<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________
COMMISSION FILE NUMBER.......................................0-15227
THE DWYER GROUP, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
Delaware 73-0941783
- --------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
1010 N. University Parks Dr., Waco, TX 76707
-----------------------------------------------------
(ADDRESS AND ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
(254) 745-2400
------------------------------------------------
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at November 10, 1998
- ---------------------------- --------------------------------
<S> <C>
Common stock, $.10 par value 7,076,460
</TABLE>
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes [ ] No [X]
<PAGE> 2
THE DWYER GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998 (unaudited)
and December 31, 1997................................................................ 3
Consolidated Statements of Income for the Three Months Ended
September 30, 1998 and 1997 (unaudited).............................................. 4
Consolidated Statements of Income for the Nine Months Ended
September 30, 1998 and 1997 (unaudited).............................................. 5
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997 (unaudited)........................................ 6
Notes to Condensed Consolidated Financial Statements................................. 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................. 10-13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 14
Item 2. Changes in Securities................................................................ 14
Item 3. Defaults Upon Senior Securities...................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders.................................. 14
Item 5. Other Information.................................................................... 14
Item 6. Exhibits and Reports on Form 8-K..................................................... 14
</TABLE>
2
<PAGE> 3
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 326,587 $ 1,568,187
Marketable securities, available-for-sale 2,677,634 2,327,090
Trade accounts receivable, net of allowance for doubtful
accounts of $107,233 and $265,923, respectively 691,978 1,070,573
Accounts and interest receivable from related parties 856,537 844,256
Accrued interest receivable 55,792 14,133
Trade notes receivable, current portion 1,014,988 1,115,707
Inventories 48,869 306,751
Prepaid expenses 340,256 376,556
Notes receivable from related parties, current portion 60,021 142,723
------------ ------------
Total current assets 6,072,662 7,765,976
Property and equipment, net 1,143,267 1,070,375
Notes and accounts receivable from related parties 1,095,737 1,268,015
Assets held for sale 141,575 166,575
Trade notes receivable, net of allowance for doubtful notes of
$802,280 and $816,054, respectively 2,725,633 3,760,824
Purchased franchise rights, net 1,056,968 1,446,251
Goodwill, net 5,730,211 --
Investment, equity method -- 418,117
Net deferred tax asset 600,729 429,779
Other assets 411,964 212,124
------------ ------------
TOTAL ASSETS $ 18,978,746 $ 16,538,036
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 670,436 $ 774,197
Accounts payable to related parties 5,278 44,237
Accrued liabilities 2,010,904 1,235,101
Current portion of notes payable and capital lease obligations 559,004 224,963
------------ ------------
Total current liabilities 3,245,622 2,278,498
Long-term debt, less current portion 1,839,034 487,116
Deferred franchise sales revenue 1,169,379 1,539,085
Commitments and contingencies
Stockholders' equity:
Preferred stock -- --
Common stock 722,859 689,526
Additional paid-in capital 9,653,691 9,020,358
Retained earnings 2,395,511 2,543,612
Unrealized gain on available-for-sale securities 46,821 74,012
Treasury stock, at cost (94,171) (94,171)
------------ ------------
Total stockholders' equity 12,724,711 12,233,337
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 18,978,746 $ 16,538,036
============ ============
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
3
<PAGE> 4
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUES:
Royalties $ 1,978,640 $ 2,007,156
Franchise fees 418,254 1,061,084
Sales of products and services 333,128 338,927
Tax services 13,865 117,982
Interest 151,713 156,070
Other 156,685 239,991
----------- -----------
TOTAL REVENUES 3,052,284 3,921,210
COSTS AND EXPENSES:
General, administrative and selling 4,443,231 2,948,881
Costs of product and service sales 263,268 253,612
Cost of tax service revenues 11,009 187,299
Depreciation and amortization 195,461 135,414
Interest 27,228 13,886
----------- -----------
TOTAL COSTS AND EXPENSES 4,940,197 3,539,092
----------- -----------
OPERATING INCOME (LOSS) (1,887,913) 382,118
----------- -----------
NON-OPERATING INCOME:
Gain on sale of assets 1,445,563 --
Gain on sale of securities 14,034 --
----------- -----------
TOTAL NON-OPERATING INCOME 1,459,597 --
----------- -----------
Income (loss) before income taxes (428,316) 382,118
Income tax (expense) benefit 140,143 (129,909)
----------- -----------
NET INCOME (LOSS) $ (288,173) $ 252,209
=========== ===========
EARNINGS (LOSS) PER SHARE - BASIC $ (0.04) $ 0.04
=========== ===========
EARNINGS (LOSS) PER SHARE - DILUTED $ (0.04) $ 0.04
=========== ===========
WEIGHTED AVERAGE COMMON SHARES 7,025,427 6,775,427
=========== ===========
WEIGHTED AVERAGE COMMON SHARES AND POTENTIAL
DILUTIVE COMMON SHARES 7,131,575 6,880,558
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
4
<PAGE> 5
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUES:
Royalties $ 6,271,015 $ 5,789,146
Franchise fees 1,460,760 2,469,751
Sales of products and services 1,548,128 830,150
Tax services 673,234 682,974
Interest 453,842 507,910
Other 547,590 716,934
------------ ------------
TOTAL REVENUES 10,954,569 10,996,865
COSTS AND EXPENSES:
General, administrative and selling 10,575,712 8,640,965
Costs of product and service sales 1,280,734 454,971
Cost of tax service revenues 494,080 709,406
Depreciation and amortization 535,166 403,708
Interest 63,090 36,998
------------ ------------
TOTAL COSTS AND EXPENSES 12,948,782 10,246,048
OPERATING INCOME (LOSS) (1,994,213) 750,817
------------ ------------
NON-OPERATING INCOME:
Gain on sale of assets 1,445,563 --
Gain on sale of securities 331,408 --
------------ ------------
TOTAL NON-OPERATING INCOME 1,776,971 --
------------ ------------
Income (loss) before income taxes (217,242) 750,817
Income tax (expense) benefit 69,141 (258,182)
------------ ------------
NET INCOME (LOSS) $ (148,101) $ 492,635
============ ============
EARNINGS (LOSS) PER SHARE - BASIC $ (0.02) $ 0.07
============ ============
EARNINGS (LOSS) PER SHARE - DILUTED $ (0.02) $ 0.07
============ ============
WEIGHTED AVERAGE COMMON SHARES 6,859,676 6,773,951
============ ============
WEIGHTED AVERAGE COMMON SHARES AND POTENTIAL
DILUTIVE COMMON SHARES 7,027,551 6,920,870
============ ============
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
5
<PAGE> 6
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Operating activities:
Net income (loss) for the period $ (148,101) $ 492,635
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 535,166 403,708
Gain on sale of assets (1,445,562) --
Change in reserve for doubtful accounts 210,779 (106,619)
Notes received for franchise sales (812,814) (525,358)
Change in deferred tax asset (170,950) 64,346
Other adjustments 16,879 (10,440)
Changes in assets and liabilities:
Accounts and interest receivable 75,219 (76,694)
Receivables / payables to related parties (150,328) 88,540
Inventories (23,908) (89,159)
Prepaid expenses (86,384) (218,899)
Federal income tax receivable -- 390,404
Accounts payable and accrued liabilities 731,913 (472,746)
Deferred franchise sales revenue (183,330) (488,167)
Other assets -- 151,687
Other 115,699 (459,586)
----------- -----------
Net cash used in operating activities (1,335,722) (856,348)
----------- -----------
Investing activities:
Collections of notes receivable 1,098,236 492,466
Proceeds from sale of assets 3,609,793 3,000
Acquisition of business (3,225,000) --
Purchases of property and equipment (420,899) (190,206)
Purchases of franchise rights (586,564) --
Net (increase) decrease in marketable securities (350,544) (332,312)
Acquisition of other assets (49,710) (20,112)
Increase (decrease) in unrealized gain on marketable securities (27,191) 124,598
Collections on notes receivable from related parties 115,069 86,223
----------- -----------
Net cash provided by investing activities 163,190 163,657
----------- -----------
Financing activities:
Proceeds from borrowings 62,465 --
Payments on borrowings (131,532) (173,100)
----------- -----------
Net cash used in financing activities (69,067) (173,100)
----------- -----------
Net decrease in cash and cash equivalents (1,241,600) (865,791)
Cash and cash equivalents, beginning of period 1,568,187 1,820,167
----------- -----------
Cash and cash equivalents, end of period $ 326,587 $ 954,376
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements (unaudited).
6
<PAGE> 7
THE DWYER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION
The Dwyer Group, Inc. is a holding company for service-based businesses
providing specialty services internationally through franchising. The condensed
consolidated financial statements include the accounts of The Dwyer Group, Inc.
and its wholly-owned subsidiaries (the "Company") which include the following:
o Rainbow International Carpet Dyeing and Cleaning Co. ("Rainbow") is a
franchisor of carpet cleaning, dyeing, air duct cleaning, and
restoration services under the service mark "Rainbow International"(R).
o Mr. Rooter Corporation ("Mr. Rooter") is a franchisor of plumbing repair
and drain cleaning services under the service mark "Mr. Rooter"(R).
o Aire Serv Heating & Air Conditioning, Inc. ("Aire Serv") is a franchisor
of heating, ventilating and air conditioning service businesses under
the service mark "Aire Serv"(R).
o Mr. Electric Corp. ("Mr. Electric") is a franchisor of electrical repair
and service businesses under the service mark "Mr. Electric"(R).
o Mr. Appliance Corp. ("Mr. Appliance") is a franchisor of major household
appliance service and repair businesses under the service mark "Mr.
Appliance"(R).
o The Dwyer Group National Accounts, Inc. ("National Accounts") solicits
national account customers who can call a toll-free phone number for
their general repair and 24-hour emergency service needs. The order is
filled through the Company's network of franchisees or qualified
subcontractors.
o The Dwyer Group Canada, Inc. ("TDG Canada") was incorporated in January
1998 in order to market and service certain of the Company's franchise
concepts in Canada. Currently, those concepts are: Mr. Rooter, Mr.
Electric, Rainbow and Aire Serv.
o Synergistic International, Inc., which was incorporated in July 1998, is
franchisor of Glass Doctor (R), a service concept whose business is the
replacement of automobile, residential and commercial glass.
o General Business Services, Inc. ("GBS") is a franchisor of business
management service to small businesses. The business and substantially
all of the assets of GBS were sold in July 1998.
o 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. The business and substantially all of
the assets of EKW were sold in July 1998.
NOTE 2. BASIS OF PRESENTATION
A. PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include The Dwyer
Group, Inc. and its subsidiaries (the "Company"). All significant intercompany
balances and transactions have been eliminated.
7
<PAGE> 8
B. INTERIM DISCLOSURES
The information as of September 30, 1998 and for the three months and nine month
periods ended September 30, 1998 and 1997 is unaudited, but in the opinion of
management, reflects all adjustments, which are of a normal recurring nature,
necessary for a fair presentation of financial position and results of
operations for the interim periods. The accompanying condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1997, and with other
filings with the U.S. Securities and Exchange Commission.
The results of operations for the three months and nine month periods ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the fiscal year ending December 31, 1998.
C. RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 condensed consolidated
financial statements to conform to the presentation used in the 1998 condensed
consolidated financial statements. These reclassifications had no effect on
stockholders' equity or net income.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
EARNINGS PER COMMON SHARE
Basic earnings per share is computed based on the weighted average number of
shares outstanding during each of the periods. Diluted earnings per share
include the dilutive effect of unexercised stock options and warrants.
Effective December 31, 1997, the Company adopted the provisions of SFAS No. 128,
"Earnings Per Share". This statement establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. There was no material impact on the Company's
financial statements resulting from the adoption of SFAS No. 128.
NOTE 4. PURCHASED FRANCHISE RIGHTS
In February 1998, the Company repurchased all Canadian franchise rights for its
Mr. Rooter and Mr. Electric franchise concepts from its Canadian master
licensee, a nonaffiliated third party. The purchase price of approximately
$600,000 was capitalized as Purchased Franchise Rights. The purchase is expected
to generate additional revenues to the Company of approximately $250,000 per
year.
In March 1998, the Company repurchased Canadian franchise rights for its Rainbow
International franchise concept from a related party. The purchase price of
approximately $250,000 was capitalized as Purchased Franchise Rights. The
purchase is expected to generate additional revenues to the Company of
approximately $50,000 per year.
NOTE 5. DISPOSITION OF ASSETS
In July 1998, the Company sold substantially all of the assets and the business
of two of its franchising subsidiaries, GBS and EKW, to Century Business
Services, Inc. ("Century"). The Company received $3.8 million in cash and can
receive up to 47,407 restricted shares of Century common stock (the "Stock")
subject to certain contingencies. The Stock is subject to a two-year lock-up
agreement. One-half of the Stock will be earned based on the renewal of certain
GBS franchisees by December 31, 1998. Management believes that the Company will
receive substantially all of this portion of the Stock by May 1999. The other
half of the Stock will be held in escrow for two years and 90 days from the date
of the agreement in order to facilitate the payment to Century for any losses
incurred by Century which are subject to indemnification by the Company. At this
time management cannot estimate the amount of this portion of the Stock which
will eventually be received by the Company. Century also assumed certain
liabilities of GBS and EKW.
8
<PAGE> 9
Also in July of 1998, the Company sold its minority interest in Service Station
Computer Systems, Inc. (SSCS), an additional asset of EKW, for $150,000 in cash
and a note with a present value of $45,000.
The Company recorded a gain on the sale of the assets net of the liabilities
assumed by Century. The gain was calculated as follows:
<TABLE>
<S> <C>
Net cash proceeds(1) $ 3,609,793
Century Stock(2) 178,500
Note receivable 45,000
-----------
Total proceeds 3,833,293
Less: Net book value of assets sold and
liabilities assumed (2,387,730)
-----------
Pre-tax gain on sale $ 1,445,563
===========
</TABLE>
- ----------
(1) Includes $3.8 million received from Century plus $150,000 in cash received
from a third party for SSCS, less $281,000 paid to obtain releases from
certain Regional Master Licensees and legal fees associated with the
transaction.
(2) Includes 47,407 shares of Century stock valued at $16.88 per share, less:
(a) 5,000 shares issued to a former employee of GBS/EKW in connection with
the sale, (b) the shares which are held in escrow for possible
indemnification by the Company, (c) an amount estimated for non-renewing
franchisees of GBS, and (d) 35% discount on remaining shares due to
marketability restrictions.
NOTE 6. BUSINESS ACQUISITION
In July 1998, the Company acquired substantially all of the assets of Glass
Doctor Corporation and Glassmarks, Inc., all of such assets being associated
with the Glass Doctor franchise concept. Glass Doctor is a national franchisor
of service centers whose business is the replacement of automobile, residential
and commercial glass. Glass Doctor's franchise system is currently comprised of
26 franchisees in the United States that generate over $33 million per year in
system-wide sales. On a pro forma basis, Glass Doctor would add approximately
$1.5 million to the Company's annual revenues. The acquisition was funded by a
combination of $3.225 million in cash, a note payable of $1.9 million and the
issuance of 333,333 shares of the Company's common stock valued at the then
current market share price of $2 per share. A recap of the total purchase price
follows:
<TABLE>
<S> <C>
Cash to seller $3,225,000
Note to seller 1,900,000
Common stock issued 666,666
Misc. acquisition costs 120,030
----------
$5,911,696
==========
</TABLE>
The acquisition was accounted for as a purchase, and accordingly, the operating
results of Glass Doctor have been included in the accompanying condensed
consolidated financial statements since the date of acquisition. The aggregate
acquisition cost was allocated to the net assets of the Company based upon their
respective fair market values, with the excess recorded as goodwill. The
allocation of the purchase price based on the estimated fair value of the assets
acquired is as follows:
<TABLE>
<S> <C>
Tangible assets, net of liabilities $ 131,485
Goodwill 5,780,211
----------
$5,911,696
==========
</TABLE>
The unaudited pro forma information for the periods set forth below give effect
to the acquisition as if it had occurred at the beginning of the respective
periods. The pro forma information is presented for informational purposes only
and is not necessarily indicative of the results of operations that actually
would have occurred had the transaction been consummated at the beginning of the
periods presented nor does the information purport to be indicative of future
results.
9
<PAGE> 10
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 3,132,284 $ 4,305,117 $ 11,748,476 $ 12,318,100
============ ============ ============ ============
Net Income (Loss) $ (267,292) $ 105,296 $ (250,541) $ 339,935
============ ============ ============ ============
Basic Earnings (Loss) Per Share $ (.04) $ .01 $ (.03) $ .05
============ ============ ============ ============
Diluted Earnings (Loss) Per Share $ (.04) $ .01 $ (.03) $ .05
============ ============ ============ ============
</TABLE>
NOTE 7. COMMON STOCK
On July 24, 1998, the Company issued 333,333 shares of its common stock in
connection with the purchase of the assets of Glass Doctor Corporation and
Glassmarks, Inc.
On September 28, 1998, the Company announced an authorization for the repurchase
of up to 100,000 of the Company's common stock in the open market or in private
transactions. As of November 13, 1998, the Company had repurchased 32,300 such
shares at an average purchase price of $1.71 per share.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Unless otherwise noted, all dollar amounts are rounded to the nearest thousand.
Percentages represent the change from the comparable amount from the previous
year. Note references refer to Notes to Condensed Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital ratio was approximately 1.9 to 1 at September 30,
1998 as compared to 3.4 to 1 at December 31, 1997. The Company had working
capital of approximately $2.8 million at September 30, 1998 as compared to
approximately $5.5 million at December 31, 1997. These changes are due primarily
to the sale of GBS and EKW and to the establishment of expense reserves as
described below in "Results of Operations". For the remainder of fiscal 1998
management expects to fund working capital requirements primarily through
operating cash flow. At September 30, 1998 and December 31, 1997, the Company
had cash and cash equivalents of approximately $.3 million and $1.6 million,
respectively, and marketable securities of approximately $2.7 million and $2.3
million, respectively.
Cash used in operating activities increased from $856,000 for the first nine
months of 1997 to $1,336,000 for the same period in 1998 primarily due to a
reduction in net income. In the first nine months of 1997, the Company generated
$164,000 in cash from investing activities versus $163,000 for the same period
in 1998. In 1998, the Company acquired a business for $3,225,000, property and
equipment for $421,000 and franchise rights for $587,000. These purchases were
offset by proceeds from the sale of assets of $3,610,000 and an increase in the
collection of notes receivable of $606,000. The Company used $173,000 in cash
for financing activities for the first nine months of 1997 (all for payments on
borrowings) and used $69,000 for such activities in 1998 ($132,000 for payments
on borrowings, partially offset by $62,000 in proceeds from new borrowings).
The Company is not aware of any trend or event which would potentially adversely
affect its liquidity. In the event such a trend would develop, management
believes that the Company has sufficient funds available to satisfy the working
capital needs of the business.
RESULTS OF OPERATIONS
For the nine months ended September 30, 1998, compared to the nine months ended
September 30, 1997.
Total revenues decreased $42,000 (.4%) to $10,955,000 in 1998 from $10,997,000
in 1997. This decrease is comprised of decreases in franchise fees of $1,009,000
(40.9%), in interest of $54,000 (10.6%) and in other revenues of $169,000
(23.6%), offset by increases in royalties of $482,000 (8.3%) and in sales of
products and services of $718,000 (86.5%).
Royalty revenues increased primarily due to higher system-wide sales within a
number of the Company's franchise concepts. Significant increases were as
follows: Mr. Rooter $248,000 (11.0%), Mr. Electric $172,000 (99.7%), Aire Serv
$47,000 (38.3%)
10
<PAGE> 11
and Mr. Appliance $38,000 (361.4%). These increases were partially offset by a
decline in Rainbow's royalty revenues of $109,000 (6.4%). The Company also
recorded $155,000 in royalties from Canadian franchise rights purchased from a
related party in the first quarter of 1998 (See Note 4) and $244,000 in
royalties from Glass Doctor which was purchased in July 1998 (See Note 6).
Royalties from EKW and GBS combined declined by $271,000, as these businesses
were sold in July 1998 (See Note 5).
Decreases in franchise fee revenues by concept were as follows: Mr. Rooter
$236,000 (42.4%), Mr. Appliance $326,000 (83.6%), Mr. Electric $84,000 (17.2%),
GBS $396,000 (72.8%), EKW $96,000 (73.3%) and Rainbow $104,000 (38.7%). These
decreases were partially offset by an increase of $233,000 (255.0%) in Aire Serv
franchise fee revenues.
The sale of products and services increased due primarily to the growth of the
Company's National Accounts program which began operating in late 1996.
Interest revenues declined primarily due to a reduction in franchisee notes
receivable. Other revenues declined primarily due to commissions received from
related parties in 1997 for the sale of franchises and to a decrease in
management fees received from related parties due to a reduction in work
performed.
General, administrative and selling expenses increased by $1,935,000 (22.4%). In
the third quarter of 1998, the Company recorded litigation reserves of
approximately $730,000 to cover estimated settlement costs of a number of
lawsuits to which the Company is a party. Management has determined that it
would be in the Company's best interest to attempt to settle these cases rather
than spend the time, effort and money to defend them. The Company also increased
its bad debt allowance for notes receivable from franchisees by approximately
$200,000 due to recent collection history on certain notes. The Company also
increased its reserve for franchisee notes to unrelated third parties payment on
which is guaranteed by the Company. Such reserve was increased by approximately
$230,000 based upon recent payment history on certain notes. Also, in the second
quarter of 1997, credits were recorded to bad debt expense as a result of
collection actions taken during the first half of the year. These credits
resulted in an increase in bad debt expense of approximately $300,000 from 1997
to 1998. The Company also increased its number of corporate level personnel with
a corresponding increase of approximately $170,000 in payroll costs. In
addition, there were increased costs associated with relatively new operations;
Mr. Appliance, Mr. Electric, National Accounts, Glass Doctor and TDG Canada. The
Company also incurred costs in the third quarter related to severance and
benefits to employees leaving the Company and in relation to the start-up of
Glass Doctor. The Company has taken action in the third and fourth quarters of
1998 which are expected to have the effect of reducing general, administrative
and selling expenses on an ongoing basis.
The cost of product and service sales increased by $826,000 (181.5%) due to
costs associated with increased revenues from National Accounts and increased
costs associated with the sale of products by GBS.
The cost of tax services revenues decreased by $215,000 (30.4%) due to the sale
of GBS.
Depreciation and amortization increased by $131,000 (32.6%) due to amortization
of Canadian franchise rights, amortization of goodwill associated with Glass
Doctor, and due to amortization and depreciation of property and equipment
purchased during 1997 and 1998.
In 1998, the Company recorded a $1,446,000 gain on the sale of assets of GBS and
EKW as described in Note 5.
In 1998, the Company sold marketable securities and recorded a gain of $331,000
on such sales.
The Company reported a net loss of $148,000 for the nine months ended September
30, 1998 as compared to a net profit of $493,000 for the same period last year.
For the three months ended September 30, 1998, compared to the three months
ended September 30, 1997.
Total revenues decreased by $869,000 (22.2%) to $3,052,000 in 1998, from
$3,921,000 in 1997. This decrease is due primarily to a decrease in royalties of
$29,000 (1.4%), in franchise fees of $643,000 (60.6%), in tax services of
$104,000 (88.2%) and in other revenues of $83,000 (34.7%).
Royalty revenues decreased primarily due to the sale of the GBS and EKW
businesses, which resulted in a decrease of $376,000. This decrease was
partially offset by royalties from the newly acquired Canadian franchise rights
of $68,000 and from Glass Doctor
11
<PAGE> 12
of $244,000. Royalties from Mr. Electric increased by $64,000 (81.2%) and from
Aire Serv increased by $50,000 (129.2%). These increases were partially offset
by a decrease in royalties from Rainbow of $78,000 (12.2%). Of the decrease in
franchise fee revenues, $400,000 was associated with GBS and EKW. Decreases in
such revenues from other franchise concepts were as follows: Mr. Rooter $56,000
(40.4%), Mr. Appliance $238,000 (93.5%), Mr. Electric $16,000 (11.5%) and
Rainbow $79,000 (81.3%). The above decreases were partially offset by an
increase in franchise fee revenues from Aire Serv of $146,000 (478.4%).
Tax service revenues declined by $104,000 (88.2%) due to the sale of GBS.
Other revenues decreased by $83,000 (34.7%) due primarily to commissions
received from related parties in 1997 for the sale of franchises and to a
decrease in related party management fees due to a reduction in the amount of
work performed.
General and administrative expenses increased by $1,494,000 (50.7%). The Company
recorded litigation reserves of approximately $730,000 to cover estimated
settlement costs of a number of lawsuits to which the Company is a party.
Management has determined that it would be in the Company's best interest to
settle these cases rather than spend the time, effort and money to defend them.
The Company also increased its bad debt allowance for franchisee notes
receivable by approximately $200,000 due to recent collection history on certain
notes. The Company also increased its reserve for franchisee notes to unrelated
third parties, payment on which is guaranteed by the Company. Such reserve was
increased by approximately $230,000 based upon recent payment history on certain
notes. In addition, there were increased costs associated with relatively new
operations; Mr. Appliance, Mr. Electric, National Accounts, Glass Doctor and TDG
Canada. The Company also incurred costs in the third quarter related to
severance and benefits to employees leaving the Company and in relation to the
start-up of Glass Doctor. The preceding increases were partially offset by a
decrease of approximately $450,000 in general and administrative costs directly
associated with GBS and EKW, which businesses were sold in July 1998. The
Company has taken actions in the third and fourth quarters of 1998 which are
expected to have the effect of reducing general, administrative and selling
expenses on an ongoing basis.
Depreciation and amortization increased by $60,000 (44.3%) due to amortization
of Canadian franchise rights, amortization of goodwill associated with Glass
Doctor, and due to amortization and depreciation of property and equipment
purchased during 1997 and 1998.
In 1998, the Company recorded a $1,446,000 gain on the sale of assets of GBS and
EKW as described in Note 5.
In 1998, the Company sold marketable securities and recorded a gain of $14,000
on such sales.
The Company reported a net loss of $288,000 for the quarter ended September
30,1998 as compared to net income of $252,000 for the same period in 1997.
IMPACT OF INFLATION
Inflation has not had a material impact on the operations of the Company.
FOREIGN OPERATIONS
The Company operates in 17 foreign countries. Typically, foreign franchises are
sold and managed by a master licensee in that country. Royalty revenues from
master licenses are recorded as received due to the difficulty sometimes
experienced in foreign countries when attempting to transfer such funds to the
United States. The Company does not depend on foreign operations, and such
operations do not have a material impact on its cash flow. During the remainder
of 1998, the Company may produce additional master license sales which could
result in each case in a one time, lump sum payment from the master licensee to
the Company.
FORWARD-LOOKING STATEMENTS
The Company cautions readers that various factors could cause the actual results
of the Company to differ materially from those indicated by forward-looking
statements made from time to time in news releases, reports, proxy statements,
registration statements and other written communications (including the
preceding sections of this Management's Discussion and Analysis), as well as
oral statements made from time to time by representatives of the Company. Except
for historical information, matters discussed in such oral and written
communications are forward-looking statements that involve risks and
uncertainties, including but not limited to, general business conditions, the
impact of competition, taxes, inflation, and governmental regulations.
12
<PAGE> 13
PART II
OTHER INFORMATION
THE DWYER GROUP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
ITEM 1 - LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
NONE
- --------------------------------------------------------------------------------
ITEM 2 - CHANGES IN SECURITIES
- --------------------------------------------------------------------------------
(a) NONE
(b) Not applicable.
(c) On July 24, 1998, the Company paid $3.2 million in cash, executed
a $1.9 million note payable and issued 333,333 shares of its
common stock in connection with the purchase of substantially all
of the assets of Glass Doctor Corporation and Glassmarks, Inc.
The Company issued the above noted shares in reliance upon Section
4(2) of the Securities Act of 1933, as amended.
- --------------------------------------------------------------------------------
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- --------------------------------------------------------------------------------
NONE
- --------------------------------------------------------------------------------
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
NONE
- --------------------------------------------------------------------------------
ITEM 5 - OTHER INFORMATION
- --------------------------------------------------------------------------------
NONE
- --------------------------------------------------------------------------------
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Exhibits:
Financial Data Schedule
(b) Reports on 8-K
Filed October 19, 1998 - Amended 8-K reporting the sale of
substantially all of the assets of two of the Company's
subsidiaries, General Business Services, Inc. and Edwin K. Williams
& Co., including pro forma financial information.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 16, 1998 The Dwyer Group, Inc.
By: /s/ Thomas Buckley
------------------------------------------
Thomas Buckley
Vice President and Chief Financial Officer
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JUL-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 326,587 0
<SECURITIES> 2,677,634 0
<RECEIVABLES> 2,619,295 0
<ALLOWANCES> 107,233 0
<INVENTORY> 48,869 0
<CURRENT-ASSETS> 6,072,662 0
<PP&E> 1,143,267 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 18,978,746 0
<CURRENT-LIABILITIES> 3,245,622 0
<BONDS> 0 0
0 0
0 0
<COMMON> 722,859 0
<OTHER-SE> 12,001,852 0
<TOTAL-LIABILITY-AND-EQUITY> 18,978,746 0
<SALES> 10,954,569 3,052,284
<TOTAL-REVENUES> 10,954,569 3,052,284
<CGS> 1,774,814 274,277
<TOTAL-COSTS> 12,948,782 4,940,197
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 63,090 27,228
<INCOME-PRETAX> (217,242) (428,316)
<INCOME-TAX> (69,141) (140,143)
<INCOME-CONTINUING> (148,101) (288,173)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (148,101) (288,173)
<EPS-PRIMARY> (.02) (.04)
<EPS-DILUTED> (.02) (.04)
</TABLE>
