenix office primarily
reflects the loss of a client.
The Company's revenue from continuing licensee and franchisee fees increased
7.4% or $88,000 from $1,185,000 in the three months ended December 31, 1998 to
$1,273,000 in the three months ended December 31, 1999. This increase reflects
the benefit to the Company's licensees and franchisees from an increase in
claims assignments from insurance companies and self-insureds.
The Company's revenue is affected by numerous factors including the work loads
of other companies and claims presented by their clients. Therefore, the Company
is unable to project its future revenue. The Company has historically seen
growth in licensee and franchisee fees paid. However, during fiscal 1998, the
Company experienced a decrease in revenue due primarily to the phase out of its
business relationship with its then major client. The Company has responded to
this loss by continuing to develop and implement sales and marketing efforts to
take advantage of its geographic diversity as well as the unique strengths of
its individual licensees and franchisees. The Company's revenue did recover in
fiscal 1999 to an amount comparable to that of fiscal 1997, which was prior to
the loss of the client, and the Company hopes to see continued growth in
licensee and franchisee fees paid from other sources.
COMPENSATION AND FRINGE BENEFITS
Compensation and fringe benefits represent approximately 54.8% of the Company's
costs and expenses and represent the largest single item of expense. These
expenses remained essentially flat at $700,000 in the three months ended
December 31, 1998 compared to the current three month period. Compensation
related expenses have declined significantly this fiscal year due to the
retirement of William J. Rocke, former CEO and Chairman of the Board, and Jean
E. Ryberg, former President, on June 30, 1999. However, the Company incurred
expenses this quarter related to the resignation of Francis J. LaPallo, former
Executive Vice President, on January 31, 2000. In connection with his
resignation, Mr. LaPallo received a severance package with a net of tax affect
on net income of approximately $106,000 for the three months ended December 31,
1999. Had the Company not incurred this expense, compensation and fringe
benefits for the three months ended December 31, 1999 would have decreased in
comparison to the same period of the prior year.
Certain of the services provided by Mr. Rocke and Mrs. Ryberg are now provided
by UFAC pursuant to a service agreement between the Company and UFAC. Charges
for these services are reflected in a monthly fee paid to UFAC. For further
discussion, see "Service Fees" below.
SERVICE FEES
On April 30, 1999, the Company entered into a service agreement with UFAC
whereby the Company pays a $25,000 monthly fee for certain services provided by
UFAC. Services included under this agreement are management, marketing,
technology, human resource support, and accounting and reporting. For the three
months ended December 31, 1999, the Company incurred $75,000 in service fees.
The Company did not incur any service fees related to this agreement in the same
quarter of the prior fiscal year.
EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS AND SERVICE FEES
The Company's expenses other than compensation and fringe benefits and service
fees decreased $61,000 during the three months ended December 31, 1999 as
compared to the same quarter of the prior fiscal year. The principal items
affecting these expenses are decreases of $91,000 in legal fees, $44,000 in
advertising and promotion, and $17,000 in audit and accounting fees, which were
partially offset by increases of $35,000 in provision for doubtful accounts,
$23,000 in technology consulting fees, and $20,000 in office expenses.
Legal fees and accounting related fees decreased significantly this quarter due
to the increased need for these services during the three months ended December
31, 1998 in preparation of the UFAC transaction that was later consummated in
April of 1999. Advertising and promotional expenses decreased $44,000 this
quarter as a portion of the monthly service fee paid to UFAC includes marketing
resources. Therefore, the Company has ceased some of the costs that were
10
<PAGE>
previously paid to external parties. Furthermore, a portion of this reduction is
due to the non-renewal of the Company's share of a luxury suite at a sporting
facility. Provision for doubtful accounts increased primarily due to the aging
of larger balanced loans given to franchisees or licensees as compared to the
same period of the prior fiscal year.
INCOME TAXES
The Company's income taxes were 42.3% and 39.4% of its income before taxes for
the three months ended December 31, 1999 and 1998, respectively. A difference in
these rates is due to an increase in permanent differences in book and tax
income between the periods. The Company's income taxes have not been
significantly affected by any changes in the federal and state laws. However,
tax rates can be changed at any time based upon legislation.
OTHER INCOME
The Company's other income increased $19,000 or 52.8% from $36,000 in the three
months ended December 31, 1998 to $55,000 in the current three month period. The
most significant items affecting other income include increases of $5,000 in
interest income, $12,000 in the gain on sale of investments and $6,000 in
miscellaneous revenue, and a decrease in dividend income of $4,000.
NET INCOME
The Company's net income for the three months ended December 31, 1999 increased
$20,000 or 11.2% from $179,000 in the three months ended December 31, 1998 to
$199,000 in the current quarter. The most significant items affecting net income
were a $43,000 increase in revenue, a $75,000 increase in service fees and a
$61,000 decrease in expenses other than compensation and fringe benefits and
service fees.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss to future earnings, fair values, or future cash
flows due to potential changes in the price of a financial instrument. A
financial instrument's value may change as a result of changes in interest
rates, exchanges rates, commodity prices, equity prices, and other market
changes. Market risk is inherent in all market risk sensitive financial
instruments.
During the first six months of fiscal 2000, the Company did own an immaterial
number of common stock shares that it sold in October 1999. Therefore, the
Company is no longer exposed to any market risk associated with this investment.
The Company has a book value of $668,000 invested in municipal bonds that it
carries as long term held to maturity investments. An increase in interest rates
would result in a decline in the market value of the bonds. These bonds mature
between 2005 and 2031. As the Company has the intent and ability to hold these
bonds to maturity, the market risk associated with these bonds is insignificant
and does not have a material effect on the financial statements.
Although the Company wholly owns a Canadian subsidiary, the cash held by the
Canadian subsidiary is not material to the Company's operations. Therefore, any
foreign currency fluctuations would not have a material effect on the Company's
financial statements.
11
<PAGE>
PART II OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
In June 1999, Safeway Inc. filed a complaint against multiple defendants
including the Company in the United States District Court in Nebraska. The
complaint arises from the alleged embezzlement of over $1,800,000 by a former
franchisee of the Company. The complaint alleges claims against the Company in
connection with claims services provided for the benefit of Safeway, Inc.,
including breach of fiduciary duty, negligent failure to monitor or supervise,
vicarious liability, and breach of contract. The complaint seeks an accounting
and a recovery of compensatory damages of at least $1,800,000. As the lawsuit is
still in its earliest phase, the Company cannot yet assess the merits of the
complaint or the effects this litigation will have on the Company. The Company
has sought coverage under various insurance policies it holds and has received
denials of coverage from the carriers. As of December 31, 1999, the Company has
not accrued any liability with respect to this lawsuit.
From time to time in the normal course of its business, the Company is named as
a defendant in lawsuits. With the exception of the complaint described above,
the Company does not believe that it is subject to any such lawsuits or
litigation or threatened lawsuits or litigation that will have a material
adverse effect on the Company or its business.
ITEM 2 - NOT APPLICABLE
ITEM 3 - NOT APPLICABLE
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
On January 26, 2000, the Company held its 1999 Annual Shareholders' Meeting.
The Company's Board of Directors were reelected with 8,473,719 shares being cast
and 18,144 shares withholding authority. The Directors elected and the numbers
of votes each received are as follows:
John M. Davies 8,434,998
Jeffrey R. Harcourt 8,434,998
Troy M. Huth 8,434,998
Jeffrey C. Jordan 8,434,998
Francis J. LaPallo 8,454,626
Louis T. Mastos 8,449,826
William J. Rocke 8,392,326
Jean E. Ryberg 8,393,826
William A. White 8,455,276
The Company's shareholders ratified the appointment of McGladrey & Pullen, LLP,
Certified Public Accountants, as the auditors of the Company for the Company's
fiscal year ending June 30, 2000 with 8,419,419 affirmative votes, 24,278
against, and 30,022 abstaining.
ITEM 5 - OTHER INFORMATION
Francis J. LaPallo, a director and an Executive Vice President of the Company,
resigned from his position with the Company effective January 31, 2000. To fill
the vacancy on the board, the board of directors appointed Kenneth A. Sexton to
the Board.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) 27 -- Financial Data Schedule
(b) The Company filed a Form 8-K on December 2, 1999 to report a change in
ownership of the Company's majority shareholder, UFAC.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRONTIER ADJUSTERS OF AMERICA, INC.
Date: 2/11/00 /s/ Troy M. Huth
---------- ----------------------------------------
Troy M. Huth, President, Chief Executive
Officer and Director
Date: 2/11/00 /s/ Jeffrey R. Harcourt
---------- ----------------------------------------
Jeffrey R. Harcourt, Chief Financial
Officer and Director
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999 (Unaudited) AND THE CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,541,141
<SECURITIES> 0
<RECEIVABLES> 1,689,377
<ALLOWANCES> 445,619
<INVENTORY> 0
<CURRENT-ASSETS> 3,308,746
<PP&E> 2,655,895
<DEPRECIATION> 1,002,453
<TOTAL-ASSETS> 6,260,423
<CURRENT-LIABILITIES> 636,760
<BONDS> 0
<COMMON> 90,191
0
0
<OTHER-SE> 5,533,472
<TOTAL-LIABILITY-AND-EQUITY> 6,260,423
<SALES> 0
<TOTAL-REVENUES> 3,243,056
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,400,264
<LOSS-PROVISION> 135,838
<INTEREST-EXPENSE> 1,097
<INCOME-PRETAX> 929,186
<INCOME-TAX> 362,786
<INCOME-CONTINUING> 566,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 566,400
<EPS-BASIC> .06
<EPS-DILUTED> .06
</TABLE>
