1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE QUARTERLY PERIOD ENDED - JANUARY 31, 1999 COMMISSION FILE NUMBER: 0-21282 SWISHER INTERNATIONAL, INC. ------------------------------- (NAME OF SMALL BUSINESS ISSUER) NEVADA 56-1541396 - ------------------------ ----------------------------------- (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 6849 FAIRVIEW ROAD, CHARLOTTE, NC 28210 - ---------------------------------------- ---------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (704) 364-7707 --------------------------- (ISSUER'S TELEPHONE NUMBER) CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE ISSUER WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. [X] YES [ ] NO NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 10, 1999: 2,208,271 TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT: [ ] YES [X] NO 2 SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES FORM 10-QSB CONSOLIDATED BALANCE SHEETS (UNAUDITED) PART I FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS (UNAUDITED) (AUDITED) JANUARY 31, OCTOBER 31, 1999 1998 ----------- ----------- ASSETS CURRENT ASSETS Cash and Cash Equivalents $ 51,742 $ 183,352 Restricted Cash 272,989 272,989 Accounts Receivable: Franchisees 3,119,081 3,097,024 Other 119,060 124,759 Related Party Receivables 161,542 160,000 Less Allowance for Doubtful Accounts (483,871) (596,000) ----------- ----------- NET ACCOUNTS RECEIVABLE 2,915,812 2,785,783 Notes Receivable, Current Portion 647,194 713,729 Inventory 61,928 63,978 Prepaid Expenses 52,279 55,380 Income tax refunds receivable 628,484 628,484 ----------- ----------- TOTAL CURRENT ASSETS 4,630,428 4,703,695 PROPERTY AND EQUIPMENT Furniture & Equipment 1,788,021 1,788,021 Less Accumulated Depreciation (856,083) (773,832) ----------- ----------- NET PROPERTY AND EQUIPMENT 931,938 1,014,189 OTHER ASSETS Notes Receivable Franchisees 2,948,331 3,230,435 Related Party 645,880 645,880 Other assets 436,096 436,096 Intangible Assets, Less Amortization 736,713 744,768 ----------- ----------- NET OTHER ASSETS 4,767,020 5,057,179 ----------- ----------- TOTAL ASSETS $10,329,386 $10,775,063 =========== =========== 2 3 SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES FORM 10-QSB CONSOLIDATED BALANCE SHEETS (CONTINUED) (UNAUDITED) (AUDITED) JANUARY 31, OCTOBER 31, 1999 1998 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Line of credit/long-term debt, current portion $ 2,841,709 $ 2,782,387 Accounts payable 2,043,785 2,598,022 Accrued expenses 473,862 403,364 Deferred revenue 145,521 145,521 Income taxes payable - - ----------- ----------- TOTAL CURRENT LIABILITIES 5,504,877 5,929,294 NONCURRENT LIABILITIES Deferred revenue 550,800 550,800 Long-term debt 341,905 384,203 Deferred income taxes - - ----------- ----------- TOTAL LIABILITIES 6,397,582 6,864,297 STOCKHOLDERS' EQUITY Common Stock, $.01 par value; 15,000,000 shares authorized; 2,208,271 shares issued and outstanding at January 31, 1999 and October 31, 1998. 22,083 22,083 Additional Paid-In Capital 4,728,395 4,728,395 Retained Earnings (818,674) (839,712) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 3,931,804 3,910,766 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,329,386 $10,775,063 =========== =========== 3 4 SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES FORM 10-QSB CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (UNAUDITED) THREE MONTHS ENDED JANUARY 31, ---------------------------- 1999 1998 ---------- ---------- REVENUES Annuity Revenues: Product Sales to Franchisees $1,705,305 $1,527,399 Service Fees 551,084 485,303 Royalties 703,994 578,302 Marketing Fees 22,079 17,710 ---------- ---------- TOTAL ANNUITY REVENUES 2,982,462 2,608,714 Revenue from Company-Owned Subsidiaries 171,264 443,520 Initial Franchise Sales: 101,441 163,645 Other Income 90,363 67,016 ---------- ---------- TOTAL REVENUES 3,345,530 3,282,895 ---------- ---------- EXPENSES Selling, G & A Expenses 1,661,424 1,997,178 Cost of Product Sales 1,411,259 1,203,632 Expenses of Company-Owned Subsidiaries 197,666 481,919 Interest Expense 54,143 86,207 ---------- ---------- TOTAL EXPENSES 3,324,492 3,768,936 ---------- ---------- INCOME/(LOSS) BEFORE TAXES AND NONRECURRING ITEMS 21,038 (486,041) Income Tax Expense/(Benefit) - (136,290) ---------- ---------- NET INCOME/(LOSS) $ 21,038 $ (349,751) ========== ========== EARNINGS/(LOSS) PER COMMON SHARE AND COMMON SHARE EQUIVALENT Basic Earnings/(Loss) $ 0.01 $ (0.16) ========== ========== Common Shares 2,208,271 2,122,271 ========== ========== Diluted Earnings/(Loss) $ 0.01 $ (0.16) ========== ========== Weighted Average Common Shares and Equivalents 2,212,057 2,122,271 ========== ========== 4 5 SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES FORM 10-QSB CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (UNAUDITED) THREE MONTHS ENDED JANUARY 31, ---------------------------- 1999 1998 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 21,038 $ (349,751) Adjustments to reconcile net income to net cash provided (used) by operating activities - Depreciation and amortization 90,306 116,419 Change in Assets and Liabilities - (Increase) decrease in assets - Accounts receivable (130,029) (241,874) Inventory 2,050 3,242 Prepaid expenses 3,101 (333,546) Deferred franchise costs - 5,161 Notes receivable 348,639 184,515 Increase (decrease) in liabilities - Accounts payable (554,237) 142,471 Accrued expenses 70,498 (88,763) Income taxes payable - (109,823) Deferred revenue - (2,895) Total Adjustments (169,672) (325,093) ---------- ---------- NET CASH (USED)/PROVIDED BY OPERATING ACTIVITIES (148,634) (674,844) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets - (55,045) Decrease (increase) in intangible & other assets - (66,563) ---------- ---------- NET CASH (USED)/PROVIDED BY INVESTING ACTIVITIES - (121,608) ---------- ---------- Cash Flows From Financing Activities Decrease in restricted cash - - Net principal payments under long-term debt obligations 17,024 207,855 ---------- ---------- NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES 17,024 207,855 ---------- ---------- NET (DECREASE) IN CASH AND CASH EQUIVALENTS (131,610) (588,597) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 183,352 662,880 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF FIRST QUARTER $ 51,742 $ 74,283 ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid year to date for - Interest $ 50,949 $ 71,237 ========== ========== Income taxes $ 17,654 $ 330,000 ========== ========== 5 6 SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES FORM 10-QSB Management's Discussion and Analysis ITEM 2. FINANCIAL CONDITION AND RESULTS OF OPERATIONS "FORWARD LOOKING INFORMATION" 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 is 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, Pest Control 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, Pest Control 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, (v) the Company's ability to re-sell certain Hygiene businesses which have been repurchased from franchisees and (vi) 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, Pest Control 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. The following analysis of the Company's financial condition as of January 31, 1999 and the Company's results of operations for the quarter ended January 31, 1999 and 1998 should be read in conjunction with the Company's financial statements included elsewhere in this report. Although the Company believes that the disclosures presented below are adequate to make the interim financial statements presented not misleading, it is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's report on Form 10-KSB for the year ended October 31, 1998. GENERAL: The financial information for the periods ended January 31, 1999 and 1998 included herein is unaudited, but includes all adjustments which, in the opinion of management of the Company, are necessary to present fairly the financial position of the Company and its results of operations and cash flows. As part of the Company's organizational restructuring, Company-owned operations in Hygiene (Tulsa, OK) and Pest Control (Monroe, NC) were sold in the fourth quarter of fiscal 1998. The Company is actively marketing its Company-owned Hygiene operations in Florida and West Virginia in order to better focus attention on its primary business as a franchisor. The Company changed the focus of the development of Swisher Pest Control in the first quarter of fiscal 1999, to include expanding the business through the Hygiene franchise system as an additional service. This change in focus has reduced the number of existing Pest Control franchisees, with the expectation the change will be a profitable method of expanding the system with minimum initial additions to overhead. Based on the existing agreements with the Pest Control franchisees, which included certain incentives, the reduction in existing franchisees is expected to have minimal impact on the financial performance of the division in 1999. While the Company will continue to pursue adding independent Pest Control franchisees to the system, this change in strategy will facilitate the recognition of significantly reduced overhead levels compared to fiscal year 1998. 6 7 ITEM 2. FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) GENERAL: (CONTINUED) In the second half of 1998 the Company instituted a plan to reorganize the overhead structure of the Company, particularly in the Surface Doctor and Pest Control franchise systems. As a result of these efforts and an overall improvement in managing expenses, the Company recorded operating income (before taxes) of $21,000 for the three months ended January 31, 1999, representing an increase of $507,000 from a pre tax loss of $486,000 in the prior year comparable period. The increase in income before taxes was created by a combination of a $190,000 increase in Royalties and Service Fees (parts of the Company's annuity revenues) and a $336,000 decrease in selling, general and administrative expenses. Net income for the three months ended January 31, 1999 was also $21,000, an increase of $371,000 from the prior year period, which included a tax benefit of $136,000. REVENUE: Total revenues of $3,346,000 for the first quarter ended January 31, 1999 increased $63,000 or 2% from the prior year comparable period. An increase of $374,000 in Annuity revenues (Product sales, Service and Marketing Fees and Royalties) was offset by decreases of $273,000 and $62,000 in revenue from Company-Owned operations and initial franchise sales, respectively. The Company's annuity revenues, consisting of product sales, royalties, and service and marketing fees, are revenues derived directly from the Company's franchise systems. The growth of annuity revenues of $374,000 or 14% from the prior year three-month period are a direct reflection of the growth of the franchise systems, primarily Hygiene. The reduction of $273,000 in revenue from Company-owned operations is a result of the sale of the Company's Pest Control business in Monroe, NC and the Tulsa, OK Hygiene business, with both sales occurring in the fourth quarter of fiscal 1998. The sales of these two Company-owned operations, included in the first quarter 1998 financial results, reflects the Company's current intent to focus on its primary business as a franchisor, and reduce the number of Company-owned operations. Initial franchise sales decreased to $62,000 from the prior year period to $101,000 in the three months ended January 31, 1999. As an offset to the decrease in initial franchise sales, certain related expenses in personnel, advertising, and promotion, have also decreased and are reflected in the decrease in selling, general and administrative expenses. EXPENSES: Total pre-tax expenses were $3,324,000 for the first quarter of 1999, a decrease of $444,000 or 12% from the first quarter of 1998. Selling, general, and administrative expenses decreased $336,000, expenses related to Company-owned operations decreased $284,000, interest expense decreased $32,000 and cost of product sales increased $208,000. The decrease in selling, general, and administrative expenses reflect reductions in overhead made during the latter part of fiscal 1998, particularly in the Company's Surface Doctor and Pest Control corporate expenses, and the nature of certain expenses in 1998 for enhancements to systems and procedures which were expected to be non-recurring. The $284,000 decrease in Company-owned expenses relate to the sale of Tulsa, OK Hygiene and Monroe, NC, Pest Control operations and have a corresponding decrease in revenue. The $208,000 increase in the cost of products sold follows a corresponding increase in revenue from products sold. Gross margin decreased slightly from the prior year primarily due to a change in the mix of product sold, with an increasing amount of lower margin items sold in 1999. INCOME: Net income of $21,000 for the three months ended January 31, 1999 was an increase of $371,000 from a net loss of $350,000 from the prior year period. The basic earnings per share for the three months ended January 31, 1999 was $0.01 per share on 2,208,271 common shares, as compared to a loss of $0.16 per share on 2,122,271 shares for the comparable period in 1998. Fully diluted (loss) earnings were $0.01 on 2,212,057 average common shares and common share equivalents in the three months ended January 31, 1999 and a loss of $0.16 on 2,122,271 average common shares and common share equivalents for the comparable prior year period. Interest expense of $54,000 for the three months ended January 31, 1999 was an improvement of $32,000 from the prior year period. 7 8 ITEM 2. FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES: The Company's principal sources of liquidity, both on a short-term and long-term basis are cash flow from operations and borrowings under a commercial revolving credit facility. The Company has also received advances on long-term notes receivable for working capital. Based upon its analysis of its consolidated financial position, its cash flow during the past three months, and the cash flow anticipated from its future operations, the Company believes that its future cash flows together with funds available under its current credit facility, or expected alternative sources, will be adequate to meet the financing requirements it anticipates during the next twelve months. There can be no assurance, however, that future developments and general economic trends will not adversely affect the Company's operations and, hence, its anticipated cash flow. Subsequent to the end of the quarter, on February 17, 1999, the Company's primary lender extended the credit facility through June 30, 1999, at which time the balance will become due and payable. The Company believes it will be successful in identifying and obtaining alternative financing sources to replace this credit facility prior to its expiration. An inability to refinance this credit facility, as needed, would adversely affect the Company's operations and financial position. For the first three months in fiscal year 1999, cash and cash equivalents decreased $132,000. This decrease is attributed primarily to cash used in operating activities of $149,000, which included a decrease of $554,000 in accounts payable, and is further detailed in the consolidated statement of cash flows. Working capital improved $351,000 in the three month period ending January 31, 1999. Total current liabilities include the outstanding balance on a commercial revolving line of credit of $1,660,000 and deferred revenue of $146,000 and exceed total current assets by $874,000. Total assets of $10,329,000 decreased $446,000 in the three months ended January 31, 1999, primarily due to a decrease of $282,000 in Notes Receivable and a decrease of $132,000 in cash and cash equivalents. Total liabilities of $6,398,000 decreased $467,000, primarily due to a decrease of $554,000 in accounts payable. In November 1998, Mr. Swisher advanced the Company $275,000, in the form of a short-term note payable, collateralized by certain anticipated income tax refunds. Also in November 1998, a pre-payment of $165,000 was received by the Company towards an outstanding note receivable from the Houston hygiene franchise. The note receivable due from the Houston Hygiene relates to the purchase of this franchise from the Company, by a company in which Mr. Swisher is a majority owner. YEAR 2000 COMPLIANCE. Many existing computer systems and applications and other control devices use only two digits to identify a year in the date field, without considering the impact of the upcoming change in the century. The Year 2000 issue is the risk that systems, products and equipment utilizing date-sensitive software or computer chips with two-digit date fields will fail to properly recognize the Year 2000. Such failures by the Company's software or hardware or that of government entities, customers, major vendors and other third parties with whom the Company has material relationships could result in interruptions of the Company's business which could have a material adverse effect on the Company. In response to the Year 2000 issue, the Company has implemented a Year 2000 program designed to identify, assess and address significant Year 2000 issues. This includes the Company's key business operations, services, business applications, and information technology systems and facilities. Additional tasking includes identification of the Company's customers, major vendors and other third parties with whom the Company has material relationships that may have Year 2000 issues with which to contend. The Company's Year 2000 readiness program applies to all hardware and software, whether developed internally or purchased from an outside supplier. Management has been assured through letters of attestation from most major software and hardware suppliers that mission critical Company software and hardware platforms are Year 2000 compliant. The Company believes that if any systems need to be repaired or replaced the repair or replacement would be minimal and could be handled within our normal budget for computer system upgrades and replacements. The Company is encouraging its subsidiaries and franchisees to take the appropriate precautionary steps necessary to ensure their computers systems are Year 2000 compliant, well in advance of the January 1, 2000 timeframe. 8 9 SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES FORM 10-Q Other Information PART II OTHER INFORMATION ITEM 1. Legal proceedings none ITEM 2. Changes in Securities none ITEM 3. Defaults Upon Senior Securities none ITEM 4. Submission of Matters to a Vote of Security Holders none ITEM 5. Other Information none ITEM 6. Exhibits and Reports on Form 8-K (1) Exhibits 27 Financial Data Schedule (for SEC use only) (2) Reports on Form 8-K The Company filed no reports on Form 8-K for the three months ended January 31, 1999. 9 10 SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES FORM 10-Q Other Information Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SWISHER INTERNATIONAL, INC. Registrant Date - March 15, 1999 by: /s/ Patrick L. Swisher ---------------------- Patrick L. Swisher President & Chief Executive Officer Date - March 15, 1999 by: /s/ Thomas W. Busch ---------------------- Thomas W. Busch Chief Financial Officer 10