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 SEPTEMBER 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 November 7, 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>
<Caption>
PART I - FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2002 (unaudited)
and December 31, 2001.............................................................................3
Consolidated Statements of Operations for the Three Months Ended
September 30, 2002 and 2001 (unaudited)...........................................................4
Consolidated Statements of Operations for the Nine Months Ended
September 30, 2002 and 2001 (Unaudited)...........................................................5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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
Item 3. Controls and Procedures..........................................................................14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................................15
Item 2. Changes in Securities............................................................................15
Item 3. Defaults Upon Senior Securities..................................................................15
Item 4. Submission of Matters to a Vote of Security Holders..............................................15
Item 5. Other Information................................................................................15
Item 6. Exhibits and Reports on Form 8-K.................................................................15
</Table>
2
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
ASSETS 2002 2001
-------------- --------------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 748,946 $ 790,151
Marketable securities, available-for-sale 571,308 548,089
Trade accounts receivable, net of allowance for doubtful
accounts of $274,208 and $471,621, respectively 1,831,062 1,836,643
Accounts receivable from related parties 549,008 323,507
Accrued interest receivable 58,897 48,960
Trade notes receivable, current portion, net of allowance for
doubtful accounts of $86,602 and $68,600, respectively 2,099,533 1,718,505
Inventories 100,068 81,702
Prepaid expenses 817,699 360,617
Federal income tax receivable 13,616 8,017
Notes receivable from related parties, current portion 185,687 188,349
-------------- --------------
Total current assets 6,975,824 5,904,540
Property and equipment, net 4,036,633 3,592,162
Notes and accounts receivable from related parties 79,974 85,925
Trade notes receivable, net of allowance for doubtful notes of
$1,465,489 and $1,107,201 respectively 6,315,238 5,198,414
Goodwill, net 5,030,081 5,030,081
Purchased franchise rights, net 3,069,791 3,441,492
Covenant not to compete, net 16,661 31,661
Net deferred tax asset 667,408 662,097
Other assets 613,278 600,090
-------------- --------------
TOTAL ASSETS $ 26,804,888 $ 24,546,462
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 772,311 $ 464,074
Accrued liabilities 1,975,993 1,704,637
Deferred franchise sales revenue 207,446 245,085
Litigation reserves 129,500 129,500
Federal income taxes payable -- 8,220
Current maturities of long-term debt 1,209,566 1,309,711
-------------- --------------
Total current liabilities 4,294,816 3,861,227
Long-term debt, less current portion 2,871,737 3,257,344
Deferred franchise sales revenue 114,804 163,309
Stockholders' equity:
Common stock 770,522 764,519
Additional paid-in capital 9,357,688 9,257,888
Retained earnings 10,670,968 8,523,364
Accumulated other comprehensive income (65,495) (71,037)
Treasury stock, at cost (1,210,152) (1,210,152)
-------------- --------------
Total stockholders' equity 19,523,531 17,264,582
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,804,888 $ 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
SEPTEMBER 30,
------------------------------
2002 2001
------------- -------------
REVENUES:
Royalties $ 3,598,958 $ 3,335,161
Franchise fees 1,703,343 1,065,680
Sales of products and services 853,054 900,690
Interest 201,197 182,980
Gain on sale of securities -- 112,270
Other 186,790 144,766
------------- -------------
TOTAL REVENUES 6,543,342 5,741,547
COSTS AND EXPENSES:
General, administrative and selling 3,976,745 3,404,865
Costs of product and service sales 707,369 723,179
Depreciation and amortization 352,297 374,763
Interest 172,686 227,049
------------- -------------
TOTAL COSTS AND EXPENSES 5,209,097 4,729,856
Income before income taxes 1,334,245 1,011,691
Income taxes (485,039) (297,433)
------------- -------------
NET INCOME $ 849,206 $ 714,258
============= =============
EARNINGS PER SHARE - BASIC $ 0.12 $ 0.10
============= =============
EARNINGS PER SHARE - DILUTED $ 0.11 $ 0.10
============= =============
WEIGHTED AVERAGE COMMON SHARES 7,057,931 6,997,931
============= =============
WEIGHTED AVERAGE COMMON SHARES AND POTENTIAL
DILUTIVE COMMON SHARES 7,419,716 7,207,264
============= =============
</Table>
See notes to condensed consolidated financial statements (unaudited).
4
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2002 2001
-------------- --------------
REVENUES:
Royalties $ 10,438,181 $ 9,262,692
Franchise fees 4,765,392 3,324,612
Sales of products and services 2,771,601 2,528,925
Interest 562,974 546,370
Gain on sale of securities -- 112,270
Other 547,689 424,526
-------------- --------------
TOTAL REVENUES 19,085,837 16,199,395
COSTS AND EXPENSES:
General, administrative and selling 12,035,459 10,012,944
Costs of product and service sales 2,279,205 2,082,220
Depreciation and amortization 1,003,165 1,100,587
Interest 393,356 420,907
-------------- --------------
TOTAL COSTS AND EXPENSES 15,711,185 13,616,658
Income before income taxes 3,374,652 2,582,737
Income taxes (1,227,048) (729,110)
-------------- --------------
NET INCOME $ 2,147,604 $ 1,853,627
============== ==============
EARNINGS PER SHARE - BASIC $ 0.31 $ 0.26
============== ==============
EARNINGS PER SHARE - DILUTED $ 0.29 $ 0.26
============== ==============
WEIGHTED AVERAGE COMMON SHARES 7,021,008 6,997,931
============== ==============
WEIGHTED AVERAGE COMMON SHARES AND POTENTIAL
DILUTIVE COMMON SHARES 7,412,733 7,132,331
============== ==============
</Table>
See notes to condensed consolidated financial statements (unaudited).
5
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2002 2001
-------------- --------------
Operating activities:
Net income for the period $ 2,147,604 $ 1,853,627
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,003,165 1,100,587
Interest rate swap adjustment 160,364 138,686
Change in reserve for doubtful accounts 837,747 328,492
Notes received for franchise sales (3,438,878) (1,694,157)
Gain on sale of securities -- (112,270)
Changes in assets and liabilities:
Accounts and interest receivable (4,356) 547,722
Notes received other than for franchise sales (978,401) (593,325)
Net change in receivables / payables to related parties (225,501) 36,980
Inventories (18,366) 17,969
Prepaid expenses (457,082) (218,594)
Federal income tax receivable (5,599) 330,252
Accounts payable and accrued liabilities 411,009 (118,238)
Litigation reserves -- (76,313)
Deferred franchise sales revenue (86,144) (152,117)
Other (7,388) (36,112)
-------------- --------------
Net cash (used in) provided by operating activities (661,826) 1,353,189
-------------- --------------
Investing activities:
Collections of notes receivable 2,079,151 1,399,002
Purchase of property and equipment (900,662) (3,835,932)
Purchase of franchise rights (226,795) (46,367)
Purchase of other assets (59,539) (283,645)
Sale of other assets 108,291 --
Purchase of marketable securities (12,116) (5,617)
Proceeds from the sale of marketable securities -- 159,262
Increase in unrealized gain on marketable securities 3,627 --
Collections on notes receivable from related parties 8,613 1,915,501
-------------- --------------
Net cash provided (used in) by investing activities 1,000,570 (697,796)
-------------- --------------
Financing activities:
Proceeds from exercise of stock options 105,803 --
Proceeds from borrowings 695,715 2,852,800
Payments on borrowings (1,181,467) (2,377,349)
-------------- --------------
Net cash (used in) provided by financing activities (379,949) 475,451
-------------- --------------
Net (decrease) increase in cash and cash equivalents (41,205) 1,130,844
Cash and cash equivalents, beginning of period 790,151 146,852
-------------- --------------
Cash and cash equivalents, end of period $ 748,946 $ 1,277,696
============== ==============
</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 September 30, 2002 and for the three months and nine
months ended September 30, 2002 and September 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 Securities and Exchange Commission (SEC).
The results of operations for the three months and nine months ended September
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 Statement
of Financial Accounting Standards 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 initial and ongoing
assessments and determined that there is no impairment of goodwill at September
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 nine months ended September 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
Statement of Financial Accounting Standards No. 143, Accounting for Assets
Retirement Obligations (SFAS 143). 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. Adoption of this standard will not have any immediate effect on
our consolidated financial statements.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). 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. Adoption of this standard will not have any immediate effect on our
consolidated financial statements.
In April 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 145, Rescission of Statement of
Financial Accounting Standards No. 4, 44, and 64, Amendment of Statement of
Financial Accounting Standards No. 13, and Technical Corrections (SFAS 145).
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 are effective
for fiscal years beginning after May 15, 2002, and the changes related to lease
accounting are 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 Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities (SFAS 146), 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 146 for restructuring activities initiated after
December 31, 2002. SFAS 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 146 also establishes that
8
the liability should initially be measured and recorded at fair value.
Accordingly, SFAS 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.
NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF STATEMENT 142
The table below represents (in thousands) a reconciliation of the first nine
months of 2002 and 2001 and the years ended December 31, 2001 and 2000, to show
the effect of the adoption of SFAS 142.
<Table>
<Caption>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------- ------------------------------------
2002 2001 2001 2000
------------- ------------- ------------- -------------
Reported net income $ 2,148 $ 1,854 $ 2,338 $ 2,053
Add back: goodwill amortization -- 141 189 189
------------- ------------- ------------- -------------
Adjusted net income $ 2,148 $ 1,995 $ 2,527 $ 2,242
============= ============= ============= =============
BASIC EARNINGS PER SHARE:
Reported net income $ .31 $ .26 $ .33 $ .29
Add back: goodwill amortization -- .02 .03 .03
------------- ------------- ------------- -------------
Adjusted net income $ .31 $ .28 $ .36 $ .32
============= ============= ============= =============
DILUTED EARNINGS PER SHARE:
Reported net income $ .29 $ .26 $ .33 $ .29
Add back: goodwill amortization -- .02 .03 .03
------------- ------------- ------------- -------------
Adjusted net income $ .29 $ .28 $ .36 $ .32
============= ============= ============= =============
</Table>
Note 5. COMMON STOCK, STOCK OPTIONS, AND WARRANTS
In June 2002, we issued 60,000 shares of Common Stock pursuant to the exercise
of stock options by related parties. We received proceeds of $105,000 in this
transaction.
During 2002, we issued 8,000 warrants to purchase our Common Stock to a
nonaffiliated third party in connection with investor relations consulting. In
the second quarter, 4,000 were issued at an exercise price of $4.63 per share.
In the third quarter, 4,000 were issued at an exercise price of $4.30 per share.
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.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital ratio was approximately 1.6 to 1 at September 30, 2002 as
compared to 1.5 to 1 at December 31, 2001. We had working capital of
approximately $2.7 million at September 30, 2002 as compared to approximately
$2.0 million at December 31, 2001. For the remainder of fiscal 2002, we expect
to fund working capital requirements primarily through operating cash flow. At
September 30, 2002, we had cash and cash equivalents of approximately $749,000,
and marketable securities of approximately $571,000.
In September 2002, we secured an increase in our line of credit with our bank to
$1 million.
Cash in the amount of $662,000 was used by operating activities in the first
nine months of 2002, as compared to $1,353,000 provided by such activities for
the same period in 2001. In 2002, cash was generated primarily by a net profit
of $2,148,000, depreciation and amortization of $1,003,000, a change in the
reserve for doubtful accounts of $838,000, an increase in accounts payable and
accrued liabilities of $411,000, and an interest rate SWAP adjustment of
$160,000; this was more that offset by an increase in notes receivable of
$4,417,000, an increase in prepaid expenses of $457,000, an increase in
receivables from related parties of $226,000, and a decrease in our deferred
franchise sales in the amount of $86,000. In 2001, cash was generated primarily
by a net profit of $1,854,000, depreciation and amortization of $1,101,000, a
decrease in receivables of $585,000 and a decrease in a tax refund receivable of
$330,000, partially offset by notes receivable of $2,287,000, a decrease in
deferred franchise sales of $152,000, an increase of $219,000 in prepaid
expenses, and a net increase in accounts payable and accrued liabilities of
$118,000.
In the first nine months of 2002, we generated $1,001,000 from investing
activities. This resulted primarily from the collections of notes receivable of
$2,079,000 and the sales of assets for $108,000, which was partially offset by
the purchase of property and equipment of $901,000 and the purchase of franchise
rights for $227,000. For the same period in 2001, we used $698,000 for investing
activities. This resulted primarily from the purchase of property and equipment
for $3,836,000 and the purchase of other assets for $284,000, which was
partially offset by collections on notes receivable of $1,399,000, collections
on notes receivable from related parties of $1,916,000, and proceeds from sales
of marketable securities of $159,000.
Cash in the amount of $380,000 was used by financing activities in the first
nine months of 2002. Proceeds from borrowings of $696,000 and proceeds from the
exercise of stock options of $106,000, were more that offset by payments on
borrowings of $1,181,000. For the same period in 2001, cash in the amount of
$475,000 was provided by financing activities. Proceeds from borrowings of
$2,853,000 was partially offset by payments on borrowings of $2,377,000.
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 and credit available to satisfy the working capital
needs of the business.
RESULTS OF OPERATIONS
For the nine months ended September 30, 2002, compared to the nine months ended
September 30, 2001.
Total revenues for the nine months increased by $2,887,000 (18%) to $19,086,000
in 2002 from $16,199,000 in 2001. This increase is due to increases in the
following revenue categories: royalties - $1,175,000 (13%); franchise fees -
$1,441,000 (43%); sales of products and services - $243,000 (10%); interest -
$17,000 (3%); and other - $123,000 (29%), partially offset by a gain on sale of
securities of $112,000 in 2001.
10
Royalty revenues from each of our franchise concepts increased as follows:
<Table>
Mr. Rooter $ 446,000 11%
Glass Doctor $ 318,000 20%
Rainbow $ 94,000 5%
Mr. Electric $ 91,000 11%
Mr. Appliance $ 41,000 27%
Aire Serv $ 32,000 6%
</Table>
In addition to the above, royalties from our Canadian and other foreign
operations increased by $153,000 (45%).
Overall, these royalty revenue increases coincide with the increased business
revenues of existing franchisees, as well as an increase in the number of
franchisees producing revenue. These increases 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 our
franchise concepts: Mr. Rooter - $455,000 (52%); Glass Doctor - $297,000 (51%);
Aire Serv - $201,000 (51%); Mr. Appliance - $180,000 (136%); Rainbow - $279,000
(54%); and Mr. Electric - $128,000 (21%).
The above increases were partially offset by a decrease in franchise sales from
our Canadian and other foreign operations of $99,000 (46%).
Sales of products and services increased by $243,000 (10%), primarily due to
additions to the National Accounts customer base, at the end of 2001.
Interest income increased by $17,000 (3%) due to an increase in trade notes
receivable related to the sale of franchises.
General and administrative expenses increased by $2,023,000 (20%), due to
additional costs and personnel associated with the increase in overall revenues.
We have increased the number of franchise sales department personnel in order to
help obtain the 43% growth in revenues in that area. We have also increased our
support team to facilitate the implementation of new training initiatives and to
handle the additional franchisees coming into our system.
Due to the increase in product and service sales, costs associated with such
sales increased by $197,000 (9%).
Depreciation and amortization decreased by $97,000 (9%) due primarily to a
change in accounting rules associated with amortization of goodwill as described
in Note 3, partially offset by increased depreciation on facilities purchased in
April 2001.
Interest expense decreased by $28,000 (7%) due to the overall reduction of debt.
We reported net income of $2,148,000 for the nine months ended September 30,
2002 as compared to net income of $1,854,000 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 September 30, 2002, compared to the three months
ended September 30, 2001.
Total revenues for the quarter increased by $802,000 (14%) to $6,543,000 in 2002
from $5,741,000 in 2001. This increase is due to an increase of $264,000 (8%) in
royalties, an increase of $638,000 (60%) in franchise fees, an increase of
$18,000 (10%) in interest income, and an increase of $42,000 (29%) in other
revenues. These increases were partially offset by a decrease in the sale of
products and services of $48,000 (5%) and a gain on the sale of securities of
$112,000 in 2001.
11
Royalty revenues increased for the following franchise concepts:
<Table>
Mr. Rooter $ 126,000 9%
Glass Doctor $ 71,000 12%
Rainbow $ 17,000 3%
Mr. Electric $ 17,000 6%
Mr. Appliance $ 9,000 17%
</Table>
These increases were partially offset by decreases in royalties of $10,000 (5%)
from Aire Serv.
In addition to the above, royalties from our Canadian and other foreign
operations increased by $33,000 (27%).
Overall, these royalty revenue increases coincide with the increased business
revenues of existing franchisees, as well as an increase in the number of
franchisees producing revenue. These increases 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 sales revenues increased by $638,000 (60%) from 2001 to 2002.
Increases from: Rainbow - $208,000 (134%); Glass Doctor - $273,000 (152%); Aire
Serve - $62,000 (51%); and Mr. Appliance - $115,000 (307%) were partially offset
by decreases from Mr. Rooter - $20,000 (5%); and Mr. Electric - $40,000 (21%).
In addition to the above, franchise sales from our Canadian and other foreign
operations increased by $40,000 (226%).
Sales of products and services decreased by $48,000 (5%), primarily due to
decreases in volume with a few major accounts in the National Accounts customer
base.
Interest income increased by $18,000 (10%) due to an increase in trade notes
receivable related to the sale of new franchises.
General and administrative expenses increased by $572,000 (17%). This increase
was primarily a result of additional costs and personnel associated with the
increase in overall revenues.
Due to the decrease in product and service sales, costs associated with such
sales decreased by $16,000 (2%).
Depreciation and amortization decreased by $22,000 (6%) due primarily to a
change in accounting rules associated with amortization of goodwill as described
in Note 3, partially offset by increased depreciation on facilities purchased in
April 2001.
Interest expense decreased by $54,000 (24%) due to the overall reduction of
debt.
We reported net income of $849,000 for the quarter ended September 30, 2002 as
compared to net income of $714,000 for the same period in 2001.
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.
12
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.
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 which involves 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 18 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. 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.
13
CONTROLS AND PROCEDURES
Within the 90 days prior to the date of filing this Quarterly Report on Form
10-QSB, we carried out an evaluation, under the supervision of management,
including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a - 14. Based on that evaluation, our
Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in our periodic SEC filings. Subsequent to
the date of that evaluation, there have been no significant changes in our
internal controls or in other factors that could significantly affect internal
controls, nor were any corrective actions required with regard to significant
deficiencies and material weaknesses.
THIS SECTION LEFT INTENTIONALLY BLANK.
14
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
15
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: November 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 September 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
November 7, 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 September 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
November 7, 2002
16
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Dina Dwyer-Owens, President and Chief Executive Officer of The Dwyer Group,
Inc., certify that:
(1) I have reviewed this quarterly report on Form 10-QSB of The
Dwyer Group, Inc.
(2) Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
(6) The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
By: \s\ Dina Dwyer-Owens
--------------------------
Dina Dwyer-Owens
Chief Executive Officer
November 7, 2002
17
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas Buckley, Vice President and Chief Financial Officer of The Dwyer
Group, Inc., certify that:
(1) I have reviewed this quarterly report on Form 10-QSB of The
Dwyer Group, Inc.
(2) Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
(6) The registrant's other certifying officer and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
By: \s\ Thomas Buckley
-----------------------------
Thomas Buckley
Vice President and Chief Financial Officer
November 7, 2002
18