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FORM 10-K/A-3
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED OCTOBER
31, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] for the transition period from
to
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Commission file number: 0-21282
SWISHER INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
NEVADA 56-1541396
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6849 FAIRVIEW ROAD
CHARLOTTE, NORTH CAROLINA 28210
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (704) 364-7707
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to section 12(g) of the Act:
(Title of Class)
COMMON STOCK $.01 PAR VALUE
WARRANTS TO PURCHASE COMMON STOCK
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes_X_ No___
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of the 1,470,182 shares of Common Stock held by
non-affiliates was $12,312,774 as of February 6, 1997. The market value of the
shares was calculated based on a $8.375 closing bid price of such shares on
Nasdaq National Market on such date.
As of January 28, 1997, 1,935,841 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
THE INFORMATION REQUIRED BY PART III OF THIS ANNUAL REPORT IS INCORPORATED BY
REFERENCE TO THE REGISTRANT'S DEFINITIVE PROXY STATEMENT IF FILED WITH THE
COMMISSION ON OR BEFORE FEBRUARY 28, 1997 OR, IF SUCH PROXY STATEMENT IS NOT
FILED, WILL BE FILED WITH THE COMMISSION AS AN AMENDMENT TO THIS FORM 10-K UNDER
COVER OF FORM 10-K/A, NOT LATER THAN FEBRUARY 28, 1997.
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INDEX
Part I
Item 1 Business
Part II
Item 6 Selected Financial Data
Item 7 Management's Discussion and Analysis of Results of
Operations
Item 8 Financial Statements
Part IV Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
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PART I
ITEM 1. BUSINESS
GENERAL
Swisher International, Inc., (the "Company") was organized in 1986 to
offer hygiene services and products to business customers throughout the
country. From 1983 through 1988, Patrick L. Swisher, the Company's founder and
President, operated a hygiene service business in the southeast portion of the
United States through 11 majority-owned corporations. In 1988, the Company
acquired the controlling interest in these 11 corporations from Mr. Swisher and
the minority shareholders. From 1988 through 1990, the Company provided hygiene
services and products to retail business customers through a total of 18
majority-owned subsidiaries. In April 1990, the Company commenced selling its
existing majority-owned subsidiaries as hygiene franchises and initiated a
hygiene franchise sales program in new markets. The Company restructured its
operations in order to achieve (i) faster market expansion and penetration, (ii)
lower capital requirements, (iii) higher income from operations due to higher
margins, (iv) lower overhead resulting from elimination of local
Company-employed managers and (v) greater commitment of management through local
franchise ownership. As a result, the Company's hygiene operations are now
conducted principally through franchises located in the United States and
Canada. The Company has also begun development of international markets, and to
date has entered into master license agreements covering hygiene operations in
the United Kingdom, Ireland and the Caribbean.
In February 1994, the Company began operating a residential maid
service in Charlotte, North Carolina, in order to establish a home-cleaning
franchise program. In September 1994, Swisher Maids, Inc., a wholly-owned
subsidiary of the Company, commenced offering franchises for "Swisher Maids"
businesses, specializing in providing residential maid services. The Company
currently conducts its maid services business through eleven franchises and
certain Company-owned operations.
Effective July 1, 1996, the Company acquired substantially all of the
assets of a franchise business based in Atlanta, Georgia known as "Surface
Doctor." Surface Doctor has been engaged in franchise operations since 1993, and
currently has 117 franchises located principally in the United States and
Canada. Surface Doctor has also entered into master license agreements covering
Brazil, Singapore/Malaysia/Indonesia, and United Kingdom/Ireland.
The Company's operations are presently comprised of the "Hygiene,"
"Swisher Maids" and "Surface Doctor" franchise programs, as well as certain
Company-owned Hygiene and Maids operations. Certain Company-owned Surface Doctor
operations were sold during the first quarter of 1997. (Unless the context
otherwise requires, the term "Company" refers to Swisher International, Inc. and
its eight wholly-owned subsidiaries, Swisher Hygiene Franchise Corporation,
Swisher International of Charlotte, Inc., Swisher International of South
Carolina, Inc., Swisher Maids, Inc., Swisher Hygienic Services, Inc.,
Jacksonville Hygiene, Inc., Surface Doctor, Inc. and F.M.S., Inc.)
HYGIENE OPERATIONS
HYGIENE FRANCHISE SERVICES
The Company's Hygiene services and products are sold principally
through franchises to a broad spectrum of businesses throughout the United
States and Canada, including restaurants, retail stores, manufacturers,
commercial office buildings, health and childcare facilities, schools, military
bases and hotels. The Company operates nationally through 99 Hygiene franchisees
and in portions of North and South Carolina, Florida, and Oklahoma through
Company-owned operations. The Company has also implemented an aggressive
international Hygiene marketing program which is conducted through master
license agreements. To date, the Company has entered into Hygiene master license
agreements covering the United Kingdom, Ireland and the Caribbean.
The Hygiene services initially offered by the Company's majority-owned
subsidiaries consisted of the sanitation and detail cleaning of porcelain
restroom fixtures, including toilets, urinals and wash basins. Because
franchisees generally visit retail business customers every week to ten days to
replenish supplies and perform services, the Company has expanded the services
and products offered by its franchisees to include:
- Sanitation and detail cleaning of porcelain fixtures in
restrooms;
- Installation and replenishment of dispensers for lanolin, soap
and air fresheners;
- Providing hand sanitizing soap and hand sanitizers in kitchens
and restrooms for food services customers;
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- Biologically treating drain lines for food services customers;
- Providing flying insect control systems for use in
restaurants;
- Providing grit soap for car dealerships, tire stores and
garages;
- Biologically treating grease traps in restaurants;
- Providing and servicing air sanitizers in restrooms, waiting
rooms and common areas; and
- Providing toilet tissue, hand towels and other paper products.
Certain services and products provided by the Company's Hygiene
franchisees are a natural extension of the primary services historically offered
by the Company. Other services, such as providing anti-bacterial soap, have been
promoted by the adoption of government regulations requiring restaurants and
food handlers to use anti-bacterial soap to prevent the spread of hepatitis and
other communicable diseases. Yet other services, such as the biological
treatment of grease traps at food services locations, have been viewed by the
Company as an opportunity to provide expanded services at restaurants.
Management believes that the frequency of regularly scheduled service visits by
its franchisees will continue to provide the Company with opportunities to
expand the services and products marketed by its franchisees to retail business
customers.
The Company's Hygiene franchisees market their services and products to
retail business customers based on factors such as enhanced appearance of the
customer's business premises, cost savings, convenience, reliability,
cleanliness and hygiene. The services offered by the Hygiene franchisees also
enable retail businesses to decrease operating costs by reducing pilferage of
supplies, inventory carrying costs, and training expense.
HYGIENE REVENUES
The Company generates revenue through its Hygiene franchise operations
in the form of initial franchise fees, product sales to franchisees, royalties,
service fees, marketing fees and interest.
INITIAL FRANCHISE FEES. On the sale of a Hygiene franchise, the Company
receives an initial franchise fee which is calculated based upon the population
of the territory purchased by the franchisee. The initial franchise fee is paid
for a single franchise within a given geographic territory and is not related to
the number of service offices opened in that territory. For territories in which
the population is 500,000 persons or less, the initial franchise fee is $35,000.
For each incremental increase in population of 500,000 persons, the franchise
fee increases by $10,000. For territories in which the population exceeds
2,000,000 persons, the incremental increase in the initial franchise is $10,000
per 1,000,000 increase in population.
The Company typically finances a significant portion of the initial
Hygiene franchise fee payable by new franchisees and from time to time has
financed 100% of the initial franchise fee payable by an existing franchisee for
expansion of its territory. Since April 1993, the Company has also offered
financial assistance to existing franchisees in the acquisition of competitors
engaged in the hygiene business. Management believes the Company has accelerated
its penetration into new markets by offering financial assistance to qualified
candidates.
Payment of the franchise fee entitles the franchisee to initial
training of key employees and an initial inventory of hygiene products. The
training course has a two-week curriculum, consisting of one week at the
Company's facilities and one week at the franchisee's proposed business
location. Continuing training is provided to franchisees through semi-annual
regional meetings and a yearly national conference. The initial training program
is designed to provide a franchisee with a working understanding of the
day-to-day operations, management and marketing of a hygiene franchise, to
familiarize the franchisee with the services and products offered by the Company
and to demonstrate marketing techniques. The Company maintains a permanent staff
which provides continuing operating and marketing support to its franchisees.
The Company has also devoted substantial effort to the development and updating
of an operations manual which provides operations, management and marketing
guidelines for Swisher franchises.
PRODUCT SALES TO HYGIENE FRANCHISEES. The franchise agreement requires
franchisees to purchase Hygiene products from approved vendors, which allows the
Company to maintain the quality and integrity of the products delivered by
franchisees to the retail business customer. The Company is the primary approved
product vendor at this time. Management believes that through the Company's
volume buying of Hygiene products, the Company provides quality Hygiene products
at competitive prices. Management believes the prices charged by the Company for
its products are competitive with similar quality products produced by others.
The Company subjects all new products to test marketing and field tests at its
own facilities prior to introduction to its franchisees. Products provided by
the Company to its franchisees include, among others,
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cleaning agents, air sanitizers and fresheners, a variety of handsoaps, flying
insect spray, biological drain line and grease trap products and dispensers.
ROYALTIES. The Company receives a royalty of 6% of a franchisee's gross
revenues, as defined in the franchise agreement.
SERVICE FEES. The Company receives a monthly service fee calculated on
a sliding scale based on the franchisee's sales. The service fee ranges from
$500 per month for franchises with annualized sales of up to $50,000 to $1,750
per month for franchises generating sales of up to $200,000. The service fee
increases by $250 per month for each additional $100,000 in annualized sales
over $200,000. The service fee is paid to compensate the Company for services
provided to franchisees, which include:
- Generation of invoices to customers;
- Collection services for accounts receivable;
- Preparation of monthly financial statements and monthly
receivables aging reports;
- Referral of national and regional accounts for which the
Company has obtained approved vendor status; and
- Toll-free phone answering services providing customers with
account information and franchisees with message services.
MARKETING FEES. The Company receives a national marketing fee, used for
marketing and advertising, equal to 2% of each franchisee's gross revenues. The
marketing fees are used to fund national marketing and advertising activities.
An advisory council, which consists of four franchisees who are elected
representatives from the four franchise regions and three senior management
representatives from the Company, is responsible for directing the application
of the national marketing fee. A portion of the national marketing fee is used
to market to multi-location businesses such as fast food franchisors, retailers,
convenience stores and manufacturers. The Company receives 10% of the 2%
marketing and advertising fee for management of the national marketing programs.
INTEREST INCOME. Interest income received by the Company from franchise
operations represents income derived from financing of the initial franchise fee
and purchases of short-term investments.
HYGIENE FRANCHISE DEVELOPMENT. As of October 31, 1996, the Company had
99 Hygiene franchises and certain Company-owned operations conducting business
in 38 states, the District of Columbia and Canada. This compares to 93, 88 and
66 Hygiene franchises as of October 31, 1995, 1994 and 1993, respectively. The
slower growth in 1996 reflects the Company's broad geographic market penetration
and the limited number of major unsold markets.
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Set forth below is information concerning the location of the Hygiene
franchises sold by the Company as of October 31, 1996. The territories below are
identified by the metropolitan or geographic area in which the franchise is
headquartered and do not, in many cases, reflect the boundaries of the
franchised territory.
ALABAMA GEORGIA NEW HAMPSHIRE TENNESSEE
Huntsville Atlanta Ashland Bristol
Mobile Chattanooga
Montgomery ILLINOIS NEW JERSEY Knoxville
Chicago (Metro) Fanwood Memphis
ARIZONA Chicago (Western) Oakhurst Nashville
Phoenix Chicago (Suburban) Rockaway
Tucson TEXAS
INDIANA NEW YORK Austin
ARKANSAS Indianapolis Brewster Dallas
Little Rock(1) Buffalo/Rochester McAllen
KANSAS Long Island San Antonio
CALIFORNIA Kansas City Queens
Beverly Hills UTAH
East Bay Area KENTUCKY NEW MEXICO Salt Lake City
Fresno Louisville Albuquerque
Long Beach VIRGINIA
Mission Viejo LOUISIANA NORTH CAROLINA Norfolk
Redondo Beach New Orleans Greensboro Richmond
Riverside/San Hickory
Bernardino MARYLAND Raleigh WASHINGTON
Sacramento Baltimore Seattle
San Diego OHIO Tacoma
San Francisco MASSACHUSETTS Columbus
San Jose Sterling Cincinnati WEST VIRGINIA
Ventura Plymouth Toledo Beaver
COLORADO MICHIGAN OKLAHOMA WISCONSIN
Denver Detroit Tulsa(2) Madison
Flint Milwaukee
CONNECTICUT Grand Rapids OREGON
South Windsor Kalamazoo Portland ALBERTA, CANADA
Lansing Calgary
DISTRICT OF Rochester Hills PENNSYLVANIA Edmonton
COLUMBIA Central
Washington MINNESOTA Northern ONTARIO, CANADA
Winona Philadelphia Guelph
FLORIDA Pittsburgh Ottawa
Dade County MISSOURI Reading Toronto
Ft. Lauderdale Springfield
Jacksonville(2) St. Louis RHODE ISLAND BRITISH
Orlando North Kingstown COLUMBIA,
Sanibel Island NEBRASKA CANADA
Space Coast(2) Omaha SOUTH CAROLINA Vancouver
Tallahassee/ Columbia
Gainsville NEVADA Greenville SASKATCHEWAN
Tampa Las Vegas Myrtle Beach Saskatoon
Reno(1)
CARIBBEAN(3)
IRELAND(3)
UNITED
KINGDOM(3)
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(1) Represents franchises which have been sold but are not yet operational.
(2) The Jacksonville, Space Coast and Tulsa franchises are currently owned and
operated by the Company.
(3) Represents master license agreement.
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HYGIENE FRANCHISE AGREEMENT
The Company's Hygiene franchise agreement grants the franchisee an
exclusive geographical territory for a ten-year period. The franchise agreement
permits successive five-year renewal terms following expiration of the initial
term if the franchisee is in compliance with the terms of the agreement. The
Company retains a right of first refusal to repurchase each franchise and also
has the right to approve a purchaser of a franchise in the event the Company
does not exercise its right of first refusal. If ownership of a franchise is
transferred, the Company is entitled to receive a fee equal to 10% of the
original purchase price of the franchise.
Prospective Hygiene franchisees are given an opportunity to reserve an
exclusive territory prior to execution of the franchise agreement by providing a
$5,000 deposit to the Company. Following receipt of the deposit, a 30-day
waiting period is imposed by the Company prior to execution of the franchise
agreement to allow the prospective franchisee time to conduct due diligence and
obtain professional advice and to allow the Company time to conduct credit and
background checks. The deposit is applied against the franchise fee in the event
of the purchase of a franchise, or is refunded, less a $500 application fee, in
the event the franchise sale is not completed.
The Hygiene franchise agreement may be terminated by the Company for,
among other things, bankruptcy, insolvency or liquidation of the franchise; a
material misrepresentation by the franchisee; breach of the franchise agreement
or applicable federal, state or local laws; acquisition by the franchisee of an
interest in a competing business; unauthorized use of the Company's services or
products; or the sale, sublicense or assignment of an interest in the franchised
business. The Company also has the right to terminate the franchise agreement in
the event the franchise does not generate at least $100,000 in gross revenues in
the first year of operation. Under certain circumstances, the franchisee may
have an opportunity to cure any alleged default under the franchise agreement.
The franchisee does not have a right to terminate the franchise agreement and is
subject to a three year non-compete agreement following expiration or
termination of the franchise agreement.
The Company estimates that the initial investment to establish a new
Hygiene franchise is between $65,700 and $115,200, allocated as follows:
ESTIMATE ESTIMATED
EXPENSES MINIMUM MAXIMUM
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Initial franchise fee......................... $ 35,000 $ 75,000 (1)
Lease deposits and leasehold improvements..... 1,000 1,400
Equipment..................................... 1,000 1,500
Permits and licenses.......................... 200 500
Insurance..................................... 700 2,000
Deposits ..................................... 300 500
Working capital .............................. 27,500 34,300
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Total......................................... $ 65,700 $115,200
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(1) Represents the highest initial franchise fee charged by the Company.
Working capital includes funds for estimated initial start-up costs,
supplies, salaries during the initial six months of operations and royalties,
service fees and marketing fees to be paid to the Company during the initial six
months of operations. A franchisee may require working capital in excess of
these estimates to sustain operations, depending on such factors as the
geographic distribution of retail business accounts (which impacts the number of
personnel required to service the accounts), the type of retail business
accounts and the frequency of service required, the balance between credit and
C.O.D. customers and local marketing expenses incurred by the franchisee.
COMPANY-OWNED HYGIENE OPERATIONS
The Company's wholly-owned subsidiary, Swisher International of
Charlotte, Inc., is actively engaged in providing Hygiene services and products
in portions of North and South Carolina. In the course of conducting its hygiene
operations, the Company is able to test new products, services, marketing
strategies and other business practices prior to introduction to the
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franchisees. The Charlotte, North Carolina operation is also used by the Company
to provide training to franchisees. The following table sets forth information
concerning the revenues derived from the Company-owned Hygiene operations:
YEAR ENDED OCTOBER 31,
------------------------------------------
1996 1995 1994
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Hygiene revenues....................... $1,672,947 $1,462,332 $878,605
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(1) Figures for 1994 include revenues attributable to (i) the Company's
wholly-owned hygiene operations in Columbia, South Carolina and Augusta,
Georgia, which were sold in July 1994 and (ii) the Austin, Texas franchise,
which was repurchased by the Company in June 1993 and resold in January
1994.
(2) Figure for 1995 includes revenues attributable to (i) the Houston
franchise, which was owned and operated by the Company during the entire
year, and (ii) the Birmingham, Jacksonville, Space Coast and Tulsa
franchises, each of which the Company repurchased, owned and operated for a
portion of the year. The Company continues to own and operate the
Jacksonville, Space Coast and Tulsa franchises.
INTERNATIONAL HYGIENE LICENSE AGREEMENTS
During 1996 the Company implemented an international Hygiene marketing
program. To date, the Company has entered into Master License Agreements
covering the United Kingdom, Ireland and the Caribbean.
The Master License Agreement grants a ten year, exclusive license to
conduct a Swisher Hygiene business using the Company's trademarks, service
marks, procedures and techniques within a specified country or territory. The
licensee has the right to establish its own Hygiene operations or to assign such
rights to one or more sublicensees. The Company retains a right of first refusal
to repurchase the Master License and also has the right to approve any proposed
transfer of the Master License.
The licensee is required to pay an initial license fee which, to date,
has ranged from $60,000 to $250,000. The licensee is also required to pay
minimum monthly royalties which are based upon (i) initial fees paid by
sublicensees and (ii) ongoing revenues attributable to the Hygiene operations of
the licensee and any of its sublicensees.
The licensee is responsible for the selection, training and supervision
of all sublicensees and for ensuring that its operations comply with applicable
government regulations. The licensee is obligated to develop and maintain a
minimum number of company-owned or sublicensed Hygiene businesses, and to make
certain minimum advertising and marketing expenditures. The licensee and all
sublicensees are required to purchase equipment and supplies from the Company or
from vendors approved by the Company. The Company is obligated to provide
initial training and ongoing support directly to the licensee.
The Master License Agreement may be terminated by the Company or by the
licensee upon certain breaches or events of default.
HYGIENE MARKET AND GROWTH STRATEGY
The Company estimates that there are approximately 10 significant
territories in the United States which are not currently served by the Company
or its existing Hygiene franchisees. In order to expand the market for Hygiene
franchises, the Company has developed a Canadian franchise sales program. The
Company sold its first Canadian franchise in Toronto in October 1993, sold three
additional franchises in Canada during the 1994 fiscal year and sold one
additional franchise in Canada in the 1995 fiscal year. The Canadian franchise
sales program is similar to the Company's franchise sales program in the United
States. The Company focuses its franchising activities on selected areas in an
effort to establish multiple franchises within a particular geographic area.
However, the Company has not had extensive experience with international
franchise operations in the past and, accordingly, the Company may be subject to
a number of risks in the development of international franchises.
The Company's Master License program represents the Company's latest
expansion of its Hygiene Market. Given the penetration already achieved by
the Company's domestic Hygiene operations, the Company believes that
international markets offer the greatest growth opportunity for Hygiene
revenues. The Company has sold three Hygiene Master Licenses to date, and
international marketing efforts are expected to increase during 1997.
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The Company expects that its future growth in Hygiene revenues will be
derived from penetration of international markets, increased product sales to
franchisees, expansion of business accounts serviced by franchisees, sale of
additional franchises, and introduction of new products and services. The sale
of new franchises has the potential to generate franchise fees as well as
increase continuing revenues attributable to continuing product sales, royalties
and/or service fees. The Company offers franchises and master licenses directly
through sales personnel located at the Company's headquarters. The Company
solicits franchise and master license sales through advertisements placed in
ENTREPRENEUR and SUCCESS magazines and other business publications. The Company
also places newspaper advertisements in both domestic and international markets
which are targeted by the Company for expansion. Through the Company's efforts,
it and its franchisees have also received publicity in magazines, newspapers and
on television, which management believes enhances the Company's ability to
market new franchises.
SWISHER MAIDS OPERATIONS
SWISHER MAIDS SERVICES
As of October 31, 1996, the Company had eleven Swisher Maids franchises
in operation and Company-owned residential maid services in Charlotte, North
Carolina and Phoenix, Arizona. A Swisher Maids franchisee provides residential
maid services to its customers. A team of house-cleaning professionals is
assigned to each customer's home on a schedule that is set by the customer.
Cleaning services regularly performed include:
Cleaning and sanitizing bathroom fixtures and mirrors;
Cleaning counters, appliance surfaces, floors and sinks in the
kitchen; Vacuuming carpets, hardwood, tile and vinyl; Dusting
baseboards, sills, decor and furnishings; Spot cleaning to
remove fingerprints and smudges; and Other services as
required by the customer.
Franchisees provide all necessary cleaning supplies and equipment,
including backpack vacuums, which allows customers to decrease their household
expenses for such items.
A significant service made available to franchisees and their customers
is the Swisher Maids computerized scheduling system. The Company's research
prior to establishment of the Swisher Maids franchise operations indicated that
potential customers are unable to contact most maid services by telephone. In
order to avoid this problem, each Swisher Maid franchisee is equipped with a
computerized scheduling system that is linked to the Company's central office.
Should a customer call when the franchisee is out of his office, the call will
automatically "roll over" to the central office and be answered by the Company's
central operator. The central office has access to each franchisee's
computerized calendar and can schedule an appointment for the customer on the
franchisee's computer.
SWISHER MAIDS REVENUES
The Company generates revenues from its Swisher Maids franchise
operations in the form of franchise fees, royalties, service fees, marketing
fees and interest income. The first five franchises were sold in October 1994,
and accordingly, the fiscal year ended October 31, 1995 was the first full year
of operations for Swisher Maids franchisees.
INITIAL FRANCHISE FEES. Franchises are granted for a specific
geographic territory, but unlike the Hygiene franchise, a Swisher Maids
franchise entitles the franchisee to operate from a single location within the
specified territory. Each Swisher Maids franchisee may offer and provide
services only to residential customers which are located within its franchised
territory. The initial franchise fee payable to Swisher Maids is $10,000, plus
$1.00 per qualified household within the territory purchased by the franchisee.
A "qualified household" is a household whose minimum annual income is $50,000 or
more, according to the most recent U.S. Census Bureau data available or from
data provided by a generally accepted independent commercial demographic firm.
The Company expects that territories will generally contain not less than 5,000
nor more than 20,000 qualified households. Accordingly, the initial franchise
fee ranges from $15,000 to $30,000. Prospective franchisees may pay a $5,000
deposit to the Company to reserve a specified territory. The balance of the fee
is due upon signing the franchise agreement. The deposit is applied against the
initial franchise fee in the event of the purchase of a franchise, or is
refunded, less a $500 administrative fee, in the event the franchise sale is not
completed. As with its sale of Hygiene franchises, the Company may finance all
or a portion of the initial franchise fee payable by a franchisee.
The franchise fee entitles the franchisee to initial training of two
employees designed to provide a franchisee with a working understanding of the
day-to-day operations, management and marketing of the franchise. The Company
also provides continuing operating and marketing support to its franchisees and
provides its franchisees with an operations manual.
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PRODUCT PURCHASES BY FRANCHISEES. The franchise agreement requires
franchisees to purchase house-cleaning supplies and equipment from approved
vendors, which allows the Company to maintain the quality and integrity of the
products delivered by franchisees to the retail customer. The Company does not
offer products to franchisees and does not receive any fee in connection with
purchases made by franchisees.
ROYALTIES. Swisher Maids receives a royalty, payable weekly, based on a
franchisee's annual gross revenues, as defined in the franchise agreement. The
royalty is 6% of gross revenues up to $300,000; 5% of gross revenues over
$300,000 and up to $400,000; and 4% of gross revenues over $400,000.
SERVICE FEES. The service fee for each franchise is $75 per week during
the first four weeks. Thereafter, the fee increases by $25 every four weeks
until the fee reaches the maximum of $175 per week. The maximum flat fee remains
in place until weekly gross revenues from the franchise reach $9,600;
thereafter, the service fee is 2% of gross revenues. The service fee is paid to
compensate the Company for certain services provided to franchisees, which
include telephone answering services for purposes of scheduling estimates for
potential customers. The Company may also provide management support (including
hiring, recruiting, training and managing) for additional fees specified from
time to time.
MARKETING FEES. The Company has established a marketing fund used for
marketing and advertising for Swisher Maids franchises. Each franchisee must pay
a fee equal to 2% of its gross revenues into the fund. This fee is in addition
to the minimum local advertising expenditure required of each Swisher Maids
franchisee in the amount of $2,000 per month. The Company retains 10% of the
marketing fees as compensation for administrative and overhead expense incurred
in managing the marketing and advertising activities.
SWISHER MAIDS FRANCHISE DEVELOPMENT. As of October 31, 1996, the
Company had eleven franchises and Company-owned operations in Charlotte, North
Carolina and Phoenix, Arizona. This compares to 19, 5 and 0 Swisher Maids
franchises as of October 31, 1995, 1994 and 1993. The decline experienced in
1996 reflects the consolidation of certain franchise markets and the Company's
intentions to continue Swisher Maids operations at their existing level for the
immediate future.
SWISHER MAIDS FRANCHISE AGREEMENT
Swisher Maids franchisees are granted a sublicense to use the "Swisher
Maids" service mark and associated proprietary names and marks in an exclusive
franchised territory. Franchisees have the right to operate their business from
a single location within the territory for a five year term. The term of the
agreement may be renewed provided, among other conditions, the franchisee has
been, and is, in compliance with the terms of the agreement and pays Swisher
Maids a renewal fee equal to 10% of the initial franchise fee then being charged
for a new Swisher Maids franchise.
Other terms and conditions of the franchise agreement, including the
right of first refusal to repurchase a franchise, the right to approve a
transfer and receive a transfer fee, and the termination provisions, are similar
to those contained in the Company's Hygiene franchise agreement, as described
above. However, unlike the Hygiene franchise agreements, (i) the Company cannot
terminate the Swisher Maids franchise agreement for failure of the franchisee to
generate any specific level of revenue and (ii) the franchisee is subject to a
two year non-compete following expiration or termination of the franchise
agreement.
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11
The Company estimates that the initial investment to establish a new
Swisher Maids franchise ranges from approximately $24,200 to $52,100, allocated
as follows:
ESTIMATED ESTIMATED
EXPENSES MINIMUM MAXIMUM
----------------------------------------------- --------- ---------
Initial franchise fee.......................... $ 15,000 $ 30,000
Lease deposits and leasehold improvements...... 1,700 4,500
Equipment...................................... 200 1,000
Permits and licenses........................... 200 300
Insurance(1)................................... 500 2,000
Automobile(2).................................. 300 400
Computers(3)................................... 0 1,900
Training expense............................... 0 500
Advertising(4)................................. 4,000 5,000
Deposits....................................... 300 500
Working capital................................ 2,000 6,000
--------- ---------
Total.......................................... $ 24,200 $ 52,100
========= =========
- --------------------------
(1) One year of liability coverage, including automobile insurance. Does not
include bonds for employees or workers compensation insurance.
(2) Franchisees must purchase or lease at least one vehicle in accordance with
specifications.
(3) Required for telephone answering services and accounting
software.
(4) Includes $2,000 for grand opening advertising and one month of the
required $2,000 monthly fee.
A franchisee may require working capital in excess of these estimates
to sustain operations, depending on such factors as whether the business is
owner- operated, the rate of growth of the business, the size of the territory,
the franchisee's business and management skill, economic conditions, competition
in the territory and the quality of the franchisee's customer service.
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12
COMPANY-OWNED SWISHER MAIDS OPERATIONS
The following table sets forth information concerning the revenues
derived from Company-owned Swisher Maids operations:
YEAR ENDED OCTOBER 31,
-------------------------------------------
1996 1995 1994
-------- -------- --------
Swisher Maids.......................... $855,181 $313,253 $150,405
SWISHER MAIDS MARKET AND CONSOLIDATION STRATEGY
Management believes the aging of the Baby Boom generation and the
increase in dual income families have combined to make residential maid service
a growing industry. Various sources estimate that over 70% of working-age women
in America are employed outside the home, often times as part of a dual income
family with small children. Women in these households typically have limited
time to clean their homes, but do have sufficient income to contract for maid
service. The Company anticipates that this market will continue to grow.
The Company believes that strong demand exists for residential maid
services. In order to strengthen its Swisher Maids operations, the Company has
taken steps to expand the territories of most of its franchisees. In particular,
the Company has repurchased a total of four Swisher Maids franchises, of which
two have been resold and two are currently owned and operated by the Company.
The Company intends to continue its Swisher Maids operations at their existing
levels for the immediate future.
SURFACE DOCTOR OPERATIONS
SURFACE DOCTOR SERVICES
The Company acquired the Surface Doctor franchise operations as of July
1, 1996, from Professional Carpet Systems, Inc. (the "Seller"). The purchased
assets consisted of all of Seller's rights under Surface Doctor franchise
agreements and all trademarks, and service marks, accounts and notes receivable,
inventories and equipment relating to the Surface Doctor operations.
Surface Doctor franchise operations were initiated by the Seller in
1994. As of the Company's acquisition of Surface Doctor, there were
approximately 92 domestic and 9 foreign Surface Doctor franchisees. The Company
began to offer Surface Doctor franchises in August 1996, and there are currently
approximately 117 domestic and foreign Surface Doctor franchises. Surface Doctor
franchises offer mobile, on-location kitchen and bath restoration services,
particularly with respect to cabinets, counter tops, and fixtures. Surface
Doctor restoration services offer customers a low-cost alternative to the
replacement of laminate, porcelain, fiberglass, tile, cultured marble, metal and
related surfaces. Restoration services are typically marketed to homeowners,
hotels, apartment complexes, office and industrial facilities, appliance rental
companies, and managers of residential and commercial properties.
SURFACE DOCTOR REVENUES
The Company generates revenue through its Surface Doctor franchise
operations in the form of initial franchise fees, product sales to franchisees,
royalties, and marketing fees.
INITIAL FRANCHISE FEES. On the sale of a Surface Doctor franchise, the
Company receives an initial franchise fee of $10,800 for each Designated
Marketing Area ("DMA"). A DMA is defined as a single county, parish or similar
geographic area containing at least 100,000 residents. Each franchisee has the
non-exclusive right to use the Surface Doctor names, marks and business methods
in the DMA. Within a DMA, the Company may not sell more than one Surface Doctor
franchise for each 100,000 residents.
Payment of the franchise fee entitles the franchisee to initial
training of key employees. The training course has a two-week curriculum of
classroom and hands-on training which is conducted at the Company's facilities.
Continuing training is provided to franchisees through periodic meetings and
conferences. The initial training program is designed to provide a franchisee
with a working understanding of the management and marketing of a Surface Doctor
franchise and to familiarize the
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13
franchisee with the refinishing and restoration services and products offered by
the Company. The Company maintains a permanent staff which provides continuing
operating and marketing support to its franchisees.
PRODUCT SALES TO SURFACE DOCTOR FRANCHISEES. The franchise agreement
requires franchisees to purchase Surface Doctor products from approved vendors,
which allows the Company to maintain the quality and integrity of the products
delivered by franchisees to the retail business customer. The Company is the
sole approved product vendor at this time. Management believes that through
volume purchasing, the Company provides quality products at competitive prices.
Products provided by the Company to its franchisees include, tools and
equipment, cleaning agents, safety equipment, supplies and marketing and
promotional materials.
ROYALTIES. Pursuant to the Company's current franchise agreement, the
Company receives a royalty on each franchisee's gross revenues. Royalties are
calculated on a sliding scale based on the franchisee's revenues, ranging from
4% to 6% of gross revenues. The Company is entitled to a minimum monthly royalty
of $200. Substantially all of the franchisees as of October 31, 1996 are
governed by the prior Surface Doctor franchise agreement, which requires a $175
monthly royalty.
SERVICE FEES. The Company receives a monthly service fee of 2% of
monthly gross revenues. The service fee is paid to compensate the Company for
services provided to franchisees, which include:
Generation of invoices to customers;
Collection services for accounts receivable;
Preparation of monthly financial statements and monthly
receivables aging reports; and
Toll-free phone answering services providing customers with
account information and franchisees with message services.
MARKETING FEES. Pursuant to the current franchise agreement, the
Company receives a monthly marketing fee equal to 2% of each franchisee's gross
revenues. The marketing fees are used to fund marketing and advertising
activities and to fund various market research and development activities. The
Company has the authority and responsibility for directing the application of
the marketing fee. Substantially all of the franchisees as of October 31, 1996
are governed by the prior franchise agreement, which requires a $25 monthly
marketing fee.
SURFACE DOCTOR FRANCHISE DEVELOPMENT. As of October 31, 1996, the
Company had approximately 117 Surface Doctor franchises conducting business in
the United States and in certain foreign countries with one Company-owned
operation based in Atlanta. The Atlanta operation was sold to a former director
of the Company in the first quarter of 1997.
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14
Set forth below is information concerning the location of Surface
Doctor franchises existing as of October 31, 1996. The territories below are
identified by the metropolitan or geographic areas in which the franchise is
headquartered and do not, in many cases, reflected the boundaries of the
franchised territory.
ALABAMA ILLINOIS NEW YORK WASHINGTON
Birmingham Chicago Queens Bainbridge Island
Tuscaloosa Lake County Staten Island
Suffolk County WEST VIRGINIA
ALASKA INDIANA Walden Charleston
Anchorage Indianapolis Westchester County Morgantown
Parkersburg
ARIZONA IOWA NORTH CAROLINA
Phoenix Council Bluffs Charlotte WISCONSIN
Tucson Davenport Kitty Hawk Green Bay
Sioux City Milwaukee
ARKANSAS Des Moines OHIO
Hot Spring Cleveland WYOMING
KANSAS Columbus Casper
CALIFORNIA Kansas City Marietta Upton
Los Angeles Topeka Toledo
Orange County BRAZIL
KENTUCKY OKLAHOMA San Paulo
COLORADO Paducah Oklahoma City
Colorado Springs Tulsa BRITISH COLUMBIA,
Denver LOUISIANA CANADA
Fort Collins Jefferson Parrish OREGON Campbell River
Leadville New Orleans Portland
Stamboat Springs ONTARIO, CANADA
MARYLAND PENNSYLVANIA Amherstview
CONNECTICUT Easton Pittsburgh Carrying Place
Hartford Ottowa
New Haven MICHIGAN SOUTH CAROLINA Wiarton
Grand Rapids Charleston
FLORIDA Muskegon Fort Mill NEWFOUNDLAND,
Destin Greenville CANADA
Indian Harbor MINNESOTA Spartanburg Mount Pearl
Jacksonville Minneapolis
Orlando Rochester SOUTH DAKOTA NOVA SCOTIA,
Palm Harbor/ St. Cloud Sioux Falls CANADA
St. Petersburg St. Paul Dartmouth
Pensacola TENNESSEE Halifax
MISSISSIPPI Chattanooga
GEORGIA Gulfport/Biloxi Knoxville SINGAPORE/
Atlanta Nashville INDONESIA/
Augusta MISSOURI MALAYSIA
Columbus Kansas City TEXAS
Decatur Springfield El Paso
Jessup Houston
Kennesaw NEBRASKA Lake Jackson
Savannah Gibbon Midland/Odessa
Tucker Plano
NEVADA
HAWAII Reno VERMONT
Honolulu Burlington
NEW JERSEY
IDAHO East Brunswick VIRGINIA
Boise Alexandria/Arlington
NEW MEXICO Fairfax County
Hobbs Hampton
Richmond
Virginia Beach
- 14 -
15
SURFACE DOCTOR FRANCHISE AGREEMENT
The Company's Surface Doctor franchise agreement grants the franchisee
a nonexclusive geographical territory for a ten-year period. The franchise
agreement permits successive renewal terms following expiration of the initial
term if the franchisee is in compliance with the terms of the agreement.
The Surface Doctor franchise agreement may be terminated by the Company
for, among other things, bankruptcy, insolvency or abandonment of the
franchisee; a material misrepresentation by the franchisee; breach of the
franchise agreement or applicable federal, state or local laws; unauthorized use
of the Company's services or products; or the unauthorized sale or assignment of
an interest in the franchised business. Under certain circumstances, the
franchisee may have an opportunity to cure any alleged default under the
franchise agreement. The franchisee has the right to terminate the franchise
agreement upon 60 days' prior notice.
The Company estimates that the initial investment to establish a new
Surface Doctor franchise is between $36,000 and $41,900 allocated as follows:
ESTIMATED ESTIMATED
EXPENSES MINIMUM MAXIMUM
------------------------------------------------- --------- ---------
Initial franchise fee............................ $ 10,800 $ 10,800
Training expenses................................ 1,000 3,000
Equipment and Inventory.......................... 4,000 4,000
Insurance........................................ 1,300 2,200
Working capital.................................. 1,000 2,000
Service van...................................... 17,000 19,000
Miscellaneous.................................... 900 900
--------- --------
Total............................................ $ 36,000 $ 41,900
========= ========
Working capital includes funds for estimated start-up costs during the
initial three months of operations, and assumes the franchisee operates the
business himself and thereby avoids payroll costs.
COMPANY-OWNED SURFACE DOCTOR OPERATIONS
The Company acquired Surface Doctor effective July 1, 1996.
Company-owned Surface Doctor operations generated revenues of $84,427 from July
1, 1996 through October 31, 1996.
SURFACE DOCTOR MARKET AND GROWTH STRATEGY
The Company expects that future growth of Surface Doctor operations
will be derived from sale of additional franchises, increased product sales to
franchisees, and introduction of new products and services. The sale of new
franchises has the potential to generate franchise fees as well as increase
revenues attributable to product sales, royalties and service fees. Unlike the
Company's Hygiene operations, which have already achieved substantial market
coverage in the United States, substantial growth opportunities continue to
exist for Surface Doctor in the United States. Although there are currently in
excess of 100 Surface Doctor franchises in the United States, such franchises
are granted on a nonexclusive basis with a population requirement of just
100,000 people per franchise. As a result, the Company expects that the sale of
Surface Doctor franchises in the United States will exceed sales of both Hygiene
and Swisher Maids franchises. The Company also believes that a demand exists for
Surface Doctor franchises in foreign countries, as there are currently
franchises located in Canada, Brazil and Singapore/Indonesia/Malaysia. Since
August 1996, the Company has marketed Surface Doctor franchises directly through
sales personnel located at the Company's headquarters, through advertisements
placed in magazines and other business publications. The Company also places
newspaper advertisements in select markets which are targeted by the Company for
expansion.
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PROPRIETARY RIGHTS
The "SWISHER," "Swisher Maids," "S" design and "Surface Doctor" marks
have been registered as service marks on the principal register of the United
States Patent and Trademark Office. The "Surface Doctor" mark is owned by the
prior owner of the Surface Doctor operations, which is obligated to assign the
mark to the Company. Management of the Company also believes the Company has
developed proprietary rights in the Swisher trade name and in associated common
law trademarks including "Sanitized by Swisher," "Swisher System" and "Swisher
Hygiene." All of the Company's service marks, trade names and common law
trademarks are licensed to franchisees under franchise agreement provisions
strictly regulating their use. The Company has applied for registration of its
marks in Europe, Canada, Brazil, Japan, Jordan, Mexico, Oman, Saudi Arabia and
South Africa, and will make applications in other countries as the expansion of
its operations may require.
The Company intends to file all required renewal applications and to
take other steps reasonably necessary to maintain the integrity of its services
marks, trade names and other proprietary names and marks against unauthorized
use. Failure to defend and protect such service marks and other proprietary
names and marks could adversely affect the Company's sales of franchises and
continuing operations. The Company knows of no currently infringing uses.
COMPETITION
The Company believes that the markets for its Hygiene, Maids and
Surface Doctor services are highly fragmented. The barriers to entry in each
market are low and, accordingly, competition is intense. The vast majority of
the Company's Hygiene competitors are small, locally-owned janitorial or hygiene
service firms, as well as a number of regional hygiene competitors based in
Florida, Texas and Missouri, while Maid Service competitors consist generally of
local independent operators and a small number of national or regional
companies, including franchise operators. Surface Doctor competitors consist
primarily of providers of traditional remodeling services, as well as small
operators who offer certain of the refinishing services which are provided by
Surface Doctor franchises.
The success of the Company depends in great part on the operating
performance of its Hygiene, Swisher Maids and Surface Doctor franchisees and
their ability to increase market penetration and establish name awareness. The
Company believes that the principal competitive factors in the Hygiene, Swisher
Maids and Surface Doctor industries are quality and timeliness of services,
price, convenience and the mix of services offered. Management believes that
both Hygiene and Surface Doctor franchises compete effectively on the basis of
price, convenience, quality and timeliness of service. Although Swisher Maids
franchises have, for a variety of reasons, competed less favorably in the market
for residential maid services, the Company believes that the recent
consolidation of certain Maids franchises has strengthened the competitive
position of the Company's Maids operations. There nevertheless can be no
assurance that the Company and its franchisees will be able to compete
successfully in their respective markets.
REGULATION
The Company is subject to Federal Trade Commission ("FTC") regulation
and state laws which regulate the offering and sale of franchises. The Company
is also subject to a number of state laws which regulate substantive aspects of
the franchise/franchisee relationship, such as business opportunity laws. The
FTC's Trade Regulation Rule on Franchising (the "FTC Rule") requires the Company
to furnish all prospective franchisees with a franchise offering circular
containing information prescribed by the FTC Rule.
Several states regulate the offer and sale of franchises by requiring
both disclosure to prospective franchisees and, in almost all cases,
registration of the franchise offering. Certain states also regulate the
franchise relationship by requiring that the franchisor deal with its
franchisees in good faith, prohibit interference with the right of free
association among franchisees, limit the imposition of standards of performance
on a franchisee, and regulate discrimination among franchisees in charges,
royalties and fees. Such laws also restrict a franchisor in the termination of a
franchise agreement by, for example, requiring "good cause" to exist as a basis
for the termination, advance notice to the franchisee of the termination, an
opportunity to cure and an obligation to repurchase inventory or pay other
compensation. These provisions have not had a material effect on the Company's
operations.
Although the Company is not aware of any pending franchise legislation
which is likely to affect its operations, there can be no assurance that future
franchise legislation will not impose additional requirements or expenses on the
Company's business. The Company believes that its operations are in compliance
with the FTC Rule and state franchise laws. The Company is presently authorized
to sell Hygiene franchises in 47 states, Surface Doctor franchises in 50 states,
and Swisher Maid franchises in 39 states.
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17
The Company may also be subject to government regulation concerning the
offer and sale of licenses and franchises in foreign countries. However, by
offering a master franchise or master license covering an entire country, the
Company expects to minimize the extent to which its international operations
will be governed by the laws of foreign jurisdictions. The Company's master
licensee or master franchisee will, however, be required to comply with the laws
and regulations, if any, governing the sale of franchises within its country or
territory. Government regulations in foreign jurisdictions may, therefore, slow
the development of international franchise operations.
The Company is also subject to the Fair Labor Standards Act, which
governs such matters as minimum wages, overtime and other working conditions. A
significant number of the personnel employed by the Company are paid at rates
related to the federal minimum wage and, accordingly, increases in the minimum
wage will increase the Company's labor costs.
Federal and state environmental regulations have not had a material
adverse effect on the Company's operations.
EMPLOYEES
The Company employed approximately 110 persons at February 1, 1997.
Approximately 40 persons are employed in the Company's franchise operations, and
approximately 70 persons are employed in the Company-owned Hygiene and Swisher
Maids operations. The Company's employees are not covered by any collective
bargaining agreements. Management believes that its relations with employees are
satisfactory.
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18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information is qualified by reference
to, and should be read in conjunction with, the Consolidated Financial
Statements, related Notes to Consolidated Financial Statements and independent
auditors' report, and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained elsewhere herein.
STATEMENT OF OPERATIONS:
FOR THE YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Revenues $ 10,298 $ 7,963 $ 5,978 $ 4,769 $ 3,799
=========== =========== =========== =========== ===========
Expenses:
Selling, general and administrative
expenses $ 4,823 $ 3,124 $ 2,891 $ 1,988 $ 1,435
Cost of product sales to franchisees 3,067 2,104 1,376 930 554
Costs related to Company-owned 1,433 1,521 785 852 1,074
hygiene operations
Costs related to Company-owned maids 991 430 379 -- --
operations
Costs related to Company-owned Surface 117 -- -- -- --
Doctor franchises Interest 244 162 5 11 23
----------- ----------- ----------- ----------- -----------
$ 10,675 $ 7,341 $ 5,436 $ 3,781 $ 3,086
----------- ----------- ----------- ----------- -----------
Income before other revenues (expenses) $ (377) $ 622 $ 542 $ 988 $ 714
Other revenues (expenses)
Gain on sale of Company-owned
hygiene operations $ 289 -- -- -- 87
Minority interest -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Income before taxes $ (88) $ 622 $ 542 $ 988 $ 800
Income tax expense (66) (246) (209) (370) (328)
Net income $ (154) $ 376 $ 333 $ 618 $ 472
----------- ----------- ----------- ----------- -----------
Net income per common share $ (0.09) $ 0.20 $ 0.17 $ 0.37 $ 0.39
=========== =========== =========== =========== ===========
Weighted average number of shares
outstanding 1,797,319 1,904,258 2,014,932 1,686,436 1,224,655
=========== =========== =========== =========== ===========
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BALANCE SHEET DATA:
OCTOBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(IN THOUSANDS)
Working Capital $1,417 $2,144 $2,556 $3,484 $ 228
Total assets 9,592 7,958 5,959 5,344 1,163
Long-term debt 859 1,438 113 2 7
Total liabilities 4,256 3,474 1,007 710 644
Stockholder's equity 5,336 4,485 4,952 4,634 520
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND SELECTED FINANCIAL DATA
APPEARING ELSEWHERE IN THIS ANNUAL REPORT.
The Company operates in four principal business segments: Hygiene,
Maids and Surface Doctor services conducted through franchise operations which
generate franchise sales and annuity revenues (i.e., services fees, product
sales, royalties and marketing fees), and each of the Company's wholly-owned
Hygiene, Swisher Maids and Surface Doctor operations. The Company acquired
Surface Doctor effective July 1, 1996, and the Company's financial statements
reflect the Surface Doctor franchise operations and certain Company-owned
Surface Doctor operations for the four month period ended October 31, 1996.
Company-owned Surface Doctor operations were sold to a franchisee in the first
quarter of the 1997 fiscal year. In February 1994, the Company's wholly-owned
Swisher Maids subsidiary began operating in Charlotte, North Carolina in
preparation for initiating the Maid Service franchise marketing program. In
October 1994, the Company sold its first Swisher Maids franchises.
Prior to and during a majority of the year ended October 31, 1990, the
Company derived its revenues exclusively from Company-owned Hygiene operations.
During the 1990 Fiscal Year, the Company commenced selling its 18 existing
majority-owned Hygiene subsidiaries as franchises in their existing markets and
began selling other franchises in new markets. This repositioning of the Company
was a direct result of management's determination in late 1989 that an
opportunity existed to accelerate the Company's penetration of the national
Hygiene market and increase its profitability through a program of selling
franchises. As the Company implemented its plan to operate as a franchise
business, including the sale of majority-owned subsidiaries as franchises,
revenues from Company-owned Hygiene operations declined, both in terms of
absolute dollars and as a percentage of total revenues. At October 31, 1993, the
Company had substantially completed its repositioning to a franchise business as
a result of the sale as franchises of all of its majority-owned subsidiaries and
had commenced an international franchise sales program. The Company nevertheless
continues to maintain Company-owned Hygiene operations servicing portions of
North and South Carolina, Florida and Oklahoma. In addition, the Company
repurchased and currently owns and operates Hygiene franchises located in
Jacksonville and Space Coast, Florida and Tulsa, Oklahoma. The Company also
continues to operate a Swisher Maids business in portions of Charlotte, North
Carolina.
Management's decision to reposition the Company has resulted in
substantial increases in revenues from franchise operations since the fiscal
year ended October 31, 1991. Revenues from franchise operations, including
franchise sales, product sales, royalties, service fees, marketing fees and
interest income, have increased consistently from $1,412,000 in the 1991 Fiscal
Year to $7,646,000 in the 1996 Fiscal Year. The Company experienced a decrease
in net income during fiscal 1994, due to the cost of expanding the Company's
infrastructure to support its present and future growth in Hygiene services and
products. Net income increased during fiscal 1995 due largely to the increase in
Hygiene franchise revenues, particularly revenues attributable to product sales
and royalties. From April 1993 to October 1996, the total number of Swisher
Hygiene and Maid franchises had grown from 46 to 110; also at October 31, 1996,
the Company had 117 Surface Doctor franchises.
Assets held for sale consist of assets purchased by the Company from
certain franchisees who failed to comply with the terms of their franchise
agreements. The Company intends to sell such assets as soon as possible. Notes
receivable primarily consist of all or a portion of the initial franchise fees
financed by the Company. The notes are collateralized by the franchises' assets
and, in some cases, are personally guaranteed by the franchisees. Notes
receivable were $2,899,000 and $2,729,000 as of October 31, 1996 and 1995,
respectively. Goodwill includes the excess of acquisition costs over fair value
of the net assets acquired in the Surface Doctor transaction, and is being
amortized over a 20 year period. During the 1996 Fiscal Year the Company
initiated certain international activities. In particular, the Company began
offering Hygiene master licenses and
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20
Surface Doctor franchises in certain foreign markets. The Company's
international operations generated revenues of $256,000 during the 1996 Fiscal
Year. (See Consolidated Financial Statements.)
The following table sets forth the percentage relationship to total
revenues or total expenses, as the case may be, of certain items included in the
Company's statement of operations and notes thereto for the periods indicated.
YEAR ENDED OCTOBER
-------------------------------------
1996 1995 1994
------ ------ ------
Revenues:
Product sales 31.0% 29.6% 26.1%
Service fees 15.7% 17.4% 16.6%
Royalties 15.4% 15.0% 13.5%
Marketing fees 0.4% 0.6% 0.4%
Initial franchise fees - hygiene 4.0% 7.4% 19.6%
Initial franchise fees - maids (0.4)% 4.4% 0.5%
Initial franchise fees - Surface Doctor 3.3% -- --
Company-owned hygiene operations 15.8% 18.4% 14.7%
Company-owned maids operations 8.1% 3.9% 2.5%
Company-owned Surface Doctor operations 0.8% -- --
Interest income 2.7% 2.7% 1.6%
Sale of customer lists -- -- 1.9%
Gain on sale of Company-owned hygiene 2.7% -- 2.0%
operations
Other income 0.4% 0.6% 0.6%
----- ----- -----
Total Revenues 100.0% 100.0% 100.0%
Expenses:
Selling, general and administrative expenses 45.2% 42.6% 53.2%
Cost of product sales 28.7% 28.7% 25.3%
Company-owned hygiene operations 13.4% 20.7% 14.4%
Company-owned maids operations 9.3% 5.8% 7.0%
Company-owned Surface Doctor operations 1.1% -- --
Interest expense 2.3% 2.2% 0.1%
------ ------ ------
Total Expenses 100.0% 100.0% 100.0%
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED OCTOBER 31, 1996 AND OCTOBER 31, 1995.
Total revenues increased by approximately 33% from $7,963,000 in the
1995 Fiscal Year to $10,586,000 in the 1996 Fiscal Year. The increase was due
primarily to an increase in annuity revenues (consisting of product sales,
service fees, royalties and marketing fees), which totaled $6,621,000 in the
1996 Fiscal Year as compared to $4,981,000 in the 1995 Fiscal Year. The increase
in annuity revenues reflects the acquisition of Surface Doctor effective July 1,
1996, a 39% increase in product sales and the growth in Hygiene franchise
operations. Growth in total revenues was also due to a combined 42% increase in
revenues attributable to Company-owned Hygiene and Maids operations, as well as
the addition of Company-owned Surface Doctor operations. Initial franchise sales
for both Hygiene and Maids declined during Fiscal 1996 reflecting the broad
geographic penetration achieved by Hygiene franchises and the Company's decision
to maintain existing Swisher Maids operations at their existing level.
Consistent with the expansion of the Company's operations, total
expenses increased by approximately 45% from $7,341,000 in the 1995 Fiscal Year
to $10,675,000 in the 1996 Fiscal Year. In particular, selling, general and
administrative expenses increased by $1,699,000 from $3,124,000 in the 1995
Fiscal Year to $4,823,000 in the 1996 Fiscal Year, and cost of product sales
increased by $963,000 from $2,104,000 in the 1995 Fiscal Year to $3,067,000 in
the 1996 Fiscal Year.
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21
Approximately $439,000, or 13.2% of the increase in total expenses, was
attributable to a write-down of certain Company assets and acquisition and
reporting expenses associated with Surface Doctor. These expenses accounted for
7% of the increase in selling, general and administrative expenses and 24% of
the increase in Company-owned Maids operations expenses. (In addition, a $41,000
tax expense provision was incurred to allow for an adjustment of the deferred
tax liabilities.)
As a result of the foregoing, income before taxes decreased from
$622,000 in the 1995 Fiscal Year to a loss of ($88,000) in the 1996 Fiscal Year.
COMPARISON OF YEARS ENDED OCTOBER 31, 1995 AND OCTOBER 31, 1994.
Total revenues increased by approximately 33% from $5,978,000 in the
1994 Fiscal Year to $7,963,000 in the 1995 Fiscal Year. The increase in revenues
was due primarily to an increase in the Company's annuity revenues (consisting
of product sales, service fees, royalties and marketing fees), which totaled
$4,981,000 in the 1995 Fiscal Year as compared to $3,382,000 in the 1994 Fiscal
Year. The increase in annuity revenues reflects the overall growth in the
Company's franchise operations. The growth in total revenues was also due to
increases in Swisher Maids franchise fees and revenues from both Company-owned
hygiene and maids operations. Swisher Maids franchise fees increased to $347,000
during the 1995 Fiscal Year as compared to $30,000 in the 1994 Fiscal Year; such
increase was due to the fact that the program was established in the 1994 Fiscal
Year and 1995 represented the Company's first complete year of offering Swisher
Maids franchises. Revenue from Company-owned hygiene and maids operations were
$1,462,000 and $313,000 during the 1995 Fiscal Year, respectively, which
represent increases of 66% and 108% over 1994 revenues. The increase in revenue
from Company-owned hygiene operations reflects the Company's repurchase of four
franchises during 1995 and its operation of such franchises for a portion of the
year. The Company's hygiene franchise fees declined from $1,173,000 in the 1994
Fiscal Year to $587,000 in the 1995 Fiscal Year. The decline in hygiene
franchise fees is attributable to the market penetration already achieved by the
hygiene franchise program and the reduced number of markets available for sale.
Total expenses increased by approximately 35% from $5,436,000 in the
1994 Fiscal Year to $7,341,000 in the 1995 Fiscal Year. Selling, general and
administrative expenses increased by approximately 8% from $2,891,000 in the
1994 Fiscal Year to $3,124,000 in the 1995 Fiscal Year.
Income before taxes increased by approximately 15% from $542,000 in the
1994 Fiscal Year to $622,000 in the 1995 Fiscal Year. The Company's income tax
expense increased by approximately 18% from $209,000 in the 1994 Fiscal Year to
$246,000 in the 1995 Fiscal Year, resulting in net income increasing by
approximately 13% from $333,000 in the 1994 Fiscal Year to $376,000 in the 1995
Fiscal Year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its growth through cash from
operations. In addition, the Company used the proceeds of a public offering
completed in April 1993 to finance the expansion of its franchise system.
During the 1996 Fiscal Year, net cash provided by operations was
$734,000 and net cash used by changes in investing and financing activities was
($65,000). Cash provided by financing activities was $210,000.
The Company had working capital of $1,417,000 at October 31, 1996 as
compared to working capital of $2,144,000 at October 31, 1995. Excluding the
acquisition of the Surface Doctor division, the change in working capital was
due primarily to an $879,000 increase in cash and cash equivalents and a
$536,000 increase in accounts receivable, which were offset by increases in
certain current liabilities, including a $376,000 increase in borrowings under
the Company's line-of-credit and a $710,000 increase in accounts payable. As of
October 31, 1996, the Company's balance of cash, cash equivalents and restricted
cash was $2,070,000 as compared to $1,630,000 at October 31, 1995. Net accounts
receivable from franchisees were $1,382,000 at October 31, 1996, an increase of
$239,000 as compared to October 31, 1995. The current portion of notes
receivable decreased from $762,000 at October 31, 1995 to $616,000 at October
31, 1996. The current portion of notes receivable from related parties and
advances to officers totaled $54,000 at October 31, 1996 as compared to $46,000
at October 31, 1995.
At October 31, 1996, other assets consisted principally of notes
receivable in the amount of $2,284,000, assets held for sale in the amount of
$621,000, and goodwill (net of amortization) of $704,000. Notes receivable are
primarily comprised of notes executed by franchisees in payment of initial
franchise fees which are due beyond the ensuing year, while the assets held for
sale consist of repurchased franchise assets which are expected to be resold by
the Company.
The Company's total current liabilities were $3,396,000 at October 31,
1996, an increase of $1,409,000 over total current liabilities of $1,987,000 at
October 31, 1995. The increase in current liabilities was comprised primarily of
a $710,000
- 21 -
22
increase in accounts payable and a $376,000 increase in borrowings under the
Company's line-of-credit. The Company's long-term debt was $859,000 at October
31, 1996, a decrease of $579,000 over long-term debt of $1,438,000 at October
31, 1995.
The Company's material commitments at October 31, 1996 consisted
primarily of office facility, equipment and vehicle leases in varying amounts
through March 2000.
INFLATION
The Company does not believe that inflation will have a material impact
on the Company's future operations.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act
and are subject to the safe harbors created thereby. These forward-looking
statements include the plans and objectives of management for future operations,
including plans and objectives relating to (i) the continued expansion of the
Company's Hygiene, Swisher Maids and Surface Doctor franchise programs, (ii) the
introduction of new products to be sold to franchisees, (iii) the continued
successful operation of franchised businesses by Hygiene, Surface Doctor and
Swisher Maids franchisees, (iv) successful collection of the Company's notes
receivable, particularly those executed by franchisees in the payment of initial
franchise fees, (iv) the Company's ability to re-sell certain Hygiene businesses
which have been repurchased from franchisees and (v) the Company's ability to
expand into international and new domestic markets. The forward-looking
statements included herein are based on current expectations that involve a
number of risks and uncertainties. These forward- looking statements were based
on assumptions that the Company would continue to develop and introduce new
products on a timely basis, that competitive conditions within the Company's
markets would not change materially or adversely, that demand for the Company's
Hygiene, Swisher Maids and Surface Doctor franchises would remain strong, and
that there would be no material adverse change in the Company's operations or
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking information will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements are included on pages
F-1 to F-24.
- 22 -
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) CONSOLIDATED FINANCIAL STATEMENTS.
Independent Auditor's Report of Scharf Pera & Co. F-1
Independent Auditor's Report of Ehrhardt Keefe Steiner & Hottman, P.C. F-2
Consolidated Balance Sheets as of October 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the years ended October 31, F-5
1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the years ended F-6
October 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended October 31, F-7
1996, 1995 and 1994
Notes to Consolidated Financial Statements F-10
(b) EXHIBITS.
The following is a complete list of Exhibits filed as part of this
report and which are incorporated herein.
EXHIBIT
-------
* 3.1.1 Articles of Incorporation, as amended, of the Company as filed on October 10, 1986 with the Secretary of
State of the State of Nevada.
* 3.1.2 Certificate of Amendment of Articles of Incorporation of the Company as filed on January 19, 1993, with the
Secretary of State of the State of Nevada.
# 3.1.3 Certificate of Designations of Series A Junior Participating Preferred Stock.
* 3.2.1 Amended and Restated By-Laws of the Company.
* 4.1.1 Form of specimen certificate for Common Stock of the Company.
* 4.1.2 Form of specimen certificate for Warrants of the Company.
** 4.1.3 Form of Warrant Agreement, dated April 12, 1993, between American Securities Transfer & Trust Co. and
the Company.
** 4.2 Form of specimen certificate for Underwriter's Warrant of the Company.
# 4.3 Form of Rights Agreement and Form of Rights Certificate.
* 10.1.2 Amended Employment Agreement, effective January 1, 1993, between Patrick L. Swisher and
the Company.
* 10.2.1 1992 Incentive Stock Option Plan, effective April 29, 1992, authorizing 58,334 shares of Common Stock for
issuance pursuant to the Plan.
* 10.2.2 1992 Non-Qualified Stock Option Plan, effective April 29, 1992, authorizing 133,333 shares of Common
Stock for issuance pursuant to the Plan.
*** 10.2.3 Amendment to 1992 Incentive Stock Option Plan, effective April 12, 1994, authorizing 250,000 shares of
Common Stock for issuance pursuant to the Plan.
*** 10.2.4 Amendment to 1992 Non-Qualified Stock Option Plan, effective April 12, 1994, authorizing 150,000 shares
of Common Stock for issuance pursuant to the Plan.
10.3 Franchise Agreements by and between the Company and its franchisees, effective dates set forth below:
- 23 -
24
* (i) Form of Franchise Agreement by and between the Company and certain franchisees.
* (ii) Form of Franchise Agreement by and between the Company and certain franchisees.
* (iii) Form of Franchise Agreement by and between the Company and certain franchisees.
* (iv) Franchise Agreement, dated August 20, 1990, by and between the Company and J/S Enterprises,
Inc. for Louisville territory, subsequently transferred to Louisville Restroom Sanitation Services,
Inc. on August 31, 1990.
* (v) Franchise Agreement, dated October 31, 1990, by and between the Company and Rice & Rice
Corporation for Richmond territory.
** (vi) Form of Franchise Agreement, dated October 31, 1990, by and between the Company and maid
service franchisees.
Oo (v) Form of Master License Agreement relating to international licenses by and between the Company's
wholly-owned subsidiary, F.M.S., Inc., and certain licensees.
* 10.4 Lease, dated April 20, 1992, by and between B.S. Associates Partnership and the Company.
* 10.5 Lease Agreement, dated August 6, 1992, by and between Economy Air, Inc. and the Company.
* 10.6 Agreement, dated February 11, 1993, by and among Locke Burgess, Ross Burgess, Lynn Smith and Austin-
San Antonio Hygiene Services, Inc, the Company and Swisher Hygiene Franchise Corp.
* 10.7 Promissory Note and Guaranty, dated December 17, 1992, by and between Wachovia Bank of North
Carolina, N.A. and the Company (terminated).
oo 10.7.1 Revolving Note and Loan Agreement, dated September 19, 1996, by and between SouthTrust Bank of North
Carolina and the Company.
* 10.8 Letter of Intent, dated February 11, 1993, by and between Consolidated Products, Inc. and the
Company.
* 10.9.1 Asset Purchase and Sale Agreement, dated March 12, 1993, by and between Consolidated Products, Inc. and
Swisher Products, Inc.
+ 10.9.2 Asset Purchase Agreement effective July 1, 1996, relating to the sale of Surface Doctor by Professional
Carpet Systems, Inc. and Old Dixie Supply Company to the Company.
* 10.10.1 Promissory Note, dated April 1, 1993, by and between Branch Banking and Trust Company and the
Company.
* 10.10.2 Loan Agreement, dated April 1, 1993, by and between Branch Banking and Trust Company and the
Company.
o 10.10.3 Loan Agreement, dated April 21, 1995, by and between First Union National Bank of North Carolina and the
Company (terminated).
o 10.10.4 Loan Agreement, dated May 18, 1995, by and between Stephens Diversified Leasing, Inc., d/b/a Stephens
Franchise Finance, and the Company.
- 21. List of Subsidiaries of the Company.
- 23.1 Consent of Scharf Pera & Co.
- 23.2 Consent of Ehrhardt Keefe Steiner & Hoffman PC
- 24 -
25
Exhibit
- ---------
- 27. Financial Data Schedule (for SEC use only).
- ---------
- - Filed herewith.
oo Previously filed.
* Previously filed and incorporated by reference from the Company's Registration Statement on Form S-1 (S.E.C. File No.
33-58320), filed February 18, 1993, as subsequently amended and declared effective April 21, 1993.
** Previously filed and incorporated by reference from the Company's Form 10-K for the fiscal year ended October 31,
1993, filed on January 31, 1994 (S.E.C. File No. 0-21282).
*** Previously filed and incorporated by reference from the Company's Form 10-K for the fiscal year ended October 31,
1994, filed on January 30, 1995. (S.E.C. File No. 0-21282).
# Previously filed and incorporated by reference from the Company's Registration Statement on Form 8-A filed September
19, 1995.
+ Previously filed and incorporated by reference from the Company's Form 8-K dated July 30, 1996, as filed with the SEC
on or about August 8, 1996.
o Previously filed and incorporated by reference from the Company's Form 10-K for the fiscal year ended October 31,
1995. (S.E.C. File No. 0-21282).
(c) REPORTS ON FORM 8-K.
The Company filed a Form 8-K on or about August 8, 1996 to disclose the
acquisition of Surface Doctor; financial statements for Surface Doctor were
filed pursuant to Form 8-K/A1 on October 15, 1996.
- 25 -
26
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Swisher International, Inc. & Subsidiaries
Charlotte, North Carolina
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheet of Swisher
International, Inc. & Subsidiaries as of October 31, 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Swisher
International, Inc. & Subsidiaries as of October 31, 1996, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
As described in Note 6 to the Consolidated Financial Statements, during
the current year the Company changed its method of accounting for stock based
compensation.
/s/ Scharf Pera & Co.
Charlotte, North Carolina
May 20, 1998
F-1
27
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Swisher International, Inc.
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheet of Swisher
International, Inc. and subsidiaries as of October 31, 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years in the two-year period ended October 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Swisher International, Inc. and
subsidiaries as of October 31, 1995, and the results of their operations and
their cash flows for each of the years in the two-year ended October 31, 1995,
in conformity with generally accepted accounting principles.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
December 21, 1995
Denver, Colorado
F-2
28
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 1996 and 1995
ASSETS 1996 1995
----------- -----------
Cash and cash equivalents $ 1,809,590 $ 930,492
Cash, restricted (Note 4) 260,827 700,000
Accounts receivable, franchisees, net of allowance for
doubtful accounts 1996 $150,000; 1995 $40,644 1,382,290 1,142,979
Other receivables 448,577 217,716
Current portion of notes receivable (Notes 3 and 5) 615,870 761,686
Current portion of accounts and notes receivable - related 54,344 45,960
parties
(Note 2)
Inventories 87,279 75,327
Prepaid expenses 154,586 147,125
Prepaid advertising costs -- 110,073
----------- -----------
TOTAL CURRENT ASSETS 4,813,363 4,131,358
----------- -----------
Property and equipment
Property, furniture and equipment 1,147,317 1,262,718
Less accumulated depreciation (465,129) (281,440)
----------- -----------
682,188 981,278
----------- -----------
Other assets
Notes receivable (Notes 3 and 5) 2,283,938 1,967,790
Notes receivable - related parties (Note 2) 204,732 10,969
Deferred franchise costs, net of accumulated amortization 1996
$85,665; 1995 $26,154 99,782 72,213
Intangible assets, net of accumulated amortization 1996 $4,247; 1995
$44,942 127,237 32,673
Goodwill, net of accumulated amortization 1996 $11,057 703,906 --
Assets held for sale (Note 11) 621,502 703,085
Cash surrender value of officers' life insurance 37,339 --
Deposits and other assets 45,869 31,412
----------- -----------
4,096,736 2,845,711
----------- -----------
TOTAL ASSETS $ 9,592,287 $ 7,958,347
=========== ===========
See Notes to Consolidated Financial Statements.
F-3
29
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- ---------------------------------------------------------------------- ---------- ----------
Current Liabilities
Note payable (Note 4) $ 64,469 $ --
Line-of-credit (Note 4) 969,573 658,000
Current maturities of long-term debt (Note 5) 516,436 436,158
Accounts payable 1,252,597 488,180
Accrued expenses 181,135 123,851
Deferred revenue 309,124 240,986
Income taxes payable (Note 7) 101,170 11,000
Deferred income taxes (Note 7) 1,000 29,000
---------- ----------
TOTAL CURRENT LIABILITIES 3,395,504 1,987,175
---------- ----------
Long-Term Debt, less current maturities (Note 5) 858,616 1,437,651
---------- ----------
Deferred income taxes (Note 7) 2,000 49,000
---------- ----------
Commitments (Note 8)
Stockholders' Equity (Note 6)
Preferred stock, par value $.10; authorized 1,500,000 shares; none
issued -- --
Series A Junior Participation Preferred stock, par value $1.00;
authorized 100,000 shares; none issued -- --
Common stock, par value $.01; authorized 15,000,000 shares; issued
1996 1,935,799 shares; 1995 1,719,299 shares 19,359 17,194
Additional paid-in capital 4,006,659 3,002,637
Retained earnings 1,310,149 1,464,690
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 5,336,167 4,484,521
---------- ----------
TOTAL STOCKHOLDERS' EQUITY AND LIABILITIES $9,592,287 $7,958,347
========== ==========
F-4
30
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ---------- ----------
Revenues
Annuity revenues
Product sales $ 3,288,324 $2,359,461 $1,559,719
Service fees 1,659,679 1,382,852 992,438
Royalties 1,626,660 1,192,336 804,360
Marketing fees 46,822 45,864 26,045
------------ ---------- ----------
6,621,485 4,980,513 3,382,562
Initial franchise sales - hygiene 424,411 586,846 1,173,025
(Notes 3 and 9)
Initial franchise sales - maids
(Notes 3 and 9) (38,610) 347,272 29,654
Initial franchise sales - Surface Doctor
(Notes 3 and 9) 353,983 -- --
Revenue from Company-owned hygiene
operations 1,672,947 1,462,332 878,605
Revenue from Company-owned maids
operations 855,181 313,253 150,405
Revenue from Company-owned Surface Doctor
operations 84,427 -- --
Interest income 284,757 213,195 97,104
Sale of customer lists -- -- 113,000
Gain on sale of Company-owned hygiene
operations 288,597 -- 121,495
Other 39,387 59,123 32,200
------------ ---------- ----------
10,586,565 7,962,534 5,978,050
------------ ---------- ----------
Expenses
Selling, general and administrative 4,823,247 3,124,145 2,891,193
Cost of product sales to franchisees 3,066,788 2,104,330 1,375,644
Costs related to Company-owned hygiene
operations 1,432,609 1,521,442 784,553
Costs related to Company-owned maids
operations 991,059 428,888 379,346
Costs related to Company-owned Surface
Doctor operations 117,136 -- --
Interest 243,885 162,110 5,456
------------ ---------- ----------
10,674,724 7,340,915 5,436,192
------------ ---------- ----------
INCOME (LOSS) BEFORE INCOME (88,159) 621,619 541,858
TAXES
Income tax expense (Note 7) 66,382 246,000 209,000
------------ ---------- ----------
NET INCOME (LOSS) $ (154,541) $ 375,619 $ 332,858
============ ========== ==========
Net income (loss) per common share $ (0.09) $ 0.20 $ 0.17
============ ========== ==========
Weighted average number of common share and
common share equivalents outstanding 1,797,319 1,904,258 2,014,932
============ ========== ==========
See Notes to Consolidated Financial Statements.
F-5
31
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended October 31, 1996, 1995, and 1994
Common Stock Additional
------------------------ Paid-In Retained
Shares Amount Capital Earnings Total
--------- -------- ---------- ---------- -----------
Balance, October 31, 1993 1,999,133 $ 19,992 $ 3,857,345 $ 756,213 $ 4,633,550
Exercise of stock options 6,667 67 24,934 -- 25,001
for cash
Offering costs settled
subsequent to October 31, -- -- (14,197) -- (14,197)
1993
Repurchase and retirement (5,000) (50) (25,584) -- (25,634)
of common stock
Net income -- -- -- 332,858 332,858
-----------
Balance, October 31, 1994 2,000,800 20,009 3,842,498 1,089,071 4,951,578
--------- -------- ----------- ----------- -----------
Repurchase and retirement (281,501) (2,815) (839,861) -- (842,676)
of common stock
Net income -- -- -- 375,619 375,619
--------- -------- ----------- ----------- -----------
Balance, October 31, 1995 1,719,299 17,194 3,002,637 1,464,690 4,484,521
Issuance of common stock
and options in connection
with an asset acquisition 200,000 2,000 967,062 -- 969,062
(Notes 6 and 12)
Issuance of common stock in
connection with the 16,500 165 36,960 -- 37,125
exercise of stock options
Net loss -- -- -- (154,541) (154,541)
--------- -------- ----------- ----------- -----------
Balance, October 31, 1996 1,935,799 $ 19,359 $ 4,006,659 $ 1,310,149 $ 5,336,167
========= ======== =========== =========== ===========
See Notes to Consolidated Financial Statements
F-6
32
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended October 31, 1996, 1995 and 1994
1996 1995 1994
--------- ----------- -----------
Cash Flows from Operating Activities
Net income (loss) $(154,541) $ 375,619 $ 332,858
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 186,254 108,452 44,410
Amortization 63,245 67,701 7,888
Deferred income taxes (75,000) 52,000 (2,500)
Gain on sale of Company-owned stores (288,597) -- (121,495)
Loss on sale of property 21,068 -- --
Franchise fee revenue financed through notes
receivable (302,053) (627,018) (814,525)
Sale of customer lists financed through notes
receivable -- -- (112,654)
Provision for doubtful notes receivable 254,972 --
Provision for doubtful receivable 109,356
Change in working capital components:
(Increase) in accounts receivable (240,177) (466,696) (360,307)
(Increase) in inventories 63,048 (36,705) (11,831)
(Increase) decrease in prepaid expenses 143,116 (84,588) (164,472)
(Increase) in deferred franchise costs (21,487) (47,475) (46,061)
(Decrease) increase in allowance for valuation of
assets held for sale 192,665
Increase (decrease) in accounts payable 710,136 (75,298) 256,654
Increase (decrease) in accrued expenses 29,813 75,674 (7,075)
Increase (decrease) in income taxes payable 90,170 (112,500) (37,500)
Decrease in deferred revenue (48,077) (94,200) (94,619)
--------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 733,911 (865,034) (1,131,229)
--------- ----------- -----------
Cash Flows from Investing Activities
Decrease in short-term investments -- -- 2,380,584
Purchase of equipment (175,406) (227,895) (364,422)
Advances to officer (79,538) (33,300) --
Notes receivable proceeds (287,838) (224,643) (249,084)
Notes receivable-related parties proceeds (37,291) (23,629) --
Notes receivable payments 532,579 534,101 320,127
Purchase of assets held for sale (275,960) (130,787) --
Proceeds from assets held for sale -- -- 154,641
Proceeds from sale of property 323,410 -- --
Acquisition of Surface Doctor assets (20,000) -- --
(Increase) decrease in intangible assets and other
assets (44,973) (14,422) 9,262
--------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (65,017) (120,575) 2,251,108
--------- ----------- -----------
F-7
33
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended October 31, 1996, 1995 and 1994
1996 1995 1994
----------- ----------- -----------
Cash Flows from Financing Activities
Proceeds from stock transactions $ 37,125 $ -- $ 25,001
Payment of offering costs -- -- (14,197)
(Increase) decrease in restricted cash 439,174 (700,000) --
Proceeds from advances on line-of-credit and
short-term notes payable 376,042 658,000 --
Proceeds from long-term debt 85,889 1,522,815 --
Net principal payments on long-term debt obligations (728,026) (176,071) (35,644)
Repurchase and cancellation of common stock -- (842,676) (25,634)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 210,204 462,068 (50,474)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 879,098 (523,541) 1,069,405
Cash and cash equivalents - beginning of year 930,492 1,454,033 384,628
----------- ----------- -----------
Cash and cash equivalents - end of year $ 1,809,590 $ 930,492 $ 1,454,033
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 250,763 $ 162,110 $ 5,456
Income taxes 51,213 148,900 248,889
Supplemental Disclosure of Non-Cash Investing and
Financing Activities:
Purchase plant, property and equipment under notes
payable -- 272,500 98,513
Notes receivable, included in deferred revenue 299,324 220,986 54,212
Transfer of accounts receivable to a note receivable -- -- 34,950
Notes payable issued for franchise repurchases 143,380 96,982 --
Notes payable assumed for resale of franchises -- -- 64,900
Transfer of accounts receivable to assets held for sale 51,573 141,117 17,552
Sale of franchises for notes receivable 265,983 308,699 31,476
Acquisition of Surface Doctor division:
Assets Purchased
Accounts receivable 120,639 -- --
Inventories 75,000 -- --
Prepaid expenses 40,504 -- --
Notes receivable 79,687 -- --
Equipment 56,233 -- --
Intangibles 100,000 -- --
Goodwill recognized 714,963 -- --
----------- ----------- -----------
$ 1,187,026 $ -- $ --
Liabilities assumed
Accounts payable $ 54,281 $ -- $ --
Accrued expenses 27,468 -- --
Deferred revenue 116,215 -- --
----------- ----------- -----------
197,964 -- --
Stock options issued in consideration 969,062 -- --
Cash consideration 20,000 -- --
----------- ----------- -----------
$ 1,187,026 $ -- $ --
=========== =========== ===========
F-8
34
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICES
NATURE OF BUSINESS: The Company is engaged in the marketing of franchises which
provide hygiene services and products for public restrooms, residential maid
services and residential and commercial kitchen and bath restoration services
under the service marks "Swisher" and "Surface Doctor" and associated
proprietary names and marks. The Company and its independently owned franchises
are located in the United States and in certain other parts of the world.
A summary of the Company's significant accounting policies follows: PRINCIPLES
OF CONSOLIDATION: The accompanying consolidated financial statements include the
accounts of Swisher International, Inc. and its subsidiary companies, all of
which are wholly-owned, after elimination of intercompany accounts and
transactions.
CASH AND CASH EQUIVALENTS: For purposes of reporting the statement of cash
flows, the Company considers all cash accounts, which are not subject to
withdrawal restrictions or penalties, and all highly liquid short-term
investments purchased with an original maturity of three months or less to be
cash equivalents. The Company maintains deposits with financial institutions
which exceed the federally insured amounts. The Company maintains deposits with
financial institutions which exceed the federally insured amounts in the amount
of $1,982,000 at October 31, 1996. Additionally, the Company maintains deposits
in foreign accounts, not insured, in the amount of $242,000 at October 31, 1996.
INVENTORIES: Inventories are stated at the lower of cost or market and consist
of purchased finished goods. Cost is determined using the first-in, first-out
(FIFO) method.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost. Depreciation
is computed using the straight-line method over the estimated useful life of the
assets, which is five to thirty-nine years.
INTANGIBLE ASSETS: Intangible assets consisting primarily of trademarks and
organization costs are stated at cost and are being amortized using the
straight-line method over periods from five to fifteen years.
GOODWILL: Goodwill includes the excess of acquisition costs over fair value of
the net assets acquired in the purchase of the Surface Doctor division of
Professional Carpet Systems, Inc. (See Note 12) and is being amortized on the
straight-line basis over a twenty year period.
INITIAL FRANCHISE FEES, RELATED FRANCHISE COSTS, AND DEFERRED REVENUE: The
Company has entered into franchise agreements which grant franchisees the
exclusive right to develop and operate franchise businesses within specified
geographic territories for a fee. The initial franchise fee is deferred and
recognized as revenue when substantially all significant services to be provided
by the Company are performed. Initial training costs are accrued as incurred,
and expensed when the initial franchise fee is recognized. Costs related to the
development of the maids service franchise operation are capitalized and will be
amortized over their expected period of benefit of two to three years. These
costs include development of the franchise document and development of marketing
tools for future use by franchisees.
F-9
35
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company typically finances part of the initial franchise fee payable by new
Swisher Hygiene franchisees and from time to time has financed 100% of the
initial franchise fee payable by an existing franchisee for expansion of its
territory. Before financing is granted to a new franchisee, the Company performs
extensive credit evaluations of the franchisee's financial condition and obtains
a security interest in the underlying franchise and essentially all of the
franchisee's assets. Revenue is recognized on financed sales when the Company
determines that collection is probable.
PREPAID ADVERTISING COSTS: The Company expenses advertising costs as incurred
except for the cost of developing certain magazine ads and other materials which
are capitalized and amortized over the expected useful life for such materials.
ASSETS HELD FOR SALE: The Company has acquired assets of certain franchisees who
have failed to comply with the terms and conditions of their franchise
agreements. The Company carries these assets at the lower of cost or market and
intends to sell these operations as soon as possible.
ROYALTIES, MARKETING FEES AND SERVICE FEES: Royalties and marketing fees are
recognized as revenue based on a percentage of the monthly gross revenues as
reported by the franchisees. Service fees are recognized as revenue based on a
sliding dollar amount determined by the annualized gross revenues as reported by
each franchisee and are collected from monthly revenues.
PRODUCT SALES: Product sales consist of product sold to the franchisees and are
recognized as revenue at the time of shipment.
INCOME TAXES: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets may not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of enactment.
NET INCOME (LOSS) PER COMMON SHARE: Net income (loss) per common share and
common share equivalents outstanding are calculated using the treasury stock
method per Accounting Principles Board Opinion No. 15 (APB 15), as amended,
based on the weighted average number of common shares outstanding during the
year and on the net additional number of shares which would be issuable upon the
exercise of certain options, assuming that the Company used the proceeds
received to purchase and retire common shares at market value. Common stock
equivalents are excluded from the loss per share calculation for fiscal 1996
because the effect would be antidilutive. The weighted average of common shares
outstanding for the year ended October 31, 1996 was 1,797,319. For the years
ended October 31, 1995 and 1994, the weighted average of common and common
equivalent shares outstanding were 1,904,258 and 2,014,932.
F-10
36
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
RECLASSIFICATION: Certain amounts in the 1995 and 1994 financial statements have
been reclassified to conform with the 1996 presentation. These reclassifications
had no effect on 1995 and 1994 net income or retained earnings.
ACCOUNTING STANDARDS NOT YET ADOPTED: The Financial Accounting Standards Board
("FASB") has issued Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which has not
been adopted by the Company as of October 31, 1996. FASB Statement No. 121 is
effective for fiscal years beginning after December 15, 1995. FASB Statement No.
121 establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. Under the guidelines of the new standard, the Company will be
required to review long-lived assets and certain identifiable intangibles to be
held for impairment whenever events or changes in circumstances, as outlined in
Statement No. 121, indicate that the carrying amount of an asset may not be
recoverable. If these events or changes in circumstances indicate that the
carrying amount of an asset that an entity expects to hold and use may not be
recoverable, the Company shall estimate the future cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows is less than the carrying amount of the asset, the
Company shall recognize an impairment loss in accordance with this Statement. At
October 31, 1996, the Company was not required to adopt this statement and
accordingly had not determined the impact of this Statement on the financial
statements.
NOTE 2. NOTES AND ACCOUNTS RECEIVABLE - RELATED PARTIES AND RELATED PARTY
TRANSACTIONS:
The Company had the following accounts and notes receivable from officers
at October 31, 1996 and 1995:
1996 1995
-------- -------
Notes receivable for life insurance policies paid by the Company
on behalf of the officers of the Company pursuant to a split
dollar life insurance plan. The notes are payable in monthly
installments ranging from $1,392 to $2,789, plus interest at 6
percent, commencing April, 1997 through July, 1998. The notes
are unsecured $ 60,920 $23,629
Accounts receivable from officers for advances and personal
expenses paid by the Company 112,838 33,300
Accounts receivable from the President for third party accounts
receivable collected by the franchise owned 51 percent by the
officer. Account receivable bears an interest rate of 12
percent 85,318 --
-------- -------
Total accounts and notes receivable from officers 259,076 56,929
Current portion 54,344 45,960
-------- -------
Long-term portion $204,732 $10,969
======== =======
F-11
37
The Company leases its operating facility from a partnership which owns the
building. The President of the Company is a 33.3 partner in the partnership
(Note 8). Rent expense relating to the lease during the years ended October 31,
1996, 1995 and 1994 was $127,501, 108,187, and $96,400, respectively.
During the years ended October 31, 1996, 1995 and 1994, the Company paid the
President and/or a corporation in which the President is a major stockholder
$126,950, $88,809, and $73,696, respectively, for the use of an airplane for
business travel.
During the years ended October 31, 1995 and 1994, the Company incurred legal
expenses in the amount of $9,267 and $35,673, respectively, to a legal firm in
which a former stockholder and director is a partner. All of the stockholder's
outstanding shares were repurchased by the Company and canceled during the year
ended October 31, 1995.
As shown in Note 3, there are notes receivable with a total face value of
$450,000 from related parties for franchise sales. This $450,000 note results
from the purchase of a franchise by a company that is 51 percent owned by the
President of the Company. This note, dated July 29, 1996, was for the entire
amount of the purchase and was interest-free until payments of monthly interest
at a rate of 12 percent per annum began May 1, 1997. Monthly payments of
principal and interest of $5,401 begin May 1, 1998 for 84 months, when on May 1,
2005 a balloon payment of $330,218 is due to repay the note in full. The note is
secured by the franchise and its assets, and additionally secured by a pledge of
25,000 shares of restricted Swisher International, Inc. common stock owned by
the President. The Company recognized a $255,045 net gain on the transaction and
$47,544 in management fee income for the year ended October 31, 1996.
F-12
38
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. NOTES RECEIVABLE - FRANCHISEES:
Notes receivable - franchisees primarily consists of all or a portion of the
initial franchise fees financed by the Company. The notes are collateralized by
the underlying franchise and by essentially all of the franchisees' assets
incidental to the operation of the franchises and, for certain franchises, are
personally guaranteed by the owners. The interest rates associated with the
majority of these notes range from 7 percent to 13.25 percent with monthly
principal and interest payments ranging from $70 to $5,401 including interest
over periods ranging from 12 to 120 months with the first note maturing in 1998
and the last one in 2007.
Notes receivable - franchisees at October 31, 1996 and 1995 consisted of the
following:
1996 1995
----------- ----------
Notes receivable - franchisees at face value $ 2,704,780 $2,729,476
Notes receivable - related parties at face value
(Note 4) 450,000 --
----------- ----------
Total notes receivable - face value 3,154,780 2,729,476
Less imputed discount (131,000) --
----------- ----------
Net present value of notes receivable 3,023,780 2,729,476
Less allowance for doubtful accounts (123,972) --
----------- ----------
Balance of notes receivable - franchisees
$ 2,899,808 $2,729,476
=========== ==========
Current portion $ 615,870 $ 761,686
Long-term position $ 2,283,938 $1,967,790
The notes receivable - franchisees at face value have been reduced to net
present value at October 31, 1996 for imputed discounts. These imputed discounts
are based on notes with terms including delayed payment schedules and
interest-free periods, and additionally, the notes have been discounted to net
present values based on actual payments differing from scheduled payments
contained in the note agreements.
Future minimum principal payments to be received pursuant to the notes are as
follows:
Year Ended October 31,
1997 $ 615,870
1998 896,077
1999 458,244
2000 301,554
2001 145,589
Thereafter 737,446
----------
3,154,780
Less imputed discounts 131,000
Less allowance for doubtful accounts 123,972
----------
$2,899,808
==========
F-13
39
At the time the notes receivable are executed, the Company considers a reserve
for doubtful collections based on the creditworthiness of the franchisee. The
provision for uncollectible amounts is continually reviewed and adjusted to
maintain the allowance at a level considered adequate to cover future losses.
The allowance is management's best estimate of uncollectible amounts and is
determined based on historical performance of the notes, which are tracked by
the Company on an ongoing basis. The losses ultimately incurred could differ
materially in the near term from the amounts estimated in determining the
allowance.
F-14
40
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LINE OF CREDIT, NOTE PAYABLE AND PLEDGED ASSETS
The Company has a $1,000,000 line of credit agreement with a bank which expires
February 17, 1999. Borrowings under the agreement bear interest at 2.85% above
the LIBOR (5.66% at October 31, 1996) and are due on demand. In addition, the
line of credit is collateralized by substantially all assets of the Company and
the Company must maintain a minimum cash balance of $250,000 at all times.
Outstanding borrowings on the line of credit were $969,573 and $658,000 at
October 31, 1996 and 1995, respectively. This line-of-credit agreement contains
financial covenants which require specified levels of equity and the maintenance
of certain financial ratios. At October 31, 1996, the Company was in violation
of two of these covenants, and these violations were waived by the bank.
The Company also has a $64,469 unsecured note payable which is due November 30,
1996. Interest on the note is payable monthly at 9%.
NOTE 5. LONG-TERM DEBT AND PLEDGED ASSETS
Long-term debt consists of the following:
October 31,
-----------------------------
1996 1995
----------- -----------
Note payable, finance company, due in monthly installments ranging
from $3,123 to $51,793 including interest at 13.4%, through April
2001; collateralized by certain franchisee notes receivable $ 1,079,714 $ 1,417,260
Note payable, individual, paid in full during fiscal year 1996 -- 266,382
Note payable, individual, due in monthly installments of $3,350, including
interest at 7%, through September 1997; personally
guaranteed by the Company's President 35,594 68,982
Note payable, bank, due in monthly installments of $3,125, including
interest at .50% above the banks prime rate (8.25% at October 31,
1996) through July 1997; unsecured 21,707 58,144
Notes payable, vendors, due in monthly installments of $1,347 including
interest at 9%, through December 1999; unsecured 43,387 55,072
Note payable, individual, paid in full during fiscal year 1996 -- 7,969
Note payable, individuals, due in monthly installments of $1,575,
including interest at 8% through January 1998; unsecured 22,524 --
Note payable, individuals, due in monthly installments of $1,245,
including interest at 9% through May 2000; unsecured 45,634 --
Note payable, individual, due in monthly installments of $1,065,
including interest at 10% through July 1999; collateralized by a maids
franchise with a net book value at October 31, 1996 of $61,776 30,611 --
Note payable, individual, due in monthly installments of $1,300,
noninterest bearing through January, 1998; unsecured 21,021 --
Note payable, finance company, due in monthly installments ranging
from $1,189 to $1,464 including interest at 12.5% through June 2001;
collateralized by notes receivable with a balance at October 31, 1996
of $111,083 74,860
----------- -----------
1,375,052 1,873,809
Less current portion (516,436) (436,158)
----------- -----------
$ 858,616 $ 1,437,651
=========== ===========
F-15
41
Aggregate maturities required on the long-term debt are as follows:
Year Ending October 31
1997 516,436
1998 398,888
1999 303,587
2000 127,472
2001 28,669
----------
$1,375,052
==========
NOTE 6. STOCK, STOCK OPTIONS AND ACCOUNTING CHANGE
In 1993, the Company completed a public offering which raised $4,560,000 net of
$1,013,949 of offering costs. The offering consisted of 760,000 units of the
Company's securities, each unit consisting of one share of common stock and one
warrant. Two warrants entitle the holder to purchase one share of common stock
at $7.80 per share expiring December 1997. All warrants are outstanding at
October 31, 1996. A warrant to purchase up to 76,000 units through April 1998
was issued to the Company's Underwriter for $100 in connection with the offering
with an exercise price of $7.20 per share.
In December 1992, the stockholders authorized the issuance of 1,500,000 shares
of preferred stock. The preferred stock may be issued in one or more series with
such rights and preferences as may be fixed and determined by the Board of
Directors. No preferred shares have been issued as of October 31, 1996.
SHARE PURCHASE RIGHTS PLAN: In June 1995, the Board of Directors authorized the
designation of 100,000 shares of Series A Junior Participating Preferred Stock
with a $1.00 par value per share. Each Series A Preferred Share is entitled to a
cumulative quarterly dividend of 100 times the dividend declared per common
share but in no event less than $1.00 per share. No Series A Preferred Shares
have been issued at October 31, 1996.
Also in June 1995, the Company adopted a Share Rights Purchase Plan (the "Plan")
under which the Board of Directors declared a dividend of one preferred share
purchase right ("Right") for each outstanding share of common stock. Each right
entitles the holder to purchase from the Company one one-hundredth of a share of
Series A Junior Participating Preferred Stock at a price of $18.75, subject to
adjustment as provided in the Plan. The Rights will be distributed to all common
shareholders ten days following the earlier of 1) an announcement that a person
or group of persons has acquired beneficial ownership of 15% or more of the
outstanding common shares or 2) the commencement or announcement of a tender
offer or exchange offer the consummation of which would result in the beneficial
ownership of 15% or more of the outstanding common shares. At any time prior to
this, the Board of Directors may redeem the Rights in whole at a price of $.01
per Right. The Rights expire June 30, 2005.
1,935,799 Rights are outstanding at October 31, 1996.
STOCK OPTION PLANS: In August 1992, the Company adopted an Incentive Stock
Option Plan (the "Incentive Plan"). The Incentive Plan covers an aggregate of
133,333 shares. In fiscal 1994, the Incentive Plan was amended by a shareholder
vote to reserve 250,000 shares of common stock for issuance under the Incentive
Plan. The Plan is administered by the Compensation Committee of the Board of
Directors, and requires that options be granted at an exercise price equal to
fair market value of the common shares of the Company on the date of the grant.
The options expire up to five years from the date of grant and may not be
exercised during the initial one-year period from the date of grant. Options to
purchase 232,568 shares of the Company's $.01 par value common stock have been
granted pursuant to the Incentive Plan.
The Company also adopted a Non-Qualified Stock Option Plan in August 1992 (the
"Non-Qualified Plan"). The Non-Qualified Plan is also administered by the
Compensation Committee of the Board of Directors and covers a total of 58,334
shares. In fiscal 1994, the Non-Qualified Plan was amended by a shareholder vote
to reserve 150,000 shares of common stock for issuance under the Non-qualified
Plan. The Non-Qualified Plan provides that options may be granted at exercise
price not less than 85% of the fair market value of the Common Shares of the
Company on the date of grant. The committee is empowered to grant bonuses at the
time of issuance of non-qualified stock options in an amount sufficient to cover
the tax liability incurred by the recipient at the date of grant. Options to
purchase 47,667 shares of the Company's $.01 par value commons stock have been
granted under the Non-Qualified Plan. The exercise price of the options
approximated the fair market value of the Company's common stock at the dates of
grant.
F-16
42
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. STOCK, STOCK OPTIONS AND ACCOUNTING CHANGE (CONTINUED)
The following is a summary of options granted:
Weighted-Average
Number of Exercise
Options Price
--------- -----------------
Outstanding October 31, 1994 270,735 $3.36
Options canceled (55,500) 3.75
-------
Outstanding October 31, 1995 215,235 3.26
Options exercised (16,500) 2.25
Options issued 81,500 3.50
-------
Outstanding October 31, 1996 280,235 3.39
=======
NON-PLAN OPTIONS: In 1994, the Company entered into an agreement with an
investor relations firm. Under this agreement, the firm received an option to
purchase 40,000 shares of common stock at an exercise price of $2.88 per share.
In October 1995, the Company entered into a consulting agreement with a public
relations firm. Pursuant to this agreement, the Company granted to the
consultant options to purchase a total of 100,000 shares of common stock at
exercise prices ranging from $3.50 to $4.50 per share which become exercisable
only upon the satisfaction of certain contingencies, as defined. Options for
75,000 shares expired during the year ended October 31, 1996.
In April 1996, the Company entered into an agreement with an investment banking
firm whereby the Company granted the investment banking firm options to purchase
75,000 shares of the Company's common stock at a price of $3.50 per share. In
accordance with Financial Accounting Standards Board Statement No. 123 (FASB
123), the transaction was recorded based on the value of the services received.
On January 17, 1997, the investment banking firm exercised their rights under
the option agreement by completing a cashless exercise for 41,129 shares of
common stock.
In June 1996, the Company entered into an agreement with a public relations firm
whereby the Company granted the public relations firm options to purchase 25,000
shares of the Company's common stock at a price of $5.75 per share. In
accordance with FASB 123, the transaction was recorded based on the value of the
services received.
ACCOUNTING CHANGE: The Company has adopted Financial Accounting Standards Board
Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. FASB Statement No.
123, requires that the Company account for its stock based compensation plans
using a fair value based method which measures compensation cost at the grant
date based upon the value of the awards, which is then recognized over the
vesting period. The accounting requirements of the statement apply to awards to
employees entered into in fiscal years that begin after December 15, 1995 and to
transactions with non-employees entered into after December 15, 1995. The
Statement allows and the Company has elected to continue to use APB Opinion No.
25 ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES to measure compensation cost, but is
required to disclose the pro forma effects on net income and earnings per share
to reflect the difference between the compensation cost from applying APB
Opinion No. 25 and the related cost measured by the fair value method defined in
the statement for all awards granted in years beginning after December 15, 1994.
The Statement did not change the reporting required for the Incentive Stock
Option Plan and Non-Qualified Stock Option Plan discussed above. The pro forma
effects of not utilizing the fair value method prescribed in FASB Statement No.
123 for the Company's stock options is shown in the following table for the year
ending October 31, 1996 and there was no effect for 1995. In computing the pro
forma effects of the SFAS No. 123 compensation cost, the Company used a 6.4%
risk-free interest rate, an expected life of five years, and expected volatility
of 60.7%, and assumed no dividends and that such cost could not be tax effected.
F-17
43
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. STOCK, STOCK OPTIONS AND ACCOUNTING CHANGE (CONTINUED)
Earnings
Net Income Per Share
---------- ----------
Year Ended October 31, 1996:
As reported $(154,541) $(0.09)
Pro-forma $(319,986) $(0.18)
NOTE 7. INCOME TAXES
Net deferred tax liabilities consist of the following components as of
October 31:
1996 Current Long-Term Total
- ------------------------------- -------- --------- ---------
Deferred tax asset:
Receivable allowances $ 19,000 $ -- $ 19,000
Assets held for sale -- 70,000 70,000
Inventory valuation allowance 29,000 -- 29,000
-------- --------- ---------
48,000 70,000 118,000
-------- --------- ---------
Deferred tax liabilities:
Deferred advertising costs (49,000) -- (49,000)
Property and equipment -- (61,000) (61,000)
Intangible Assets -- (11,000) (11,000)
-------- --------- ---------
(49,000) (72,000) (121,000)
-------- --------- ---------
$ (1,000) $ (2,000) $ (3,000)
-------- --------- ---------
1995 Current Long-Term Total
- ------------------------------- -------- --------- ---------
Deferred tax asset:
Receivable allowances $ 13,000 $ -- $ 13,000
-------- --------- ---------
Deferred tax liabilities:
Deferred advertising costs (42,000) -- (42,000)
Property and equipment -- (49,000) (49,000)
-------- --------- ---------
(42,000) (49,000) (91,000)
-------- --------- ---------
$(29,000) $ (49,000) $ (78,000)
======== ========= =========
F-18
44
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. INCOME TAXES (CONTINUED)
The provision for income taxes charged to operations for the years ended October
31, 1996, 1995 and 1994 consists of the following:
For the Year Ended October 31,
---------------------------------------
1996 1995 1994
--------- -------- ---------
Current tax provision
Federal $ 84,722 $169,000 $ 178,000
State 37,940 25,000 33,500
Prior period under-accrued 18,720
Deferred tax provision
Federal (70,000) 44,000 (2,000)
State (5,000) 8,000 (500)
--------- -------- ---------
$ 66,382 $246,000 $ 209,000
========= ======== =========
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the years ended
October 31, 1996, 1995 and 1994 due to the following:
1996 1995 1994
--------- -------- ---------
Computed expected tax expense: $ (29,974) $211,350 $184,232
Increase (decrease) in income taxes resulting from:
State income taxes 22,819 31,081 32,511
Permanent differences 8,830 3,569 (7,743)
Temporary differences 62,311
Effect of change in tax rate used in computing
deferred taxes 5,118 -- --
Other (2,722) -- --
--------- -------- ---------
$ 66,382 $246,000 $209,000
========= ======== ========
NOTE 8. LEASE COMMITMENTS AND RENT EXPENSE
The Company leases its present facility from a partnership in which the
President is a 33.3% partner. The term of the lease extends through March 2000
(See Note 2). During the term of the lease, rent is subject to increases in
accordance with the rate of increase in the Consumer Price Index. The lease
requires the Company to pay for all insurance, maintenance, and taxes. The
Company also leases other facilities, equipment and vehicles under operating
leases which expire in varying amounts through 2000.
F-19
45
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: LEASE COMMITMENTS AND RENT EXPENSE (CONTINUED)
Future minimum lease payments pursuant to these leases are as follows:
Year Ending October 31,
- -----------------------------------------------------------------------
1997 $ 297,984
1998 269,215
1999 238,815
2000 174,532
2001 13,369
----------
$ 993,915
==========
For the years ended October 31, 1996, 1995 and 1994, operating lease expense was
$206,514, $131,850 and $108,160, respectively.
NOTE 9. FRANCHISES
The following table summarizes the number of hygiene franchised operations of
Swisher International, Inc.:
For the Year Ended October 31,
--------------------------------------------------
1996 1995 1994
------- ------ ------
Franchises at the beginning of the year 93 88 66
Franchises sold 6 11 22
Closed -- (2) --
Repurchased -- (4) --
------- ------ ------
Franchises at the end of the year 99 93 88
======= ====== ======
Franchises sold and not open at year end 2 3 6
======= ====== ======
The following table summarizes the number of maids operations of Swisher
International, Inc.:
For the Year Ended
-----------------------------------
October 31,
-----------------------------------
1996 1995 1994
------ ------ -------
Franchises at the beginning of the year 19 5 --
Franchises sold -- 15 5
Consolidated (3) -- --
Repurchased (4) (1) --
Closed (1) -- --
------ ------ ------
Franchises at the end of the year 11 19 5
------ ------ ------
Franchises sold and not open at year end 2 5 4
------ ------ ------
F-20
46
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. FRANCHISES (CONTINUED)
The following table summarizes the number of Surface Doctor operations of
Swisher International, Inc.:
For the Year Ended
October 31, 1996
-------------------
Franchises acquired upon acquisition 101
Franchises sold 16
-------------------
Franchises at the end of the year 117
-------------------
Franchises sold and not open at year end 1
-------------------
As of October 31, 1996, 1995 and 1994, the Company had seven, three and one
corporate operations, respectively.
NOTE 10. SEGMENT INFORMATION
The Company operates in four principal business segments: Hygiene, residential
maid services and residential and commercial resurfacing services conducted
through Company-owned operations and hygiene, residential maid services and
residential and commercial resurfacing services conducted through franchised
operations. Selected financial information is presented below for the years
ended October 31, 1996, 1995 and 1994.
Operating income (loss) is revenue less related costs and direct and allocated
operating expenses, excluding interest and the unallocated portion of corporate
expenses.
Corporate assets are those assets maintained for general purposes, principally
cash and short-term investments.
During the year ended October 31, 1996 foreign sales totaled $256,024.
F-21
47
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SEGMENT INFORMATION (CONTINUED)
Maid Hygiene Surface Doctor
Company Company Company Franchise
1996 Operations Operations Operations Operations Total
- ------------------------- ---------- ----------- ---------------- ----------- ------------
Net revenues $ 855,181 $1,672,947 $ 84,427 $ 7,974,010 $ 10,586,565
Operating income (loss) $(135,878) $ 240,338 $(32,709) $ (159,910) $ (88,159)
Identifiable assets $ 219,645 $ 300,201 $ 27,943 $ 9,044,498 $ 9,592,287
Capital expenditures $ -- $ -- $ -- $ 235,176 $ 235,176
Depreciation and $ 10,662 $ 21,893 $ 1,627 $ 242,816 $ 276,998
Maid Hygiene
Company Company Franchise
1995 Operations Operations Operations Total
- ------------------------- ---------- ----------- ----------- ------------
Net revenues $ 313,253 $1,462,332 $6,186,949 $7,962,534
Operating income (loss) $(115,635) $ (59,110) $ 796,364 $ 621,619
Identifiable assets $ 475,480 $ 553,329 $6,929,538 $7,958,347
Capital expenditures $ 410,447 $ 46,272 $ 43,676 $ 500,395
Depreciation and amortization $ 43,332 $ 40,084 $ 92,737 $ 176,153
Maid Hygiene
Company Company Franchise
1994 Operations Operations Operations Total
- ------------------------- ---------- ----------- ----------- -----------
Net revenues $150,405 $878,605 $4,949,040 $5,978,050
Operating income (loss) $(86,287) $215,547 $ 412,598 $ 541,858
Identifiable assets $241,147 $ 73,422 $5,644,447 $5,959,016
Capital expenditures $107,854 $ -- $ 256,568 $ 364,422
Depreciation and amortization $ 4,110 $ -- $ 48,188 $ 52,298
NOTE 11. ASSETS HELD FOR SALE
As of October 31, 1996 and 1995, the Company had seven franchises and five
franchises, respectively, that it had reacquired from franchisees. The results
of operations for the period since acquisition are included in Company-owned
operations in the accompanying statements of operations.
1996 1995
---------- ---------
Cost basis of assets $ 838,369 $ 713,558
Less: valuation allowance to
fair market value (192,665) --
-------------------------------
645,704 713,558
Less: accumulated amortization
of goodwill (24,202) (10,473)
-------------------------------
$ 621,502 $ 703,085
===============================
F-22
48
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. BUSINESS COMBINATION
Effective July 1, 1996, the Company, pursuant to an Asset Purchase Agreement
completed the acquisition of certain assets and assumption of certain
liabilities of the Surface Doctor division from Professional Carpet Systems,
Inc. and Old Dixie Supply Company. The Surface Doctor division specializes in
resurfacing appliances, counter tops, and fixtures. The acquisition was
accounted for under the purchase method whereby assets and liabilities were
recorded at their fair value and the excess purchase price over fair value of
net assets is recognized as goodwill.
The purchase price for the assets acquired consisted of issuance to the Sellers
of an aggregate of 200,000 shares of the Company's previously authorized but
unissued common stock, $.01 par value. The shares issued are subject to demand
and piggyback registration rights.
In addition, the sellers were granted an option to purchase 75,000 shares of the
Company's common stock at a purchase price of $6.00 per share. The options must
be exercised on or before July 31, 2001.
Assets acquired in connection with the acquisition are as follows:
Accounts receivable $ 120,639
Inventories 75,000
Prepaid expenses 40,504
Notes receivable 79,687
Equipment 56,233
Intangibles 100,000
Goodwill 714,963
------------
$ 1,187,026
============
Liabilities assumed and common stock and options to purchase common stock issued
in connection with the acquisition are as follows:
Accounts payable $ 54,281
Accrued expenses 27,468
Deferred revenue 116,215
------------
197,964
Consideration paid 989,062
------------
$ 1,187,026
============
Unaudited pro forma consolidated results of operations for the years ended
October 31, 1996 and 1995 as though the Surface Doctor division of Professional
Carpet Systems, Inc. and Old Dixie Supply Company had been acquired as of
November 1, 1994 follow:
1996 1995
---------- ----------
Total revenue 11,456,034 $9,870,811
Net income (146,214) 501,701
Net income per common share (.08) 0.24
F-23
49
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Financial Standards No. 107,
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The estimated fair value
amounts have been determined by the Company using available market information
and valuation methodologies described below. However, considerable judgment is
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein may not be indicative of the amounts
the Company could realize in a current market exchange. The use of different
market assumptions or valuation methodologies may have a material effect on the
estimated fair value amounts.
The carrying values of accounts and notes receivable, accounts payable, note
payable and line-of-credit borrowings approximate their fair values due to the
short-term maturities of these instruments. The carrying values of notes
receivable and long-term debt approximate fair values at October 31, 1996 due to
rates being at current market rates.
F-24
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SWISHER INTERNATIONAL, INC.
By: /s/ Patrick L. Swisher
-------------------------------------
Patrick L. Swisher
President and Chief Executive Officer
and Interim Principal Accounting
Officer
Dated: June 30, 1998
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- -----
/s/ Patrick L. Swisher
- -------------------------- President, Chief Executive and June 30, 1998
Patrick L. Swisher Financial Officer and Director
/s/ George K. Moore
- -------------------------- Director June 30, 1998
George K. Moore
F-25
51
EXHIBITS
Exhibit 21.1 List of Registrant's Subsidiaries
Exhibit 23.1 Consent of Scharf Pera & Co.
Exhibit 23.2 Consent of Ehrhardt Keefe Skinner &
Hoffman PC
Exhibit 27 Financial Data Schedule (for SEC use only).