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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, 1999
[ ] 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)
(254) 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 [ ] No [X]
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: $16,424,137
Aggregate market value of the voting stock held by nonaffiliates
computed by average bid and asked prices of such stock, as of
March 15, 2000: $ 7,899,000
Aggregate number of shares of Common Stock outstanding as of the close
of business on March 15, 2000: 7,002,314
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
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TABLE OF CONTENTS
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PART I
Item 1. DESCRIPTION OF BUSINESS..................................................................................... 1
General..................................................................................................... 1
Franchise Operations........................................................................................ 2
Marketing................................................................................................... 6
Competition................................................................................................. 7
Trade Names and Service Marks............................................................................... 8
Regulation.................................................................................................. 8
Employees................................................................................................... 9
Item 2. DESCRIPTION OF PROPERTY..................................................................................... 9
Item 3. LEGAL PROCEEDINGS........................................................................................... 9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................................................9
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................................................10
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS........................................................................10
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................................15
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................15
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT.....................................................................................16
Item 10. EXECUTIVE COMPENSATION......................................................................................18
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................................20
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................................22
Item 13. EXHIBITS, AND REPORTS ON FORM 8-K...........................................................................23
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Dwyer Group, Inc. and its wholly owned subsidiaries (the "Company")
provide a diverse array of specialty services internationally through its
service-based, brand-name franchising businesses. The Company currently owns six
such businesses, which service an aggregate of approximately 750 franchises
located in the United States and Canada, and through their master licensees,
approximately 250 franchisees in 19 other 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, a commitment to its
mission and vision, its brands and the reputation of its management team.
In 1998 and 1999, the Company operated its businesses through the
following wholly owned subsidiaries - See "Management's Discussion and Analysis
- - Results of Operations":
o Mr. Rooter Corporation ("Mr. Rooter") is a franchisor of
plumbing repair and drain cleaning services under the service
mark "Mr. Rooter"(R). In 1999, Mr. Rooter accounted for
approximately 32.3% of the Company's consolidated revenues as
compared to 28.4% in 1998.
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). In 1999, Rainbow accounted for
approximately 17.9% of the Company's consolidated revenues as
compared to 17.8% in 1998.
o Mr. Electric Corp. ("Mr. Electric") is a franchisor of
electrical repair and service businesses under the service
mark "Mr. Electric"(R). In 1999, Mr. Electric accounted for
approximately 10.0% of the Company's consolidated revenues as
compared to 8.8% in 1998.
o Synergistic International, Inc. ("Glass Doctor"), which
commenced operations in July of 1998, is franchisor of Glass
Doctor (R), a service concept whose business is the
replacement of automobile, residential and commercial glass.
In 1999, Glass Doctor accounted for approximately 14.5% of the
Company's consolidated revenues as compared to 5.5% in 1998.
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). In
1999, Aire Serv accounted for approximately 7.0% of the
Company's consolidated revenues as compared to 4.5% in 1998.
o Mr. Appliance Corp. ("Mr. Appliance") is a franchisor of major
household appliance service and repair businesses under the
service mark "Mr. Appliance"(R). In 1999, Mr. Appliance
accounted for approximately 2.3% of the Company's consolidated
revenues as compared to 1.4% in 1998.
o The Dwyer Group National Accounts, Inc. ("National Accounts")
solicits commercial national account customers who can call a
toll-free 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.
In 1999, National Accounts accounted for approximately 9.3% of
the Company's consolidated revenues as compared to 10.3% in
1998.
o The Dwyer Group Canada, Inc. ("TDG Canada") commenced
operations in January of 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. In 1999, TDG Canada accounted for
approximately 2.6% of the Company's consolidated revenues as
compared to 1.8% in 1998.
o General Business Services, Inc. ("GBS") is a franchisor of
businesses which provide management services to small
businesses. The business and substantially all of the assets
of GBS were sold in July of 1998. In 1998, GBS accounted for
approximately 10.5% of the Company's consolidated revenues.
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o Edwin K. Williams & Co. ("EKW") is a franchisor of businesses
which provide information systems and financial management
services to small businesses. The business and substantially
all of the assets of EKW were sold in July of 1998. In 1998,
EKW accounted for approximately 5.8% of the Company's
consolidated revenues.
Mr. Rooter, Mr. Electric, Mr. Appliance, Aire Serv, Rainbow and Glass
Doctor are referred to as the Company's "franchise concepts", or "franchising
businesses".
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. In 1993, 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. In that same year, this new subsidiary was incorporated in
Texas under the name Mr. Rooter Corporation and the Company was renamed The
Dwyer Group, Inc.
The Company's principal executive offices are located at 1010 North
University Parks Drive, Waco, Texas 76707, and its telephone number is (254)
745-2400. All references herein to the Company include Rainbow, Mr. Rooter, Aire
Serv, Mr. Electric, Mr. Appliance, Glass Doctor, TDG Canada and National
Accounts unless the context otherwise requires.
FRANCHISE OPERATIONS
The Company's goal is to build upon its successful systems of
franchising businesses in order to develop strong new franchises and provide
them with ongoing franchise support.
The franchising industry in which the Company operates is fragmented,
consisting mainly of small, single-service or single-concept franchising
companies. The Company's philosophy is to be a multi-concept franchisor by
bringing its franchising expertise to bear on a number of businesses in various
service fields. The Company applies franchise systems management and marketing
skills in order to maximize the profitability of its franchised businesses.
Thus, instead of franchising only one line of business, the Company's philosophy
is to benefit from economies of scale by the pooling of resources.
The Company's primary sources of revenues are initial franchise fees
paid by new franchisees and ongoing royalties based on the sales volume of
franchisees.
Initial franchise fees and royalty rates for each franchise concept
vary, and are described in the following sections related to each concept. In
general, the Company at its discretion, may finance a portion of the franchise
fee (30-80%) and may give a discount if the franchise fee is paid in full upon
the signing of the agreement.
In addition to royalties, each franchisee is required to contribute to
a national advertising fund maintained by each franchise concept. Expenditures
from each such fund are used to develop and place advertising and to create
marketing materials and programs which will benefit all franchisees operating
under the particular franchise concept. Such funds are maintained separately
from the Company's funds and are not reflected on the Company's books.
During 1998, in order to encourage business owners to convert their
businesses to one of the Company's franchise concepts, the Company formalized a
"roll-in" program whereby new franchisees can roll-in sales from their existing
business, and pay reduced royalty and advertising fee rates on the existing
sales. The franchisee may also receive a discount on the initial franchise fee
based on the amount of sales "rolled-in".
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 operating
system, have positioned it to capitalize on the projected opportunities for
growth in the franchising industry. In addition, the Company believes that the
franchise sales and operations expertise developed by its management over many
years provides the Company with a competitive advantage.
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In 1999, the Company formed alliances with OurHouse.com, the Internet's
premier online destination for home improvement and home services, and with Ace
Hardware, a leader in the hardware industry with 5,100 independent hardware,
home center, lumber and building materials retailers in 62 countries. Although
both projects are still in the start-up phase, management believes that these
alliances will benefit both the Company and its franchisees by providing the
franchisees with additional retail sales opportunities.
Each of the Company's franchising businesses requires the franchise
owners and/or key employees to undergo training at the Company's Headquarters
located in Waco, Texas prior to commencing operations. The training program for
each franchisee differs 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. Mr. Rooter, Aire
Serv, Mr. Electric, Mr. Appliance, and Glass Doctor, on the other hand, are
primarily "conversion" franchisors, which recruit existing people operating in
the "trades" and teach them an improved business methodology. All of the
Company's franchisees 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 the financial aspects
of their businesses, 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 to best take advantage of them.
Following completion of the Company's initial training course (which
represents the fulfillment 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 challenges 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
responsibility is to assist 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 its franchisees with 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 one of its primary distinguishing features.
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 and to
grant franchise rights in their defined geographic territory. Foreign franchise
rights are sold based upon the population of the 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, bonus compensation based on the overall performance of the
subsidiary or subsidiaries for which he is responsible. Thus, the emphasis is on
profitable growth, not just sales.
Mr. Rooter
Mr. Rooter is a franchisor of plumbing repair and drain cleaning
services under the service mark "Mr. Rooter(R)" and related trade and service
marks. In 1989, when Mr. Rooter was acquired by the Company, there were 22 Mr.
Rooter franchises in operation. By the end of 1999, Mr. Rooter had a total of
191 franchises in the United States and Canada, and through master franchise
licensees, 72 franchises in eight other countries. Mr. Rooter has shown
significant growth in revenues from royalties paid by franchisees (from $234,000
in 1989 to $3,885,000 in 1999).
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 modern equipment to perform
residential, commercial and industrial drain cleaning and plumbing repair.
A new franchisee pays an initial franchise fee of $195 for each 1,000
of the franchise territory's population, with a minimum initial fee of $19,500.
In the second quarter of 2000, the minimum fee will increase to $22,500 for the
first
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100,000 of population, plus $225 for each additional 1,000 of population. 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, customer service, pricing, profitability, growth of the business and
personnel management. Each franchisee is required to maintain an advertisement
in the Yellow Pages of the telephone directory serving the franchised territory.
Extensive ongoing support emphasizing the development of the franchisee's
marketing and business management skills is provided through regional training
meetings and toll-free telephone support from Company personnel.
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, depending on weekly gross sales volume. In
addition to the weekly royalty, the franchisees pay an advertising fee equal to
2% of their gross sales. For "roll-in" business, the franchisee pays a 2%
royalty and a 1% advertising fee for the first year of operation. From
time-to-time, Mr. Rooter has advertised nationally on network radio and
television.
The term of the initial franchise agreement is ten years, which may be
renewed for additional five year terms at the option of the franchisee upon
certain conditions, including six months prior notice and payment of a $2,500
renewal fee. Mr. Rooter may terminate a franchise agreement in the event that a
franchisee breaches the terms of the agreement.
Rainbow
Rainbow is a franchisor of carpet and upholstery cleaning and dyeing,
air duct cleaning, and restoration service businesses. At December 31, 1999,
Rainbow had 324 franchises in the United States and Canada, and 144 franchises
through master franchise licensees in 13 other 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 a customer base.
The initial franchise fee is a minimum of $15,900, with an additional
amount depending upon the population of the franchise territory. During the term
of the agreement, the franchisee is required to pay Rainbow a continuing royalty
of 7% of weekly gross sales plus a national advertising fee of 2% of weekly
gross sales. Franchisees may be eligible to receive a rebate of up to 50% of
royalties paid upon satisfying certain conditions. For "roll-in" business, the
franchisee pays a 2% royalty and a 1% advertising fee for the first year of
operation. The term of the initial franchise agreement is ten years, with a
mutual option to renew and no renewal fee.
No previous knowledge, experience or skills in 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, extensive ongoing support emphasizing
the development of the franchisee's marketing and business management skills is
provided by individually assigned franchise systems managers, through regional
training meetings and toll-free telephone support. Ongoing technical training is
handled in the same manner.
Mr. Electric
Mr. Electric is a franchisor of electrical repair and service
businesses under the service mark "Mr. Electric(R)". Mr. Electric began
operations in September of 1994, and at December 31, 1999, had 87 franchises in
the United States and Canada, and through master licenses, 25 franchise
operations in two foreign countries.
The minimum initial franchise fee is $17,500, based on a territory
population of approximately 100,000. The fee is increased by $175 for each
additional 1,000 of population contained in the franchise territory. In the
second quarter of 2000, the fee will increase to $19,500 for the first 100,000
in population, plus $195 for each additional 1,000 in population.
The initial franchise agreement term is ten years. An election to renew
the contract may be made by the franchisee for additional five-year periods upon
certain conditions and payment of a $2,500 renewal fee.
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During the term of the franchise agreement, the franchisee is required
to pay Mr. Electric (i) a royalty fee ranging from 3% to 6% of weekly gross
sales, based on weekly gross sales volume and (ii) an advertising fee equal to
2% of weekly gross sales. For "roll-in" business, the franchisee pays a 2%
royalty and a 1% advertising fee for the first year of operation. 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
their local telephone directory. Beyond initial business training, extensive
ongoing support emphasizing the development of the franchisee's marketing and
business management skills is provided by individually assigned franchise
systems managers, through regional and national training meetings and toll-free
telephone support from Company personnel.
Aire Serv
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.
At December 31, 1999, Aire Serv had 52 franchises in the United States and
Canada and two foreign master franchise licensees.
The minimum initial franchise fee is $25,000, 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. In the second quarter of 2000, the fee will increase to $27,500 for
the first 100,000 in population, plus $175 for each additional 1,000 in
population. New franchisees are provided with a variety of start-up items
including marketing and advertising materials, an administrative start-up
package and computer software.
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
of a $2,500 renewal fee.
During the term of the franchise agreement, the franchisee is required
to pay to Aire Serv (i) a continuing royalty fee ranging from 2.5% to 4.5% of
weekly gross sales, based on weekly gross sales volume and (ii) an advertising
fee equal to 2% of the franchisee's weekly gross sales. For "roll-in" business,
the franchisee pays a 2% royalty and a 1% advertising fee for the first year of
operation. If the amount of existing business "rolled-in" is large enough, the
reduced rates may apply for the life of the franchise agreement. The franchisee
is also required to maintain an advertisement in the Yellow Pages of their local
telephone directory. Beyond initial business training, extensive ongoing support
emphasizing the development of the franchisee's marketing and business
management skills is provided by individually assigned franchise systems
managers and through regional training meetings and toll-free telephone support
from Company personnel.
Mr. Appliance
Mr. Appliance is a franchisor of major household appliance service and
repair businesses. Mr. Appliance was organized in January of 1996, and at
December 31, 1999, had 35 franchises, all in the United States.
The minimum initial franchise fee is $14,500, based on a territory
population of approximately 100,000. The initial franchise fee is increased by
$50 for each additional 1,000 of population contained in the franchise
territory. Beginning in the second quarter of 2000, the minimum initial
franchise fee will be $15,900, increased by $50 for each additional 1,000 of
population contained in the franchise territory. With the increased franchise
fee, the franchisee will receive an advertising and marketing package, and other
start-up materials.
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 of a $2,500 renewal fee.
During the term of the franchise agreement, the franchisee is required
to pay to Mr. Appliance (i) a royalty fee ranging from 3% to 6% of weekly gross
sales, based on weekly gross sales volume and (ii) an advertising fee equal to
2% of weekly gross sales. For "roll-in" business, the franchisee pays a 2%
royalty and a 1% advertising fee for the first year of operation. Franchisees
are also required to engage in local promotion of the services and products
available, as well as maintain an advertisement in the Yellow Pages of their
local telephone directory. The franchisee is provided with a
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computerized business package which standardizes the operation of their
business. Beyond initial business training, extensive ongoing support
emphasizing the development of the franchisee's marketing and business
management skills is provided through regional training meetings and toll-free
telephone support from Company personnel.
Glass Doctor
Glass Doctor is a franchisor of automobile, residential and commercial
glass replacement businesses. The Company acquired Glass Doctor in July of 1998,
and at December 31, 1999, Glass Doctor had 46 franchises, all in the United
States.
The minimum initial franchise fee is $15,925, based on a territory
population of 100,000. The fee is increased by $159 for each additional 1,000 of
population in the franchise territory. In the second quarter of 2000, the fee
will increase to $18,925 for the first 100,000 of population, plus $189 for each
additional 1,000 in population.
The initial franchise agreement is for ten years. An election to renew
may be made by the franchisee for two additional five-year periods upon certain
conditions and payment of a $2,500 renewal fee.
During the term of the franchise agreement, the franchisee is required
to pay (i) a royalty fee ranging from 3% to 6% of weekly gross sales, based on
weekly gross sales volume and (ii) an advertising fee equal to 2% of weekly
gross sales. For "roll-in" business, the franchisee pays a 2% royalty and a 1%
advertising fee for the first year of operation. Franchisees are also required
to engage in local promotion of their services and to maintain an advertisement
in the Yellow Pages of their local telephone directory. Each new franchisee is
given initial business training and is taught a system for doing business. The
franchisee is provided with a computerized business package which standardizes
the operation of their business. All franchisees receive extensive ongoing
support emphasizing development of marketing and business management skills
through regional and national training meetings and toll-free telephone support
from Company personnel.
MARKETING
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.
Rainbow's marketing strategy for franchise sales 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. Rainbow has also recently began a program to market franchises to
carpet retailers. The market for Rainbow's carpet cleaning, dyeing and water and
fire restoration services extends through the residential, commercial,
industrial and municipal markets.
Mr. Electric's marketing strategy is focused on the sale of franchises
to existing electrical contractors and electricians. Mr. Electric's targeted
approach supplies a proven system to make an electrical service and repair
business successful. Franchisees receive extensive training in sales, marketing
and business systems which allows them to achieve a greater market share and
increase their gross sales and profits. Mr. Electric is the only brand-name with
national recognition in the electrical service and repair industry.
Aire Serv's marketing strategy is focused on the sale of franchises to
existing heating and air conditioning contractors. The Company believes that the
heating, ventilating and air conditioning ("HVAC") market is extensive. The Aire
Serv franchisee, equipped with 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
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effective strategies and systems in these areas. Whether a client is residential
or commercial, the emphasis is on service and repair.
Mr. Appliance's marketing strategy is to sell franchises to existing
appliance dealers and appliance servicers. Mr. Appliance provides a proven
system, technical and management support, and training to make an appliance
repair and service franchise successful. Franchisees receive extensive training
in sales, marketing and business systems.
Glass Doctor's marketing strategy is to sell franchises to existing
glass installation and/or replacement business owners. Glass Doctor provides an
operating system, technical and management support, and training to make such
businesses more 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 regional and national
franchisors which are also seeking to sell their franchises or business
opportunities to prospective franchisees or investors.
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.
Mr. Electric is the first company to offer franchises in the electrical
service industry. Local electricians are Mr. Electric's primary source of
competition.
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.
Mr. Appliance is the first company to offer franchises in the
fragmented appliance repair and service industry. Local appliance repair
businesses are Mr. Appliance's primary competition.
Glass Doctor competes with local and regional glass replacement
companies as well as large glass manufacturers such as Safelite and other glass
replacement services such as Harmon AutoGlass and Harding Glass, who operate on
a national basis.
The Company's franchisees generally compete on the basis of price,
training and support services and reputation. Other large companies have entered
the home service market through the acquisition of existing companies.
In addition, the Company expects to encounter competition in attempting
to acquire 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 and may be in a better position 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.
7
<PAGE> 10
TRADE NAMES AND SERVICE MARKS
The Company believes that its trademarks and service marks are
important to the marketing of its franchises and the sale of services to
consumers by its franchisees. The Company currently holds the following
federally registered trademark and service marks: The Dwyer Group(R), Providing
a World of Service(R) and Providing a World of Specialty Services(R) and has
applied for federal trademark registration of the stylized Dwyer Group logo. 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),
BiochoiceES(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 Care & Restoration Services" stylized global device,
"Rainbow International"(R), "Vehicle Stripe Design for Rainbow", "Mr.
Appliance"(R), the stylized Mr. Appliance logo, "Glass Doctor"(R), the stylized
Glass Doctor logo, and "We Fix Your Panes"(R). The Company has applied for
federal trademark and service mark registration for the revised stylized Glass
Doctor logo and the van stripe design for each of Mr. Rooter, Mr. Electric, Mr.
Appliance and Aire Serv. The Company holds a state trademark registration for
"Mr. Rooter" in Texas, a service mark registration for "Rainbow International
Carpet Dyeing & Cleaning Co." in 13 states and a state service mark registration
for Aire Serv and the stylized Aire Serv logo in California. In addition, the
Company holds copyrights in connection with all training manuals and materials,
which it considers proprietary. The Company also holds numerous foreign
trademarks and service marks related to its franchising concepts.
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 disclosure documents.
The Company is required to update its offering disclosure documents to
reflect the occurrence of material events. The occurrence of any such events may
from time to time require the Company to cease offering and selling franchises
until the affected disclosure documents are 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 it offers and sells franchises. 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 and state 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
8
<PAGE> 11
businesses, including state and local licensing, zoning, land use, construction
and environmental regulations and various safety and other standards. The
failure of a franchisee 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, 1999, the Company had 94 full-time employees and 7
part-time employees, none of whom belong to unions, as detailed below:
<TABLE>
<CAPTION>
Full-time Part-time Total
--------- --------- -----
<S> <C> <C> <C>
Corporate.......................... 43 6 49
Mr. Rooter......................... 10 -- 10
Aire Serv.......................... 7 -- 7
Rainbow............................ 11 -- 11
Mr. Electric....................... 8 -- 8
Glass Doctor....................... 5 1 6
Mr. Appliance...................... 4 -- 4
National Accounts.................. 6 -- 6
Total.............................. 94 7 101
</TABLE>
ITEM 2. DESCRIPTION OF PROPERTY
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 a related party under an operating lease which
expires December 31, 2000. Monthly rental for these offices is approximately
$31,000. See "Certain Relationships and Related Party Transactions." Management
considers the offices to be suitable and adequate.
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 $250,000 as of December 31,1999. The
Company accrued for its estimate of such losses when they became probable and
estimable. In 1999, the Company resolved lawsuits and a potential lawsuit and
made payments of approximately $850,000. This amount was included in the accrual
at December 31, 1998.
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, 1999.
9
<PAGE> 12
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on The Nasdaq Stock Market(SM)
under the symbol "DWYR". The Nasdaq Stock Market(SM), which began operation in
1971, is the world's first electronic securities market and the fastest growing
stock market in the U.S. Nasdaq utilizes today's information technologies -
computers and telecommunications - to unite its participants in a screen-based,
floorless market. It enables market participants to compete with each other for
investor orders in each Nasdaq security and, through the use of Nasdaq
WorkstationII(TM) and other automated systems, facilitates the trading and
surveillance of thousands of securities. This competitive marketplace, along
with the many products and services available to issuers and their shareholders,
attracts today's largest and fastest growing companies to Nasdaq. These include
industry leaders in computers, pharmaceuticals, telecommunications,
biotechnology, and financial services. More domestic and foreign companies list
on Nasdaq than on all other U.S. stock markets combined.
The following table sets forth the quarterly high and low sales prices
per share of the Company's Common Stock as reported by The Nasdaq Stock
Market(SM), 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>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1999
First Quarter $2.38 $1.75
Second Quarter $2.13 $1.75
Third Quarter $2.88 $1.88
Fourth Quarter $2.50 $2.19
FISCAL YEAR ENDED DECEMBER 31, 1998
First Quarter $2.19 $1.75
Second Quarter $3.25 $2.00
Third Quarter $2.44 $1.38
Fourth Quarter $2.00 $1.63
</TABLE>
On March 15, 2000, the closing sales price of the Company's Common
Stock as reported by The Nasdaq Stock Market(SM) was $3.00 per share. As of such
date, there were approximately 400 shareholders of record.
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
Unless otherwise noted, all dollar amounts are rounded to the nearest
thousand. Percentages represent the change from the comparable amount from the
previous year. References to 1998 and 1999 are to the years ended December 31 of
each year. Note references refer to Notes to Consolidated Financial Statements.
10
<PAGE> 13
RESULTS OF OPERATIONS
The following table shows the approximate amount (in thousands) and
percentage of the total, of revenues and operating income (loss) of each of the
Company's operating subsidiaries.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
REVENUES:
Mr. Rooter $ 5,311 32.3% $ 4,205 28.4%
Rainbow 2,945 17.9 2,639 17.8
Glass Doctor (1) 2,387 14.5 817 5.5
Aire Serv 1,157 7.0 669 4.5
Mr. Electric 1,640 10.0 1,304 8.8
Mr. Appliance 385 2.3 202 1.4
National Accounts 1,525 9.3 1,527 10.3
TDG Canada (2) 429 2.6 271 1.8
GBS (3) -- -- 1,553 10.5
EKW (3) -- -- 856 5.8
Other (4) 645 4.1 768 5.2
--------- ---- --------- -----
$ 16,424 100.0% $ 14,811 100.0%
========= ===== ========= =====
NET OPERATING INCOME (LOSS) (5):
Mr. Rooter $ 1,830 76.7% $ 507 (30.5)%
Rainbow 664 27.8 274 (16.5)
Glass Doctor (1) 666 27.9 132 (7.9)
Aire Serv (245) (10.3) (671) 40.4
Mr. Electric 75 3.2 (563) 33.8
Mr. Appliance (207) (8.7) (352) 21.2
National Accounts (99) (4.2) (57) 3.5
TDG Canada (2) 64 2.7 (24) 1.4
GBS (3) -- -- (205) 12.4
EKW (3) -- -- (79) 4.8
Other (4) (362) (15.1) (622) 37.4
--------- ---- --------- -----
$ 2,386 100.0% $ (1,660) 100.0%
========= ===== ========= =====
</TABLE>
- ---------------------------
(1) Glass Doctor was acquired in July of 1998.
(2) TDG Canada was formed in January of 1998.
(3) GBS and EKW were sold in July of 1998.
(4) Includes revenues or operating income (loss) of The Dwyer Group, Inc.
(parent holding company) which maintains all corporate activities and
functions (executive, accounting, legal, data processing and
administration). Revenues are derived primarily from administrative
fees charged to related parties. A portion of general and
administrative expenses are allocated to subsidiary companies.
(5) Before gain on sales of securities, gain on sale of assets and income
taxes.
11
<PAGE> 14
YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED DECEMBER 31, 1998:
The Company recorded a net profit of $1,535,000 or $.22 per share for
1999, as compared to a net profit of $53,000, or $.01 per share for 1998.
Revenues
Total revenues for 1999 were $16,424,000, an increase of $1,613,000 or
10.9%, from $14,811,000 for 1998. This increase is comprised of the following
components: royalties increased $933,000 (11.0%); franchise fees increased
$1,840,000 (74.7%); sales of products and services decreased by $259,000
(13.9%); tax services decreased by $673,000 (100%); interest decreased by
$51,000 (8.7%); and other revenues decreased by $177,000 (24.3%).
Royalty revenues increased by 11% from $8,483,000 in 1998 to $9,416,000
in 1999. Each operating concept increased as follows: Mr. Rooter - $461,000
(13.5%); Aire Serv - $233,000 (94.2%); Mr. Electric - $196,000 (40.3%); Glass
Doctor - $769,000 (130.7%); Rainbow - $289,000 (13.0%) and Mr. Appliance -
$46,000 (64.0%). Royalties from Canadian and certain other foreign operations
also increased by $109,000 (39.8%). The large increase in royalties from Glass
Doctor was partially due to the fact that Glass Doctor was acquired in July of
1998. Overall, these royalty revenue increases, which coincide with the
increased business revenues of existing franchisees as well as an increase in
the number of franchisees producing revenue, are a direct result of the
Company's emphasis on providing strong franchise support services, and its
methods and programs created to assist franchisees in building successful
businesses, along with continued emphasis on the sale of new franchises. These
strategies are very important to the future of the Company, as royalties are the
foundation for the Company's long-term financial strength. Partially offsetting
the above increases were decreases in royalties from GBS - $636,000 and EKW -
$534,000, due to the sale of these franchise concepts in July of 1998.
Franchise sales revenues represent the initial franchise fees paid to
the Company by its individual and regional franchisees as well as fees charged
for foreign master licenses. These revenues increased from $2,475,000 in 1998 to
$4,315,000 in 1999. Each operating concept showed increases as follows: Mr.
Rooter - $635,000 (115.6%); Aire Serv - $253,000 (65.0%); Mr. Electric -
$139,000 (17.9%); Glass Doctor - $735,000 (325.6%); Rainbow - $60,000 (26.2%)
and Mr. Appliance - $134,000 (113.4%). Canadian franchise sales revenues also
added $67,000 to the increase. The large increase from Glass Doctor was
partially due to the fact that Glass Doctor was acquired in July of 1998.
Partially offsetting the above increases were decreases in franchise sales
revenues from GBS - $148,000 and EKW - $35,000 due to the sale of these
franchise concepts in July of 1998. The significant increase in overall
franchise sales revenues was partially due to changes made in late 1998, which
resulted in the Company realigning its franchise sales department in order to
provide for a more efficient and focused sales process and the revamping of its
franchise sales system in order to increase the quality and quantity of new
franchisees.
Revenues from sales of products and services decreased by $259,000
(13.9%) due to the sale of GBS and EKW in July of 1998.
Revenues from tax services decreased by $673,000 (100%) due to the sale
of GBS in July of 1998.
Interest revenues decreased by $51,000 (8.7%) primarily due to a
decrease in the amount of treasury notes held for investment purposes.
Other revenues decreased by $177,000 (24.3%) due to a decrease in
commissions received from related parties for the sale of franchises and a
decrease in management fees received from related parties due to a reduction in
work performed.
Costs and Expenses
During 1999, general, administrative and selling expenses decreased by
$1,866,000 (13.7%) as compared to 1998. In 1998, the Company recorded
approximately $1 million in legal expenses due to litigation accruals related to
lawsuits to which the Company was a party, and increased its bad debt expense by
approximately $400,000 due to collection experiences and increased reserves for
guarantees of third party debt. The remaining decrease of approximately $466,000
was primarily due to operational efficiencies introduced by management in late
1998. Reductions in expenses resulting from the sale of GBS and EKW were offset
by expenses associated with Glass Doctor in the second half of 1998 and during
1999.
12
<PAGE> 15
The cost of products and service sales decreased by $180,000 (11.7%)
due to the sale of GBS and EKW in July of 1998.
The cost of tax service revenues decreased by $494,000 (100%) due to
the sale of GBS in July of 1998.
Depreciation and amortization expense increased by $116,000 (16.7%) due
to amortization of intangible assets acquired in 1998, partially offset by
decreases related to the sale of GBS and EKW.
Interest expense decreased by $10,000 (10.0%) due to reductions in
long-term debt.
In 1998, the Company recorded a gain of $1,446,000 on the sale of GBS
and EKW as described in Note 4.
In 1998, the Company sold marketable securities and reported a gain of
$333,000. No such gains were recorded in 1999.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company's working capital ratio was 1.4 to 1
compared to 1.7 to 1 at December 31, 1998. The Company had working capital of
$1,347,000 at the end of 1999, as compared to $2,471,000 at the end of 1998.
These changes are due primarily to the sale of marketable securities to fund the
purchase of treasury stock and franchise rights and to an increase in current
maturities of long-term debt. At December 31, 1999, the Company had cash and
cash equivalents of approximately $556,000 and marketable securities of
approximately $884,000.
In February of 2000, the Company negotiated a $500,000 term loan and a
$500,000 line of credit with its bank. Of such total amount, $700,000 was
received and was used primarily to fund a portion of the purchase price of
franchise rights as described in Note 19.
Management believes that the Company's cash flow, supplemented by the
Company's positive cash position and available line of credit, will be adequate
to fund the Company's capital requirements over the next year.
Net cash used by operating activities for 1999 totaled $530,000 as
compared to $1,991,000 in 1998. The improvement of $1,461,000 is due primarily
to an increase of $1,481,000 in net income. Although earnings were relatively
strong in 1999, the Company used cash for operating activities primarily due to
the fact that notes in the amount of $2,622,000 were accepted for franchise
fees, in accordance with the Company's policies with regard to the sale of
franchises. Collections on these notes will add to the Company's cash flow in
the future. Also contributing to cash used for operating activities in 1999 was
$859,000 in payments made to settle legal proceedings. This amount was included
in accrued litigation reserves at December 31, 1998.
In 1999, the Company generated $1,700,000 in cash from investing
activities versus $1,467,000 in 1998. In 1998, the Company acquired Glass Doctor
for $3,225,000, property and equipment for $461,000 and franchise rights for
$587,000. These purchases were offset by proceeds from the sale of assets of
$3,610,000 and by collections of notes receivable of $1,475,000 (of which
$151,000 was from related parties). The Company also generated $686,000 in cash
from a net sale of marketable securities in 1998. In 1999, The Company generated
$1,538,000 from collections on notes receivable (of which $147,000 was from
related parties), $150,000 from the sale of assets and $1,030,000 from the net
sale of marketable securities. These amounts were partially offset by purchases
of property and equipment of $306,000 and purchases of franchise rights of
$661,000.
In addition to the $3,225,000 cash portion of the purchase price paid
for Glass Doctor, the Company also executed an unsecured note payable to the
seller in the amount of $1,900,000. The note bears interest at 5.5% per annum
and is payable in quarterly installments through July of 2002.
In 1999, the Company used $1,112,000 for financing activities, $896,000
for the purchase of treasury stock, and $777,000 for payments on borrowings,
partially offset by proceeds of $562,000 from the exercise of stock options. In
1998, the Company used $545,000 for such activities, $345,000 to reduce net
borrowings and $200,000 for the purchase of treasury stock.
13
<PAGE> 16
In 1993, the Company entered into a 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. Rooter and Aire Serv franchisees up to an aggregate amount of $10,000,000.
As of December 31, 1999, the aggregate principal amounts of outstanding
franchisee indebtedness under such agreement was approximately $748,000.
Pursuant to the terms of the agreement, the Company is liable for such
franchisee indebtedness in the event a default occurs and the Company has 180
days to correct the default. If the default is not corrected within such time,
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 and the debt is
assumed by that party. In addition, approximately $128,000 and $84,000 was paid
to SunTrust during 1999 and 1998, respectively, representing monthly
installments on behalf of franchisees in default. In 1998, management
discontinued the practice of guaranteeing notes to third parties.
In September 1996, The Dwyer Group, Inc., 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 Company. Each month, the
Company receives an Aging Report of the amounts due and owing by the
franchisees. If an Aging Report shows that any franchisee has failed to make all
of the scheduled monthly payments due during any sixty day period, then the
Company, within ten days of delivery of such Aging Report, shall pay all of such
franchisee's delinquent scheduled payments, together with all late charges then
due. In 1999 and 1998, the Company paid approximately $69,000 and $39,000,
respectively, on such delinquent notes. At December 31, 1999, the Company was
contingently liable for approximately $540,000, relating to such notes. In 1998,
management discontinued the practice of guaranteeing notes to third parties.
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
recognizes franchise sales revenues for the entire sale if the franchisee has
made a down payment in cash of at least 20% of the sales price and has completed
training. The Company also recognizes franchise sales revenues from existing
franchisees buying additional territory who make a cash down payment of less
than 20% but who have an established history of good credit. At December 31,
1999 and 1998, notes receivable (in excess of those recognized as deferred
liabilities), less allowance for doubtful collections, were approximately
$4,348,000 and $3,302,000, respectively. At December 31, 1999, the Company's
allowance for doubtful notes was $929,000, which the Company believes is
adequate for the size and nature of its notes receivable.
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.
FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY
The Company's operating results could vary significantly from period to
period as a result of a variety of factors, including the timing of acquisitions
and/or dispositions; 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. 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 and is not expected to have a material impact on the Company in the
future.
INCOME TAXES
The Company establishes a valuation allowance to be applied against its
deferred tax asset in accordance with the provisions of SFAS 109, "Accounting
for Income Taxes". At December 31, 1999, such allowance was $777,661. The
Company continually reviews the adequacy of the valuation allowance and is
recognizing benefits only as reassessment indicates that it is more likely than
not that the benefits will be realized.
14
<PAGE> 17
The Company expects to realize the net deferred asset principally
through the implementation of reasonable tax strategies based on future income
projections. The valuation allowance as of December 31, 1999 pertains primarily
to the minimum tax credits available for carryforward.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS
This Annual Report contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. All statements other than statements of historical fact included in the
Annual Report, including without limitation, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" regarding the
Company's financial position, business strategy and plans and objectives for
future performance are forward-looking statements. Forward-looking statements
are commonly identified by the use of such terms and phrases as "intends",
"estimates", "expects", "projects", "anticipates", "foreseeable future",
"seeks", and words or phases of similar import. Such statements are subject to
certain risks, uncertainties or assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
projected.
UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
Like other companies, the Company could be adversely affected if the
computer systems the Company, its suppliers or customers use do not properly
process and calculate date-related information and data from the period
surrounding and including January 1, 2000. This is commonly known as the " Year
2000" or "Y2K" issue. Additionally, this issue could impact non-computer devices
such as production equipment, elevators, etc. While the Company's project to
assess and correct Y2K related issues has been completed, and the Company has
not experienced any significant Y2K related events, interactions with other
companies' systems make it difficult to conclude that there will not be future
effects. Consequently, at this time, management cannot provide assurances that
the Year 2000 issue will not have an impact on the Company's future operations.
Through March 15, 2000, the Company has had no material impact from the Y2K
issue. The Company spent approximately $200,000 to address Y2K related issues
during 1999 and 1998.
ACCOUNTING MATTERS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
which establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that entities recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Management does not believe that this will have a material impact
on the Company's financial statements. Implementation of this standard has
recently been delayed by the FASB for a twelve-month period through the issuance
of SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
deferral of effective date of FASB Statement No. 133". The Company will adopt
SFAS as required for the first quarterly filing of fiscal year 2001.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, together with the
independent auditor's report of BDO Seidman, LLP, appear on pages 28 through 51
of this report. See Index to Financial Statements on page 27 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
15
<PAGE> 18
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............................. 65 Chairperson of the Board of Directors and Director
Dina Dwyer-Owens.......................... 37 President, Chief Executive Officer and Director
Robert Tunmire............................ 41 Executive Vice President and Director
Thomas J. Buckley......................... 53 Vice President, Treasurer and Chief Financial Officer
Deborah Wright-Hood....................... 39 Vice President of Administration and Assistant Treasurer
Donald J. Dwyer, Jr....................... 35 Director of International Operations and Director
James L. Sirbasku......................... 60 Director
John P. Hayes............................. 50 Director
Donald E. Latin........................... 69 Director
Michael Bidwell........................... 41 President of Rainbow, Mr. Rooter and Mr. Appliance
</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. No officer or director is
subject to an employment agreement.
Theresa Dwyer has been Chairperson of the Board of Directors since July
of 1995, and Director of the Company since December of 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 of 1994. She also
serves as Vice President of Worldwide Supply, Inc., and Secretary of Dwyer Real
Estate and Development, Inc. Mrs. Dwyer also serves as Managing Partner of Dwyer
Investments, Ltd. Prior to December of 1994 Mrs. Dwyer was self-employed.
Dina Dwyer-Owens has served as President and Chief Executive Officer
since January 1, 1999 and has been a Director of the Company since 1989. Prior
to that time, she served as Vice President of Operations since September of 1995
after serving as Co-Chairperson of the Board of Directors from December of 1994
to July of 1995. Ms. Dwyer-Owens also served as Secretary of the Company from
1989 through December of 1998. Ms. Dwyer-Owens has been employed by Dwyer Real
Estate and Development, Inc., a real estate concern located in Waco, Texas,
since June of 1981, most recently as President. She also serves as Director to
Rainbow, Mr. Rooter and National Accounts and is President of National Accounts
and Aire Serv. Ms. Dwyer-Owens has approximately 19 years experience in the
franchising industry.
Robert Tunmire has been Executive Vice President since January 1, 1999.
Prior to that time, he served as President and Chief Executive Officer of the
Company since December of 1994 after serving as Executive Vice President since
June of 1993. Mr. Tunmire also currently serves as President of Glass Doctor.
Mr. Tunmire served as President of the Company, then operating as Mr. Rooter
Corporation, from January of 1992 through May of 1993. From 1989 to 1992, he
served as Vice President of Mr. Rooter. From December of 1980 until May of 1989,
Mr. Tunmire was employed by Rainbow, most recently as Executive Vice President
of Franchise Counseling. Mr. Tunmire has approximately 24 years experience in
the franchising industry.
Thomas J. Buckley has served as Treasurer and Chief Financial Officer
since August of 1997 and as Vice President since June of 1998. He has also
served as President of Mr. Electric since May of 1999. Prior to employment by
the Company, he served as Chief Financial Officer of Watermarc Food Management
Co. ("Watermarc") since 1994. Mr. Buckley resigned as an officer of Watermarc
effective July 1, 1997. In January of 1999, Watermarc filed for bankruptcy
protection under Chapter XI of the U.S. Bankruptcy Code. From 1990 to 1994, Mr.
Buckley served as Vice President of Finance and Franchising for Western Sizzlin'
Restaurants. Mr. Buckley has also owned and operated his own franchising
business as a regional franchisor of SpeeDee Oil Change & Tune-Up, and has 18
years overall experience in the franchising industry.
16
<PAGE> 19
Deborah Wright-Hood has served as Secretary of the Company since
December of 1998 and as Vice President of Administration since June of 1998.
Prior to that time, she was employed by the Company in various capacities since
1985, including Director of Administration since 1994. Ms. Wright-Hood has also
been President of Worldwide Supply, Inc. since 1985.
Donald J. Dwyer, Jr. has served as a Director since May of 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 has approximately 16 years
experience in the franchising industry.
James L. Sirbasku has served as a Director since July of 1994. He has
served as Chairman and Chief Executive Officer of Profiles International, Inc.,
an international company providing pre-employment evaluation systems, since
March of 1991. From 1980 to 1991, Mr. Sirbasku served as President of SMI
International, Inc., a company specializing in franchising businesses. Mr.
Sirbasku has over 25 years experience in the franchising industry.
John P. Hayes has served as a Director since July of 1994. He founded
and served, from January of 1987 to 1995, as President of The Hayes Group, Inc.,
an international marketing and promotion company specializing in franchised
businesses. Since January of 1996, Mr. Hayes has served as a consultant to
franchisors. Mr. Hayes has approximately 21 years experience in the franchising
industry.
Donald E. Latin has served as a Director since July of 1995. He 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.
Michael Bidwell has been President of Rainbow since July of 1995 and
President of Mr. Rooter and Mr. Appliance since August of 1998. Mr. Bidwell was
a Rainbow franchisee in Tucson, Arizona from April of 1984 to June of 1995, and
a Mr. Rooter franchisee from August of 1992 to June of 1995. From 1986 to June
of 1995, Mr. Bidwell served as President of Ramsoo, Inc., an Arizona
corporation, which operated the Rainbow and Mr. Rooter franchises in Tucson,
Arizona. From November of 1987 until July of 1995, Mr. Bidwell was also a
franchisee and regional director for Worldwide Refinishing Systems, Inc., a
related party to the Company. Mr. Bidwell also serves as a Director of National
Accounts.
Dina Dwyer-Owens, Deborah Wright-Hood and Donald J. Dwyer, Jr. are the
children, of Theresa Dwyer and the late founder, Donald J. Dwyer.
BOARD PARTICIPATION AND STRUCTURE
The Board of Directors met five times during 1999 and additionally took
action 59 times by means of written consent. Each director attended all of the
meetings with the exception of Mr. Sirbasku, who was not present at two of the
meetings and Donald Dwyer, Jr., who was not present at two of the meetings.
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, comprised of Ms. Dwyer-Owens and Messrs. Hayes,
Latin and Sirbasku, met twice during 1999. All members attended.
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, 1999, or written
representations from certain reporting persons, the Company believes that all
filing
17
<PAGE> 20
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 1999 the following officers and
directors were late in filing the number of reports indicated as required by
Section 16(a): Messers. Tunmire (1), Donald Dwyer, Jr. (1), Buckley (1), Latin
(1), Hayes (1), Ms. Dwyer (1), Ms. Wright-Hood (1), and Ms. Dwyer-Owens (1). No
other officer, director, or ten percent shareholder was late in filing his or
its reports pursuant to Section 16(a).
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 $100,000 in 1999, for
services rendered for the Company and its Subsidiaries during the fiscal years
indicated:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- ---------------------
NAME AND SECURITIES UNDERLYING
PRINCIPAL POSITION YEAR SALARY($) BONUS($) OTHER($) OPTIONS
------------------ ---- --------- -------- -------- ---------------------
<S> <C> <C> <C> <C> <C>
Dina Dwyer-Owens 1999 $ 81,125 $ 300 -- --
President and CEO 1998 76,111 7,000 -- --
1997 76,677 -- -- --
Robert Tunmire, 1999 $125,215 $104,932 -- --
Executive Vice President 1998 218,616 20,000 -- --
1997 205,500(1) -- -- --
Thomas J. Buckley (2) 1999 $112,692 $ 1,555 -- 12,000
Vice President & Chief 1998 103,846 10,000 -- 15,000
Financial Officer 1997 38,462 -- -- 64,205
Michael Bidwell, 1999 $117,305 $ 96,816 -- 16,000
President of Rainbow, Mr. 1998 127,083 31,286 -- --
Rooter & Mr. Appliance 1997 121,626 13,170 -- 50,000
--
</TABLE>
- -----------------------------------
(1) Includes salary and any commissions from franchise sales.
(2) Mr. Buckley began employment in August, 1997.
THIS SECTION LEFT INTENTIONALLY BLANK.
18
<PAGE> 21
The following table sets forth information regarding options granted to the
named executive officers during the fiscal year ended December 31, 1999:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED TO EXERCISE
UNDERLYING EMPLOYEES OR BASE EXPIRATION
NAME OPTIONS GRANTED IN FISCAL YEAR PRICE (1) DATE
---- --------------- ------------------ --------- ----------
<S> <C> <C> <C> <C>
Dina Dwyer-Owens -- -- -- --
Robert Tunmire -- -- -- --
Thomas J. Buckley 10,000 8.1% $1.94 4/29/09
Thomas J. Buckley 2,000 1.6% $1.97 6/29/09
Michael Bidwell 16,000 13.0% $1.97 6/29/09
</TABLE>
- -------------------------
(1) Reflects the per share exercise price, which is equal to or greater
than the closing market price of the underlying security on the date of
grant.
The following table shows option exercises during the year ended December 31,
1999 and the value of unexercised options at December 31, 1999 for the named
executive officers who exercised options during 1999 or who had unexercised
options at December 31, 1999:
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>
Dina Dwyer-Owens 1,500 $ 915 3,000 / 2,000 $1,125 / $750
Robert Tunmire 30,100 $18,361 100,000 / -0- $0 / -0-
Thomas J. Buckley -- -- 26,862 / 62,523 $10,561 / $21,826
Michael Bidwell -- -- 55,000 / 36,000 $3,750 / $10,105
</TABLE>
- -----------------------------
(1) The closing price of the Common Stock on December 31, 1999 was $2.25
per share.
THIS SECTION LEFT INTENTIONALLY BLANK.
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<PAGE> 22
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1999, 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 OWNER NUMBER OF SHARES PERCENT (2)
- ------------------------------------ ---------------- -----------
<S> <C> <C>
Dwyer Investments, Ltd.(4) 3,900,736 55.7%
Donald J. Dwyer Family Trust(4) 112,766 1.6%
Theresa Dwyer(3)(6)(7) 4,014,802 57.3%
Donald J. Dwyer, Jr.(3)(5)(7)(8)(9) 979,246 14.0%
Dina Dwyer-Owens (3)(8)(10) 568,015 8.1%
Robert Tunmire (3)(8)(11) 683,934 9.6%
Deborah Wright-Hood(3)(8)(12) 567,284 8.0%
Thomas Buckley (3)(13) 32,382 *
John Hayes(14) 28,818 *
James Sirbasku(15) 19,000 *
Donald E. Latin(16) 18,000 *
Michael Bidwell(3)(17) 56,745 *
Darren Dwyer(3)(8) 533,215 7.6%
Douglas Dwyer(3)(8) 550,597 7.9%
Donna Dwyer-Van Zandt(3)(8) 559,879 8.0%
Renaissance Capital Growth & Income Fund III(18) 675,000 9.6%
All officers and directors as a group (nine persons)(5)(6)(19) 4,649,829 64.1%
</TABLE>
- ----------------------
*Less than 1%.
(1) Each beneficial owner's percentage ownership is determined by including
shares over which the person has voting power or dispositive power and
by assuming that options that are held by such person (but not those
held by any other person) and which are exercisable, have been
exercised. Except as noted, the Company believes that all persons named
in the table have voting and dispositive power with respect to all
shares of Common Stock beneficially owned by them.
(2) Based on a total of 7,005,914 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. On April 10, 1997, his Estate
distributed 4,077,501 shares of Common Stock beneficially owned by the
Estate to Ms. Theresa Dwyer with the remaining 115,423 shares
distributed to the Donald J. Dwyer Family Trust (the "Trust), of which
Ms. Theresa Dwyer and Mr. Donald Dwyer, Jr. are Co-Trustees. On
September 4, 1997, Ms. Theresa Dwyer contributed 3,899,182 beneficially
owned shares, and the Trust contributed 115,092 beneficially owned
shares, to Dwyer Investments, Ltd. (the "Partnership") in exchange for
equity interests. On April 10, 1998, Ms.
20
<PAGE> 23
Dwyer sold 13.3% limited partnership interests in the Partnership to
Mr. Donald J. Dwyer, Jr., Ms. Donna Dwyer-Van Zandt, Ms. Deborah
Wright-Hood, Ms. Dina Dwyer-Owens, Mr. Darren Dwyer, Mr. Douglas Dwyer,
as trustees of various generation-skipping trusts, and to Mr. Robert
Tunmire, individually, each acquiring a 13.3% limited partnership
interest. Ms. Dwyer, as managing partner, has sole dispositive power
over the stock owned by the Partnership. The principal address for the
Partnership and the Trust is c/o the Company, 1010 N. University Parks
Drive, Waco, Texas, 76707.
(5) Includes beneficial ownership of 295,000 shares of Common Stock
acquired in 1999 pursuant to a stock option agreement with the Company.
(6) Includes 3,900,736 shares of Common Stock of the Partnership over which
Ms. Theresa Dwyer has sole dispositive power as Managing Partner.
(7) Includes 112,766 shares of Common Stock of the Trust over which Ms.
Theresa Dwyer and Donald J. Dwyer, Jr., have shared voting power as
Co-Trustees.
(8) Includes 533,215 shares of Common Stock of the Partnership over which
the individual has full voting power, but no dispositive power.
(9) Includes 4,000 shares of Common Stock now exercisable or exercisable
within 60 days under an Incentive Stock Option Plan.
(10) Includes 4,000 shares of Common Stock now exercisable or exercisable
within 60 days under an Incentive Stock Option Plan.
(11) Includes 100,000 shares of Common Stock now exercisable or exercisable
within 60 days under an Incentive Stock Option Plan.
(12) Includes 5,000 shares of Common Stock now exercisable or exercisable
within 60 days under an Incentive Stock Option Plan.
(13) Includes 28,682 shares of Common Stock now exercisable or exercisable
within 60 days under an Incentive Stock Option Plan.
(14) Includes 28,568 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.
(15) Includes 14,000 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.
(16) Includes 11,000 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.
(17) Includes 55,000 shares of Common Stock now exercisable or exercisable
within 60 days under an Incentive Stock Option Plan.
(18) 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.
(19) Includes 250,250 shares of Common Stock now exercisable or exercisable
within 60 days under an Incentive Stock Option Plan.
21
<PAGE> 24
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The Company engages in a number of transactions with the Chairperson of
the Board and majority stockholder, Ms. Theresa Dwyer ("Ms. Dwyer"), and with
entities controlled by Ms. Dwyer ("Affiliates").
The Company currently leases its principal executive and administrative
facilities from an Affiliate under a lease expiring December 31, 2000, requiring
a monthly lease payment of approximately $31,000. In addition to rent, the
Company pays for repairs and maintenance, promotional materials and other
services from Affiliates. The Company expensed approximately $387,000 for such
rent and services in 1999 and $592,000 in 1998.
The Company recognized income from Affiliates for accounting, legal and
administrative services, interest income, product sales, commissions and
management fees totaling approximately $582,000 in 1999 and $631,000 in 1998.
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 reimbursed by the other companies for the
appropriate amount based on a pro rata allocation of the services provided to
each company.
Dina Dwyer-Owens, Deborah Wright-Hood, Donald J. Dwyer, Jr., Darren
Dwyer, Douglas Dwyer, and Donna Dwyer-Van Zandt are the children of Theresa
Dwyer ("Ms. Dwyer") and the late founder, Donald J. Dwyer, Sr. ("Mr. Dwyer").
In January of 1998, the Company agreed to purchase Rainbow
International Carpet Dyeing and Cleaning, Ltd., ("Rainbow Canada") from Ms.
Dwyer, for a purchase price of $250,000. Rainbow Canada owns the Rainbow
franchise rights for Canada and at the time of purchase had 20 franchisees
generating royalties of approximately $55,000 per year. The Company believes
that the purchase price approximated the price that would have been paid to an
unrelated third party in a similar transaction.
In 1993, the Company, Rainbow, and Mr. Dwyer entered into a
reorganization agreement (the "Reorganization Agreement") pursuant to which Mr.
Dwyer was issued 4,035,555 shares of the Company's common stock in exchange for
all of the outstanding stock of Rainbow and GBS (the "Exchange"), and GBS and
Rainbow became wholly owned subsidiaries of the Company. Of the shares issued,
340,300 shares were placed in escrow (the "Escrow Shares") until such time as
GBS met certain earnings requirements. However the material definitive terms of
the escrow were never resolved.
Ms. Dwyer, and Donald J. Dwyer, Jr., were appointed and qualified as
the personal representatives of Mr. Dwyer's Estate (the "Estate") and are now
serving as co-trustees of the Dwyer Family Trust (the "Trust"). In lieu of the
escrow arrangement contemplated by the Reorganization Agreement, and in order to
more accurately represent the intent of the parties, the Company and personal
representatives of Mr. Dwyer, the Estate and the Trust, entered into an
Agreement relating to the Escrow Shares, effective as of June 1, 1993 (the
"Agreement"). The Agreement provides for the cancellation of the Escrow Shares
and such shares have been returned to the authorized but unissued shares of the
Company's Common Stock as of June 1, 1993. Pursuant to the Agreement, 340,300
new shares of Common Stock (the "Contingent Shares") were reserved by the
Company's Board of Directors out of the Company's authorized but unissued Common
Stock and could have been issued to the successors and assigns of Mr. Dwyer if
certain earnings targets were achieved by GBS or if GBS was sold to a third
party in certain transactions as provided in the Agreement.
In July of 1998, the Company sold GBS as described in Note 4 to the
Consolidated Financial Statements. GBS had not achieved the required earnings
targets and the gain on the sale did not reach the required threshold amount.
Therefore, the Contingent Shares were not issued and are no longer reserved out
of the Company's authorized but unissued Common Stock.
The Company paid Don Latin, an independent director, $30,562 and
$31,400 for consulting services in 1999 and 1998, respectively. In addition, the
Company uses the consulting services of another independent director, John
Hayes, regarding public relations, marketing and special projects for the
Company. The Company paid approximately $123,000 and $110,000 for Mr. Hayes'
services in 1999 and 1998, respectively.
22
<PAGE> 25
At December 31, 1999 and 1998, the Company had accounts, interest and
notes receivable from related parties totaling approximately $2,229,000 and
$2,037,000, respectively, the majority of which was due from Affiliates. Ms.
Dwyer has guaranteed payment of all amounts due from Affiliates.
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 27.
2. Exhibits
<TABLE>
<S> <C>
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)
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)
</TABLE>
23
<PAGE> 26
<TABLE>
<S> <C>
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 Stock Option Agreement by and between the Company and James Sirbasku for 10,000 shares of the Company's Common
Stock(7)
10.42 Stock Option Agreement by and between the Company and John Hayes for 10,000 shares of the Company's Common Stock(7)
10.43 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(8)
10.46 Consulting Agreement by and between General Business Services, Inc., E.K. Williams & Co., and Paul Woody effective
July 1, 1996(8)
10.47 Stock Option Agreement by and between the Company and Paul Woody for 25,000 shares of the Company's Common Stock(8)
10.48 Agreement dated as of June 1, 1993, between the Company and the personal representatives of Mr. Donald J. Dwyer, Sr.,
his Estate and the Dwyer Family Trust regarding cancellation of 340,300 Escrow Shares(9)
10.49 Form Of Stock Option Agreement by and between the Company and Don Latin for 10,000 shares of the Company's Common
Stock(10)
10.50 1997 Stock Option Plan and Form Of Employee Stock Option Agreement(10)
10.51 Form Of Warrant Agreement and Warrant issued to V. Lee Russell(10)
10.52 Form Of Warrant Agreement and Warrant issued to David B. Duck.(10)
10.53 Form Of Stock Option Agreement by and between the Company and Target Enterprises, Inc. for 28,500 shares of the
Company's Common Stock.(10)
10.54 Form Of Stock Option Agreement by and between the Company and John Hayes for 11,420 shares of the Company's Common
Stock.(10)
10.55 Asset Purchase Agreement dated July 24, 1998, by and among The Dwyer Group, Inc., Glassmarks, Inc., Glass Doctor
Corporation and Barton G. Tracy.(11)
10.56 Stock Purchase Agreement dated July 24, 1998, by and between The Dwyer Group, Inc., Barton G. Tracy and Glassmarks,
Inc.(11)
10.57 Asset Purchase Agreement by and among Century Business Services, Inc., General Business Services, Inc., General Tax
Services, Inc., Edwin K. Williams & Co., GBS Acquisition Corp. and The Company.(12)
10.58 Form of Stock Option Agreement dated December 23, 1997, by and between the Company and Tom Buckley for 64,205 shares
of the Company's Common Stock.(13)
10.59 Form of Stock Option Agreement dated August 25, 1998, by and between the Company and Tom Buckley for 15,000 shares of
the Company's Common Stock.(13)
10.60 Form of Stock Option Agreement dated January 28, 1998, by and between the Company and James Sirbasku for 10,000
shares of the Company's Common Stock.(13)
10.61 Form of Stock Option Agreement dated August 25, 1998, by and between the Company and Donald E. Latin for 5,000 shares
of the Company's Common Stock.(13)
</TABLE>
24
<PAGE> 27
<TABLE>
<S> <C>
10.62 Form of Stock Option Agreement dated January 28, 1998, by and between the Company and John Hayes for 10,000 shares of
the Company's Common Stock.(13)
10.63 Form of Stock Option Agreement dated April 29, 1999 by and between the Company and Don Latin for 5,000 shares of the
Company's Common Stock.(14)
10.64 Form of Stock Option Agreement dated June 29, 1999 by and between the Company and Don Latin for 10,000 shares of the
Company's Common Stock.(14)
10.65 Form of Stock Option Agreement dated June 29, 1999 by and between the Company and Mike Bidwell for 16,000 shares of
the Company's Common Stock.(14)
10.66 Form of Stock Option Agreement dated June 29, 1999 by and between the Company and John Hayes for 10,000 shares of the
Company's Common Stock.(14)
10.67 Form of Stock Option Agreement dated April 29, 1999 by and between the Company and Tom Buckley for 10,000 shares of
the Company's Common Stock.(14)
10.68 Form of Stock Option Agreement dated June 29, 1999 by and between the Company and Tom Buckley for 2,000 shares of the
Company's Common Stock.(14)
21.1* List of Subsidiaries
27* Financial Data Schedules
</TABLE>
* 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 (SEC File 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. 0-15227).
(8) Incorporated by reference to the Registrant's Form 10-KSB for its
fiscal year ended December 31, 1996 (SEC File No. 0-15227).
(9) Incorporated by reference to the Registrant's Form 8-K dated as of July
31, 1997 (SEC File No. 0-15227).
(10) Incorporated by reference to the Registrant's Form 10-KSB for its
fiscal year ended December 31, 1997 (SEC File No. 0-15227).
(11) Incorporated by reference to the Registrant's Form 8-K dated as of July
24, 1998 (SEC File No. 0-15227).
(12) Incorporated by reference to the Registrant's Form 8-K dated as of July
31, 1998 (SEC File No. 0-15227).
(13) Incorporated by reference to the Registrant's Form 10-KSB dated as of
March 29, 1999 (SEC File No. 0-15227).
(14) Incorporated by reference to the Registrant's Form 10-QSB dated as of
July 30, 1999 (SEC File No. 0-15227).
- --------------------------
(b) Reports on Form 8-K
(1) None
25
<PAGE> 28
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
15th day of March, 2000.
The Dwyer Group, Inc.
By: /s/Thomas J. Buckley
--------------------------------------------------
Thomas J. Buckley, Vice President, Chief Financial
Officer and Treasurer
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 March 15, 2000
- ------------------------------- Board of Directors and Director
Theresa Dwyer
/s/ Dina Dwyer-Owens President and Chief March 15, 2000
- ------------------------------- Executive Officer
Dina Dwyer-Owens (Principal Executive Officer)
/s/ Robert Tunmire Executive Vice President March 15, 2000
- -------------------------------
Robert Tunmire
/s/ Thomas J. Buckley Vice President, Chief March 15, 2000
- ------------------------------- Financial Officer and Treasurer
Thomas J. Buckley (Principal Financial and Accounting Officer)
/s/ James Sirbasku Director March 15, 2000
- -------------------------------
James Sirbasku
/s/ Donald J. Dwyer, Jr. Director March 15, 2000
- -------------------------------
Donald J. Dwyer, Jr.
/s/ John P. Hayes Director March 15, 2000
- -------------------------------
John P. Hayes
/s/ Donald E. Latin Director March 15, 2000
- -------------------------------
Donald E. Latin
</TABLE>
26
<PAGE> 29
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants.....................................................................28
Consolidated Balance Sheets as of December 31, 1999 and 1998........................................................29-30
Consolidated Statements of Income for the years ended December 31, 1999 and 1998.......................................31
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) for the
years ended December 31, 1999 and 1998............................................................................32
Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998...................................33
Notes to Consolidated Financial Statements..........................................................................34-51
</TABLE>
27
<PAGE> 30
REPORT OF INDEPENDENT CERTIFIED PUBLIC 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, 1998 and 1999, and the related
consolidated statements of income, stockholders' equity and comprehensive income
(loss), and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our 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, 1998 and 1999, and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
BDO SEIDMAN, LLP
Dallas, Texas
March 1, 2000
28
<PAGE> 31
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 556,383 $ 498,199
Marketable securities, available-for-sale 883,717 1,973,761
Trade accounts receivable, net of allowance for doubtful
accounts of $220,242 and $175,036, respectively 829,866 684,955
Accounts receivable from related parties 55,581 766,623
Accrued interest receivable, including amounts due from
related parties of $200,033 and $149,643, respectively 234,034 199,953
Trade notes receivable, current portion, net of allowance for
doubtful accounts of $56,053 and $43,433, respectively 1,345,267 1,042,377
Inventories 31,779 46,013
Prepaid expenses 184,579 164,937
Federal income tax receivable 301,579 --
Notes receivable from related parties, current portion 682,878 660,300
----------- -----------
TOTAL CURRENT ASSETS 5,105,663 6,037,118
PROPERTY AND EQUIPMENT, at cost, net 1,036,107 1,103,862
NOTES AND ACCOUNTS RECEIVABLE FROM RELATED PARTIES 1,290,998 460,558
ASSETS HELD FOR SALE -- 141,575
TRADE NOTES RECEIVABLE, net of allowance for doubtful notes of
$872,467 and $898,039, respectively 3,601,029 3,077,918
GOODWILL, net 5,408,617 5,599,553
PURCHASED FRANCHISE RIGHTS, net 2,298,851 938,823
COVENANT NOT TO COMPETE, net 71,661 91,665
NET DEFERRED TAX ASSET 299,013 867,773
OTHER ASSETS 304,988 398,455
----------- -----------
TOTAL ASSETS $19,416,927 $18,717,300
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
29
<PAGE> 32
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable, trade $ 577,500 $ 326,464
Accounts payable to related parties -- 13,723
Accrued liabilities 1,399,378 1,166,439
Deferred franchise sales revenue 405,757 421,428
Litigation reserves 244,096 1,103,211
Current maturities of long-term debt 1,131,600 534,767
------------ ------------
TOTAL CURRENT LIABILITIES 3,758,331 3,566,032
LONG-TERM DEBT, less current maturities 1,481,707 1,799,821
DEFERRED FRANCHISE SALES REVENUE 417,432 734,318
------------ ------------
TOTAL LIABILITIES 5,657,470 6,100,171
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value - 500,000 shares authorized,
none outstanding -- --
Common stock, $.10 par value - 15,000,000 shares authorized;
7,645,185 issued and 7,005,914 outstanding in 1999;
7,228,585 issued and 6,999,360 outstanding in 1998 764,519 722,859
Additional paid-in capital 10,183,855 9,653,691
Retained earnings 4,131,821 2,596,872
Accumulated other comprehensive income (loss) (130,052) (61,657)
Treasury stock, at cost, 639,271 shares in 1999 and 229,225
shares in 1998 (1,190,686) (294,636)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 13,759,457 12,617,129
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 19,416,927 $ 18,717,300
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
30
<PAGE> 33
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Royalties $ 9,416,439 $ 8,483,380
Franchise fees 4,314,885 2,474,579
Sales of products and services 1,599,493 1,858,339
Tax services -- 673,234
Interest 542,944 594,391
Other 550,376 727,257
------------ ------------
TOTAL REVENUES 16,424,137 14,811,180
------------ ------------
COSTS AND EXPENSES:
General, administrative and selling 11,778,559 13,644,074
Costs of product and service sales 1,359,971 1,540,368
Cost of tax service revenues -- 494,080
Depreciation and amortization 811,925 695,526
Interest 87,410 97,134
------------ ------------
TOTAL COSTS AND EXPENSES 14,037,865 16,471,182
------------ ------------
OPERATING INCOME (LOSS) 2,386,272 (1,660,002)
------------ ------------
OTHER INCOME:
Gain on sale of assets -- 1,445,563
Gain on sale of securities -- 332,920
------------ ------------
TOTAL OTHER INCOME -- 1,778,483
------------ ------------
Income before income taxes 2,386,272 118,481
Income tax expense (851,323) (65,221)
------------ ------------
NET INCOME $ 1,534,949 $ 53,260
============ ============
EARNINGS PER SHARE - BASIC $ 0.22 $ 0.01
============ ============
EARNINGS PER SHARE - DILUTED $ 0.22 $ 0.01
============ ============
WEIGHTED AVERAGE COMMON SHARES 6,968,401 6,910,587
============ ============
WEIGHTED AVERAGE COMMON SHARES AND POTENTIAL
DILUTIVE COMMON SHARES 7,121,770 7,061,659
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
31
<PAGE> 34
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUTIY AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECMEBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
COMPREHENSIVE
STOCKHOLDERS' EQUITY INCOME (LOSS)
----------------------------- -----------------------------
SHARES DOLLARS 1998 1999
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
COMMON STOCK
Balance at January 1,1998 6,895,252 $ 689,526
Issuance of common stock 333,333 33,333
--------- ------------
Balance at December 31,1998 7,228,585 722,859
Issuance of common stock 416,600 41,660
--------- ------------
Balance at December 31, 1999 7,645,185 764,519
--------- ------------
ADDITIONAL PAID-IN CAPITAL
Balance at January 1,1998 9,020,358
Issuance of stock 633,333
------------
Balance at December 31,1998 9,653,691
Issuance of common stock 520,164
Issuance of warrants 10,000
------------
Balance at December 31, 1999 10,183,855
------------
RETAINED EARNINGS
Balance at January 1,1998 2,543,612
Net income 53,260 $ 53,260
------------
Balance at December 31,1998 2,596,872
Net income 1,534,949 $ 1,534,949
------------
Balance at December 31, 1999 4,131,821
------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at January 1,1998 74,012
Reduction in carrying value of investments
(net of tax of $21,774) (42,266) (42,266)
Foreign currency translation adjustment (93,403) (93,403)
------------
Balance at December 31,1998 (61,657)
Reduction in carrying value of investments ------------
(net of tax benefit of $63,824) (134,686) (134,686)
Foreign currency translation adjustment 66,291 66,291
------------
Balance at December 31,1999 (130,052)
------------
TREASURY STOCK
Balance at January 1,1998 (119,825) (94,171)
Purchase of treasury stock (109,400) (200,465)
--------- ------------
Balance at December 31,1998 (229,225) (294,636)
Purchase of treasury stock (410,046) (896,050)
--------- ------------
Balance at December 31,1999 (639,271) (1,190,686)
--------- ------------ --------- ------------
TOTAL STOCKHOLDERS' EQUITY 7,005,914 $ 13,759,457
========= ============
TOTAL COMPREHENSIVE INCOME $ (82,409) $ 1,466,554
========= ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
32
<PAGE> 35
THE DWYER GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net income $ 1,534,949 $ 53,260
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 811,925 695,526
Gain on sale of assets -- (1,445,563)
Gain on sale of securities -- (332,920)
Change in reserve for doubtful accounts 43,605 531,918
Notes received for franchise sales (2,621,964) (1,546,931)
Change in deferred tax asset 568,760 (437,994)
Other adjustments 6,280 (17,273)
Changes in assets and liabilities (net of business acquisition and
business dispositions):
Accounts and interest receivable (178,992) 40,414
Net change in receivables / payables to related parties (302,681) (236,402)
Inventories 14,234 (21,053)
Prepaid expenses (19,642) 88,935
Federal income tax receivable (301,579) --
Accounts payable and accrued liabilities (168,894) 851,688
Deferred franchise sales revenue 41,683 (140,615)
Other 41,820 (74,328)
----------- -----------
Net cash used in operating activities (530,496) (1,991,338)
----------- -----------
Investing activities:
Collections on notes receivable 1,390,617 1,323,826
Proceeds from sale of assets 150,182 3,609,793
Acquisition of business -- (3,225,000)
Purchases of property and equipment (305,718) (460,795)
Purchases of franchise rights (660,787) (586,564)
Acquisition of other assets (51,178) (31,574)
Purchase of marketable securities (139,350) (1,168,753)
Sale of marketable securities 1,169,685 1,855,002
Collections on notes receivable from related parties 146,982 150,863
----------- -----------
Net cash provided by investing activities 1,700,433 1,466,798
----------- -----------
Financing activities:
Purchases of treasury stock (896,050) (200,465)
Proceeds from exercise of stock options 561,824 --
Proceeds from borrowings -- 55,000
Payments on borrowings (777,527) (399,983)
----------- -----------
Net cash used in financing activities (1,111,753) (545,448)
----------- -----------
Net increase (decrease) in cash and cash equivalents 58,184 (1,069,988)
Cash and cash equivalents, beginning of period 498,199 1,568,187
----------- -----------
Cash and cash equivalents, end of period $ 556,383 $ 498,199
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
33
<PAGE> 36
THE DWYER GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Organization and Description of Business
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. In 1993, the Company was renamed The Dwyer Group,
Inc.
The Company provides a diverse array of specialty services
internationally through its service-based franchising businesses. The Company
currently owns six such businesses, which have an aggregate of approximately 750
franchises located in the United States and Canada, and through their master
licensees, approximately 250 franchisees in 19 other 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 of the Company to its mission and vision statements and the
established reputation of its management team.
In 1998 and 1999, the Company operated its businesses through the
following wholly owned subsidiaries:
o Mr. Rooter Corporation ("Mr. Rooter") is a franchisor of
plumbing repair and drain cleaning services under the service
mark "Mr. Rooter,"(R) with 191 franchise operations in the
United States and Canada, and, through master licensees, 72
franchises in eight other countries. In 1999, Mr. Rooter
accounted for approximately 32.3% of the Company's
consolidated revenues as compared to 28.4% in 1998.
o Rainbow International Carpet Dyeing and Cleaning Co.
("Rainbow") is a franchisor of carpet cleaning and dyeing, air
duct cleaning, and smoke, fire and water restoration services,
with 324 franchises in the United States and Canada and,
through master franchise licensees, 144 franchise operations
in 13 other countries. In 1999, Rainbow accounted for
approximately 17.9% of the Company's consolidated revenues as
compared to 17.8% in 1998.
o Mr. Electric Corp. ("Mr. Electric") is a franchisor of
electrical repair and service businesses under the service
mark "Mr. Electric"(R). Mr. Electric has 87 franchises in the
United States and Canada, and through master licenses, 25
franchise operations in two other countries. In 1999, Mr.
Electric accounted for approximately 10.0% of the Company's
consolidated revenues as compared to 8.8% in 1998.
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. The Company purchased the concept in
July 1998, from an unrelated third party. Glass Doctor has 46
franchisees, all in the United States. In 1999, Glass Doctor
accounted for approximately 14.5% of the Company's
consolidated revenues as compared to 5.5% in 1998.
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) and has
52 franchises in the United States and Canada, and two foreign
master licensees. In 1999, Aire Serv accounted for
approximately 7.0% of the Company's consolidated revenues as
compared to 4.5% in 1998.
o Mr. Appliance Corp. ("Mr. Appliance") is a franchisor of
businesses relating to service and repair of appliances (both
residential and commercial). Mr. Appliance(R)began franchising
in September 1996,
34
<PAGE> 37
and has 35 franchises in the United States. In 1999, Mr.
Appliance accounted for approximately 2.3% of the Company's
consolidated revenues as compared to 1.4% in 1998.
o The Dwyer Group National Accounts, Inc. ("National Accounts")
solicits commercial national account customers who can call a
toll-free 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.
In 1999, National Accounts accounted for approximately 9.3% of
the Company's consolidated revenues as compared to 10.3% in
1998.
o The Dwyer Group Canada, Inc. ("TDG Canada") was incorporated
in January of 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.
In 1999, TDG Canada accounted for approximately 2.6% of the
Company's consolidated revenues as compared to 1.8% in 1998.
o General Business Services, Inc. ("GBS") is a franchisor of
management services businesses. General Tax Services, Inc.
("GTS"), a wholly-owned, non-franchising subsidiary of GBS,
provides tax return preparation and tax research services to
GBS and EKW franchisees. In July 1998, the Company sold
substantially all of the assets and the business of GBS (see
Note 4). In 1998, GBS accounted for approximately 10.5% of the
Company's consolidated revenues.
o Edwin K. Williams & Co. ("EKW") is a franchisor of information
systems and financial management service businesses,
specifically designed to meet the special needs of small
businesses. In July 1998, the Company sold substantially all
of the assets and the business of EKW (see Note 4). In 1998,
EKW accounted for approximately 5.8% of the Company's
consolidated revenues.
The Company's primary sources of revenues are as follows:
o Royalties from existing franchisees based on a percentage of
each franchisee's gross sales. These fees generally range from
2% to 7% of the franchisee's sales, depending upon the
particular franchise concept and upon various other factors.
o Franchise fees generated from the sale of new franchise
territories.
o Sales of services to unrelated third parties by National
Accounts.
B. Inventories
Inventories consist of products to be sold to the Company's franchisees
and are stated at the lower of cost (first-in, first-out method) or market.
C. Property and Equipment
Property and equipment is 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 thirty 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.
The Company reviews the carrying value of property and equipment for
impairment whenever events or changes in circumstances indicate that such
carrying value may not be recoverable. Recoverability of an asset to be held and
used is measured by a comparison of the carrying amount of the asset to the
future net cash flows expected to be generated by the asset. If such asset is
considered to be impaired, the impairment recognized is measured by the amount
by which the carrying value of the asset exceeds the fair value of the asset.
There was no such impairment recorded in 1999 or 1998. Assets to be disposed of
are reported at the lower of the carrying amount or fair value less the
estimated cost of selling.
35
<PAGE> 38
D. Earnings Per Share (EPS)
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.
Following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computation:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
<S> <C> <C> <C>
Basic EPS $ 1,534,949 6,968,401 $ .22
=========== =======
Effect of dilutive securities
Warrants and options 153,369
----------
Diluted EPS $ 1,534,949 7,121,770 $ .22
=========== ========== =======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
<S> <C> <C> <C>
Basic EPS $ 53,260 6,910,587 $ .01
=========== =======
Effect of dilutive securities
Warrants and options 151,072
----------
Diluted EPS $ 53,260 7,061,659 $ .01
=========== ========== =======
</TABLE>
Options and warrants to purchase 490,325 and 595,325 shares of common
stock were outstanding during 1999 and 1998, respectively, but were not included
in the computation of diluted EPS because their exercise prices were greater
than the average market price of the common shares. Of such options and
warrants, 335,325 were still outstanding at the end of 1999.
E. Cash and Cash Equivalents
The Company considers all cash and highly liquid investments purchased
with an initial maturity of three months or less to be cash or cash equivalents.
The Company maintains its cash in bank deposit and money market accounts 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 includes, but is not
limited to, money market funds of $33,270 at December 31, 1999 and $76,703 at
December 31, 1998.
F. Franchise Operations
Revenues from the sale of 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 have been sold in the past which grant the regional franchisees the
right to sell individual franchises in their territory. The regional franchisees
generally receive commissions on individual franchises sold as well as a share
of royalties collected from franchisees in their territory. Interest on trade
notes receivable is accrued and recorded as income, net of an allowance for
uncollectible amounts, when due. In situations where revenues from franchise
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
36
<PAGE> 39
as amounts are collected or when collection is reasonably assured. Interest on
trade notes receivable resulting from sales recorded on the installment method
is recorded when received.
Revenue from franchise royalties is generally recognized when earned.
The Company collects and holds in escrow 2% of Rainbow, Mr. Rooter,
Aire Serv, Mr. Appliance, Mr. Electric and Glass Doctor franchisees' sales to be
used for national advertising. In order to accurately reflect the nature of such
advertising funds, the amounts related to such funds are excluded from the
Company's financial statements.
Revenue from product sales is recognized when orders are shipped.
Revenue from services is recognized upon the completion of the service.
G. Assets Held for Sale
At December 31, 1998, the Company owned real estate in Waco, Texas
which was held for resale and carried at fair market value. The real estate was
sold in 1999.
H. 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 net 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 itself and its
domestic Subsidiaries.
I. Goodwill and Covenant Not to Compete
Goodwill, which is the excess of the cost of acquiring Glass Doctor
over the fair value of the net assets acquired, is being amortized on a
straight-line basis over the expected period to be benefited, which is 30 years.
It is the Company's policy to evaluate the carrying amount of goodwill based on
an evaluation of such factors as the occurrence of a significant adverse event
or change in the environment in which the business operates, or if the expected
future net cash flows, undiscounted and without interest, would be less than the
carrying amount. An impairment loss would be recorded in the period in which
such determination is made based on the fair value of the business. There was no
such impairment recorded in 1999 or 1998. Glass Doctor was acquired in July of
1998 (see Note 5). Amortization expense was $190,936 in 1999 and $71,823 in
1998.
In connection with the acquisition, the Company also recorded $100,000
as the value of a covenant not to compete. This amount is being amortized over
five years, the life of the agreement. Amortization expense was $20,000 in 1999
and $8,334 in 1998.
J. Purchased Franchise Rights and Other Intangible Assets
The Company may from time-to-time 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 assets 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. There was no such impairment recorded in 1999 or 1998. The Company had
an investment of $2,298,851 and $938,823 in purchased franchise rights at
December 31, 1999 and 1998, respectively.
The costs of purchased franchise rights are amortized using the
straight-line method over their estimated lives of five to seven years. The
costs of other intangible assets, primarily patents and trademarks, are
amortized over fifteen years.
37
<PAGE> 40
K. Equity Method Investments
In 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 California which develops and provides
computerized bookkeeping products to conventional service stations, self-serve
stations and convenience store operations. The investment in SSCS has been
accounted for using the equity method of accounting. The cost of SSCS in excess
of amounts attributable to tangible assets at acquisition was approximately
$257,000 which was being amortized to operations over a 10 year period using the
straight-line method. In July 1998, the Company sold this investment for
$200,000 (See Note 4).
L. Marketable Securities
Marketable securities, available-for-sale are carried at fair value,
with unrealized gains or losses, net of tax, reported in accumulated other
comprehensive income in stockholders' equity. The increase or decrease in such
gains or losses in a given year is reported as comprehensive income. Realized
gains and losses are included in income.
At December 31, 1999 and 1998, the amortized cost and estimated fair
values of marketable securities are shown below.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------------------------------------------------
AMORTIZED NET UNREALIZED ESTIMATED FAIR
COST LOSSES VALUE
<S> <C> <C>
$ 916,687 $ 32,970 $ 883,717
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
- --------------------------------------------------------------
AMORTIZED NET UNREALIZED ESTIMATED FAIR
COST GAINS VALUE
<S> <C> <C>
$1,925,571 $48,100 $1,973,671
</TABLE>
During 1999, the Company purchased marketable securities at a cost of
$139,350 and sold marketable securities receiving proceeds of $1,169,685. At
December 31, 1999, the estimated fair value of marketable securities was
comprised of $505,775 in U.S. Treasury bills and $377,942 in common stocks and
mutual funds. At December 31, 1998, the estimated fair value of marketable
securities was comprised of $1,499,494 in U.S. Treasury bills and $474,267 in
common stock and mutual funds. At December 31, 1999 the Company held restricted
stock in an unrelated public company which was received from the sale of GBS and
EKW. At that date, the Company showed an unrealized loss, net of tax, of
$81,180. Such unrealized loss is included in accumulated other comprehensive
income on the Company's balance sheet.
M. Reclassifications
Certain reclassifications have been made to prior year financial
statements to conform to 1999 presentation.
N. 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.
38
<PAGE> 41
O. New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
which establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that entities recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Management does not believe that this will have a material impact
on the Company's financial statements. Implementation of this standard has
recently been delayed by the FASB for a twelve-month period through the issuance
of SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
deferral of effective date of FASB Statement No. 133". The Company will adopt
SFAS as required for the first quarterly filing of fiscal year 2001.
NOTE 2. COMMON STOCK, STOCK OPTIONS, WARRANTS AND CERTAIN TRANSACTIONS
A. Preferred Stock
The Company has authorized 500,000 shares of $1 par value preferred
stock, none of which is issued or outstanding. Such preferred stock may
be issued in one or more classes or series as determined by the Board
of Directors. The Board has the authority to fix the rights, terms of
redemption and liquidation preferences of any such series. The Company
currently has no plans for issuing preferred stock.
B. Common Stock
Treasury Stock
In December 1994, the Company's Board of Directors authorized the
repurchase of up to 355,500 shares of its common stock outstanding. At
December 31, 1996, the Company had 122,425 shares of stock in its
treasury at a cost of $96,121.
In June 1997, the Company issued 2,600 shares of treasury stock to
former employees in connection with their termination of employment,
leaving a balance of 119,825 shares of stock in its treasury at a cost
of $94,171.
In September 1998, the Company's Board of Directors authorized the
purchase of up to 100,000 shares of its common stock outstanding, and
in December 1998, increased that amount to 150,000 shares. In the
fourth quarter of 1998, the Company purchased 109,400 of such shares at
a cost of $200,465.
In 1999, the Company's Board of Directors increased the amount of
treasury stock authorized to be purchased to 550,000 shares. During
1999, the Company repurchased 410,046 shares at a cost of $896,050,
resulting in a balance of 639,271 shares of treasury stock at a cost of
$1,190,686.
Issuance of Common Stock
In July 1998, the Company issued 333,333 shares of its common stock in
connection with the purchase of Glass Doctor (see Note 5).
In September 1999, the Company issued 416,600 shares of its common
stock pursuant to the exercise of stock options by related parties. The
Company received total proceeds of $561,824 in the transactions.
Escrow Shares
In 1993, the Company, Rainbow, and Mr. Donald J. Dwyer, Sr., ("Mr.
Dwyer") entered into a reorganization agreement ("Reorganization
Agreement") pursuant to which Mr. Dwyer was issued 4,035,555 shares of
the Company's common stock, in exchange for all of the outstanding
stock of Rainbow and GBS (the "Exchange") and GBS and Rainbow became
wholly owned subsidiaries of the Company. Of the shares issued, 340,300
shares were placed in escrow (the "Escrow Shares") until such time as
GBS met certain earnings requirements. However the material definitive
terms of the escrow were never resolved.
39
<PAGE> 42
Theresa Dwyer ("Ms. Dwyer") and her son, Donald J. Dwyer, Jr., were
appointed and qualified and serve as the personal representatives of
Mr. Dwyer's Estate (the "Estate") and the Dwyer Family Trust (the
"Trust"). In lieu of the escrow arrangement contemplated by the
Reorganization Agreement, and in order to more accurately represent the
intent of the parties, the Company and personal representatives of Mr.
Dwyer, the Estate and the Trust, entered into an agreement relating to
the Escrow Shares, to be effective as of June 1, 1993 (the
"Agreement").
The Agreement provided for the cancellation of the Escrow Shares and
such shares were returned to the authorized but unissued shares of the
Company's Common Stock as of June 1, 1993. Pursuant to the Agreement,
340,300 new shares of Common Stock (the "Contingent Shares") were
reserved by the Company's Board of Directors out of the Company's
authorized but unissued Common Stock and could have been subsequently
issued to the successors and assigns of Mr. Dwyer if certain earnings
targets were achieved by GBS or if GBS was sold to a third party
resulting in gain in equal to or in excess of an amount specified in
the Agreement.
In July of 1998, the Company sold GBS as described in Note 4. GBS had
not achieved the required earnings targets and the gain on the sale did
not reach the threshold amount. Therefore, the Contingent Shares were
not issued and are no longer reserved out of the Company's authorized
but unissued Common Stock.
C. Warrants and Non-Employee Stock Options
In connection with the purchase of Mr. Rooter in 1989, the Company
issued options to purchase 385,000 shares of the Company's Common Stock
to Mr. Dwyer, as follows: (1) 135,000 shares at an exercise price of
$1.00 per share, and (2) 250,000 shares at an exercise price of $1.50
per share. In 1994, all of the options exercisable at $1.50 per share
and 45,000 of the options exercisable at $1.00 per share were
transferred to a related third party. The remaining 90,000 options were
owned by a partnership controlled by Ms. Dwyer. All of the above noted
options were exercised in April of 1999.
In 1996, in connection with a consulting agreement, the Company granted
options to purchase 25,000 shares of the Company's Common Stock at an
exercise price of $3.38 per share, to a non-employee of the Company.
These options vest on a graded schedule of 20% per year beginning July
1, 1996, and expire in July of 2001.
In 1996, in connection with the purchase of franchise rights, the
Company issued options to purchase 28,500 shares of the Company's
Common Stock, at an exercise price of $2.25 per share, to a
non-employee of the Company. These options vest on a graded schedule of
20% per year beginning March of 1998 and expire in March of 2003.
In 1997, in connection with a consulting arrangement, the Company
granted options to purchase the Company's Common Stock to a
non-employee of the Company under the following terms: (1) 25,000
shares at an exercise price of $3.75 per share until January of 1999,
and (2) 5,000 shares at an exercise price of $3.00 per share until
January of 1999. Such shares expired without being exercised.
In 1997, in connection with the purchase of franchise rights, the
Company granted options to purchase 60,000 shares of the Company's
Common Stock at an exercise price of $1.75 per share, to a non-employee
of the Company. These options expire in April of 2002.
In 1997, the Company issued warrants to two non-employees of the
Company in connection with a consulting arrangement. The warrants can
be converted to an aggregate of 109,225 shares of the Company's Common
Stock, at an exercise price of $4.12 per share. These warrants expire
in June of 2001.
In 1998, the Company issued warrants to purchase the Company's Common
Stock to former employees of the Company in connection with severance
agreements, as follows:
<TABLE>
<CAPTION>
NUMBER OF WARRANTS EXERCISE PRICE EXPIRATION DATE
------------------ -------------- ---------------
<S> <C> <C>
12,500 $2.63 April 2005
21,420 $2.00 August 2008
</TABLE>
40
<PAGE> 43
In 1999, the Company agreed to issue 100,000 warrants to purchase the
Company's Common Stock to a nonaffiliated third party in connection
with the purchase of franchise rights. The warrants were issued at an
exercise price of $3.00 per share and expire in 2005.
D. Stock-Based Compensation Plan
The Company sponsors a stock-based compensation plan (the "Plan"),
which is described below. The Company applies APB Opinion 25 and
related Interpretations in accounting for its stock-based compensation
plan. 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 plan. 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 Plan, the Company is authorized to issue up to 700,000 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, directors or consultants of the Company or any
subsidiary. In 1999 and 1998, the Company granted both incentive stock
options and nonqualified stock options.
Employee Stock Options
The Company granted a total of 123,500 and 129,500 awards in the form
of incentive stock options and nonqualified stock options under the
Plan in 1999 and 1998, respectively. Under the Plan, the options
granted have contractual terms of 10 years. The incentive options
granted generally vest at the rate of 20% per year, beginning on the
first anniversary of the date of grant. All options granted have an
exercise price that is equal to or greater than the fair market value
of a share of common stock on the grant date.
THIS SECTION LEFT INTENTIONALLY BLANK.
41
<PAGE> 44
A summary of the status of the Company's stock options as of December
31, 1999 and 1998, and the changes during the years ended on those
dates is presented below.
<TABLE>
<CAPTION>
1999 1998
-------------------------------- -------------------------------
# of Shares Weighted # of Shares Weighted
Underlying Average Underlying Average
Options Exercise Prices Options Exercise Prices
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of the year 506,726 $ 2.32 437,646 $2.41
Granted 123,500 $ 1.99 129,500 $1.93
Exercised (31,600) $ 1.64 -- N/A
Forfeited (501) $ 2.12 (60,420) $2.09
Expired -- N/A -- N/A
-------- --------- -----
Outstanding at end of year 598,125 $ 2.29 506,726 $2.32
======== =========
Exercisable at end of year 292,450 $ 2.62 263,326 $2.63
======== =========
1999 1998
---- ----
Weighted-average grant date fair value of all options
granted during the year $1.35 $1.34
</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 1999 and 1998: dividend
yield of 0%; 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 summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- --------------------------------
Wgtd. Avg.
Range of Number Remaining Wgtd. Avg. Number Wgtd. Avg.
Exercise Prices Outstanding Contr. Life Exercise Price Exercisable Exercise Price
--------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.64 to $3.00 518,125 7.5 years $2.07 218,450 $2.24
$3.01 to $4.25 80,000 5.6 years $3.73 74,000 $3.77
</TABLE>
Pro Forma Net Income (Loss) and Earnings (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
income (loss) and earnings (loss) per common share for 1999 and 1998
would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ---------- ----------- ----------
1999 1999 1998 1998
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
SFAS 123 Charge $ -- $ 107,000 $ -- $ 65,000
APB25 Charge -- -- -- --
Net Income (Loss) $ 1,535,000 $1,428,000 $ 53,000 $ (12,000)
Basic Earnings Per Share $ .22 $ .20 $ .01 $ .00
Diluted Earnings Per Share $ .22 $ .20 $ .01 $ .00
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future results.
42
<PAGE> 45
NOTE 3. 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 the approximate market rates
prevailing at the dates of the transactions. A summary of such notes receivable
as of December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Amounts due within one year, net of allowance for doubtful
amounts of $56,053 and $43,433 in 1999 and 1998, respectively $1,345,267 $1,042,377
Amounts due after one year, net of allowance for doubtful amounts
of $872,467 and $898,039 in 1999 and 1998, respectively 3,601,029 3,077,918
---------- ----------
Total notes receivable $4,946,296 $4,120,295
========== ==========
</TABLE>
Activity in the allowance for uncollectible amounts was as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Balance, January 1 $ 941,472 $ 816,054
Provision for doubtful accounts
404,964 531,918
Write-offs (417,916) (406,500)
--------- ---------
Balance, December 31 $ 928,520 $ 941,472
========= =========
</TABLE>
At December 31, 1999 and 1998, the amounts of deferred revenue from
franchise sales were $823,189 and $1,155,746, respectively. Fees from franchise
sales accounted for by the installment method are collectible in the years 2000
through 2007.
At December 31, 1999, interest rates on trade notes receivable ranged
from 7% to 12%.
NOTE 4. DISPOSITION OF ASSETS
In July of 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. Up to one-half of the Stock could have been earned based on
the renewal of certain GBS franchisees by December 31, 1998. The Company earned
18,891 shares based on these renewals and received these shares in 1999. The
other half of the Stock is being 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.
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>
43
<PAGE> 46
- ----------------
(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 $59,000 in 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.
The unaudited pro forma information for the period set forth below
gives effect to the disposition as if it had occurred at the beginning of the
period. 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
period presented nor does the information purport to be indicative of future
results.
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
-----------------
<S> <C>
Revenues $ 10,956,519
==============
Net Income $ 240,877
==============
Basic Earnings Per Share $ .03
==============
Diluted Earnings Per Share $ .03
==============
</TABLE>
NOTE 5. GLASS DOCTOR ACQUISITION
In July of 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. At the time of acquisition, Glass Doctor's
franchise system was comprised of 26 franchisees in the United States that were
generating over $33 million per year in system-wide sales. On a pro forma basis
in 1998, Glass Doctor would have added 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 111,195
----------
$5,902,861
==========
</TABLE>
The acquisition was accounted for as a purchase, and accordingly, the
operating results of Glass Doctor have been included in the accompanying
consolidated financial statements since the date of acquisition. The aggregate
acquisition cost was allocated to the net assets of Glass Doctor 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
Covenant Not to Compete 100,000
Goodwill 5,671,376
----------
$5,902,861
==========
</TABLE>
The unaudited pro forma information for the period set forth below
gives effect to the acquisition as if it had occurred at the beginning of the
period. 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
period presented nor does the information purport to be indicative of future
results.
44
<PAGE> 47
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
------------------
<S> <C>
Revenues $ 15,605,087
==================
Net Loss $ (49,179)
==================
Basic Loss Per Share $ (.01)
==================
Diluted Loss Per Share $ (.01)
==================
</TABLE>
NOTE 6. ACQUISITION OF FRANCHISE RIGHTS
In February of 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.
In March of 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.
In 1999, the Company purchased franchise rights for two territories
from nonaffiliated third parties. The total purchase price of approximately
$1,521,000 was capitalized as Purchased Franchise Rights. Of such purchase
price, approximately $661,000 was paid in cash. The Company issued a note
payable for $850,000 and common stock warrants valued at $10,000 to fund the
balance of the purchase price.
NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values of the Company's financial instruments (all of
which are held for nontrading purposes) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------- ---------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Trade notes receivable $ 4,946,296 $ 4,901,296 $ 4,120,295 $ 3,936,688
Notes payable $ 2,613,307 $ 2,597,956 $ 2,334,588 $ 2,161,482
</TABLE>
The carrying amount approximates fair value of cash and cash
equivalents. The carrying value of accounts receivable, accrued interest
receivable, accounts payable, accrued liabilities, and other payables
approximates fair value because of the relatively short maturities of these
items. The fair value for fixed rate trade notes receivable is estimated using
discounted cash flow analyses, using interest rates currently being offered for
notes with similar terms to franchisees of similar credit quality. The fair
value for notes payable is estimated using discounted cash flow analyses, using
an interest rate at which the Company could borrow additional funds.
NOTE 8. PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Land $ 57,159 $ 57,159
Building and improvements 184,131 180,720
Machinery and equipment 1,852,731 1,706,740
Furniture and fixtures 190,123 198,149
------------ ------------
2,284,144 2,142,768
Less accumulated depreciation 1,248,037 1,038,906
------------ ------------
$ 1,036,107 $ 1,103,862
============ ============
</TABLE>
45
<PAGE> 48
Depreciation expense for the years ended December 31, 1999 and 1998 was $369,791
and $367,288, respectively.
NOTE 9. INCOME TAXES
Federal income tax expense/benefit for the years ended December 31,
1999 and 1998 was as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Current tax expense $ 282,562 $ 503,215
Deferred tax expense (benefit) 568,761 (437,994)
---------- ----------
Total tax expense $ 851,323 $ 65,221
========== ==========
</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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Federal income tax at statutory rate $ 811,332 34% $ 40,284 34%
Goodwill amortization not deductible
for tax purposes --
State taxes 17,700 1% 6,200 5%
Other permanent differences 22,291 1% 18,737 16%
---------- ---------- ---------- ----------
Total tax expense $ 851,323 36% $ 65,221 55%
========== ========== ========== ==========
</TABLE>
The components of deferred income tax assets and liabilities at
December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Deferred tax liabilities:
Accelerated depreciation and amortization $ (217,850) $ (142,644)
Franchise agreements --
Intangibles (224,256) (27,253)
------------- -------------
Total deferred income tax liabilities (442,106) (169,897)
Deferred tax assets:
Patents and trademarks 21,489 21,282
Franchise agreements 27,606 15,266
Minimum tax credits 807,566 807,566
Reserves 558,789 864,652
Deferred fees 103,280 89,108
Other -- 17,407
------------- -------------
Total deferred tax assets 1,518,730 1,815,281
Valuation allowance (777,611) (777,611)
------------- -------------
Net deferred income tax asset $ 299,013 $ 867,773
============= =============
</TABLE>
The Company establishes valuation allowances in accordance with the
provisions of SFAS 109, "Accounting for Income Taxes". The Company continually
reviews the adequacy of the valuation allowance and is recognizing benefits only
as reassessment indicates that it is more likely than not that the benefits will
be realized.
46
<PAGE> 49
The Company expects to realize the net asset principally through the
implementation of reasonable tax strategies based on future income projections.
The valuation allowance as of December 31, 1999 and 1998 pertains primarily to
the minimum tax credits available for carryforward. Management has determined it
is unlikely that this component of the deferred tax asset will be realized.
At December 31, 1999, the Company has available unused preacquisition
minimum tax credit carryforwards of Ekwill Acquisition Corporation ("Ekwill"),
of which EKW is a wholly owned subsidiary. This minimum tax credit carryforward
has no expiration date. These preacquisition carryforwards may be used only to
offset taxable income, if any, of Ekwill and may not be used to offset future
taxable income of any other member of the group with which Ekwill files a
consolidated return. The amount of the preacquisition carryforwards which may be
applied in any one year is limited to the lesser of Ekwill's taxable income or
$67,000, as applied on a cumulative basis. Carryovers have only been recognized
for financial reporting purposes to the extent of Ekwill's taxable temporary
differences. To the extent that the carryovers exceed Ekwill's taxable temporary
differences, a valuation allowance has been created.
NOTE 10. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
The following notes payable and capital lease obligations were
outstanding at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Note payable to an individual pursuant to the acquisition of Glass Doctor, with
interest at 5 1/2%, payable in quarterly installments of $140,108, with the
remaining balance due in July 2002 $ 1,314,197 $ 1,786,017
8% note payable to an individual for purchase of franchise rights. Principal
payments of $450,000 in January 2000, $200,000 in January 2001 and $200,000 in
January 850,000 --
Notes payable to a finance company under performance guarantees, with interest
at approximately 15%, payable in monthly installments through 2001 317,494 205,000
Note payable with no interest to an individual. Minimum payments of $1,000 per
month with a balloon of the remaining balance due November 2002 90,850 103,850
Obligations under capital leases, interest of approximately 13.5%, due in
monthly installments through December 2000 18,071 40,660
10% note payable to a finance company, assumed in 1996 pursuant to a regional
franchise repurchase, due in installments through October 2000 12,458 22,507
12.5% note payable to a finance company, assumed in 1997 pursuant to a
performance guarantee, due in monthly payments of $787 per month including
interest, through December 2000 10,237 18,582
9.25% mortgage loan from a bank, collateralized by property in Waco, Texas -- 148,860
10% note payable to an employee due in monthly payments through June 1999 -- 6,998
13.2% notes payable to a finance company, assumed in 1997 pursuant to a
performance guaranty, due in monthly payments of $798 per month, including
interest -- 2,114
-------------- --------------
2,613,307 2,334,588
Less current portion 1,131,600 534,767
-------------- --------------
Notes payable and capital lease obligations - long term $ 1,481,707 $ 1,799,821
============== ==============
</TABLE>
47
<PAGE> 50
Maturities of notes payable and capital lease obligations are as
follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 1,131,600
2001 836,347
2002 571,876
2003 30,633
2004 12,000
2005 and beyond 30,851
-------------
$ 2,613,307
=============
</TABLE>
In February of 2000, the Company negotiated a $500,000 term loan and a
$500,000 line of credit with its bank. Of such total amount, $700,000 was
received and was used primarily to fund a portion of the purchase price of
regional franchise rights as described in Note 19.
NOTE 11. RELATED PARTY TRANSACTIONS
The Company engages in a number of transactions with its Chairperson of
the Board and majority stockholder, Ms. Theresa Dwyer ("Ms. Dwyer"), and with
entities controlled by Ms. Dwyer ("Affiliates"). The Company currently leases
its principal executive and administrative facilities from an Affiliate, under
an operating lease which expires on December 31, 2000, requiring monthly lease
payments of approximately $31,000. 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 approximately
$387,000 for these rents and services in 1999, and $592,000 in 1998.
The Company recognized income from Affiliates for accounting, legal and
administrative services, interest income, product sales commissions and
management fees of approximately $582,000 in 1999, and $631,000 in 1998. 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 January 1998, the Company agreed to purchase an Affiliate, Rainbow
International Carpet Dyeing and Cleaning, Ltd., ("Rainbow Canada"), from Ms.
Dwyer, for a purchase price of $250,000. Rainbow Canada owns the Rainbow
franchise rights for Canada and at the time of purchase had 20 franchisees
generating royalties of approximately $55,000 per year. The Company believes
that the purchase price approximates the price that would be paid to an
unrelated third party in a similar transaction.
In 1999 and 1998, the Company paid an independent director $30,562 and
$31,400, respectively, for consulting services. In addition another independent
director provides consulting services regarding public relations, marketing and
special projects to the Company. The Company paid approximately $123,000 and
$110,000, in 1999 and 1998, respectively, for these services.
In 1997, the Company entered into an agreement with related parties
regarding cancellation of certain shares of the Company's Common Stock. See Note
2 (B) - "Escrow Shares".
At December 31, 1999 and 1998, the Company had accounts, interest and
notes receivable from related parties totaling approximately $2,229,000 and
$2,037,000, respectively, the majority of which was due from Affiliates. Ms.
Dwyer has guaranteed payment of all amounts due from Affiliates.
48
<PAGE> 51
NOTE 12. 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 1993, the Company entered into a 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. Rooter and Aire Serv franchisees up to an aggregate amount of $10,000,000.
As of December 31, 1999, the aggregate principal amounts of outstanding
franchisee indebtedness under such agreement was approximately $748,000.
Pursuant to the terms of the agreement, the Company is liable for such
franchisee indebtedness in the event a default occurs and the Company has 180
days to correct the default. If the default is not corrected within such time,
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 and the debt is
assumed by that party. The Company also has the option of substituting its notes
receivable from franchisees of equal or greater value. During 1998 and 1999, the
Company did not exchange any such notes. Approximately $128,000 and $84,000 was
paid to SunTrust during 1999 and 1998, respectively, representing monthly
installments on behalf of franchisees in default. In 1998, management
discontinued the practice of guaranteeing franchise notes to third parties.
In September 1996, The Dwyer Group, Inc., 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 Company. The Company
receives 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 day period, then the Company, within ten days of delivery of such
Aging Report, shall pay all of such franchisee's delinquent scheduled payments,
together with all late charges then due. The Company paid approximately $69,000
and $39,000 on such delinquent notes in 1999 and 1998, respectively. The Company
was not required to make any such payments in 1997. At December 31, 1999, the
Company was contingently liable for approximately $540,000, relating to such
notes. In 1998, management discontinued the practice of guaranteeing franchisee
notes to third parties.
NOTE 13. EMPLOYEE BENEFIT PLANS
The Company sponsors 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 1999 or 1998. Each year the Board of Directors will determine the amount
of any Company contribution based upon the Company's profitability.
NOTE 14. COMMITMENT AND CONTINGENCIES
The Company leases its facilities from an Affiliate under an operating
lease expiring December 31, 2000. The approximate minimum rental commitment for
the year 2000 is $372,000. Rent paid to the Affiliate in both 1999 and 1998 was
approximately $372,000.
NOTE 15. 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, operations
or cash flow. Management has estimated that the potential loss due to these
proceedings does not exceed $250,000 at December 31, 1999. The Company accrued
for its estimate of such losses when they became probable and estimable. In
1999, the Company resolved lawsuits and a potential lawsuit and made payments of
$850,000. This amount was included in the accrual at December 31, 1998.
49
<PAGE> 52
NOTE 16. BUSINESS SEGMENTS AND FOREIGN OPERATIONS
(A) Business Segments
The Company has adopted Statement of Financial Standards No. 131,
Disclosure about Segments of an Enterprise and Related Information.
The Company operates in two principal areas, each of which is a
reportable segment: Franchising and National Accounts. Each of these
are strategic business units that offer different services and are
managed separately based on the fundamental differences in their
operations.
The Company's Franchising segment engages in the selling of new
franchises and the servicing of existing franchises, with its primary
source of revenues being franchise fees and royalties.
National Accounts solicits commercial accounts for their general repair
and emergency service needs. The order is filled through the Company's
network of franchisees or qualified subcontractors. Service fees are
its primary source of revenues.
Information by business segment is set forth below:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
Revenues:
<S> <C> <C>
Franchising $ 14,899,020 $ 13,284,506
National Accounts 1,525,117 1,526,674
------------ ------------
Total $ 16,424,137 $ 14,811,180
============ ============
Operating Income (Loss):
Franchising $ 2,485,591 $ (1,602,708)
National Accounts (99,319) (57,294)
------------ ------------
Total $ 2,386,272 $ (1,660,002)
============ ============
</TABLE>
<TABLE>
<CAPTION>
1999: NATIONAL
FRANCHISING ACCOUNTS TOTAL
-------------- -------------- --------------
<S> <C> <C> <C>
Identifiable assets $ 19,114,005 $ 302,922 $ 19,416,927
Depreciation and amortization 809,558 2,367 811,925
Net capital expenditures 305,718 -- 305,718
Purchases of franchise rights 660,787 -- 660,787
</TABLE>
<TABLE>
<CAPTION>
1998: NATIONAL
FRANCHISING ACCOUNTS TOTAL
-------------- -------------- --------------
<S> <C> <C> <C>
Identifiable assets $ 18,426,523 $ 290,777 $ 18,717,300
Depreciation and amortization 693,339 2,187 695,526
Net capital expenditures 456,997 3,798 460,795
Purchases of franchise rights 586,564 -- 586,564
</TABLE>
All of the Company's interest income and interest expense is associated
with Franchising.
50
<PAGE> 53
(B) Revenues from Foreign Operations
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
United States $ 15,291,710 $ 14,149,391
Canada 428,952 248,183
Other foreign countries 703,475 413,606
------------- -------------
Total $ 16,424,137 $ 14,811,180
============= =============
</TABLE>
All of the Company's long-lived assets are associated with United
States and Canadian operations.
NOTE 17. SUPPLEMENTAL CASH FLOW
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Cash paid for interest $ 88,705 $ 80,762
Cash paid for income taxes $ 615,000 $ 450,000
Value of common stock issued
for acquisition $ -- $ 666,666
Value of stock received for
sale of assets $ -- $ 178,500
Notes and warrants issued for
for purchase of franchise rights $ 860,000 $ --
</TABLE>
NOTE 18. COMPREHENSIVE INCOME
The components of comprehensive income (loss) at December 31, 1998 and
1999 were as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Foreign currency translation adjustment $ (27,112) $ (93,403)
Unrealized gain (loss) on available for sale securities (102,940) 31,746
---------- ----------
Total $ (130,052) $ (61,657)
========== ==========
</TABLE>
NOTE 19. SUBSEQUENT EVENTS
In February of 2000, the Company entered into an agreement to purchase
franchise rights from a nonaffiliated third party. The transaction also included
the purchase of notes receivable due from certain franchisees operating in the
purchased territory. The Company paid $800,338 in cash and executed a promissory
note for $1,750,000 in connection with the transaction.
Also in February of 2000, the Company negotiated a $500,000 term loan
and a $500,000 line of credit with its bank. Of such total amount, $700,000 was
received and was used primarily to fund a portion of the purchase price of
regional franchise rights and notes described above.
51
<PAGE> 54
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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)
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)
</TABLE>
<PAGE> 55
<TABLE>
<S> <C>
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 Stock Option Agreement by and between the Company and James Sirbasku for 10,000 shares of the Company's Common
Stock(7)
10.42 Stock Option Agreement by and between the Company and John Hayes for 10,000 shares of the Company's Common Stock(7)
10.43 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(8)
10.46 Consulting Agreement by and between General Business Services, Inc., E.K. Williams & Co., and Paul Woody effective
July 1, 1996(8)
10.47 Stock Option Agreement by and between the Company and Paul Woody for 25,000 shares of the Company's Common Stock(8)
10.48 Agreement dated as of June 1, 1993, between the Company and the personal representatives of Mr. Donald J. Dwyer, Sr.,
his Estate and the Dwyer Family Trust regarding cancellation of 340,300 Escrow Shares(9)
10.49 Form Of Stock Option Agreement by and between the Company and Don Latin for 10,000 shares of the Company's Common
Stock(10)
10.50 1997 Stock Option Plan and Form Of Employee Stock Option Agreement(10)
10.51 Form Of Warrant Agreement and Warrant issued to V. Lee Russell(10)
10.52 Form Of Warrant Agreement and Warrant issued to David B. Duck.(10)
10.53 Form Of Stock Option Agreement by and between the Company and Target Enterprises, Inc. for 28,500 shares of the
Company's Common Stock.(10)
10.54 Form Of Stock Option Agreement by and between the Company and John Hayes for 11,420 shares of the Company's Common
Stock.(10)
10.55 Asset Purchase Agreement dated July 24, 1998, by and among The Dwyer Group, Inc., Glassmarks, Inc., Glass Doctor
Corporation and Barton G. Tracy.(11)
10.56 Stock Purchase Agreement dated July 24, 1998, by and between The Dwyer Group, Inc., Barton G. Tracy and Glassmarks,
Inc.(11)
10.57 Asset Purchase Agreement by and among Century Business Services, Inc., General Business Services, Inc., General Tax
Services, Inc., Edwin K. Williams & Co., GBS Acquisition Corp. and The Company.(12)
10.58 Form of Stock Option Agreement dated December 23, 1997, by and between the Company and Tom Buckley for 64,205 shares
of the Company's Common Stock.(13)
10.59 Form of Stock Option Agreement dated August 25, 1998, by and between the Company and Tom Buckley for 15,000 shares of
the Company's Common Stock.(13)
10.60 Form of Stock Option Agreement dated January 28, 1998, by and between the Company and James Sirbasku for 10,000
shares of the Company's Common Stock.(13)
10.61 Form of Stock Option Agreement dated August 25, 1998, by and between the Company and Donald E. Latin for 5,000 shares
of the Company's Common Stock.(13)
</TABLE>
<PAGE> 56
<TABLE>
<S> <C>
10.62 Form of Stock Option Agreement dated January 28, 1998, by and between the Company and John Hayes for 10,000 shares of
the Company's Common Stock.(13)
10.63 Form of Stock Option Agreement dated April 29, 1999 by and between the Company and Don Latin for 5,000 shares of the
Company's Common Stock.(14)
10.64 Form of Stock Option Agreement dated June 29, 1999 by and between the Company and Don Latin for 10,000 shares of the
Company's Common Stock.(14)
10.65 Form of Stock Option Agreement dated June 29, 1999 by and between the Company and Mike Bidwell for 16,000 shares of
the Company's Common Stock.(14)
10.66 Form of Stock Option Agreement dated June 29, 1999 by and between the Company and John Hayes for 10,000 shares of the
Company's Common Stock.(14)
10.67 Form of Stock Option Agreement dated April 29, 1999 by and between the Company and Tom Buckley for 10,000 shares of
the Company's Common Stock.(14)
10.68 Form of Stock Option Agreement dated June 29, 1999 by and between the Company and Tom Buckley for 2,000 shares of the
Company's Common Stock.(14)
21.1* List of Subsidiaries
27* Financial Data Schedules
</TABLE>
* 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 (SEC File 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. 0-15227).
(8) Incorporated by reference to the Registrant's Form 10-KSB for its
fiscal year ended December 31, 1996 (SEC File No. 0-15227).
(9) Incorporated by reference to the Registrant's Form 8-K dated as of July
31, 1997 (SEC File No. 0-15227).
(10) Incorporated by reference to the Registrant's Form 10-KSB for its
fiscal year ended December 31, 1997 (SEC File No. 0-15227).
(11) Incorporated by reference to the Registrant's Form 8-K dated as of July
24, 1998 (SEC File No. 0-15227).
(12) Incorporated by reference to the Registrant's Form 8-K dated as of July
31, 1998 (SEC File No. 0-15227).
(13) Incorporated by reference to the Registrant's Form 10-KSB dated as of
March 29, 1999 (SEC File No. 0-15227).
(14) Incorporated by reference to the Registrant's Form 10-QSB dated as of
July 30, 1999 (SEC File No. 0-15227).
<PAGE> 1
EXHIBIT 21.1
NAMES OF SUBSIDIARY COMPANIES OF THE DWYER GROUP, INC.
1. Rainbow International Carpet Dyeing and Cleaning Co.
2. Mr. Rooter Corporation
3. General Business Services, Inc.
4. Edwin K. Williams & Co.
5. Aire Serv Heating & Air Conditioning, Inc.
6. Mr. Electric Corp.
7. Mr. Appliance Corp.
8. The Dwyer Group National Accounts, Inc.
9. Synergistic International, Inc.
10. The Dwyer Group Canada, Inc.
11. Ekwill Acquisition Corporation
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 556,383
<SECURITIES> 883,717
<RECEIVABLES> 2,464,748
<ALLOWANCES> 276,295
<INVENTORY> 31,799
<CURRENT-ASSETS> 5,105,663
<PP&E> 1,036,107
<DEPRECIATION> 0
<TOTAL-ASSETS> 19,416,927
<CURRENT-LIABILITIES> 3,758,331
<BONDS> 0
0
0
<COMMON> 764,519
<OTHER-SE> 12,994,938
<TOTAL-LIABILITY-AND-EQUITY> 19,416,927
<SALES> 1,599,493
<TOTAL-REVENUES> 16,424,137
<CGS> 1,359,971
<TOTAL-COSTS> 14,037,865
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87,410
<INCOME-PRETAX> 2,386,272
<INCOME-TAX> 851,323
<INCOME-CONTINUING> 1,534,949
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,534,949
<EPS-BASIC> .22
<EPS-DILUTED> .22
</TABLE>
