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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, 1996
( ) 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: 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: $ 14,092,943
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Aggregate market value of the voting stock held by nonaffiliates computed
by average bid and asked prices of such stock, as of April 10, 1997:
$4,546,325
Aggregate number of shares of Common Stock outstanding as of the close of
business on April 10, 1997: 7,113,127
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
DOCUMENTS INCORPORATED BY REFERENCE
None
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TABLE OF CONTENTS
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PART I
Item 1. DESCRIPTION OF BUSINESS........................................ 3
General........................................................ 3
Franchise Operations........................................... 4
Marketing...................................................... 9
Competition.................................................... 10
Trade Names and Service Marks.................................. 10
Regulation..................................................... 11
Employees...................................................... 12
Item 2. DESCRIPTION OF PROPERTIES...................................... 12
Item 3. LEGAL PROCEEDINGS.............................................. 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 12
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................ 13
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS........................... 13
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 18
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................... 18
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.............. 19
Item 10. EXECUTIVE COMPENSATION......................................... 21
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 24
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 25
Item 13. EXHIBITS, AND REPORTS ON FORM 8-K.............................. 26
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Dwyer Group, Inc. (the "Company") provides a diverse array of specialty
services through its wholly-owned service-based franchising subsidiaries. The
Company currently owns seven such franchising businesses, which have an
aggregate of approximately 1400 franchises located in all 50 states, and,
through their master licensees, in sixteen 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 reputation of
its management team.
The Company's current franchising businesses include:
. Rainbow International Carpet Dyeing and Cleaning Co. ("Rainbow") is a
franchisor of carpet cleaning, dyeing, air duct cleaning, and
restoration services, with 417 franchises in the United States, and,
through master franchise licensees, 128 foreign franchise operations in
twelve foreign countries. For the year ended December 31, 1996,
Rainbow's operations accounted for approximately 21.3% of the Company's
revenues.
. Mr. Rooter Corporation ("Mr. Rooter") is a franchisor of plumbing repair
and drain cleaning services under the service mark "Mr. Rooter," (R)
with 180 franchisees operating 197 franchise operations in the United
States and, through master licenses, 66 foreign franchises in 7 foreign
countries. For the year ended December 31, 1996, Mr. Rooter's operations
accounted for approximately 28.1% of the Company's revenues.
. General Business Services, Inc. ("GBS") is a franchisor of business
management services to small businesses, with 340 franchises located
throughout the United States, one franchise in Canada, and two
franchises in Thailand through a master franchise licensee. Such
business management services include, among others, business counseling,
tax counseling, accounting services and products, financial counseling
and personnel services. 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, 1996, GBS's operations accounted for approximately 24.4% of
the Company's revenues.
. Edwin K. Williams & Co. ("EKW") is a franchisor of information systems
and financial management services, specifically designed to meet the
special needs of small businesses. EKW, which was acquired effective
May 1, 1994, has a total of 177 franchises located throughout the United
States, and one master franchise licensee in Canada. Its financial
management services include, among others, accounting and bookkeeping
services and systems, financial management analysis, payroll processing,
and tax preparation and planning services. For the year ended December
31, 1996, EKW's operations accounted for approximately 11.1% 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 44 United States franchises and one foreign master licensee. For
the year ended December 31, 1996, Aire-Serv's operations accounted for
approximately 3.0% 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"(R). Mr.
Electric was organized in September 1994 and has 32 franchises in the
United States, and has granted two foreign master licenses. For the year
ended December 31, 1996, Mr. Electric's operations accounted for
approximately 4.5% of the Company's revenues.
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. Mr. Appliance Corp. ("Mr. Appliance") is a franchisor of major household
appliance service and repair businesses. Mr. Appliance was incorporated
on January 4, 1996, began franchising in September 1996 and has 3
franchises in the United States. For the year ended December 31, 1996,
Mr. Appliance's operations accounted for approximately .6% 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 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 8,070,000 shares (4,035,000 shares after reverse split) 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.
As of May 1, 1994, the Company acquired EKW, a Colorado corporation and 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.
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 Rainbow, Mr. Rooter,
GBS, EKW, Aire Serv, Mr. Electric and Mr. Appliance 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 multi-concept franchising consolidator, by bringing 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 24 years, such attributes will provide
the Company with a strong competitive advantage.
Each of the Company's franchising businesses requires the owners and/or key
employees of 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 and EKW franchisees are taught record keeping and tax and
business counseling. Mr. Rooter, Aire Serv, Mr. Electric and Mr. Appliance, 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 broad-based marketing techniques, as well
as guidelines and methods for hiring and managing personnel, providing quality
customer service and managing and collecting
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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 (which
represents the majority of the services required to be provided for revenue
recognition), 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 coach the Company's franchisees and provide them with
marketing support. Each franchisee is contacted by such a director approximately
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.
Pursuant to foreign master license agreements, the Company licenses
individuals and/or other legal entities, which are typically residents of the
foreign country, the rights to use the Company's trademarks and systems to grant
franchise rights in the defined foreign geographic territory. Foreign franchise
rights are sold based upon the population of the geographic territory, the
estimated number of potential franchises that could be sold in such territory
and the relationship of that foreign territory's gross national product per
capita to that of the United States.
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.
Rainbow International Carpet Dyeing and Cleaning Company
Rainbow International Carpet Dyeing and Cleaning Company is a franchisor of
carpet and upholstery cleaning, dyeing, air duct cleaning, and restoration
service businesses. At December 31, 1996, Rainbow had 417 franchises in the
United States, and 128 franchises through master franchise licenses in 12
foreign countries.
Rainbow offers 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, air duct cleaning, problem odor removal, carpet
repair, 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 $8,000 to $21,000
for an equipment package, supplies, chemicals and promotional materials;
approximately $7,500 to $20,000 for a new or used cargo van (unless one is
already owned), including $450 for purchasing and applying trademark decals and
advertisements on the van; up to $2,000 for first year insurance premiums; up to
$2,000 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 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
initial business and technical training (two weeks), extensive ongoing support
emphasizing the development of the franchisee's marketing and business
management skills is provided by individually assigned franchise systems
managers or through regional training meetings and toll free telephone number
support.
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Mr. Rooter Corporation
Mr. Rooter is a franchisor of plumbing repair and drain cleaning 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. At the time of Mr. Dwyer's acquisition of the Company, Mr.
Rooter had 22 franchises. By the end of 1996, Mr. Rooter had a total of 180
franchisees operating 197 franchises in 43 states and had granted master
franchise licenses covering seven foreign countries. Mr. Rooter has shown
significant growth in income from royalties paid by franchisees (from $234,000
in 1989 to $2,664,000 in 1996).
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 franchise territory's population, with a minimum initial fee of $17,500. In
general, Mr. Rooter sells its 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. In addition, the franchisee
is required to maintain an advertisement in the Yellow Pages of the telephone
directory serving the franchised territory. Regional consultants 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 two major television networks and network
radio. The term of the initial franchise agreement is for ten years, which may
be renewed for additional five year terms at the option of the franchisee upon
certain conditions (six months prior notice) and payment of $2,500 renewal fee.
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 management services and accounting services
to small businesses. At December 31, 1996, GBS had a total of 340 franchisees
located throughout the United States, one franchisee in Canada and two
franchisees in Thailand through a master franchise licensee. Such business
management services include counseling in financing, accounting, tax matters
(including tax counseling and planning), 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 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. GBS provides its
franchisees with the information that it believes a franchisee needs to
appropriately counsel other businesses.
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
between 2.0% and 8%, 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.
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
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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 is a franchisor of information systems and financial management and
accounting services to small businesses. At December 31, 1996, there were a
total of 177 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.
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 between 2% and 8%, based on gross
billings and length of service. 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.
Aire Serv Heating & Air Conditioning, Inc.
Aire Serv 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, 1996, had 44 Aire Serv franchises in the United States and
one in Canada.
The minimum initial franchise fee is $14,500, 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 $150 for each additional 1,000 of
population contained in the franchise territory. Aire Serv may, at its
discretion, agree to finance a portion 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 between 2.5% and 4.5%, 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. Beyond initial business training (one week), extensive
ongoing support emphasizing the development of the franchisee's marketing and
business management skills is provided by individually assigned franchise
systems managers or through regional training meetings and toll free telephone
number support.
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, 1996 had 32 franchises in the United States and one
foreign master licensee.
The minimum initial franchise fee is $15,000, 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 $150 for each additional 1,000 of
population contained in the franchise 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.
During the term of its license agreement, the franchisee is required to pay
Mr. Electric (i) an advertising fee equal to 2% of the franchisee's weekly gross
sales and (ii) a continuing royalty fee of between 3% and 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, as well as
maintain an advertisement in the Yellow Pages of the telephone directory serving
the franchised territory. Beyond initial business training (one week),
extensive ongoing support emphasizing the development of the franchisee's
marketing and business management skills is provided by individually assigned
franchise systems managers or through regional training meetings and toll free
telephone number support.
Mr. Appliance Corp.
Mr. Appliance is a franchisor of major household appliance service and
repair businesses. Mr. Appliance was organized in January 1996, and at December
31, 1996 had 3 franchises in the United States.
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 franchise territory. Mr. Appliance may, at its
discretion, agree to finance up to one-half of the initial franchise fee.
The initial Mr. Appliance 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.
During the term of its license agreement, the franchisee is required to pay
to Mr. Appliance (i) an advertising fee equal to 2% of the franchisee's weekly
gross sales and (ii) a continuing royalty fee of between 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, as well as
maintain an advertisement in the Yellow Pages of the telephone directory serving
the franchised territory. The franchisee is also provided a computerized
business package which standardizes the franchise operation. Beyond initial
business training (two weeks), extensive ongoing support emphasizing the
development of the franchisee's marketing and business management skills is
provided by individually assigned franchise systems managers or through regional
training meetings and toll free telephone number support.
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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, print advertising
and franchise trade shows. Recently, contractors have also been targeted 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's marketing strategy is focused on existing accountants or
individuals with an accounting background. 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.
Aire Serv's marketing strategy is focused on the sale of franchises to
existing HVAC contractors. 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.
Mr. Appliance's marketing strategy is to sell franchises to existing
appliance dealers and appliance servicers. Mr. Appliance provides the proven
system, technical and management support, and training to make a major appliance
repair and service franchise successful. Franchisees receive extensive training
in sales, marketing and business systems.
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., Duraclean International, Inc., Harris Research, Inc.,
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
9
<PAGE>
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, national home improvement retailers provide competition in some
markets. Local electricians are Mr. Electric's primary source of competition.
Mr. Appliance is the first company to offer franchises in the fragmented
appliance repair and service industry. Local appliance repairmen are Mr.
Appliance's primary competition.
The Company's franchisees generally compete on the basis of price, training
and support services and reputation. During 1996, companies such as American
Residential Services have entered the home service market through the
acquisition of existing companies.
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. These competitors may have greater
financial resources than the Company to take advantage of these opportunities.
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 through its subsidiaries, currently holds the
following federally registered trademarks and service marks: "Mr. Rooter"(R),
the stylized Mr. Rooter logo, "Mr. Winkie Design", "Quick-as-a-Wink"(R), "Super
Kleens"(R), "America's Trouble Shooter"(R), "North America's Trouble
Shooter"(R), "Aire Serv"(R), the stylized Aire Serv logo, "America's Comfort
Company"(R), "Mr. Electric"(R), the stylized Mr. Electric design, the "Rainbow
International Carpet Dyeing & Cleaning" stylized global device, "Rainbow
International"(R), "Vehicle Stripe Design for Rainbow", "GBS"(R),
"Dollartrak"(R), "GBS General Business Services"(R), "Dollartrak Systems", "EKW
Since 1935"(R), "E.K. Williams & Co." (R), "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 "Mr. Appliance", the stylized Mr.
Appliance logo, the van stripe design for each of Mr. Rooter, Mr. Electric, Mr.
Appliance 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.
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<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, continue offering and selling franchises or comply with
existing or future franchise regulations in any particular state. The failure
to take any of these actions 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
generally be unable to engage in offering or selling franchises in or from such
state. In addition, the Company is subject to franchise laws in Alberta, 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, 1996, the Company had 110 full-time employees and 12
part-time employees, none of whom belong to unions, as detailed below:
<TABLE>
<CAPTION>
Full-time Part-time Total
--------- --------- -----
<S> <C> <C> <C>
Corporate........ 41 3 44
Mr. Rooter....... 14 1 15
Aire Serve....... 3 - 3
Rainbow.......... 18 - 18
GBS.............. 21 7 28
Mr. Electric..... 5 - 5
E.K. Williams.... 6 1 7
Mr. Appliance.... 2 - 2
Total............ 110 12 122
</TABLE>
11
<PAGE>
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 various operating
leases expiring at different dates through October 31, 2000. Monthly rental for
these offices is $31,417. See "Certain Transactions."
In July 1996, the Company sold 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 until 1993. Since 1993 the property has been leased to an
unrelated party for $4,500 per month.
The Company also leases office space in Columbia, Maryland, for its GTS
operations, from an unrelated party for $2,035 per month. This lease expires
September 30, 2001. For its satellite EKW support office, EKW sub-leases office
space in Westminster, Colorado from a franchisee for $700 per month on a month-
to-month basis.
ITEM 3. LEGAL PROCEEDINGS
The Company is engaged in various legal proceedings incidental to its
normal business activities. Management has estimated a potential range of loss
due to these proceedings not to exceed $100,000.
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, 1996.
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, 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
------------ ------
<S> <C> <C>
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
FISCAL YEAR ENDED DECEMBER 31, 1996
First Quarter 3 2 1/2
Second Quarter 3 1/4 2 3/8
Third Quarter 3 1/16 2 1/4
Fourth Quarter 2 3/4 1 5/8
</TABLE>
12
<PAGE>
On April 10, 1997, the high and low prices of the Common Stock as reported
by the Nasdaq National Market were $1.625 and $1.625 per share, respectively.
As of such date, there were approximately 405 shareholders of record and 800
beneficial shareholders 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
As discussed in Note 15 to the consolidated financial statements, in
connection with the December 31, 1996 year end accounting closing and subsequent
analyses performed, the Company recorded a prior period adjustment for the
correction of an error in the consolidated financial statements for the year
ended December 31, 1995 relating to the carrying value of certain individual
franchises and regional franchises. The Management's Discussion and Analysis
which follows incorporates those adjustments.
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: 1996 1995
--------------- -----------------
<S> <C> <C> <C> <C>
Mr. Rooter $ 3,964 28.1% $ 3,015 22.1%
Rainbow 3,007 21.3 3,267 23.9
GBS 3,438 24.4 3,467 25.4
Aire Serv 422 3.0 795 5.8
E.K. Williams 1,566 11.1 1,616 11.9
Mr. Electric 626 4.5 724 5.3
Mr. Appliance (1) 87 .6 -- --
Other (2) 983 7.0 768 5.6
------- ----- ------- -----
$14,093 100.0% $13,652 100.0%
======= ===== ======= =====
INCOME (LOSS):
Mr. Rooter $ 634 143.7% (197) (19.2)%
Rainbow 471 106.8 541 52.6
GBS (733) (166.2) (882) (85.7)
Aire Serv (718) (162.8) (688) (66.9)
E.K. Williams 32 7.3 112 10.9
Mr. Electric (238) (54.0) 149 14.5
Mr. Appliance (1) (24) (5.4) -- --
Other (2) 135 30.6 (64) (6.2)
------- ----- ------- -----
$(441) 100.0% $(1,029) 100.0%
====== ===== ======= =====
</TABLE>
___________________________
(1) Mr. Appliance commenced franchise activities in September 1996.
(2) Includes revenues or earnings of The Dwyer Group, Inc. (Parent holding
company) which maintains all corporate activities and functions
(accounting, legal, data processing and administrative).
13
<PAGE>
Year ended December 31, 1996, compared to year ended December 31, 1995:
The Company incurred a net loss of $441,000, or $.06 per share for the year
ended December 31, 1996, an increase of $588,000, or 57.1%, as compared to
generating a net loss of $1,029,000, or $.14 per share for the year ended
December 31, 1995.
Total revenues for fiscal 1996 were $14,093,000, an increase of $441,000,
or 3.2%, compared to revenues of $13,652,000 for the year ended December 31,
1995. This net increase in revenues is comprised of the following components:
royalty income increased $735,000, or 11.2%; franchise sales decreased $740,000,
or 17.5%; product sales increased $182,000, or 27.2%; other income
increased $280,000, or 32.5%; and tax services increased $17,000, or 2.5%.
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: Mr. Rooter - $586,000 or 28.2%; GBS - $133,000 or
16.2%; Aire Serv - $37,000 or 17.6%; and Mr. Electric - $96,000 or 387.3%. These
increases, which coincide with the increased business revenues of the
existing franchisees as well as an increase in the number of franchisees
producing revenue, 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.
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. Mr. Rooter, with franchise sales increasing
from $734,000 in 1995 to $1,000,000 in 1996 (an increase of $266,000 or 36.2%)
and Mr. Appliance, which was organized in January 1996 and recorded $86,000 of
franchise sales in fiscal 1996, were the companies within The Dwyer Group, Inc.
with franchise sales increases. Mr. Rooter'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 Aire Serv, GBS, Mr. Electric, and Rainbow of
$428,000 (77.6%), $356,000 (20.5%), $216,000 (31.9%) and $83,000 (16.3%),
respectively. The Aire Serv decrease is primarily due to the management planned
slowdown of Aire Serv franchise sales to allow for the restructure and ultimate
enhancement of the Aire Serv franchise package. The enhanced Aire Serv franchise
package now includes a new franchise marketing plan, flat rate pricing manuals
and added services the Aire Serv franchise will offer such as air duct cleaning
and blower door testing. The GBS franchise sales decrease is primarily
attributable to the planned cessation of GBS regional franchise sales.
GBS regional franchise sales in 1995 were $457,400 as compared to -0- for 1996.
In addition, GBS accrued against franchise sales approximately $179,000 at
December 31, 1996 for anticipated refunds. The $216,000 franchise
sales decrease in 1996 for Mr. Electric generally relates to the decline in
regional franchises. During 1995, four regional franchises were sold totaling
$290,000. In 1996, only one regional franchise was sold totaling $125,000. In
addition, although Mr. Electric sold 19 individual franchises in 1996 as
compared to 12 in 1995, the territories sold in 1995 were, on the average,
larger than the franchise territories sold in 1996, therefore commanding a
larger individual franchise average sales amount ($5,500 higher average per
individual franchise sold in 1995 as compared to 1996).
The product sales increase of $182,000 in 1996 over the prior year, is
primarily due to GBS directly selling its recordkeeping systems and forms rather
than a third party seller as in 1995. GBS sold approximagely $255,000 of product
during 1996. EKW product sales decreased $73,000 to approximately $595,000 in
1996. EKW and GBS sell products such as manual recordkeeping systems and forms
to its franchisees and outside customers.
The increase in other income of approximately $280,000 is primarily due to
increased administrative and management services fees to related parties of
approximately $215,000.
In total, costs and expenses for the year ended December 31, 1996 decreased
$571,000 (3.7%) to $14,692,000 as compared to costs and expenses of $15,263,000
for the year ended December 31, 1995. This decrease is primarily due to the
decrease from 1995 to 1996 in the write down of assets held for sale ($400,000)
and the non-recurring disposal of assets held for sale ($285,000). In addition,
cost of tax services decreased approximately $260,000 due primarily to the
implementation of cost cutting measures at GTS. These decreases were somewhat
offset by the following 1996 increased costs and expenses: compensation expenses
increased from $4,747,000 in 1995 to $5,036,000 in 1996, a $289,000 (6.1%)
increase; and convention expenses increased from $204,000 in 1995 to $374,000 in
1996, a $170,000 (83.5%).
The $289,000 increase in compensation costs is primarily attributable to
the creation throughout 1995 of several new corporate departments and positions
(telecommunications, office services, international marketing, MIS, V.P. of
Operations and a Collections Manager). Such additions had a full year of
expenses in 1996. In 1996, national accounts and human resources departments
were added. Also in 1996, the Company enhanced its vacation policy which
resulted in a $59,000 expense to establish the initial accrual. In addition, Mr.
Electric compensation costs increased approximately $100,000 (60.1%), as the
September 1994 start-up company continues to build its management staff and
position Mr. Electric to be able to continually develop existing franchisees as
well as the expected growth of new franchisees.
The 1996 annual convention held in Las Vegas, Nevada, was the biggest in
attendance in the history of the Company. The expenses in conjunction with the
1996 convention rose 83.5% ($170,000) to $374,000 in 1996 from $204,000 in 1995.
Income taxes consist of tax benefits 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 years
ended December 31, 1996 and December 31, 1995, the Company recorded income
tax benefits of approximately $158,000 and $582,000, respectively.
During the fourth quarter of 1996, various year-end adjustments were
recorded to the consolidated financial statements. The effect of these
adjustments was a net decrease in total assets of $2,301,000, a net decrease in
liabilities of $305,000, a net decrease in stockholders' equity and
corresponding increased net loss of $1,996,000. These adjustments were primarily
to increase the allowance for doubtful accounts and notes receivable,
adjustments to and write-downs of assets held for sale, and write-offs of notes
receivable. The 1996 10-QSB's, as previously reported, are in the process of
restatement.
LIQUIDITY AND CAPITAL RESOURCES:
At December 31, 1996, the Company's working capital ratio was approximately
2.7 to 1 compared to approximately 3.0 to 1 at December 31, 1995. In addition,
the Company had working capital of approximately $4,366,000 at December 31,
1996, including $460,000 of franchise funds held for advertising as compared to
approximately $5,243,000 of working capital, including $354,000 of franchisee
funds held for advertising at December 31, 1995. The decrease in the Company's
working capital ratio and working capital at December 31, 1996 is primarily due
to a $1,626,000 decrease in cash and cash equivalents offset in part by a
$793,000 increase in short term investments and marketable securities, a
$289,000 increase in federal income tax receivable ($479,000 was actually paid
to the I.R.S. during 1996 for estimated 1996 federal income taxes)and a net
current receivable decrease of approximately $217,000 regarding related party
receivables and payables.
Total trade notes receivable decreased approximately $96,000 from December
31, 1995 to December 31, 1996. This decrease in trade notes receivable is mainly
comprised of additional new notes receivable of $2,907,000, which was offset by:
note payments of $450,000; transfers to assets held for sale of $667,000;
transfers to SunTrust Credit of $324,000; additions to the provision for
doubtful notes receivable of $777,000; and write-offs of notes receivable of
$785,000.
14
<PAGE>
Capital expenditures for the year ended December 1996 were approximately
$404,000 compared to approximately $632,000 for the year ended December 31,
1995. Management believes that the Company's cash flow from operations
supplemented by the Company's positive cash position will be adequate to fund
the Company's capital requirements.
Total notes receivable from related parties increased $794,000 from
December 31, 1995 to December 31, 1996. The Company converted approximately
$909,000 of related party accounts receivable to interest bearing notes
receivable in 1996. During 1996 related parties paid approximately $445,000 of
note principal ($419,000 from the estate of Donald J. Dwyer) and $43,000
interest ($38,000 from the estate of Donald J. Dwyer).
Net cash used by operating activities for the year ended December 31, 1996
totaled approximately $1,134,000 as compared to approximately $1,105,000 used by
operating activities for the year ended December 31, 1995. Net cash used in
investing activities for the year ended December 31, 1996 decreased by
approximately $142,000 to $947,000, as compared to the year ended December 31,
1995. The primary uses of cash for investing activities were: $812,000 for the
purchase of marketable securities; $393,000 in additional notes and accounts
receivable from related parties; and $404,000 for the purchase of property and
equipment. Net cash provided by financing activities in the year ended December
31, 1996 decreased by approximately $82,000 as compared to the prior year,
primarily as a result of decreased payments received on the shareholder note of
approximately $112,000.
In 1993, the Company entered into the Franchise Financing Agreement with
Stephens Franchise Financing, which is now SunTrust Credit Corporation
("SunTrust"), pursuant to which SunTrust agreed to extend credit to qualified
Mr.
15
<PAGE>
Rooter and Aire Serv franchisees up to an aggregate amount of $10,000,000.
As of December 31, 1996 and 1995, the aggregate principal amounts of outstanding
franchisee indebtedness under such agreement was approximately $2,431,000 and
$2,749,000, respectively. Pursuant to the terms of the Company's agreement with
SunTrust, until the entire principal balance of such indebtedness is repaid in
full, the Company is liable 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 1996 and 1995,
the Company exchanged notes it owned aggregating approximately $324,000 and
$261,000, respectively, to SunTrust for franchisee defaulted notes. In
addition, approximately $24,000 and $58,000 was paid to SunTrust during 1996
and 1995, 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 September, 1996, the Parent, Mr. Rooter, Aire Serv, Mr. Appliance, and
Mr. Electric entered into an agreement with Phoenix Leasing Incorporated
("Phoenix") to finance franchise sales for franchise applicants who meet
Phoenix's qualifications. Phoenix agreed to provide up to $3,000,000 in debt
financing to the franchisees provided that each franchisee's obligations to
Phoenix under its debt financing be guaranteed by the Parent and the franchising
subsidiary for such franchisee. On or about the 15th day of each calendar
month, the Parent will receive from Phoenix an Aging Report of the amounts due
and owing by the franchisees as of the first day of such month. If an Aging
Report shows that any franchisee has failed to make all of the scheduled monthly
payments due during any sixty (60) day period, then the Parent, within ten (10)
days of delivery of such Aging Report, shall pay all of such franchisee's
delinquent scheduled payments, together with all late charges then due and
Phoenix shall bill the Parent directly for amounts due and payable under such
franchisee's loan agreement. At December 31, 1996, the Parent was contingently
liable for approximately $29,000 relating to such notes.
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, Mr. Appliance 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, 1996 and 1995, notes receivable (in excess
of those recognized as deferred liabilities), less allowance for doubtful
collections, were approximately $2,958,000 and $2,652,000, respectively. For the
year ended December 31, 1996, the Company increased the allowance for doubtful
notes receivable collection approximately $777,000 compared to a $434,000
increase for the year ended December 31, 1995. At December 31, 1996, the
Company's allowance for doubtful note collections was $1,633,000, which the
Company believes is currently adequate for the size and nature of its notes
receivable.
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 on or before 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. During 1996, the estate paid the
remaining principal of $419,000 and interest in the amount of $38,000.
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
16
<PAGE>
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 June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 125"). This Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. This Statement requires that
after a transfer of financial assets, an entity recognizes the financial assets
it controls and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered, and derecognizes liabilities it extinguished.
This Statement is effective for transfer of financial assets and extinguishments
of liabilities occurring after December 31, 1996. In December 1996, FASB issued
Statement of Financial Accounting Standards No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125". This Statement deferred
the effective date of FASB Statement No. 125 for secured lending and similar
transactions to transactions occurring after December 31, 1997. The Company will
adopt that Statement effective January 1, 1997.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
establishes standards for computing and presenting earnings per share. SFAS No.
128 requires the replacement of primary earnings per share with basic earnings
per share. Basic earnings per share excludes dilution, and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period. The Company will be required to
adopt the provisions of SFAS No. 128 for fiscal 1997.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, together with the
independent auditor's report thereon of Coopers & Lybrand LLP, appears on pages
31 through 38 of this report. See Index to Financial Statements on 30 of this
report.
17
<PAGE>
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, and the Board of Directors of the
Company took action necessary to effect such change. 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......... 62 Chairperson of the Board of Directors
Robert Tunmire........ 38 President and Chief Executive Officer and Director
John Appel............ 55 Vice President
Dina Dwyer-Owens...... 34 Secretary and Vice President of Operations and Director
Stephen E. Beatty..... 45 Treasurer and Chief Financial Officer
Donald J. Dwyer, Jr... 32 Director
James L. Sirbasku..... 57 Director
John P. Hayes......... 47 Director
Donald E. Latin....... 66 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.
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 Mr. Rooter, Mr.
Electric, Mr. Appliance and Aire Serv. From December 1980 until May 1989, Mr.
18
<PAGE>
Tunmire was employed by Rainbow, most recently as Executive Vice President of
Franchise Counseling. Mr. Tunmire has approximately 22 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 and as President of General
Business Services and E.K. Williams since July 1, 1996. 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 1986 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, and has been since 1994, employed by the Company as Director of
International Operations. He previously served as Director of International
Operations 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 served,
from January 1987 to 1995, as President of The Hayes Group, Inc., an
international marketing and promotion company specializing in franchised
businesses. Since January 1996, Mr. Hayes has served as a consultant to
franchisors.
Donald E. Latin founded and, since 1986, has served as President of D. Latin
and Company, Inc., an investment banking 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 and the late founder, Donald J. Dwyer.
SIGNIFICANT EMPLOYEES
Michael Bidwell, age 39, 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.
Richard Cross, age 48, has been Chief Operating Officer of Mr. Rooter, Mr.
Electric and Aire Serv since December 1994 and Mr. Appliance since January 1996.
Mr. Cross previously served as Vice President of Marketing from December 1991
19
<PAGE>
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 5 times during 1996 and took action 59 times by means
of written consent. Each director attended all of the meetings and signed each
consent. Directors are not compensated for their services as directors. Non-
employee 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 4 times during 1996.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
officers and directors of the Company and persons who beneficially own more than
ten percent of the Company's Common Stock to file reports of securities
ownership and changes in such ownership with the Securities and Exchange
Commission (the "SEC"). Officers, directors, and greater than 10 percent
beneficial owners also are required by rules promulgated by the SEC to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it with
respect to the fiscal year ended December 31, 1996, or written representations
from certain reporting persons, the Company believes that all filing
requirements applicable to its directors, officers and persons who own more than
ten percent of a registered class of the Company's equity securities have been
complied with, except that during fiscal 1996, Messrs. Tunmire, Dwyer, Hayes,
Appel Sirbasku, and Ms. Dwyer and Ms. Dwyer-Owens were late in filing one
report required pursuant to Section 16(a). Mr. Beatty was late in filing two
reports required pursuant to Section 16(a). No other officer, director, or ten
percent shareholder was late in filing his or its reports pursuant to Section
16(a).
20
<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 $100,000 for services
rendered for the Company and its Subsidiaries during the fiscal years indicated:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- ----------------------
NAME AND SECURITIES UNDERLYING
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OTHER($) OPTIONS($)
- --------------------- ---- ---------------- -------- -------- ----------------------
<S> <C> <C> <C> <C> <C>
Robert Tunmire, 1996 $ 215,818(1) ---- ----
President & CEO 1995 $ 196,414(1) $20,779 100,000
1994 $ 158,780(1) $88,756 ----
John Appel, 1996 $ 137,004(1) ---- 5,000
Vice President 1995 $ 123,882(1) $21,389 ----
1994 $ 123,059(1) $23,474 ----
Stephen Beatty(2) 1996 $ 98,679 $10,000 5,000
Treasurer & CFO 1995 $ 85,829 $15,000 12,500
1994 $ 51,544 $15,000 ----
Michael Bidwell(3) 1996 $ 118,360 $44,360 ----
1995 $ 68,495 $14,101 25,000
Paul Woody(4) 1996 $ 104,808 ---- $338,256 25,000
1995 $ 115,385 ---- $ 28,846 25,000
</TABLE>
(1) Includes salary and any commissions from franchise sales.
(2) Mr. Beatty was appointed Treasurer and Chief Financial Officer of the
Company effective December 19, 1994.
(3) Mr. Bidwell was appointed President of Rainbow effective July 15, 1995.
(4) Mr. Woody, who was appointed President of GBS and EKW effective June 1,
1995, left the employ of GBS and EKW on June 28, 1996 and returned to
Oklahoma city to operate his 25 year old GBS franchise. Pursuant to the
terms of Mr. Woody's stock option agreement which granted 25,000 stock
options to Mr. Woody on June 1, 1995 at $3.375, these options terminated 30
days subsequent to the termination of Mr. Woody's employment. A Mutual
Termination of Employment Agreement was executed on June 30, 1996 pursuant
to which the Company purchased Mr. Woody's house in Waco, Texas in exchange
for the $18,873 equity in the house at the date of the agreement,
reimbursed Mr. Woody $9,050 for his 1995 closing costs which were incurred
during his 1995 move to Waco, Texas, and paid Mr. Woody's actual moving
costs from Waco, Texas to Oklahoma City, OK.
GBS and EKW subsequently executed a 3 year consulting agreement beginning
July 1, 1996 with Mr. Woody, who will provide franchise training and
various professional services in conjunction with the future growth and
development of GBS and EKW. For services rendered under this 3 year
consulting agreement, Mr. Woody was paid a fee of $305,000 in advance to be
amortized over the 3 year life of the consulting agreement. In addition,
expenses incurred by Mr. Woody directly attributable to services rendered
under the consulting agreement are to
21
<PAGE>
be reimbursed. In conjunction with this consulting agreement, Mr. Woody was
granted 25,000 non-qualified stock options to acquire 25,000 shares of
common stock of the Company at $3.375 per share. This stock option
agreement expires on July 1, 2001. Stock options under this agreement
become exercisable in 5,000 increments beginning July 1, 1996 and each year
thereafter through July 1, 2000.
This portion intentionally left blank.
22
<PAGE>
The following table sets forth information regarding options granted to the
named executive officers during the fiscal year ended December 31, 1996:
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(1) DATE
- ----------------- --------------------- ------------------- -------- -----------
<S> <C> <C> <C> <C>
Robert Tunmire ---- ---- ---- ----
Stephen Beatty 5,000 7% 3.00 (2)
John Appel 5,000 7% 3.00 (2)
Paul Woody 25,000 N/A 3.375 7/1/2001
Michael Bidwell ---- ---- ---- ----
</TABLE>
_________________________
(1) Reflects the dollars per share exercise price which equals the closing
market price of the underlying security on
the date of grant.
(2) The Incentive Stock Option Agreements do not contain a specific option
expiration date. Each incentive stock option granted under the 1986 Stock
Option Plan ("SOP") will not be exercisable more than 10 years from the
date the option is granted except for incentive stock option grants to any
person owning 10% or more of the Company's Common Stock whose options
expire 5 years from the date of the grant. 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. Unless otherwise determined by the Board of
Directors at the time an option is granted, incentive options and non-
incentive options under the SOP become exercisable at the rate of 20% of
the number of shares covered thereby per year, beginning one year from the
date of grant.
23
<PAGE>
The following table shows option exercises during the year ended December
31, 1996 and the value of unexercised options at December 31, 1996 for the named
executive officers who exercised options during 1996 or who had unexercised
options at December 31, 1996.
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>
Robert Tunmire ---- ---- 63,434/66,667 $101,139/-0-
John Appel ---- ---- 20,000/10,000 -0-/-0-
Stephen Beatty ---- ---- 2,500/15,000 -0-/-0-
Michael Bidwell ---- ---- 5,000/20,000 -0-/-0-
Paul Woody ---- ---- 5,000/20,000 -0-/-0-
</TABLE>
_____________________________
(1) The closing price of the Common Stock on December 31, 1996 was $2.00 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1996, 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>
BENEFICIAL OWNERSHIP (1)
NAME AND ADDRESS -------------------------
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) 3,913 *
Robert Tunmire (3)(6) 83,040 1.2%
Donald J. Dwyer, Jr. (3)(7) 4,618,520 64.1%
Theresa Dwyer (3)(7) 4,612,220 64.0%
John Hayes (8) 20,250 *
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
James Sirbasku (9) 15,000 *
Donald E. Latin (10) 15,000 *
John Appel (3)(11) 20,000 *
Steve Beatty (3)(12) 3,500 *
Renaissance Capital Growth & Income
Fund III (13) 700,000 9.8%
All officers and directors as a
group (nine persons) (14) 4,780,523 65.2%
</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 pending 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.
(5) Includes 2,500 shares of Common Stock now exercisable or exercisable within
60 days under an Incentive Stock Option Plan.
(6) Includes 63,434 shares of Common Stock now exercisable or exercisable
within 60 days under an Incentive Stock Option Plan.
(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. Also includes for Donald J. Dwyer,
Jr., 1,000 shares of Common Stock now exercisable or exercisable within 60
days under an Incentive Stock Option Plan.
(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.
25
<PAGE>
(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 20,000 shares of Common Stock now exercisable or exercisable
within 60 days under an Incentive Stock Option Plan.
(12) Includes 3,500 shares of Common Stock now exercisable or exercisable within
60 days under an Incentive Stock Option Plan.
(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 129,434 shares of Common Stock now exercisable or exercisable
within 60 days under an Incentive Stock Option Plan 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, the Estate of Donald J. Dwyer, under
various leases expiring at various times through October 31, 2000 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 such majority stockholder. The Company expensed
$629,769 for such rent and services in 1996 and $618,106 in 1995.
The Company recognized income from related parties for accounting, legal
and administrative services, interest income, product sales commissions and
management fees totaling $812,985 in 1996 and $554,116 in 1995.
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.
Donald J. Dwyer, Jr., and Dina Dwyer-Owens are the son and daughter,
respectively, of Theresa Dwyer and the late founder, Donald J. Dwyer.
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 leaving a balance
due of $914,000. Therefore the Company recorded income from the insurance
proceeds of $914,000. The Company received $50,000 of the total life insurance
proceeds (914,000) in December 1994. The remaining $864,000 proceeds of this
insurance were pledged to the lender of the Industrial Revenue Bonds ("IRB's")
which were secured by Rainbow's guaranty. Proceeds of $864,000 were utilized to
pay down the IRB's and also Housing Finance Revenue Bonds for which Rainbow had
previously guaranteed and for which the remaining insurance process were
assigned for the benefit of the estate. As such, the Company in December 1994
recorded a note receivable from Mr. Dwyer's estate of $864,000. This $864,000
note was paid in full during 1995, including $34,087 of interest.
Beginning June 1995, the Company 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 1996 and 1995 the Company expensed approximately $171,000 and $108,000
for Mr. Hayes' services, respectively.
26
<PAGE>
In December 1996 the Company, together with selected related parties,
agreed to convert $908,632 of related party accounts receivable and accounts
receivable from affiliates to interest bearing (9.25%) notes receivable. These
notes are payable in full by December 31, 2006. In total, accounts and notes
receivable from related parties and officers (current and long-term) increased
approximately $285,000, to $1,861,368 at December 31, 1996 when compared to
December 31, 1995.
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. During 1996 the estate paid the remaining principal of
$418,896 and interest of $38,376.
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 30.
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. (2)
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)
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)
27
<PAGE>
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)
10.44 Incentive Stock Option Agreement by and between the Company and Matthew
Michel.(7)
10.45* Mutual Release by and between General Business Services, Inc., and
Paul Woody effective June 30, 1996.
10.46* Consulting Agreement by and between General Business Services, Inc.,
E.K. Williams & Co., and Paul Woody effective July 1, 1996.
10.47* Form of Stock Option Agreement by and between the Company and Paul
Woody for 25,000 shares of the Company's Common Stock.
21 List of Subsidiaries.(2)
28
<PAGE>
27* Financial Data Schedules.
* Filed herewith.
__________________________
(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.)
(a) Reports on Form 8-K
NONE
29
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
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 24th day of
April, 1997.
The Dwyer Group, Inc.
By: /s/Robert Tunmire
-------------------------
Robert Tunmire, President
and Chief Executive Officer
In accordance with the Exchange Act, 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 24, 1997
- -------------------------- Board of Directors
Theresa Dwyer
/s/ Robert Tunmire President and April 24, 1997
- -------------------------- Chief Executive Officer
Robert Tunmire (Principal Executive Officer)
/s/ Dina Dwyer-Owens Secretary and April 24, 1997
- -------------------------- Vice President of Operations
Dina Dwyer-Owens
/s/ Stephen E. Beatty Treasurer and Chief April 24, 1997
- -------------------------- Financial Officer
Stephen E. Beatty (Principal Financial and
Accounting Officer)
/s/ James Sirbasku Director April 24, 1997
- --------------------------
James Sirbasku
/s/ Donald J. Dwyer, Jr. Director April 24, 1997
- --------------------------
Donald J. Dwyer, Jr.
/s/ John P. Hayes Director April 24, 1997
- --------------------------
John P. Hayes
/s/ Donald E. Latin Director April 24, 1997
- --------------------------
Donald E. Latin
</TABLE>
30
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
-----
Reports of Independent Accountants 32
Consolidated Balance Sheets as of December 31, 1996 and 1995. 33
Consolidated Statements of Operations for the years ended
December 31, 1996 and 1995 35
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996 and 1995 37
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 and 1995 38
Notes to Consolidated Financial Statements 41
31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
____________________________________________________________
Board of Directors
The Dwyer Group, Inc.
Waco, Texas
We have audited the accompanying consolidated balance sheets of The Dwyer Group,
Inc. and Subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 financial position of The Dwyer Group, Inc. and
Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
As discussed in Note 15 to the consolidated financial statements, the Company
recorded a prior period adjustment for the correction of an error in the
consolidated financial statements for the year ended December 31, 1995, relating
to certain individual franchises and regional franchises.
COOPERS & LYBRAND L.L.P
Fort Worth, Texas
April 11, 1997
32
<PAGE>
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1995
----------- -----------
Restated
Note 15
-----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,820,167 $ 3,446,166
Short term investments held to maturity 1,084,061 1,000,000
Marketable securities, available for sale 709,246 ----
Trade accounts receivable, net of
allowance for doubtful accounts of
$429,647 and $491,613, respectively 616,959 696,389
Accounts receivable from related
parties 317,053 825,029
Accrued interest receivable 183,272 150,748
Trade notes receivable, current
portion 686,117 826,418
Inventories 143,794 136,728
Prepaid expenses 260,947 148,854
Federal income tax receivable 935,443 646,641
Notes receivable from related
parties, current portion 130,453 ----
----------- -----------
TOTAL CURRENT ASSETS 6,887,512 7,876,973
ACCOUNTS RECEIVABLE FROM
RELATED PARTIES, long term portion 97,290 97,916
PROPERTY AND EQUIPMENT, at cost less
accumulated depreciation 1,259,863 1,472,863
ASSETS HELD FOR SALE (NOTE 15) 452,428 398,651
TRADE NOTES RECEIVABLE, long term
portion, net allowance for doubtful notes
of $1,633,092 and $855,849 respectively 4,521,896 4,478,071
PURCHASED FRANCHISE RIGHTS, at cost less
accumulated amortization of $419,124
and $331,466, respectively 1,177,929 1,306,456
PATENTS, TRADEMARKS AND OTHER, at cost
less accumulated amortization of
$96,077 and $65,009, respectively 173,346 139,160
NOTES RECEIVABLE FROM RELATED PARTIES,
long term portion 1,316,572 653,403
INVESTMENT, EQUITY METHOD 389,241 428,423
NET DEFERRED TAX ASSET 342,046 217,005
OTHER ASSETS 613,955 199,778
----------- -----------
TOTAL ASSETS $17,232,078 $17,268,699
=========== ===========
</TABLE>
33
<PAGE>
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
----------- -----------
Restated
CURRENT LIABILITIES: Note 15
- -------------------- -----------
<S> <C> <C>
Trade accounts payable $ 1,007,146 $ 883,307
Accounts payable to related parties 61,490 222,227
Accrued liabilities 1,149,890 1,208,409
Other payables 22,527 67,759
Current portion of notes payable and
capital lease obligations 280,689 252,289
----------- -----------
TOTAL CURRENT LIABILITIES 2,521,742 2,633,991
NOTES PAYABLE & CAPITAL LEASE
OBLIGATIONS, less current portion 612,381 276,677
DEFERRED FRANCHISE SALES REVENUE 2,250,299 2,652,057
FRANCHISE FUNDS HELD FOR ADVERTISING 459,586 318,447
----------- -----------
TOTAL LIABILITIES 5,844,008 5,881,172
Commitments and contingent liabilities
(Notes 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 at December 31, 1996
and 1995, respectively 723,556 723,556
Additional paid-in capital 8,941,029 8,941,029
Retained earnings (Note 15) 1,796,836 2,237,959
Note receivable from shareholder ----- (418,896)
Unrealized gain on available for
sale securities 22,770 -----
Treasury stock, at cost (122,425 shares
at December 31, 1996 and 1995,
respectively) (96,121) (96,121)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 11,388,070 11,387,527
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $17,232,078 $17,268,699
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE>
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
----------- -----------
Restated
Note 15
-----------
<S> <C> <C>
REVENUES:
Royalty income $ 7,324,213 $ 6,588,983
Franchise sales 3,495,792 4,235,649
Tax services 728,267 710,823
Product sales 850,129 668,544
Interest 553,931 587,704
Other (Note 9) 1,140,611 860,543
----------- -----------
14,092,943 13,652,246
COSTS AND EXPENSES:
Cost of product sales 476,780 340,053
Cost of tax services 857,975 1,117,791
General, administrative, selling 12,145,453 11,996,575
Depreciation and amortization 522,068 432,443
Interest 47,342 48,913
Write down of assets held for sale 634,289 1,034,302
Loss on disposal of assets held for
sale 8,041 292,614
----------- -----------
14,619,948 15,262,691
Loss before benefit for income taxes (599,005) (1,610,445)
Benefit from income taxes 157,882 581,941
----------- -----------
Net loss $ (441,123) $(1,028,504)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE>
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995
---------- ----------
Restated
Note 15
----------
<S> <C> <C>
Net Loss per common share
$ (0.06) $ (0.14)
========== ==========
Weighted average common
shares outstanding 7,113,127 7,206,489
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
36
<PAGE>
THE DWYER GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
ADDITIONAL RECEIVABLE AVAILABLE
COMMON STOCK PAID-IN RETAINED FROM FOR SALE TREASURY STOCK
SHARES DOLLARS CAPITAL EARNINGS SHAREHOLDER SECURITIES SHARES DOLLARS TOTAL
--------- ------- ---------- ---------- ------------ ---------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994 7,234,552 723,456 7,989,489 3,266,463 ----- ---- 137,425 (137,989) 11,841,419
--------- -------- ---------- ---------- ----------- -------- ------- --------- -----------
Net loss for the year ----- ----- ----- (515,206) ----- ---- ----- ----- (515,206)
Stock options exercised 1,000 100 1,540 ----- ----- ---- ----- ----- 1,640
Contributions from
stockholder ----- ----- 950,000 ----- (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, as previously
reported 7,235,552 723,556 8,941,029 2,751,257 (418,896) ---- 122,425 (96,121) 11,900,825
Restatement (Note 15) (513,298) (513,298)
Balance at December 31,
1995 as adjusted 7,235,552 723,556 8,941,029 2,237,959 (418,896) ---- 122,425 (96,121) 11,387,527
--------- -------- ---------- ---------- ----------- -------- ------- --------- -----------
Net loss for the year ----- ----- ----- (441,123) ----- ---- ----- ----- (441,123)
Payments received on
stockholder note ----- ----- ----- ----- 418,896 ---- ----- ----- 418,896
Increase in unrealized
appreciation included
in carrying value of
investments (net of tax
of $12,262) ----- ----- ----- ----- ----- 22,770 ----- ----- 22,770
--------- -------- ---------- ---------- ----------- -------- ------- --------- -----------
Balance as December 31,
1996 7,235,552 $723,556 $8,941,029 $1,796,836 ----- $ 22,770 122,425 $ (96,121) $11,388,070
========= ======== ========== ========== =========== ======== ======= ========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
37
<PAGE>
THE DWYER GROUP, INC., AND SUBISDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995
---- ----
Restated Note 15
----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (441,123) $(1,028,504)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 522,068 432,443
Provision for doubtful accounts
receivable and notes receivable 946,846 1,183,531
Notes receivable issued for
franchise sales (1,353,434) (3,513,119)
Equity in earnings of investment 13,465 33,561
Gain on disposal of property (42,673) ----
Write down of assets held for sale 634,289 1,034,302
Loss on disposal of assets held
for sale 8,041 292,614
Write off of deferred revenue (87,650) ----
Unrealized gains on available for
sale securities 22,770 ----
Deferred tax asset (125,041) (239,707)
Changes in assets and liabilities:
Accounts receivable (332,045) (209,553)
Accrued interest receivable (32,524) (112,248)
Inventories (7,066) 23,110
Prepaid expenses (112,093) (37,649)
Federal income tax receivable (288,802) (646,641)
Other assets (11,677) (106,324)
Accounts payable and accrued
liabilities 65,319 760,673
Accounts payable to related
parties (160,737) 222,227
Income taxes payable ---- (370,271)
Other payables (45,232) (111,875)
Franchisee funds held for
advertising 141,139 25,452
Deferred franchise sales revenue (189,290) 1,047,394
Other (109,338) 31,841
----------- -----------
Net cash used in operating activities (984,788) (1,288,743)
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of notes
receivable 175,433 379,175
Payments received on note
receivables 450,037 1,059,087
Purchases of property and
equipment (403,507) (681,372)
Proceeds from sale of property
and equipment 322,661 ----
Payments for patents, trademarks
and franchise rights (66,334) (40,881)
Net change in notes and accounts
receivable from related parties (392,668) 421,068
Acquisition of assets held for
sale (257,697) (828,102)
Proceeds from sale of assets
held for sale 96,400 70,000
Purchase of short-term investments,
held to maturity (84,061) (1,000,000)
Purchase of marketable securities,
available for sale (811,742) ----
Acquistion of other assets (252,500) ----
Sales of marketable securities,
available for sale 102,496 ----
Payments on notes receivable
from related parties 26,033 ----
----------- -----------
Net cash used in investing
activities (1,095,449) (621,025)
----------- -----------
</TABLE>
38
<PAGE>
THE DWYER GROUP, INC., AND SUBISDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995
----------- -----------
RESTATED NOTE 15
----------------
<S> <C> <C>
Cash Flows from Financing Activities:
Proceeds from debt issued 589,559 176,622
Principal payments of debt (554,217) (215,095)
Proceeds from redemption of stock
options --- 1,640
Payments received on shareholder
note 418,896 531,104
Purchase of treasury stock --- (203,993)
Sales of treasury stock --- 245,861
----------- -----------
Net cash provided by financing
activities 454,238 536,139
----------- -----------
Net decrease in cash and cash
equivalents (1,625,999) (1,373,629)
Cash and cash equivalents, at beginning
of year 3,446,166 4,819,795
----------- -----------
Cash and cash equivalents, end of
year $ 1,820,167 $ 3,446,166
=========== ===========
Cash paid during the year for:
Interest $ 51,000 $ 43,000
Income taxes 479,000 642,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
39
<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 (collectively the "Subsidiaries" and
together with the Parent, 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 ("Mr. 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 Mr. 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, Mr. Donald J.
Dwyer, 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
Colorado corporation and 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 Corp., ("Mr. Electric"), a Texas corporation. Mr. Electric is engaged
in franchising electrical contracting service businesses.
On January 4, 1996, the Company formed a new wholly-owned subsidiary, Mr.
Appliance Corp., ("Mr. Appliance"). Appliance is a Texas corporation engaged in
franchising major household appliance service and repair businesses.
B. Inventories
-----------
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
41
<PAGE>
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 property capitalized
under 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.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
establishes standards for computing and presenting earnings per share. SFAS No.
128 requires the replacement of primary earnings per share with basic earnings
per share. Basic earnings per share excludes dilution, and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period. The Company will be required to
adopt the provisions of SFAS No. 128 for fiscal 1997.
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, 1996
include, but are not limited to, $490,000 in money market funds and $200,000 in
certificates of deposit. Included in cash equivalents at December 31, 1995 is
$1,374,575 in money market funds and $1,040,494 in certificates of deposit.
Cash and cash equivalents include funds collected from Rainbow, Mr. Rooter,
Mr. Electric and Aire Serv franchisees and held for national advertising
expenditures only. At December 31, 1996 and 1995 these national advertising
funds held totaled $460,000 and $354,000, 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, 1996 the Company maintained a $1,084,000
Canadian bank certificate of deposit purchased with a twelve month maturity
(August 1997) which is to be held to maturity and is carried at cost. The
Company believes it is not exposed to any significant credit risk regarding this
short term investment.
Securities classified as available for sale are carried at fair value, with
unrealized gains and losses, net of tax, reported in a separate component of
stockholders' equity. Realized gains and losses are included in income.
G. Franchise Operations
--------------------
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 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.
42
<PAGE>
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 Rainbow, Mr. Rooter, Aire-Serv, Mr. Appliance, and Mr.
Electric franchisee's sales to be used for national advertising.
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 franchise territories from existing
franchisees, which it markets to new franchisees. If there is a committed buyer
for the acquired franchise territory, 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, see Note 15. The
cost of acquiring a franchise territory where there is not a committed buyer is
expensed.
The Company may repurchase regional franchise rights. Regional franchise
repurchases are recorded at the lower of cost or fair value based upon estimated
cash flows from existing franchises operating in the region. Periodically the
Company assesses the fair value of these areas based on estimated, undiscounted
future cash flows to determine if an impairment in the value has occurred and an
adjustment is necessary. If an adjustment is required, a discounted cash flow
analysis is performed and an impairment loss is recorded. The Company had an
investment of $235,567 in such regional franchises held for sale at December 31,
1996.
I. Income Taxes
------------
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, Plant &
Equipment, Inventory, and Accounts and Notes Receivable for financial and income
tax reporting. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
The Company files a consolidated tax return on behalf of its Subsidiaries.
Income tax expense is allocated to the Parent and the Subsidiaries as if they
filed separate tax returns.
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 in accordance with SFAS No.
121. 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 Investment
------------------------
As of September 1, 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
43
<PAGE>
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 1996 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.
N. Investment Securities
---------------------
At December 31, 1996 and 1995, the amortized cost and estimated fair values of
investment securities by type and contractual maturity are shown below.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------
AMORTIZED GROSS ESTIMATED FAIR
COST UNREALIZED VALUE
GAINS
<S> <C> <C> <C>
Held-to-Maturity
Certificate of Deposit
(due within 1 year) $1,084,061 $36,179 $1,120,239
Available-for-sale
Securities $ 674,214 $35,032 $ 709,246
DECEMBER 31, 1995
----------------------------------------------
AMORTIZED GROSS ESTIMATED FAIR
COST UNREALIZED VALUE
GAINS
Held-to-Maturity
Certificate of Deposit
(due within 1 year) $1,000,000 $25,594 $1,025,594
</TABLE>
During 1996, the Company sold available-for-sale debt securities for gross
proceeds of $102,496. There were no sales of securities classified as
held-to-maturity investments during 1996 and 1995.
Also included in other assets are debt securities, held to maturity and earning
10.5%. These securities have a carrying value of $200,000 and $100,000 at
December 31, 1996 and 1995, respectively, and mature on September 1, 2000.
Management estimates that the fair value of these securities is $200,000 at
December 31, 1996.
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.
As of May 1, 1994, the Company acquired EKW, a Colorado corporation and
wholly-owned subsidiary of Ekwill, a California corporation ("Ekwill"), 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%, 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 acquisition of EKW and Ekwill has been accounted for as a
purchase and its 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. The 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.
NOTE 3. COMMON STOCK, STOCK OPTIONS, WARRANTS AND CERTAIN TRANSACTIONS
A. Common Stock
------------
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.
44
<PAGE>
B. 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, the Company 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
July19, 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 could 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).
C. Stock-Based Compensation Plan
-----------------------------
The Company sponsors various stock-based compensation plans (the "Plans"), which
are described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for its stock-based compensation plans. In 1995,
the FASB issued FASB Statement No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123") which, if fully adopted by the Company, would change the methods
the Company applies in recognizing the cost of its stock-based compensation
plans. Adoption of the cost recognition provision of SFAS 123 is optional and
the Company has decided not to elect these provisions of SFAS 123. However, pro
forma disclosures as if the Company adopted the cost recognition provisions of
SFAS 123 in 1995 are required by SFAS 123 and are presented below.
Under the Plans, the Company is authorized to issue shares of Common Stock
pursuant to "Awards" granted in the form of incentive stock options qualified
under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code")
and nonqualified stock options not qualified under Section 422 of the Code.
Awards may be granted to selected employees and directors of the Company or any
subsidiary. In 1996 and 1995, the Company granted both incentive stock options
and nonqualified stock options.
Employee Stock Options
In 1996, the Company granted a total of 79,000 awards in the form of incentive
stock options and nonqualified stock options under the Plans. In 1995, the
Company granted a total of 202,500 awards in the form of incentive stock options
and nonqualified stock options under the Plans. Under the Plans, the incentive
options granted have contractual terms of either 8 or 10 years and the
nonqualified options have contractual terms of 5 years. The incentive options
granted vest on graded schedule, 20% per year, over 5 years, beginning on the
first anniversary of the date of grant. The nonqualified options vest either
100% as of the date of grant or 20% per year, over 5 year, beginning on the date
of grant. All options granted have an exercise price that is equal to the fair
market value of a share of common stock on the grant date.
A summary of the status of the Company's stock options as of December 31, 1996
and December 31, 1995 and the changes during the year ended on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------- --------------------------------------
Weighted Weighted
# Shares of Underlying Average # Share of Underlying Average
Options Exercise Prices Options Exercise Prices
---------------------- --------------- --------------------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of the year 793,326 $2.32 604,326 $2.07
Granted 79,000 $2.85 202,500 $2.87
Exercised 0 n/a 1,000 $1.64
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Forfeited 37,500 $3.13 12,500 $2.76
Expired 0 n/a 0 n/a
------- -------
Outstanding at end of year 834,826 $2.33 793,326 $2.32
Exercisable at end of year 647,156 $2.14 595,826 $2.10
1996 1995
-------- --------
Weighted-average fair value of all
options granted during the year $1.54 $1.40
</TABLE>
The fair value of each stock option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1996 and 1995, respectively: dividend yield of 0% for
both years; risk-free interest rates are different for each grant and range from
5.21% to 6.98%; the expected lives of options are from 2.5 to 6 years; and
volatility of 50% for all grants.
The following table summarized information about stock options outstanding at
ecember 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------- ---------------------------
Number Wgtd. Avg. Number
Range of Outstanding Remaining Wgtd. Avg. Exercisable Wgtd. Avg.
Exercise Prices at 12/31/96 Contr. Life Exercise Price at 12/31/96 Exercise Price
- ----------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.00 to $2.50 551,101 2.86 $1.59 470,931 $1.45
$2.51 to $4.25 283,725 4.52 $3.61 176,225 $3.97
$1.00 to $4.25 834,826 3.43 $2.28 647,156 $2.14
</TABLE>
Non-Employee Stock Options
In 1996, the Company granted 25,000 non-qualified stock options to a non-
employee of the Company. These options have a contractual term of five years
and vest on a graded schedule of 20% per year, for the next 5 years, beginning
on the date of grant. As of December 31, 1996, all of the stock options are
outstanding with a weighted-average contractual life of 4.5 years and 5,000 of
these stock options are exercisable at a weight-average price of $3.375. In
1996, the Company expensed approximately $12,398 as compensation, pursuant to
the requirements of SFAS No. 123.
The fair value of $1.65 was calculated for the stock option granted to non-
employees in 1996. The fair value was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1996: dividend yield of 0%; risk-free interest rate
of 6.46.%; the expected life of the options is 4.5 years; and volatility of
50%.
Pro Forma net Loss and Net Loss Per Common Share
Had the compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS 123, the Company's net loss and net loss per
common share for 1996 and 1995 would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
For the Year Ended December 31
-------------------------------------------------
As Reported Pro Forma As Reported Pro Forma
1996 1996 1995 1995
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
SFAS 123 Charge ---- $ 71,000 ---- $ 42,000
APB25 Charge ---- ---- ----
Net Loss $(441,000) $(512,000) $(1,029,000) $(1,017,000)
Net Loss Per Common Share $(0.06) $(0.07) $(0.14) $(0.15)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts SFAS 123 does not apply to awards prior to 1995.
46
<PAGE>
NOTE 4. TRADE NOTES RECEIVABLE - FRANCHISE FEES AND DEFERRED FRANCHISE SALES
REVENUE
The Company receives various notes from the sale of new franchises. These 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>
1996 1995
-------- -----------
<S> <C> <C>
Amounts due within one year $ 616,959 $ 826,418
Amounts due after one year, net of
allowance for uncollectible
amounts of $1,633,092 and $855,849
in 1996 and 1995, respectively 4,521,896 4,478,071
---------- ----------
Total notes receivable $5,138,855 $5,304,489
========== ==========
</TABLE>
At December 31, 1996 and 1995, the amounts of deferred revenue from franchise
sales were $2,250,299 and $2,652,057, respectively. Fees from franchise
sales accounted for by the installment method are collectible in the years 1996
through 2007.
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.
47
<PAGE>
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.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------ ----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- --------------- -----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 1,820,167 $ 1,820,167 $3,446,166 $3,446,166
Short term investment 1,084,061 1,120,239 1,000,000 1,025,594
Trade accounts receivable 616,959 616,959 696,389 696,389
Accounts receivable from related parties 414,343 414,343 922,945 922,945
Accrued interest receivable 183,272 183,272 150,748 150,748
Trade notes receivable 5,208,013 5,039,864 5,304,489 4,797,515
Notes receivable from related parties 1,447,025 1,447,025 653,403 653,403
Assets held for sale 452,428 452,428 398,651 398,651
Liabilities:
Trade accounts payable 1,007,146 1,007,146 888,307 888,307
Accounts payable to related parties 61,490 61,490 222,227 222,227
Accrued liabilities 1,149,890 1,149,890 1,208,409 1,208,409
Other payables 22,527 22,527 67,759 67,759
Notes payable and capital lease obligations 893,070 893,070 528,966 475,875
</TABLE>
NOTE 6. PROPERTY AND EQUIPMENT
A summary of property and equipment as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
---------- ----------
<S> <C> <C>
Land $ 57,159 $ 97,159
Building and Improvements 184,392 450,431
Machinery and Equipment 1,530,787 1,141,512
Furniture and Fixtures 288,864 462,244
Vehicles --- 8,300
---------- ----------
2,061,202 2,159,646
Less accumulated depreciation 801,339 686,783
---------- ----------
$1,259,863 $1,472,863
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1996 and 1995 was
$336,765 and $243,355, respectively.
48
<PAGE>
NOTE 7. INCOME TAXES
Income tax benefit for the years ended December 31, 1996 and 1995
were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Restated)
<S> <C> <C>
Current $ (32,841) $(342,234)
Deferred (125,041) (239,707)
--------- ---------
Total benefit $(157,882) $(581,941)
========= =========
</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, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Federal statutory income tax rate $(191,184) (32%) $(552,365) (34%)
Valuation allowance - (29,955) ( 2%)
Other 33,302 6% 379 0%
--------- ------- --------- -------
Total tax benefit $(157,882) (26%) $(581,941) (36%)
========= ======= ========= =======
</TABLE>
The components of deferred income tax assets and liabilities at December 31,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Restated)
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation and
amortization $ (59,226) $ (41,817)
Franchise agreements (190,853) (190,756)
IRC Section 481 Adjustment
(changes in accounting method) (420,505) ---
---------- ----------
Total deferred income tax liabilities (670,584) (232,573)
Deferred tax assets:
Accrued expenses 99,312 16,780
Equity earnings from subsidiary not
currently available 18,607 14,029
Net operating losses and tax credits 905,513 928,308
Reserves 621,608 268,073
Deferred fees 142,581 ---
Other 2,620 ---
---------- ----------
Total deferred tax assets 1,790,241 1,227,189
Valuation allowance 777,611 777,611
---------- ----------
Net deferred income tax (asset) $ 342,046 $ 217,005
========== ==========
</TABLE>
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 operating 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.
49
<PAGE>
NOTE 8. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
The following notes payable and capital lease obligations were outstanding at
December 31,
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
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. Note paid in full December 1996. $ -0- $ 61,163
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 August 1994, collateralized
by GBS assets. -0- 270,228
12.5% note payable due in monthly payments of $2,631
through June 1996 collateralized by 184,871 shares of
EKW stock. -0- 13,467
$40,000 Bank line of credit at 6.9% interest, payable
interest only until maturity on January 31, 1996. -0- 31,500
7.75% mortgage loan at bank due in monthly payments of
$1,029 through November 2025, collateralized by
property in Waco, TX. 142,230 -0-
9.25% mortgage loan at bank due in monthly payments of
$185.48 through November 2010, collateralized by 2/nd/
lien on property in Waco, TX. 17,308 -0-
7.76% note payable due in monthly payments of $429
through march 25, 1997, including interest, collateralized
by a van. 1,339 6,178
Note payable under a line of credit of $200,000, at 7%
interest. Guaranteed by a $200,000 advertising fund
certificate of deposit. Expires May 1997. 150,000 -0-
Note payable to bank at 9.5% interest, due December 6, 2000,
collateralized by telephone system. 183,856 -0-
8% note payable to an individual, due in monthly payments of
$3,436 through March 1997. 9,889 43,818
10% note payable to an employee due in monthly payments
starting August 1996 for 34 months. 30,219 54,338
Note payable to finance company assumed in 1996 pursuant to
Aire Serv regional franchise repurchase. $60,000 original
note balance at 10% interest dated October 1, 1994 with a
6 year term. 53,354 -0-
Note payable with no interest to individual third party due
in initial payment of $4,000 in March 1997 with monthly
payments of $1,500 until paid. 56,409 -0-
Note payable with no interest to employee. Minimum due for
$1,000 per month beginning December 1996 with a balloon of the
remaining balance due November 2002. 150,000 -0-
Obligations under capital leases, interest of approximately
13.5%, due in monthly installments through December 2000. 98,466 48,274
-------- --------
893,070 528,966
Less current portion of notes payable and capital lease
obligations. 280,689 252,289
-------- --------
Notes Payable & capital lease obligation - long term $612,381 $276,677
======== ========
</TABLE>
50
<PAGE>
Maturities of notes payable and capital lease obligations at December
31, 1996, are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1997 $280,689
1998 126,357
1999 124,910
2000 111,504
2001 28,425
2002 and beyond 221,185
-------
$893,070
========
</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 $629,769 for these rents and services in 1996,
and $618,106 in 1995.
The Company recognized income from related parties for accounting, legal and
administrative services, interest income, product sales commissions and
management fees totaling $812,985 in 1996 and $554,116 in 1995. 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. Rainbow's guaranty was released in 1995 due
to Mr. Dwyer's indebtedness being paid through life insurance proceeds as
discussed below.
At the time of Mr. Dwyer's 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 leaving a remaining balance
of $914,000. Therefore, 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 proceeds of this insurance were pledged to the
lender of the Industrial Revenue Bonds ("IRB's"), which were secured by
Rainbow's guaranty. Therefore, because of Rainbow's guaranty, the $864,000 of
remaining insurance proceeds were utilized to pay down the IRB's and also
Housing Finance Revenue Bonds for which Rainbow had previously guaranteed and
for which the remaining 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 of $864,000. 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 $2,500
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 1996 the Company expensed approximately
51
<PAGE>
$171,000 for this independent directors' services. In December 1996, the
Company, along with selected related parties, agreed to convert $908,632 of
related party accounts receivable and accounts receivable from affiliates to
interest bearing (9.25%) notes receivable. These notes are payable in full by
December 31, 2006. In total, accounts and notes receivable from related parties
and officers (current and long-term) increased approximately $285,000 at
December 31, 1996 when compared to December 31, 1995. 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 February10, 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 since
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.
On December 4, 1996 the estate paid the remaining principal balance and accrued
interest of $418,896 and $38,376, respectively.
NOTE 10. CONCENTRATION OF CREDIT RISK AND CONTINGENCIES FROM NOTES RECEIVABLE
The Company extends credit to individuals to purchase 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. In addition, Mr. Rooter, Aire Serv and Mr. Electric have entered into
an agreement with SunTrust Credit ("STI") to finance franchise sales for
franchise applicants who meet STI's qualifications. This financing is with
recourse and STI's recourse states that, in the event of the franchisee's
default, Mr. 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 180 days the default has not been corrected, the responsible company must
pay to STI 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 1996 and 1995, Mr. Rooter and Aire Serv exchanged with STI several of
their notes, aggregating approximately $324,000 and $261,000, respectively, for
defaulted notes. In addition, approximately $24,000 and $58,000 were paid by Mr.
Rooter during 1996 and 1995, respectively, to STI, representing monthly
installments on behalf of franchisees. At December 31, 1996 and 1995, Rooter,
Aire-Serv and Mr. Electric were contingently liable for approximately $2,431,000
and $2,749,000 respectively, relating to such notes.
In September, 1996, the Parent, Mr. Rooter, Aire Serv, Mr. Appliance, and Mr.
Electric entered into an agreement with Phoenix Leasing Incorporated ("Phoenix")
to finance franchise sales for franchise applicants who meet Phoenix's
qualifications. Phoenix agreed to provide up to $3,000,000 in debt financing to
the franchisees provided that each franchisee's obligations to Phoenix under its
debt financing be guaranteed by the Parent and the franchising subsidiary for
such franchisee. On or about the 15/th/ day of each calendar month, the Parent
will receive from Phoenix an Aging Report of the amounts due and owing by the
franchisees as of the first day of such month. If an Aging Report shows that
any franchisee has failed to make all of the scheduled monthly payments due
during any sixty (60) day period, then the Parent, within ten (10) days of
delivery of such Aging Report, shall pay all of such franchisee's delinquent
scheduled payments, together with all late charges then due and Phoenix shall
bill the Parent directly for amounts due and payable under such franchisee's
loan agreement. At December 31, 1996, the Parent was contingently liable for
approximately $29,000 relating to such notes.
52
<PAGE>
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 or 1996. Each year the Board
of Directors will determine the amount of any company contribution based upon
the Company's profitability.
NOTE 12. COMMITMENT 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, 2000. The approximate minimum rental commitments under operating
leases are as follows:
<TABLE>
<CAPTION>
For Years Ending
- ----------------
<S> <C>
1997 $410,000
1998 114,000
1999 103,000
2000 58,000
2001 18,000
--------
$703,000
========
</TABLE>
53
<PAGE>
NOTE 13. LITIGATION
The Company and its subsidiaries are parties to various legal proceedings
incidental to its normal business activities; many of which 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. Management has estimated a
potential range of loss due to these proceedings not to exceed $100,000.
NOTE 14. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1996, various year-end adjustments were recorded to
the consolidated financial statements. The effect of these adjustments was a net
decrease in total assets of $2,301,000, a net decrease in liabilities of
$305,000, a net decrease in stockholder's equity and corresponding increased
net loss of $1,996,000. These adjustments were primarily to increase the
allowance for doubtful accounts and notes receivable, adjustments to and write
downs of assets held for sale and write offs of notes receivables.
NOTE 15. PRIOR PERIOD ADJUSTMENT AND RESTATEMENT OF PREVIOUSLY ISSUED
FINANCIAL RESULTS
In connection with the December 31, 1996 year end accounting closing and
subsequent analyses performed, it was determined that an error had been made
relating to the carrying value of certain nonoperating individual franchises and
regional franchises held for sale at December 31, 1995. Accordingly, the
Company has restated its previously issued consolidated financial statements for
the year ended December 31, 1995 to correct the error. The adjustments to these
assets reduced previously reported total assets at December 31, 1995 by
$571,445, reduced assets held for resale by $788,450, reduced liabilities by
$58,147, reduced retained earnings by $513,298 and increased the previously
reported net loss for the year ended December 31, 1995 by $513,298. The net
loss per share for the year ended December 31, 1995 increased by $.07 per share.
54
<PAGE>
EXHIBIT 10.45
MUTUAL TERMINATION OF EMPLOYMENT AGREEMENT
------------------------------------------
This MUTUAL TERMINATION OF EMPLOYMENT AGREEMENT ("Agreement") is made and
entered into as of the 30th day of June, 1996 by and between GENERAL BUSINESS
SERVICES, INC., a Texas corporation having an address of 1010 -1020 North
University Parks Drive, Waco, TX 76707 (the "Company") and W. PAUL WOODY,
individually, having a residence address of 100 Lost Oaks, Waco, TX 76705
("Woody").
WHEREAS, Woody was employed by GBS in the position of President pursuant to
an Employment Agreement beginning June 1, 1995 and prior to the execution of
this Agreement, Woody has agreed to resign his position and his employment with
the Company, effective June 30, 1996, and the Company has accepted that
resignation;
WHEREAS, Woody and the Company desire to provide for an orderly termination
of the employment relationship and prior to the execution of this Agreement,
Woody has fully read this Agreement, has been given adequate time to consider
this Agreement, a reasonable opportunity to consult with advisors of Woody's
choosing and understands this Agreement;
NOW, THEREFORE, in consideration of the foregoing recitals and mutual
promises, covenants and agreements set forth in this Agreement, Woody and the
Company covenant and agree as follows:
1. The Employment Agreement which was signed May 26, 1995 with an
effective date of June 1, 1995 by and between the Company and Woody is hereby
terminated by mutual agreement of Woody and the Company, conditioned upon full
performance by Company of this Agreement.
2. Woody acknowledges that during the course of employment, he had access
to and did receive confidential information about the Company; Woody represents
and covenants that he will in no way divulge, use or in any way employ such
confidential information without the express prior written consent of Company.
3. Woody acknowledges that by virtue of his employment with the Company,
he acquired knowledge and experience and/or was a participant or witness to
events and circumstances that may be important in pending and future litigation,
arbitration and/or administrative proceedings involving the Company. Woody
agrees to cooperate fully with all reasonable requests of the Company, at the
Company' expense, in conjunction with any such litigation, arbitration and/or
administrative proceedings involving the Company which cover a time period in
which Woody was employed by the Company. Woody also agrees that he will not,
without the prior written consent of the Company, cooperate with or assist any
person or entity which is or which may become an adverse party to the Company or
any of the Releasees in any litigation, arbitration and/or administrative
proceeding, or
MUTUAL TERMINATION OF EMPLOYMENT AGREEMENT--Page 1
- ------------------------------------------
<PAGE>
disclose or make available to such person or entity any information or documents
which may be relevant to such, except as may be required by law or compulsory
process; provided, however, that this provision is not intended to and does not
prevent Woody from personally pursuing any claims against the Company which may
arise after the effective date hereof in connection with Woody's operation of
his GBS Franchise in Oklahoma City, OK.
4. Woody and the Company warrant and represent to one another that they
will not undertake any future conduct which is intended to damage any of the
franchise systems affiliated with the Company or which discredits Woody or the
Company in the eyes of franchisees, the franchise community or third parties.
5. Woody agrees to surrender all keys and tangible personal property
belonging to the Company and represents that he has returned to and left in the
custody of the Company all documents and property, including but not limited to
computers, computer netport cards, papers, keys, files, records, books or other
materials belonging to the Company or any other Releasee (as that term is
defined in Section 6 hereof), whether in writing, or recorded by manual or
electronic means, whether located at Woody's residence or the offices of the
Company.
6. Woody, for himself and on behalf of his heirs, assigns, successors,
executors, administrators and attorneys, IRREVOCABLY AND UNCONDITIONALLY
RELEASES, ACQUITS AND FOREVER DISCHARGES the Company, any current, past or
future parent, subsidiaries, affiliated and related corporations, firms,
associations, partnerships and entities, and their successors and assigns, and
the current and former owners, shareholders, directors, officers, employees,
agents, attorneys, representatives and insurers of said corporations, firms,
associations, partnerships and entities, and their guardians, successors,
assigns, heirs, executors and administrators (collectively referred to as
"Releasees"), from any and all claims, complaints, grievances, liabilities,
obligations, promises, agreements, damages, causes of action, and expenses
whatsoever, including attorney's fees and expenses.
7. The Company, for itself and on behalf of the Releasees, IRREVOCABLY
AND UNCONDITIONALLY RELEASES, ACQUITS AND FOREVER DISCHARGES Woody, for himself
and on behalf of his heirs, assigns, successors, executors, administrators and
attorneys (collectively referred to as "Woody Releasees"), from any and all
claims, complaints, grievances, liabilities, obligations, promises, agreements,
damages, causes of action, and expenses whatsoever, including attorney's fees
and expenses.
8. Woody, for himself and on behalf of the Woody Releasees, COVENANTS NOT
TO SUE OR OTHERWISE VOLUNTARILY CONSENT TO PARTICIPATE IN AN ACTION AGAINST the
Company or any of the Releasees under municipal, local, state or federal law,
common or statutory, for any actions or omissions whatsoever, whether known
MUTUAL TERMINATION OF EMPLOYMENT AGREEMENT--Page 2
- ------------------------------------------
<PAGE>
or unknown and whether connected with the employment of Woody by the Company or
not, except as may be required in response to lawful judicial process; provided,
however, that this provision is not intended to and does not prevent Woody from
personally pursuing any claims against the Company which may arise after the
effective date hereof in connection with Woody's operation of his GBS Franchise
in Oklahoma City, OK.
9. The Company, for itself and on behalf of the Releasees, COVENANTS NOT
TO SUE OR OTHERWISE VOLUNTARILY CONSENT TO PARTICIPATE IN AN ACTION AGAINST
Woody or any of the Woody Releasees under municipal, local, state or federal
law, common or statutory, for any actions or omissions whatsoever, whether known
or unknown and whether connected with the employment of Woody by the Company or
not, except as may be required in response to lawful judicial process; provided,
however, that this provision is not intended to and does not prevent the Company
from pursuing any claims against Woody which may arise after the effective date
hereof in connection with Woody's operation of a GBS franchise in Oklahoma City,
OK.
10. From and after the effective date of this Agreement, Woody agrees that
he will keep the terms, amount and fact of this Agreement STRICTLY AND
COMPLETELY CONFIDENTIAL and that he will not communicate or otherwise disclose
the terms, amount or fact of this Agreement to any employee of the Company
(past, present or future) or to a member of the general public, except as may be
required in response to lawful judicial process.
11. From and after the effective date of this Agreement, the Company
agrees that it will keep the terms, amount and fact of this Agreement STRICTLY
AND COMPLETELY CONFIDENTIAL and that it will not communicate or otherwise
disclose the terms, amount or fact of this Agreement to any employee of the
Company (past, present or future) or to a member of the general public, except
as may be required in response to lawful judicial process.
12. Woody and the Company agree that they shall effect a final
reconciliation of all outstanding business expense advances and/or reports and
the like within 30 days after the effective date hereof.
13. In consideration for this Agreement, the Company agrees to do the
following:
(a) assume and agree to pay all mortgage payments on the house located
at 100 Lost Oaks Drive, Waco, TX 76705, beginning with the payment due in
July, 1996 until the closing of the sale of the house, which closing shall
be held by August 31, 1996. At closing, Woody shall transfer title to the
house to the Company or its designee. Company further agrees to pay all
utility charges incurred at the house from July 25, 1996 so long as Woody
has completely vacated the premises by July 24, 1996. Upon
MUTUAL TERMINATION OF EMPLOYMENT AGREEMENT--Page3
- ------------------------------------------
<PAGE>
execution of this Agreement, the parties agree that the Company shall pay
Woody the equity in the house in the amount of $18,872.79. Woody agrees
that if the house is transferred to a designee of the Company at closing,
Woody will sign the equity check that will be received at closing over to
the Company; otherwise, the Company becomes the sole owner of the house at
closing. The parties agree that Woody shall be fully released from all
personal liability with respect to the mortgage on the house upon signing
this Agreement; and
(b) pay Woody $9,050 to reimburse Woody for closing costs incurred in
the purchase of a home in Waco, TX and the sale of a home in Oklahoma City,
OK upon receipt of a copy of the closing statement, which Woody and the
Company acknowledge occurred on June 28, 1996; and
(c) arrange for and pay for the actual costs of moving Woody from
Waco, TX to Oklahoma City, OK.
14. This Agreement constitutes the entire Agreement of the parties hereto
with regard to the subject matter hereof and supersedes all prior and
contemporaneous negotiations and agreements, oral or written. All rights,
duties and remedies provided by this Agreement to the parties hereto are
independent of and not affected by any release or forbearance which is part of
this Agreement. All prior and contemporaneous negotiations and agreements are
deemed incorporated and merged into this Agreement and are deemed to have been
abandoned if not so incorporated. No representations, oral or written, are
being relied upon by either party in executing this Agreement, other than the
express representations of this Agreement. This Agreement cannot be changed or
terminated orally.
15. This Agreement shall be governed by and construed in accordance with
the laws of the state of Texas.
16. If any action at law or in equity is necessary to enforce or interpret
the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorney's fees, costs and necessary disbursements in addition to any
other relief to which the party may be entitled.
<PAGE>
17. SIGNED AND EXECUTED at Waco, Texas this ______ day of ________, 1996.
GENERAL BUSINESS SERVICES, INC.
BY:/s/ /s/ John R. Appel
-----------------------------------
John R. Appel, President
ATTEST:
/s/Stephen E. Beatty
- ----------------------------
Stephen E. Beatty, Treasurer
By my signature below, I represent that I have been given adequate time to
consider this Agreement. I have fully read and understand this Agreement and I
sign it of my own free will.
/s/ W. Paul Woody 7/25/96
-----------------------------------
W. Paul Woody
THE STATE OF TEXAS (S)
(S)
COUNTY OF McLENNAN (S)
BEFORE ME, the undersigned notary public, on this day personally appeared
JOHN R. APPEL, PRESIDENT of GENERAL BUSINESS SERVICES, INC., and acknowledged
that he executed the same for the purpose and consideration therein expressed,
and in the capacity therein stated.
Given under my hand and seal of office on this 25 day of July, 1996
/s/ Linda E. Jenkins
-------------------------------
Notary Public, State of Texas
[NOTARY PUBLIC SEAL FOR
LINDA E. JENKINS APPEARS HERE]
<PAGE>
THE STATE OF TEXAS (S)
(S)
COUNTY OF McLENNAN (S)
BEFORE ME, the undersigned notary public, on this day personally appeared
W. PAUL WOODY and acknowledged that he executed the same for the purpose and
consideration therein expressed.
Given under my hand and seal of office on this 25 day of July, 1996.
/s/ Linda E. Jenkins
-----------------------------
Notary Public, State of Texas
[NOTARY PUBLIC SEAL FOR
LINDA E. JENKINS APPEARS HERE]
<PAGE>
EXHIBIT 10.46
CONSULTING AGREEMENT
--------------------
THIS CONSULTING AGREEMENT is made as of this 30th day of June, 1996, by and
among GENERAL BUSINESS SERVICES, INC., a Texas corporation having a principal
business address of 1010 -1020 North University Parks Drive, Waco, TX 76707 and
EDWIN K. WILLIAMS & CO., a Colorado corporation having a principal business
address of 1010-1020 North University Parks Drive, Waco, TX 76707 (collectively
the "Company") and W. PAUL WOODY, individually, having a residence address of
100 Lost Oaks, Waco, TX 76705 (the "Consultant").
WHEREAS, the Company consists of two (2) service concept franchise
companies owned by The Dwyer Group, Inc. and affiliated with other franchise
companies and certain other related business interests and it is the desire of
the Company to engage the services of the Consultant, as an independent
contractor and not as an employee, to perform consulting services for the
Company in regard to special projects assigned by the Chief Executive Officer of
the Company for the operation of the Company.
WHEREAS, it is the desire of the Consultant to consult with the officers,
the Board of Directors and the administrative staff of the Company, and to
undertake, for the Company, consultation as to the direction of certain
functions in the management of the Company and such other special projects as
may be assigned by the Company's Chief Executive Officer.
WHEREAS, in consideration of the mutual promises contained in this
Consulting Agreement, the parties agree as follows:
1. Term. The respective duties and obligations of the parties to this
----
Consulting Agreement shall be for a period of three (3) years, commencing on
July 1, 1996. The parties agree that this Agreement may be extended for an
additional term or terms upon the mutual agreement of both parties.
2. Obligations of Consultant. Consultant shall make himself available to
-------------------------
consult with and perform services at the direction of the Board of Directors,
officers, and administrative department heads at reasonable times as agreed upon
between the Consultant and the Company concerning matters which Consultant and
the Chief Executive Officer agree, in writing, are responsibilities of the
Consultant. Initially, Consultant and the Chief Executive Officer agree that
Consultant shall perform those services outlined on Exhibit "A".
3. Services Rendered to Others by Consultant. The Company and the
-----------------------------------------
Consultant agree that the Consultant may represent, perform services for and be
employed by such additional clients, persons or companies as the Consultant, in
his sole discretion, sees fit.
CONSULTING AGREEMENT -- PAGE 1
- -------------------
<PAGE>
4. Compensation. For services rendered under this Consulting Agreement,
------------
the Consultant shall receive a base fee of $305,000, which shall be payable in
full by Company upon execution of this Agreement unless otherwise directed by
Consultant. Once paid, the fee shall be nonforfeitable and nonrefundable. In
addition, Consultant shall be reimbursed for expenses, other than ordinary
office overhead, incurred and directly attributable to services rendered under
this Consulting Agreement. As a condition to payment of expenses, Consultant
shall discuss such expenses with the Company in advance and provide a report of
such expenses for the previous month, supported by invoices, to the Chief
Financial Officer of the Company no later than the 10th day of each month. The
Consultant shall be reimbursed on or before the 20th day of the same month for
the previous month's authorized expenses. In addition, Consultant shall be paid
$500 for each prospective franchisee candidate who signs a contract and becomes
a franchisee for the Company if that candidate visited with Consultant "one-on-
one" either in Oklahoma City, OK or otherwise at the Company's request as
verified by the Company's records. If a prospective franchisee candidate who
has visited with Consultant by telephone, as verified by the Company's records,
signs a contract and becomes a franchisee for the Company, Consultant shall be
paid $250. Such payments shall be made on the 20th day of each month for the
previous month.
5. Stock Options. Consultant is hereby granted non-qualified stock
-------------
options to acquire 25,000 shares of common stock of the Company's parent, The
Dwyer Group, Inc., in accordance with the Non-qualified Stock Option Agreement
attached hereto as Exhibit "B".
6. Limited Liability. The Consultant shall not be liable to the Company,
-----------------
or to anyone who may claim any right due to his relationship with the Company,
for any acts or omissions on the part of the Consultant or the agents or
employees of Consultant in the performance of the Consultant services under this
Consulting Agreement, except when such acts or omissions are due to willful
misconduct or culpable negligence. The Company shall hold the Consultant
harmless from any obligations, costs, claims, judgments, attorney's fees or
attachments arising from our growing out of the services rendered to the Company
pursuant to the terms of this Consulting Agreement or in any way connected with
the rendering of such services, except when the same shall arise due to the
willful misconduct or culpable negligence of the Consultant and the Consultant
is adjudged to be guilty of willful misconduct and culpable negligence by a
court of competent jurisdiction.
7. Applicable Law. This Consulting Agreement shall be construed under
--------------
and in accordance with the laws of the State of Texas.
8. Parties Bound. This Consulting Agreement shall be binding on and
-------------
inure to the benefit of the parties to it and their respective heirs, executors,
administrators, legal representatives, successors and assigns when permitted by
this Consulting Agreement.
CONSULTING AGREEMENT -- PAGE 2
- -------------------
<PAGE>
9. Legal Construction. If any one or more of the provisions contained in
------------------
this Consulting Agreement shall for any reason be held to be invalid, illegal,
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions and this Consulting Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained in it.
10. Remedies. If any action at law or in equity is necessary to enforce
--------
or interpret the terms of this Consulting Agreement, the prevailing party shall
be entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which the party may be entitled.
11. Entire Agreement. This Consulting Agreement constitutes the sole and
----------------
only agreement of the parties to it as to the subject matter hereof and
supersedes any prior understandings or written or oral agreements between the
parties respecting this subject matter.
12. Effective Date. This Consulting Agreement is effective as of July 1,
--------------
1996.
GENERAL BUSINESS SERVICES, INC.
BY: /s/ John R. Appel
---------------------------------------
John R. Appel, President
ATTEST:
/s/ Stephen E. Beatty
- --------------------------------
Stephen E. Beatty, Treasurer
EDWIN K. WILLIAMS & CO.
BY: /s/ John R. Appel
---------------------------------------
John R. Appel, President
ATTEST:
/s/ Stephen E. Beatty
- --------------------------------
Stephen E. Beatty, Treasurer
CONSULTANT:
/s/ W. Paul Woody,
------------------------------------------
W. Paul Woody, individually
CONSULTING AGREEMENT -- PAGE 3
- --------------------
<PAGE>
EXHIBIT "A"
Consultant shall attend the Annual Convention of the Company scheduled to be
held in Las Vegas, Nevada on August 1 - 8, 1996 to facilitate a smooth
transition from Consultant's role as President of the Company to a consulting
role.
Consultant shall teach at the PTM scheduled for the fall of 1996.
Consultant shall continue to host meetings with prospective franchisee
candidates in Consultant's office in Oklahoma City, OK on one (1) day per month
for the balance of 1996, 1997 and 1998. The date each month will be mutually
agreed upon in advance by Consultant and the Company.
<PAGE>
EXHIBIT "B"
NON-QUALIFIED STOCK OPTION AGREEMENT
OF
THE DWYER GROUP, INC.
<PAGE>
EXHIBIT 10.47
NON-QUALIFIED STOCK OPTION AGREEMENT
OF
THE DWYER GROUP, INC.
---------------------
This NON-QUALIFIED STOCK OPTION AGREEMENT ("Agreement") is entered into as
of July 1, 1996 by and between W. PAUL WOODY, individually (the "Holder") and
THE DWYER GROUP, INC., a Delaware corporation (the "Company").
WHEREAS, the Board of Directors of the Company has approved the grant to
Holder, an independent consultant of the Company, of non-qualified options to
purchase twenty-five thousand (25,000) shares of the Company's common stock,
$.10 par value (such class of stock being referred to herein as the "Stock"), at
three and 375/1000 dollars ($3.375) per share (the "Exercise Price") and
authorized the Company to prepare and execute a non-qualified stock option
agreement to evidence such grant.
NOW, THEREFORE, for the premises stated herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Company and Holder hereby agree as follows:
1. Exercise of Option. This Option shall be exercisable with respect to
------------------
the number of shares listed at the times set forth in the following schedule:
<TABLE>
<CAPTION>
Number of Shares Date
---------------- ------------
<S> <C>
5,000 July 1, 1996
5,000 July 1, 1997
5,000 July 1, 1998
5,000 July 1, 1999
5,000 July 1, 2000
</TABLE>
by presentation and surrender to Company at its principal office of the Purchase
Form annexed hereto duly executed and accompanied by payment, in cash, certified
or official bank check payable to the order of Company in the amount of the
Exercise Price for the number of Option Shares specified in such form. Upon and
as of receipt by Company at its office, in proper form for exercise and
accompanied by payment as herein provided, Holder shall be deemed to be the
holder of record of the shares of Stock issuable upon such exercise,
notwithstanding that the stock transfer books of Company shall then be closed or
that certificates representing such shares of Stock shall not then be actually
delivered to Holder. After the Option becomes exercisable, it may thereafter be
exercised, as to the number of shares becoming exercisable, at any time and from
time to time until termination of this Option Agreement on the Expiration Date,
as that term is hereinafter defined.
NON-QUALIFIED STOCK OPTION AGREEMENT--PAGE 1
- ------------------------------------
<PAGE>
2. Reservation of Shares. Company shall at all times after July 1, 1996
---------------------
(the "Commencement Date") and until the date which is five (5) years after the
Commencement Date (the "Expiration Date") of this Option, have the number of
Option Shares as shall be required for issuance and delivery upon exercise of
this Option.
3. Restrictions on Exercise. This Option:
------------------------
A. may be exercised only with respect to full shares and no
factional share of stock shall be issued;
B. may not be exercised in whole or in part and no cash or
certificates representing shares subject to such Option shall be delivered
if any requisite approval or consent of any government authority of any
king having jurisdiction over the exercise of Options shall not have been
secured.
4. Non-Assignability. This Option is not assignable or transferable by
-----------------
the Holder except by will or by the laws of descent and distribution.
5. Adjustment in the Number of Option Shares Purchasable and Exercise
------------------------------------------------------------------
Price.
- -----
A. The number of shares of Stock for which this Option may be
exercised shall be subject to adjustment as follows:
(1) in the event there is a subdivision or combination of the
outstanding shares of Stock into a larger or smaller number of shares,
the number of shares of Stock for which this Option may be exercised
shall be increased or reduced in the same proportion as the increase
or decrease in the outstanding shares of Stock:
(2) if Company declares a dividend on Stock payable in Stock or
securities convertible into Stock, the number of shares of Stock for
which this Option may be exercised shall be increased, as of the
record date for determining which holders of Stock shall be entitled
to receive such dividend, in proportion to the increase in the number
of outstanding shares of Stock as a result of such dividend:
(3) if Company decides to offer rights to all holders of Stock
which entitle them to subscribe to additional Stock or securities
convertible into Stock, Company shall give written notice of any such
proposed rights offering the Holder at least fifteen days prior to the
proposed record date in order to permit Holder to exercise this Option
on or before such record date. There shall be no adjustment in the
number of shares of Stock for which this Option may be exercised or
the Exercise Price by virtue of such rights offering or by
NON-QUALIFIED STOCK OPTION AGREEMENT--PAGE 2
- ------------------------------------
<PAGE>
virtue of any sale of any class of securities of Company pursuant to
such rights offering; and
(4) if the Company declares a dividend to its shareholders of
securities of any subsidiary of the Company, Holder, upon exercise
thereof, shall be entitled to receive the shares of such securities
that Holder would have been entitled to receive at the same aggregate
Exercise Price if Holder's Options had been exercised immediately
prior to such dividend.
B. In the event at any time prior to the expiration of this Option
of any reorganization or reclassification of the outstanding shares of
Stock (other than a change in per value, or from no par value to par value,
or from par value to nor par value, or as a result of a subdivision or
combination), Holder shall have the right, but not the obligation, to
exercise this Option. Upon such exercise, Holder shall have the right to
receive the same kind and number of shares of stock and other securities,
cash or other property as would have been distributed to Holder upon such
reorganization or reclassification had Holder exercised this Option
immediately prior to such reorganization or reclassification. Holder shall
pay upon such exercise the Exercise Price that otherwise would have been
payable pursuant to the terms of this Option. If any such reorganization or
reclassification results in a cash distribution in excess of the Exercise
Price provided by this Option, Holder may, at Holder's option, exercise
this Option without making payment of the Exercise Price, and in such case
Company shall, upon distribution to Holder, consider the Exercise Price to
have been paid in full, and in making settlement to Holder, shall deduct an
amount equal to the Exercise Price from the amount payable to Holder.
C. If Company shall, at any time prior to the expiration of this
Option, dissolve, liquidate or wind up its affairs, Holder shall have the
right, but not the obligation, to exercise this Option. Upon such exercise
Holder shall have the right to receive, in lieu of the shares of Stock that
Holder otherwise would have been entitled to receive, the same kind and
amount of assets as would have been issued, distributed or paid to Holder
upon any such dissolution, liquidation or winding up with respect to such
shares of Stock had Holder been the holder of record of such shares of
Stock receivable upon exercise of this Option on the date for determining
those entitled to receive any such distribution. If any such dissolution,
liquidation or winding up results in any cash distribution in excess of the
Exercise Price provided for by this Option, Holder may, at Holder's option,
exercise this Option without making payment of the Exercise Price and, in
such case, Company shall, upon distribution to Holder, consider the
Exercise Price to have been paid in full, and in making settlement to
Holder shall deduct an amount equal to the Exercise Price from the amount
payable to Holder.
NON-QUALIFIED STOCK OPTION AGREEMENT--PAGE 3
- ------------------------------------
<PAGE>
D. In the event at any time prior to the expiration of this Option
that Company is merged into or consolidated with another corporation under
circumstances where Company is not the surviving corporation, or more than
fifty percent (50%) of the outstanding voting securities of Company are
owned by another corporation as a result of such merger or consolidation,
then at the election of the Board of Directors of Company:
(1) the successor entity shall assume Company's obligations
hereunder and Holder shall be entitled, upon exercise of this Option,
to receive in lieu of shares of Stock shares of such stock or other
securities as the holder of shares of Stock received pursuant to the
terms of the merger or consolidation, or
(2) this Option may be canceled by the Board of Directors of
Company as of the effective date of any such merger or consolidation,
provided that:
(a) written notice of such cancellation shall be given to
Holder, and
(b) Holder shall have the right to exercise this Option in
full during a thirty day period preceding the effective date of
such merger or consolidation.
E. Company may retain a firm of independent public accountants of
recognized standing (who may be any such firm regularly employed by
Company) to make any computation required under this Section 5, and a
certificate signed by such firm shall be conclusive evidence of the
correctness of any computation made under this Section.
F. Whenever the number of shares of Stock purchasable upon the
exercise of this Option is adjusted as herein provided, the Exercise Price
shall be adjusted by multiplying the applicable Exercise Price immediately
prior to such adjustment by a fraction, the numerator of which shall be the
number of shares of Stock purchasable upon exercise of this Option
immediately prior to such adjustment and the denominator of which shall be
the number of shares of Stock purchasable immediately after such
adjustment.
6. Officer's Certificate. Whenever the number of Option Shares or the
---------------------
Exercise Price shall be adjusted as required by the provisions of Section 5
hereof, Company forthwith shall file in the custody of its secretary or an
assistant secretary, at its principal office, a certificate of the chief
executive officer of Company setting forth the number and kind of shares
purchasable, as so adjusted, stating that such adjustments in the number
NON-QUALIFIED STOCK OPTION AGREEMENT--PAGE 4
- ------------------------------------
<PAGE>
or kind of shares or other securities conform to the requirements of Section 5
of this Option, and setting forth a brief statement of the facts accounting for
such adjustments. Promptly after receipt of such certificate, the Company will
deliver, by first-class, postage pre-paid mail, a brief summary thereof (to be
supplied by the Company) to the Holder; provided, however, that failure to file
-------- -------
or to give any notice required under this Subsection, or any defect therein,
shall not affect the legality or validity of any such adjustments under Section
5. Each such officer's certificate shall be made available at all reasonable
times during reasonable hours for inspection by Holder.
7. Notice to Holder. So long as this Option shall be outstanding, if:
----------------
A. Company shall pay any dividend or make any distribution upon the
Stock otherwise than in cash or
B. Company shall offer to the holders of Stock for subscription or
purchase by them any shares of any class of stock of the Company or any
other rights or
C. There shall be any capital reorganization of Company,
reclassification of the capital stock of Company, consolidation or merger
of Company with or into another corporation, sale, lease or transfer of all
or substantially all of the property and assets of Company, or voluntary or
involuntary dissolution, liquidation or winding up of company, then in any
such event, Company shall cause to be mailed by certified mail to Holder,
at least twenty (20) days prior to the relevant date described below, a
notice containing a brief description of the proposed action and stating
the date or expected date on which a record is to be taken for the purpose
of such dividend, distribution or rights, or such merger, reclassification,
organization, consolidation, lease, transfer or conveyance, dissolution,
liquidation or winding up and the date or expected date as of which the
holders of Stock of record shall be entitled to exchange their shares of
Stock for securities or other property deliverable upon such event.
8. Option Certificate Holder Not Deemed a Stockholder. Holder shall not,
--------------------------------------------------
solely because of holding the Option, be entitled to vote, receive dividends or
be deemed the holder of Common Stock or any other securities of the Company
which at any time may be issuable on the exercise of the Options for any purpose
whatsoever, nor shall anything contained herein be construed to confer upon the
Holder, as such, any of the rights of a stockholder of the Company or any right
to vote for the election of directors or upon any matter submitted to
stockholders at any time thereof, or to give or withhold consent to any
corporate action (whether upon any recapitalization, issuance of stock,
reclassification of stock, change of par value or change of stock to no par
value, consolidation, merger, conveyance or otherwise), or to receive notice of
meetings or other actions affecting stockholders (except as provided in Section
7 hereof), or to receive dividend or
NON-QUALIFIED STOCK OPTION AGREEMENT--PAGE 5
- ------------------------------------
<PAGE>
subscription rights, or otherwise, until such Option Certificate shall have been
exercised in accordance with the provisions hereof and the receipt of the
Exercise Price and any other amounts payable upon such exercise by the Company.
9. Issuance of Shares Certificates. Holder expressly acknowledges that
-------------------------------
the Shares of Common Stock issued upon any exercise of this Option are
restricted securities and shall be evidenced by a certificate or certificates in
the form approved by the Board of Directors and, subject to registration of such
shares under the Act, each such certificate shall bear the following legend:
The shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended, or the securities laws of any state
or pursuant to one or more exemptions therefrom. Such shares may not be
sold, transferred or otherwise disposed of in the absence of such
registration unless the Company is furnished with an opinion of counsel
reasonably satisfactory to the Company to the effect that such transfer is
exempt from registration under such laws.
10. Agreement of Holder. The Holder, by accepting this Option consents
-------------------
and agrees with the Company that:
A. The Options are transferable on the registry books of the Company
only upon the terms and conditions set forth in this Option; and
B. The Company may deem and treat the person in whose name the
Option is registered as the absolute owner of the Option (notwithstanding
any notation of ownership or other writing thereon made by anyone other
than the Company or the Option Agent) for all purposes whatever and the
Company shall not be affected by any notice to the contrary, except as set
forth in Section 4 of this Option.
11. Governing Law. This Option shall be construed in accordance with the
-------------
laws of the State of Texas applicable to contracts executed and to be performed
wholly within such state.
12. Notice. Notices and other communications to be given to Holder of the
------
Options evidenced hereby shall be delivered by hand or by certified first-class
mail, postage prepaid, return receipt requested, addressed to Holder at
________________________________________________________________________ (until
another address is filed in writing by the Holder with the Company). Notices
or other communications to Company shall be deemed to have been sufficiently
give if delivered by hand or by first-class mail, postage prepaid to Company at
1010-1020 North University Parks Drive, Waco, TX 76707, or such other address as
Company shall have designated
NON-QUALIFIED STOCK OPTION AGREEMENT--PAGE 6
- ------------------------------------
<PAGE>
by written notice to such registered owner as herein provided. Notice by mail
shall be deemed given when deposited in the United States mail, postage prepaid,
as herein provided.
13. Successors. All the covenants and provisions of this Option by or for
----------
the benefit of the Company shall bind and inure to the benefit of its successors
and assigns hereunder, and all covenants and provisions of this Option by or for
the benefit of the Holder of this Option shall bind and inure to the benefit of
the registered holder of the Options.
14. Termination. This Agreement shall terminate as of the close of
-----------
business on the Expiration Date, or such earlier date upon which all Options
shall have been exercised.
15. Benefits of This Agreement. Nothing in this Agreement or in the
--------------------------
Option Certificates shall be construed to give to any person or corporation
other than the Company, and its respective successors and assigns hereunder and
the registered holders of the Options any legal or equitable right, remedy or
claim under this warrant, but this Agreement shall be for the sole and exclusive
benefit of the Company and its respective successors and assigns hereunder and
the registered holders of the Options.
16. Transfer Books. The Company will at no time close its transfer books
--------------
against the transfer of this Option in any manner which interferes with the
timely exercise of this Option.
17. Amendment. This Option Certificate may be modified or amended and any
---------
provision hereof may be waived only be a writing executed by the Company and the
Holder.
NON-QUALIFIED STOCK OPTION AGREEMENT--PAGE 7
- ------------------------------------
<PAGE>
IN WITNESS WHEREOF, Company and Holder have executed this Non-Qualified
Stock Option Agreement as of the date set forth above.
COMPANY:
THE DWYER GROUP, INC.
BY: /s/ Robert E. Tunmire
-----------------------------------------
Robert E. Tunmire, President
ATTEST:
/s/ Dina Dwyer-Owens
- ---------------------------
Dina Dwyer-Owens, Secretary
HOLDER:
/s/ W. Paul Woody
--------------------------------------------
W. Paul Woody
THE SECURITIES REPRESENTED HEREBY MAY NOT BE SOLD OR TRANSFERRED IN WHOLE
OR IN PART, UNLESS A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), HAS BEEN DECLARED EFFECTIVE WITH RESPECT TO
SUCH SECURITIES, OR COUNSEL SATISFACTORY TO THE DWYER GROUP, INC. HAS
RENDERED AN OPINION TO THE DWYER GROUP, INC. IN FORM AND SUBSTANCE
SATISFACTORY TO THE DWYER GROUP, INC. THAT THE PROPOSED TRANSFER IS EXEMPT
FROM REGISTRATION UNDER THE ACT OR THE RULES AND REGULATIONS THEREUNDER.
NON-QUALIFIED STOCK OPTION AGREEMENT--PAGE 8
- ------------------------------------
<PAGE>
PURCHASE FORM
Dated ___________, 19__
The undersigned hereby irrevocably elects to exercise the within Option to
the extent of purchasing _______________shares of Stock and hereby makes payment
of $____________in payment of the actual exercise price thereof.
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name: W. Paul Woody
---------------------------------------------------------
Address:
---------------------------------------------------------
Signature:
---------------------------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,904,228
<SECURITIES> 709,246
<RECEIVABLES> 10,867,794
<ALLOWANCES> 2,062,739
<INVENTORY> 143,794
<CURRENT-ASSETS> 6,887,512
<PP&E> 2,061,202
<DEPRECIATION> 801,339
<TOTAL-ASSETS> 17,232,078
<CURRENT-LIABILITIES> 2,521,742
<BONDS> 893,070
0
0
<COMMON> 723,556
<OTHER-SE> 10,664,514
<TOTAL-LIABILITY-AND-EQUITY> 17,232,078
<SALES> 4,345,921
<TOTAL-REVENUES> 14,092,943
<CGS> 476,780
<TOTAL-COSTS> 14,691,948
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,550,138
<INTEREST-EXPENSE> 47,342
<INCOME-PRETAX> (599,005)
<INCOME-TAX> (157,882)
<INCOME-CONTINUING> (441,123)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (441,123)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
