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, 2003.
__ 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)
<Table>
Delaware 73-0941783
- -------- ----------
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
</Table>
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 October 29, 2003
- ---------------------------- -------------------------------
Common stock, $.10 par value 7,202,888
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, 2003 (unaudited)
and December 31, 2002.............................................................................3
Consolidated Statements of Operations for the Three Months Ended
September 30, 2003 and 2002 (unaudited)...........................................................4
Consolidated Statements of Operations for the Nine Months Ended
September 30, 2003 and 2002 (Unaudited)...........................................................5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2003 and 2002 (unaudited).....................................................6
Notes to Condensed Consolidated Financial Statements............................................7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................................................10-14
Item 3. Controls and Procedures......................................................................... 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................................16
Item 2. Changes in Securities............................................................................16
Item 3. Defaults Upon Senior Securities..................................................................16
Item 4. Submission of Matters to a Vote of Security Holders..............................................16
Item 5. Other Information................................................................................16
Item 6. Exhibits and Reports on Form 8-K.................................................................17
</Table>
2
THE DWYER GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
ASSETS 2003 2002
------------- -------------
(Unaudited) (Audited)
Current assets:
Cash and cash equivalents $ 1,711,427 $ 1,486,256
Marketable securities, available-for-sale 587,561 572,070
Trade accounts receivable, net of allowance for doubtful
accounts of $558,193 and $379,996, respectively 1,584,641 1,852,834
Accounts receivable from related parties 184,135 116,901
Accrued interest receivable 83,824 69,344
Trade notes receivable, current portion, net of allowance for
doubtful accounts of $89,326 and $92,065, respectively 2,143,836 2,209,542
Inventories 73,659 74,885
Prepaid expenses 555,823 470,762
Notes receivable from related parties, current portion 186,467 184,384
------------- -------------
Total current assets 7,111,373 7,036,978
Property and equipment, net 4,102,730 4,086,419
Notes and accounts receivable from related parties 190,929 75,484
Trade notes receivable, net of allowance for doubtful notes of
$1,558,705 and $1,635,787 respectively 8,351,896 6,587,095
Goodwill, net 5,030,081 5,030,081
Purchased franchise rights, net 2,325,725 2,877,346
Net deferred tax asset 841,936 846,568
Other assets 902,315 631,391
------------- -------------
TOTAL ASSETS $ 28,856,985 $ 27,171,362
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 546,640 $ 898,424
Accrued liabilities 1,008,223 957,305
Accrued interest 249,865 283,758
Accrued payroll 1,226,025 675,528
Deferred franchise sales revenue 163,086 302,142
Federal income taxes payable 23,273 89,149
Current maturities of long-term debt 489,951 1,117,312
------------- -------------
Total current liabilities 3,707,063 4,323,618
Long-term debt, less current portion 2,318,235 2,690,761
Deferred franchise sales revenue 45,614 82,592
Stockholders' equity:
Common stock 785,018 771,122
Additional paid-in capital 9,367,671 9,112,248
Retained earnings 13,774,799 11,469,780
Accumulated other comprehensive income 68,737 (68,607)
Treasury stock, at cost (1,210,152) (1,210,152)
------------- -------------
Total stockholders' equity 22,786,073 20,074,391
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,856,985 $ 27,171,362
============= =============
</Table>
See notes to condensed consolidated financial statements (unaudited).
3
THE DWYER GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
2003 2002
------------- -------------
REVENUES:
Royalties $ 3,975,973 $ 3,598,958
Franchise fees 2,528,701 1,703,343
Sales of products and services 631,321 853,054
Interest 228,466 201,197
Other 221,804 186,790
------------- -------------
TOTAL REVENUES 7,586,265 6,543,342
COSTS AND EXPENSES:
General, administrative and selling 4,650,744 3,976,745
Costs of product and service sales 517,271 707,369
Depreciation and amortization 378,166 352,297
Interest 26,014 172,686
Merger related expenses 312,994 --
------------- -------------
TOTAL COSTS AND EXPENSES 5,885,189 5,209,097
Income before income taxes 1,701,076 1,334,245
Income taxes (603,717) (485,039)
------------- -------------
NET INCOME $ 1,097,359 $ 849,206
============= =============
EARNINGS PER SHARE - BASIC $ 0.15 $ 0.12
============= =============
EARNINGS PER SHARE - DILUTED $ 0.14 $ 0.11
============= =============
WEIGHTED AVERAGE COMMON SHARES 7,169,719 7,057,931
============= =============
WEIGHTED AVERAGE COMMON SHARES AND POTENTIAL
DILUTIVE COMMON SHARES 7,744,789 7,419,716
============= =============
</Table>
See notes to condensed consolidated financial statements (unaudited).
4
THE DWYER GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
(Unaudited)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2003 2002
-------------- --------------
REVENUES:
Royalties $ 11,173,298 $ 10,438,181
Franchise fees 6,269,853 4,765,392
Sales of products and services 2,018,010 2,771,601
Interest 674,154 562,974
Other 630,284 547,689
-------------- --------------
TOTAL REVENUES 20,765,599 19,085,837
COSTS AND EXPENSES:
General, administrative and selling 13,541,040 12,035,459
Costs of product and service sales 1,703,201 2,279,205
Depreciation and amortization 1,103,267 1,003,165
Interest 143,606 393,356
Merger related expenses 672,072 --
-------------- --------------
TOTAL COSTS AND EXPENSES 17,163,186 15,711,185
Income before income taxes 3,602,413 3,374,652
Income taxes (1,297,394) (1,227,048)
-------------- --------------
NET INCOME $ 2,305,019 $ 2,147,604
============== ==============
EARNINGS PER SHARE - BASIC $ 0.32 $ 0.31
============== ==============
EARNINGS PER SHARE - DILUTED $ 0.31 $ 0.29
============== ==============
WEIGHTED AVERAGE COMMON SHARES 7,102,636 7,021,008
============== ==============
WEIGHTED AVERAGE COMMON SHARES AND POTENTIAL
DILUTIVE COMMON SHARES 7,550,325 7,412,733
============== ==============
</Table>
See notes to condensed consolidated financial statements (unaudited).
5
THE DWYER GROUP, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(Unaudited)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
2003 2002
--------------- ---------------
Operating activities:
Net income $ 2,305,019 $ 2,147,604
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 1,103,267 1,003,165
Change in reserve for doubtful accounts 1,094,852 837,747
Notes received for franchise sales (4,083,068) (3,438,878)
Notes received other than for franchise sales (711,001) (978,401)
Changes in assets and liabilities:
Accounts and interest receivable 246,957 (4,356)
Receivables / payables to related parties, net (67,234) (225,501)
Inventories 1,226 (18,366)
Prepaid expenses (85,061) (457,082)
Income tax receivable -- (5,599)
Deferred tax asset 4,632 --
Accounts payable and accrued liabilities 149,862 571,373
Deferred franchise sales revenue (176,034) (86,144)
Other 27,814 (7,388)
--------------- ---------------
Net cash used in operating activities (188,769) (661,826)
--------------- ---------------
Investing activities:
Collections of notes receivable 2,051,324 2,079,151
Purchases of property and equipment (473,466) (900,662)
Purchases of franchise rights -- (226,795)
Purchases of other assets (334,875) (59,539)
Purchases of marketable securities (10,203) (12,116)
Sale of other assets -- 108,291
Increase in unrealized gain on marketable securities 29,256 3,627
Advances to related parties (117,528) --
Collections on notes receivable from related parties -- 8,613
--------------- ---------------
Net cash provided by investing activities 1,144,508 1,000,570
--------------- ---------------
Financing activities:
Proceeds from exercise of stock options 269,319 105,803
Proceeds from borrowings -- 695,715
Payments on borrowings (999,887) (1,181,467)
--------------- ---------------
Net cash used in financing activities (730,568) (379,949)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 225,171 (41,205)
Cash and cash equivalents, beginning of period 1,486,256 790,151
--------------- ---------------
Cash and cash equivalents, end of period $ 1,711,427 $ 748,946
=============== ===============
</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 which include the following:
o Rainbow International Carpet Dyeing and Cleaning Co.
("Rainbow") is a franchisor of carpet cleaning, dyeing, air
duct cleaning, and restoration services under the service mark
"Rainbow International"(R).
o Mr. Rooter Corporation ("Mr. Rooter") is a franchisor of
plumbing repair and drain cleaning services under the service
mark "Mr. Rooter"(R).
o Aire Serv Heating & Air Conditioning, Inc. ("Aire Serv") is a
franchisor of heating, ventilating and air conditioning
service businesses under the service mark "Aire Serv"(R).
o Mr. Electric Corp. ("Mr. Electric") is a franchisor of
electrical repair and service businesses under the service
mark "Mr. Electric"(R).
o Mr. Appliance Corp. ("Mr. Appliance") is a franchisor of major
household appliance service and repair businesses under the
service mark "Mr. Appliance"(R).
o Synergistic International, Inc., ("Glass Doctor"), 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. ("National Accounts")
solicits national account customers who can call a toll-free
phone number for their general repair and 24-hour emergency
service needs. The order is filled through the Company's
network of franchisees or qualified subcontractors.
o The Dwyer Group Canada, Inc. ("TDG Canada") markets and
services certain of the Company's franchise concepts in
Canada. Currently, those concepts are Mr. Rooter, Mr.
Electric, Rainbow and Mr. Appliance.
o Zorware, Inc. ("Zorware") markets and supports certain
software applications for license to our franchisees as well
as other customers.
NOTE 2. BASIS OF PRESENTATION
A. PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include The Dwyer
Group, Inc. and its subsidiaries (the "Company"). All significant intercompany
balances and transactions have been eliminated.
B. INTERIM DISCLOSURES
The information as of September 30, 2003 and for the three months and nine
months ended September 30, 2003 and September 30, 2002 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 the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 2002, and with other
filings with the SEC.
7
The results of operations for the three months and nine months ended September
30, 2003 are not necessarily indicative of the results to be expected for the
fiscal year ending December 31, 2003.
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 2002, the 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. The
Company 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 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
did not have any immediate effect on the Company's consolidated financial
statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51" ("FIN 46"). This interpretation
addresses the consolidation of entities whose equity holders have either (a) not
provided sufficient equity at risk to allow the entity to finance its own
activities or (b) do not possess certain characteristics of a controlling
financial interest. FIN 46 requires the consolidation of these entities, known
as variable interest entities ("VIE's"), by the primary beneficiary of the
entity. The primary beneficiary is the entity, if any, that is subject to a
majority of the risk of loss from the VIE's activities, entitled to receive a
majority of the VIE's residual returns, or both. As amended by FASB Staff
Position ("FSP") No. FIN 46-6, FIN 46 is applicable to variable interests in a
VIE created before February 1, 2003, and is effective at the end of the first
interim or annual period ending after December 15, 2003. FIN 46 requires certain
disclosures in financial statements issued after January 31, 2003, if it is
reasonably possible that VIE's will be consolidated or information about VIE's
will be disclosed. As of the date of this filing, the Company is still assessing
the impact of FIN 46 on its consolidated financial statements and it is
uncertain as to future consolidations and disclosures.
In December 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation
- - Transition and Disclosure (SFAS 148), which amends SFAS 123; Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used in reported financial results.
SFAS 148, paragraphs 2(a) - 2(e), are effective for financial statements for
fiscal years ending after December 15, 2002. SFAS 148, paragraph 2(f), and the
amendment to APB Opinion No. 28, Interim Financial Reporting, shall be effective
for financial reports containing condensed financial statements for interim
periods beginning after December 15, 2002. Earlier adoption is permitted. The
Company adopted the disclosure provisions of SFAS 148 effective December 31,
2002. As permitted under SFAS 148, the Company continues to apply the
recognition provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, in determining compensation expense.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities (SFAS 149), which amends SFAS 133, Accounting
for Derivative Instruments and Hedging Activities, to amend and clarify
financial accounting and reporting for derivative instruments embedded in other
contracts (collectively referred to as derivatives) and hedging activities. SFAS
149 is effective for contracts entered into or modified after June 30, 2003.
Effective April 2003, the Company adopted SFAS 149, which will not have a
material impact on its consolidated results of operations and financial
position.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity (SFAS 150),
which establishes standards for
8
how an issuer classifies and measures certain financial instruments with
characteristics of both debt and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances) because that financial instrument embodies an obligation to
the issuer. Effective June 2003, the Company adopted SFAS 150, which will not
have a material impact on its consolidated results of operations and financial
position.
STOCK BASED COMPENSATION
In compliance with SFAS 148, the Company has elected to continue to follow the
intrinsic value method in accounting for our stock-based employee compensation
arrangement as defined by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and have made the applicable disclosures.
Had the compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS 123, net income and earnings per common share
for the nine months ended September 30, 2003 and September 30, 2002 would
approximate the pro forma amounts below:
<Table>
<Caption>
2003 2002
--------------- ---------------
Net income, as reported $ 2,305,019 $ 2,147,604
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards,
net of tax effects (48,000) (48,000)
--------------- ---------------
Pro forma net income $ 2,257,019 $ 2,099,604
=============== ===============
Net income per share
Basic, as reported $ .32 $ .31
Basic, pro forma $ .32 $ .30
Diluted, as reported $ .31 $ .29
Diluted, pro forma $ .30 $ .28
</Table>
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future results.
NOTE 4. MERGER TRANSACTION
On October 30, 2003, the shareholders of the Company approved a merger whereby
the Company became a wholly owned subsidiary of TDG Holding Company. As a result
of the merger, the Company ceased to be an independent, publicly traded company
and is no longer listed on the NASDAQ Stock Market. For further information see
"Definitive Proxy Statement-Merger" filed with the Securities and Exchange
Commission on October 2, 2003.
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 1.9 to 1 at September 30, 2003 as
compared to 1.6 to 1 at December 31, 2002. We had working capital of
approximately $3,404,000 at September 30, 2003 as compared to approximately
$2,713,000 at December 31, 2002. For the remainder of fiscal 2003, we expect to
fund working capital requirements primarily through operating cash flow. At
September 30, 2003, we had cash and cash equivalents of approximately
$1,711,000, and marketable securities of approximately $588,000.
In September 2002, we secured an increase in our line of credit with our bank to
$1 million.
Cash in the amount of $189,000 was used by operating activities in the first
nine months of 2003, as compared to $662,000 used by such activities for the
same period in 2002. In 2003, cash was generated primarily by a net profit of
$2,305,000, depreciation and amortization of $1,103,000, a change in the reserve
for doubtful accounts of $1,095,000, an increase in accounts payable and accrued
liabilities of $150,000, and a decrease in accounts and interest receivable of
$247,000; this was more that offset by an increase in notes receivable of
$4,794,000, an increase in prepaid expenses of $85,000, an increase in
receivables from related parties of $67,000, and a decrease in deferred
franchise sales in the amount of $176,000. 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 the first nine months of 2003, we generated $1,145,000 from investing
activities. This resulted primarily from collections of notes receivable of
$2,051,000, which was partially offset by the purchase of property and equipment
of $473,000, the purchase of other assets for $335,000, and advances to related
parties in the amount of $118,000. For the same period in 2002, we generated
$1,001,000 from investing activities. This resulted primarily from 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 for $901,000 and
the purchase of franchise rights for $227,000.
Cash in the amount of $731,000 was used by financing activities in the first
nine months of 2003. Proceeds from the exercise of stock options of $269,000,
were more that offset by payments on borrowings of $1,000,000. For the same
period in 2002, $380,000 was used by financing activities. 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.
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, 2003, compared to the nine months ended
September 30, 2002.
Total revenues for the nine months increased by $1,680,000 (8.8%) to $20,766,000
in 2003 from $19,086,000 in 2002. This increase is due to increases in the
following revenue categories: royalties - $735,000 (7%); franchise fees -
$1,504,000 (32%); interest - $111,000 (20%); and other - $83,000 (15%),
partially offset by a decrease in sales of products and services - $754,000
(27%).
10
Royalty revenues increased from each of the following franchise concepts:
<Table>
Mr. Rooter $ 462,000 11%
Rainbow $ 133,000 7%
Mr. Appliance $ 48,000 25%
Aire Serv $ 101,000 18%
</Table>
In addition to the above, royalties from our Canadian and other foreign
operations increased by $44,000 (9%).
The above increases were partially offset by a decrease in royalties from Glass
Doctor - $53,000 (3%). Royalties from Mr. Electric were flat as compared to last
year.
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 - $543,000 (41%); Glass Doctor - $941,000 (106%);
Aire Serv - $86,000 (14%); Mr. Appliance - $121,000 (39%); and Mr. Electric -
$197,000 (27%).
The above increases were partially offset by a decrease in franchise sales from
our Canadian and other foreign operations of $76,000 (65%); and a decrease in
franchise sales from Rainbow - $309,000 (39%).
Sales of products and services decreased by $754,000 (27%), due primarily to the
loss of a major National Accounts customer.
Interest income increased by $111,000 (20%) due to an increase in trade notes
receivable related to the sale of franchises.
General and administrative expenses increased by $1,506,000 (13%), due to
additional costs and personnel associated with the increase in overall revenues.
We increased the number of franchise sales department personnel in order to help
obtain the 32% growth in franchise sales revenues. We have also increased our
support team to facilitate the implementation of new training initiatives and to
handle new franchisees.
Due to the decrease in product and service sales, costs associated with such
sales decreased by $576,000 (25%).
Depreciation and amortization decreased by $100,000 (10%) due primarily to
purchases of additional property, plant, and equipment.
Interest expense decreased by $250,000 (63%) due to a reduction in overall debt
and due to amounts recorded in 2002 related to an interest rate SWAP agreement.
Merger related expenses in 2003 pertain to the merger transaction completed on
October 30th of this year.
We reported net income of $2,305,000 for the nine months ended September 30,
2003 as compared to net income of $2,148,000 for the same period in 2002.
For the three months ended September 30, 2003, compared to the three months
ended September 30, 2002.
Total revenues for the quarter increased by $1,043,000 (16%) to $7,586,000 in
2003 from $6,543,000 in 2002. This increase is due to an increase of $377,000
(10%) in royalties, an increase of $825,000 (48%) in franchise fees, an increase
of $27,000 (14%) in interest income, and an increase of $35,000 (19%) in other
revenues. These increases were partially offset by a decrease in the sale of
products and services of $222,000 (26%).
11
Royalty revenues increased for each of our franchise concepts as follows:
<Table>
Mr. Rooter $ 159,000 11%
Rainbow $ 112,000 16%
Glass Doctor $ 13,000 2%
Aire Serv $ 42,000 21%
Mr. Appliance $ 20,000 31%
Mr. Electric $ 2,000 1%
</Table>
In addition to the above, royalties from our Canadian and other foreign
operations increased by $29,000 (19%).
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 $825,000 (49%) from 2002 to 2003.
Increases from: Glass Doctor - $397,000 (88%); Aire Serve - $134,000 (73%); Mr.
Rooter - $155,000 (45%); Mr. Electric $442,000 (299%) and Mr. Appliance - $9,000
(6%) were partially offset by a decrease from Rainbow - $254,000 (70%).
In addition to the above, franchise sales from our Canadian and other foreign
operations decreased by $58,000.
Sales of products and services decreased by $222,000 (26%), primarily due to
decreases in sales to a few major National Accounts customers.
Interest income increased by $27,000 (14%) due to an increase in trade notes
receivable related to the sale of new franchises.
General and administrative expenses increased by $674,000 (17%). This increase
is primarily 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 49% growth in franchise sales revenues. We
have also increased our support team to facilitate the implementation of new
training initiatives and to handle new franchisees.
Due to the decrease in product and service sales, costs associated with such
sales decreased by $190,000 (27%).
Depreciation and amortization increased by $26,000 (7%) due primarily to
purchases of additional property, plant, and equipment.
Interest expense decreased by $147,000 (85%) due to a reduction in overall debt
and due to amounts recorded in 2002 related to an interest rate SWAP agreement.
Merger related expenses in 2003 pertain to the merger transaction completed on
October 30th of this year.
We reported net income of $1,097,000 for the quarter ended September 30, 2003 as
compared to net income of $849,000 for the same period in 2002.
IMPACT OF INFLATION
Inflation has not had a material impact on the operations of the Company.
FOREIGN OPERATIONS
The Company operates in 16 foreign countries. Typically, other than in Canada,
foreign franchises are sold and managed by a master licensee in that country.
Royalties 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. The Company does not depend on foreign operations,
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and such operations do not have a material impact on its cash flow. The Company
may sell additional master licenses, which could result in lump sum payments
from the master licensees to the Company.
FORWARD-LOOKING STATEMENTS
The Company cautions readers that various factors could cause the actual results
of the Company 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 representatives of the Company. 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company has identified certain accounting policies as critical to its
business and to the results of its operations, certain of which entail
significant estimates. These critical policies are further discussed below.
Revenues from the sale of individual franchises in the United States and Canada,
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 the Company 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.
The Company's policy for valuation of its allowance accounts, including its
notes receivable allowance and its accounts receivable allowance, requires it 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 the underlying assumptions
for these estimates change, then the Company 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,
the Company completed a goodwill impairment review for Glass Doctor, the
reporting unit that has all of its recorded goodwill, as of January 1, 2002 and
December 31, 2002, and found no impairment. According to the Company's
accounting policy under the new rules, it will perform a similar review as of
the last day of the year, or earlier if indicators of potential impairment
exist. The Company's impairment review process is based on a discounted multiple
of royalties which involves its estimate of future royalty revenues for four
years, as well as appropriate discount rates. These estimates are consistent
with the plans and estimates it uses to manage the underlying business. The
estimates is uses assume continuation of the growth rate of existing franchisees
and the addition of new franchisees. If the Company fails to achieve its assumed
growth rates or experience a significant decrease in its royalty stream, the
Company may incur charges for impairment of goodwill in the future.
Also in conjunction with the new accounting rules, the Company reviewed the
useful lives of its other intangible assets and found no impairment or change in
their useful lives. In the future the Company may incur charges if the useful
life of any such asset changes or if an asset becomes impaired.
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CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS
The Company has contractual obligations and commitments primarily in regard to
payment of debt and lease arrangements.
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------------------------
Beyond
Contractual Obligations 2003 2004 2005 2006 2007 Total
---------- ---------- ---------- ---------- ---------- ----------
Long-Term Debt $ 88 $ 468 $ 257 $ 1,966 $ -- $ 3,031
Operational Lease Commitments -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total Contractual Obligations $ 88 $ 468 $ 257 $ 1,966 $ -- $ 3,031
========== ========== ========== ========== ========== ==========
</Table>
RECENT EVENTS
On October 30, 2003, the shareholders of the Company approved a merger whereby
the Company became a wholly owned subsidiary of TDG Holding Company. As a result
of the merger, the Company ceased to be an independent, publicly traded company
and is no longer listed on the NASDAQ Stock Market. For further information see
"Definitive Proxy Statement-Merger" filed with the Securities and Exchange
Commission on October 2, 2003.
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ITEM 3. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision of management,
including its Chief Executive Officer and its Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a - 14 as of September 30, 2003.
Based on that evaluation, its Chief Executive Officer and its Chief Financial
Officer concluded that the Company's 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 its
periodic SEC filings. Subsequent to the date of that evaluation, there have been
no significant changes in its 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.
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PART II
OTHER INFORMATION
THE DWYER GROUP, INC. AND SUBSIDIARIES
ITEM 1 - LEGAL PROCEEDINGS
On May 20, 2003, an individual plaintiff filed a purported class action
complaint in the Court of Chancery of the State of Delaware for New Castle
County against the Company and certain of its current directors, in relation to
the proposed merger announced by the Company. The complaint alleges that the
directors breached their fiduciary duties to the plaintiff. The plaintiff seeks
to have the action maintained as a class action, to have the defendants enjoined
from proceeding with or closing the proposed transaction and to recover
unspecified costs of the action. The class is alleged to include all public
stockholders of the Company, excluding the defendants and certain members of
senior management. The plaintiff has served the defendants with discovery
requests and the Company has turned over certain of the information requested.
The Company and the director defendants intend to defend vigorously against the
complaint.
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
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 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: November 13, 2003 The Dwyer Group, Inc.
By: \s\ Thomas Buckley
------------------------------------------
Thomas Buckley
Vice President and Chief Financial
Officer
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