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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 MARCH 31, 1999.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 FOR THE TRANSITION PERIOD FROM
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COMMISSION FILE NUMBER 0-15227
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THE DWYER GROUP, INC.
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(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Delaware 73-0941783
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(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1010 N. University Parks Dr., Waco, TX 76707
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(ADDRESS AND ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
(254) 745-2400
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(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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(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 No X
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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 May 10, 1999
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Common stock, $.10 par value 6,888,610
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes No X
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THE DWYER GROUP, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998.............................................................................3
Consolidated Statements of Income for the Three Months Ended
March 31, 1999 and 1998 (unaudited)...............................................................4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (unaudited).........................................................5
Notes to Condensed Consolidated Financial Statements............................................6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................8-10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................................................11
Item 2. Changes in Securities............................................................................11
Item 3. Defaults Upon Senior Securities..................................................................11
Item 4. Submission of Matters to a Vote of Security Holders..............................................11
Item 5. Other Information................................................................................11
Item 6. Exhibits and Reports on Form 8-K.................................................................11
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THE DWYER GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
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(Unaudited)
Current assets:
Cash and cash equivalents $ 718,071 $ 498,199
Marketable securities, available-for-sale 1,399,836 1,973,761
Trade accounts receivable, net of allowance for doubtful
accounts of $262,347 and $175,036, respectively 798,198 684,955
Accounts receivable from related parties 724,479 766,623
Accrued interest receivable, including amounts due from
related parties of $161,090 and $149,643, respectively 219,670 199,953
Trade notes receivable, current portion 1,197,769 1,085,810
Inventories 43,713 46,013
Prepaid expenses 225,105 164,937
Notes receivable from related parties, current portion 659,770 660,300
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Total current assets 5,986,611 6,080,551
Property and equipment, net 1,101,484 1,103,862
Notes and accounts receivable from related parties 425,510 460,558
Assets held for sale 141,575 141,575
Trade notes receivable, net of allowance for doubtful notes of
$834,509 and $941,472, respectively 3,117,280 3,034,485
Goodwill, net 5,558,959 5,599,553
Purchased franchise rights, net 915,983 938,823
Covenant not to compete, net 86,665 91,665
Net deferred tax asset 709,480 867,773
Other assets 408,411 398,455
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TOTAL ASSETS $ 18,451,958 $ 18,717,300
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 602,557 $ 326,464
Accounts payable to related parties 7,647 13,723
Accrued liabilities 1,217,162 1,166,439
Litigation reserves 523,708 1,103,211
Current portion of notes payable and capital lease obligations 649,603 534,767
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Total current liabilities 3,000,677 3,144,604
Long-term debt, less current portion 1,657,986 1,799,821
Deferred franchise sales revenue 1,113,819 1,155,746
Commitments and contingencies
Stockholders' equity:
Preferred stock -- --
Common stock 722,859 722,859
Additional paid-in capital 9,653,691 9,653,691
Retained earnings 2,851,481 2,596,872
Accumulated other comprehensive income (71,527) (61,657)
Treasury stock, at cost (477,028) (294,636)
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Total stockholders' equity 12,679,476 12,617,129
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,451,958 $ 18,717,300
============ ============
See notes to condensed consolidated financial statements (unaudited).
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THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
1999 1998
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REVENUES:
Royalties $ 1,991,439 $ 1,853,863
Franchise fees 778,834 621,479
Sales of products and services 431,163 724,329
Tax services -- 419,120
Interest 129,709 166,619
Other 130,655 287,181
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TOTAL REVENUES 3,461,801 4,072,591
COSTS AND EXPENSES:
General, administrative and selling 2,509,850 2,914,611
Costs of product and service sales 356,594 539,312
Cost of tax services -- 268,312
Depreciation and amortization 169,755 153,618
Interest 29,533 14,633
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TOTAL COSTS AND EXPENSES 3,065,732 3,890,486
Income before income taxes 396,068 182,104
Income taxes (141,459) (61,944)
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NET INCOME $ 254,609 $ 120,160
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EARNINGS PER SHARE - BASIC $ 0.04 $ 0.02
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EARNINGS PER SHARE - DILUTED $ 0.04 $ 0.02
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WEIGHTED AVERAGE COMMON SHARES 6,956,981 6,775,427
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WEIGHTED AVERAGE COMMON SHARES AND POTENTIAL
DILUTIVE COMMON SHARES 7,113,057 6,910,540
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See notes to condensed consolidated financial statements (unaudited).
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THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
1999 1998
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Operating activities:
Net income for the period $ 254,609 $ 120,160
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 169,755 155,903
Provision for doubtful accounts 5,305 (54,794)
Notes received for franchise sales (454,278) (354,212)
Change in deferred tax asset 158,293 10,306
Other adjustments 2,558 (52)
Changes in assets and liabilities:
Accounts and interest receivable (132,960) (72,547)
Net change in receivables / payables to related parties 36,068 (2,903)
Inventories 2,300 (35,749)
Prepaid expenses (60,168) (113,432)
Accounts payable and accrued liabilities 464,118 140,114
Litigation reserves (579,503) --
Deferred franchise sales revenue (31,728) (114,300)
Other (2,679) 19,812
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Net cash used in operating activities (168,311) (301,694)
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Investing activities:
Collections of notes receivable 251,840 575,981
Purchases of property and equipment (73,279) (138,023)
Purchases of franchise rights -- (586,564)
Acquisition of other assets (14,979) (3,007)
Sale of marketable securities 573,925 --
Purchase of marketable securities -- (192,688)
Increase (decrease) in unrealized gain on marketable securities (38,210) 57,856
Collections on notes receivable from related parties 35,578 35,851
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Net cash provided by (used in) investing activities 734,875 (250,594)
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Financing activities:
Purchases of treasury stock (182,392) --
Proceeds from borrowings -- 62,465
Payments on borrowings (164,301) (37,842)
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Net cash provided by (used in) financing activities (346,693) 24,623
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Net increase (decrease) in cash and cash equivalents 219,872 (527,664)
Cash and cash equivalents, beginning of period 498,199 1,568,187
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Cash and cash equivalents, end of period $ 718,071 $ 1,040,523
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See notes to condensed consolidated financial statements (unaudited).
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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 (the "Company") 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., which was incorporated in July
1998, 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") was incorporated in
January 1998 in order to market and service certain of the
Company's 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 (the "Company"). All significant intercompany
balances and transactions have been eliminated.
B. INTERIM DISCLOSURES
The information as of March 31, 1999 and for the three months ended March 31,
1999 and 1998 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, 1998, and with other filings with the U.S. Securities
and Exchange Commission.
The results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the fiscal year ending
December 31, 1999.
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C. RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 condensed consolidated
financial statements to conform to the presentation used in the 1999 condensed
consolidated financial statements. These reclassifications had no effect on
stockholders' equity or net income.
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.
NOTE 4. BUSINESS ACQUISITION
In July 1998, the Company acquired substantially all of the assets associated
with the Glass Doctor franchise concept. Glass Doctor is a national franchisor
of service centers whose business is the replacement of automobile, residential
and commercial glass. The acquisition was accounted for as a purchase, and
accordingly, the operating results of Glass Doctor have been included in the
accompanying condensed consolidated financial statements since the date of
acquisition.
The unaudited pro forma information for the three months ended March 31, 1998,
which is set forth below, gives effect to the acquisition as if it had occurred
at the beginning of the period. The pro forma information is presented for
informational purposes only and is not necessarily indicative of the results of
operations that actually would have occurred had the transaction been
consummated at the beginning of the period presented nor does the information
purport to be indicative of future results.
Revenues $4,355,470
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Net Income (Loss) $ (29,445)
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Basic Earnings Per Share $ .00
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Diluted Earnings Per Share $ .00
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NOTE 7. COMMON STOCK
In September 1998, the Company authorized the repurchase of up to 100,000 of
the Company's common stock in the open market or in private transactions and
subsequently increased that amount to 270,000 shares. As of May 10, 1999, the
Company had repurchased 210,510 shares at an average purchase price of $1.94.
Of such shares 100,750 have been purchased in 1999.
THIS SECTION LEFT INTENTIONALLY BLANK.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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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
The Company's working capital ratio was approximately 2.0 to 1 at March 31,
1999 as compared to 1.9 to 1 at December 31, 1998. The Company had working
capital of approximately $3.0 million at March 31, 1999 as compared to
approximately $2.9 million at December 31, 1998. For the remainder of fiscal
1999, management expects to fund working capital requirements primarily through
operating cash flow. At March 31, 1999, the Company had cash and cash
equivalents of approximately $700,000, and marketable securities of
approximately $1.4 million.
Cash used in operating activities decreased from $302,000 for the first quarter
of 1998 to $168,000 for the same period in 1999, primarily due to an increase
of $134,000 in net income. Also included in operating activities was cash used
for payments against litigation reserves of $579,000, which was offset by cash
generated from an increase in accounts payable and accrued liabilities of
$464,000 and from a decrease in the deferred tax asset of $158,000. In the
first quarter of 1998, the Company used $251,000 in cash for investing
activities, primarily for the purchase of Canadian franchise rights for
$587,000, net purchases of marketable securities of $193,000 and purchases of
property and equipment of $138,000, partially offset by collections on notes
receivable of $611,000. In the first quarter of 1999, the Company generated
$735,000 in cash from investing activities, primarily from proceeds from the
sale of marketable securities of $574,000 and collections of notes receivable
of $287,000, partially offset by purchases of property and equipment of
$73,000. The Company generated $25,000 in cash from financing activities in the
first quarter of 1998 from borrowings net of payments on borrowings. In the
first quarter of 1999, the Company used $347,000 in cash for financing
activities for payments on borrowings of $164,000 and for purchases of treasury
stock of $182,000.
The Company is not aware of any trend or event which would potentially
adversely affect its liquidity. In the event such a trend would develop,
management believes that the Company has sufficient funds available to satisfy
the working capital needs of the business.
RESULTS OF OPERATIONS
For the three months ended March 31, 1999, compared to the three months ended
March 31, 1998.
In July 1998, the Company sold two of its franchising businesses - General
Business Services ("GBS") and E.K. Williams & Co. ("EKW"). In addition, in the
first quarter of 1998, the Company repurchased Canadian franchise rights for
its Mr. Rooter, Mr. Electric and Rainbow International franchise concepts. Also
in July 1998, the Company purchased the Glass Doctor franchise concept.
Total revenues for the quarter decreased by $611,000 (15.0%) to $3,462,000 in
1999 from $4,073,000 in 1998. This decrease is due primarily to a decrease in
tax services of $419,000 and a decrease in the sale of products and services of
$293,000. Both such decreases were due to the absence of GBS and EKW in 1999.
Other changes in revenues included an increase of $138,000 in royalties, an
increase of $157,000 in franchise fees and a decrease of $157,000 in other
revenues.
Royalty revenues from each of the Company's franchise concepts increased as
follows:
Mr. Rooter $74,000 (9%)
Aire Serv $64,000 (239%)
Mr. Electric $41,000 (43%)
Rainbow $34,000 (8%)
Mr. Appliance $11,000 (83%)
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 the Company's emphasis
on providing strong franchise support services, and its methods and programs
created to assist franchisees in building successful businesses, along with
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continued emphasis on the sale of new franchises. These strategies are very
important to the future of the Company, as royalties are the foundation for the
Company's long-term financial strength.
In addition, the Company recorded royalty revenues from the newly acquired
Canadian franchise rights of $68,000 and from Glass Doctor of $303,000. The
above increases were partially offset by a decrease of $457,000 due to the
absence of GBS and EKW in 1999.
The increase in franchise fee revenues was due to an increase in Aire Serv of
$83,000 (119%), and to the sale of $324,000 in Glass Doctor franchises and
$50,000 in Canadian franchises. Such increases were partially offset by
decreases in franchise fee revenues from the following concepts: Mr. Rooter -
$60,000 (41%); Mr. Electric - $110,000 (55%); Rainbow - $23,000 (32%); Mr.
Appliance - $19,000 (39%); and GBS - $88,000 (100%).
Other revenues decreased due to a gain on sale of securities in 1998 of
$101,000 and due to a decrease in related party management fees resulting from
a reduction in the number of entities for which work was performed.
General and administrative expenses decreased by $405,000 (13.9%), due to the
sale of GBS and EKW, and due to actions taken by management during the third
and fourth quarters of 1998 which served to increase operational efficiency.
Such efficiencies were achieved primarily by a reduction in the number of
employees and related expenses.
Due to the decline in product and service sales, costs associated with such
sales decreased by $183,000 (33.9%).
There was no cost of tax services in 1999 due to the absence of GBS.
Depreciation and amortization increased by $16,000 (10.5%) due to amortization
of Canadian franchise rights and goodwill associated with Glass Doctor,
partially offset by reductions resulting from the sale of GBS and EKW.
Interest expense increased by $15,000 due to a note payable related to the
purchase of Glass Doctor, partially offset by reductions in other notes
payable.
The Company reported net income of $255,000 for the quarter ended March 31,
1999 as compared to net income of $120,000 for the same period in 1998.
IMPACT OF INFLATION
Inflation has not had a material impact on the operations of the Company.
FOREIGN OPERATIONS
The Company operates 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. The Company does not depend on foreign operations, and such
operations do not have a material impact on its cash flow. During the remainder
of 1999, the Company may sell additional master licenses which could result in
lump sum payments from the master licensees to the Company.
YEAR 2000 COMPLIANCE
The Company initiated a program in 1996 to assess its internal information
technology systems in order to upgrade those systems for the next stage of the
Company's growth and to make them Year 2000 compliant. The Company expects this
program to be completed by the third quarter of 1999.
In 1996, the Company determined that its accounting system was not Year 2000
compliant and that the Company's servers also required upgrading in order to be
Year 2000 compliant.
During 1996 and 1997, the Company purchased new Year 2000 compliant accounting
software, servers, network operating systems and software applications. All of
the new equipment and software has been installed and implemented, except that
the module of
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the accounting package that is used to process royalty payments from the
franchisees is in the testing phase. Implementation of the royalty module is
scheduled to be complete by the third quarter of 1999.
In 1998, the Company performed an inventory of all of its personal computers,
workstations and related software for Year 2000 compliance. The Company
formulated a replacement schedule for all non-compliant personal computers and
software, which the Company expects to complete by the third quarter of 1999.
Also in 1998, the Company determined that its telephone switch (PBX) software
and its voice mail system software are not Year 2000 compliant. The Company
plans to replace such software by the third quarter of 1999 with Year 2000
compliant systems.
Also in 1998, the Company purchased a software application from Pivotal
Software, Inc. called Relationship99, an information management program which
facilitates and enhances all aspects of the Company's operations and integrates
with the Company's accounting software, data bases and other applications.
While this software is Year 2000 compliant, it was not purchased specifically
to meet the Company's Year 2000 compliance requirements.
To date, the Company has relied on representations from suppliers that its
information technology systems are Year 2000 compliant. The Company plans to
test its systems for Year 2000 compliance during the second and third quarters
of 1999.
Aside from the Company's telephone system, the Company's other non-information
technology systems (i.e. embedded systems contained in the Company's buildings,
plant, equipment and other infrastructure) do not significantly impact regular
operations of the Company.
Fees from franchisees constitute the Company's principle source of revenue. The
Company is currently assessing the information technology and non-information
technology systems used by its franchisees. The Company is also continuing to
identify third party vendors and service providers whose non-compliant systems
could have an impact on the Company and assessing their compliance status. The
Company expects that these assessments will be completed by the end of the
second quarter of 1999.
The Company expects its total cost to address the Year 2000 issue to be
approximately $250,000, of which approximately $100,000 has been expended
through April 1999. The Company expects to incur the balance of such costs to
complete the compliance plan in 1999. The balance of such costs is expected to
be funded through operating cash flows. The Company has been expensing or
capitalizing the costs to complete the compliance plan in accordance with
appropriate accounting principles. The above described costs do not include
$250,000 for the Pivotal Relationship99 system.
Management does not expect the Year 2000 issue to pose significant operational
or financial problems for the Company. This expectation is based on the
progress the Company has made in upgrading internal information systems and the
fact that it is a service business that does not depend heavily on machinery
that might have embedded technology nor on suppliers of goods for resale. In
addition, the Company's franchisees are in service businesses. Nevertheless,
the Year 2000 issue could have a material impact on the Company's operations
and financial condition in the future in the event the Company or its key
suppliers, such as banks, public utilities or telecommunications services, or a
significant number of the Company's franchisees, are unable to resolve the Year
2000 issue in a timely manner; or if the Company becomes the subject of
litigation or other proceedings regarding any Year 2000-related events. The
amount of potential loss cannot be reasonably estimated at this time.
The Company has not developed contingency plans as of this date. As the Year
2000 compliance program proceeds, contingency plans will be prepared, updated
and implemented as necessary to address the risks identified, including a plan
for a yet to be determined worst case scenario. No contingency plans are being
developed for the availability of key public services and utilities.
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.
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PART II
OTHER INFORMATION
THE DWYER GROUP, INC. AND SUBSIDIARIES
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ITEM 1 - LEGAL PROCEEDINGS
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NONE
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ITEM 2 - CHANGES IN SECURITIES
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(a) NONE
(b) Not applicable.
(c) NONE
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ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
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NONE
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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NONE
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ITEM 5 - OTHER INFORMATION
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NONE
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits:
Financial Data Schedule
(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: May 12, 1999 The Dwyer Group, Inc.
By: /s/ Thomas Buckley
-------------------------------------
Thomas Buckley
Vice President and Chief Financial
Officer
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
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27 Financial Data Schedule