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, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-12902
FRONTIER ADJUSTERS OF AMERICA, INC.
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(Exact name of registrant as specified in its charter)
ARIZONA 86-0477573
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
45 East Monterey Way
Phoenix, Arizona 85012
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (602) 264-1061
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange On Which Registered
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Common Stock $.01 Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $10,587,694 as of September 5, 2000.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, as of September 5, 2000, was 8,957,660.
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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, 2000, the Company had entered into 499 license and
franchise agreements ("Agreements") with 394 entities, operating 382 offices
with 672 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, 2000, the Company employed 34 people: 32 full-time and two
part-time. Nine employees provided adjusting services full-time, one employee
provided adjusting services part-time, two 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.
In March of 2000, the Company's board of directors agreed in principle to enter
into a transaction (the "Transaction") whereby the Company will exchange a net
of approximately 11.5 million shares of its common stock for all of the issued
and outstanding shares of stock of United Financial Adjusting Company ("UFAC").
Upon consummation of the proposed Transaction, the Company will merge with UFAC
and will become the parent of UFAC's two subsidiaries, JW Software, Inc. ("JW")
and DBG Technologies, Inc. ("DBG"). In May 2000, JW acquired 100% of the stock
of Vedder Software Group, Inc. ("Vedder"). Vedder will therefore be included in
the Transaction. The Transaction will be accounted for in a manner similar to a
pooling of interest since the entities are under common control, to the extent
of the common ownership. The assets and liabilities of these companies will be
recorded at their fair value to the extent of the ownership interest by minority
stockholders and at the historical cost for the ownership interest under common
control.
UFAC is an insurance claim management services company, JW develops and markets
claim management software, DBG develops and markets internet-based systems and
websites, and Vedder develops property estimating software and tools.
Netrex Holdings, LLC ("Netrex") currently owns all of the outstanding shares of
stock in UFAC which holds approximately 59% of the Company's outstanding common
stock. Consequently, after the Transaction is consummated, Netrex will own
approximately 16.4 million shares of the Company's stock, representing
approximately 82% of the Company's outstanding common stock.
The Transaction is subject to the approval of certain regulatory agencies and
the American Stock Exchange, the stock exchange on which the Company's shares
are currently traded, as well as the approval by shareholders of the Company and
UFAC. In connection with this Transaction, the Company is proposing to change
its name to "Netrex Business Services, Inc.". The Company will, however,
continue to operate the franchised and licensed claims adjusting business under
the Frontier name even if the Transaction is consummated and the name change
effected.
GENERAL
For its fiscal year ended June 30, 2000, the Company's licensing and franchising
activities accounted for approximately 83% of gross revenue, and the Company's
adjusting and risk management businesses accounted for approximately 17% of
gross revenue. For the fiscal years ended June 30, 1999 and June 30, 1998, the
Company's licensing and franchising activities accounted for approximately 78%
and 79%, respectively, of gross revenue, and the Company's adjusting and risk
management businesses accounted for approximately 22% and 21%, 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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2000 1999 1998
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Gross billings by Adjusters $45,810,000 $44,730,000 $42,050,000
(approximate)
Revenue from licensing and
franchising activities 5,170,592 4,936,349 4,596,657
Revenue from Company-owned adjusting
and risk management businesses 1,086,304 1,405,235 1,228,691
For its fiscal year ended June 30, 2000, the Company's licensing and franchising
activities accounted for approximately $2,372,000 in income from operations and
the Company's adjusting and risk management businesses accounted for
approximately $88,000 in income from operations. For the fiscal years ended June
30, 1999 and June 30, 1998, the Company's licensing and franchising activities
accounted for approximately $1,051,000 and $1,152,000 respectively, in income
from operations, and the Company's adjusting and risk management businesses
accounted for approximately $221,000 and $106,000, respectively, in income from
operations.
CLAIMS ADJUSTING
A claims adjuster conducts the business of providing claims adjustment services
to insurance companies and to self-insured clients. The major elements of claims
adjusting consist of the following:
1. Investigation - the development of information necessary to determine
the cause and origin of the loss.
2. Evaluation - the determination of the extent and value of damage
incurred and the coverage, liability, and compensability relating to
the parties involved.
3. Disposition - the resolution of the claim, whether by payment,
negotiation and settlement, by denial, or by other resolution.
4. Management - the coordination of all parties involved in the claims
process and the supervision of the claims process including risk
management related services.
Insurance companies, which represent the major source of revenue to adjusters,
customarily manage their own claims management function, and require defined
services from adjusters, such as field investigation and settlement services.
Self-insured clients typically require a range of risk management services
including claims adjustment, claims management, statistical reporting, and loss
control, among other services. Insurance companies usually make claims adjusting
assignments on a claim by claim basis. Self-insured clients typically retain
adjusting firms like the Company and the Adjusters to handle all of their
claims, such as workers compensation, general liability claims, and other
claims. Neither the Company nor any of the Adjusters engages in public
adjusting, which consists of representing individual insureds with respect to
their claims against insurance companies.
Risk management related services consist primarily of providing services to
in-house risk managers of self-insureds whose internal resources do not include
expertise in claims adjusting or other aspects of claims management. Risk
management services, which are often referred to in the industry as "third party
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CLAIMS ADJUSTING (CONTINUED)
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 2000, 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 licensees' 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,
national account marketing programs 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 in attracting
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 $331,836 per month and has received reimbursement of an average of
$322,425 per month. At June 30, 2000, the Company had approximately $1,198,000
in outstanding loans or advances. During the past four fiscal years, the Company
has written off an average of $147,554 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
Agreement sets forth a minimum performance standard. The current form of
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LICENSE AND FRANCHISE AGREEMENTS (CONTINUED)
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 Netrex, age
44, as Vice President of the Company. In August 1999, the Board of Directors
appointed Troy M. Huth of Netrex, age 40, as President and, in January 2000, CEO
of the Company. Mr. Jordan is located in the Company's home office and manages
the daily operations of the Company, whereas Mr. Huth is located at the UFAC
corporate office in Cleveland, Ohio, and oversees the direction of the Company.
Pursuant to an agreement with UFAC, the Company also receives certain
managerial, marketing, financial, technological, and other services provided by
UFAC. Should the Company lose the services of Mr. Jordan and/or UFAC, the
Company would be materially adversely affected.
VOTING CONTROL
The directors and officers of the Company own in excess of 9% of the outstanding
voting stock of the Company. UFAC's ownership constitutes 58.7% of the Company's
outstanding voting stock. The Company anticipates that UFAC's ownership will
enable UFAC, and therefore Netrex, to control the business and affairs of the
Company. If the Transaction is consummated, Netrex will continue to be able to
elect a majority of the Board of Directors, and therefore, will be able to
continue to control the affairs of the Company.
DEPENDENCE UPON SIGNIFICANT CLIENTS
The Company generally considers its client base broad and well-diversified, and
does not have any clients that generate 10% or more of consolidated revenue. To
avoid dependence on any one 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 renewing accounts. Failure to procure or
maintain such accounts may have a material adverse affect on the Company's
business. See "Special Considerations - Competition".
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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
continues to monitor and evaluate this matter. If it is determined that action
should be taken to protect its service mark, but the Company 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 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
"Item 3 - 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 these laws that regulate substantive matters in the franchisor 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.
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FRANCHISING (CONTINUED)
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", "Special Considerations - The Insurance Adjusting Business",
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, until 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 Company intends to retain
its earnings to finance development, expansion and growth of its business.
Consequently, the Board of Directors does not currently anticipate the payment
of any dividends to the Company's shareholders in the foreseeable future.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information contained in this Report under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and Item 1, "Business" concerning future, proposed, and anticipated
activities of the Company, certain trends with respect to the Company's
operating results, capital resources and liquidity, or with respect to the
insurance adjusting industry in general, and other statements contained in this
Report regarding matters that are not historical facts, are forward-looking
statements, and by their very nature, include risks and uncertainties.
Accordingly, actual results may differ, perhaps materially, from those expressed
in or implied by such forward-looking statements. Factors that could cause
actual results to differ materially include the foregoing and those discussed
elsewhere under this Item 1, "Special Considerations".
ITEM 2 - PROPERTIES
The Company owns the office building and property located at 45 East Monterey
Way, Phoenix, Arizona, where it conducts its licensing and franchising
operations and its Phoenix claims adjusting and risk management-related services
business. 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 that city. As the Company sold it's Tucson, Arizona
adjusting office in January 2000, the Company no longer uses the office leased
there and is currently attempting to sublease it.
Management believes the facilities owned and leased by the Company are adequate
for its current and foreseeable future operations.
Page 9
<PAGE>
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 Company has denied the
allegations of liability contained in the complaint. As the lawsuit is still in
its earliest phase, the Company cannot yet assess the merits of the complaint or
whether this suit will have a material adverse affect on the Company. The
Company has sought coverage under various insurance policies it holds and has
received denials of coverage from the carriers. The Company is continuing to
attempt to obtain coverage and defense from these carriers. As of June 30, 2000,
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 4 - SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
Matters were submitted to a vote of securities holders during the third quarter
of this fiscal year. Such matters were reported on the Company's Form 10-Q for
the period ended March 31, 2000. No matters were submitted to a vote of security
holders during the fourth quarter of the fiscal year covered by this report.
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, 2000
First Quarter $3.250 $1.500 308,800
Second Quarter 2.125 1.000 370,900
Third Quarter 4.500 1.250 397,600
Fourth Quarter 4.000 2.500 240,500
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
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, 2000
First Quarter......................................... $ .0000
Second Quarter........................................ .0000
Third Quarter......................................... .0000
Fourth Quarter........................................ .0000
Fiscal Year Ended June 30, 1999
First Quarter......................................... $ .0375
Second Quarter........................................ .0000
Third Quarter......................................... .0000
Fourth Quarter........................................ 1.6000
As of June 30, 2000, there were 220 shareholders of record (approximately 1,020
including beneficial owners) of the Company's Common Stock.
The Company intends to retain its earnings to finance development, expansion and
growth of its business. Consequently, the Board of Directors does not currently
anticipate the payment of any dividends to the Company's shareholders in the
foreseeable future.
Page 11
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating revenue $ 6,256,896 $ 6,341,584 $ 5,825,348 $ 6,164,603 $ 5,641,984
Net income 1,240,369 546,452 612,475 979,198 1,134,519
Basic earnings per share .14 .12 .13 .21 .25
Diluted earnings per share .14 .12 .13 .21 .25
Weighted average number of
shares used in per share
data: Basic 8,957,586 4,569,049 4,605,358 4,607,709 4,620,101
Diluted 8,957,586 4,570,113 4,612,674 4,631,898 4,627,606
Cash dividends per share $ -- $ 1.638 $ .15 $ .15 $ .14
BALANCE SHEET DATA
Working capital $ 3,533,324 $ 2,073,511 $ 3,214,489 $ 3,261,953 $ 3,196,562
Total assets 6,720,093 12,118,984 7,800,700 7,912,139 6,875,752
Long-term debt -- -- 4,953 33,462 59,983
Property and equipment, net 1,622,389 1,608,936 1,724,329 1,736,226 1,554,401
Stockholders' equity 6,300,340 5,053,633 6,452,241 6,564,193 6,230,799
Book value per common share .70 .56 1.40 1.43 1.35
Retained earnings 4,263,100 3,022,731 4,735,935 4,814,266 4,526,419
Total shares outstanding 8,957,660 8,957,560 4,605,358 4,605,358 4,619,658
</TABLE>
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<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
In fiscal 2000, the Company's continuing operations generated $1,067,000 in
cash, which was sufficient for the Company's cash requirements. The most
significant items affecting cash generated by the Company's operations are net
income of $1,240,000, a $437,000 decrease in franchisee and licensee remittance
payable, a decrease of $266,000 in salaries payable and related benefits, and
the bad debt expense of $312,000. 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 premiums.
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 the licensees and
franchisees. As June 30, 2000 fell one day after the collections were remitted
to licensees and franchisees, the Company's remittance payable was $116,000. In
comparison, the Company's financial statements as of June 30, 1999, reflect
collections for four days of $553,000. The decrease in salaries payable and
related benefits results from the payout of employee benefits and bonuses during
the first quarter of fiscal 2000. The bad debt expense relates to the reserves
for aged larger balance loans given to franchisees and licensees.
For the fiscal year ended June 30, 2000, the Company's investing activities
generated $85,000 in cash. The most significant items affecting cash generated
from investing activities are $3,498,000 given as advances or loans to licensees
and franchisees, $3,701,000 in collections on advances or loans given to
licensees and franchisees, $172,000 in capital expenditures, and $51,000
received on a called bond held by the Company.
For the fiscal year ended June 30, 2000, the Company's financing activities used
$5,918,000 in cash. The most significant item affecting cash used in financing
activities is the $5,918,000 dividend declared in fiscal 1999 but not paid until
the first quarter of fiscal 2000. This dividend was a one-time $1.60 per share
dividend in conjunction with UFAC's purchase of 5,258,513 of the Company's
shares in April of 1999.
Without giving effect to the operations added as a result of the proposed
Transaction with UFAC, the Company anticipates that during fiscal 2001 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 2001.
The Company continues to maintain a strong cash position. As a result, the
Company's ratio of current assets to current liabilities is 9.42 to 1 as of June
30, 2000, compared to 1.29 to 1 as of June 30, 1999. The increase is primarily
the result of the decreases in payables for dividends, franchisee/licensee
remittances, and salaries and related benefits.
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. The Company
has denied allegations of liability contained in the complaint. As the lawsuit
is still in its earliest phase, the Company cannot yet assess the merits of the
complaint or whether this suit will have a material adverse effect on the
Company. For further discussion, see "Item 3 - Legal Proceedings".
Page 13
<PAGE>
RESULTS OF OPERATIONS 2000 COMPARED TO 1999
REVENUE
The Company's revenue decreased $85,000, or 1.3%, to $6,257,000 during the
fiscal year ended June 30, 2000 from $6,342,000 in the prior fiscal year. This
decrease consists primarily of a $319,000 decrease in adjusting and other
revenue and a $234,000 increase in continuing licensee and franchisee fees.
The decrease of $319,000 in adjusting and other fees to $1,086,000 in the
current fiscal year compared to $1,405,000 in the prior fiscal year represents a
22.7% decrease. The Company experienced decreases of $209,000 in adjusting fees
its Phoenix office, $7,000 in adjusting fees in its Las Vegas/Henderson office,
and $99,000 in adjusting fees in its Tucson office. The remainder of the
decrease, $4,000, is due to the discontinuation of risk management services
provided by the Company's home office.
The decline in the Las Vegas/Henderson office is primarily the result of a
decrease in storms towards the end of the 2000 fiscal year as compared to the
prior year. The decrease in the Phoenix office mainly relates to a client the
Phoenix office acquired in November 1997 and lost in early fiscal 2000. The
decrease in the Tucson office is the result of the Company's sale of the Tucson
office to a new franchisee on January 1, 2000. Finally, the Company ceased
providing risk management services within the home office during fiscal 2000 as
it was not economical to continue providing such services. Fees generated from
the risk management services were $2,000 and $5,000 for the years ended June 30,
2000 and 1999, respectively. The decision to have franchisees and licensees
provide risk management services for clients continues to remain with the
individual franchisees and licensees.
The Company's revenue from continuing licensee and franchisee fees increased
$234,000, or 4.7%, from $4,936,000 in the prior fiscal year to $5,170,000 in the
current fiscal year. 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 the licensee and franchisees paid, with exception to the loss of a
major client in 1997. To further enhance revenue growth, the Company continues
to develop and implement sales and marketing efforts that take advantage of its
geographic diversity as well as the unique strengths of its individual licensees
and franchisees. In addition to the marketing resources provided by UFAC, the
Company hopes to see continued growth in licensee and franchisee fees paid.
COMPENSATION AND EMPLOYEE BENEFITS
Compensation and employee benefits represent approximately 45.3% of the
Company's cost and expenses and represent the largest single item of expense.
These expenses decreased $1,263,000, or 38.8%, from $3,248,000 in the prior
fiscal year to $1,985,000 in the current fiscal year. 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. In addition to
the absence of their salaries in the current fiscal year, the Company had paid
severance packages to Mr. Rocke and Mrs. Ryberg in the 1999 fiscal year, thereby
increasing compensation expense compared to this fiscal year. Furthermore,
compensation decreased as a result of the resignation of Francis J. LaPallo, a
former Executive Vice President, on January 31, 2000. Certain of the services
provided by Mr. Rocke, Mrs. Ryberg, and Mr. LaPallo 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 support. For
the fiscal year ended June 30, 2000, the Company incurred $300,000 in services
fees under this agreement as compared to $50,000 for the prior year (as the
agreement was in affect for only two months during fiscal 1999).
The Company also pays UFAC for services performed beyond the scope of the
service agreement. For the fiscal year ended June 30, 2000, the Company incurred
$51,000 in computer consulting fees and $10,000 in telephone support for the
Company's after-hour hotline, for an aggregate of $61,000 in services provided
by UFAC that were not within the scope of the service agreement.
Page 14
<PAGE>
SERVICE FEES (continued)
The Company believes that the charges for the services provided under the
service agreement are competitive with charges for similar services and
facilities available from third parties.
EXPENSES OTHER THAN COMPENSATION AND FRINGE BENEFITS AND UFAC SERVICE FEES
The Company's expenses other than compensation and fringe benefits and UFAC
service fees decreased $261,000, or 11.4%, from fiscal 1999 to fiscal 2000. The
principal items affecting these expenses are decreases of $175,000 in
advertising and promotion, $110,000 in legal fees, $53,000 in depreciation,
$24,000 in office expenses, and increases of $74,000 in bad debt and $25,000 in
insurance coverage costs.
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. Accordingly, advertising and promotional expenses have
decreased this fiscal year as these services were provided by UFAC and recorded
under service fees for the fiscal year 2000. 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. Legal fees decreased significantly due to the increased
need for legal services during the first nine months of fiscal 1999 in
preparation of the UFAC transaction that was later consummated in April of 1999.
Furthermore, the Company has reduced the legal services it receives from the
Company's outside counsel, a current shareholder of the Company and former
officer and director of the Company, by $49,000 from $92,000 in fiscal 1999 to
$43,000 in fiscal 2000. The decrease in depreciation expense is a result of a
decline in capital purchases as well as an increase in fully depreciated assets
as compared to the prior fiscal year.
The Company has traditionally advanced funds to franchisees and licensees to
assist them in the initial start-up and further growth of their businesses.
Throughout the years, the Company has loaned significant amounts of money to
various franchisees and licensees. The Company reserves for such loans based
upon historical experience and current changes in circumstances. Loans are
reserved for under the following circumstances: (1) the Company determines that
the loan is uncollectible and (2) the collectability of the entire loan balance
is questionable. Based upon historical experience, a loan is determined to be
uncollectible when notice is given by the Company or by a franchisee or licensee
that the relationship with the Company is being terminated. Collectability of a
loan becomes questionable when either the Company anticipates that the
relationship between the Company will become terminated, or the volume of the
franchisee or licensee is inadequate to repay the loan in a reasonable period.
As of June 30, 2000, the Company carried loans with certain franchisees or
licensees that had sizable loan balances which accumulated over a number of
years. As the franchisees' or licensees' volume has diminished, or their loans
age, the Company has provided for reserves on these loans as appropriate. The
likelihood of collecting 100% of such loans was determined to be questionable,
based on the Company's past experience, and therefore the Company found it
appropriate to reserve for these loans. The Company is currently more
conservative in lending funds to franchisees and licensees today; however, older
loans are affecting current reserves for bad debt. As of June 30, 2000, the
Company carried older, large balance loans as compared to the prior year and
therefore increased its reserves for bad debt, consequently increasing the bad
debt expense for fiscal 2000.
The increase in insurance costs relates to increased coverage as well as
increases in the premiums during fiscal 2000 for the various insurance policies
the Company carries.
OTHER INCOME
The Company's other income decreased $42,000 or 18.4% from fiscal 1999 to fiscal
2000. The principal items affecting this decrease include a $49,000 decrease in
realized gain on equity securities primarily due to the redemption in fiscal
1999 of mutual funds owned by the Company as investments, an increase of $16,000
in the gain on sale of a license, an increase of $13,000 in miscellaneous
revenue, a decrease of $10,000 in interest income, and a decrease of $9,000 in
the disposition of fixed assets.
INCOME TAXES
Income taxes were 40.1% and 44.4% of the Company's income before income taxes
for fiscal year 2000 and 1999 respectively. A difference in these rates is due
to permanent differences and is reflected in the increase of the deferred tax
asset of $122,000 from $235,000 at June 30, 1999, to $357,000 at June 30, 2000.
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.
Page 15
<PAGE>
NET INCOME
The Company's net income increased $694,000 to $1,240,000 in the current fiscal
year from $546,000 in fiscal 1999, an increase of 127.1%. The most significant
items affecting net income were the $85,000 decrease in revenue, a $1,263,000
decrease in compensation and fringe benefits, a $250,000 increase in service
fees, a $261,000 decrease in expenses other than compensation and fringe
benefits and service fees, and a $42,000 decrease in other income. During the
fourth quarter of fiscal 2000, the Company recorded net income of $369,000.
RESULTS OF OPERATIONS 1999 COMPARED TO 1998
REVENUE
The Company's revenue increased to $6,342,000 from $5,825,000 in fiscal 1998,
resulting in a 8.9% increase as compared to fiscal 1998. 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 fiscal
1999 compared to $1,229,000 in fiscal 1998 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 fiscal 1998 to $4,936,000 in fiscal 1999.
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 1998 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.
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 fiscal 1999 from
$2,817,000 in the fiscal 1998. 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 in fiscal 1999 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 in fiscal 1999
with UFAC.
The balance of the Company's costs and expenses have not changed significantly
from the 1998 fiscal year.
Page 16
<PAGE>
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 fiscal 1999 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.
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 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 interest income risk and market value risks associated with this
investment.
At June 30, 2000, the Company has a book value of $619,000 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>
Peter I. Cavallaro Mr. Cavallaro was appointed Secretary of 38
Secretary the Company in January 2000. Mr.
Cavallaro joined Netrex LLC, a newly
organized financial services and
technology company, in November 1999.
From May 1990 to March 1999, Mr.
Cavallaro was employed by NationsBanc
Auto Leasing, Inc. (formerly named
Oxford Resources Corp.), most recently
serving as Senior Vice President and
General Counsel. From June 1999 to
November 1999, Mr. Cavallaro was a
partner at the New York Law Firm of
Rivkin, Radler & Kremerer LLP. Mr.
Cavallaro continues as Of Counsel to
that law firm. Mr. Cavallaro holds a
J.D. degree from St. John's University
School of Law, and a BA from St. John's
University.
John M. Davies Mr. Davies has been associated with the 44 1999
Director and Chairman Company as a director since April 1999
of the Board and Chairman of the Board since January
2000. Since June 1999, Mr. Davies has
also served as President of Netrex LLC,
a newly organized financial services and
technology company. From September 1989
to June 1999, Mr. Davies was employed by
The Progressive Corporation, most
recently as Division President of
Progressive's Diversified Business
Group. 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 served as Chief 39 1999
Director, Chief Financial Financial Officer of the Company since
Officer and Treasurer August 1999, as a director of the
Company since April 1999 and as
Treasurer of the Company since January
2000. From October 1990 through November
1999, Mr. Harcourt was employed by The
Progressive Corporation, most recently
as the Controller of the Diversified
Business Group. Mr. Harcourt currently
also serves as the Chief Financial
Officer of Netrex. 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>
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<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>
Troy M. Huth Mr. Huth has served as President and a 40 1999
Director, director of the Company since April 1999
CEO and President and as the Company's CEO since January
2000. Mr. Huth was also appointed
President of UFAC in June 1999, Chairman
of the Board and director of JW in
November 1999 and President and director
of DBG in November 1999. From April 1986
until November 1999, Mr. Huth was
employed by The Progressive Corporation
in various technology and management
positions. Mr. Huth has a BA from
Baldwin Wallace College.
Jeffrey C. Jordan Mr. Jordan has been Vice President and a 44 1999
Director and director of the Company since April
Vice President 1999. From September 1984 through
November 1999, Mr. Jordan was employed
by The Progressive Corporation in
numerous capacities, most recently as
claims division manager. Mr. Jordan
holds a BA degree from Rutgers
University and a JD from UCLA.
Louis T. Mastos Mr. Mastos has been the President of 79 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.
Laurel A. Park Ms. Park has been employed by the 28
Assistant Secretary Company since June 1995 and currently
serves as Controller. In January 2000,
Ms. Park was appointed as the Company's
Assistant Secretary. Ms. Park holds a BS
degree in accounting from Arizona State
University.
James S. Rocke Mr. Rocke has been employed by the 32
Vice President Company since 1982 and has served in
various positions including Secretary
and Treasurer of the Company from
January 1993 to January 2000. In January
2000 Mr. Rocke was elected as Vice
President of the Company and currently
serves in that capacity. Mr. Rocke
graduated from Arizona State University
in 1991 with a BS degree in Finance. Mr.
Rocke is the son of William J. Rocke.
</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>
William J. Rocke Mr. Rocke founded the Company in 1957 76 1975
Director and served as an executive officer of
the Company and its predecessor entities
from May 1957 through June 1999. 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. Mr. Rocke is the father of
James S. Rocke
Jean E. Ryberg Mrs. Ryberg held several positions with 68 1975
Director* the Company from October 1962 through
June 1999, most recently as President of
the Company from January 1993 through
June 1999, when she retired.
Kenneth A. Sexton Mr. Sexton was appointed as a director 46 2000
Director* of the Company in January 2000, Mr.
Sexton currently serves as Senior Vice
President of Finance and Administration
and Chief Financial Officer of Merant a
world-wide technology and software
company. Mr. Sexton has served in
various positions with Merant and its
related companies since 1991. Mr. Sexton
holds a BS degree in business from Ohio
State University and is a Certified
Public Accountant
William A. White Mr. White has served as a director of 46 1999
Director and the Company since April 1999 and was
Vice President appointed Vice President of the Company
in January 2000. Mr. White was also
appointed as a director of JW and DBG in
March 1999. From May 1985 to November
1999, Mr. White was employed by The
Progressive Corporation, managing the
Diversified Claims Business Group. Mr.
White holds a master's degree from the
University of Southern California and
undergraduate degree in Business
Administration from John Carroll
University.
</TABLE>
* Member of the Company's audit committee
(1) Term will continue until next election of directors
Page 20
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the compensation
paid by the Company during its year ended June 30, 2000, to the chief executive
officer and each other executive officer whose aggregate compensation exceeded
$100,000.
Summary Compensation Table (1)
a b c d e
--------------------------------------------------------------------------------
Annual Compensation All Other
---------------------- Compensation
Name and Principal Position Year Salary ($) Bonus ($) ($)
--------------------------- ---- ---------- --------- ------------
Troy M. Huth 2000
Director, CEO and 1999 (3) (3) (3)
President 1998
(1) Columns (e), (f), (g) and (h) have been omitted as no such compensation was
granted.
(2) No perquisites were received by any person named above greater than the
lesser of $50,000 or 10% of salary plus bonus.
(3) Mr. Huth's services and the services of other executive officers of the
Company are provided to the Company by UFAC under a contract where the
Company pays $25,000 per month for services consisting of management,
marketing, technology, human resource support and accounting and reporting
services.
OPTION/SAR EXERCISES AND HOLDINGS
The Company did not grant any stock options during fiscal 2000 nor were there
any options outstanding as of June 30, 2000 for any of the Named Executive.
DIRECTORS COMPENSATION
Each Director, including employees of the Company, but excluding employees of
UFAC or Netrex, is paid $1,000 per board meeting attended ($750 per meeting
prior to March 1, 2000). During fiscal 2000, each such director, except for
Kenneth A. Sexton, received $2,750 for attendance at board meetings. Mr. Sexton
received $2,000 for attendance at board meetings.
EMPLOYMENT AGREEMENTS
The Company had an employment agreement with Mr. LaPallo for a five-year term.
Mr. LaPallo's agreement was effective June 23, 1996 and was terminated on
January 3, 2000, due to Mr. LaPallo's resignation. In addition, the services of
Mr. Jeffrey Jordan are provided to the Company pursuant to the service agreement
with UFAC. See "Item 11 - Executive Compensation - Summary Compensation Table".
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 June 30, 2000, 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. Unless otherwise indicated in the
footnotes, all of such interests are owned directly, and the indicated person
has sole voting and investment power. The number of shares represents the number
of shares of the Company's common stock the person holds. Information presented
in the table and related notes has been obtained from the beneficial owner
and/or from reports filed by the beneficial with the Securities and Exchange
Commission pursuant to Section 13 of the Exchange Act.
Page 21
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(CONTINUED)
AMOUNT OF BENEFICIAL OWNERSHIP
COMMON STOCK $.01 PAR VALUE
------------------------------
NUMBER OF
NAME AND ADDRESS SHARES (1) PERCENT (2)
---------------- ---------- -----------
OFFICERS AND DIRECTORS
Peter I. Cavallaro (3) -- *
John M. Davies (3) (6) 500 *
Jeffrey R. Harcourt (3) -- *
Troy M. Huth (3) -- *
Jeffrey C. Jordan (3) -- *
Louis T. Mastos and Eva B. Mastos, his wife (3) (7) 207,103 2.31%
Laurel A. Park (3) -- *
William J. Rocke and Garnet Rocke, his wife (3) (8) 415,332 4.64%
James S. Rocke and Kelly Rocke, his wife (3) (9) 444,867 4.97%
Jean E. Ryberg (3) (10) 97,960 1.09%
Kenneth A. Sexton (3) -- *
William A. White (3) -- *
All officers and directors as a group 875,762 9.78%
(twelve persons) (11)
FIVE PERCENT SHAREHOLDERS
United Financial Adjusting Company (4) (12) 5,258,513 58.70%
NETREX HOLDINGS, LLC (5) (13) -- --
----------
* Less than 1%
(1) The number of shares shown in the table, including the notes thereto, have
been rounded to the nearest whole share. Includes, when applicable, shares
owned of record by such person's minor children and spouse and by other
related individuals and entities over whose shares of Common Stock such
person has custody, voting control or power of disposition.
(2) The percentages shown include the shares of Common Stock which the person
will have the right to acquire within 60 days of June 30, 2000. 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 June
30, 2000 are deemed to be outstanding for the purpose of computing the
percentage of the shares of Common Stock owned by such person, but are not
deemed to be outstanding for the purpose of computing the percentage of
shares of Common Stock owned by any other stockholders.
(3) Each of such persons may be reached through the Company at 45 East Monterey
Way, Phoenix, Arizona 85012.
(4) May be reached at 31500 Solon Road, Solon, Ohio 44139.
(5) May be reached at 270 South Service Road, Suite 45, Melville, New York
11747.
(6) Does not include 5,258,513 shares owned by UFAC to which Mr. Davies
disclaims any beneficial interest for purposes of Section 13(d) or (g) of
the Securities Exchange Act of 1934, as amended.
Page 22
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(CONTINUED)
(7) 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.
(8) 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.
(9) Includes 290,000 shares held by Old Frontier Investment, Inc. of Arizona of
which James S. Rocke holds 49% of the outstanding stock.
(10) Excludes 28,000 held by Mrs. Ryberg's sons and grandchildren, in which she
disclaims any beneficial interest.
(11) Excludes all duplicate reporting of holdings required to be reported by
more than one officer or director.
(12) Includes 5,258,513 shares owned by UFAC. These shares were purchased
directly from Frontier in April 1999. As a result there was a change in
control of Frontier. UFAC is a wholly-owned subsidiary of Netrex. Netrex is
owned 51.4% by The Progressive Corporation and 48.6% by Netrex Capital
Group LLC ("NCG") which is wholly-owned by Netrex LLC. The Progressive
Corporation is a large publicly-traded corporation. According to certain
insurance regulatory filings dated March 30, 2000 of The Progressive
Corporation, Peter B. Lewis, President and Chief Executive Officer of The
Progressive Corporation, owns approximately 13.1% of the outstanding common
stock of that company. Netrex LLC is a limited liability company, the
manager of which is Duck Pond Corp., which is a privately-held corporation
having voting control and investment power of Netrex LLC. Each of Michael
C. Pascucci, Christopher S. Pascucci and Ralph P. Pascucci owns one- third
of the outstanding stock of and each is a director of (together
constituting all of the directors of) Duck Pond Corp. The Progressive
Corporation, NCG, Netrex LLC, Netrex, Duck Pond Corp., Peter B. Lewis,
Michael C. Pascucci, Christopher S. Pascucci and Ralph P. Pascucci each
disclaims that it is the beneficial owner of Frontier's shares owned by
UFAC for purposes of Section 13(d) or (g) of the Securities Exchange Act of
1934, as amended.
(13) Does not include 5,258,513 shares owned by UFAC prior to the Transaction
and cancelled upon the Transaction being affected. The Progressive
Corporation, NCG, Netrex LLC, Netrex, Duck Pond Corp., Peter B. Lewis,
Michael C. Pascucci, Christopher S. Pascucci and Ralph P. Pascucci each
disclaims that it is the beneficial owner of Frontier's shares owned by
Netrex for purposes of Section 13(d) or (g) of the Securities Exchange Act
of 1934, as amended.
Based solely on a review of the copies of such forms received by the Company
during the fiscal year ended June 30, 2000, 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.
To the best knowledge of the Company, no person or groups of persons, other
than officers, directors and UFAC beneficially own more than five percent of the
Company's common stock (based upon present records of the transfer agent).
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 of which 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 Old Frontier Investment, Inc. $14,448
during fiscal year 2000 in connection with such 5% royalty agreement.
George M. Hill, a shareholder and a former Vice President and Director of the
Company, acts as outside counsel to the Company. During the fiscal year ended
June 30, 2000, the Company paid Mr. Hill's law firm $42,774 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.
In April 1999, the Company entered into an agreement with UFAC whereby the
Company pays a $25,000 monthly fee for marketing, managerial, technological,
human resource support, financial and reporting support, the full-time services
of Jeffrey C. Jordan, and other services and resources. As of June 30, 2000, the
Company had incurred $300,000 in service fees related to this agreement, as well
as an additional $60,741 for services performed outside the agreement, for an
aggregate of $360,741.
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 23
<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, 2000 and 1999
Consolidated Statements of Income for the Years Ended June 30, 2000,
1999 and 1998
Condensed Consolidated Statements of Comprehensive Income for years
ended June 30, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended June 30,
2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the Years Ended
June 30, 2000, 1999 and 1998
Notes to Consolidated Financial Statements - June 30, 2000, 1999 and
1998
(a) (2) Financial Statement Schedules
Schedule
Number
------
II Valuation and Qualifying Accounts Years Ended June 30, 2000,
1999 and 1998
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 24
<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
10(m) 2000 Stock Option Plan
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.
******* 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 preliminary form on September 6, 2000.
(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, 2000
Page 25
<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 Chief Executive
Officer
September 6, 2000
----------------------------------------
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 6, 2000
-------------------------------------------------- -----------------
John M. Davies, Chairman of the Board and Director
/s/ Jeffrey R. Harcourt September 6, 2000
-------------------------------------------------- -----------------
Jeffrey R. Harcourt, Chief Financial Officer,
Treasurer and Director
/s/ Troy Huth September 6, 2000
-------------------------------------------------- -----------------
Troy Huth, Chief Executive Officer, President and
Director
/s/ Jeffrey C. Jordan September 6, 2000
-------------------------------------------------- -----------------
Jeffrey C. Jordan, Vice President and Director
/s/ Lou Mastos September 6, 2000
-------------------------------------------------- -----------------
Lou Mastos, Director
/s/ William J. Rocke September 6, 2000
-------------------------------------------------- -----------------
William J. Rocke, Director
/s/ Jean E. Ryberg September 6, 2000
-------------------------------------------------- -----------------
Jean E. Ryberg, Director
/s/ Kenneth A. Sexton September 6, 2000
-------------------------------------------------- -----------------
Kenneth A. Sexton, Director
/s/ William A. White September 6, 2000
-------------------------------------------------- -----------------
William A. White, Director
Page 26
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditor F-2
Consolidated Balance Sheets - June 30, 2000 and 1999 F-3
Consolidated Statements of Income for the Years Ended June 30,
2000, 1999 and 1998 F-4
Condensed Consolidated Statements of Comprehensive Income F-5
for the Years Ended June 30, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the Years Ended
June 30, 2000, 1999 and 1998 F-6
Consolidated Statements of Stockholders' Equity for the Years
Ended June 30, 2000, 1999 and 1998 F-7
Notes to Consolidated Financial Statements - June 30, 2000,
1999 and 1998 F-8
Supplementary Data (unaudited) F-17
Schedule II - Valuation and Qualifying Accounts Years Ended
June 30, 2000, 1999 and 1998 F-18
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, 2000 and 1999, and
the related consolidated statements of income, comprehensive income, cash flows,
and stockholders' equity for each of the three years ended June 30, 2000, 1999
and 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Frontier Adjusters
of America, Inc. and subsidiaries as of June 30, 2000 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 2000, 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, 2000, 1999, and 1998
included on page F-18 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 2, 2000
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
Frontier Adjusters of America, Inc. and Subsidiaries
<TABLE>
<CAPTION>
June 30, 2000 1999
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,132,297 $ 6,892,851
Current portion of advances to licensees and franchisees (Notes 4 and 6) 535,472 859,515
Receivables, net (Note 3) 809,463 744,241
Income tax refund receivable -- 99,226
Unbilled adjusting fees 23,130 37,170
Prepaid expenses 211,108 344,041
Deferred income taxes, current portion (Note 9) 241,607 161,818
------------ ------------
TOTAL CURRENT ASSETS 3,953,077 9,138,862
------------ ------------
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation and amortization (Note 5) 1,622,389 1,608,936
------------ ------------
OTHER ASSETS
Held to maturity investments (Note 7) 628,661 685,148
Advances to licensees and franchisees, net of current portion (Note 4) 200,000 350,000
Licenses and franchises, net of accumulated amortization of $261,789
in 2000 and $303,605 in 1999 170,412 226,015
Deferred income taxes, net of current portion (Note 9) 115,488 73,563
Cost of subsidiary in excess of net identifiable assets acquired, net
of accumulated amortization of $183,752 in 2000 and $181,441 in 1999 30,066 32,377
Other -- 4,083
------------ ------------
1,144,627 1,371,186
------------ ------------
TOTAL ASSETS $ 6,720,093 $ 12,118,984
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 25,835 $ 28,005
Salaries payable and related benefits 138,275 404,325
Service fees due to UFAC 15,000 50,000
Distributions payable (Note 14) -- 5,918,475
Licensees' and franchisees' remittance payable 116,287 552,946
Income Taxes Payable 33,989 --
Other (Note 13) 90,367 111,600
------------ ------------
TOTAL CURRENT LIABILITIES 419,753 7,065,351
------------ ------------
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 90,191 90,191
Additional contributed capital 2,104,413 2,104,426
Retained earnings 4,263,100 3,022,731
------------ ------------
6,457,704 5,217,348
Add (deduct):
Treasury stock; 61,399 shares in 2000 and 61,499 in 1999 (184,068) (184,368)
Other 26,704 20,653
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 6,300,340 5,053,633
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,720,093 $ 12,118,984
============ ============
</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, 2000 1999 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE
Continuing licensee and franchisee fees (Note 8) $ 5,170,592 $ 4,936,349 $ 4,596,657
Adjusting and risk management fees (Note 8) 1,086,304 1,405,235 1,228,691
----------- ----------- -----------
6,256,896 6,341,584 5,825,348
----------- ----------- -----------
COST AND EXPENSES
Compensation and employee benefits (Note 11) 1,984,581 3,248,276 2,817,168
Office 387,529 411,345 404,554
Advertising and promotion 210,441 385,372 395,210
Depreciation and amortization 218,615 271,884 253,667
Bad debt expense 311,820 237,601 352,132
Service fees to UFAC (Note 10) 360,741 50,000 --
Legal fees paid to a shareholder (Note 10) 42,774 92,187 92,510
Other 857,913 891,342 609,111
----------- ----------- -----------
4,374,414 5,588,007 4,924,352
----------- ----------- -----------
INCOME FROM OPERATIONS 1,882,482 753,577 900,996
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 155,038 165,272 133,067
Disposition of investments 1,000 -- 4,042
Gain (loss) on sale of license (Note 6) 1,276 (14,500) (13,000)
Gain (loss) on disposition of equipment (7,066) 1,501 6,352
Realized gain (loss) (Note 7) 12,494 60,753 (93)
Other 24,231 15,539 (3,497)
----------- ----------- -----------
TOTAL OTHER INCOME 186,973 228,565 126,871
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,069,455 982,142 1,027,867
INCOME TAXES (Note 9) 829,086 435,690 415,392
----------- ----------- -----------
NET INCOME $ 1,240,369 $ 546,452 $ 612,475
=========== =========== ===========
EARNINGS PER SHARE
Basic $ .14 $ .12 $ .13
=========== =========== ===========
Diluted $ .14 $ .12 $ .13
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 8,957,586 4,569,049 4,605,358
=========== =========== ===========
Diluted 8,957,586 4,570,113 4,612,674
=========== =========== ===========
</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, 2000 1999 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME $1,240,369 $ 546,452 $ 612,475
OTHER COMPREHENSIVE INCOME, NET OF TAX
Foreign currency translation adjustments 6,051 9,746 (6,037)
Unrealized gain (loss) on securities, net of
reclassification adjustment (see below) -- (38,693) (27,584)
---------- ---------- ----------
OTHER COMPREHENSIVE INCOME: 6,051 (28,947) (33,621)
---------- ---------- ----------
COMPREHENSIVE INCOME $1,246,420 $ 517,505 $ 578,854
========== ========== ==========
Reclassifications adjustment
Unrealized gain (loss) on securities during the year $ 12,494 $ 22,060 $ (27,584)
Less reclassification adjustment for gain (loss)
included in net income 12,494 60,753 --
---------- ---------- ----------
Net unrealized gains on securities $ -- $ (38,693) $ (27,584)
========== ========== ==========
</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, 2000 1999 1998
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,240,369 $ 546,452 $ 612,475
------------ ------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 218,615 272,430 255,852
(Gain) on sale of investments (1,000) -- (4,042)
(Gain) loss on sale of license (1,276) 14,500 13,000
(Gain) loss on disposition of equipment 7,066 (1,501) (6,352)
Bad debt expense 311,820 237,601 352,132
Deferred income taxes (121,714) 53,891 117,288
Realized (gain)/loss on equity investments (12,494) (60,753) 93
Other 6,507 9,576 (355)
Change in assets and liabilities
(Increase) decrease in:
Receivables (100,277) (91,235) (1,665)
Unbilled adjusting fees 14,040 3,780 (14,250)
Prepaid expenses 132,933 (26,587) (49,262)
Other -- 83,993 (65,220)
Increase (decrease) in:
Accounts payable (2,170) (34,113) 28,325
Salaries payable and related benefits (266,050) (204,788) 440,081
Income taxes payable/receivable 133,215 73,722 (257,937)
Licensees' & franchisees' remittance payable (436,659) 7,116 148,839
Other (56,233) 63,664 (505,222)
------------ ------------ ------------
Total adjustment (173,677) 401,296 451,305
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,066,692 947,748 1,063,780
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of fixed assets 1,550 93,512 16,200
Capital expenditures (171,655) (324,416) (167,078)
Investments purchased -- (11,769,769) (1,993,019)
Proceeds from maturity of held-to-maturity investments 51,000 13,124,869 2,040,000
Proceeds from sale of available-for-sale investments 12,494 -- --
Proceeds from sale of licenses 31,531 -- --
Payments on license acquisition (43,660) (33,462) (26,521)
Advances to licensees' and franchisees' (3,497,630) (4,183,647) (4,267,700)
Collections of advances to licensees & franchisees 3,701,261 4,096,545 3,948,312
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 84,891 1,003,632 (449,806)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (5,918,475) (172,701) (690,806)
Proceeds from sales of stock 287 6,992,308 --
Common stock repurchased -- (2,817,246) --
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (5,918,188) 4,002,361 (690,806)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 6,051 9,746 (6,037)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,760,554) 5,963,487 (82,869)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 6,892,851 929,364 1,012,233
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 2,132,297 $ 6,892,851 $ 929,364
============ ============ ============
</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
Years Ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
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, 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 -- --
Stock options exercised from
100 shares of treasury stock -- -- (13) -- --
Net income -- -- -- -- --
Foreign currency translation -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, June 30, 2000 9,019,059 $ 90,191 $ 2,104,413 -- --
=========== =========== =========== =========== ===========
Cumulative Unrealized
Retained Treasury Translation Gain (loss) on
Earnings Stock Adjustment Investments
----------- ----------- ----------- -----------
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 --
Stock options exercised from
100 shares of treasury stock -- 300 -- --
Net income 1,240,369 -- -- --
Foreign currency translation -- -- 6,051 --
----------- ----------- ----------- -----------
Balance, June 30, 2000 $ 4,263,100 $ (184,068) $ 26,704 --
=========== =========== =========== ===========
</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, 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 -- Property and equipment is stated at cost.
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 a period no less than 31 years and six months. 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.
IMPAIRMENT OF LONG-LIVED ASSETS -- The Company reviews its long-lived assets
and intangibles related to those assets periodically to determine potential
impairment by comparing the carrying value of the long-lived assets and
identified goodwill with the estimated future net undiscounted cash flows
expected to result from the use of the assets, including cash flows from
disposition. Should the sum of the expected future net cash flows be less than
the carrying value, the Company would recognize an impairment loss at that date.
An impairment loss would be measured by comparing the amount by which the
carrying value exceeds the fair value (estimated discounted future cash flows)
of the long-lived assets and identified goodwill.
Goodwill not identified with impaired assets is evaluated to determine whether
events or circumstances warrant a write-down or revised estimates of useful
lives. The Company determines impairment by comparing the carrying value of
goodwill with the estimated future net undiscounted cash flows expected to
result from the use of the assets, including cash flows from disposition. Should
the sum of the expected future net cash flows be less than the carrying value,
the Company would recognize an impairment loss at that date. Impairment losses
are measured by comparing the amount by which the carrying value exceeds the
fair value (estimated discounted future cash flows) of the goodwill.
To date, management has determined that no impairment of long-lived assets and
goodwill exists.
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.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 7 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.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - - In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which is required to be adopted in all
fiscal quarters of all fiscal years beginning after June 15, 2000. The Statement
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Company will adopt the new Statement effective July 1, 2000. The
Statement will require the Company recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivative will either be offset against
the change in fair value of the hedges assets, liabilities or firm commitment
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. Because of the
Company's minimal use of derivatives, management does not anticipate that he
adoption of the new Statement will have a significant effect on the Company's
earnings or financial position.
REVENUE RECOGNITION -- In December 1999, the staff of the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 101 REVENUE RECOGNITION
IN FINANCIAL STATEMENTS. SAB No. 101 summarizes some of the staff's
interpretations of the application of generally accepted accounting principles
to revenue recognition. The Company will adopt SAB No. 101 in fiscal year 2001.
Management believes the adoption of SAB No. 101 will not have a significant
affect on it's financial statements.
SEGMENT REPORTING -- Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, 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 No. 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. Management has determined the Company to have one reportable segment.
With the disposition of the Tucson, Arizona office, the Company no longer
reports it's operations by geographic segments due to immateriality and
accordingly, the Company has only one segment. The Company still provides the
same services to the same markets and clients.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER COMMON SHARE -- The Company is required to present basic and
diluted earnings per share amounts. Basic earnings per common share is computed
by dividing net income by the weighted average of common shares outstanding.
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. At June 30, 2000, the
Company has no dilutive potential common shares outstanding.
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
2000 1999 1998
---------- ---------- ----------
Cash paid during the year:
Interest $ 1,405 $ 1,369 $ 30,898
Income taxes 838,099 315,659 607,170
Noncash investing activities:
Sale of licenses 242,629 -- --
Deferred gain on sale of licenses (231,021) -- --
Disposal of license (11,608) -- --
Noncash financing activities:
Accrued dividends -- 5,918,475 --
NOTE 3: RECEIVABLES
2000 1999
---------- ----------
Receivables consist of:
Accounts receivable trade $ 165,377 $ 209,049
Licensee and franchisee fees receivable 595,354 601,518
Errors and omissions insurance premium advanced 160,854 90,992
Other 30,964 3,469
---------- ----------
Total receivables 952,549 905,028
Less allowance for doubtful accounts 143,086 160,787
---------- ----------
$ 809,463 $ 744,241
========== ==========
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:
2000 1999
---------- ----------
Advances to licensees and franchisees $1,197,533 $1,399,095
Less allowance for doubtful advances 462,061 189,580
---------- ----------
735,472 1,209,515
Less current portion 535,472 859,515
---------- ----------
Long term portion $ 200,000 $ 350,000
========== ==========
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consist of:
2000 1999
---------- ----------
Building and improvements $1,390,166 $1,273,023
Computers and software 314,716 269,724
Furniture and fixtures 348,596 359,235
Automobiles 16,494 51,494
---------- ----------
2,069,972 1,953,476
Less accumulated depreciation and amortization 1,034,326 931,283
---------- ----------
1,035,646 1,022,193
Land 586,743 586,743
---------- ----------
$1,622,389 $1,608,936
========== ==========
NOTE 6: SALE OF LICENSES
On January 1, 2000, the Company sold its Tucson, Arizona office to a new
franchisee for $167,629 resulting in a deferred gain of $156,021. The Company
also sold three franchises located in the Chicago, Illinois area in the third
quarter of fiscal 2000 for $25,000 per franchise that resulted in an aggregate
deferred gain of $75,000. The Company is collecting proceeds from these sales by
deducting a specified percentage of the franchisees' weekly remittances to be
applied against the sales price until paid in full. The deferred gains
associated with these sales are netted against the current portion of advances
to licensees and franchisees for balance sheet presentation and are recorded as
a gain on sale of assets when received. On June 30, 2000, the aggregate deferred
gain netted against receivables was $229,745. As of June 30, 2000, total
collected in payment of these loans was $6,531 and the gain recognized was
$1,276. The Company also sold a license in the Oakland, California area for cash
proceeds of $25,000.
NOTE 7: 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, 2000 and 1999:
<TABLE>
<CAPTION>
2000
------------------------------------------------
Gross Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
Held to maturity securities
Local government securities & other $ 628,661 $ 1,010 $ 18,596 $ 611,075
========= ========= ========= =========
1999
------------------------------------------------
Held to maturity securities
Local government securities & other $ 685,148 $ 17,886 $ 2,992 $ 700,042
========= ========= ========= =========
</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 $12,494, $60,753, and ($93) for the
years ended June 30, 2000, 1999, and 1998, respectively, due to the realized
gain or permanent impairment in value of its available for sale securities.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTE 8: LICENSING AND FRANCHISING
As of June 30, 2000, the Company has entered into 499 license and franchise
agreements with 394 entities, operating 382 offices with 672 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, 2000, 1999 and 1998
were approximately $45,810,000, $44,730,000 and $42,050,000, respectively.
The Company's main line of business is providing services, directly and through
licensees and franchisees, to the insurance industry and to self-insureds. The
revenue and cost components along with identifiable assets and number of
advertised locations are as follows.
<TABLE>
<CAPTION>
Licensing Adjusting Corporate
and and and
Franchising Risk Management Other Consolidated
----------- --------------- ----- ------------
<S> <C> <C> <C> <C>
2000
Revenue $ 5,170,592 $ 1,086,304 $ -- $ 6,256,896
Cost and expenses 2,798,397 998,078 577,939 4,374,414
------------ ------------ ------------ ------------
Income (loss) from operations $ 2,372,195 $ 88,226 $ (577,939) $ 1,882,482
============ ============ ============ ============
Identifiable assets $ 3,346,286 $ 494,756 $ 2,879,051 $ 6,720,093
============ ============ ============ ============
Number of advertised locations
Beginning of year 659 19 -- 678
Opened 5 -- -- 5
Closed (11) -- -- (11)
Ownership changes (4) 4 -- --
------------ ------------ ------------ ------------
End of year 649 23 -- 672
============ ============ ============ ============
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
============ ============ ============ ============
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTE 8: LICENSING AND FRANCHISING (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
1998
Revenue $ 4,596,657 $ 1,228,691 $ -- $ 5,825,348
Costs and expenses 3,444,402 1,123,172 356,778 4,924,352
----------- ----------- ----------- -----------
Income (loss) from operations $ 1,152,255 $ 105,519 $ (356,778) $ 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
=========== =========== =========== ===========
</TABLE>
NOTE 9: INCOME TAXES
The components of the provision for income taxes at June 30 are as follows:
2000 1999 1998
--------- --------- ---------
Federal
Current $ 762,200 $ 309,299 $ 241,232
Deferred (96,637) 42,788 93,123
State
Current 188,600 72,500 56,872
Deferred (25,077) 11,103 24,165
--------- --------- ---------
Income taxes $ 829,086 $ 435,690 $ 415,392
========= ========= =========
A reconciliation of the statutory Federal income tax rate to the Company's
effective tax rate follows:
2000 1999 1998
--------- --------- ---------
Statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State income taxes, net 5.1 5.5 5.1
Non-deductible items 1.1 4.0 3.4
Non-taxable revenue (.6) (1.4) (1.4)
Other (.5) 1.3 (1.7)
----- ----- -----
Effective rate 40.1% 44.4% 40.4%
===== ===== =====
Net deferred tax assets consist of the following components:
2000 1999
--------- ---------
Deferred tax assets
Current:
Allowance for doubtful accounts $ 224,301 $ 129,858
Other liabilities 17,306 31,960
--------- ---------
241,607 161,818
--------- ---------
Long term:
Property and equipment 84,714 73,563
Other liabilities 30,774 --
--------- ---------
115,488 73,563
--------- ---------
$ 357,095 $ 235,381
========= =========
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
--------------------------------------------------------------------------------
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 $14,448, $13,382 and $13,142
for the fiscal years ended June 30, 2000, 1999 and 1998 respectively, in
connection with such 5% royalty agreement.
George M. Hill, a shareholder, former Vice President and former Director of the
Company, acts as outside counsel to the Company. The Company paid Mr. Hill's law
firm approximately $43,000 in fiscal 2000, $92,000 in fiscal 1999, $93,000 in
fiscal 1998 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.
In April 1999, in conjunction with UFAC's purchase of 5,258,513 shares of the
Company's stock, 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, 2000, the Company had incurred $300,000 in service
fees related to this agreement, and an additional $60,741 for services performed
outside of the agreement, for an aggregate of $360,741. The Company incurred
$50,000 and $0 in service fees for the fiscal years ended June 30, 1999 and 1998
respectively.
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 AND GAINSHARING 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 $17,726, $235,724, and $258,272 for the years ended June 30, 2000,
1999, and 1998 respectively.
With the intent to eventually terminate the Profit Sharing Plan, the Company
implemented a gainsharing program for its employees during fiscal 2000. The
program is designed to reward employees for exceptional growth and return on
revenue. Disbursements are only made if targets set by upper management are met.
Gainsharing expense for the year ended June 30, 2000 was $86,362.
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 for
employee awards. 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 2000,
1999 and 1998 would have decreased by $0, $18,000 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 1987 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. As of June 30, 2000, the 1987 Plan has no shares outstanding and
134,847 available for granting.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTE 12: STOCK OPTIONS (CONTINUED)
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 1996 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. As of June 30, 2000, the 1996 Plan has no shares
outstanding and 299,900 available for granting.
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
---------------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
Number of Weighted Number of Weighted Number of Weighted
Shares Average Shares Average Shares Average
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding July 1 129,629 $2.99 300,000 $3.05 300,000 $3.05
Granted -- -- -- -- -- --
Exercised (100) (2.88) (65,153) (2.67) -- --
Expired (129,529) (2.99) (105,218) (3.37) -- --
--------- ----- --------- ----- --------- -----
Outstanding June 30 -- -- 129,629 $2.99 300,000 $3.05
========= ===== ========= ===== ========= =====
</TABLE>
2000 1999 1998
---- ---- ----
Exercisable at end of year -- 129,629 234,782
At June 30, 2000, there are no remaining options outstanding under the 1987 Plan
or the 1996 Plan. The 1987 Plan and 1996 Plan have available for granting up to
134,847 and 299,900 shares, respectively.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computation for June 30:
<TABLE>
<CAPTION>
2000 1999 1998
------------------- ------------------- -------------------
Shares Per-share Shares Per-share Shares Per-share
(Denominator) Amount (Denominator) Amount (Denominator) Amount
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Basic EPS 8,957,586 $0.14 4,569,049 $0.12 4,605,358 $0.13
===== ===== =====
Effect of Dilutive
Securities Options -- -- 1,064 -- 7,316 --
--------- ----- --------- ----- --------- -----
Diluted EPS 8,957,586 $0.14 4,570,113 $0.12 4,612,674 $0.13
========= ===== ========= ===== ========= =====
</TABLE>
NOTE 13: COMMITMENTS AND CONTINGENCIES
The Company entered into five-year employment agreements with three key
executive officers. Two of these agreements were terminated on June 30, 1999,
due to the employees' early retirement. The third agreement was terminated on
January 31, 2000 due to the resignation of Francis J. LaPallo, a former
Executive Vice President. There are no liabilities relating to these agreements
as of June 30, 2000.
The Company leases various office space and office equipment under various
noncancellable agreements. These leases expire between August 31, 2000 and
August 31, 2003 and require various minimum annual rental payments. Each office
lease also requires the payment of taxes.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Frontier Adjusters of America, Inc. and Subsidiaries
--------------------------------------------------------------------------------
NOTE 13: COMMITMENTS AND CONTINGENCIES (CONTINUED)
The total minimum rental commitment at June 30, 2000 is due as follows:
During the year ending June 30:
2001 36,115
2002 36,473
2003 35,291
---------
$ 107,879
=========
The total rental expense included in the income statements for the years ended
June 30, 2000, 1999, and 1998 is $34,426, $35,633, and $34,365, 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 Company has denied allegations
of liability contained in the complaint. 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, 2000, 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, 2000 and June 30, 1999 of $37,593 and $37,065,
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.
In March of 2000, the Company's board of directors agreed in principle to enter
into a transaction (the "Transaction") whereby the Company will exchange a net
of approximately 11.5 million shares of its common stock for all of the issued
and outstanding shares of stock of UFAC. Upon consummation of the proposed
Transaction, the Company will merge with UFAC and will become the parent of
UFAC's two subsidiaries, JW Software, Inc. ("JW") and DBG Technologies, Inc.
("DBG"). In May 2000, JW acquired 100% of the stock of Vedder Software Group,
Inc. ("Vedder"). Vedder will therefore be included in the Transaction. The
Transaction will be accounted for in a manner similar to a pooling of interest
since the entities are under common control, to the extent of the common
ownership. The assets and liabilities of these companies will be recorded at
their fair value to the extent of the ownership interest by minority
stockholders and at the historical cost for the ownership interest under common
control.
UFAC is an insurance claim management services company, JW develops and markets
claim management software, DBG develops and markets internet-based systems and
websites, and Vedder develops property estimating software and tools.
Netrex Holdings, LLC ("Netrex") currently owns all of the outstanding shares of
stock in UFAC which holds approximately 59% of the Company's outstanding common
stock. Consequently, after the Transaction is consummated, Netrex will own
approximately 16.4 million shares of the Company's stock, representing
approximately 82% of the Company's outstanding common stock.
The Transaction is subject to the approval of certain regulatory agencies and
the American Stock Exchange, the stock exchange on which the Company's shares
are currently traded, as well as the approval by shareholders of the Company and
UFAC. In connection with this Transaction, the Company is proposing to change
its name to "Netrex Business Services, Inc.". The Company will, however,
continue to operate the franchised and licensed claims adjusting business under
the Frontier name even if the Transaction is consummated and the name change
effected.
F-16
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
SUPPLEMENTARY DATA
Selected Quarterly Financial Data
(Information for all periods shown below is unaudited)
<TABLE>
<CAPTION>
2000
-----------------------------------------------------
Three Months Ended
-----------------------------------------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 1,676,064 $ 1,566,992 $ 1,482,098 $ 1,531,742
Income from operations 552,906 289,886 467,744 571,946
Income before income taxes 583,929 345,257 509,423 630,846
Net income 367,332 199,068 304,497 369,472
Net income per share
Basic .04 .02 .03 .04
Diluted .04 .02 .03 .04
Weighted average shares outstanding
Basic 8,957,560 8,957,560 8,957,564 8,957,660
Diluted 8,957,560 8,957,560 8,957,564 8,957,660
1999
-----------------------------------------------------
THREE MONTHS ENDED
-----------------------------------------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30
----------- ----------- ----------- -----------
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
</TABLE>
F-17
<PAGE>
FRONTIER ADJUSTERS OF AMERICA, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998
<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, 2000:
Allowance for doubtful accounts $ 350,367 $ 311,820 $ 57,040 $ 605,147
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
</TABLE>
F-18
