U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________
COMMISSION FILE NUMBER.......................................0-15227
THE DWYER GROUP, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Delaware 73-0941783
- -------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1010 N. University Parks Dr., Waco, TX 76707
-----------------------------------------------------
(ADDRESS AND ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
(254) 745-2400
------------------------------------------------
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at August 6, 2002
- ---------------------------- -----------------------------
Common stock, $.10 par value 7,057,931
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes [ ] No [X]
THE DWYER GROUP, INC.
INDEX
<Table>
PART I - FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2002 (unaudited)
and December 31, 2001 (audited)...................................................................3
Consolidated Statements of Operations for the Three Months Ended
June 30, 2002 and 2001 (unaudited)................................................................4
Consolidated Statements of Operations for the Six Months Ended
June 30, 2002 and 2001 (unaudited)................................................................5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001 (unaudited)..........................................................6
Notes to Condensed Consolidated Financial Statements............................................7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................................................10-13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................................14
Item 2. Changes in Securities............................................................................14
Item 3. Defaults Upon Senior Securities..................................................................14
Item 4. Submission of Matters to a Vote of Security Holders..............................................14
Item 5. Other Information................................................................................14
Item 6. Exhibits and Reports on Form 8-K.................................................................14
</Table>
2
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
JUNE 30, DECEMBER 31,
ASSETS 2002 2001
------------ ------------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 593,900 $ 790,151
Marketable securities, available-for-sale 558,608 548,089
Trade accounts receivable, net of allowance for doubtful
accounts of $427,361 and $471,621, respectively 1,984,612 1,836,643
Accounts receivable from related parties 493,039 323,507
Accrued interest receivable 54,069 48,960
Trade notes receivable, current portion, net of allowance for
doubtful accounts of $81,554 and $68,600, respectively 1,957,314 1,718,505
Inventories 83,682 81,702
Prepaid expenses 800,277 360,617
Federal income tax receivable -- 8,017
Notes receivable from related parties, current portion 182,779 188,349
------------ ------------
Total current assets 6,708,280 5,904,540
Property and equipment, net 4,073,531 3,592,162
Notes and accounts receivable from related parties 85,925 85,925
Trade notes receivable, net of allowance for doubtful notes of
$1,383,156 and $1,107,201 respectively 5,814,374 5,198,414
Goodwill 5,030,081 5,030,081
Purchased franchise rights, net 3,059,234 3,441,492
Covenant not to compete, net 21,661 31,661
Net deferred tax asset 666,964 662,097
Other assets 602,716 600,090
------------ ------------
TOTAL ASSETS $ 26,062,766 $ 24,546,462
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 523,945 $ 464,074
Accrued liabilities 2,056,554 1,704,637
Deferred franchise sales revenue 234,834 245,085
Litigation reserves 129,500 129,500
Federal income taxes payable 68,704 8,220
Current maturities of long-term debt 1,282,529 1,309,711
------------ ------------
Total current liabilities 4,296,066 3,861,227
Long-term debt, less current portion 2,928,350 3,257,344
Deferred franchise sales revenue 138,192 163,309
Stockholders' equity:
Common stock 770,519 764,519
Additional paid-in capital 9,356,888 9,257,888
Retained earnings 9,821,763 8,523,364
Accumulated other comprehensive income (38,860) (71,037)
Treasury stock, at cost (1,210,152) (1,210,152)
------------ ------------
Total stockholders' equity 18,700,158 17,264,582
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,062,766 $ 24,546,462
============ ============
</Table>
See notes to condensed consolidated financial statements (unaudited).
3
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30,
2002 2001
----------- -----------
REVENUES:
Royalties $ 3,882,306 $ 3,166,602
Franchise fees 1,468,462 953,688
Sales of products and services 970,414 805,365
Interest 184,177 169,813
Other 170,827 149,033
----------- -----------
TOTAL REVENUES 6,676,186 5,244,501
COSTS AND EXPENSES:
General, administrative and selling 4,212,542 3,200,850
Costs of product and service sales 795,495 655,682
Depreciation and amortization 334,035 369,246
Interest 169,186 104,419
----------- -----------
TOTAL COSTS AND EXPENSES 5,511,258 4,330,197
Income before income taxes 1,164,928 914,304
Income taxes (424,263) (258,258)
----------- -----------
NET INCOME $ 740,665 $ 656,046
=========== ===========
EARNINGS PER SHARE - BASIC $ 0.11 $ 0.09
=========== ===========
EARNINGS PER SHARE - DILUTED $ 0.10 $ 0.09
=========== ===========
WEIGHTED AVERAGE COMMON SHARES 7,006,502 6,997,931
=========== ===========
WEIGHTED AVERAGE COMMON SHARES AND POTENTIAL
DILUTIVE COMMON SHARES 7,398,273 7,115,478
=========== ===========
</Table>
See notes to condensed consolidated financial statements (unaudited).
4
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
2002 2001
------------ ------------
REVENUES:
Royalties $ 6,839,223 $ 5,927,530
Franchise fees 3,062,049 2,258,930
Sales of products and services 1,918,547 1,628,234
Interest 361,777 363,388
Other 360,899 279,760
------------ ------------
TOTAL REVENUES 12,542,495 10,457,842
COSTS AND EXPENSES:
General, administrative and selling 8,058,713 6,607,549
Costs of product and service sales 1,571,836 1,359,043
Depreciation and amortization 650,868 726,347
Interest 220,670 193,857
------------ ------------
TOTAL COSTS AND EXPENSES 10,502,087 8,886,796
Income before income taxes 2,040,408 1,571,046
Income taxes (742,009) (431,678)
------------ ------------
NET INCOME $ 1,298,399 $ 1,139,368
============ ============
EARNINGS PER SHARE - BASIC $ 0.19 $ 0.16
============ ============
EARNINGS PER SHARE - DILUTED $ 0.18 $ 0.16
============ ============
WEIGHTED AVERAGE COMMON SHARES 7,006,502 6,997,931
============ ============
WEIGHTED AVERAGE COMMON SHARES AND POTENTIAL
DILUTIVE COMMON SHARES 7,398,273 7,115,478
============ ============
</Table>
See notes to condensed consolidated financial statements (unaudited).
5
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
-----------------------------
2002 2001
------------ ------------
Operating activities:
Net income for the period $ 1,298,399 $ 1,139,368
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 650,868 726,347
Change in reserve for doubtful accounts 74,614 (155,194)
Notes received for franchise sales (2,389,249) (1,020,030)
Change in deferred tax asset (4,867) 1,827
Changes in assets and liabilities:
Accounts and interest receivable (153,078) 689,795
Net change in receivables / payables to related parties (169,532) 81,417
Inventories (1,980) 18,768
Prepaid expenses (439,660) (251,210)
Federal income tax receivable 8,017 (10,357)
Accounts payable and accrued liabilities 472,272 65,720
Litigation reserves -- 23,028
Deferred franchise sales revenue (35,368) (171,817)
Other 8,627 (11,383)
------------ ------------
Net cash provided by (used in) operating activities (680,937) 1,126,279
------------ ------------
Investing activities:
Collections of notes receivable 1,581,571 907,150
Purchase of property and equipment (807,485) (3,804,634)
Purchase of franchise rights -- (46,367)
Purchase of other assets (37,924) (136,343)
Purchase of marketable securities (8,090) (9,488)
Increase in unrealized gain on marketable securities 2,220 3,450
Collections on notes receivable from related parties 5,570 1,739,459
------------ ------------
Net cash (used in) provided by investing activities 735,862 (1,346,773)
------------ ------------
Financing activities:
Proceeds from exercise of stock options 105,000 --
Proceeds from borrowings 518,920 2,852,800
Payments on borrowings (875,096) (1,996,892)
------------ ------------
Net cash provided by (used in) financing activities (251,176) 855,908
------------ ------------
Net increase (decrease) in cash and cash equivalents (196,251) 635,414
Cash and cash equivalents, beginning of period 790,151 146,852
------------ ------------
Cash and cash equivalents, end of period $ 593,900 $ 782,266
============ ============
</Table>
See notes to condensed consolidated financial statements (unaudited).
6
THE DWYER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION
The Dwyer Group, Inc. is a holding company for service-based businesses
providing specialty services internationally through franchising. The condensed
consolidated financial statements include the accounts of The Dwyer Group, Inc.
and its wholly-owned subsidiaries ("We" or "Our") which include the following:
o Rainbow International Carpet Dyeing and Cleaning Co. is a
franchisor of carpet cleaning, dyeing, air duct cleaning, and
restoration services under the service mark "Rainbow
International"(R).
o Mr. Rooter Corporation is a franchisor of plumbing repair and
drain cleaning services under the service mark "Mr. Rooter"(R).
o Aire Serv Heating & Air Conditioning, Inc. is a franchisor of
heating, ventilating and air conditioning service businesses
under the service mark "Aire Serv"(R).
o Mr. Electric Corp. is a franchisor of electrical repair and
service businesses under the service mark "Mr. Electric"(R).
o Mr. Appliance Corp. is a franchisor of major household appliance
service and repair businesses under the service mark "Mr.
Appliance"(R).
o Synergistic International, Inc., is franchisor of Glass
Doctor(R), a service concept whose business is the replacement of
automobile, residential and commercial glass.
o The Dwyer Group National Accounts, Inc. solicits national account
customers who call a toll-free phone number for their general
repair and 24-hour emergency service needs. The order is filled
through our network of franchisees or qualified subcontractors.
o The Dwyer Group Canada, Inc. was incorporated in January 1998 in
order to market and service certain of our franchise concepts in
Canada. Currently, those concepts are Mr. Rooter, Mr. Electric,
Rainbow and Aire Serv.
NOTE 2. BASIS OF PRESENTATION
A. PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include The Dwyer
Group, Inc. and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
B. INTERIM DISCLOSURES
The information as of June 30, 2002 and for the three months and six months
ended June 30, 2002 and June 30, 2001 is unaudited but in the opinion of
management, reflects all adjustments, which are of a normal recurring nature,
necessary for a fair presentation of financial position and results of
operations for the interim periods. The accompanying condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in our Annual Report on Form
10-KSB for the fiscal year ended December 31, 2001, and with other filings with
the SEC.
The results of operations for the three months and six months ended June 30,
2002 are not necessarily indicative of the results to be expected for the fiscal
year ending December 31, 2002.
7
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
EARNINGS PER COMMON SHARE
Basic earnings per share is computed based on the weighted average number of
shares outstanding during each of the periods. Diluted earnings per share
include the dilutive effect of unexercised stock options and warrants.
NEW ACCOUNTING POLICIES
In June 2001, the Financial Accounting Standards Board issued FASB
Statement No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142), effective for years beginning after December
31, 2001. Under the new rules, goodwill will no longer be amortized but will be
subject to annual impairment tests in accordance with the statements. Other
intangible assets will continue to be amortized over their useful lives.
Effective January 1, 2002, we adopted the new rules on accounting for
goodwill and other intangible assets. We have performed our initial assessment
and determined that there is no impairment of goodwill at June 30, 2002. As a
result of the adoption of SFAS 142 and the application of the nonamortization
provisions of that statement, we recorded no amortization of goodwill for the
three and six months ended June 30, 2002. Prior to 2002, goodwill was being
amortized at the rate of approximately $189,000 per year.
In August 2001, the Financial Accounting Standards Board issued FASB
Statement No. 143, Accounting for Assets Retirement Obligations. This statement
requires that the fair value for an asset retirement obligation be recognized in
the period in which it is incurred, if a reasonable estimate of fair value can
be made, and that the carrying amount of the asset, including capitalized asset
retirement costs, be tested for impairment. SFAS 143 is effective for fiscal
years beginning after June 15, 2002. Management does not believe this statement
will have a material effect on our financial position or our results of
operations.
In August 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. This statement prescribes financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of, and
specifies when to test a long-lived asset for recoverability. Effective January
1, 2002, we adopted this new rule. Management has determined that this will not
have a material effect on our financial position or results of our operations.
In April 2002, the Financial Accounting Standards Board issued FASB
Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections. This statement eliminates the
current requirement that gains and losses on debt extinguishment must be
classified as extraordinary items in the income statement. Instead, such gains
and losses will be classified as extraordinary items only if they are deemed to
be unusual and infrequent, in accordance with the current GAAP criteria for
extraordinary classification. In addition, SFAS 145 eliminates an inconsistency
in lease accounting by requiring that modifications of capital leases that
result in reclassification as operating leases be accounted for consistent with
sale-leaseback accounting rules. The statement also contains other
nonsubstantive corrections to authoritative accounting literature. The changes
related to debt extinguishment will be effective for fiscal years beginning
after May 15, 2002, and the changes related to lease accounting will be
effective for transactions occurring after May 15, 2002. Adoption of this
standard will not have any immediate effect on our consolidated financial
statements. We will apply this guidance prospectively.
In June 2002, Financial Accounting Standards Board issued FASB
Statement No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, which addresses accounting for restructuring and similar costs. SFAS
No. 146 supersedes previous accounting guidance, principally Emerging Issues
Task Force (EITF) Issue No. 94-3. We will adopt the provisions of SFAS No. 146
for restructuring activities initiated after December 31, 2002. SFAS No. 146
requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF No. 94-3, a
liability for an exit cost was recognized at the date of a company's commitment
to an exit plan. SFAS No. 146 also establishes that the liability should
initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may
affect the timing of recognizing future restructuring costs as well as the
amount recognized. Adoption of this standard will not have any immediate effect
on our consolidated financial statements.
8
NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF STATEMENT 142
The table below represents a reconciliation of the first six months of 2001 and
2002 and the years ended December 31, 2001 and 2000, to show the effect of the
adoption of SFAS 142.
<Table>
<Caption>
FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
---------------------------------- ----------------------------------
2002 2001 2001 2000
--------------- --------------- --------------- ---------------
Reported net income $ 1,298 $ 1,139 $ 2,338 $ 2,053
Add back: goodwill amortization -- 94 189 189
--------------- --------------- --------------- ---------------
Adjusted net income $ 1,298 $ 1,233 $ 2,527 $ 2,242
=============== =============== =============== ===============
BASIC EARNINGS PER SHARE:
Reported net income $ .19 $ .16 $ .33 $ .29
Add back: goodwill amortization -- .01 .03 .03
--------------- --------------- --------------- ---------------
Adjusted net income $ .19 $ .17 $ .36 $ .32
=============== =============== =============== ===============
BASIC EARNINGS PER SHARE:
Reported net income $ .18 $ .16 $ .33 $ .29
Add back: goodwill amortization -- .01 .03 .03
--------------- --------------- --------------- ---------------
Adjusted net income $ .18 $ .17 $ .36 $ .32
=============== =============== =============== ===============
</Table>
THIS SECTION LEFT INTENTIONALLY BLANK
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Unless otherwise noted, all dollar amounts are rounded to the nearest thousand.
Percentages represent the change from the comparable amount from the previous
year. Note references refer to Notes to Condensed Consolidated Financial
Statements (unaudited).
LIQUIDITY AND CAPITAL RESOURCES
Our working capital ratio was approximately 1.6 to 1 at June 30, 2002 as
compared to 1.5 to 1 at December 31, 2001. We had working capital of
approximately $2.4 million at June 30, 2002 as compared to approximately $2.0
million at December 31, 2001. For the remainder of fiscal 2002, management
expects to fund working capital requirements primarily through operating cash
flow. At June 30, 2002, we had cash and cash equivalents of approximately
$594,000, and marketable securities of approximately $559,000.
In May of 2002, we renewed a $500,000 line of credit with our bank.
Cash in the amount of $681,000 was used in operating activities in the first six
months of 2002, as compared to $1,126,000 of cash provided by such activities
for the same period in 2001. In 2002, cash usage was primarily the result of a
net profit of $1,298,000, depreciation and amortization of $651,000, an increase
in payables and accrued liabilities of $472,000, and a change in reserve for
doubtful accounts of $75,000; this was more than offset by notes received from
franchise sales of $2,389,000, a decrease in deferred franchise sales revenues
of $35,000, an increase in accounts and interest receivable and related party
amounts of $323,000, and an increase in prepaid expenses of $440,000. Cash in
the amount of $1,126,000 was provided by operating activities in the first six
months of 2001. Cash was generated primarily by a net profit of $1,139,000,
depreciation and amortization of $726,000, a decrease in receivables of $771,000
and an increase in accounts payable and accrued liabilities of $66,000,
partially offset by notes received from franchise sales of $1,020,000, a
decrease in deferred franchise sales revenues of $172,000 and an increase in
prepaid expenses of $251,000.
Cash in the amount of $736,000 was provided by investing activities in the first
six months of 2002, primarily by collections on notes receivable of $1,582,000,
partially offset by purchases of property and equipment of $807,000 and other
assets of $38,000. For the same period in 2001, we used $1,347,000 for investing
activities, primarily for the purchase of property and equipment for $3,805,000
and the purchase of other assets for $136,000, partially offset by collections
on notes receivable of $907,000 and collections on notes receivable from related
parties of $1,739,000.
Cash in the amount of $251,000 was used in financing activities in the first six
months of 2002. Payments on borrowings of $875,000 were partially offset by
proceeds from borrowings of $519,000 and proceeds from the exercise of stock
options in the amount of $105,000. In the first six months of 2001, we generated
$856,000 in cash for financing activities. Proceeds from borrowings of
$2,853,000 were partially offset by payments on borrowings of $1,997,000.
We are not aware of any trend or event, which would potentially adversely affect
our liquidity. In the event such a trend would develop, management believes that
we have sufficient funds available to satisfy the working capital needs of our
business.
RESULTS OF OPERATIONS
For the six months ended June 30, 2002, compared to the six months ended June
30, 2001.
Total revenues for the six months increased by $2,085,000 (20%) to $12,542,000
in 2002 from $10,458,000 in 2001. This increase is due to increases in the
following revenue categories: royalties - $912,000 (15%); franchise fees -
$803,000 (36%); sales of products and services - $290,000 (18%); and other
revenues - $81,000 (29%); partially offset by decrease in interest - $2,000.
10
Royalty revenues from our franchise concepts increased as follows:
<Table>
Mr. Rooter $ 320,000 12%
Glass Doctor $ 247,000 25%
Rainbow $ 77,000 6%
Mr. Electric $ 74,000 15%
Aire Serv $ 42,000 13%
Mr. Appliance $ 32,000 33%
</Table>
In addition to the above, royalties from our Canadian and other foreign
operations increased by $120,000 (54%).
Overall, these royalty revenue increases, which coincide with the increased
business revenues of existing franchisees as well as an increase in the number
of franchisees producing revenue, are a direct result of our emphasis on
providing strong franchise support services, and our methods and programs
created to assist franchisees in building successful businesses, along with
continued emphasis on the sale of new franchises. These strategies are very
important to our future, as royalties are the foundation for our long-term
financial strength.
The increase in franchise fee revenues was due to increases from each of the
following concepts: Mr. Rooter - $475,000 (93%); Aire Serv - $139,000 (51%); Mr.
Electric - $167,000 (41%); Rainbow - $71,000 (20%); Mr. Appliance - $65,000
(68%); and Glass Doctor - $24,000 (6%). These increases were partially offset by
a decrease in Canadian and other foreign operations of $139,000 (70%).
Sales of products and services increased by $290,000 (18%), due primarily to
additions to the National Accounts customer base.
Interest income decreased by $2,000 (.4%) due to a decrease in interest on
related party notes which were paid in April of 2001, offset by increases in
franchise notes.
General and administrative expenses increased by $1,451,000 (22%), due to
additional costs and personnel associated with the increase in overall revenues.
This includes additional support positions for existing franchisees, additional
sales personnel hired in an effort to increase our franchise sales revenue, and
the commissions associated with additional franchise fee revenues.
Due to the increase in product and service sales, costs associated with such
sales increased by $213,000 (16%).
Depreciation and amortization decreased by $75,000 (10%) due primarily to a
change in accounting rules associated with amortization of goodwill as described
in Note 3, offset by increased depreciation on facilities purchased in April
2001.
Interest expense increased by $27,000 (14%) due to additional debt resulting
from the purchase of property.
We reported net income of $1,298,000 for the six months ended June 30, 2002 as
compared to net income of $1,139,000 for the same period in 2001. We had a lower
effective tax rate in 2001, due to utilizing available tax credits.
For the three months ended June 30, 2002, compared to the three months ended
June 30, 2001.
Total revenues for the quarter increased by $1,432,000 (27%) to $6,676,000 in
2002 from $5,245,000 in 2001. This increase is due to an increase of $716,000
(23%) in royalties, an increase of $515,000 (54%) in franchise fees, an increase
in sales of products and services of $165,000 (21%), an increase in interest
income of $14,000 (9%), and an increase in other income of $22,000 (15%).
Royalty revenues from our franchise concepts increased as follows:
<Table>
Mr. Rooter $ 236,000 18%
Glass Doctor $ 204,000 37%
Rainbow $ 105,000 17%
Aire Serv $ 40,000 22%
Mr. Electric $ 27,000 9%
Mr. Appliance $ 21,000 40%
</Table>
11
In addition to the above, royalties from our Canadian and other international
operations increased by $83,000 (68%).
Overall, these royalty revenue increases, which coincide with the increase in
business revenues of existing franchisees as well as an increase in the number
of franchisees producing revenue, are a direct result of our emphasis on
providing strong franchise support services, and our methods and programs
created to assist franchisees in building successful businesses, along with
continued emphasis on the sale of new franchises. These strategies are very
important to our future, as royalties are the foundation for our long-term
financial strength.
Franchise fee revenues increased by $515,000 (54%) from 2001 to 2002. The
increase in franchise fee revenues was due to increases from each of the
following concepts: Mr. Rooter - $238,000 (190%), Aire Serv - $172,000 (575%),
Rainbow - $135,000 (77%), Glass Doctor - $43,000 (27%), and Mr. Appliance -
$32,000 (91%). These were partially offset by decreases of $19,000 (7%) in
franchise sales revenues from Mr. Electric and $87,000 (59%) from Canadian
operations.
Sales of products and services increased by $165,000 (21%), primarily due to
additions to the National Accounts customer base.
Interest income increased by $14,000 (9%) primarily due to an increase in trade
notes receivable related to the sale of new franchises, partially offset by a
decrease in related party interest on notes paid in April of 2001.
General and administrative expenses increased by $1,012,000 (32%), due to
additional costs and personnel associated with the increase in overall revenues.
Specifically, additional support personnel for existing franchisees, and sales
personnel and expenses related to the increase in franchise fee revenues.
Due to the increase in product and service sales, costs associated with such
sales increased by $140,000 (21%).
Depreciation and amortization decreased by $35,000 (10%), due primarily to a
change in accounting rules associated with amortization of goodwill as described
in Note 3, partially offset by increase in depreciation on facilities purchased
in April 2001.
Interest expense increased by $65,000 (62%) due to additional debt resulting
from the purchase or property.
We reported net income of $741,000 for the quarter ended June 30, 2002 as
compared to net income of $656,000 for the same period in 2001. We had a lower
effective tax rate in 2001, due to utilizing available tax credits.
CRITICAL ACCOUNTING ESTIMATES
We have identified certain accounting policies as critical to our business and
to the results of our operations which entail significant estimates. These
critical policies are further discussed below. There are other significant
accounting policies followed by us, please refer to the notes to the
consolidated financial statements included in our Annual Report on Form 10-KSB
for the year ended December 31, 2001.
Revenues from the sale of individual franchises in the United States and master
license agreements in foreign countries are generally recognized, net of an
allowance for uncollectible amounts, when substantially all significant services
to be provided by us have been performed. Regional franchise agreements have
been sold in the past which grant the regional franchisees the right to sell
individual franchises in their territory. The regional franchisees generally
receive commissions on individual franchises sold as well as a share of
royalties collected from franchisees in their territory.
Interest on trade notes receivable from franchisees is accrued and recorded as
income, net of an allowance for uncollectible amounts, when due. In situations
where revenues from franchise sales is collectible over an extended period of
time, down payments are not sufficient and/or collectibility is not reasonably
certain, revenue is recognized on the installment method as amounts are
collected or when collection is reasonably assured. Interest on trade notes
receivable resulting from sales recorded on the installment method is recorded
when received.
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Our policy for valuation of our allowance accounts, including our notes
receivable allowance and our accounts receivable allowance, requires us to
estimate the collectibility of the assets associated with these allowances,
based on payment history. These estimates are reviewed monthly and changes made
based on any new information we have at the time. If our underlying assumptions
for these estimates change then we could be required to record additional
reserves or lower the reserves as appropriate.
In conjunction with the implementation of the new accounting rules for goodwill,
as of the beginning of fiscal 2002, we completed a goodwill impairment review
for Glass Doctor, the reporting unit that has all of our recorded goodwill, and
found no impairment. According to our accounting policy under the new rules, we
will perform a similar review annually, or earlier if indicators of potential
impairment exist. Based on our review of the indicators, we have determined that
an additional impairment review is not currently required. Our impairment review
process is based on a discounted multiple of royalties that uses our estimate
of future royalty revenues for three years as well as appropriate discount
rates. These estimates are consistent with the plans and estimates we use to
manage the underlying business. The estimates we use assume continuation of the
existing growth rate of existing franchisees and the addition of new
franchisees. If we fail to achieve our assumed growth rates or experience a
significant decrease in our royalty stream, we may incur charges for impairment
of goodwill in the future.
Also in conjunction with this review we reviewed the useful lives of our other
intangible assets and found no impairment or change in their useful lives. In
the future we may incur charges if the useful life of any such asset changes or
if an asset becomes impaired.
IMPACT OF INFLATION
Inflation has not had a material impact on our operations.
FOREIGN OPERATIONS
We operate in 17 foreign countries. Typically, foreign franchises are sold and
managed by a master licensee in that country. Royalty revenues from master
licenses are recorded as received due to the difficulty sometimes experienced in
foreign countries when attempting to transfer such funds to the United States.
We do not depend on foreign operations, and such operations do not have a
material impact on our cash flow. During the remainder of 2002, we may sell
additional master licenses, which could result in lump sum payments from the
master licensees to us.
FORWARD-LOOKING STATEMENTS
We caution readers that various factors could cause our actual results to differ
materially from those indicated by forward-looking statements made from
time-to-time in news releases, reports, proxy statements, registration
statements and other written communications (including the preceding sections of
this Management's Discussion and Analysis), as well as oral statements made by
our representatives. Except for historical information, matters discussed in
such oral and written communications are forward-looking statements that involve
risks and uncertainties, including, but not limited to, general business
conditions, the impact of competition, taxes, inflation, and governmental
regulations.
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PART II
OTHER INFORMATION
THE DWYER GROUP, INC. AND SUBSIDIARIES
ITEM 1 - LEGAL PROCEEDINGS
NONE
ITEM 2 - CHANGES IN SECURITIES
(a) NONE
(b) Not applicable.
(c) NONE
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5 - OTHER INFORMATION
NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
NONE
(b) Reports on 8-K
NONE
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 7, 2002 The Dwyer Group, Inc.
By: /s/ Thomas Buckley
------------------------------------------
Thomas Buckley
Vice President and Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Dwyer Group, Inc. (the "Company")
on Form 10-QSB for the period ending June 30, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Dina Dwyer-Owens,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
By: /s/ Dina Dwyer-Owens
--------------------
Dina Dwyer-Owens
Chief Executive Officer
August 13, 2002
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Dwyer Group, Inc. (the "Company")
on Form 10-QSB for the period ending June 30, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Thomas Buckley,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
By: /s/ Thomas Buckley
-------------------
Thomas Buckley
Vice President and Chief Financial Officer
August 13, 2002
15