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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (FEE REQUIRED) for the fiscal year ended December 31, 1995
( ) 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 ______________
Commission File No. 0-15227
THE DWYER GROUP, INC.
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(Name of small business issuer in its charter)
Delaware 73-0941783
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1010 N. University Parks Drive
Waco, Texas 76707
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(Address and zip code of principal executive offices)
(817) 745-2400
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(Issuer's telephone number including area code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Title of Each Class
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Common Stock ($.10 par value)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes (X)
No ( )
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $13,383,000
Aggregate market value of the voting stock held by nonaffiliates computed
by average bid and asked prices of such stock, as of February 29, 1996:
$6,534,000
Aggregate number of shares of Common Stock outstanding as of the close of
business on February 29, 1996: 7,113,127
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
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PART I
Item 1. DESCRIPTION OF BUSINESS.................................................................................... 1
General.................................................................................................... 1
Franchise Operations....................................................................................... 2
Marketing.................................................................................................. 5
Competition................................................................................................ 6
Trade Names and Service Marks.............................................................................. 6
Regulation................................................................................................. 6
Employees.................................................................................................. 7
Item 2. DESCRIPTION OF PROPERTIES.................................................................................. 7
Item 3. LEGAL PROCEEDINGS.......................................................................................... 8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................................ 8
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................... 8
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS....................................................................... 9
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................................ 14
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................................................................................. 14
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT.......................................................................... 14
Item 10. EXECUTIVE COMPENSATION..................................................................................... 17
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................. 19
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................. 20
Item 13. EXHIBITS, AND REPORTS ON FORM 8-K.......................................................................... 21
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Dwyer Group, Inc. (the "Company") is in the business of providing,
through its wholly-owned service-based franchising subsidiaries, a diverse array
of specialty services. The Company currently owns six such franchising
businesses, which have an aggregate of approximately 1400 franchises located in
all 50 states, and, through their master licensees, in fourteen foreign
countries. The Company has positioned itself as a consolidator of franchising
businesses in order to benefit from economies of scale achievable through the
pooling of resources. The Company believes that franchisees are attracted to the
Company's franchise opportunities because of the depth of the Company's support
services, the commitment to the Company's mission and vision and the established
reputations of its management team.
The Company's current franchising businesses include:
. Rainbow International Carpet Dyeing and Cleaning Co. ("Rainbow"), a
franchisor of carpet cleaning, dyeing and restoration services, has
451 franchises in the United States, and, through master franchise
licensees, 129 foreign franchise operations in twelve foreign
countries. For the year ended December 31, 1995, Rainbow's operations
accounted for approximately 24% of the Company's revenues.
. Mr. Rooter Corporation ("Mr. Rooter"), a franchisor of drain cleaning
and plumbing repair services under the service mark "Mr. Rooter,"
currently has 190 franchisees operating 212 franchise operations in
the United States and has granted master licenses in six foreign
countries with 61 foreign franchises. For the year ended December 31,
1995, Mr. Rooter's operations accounted for approximately 23% of the
Company's revenues.
. General Business Services, Inc. ("GBS") and Edwin K. Williams & Co.
("EKW") are franchisors of consulting services to small businesses.
GBS has a total of 295 franchises located throughout the United
States, one franchise in Canada, and one master franchise licensee in
Thailand. EKW, which was acquired effective May 1, 1994, has a total
of 172 franchises located throughout the United States, and one master
franchise licensee in Canada. Such consulting services include, among
others, counseling in finance, accounting, bookkeeping, tax matters,
marketing, and profit development. In addition, General Tax Services,
Inc. ("GTS"), a wholly-owned, non-franchising subsidiary of GBS
located in Maryland, provides tax return preparation and tax research
services to GBS and EKW franchisees. GTS commenced operations in June
1993. For the year ended December 31, 1995, the operations of GBS and
EKW accounted for approximately 38% of the Company's revenues.
. Aire Serv Heating & Air Conditioning, Inc. ("Aire Serv") is a
franchisor of heating, ventilating and air conditioning service
businesses. Aire-Serv was organized in December 1992, began offering
franchises in 1993 and has 54 United States franchises. For the year
ended December 31, 1995, Aire-Serv's operations accounted for
approximately 6% of the Company's revenues.
. Mr. Electric Corp. ("Mr. Electric") is a franchisor of electrical
repair and service businesses under the service mark "Mr. Electric".
Mr. Electric was organized in September 1994 and has 14 franchises in
the United States, and has granted one foreign master license. For the
year ended December 31, 1995, the operations of Mr. Electric accounted
for approximately 5% of the Company's revenues.
The Company was incorporated in 1970 in the State of Oklahoma under the
name Mr. Rooter Corporation of America, Inc. The Company's name was changed to
Mr. Rooter Corporation in 1972, and in 1986 the Company was reincorporated as a
Delaware corporation. The Company acquired GBS and Rainbow, each a Texas
corporation, as a result of a reorganization approved by the Board of Directors
on May 24, 1993. Prior to such time, GBS (since January 1993) and Rainbow were
wholly-owned by Mr. Donald Dwyer, the Company's Chairman who died December 4,
1994. On June 1, 1993, Mr. Dwyer was issued shares of Common Stock of the
Company in exchange for all of his shares of GBS and Rainbow (the "Exchange"),
and Rainbow and GBS became wholly-owned subsidiaries of the Company. These
acquisitions are accounted for in the Company's Consolidated Financial
Statements in a manner similar to a pooling of interests. Following the
Exchange, the Board approved a plan to convert the Company into a holding
company and to form a new subsidiary to operate the Mr. Rooter business. On July
30, 1993, this new subsidiary was incorporated in Texas under the name Mr.
Rooter Corporation and the Company was renamed The Dwyer Group, Inc.
On May 14, 1994, the Company acquired (effective May 1, 1994) EKW, a
wholly-owned subsidiary of Ekwill Acquisition Corporation, a California
corporation ("Ekwill"), for approximately $1,150,000 by purchasing all of the
outstanding capital stock of Ekwill from Ekwill's two shareholders. The
acquisition was financed by a short-term loan from an unaffiliated entity which
was repaid in July 1994 from the proceeds of the Company's 1994 public offering.
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The Company's principal executive offices are located at 1010 North
University Parks Drive, Waco, Texas 76707, and its telephone number is (817)
745-2400. All references herein to the Company include Mr. Rooter, Aire-Serv,
Rainbow, GBS, EKW and Mr. Electric unless the context otherwise specifies.
FRANCHISE OPERATIONS
The Company's goal is to build on its successful systems of franchising
businesses to develop strong new franchises and provide them with ongoing expert
franchise support.
The franchising industry is fragmented, consisting chiefly of small single-
service or single-concept franchising companies. The Company's philosophy is to
be a consolidator, that is to bring its franchising expertise to bear on a
number of businesses in various service fields. The Company applies its
franchise systems management and marketing skills to maximize the profitability
of franchise businesses. Thus, instead of franchising only one line of
business, the Company's philosophy is to benefit from economies of scale
achievable through the pooling of resources.
The Company, as a consolidator of franchising businesses, believes that its
existing broad base of franchisees, the diversity of services provided by its
current operations, its centralized financial, marketing, training and support
staff, and the adaptability and versatility of its established franchise
operating system, have positioned it to capitalize on the projected
opportunities for growth in the franchising industry. In addition, the Company
believes that, when coupled with the franchise sales and operations expertise
developed by its management over the last 23 years, such attributes will provide
the Company with a strong competitive advantage.
Each of the Company's franchising businesses requires its franchisees to
undergo training at the Company's World Headquarters in Waco, Texas prior to
operating one of the Company's franchises. The training program for each
franchisee will differ depending upon the type of franchise purchased. For
example, Rainbow franchisees are taught how to dye, clean, deodorize and repair
carpets, clean upholstery and perform restoration services. GBS franchisees
are taught record keeping and tax and business counseling. Mr. Rooter, Aire
Serv and Mr. Electric, on the other hand, are primarily "conversion"
franchisors, which recruit existing people operating in the "trades" and teach
them through franchising an improved business methodology. All of the Company's
franchisees, however, receive extensive instruction with respect to broadbased
marketing techniques, as well as guidelines and methods for hiring and managing
personnel, handling customer complaints and managing and collecting receivables,
among other things. In addition, the Company's training program, which utilizes
proprietary motivational techniques developed by the Company, educates each
franchisee about the extensive support services offered by the Company and how
best to take advantage of them.
Following their completion of the Company's initial training course, the
Company's franchisees continue to receive a broad range of services and support
from the Company on an ongoing basis. Certain of the Company's franchising
businesses maintain field trainers to assist franchisees in resolving day-to-day
difficulties encountered in operating their franchises. Each of the Company's
franchising businesses also provide numerous follow-up training sessions for its
franchisees each year at various locations around the United States. In
addition, the Company employs directors of franchise systems management on the
staff of each of its franchising businesses whose sole responsibilities are to
motivate the Company's franchisees and provide them with marketing support. Each
franchisee is contacted by such a director at least once a month (more often
when necessary) to discuss marketing techniques and business development.
Furthermore, each of the Company's franchising businesses provides to its
franchisees an updated Confidential Operations Manual, which serves as a
reference guide for all aspects of their franchise operations. The Company
believes that its proactive support philosophy with respect to its franchisees
is its primary distinguishing feature.
Each of the heads of the Company's franchise subsidiaries receives, in
addition to salary and commissions, bonus compensation based on the overall
performance of the subsidiary for which he is responsible. Thus, the emphasis
is on profitable growth, not just sales.
Mr. Rooter Corporation
Mr. Rooter is a franchisor of drain cleaning and plumbing repair services
under the service mark "Mr. Rooter" and related trade and service marks. Prior
to 1989, Mr. Rooter's franchise sales primarily resulted from referrals from
existing Mr. Rooter franchisees. In 1989, when Mr. Dwyer acquired control of Mr.
Rooter, additional franchise sales staff were hired and trained to actively sell
franchises. In 1989, at the time of Mr. Dwyer's acquisition of the Company, Mr.
Rooter had 22 franchises. By the end of 1995, Mr. Rooter had a total of 190
franchisees operating 212 franchises in 39 states and had granted master
franchise licenses covering six foreign countries. Mr. Rooter has shown
significant growth in income from royalties paid by franchisees (from $234,000
in 1989 to $2,079,000 in 1995).
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Mr. Rooter franchisees are required to operate their franchises in
accordance with specified methods, techniques and standards and with specified
equipment within a designated geographic territory. Franchisees are typically
able to service their territory by establishing only one service center within
such territory. Mr. Rooter emphasizes and promotes fast, efficient and high
quality service, seven days a week, using the most modern equipment available
for residential, commercial and industrial drain systems and plumbing repair.
A new franchisee pays an initial franchise fee of $175 for each 1,000 of
the Territory's population, with a minimum initial fee of $17,500. In general,
Mr. Rooter sells its Mr. Rooter franchises to licensed plumbers. No training is
provided on the technical aspects of operating a plumbing or drain cleaning
business. Instead, Mr. Rooter concentrates its training and support efforts on
marketing issues, customer service, pricing, profit development and
maximization, and growth and personnel management. Appointed regional
consultants, which are chosen from existing franchises, provide technical
support for franchisees in their region.
In addition to the initial franchise fee, under the terms of Mr. Rooter's
standard franchise agreement, a franchisee pays a weekly royalty which ranges
from 3% to 6% of gross sales. In addition to the weekly royalty, the
franchisees pay a weekly advertising fee equal to 2% of their gross sales which
must be used by Mr. Rooter for national advertising and marketing. Mr. Rooter
currently advertises nationally on all three major television networks. The
term of the initial franchise agreement is for ten years, which may be renewed
for an additional ten years at the option of the franchisee upon eight to twelve
months prior notice. Mr. Rooter may terminate a franchise agreement in the
event that a franchisee breaches the terms of his franchise agreement.
General Business Services, Inc.
GBS is a franchisor of business consulting and accounting services to small
businesses. At December 31, 1995, GBS had a total of 295 franchisees located
throughout the United States, one franchisee in Canada and one master franchise
licensee in Thailand. Such consulting services include counseling in financing,
accounting, tax matters (including tax counseling and planning), marketing and
profit development. In addition, GTS, a wholly-owned, non-franchising
subsidiary of GBS located in Maryland, provides tax return preparation and tax
research services to GBS franchisees.
GBS franchisees are typically independent business persons serving small
business owners and professionals. Under the GBS license agreement, a
franchisee obtains the right to use the GBS system and all other trademarks,
trade symbols, emblems, signs or slogans that GBS has adopted or may adopt and
designate for use in connection with the GBS services.
The initial franchise fee is $30,000, which must be paid in full prior to
attendance at GBS's basic training program. In addition to the initial
franchise fee, the franchisee is required to pay GBS a continuing royalty fee
from 2.5% to 10%, based on both gross billings and length of service. Currently
the initial term of the franchise agreement is ten years and is renewable for
succeeding five year terms. GBS may terminate a franchise agreement in the
event that a franchisee breaches the terms of his franchise agreement.
GBS provides its franchisees with the information that it believes a
franchisee needs to appropriately counsel other businesses. In addition to
providing training to franchisees on marketing techniques, GBS makes available
at an additional cost telemarketing services to the franchisees on a per
appointment fee basis.
Ordinarily, the franchisee enters into his own contractual arrangements
with clients for providing tax and other related business counseling services.
As an independent business counselor, the franchisee meets with his clients
periodically, sets his own fees, installs the record keeping systems, counsels
his clients on decisions affecting their businesses and collects information
necessary for the preparation of income tax returns. GTS prepares income tax
returns for the client businesses (submitted by the franchisee) based on the
information supplied by the GBS franchisee. The franchisee is then billed by GTS
for the tax return services, based on the time and complexity of return
preparation. GTS's tax return services are performed at the GTS office in
Columbia, Maryland by a group of tax specialists, including attorneys, Certified
Public Accountants and Enrolled Agents.
Edwin K. Williams & Co.
EKW was acquired by the Company in May 1994. Like GBS, EKW is a franchisor
of business consulting services and accounting to small businesses. At December
31, 1995, there were a total of 172 EKW franchises located throughout the United
States and one master franchise licensee in Canada. EKW's services include
bookkeeping and business management services, business counseling, tax services
and other related services to small businesses. EKW catered exclusively to the
retail petroleum industry from 1935 until the early 1970's. Although it has
since expanded its client base, a significant portion of its present client base
still consists of petroleum retail outlets.
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EKW has developed a distinctive system for providing bookkeeping and
business management systems and services to oil jobbers (wholesale and retail),
retail petroleum marketing outlets and service station owners, and other retail,
wholesale and service business establishments. In connection with such system,
EKW has designed and developed proprietary computer software. Under the standard
EKW license agreement, a franchisee obtains the right to use the EKW system,
including the software, and all other trade names, trademarks, service marks and
certain copyright works and materials, customer lists and other trade secrets
designated for use in connection with EKW services.
The initial franchise fee is $30,000 which must be paid in full prior to
attending EKW's basic training program. In addition, the franchisee is also
required to pay to EKW a monthly royalty fee from 4% to 8%, based on gross
billings. Tax support services, including a tax support hot line, tax update
bulletins and an annual tax training seminar, are provided by GTS. The initial
term of the franchise agreement is ten years and is renewable for succeeding
five year terms. In addition, all supplies and other customer service materials
used by the franchisee must be purchased from EKW, unless otherwise approved by
EKW.
EKW provides its franchisees with certain proprietary information,
including the software prescribed by EKW for a franchisee's business operations,
and an initial two-week training course. In addition, all new franchisees spend
up to one week in an existing franchisee's office. EKW franchisees are required
to have 24 hours per year of continuing education in taxation, accounting and
other subjects related to its business. A franchisee is assigned a non-exclusive
marketing area, generally consisting of one or more counties, a small portion of
which will be designated as an exclusive office location area.
Rainbow International Carpet Dyeing and Cleaning Co.
Rainbow is a franchisor of carpet cleaning, dyeing and restoration service
businesses. At December 31, 1995, Rainbow had 451 franchises in the United
States, 25 franchises in Canada and 104 franchises through master franchise
licenses in eleven other countries.
Rainbow offers for sale individual franchises for the operation of a carpet
and upholstery cleaning, dyeing and related services business (such related
services include, but are not limited to, drapery cleaning and water and smoke
damage restoration) for residential and commercial locations. The franchised
business often begins as a single truck operation which can later be expanded
into a multi-truck operation as the franchisee builds his customer base.
An individual's initial franchise fee is a minimum of $15,000 depending
upon the population of the franchise territory which can be financed in part
through Rainbow at Rainbow's discretion, plus approximately $9,000 to $18,000
for an equipment package, supplies, chemicals and promotional materials;
approximately $5,000 to $15,000 for a new or used van type truck (unless one is
already owned), including $550 for applying trademark decals and advertisements
on the truck; up to $2,000 for first year insurance premiums; approximately
$1,500 for travel, lodging, food and other miscellaneous expenses incurred
during training and a minimum working capital of at least $2,500. During the
term of a franchise agreement, the franchisee is required to pay Rainbow a
continuing royalty of 7% of its weekly gross sales plus, effective January 1,
1996, a 2% national advertising fee.
No previous knowledge, experience or skills for the carpet cleaning or
dyeing business are required prior to purchasing a Rainbow franchise. Instead,
new franchisees are thoroughly trained on all aspects of the business under an
operating system that the Company believes has proven to be successful. Beyond
technical training, extensive support emphasizing the development of the
franchisee's marketing and business management skills is provided.
Aire Serv Heating & Air Conditioning, Inc.
Aire Serv, a wholly-owned subsidiary of Mr. Rooter, is a franchisor of
heating, ventilating and air conditioning service businesses providing
installation, maintenance, repair and related services of residential and
commercial heating and air conditioning equipment. Aire Serv was organized in
December 1992, began offering franchises in 1993, and, at December 31, 1995, had
54 Aire-Serv franchises, all in the United States.
The minimum initial franchise fee is $14,000, payable in full at the time
of the franchisee's execution of a franchise agreement. The minimum initial
franchise fee is based on a territory population of approximately 100,000. The
initial franchise fee is increased by $140 for each additional 1,000 of
population contained in the territory. Aire Serv may, at its discretion, agree
to finance up to one-half of the initial franchise fee.
The term of an Aire Serv franchise agreement is ten years from the date
specified in the agreement. A franchisee may elect to renew the term of the
franchise for additional five-year periods upon certain conditions and payment
by such franchisee of a $2,500 renewal fee to Aire Serv.
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During the term of its license agreement, the franchisee is required to pay
to Aire Serv (i) an advertising fee equal to 2% of the franchisee's weekly gross
sales and (ii) a continuing royalty fee from 3% to 5%, also based on the
franchisee's weekly gross sales. In addition, the franchisee is required to
maintain an advertisement in the Yellow Pages of the telephone directory serving
the franchised territory.
Mr. Electric Corp.
Mr. Electric is a franchisor of electrical repair and service businesses
under the service mark "Mr. Electric". Mr Electric was organized in September
1994, and at December 31, 1995 had 14 franchises in the United States and one
foreign master licensee.
The minimum initial franchise fee is $12,500, payable in full at the time
of the franchisee's execution of a license agreement. The minimum initial
franchise fee is based on a territory population of approximately 100,000. The
initial franchise fee is increased by $125 for each additional 1,000 of
population contained in the territory. Mr. Electric may, at its discretion,
agree to finance up to one-half of the initial franchise fee.
The initial Mr. Electric franchise agreement term is ten years from the
date specified in the agreement. An election to renew the contract may be made
by the franchisee for additional five year periods. Upon certain conditions and
payment by such franchisee of a $2,500 renewal fee.
The franchisee is required to pay to Mr. Electric during the term of its
license agreement (i) an advertising fee equal to 2% of the franchisee's weekly
gross sales and (ii) a continuing royalty fee of from 3% to 6%, also based on
the franchisee's weekly gross sales. In addition, franchisees are required to
engage in local promotion of the services and products available.
MARKETING
Rainbow's marketing strategy for franchise sales in the United States and
Canada is based on the sale of individual franchise territories to business-
minded individuals. The primary lead sources are referrals and business
opportunity advertisements. Recently, contractors have also been targeted
through trade and franchise shows with Rainbow's new emphasis on fire, smoke and
water restoration services. International expansion has been targeted through
the sale of additional master licenses in selected foreign countries. The
market for Rainbow's carpet cleaning, dyeing and water and fire restoration
services extends through the residential, commercial, industrial and municipal
markets.
Mr. Rooter considers the market for the drain cleaning and plumbing
industry to be extensive. It is composed of residential, commercial, industrial
and municipal markets. Mr. Rooter's marketing strategy and efforts are directed
toward the sale of franchised operations in all major population areas. The
franchisees follow specific marketing guidelines provided by Mr. Rooter during
their franchise training sessions and as an ongoing service. These marketing
techniques help the franchisee capture a larger market share, which in turn
provides a more consistent stream of revenue.
GBS and EKW franchisees' services are marketed to individuals as well as
businesses, corporations, organizations, partnerships and other entities who
require bookkeeping, accounting, tax return preparation, counseling and similar
services. The market for the business counseling industry is considered to be
extensive. GBS's and EKW's marketing efforts are directed toward small-to-
medium sized companies that employ up to 250 employees. In addition, EKW has a
strong marketing presence and resulting large client base of petroleum retail
outlets.
The Company believes that the heating, ventilating and air conditioning
("HVAC") market is extensive. The Aire Serv franchisee, equipped with state-of-
the-art marketing techniques, guidelines and industry expertise provided by Aire
Serv, targets the residential and light commercial segments of the HVAC market.
Aire Serv provides its franchisees with the critical elements necessary to
achieve success as a retailing contractor and works with the franchisees to
implement and execute effective strategies and systems in these areas. Whether
a client is residential or commercial, the emphasis is on the service and
replacement segments. Aire Serv intends to create a national name in HVAC
service through establishing consumer awareness.
Mr. Electric's marketing strategy is focused on the sale of franchises to
existing electrical contractors and electricians. Mr. Electric's targeted
approach supplies the proven system to make an electrical service and repair
franchise business successful. Franchisees receive extensive training in sales,
marketing and business systems which allow them to achieve a greater market
share and increase their gross sales and profits. Mr. Electric is creating
national name recognition in the electrical service and repair industry.
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COMPETITION
The Company's markets and those of its franchisees are highly competitive.
The Company competes directly with other local and national franchisors which
are also seeking to sell their franchises or business opportunities to
prospective franchisees. Mr. Rooter franchisees compete principally with Roto-
Rooter, Inc., a nationally recognized provider of sewer and drain cleaning
services in the United States, as well as numerous plumbers, small drain
cleaning firms and regional and local firms in other segments of the market,
such as septic tank pumping and hydrojet cleaning. The Company believes that
Mr. Rooter is distinguished from its primary competition because Mr. Rooter
franchisees concentrate on providing plumbing repair while most competitors
focus on providing either drain and sewer cleaning or plumbing services. The
principal competitors of Rainbow's franchisees are Stanley Steemer
International, Inc., Professional Carpet Systems, Steamatic, Inc., Serv-Pro
Industries, Inc. and Servicemaster Co., all of which operate on a national
basis, as well as independent carpet cleaning and restoration companies. The
major competitors of GBS and EKW franchises, such as Comprehensive Business
Services, Inc., and Padget Business Services U.S.A., Inc., specialize in
providing general accounting and bookkeeping services to small businesses.
Local accountants, bookkeepers and individual consultants also provide sources
of competition. National tax preparation services, such as H & R Block Co., and
many of the local tax preparers compete with GBS, although such competitors tend
to concentrate on individual tax returns rather than on business returns. Local
or regional HVAC contractors are Aire Serv's primary source of competition and,
to a lesser extent and in some markets, national home improvement retailers
provide competition. Local electricians are Mr. Electric's primary source of
competition.
The Company's franchisees generally compete on the basis of price, training
and support services and reputation.
In addition, the Company expects to encounter competition in attempting to
effectuate acquisitions of franchise companies. Potential competitors, many of
which are well established and have extensive experience in connection with
identifying and effecting business acquisitions, may include other franchise
companies, leveraged acquisition partnerships (leveraged buy out funds),
business development companies, investment partnerships and corporations
(including venture capital entities), small business investment companies, large
industrial and financial companies seeking acquisitions directly or through
affiliates and wealthy individuals. In the event that the Company succeeds in
effecting acquisitions, the Company will, in all likelihood, become subject to
intense competition from competitors of the acquired business. The degree of
competition characterizing the industry of any prospective acquisition candidate
cannot be presently ascertained.
TRADE NAMES AND SERVICE MARKS
The Company believes that its trademarks and service marks are important to
the marketing of its franchises and the sale of services to consumers by its
franchisees. The Company currently holds the following federally registered
trademarks and service marks: "Mr. Rooter", the stylized Mr. Rooter logo, "Mr.
Winkie Design", "Quick-as-a-Wink", "Super Kleens", "America's Trouble Shooter",
"Aire Serv", the stylized Aire Serv logo, "America's Comfort Company", "Mr.
Electric", the stylized Mr. Electric design, "Rainbow International Carpet
Dyeing & Cleaning", "Rainbow International", "The Vehicle Stripe Design for
Rainbow", "GBS", "Dollartrak", "GBS General Business Services", "Dollartrak
Systems", "EKW Since 1935", "E.K. Williams & Co.", "EKW * Manager", "Good
Accounting Doesn't Cost -- It Pays!", and "E.K. Williams & Co. The Accounting
and Tax People For Small Business Since 1935". The Company has applied for
federal trademark and service mark registration for "North America's Trouble
Shooter", the van stripe design for each of Mr. Rooter, Mr. Electric and Aire
Serv and a new stylized logo for Rainbow. The Company holds a state trademark
registration for "Mr. Rooter" in Texas and a service mark registration for
"Rainbow International Carpet Dyeing & Cleaning Co." in 13 states. In addition,
the Company holds copyrights in connection with all of its training manuals and
materials which it considers proprietary.
Although the Company is not aware of any current use of similar marks,
there can be no assurance that the Company's marks do not or will not violate
the proprietary rights of others, that the Company's marks would be upheld if
challenged or that the Company would not be prevented from using its marks. Any
limitations on the use by the Company of its trade names or service marks and
the ability of its franchisees to use such marks would have an adverse effect on
the Company.
REGULATION
The offer and sale of franchises is subject to extensive federal and state
laws and substantial regulation under such laws by government agencies,
including the Federal Trade Commission (the "FTC") and various state
authorities. Pursuant to FTC regulations, the Company is required to furnish to
prospective franchisees a current franchise offering disclosure document
containing information prescribed by the FTC. The Company uses Uniform
Franchise Offering Circulars to satisfy this disclosure obligation. In
addition, in certain states, the Company is required to register or file with
such states and to provide prescribed disclosures. The Company is required to
update its offering disclosure documents to reflect the occurrence of material
events.
6
<PAGE>
The occurrence of any such events may from time to time require the Company to
cease offering and selling franchises until the disclosure document relating to
such franchising business is updated. There can be no assurance that the
Company will be able to update its disclosure documents (or in the case of any
newly acquired franchising business, prepare an adequate disclosure document) or
become registered in certain states in a time frame consistent with its
expansion plans, that it will not be required to cease offering and selling
franchises or that the Company will be able to comply with existing or future
franchise regulations in any particular state, any of which could have an
adverse effect on the Company.
The Company is also subject to a number of state laws that regulate certain
substantive aspects of the franchisor-franchisee relationship, such as
termination, cancellation or non-renewal of a franchise (including requirements
that "good cause" exist as a basis for such termination and that a franchisee be
given advance notice of and a right to cure a default prior to termination) and
may require the franchisor to deal with its franchisees in good faith, prohibit
interference with the right of free association among franchisees, and regulate
discrimination among franchisees in charges, royalties or fees. If the Company
is unable to comply with the franchise laws, rules and regulations of a
particular state relating to offers and sales of franchises, the Company will be
unable to engage in offering or selling franchises in or from such state. In
addition, the Company is subject to franchise laws in Canada where, although it
has granted foreign master licenses, it also offers and sells franchises
directly. Amendments to existing statutes and regulations, adoption of new
statutes and regulations and the Company's expansion into new states and foreign
jurisdictions could require the Company to continually alter methods of
operations at costs which could be substantial. The Company believes that it is
in substantial compliance with all of the foregoing federal, state and foreign
franchising laws and the regulations promulgated thereunder and has obtained all
licenses and permits necessary for the conduct of its business. Failure to
comply with such laws and regulations in the future could subject the Company to
civil remedies, including fines or injunctions, as well as possible criminal
sanctions, which would have a material adverse effect on the Company. The
Company's franchisees are also subject to various federal, state and local laws
affecting their franchise businesses, including state and local licensing,
zoning, land use, construction and environmental regulations and various safety
and other standards. The failure of such franchisees to comply with applicable
regulations could interrupt the operations of the affected franchise or
otherwise adversely affect the franchise or the Company.
EMPLOYEES
As of December 31, 1995, the Company had 124 full-time employees and 16
part-time employees, none of whom belong to unions, as detailed below:
<TABLE>
<CAPTION>
Full-time Part-time Total
--------- --------- ------
<S> <C> <C> <C>
Corporate......... 37 5 42
Mr. Rooter........ 11 2 13
Aire Serve........ 4 - 4
Rainbow........... 18 1 19
GBS............... 40 7 47
Mr. Electric...... 5 - 5
E.K. Williams..... 9 1 10
--- -- ---
Total............. 124 16 140
=== == ===
</TABLE>
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's principal executive and administrative offices are presently
located at 1010 - 1020 N. University Parks Drive, Waco, Texas. These
facilities are leased from the Estate of Donald Dwyer under month to month and
various operating leases expiring at different dates through October 31, 2001.
Monthly rental for these offices is $31,417. See "Certain Transactions."
The Company owns a 30,658 square foot warehouse and three acres of land at
3321 Mary Street, Waco, Texas, which was used for the Company's manufacturing
concern which has been sold. The property is currently leased to an unrelated
party for $4,500 per month through December 31, 1998.
The Company also leases office space in Columbia, Maryland from an
unrelated party for $4,878 per month, which lease expires in June 1996 and sub-
leases office space in Westminster, Colorado from a franchisee for $700 per
month on a month-to-month basis.
7
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is engaged in various legal proceedings incidental to its
normal business activities. Management of the Company does not believe that the
outcome of each such proceeding or all of them combined will have a material
adverse effect on the Company or its consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the year ended December 31, 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since July 1994, the Company's Common Stock has traded on the Nasdaq
National Market tier of The Nasdaq Stock Market under the symbol "DWYR". Prior
to that time, the Company's Common Stock was quoted on the Nasdaq Small-Cap
Market. Prior to July 1993 the Common Stock was quoted under the symbol "ROOT".
The following table sets forth the quarterly high and low sales prices per
share of the Common Stock as reported by the Nasdaq National Market or the
Nasdaq market, as applicable, for each quarter during the last two fiscal years.
These per share quotations represent inter-dealer prices and do not include
retail mark-ups, mark-downs or commissions and may not represent actual
transactions.
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
HIGH LOW
---- ---
FISCAL YEAR ENDED DECEMBER 31, 1994
<S> <C> <C>
First Quarter 4 5/8 3 1/2
Second Quarter 5 1/4 4 1/2
Third Quarter 5 4 1/4
Fourth Quarter 4 5/8 2 1/4
FISCAL YEAR ENDED DECEMBER 31, 1995
First Quarter 4 3
Second Quarter 3 3/4 2 1/2
Third Quarter 3 7/8 2 1/2
Fourth Quarter 3 1/8 2 3/8
</TABLE>
On February 29, 1996, the high and low prices of the Common Stock as
reported by the Nasdaq National Market were $2 5/8 and $ 2 1/2 per share,
respectively. As of such date, there were approximately 395 holders of record of
the Common Stock.
No cash dividends have been paid by the Company on its Common Stock, and the
Company does not currently intend to pay cash dividends on its Common Stock, but
will retain earnings for the operation and development of its business.
8
<PAGE>
ITEM 6.MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the approximate
dollar amount (in thousands) and percentage of revenue and earnings from
continuing operations derived from each of the Company's subsidiaries.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
REVENUES: 1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Mr. Rooter $ 3,015 22.5% $ 2,914 21.6% $ 3,194 32.4%
Rainbow 3,267 24.4 4,051 30.0 3,516 35.7
GBS(1) 3,467 25.9 3,813 28.2 2,708 27.5
Aire Serv(2) 795 5.9 891 6.6 433 4.4
E.K. Williams(3) 1,616 12.1 1,387 10.3 - -
Mr. Electric(4) 724 5.4 - - - -
Other(5) 499 3.8 452 3.3 - -
------- ------ ------- ------ ------- ------
$13,383 100.0% $13,508 100.0% $ 9,851 100.0%
======= ====== ======= ====== ======= ======
INCOME (LOSS) FROM CONTINUING OPERATIONS:
<S> <C> <C> <C> <C> <C> <C>
Mr. Rooter $ 133 25.8% $ 444 21.1% $ 621 50.7%
Rainbow 546 106.0 1,437 68.3 296 24.2
GBS(1) (799) (155.1) 262 12.4 231 18.9
Aire Serv(2) (592) (115.0) 136 6.5 77 6.2
E.K. Williams(3) 112 21.7 (9) (.4) - -
Mr. Electric(4) 149 29.0 (44) (2.1) - -
Other(5) (64) (12.4) (122) (5.8) - -
-------- ------ -------- ------ ------- ------
$ (515) 100.0% $2,104 100.0% $ 1,225 100.0%
======== ====== ======== ====== ======= ======
</TABLE>
______________
(1) Includes revenues or earnings of GBS since January 11, 1993, the date of
the Company's assumed control of GBS.
(2) Aire Serv commenced franchise activities in April 1993.
(3) Includes revenues or earnings of E.K. Williams since May 1, 1994, the
effective date the Company acquired EKW.
(4) Mr. Electric commenced franchise activities in December 1994.
(5) Includes revenues or earnings of The Dwyer Group, Inc. (Parent holding
company) which beginning January 1,1994 maintains all corporate activities
and functions. During 1993 such corporate activities (accounting, legal and
administrative) were a part of Rainbow operations.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company incurred a net loss of $515,000, or $.07 per share for the year
ended December 31, 1995, a decrease of $2,619,000, or 124.5%, as compared to
generating net income of $2,104,000, or $.31 per share for the year ended
December 31, 1994.
Total revenues for fiscal 1995 were $13,383,000, a decrease of $125,000, or
.9%, compared to revenues of $13,508,000 for the year ended December 31, 1994.
This net decrease in revenues is comprised of the following components: royalty
income increased $1,135,000, or 20.8%; franchise sales decreased $648,000, or
13.3%; product sales increased $80,000, or 13.6%; interest and other income
increased $249,000, or 26.7%; whereas tax services decreased $27,000, or 3.7%.
Fiscal 1994 revenues included the one-time recognition of $914,000 of life
insurance proceeds. Excluding these life insurance proceeds from the 1994
revenues, results in fiscal 1995 revenues increased $789,000 (6.3%).
9
<PAGE>
The Company recognizes revenues from franchise royalties (net of an
allowance for uncollectible amounts) when due from the franchisees. Increases
in royalty income occurred in: Rooter - $604,000 or 40.9%; Aire Serv - $149,000
or 239.8%; and GBS - $53,000 or 7.0%. These increases, which coincide with the
increased business revenues of the franchisees, are a direct result of the
Company's emphasis placed on providing strong franchise support services, and
it's methods and programs created to assist franchisees in building successful
businesses. This in turn is very instrumental to the future of the Company as
royalties are the foundation for the Company's long-term financial strength.
Additionally, royalty income of E. K. Williams & Co. ("EKW"), which was acquired
in May 1994 and therefore contributed only eight months of operations during
fiscal 1994, increased approximately $265,000 (37.0%) in fiscal 1995 as compared
to fiscal 1994.
Franchise sales revenue represents the initial franchise fees charged
by the Company to buyers of its individual and regional franchises as well as
fees for its foreign master licenses. Rainbow, with franchise sales increasing
from $380,000 in 1994 to $508,000 in 1995 ( an increase of $128,000 or 33.7%)
and Mr Electric, which was organized in September 1994 and recorded $695,000 of
first year franchise sales in fiscal 1995, were the companies within The Dwyer
Group, Inc. with franchise sales increases. Rainbow's franchise sales increase
is primarily due to increased franchise sales activity on which down payments
and revenue recognition criteria have been met. Offsetting the above franchise
sales increases were decreases in Rooter, GBS and Aire Serv of $671,000 (47.7%),
$493,000 (22.1%) and $272,000 (33.0%), respectively. The Rooter and Aire Serv
decreases are primarily attributable to the reorganization and restructure of
their respective franchise sales departments necessitated by the promotion of
Robert Tunmire to the position of President and CEO of the Company due to the
death of Donald J. Dwyer in December 1994. Prior to Mr. Tunmire's promotion, he
was President of Mr. Rooter and Aire Serv, and was actively involved in the
daily management and closing of franchise sales. The GBS franchise sales
decrease is attributable to the 1995 planned decrease in regional franchise
sales which was a major contributor to GBS' 1994 franchise sales.
The product sales increase of $80,000 in 1995 over the prior year, is
due to EKW which only contributed eight months of operations in 1994 after its
May 1, 1994 acquisition by the Company. EKW sells products such as manual record
keeping systems and forms to its franchisees and outside customers. Tax service
revenues generated by GTS decreased $27,000 from $738,000 in fiscal 1994 to
$711,000 in fiscal 1995.
The increase in interest and other income is primarily due to
increased interest income from invested cash balances and interest earned from
related party and trade notes receivable.
Costs and expenses for the year ended December 31, 1995 were
$14,219,000, an increase of $3,659,000 or 34.7%, compared to costs and expenses
of $10,560,000 for the year ended December 31, 1994. The major contributors to
these increased expenses were: $796,000 regarding the loss in the repurchase of
and subsequent operation of two Rooter and six Aire Serv franchise territories;
$413,000 of additional Mr. Electric expenses, which was organized in September
1994 and began franchising in December 1994; $736,000 of additional trade notes
and accounts receivable bad debt expenses as a result of an in-depth study of
the collectibility of each franchise subsidiary's detailed receivable portfolio;
$265,000 of increased regional director commissions primarily due to the
increased franchisee revenues and resulting royalty income increases of Rooter
and Aire Serv and the progression of the regional director program started in
GBS in 1994; $157,000 of additional depreciation and amortization expenses
primarily due to telephone and computer equipment acquired during fiscal 1995,
the additional amortization of EKW franchise rights, which were acquired May 1,
1994, and increased goodwill amortization regarding the minority interest
acquired in SSCS September 1, 1994; and costs (of which approximately $712,000
relates to salaries and payroll taxes) associated with the re-engineering of the
administrative, franchise sales and franchise management departments of the
operating subsidiaries, as well as the creation of several new corporate
departments (telecommunications, office services, international marketing and
MIS) in 1995.
Income taxes consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of property, plant and
equipment, inventory, and accounts receivable for financial and income tax
reporting. For the year ended December 31, 1995 the Company recorded an income
tax benefit of $(321,000) as compared to an $844,000 income tax expense for the
year ended December 31, 1994.
During the fourth quarter of 1995, various year-end adjustments were
recorded to the consolidated financial statments. The effect of these
adjustments was a net decrease in total assets, liabilities, stockholders'
equity and increased net loss of approximately $1,715,000, $927,000,$788,000,
and $370,000, respectively. These adjustments were to primarily increase the
allowance for doubtful accounts and notes receivable, adjustments to and write-
downs of assets held for sale, write-off's of notes receivable, and adjustments
to income tax accounts.
10
<PAGE>
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Income from continuing operations for the year ended December 31, 1994
was $2,104,000 (15.6% of revenues), an increase of $879,000, or 72%, compared to
income from continuing operations of $1,225,000 (12.4% of revenues) for the year
ended December 31, 1993. The Company incurred a net loss from discontinued
operations of $48,000 during 1993 as a result of the sale of manufacturing
operations, offset, in part, by a gain on the sale of such assets. As a result
of the foregoing, the Company generated net income of $2,104,000, or $.31 per
share for the year ended December 31, 1994, an increase of $857,000, or 69%, as
compared to net income of $1,247,000, or $.20 per share for the year ended
December 31, 1993.
Total revenues for fiscal 1994 were $13,508,000, an increase of
$3,657,000, or 37.1%, compared to revenues of $9,851,000 for the year ended
December 31, 1993. This revenue increase is comprised of the following
components: royalty income increased $1,253,000, or 29.8%; franchise sales
increased $981,000, or 25.1%; product sales increased $460,000, or 356.5%;
interest and other income increased $1,044,000, or 130.7%; whereas tax services
decreased $81,000, or 9.8%.
The Company recognizes revenues from franchise royalties (net of an
allowance for uncollectible amounts) when due from the franchisees except in the
case of Rainbow where royalty revenues are recognized when paid. Increases in
royalty income occurred in: Aire Serv - $52,000 or 512.7%; Rooter - $443,000 or
43.7%; and Rainbow - $140,000 or 6.1%. These increases, which coincide with the
increased business revenues of the Company's franchisees, are a direct result
of the Company's emphasis placed on providing strong franchise support services,
and it's proven methods and programs created to assist franchisees in building
successful businesses. This in turn is very instrumental to the future of the
Company as royalties are the foundation for the Company's long-term financial
strength. Additionally, approximately $715,000 of the increase was generated
from the royalty revenues of EKW which was acquired effective May 1, 1994.
Franchise sales revenue represents the initial franchise fees charged
by the Company to buyers of its individual and regional franchises as well as
fees for its foreign master licenses. GBS, with franchise sales increasing from
$990,000 in 1993 to $2,231,000 in 1994 (an increase of $1,241,000 or 125.4%) and
Aire Serv, with franchise sales increasing from $422,000 in 1993 to $823,000 in
1994 (an increase of $401,000, or 95.0%) were the companies within The Dwyer
Group, Inc. with franchise sales increases. Aire Serv, which commenced
operations in April 1993, achieved a natural progression in increased franchise
sales, being a relatively new franchise operation. GBS's franchise sales
increase is primarily due to the focus by the Company in establishing a
nationwide network of regional franchises to assist GBS in the sale and support
of individual franchises. During 1994, GBS sold ten (10) regional franchises
accounting for approximately $1,620,000 in franchise sales revenue. Partially
offsetting the above franchise sales increases were decreases in Rooter and
Rainbow franchise sales of $420,000 or 23.0% and $288,000 or 43.1%,
respectively, which was primarily due to management's increased focus on
profitability of existing franchises and decreased focus on franchise sales. In
addition, these declines in franchise sales are consistent with the maturation
process of franchise companies, where as the company matures, franchise sales
revenue gives way to royalty income as the main income stream.
The product sales increase of $460,000 in 1994 over the prior year,
is due to the acquisition of EKW. EKW sells products such as manual record
keeping systems and forms to its franchisees and outside customers.
The major contributor to the $1,044,000 increase in other income is
the $914,000 income recognition of life insurance proceeds relating to the death
of the Company's Chairman and majority stockholder in December 1994. At December
31, 1994 the Company had actually received $50,000 of the $914,000 in life
insurance proceeds, with the remaining $864,000 accrued and recorded as a note
receivable from Mr. Dwyer's estate. The estate of Mr. Dwyer issued to the
Company on December 20, 1994 a promissory note bearing 9% interest per annum
covering the remaining life insurance proceeds ($864,000) which had been pledged
to lenders for the benefit of the estate and not received by the Company. This
note matured December 19, 1995.
Costs and expenses for the year ended December 31, 1994 were
$10,560,000, an increase of $2,430,000 or 29.9%, compared to costs and expenses
of $8,130,000 for the year ended December 31, 1993. Costs and expenses
represented 78.2% and 82.5% of revenues for 1994 and 1993, respectively. When
1994 revenues are adjusted downward to exclude the one-time 1994 revenue
recognition of the $914,000 in life insurance proceeds, cost and expenses for
1994 represent 83.9% of these non-life insurance adjusted revenues. The
increase in costs and expenses from 82.5% in 1993 to 83.9% as a percent of
continuing revenues in 1994 is due to the added operations of Mr. Electric and
EKW during 1994. Costs and expenses as a percent of revenues for EKW in 1994
was 98.6% and the 1994 start-up of Mr. Electric resulted in net expenses of
approximately $72,000.
The Company's effective income tax rate on income from continuing
operations decreased to 28.6% for the year ended December 31, 1994 from 28.8 %
for the year ended December 31, 1993.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company's working capital ratio was approximately 3.0
to 1 compared to approximately 4.3 to 1 at December 31, 1994. In addition, the
Company had working capital of approximately $5,213,000 at December 31, 1995,
including $354,000 of franchisee funds held for advertising as compared to
approximately $5,541,000 of working capital, including $443,000 of franchisee
funds held for advertising at December 31, 1994. The decrease in the Company's
working capital ratio and working capital at December 31, 1995 is primarily due
to a $1,374,000 decrease in cash and cash equivalents and an overall $1,019,000
increase in accrued liabilities offset in part by a $1,000,000 increase in short
term investments, a $647,000 increase in federal income tax receivable and a net
receivable increase of approximately $262,000 regarding related party
receivables and payables.
Net trade accounts receivable decreased approximately $85,000 from
December 31, 1994 to December 31, 1995. This decrease can be attributed to the
$127,000 increase in allowance for doubtful accounts at December 31, 1995 as
compared to December 31, 1994. Total trade notes receivable decreased
approximately $1,324,000 from December 31, 1994 to December 31, 1995. This
decrease in trade notes receivable is mainly comprised of: $772,000 of Rainbow
notes written off (due to uncollectibility) against deferred franchise sales
revenue, a liability account, (accounting for the majority of the $844,000
decrease in deferred franchise sales revenue from December 31, 1994 to December
31, 1995) and $720,000, $188,000 and $125,000 of Rooter, Aire Serv and GBS trade
notes receivable , respectively, written off to assets held for sale relating to
repurchased franchise territories.
Capital expenditures for the year ended December 1995 were
approximately $632,000 compared to approximately $281,000 for the year ended
December 31, 1994. The Company anticipates capital expenditures for 1996 will be
approximately $500,000. Management believes that the Company's cash flow from
ongoing operations supplemented by the Company's positive cash position will be
adequate to fund the Company's capital requirements.
Net cash provided by operating activities for the year ended December
31, 1995 decreased to approximately $150,000 as compared to $1,853,000 for the
year ended December 31, 1994 primarily as a result of decreased net earnings.
Net cash used in investing activities for the year ended December 31, 1995
decreased by approximately $661,000 to $2,010,000, as compared to the year ended
December 31, 1994. The primary uses of cash for investing activities were:
$1,000,000 for short-term investments and $828,000 to acquire assets held for
sale. Net cash provided by financing activities in the year ended December 31,
1995 decreased by approximately $3,981,000 as compared to the prior year,
primarily as a result of fiscal 1994 including approximately 5,036,000 of the
net proceeds from the July 1994 common stock offering.
In 1993, the Company entered into the Franchise Financing Agreement
with Stephens Franchise Financing, ("Stephens"), pursuant to which Stephens
agreed to extend credit to qualified Mr. Rooter and Aire Serv franchisees up to
an aggregate amount of $10,000,000. As of December 31, 1995 and 1994, the
aggregate principal amounts of outstanding franchisee indebtedness under such
agreement was approximately $2,749,000 and $2,571,000, respectively. Pursuant to
the terms of the Company's agreement with Stephens, until the entire principal
balance of such indebtedness is repaid in full, the Company is obligated through
full recourse on such franchisee indebtedness in the event a default with
respect to such indebtedness occurs, the Company has 180 days to correct the
default. If the default is not corrected within 180 days, the Company is
obligated to make the monthly installments on the note until paid in full or the
franchise is sold to another approved party. During 1995 and 1994, the Company
exchanged notes it owned aggregating approximately $261,000 and $93,000,
respectively, to Stephens for franchisee defaulted notes. In addition,
approximately $58,000 and $13,000 was paid to Stephens during 1995 and 1994,
respectively representing monthly installments on behalf of franchisees in
default. The Company believes that its agreement with Stephens significantly
improves its liquidity and working capital position.
In connection with its franchising activities, the Company regularly
extends credit to prospective franchisees to finance their purchase of
franchises. The repayment of such indebtedness is secured by the assets of such
franchises, including the franchise rights sold to the franchisees. The Company
does recognize as revenue, franchise sales represented by notes from Rainbow,
GBS, EKW, Mr. Rooter, Mr. Electric and Aire Serv franchisees who have made a
down payment in cash of at least 20% of the sales price and completed training.
At December 31, 1995 and 1994, notes receivable (in excess of those recognized
as deferred liabilities), less allowance for doubtful collections, were
approximately $2,652,000 and $3,133,000, respectively. For the year ended
December 31, 1995, the Company expensed approximately $753,000 in conjunction
with increased notes receivable bad debt reserves and notes receivable from
franchisees which were determined to be uncollectible as compared to $267,000
for the year ended December 31, 1994. At December 31, 1995, the Company's
allowance for doubtful note collections was $856,000, which the Company believes
is currently adequate for the size and nature of its notes receivable.
In 1982 and 1984, Rainbow guaranteed the repayment of approximately
$1,500,000 of Mr. Donald Dwyer's personal indebtedness evidenced by industrial
revenue bonds ("IRB's") in connection with Mr. Dwyer's improvements to certain
real estate holdings, including the building of office facilities occupied by
the Company and certain other companies.
12
<PAGE>
At the time of Mr. Dwyer's death in December 1994, life insurance with
a face a value of approximately $1,050,000 was owned by Rainbow. Rainbow had
outstanding loans against the value of the policy for $136,000. Therefore, upon
the death of Mr. Dwyer in December 1994, the Company recorded income from the
insurance proceeds of $914,000. The Company received $50,000 of life insurance
proceeds in December 1994. The remaining $864,000 in proceeds of this insurance
were pledged to the lender of the IRB's to secure Rainbow's guaranty. As such,
the Company in December 1994 recorded a note receivable from Mr. Dwyer's estate
in the same amount. This $864,000 note was paid in full during 1995 comprising
the majority of the $872,000 decrease in notes receivable from related parties
from December 31, 1994 to December 31, 1995.
In February 1995, The Dwyer Group, Inc. reached an agreement with the
estate of the late Donald J. Dwyer, Sr. regarding resolution of the discrepancy
between the amount of life insurance on Mr. Dwyer's life which had been reported
and that which was actually in force. The face amount of life insurance on Mr.
Dwyer's life in force at the time of his death was less than the $2,000,000 of
life insurance in force as stated at the time of the July 19, 1994 offering of
Common Stock. The life insurance in force at the time of Mr. Dwyer's death was
$1,050,000, a portion of which ($136,000) had been borrowed against for the
benefit of a wholly-owned subsidiary of the Company, which owned the policies.
On February 10, 1995 the estate executed a promissory note in the amount of
$950,000 bearing interest of 9% per annum payable February 9, 1997 resolving the
discrepancy of life insurance in force and life insurance previously reported to
be in force on Mr. Dwyer's life. This transaction was recorded in February 1995
as an additional capital contribution and as a note receivable. The note
receivable has been classified as a reduction in stockholders' equity. During
1995 the estate paid principal and interest in the amount of $531,000 and
$65,000, respectively. Therefore, at December 31, 1995 the remaining unpaid
principal balance and accrued interest receivable were $419,000 and $5,000,
respectively.
From time to time, the Company repurchases operating franchise
territories from existing franchisees which are carried as an asset held for
sale while being marketed to new franchisees. During fiscal 1995 assets held for
sale increased from $26,000 at December 31, 1994 to $1,187,000 at December 31,
1995, an increase of $1,161,000. Rooter, Aire Serv and GBS with assets held for
sale of $884,000. $167,000 and $125,000, respectively, at December 31, 1995 are
the primary contributors to this increase.
Accrued liabilities increased from $244,000 at December 31, 1994 to
$1,263,000 at December 31, 1995 an increase of $1,019,000. This increase is
primarily composed of: $404,000 accrued in GBS in conjunction with the
restructure of the GBS regional franchise program; and $376,000 accrued between
Rooter and Aire Serv regarding expenses assumed in acquiring assets held for
sale during fiscal 1995.
FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY
The Company's operating results could vary significantly from period
to period as the result of a variety of factors, including the timing of
acquisitions, the length of the Company's franchise sales cycles; the ability of
franchisees to collect their receivables and satisfy obligations under franchise
agreements with the Company; seasonal conditions in the markets in which the
Company's franchisees operate and competitive factors. For instance, Rainbow's
revenues have historically decreased during cold weather months and increased
during hot weather months and GBS's and EKW's revenues typically increase
significantly during the tax season. There can be no assurance that such
factors will not result in significant fluctuations in the Company's operating
results in the future.
INFLATION
Inflation has not historically had a material effect on the Company's
operations.
ACCOUNTING MATTERS
In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". This Statement requires that long-lived
assets and certain identifiable intangibles held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Measurement of an
impairment loss for long-lived assets and identifiable intangibles that an
entity expects to hold and use should be based on the fair value of the asset.
This statment is effective for fiscal years beginning after December 15, 1995.
13
<PAGE>
In October 1995, the FASB issued Statement of Financial Acounting
Standards No. 123, "Accounting for Stock-Based Compensation". This Statement
defines a fair value based method of accounting for an employee stock option or
similar equity instrument and encourages all entitites to adopt that method of
accounting for all employee stock compensation plans. However, it also allows
an entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees". Entities electing to continue to
use the method of acounting specified in Opinion 25 must make pro forma
disclosures of net income and, if presented, earnings per share, as if the fair
value method of accounting defined in this Statement had been applied. This
Statement is effective for fiscal years beginning after December 15, 1995.
Management believes that the adoption of these pronouncements will not have a
material impact on the financial statements of the Company.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company, together with the report of
independent certified public accountants, are included in this report following
the signature pages.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 31, 1995, the Audit Committee of the Board of Directors of the
Company approved the dismissal of Grant Thornton LLP as its independent public
accountants and the appointment of Coopers & Lybrand L.L.P. as its independent
public accountants, effective on such date. The Company had not consulted
Coopers & Lybrand L.L.P. prior to such appointment with respect to any matter of
accounting principles or practices, financial statement disclosure, auditing
scope or procedure, or any disagreement with the Company's independent public
accountants. From 1989 until such date, the Company had engaged Grant Thornton
LLP as its independent public accountants. During the period of the engagement
of Grant Thornton LLP by the Company, there were no disagreements between Grant
Thornton LLP and the Company on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Grant Thornton LLP would
have caused them to make reference to the disagreements in any of their
financial reports to the Company. In addition, no report on the financial
statements of the Company rendered by Grant Thornton LLP contained an adverse
opinion or a disclaimer of opinion or was qualified or modified as to
uncertainty, the scope of audit performed, or accounting principles.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Theresa Dwyer......... 61 Chairperson of the Board of Directors
Robert Tunmire........ 37 President and Chief Executive Officer and Director
John Appel............ 54 Vice President
Dina Dwyer-Owens...... 32 Secretary and Vice President of Operations and Director
Stephen E. Beatty..... 44 Treasurer and Chief Financial Officer
Donald J. Dwyer, Jr... 31 Director
James L. Sirbasku..... 56 Director
John P. Hayes......... 46 Director
Donald E. Latin....... 65 Director
</TABLE>
All directors hold office until the next annual meeting of stockholders
or until their successors have been elected and qualified. Officers of the
Company serve at the will of the Board of Directors.
14
<PAGE>
Theresa Dwyer has been Chairperson of the Board of Directors since
July 1995 and Director of the Company since December 1994. She has been the
majority stockholder and President of the following privately held companies:
Worldwide Cabinet Systems, Inc.; Worldwide Refinishing Systems, Inc.; Worldwide
Whirlpool Systems, Inc.; Worldwide Franchise Consultants, Ltd.; Aames Auto
Leasing, Inc.; and Sun Screen of Austin, Inc. since December 1994. She also
serves as Vice President of Worldwide Supply, Inc., and Secretary of Dwyer Real
Estate and Development, Inc. Mrs. Dwyer serves as Co -Executrix of the Estate of
Donald J. Dwyer. Prior to December 1994 Mrs. Dwyer was self-employed.
Robert Tunmire has been President of the Company since December 1994 after
serving as Executive Vice President since June 1993. Mr. Tunmire served as
President of the Company, then operating as Mr. Rooter Corporation, from January
1992 through May 1993, after serving from May 1989 as Director and Executive
Vice President. Mr. Tunmire currently serves as President of the following
subsidiaries of the Company: Mr. Rooter Corporation, Mr. Electric Corp. and Aire
Serv Heating & Air Conditioning, Inc. From December 1980 until May 1989, Mr.
Tunmire had been employed by Rainbow International Carpet Dyeing & Cleaning Co.,
a subsidiary of the Company, most recently as Executive Vice President of
Franchise Counseling. Mr Tunmire has approximately 20 years experience in the
franchising industry.
Stephen E. Beatty has served as the Company's Treasurer and Chief
Financial Officer since December 1994. He previously served as Controller of
the Company from April 1993 to December 1994. Prior to that time, Mr. Beatty
served as Controller for Gulf Stream Coach, Inc., a company that manufactures
recreational vehicles from August 1991 to April 1993. Mr. Beatty served as
Treasurer and Vice President of Finance for SMI International, Inc., a company
specializing in franchising businesses, from April 1987 to June 1991. Mr.
Beatty previously served as Controller and Treasurer of SMI International, Inc.
from April 1986 to June 1991, and Controller from October 1983 to April 1986.
John Appel, who has over 25 years of franchising experience, has
served as Vice President of the Company since December 1994. Mr. Appel served as
President of Rainbow from February 1, 1992 through June 1995. Before coming to
Rainbow, he served for seven years as President of Leadership Management, Inc.,
a company specializing in franchising businesses, and prior to that he was
employed by Success Motivation Institute, Inc., a franchising company, most
recently as Vice President of Franchising.
Dina Dwyer-Owens has been Vice President of Operations since September
1995 after serving as Co-Chair of the Board of Directors from December 1994 to
July 1995, and has been a Director and Secretary of the Company since May 1989.
Ms. Dwyer-Owens has been employed by Dwyer Real Estate and Development, a real
estate concern located in Waco, TX since June 1981, most recently as President.
She also serves as Director to Rainbow and Mr. Rooter.
Donald J. Dwyer, Jr. has served as a Director since May 1989. Mr.
Dwyer is currently employed by the Company as Director of International
Marketing. He previously served as Director of International Marketing for
Rainbow from 1987 to 1994. Mr. Dwyer serves as Co - Executor of the Estate of
Donald J. Dwyer.
James L. Sirbasku has served as a Director since July 1994. He has
served as Chairman and Chief Executive Officer of Profiles International, Inc.,
an international company providing pre-employment evaluation systems, since
March 1991. From 1980 to 1991, Mr. Sirbasku served as President of SMI
International, Inc., a company specializing in franchising businesses.
John P. Hayes has served as a Director since July 1994. He founded and
has served as President of The Hayes Group, Inc., since 1987. The Hayes Group,
Inc. is an international marketing and promotion company specializing in
franchised businesses.
Donald E. Latin founded and, since 1986, has served as President of D.
Latin and Company, Inc., a corporate consulting and service company which
provides such corporate finance services as: the raising of capital, mergers and
acquisitions, valuation of businesses, fairness opinions, and other financial
advisory services.
Donald J. Dwyer, Jr. and Dina Dwyer-Owens are the son and daughter,
respectively, of Theresa Dwyer.
15
<PAGE>
SIGNIFICANT EMPLOYEES
Michael Bidwell, age 38, has been President of Rainbow since July
1995. Mr. Bidwell was a Rainbow franchisee in Tucson, Arizona from April 1984 to
June 1995, and a Mr. Rooter franchisee from August 1992 to June 1995. From 1986
to June 1995, Mr. Bidwell served as President of Ramsoo, Inc., an Arizona
corporation, which operated the Rainbow and Mr. Rooter franchises in Tucson,
Arizona.
Paul Woody, age 53, has been President of GBS and EKW since June 1995.
Mr. Woody has owned and operated a GBS franchise, located in Oklahoma City,
Oklahoma since 1972.
Richard Cross, age 47, has been Chief Operating Officer of Mr. Rooter,
Mr. Electric and Aire Serv since December 1994. Mr. Cross previously served as
Vice President of Marketing from December 1991 to October 1993. Prior to that
time, he served as National Marketing Director for Leadership Management, Inc.,
a company specializing in franchising businesses, from December 1986 to November
1991.
BOARD PARTICIPATION AND STRUCTURE
The Board of Directors met four times during 1995 and took action 25
times by means of written consent. Each director attended each of the meetings.
Non-employee directors are not compensated for their services as directors.
Such directors are reimbursed for expenses incurred for their attendance at
Board of Directors meetings and are eligible to receive stock options.
The Audit Committee met two times during 1995.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Disclosure of delinquent filings pursuant to Section 16(a) of the
Exchange Act are incorporated herein by reference to the Company's definitive
proxy statement.
This portion intentionally left blank.
16
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table. The following information sets forth
compensation earned by the Company's Chief Executive Officer and all other of
its executive officers whose annual compensation exceeded $100,000 for services
rendered for the Company and its Subsidiaries during the fiscal years indicated:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
NAME AND STOCK/
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS
------------------ ---- ------ ----- --------
<S> <C> <C> <C> <C>
Robert Tunmire, 1995 $196,414/(1)/ $20,779 100,000
President & CEO 1994 $158,780/(1)/ $88,756 --
1993 $145,300/(1)/ $55,649 --
John Appel,
Vice President 1995 $123,882 $21,389 --
1994 $123,059 $23,474 --
1993 $135,107 $ 4,788 25,000
Stephen Beatty/(2)/ 1995 $ 85,829 $15,000 12,500
Treasurer & CFO 1994 $ 51,544 $15,000 --
Paul Woody/(3)/ 1995 $115,385 $28,846 25,000
</TABLE>
________________________
(1) Includes salary of $189,164 in 1995, $62,500 in 1994, and $74,500 in 1993
and commissions from franchise sales of $7,250 in 1995, $96,280 in 1994,
and $70,800 in 1993.
(2) Mr. Beatty was appointed Treasurer and Chief Financial Officer of the
Company effective December 19, 1994.
(3) Mr. Woody was appointed President of GBS and EKW effective June 1, 1995.
Employment Agreement. GBS has a written employment agreement dated June 1,
1995 with Paul Woody, President of GBS, which extends through May 31, 2000. Mr.
Woody receives a base salary of $200,000 per year, and a bonus equal to the
greater of $50,000 or five percent (5%) of GBS' annual net income. In addition,
pursuant to the agreement, GBS pays the cost of Mr. Woody's family health
insurance and his individual disability and life insurance coverages.
This portion intentionally left blank.
17
<PAGE>
The following table sets forth information regarding options granted to the
named executive officers during the fiscal year ended December 31, 1995:
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF OPTIONS GRANTED TO EXERCISE
SECURITIES UNDERLYING EMPLOYEES OR BASE EXPIRATION
NAME OPTIONS GRANTED IN FISCAL YEAR PRICE DATE
---- --------------- -------------- ----- ----
<S> <C> <C> <C> <C>
Robert Tunmire 100,000 55% 2.50 (2)
Stephen Beatty 12,500 7% 2.625 (2)
John Appel -- -- -- ---
Paul Woody 25,000 14% 3.375 (2)
</TABLE>
__________________________
(2) The Incentive Stock Option Agreements do not contain a specific option
expiration date. In addition, incentive options whether or not then exercisable,
terminate immediately upon termination of employment for cause. If an employee's
termination is not for cause, the employee has the right to exercise stock
options, to the extent exercisable at the date of cessation of employment, at
any time within 30 days of that employment cessation date. Pursuant to the 1986
Stock Option Plan, no Incentive Option granted shall be exercisable after 10
years from the date the option is granted.
The following table shows option exercises during the year ended December
31, 1995 and the value of unexercised options at December 31, 1995 for the named
executive officers who exercised options during 1995 or who had unexercised
options at December 31, 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED IN-
OPTIONS AT FISCAL THE-MONEY OPTIONS
YEAR END AT FISCAL YEAR END
SHARES ACQUIRED (EXERCISABLE/ (EXERCISABLE/
NAME ON EXERCISE VALUE REALIZED UNEXERCISABLE) UNEXERCISABLE)(1)
---- ------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
Donald J. Dwyer -- -- 90,000/-0- $180,000/-0-
Estate/(2)/
Robert Tunmire 1,000 $1,640 130,101/-0- $ 90,937/-0-
John Appel -- -- 15,000/10,000 -0-/-0-
Stephen Beatty -- -- -0-/12,500 -0-/$4,688
</TABLE>
___________________
(1) The closing price of the Common Stock on December 31, 1995 was $3.00 per
share.
(2) Mr. Dwyer assigned 295,000 of the 385,000 remaining unexercised options to
purchase shares of the Company's Common Stock ( which options are governed
by that certain Stock Option Agreement dated April 28, 1989 by and between
Mr. Rooter Corporation (now The Dwyer Group, Inc). and Donald J. Dwyer) to
a bank.
18
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1995, certain information
regarding the beneficial ownership of Common Stock by (i) each of named
executive officers, (ii) each person known by the Company to own beneficially
more than 5% of the outstanding Common Stock, (iii) each director of the Company
and (iv) all directors and officers as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS BENEFICIAL OWNERSHIP(1)
-----------------------
OF BENEFICIAL NUMBER
OWNER OF SHARES PERCENT (2)
------------- --------- -----------
<S> <C> <C>
Estate of Donald J. Dwyer/(3)(4)/................... 4,610,920 64.0%
Dina Dwyer-Owens/(3) (5)/........................... 2,913 *
Robert Tunmire/(3) (6)/............................. 49,707 *
Donald J. Dwyer, Jr./ (3)(7)/....................... 4,617,520 64.1%
Theresa Dwyer/ (3)(7)/.............................. 4,612,220 64.0%
John Hayes/(8)/..................................... 20,250 *
James Sirbasku/(9)/................................. 15,000 *
Donald E. Latin/(10)/............................... 12,000 *
John Appel/(3) (11)/................................ 15,000 *
Paul Woody/(3) (12)/................................ 1,900 *
Renaissance Capital Growth & Income Fund III/(13)/.. 504,900 7.1%
All officers and
directors as a group
(nine persons)/(14)/................................ 4,735,590 65.0%
</TABLE>
______________________
*Less than 1%.
(1) Each beneficial owner's percentage ownership is determined by assuming that
options or warrants that are held by such person (but not those held by any
other person) and which are exercisable have been exercised. Unless
otherwise noted, the Company believes that all persons named in the table
have sole voting and investment power with respect to all shares of Common
Stock beneficially owned by them.
(2) Based on a total of 7,113,127 shares of Common Stock outstanding prior to
the exercise of any outstanding options or warrants.
(3) The principal business address of each of these individuals is c/o the
Company, 1010 N. University parks Drive, Waco, Texas 76707.
(4) Mr. Dwyer, former Chairman of the Board, President and CEO of the Company,
died December 4, 1994. The number of shares beneficially owned includes the
90,000 Option Shares (held by Mr. Dwyer's estate), currently exercisable
pursuant to a Stock Option Agreement dated April 28, 1989, and 244,700
shares of Common Stock owned by another stockholder of the Company in
connection with which Mr. Dwyer's estate has sole voting power pursuant to
a Shareholder Voting, Proxy and Stock Sale Agreement between Mr. Dwyer and
such stockholder. It also includes 340,300 of Mr. Dwyer's shares of Common
Stock which are being held in escrow GBS's achievement of certain pre-tax
income levels. Mr. Dwyer's estate retains voting power in connection with
such shares. Theresa Dwyer and Donald J. Dwyer, Jr. serve as Co-Executors
of the Estate of Donald J. Dwyer.
19
<PAGE>
(5) Includes 1,500 shares of Common Stock now exercisable or exercisable within
60 days under an Incentive Stock Option.
(6) Includes 30,101 shares of Common Stock now exercisable or exercisable
within 60 days under an Incentive Stock Option.
(7) Includes 4,610,920 shares of Common Stock beneficially held by the Estate
of Donald J. Dwyer. Theresa Dwyer and Donald J. Dwyer, Jr. serve as
Independent Co-Executors of the Estate of Donald J. Dwyer, and as such,
share voting and disposition power with respect to such shares and may be
deemed to beneficially own such shares.
(8) Includes 20,000 shares of Common Stock now exercisable or exercisable
within 60 days pursuant to options granted Mr. Hayes. The principal
business address of Mr. Hayes is 6612 Dupper Court, Dallas, Texas 75252.
(9) Includes 10,000 shares of Common stock now exercisable or exercisable
within 60 days pursuant to options granted Mr. Sirbasku. The principal
business address of Mr. Sirbasku is 5205 Lakeshore Drive, Waco, TX 76710.
(10) Includes 10,000 shares of Common Stock now exercisable or exercisable
within 60 days pursuant to options granted Mr. Latin. The principal
business address of Mr. Latin is 600 N. Pearl Street, Suite 2250; Dallas,
TX 75201.
(11) Includes 15,000 shares of Common Stock now exercisable or exercisable
within 60 days under Incentive Stock Options.
(12) Includes 900 shares of Common Stock owned by an employee profit sharing
plan of Mr. Woody's GBS franchise business and for which Mr. Woody is
Trustee.
(13) The principal business address of Renaissance Capital Growth & Income Fund
III, Inc. is c/o Renaissance Capital Group, Inc., 8080 N. Central
Expressway, Suite 210; Dallas, TX 75206.
(14) Includes 86,601 shares of Common Stock now exercisable or exercisable
within 60 days under Incentive Stock Options and the 90,000 Option Shares
exercisable under a non-Option Plan stock option.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company currently leases its principal executive and administrative
facilities from the majority stockholder, under various leases expiring at
various times through October 31, 2001 requiring total monthly lease payments of
$31,417. In addition to rent, the Company receives repairs and maintenance,
promotional materials and other services from entities controlled by its
majority stockholder. The Company expensed $618,106 for these rents and services
in 1995, $845,554 in 1994 and $378,648 in 1993.
The Company recognized income from related parties for accounting, legal and
administrative services, interest income, product sales commissions and
management fees totaling $554,116 in 1995, $505,966 in 1994 and $316,265 in
1993.
In addition, from time to time, the Company and its affiliates have made
advances to each other, which generally have not had specific repayment terms
and have been reflected in the Company's financial statements as accounts
receivable or payable from related parties. These advances typically result from
the payment of an invoice by one entity for services or items performed or
delivered on behalf of the Company and one or more of its affiliates. The
company that pays the invoice is eventually reimbursed by the other companies
for the appropriate amount based on a pro rata allocation of the services
provided to each company.
In 1982 and 1984, Rainbow guaranteed the repayment of approximately
$1,500,000 of Mr. Donald Dwyer's personal indebtedness evidenced by industrial
revenue bonds ("IRB's") in connection with Mr. Dwyer's improvements to certain
real estate holdings, including the building of office facilities occupied by
the Company and certain other companies.
At the time of Mr. Dwyer's death in December 1994, life insurance with a
face a value of approximately $1,050,000 was owned by Rainbow. Rainbow had
outstanding loans against the value of the policy for $136,000. Therefore, upon
the death of
20
<PAGE>
Mr. Dwyer in December 1994, the Company recorded income from the insurance
proceeds of $914,000. The Company received $50,000 of life insurance proceeds in
December 1994. Part of the remaining $864,000 proceeds of this insurance were
pledged to the lender of the IRB's to secure Rainbow's guaranty. Proceeds of
$864,000 were directed to Mr. Dwyer's estate and were utilized to pay down the
IRB's and also Housing Finance Revenue Bonds for which the remainder of the
insurance proceeds are assigned for the benefit of the estate. As such, the
Company in December 1994 recorded a note receivable from Mr. Dwyer's estate in
the same amount. This $864,000 note was paid in full during 1995, including
$34,087 of interest.
The Company, beginning June 1995, agreed to pay Don Latin, an independent
director, $2500 per month for investment banking consulting services. In
addition, in August 1995 the Company entered into a consulting agreement with
another independent director, John Hayes, to provide consulting services
regarding public relations, marketing and special projects for the company.
During 1995 the Company expensed approximately $108,000 for Mr. Hayes' services.
In December 1994 the Company, along with selected related parties, agreed
to convert $661,597 of related party accounts receivable and accounts receivable
from affiliates to interest bearing (9%) notes receivable. These notes are
payable in full by December 1999. In total, accounts and notes receivable from
related parties and officers (current and long-term) decreased approximately
$421,000, to $1,576,348 at December 31, 1995 when compared to December 31, 1994.
In February 1995, the Dwyer Group, Inc reached an agreement with the estate
of the late Donald J. Dwyer, Sr. regarding resolution of the discrepancy between
the amount of life insurance on Mr. Dwyer's life which had been reported and
that which was actually in force. The face amount of life insurance on Mr.
Dwyer's life in force at the time of his death was less than the $2,000,000 of
life insurance in force as stated at the time of the July 19, 1994 offering of
Common Stock. The life insurance in force at the time of Mr. Dwyer's death was
$1,050,000, a portion of which ($136,000) had been borrowed against for the
benefit of a wholly-owned subsidiary of the Company, which owned the policies.
On February 10, 1995 the estate executed a promissory note in the amount of
$950,000 bearing interest of 9% per annum payable February 9, 1997 resolving the
discrepancy of life insurance in force and life insurance previously reported to
be in force on Mr. Dwyer's life. This transaction was recorded in February 1995
as an additional capital contribution and as a note receivable. The note
receivable has been classified as a reduction in stockholders' equity. During
1995 the estate paid principal and interest in the amount of $531,103 and
$65,355, respectively. Therefore, at December 31, 1995, the remaining unpaid
principal balance and accrued interest receivable were $418,896 and $4,751,
respectively.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. Financial Statements
--------------------
The Consolidated Financial Statements of the Company are
included in Part II, Item 7. See index on page 25.
2. Exhibits
--------
3.1 Certificate of Incorporation, as amended (1)
3.2 Certificate of Amendment of Certificate of Incorporation filed
June 12, 1987 (2)
3.3 Certificate of Amendment of Certificate of Incorporation filed
May 8, 1988 (2)
3.4 Certificate of Amendment of Certificate of Incorporation filed
July 30, 1993 (2)
3.5 Bylaws (1)
4.1 Form of Representative's Warrant Agreement, including
Representative's Warrant (2)
4.2 Warrants to Purchase Common Stock issued to Norcross Securities,
Inc.
10.1 Stock Option Plan, as amended, and form of Employee Stock Option
Agreement (1)
10.2 Form of Rainbow International Carpet Dyeing and Cleaning Co.
License Agreement (2)
10.3 Form of Mr. Rooter Corporation Franchise Agreement (2)
10.4 Form of General Business Services License Agreement (2)
10.5 Form of Aire-Serv Corporation Franchise Agreement (2)
10.6 Certificate of Registration of Service Mark "MR. ROOTER" (1)
10.7 Certificate of Registration of Service Mark "QUICK-AS-A-WINK" (1)
10.8 Certificate of Registration of Mr. Rooter logo (1)
2. Exhibits (continued)
--------------------
21
<PAGE>
10.9 Certificate of Registration of Service Mark "Super Kleens"
logo (1)
10.10 Certificate of Registration for Service Mark "America's Trouble
Shooter" (1)
10.11 Certificate of Registration of Trademark "MR. ROOTER" issued by
Office of Consumer and Corporate Affairs in Canada (1)
10.12 Lease Agreement between Donald J. Dwyer and Mr. Rooter
Corporation, dated December 20, 1991 (2)
10.13 Lease Agreement between Donald J. Dwyer and Rainbow International
Carpet Dyeing and Cleaning Training Center, commencing
January 1, 1993 (2)
10.14 Lease Agreement between Donald J. Dwyer and Rainbow International
Carpet Dyeing and Cleaning Waco Franchise, commencing
January 1, 1993 (2)
10.15 Lease Agreement between Donald J. Dwyer and General Business
Services, dated August 31, 1993 (2)
10.16 Lease Agreement between Donald J. Dwyer and Rainbow
International, dated September 1, 1993 (2)
10.17 Lease Agreement between Donald J. Dwyer and The Dwyer Group,
Inc., dated February 18, 1994 (2)
10.18 Agreement and Plan of Reorganization and Share Exchange (3)
10.19 Agreement for Purchase and Sale of Assets of National
Manufacturing & Supply Corporation (4)
10.20 Franchisee Financing Agreement dated July 2, 1993, with Addendum
dated December 23, 1993 (4)
10.21 Shareholders' Voting Proxy and Stock Sale Agreement, between
Donald J. Dwyer, Sr. and Vernon Lee Russell and wife, Sylvia
Russell, and the Company (5)
10.22 Stock Purchase Agreement between Donald J. Dwyer, Sr., Vernon Lee
Russell and Sylvia Russell (5)
10.23 Stock Option Agreement between the Company and Donald J. Dwyer
(5)
10.24 Incentive Stock Option Agreement between the Company and John
Appel for 25,000 shares of the Company's Common Stock (4)
10.25 Incentive Stock Option Agreement between the Company and
Douglas C. Holsted for 12,500 shares of the Company's Common
Stock (1)
10.26 Incentive Stock Option Agreement between the Company and Dina
Dwyer-Owens for 2,500 shares of the Company's Common Stock
(1)
10.27 Incentive Stock Option Agreement between the Company and Robert
A. Tunmire for 50,000 shares of the Company's Common Stock
(1)
10.28 Employment Contract between the Company and Donald J. Dwyer (1)
10.29 Guaranty Agreement, executed December 1, 1982 by Rainbow
International Carpet Dyeing and Cleaning Company (2)
10.30 Guaranty Agreement, executed May 1, 1984 by Rainbow International
Carpet Dyeing and Cleaning Company (2)
10.31 Promissory Note, executed January 7, 1993, by and between Pride
Venture Capital, Inc. and GTL Services, Ltd. (2)
10.32 Form of Affiliate Transactions Agreement (2)
10.33 Stock Purchase Agreement dated May 14, 1994 by and between The
Dwyer Group, Inc., Co Data AG and Central Data BV (6)
10.34 Irrevocable Stock or Bond Power, Note and Security Agreement,
dated May 25, 1994, by and between Christian Mission
Concerns, as lender, and the Company, as borrower (2)
10.35 Mutual Release by and between General Business Services, Pride
Venture Capital and GTL Services Ltd., effective June 10,
1994 (2)
10.36 Assignment of Judgments and Claims, executed by and between
General Business Services, Inc., Pride Venture Capital,
Inc., and GTL Services, Ltd., dated June 10, 1994 (3)
10.37 Promissory Note, executed June 8, 1994, by and between the
Company and NationsBank of Texas, N.A. (2)
10.38 Promissory Note, executed June 9, 1994, by and between the
Company and Central National Bank (2)
10.39 Certificate of Registration of Service Mark "Aire Serv", dated
Jan. 25, 1994 (7)
10.40 Stock Purchase Agreement dated September 14, 1994, by and between
E.K. Williams & Co. and Service Station Computers Systems,
Inc.(7)
10.41 Form of Stock Option Agreement by and between the Company and
James Sirbasku for 10,000 shares of the Company's Common
Stock.(7)
10.42 Form of Stock Option Agreement by and between the Company and
John Hayes for 10,000 shares of the Company's Common Stock.(7)
10.43 Form of Stock Option Agreement by and between the Company and
Anthony DeSio for 10,000 shares of the Company's Common Stock.(7)
22
<PAGE>
10.44 Incentive Stock Option Agreement by and between the Company and
Matthew Michel.(7)
21 List of Subsidiaries.(2)
27 Financial Data Schedules.(8)
__________________________
(1) Incorporated by reference to the Registrant's Form S-18 registration
statement (SEC File No. 33-7290-FW).
(2) Incorporated by reference to the Registrant's Form SB-2 registration
statement (No. 33-78814).
(3) Incorporated by reference to the Registrant's Form 8-K/A dated as of June
1, 1993 (SEC File No. 0-15227)
(4) Incorporated by reference to the Registrant's Form 10-K for its fiscal year
ended December 31, 1993 (SEC File No. 0-15227).
(5) Incorporated by reference to the Registrant's Schedule 13D of Donald J.
Dwyer, dated May 4, 1989, filed May 9, 1989 (SEC File No. 0-15227).
(6) Incorporated by reference to the Registrant's Form 8-K dated as of May 14,
1994 (SEC File No. 0-15227).
(7) Incorporated by reference to the Registrant's Form 10-KSB for its fiscal
year ended December 31, 1994 (SEC File No. 0-152227.)
(8) Incorporated by reference to the Registrant's Form 10-KSB for its fiscal
year ended December 31, 1995 (SEC File No. 0-152227.)
(a) Reports on Form 8-K
NONE
23
<PAGE>
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, in the City of Waco
and the State of Texas on this 23rd day of April, 1996.
The Dwyer Group, Inc.
By: \s\ Robert Tunmire
----------------------
Robert Tunmire, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ----------- ----- ----
<S> <C> <C>
\s\Theresa Dwyer Chairperson of the April 23, 1996
- ----------------
Theresa Dwyer Board of Directors
\s\Robert Tunmire President and April 23, 1996
- -----------------
Robert Tunmire Chief Executive Officer
(Principal Executive Officer)
\s\ Dina Dwyer-Owens Secretary and April 23, 1996
- --------------------
Dina Dwyer-Owens Vice President of Operations
\s\ Stephen E. Beatty Treasurer and Chief April 23, 1996
- ---------------------
Stephen E. Beatty Financial Officer
(Principal Financial and
Accounting Officer)
\s\ James Sirbasku Director April 23, 1996
- ------------------
James Sirbasku
\s\Donald J. Dwyer, Jr. Director April 23, 1996
- -----------------------
Donald J. Dwyer, Jr.
\s\John P. Hayes Director April 23, 1996
- ----------------
John P. Hayes
\s\Donald E. Latin Director April 23, 1996
- ------------------
Donald E. Latin
</TABLE>
24
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Accountants............................................................ 26-27
Consolidated Balance Sheets as of December 31, 1995 and 1994.................................. 28-29
Consolidated Statements of Operations for the years ended December 31, 1995, 1994, and 1993... 30-31
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994,
and 1993................................................................................... 32
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994, and 1993... 33-35
Notes to Consolidated Financial Statements.................................................... 36-51
</TABLE>
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
____________________________________________________________
Board of Directors
The Dwyer Group, Inc.
We have audited the consolidated balance sheet of The Dwyer Group, Inc. and
Subsidiaries as of December 31, 1995, and the related consolidated statement 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. The financial statements of The Dwyer Group, Inc. and Subsidiaries as
of December 31, 1994 and for the two years in the period ended December 31,
1994, were audited by other auditors whose report, dated February 23, 1995,
included an explanatory paragraph that described a change in the Company's
method of accounting for income taxes discussed in Note 1 to the financial
statements.
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 1995 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Dwyer
Group, Inc. and Subsidiaries as of December 31, 1995 and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P
Fort Worth, Texas
March 26, 1996
26
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Board of Directors
The Dwyer Group, Inc.
We have audited the consolidated balance sheet of The Dwyer Group, Inc. and
Subsidiaries, as of December 31, 1994, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 1994. 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 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Dwyer Group,
Inc., and Subsidiaries as of December 31, 1994, and the consolidated results of
their operations and their consolidated cash flows for each of the two years in
the period ended December 31, 1994 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes.
GRANT THORNTON, LLP
Oklahoma City, Oklahoma
February 23, 1995
27
<PAGE>
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,446,166 $ 4,819,795
Short-term investments 1,000,000 -
Trade accounts receivable, net of allowance for
doubtful accounts of $491,613 and $364,839,
respectively 696,389 781,201
Accounts receivable from related parties 825,029 340,903
Accrued interest receivable 150,748 38,500
Trade notes receivable, current portion 826,418 992,258
Inventories 136,728 159,838
Prepaid expenses 148,854 107,254
Federal income tax receivable 646,641 -
----------- -----------
TOTAL CURRENT ASSETS 7,876,973 7,239,749
ACCOUNTS RECEIVABLE FROM
RELATED PARTIES, long term portion 97,916 130,916
PROPERTY AND EQUIPMENT, at cost less
accumulated depreciation 1,472,863 1,034,846
ASSETS HELD FOR SALE 1,187,101 25,815
TRADE NOTES RECEIVABLE, long-term portion,
net of allowance for doubtful notes of $855,849 and
$421,797, respectively 4,478,071 5,636,693
PURCHASED FRANCHISE RIGHTS, at cost less
accumulated amortization of $331,466 and $180,540,
respectively 1,337,518 1,436,164
PATENTS AND TRADEMARKS, at cost less
accumulated amortization of $24,150 and $16,303,
respectively 108,098 92,294
NOTES RECEIVABLE FROM RELATED PARTIES 653,403 1,525,597
INVESTMENT, equity method 428,423 492,300
OTHER ASSETS 199,778 93,454
----------- -----------
TOTAL ASSETS $17,840,144 $17,707,828
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE>
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable $ 883,307 $ 747,567
Accounts payable to related parties 222,227 -
Accrued liabilities 1,262,747 243,757
Income tax payable - 370,271
Other payables 67,759 179,634
Current portion of notes payable and capital
lease obligations 228,170 157,555
----------- -----------
TOTAL CURRENT LIABILITIES 2,664,210 1,698,784
NOTES PAYABLE, less current portion 246,458 355,546
DEFERRED FRANCHISE SALES REVENUE 2,652,057 3,496,382
FRANCHISE FUNDS HELD FOR ADVERTISING 318,447 292,995
DEFERRED TAX LIABILITY 58,147 22,702
----------- -----------
TOTAL LIABILITIES 5,939,319 5,866,409
Commitments and contingent liabilities (Note 10 and 12)
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value - shares authorized,
500,000; outstanding, none - -
Common stock, authorized 15,000,000 shares of
$.10 par value; issued 7,235,552 shares and 7,234,552
at December 31, 1995 and 1994, respectively 723,556 723,456
Additional paid-in capital 8,941,029 7,989,489
Retained earnings 2,751,257 3,266,463
Note receivable from shareholder (418,896) -
Treasury stock, at cost (122,425 and 137,425 shares
at December 31, 1995 and 1994, respectively) (96,121) (137,989)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 11,900,825 11,841,419
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,840,144 $17,707,828
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE>
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Royalty income $ 6,588,983 $5,453,611 $4,200,599
Franchise sales 4,235,649 4,884,000 3,903,392
Tax services 710,823 738,077 818,658
Product sales 668,544 588,458 128,904
Insurance proceeds - 914,000 -
Interest and other, net 1,178,638 929,913 799,438
----------- ---------- ----------
13,382,637 13,508,059 9,850,992
COSTS AND EXPENSES:
Cost of product sales 340,053 233,922 69,697
Cost of tax services 1,117,791 1,103,826 1,126,261
General, administrative, selling 11,741,125 8,828,122 6,604,616
Depreciation and amortization 432,443 275,824 182,089
Interest 48,913 118,491 146,929
Write down of assets held for sale 245,852 - -
Loss on disposal of assets held for sale 292,614 - -
----------- ---------- ----------
14,218,791 10,560,185 8,129,592
----------- ---------- ----------
(Loss) Income from continuing operations
before (benefit) provision for income taxes (836,154) 2,947,874 1,721,400
(Benefit) provision for income taxes (320,948) 843,918 496,425
----------- ---------- ----------
(Loss) Income from continuing operations (515,206) 2,103,956 1,224,975
----------- ---------- ----------
Discontinued operations
Loss from discontinued operations of business
segment - - (115,283)
Gain on sales of assets of business segment - - 67,091
----------- ---------- ----------
Net (Loss) Income before cumulative effect of change
in accounting principle (515,206) 2,103,956 1,176,783
Cumulative effect of change of accounting
principle - - 70,038
----------- ---------- ----------
Net (loss) income $ (515,206) $2,103,956 $1,246,821
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE>
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
(Loss) income per common and dilutive share:
(Loss) income from continuing operations $ (0.07) $ 0.31 $ 0.20
Discontinued operations - - (0.01)
Cumulative effect of change in accounting
principle - - 0.01
----------- ---------- -----------
$ (0.07) $ 0.31 $ 0.20
========== ========== ==========
Weighted average common and dilutive common
equivalent shares outstanding 7,450,066 6,809,222 6,243,991
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE>
THE DWYER GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES DOLLARS CAPITAL EARNINGS
----------------------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 1,611,838 757,083 $1,754,196 $ 979,426
Net income for the year - - - 1,246,821
Stock options and warrants exercised 109,799 10,980 47,240 -
Reclassification of undistributed earnings - - 1,063,740 (1,063,740)
Acquisition of affiliated company for stock 4,237,352 423,735 (273,735) -
Effect of reverse stock split - (595,899) 595,899 -
---------- -------- ---------- -----------
Balance at December 31, 1993 5,958,989 595,899 3,187,340 1,162,507
Net income for the year - - - 2,103,956
Stock options exercised 1,500 150 2,310 -
Purchase of treasury stock - - - -
Issuance of common stock 1,437,500 143,750 4,892,350 -
Retirement of treasury stock (163,437) (16,343) (92,511) -
---------- -------- ---------- -----------
Balance at December 31, 1994 7,234,552 723,456 7,989,489 3,266,463
---------- -------- ---------- -----------
Net loss for the year - - - (515,206)
Stock options exercised 1,000 100 1,540 -
Contributions from stockholder - - 950,000 -
Payments received on stockholder note - - - -
Purchase of treasury stock - - - -
Sales of treasury stock - - - -
---------- -------- ---------- -----------
Balance as December 31, 1995 7,235,552 $ 723,556 $8,941,029 $ 2,751,257
========== ========= ========== ===========
<CAPTION>
RECEIVABLE
FROM TREASURY STOCK
STOCKHOLDER SHARES DOLLARS TOTAL
------------ -------------------------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 - 285,862 $(190,393) $ 3,300,312
Net income for the year - - - 1,246,821
Stock options and warrants exercised - - - 58,220
Reclassification of undistributed earnings - - - -
Acquisition of affiliated company for stock - - - 150,000
Effect of reverse stock split - - - -
------------ ---------- --------- -----------
Balance at December 31, 1993 - 285,862 $(190,393) 4,755,353
Net income for the year - - - 2,103,956
Stock options exercised - - - 2,460
Purchase of treasury stock - 15,040 (56,450) (56,450)
Issuance of common stock - - - 5,036,100
Retirement of treasury stock - (163,477) 108,854 -
------------ --------- --------- -----------
Balance at December 31, 1994 - 137,425 (137,989) 11,841,419
------------ --------- --------- -----------
Net loss for the year - - - (515,206)
Stock options exercised - - - 1,640
Contributions from stockholder ($950,000) - - -
Payments received on stockholder note 531,104 - - 531,104
Purchase of treasury stock - 55,000 (203,993) (203,993)
Sales of treasury stock - (70,000) 245,861 245,861
------------ --------- --------- -----------
Balance as December 31, 1995 $ (418,896) 122,425 $ (96,121) $11,900,825
============ ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE>
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($515,206) $ 2,103,956 $ 1,246,821
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 432,443 275,824 186,412
Provision for doubtful accounts and notes
receivable 1,183,531 216,310 270,678
Notes receivable written off 31,841 75,548 10,000
Income recognized from sales previously deferred (547,260) (284,376) (452,187)
Sales of franchises for installment notes receivable (3,328,933) (3,465,242) (1,100,262)
Payments received on notes receivable 1,254,076 1,040,769 265,038
Sale of notes receivable - 41,294 1,011,536
Sales of franchises on which
revenues were deferred 1,594,654 770,440 123,272
Equity in earnings of investment 33,561 7,700
Gain on disposal of property - (16,507) (101,653)
Write down of assets held for sale 245,852 - -
Loss on disposal of assets held for sale 292,614 - -
Change in assets and liabilities:
Accounts receivable (209,553) 125,870 (309,796)
Accrued interest receivable (112,248) 37,511 (59,655)
Inventories 23,110 (26,744) 221,583
Prepaid expenses (37,649) (40,767) 1,104
Federal income tax receivable (646,641) - -
Other assets (106,324) 67,612 120,583
Deferred tax asset and liability 35,445 25,448 (25,513)
Accounts payable and accrued liabilities 760,673 688,494 20,930
Accounts payable to related parties 222,227 (36,545) (18,733)
Income tax payable (370,271) 212,441 (1,921)
Other payables (111,875) (18,003) 102,840
Franchisee funds held for advertising 25,452 51,832 219,948
---------- ----------- ----------
Net cash provided by operating activities 149,519 1,852,865 1,731,025
---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (631,965) (280,676) (220,161)
Proceeds from sale of property and equipment - 92,800 202,849
Payments for patents, trademarks and franchise rights (40,881) (108,597)
Advances to officer - 60,419 (60,419)
Net change in notes and accounts receivable
from related parties 421,068 (1,207,761) (318,644)
Net cash paid in acquisition - (1,006,487) (79,500)
Acquisition of assets held for sale (828,102) (5,000)
Proceeds from disposal of assets held for sale 70,000 284,130 25,000
Acquisition of short-term investments (1,000,000)
Disposition of short-term investments - 72,639
Acquisition of equity investment - (500,000) -
Payments on notes receivable other - 12,200
---------- ---------- ----------
Net cash used in investing activities (2,009,880) (2,671,172) (366,036)
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
33
<PAGE>
THE DWYER GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issued 127,215 1,921,860 452,637
Principal payments of debt (215,095) (2,435,948) (1,278,015)
Proceeds from sale of stock - 5,036,100 208,220
Proceeds from redemption of stock options 1,640 2,460 -
Contribution from shareholder 531,104 - -
Purchase of treasury stock (203,993) (56,450) -
Sales of treasury stock 245,861 - -
----------- ----------- -----------
Net cash provided by (used in) financing activities 486,732 4,468,022 (617,158)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (1,373,629) 3,649,715 747,831
Cash and cash equivalents, at beginning of year 4,819,795 1,170,080 422,249
----------- ----------- -----------
Cash and cash equivalents, at end of year $ 3,446,166 $ 4,819,795 $ 1,170,080
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE>
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $43,000 $173,000 93,000
Income taxes 642,000 583,000 429,000
Supplemental schedule of noncash investing
and financing activities:
Capital lease obligations 49,407 - -
Transfers from notes receivable to assets
held for sale 1,024,470 - -
Adjustment to purchased franchise rights for
acquired assets determined to have no value 39,000 - -
Additions to notes receivable from sales
of assets held for sale 485,742 - -
Transfers from accounts receivable to assets
held for sale 8,865 - -
Additions to assets held for sale from
liabilities assumed 394,057 - -
</TABLE>
Non-cash investing and financing activities:
In 1994, the Company acquired EKW and Ekwill for cash and liabilities assumed
as follows:
<TABLE>
<S> <C>
Fair value of assets $1,608,278
Cash paid in acquisition (1,150,000)
-----------
Liabilities assumed $ 458,278
===========
</TABLE>
In 1993, GBS acquired assets from a corporation by executing a note payable to
the seller for $901,560. In conjunction with the acquisition, cash was paid
and liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets $1,081,060
Note payable (901,560)
Cash paid in acquisition (79,500)
-----------
Liabilities assumed $ 100,000
===========
</TABLE>
In 1993, the Company settled notes payable due to an officer in the amount of
$150,249 offsetting accounts receivable due from the officer and from another
officer.
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE>
THE DWYER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Organization
------------
The Dwyer Group, Inc. (the "Parent") is a holding company for service-based
businesses providing specialty services internationally through franchising. The
consolidated financial statements include the accounts of The Dwyer Group, Inc.
and its wholly-owned Subsidiaries (the "Company"). All material intercompany
accounts and transactions have been eliminated in consolidation
The Company was incorporated in 1970 in the State of Oklahoma under the name Mr.
Rooter Corporation of America, Inc. The Company's name was changed to Mr. Rooter
Corporation ("Rooter") in 1972, and in 1986 it was reincorporated as a Delaware
corporation. Until May 1, 1993, the Company operated in two segments:
franchising plumbing repair and sewer and drain cleaning services as well as
manufacturing and selling sewer and drain cleaning equipment and supplies. On
May 1, 1993, substantially all of the assets of the manufacturing operations
were sold.
On March 1, 1993, the Company, through Rooter's wholly-owned subsidiary Aire
Serv Heating and Air Conditioning, Inc. ("Aire Serv"), began to grant licenses
to operate air conditioning and heating repair services under the trade name
Aire Serv.
On June 1, 1993, the Company acquired all of the shares of common stock of
Rainbow International Carpet Dyeing & Cleaning Co. ("Rainbow"), and General
Business Services, Inc. ("GBS") from its majority stockholder for 8,070,000
shares (4,035,000 shares after reverse split) of common stock. With the
acquisition of GBS, the Company began operating in another segment, tax
services, through GBS's wholly-owned subsidiary, General Tax Services, Inc.
("GTS"). These acquisitions have been accounted for similar to a pooling of
interests because all companies were under common control.
Following the acquisition of Rainbow and GBS, the Board of Directors approved
a plan to convert the Company into a holding company and to form a new
subsidiary to operate the Mr. Rooter business. On July 30, 1993, this new
subsidiary was incorporated in Texas under the name Mr. Rooter Corporation and
the Company was renamed The Dwyer Group, Inc.
Effective May 1, 1994, the Company acquired Edwin K. Williams & Co. ("EKW"), a
wholly-owned subsidiary of Ekwill Acquisition Corporation ("Ekwill"), a
California corporation, for approximately $1,150,000 cash by purchasing all of
the outstanding capital stock of Ekwill from Ekwill's two shareholders. The
acquisition of Ekwill has been accounted for using the purchase method of
accounting; accordingly, assets acquired and liabilities assumed were recorded
at their estimated fair values.
Effective September 1, 1994, EKW purchased 33 1/3% of the capital stock of
Service Station Computer Systems, Inc. ("SSCS") for $500,000 cash. The
investment in SSCS has been accounted for under the equity method.
On September 6, 1994, the Company formed a new wholly-owned subsidiary. Mr.
Electric Corporation, ("Electric"), is a Texas corporation engaged in
franchising electrical contracting service businesses.
36
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
B. INVENTORIES
-----------
Inventories are stated at the lower of cost or market and consist of finished
goods available for sale. Cost is determined using the average cost and
first-in, first-out ("FIFO") methods.
C. PROPERTY AND EQUIPMENT
----------------------
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is recorded using the straight-line method over the estimated
useful lives of the respective assets, ranging from three to forty years. The
cost of equipment held under capital leases is equal to the lower of the net
present value of the minimum lease payments or the fair value of the leased
property at the inception of the lease. Amortization of capital leases is
included with depreciation expense.
D. EARNINGS PER COMMON SHARE
-------------------------
Earnings per share of common stock is computed based on the weighted average
number of shares and common equivalent shares outstanding during each of the
periods. Earnings per share include the dilutive effect of unexercised stock
options and warrants.
E. CASH AND CASH EQUIVALENTS
-------------------------
The Company considers all cash and highly liquid investments purchased with a
maturity of three months or less to be cash or cash equivalents. The Company
maintains its cash in bank deposit accounts and certificates of deposit which,
at times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts and believes it is not exposed to any significant
credit risks on cash and cash equivalents. Cash equivalents at December 31, 1995
include $1,374,575 in money market funds and $1,040,494 in certificates of
deposit. Included in cash equivalents at December 31, 1994 is $3,566,429 in
money market funds. Cash and cash equivalents includes funds collected from Mr.
Rooter, Mr. Electric and Aire Serv franchisees and held for national advertising
expenditures only. At December 31, 1995 and 1994 these national advertising
funds held totaled $354,000 and $443,000, respectively.
F. SHORT TERM INVESTMENTS
----------------------
The company considers all highly liquid debt instruments purchased with a
maturity of not less than three months but not more than twelve months to be
short term investments. At December 31, 1995 the Company maintained a
$1,000,000 Canadian bank certificate of deposit purchased with a twelve month
maturity. The Company believes it is not exposed to any significant credit
risk regarding this short term investment.
G. FRANCHISE OPERATIONS
--------------------
During 1995, the Company in aggregate added 143 U.S. franchises while 178 U.S.
franchises canceled, terminated or did not renew their contracts. At December
31, 1995 there were 191 foreign franchises and 1,176 U.S. franchise
operations, of which two were Company owned franchise operations reacquired
from franchisees for resale.
Revenues from the sale of regional franchise agreements and individual
franchises in the United States and master license agreements in foreign
countries are generally recognized, net of an allowance for uncollectible
amounts, when substantially all significant services to be provided by the
Company have been performed. Regional franchise agreements grant the regional
franchisee the right to sell individual
37
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
G. FRANCHISE OPERATIONS (CONTINUED)
--------------------------------
franchises for the Company in the regional franchisee's territory. The regional
franchisee generally receives a commission on individual franchises sold as well
as a share of future royalties received by the Company from franchisees in the
regional franchisee's territory. Interest on trade notes receivable is accrued
and recorded as income, net of an allowance for uncollectible amounts, when due.
In situations, however, where revenue from such sales is collectible over an
extended period of time, down payments are not sufficient and/or collectibility
is not reasonably certain, revenue is recognized on the installment method as
amounts are collected. Interest on trade notes receivable resulting from sales
recorded on the installment method is recorded when received.
Revenue from franchise royalties is generally recognized, net of an allowance
for uncollectible amounts, when due from the franchisees. The Company collects
and holds in escrow 2% of Rooter, Aire-Serv, and Mr. Electric franchisee's
sales to be used for an advertising campaign. The current portion of these
funds, in the amounts of approximately $35,000 and $150,000 at December 31,
1995 and 1994, respectively, is included in other payables.
Revenue from product sales is recognized when orders are shipped. Revenue from
tax services is recognized upon the completion of the tax service. For master
license agreements, revenues are recognized upon completion of all significant
initial services provided to the master licensee and upon satisfaction of all
material conditions of the master license.
H. ASSETS HELD FOR SALE
--------------------
On occasion, the Company purchases operating franchise territories from existing
franchisees, which it markets to new franchisees. The acquisition is recorded as
an asset held for sale at the lower of cost or fair market value. Any gain or
loss realized when the territory is sold is included in operations.
I. INCOME TAXES
------------
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 required
a change from the deferred method to the liability method for accounting for
income taxes. Under the liability method, deferred taxes are recognized for the
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of property and equipment,
inventory, and accounts receivable for financial and income tax reporting.
The deferred tax assets and liabilities are recovered or settled.
The Company files a consolidated tax return on behalf of itself and its
Subsidiaries. Income tax expense is allocated to the Parent and the
Subsidiaries as if they filed separate tax returns.
38
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J. PURCHASED FRANCHISE RIGHTS AND PATENTS AND TRADEMARKS
-----------------------------------------------------
The costs of intangible assets are amortized using the straight-line method
over their estimated lives of seven to fifteen years. Annually, the Company
reviews the recoverability of purchased franchise rights. The measurement of
possible impairment is based, primarily on the ability to recover the balance
of the purchased franchise rights from expected future operating cash flows.
K. EQUITY METHOD INVESTMENTS
-------------------------
On September 14, 1994, E.K. Williams acquired 33 1/3% of the outstanding Capital
Stock of Service Station Computer Systems, Inc. ("SSCS") for $500,000 cash. SSCS
is a private concern headquartered in Salinas, California who develops and
provides computerized bookkeeping products to conventional service stations,
self-serve stations and convenience store operations. The investment in SSCS has
been accounted for using the equity method of accounting. The cost of SSCS in
excess of amounts attributable to tangible assets at September 1, 1994
(acquisition date) was approximately $257,000 and is being amortized to
operations over a 10 year period using the straight-line method.
L. RECLASSIFICATIONS
-----------------
Certain reclassifications have been made to prior year financial statements to
conform to 1995 presentation.
M. USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from these estimates.
Note 2. Reorganization and Acquisition of Affiliates
In June, 1993, the Company acquired two corporations, Rainbow and GBS,
controlled by its majority stockholder and Chairman for approximately 8,070,000
shares (4,035,000 shares after reverse split) of common stock. GBS was purchased
by the stockholder on January 11, 1993. Prior to the acquisition, both companies
were "S" corporations with income taxable to the stockholder not to the
corporation. The acquisitions are accounted for in a manner similar to a pooling
of interests.
On May 14, 1994 (effective May 1, 1994) the Company acquired EKW, a Colorado
corporation and wholly-owned subsidiary of Ekwill, a California corporation, for
approximately $1,150,000 by purchasing all of the outstanding capital stock of
Ekwill from Ekwill's two shareholders CO Data AG, a Swiss company and Central
Data BV, a Dutch company, neither of which is affiliated with the Company. The
acquisition was financed by a short-term loan from an unaffiliated entity at an
annual interest rate of 12%,
39
<PAGE>
NOTE 2. REORGANIZATION AND ACQUISITION OF AFFILIATES (CONTINUED)
and repaid in August 1994. EKW grants licenses for the operation of business
consulting services (counseling in finance, accounting, bookkeeping, tax
matters and profit development) to small businesses. The acquisitions of EKW
and Ekwill have been accounted for as a purchase and their results of
operations have been included in the consolidated financial statements from
the effective date of acquisition, May 1, 1994. The cost of the acquisition
was allocated on the basis of the estimated fair value of the assets acquired
and liabilities assumed. This allocation resulted in allocation to purchased
franchise rights of approximately $681,000. The purchased franchise rights
are being amortized over 10 years on a straight-line basis.
The unaudited consolidated results of operations on a pro forma basis as
though EKW had been acquired as of the beginning of the Company's 1994 fiscal
year is as follows:
<TABLE>
<CAPTION>
Year Ended 1994
---------------
<S> <C>
Revenues $14,493,000
Net income $2,014,000
Earnings per common share $.30
</TABLE>
NOTE 3. COMMON STOCK, STOCK OPTIONS, WARRANTS AND CERTAIN TRANSACTIONS
A. REVERSE STOCK SPLIT
-------------------
In June, 1993, the Company's Board of Directors approved a 1 for 2 reverse split
of the Company's Common Stock. A total of $595,899 was reclassified from common
stock to additional paid-in capital.
B. COMMON STOCK
------------
The Company is authorized to issue 15,000,000 shares of common stock, $.10 par
value, of which 7,235,552 shares were issued and outstanding at December 31,
1995. On October 12, 1994, the stockholders approved an amendment to the
Company's Articles of Incorporation decreasing the number of authorized shares
of common stock from 50,000,000 to 15,000,000 shares.
In July 1994, the Company completed an underwritten secondary public offering of
1,250,000 shares of common stock at $4.25 per share. In August 1994 the
Underwriter exercised its over allotment option and purchased 187,500 shares of
common stock at $4.25 per share. Proceeds to the Company net of underwriting
commissions and issuance costs, were approximately $5,000,000.
On December 14, 1994, the Company announced that its Board of Directors
authorized the repurchase of up to 355,500 shares of its common stock
outstanding. From December 1994 through April 1995 the Company acquired 70,000
shares of Treasury Stock at an approximate cost of $246,000. On June 9, 1995 the
Company sold these 70,000 shares of Treasury Stock, at $3.50 per share.
40
<PAGE>
NOTE 3. COMMON STOCK, STOCK OPTIONS, WARRANTS AND CERTAIN TRANSACTIONS
(CONTINUED)
C. PREFERRED STOCK
---------------
The Company is authorized to issue up to 500,000 shares of preferred stock,
$1.00 par value, of which no shares are issued or outstanding.
D. WARRANTS
--------
In connection with its July 1994 secondary public offering and included in the
Company's Registration Statement on Form SB-2 (SEC File No. 33-78814) filed with
the Securities and Exchange Commission,theCompany issued to the underwriter's
representatives warrants covering the purchase of an additional 125,000 shares
of the Company's common stock at an exercise price of $6.16 (145% of the public
offering price). Such warrants are exercisable from July 19, 1995 through July
19, 1999.
In addition, 50,000 warrant shares, which Norcross Securities, Inc., who is a
market maker for the Company, acquired from the underwriters of the Company's
initial public offering, were also included in the Registration Statement on
Form SB-2 (SEC File No. 33-78814) filed by the Company in conjunction with its
secondary public offering. These warrants may not be exercised for a period of
twenty-four months from the date of the Offering Prospectus (July 19, 1994).
After expiration of such two-year period, and for a period of twelve months
(through July 19, 1997), these warrants may be exercised at a price of $4.25
(secondary offering price per share).
In connection with a Registration Statement filed by the Company with the U.S.
Securities and Exchange Commission in 1986, warrants for the purchase of up to
250,000 common shares were sold to the public. During 1992, the warrant
agreement was amended to extend the expiration date to March 28, 1993, at an
exercise price of $3.50 per share. Due to warrants being exercised, 100 shares
were issued in 1993. All remaining outstanding warrants expired on March 28,
1993.
In October 1994, the Board of Directors authorized the issuance of options to
purchase 10,000 shares of common stock at $4.25 per share to each of the three
new members of the Board of Directors.
E. STOCK OPTION PLAN
-----------------
The Company maintains the 1986 Stock Option Plan (the "SOP") which, as amended
July 31, 1995, provides that Incentive and Non-Incentive Stock Options to
purchase up to an aggregate of 500,000 shares of the Common Stock of the
Company, may be granted to eligible employees, officers and directors. The
exercise price of each Incentive Option granted under the "SOP" may not be less
than 100% of the fair market value of the Common Stock on the date of grant
(110% in the case of Incentive Options granted to any person beneficially owning
more than 10% of the Common Stock of the Company). Each Incentive Option granted
under the "SOP" will not be exercisable more than 10 years from the date the
option is granted except for Incentive Option grants to any person beneficially
owning 10% or more of the Company's Common Stock whose options expire five (5)
years from the date of the grant. Each Non-Incentive Option granted under the
"SOP" will not be exercisable more that fifteen years from the date on which the
Option is granted. The exercise price of each Non-Incentive Option granted under
the "SOP" may not be less than 100% of the fair market value of the Common Stock
on the date of grant. The Incentive Options and Non-Incentive Options under the
"SOP", which may be terminated at any time by the Board of Directors, become
exercisable at the rate of 20% of the number of shares covered thereby per year,
beginning one year from the date of grant, unless otherwise determined by the
Board of Directors at the time an option is granted.
41
<PAGE>
NOTE 3. COMMON STOCK, STOCK OPTIONS, WARRANTS AND CERTAIN TRANSACTIONS
(CONTINUED)
E. STOCK OPTION PLAN (CONTINUED)
-----------------------------
The tables on the following pages summarize the activity in outstanding Common
Stock options during the years ended December 31, 1995, 1994 and 1993. All
amounts have been changed to reflect a 1 for 2 reverse stock split which
occurred in June 1993.
ACTIVITY IN OUTSTANDING COMMON STOCK OPTIONS DURING THE YEARS ENDED DECEMBER 31,
1995, 1994 AND 1993
<TABLE>
<CAPTION>
Exercise
Incentive Non-Incentive Other Price
stock options stock options stock options per share
------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1992 68,900 - 544,225 $1.00 - $4.12
Granted 25,000 - - $3.75
Exercised (4,799) - (50,000) $1.00 - $1.64
Canceled (15,000) - - $2.20 - $2.76
Outstanding at December 31, 1993 74,101 - 494,225 $1.64 - $4.25
Granted 7,500 30,000 - $2.75 - $4.25
Exercised (1,500) - - $1.64
Outstanding at December 31, 1994 80,101 30,000 494,225 $1.00 - $4.25
Granted 182,500 20,000 - $2.50 - $3.50
Exercised (1,000) - - $1.64
Canceled (12,500) - - $2.76
Outstanding at December 31, 1995 249,101 50,000 494,225 $1.00 - $4.25
</TABLE>
As of December 31, 1995 exercisable incentive, non-incentive and other stock
options totaled 51,601, 50,000 and 494,225, respectively.
NOTE 4. TRADE NOTE RECEIVABLE - FRANCHISE FEES AND DEFERRED FRANCHISE SALES
REVENUE
The Company receives various notes from the sale of new franchises. These
installment notes receivable are generally collateralized by the rights to the
related franchise territory sold, and bear interest at approximately market
rates prevailing at the dates of the transactions. A summary of such notes
receivable as of December 31, is as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Amounts due within one year $ 826,418 $ 992,258
Amounts due after one year, net of
allowance for uncollectible
amounts of $855,849 and $421,797
in 1995 and 1994, respectively 4,478,071 5,636,693
---------- ----------
Total notes receivable $5,304,489 $6,628,951
========== ==========
</TABLE>
42
<PAGE>
NOTE 4. TRADE NOTE RECEIVABLE - FRANCHISE FEES AND DEFERRED FRANCHISE SALES
REVENUE (CONTINUED)
In December 1993, Rooter sold approximately $1,162,000 of its trade notes
receivable to a finance company. No discount was required by the finance company
due to certain recourse provisions that they have under this arrangement.
However, the finance company did require that the overall Rooter notes
receivable portfolio purchased return an effective rate of 10%. Since the actual
interest rates ranged from 8% to 12%, $15,358 was withheld from the proceeds
paid to Rooter, which represented the difference between the present value of
all note payments including interest at an effective interest rate of 10% and
the actual balance of the notes receivable. An additional $150,000 was also
withheld by the finance company as a reserve against future prime rate interest
increases as the loan portfolio was purchased at a floating 10% base rate tied
to a prime rate which was 6% at the time. Any change in the prime rate requires
a new calculation of the net present value of the payments remaining on these
purchased loan contracts. As the prime increases, the net present value of the
remaining payments on these loans decreases. The amount of the decrease is then
withdrawn from the reserve. During 1995 and 1994, $1,680 and $56,546,
respectively, was released from this reserve to the finance company (and
expensed by the Company) in response to the changes in interest rates during
1995 and 1994.
At December 31, 1995 and 1994, the amounts of deferred revenue from franchise
sales were $2,652,057 and $3,496,382 respectively. Fees from franchise sales
accounted for by the installment method are collectible in the years 1996
through 2006.
NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following method and assumptions were used in estimating fair value
disclosures for financial instruments in accordance with Statement of Financial
Accounting Standards No. 107, Disclosures about Fair Value of Financial
Instruments:
Cash and cash equivalents - the carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values.
Short- term investments - the fair value of short-term investments are estimated
using current interest rates offered for investments of a similar dollar amount
and remaining maturity.
Accounts receivable, accrued interest receivable, accounts payable, accrued
liabilities, and other payables - the carrying amounts reported in the balance
sheet approximates the fair value because of the relatively short maturities
of these items.
Trade notes receivable - the fair values for fixed rate notes receivable are
estimated using discounted cash flow analyses, using interest rates currently
being offered for notes receivable with similar terms to franchisees of
similar credit quality.
Notes payables - the fair values for fixed-rate notes payable are estimated
using a discounted cash flow calculation that applies interest rates currently
available to the Company for issuance of debt with similar terms and remaining
maturities.
Assets held for sale - the carrying amount reported in the balance sheet
approximates fair value as these assets are carried at the lower of cost or fair
value.
43
<PAGE>
NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
December 31,1995
----------------
Carrying Amount Fair Value
--------------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 3,446,166 $ 3,446,166
Short term investment 1,000,000 1,025,594
Trade accounts receivable 696,389 696,389
Accounts receivable from related parties 825,029 825,029
Accrued interest receivable 150,748 150,748
Trade notes receivable 5,304,489 4,797,515
Notes receivable from related parties 653,403 653,403
Assets held for sale 1,187,101 1,187,101
Liabilities:
Trade accounts payable 888,307 888,307
Accounts payable to related parties 222,227 222,227
Accrued liabilities 1,262,747 1,262,747
Other payables 67,759 67,759
Notes payable and capital lease obligations 474,628 421,537
</TABLE>
NOTE 6. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
----------- ----------
<S> <C> <C>
Land $97,159 $97,159
Building and Improvements 450,431 397,904
Machinery and Equipment 1,141,512 628,246
Furniture and Fixtures 462,244 351,666
Vehicles 8,300 12,286
---------- ----------
2,159,646 1,487,261
Less accumulated depreciation 686,783 452,415
---------- ----------
$1,472,863 $1,034,846
=========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1995, 1994 and 1993 was
$243,355, $140,052 and $127,878, respectively.
44
<PAGE>
NOTE 7. INCOME TAXES
Income tax (benefit) provision for the years ended December 31, 1995, 1994, and
1993 was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Current $(356,393) $819,601 $451,900
Deferred 35,445 24,317 44,525
--------- -------- --------
Total tax (benefit) expense $(320,948) $843,918 $496,425
========= ======== ========
</TABLE>
A reconciliation of income tax expense at the federal statutory rate to the
income tax provision at the Company's effective rate is as follows for the years
ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Federal statutory income tax rate $(284,292) $1,031,756 $602,490
State income taxes (benefit) (21,554) 132,654 -
Portion taxable to shareholders pursuant to
Subchapter "S" election - - (94,350)
Nontaxable life insurance proceeds - (310,788) -
Net operating loss and alternative minimum
tax carryforwards - (807,566) -
Valuation allowance (29,955) 807,566 -
Other 14,853 (9,704) (11,715)
--------- -------- --------
Total tax (benefit) expense $(320,948) $843,918 $496,425
========= ======== ========
</TABLE>
The components of deferred income tax assets and liabilities at December 31,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation and amortization $ (45,471) $ (21,906)
Franchise agreements (207,419) (218,514)
Other - -
-------- --------
Total deferred income tax liabilities (252,890) (240,420)
-------- --------
Deferred tax assets:
Accrued expenses 18,245 58,680
Equity earnings from subsidiary not currently taxable 15,254 -
Net operating losses and tax credits 938,855 966,604
-------- --------
Total deferred tax assets 972,354 1,025,284
Valuation allowance 777,611 807,566
-------- --------
Net deferred income tax liability $ (58,147) $ (22,702)
========= =========
</TABLE>
45
<PAGE>
NOTE 7. INCOME TAXES (CONTINUES)
The Company has available at December 31, 1995, unused preacquisition operating
loss and alternative minimum tax carryforwards of EKW. The operating loss
carryforwards expire, if not utilized, between 2004 and 2007. Approximately
$109,000 of the net operting loss carryfowards expire in 2004, $215,000 in 2006
and $32,000 in 2007. The alternative minimum tax carryforward has no expiration
date. These preacquisition carryforwards may be used only to offset taxable
income, if any, of EKW and may not be used to offset future taxable income of
any other member of the group with which EKW files a consolidated return. The
amount of the preacquisition carryforwards which may be applied in any one year
is limited by the Internal Revenue Code to the lesser of EKW's taxable income or
$67,000. These carryovers have only been recognized for financial reporting
purposes to the extent of EKW taxable temporary differences. To the extent that
these carryovers exceed EKW taxable temporary differences a valuation allowance
has been created.
NOTE 8. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
The maximum and average amounts of notes payable outstanding during the year
ended December 31, 1995 were $521,026 and $416,913, respectively. The weighted
average interest rates during the year and at December 31, 1995 were 10.39%
and 9.88% respectively.
The following notes payable and capital lease obligations were outstanding at
December 31,
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
7.76% note payable due in monthly payments
of $429 through March 25, 1997, including
interest, collateralized by a van $ 6,178 $ 10,589
Note payable to bank at 1% over prime (10.75% at
December 31, 1995) due in monthly payments
of $1,469 through December 1999, collateralized
by land and buildings 61,163 73,012
Note payable to bank at 1% over bank's
base rate (10.25% at December 31, 1995) due
in 60 monthly payments of $6,666 beginning
in August 1994 collateralized by GBS assets 270,228 350,228
Uncollateralized 8% note payable due in monthly
payments of $5,036 through February 1995 - 9,972
12.5% note payable due in monthly payments
of $2,631 through June 1996 collateralized by
184,871 shares of EKW stock 13,467 43,236
$40,000 Bank line of credit at 6.9% interest,
payable interest only until maturity on January
31, 1996 31,500 -
8% note payable to an individual, due in monthly
payments of $3,552 through March 1997 43,818 -
Other - 26,064
</TABLE>
46
<PAGE>
NOTE 8. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
<TABLE>
<S> <C> <C>
Obligations under capital leases, interest of approximately
13.5%, due in monthly installments through December 2000 48,274 -
------ --------
474,628 513,101
Less current portion of notes payable and capital lease
obligations 228,170 157,555
------- --------
Notes payable $246,458 $355,546
======== ========
</TABLE>
Maturities of notes payable, exclusive of capital lease obligations at December
31, 1995, are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1996 $179,896
1997 102,654
1998 96,173
1999 47,631
2000 -
--------
$426,354
========
</TABLE>
NOTE 9. RELATED PARTY TRANSACTIONS
The Company engages in a number of transactions with its majority stockholder,
and with entities controlled by the majority stockholder ("affiliates"). The
Company currently leases its principal executive and administrative facilities
from the majority stockholder, under various leases expiring at various times
through October 31, 2001 requiring monthly lease payments of $31,417. In
addition to rent, the Company receives repairs and maintenance, promotional
materials and other services from entities controlled by its majority
stockholder. The Company expensed $618,106 for these rents and services in
1995, $845,554 in 1994 and $378,648 in 1993.
The Company recognized income from related parties for accounting, legal and
administrative services, interest income, product sales commissions and
management fees totaling $554,116 in 1995, $505,966 in 1994 and $316,265 in
1993.
In addition, from time to time, the Company and its affiliates have made
advances to each other, which generally have not had specific repayment terms
and have been reflected in the Company's financial statements as accounts
receivable or payable from related parties. These advances typically result
from the payment of an invoice by one entity for services or items performed
or delivered on behalf of the Company and one or more of its affiliates. The
company that pays the invoice is eventually reimbursed by the other companies
for the appropriate amount based on a pro rata allocation of the services
provided to each company.
In 1982 and 1984, Rainbow guaranteed the repayment of approximately $1,500,000
of Mr. Donald Dwyer's personal indebtedness evidenced by industrial revenue
bonds ("IRB's") in connection with Mr.
47
<PAGE>
NOTE 9. RELATED PARTY TRANSACTIONS (CONTINUED)
Dwyer's improvements to certain real estate holdings, including the building of
office facilities occupied by the Company and certain other companies.
At the time of Mr. Dwyer's untimely and unexpected death in December 1994, life
insurance with a face value of approximately $1,050,000 was owned by Rainbow.
Rainbow had outstanding loans against the value of the policy for $136,000.
Therefore, upon the death of Mr. Dwyer in December 1994, the Company recorded
income from the insurance proceeds of $914,000. The Company received $50,000 of
life insurance proceeds in December 1994. Part of the remaining $864,000
proceeds of this insurance were pledged to the lender of the IRB's to secure
Rainbow's guaranty. Proceeds of $864,000 were directed to Mr. Dwyer's estate and
were utilized to pay down the IRB's and also Housing Finance Revenue Bonds for
which the remainder of the insurance proceeds were assigned for the benefit of
the estate. As such, the Company in December 1994 recorded a note receivable
from Mr. Dwyer's estate in the same amount. This $864,000 note was paid in full
during 1995, including $34,087 of interest.
The Company, beginning June 1995, agreed to pay an independent director $2500
per month for investment banking consulting. In addition, in August 1995 the
Company entered into a consulting agreement with another independent director to
provide consulting services regarding public relations, marketing and special
projects for the Company. During 1995 the Company expensed approximately
$108,000 for this independent directors' services.
In December 1994, the Company, along with selected related parties, agreed to
convert $661,597 of related party accounts receivable and accounts receivable
from affiliates to interest bearing (9%) notes receivable. These notes are
payable in full by December 1999. In total accounts and notes receivable from
related parties and officers (current and long-term) decreased approximately
$421,000 at December 31, 1995 when compared to December 31, 1994.
In February 1995, the Company reached an agreement with the estate of the late
Donald J. Dwyer, Sr. regarding resolution of the discrepancy between the amount
of life insurance on Mr. Dwyer's life which had been reported and that which was
actually in force. The face amount of life insurance on Mr. Dwyer's life in
force at the time of his death was less than the $2,000,000 of life insurance in
force as stated at the time of the July 19, 1994 offering of Common Stock. The
life insurance in force at the time of Mr. Dwyer's death was $1,050,000, a
portion of which ($136,000) had been borrowed against for the benefit of a
wholly-owned subsidiary of the Company, which owned the policies. On February
10, 1995 the estate executed a promissory note in the amount of $950,000 bearing
interest of 9% per annum payable February 9, 1997 resolving the discrepancy of
life insurance in force and life insurance previously reported to be in force on
Mr. Dwyer's life. This transaction was recorded in February 1995 as an
additional capital contribution and as a note receivable. The note receivable
has been classified as a reduction in stockholders' equity. During 1995 the
estate paid principal and interest in the amount of $531,103 and $65,355,
respectively. Therefore, at December 31, 1995 the remaining unpaid principal
balance and accrued interest receivable were $418,896 and $4,751, respectively.
NOTE 10. CONCENTRATION OF CREDIT RISK AND CONTINGENCIES FROM NOTES
RECEIVABLE
The Company extends credit to individuals to purchase company franchises. These
individuals typically operate their franchises as an owner/manager. Generally,
the loans are collateralized by the related franchise territory rights. The
individual's ability to perform is dependent upon the economic condition of the
franchise.
48
<PAGE>
NOTE 10. CONCENTRATION OF CREDIT RISK AND CONTINGENCIES FROM NOTE
RECEIVABLE (CONTINUED)
In addition, Rooter, Aire-Serv and Mr. Electric have entered into an agreement
with a finance company to finance franchise sales for franchise applicants who
meet the finance company's qualifications. This financing is with recourse. The
financing company's recourse states that, in the event of the franchisee's
default, Rooter, Aire-Serv or Mr. Electric whichever is applicable, has one
hundred eight days to correct the default by getting the franchisee to pay or to
sell the franchise to another approved party, making the original note good, or
by exchanging the note in default with a current note. If at the end of the
first one hundred eighty days the default has not been corrected, the
responsible company must pay to the finance
company monthly installments specified in the defaulted franchisee's note, and
all other amounts, if any, specified in the defaulted franchisee's note, until
the note (principal, interest and other amounts, if any) is paid in full. During
1995 and 1994, Mr. Rooter and Aire Serv exchanged with the finance company
several of their notes, aggregating approximately $261,000 and $93,000,
respectively, for defaulted notes. In addition, approximately $58,000 and
$13,000 were paid by Mr. Rooter during 1995 and 1994, respectively, to the
finance company, representing monthly installments on behalf of franchisees.
Future losses resulting from defaults are not expected to be significant. At
December 31, 1995 and 1994, Rooter, Aire-Serv and Mr. Electric were contingently
liable for approximately $2,749,000 and $2,571,000 respectively, relating to
such notes.
NOTE 11. EMPLOYEE BENEFIT PLANS
On July 1, 1995 the Company initiated and continues to sponsor a 401(k) plan
covering all full-time employees who have attained age 21 and completed 90 days
of service. Plan participants may contribute up to 15% of their annual
compensation before taxes for investment in several investment alternatives.
Employees are fully vested with respect to their contributions. The Company did
not make any contributions to the plan during 1995. Each year the Board of
Directors will determine the amount of any company contribution based upon the
Company's profitability.
NOTE 12. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities from the majority shareholder under month to
month and non-cancelable operating leases expiring at various dates through
October 31, 2001. The approximate minimum rental commitments under operating
leases are as follows:
<TABLE>
<CAPTION>
For Years Ending:
-----------------
<S> <C>
1996 $ 450,000
1997 378,000
1998 87,000
1999 75,500
2000 34,500
---------
$1,025,000
==========
</TABLE>
Rent expensed by the Company is as follows:
<TABLE>
<CAPTION>
For Years Ending:
-----------------
<S> <C>
1995 $ 524,000
1994 452,000
1993 504,000
</TABLE>
49
<PAGE>
NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company leases some of its telecommunications equipment under capital
leases. The typical lease has an original maturity of five years, and the lease
contains options to purchase the assets for $1 at the end of the lease as well
as buy-out provisions at any time during the lease.
Capitalized leases are calculated using interest rates appropriate at the
inception of the lease. Future minimum lease payments for capitalized lease
obligations at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
For Years Ending:
-----------------
<S> <C>
1996 $13,488
1997 13,488
1998 13,488
1999 13,488
2000 12,364
-------
66,316
less amount representing interest (18,042)
-------
$48,274
=======
</TABLE>
NOTE 13. DISCONTINUED OPERATIONS
On May 1, 1993, the Company disposed of substantially all of the assets of
National Manufacturing and Supply Corporation ("National"), which manufactured
drain cleaning and sewer service equipment for sale to the Rooter's franchisees
and, to a lesser extent, to outside parties. The assets sold consisted of
production equipment, copyrights, trademarks, patents, inventory, customer lists
and other assets with a net book value of $92,074 A receivable for approximately
$77,000 relating to this asset sale will be repaid over a three-year period.
Certain computer equipment was transferred to the Company and recorded at
historical cost. All liabilities of National were retained and satisfied by the
Company. A gain of approximately $67,091 (net of tax effects of $34,562) was
realized upon the sale of assets and an operating loss of $115,283 (net of tax
benefits of $59,388) was incurred during the year ended December 31, 1993.
Revenues for the discontinued segment were approximately $390,000 during 1993.
All activity associated with the segment had ceased by December 31, 1993. Assets
remaining in National at that time were transferred to Rooter at their book
value.
NOTE 14. LITIGATION
The Company and its subsidiaries are parties to various legal proceedings
incidental to its normal business activities; many of these are covered by
insurance. Management of the Company does not believe that the outcome of each
such proceeding or all of them combined will have a material adverse affect on
the Company or its consolidated financial position.
50
<PAGE>
NOTE 15. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1995, various year-end adjustments were recorded to
the consolidated financial statements. The effect of these adjustments was a net
decrease in total assets, liabilities, stockholders' equity and increased net
loss of approximately $1,715,000, $927,000, $788,000 and $370,000, respectively.
These adjustments were primarily to increase the allowance for doubtful accounts
and notes receivable, adjustments to and write-downs of assets held for sale,
write-off's of notes receivable, and adjustments to income tax accounts.
51
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRATED FROM DECEMBER 31,
1995 FINANCIAL STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,446,166
<SECURITIES> 0
<RECEIVABLES> 9,722,077
<ALLOWANCES> 1,347,462
<INVENTORY> 136,728
<CURRENT-ASSETS> 7,876,973
<PP&E> 2,159,646
<DEPRECIATION> 686,783
<TOTAL-ASSETS> 17,840,144
<CURRENT-LIABILITIES> 2,664,210
<BONDS> 474,628
0
0
<COMMON> 723,556
<OTHER-SE> 11,177,269
<TOTAL-LIABILITY-AND-EQUITY> 17,840,144
<SALES> 4,946,472
<TOTAL-REVENUES> 13,382,637
<CGS> 340,053
<TOTAL-COSTS> 14,218,791
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,098,003
<INTEREST-EXPENSE> 48,913
<INCOME-PRETAX> (836,154)
<INCOME-TAX> (320,948)
<INCOME-CONTINUING> (515,206)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (515,206)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
