<PAGE> 1
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER
31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from
____________ to ____________
Commission file number: 0-21282
SWISHER INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
NEVADA 56-1541396
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6849 FAIRVIEW ROAD
CHARLOTTE, NORTH CAROLINA 28210
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(Address of principal executive offices) (Zip Code)
(704) 364-7707
Registrant's telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act:
NONE
Securities
registered pursuant to section 12(g) of the Act:
COMMON STOCK $.01 PAR VALUE
WARRANTS TO PURCHASE COMMON STOCK
---------------------------------
(Title of Class)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
--
Check if disclosure of delinquent filers pursuant 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-K or any amendment to this
Form 10-K [ ]
The registrant's revenues for the fiscal year ended October 31, 1997 were
$13,276,331.
The aggregate market value of the 2,222,271 shares of Common Stock held by
non-affiliates was $5,000,109.75 of June 26, 1998. The market value of the
shares was calculated based on the $2.25 price of such shares for the last trade
as reported by certain broker-dealer proprietary trading systems on such date.
As of June 26, 1998, 2,222,271 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE.
Transitional Small Business Disclosure Format: Yes No X
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<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Swisher International, Inc. and its wholly-owned subsidiaries
(collectively, the "Company") are engaged in the sale of certain products and
services primarily through a total of approximately 218 franchises included in
the Company's Hygiene, Swisher Maids, Surface Doctor and Swisher Pest Control
divisions.
The Company's Hygiene division offers services and products to a
broad spectrum of businesses in 38 states and Canada, through approximately 105
franchises, including two Company-owned franchises in Oklahoma and Florida and
six international master licenses. The Company's hygiene services and products
include restroom sanitization, anti-bacterial and degreasing handsoap, flying
insect control, air sanitizers and biological greasetrap and drain line
cleaners. The Company is an approved vendor for such national accounts as Burger
King, Wendy's, Shell and Dunkin' Donuts.
In February 1994, Swisher Maids, Inc., a wholly-owned subsidiary of
the Company, began operating a home cleaning business in Charlotte, North
Carolina, in order to introduce a home-cleaning franchise marketing program.
Swisher Maids currently has six home-cleaning franchises as well as
corporate-owned home-cleaning operations based in Charlotte, North Carolina and
Scottsdale, Arizona.
In July 1996, the Company acquired substantially all of the assets and
business operations of Surface Doctor, a provider of bath and kitchen
restoration services, from Professional Carpet Systems ("PCS"). Surface Doctor
has provided on-site bath and kitchen restoration services since November 1994
and has conducted its franchise program since 1994. Surface Doctor operates
through approximately 96 domestic franchises, seven Canadian franchises and two
international master licenses. Since July 1996, the Company has conducted
Surface Doctor operations through a wholly-owned subsidiary.
In September 1997, the Company acquired Carolina Termite & Pest
Control ("CTPC"), a pest control business based in North Carolina. As of October
31, 1997, the Company has four pest control franchises and one Company-owned
operation, all located in North Carolina. The Company conducts Swisher Pest
Control operations through a wholly-owned subsidiary.
The principal sources of the Company's revenues are initial franchise
fees and recurring franchise revenues (consisting of product sales, royalties,
service fees and marketing fees) relating to the Company's operations in each of
its four divisions. Revenues are also generated by Company-owned operations. The
Company provides a range of support services to franchisees, including training,
sales and service support, accounting services, and volume pricing on products
and supplies.
HYGIENE OPERATIONS
HYGIENE FRANCHISE SERVICES
The Company's Hygiene services and products are sold principally
through franchises to a broad spectrum of businesses throughout the United
States and Canada, including restaurants, retail stores, manufacturers,
commercial office buildings, health and childcare facilities, schools, military
bases and hotels. As of October 31, 1997, the Company operates nationally
through approximately 105 Hygiene domestic and Canadian franchisees and two
Company-owned operations. The Company began to offer Hygiene licenses on an
international basis in 1996, and has entered into six international master
license agreements covering the United Kingdom, Ireland, the Caribbean, Korea,
Hong Kong/Macau/China and Australia/New Zealand.
Franchisees generally visit retail business customers every seven to
ten days to replenish supplies and perform services. Services and products
offered by the Company's franchisees include sanitation and detail cleaning of
porcelain fixtures in restrooms; installation and replenishment of dispensers
for lanolin, soap and air fresheners; providing of hand sanitizing soap and hand
sanitizers in kitchens and restrooms for food service customers; biologically
treating drain lines for food service customers; providing flying insect control
systems for use in restaurants; providing grit soap for car dealerships, tire
stores and garages; biologically treating grease traps in restaurants; providing
and servicing air sanitizers in restrooms, waiting rooms and common areas; and
providing toilet tissue, hand towels and other paper products.
The Company's Hygiene franchisees market their services and products
to retail business customers based on factors such as enhanced appearance of the
customer's business premises, cost savings, convenience, reliability,
cleanliness and hygiene. The services offered by the Hygiene franchisees also
enable retail businesses to decrease operating costs by reducing pilferage of
supplies, inventory carrying costs, and training expense.
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HYGIENE REVENUES
The Company generates revenue through its Hygiene franchise
operations in the form of initial franchise fees, product sales to franchisees,
royalties, service fees, marketing fees and interest.
INITIAL FRANCHISE FEES. On the sale of a Hygiene franchise, the
Company receives an initial franchise fee which is calculated based upon the
population of the territory purchased by the franchisee. The Company
historically has financed a significant portion of the initial Hygiene franchise
fee payable by new franchisees and from time to time has financed 100% of
certain franchise fees. The Company has also offered financial assistance to
existing franchisees in the acquisition of competitors engaged in the hygiene
business. Management believes the Company has accelerated its penetration into
new markets by offering financial assistance to qualified candidates.
The franchise fee includes an initial two-week training of key
employees and an initial inventory of hygiene products. Continuing training is
provided to franchisees through regional meetings and an annual national
conference. The Company maintains a permanent staff which provides continuing
operating and marketing support to its franchisees. Franchisees are also
provided with an operations manual which provides guidelines for the operation,
management and marketing of Swisher franchises.
PRODUCT SALES TO HYGIENE FRANCHISEES. The franchise agreement
requires franchisees to purchase Hygiene products from approved vendors, which
allows the Company to maintain the quality and integrity of the products
delivered by franchisees to the retail business customer. The Company is the
primary approved product vendor at this time. Management believes that through
the Company's volume buying of Hygiene products; the Company provides quality
Hygiene products at competitive prices. The Company subjects new products to
test marketing and field tests at its own facilities prior to introduction to
its franchisees. Products provided by the Company to its franchisees include,
among others, cleaning agents, air sanitizers and fresheners, a variety of
handsoaps, flying insect spray, biological drain line and grease trap products
and dispensers.
ROYALTIES. The Company receives a royalty of 6% of a franchisee's
gross revenues, as defined in the franchise agreement.
SERVICE FEES. The Company receives a monthly service fee for services
provided to franchisees calculated on a sliding scale based on the franchisee's
annualized sales. Services provided by the Company include invoicing customers,
collection of accounts receivable, preparation of monthly financial statements
and monthly receivables aging reports, referral of national and regional
accounts for which the Company has obtained approved vendor status, and toll
free telephone answering services providing customers with account information
and franchisees with message services.
MARKETING FEES. The Company receives a national marketing fee, used
for marketing and advertising, equal to 2% of each franchisee's gross revenues.
INTEREST INCOME. Interest income received by the Company from
franchise operations represents income derived from financing franchise fees,
acquisition of competitors, and purchases of short-term investments.
HYGIENE FRANCHISE DEVELOPMENT. As of October 31, 1997, the Company
had 105 Hygiene franchises and Company-owned operations conducting business in
38 states, the District of Columbia and Canada. This compares to 99 and 93
franchises as of October 31, 1996 and 1995, respectively. The slower growth in
the number of domestic franchises in 1997 reflects the Company's broad
geographic market penetration and the limited number of major domestic unsold
markets.
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Set forth below is information concerning the location of the
Company's Hygiene franchises as of October 31, 1997. The territories below are
identified by the metropolitan or geographic area in which the franchise is
headquartered and do not, in many cases, reflect the boundaries of the
franchised territory.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ALABAMA INDIANA NEW YORK UTAH
Huntsville Indianapolis Brewster Salt Lake City
Mobile Buffalo/Rochester
Montgomery KANSAS Long Island VIRGINIA
Kansas City Queens Norfolk
ARIZONA Richmond
Phoenix KENTUCKY NEW MEXICO
Tucson Louisville Albuquerque WASHINGTON
Seattle
CALIFORNIA LOUISIANA NORTH CAROLINA Tacoma
Beverly Hills New Orleans Greenboro
East Bay Area Hickory WEST VIRGINIA
Fresno MARYLAND Raleigh Beaver
Long Beach Baltimore
Mission Viejo OHIO WISCONSIN
Redondo Beach MASSACHUSETTS Columbus Madison
Riverside/San Sterling Cincinnati Milwaukee
Bernardino Plymouth Toledo
Sacramento ALBERTA, CANADA
San Diego MICHIGAN OKLAHOMA Calgary
San Francisco Detroit Tulsa(2) Edmonton
San Jose Flint
Ventura Grand Rapids OREGON ONTARIO, CANADA
Kalamazoo Portland Guelph
COLORADO Lansing Ottawa
Denver Rochester Hills PENNSYLVANIA Toronto
Central
CONNECTICUT MINNESOTA Northern BRITISH COLUMBIA
South Windsor Winona Philadelphia Vancouver
Pittsburgh
DISTRICT OF MISSOURI Reading SASKATCHEWAN
COLUMBIA Springfield Saskatoon
Washington St. Louis RHODE ISLAND
North Kingstown CARIBBEAN(3)
FLORIDA SOUTH CAROLINA
Dade County NEBRASKA Columbia IRELAND(3)
Ft. Lauderdale Omaha Greenville
Orlando Myrtle Beach UNITED KINGDOM(3)
Sanibel Island NEVADA
Space Coast(2) Las Vegas TENNESSEE AUSTRALIA(3)
Tallahassee/ Reno (1) Bristol
Gainesville Chattanooga KOREA(3)
Tampa NEW HAMPSHIRE Knoxville
Ashland Memphis HONG KONG(3)
GEORGIA Nashville
Atlanta NEW JERSEY
Fanwood TEXAS
ILLINOIS Oakhurst Austin
Chicago (Metro) Rockaway Dallas
Chicago (Western) San Antonio
Chicago (Suburban)
</TABLE>
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(1) Represents franchises which have been sold but are not yet operational.
(2) The Space Coast and Tulsa franchises are currently owned and operated
by the Company.
(3) Represents master license agreement.
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COMPANY-OWNED HYGIENE OPERATIONS
The Company's owned hygiene operations as of October 31, 1997,
consist of operations in Tulsa, Oklahoma and Space Coast, Florida. The
Charlotte, North Carolina location was sold in the third Quarter of 1997. The
following table sets forth information concerning the revenues derived from the
Company-owned Hygiene operations:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------
1997 1996
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<S> <C> <C>
Hygiene revenues............................. $674,742 $1,672,947
</TABLE>
INTERNATIONAL HYGIENE LICENSE AGREEMENTS
During 1996 the Company implemented an international Hygiene
marketing program. As of October 31, 1997, the Company has entered into Master
License Agreements covering the United Kingdom, Ireland, the Caribbean, Korea,
Hong Kong/Macau/China and Australia/New Zealand.
The Master License Agreement grants a ten year, exclusive license to
conduct a Swisher Hygiene business using the Company's trademarks, service
marks, procedures and techniques within a specified country or territory. The
licensee has the right to establish its own Hygiene operations or to assign such
rights to one or more sublicensees. The Company retains a right of first refusal
to repurchase the Master License and also has the right to approve any proposed
transfer of the Master License. The Master License Agreement may be terminated
by the Company or by the licensee upon certain breaches or events of default.
The licensee is required to pay an initial license fee which has
ranged from approximately $60,000 to $280,000. The licensee is also required to
pay minimum monthly royalties which are based upon ongoing revenues attributable
to the Hygiene operations of the licensee and any of its sublicensees, and to
pay a percentage of initial fees received from sublicensees.
The Company provides initial training and ongoing support directly to
its licensees. However, licensees are responsible for the selection, training
and supervision of all of their respective sublicensees and for compliance with
applicable government regulations. Licensees must develop and maintain a minimum
number of company-owned or sublicensed Hygiene businesses and to make certain
minimum advertising and marketing expenditures. Licensees and their sublicensees
are required to purchase equipment and supplies from the Company or from
Company-approved vendors.
HYGIENE MARKET AND GROWTH STRATEGY
The Company estimates that there are approximately 10 significant
territories in the United States which are not served by the Company or its
existing Hygiene franchisees. In order to expand the market for Hygiene
franchises, the Company has developed a Canadian franchise sales program. Since
1993, the Company has sold seven franchises in Canada. The Canadian franchise
sales program is similar to the Company's franchise sales program in the United
States. The Company focuses its franchising activities on selected areas in an
effort to establish multiple franchises within a particular geographic area.
However, the Company has not had extensive experience with international
franchise operations in the past and, accordingly, the Company may be subject to
a number of risks in the development of international franchises.
The Company's Master License program represents the Company's effort
to expand its Hygiene Market. Given the penetration already achieved by the
Company's domestic Hygiene operations, the Company believes that international
markets offer a growth opportunity for Hygiene revenues. The Company has sold
six Hygiene Master Licenses to date, and international marketing efforts are
expected to increase during 1998. During 1997, the Company sold Master Licenses
for the United Kingdom, Hong Kong, Korea, and Australia.
The Company expects that its future growth in Hygiene revenues will
be derived from penetration of international markets, increased product sales to
franchisees, expansion of business accounts serviced by franchisees, sale of
additional franchises, and introduction of new products and services. The sale
of new franchises has the potential to generate franchise fees as well as
increase continuing revenues attributable to continuing product sales, royalties
and/or service fees. The Company markets its franchises and master licenses
directly through sales personnel located at the Company's headquarters. The
Company also solicits franchise and master license sales through advertisements
in business magazines and newspapers.
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SWISHER MAIDS OPERATIONS
SWISHER MAIDS SERVICES
As of October 31, 1997, the Company had 7 Swisher Maids franchises in
operation and 2 Company-owned residential maid services in Charlotte, North
Carolina and Scottsdale, Arizona. A Swisher Maids franchisee provides
residential maid services to its customers. A team of house-cleaning
professionals is assigned to each customer's home on a schedule that is set by
the customer. Cleaning services regularly performed include: Cleaning and
sanitizing bathroom fixtures and mirrors; cleaning counters, appliance surfaces,
floors and sinks in the kitchen; vacuuming carpets, hardwood, tile and vinyl;
dusting baseboards, sills, decor and furnishings; spot cleaning to remove
fingerprints and smudges; and other services as required by the customer.
Franchisees provide all necessary cleaning supplies and equipment, including
backpack vacuums, which allows customers to decrease their household expenses
for such items.
Franchises are granted for a specific geographic territory, but
unlike the Hygiene franchise, a Swisher Maids franchise entitles the franchisee
to operate from a single location within the specified territory. Each Swisher
Maids franchisee may offer and provide services only to residential customers
which are located within its franchised territory.
SWISHER MAIDS REVENUES
The Company generates revenues from its Swisher Maids franchise
operations in the form of franchise fees, royalties, service fees, marketing
fees and interest income.
INITIAL FRANCHISE FEES. The initial franchise fee payable to Swisher
Maids is a flat fee, plus $1.00 per qualified household within the territory
purchased by the franchisee. A "qualified household" is a household whose
minimum annual income is $50,000 or more, according to the most recent U.S.
Census Bureau data available or from data provided by a generally accepted
independent commercial demographic firm. The Company expects that territories
will generally contain not less than 5,000 nor more than 20,000 qualified
households. As with its sale of Hygiene franchises, the Company may finance all
or a portion of the initial franchise fee payable by a franchisee.
The franchise fee entitles the franchisee to initial training of two
employees. The Company also provides continuing operating and marketing support
to its franchisees, including an operations manual.
PRODUCT PURCHASES BY FRANCHISEES. The franchise agreement requires
franchisees to purchase house-cleaning supplies and equipment from approved
vendors, which allows the Company to maintain the quality and integrity of the
products delivered by franchisees to the retail customer. The Company does not
offer products to franchisees and does not receive any fee in connection with
purchases made by franchisees.
SWISHER MAIDS FRANCHISE DEVELOPMENT. As of October 31, 1997, the
Company had 7 franchises and Company-owned operations in Charlotte, North
Carolina and Scottsdale, Arizona. This compares to 11 Swisher Maids franchises
as of October 31, 1996. The decline experienced in 1997 reflects the
consolidation of certain franchise markets and the Company's intentions to
continue Swisher Maids operations at their existing 1997 level for the immediate
future.
SWISHER MAIDS FRANCHISE AGREEMENT
Swisher Maids franchisees are granted a sublicense to use the
"Swisher Maids" service mark and associated proprietary names and marks in an
exclusive franchised territory. Franchisees have the right to operate their
business from a single location within the territory for a five year term, which
is renewable subject to certain conditions being met. Other terms and conditions
of the franchise agreement, including the right of first refusal to repurchase a
franchise, the right to approve a transfer and receive a transfer fee, and the
termination provisions, are similar to those contained in the Company's Hygiene
franchise agreement. However, unlike the Hygiene franchise agreements, (i) the
Company cannot terminate the Swisher Maids franchise agreement for failure of
the franchisee to generate any specific level of revenue and (ii) the franchisee
is subject to a two year non-compete following expiration or termination of the
franchise agreement.
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COMPANY-OWNED SWISHER MAIDS OPERATIONS
The Company has repurchased a total of four Swisher Maids franchises,
of which one was closed, one consolidated with another, and two are currently
owned and operated by the Company. The following table sets forth information
concerning the revenues derived from Company-owned Swisher Maids operations:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------
1997 1996
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<S> <C> <C>
Swisher Maids................................ $812,212 $855,181
</TABLE>
SURFACE DOCTOR OPERATIONS
SURFACE DOCTOR SERVICES
The Company acquired the Surface Doctor franchise operations
effective July 1, 1996, from Professional Carpet Systems, Inc. (the "Seller").
The purchased assets consisted of all of Seller's rights under Surface Doctor
franchise agreements and all trademarks, and service marks, accounts and notes
receivable, inventories and equipment relating to the Surface Doctor operations.
When the Company acquired Surface Doctor, there were approximately 92
domestic and 9 foreign Surface Doctor franchisees. The Company began to offer
Surface Doctor franchisees in August 1996. As of October 31, 1997, there were 96
domestic, 7 Canadian Surface Doctor franchises, and 2 international master
licenses. Surface Doctor franchises offer mobile, on-location kitchen and bath
restoration services on cabinets, counter tops, and fixtures. Surface Doctor
restoration services offer customers a low-cost alternative to the replacement
of laminate, porcelain, fiberglass, tile, cultured marble, metal and related
surfaces. Restoration services are typically marketed to homeowners, hotels,
apartment complexes, office and industrial facilities, appliance rental
companies, and managers of residential and commercial properties.
SURFACE DOCTOR REVENUES
The Company generates revenue through its Surface Doctor franchise
operations in the form of initial franchise fees, product sales to franchisees,
royalties, and marketing fees.
INITIAL FRANCHISE FEES. On the sale of a Surface Doctor franchise,
the Company receives an initial flat rate franchise fee for each Designated
Marketing Area ("DMA"). A DMA is defined as a single county, parish or similar
geographic area containing at least 100,000 residents. Each franchisee has the
non-exclusive right to use the Surface Doctor names, marks and business methods
in the DMA. Within a DMA, the Company may not sell more than one Surface Doctor
franchise for each 100,000 residents.
Payment of the franchise fee entitles the franchisee to initial
training of key employees. The training course has a two-week curriculum of
classroom and hands-on training which is conducted at the Company's facilities.
Continued training is provided to franchisees through periodic meetings and
conferences. The Company maintains a permanent staff which provides continuing
operating and marketing support to its franchisees.
PRODUCT SALES TO SURFACE DOCTOR FRANCHISEES. The franchise agreement
requires franchisees to purchase Surface Doctor products from approved vendors,
which allows the Company to maintain the quality and integrity of the products
delivered by franchisees to the retail business customer. Management believes
that through volume purchasing, the Company provides quality products at
competitive prices. Products provided by the Company to its franchisees include,
tools and equipment, cleaning agents, safety equipment, supplies and marketing
and promotional materials.
ROYALTIES. Pursuant to the Company's current franchise agreement, the
Company receives a royalty on each franchisee's gross revenues. Royalties are
calculated on a sliding scale based on the franchisee's revenues, ranging from
4% to 6% of gross revenues, with a minimum monthly royalty of $200.
Substantially all of the franchisees as of October 31, 1997 are governed by the
prior Surface Doctor franchise agreement, which requires a $175 monthly royalty.
MARKETING FEES. Pursuant to the current franchise agreement, the
Company receives a monthly marketing fee equal to 2% of each franchise's gross
revenues. The marketing fees are used to fund marketing and advertising
activities and to fund various market research and development activities. The
Company has the authority and responsibility for directing the
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<PAGE> 8
application of the marketing fee. Substantially all of the franchisees as of
October 31, 1997 are governed by the prior franchise agreement, which requires a
$25 monthly marketing fee.
SURFACE DOCTOR FRANCHISE DEVELOPMENT. As of October 31, 1997, the
Company had approximately 103 Surface Doctor franchises conducting business in
the United States and Canada, and has entered into 2 Master Licenses agreements
in certain foreign countries.
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<PAGE> 9
Set forth below is information concerning the location of Surface
Doctor franchises existing as of October 31, 1997. (Except as indicated
otherwise, each market contains one franchise.)
<TABLE>
<S> <C> <C> <C>
ALABAMA ILLINOIS NEW YORK WASHINGTON
Birmingham Chicago (3) Queens Bainbridge Island
Tuscaloosa Lake County Staten Island
Suffolk County WEST VIRGINIA
ALASKA INDIANA Walden Charleston
Anchorage Indianapolis Westchester County Morgantown
Parkersburg
ARIZONA IOWA NORTH CAROLINA
Phoenix (2) Council Bluffs Charlotte (2) WISCONSIN
Tucson (2) Davenport Kitty Hawk Green Bay
Sioux City Milwaukee
ARKANSAS Des Moines (2) OHIO
Hot Spring Cleveland (2) WYOMING
KANSAS Columbus Casper
CALIFORNIA Kansas City Marietta Upton
Los Angeles (2) Topeka Toledo
Orange County BRAZIL
KENTUCKY OKLAHOMA San Paulo
COLORADO Paducah Oklahoma City
Colorado Springs Tulsa (2) BRITISH COLUMBIA,
Denver LOUISIANA CANADA
Fort Collins Jefferson Parrish OREGON Campbell River
Leadville New Orleans Portland
Stamboat Springs ONTARIO, CANADA
MARYLAND PENNSYLVANIA Amherstview
CONNECTICUT Easton Pittsburgh Carrying Place
Hartford Ottowa
New Haven MICHIGAN SOUTH CAROLINA Wiarton
Grand Rapids Charleston
FLORIDA Muskegon Fort Mill NEWFOUNDLAND,
Destin Greenville CANADA
Indian Harbor MINNESOTA Spartanburg Mount Pearl
Jacksonville Minneapolis
Orlando Rochester SOUTH DAKOTA NOVA SCOTIA,
Palm Harbor/ St. Cloud Sioux Falls CANADA
St. Petersburg St. Paul Halifax
Pensacola TENNESSEE
MISSISSIPPI Chattanooga
GEORGIA Gulfport/Biloxi Knoxville SINGAPORE/
Atlanta Nashville (2) INDONESIA/
Augusta MISSOURI MALAYSIA
Columbus Kansas City (2) TEXAS
Decatur Springfield El Paso
Jessup Houston (2)
Kennesaw NEBRASKA Lake Jackson
Savannah Gibbon Midland/Odessa
Tucker Plano
NEVADA
HAWAII Reno (2) VERMONT
Honolulu Burlington
NEW JERSEY
IDAHO East Brunswick VIRGINIA
Boise (2) Alexandria/Arlington
NEW MEXICO Fairfax County
Hobbs Hampton
Richmond
Virginia Beach
</TABLE>
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<PAGE> 10
SURFACE DOCTOR FRANCHISE AGREEMENT
The Company's Surface Doctor franchise agreement grants the
franchisee a nonexclusive geographical territory for a ten-year period, subject
to termination by the Company upon the occurrence of certain event, including
insolvency of franchisee, and breach of the franchise agreement by the
franchisee. The franchisee has the right to terminate the franchise agreement
upon 60 days' prior notice. The franchise agreement permits successive renewal
terms following expiration of the initial term if the franchisee is in
compliance with the terms of the agreement.
COMPANY-OWNED SURFACE DOCTOR OPERATIONS
The Company acquired Surface Doctor effective July 1, 1996.
Company-owned Surface Doctor operations generated revenues of $45,042 and
$84,427 for the fiscal years ended October 31, 1997 and October 31, 1996,
respectively. The Atlanta, Georgia operation was sold in January 1997, producing
a gain on the sale of approximately $38,000.
SURFACE DOCTOR MARKET AND GROWTH STRATEGY
The Company expects that future growth of Surface Doctor operations
will be derived from sale of additional franchises, increased product sales to
franchisees, and introduction of new products and services. The sale of new
franchises has the potential to generate franchise fees as well as increase
revenues attributable to product sales, royalties and service fees. Unlike the
Company's Hygiene operations, which have already achieved substantial market
coverage in the United States, the Company believes that substantial growth
opportunities continue to exist for Surface Doctor in the United States.
Although there are in excess of 100 Surface Doctor franchises in the United
States, such franchises are granted on a nonexclusive basis with a population
requirement of just 100,000 people per franchise. As a result, the Company
expects that the number of Surface Doctor franchises in the United States will
exceed both Hygiene and Swisher Maids franchises. The Company also believes that
a demand exists for Surface Doctor franchises in foreign countries, and has as
of October 31, 1997 a total of 9 franchises and master license agreements
located in Canada, Brazil and Singapore/Indonesia/Malaysia. The Company markets
Surface Doctor franchises directly through sales personnel located at the
Company's headquarters, and through advertisements placed in magazines and other
business publications. The Company also places newspaper advertisements in
select markets which are targeted by the Company for expansion.
PEST CONTROL
The Company acquired Carolina Termite and Pest Control in September
1997. The Company-owned operation, located in Monroe, North Carolina, produced
approximately $171,000 in revenues and operating income of $2,000 in the two
months owned in the 1997 fiscal year.
Subsequent to the acquisition and prior to year end, the Company
entered into four pest control franchise agreements, all of which are located in
North Carolina.
The Company plans to increase the number of both franchises and
Company-owned operations. Future growth in franchises is expected from
conversions of existing pest control businesses to the Swisher franchise system
and through start up businesses with qualified candidates.
PROPRIETARY RIGHTS
The "SWISHER," "Swisher Maids," "S" design and "Surface Doctor" marks
have been registered as service marks on the principal register of the United
States Patent and Trademark Office. Management of the Company also believes the
Company has developed proprietary rights in the Swisher trade name and in
associated common law trademarks including "Sanitized by Swisher," "Swisher
System" and "Swisher Hygiene." All of the Company's service marks, trade names
and common law trademarks are licensed to franchisees under franchise agreement
provisions strictly regulating their use.
The Company intends to file all required renewal applications and to
take other steps reasonably necessary to maintain the integrity of its services
marks, trade names and other proprietary names and marks against unauthorized
use. Failure to defend and protect such service marks and other proprietary
names and marks could adversely affect the Company's sales of franchises and
continuing operations. The Company knows of no current infringing uses.
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<PAGE> 11
COMPETITION
The Company believes that the markets for its Hygiene, Maids and
Surface Doctor services are highly fragmented. The barriers to entry in each
market are low and, accordingly, competition is intense. The vast majority of
the Company's Hygiene competitors are small, locally-owned janitorial or hygiene
service firms, as well as a number of regional hygiene competitors based in
Florida, Texas and Missouri, while Maid Service competitors consist generally of
local independent operators and a small number of national or regional
companies, including franchise operators. Surface Doctor competitors consist
primarily of providers of traditional remodeling services, as well as small
operators who offer certain of the refinishing services which are provided by
Surface Doctor franchises. Pest Control competitors consist of both national
organizations and individually-owned local operations.
The success of the Company depends in great part on the operating
performance of its Hygiene, Swisher Maids and Surface Doctor franchisees and
their ability to increase market penetration and establish name awareness. The
Company believes that the principal competitive factors in the Hygiene, Swisher
Maids and Surface Doctor industries are quality and timeliness of services,
price, convenience and the mix of services offered. Management believes that
both Hygiene and Surface Doctor franchises compete effectively on the basis of
price, convenience, quality and timeliness of service. Although Swisher Maids
franchises have, for a variety of reasons, competed less favorably in the market
for residential maid services, the Company believes that the recent
consolidation of certain Maids franchises has strengthened the competitive
position of the Company's Maids operations. There nevertheless can be no
assurance that the Company and its franchisees will be able to compete
successfully in their respective markets.
REGULATION
The Company is subject to Federal Trade Commission ("FTC") regulation
and state laws which regulate the offering and sale of franchises. The Company
is also subject to a number of state laws which regulate substantive aspects of
the franchise/franchisee relationship, such as business opportunity laws. The
FTC's Trade Regulation Rule on Franchising (the "FTC Rule") requires the Company
to furnish all prospective franchisees with a franchise offering circular
containing information prescribed by the FTC Rule.
Several states regulate the offer and sale of franchises by requiring
both disclosure to prospective franchisees and, in almost all cases,
registration of the franchise offering. Certain states also regulate the
franchise relationship by requiring that the franchisor deal with its
franchisees in good faith, prohibit interference with the right of free
association among franchisees, limit the imposition of standards of performance
on a franchisee, and regulate discrimination among franchisees in charges,
royalties and fees. Such laws also restrict a franchisor in the termination of a
franchise agreement by, for example, requiring "good cause" to exist as a basis
for the termination, advance notice to the franchisee of the termination, an
opportunity to cure and an obligation to repurchase inventory or pay other
compensation. These provisions have not had a material effect on the Company's
operations.
Although the Company is not aware of any pending franchise
legislation which is likely to affect its operations, there can be no assurance
that future franchise legislation will not impose additional requirements or
expenses on the Company's business. The Company believes that as of October 31,
1997, its operations are in compliance with the FTC Rule and state franchise
laws. However, as of the date of the filing of this report, the Company is not
in compliance with the FTC Rule due to the late filings of reports with the
Securities and Exchange Commission.
The Company may also be subject to government regulation concerning
the offer and sale of licenses and franchises in foreign countries. However, by
offering a master franchise or master license covering an entire country, the
Company expects to minimize the extent to which its international operations
will be governed by the laws of foreign jurisdictions. The Company's master
licensee or master franchisee will, however, be required to comply with the laws
and regulations, if any, governing the sale of franchises within its country or
territory. Government regulations in foreign jurisdictions may, therefore, slow
the development of international franchise operations.
The Company is also subject to the Fair Labor Standards Act, which
governs such matters as minimum wages, overtime and other working conditions. A
significant number of the personnel employed by the Company are paid at rates
related to the federal minimum wage and, accordingly, increases in the minimum
wage will increase the Company's labor costs.
Federal and state environmental regulations have not had a material
adverse effect on the Company's operations.
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<PAGE> 12
EMPLOYEES
The Company employed approximately 127 persons at June 1, 1998.
Approximately 78 persons are employed in the Company's franchise operations, and
approximately 49 persons are employed in the Company-owned Hygiene and Swisher
Maids operations. The Company's employees are not covered by any collective
bargaining agreements. Management believes that its relations with employees are
satisfactory.
ITEM 2. PROPERTIES
The Company maintains its administrative facilities at 6849 Fairview
Road, Charlotte, North Carolina 28210. These facilities consist of approximately
13,000 square feet of office space which is leased from a partnership which is
beneficially owned 100% by Mr. Swisher. The Company has occupied the premises
since February 1993. The Company's lease extends through March 2000 and requires
rental payments of $10,134 per month during the term of the lease, subject to
increase in accordance with the rate of increase of the Consumer Price Index.
ITEM 3. LEGAL PROCEEDINGS
As of October 31, 1997, the Company is not a party to any legal
proceeding and is not aware of any pending or threatened legal proceeding which
could reasonably be expected to have a material adverse effect upon the
Company's business, operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the three months ended October 31, 1997.
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<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and public warrants were quoted on the
Nasdaq National Market under the symbol "SWSH" and "SWSHW," respectively, until
May 11, 1998, at which time Nasdaq delisted the Company's stock due to (i) the
Company's delinquent filings with respect to Form 10-KSB for the fiscal year
ended October 31, 1997 and the Form 10-QSB for the quarter ended January 31,
1998, and (ii) the failure of the Company to satisfy the filing requirement set
forth in NASD Marketplace Rule 4310(c)(14). The Company's Common Stock and
public warrants are not listed or quoted on any exchange or quotation system.
The Company's securities, however, may be traded on certain proprietary trading
systems operated by various broker-dealers. The Company is in the process of
bringing its filings current and working toward relisting on Nasdaq or an
exchange. See "Management's Discussion and Analysis of Results of Operations -
Additional Factors to Consider." The following table sets forth the range of
high and low closing bid prices, as reported by the Nasdaq National Market
during the past two fiscal years. The prices set forth below reflect interdealer
quotations, without retail markups, markdowns or commissions, and do not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1996 FISCAL YEAR
First quarter............................................... $4.88 $3.00
Second quarter.............................................. 5.00 3.13
Third quarter............................................... 7.00 4.00
Fourth quarter.............................................. 5.75 4.50
1997 FISCAL YEAR
First quarter............................................... 4.88 9.13
Second quarter.............................................. 7.13 13.00
Third quarter............................................... 6.25 12.68
Fourth quarter.............................................. 7.13 9.68
</TABLE>
Neither the Company's Common Stock nor its public warrants have been
listed or quoted on any exchange or quotation system since May 11, 1998. The
last sale price of a share of Common Stock as reported by the Nasdaq National
Market on May 10, 1998 was $5.75.
As of June 1, 1998, there were approximately 102 record owners of the
Company's Common Stock.
The Company's Common Stock historically has experienced significant
price fluctuations. Any purchase or sale of a significant number of shares
during a relatively short time period may have significantly affected the bid
and asked quotations for the Common Stock. Other factors that may cause the
market price of the Common Stock to fluctuate include quarterly fluctuations in
results of operations, announcements of new services or products by the Company,
market conditions specific to the Company's industry and market conditions in
general. In addition, in recent years the stock market in general has
experienced significant price and volume fluctuations. These fluctuations, which
may be unrelated to the operating performance of specific companies, have had a
substantial effect on the market price for many small capitalization companies
such as the Company. Factors such as those cited above, as well as other factors
that may be unrelated to the operating performance of the Company, may adversely
affect the price of the Common Stock.
Dividends
The Company has never paid any cash dividends on its Common Stock. It
is the current policy of the Company not to pay cash dividends on the Common
Stock. Any payment of cash dividends in the future will be dependent upon 11 the
Company's financial condition, results of operations, current and anticipated
cash requirements, plans for expansion, restrictions, if any, under debt
obligations, as well as other factors that the Board of Directors deems
relevant. The loan agreement between the Company and its bank prohibits the
payment of dividends without the bank's prior written consent.
Recent Sales of Unregistered Securities
The Research Works, Inc. exercised a warrant to purchase 40,000
Swisher restricted shares of common stock on October 27, 1997. The warrants were
exercised at a rate of $2.875 per share or a total of $115,000. A one year
holding period
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<PAGE> 14
applied to the shares unless registered sooner with the United
States Securities and Exchange Commission. The shares remain restricted and have
not yet been registered.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND SELECTED FINANCIAL DATA
APPEARING ELSEWHERE IN THIS ANNUAL REPORT.
The Company operates in four principal business divisions: Hygiene,
Swisher Maids, Surface Doctor, and Swisher Pest Control. Each division operates
primarily through franchises which generate franchise sales and annuity revenues
(i.e., services fees, product sales, royalties and marketing fees). Three of the
divisions also conduct certain Company-owned operations and all of the
divisions, on occasion, may repurchase and operate franchises until the
franchise can be resold.
Initially, the Company derived its revenues exclusively from
Company-owned Hygiene operations. During fiscal 1990, the Company began selling
its 18 majority-owned Hygiene subsidiaries as franchises in their existing
markets and began selling other franchises in new markets. This repositioning of
the Company was a direct result of management's determination in late 1989 that
an opportunity existed to accelerate the Company's penetration of the hygiene
market and increase its profitability through a program of selling franchises.
At the end of fiscal 1993, the Company had substantially completed its
repositioning to a franchise business having sold as franchises all of its
majority-owned subsidiaries. As of October 31, 1997, the Company maintains
Company-owned Hygiene operations servicing portions of Florida and Oklahoma.
As part of its strategy for expanding franchise operations, realizing
certain efficiencies and economies of scale, and improving profitability, the
Company began expansion into other business markets and into other geographic
markets. In February 1994, the Company's wholly-owned Swisher Maids subsidiary
began operating in Charlotte, North Carolina in preparation for initiating the
Swisher Maid franchise marketing program. In October 1994, the company sold its
first Swisher Maids franchises. In July 1996, the Company acquired Surface
Doctor, which then had 92 domestic and 9 Canadian franchises in operation. In
September 1997, the Company commenced operations of Swisher Pest Control. As
part of its geographic expansion, the Company began offering Hygiene and Surface
Doctor master licenses in certain foreign markets in 1996.
Management's decision to reposition the Company as a franchisor and
to operate in several markets has resulted in substantial decreases in
Company-owned operations, but substantial increases in revenues from franchise
operations. Revenues from franchise operations have increased consistently from
$1,412,000 in fiscal 1991 to $11,573,000 in fiscal 1997. One component of
franchise revenues is annuity revenues, consisting of product sales, royalties
and marketing fees paid by franchisees, which represented approximately 71% and
63% of the Company's revenues in fiscal 1997 and 1996, respectively. The
Company's profitability will continue to be largely dependent upon annuity
revenues.
The other component of franchise revenues is franchise sales. Initial
franchise fees have accounted for 10% and 7% of the Company's revenues in fiscal
1997 and 1996, respectively. From April 1993 to October 1997 the total number of
Swisher Hygiene franchises grew from 46 to 105. Since the Company acquired
Surface Doctor in July 1996, the Surface Doctor domestic franchises increased
from 92 to 96 and international franchises remained at 9. Swisher Maids
franchises decreased from 19 in 1995 to 7 in 1997 due to the consolidation of
certain franchise markets. The Company completed its acquisition of Swisher Pest
Control in September 1997 and added 4 franchises before year-end.
Assets held for sale consist of assets purchased by the Company from
certain franchisees who failed to comply with the terms of their franchise
agreements. The Company sold 2 franchises during fiscal 1997 which had been
acquired from certain franchisees and as of October 31, 1997 holds 4 franchises
for sale. The Company intends to sell such assets as soon as possible. Notes
receivable primarily consist of all or a portion of the initial franchise fees
financed by the Company. The notes are collateralized by the franchises' assets
and, in some cases, are personally guaranteed by the franchisees. Notes
receivable, net of imputed discounts and allowances, were $3,743,000 and
$2,900,000 as of October 31, 1997 and 1996, respectively. Goodwill includes the
excess of acquisition costs over fair value of the net assets acquired in the
Surface Doctor and Carolina Termite and Pest Control transactions, each of which
is being amortized over a 20 year period.
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<PAGE> 15
The following table sets forth the percentage of total revenues of
certain items included in the Company's statement of operations for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER
-------------------------------
1997 1996
----- -----
<S> <C> <C>
Revenues:
Product sales 40.4% 31.1%
Service fees 13.8% 15.7%
Royalties 16.0% 15.4%
Marketing fees 0.6% 0.4%
Initial franchise fees - hygiene 6.9% 4.0%
Initial franchise fees - maids -- (0.4)%
Initial franchise fees - Surface Doctor 2.6% 3.3%
Initial franchise fees - pest control 0.7% --
Company-owned hygiene operations 5.1% 15.8%
Company-owned maids operations 6.1% 8.1%
Company-owned Surface Doctor operations 0.3% 0.8%
Company - owned pest control operations 1.3% --
Interest income 2.1% 2.7%
Sale of customer lists -- --
Gain on sale of Company-owned hygiene
operations 3.7% 2.7%
Other income 0.4% 0.4%
----- -----
Total Revenues 100.0% 100.0%
Expenses:
Selling, general and administrative expenses 46.8% 45.6%
Cost of product sales 32.1% 29.0%
Company-owned hygiene operations 4.4% 13.5%
Company-owned maids operations 6.1% 9.4%
Company-owned Surface Doctor operations 1.1% 1.1%
Company-owned pest control operations 1.3% --
Interest expense 1.6% 2.2%
----- -----
Total Expenses 93.4% 100.8%
</TABLE>
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED OCTOBER 31, 1997 ("1997 FISCAL YEAR") AND OCTOBER 31,
1996 ("1996 FISCAL YEAR").
Total revenues increased by approximately 25% to $13,276,000 in the
1997 fiscal year from $10,587,000 in the 1996 fiscal year. The increase in
revenues was due primarily to an increase in the Company's franchise annuity
revenues (consisting of product sales, service fees, royalties and marketing
fees), which totaled $9,399,000 in the 1997 fiscal year as compared to
$6,621,000 in the 1996 fiscal year. Revenue from Company-owned hygiene, Surface
Doctor, pest control, and maids operations totaled $1,703,000 and $2,613,000
during the 1997 and 1996 fiscal year, respectively. The decrease in revenues
from Company-owned operations resulted primarily from the sale of the Houston
Hygiene franchise in the third Quarter of 1996 and the sale of the Charlotte
operation in the third Quarter of 1997. The sales of the Charlotte and Houston
Hygiene franchises are the main components of the gain on sale of Company-owned
hygiene operations, respectively for the 1997 and 1996 fiscal years. Completion
of initial hygiene franchise fees increased from $424,000 in the 1996 fiscal
year to $911,000 in the 1997 fiscal year.
Total expenses increased by approximately 16% from $10,675,000 in the
1996 fiscal year to $12,406,000 in the 1997 fiscal year. Selling, general and
administrative expenses increased by approximately 29% from $4,823,000 in the
1996 fiscal year to $6,220,000 in the 1997 fiscal year.
- 15 -
<PAGE> 16
Income before taxes increased from a loss of ($88,000) in the 1996
fiscal year to $871,000 in the 1997 fiscal year. The income before taxes in 1997
was generated primarily from total Hygiene operations (approximately $1,449,000)
partially offset by total Surface Doctor operations (an operating loss of
approximately $539,000). The Company's income tax expense increased from $66,000
in the 1996 fiscal year to $339,000 in the 1997 fiscal year, resulting in net
income increasing from a loss of $(155,000) in the 1996 fiscal year to $532,000
in the 1997 fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its growth through cash from
operations. In addition, the Company used the proceeds of a public offering
completed in April 1993 to finance the expansion of its franchise system.
During the 1997 Fiscal Year, net cash used by operations was
approximately $560,000. Following the purchase of Carolina Termite and Pest
Control, net cash used by investing activities was approximately $1,759,000.
Cash provided by financing activities was $1,173,000, primarily due to
$1,233,000 of proceeds from increases in long-term debt.
Working capital decreased to $1,007,000 at October 31, 1997 from
working capital of $1,418,000 at October 31, 1996. Increases of $789,000 in
accounts payable, and $412,000 of borrowings from the Company's line of credit,
along with a decrease of $1,147,000 in cash and cash equivalents, were partially
offset by increases of $1,440,000 in accounts receivable, $400,000 in current
notes receivable, and $316,000 in current related party receivables.
At October 31, 1997, other assets consisted principally of notes
receivable in the amount of $2,728,000, goodwill, net of accumulated
amortization, of $1,167,000, and covenants not to compete, net of accumulated
amortization, of $599,000. Notes receivable are comprised of notes executed by
franchisees in payment of initial franchise fees which are due beyond the
ensuing year, goodwill relates to the purchases of Surface Doctor and Carolina
Termite and Pest Control (CTPC), while the covenants not to compete arose from
the purchase of CTPC.
The Company's total current liabilities were $4,682,000 at October
31, 1997, an increase of $1,286,000 over total current liabilities of $3,396,000
at October 31, 1996. Long-term debt was $1,477,000 at October 31, 1997, an
increase of $618,000 over long-term debt of $859,000 at October 31, 1996, due to
a $995,000 increase following the purchase of CTPC, including a covenant not to
compete, and a $220,000 capital lease. The increases were partially offset by a
decrease of $368,000 in note payable to a finance company.
The Company's material commitments at October 31, 1997 consisted
primarily of office facility, equipment and vehicle leases in varying amounts
through 2002.
INFLATION
The Company does not believe that inflation will have a material
impact on the Company's future operations.
ADDITIONAL FACTS TO CONSIDER
FORWARD-LOOKING STATEMENTS. This report contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act and are subject to the safe harbors
created thereby. These forward-looking statements include the plans and
objectives of management for future operations, including plans and objectives
relating to (i) the continued expansion of the Company's Hygiene, Swisher Maids,
Pest Control and Surface Doctor franchise programs, (ii) the introduction of new
products to be sold to franchisees, (iii) the continued successful operation of
franchised businesses by Hygiene, Surface Doctor, Pest Control and Swisher Maids
franchisees, (iv) successful collection of the Company's notes receivable,
particularly those executed by franchisees in the payment of initial franchise
fees, (iv) the Company's ability to re-sell certain Hygiene businesses which
have been repurchased from franchisees and (v) the Company's ability to expand
into international and new domestic markets. The forward-looking statements
included herein are based on current expectations that involve a number of risks
and uncertainties. These forward- looking statements were based on assumptions
that the Company would continue to develop and introduce new products on a
timely basis, that competitive conditions within the Company's markets would not
change materially or adversely, that demand for the Company's Hygiene, Swisher
Maids, Pest Control and Surface Doctor franchises would remain strong, and that
there would be no material adverse change in the Company's operations or
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions, and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking information will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such information
should
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<PAGE> 17
not be regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.
DEPENDENCE ON PERFORMANCE OF FRANCHISEES. The Company derived
approximately 71% and 63% of its revenues in the 1997 and 1996 fiscal years,
respectively, from annuity revenues. Annuity revenues consist of product sales,
royalties and marketing fees paid by franchisees. Royalties and marketing fees
are generally calculated based on a percentage of gross revenues or sales
generated by the franchisee. Although franchisees generate a portion of their
gross revenues from national accounts secured by the Company, the generation of
a majority of gross revenues is directly dependent upon the franchisee's own
marketing efforts. While the Company's franchise support and marketing services
are intended to maximize the marketing results obtained by the franchisee, there
is no assurance that marketing undertaken by franchisees will be successful or
result in any increase in gross revenues. The Company's profitability will be
largely dependent upon revenues from product sales to franchisees and revenues
from royalties, marketing fees and service fees for the foreseeable future.
RELIANCE ON FRANCHISE SALES. During the fiscal years ended October
31, 1997 and 1996, initial franchise fees charged to franchisees accounted for
approximately 10% and 7%, respectively, of the Company's revenues. As the number
of Company franchises and resulting annuity revenues have increased, the
Company's dependence on new franchise sales has declined. However, the Company's
future revenue growth will continue to depend, in part, upon sales of new
franchises. The Company's ability to sell franchises is impacted by a number of
factors including, among others, availability of qualified franchise candidates
located within specific geographic markets, competition and general economic
conditions. The Company is currently not in compliance with the FTC Rule on
franchise sales due to outstanding reports required to be filed with the SEC,
which affects the Company's ability to sell certain United States franchisees.
Following the filing of these outstanding documents with the SEC, the Company
expects the return of eligibility to sell domestic franchises. In order to
expand its geographic markets, the Company has recently established
international marketing programs for its Hygiene and Surface Doctor franchises.
However, there can be no assurance the Company will continue to sell franchises
at historical levels. A decline in franchise sales may have an adverse impact on
the Company's operations.
RISK OF FINANCING FRANCHISE FEES. The Company may finance a portion
of the initial franchise fee payable in connection with the purchase of a
franchise. The Company attempts to qualify each franchisee to whom financing may
be provided, and generally receives a security interest in the franchise rights,
equipment, accounts receivable and inventory of the franchise to secure the
amount financed. For so long as the Company continues to finance new franchise
sales, the Company will be exposed to a risk of defaults or delinquencies in
payments. A significant rate of defaults or delinquencies on notes receivable
would likely have a material adverse effect on the Company's operating results
and financial condition.
RISK OF FRANCHISE TERMINATION. Should a franchisee fail to comply
with the terms of its franchise agreement, the Company would generally remarket
the franchise on behalf of the franchisee. The Company might also acquire and
operate the franchise during the period of time in which it is being remarketed.
As of October 31, 1997, the Company owns and operates a total of four franchises
which were acquired from certain franchisees. The Company is subject to a number
of risks and competitive factors with respect to Company-owned franchises, and
there can be no assurance the Company will be successful in operating or
remarketing franchises. The Company has commenced arbitration proceedings in
Atlanta, Georgia against two Surface Doctor franchisees for alleged breaches of
their franchise agreements. Although the Company intends to vigorously pursue
its rights and to defend against any counterclaims, there can be no assurance
that disputes with franchisees will not have an adverse affect on the Company's
financial condition or operating results.
FUTURE CAPITAL REQUIREMENTS. At October 31, 1997, the Company had
current assets of approximately $5.7 million and current liabilities of
approximately $4.7 million. However, approximately $4.5 million of the Company's
current assets consisted of net accounts receivable and current notes
receivable. Also at October 31, 1997, the Company had other assets of
approximately $5.5 million, consisting primarily of long-term notes receivable
and intangible assets. The inability to timely collect accounts and notes
receivable could have an adverse affect on the Company's ability to fund its
future operations. The inability to collect long-term notes receivable or to
realize the value attributed to intangible assets could also have an adverse
affect on the Company's future liquidity and financial condition. There can be
no assurance that the Company will be able to raise any additional capital which
might be required, or that the terms on which such capital are available will be
acceptable to the Company.
ACQUISITION STRATEGY. The Company completed the acquisition of
Carolina Termite and Pest Control ("CTPC") on September 1, 1997 as part of the
Company's strategy for expanding its operations, realizing certain efficiencies
and economies of scale, and improving the Company's profitability. Acquisitions
typically require investment of operational and financial resources, integration
of dissimilar operations, assimilation of new employees, diversion of management
time and resources, increases in administrative costs, and additional costs
associated with debt or equity financing. There can be no assurance that the
acquisition of CTPC or any future acquisition by the Company will not have an
adverse effect on the Company's results of operations or result in dilution to
the existing shareholders.
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<PAGE> 18
PRICE FLUCTUATIONS. The public market for the Company's Common Stock
has experienced significant price fluctuations. Factors such as fluctuations in
results of operations, conditions specific to the Company's markets, and
conditions in securities markets in general, may cause the market price of the
Company's securities to fluctuate, perhaps substantially. In addition, in recent
years the stock market has experienced significant price and volume
fluctuations. These fluctuations, which are often unrelated to the operating
performance of specific companies, have had a substantial effect on the market
price for many small capitalization companies. Factors such as those cited
above, as well as other factors which may be unrelated to the operating
performance of the Company, may adversely affect the price of the Company's
securities in future periods.
KEY EMPLOYEE. The Company's success depends to a significant extent
upon the continued efforts of Patrick L. Swisher, its President and Chief
Executive Officer. The Company maintains a key-man life insurance policy of
$500,000 on the life of Mr. Swisher. The loss of the services of Mr. Swisher
could have a material adverse effect on the Company. The Company's future
success will depend in part upon its continuing ability to attract and retain
highly qualified personnel to manage the future growth of the Company.
COMPETITION. The sale of franchise businesses is highly competitive.
In marketing its franchises, the Company must compete with a rapidly growing
number of large, well-capitalized organizations which sell franchises on a
regional or national basis. Many of these firms have significantly greater
financial, marketing and personnel resources than the Company. There is no
assurance the Company will continue to compete successfully for qualified
franchise candidates.
NO DIVIDENDS ANTICIPATED. The Company does not anticipate paying any
dividends on its Common Stock in the foreseeable future. The Company intends to
retain profits to fund growth and expansion. The Company's bank loan agreement
prohibits the payment of dividends without the bank's prior consent.
DELISTING OF SECURITIES FROM NASDAQ SMALL CAP MARKET. On May 11,
1998, the Company's securities were delisted from the Nasdaq National Market for
(i) the Company's delinquent filing of its Form 10-KSB for the fiscal year ended
October 31, 1997 and the Form 10-QSB for the quarter ended January 31, 1998, and
(ii) the Company's failure to satisfy the filing requirement set forth in NASD
Marketplace Rule 4310 (c)(14). The delisting could materially adversely affect
the trading market for the Common Stock and/or the Public Warrants. Thus, as of
that date the Company's securities were not listed or quoted on any exchange or
quotation system. The Company's securities, however, may be traded on certain
proprietary trading systems operated by various broker-dealers.
The Company has filed a request with the NASD Review Counsel to
review the Hearing Panel's decision to delist its securities. If the Review
Counsel does not reverse the Hearing Panel's decision to delist the Company,
then in order to be relisted on the Nasdaq National Market, it will be necessary
for the Company to re-apply for initial listing once it determines that it can
meet the initial listing requirements. The initial listing criteria for the
Nasdaq National Market, insofar as they would be applicable to the Company,
require, generally, net tangible assets of $6,000,000, pretax income (in the
latest fiscal year or 2 of the last 3 fiscal years) of $1,000,000, a public
float of 1,100,000 shares, a market value of the public float of not less than
$8,000,000, and a minimum bid price of $5.00. Once a company is accepted for
relisting on the Nasdaq National Market, it will be required to maintain, among
other requirements, net tangible assets of $4,000,000, a public float of 750,000
shares, a market value of the public float of not less than $5,000,000, and a
minimum bid price of $1.00. At the date of the filing of this report, the
Company would not qualify for initial listing on the Nasdaq National Market.
The Company is not certain when it will be able to meet the initial
listing requirements for the Nasdaq National Market. Although the Company is
considering possible alternatives for meeting the asset requirements, there is
no assurance that the Company will be successful in meeting the requirements for
relisting on the Nasdaq National Market.
If the Company cannot meet the criteria for initial listing on the
Nasdaq National Market, then the Company may decide to apply for listing on the
Nasdaq SmallCap Market or on another exchange. The initial listing criteria for
the Nasdaq SmallCap Market, insofar as they would be applicable to the Company,
require, generally, net tangible assets of $4,000,000, a public float of
1,000,000 shares, a market value of the public float of not less than
$5,000,000, and a minimum bid price of $4.00. Once a company is accepted for
listing on the Nasdaq SmallCap Market, it will be required to maintain, among
other requirements, net tangible assets of $2,000,000, a public float of 500,000
shares, a market value of the public float of not less than $1,000,000, and a
minimum bid price of $1.00.
The Company is also considering whether to, simultaneously with its
appeal of the Hearing Panel's decision, apply for initial listing with one of
the aforementioned markets. If the Company does apply for such a listing, there
can be no assurance when, if at all, the Company may be successful in being
listed by such an exchange or market.
- 18 -
<PAGE> 19
PENNY STOCK REGULATION. If the Company's Common Stock has a trading
price less than $5.00 per share, trading in the Common Stock will also subject
to the requirements of Rule 15g-9 promulgated under the Exchange Act. Under such
rule, broker/dealers who recommend such low-priced securities to persons other
than established customers and accredited investors must satisfy special sales
practice requirements, including a requirement that they make an individualized
written suitability determination for the purchaser and receive the purchaser's
written consent prior to the transaction. The Securities Enforcement Remedies
and Penny Stock Reform Act of 1990 also require additional disclosure in
connection with any trades involving a stock defined as a "penny stock"
(generally, according to recent regulations adopted by the Securities and
Exchange Commission (the "Commission"), any non-Nasdaq equity security that has
a market price of less than $5.00 per share, subject to certain exceptions),
including the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith.
Such requirements could severely limit the market liquidity of the Common Stock
and the ability of investors to sell their securities in the secondary market.
POSSIBLE ADVERSE IMPACT ON MARKET OF WARRANT EXERCISE. In the event
of the exercise of a substantial number of Public Warrants within a reasonably
short period of time after the right to exercise commences, the resulting
increase in the amount of Common Stock of the Company in the trading market
could substantially affect the market price of the Common Stock.
POSSIBLE ADVERSE IMPACT OF UNDERWRITERS' WARRANT; REGISTRATION RIGHTS
FOR UNDERWRITERS' WARRANT AND PUBLIC WARRANTS. In connection with the initial
public offering, the Company sold to the Underwriters, for consideration of
$100, a non-redeemable Underwriters' Warrant exercisable for 76,000 units of the
Company's securities at $7.20 per unit. Each unit consists of one share of
Common Stock and one warrant. Two warrants entitle the holder to purchase one
share of Common Stock at $7.80 per share. The Underwriters' Warrant is
exercisable until April 21, 1998. The holders of the Underwriters' Warrant have
the opportunity to profit from a rise in the market price of the Securities, if
any, without assuming the risk of ownership. The Company may find it more
difficult to raise additional equity capital if it should be needed for the
business of the Company while the Underwriters' Warrant is outstanding. At any
time when the holders thereof might be expected to exercise them, the Company
would probably be able to obtain additional capital on terms more favorable than
those provided by the Underwriters' Warrant.
The Underwriters and holders of the Public Warrants have certain
registration rights with respect to the Common Stock issuable upon exercise of
the Underwriters' Warrant (and the Public Warrants issuable thereunder). Any
future exercise of these registration rights may cause the Company to incur
substantial expense and could impair the Company's ability to raise capital
through the public sale of its securities.
LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS. The Company's
Articles of Incorporation, as amended, include provisions to eliminate, to the
full extent permitted by Nevada General Corporation Law as in effect from time
to time, the personal liability of directors of the Company for damages arising
from a breach of their fiduciary duties as directors. The Company's Articles of
Incorporation also include provisions to the effect that the Company shall
indemnify any director or officer to the maximum extent that such
indemnification is permitted by the law of the State of Nevada, as it may from
time to time be in effect, or by public policy. However, insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended (the "Securities Act"), may be permitted to directors, officers or
persons controlling the Company pursuant to the foregoing, the Company has been
informed that in the opinion of the Securities and Exchange Commission (the
"SEC"), such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable.
POSSIBLE DILUTIVE EFFECT OF OPTIONS AND WARRANTS AND ADVERSE EFFECT
ON MARKET PRICE. No assurance can be given as to the effect, if any, that future
sales of Common Stock, or the availability of shares of Common Stock for future
sales, will have on the market price of the Common Stock from time to time.
Sales of substantial amounts of Common Stock (including shares issued upon the
exercise of warrants or stock options), or the possibility that such sales could
occur, could adversely affect the market price of the Common Stock and could
also impair the Company's ability to raise capital through an offering of its
equity securities in the future. As of June 1, 1998, there are outstanding
options for 309,235 shares of Common Stock and warrants for 105,000 shares of
Common Stock, exercisable at prices ranging from $2.25 to $8.13 per share
(except for an Underwriters' warrant for 76,000 shares of Common Stock and
836,000 Public Warrants, exercisable for $7.20 per share and $7.80 per each two
Public Warrants). The issuance of any additional shares by the Company in the
future may result in a reduction of the book value or market price of the then
outstanding Common Stock. For the life of the warrants and options, the holders
thereof are given the opportunity to profit from a rise in the market price of
the Common Stock. Any rise in the market price of the Common Stock may encourage
the holders to exercise such warrants or options, which may result in a dilution
of the interests of other stockholders. As a result, the Company may find it
more difficult to raise additional equity capital if it should be needed for the
business of the Company while such warrants and options are outstanding. [REVIEW
WITH TOM]
ANTI-TAKEOVER CONSIDERATIONS INCLUDING POSSIBILITY OF FUTURE ISSUANCE
OF PREFERRED STOCK. The Company's articles of incorporation, as amended
authorizes the Board of Directors to issue up to 1,500,000 shares
- 19 -
<PAGE> 20
of preferred stock in one or more series, having terms fixed by the Board of
Directors without shareholder vote, including voting, dividend or liquidation
rights that could be greater than or senior to the rights of holders of Common
Stock. The rights of holders of Common Stock will be subject to, and may be
materially adversely affected by the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. The Company's articles
of incorporation, as amended, also do not opt out of the "control shares"
statute set forth in Sections 78.378 through 78.3793 of the General Corporation
Law of Nevada which limits the acquisition of a "controlling interest" in the
corporation. This statute is designed to prevent an "acquiring person" from
gaining voting control of the corporation without the approval of the
corporation's stockholders. It provides that an acquiring person obtains only
such voting rights in the control shares as are conferred by a resolution of a
200 or more stockholders, at least 100 of whom are stockholders of record and
residents of Nevada. The Company is also subject to the provisions of Sections
78.411 through 78.444 of the General Corporation Law of Nevada. In general, this
statute prohibits a publicly held Nevada corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person becomes an
interested stockholder, unless the business combination is approved in a
prescribed manner. An "interested stockholder" is a person who, directly or
indirectly, owns (or within the prior three years did own) 10% or more of the
corporation's voting stock. The Board's authority to issue preferred stock and
the provisions of Sections 78.378 through 78.3793 and Sections 78.411 through
78.444 could impede any merger, consolidation, takeover or other business
combination involving the Company or discourage a potential acquirer from making
a tender offer or otherwise attempting to obtain control of the Company, and any
such impediment could serve to entrench management and may not be in the best
interests of the Company's shareholders.
YEAR 2000 COMPLIANCE. Many existing computer systems and
applications, and other control devices use only two digits to identify a year
in the date field, without considering the impact of the upcoming change in the
century. As a result, such systems and applications could fail or create
erroneous results unless corrected so that they can process data related to the
year 2000. The Company relies on its computer systems, applications and devices
in operating and monitoring all major aspects of its business, including
financial systems, customer services, infrastructure, embedded computer chips,
networks and telecommunications equipment and end products. The Company is in
the process of upgrading its software to address the year 2000 issue. The
Company estimates that the costs associated with the year 2000 issue, and the
consequences of incomplete or untimely resolution of the year 2000 issue, will
not have a material adverse effect on the results of operations or financial
position of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements are included on pages
F-1 to F-26.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
McGladrey & Pullen, LLP (""Former Auditor"") was the principal
accountant for the Company from December 3, 1996 to February 20, 1998. On
February 20, 1998, the Former Auditor unexpectedly resigned as the Company's
auditors prior to completion of the audit for the fiscal year ended October 31,
1997, identifying seven areas of concern in their letter of resignation. At that
time, the Former Auditor also withdrew its auditor's report dated January 30,
1997 on the financial statements for the fiscal year ended October 31, 1996. The
Former Auditor advised the Company that its decision to resign and withdraw was
the result of (i) its conclusion that it was no longer able to rely on
management's representations, and (ii) the existence of significant unresolved
accounting matters relating to the Company's financial statements as of and for
the years ended October 31, 1997 and 1996. The Former Auditor agreed with the
Company to delay the withdrawal of its report on the Company's 1996 financial
statements until March 9, 1998 so that the Company could perform a thorough and
independent investigation of the concerns raised by the Former Auditor. However,
On March 11, 1998 the Former Auditor withdrew its report on the 1996 financial
statements after being informed by the Company on or about that date that the
special investigation would be completed in an additional two to three weeks.
The seven areas of concern identified by the Former Auditor (and the
Company's comments thereon, contained in the parentheticals at the end of
individual paragraphs) are:
1. management's representations concerning the timing of the
Company's consummation of the sale of a franchise in Ireland;
2. the Company's failure to disclose certain option and
warrant agreements executed by management during 1996, and the resulting failure
to account for them in the Company's financial statement;
- 20 -
<PAGE> 21
3. management's representations concerning the sale of a
Houston franchise by the Company in third quarter 1996, resulting in recordation
of a gain of $284,017, specifically the failure to disclose the related party
nature of this transaction and the existence of a management agreement which the
Former Auditor believes indicates the Company retained control of the franchise
in a way that prevented recognition of the sale in third quarter 1996;
4. pendency of a question concerning the proper audit
treatment of a transaction similar to that described in Item 3, above, regarding
sale by the Company of a franchise in Charlotte in third quarter 1997, recorded
as a $381,000 gain in the Company's 1997 third quarter Form 10-Q but not therein
identified as a related party transaction;
5. failure of certain management employees to pay the Company,
during fiscal year 1997, $138,000 in personal expenses recorded by the Company
as receivables in 1996 and represented by management as to be repaid in 1997 but
not so repaid (these amounts were subsequently repaid) and certain concerns
about intervening explanations by the Company of the need for and nature of the
repayment which would or should be made;
6. a question as to whether Swisher management misrepresented
that no other side agreements existed concerning its receivable from
Professional Carpet Systems, Inc. (PCS) which would affect recognition of that
receivable at October 31, 1996, given that there is now litigation between the
Company and PCS which involves a PCS claim to entitlement to $80,000 in
consulting fees under a February 10, 1997 agreement with a principal in PCS
which, if valid, could mean that Swisher potentially overstated its receivable;
and
7. Representations by Swisher management regarding a note
receivable and repurchased franchise assets being held for resale in connection
with the Mobile franchise and the Scottsdale franchise, respectively, as to
which the representations made in connection with the 1996 audit proved to be in
error during 1997, resulting in writing off a $45,000 note as uncollectible and
a reduction in carrying value of a franchise by $53,000.
Further, in addition to the foregoing seven areas of concern,
discussions were ongoing regarding concerns of the Former Auditor regarding ". .
.timing of revenue recognition and the need for additional accounting reserves
to adequately address the realization of accounts receivable, notes receivable
relating to previously recorded franchise sale revenues, and the value of assets
held for resale." The audit work in these matters had not been completed at the
time of the Former Auditor's resignation; however they believed it likely they
would have issued a modified opinion if such matters were not ultimately
resolved to their satisfaction.
Prior to submitting its resignation on February 20, 1998, the Former
Auditor met with an officer and a director of the Company on February 17, 1998
to review the matters later summarized in the Former Auditor's February 20, 1998
letter.
In order to address the issues of concern to the Former Auditor and
respond accordingly, the Company took the following actions: (a) retained new
auditors and authorized the Former Auditor to respond fully to inquiries of the
successor accountant concerning each disagreement and event; (b) appointed a
three-member special committee comprised of individuals not involved in the
issues of concern to the Former Auditor to oversee an independent internal
investigation of such issues, which committee was comprised of company General
Counsel James A. Marshall and two outside individuals; and (c) retained the law
firm of Swidler & Berlin, Chartered, to conduct the independent internal
investigation under the direction of the independent special committee. The
committee will recommend appropriate responses to the foregoing matters,
including any corporate governance and/or structural changes, which may be
advisable in light of the issued raised by the Former Auditor.
On March 16, 1998, the Company engaged the accounting firm of Scharf
Pera & Co. (the "New Auditor"), Charlotte, North Carolina, as its new auditors.
During the Company's two most recent fiscal years ended October 31, 1997 and
during the interim period subsequent thereto until March 16, 1998, the Company
had not consulted with the New Auditor with respect to the application of
accounting principles to any specified transactions or the specific type of
audit opinion that might be rendered on the Company's financial statements, and
no written report or oral advice was given to the Company, other than a general
discussion of proposed services and anticipated fees. The Company did not
consult with the New Auditor with respect to the subject of the disagreement
with the Former Auditor and the New Auditor has not provided the Company with
letters in response to those from the Former Auditor and the Company attached as
exhibits to this Report.
- 21 -
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information as of June 1, 1998
regarding the directors and executive officers of the Company:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
- --------------------------------------------------- --- --------------------------------------- --------
<S> <C> <C> <C>
Patrick L. Swisher(1) 43 President, Chief Executive Officer and
Director 1986
W. Tom Reeder, III 45 Vice President and Director 1988
Bruce Mullan 45 Vice President of Sales
Amy K. Simpson 42 Secretary
George K. Moore(1) 65 Director 1993
</TABLE>
- -------------------
(1) Member of Compensation Committee and Audit Committee.
PATRICK L. SWISHER has been Chief Executive Officer, President and a
director of the Company since October 1986. From July 1983 through October 1986,
Mr. Swisher also served as Chief Executive Officer and a director of Swisher
Services, Inc., which merged into Swisher International, Inc. in October 1986.
In 1980, Mr. Swisher co-founded PSTV Corporation, a private cable television
company, and he served as President of its construction division until 1983.
From 1977 to 1980, Mr. Swisher was an owner and co-founder of Whispers
Corporation, which operated a restaurant located in Charlotte, North Carolina.
Mr. Swisher received his Bachelor of Science degree from Appalachian State
University in 1977.
W. TOM REEDER, III has served as Vice President and a director of the
Company since March 1988. From 1977 through 1988, Mr. Reeder was a
manufacturer's representative for wholesale apparel in Charlotte, North
Carolina. Mr. Reeder received his Bachelor of Science degree from Western
Carolina University in 1975.
BRUCE MULLAN has been the Company's Vice President of Sales since
January 1994. From May 1982 through January 1994, he was employed by US Safety
Company in Kansas City, Missouri, and served as National Accounts Manager of
that company from May 1989 until January 1994. Mr. Mullan received his Bachelor
of Arts degree in Economics from Hampden-Sydney College in 1975.
AMY K. SIMPSON has served as Secretary of the Company since November
1996,and has been Director of Franchise Administration since July 1991. From
1984 to 1991 she served as Vice President of Franchise Administration with Econo
Lodges of America, Inc.
GEORGE K. MOORE has served as a director of the Company since 1993.
Mr. Moore is a certified public accountant in the States of North Carolina and
Florida. Since 1984, Mr. Moore has provided financial and management consulting
to businesses located in and around the Charlotte, North Carolina area. Prior to
1984, Mr. Moore was a partner with the accounting firm of Main Hurdman and a
predecessor, which subsequently merged into KPMG Peat Marwick.
BOARD COMMITTEES
The Board of Directors has delegated certain of its authority to a
two-member Compensation Committee and a two-member Audit Committee. The
Compensation Committee and Audit Committee are each currently composed of
Patrick L. Swisher, an ex officio, nonvoting member of each committee and George
K. Moore. The Company intends to add an independent member to both the
Compensation and Audit Committees during the 1998 fiscal year.
- 22 -
<PAGE> 23
The Compensation Committee held one meeting in fiscal year 1997. The
primary function of the Compensation Committee is to review and make
recommendations to the Board with respect to the compensation, including
bonuses, of the Company's officers and to administer the Company's Stock Option
Plan.
The Audit Committee held one meeting in fiscal year 1997. The
function of the Audit Committee is to review and approve the audit reports
rendered by the Company's independent auditors and to approve the audit fee
charged by the independent auditors. The Audit Committee reports to the Board of
Directors with respect to such matters and recommends the selection of
independent auditors.
In fiscal year 1997, the Board of Directors held seven formal
meetings. All directors attended more than 75% of the aggregate of board and
committee meetings held during fiscal year 1997.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the annual
and long-term compensation for services in all capacity to the Company for the
three fiscal years ended October 31, 1997, 1996 and 1995 of Patrick L. Swisher,
the Company's Chief Executive Officer, W. Tom Reeder, III, Vice President and
Bruce Mullan, Vice President of Sales (the "Named Officers"), the only executive
officers whose total annual salary and bonus, or annual salary and other
compensation, exceeded $100,000 for such fiscal years.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION AWARDS
-------------------------------------- ----------------------
OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS OTHER (SHARES)(#) COMPENSATION(3)
- --------------------------- ---- --------- ------- ------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Patrick L. Swisher 1997 $198,198 $ -- $14,072(2) 77,600 $1,425
President and Chief 1996 198,198 -- 14,072(2) 33,000 1,846
Executive Officer 1995 198,052 -- 14,072(2) -- --
W. Tom Reeder, III 1997 $105,000 $ -- $ 5,909(2) 39,000 $475
Vice President and 1996 105,000 -- 5,909(2) 23,000 525
Secretary 1995 104,791 10,000 4,757(2) -- --
12,000
Bruce Mullan 1997 $126,038 $ -- $ -- -- $1,322
Vice President of Sales 1996 102,328 -- -- 2,500 1,334
1995 65,000 52,500 -- -- --
</TABLE>
- ---------------
(1) Includes amounts contributed to the Company's 401(k) plan by each of the
Named Officers.
(2) Includes car lease payments for vehicles leased.
(3) Includes amounts contributed by the Company to a 401(k) plan. Excludes (i)
aircraft lease payments made by the Company to Economy Air, Inc. and (ii)
office lease payments paid to SSSW Enterprises or Fairview Family Limited
Partnership by the Company. See "Item 13. Certain Relationships and Related
Transactions."
OPTION GRANTS TABLE. The following table sets forth information
concerning grants of stock options to the Named Officers pursuant to the
Company's stock option plans during the fiscal year ended October 31, 1997.
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS GRANTED EXERCISE OR
TO EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (SHARES) FISCAL YEAR ($/SHARE) DATE
- ------------------------------- ---------------- --------------- ------------- ----------
<S> <C> <C> <C> <C>
Patrick L. Swisher 77,600 67% $5.50 11/05/2001
W. Tom Reeder, III 39,000 33% $5.00 11/05/2001
</TABLE>
- 23 -
<PAGE> 24
FISCAL YEAR-END OPTIONS/OPTION VALUES TABLE. No stock options were
exercised by the Named Officers during the fiscal year ended October 31, 1997.
The following table shows the stock option values for the Named Officers as of
October 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDER- VALUE OF UNEXERCISED IN-
LYING UNEXERCISED OPTIONS THE-MONEY OPTIONS AT
AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
----------------------------------- -----------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Patrick L. Swisher 25,200 77,600 $101,430 $184,300
W. Tom Reeder, III 44,167 39,000 $196,414 $112,125
Bruce Mullan 3,500 -- $ 13,565 --
</TABLE>
- --------------------
(1) The dollar values are calculated by determining the difference between
$7.875 per share, the closing bid price of the Common Stock on October 31,
1997, and the exercise price of the options.
No employee of the Company receives any additional compensation for
his services as a director. Non-management directors receive a fee of $500 per
meeting attended and reasonable travel or other out-of-pocket expenses and may
participate in the Company's stock option plans described below.
Other than a 401(k) retirement plan for the benefit of all employees,
the Company has no retirement, pension or profit sharing program for the benefit
of its directors, officers or other employees, but the Board of Directors may
recommend one or more such programs for adoption in the future.
STOCK OPTION PLANS
The Company adopted an Incentive Stock Option Plan in 1992 (the
"Incentive Plan"). The Incentive Plan, as amended, covers an aggregate of
250,000 shares. The Plan, designed as an incentive for executive and other key
employees, is administered by the Compensation Committee of the Board of
Directors. The Incentive Plan provides that no option may be granted at an
exercise price less than the fair market value of the Common Stock of the
Company on the date of grant. Unless otherwise specified, the options expire up
to ten years from date of grant and may not be exercised during the initial
one-year period from date of grant. Thereafter, options may be exercised in
whole or in part, depending on terms of the particular option. At October 31,
1997, 199,167 options had been granted and were outstanding pursuant to the
Incentive Plan, of which 82,567 were exercisable.
The Company also adopted a Non-Qualified Stock Option Plan in 1992
(the "Non-Qualified Plan"). The Non-Qualified Plan is also administered by the
Compensation Committee of the Board of Directors and, as amended, covers a total
of 400,000 shares. The Non-Qualified Plan provides that options may be granted
at exercise prices not less than 85% of the fair market value of the Common
Stock of the Company on the date of grant. The Compensation Committee is
empowered to grant bonuses at the time of issuance of non-qualified stock
options in an amount sufficient to cover the tax liability incurred by the
recipient at the date of grant. At October 31, 1997, 110,067 options had been
granted and were outstanding under the Non-Qualified Plan, of which 47,667 were
exercisable.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers and
directors and greater than ten percent shareholders (collectively, "Reporting
Persons") to file reports of ownership (Form 3) and changes in ownership (Form
4) with the SEC and NASDAQ. Reporting Persons are required by SEC regulations 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 or written
representations from Reporting Persons that no Forms 5 were required, the
Company believes that with respect to the fiscal year ended October 31, 1997,
all the Reporting Persons complied with all applicable filing requirements
except that a Form 3 and Form 4 were not filed by Armand Investment Corp., who
formerly held over 10% of the Company's shares; and, a Form 3 was not filed by
Providence LLC, a greater than 10% shareholder.
- 24 -
<PAGE> 25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding
beneficial ownership of the Company's Common Stock as of February 28, 1998, by
(i) each person who is known by the Company to own beneficially more than 5% of
the Company's outstanding Common Stock, (ii) each of the Company's executive
officers and directors, and (iii) all executive officers and directors as a
group. Shares not outstanding but deemed beneficially owned by virtue of the
right of an individual to acquire them within 60 days are treated as outstanding
only when determining the amount and percentage of Common Stock owned by such
individual. Each person has sole voting and sole investment power with respect
to the shares shown except as noted.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
NAME AND ADDRESS(1) NUMBER PERCENT
- ----------------------------------------------------------------- -------- -------
<S> <C> <C>
Patrick L. Swisher(2)............................................ 259,217 8.7%
W. Tom Reeder, III(3)............................................ 88,167 3.0%
Bruce Mullan(4).................................................. 3,000 0.1%
Amy K. King...................................................... -- --
George K. Moore(4)............................................... 85,067 2.8%
Providence LLC(5)................................................ 259,000 12.2%
All Directors and Officers as a Group (five persons)(6).......... 435,451 14.6%
</TABLE>
- --------------------
(1) The address for Mr. Lunsford is 5182 Old Drive Highway, Forest Park,
Georgia 30050. The address for Armand Investment Corporation is 4005
Tamiami Trail, Venice Florida. The address for all other persons listed
is 6849 Fairview Road, Charlotte, North Carolina 28210.
(2) Includes 102,800 shares of Common Stock issuable upon exercise of
currently exercisable options.
(3) Includes 83,167 shares of Common Stock issuable upon exercise of currently
exercisable options.
(4) Consists solely of shares of Common Stock issuable upon exercise of
currently exercisable options.
(5) Armand Investment Corporation acquired such shares from Patrick L. Swisher
in connection with an estate planning program for Mr. Swisher. During
1997, Providence LLC assumed the obligation of the estate planning program
in exchange for, inter alia, and the assignment of the shares of Common
Stock from Armand Investment Corporation. Mr. Swisher disclaims beneficial
ownership of such shares.
(6) Includes 274,034 shares of Common Stock issuable upon exercise of
currently exercisable options at February 28, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As described below, the Company has entered into a number of
transactions with officers and directors in the past. The Company has adopted a
policy that transactions with directors, officers or entities of which they are
also officers or directors or in which they have a financial interest, will
generally be on terms consistent with industry standards and approved by a
majority of the disinterested directors of the Company's Board of Directors.
This policy, which is set forth in the Company's Articles of Incorporation,
provides that no such transactions by the Company shall be either void or
voidable solely because of such relationship or interest of directors or
officers or solely because such directors are present at the meeting of the
Board of Directors of the Company or a committee thereof which approves such
transaction or solely because their votes are counted for such purpose. In
addition, interested directors may be counted in determining the presence of a
quorum at a meeting of the Board of Directors of the Company or a committee
thereof which approves such a transaction.
The Company leases from Economy Air, Inc. ("Economy Air"), a North
Carolina corporation owned by Mr. Swisher, a twin engine airplane to provide
corporate travel for Company personnel. The lease, entered into in November,
1993 and effective through October 15, 1998, obligates the Company to make
monthly lease payments to Economy Air, together with charges for maintenance and
fuel for aircraft use. The amount of the lease payment approximates the total of
the monthly loan payment, insurance, taxes and hanger rent paid by Mr. Swisher.
Economy Air received lease payments and maintenance charges aggregating $109,078
and $126,950, respectively, during the fiscal years ended October 31, 1997 and
1996.
In 1993, the Company and B.S. Associates, a partnership in which Mr.
Swisher is a partner, entered into a lease agreement pursuant to which the
Company leases its headquarters from the partnership for a term of seven years,
expiring March 2000. In 1995, B.S. Associates sold the facilities and assigned
the lease to SSSW Enterprises, a general partnership in which
- 25 -
<PAGE> 26
Mr. Swisher is a one-third partner. In 1997, SSSW Enterprises assigned the lease
to Fairview Family Limited Partnership, of which Mr. Swisher is a 100%
beneficial owner. The lease provides for a monthly rental of $10,134. The lease
payment is to escalate in accordance with the consumer price index during the
term of the lease. During the fiscal years ended October 31, 1997 and 1996, the
Company made lease payments of $153,112 and $127,501, respectively.
During 1997 and 1996, the Company made advances of $84,230 and
$77,000, respectively, to Mr. Swisher on unsecured, interest-free bases. These
advances are payable on demand.
On July 30, 1997, the Company-owned Charlotte Hygiene operations was
sold to Charlotte Hygiene Association for $415,000. Charlotte Hygiene
Association is owned by a Vice President of the Company. A gain of $392,000 and
$26,000 in management fee income was recognized by the Company in 1997 as
disclosed in Note 4 to the Financial Statements.
- 26 -
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) CONSOLIDATED FINANCIAL STATEMENTS.
Independent Auditor's Report of Scharf Pera & Co. F-1
Consolidated Balance Sheet as of October 31, 1997 F-2
Consolidated Statements of Operations for the years ended October 31, 1997 F-4
and 1996
Consolidated Statements of Stockholders' Equity for the years ended October F-5
31, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended October 31, 1997 F-6
and 1996
Notes to Consolidated Financial Statements F-8
(b) EXHIBITS.
</TABLE>
The following is a complete list of Exhibits filed as part of this
report and which are incorporated herein.
<TABLE>
<CAPTION>
EXHIBIT
-------
<S> <C>
*3.1.1 Articles of Incorporation, as amended, of the Company as
filed on October 10, 1986 with the Secretary of State of
the State of Nevada.
*3.1.2 Certificate of Amendment of Articles of Incorporation of
the Company as filed on January 19, 1993, with the
Secretary of State of the State of Nevada.
#3.1.3 Certificate of Designations of Series A Junior
Participating Preferred Stock.
*3.2.1 Amended and Restated By-Laws of the Company.
*4.1.1 Form of specimen certificate for Common Stock of the
Company.
*4.1.2 Form of specimen certificate for Warrants of the Company.
**4.1.3 Form of Warrant Agreement, dated April 12, 1993, between
American Securities Transfer & Trust Co. and the Company.
**4.2 Form of specimen certificate for Underwriter's Warrant of
the Company.
#4.3 Form of Rights Agreement and Form of Rights Certificate.
-10.1.1 Asset Purchase Agreement dated September 1, 1997, by and
among Carolina Termite and Pest Control, Inc., et al. and
Swisher Pest Control Group.
*10.1.2 Amended Employment Agreement, effective January 1, 1993,
between Patrick L. Swisher and the Company.
-10.1.3 Non Competition Agreement dated September 1, 1997, between
Robert M. McCain, Jr. and Swisher Pest Control Group.
*10.2.1 1992 Incentive Stock Option Plan, effective April 29,
1992, authorizing 58,334 shares of Common Stock for
issuance pursuant to the Plan.
*10.2.2 1992 Non-Qualified Stock Option Plan, effective April 29,
1992, authorizing 133,333 shares of Common Stock for
issuance pursuant to the Plan.
***10.2.3 Amendment to 1992 Incentive Stock Option Plan, effective
April 12, 1994, authorizing 250,000 shares of Common Stock
for issuance pursuant to the Plan.
</TABLE>
- 27 -
<PAGE> 28
<TABLE>
<CATPION>
EXHIBIT
- -------
<S> <C>
***10.2.4 Amendment to 1992 Non-Qualified Stock Option Plan,
effective April 12, 1994, authorizing 150,000 shares of
Common Stock for issuance pursuant to the Plan.
10.3 Franchise Agreements by and between the Company and its
franchisees, effective dates set forth below:
* (i) Form of Franchise Agreement by and between the
Company and certain franchisees.
* (ii) Form of Franchise Agreement by and between the
Company and certain franchisees.
* (iii) Form of Franchise Agreement by and between the
Company and certain franchisees.
* (iv) Franchise Agreement, dated August 20, 1990, by
and between the Company and J/S Enterprises,
Inc. for Louisville territory, subsequently
transferred to Louisville Restroom Sanitation
Services, Inc. on August 31, 1990.
* (v) Franchise Agreement, dated October 31, 1990, by
and between the Company and Rice & Rice
Corporation for Richmond territory.
** (vi) Form of Franchise Agreement, dated October 31,
1990, by and between the Company and maid
service franchisees.
oo (v) Form of Master License Agreement relating to
international licenses by and between the
Company's wholly-owned subsidiary, F.M.S.,
Inc., and certain licensees.
*10.4 Lease, dated April 20, 1992, by and between B.S.
Associates Partnership and the Company.
*10.5 Lease Agreement, dated August 6, 1992, by and between
Economy Air, Inc. and the Company.
*10.6 Agreement, dated February 11, 1993, by and among Locke
Burgess, Ross Burgess, Lynn Smith and Austin-San Antonio
Hygiene Services, Inc, the Company and Swisher Hygiene
Franchise Corp.
*10.7 Promissory Note and Guaranty, dated December 17, 1992, by
and between Wachovia Bank of North Carolina, N.A. and the
Company (terminated).
oo10.7.1 Revolving Note and Loan Agreement, dated September 19,
1996, by and between SouthTrust Bank of North Carolina and
the Company.
*10.8 Letter of Intent, dated February 11, 1993, by and between
Consolidated Products, Inc. and the Company.
*10.9.1 Asset Purchase and Sale Agreement, dated March 12, 1993,
by and between Consolidated Products, Inc. and Swisher
Products, Inc.
+10.9.2 Asset Purchase Agreement effective July 1, 1996, relating
to the sale of Surface Doctor by Professional Carpet
Systems, Inc. and Old Dixie Supply Company to the Company.
*10.10.1 Promissory Note, dated April 1, 1993, by and between
Branch Banking and Trust Company and the Company.
*10.10.2 Loan Agreement, dated April 1, 1993, by and between Branch
Banking and Trust Company and the Company.
o10.10.3 Loan Agreement, dated April 21, 1995, by and between First
Union National Bank of North Carolina and the Company
(terminated).
o10.10.4 Loan Agreement, dated May 18, 1995, by and between
Stephens Diversified Leasing, Inc., d/b/a Stephens
Franchise Finance, and the Company.
</TABLE>
- 28 -
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
oo21. List of Subsidiaries of the Company.
-21.1 Updated List of Subsidiaries of the Company
-23.1 Consent of Scharf Pera & Co.
-27. Financial Data Schedule.
99.1 Letter from McGladrey & Pullen, LLP.
(to be filed by amendment)
</TABLE>
- -------------
- - Filed herewith.
oo Previously filed.
* Previously filed and incorporated by reference from the Company's
Registration Statement on Form S-1 (S.E.C. File No. 33-58320), filed
February 18, 1993, as subsequently amended and declared effective April
21, 1993.
** Previously filed and incorporated by reference from the Company's Form
10-K for the fiscal year ended October 31, 1993, filed on January 31,
1994 (S.E.C. File No. 0-21282).
*** Previously filed and incorporated by reference from the Company's Form
10-K for the fiscal year ended October 31, 1994, filed on January 30,
1995. (S.E.C. File No. 0-21282).
# Previously filed and incorporated by reference from the Company's
Registration Statement on Form 8-A filed September 19, 1995.
+ Previously filed and incorporated by reference from the Company's Form
8-K dated July 30, 1996, as filed with the SEC on or about August 8,
1996.
o Previously filed and incorporated by reference from the Company's Form
10-K for the fiscal year ended October 31, 1995. (S.E.C. File No.
0-21282).
(c) CURRENT REPORTS ON FORM 8-K.
The Company filed current reports during the 1997 Fiscal Year as
follows:
1. Form 8-K/A filed on October 15, 1996 with financial statements
relating to acquisition of Surface Doctor.
2. Form 8-K filed on December 5, 1996 reporting a change in
certifying accountant.
- 29 -
<PAGE> 30
Board of Directors
Swisher International, Inc. & Subsidiaries
Charlotte, North Carolina
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheet of
Swisher International, Inc. & Subsidiaries as of October 31, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the two 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 audit.
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 in significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Swisher
International, Inc. & Subsidiaries as of October 31, 1997, and the results of
their operations and their cash flows for each of the two years then ended, in
conformity with generally accepted accounting principles.
/s/ Scharf Pera & Co.
-------------------------------
Charlotte, North Carolina
May 20, 1998
F-1
<PAGE> 31
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
October 31, 1997
<TABLE>
<CAPTION>
ASSETS (Note 4) 1997
- ---------------------------------------------------------------------------- -----------
<S> <C>
Cash and cash equivalents (Note 2) $ 662,880
Cash, restricted (Note 6) 257,902
Accounts receivable, franchisees, net of allowance for doubtful
accounts $172,000 2,822,399
Other receivables 284,200
Current portion of notes receivable, franchisees (Notes 3 and 6) 1,015,564
Current portion of notes receivable - related parties (Note 4) 370,138
Inventories 88,786
Prepaid expenses 184,508
Prepaid advertising costs
Deferred income taxes (Note 9) 3,000
-----------
TOTAL CURRENT ASSETS 5,689,377
-----------
Property and equipment (Note 5)
Property, furniture and equipment 1,760,087
Less accumulated depreciation (652,901)
-----------
1,107,186
-----------
Other assets
Accounts receivable, noncurrent 73,500
Notes receivable, franchisees (Notes 3 and 6) 2,727,590
Notes receivable - related parties (Note 4) 85,388
Deferred franchise costs, net of accumulated amortization of $139,240 77,957
Intangible assets, net of accumulated amortization of $13,013 119,510
Goodwill, net of accumulated amortization $50,998 1,167,177
Assets held for sale (Note 13) 475,972
Covenants not to compete, net of accumulated amortization of $20,642 598,628
(Note 14)
Cash surrender value of officers' life insurance 53,560
Deposits and Other assets 75,105
-----------
5,454,387
-----------
TOTAL ASSETS $12,250,950
===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE> 32
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997
- --------------------------------------------------------------------------- ----------
<S> <C>
Current Liabilities
Line-of-credit (Note 6) $1,381,998
Current maturities of long-term debt (Note 7) 596,986
Accounts payable 2,041,705
Accrued expenses 222,548
Deferred revenue 329,198
Income taxes payable (Note 9) 109,823
-----------
TOTAL CURRENT LIABILITIES 4,682,258
-----------
Long-Term Debt, less current maturities (Note 7) 1,476,689
-----------
Deferred income taxes (Note 9) 100,000
-----------
Commitments (Note 10) --
Stockholders' Equity (Note 8)
Preferred stock, par value $.10; authorized 1,500,000 shares; none
issued --
Series A Junior Participation Preferred stock, par value $1.00;
authorized 100,000 shares; none issued --
Common stock, par value $.01; authorized 15,000,000 shares; issued
2,122,271 shares 21,223
Additional paid-in capital 4,128,723
Retained earnings 1,842,057
-----------
TOTAL STOCKHOLDERS' EQUITY 5,992,003
-----------
TOTAL STOCKHOLDERS' EQUITY AND LIABILITIES $12,250,950
===========
</TABLE>
F-3
<PAGE> 33
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Revenues
Revenues from Franchisees
Product sales $ 5,366,127 $ 3,288,324
Service fees 1,832,962 1,659,679
Royalties 2,126,369 1,626,660
Marketing fees 73,226 46,822
----------- ------------
9,398,684 6,621,485
----------- ------------
Initial franchise sales - hygiene (Notes 3 and 11) 910,507 424,411
Initial franchise sales - maids (Notes 3 and 11) -- (38,610)
Initial franchise sales - Surface Doctor
(Notes 3 and 11)
Initial franchise sales - pest control
(Notes 3 and 11) 88,000 --
Revenue from Company-owned hygiene operations 674,742 1,672,947
Revenue from Company-owned maids operations 812,212 855,181
Revenue from Company-owned Surface Doctor
operations 45,042 84,427
Revenue from Company-owned pest control
operations 171,124 --
Interest income 283,354 284,757
Gain on sale of Company-owned
operations 497,189 288,597
Other 46,672 39,387
----------- ------------
13,276,331 10,586,565
----------- ------------
Expenses
Selling, general and administrative 6,220,475 4,823,247
Cost of product sales to franchisees 4,274,019 3,066,788
Costs related to Company-owned hygiene
operations
-- 1,432,609
579,174
Costs related to Company-owned maids operations
803,458 991,059
Costs related to Company-owned Surface Doctor
operations 148,178 117,136
Costs related to Company-owned pest control
operations 169,530 --
Interest 210,721 243,885
----------- ------------
12,405,555 10,674,724
----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES 870,776 (88,159)
Income tax expense (Note 9) 338,868 66,382
----------- ------------
NET INCOME (LOSS) $ 531,908 $ (154,541)
=========== ============
Net income per common share $ 0.25 $ (0.09)
=========== ============
Weighted average number of common share and
common share equivalents outstanding 2,619,064 1,797,319
=========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 34
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock Additional
---------------------- Paid-In Retained
Shares Amount Capital Earnings Total
--------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1995 1,719,299 $17,194 3,002,637 1,464,690 4,484,521
Issuance of common stock and options in
connection with an asset acquisition 200,000 2,000 967,062 -- 969,062
Issuance of common stock in connection
with the exercise of stock options 16,500 165 36,960 -- 37,125
Net loss -- -- -- (154,541) (154,541)
--------- ------- ---------- ----------- -----------
Balance, October 31, 1996 1,935,799 19,359 4,006,659 1,310,149 5,336,167
Other 8,928 8,928
Issuance of common stock in connection 186,472 1,864 113,136 -- 115,000
with the exercise of stock options
Net income -- -- -- 531,908 531,908
--------- ------- ---------- ----------- -----------
Balance, October 31, 1997 2,122,271 $21,223 $4,128,723 $ 1,842,057 $ 5,992,003
========= ======= ========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 35
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- ---------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 531,908 $(154,541)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 187,772 186,254
Amortization 139,793 63,245
Deferred income taxes 94,000 (75,000)
Gain on sale of Company-owned operations (497,189) (288,597)
Loss on sale of property -- 21,068
Franchise fee revenue financed through notes
receivable (496,840) (302,053)
Provision for doubtful notes receivable 257,688 254,972
Provision for doubtful accounts receivable 22,000 109,356
Change in working capital components:
(Increase) in accounts receivable (1,371,232) (240,177)
(Increase) in inventories (1,507) 63,048
(Increase) decrease in prepaid expenses (29,922) 143,116
(Increase) in deferred franchise costs -- (21,487)
Increase (decrease) in allowance for valuation
of assets held for sale (256,030) 192,665
Increase (decrease) in accounts payable 789,109 710,136
Increase (decrease) in accrued expenses 41,413 29,813
Increase (decrease) in income taxes payable 8,653 90,170
Decrease in deferred revenue 20,074 (48,077)
----------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (560,310) 733,911
----------- ---------
Cash Flows from Investing Activities
Purchase of equipment (612,770) (175,406)
Advances to officer 204,732 (79,538)
Notes receivable proceeds (1,598,520) (287,838)
Notes receivable-related parties proceeds (196,449) (37,291)
Notes receivable payments 1,160,385 532,579
Purchase of assets held for sale -- (275,960)
Proceeds from sale of property 162,431 323,410
Acquisition of Surface Doctor assets -- (20,000)
Increase in intangible assets and other assets (879,640) (44,973)
----------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES $(1,759,831) $ (65,017)
=========== =========
</TABLE>
F-6
<PAGE> 36
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended October 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash Flows from Financing Activities
Proceeds from stock transactions $ 123,928 $ 37,125
(Increase) decrease in restricted cash 2,925 439,174
Net proceeds from advances on line-of-credit
and short-term notes payable 347,956 376,042
Proceeds from long-term debt 1,232,673 85,889
Net principal payments on long-term debt
obligations -- --
(534,051) (728,026)
----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,173,431 210,204
----------- -----------
Net increase (decrease) in cash and cash
equivalents (1,146,710) 879,098
Cash and cash equivalents - beginning of year 1,809,590 930,492
----------- -----------
Cash and cash equivalents - end of year $ 662,880 $ 1,809,590
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 218,121 $ 250,763
Income taxes 236,215 51,213
Supplemental Disclosure of Non-Cash Investing
and Financing Activities:
Notes receivable, included in deferred revenue 329,198 299,324
Notes payable issued for franchise repurchases -- 143,380
Transfer of accounts receivable to assets 10,982 51,573
held for sale
Notes receivable for sale of franchises 496,840 265,983
Acquisition of Surface Doctor Division:
Assets purchased
Accounts receivable $ $ 120,639
Inventories -- 75,000
Prepaid expenses -- 40,504
Notes receivable -- 79,687
Equipment -- 56,233
Intangibles -- 100,000
Goodwill recognized -- 714,963
----------- -----------
-- 1,187,026
----------- -----------
Liabilities assumed
Accounts payable $ -- $ 54,281
Accrued expenses -- 27,468
Deferred revenue -- 116,215
----------- -----------
-- 197,964
----------- -----------
Stock Options Issued in Consideration 969,062
Cash Consideration 20,000
----------- -----------
$ $ 1,187,026
----------- -----------
</TABLE>
F-7
<PAGE> 37
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICES
NATURE OF BUSINESS: The Company is engaged in the marketing of franchises which
provide hygiene services and products for public restrooms, residential maid
services and residential and commercial kitchen and bath restoration services
and residential and commercial pest control services under the service marks
"Swisher" and "Surface Doctor" and associated proprietary names and marks. The
Company and its independently owned franchises are located in the United States
and in certain other parts of the world.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of Swisher International, Inc. and its subsidiary
companies, all of which are wholly owned, after elimination of intercompany
accounts and transactions.
CASH AND CASH EQUIVALENTS: For purposes of reporting the statement of cash
flows, the Company considers all cash accounts, which are not subject to
withdrawal restrictions or penalties, and all highly liquid short-term
investments purchased with an original maturity of three months or less to be
cash equivalents.
INVENTORIES: Inventories are stated at the lower of cost or market and consist
of purchased finished goods. Cost is determined using the first-in, first-out
(FIFO) method.
PROPERTY AND EQUIPMENT: Property and equipment is stated at cost. Depreciation
is computed using the straight-line method over the estimated useful life of the
assets, which is five to thirty-one and one-half years.
INTANGIBLE ASSETS: Intangible assets, consisting primarily of trademarks and
organization costs, are stated at cost and are being amortized using the
straight-line method over periods from five to fifteen years.
GOODWILL: Goodwill includes the excess of acquisition costs over fair value of
the net assets acquired in the purchase of the Surface Doctor division of
Professional Carpet Systems, Inc. (See Note 14) and the purchase of Carolina
Termite & Pest Control, Inc. (See Note 14) and is being amortized on the
straight-line basis over a twenty year period.
INITIAL FRANCHISE FEES, RELATED FRANCHISE COSTS, AND DEFERRED REVENUE: The
Company has entered into franchise agreements which grant franchisees the
exclusive right to develop and operate franchise businesses within specified
geographic territories for a fee. The initial franchise fee is deferred and
recognized as revenue when substantially all significant services to be provided
by the Company are performed. Initial training costs are accrued as incurred,
and expensed when the initial franchise fee is recognized. Costs related to the
development of the maids service franchise operation are capitalized and will be
amortized over their expected period of benefit of two to three years. These
costs include development of the franchise document and development of marketing
tools for future use by franchisees.
F-8
<PAGE> 38
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company typically finances part of the initial franchise fee payable by new
franchisees and from time to time has financed 100% of certain franchise fees.
Before financing is granted to a new franchisee, the Company performs extensive
credit evaluations of the franchisee's financial condition and obtains a
security interest in the underlying franchise and assets incidental to the
operation of the franchise. Revenue is recognized on financed sales when the
Company determines that collection is probable.
PREPAID ADVERTISING COSTS: The Company expenses the production costs of
advertising the first time the advertising takes place, except for
direct-response advertising which is capitalized and amortized over its expected
period of future benefits.
Direct-response advertising consists primarily of magazine advertisements. The
capitalized costs of the advertising are amortized over the three month period
following the publication of the magazine in which it appears.
ASSETS HELD FOR SALE: The Company has acquired assets of certain franchisees who
have failed to comply with the terms and conditions of their franchise
agreements. The Company carries these assets at the lower of cost or market and
intends to sell these operations as soon as possible.
COVENANTS NOT TO COMPETE: Covenants not to compete acquired in connection with
the purchase of Carolina Termite & Pest Control, Inc. are being amortized over
the length of the agreements, five years, on a straight-line basis.
ROYALTIES, MARKETING FEES AND SERVICE FEES: Royalties and marketing fees are
recognized as revenue based on a percentage of the monthly gross revenues as
reported by the franchisees. Service fees are recognized as revenue based on a
sliding dollar amount determined by the annualized gross revenues as reported by
the franchisees, and are collected from monthly revenues.
PRODUCT SALES: Product sales consist of products sold to the franchisees and are
recognized as revenue at the time of shipment.
INCOME TAXES: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences, operating loss
and tax credit carryforwards, and deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
may not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
NET INCOME (LOSS) PER COMMON SHARE: Net Income (loss) per common share and
common share equivalents outstanding are calculated using the treasury stock
method per APB 15, as amended, based on the weighted average number of common
shares outstanding during the year and on the net additional number of shares
which would be issuable upon the exercise of all stock options, assuming that
the Company used the proceeds received to purchase additional common shares at
market value, but not exceeding 20 percent of the outstanding common shares.
Remaining funds are applied first to reduce short-term then long-term borrowings
then the remainder is assumed to be invested in U.S. government securities
thereby requiring an income adjustment in 1997 for the interest expense saved
and the interest income earned net of tax effects ($136,164). For the year ended
October 31, 1997 the weighted average of common and common equivalent shares
outstanding was 2,619,064. Common stock equivalents are excluded from the loss
per share calculation for fiscal 1996 because the effect would be antidilutive.
The weighted average of common shares outstanding for the year ended October 31,
1996 was 1,797,319.
F-9
<PAGE> 39
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
VALUATION OF LONG-LIVED ASSETS: Effective November 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 121 (SFAS 121). This statement
requires that long-lived assets and certain identifiable intangibles held and
used by the Company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS 121 also requires that assets to be disposed of be reported at
the lower of the carrying amount or the fair value less costs to sell. Adoption
of this statement did not have a material impact on the Company's financial
position, results of operations, or liquidity.
NOTE 2. CASH
The Company maintains deposits with financial institutions which exceed the
federally insured amounts in the amount of $971,000 at October 31, 1997.
Additionally, the Company maintains deposits in foreign accounts, not insured in
the amount of $235,000 at October 31, 1997.
F-10
<PAGE> 40
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. NOTES RECEIVABLE - FRANCHISEES
Notes receivable consists primarily of all or a portion of the initial franchise
fees financed by the Company. The notes are collateralized by the underlying
franchise and by essentially all of the franchisees' assets incidental to the
operation of the franchise and, for certain franchises, are personally
guaranteed by the owners. The interest rates associated with the majority of
these notes range from 7% to 13.25% with monthly principal and interest payments
ranging from $70 to $5,401 over periods ranging from 12 to 120 months, with the
first note maturing in 1998 and the last one in 2007.
Notes receivable - franchisees at October 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Notes receivable - franchisees at face value $ 3,273,154
Notes receivable - related parties at face value (Note 4) 865,000
------------
Total notes receivable - face value 4,138,154
Less imputed discount (270,000)
------------
Net present value of notes receivable 3,868,154
Less allowance for doubtful accounts (125,000)
------------
Balance of notes receivable - franchisees $ 3,743,154
============
Current portion $ 1,015,564
Long-term portion $ 2,727,590
</TABLE>
The notes receivable - franchisees at face value have been reduced to net
present value at October 31, 1997 for imputed discounts. These imputed discounts
are based on notes with terms including delayed payment schedules and
interest-free periods, and additionally, the notes have been discounted to net
present values based on actual payments differing from scheduled payments
contained in the note agreements.
Future minimum principal payments to be received pursuant to the notes are as
follows:
<TABLE>
<CAPTION>
Year Ending October 31
----------------------------------------------------------------
<S> <C>
1998 $ 1,015,564
1999 554,218
2000 441,110
2001 292,053
2002 246,401
Thereafter 1,588,808
-----------
4,138,154
Less imputed discounts 270,000
Less allowance for doubtful accounts 125,000
-----------
$ 3,743,154
===========
</TABLE>
F-11
<PAGE> 41
At the time the notes receivable are executed, the Company considers a reserve
for doubtful collections based on the creditworthiness of the franchisee. The
provision for uncollectible amounts is continually reviewed and adjusted to
maintain the allowance at a level considered adequate to cover future losses.
The allowance is management's best estimate of uncollectible amounts and is
determined based on historical performance of the notes which are tracked by the
Company on an ongoing basis. The losses ultimately incurred could differ
materially in the near term from the amounts estimated in determining the
allowance.
F-12
<PAGE> 42
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. NOTES AND ACCOUNTS RECEIVABLE - RELATED PARTIES AND RELATED PARTY
TRANSACTIONS:
The Company had the following accounts and notes receivable from officers at
October 31, 1997:
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Notes receivable for life insurance policies paid by the
Company on behalf of the officers of the Company pursuant
to a split dollar life insurance plan. The notes are
payable in monthly installments ranging from $1,392 to
$2,789, plus interest at 6 percent, commencing April,
1997 through July, 1998. The notes are unsecured $ 92,070
Accounts receivable from officers for advances and personal
expenses paid by the Company 197,068
Accounts receivable from the President for third party
accounts receivable collected by the franchise owned 51
percent by the officer. Account receivable bears an 61,931
interest rate of 12 percent
Accounts receivable from a Vice-President for third party
accounts receivable collected by the franchise owned by
the officer. Accounts receivable bears an interest rate 104,457
of 12 percent ----------
Total accounts and notes receivable from officers 455,526
Current portion 370,138
----------
Long-term portion $ 85,388
==========
</TABLE>
The Company leases its operating facility from a partnership in which the
President of the Company is a 100% beneficial owner (Note 10). Rent expense
relating to the lease during the years ended October 31, 1997 and 1996 was
$153,112 and $127,501, respectively.
During the years ended October 31, 1997 and 1996, the Company paid the President
and/or a corporation in which the President is a majority stockholder $109,078
and $126,950, respectively, for the use of an airplane for business travel.
As shown in Note 3 above, there are notes receivable with a total face value of
$865,000 from related parties for franchise sales. A $450,000 note results from
the purchase of a franchise by a company that is 51 percent owned by the
President of the Company. This note, dated July 29, 1996 was for the entire
amount of the purchase and was interest-free until payments of monthly interest
at the rate of 12 percent per annum began May 1, 1997. Monthly payments of
principal and interest of $5,401 begin May 1, 1998 for 84 months, when on May 1,
2005 a balloon payment of $330,218 is due to repay the note in full. The note is
secured by the franchise and its assets, and additionally secured by a pledge of
25,000 shares of restricted Swisher International, Inc. common stock owned by
the President. The Company recognized a $255,045 net gain on the transaction and
$47,544 in management fee income for the year ended October 31, 1996. For the
year ended October 31, 1997, the Company realized revenues from this franchise
of $119,607 for product sales, $15,915 for marketing fees, $47,746 for royalty
fees, and $38,250 for service fees
An additional note of $415,000 results from the purchase of a company-owned
franchise by a company owned by a Vice-President of the Company. This note,
dated July 30, 1997, was for the entire amount ($415,000) of the purchase. The
note is interest-free until payments of monthly interest at the rate of 11
percent begin May 1, 1998 for a period of 12 months. Monthly payments of $5,000
principal and interest begin May 1, 1999 for 84 months, when on May 1, 2006, a
balloon payment of $267,116 is due to repay the note in full. This note is
secured by the franchise and its assets, and additionally secured by a
F-13
<PAGE> 43
pledge of the equivalent of 20,000 shares of restricted Swisher International,
Inc. stock owned by the Vice-President. The Company recognized a $392,093 gain
on the transaction and $26,064 in management fee income for the year ended
October 31, 1997.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment is comprised of:
<TABLE>
<CAPTION>
Estimated
Useful
1997 Life
---------- ----------
<S> <C> <C>
Automotive equipment $ 69,847 5 yrs
Operating equipment 85,328 7 yrs
Office equipment 64,459 5 - 7 yrs
Office furniture 356,368 5 - 7 yrs
Computer hardware 259,282 5 yrs
Computer software 605,089 5 yrs
Leased computer equipment 224,914 5 yrs
Leasehold improvements 94,800 31.5 yrs
----------
$1,760,087
==========
</TABLE>
NOTE 6. LINE OF CREDIT, NOTE PAYABLE AND PLEDGED ASSETS
The Company has a $1,750,000 line of credit agreement with a bank which expires
February 17, 1999. Borrowings under the agreement bear interest at 2.85% above
the LIBOR (5.66% at October 31, 1997) and are due on demand. In addition, the
line of credit is collateralized by substantially all assets of the Company (not
specifically pledged in Note 7) and the Company must maintain a minimum cash
balance of $250,000 at all times. Outstanding borrowing on the line of credit
was $1,381,998 at October 31, 1997. This line-of-credit agreement contains
financial covenants which require specified levels of equity and the maintenance
of certain financial ratios. At October 31, 1997 the Company was in violation of
one of these covenants, and this violation was waived by the bank.
F-14
<PAGE> 44
NOTE 7. LONG-TERM DEBT AND PLEDGED ASSETS
Long-term debt at October 31, 1997 consisted of the following:
<TABLE>
<CAPTION>
October 31,
-----------
1997
-----------
<S> <C>
Note payable, finance company, due in monthly
installments ranging from $3,123 to $51,793 including
interest at 13.4%, through April, 2001;
collateralized by certain franchisee notes
receivable. $ 712,045
Notepayable in connection with purchase of Carolina Termite &
Pest Control, Inc. (See Note 12), due in monthly installments
of $12,504, including interest
at 10 percent, through September, 2002; guaranteed by
the Company's President. 580,889
Notes payable, individuals, for covenants not to compete
(See Note 12), dated September 1, 1997: due in
monthly installments of $8,913, including interest at
10 percent, through September, 2002; guaranteed by 414,082
the Company's President.
Capitalized lease due in monthly installments of $4,795,
including interest at 10.53 percent, through October,
2002; secured by computer equipment costing $224,914;
guaranteed by the Company's President. 220,119
Notes payable, vendors, due in monthly installments of
$1,347 including interest at 9 percent through 30,606
December 1999; unsecured.
Note payable, individuals, due in monthly installments of
$1,575, including interest at 8% through January 4,686
1998; unsecured.
Note payable, individuals, due in monthly installments of
$1,245, including interest at 9% through May 2000; 34,337
unsecured.
Note payable, individual, due in monthly installments of
$1,065, including interest at 10 percent through July 20,101
1999; unsecured
Note payable, individual, due in monthly installments of
$1,300, noninterest bearing through January, 1998; 5,421
unsecured.
Notepayable, finance company, due in monthly installments
ranging from $1,189 to $1,464 including interest at 12.5
percent through June 2001;
collateralized by notes receivable with a balance at
October 31, 1997 of $92,117. 51,389
-----------
2,073,675
Less current portion (596,986)
-----------
$ 1,476,689
===========
</TABLE>
Aggregate maturities required on the long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending October 31
-------------------------------------------------------------
<S> <C>
1998 596,986
1999 525,104
2000 372,783
2001 300,167
2002 278,635
Thereafter --
------------
$ 2,073,675
============
</TABLE>
F-15
<PAGE> 45
NOTE 8. STOCK, STOCK OPTIONS AND ACCOUNTING CHANGE
In 1993, the Company completed a public offering which raised $4,560,000 net of
$1,013,949 of offering costs. The offering consisted of 760,000 units of the
Company's securities, each unit consisting of one share of common stock and one
warrant. Two warrants entitle the holder to purchase one share of common stock
at $7.80 per share expiring December, 1997. All warrants are outstanding at
October 31, 1997. A warrant to purchase up to 76,000 units through April 1998
with an exercise price of $7.20 per unit, was issued to the Company's
Underwriter for $100 in connection with the offering.
In December 1992, the stockholders authorized the issuance of 1,500,000 shares
of preferred stock. The preferred stock may be issued in one or more series with
such rights and preferences as may be fixed and determined by the Board of
Directors. No preferred shares have been issued as of October 31, 1997.
SHARE PURCHASE RIGHTS PLAN: In June 1995, the Board of Directors authorized the
designation of 100,000 shares of Series A Junior Participating Preferred Stock
with a $1.00 par value per share. Each Series A Preferred Share is entitled to a
cumulative quarterly dividend of 100 times the dividend declared per common
share but in no event less than $1.00 per share. No Series A Preferred Shares
have been issued at October 31, 1997.
Also in June 1995, the Company adopted a Share Rights Purchase Plan (the "Plan")
under which the Board of Directors declared a dividend of one preferred share
purchase right ("Right") for each outstanding share of common stock. Each right
entitles the holder to purchase from the Company one one-hundredth of a share of
Series A Junior Participating Preferred Stock at a price of $18.75, subject to
adjustment as provided in the Plan. The Rights will be distributed to all common
shareholders ten days following the earlier of 1) an announcement that a person
or group of persons has acquired beneficial ownership of 15 percent or more of
the outstanding common shares or 2) the commencement or announcement of a tender
offer or exchange offer the consummation of which would result in the beneficial
ownership of 15% or more of the outstanding common shares. At any time prior to
this, the Board of Directors may redeem the Rights in whole at a price of $.01
per Right. The Rights expire June 30, 2005. 2,122,271 Rights are outstanding at
October 31, 1997.
STOCK OPTION PLANS: In August 1992, the Company adopted an Incentive Stock
Option Plan (the "Incentive Plan"). The Incentive Plan covers an aggregate of
133,333 shares. In fiscal 1994, the Incentive Plan was amended by a shareholder
vote to reserve 250,000 shares of common stock for issuance under the Incentive
Plan. In fiscal 1997, the Plan was amended by the Board of Directors to
authorize 500,000 shares of common stock under the incentive plan, subject to
the stockholders' approval. The Plan is administered by the Compensation
Committee of the Board of Directors, and requires that options be granted at an
exercise price equal to fair market value of the common shares of the Company on
the date of the grant. The options expire up to five years from the date of
grant and may not be exercised during the initial one-year period from the date
of grant. Options to purchase 199,168 shares of the Company's $.01 par value
common stock have been granted pursuant to the Incentive Plan. During the year
ended October 31, 1997, stock options to purchase 150,001 shares of common stock
at exercise prices of $2.90 to $3.85 per share were exercised by completing a
cashless exercise for 105,343 shares of common stock.
The Company also adopted a Non-Qualified Stock Option Plan in August 1992 (the
"Non-Qualified Plan"). The Non-Qualified Plan is also administered by the
Compensation Committee of the Board of Directors and covers a total of 58,334
shares. In fiscal 1994, the Non-Qualified Plan was amended by a shareholder vote
to authorize 150,000 shares of common stock for issuance under the Non-qualified
Plan. In fiscal 1997, the Plan was amended by the Board of Directors to
authorize 400,000 shares of common stock under the incentive plan The
Non-Qualified Plan provides that options may be granted at exercise price not
less than 85 percent of the fair market value of the Common Shares of the
Company on the date of grant. The committee is empowered to grant bonuses at the
time of issuance of non-qualified stock options in an amount sufficient to cover
the tax liability incurred by the recipient at the date of grant. Options to
purchase 110,067 shares of the Company's $.01 par value common stock have been
granted under the Non-Qualified Plan. The exercise price of the options
approximated the fair market value of the Company's common stock at the dates of
grant.
F-16
<PAGE> 46
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. STOCK, STOCK OPTIONS AND ACCOUNTING CHANGE (CONTINUED)
The following is a summary of options granted:
<TABLE>
<CAPTION>
Weighted-Average
Number of Exercise
Options Price
--------- ---------------
<S> <C> <C>
Outstanding October 31, 1995 215,235 $3.26
Options exercised (16,500) 2.25
Options issued 81,500 3.50
---------
Outstanding October 31, 1996 280,235 3.39
Options exercised (150,001) 3.59
Options issued 179,000 5.38
---------
Outstanding October 31, 1997 309,234 4.44
=========
</TABLE>
NON-PLAN OPTIONS: In 1994, the Company entered into an agreement with an
investor relations firm. Under this agreement, the firm received an option to
purchase 40,000 shares of common stock at an exercise price of $2.88 per share.
These options were fully exercised in October, 1997.
In October 1995, the Company entered into a consulting agreement with a public
relations firm. Pursuant to this agreement, the Company granted to the
consultant options to purchase a total of 100,000 shares of common stock at
exercise prices ranging from $3.50 to $4.50 per share which become exercisable
only upon the satisfaction of certain contingencies, as defined. These options
expired during the years ended October 31, 1997 and 1996.
In April, 1996, the Company entered into an agreement with an investment banking
firm whereby the Company granted the investment banking firm options to purchase
75,000 shares of the Company's common stock at a price of $3.50 per share. In
accordance with FASB Statement No. 123, the transaction was recorded based on
the value of the services received. On January 17, 1997 the investment banking
firm exercised their rights under the option agreement by completing a cashless
exercise for 41,129 shares of common stock.
In June, 1996, the Company entered into an agreement with a public relations
firm whereby the Company granted the public relations firm options to purchase
25,000 shares of the Company's common stock at a price of $5.75 per share. In
accordance with FASB Statement No. 123, the transaction was recorded based on
the value of the services received.
In April, 1997, the Company entered into an agreement with a public relations
firm whereby the Company granted the public relations firm options to purchase
5,000 shares of the Company's common stock at a price of $5.00 per share. In
accordance with FASB Statement No. 123, the transaction was recorded based on
the value of the services received.
ACCOUNTING CHANGE: The Company has adopted Financial Accounting Standards Board
Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. FASB Statement No.
123, requires that the Company account for its stock based compensation plans
using a fair value based method which measures compensation cost at the grant
date based upon the value of the awards, which is then recognized over the
vesting period. The accounting requirements of the statement apply to awards to
employees entered into in fiscal years that begin after December 15, 1995 and to
transactions with non-employees entered into after December 15, 1995. The
Statement allows and the Company has elected to continue to use APB Opinion No.
25 ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES to measure compensation costs but is
required to disclose the pro forma effects on net income and earnings per share
to reflect the difference between the compensation cost from applying APB
Opinion No. 25 and the related cost measured by the fair value method defined in
the statement for all awards granted in years beginning after December 15, 1994.
The Statement did not change the reporting required for the Incentive
F-17
<PAGE> 47
Stock Option Plan and Non-Qualified Stock Option Plan discussed above. The pro
forma effects of not utilizing the fair value method prescribed in FASB
Statement No. 123 for the Company's stock options is shown in the following
table for the years ended October 31, 1997 and 1996. In computing the pro forma
effects of the SFAS No. 123 compensation cost, the Company used a 6.4% risk-free
interest rate, an expected life of five years, and expected volatility of 54.5
percent for the year ended October 31, 1997 and 60.7 percent for the year ended
October 31, 1996, assumed no dividends, and assumed that such cost could not be
tax effected.
F-18
<PAGE> 48
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. STOCK, STOCK OPTIONS AND ACCOUNTING CHANGE (CONTINUED)
<TABLE>
<CAPTION>
Earnings
Net Income Per Share
---------- ---------
<S> <C> <C>
Year Ended October 31, 1997:
As reported $ 531,908 $ .25
Pro-forma $ 383,631 $ .15
Year Ended October 31, 1996:
As reported $ (154,541) $(.09)
Pro-forma $ (319,986) $(.18)
</TABLE>
NOTE 9. INCOME TAXES
Net deferred tax liabilities consist of the following components as of October
31:
<TABLE>
<CAPTION>
1997 Current Long-Term Total
- ---- --------- ----------- ---------
<S> <C> <C> <C>
Deferred tax asset:
Receivable allowances $ 73,000 $ -- $ 73,000
--------- --------- ---------
Deferred tax liabilities:
Prepaid expenses (70,000) -- (70,000)
Property and equipment -- (88,000) (88,000)
Intangible assets -- (12,000) (12,000)
--------- --------- ---------
(70,000) (100,000) (170,000)
--------- --------- ---------
$ 3,000 $(100,000) $ (97,000)
========= ========== =========
</TABLE>
F-19
<PAGE> 49
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. INCOME TAXES (CONTINUED)
The provision for income taxes charged to operations for the years ended October
31, 1997 and 1996 consisted of
the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current tax provision
Federal $183,024 $ 84,722
State 61,844 37,940
Prior period under-accrued 18,720
Deferred tax provision
Federal 84,000 (70,000)
State 10,000 (5,000)
-------- --------
$338,868 $ 66,382
======== ========
</TABLE>
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the years ended
October 31, 1997 and 1996 due to the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Computed expected tax expense: $296,063 $(29,974)
Increase (decrease) in income taxes resulting from:
State income taxes 40,817 22,819
Permanent differences 17,455 8,830
Temporary differences 8,620 62,311
Effect of change in tax rate used in
computing deferred taxes -- 5,118
Other (24,087) (2,722)
-------- --------
$338,868 $ 66,382
======== ========
</TABLE>
NOTE 10. LEASE COMMITMENTS AND RENT EXPENSE
The Company leases its present facility from a partnership in which the
President is a 100 percent beneficial owner. The term of the lease extends
through March 2000. During the term of the lease, rent is subject to increases
in accordance with the rate of increase in the Consumer Price Index. The lease
requires the Company to pay for all insurance, maintenance, and taxes. The
Company also leases other facilities, equipment and vehicles under operating
leases which expire in varying amounts through 2002.
F-20
<PAGE> 50
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10: LEASE COMMITMENTS AND RENT EXPENSE (CONTINUED)
Future minimum lease payments pursuant to these leases are as follows:
<TABLE>
<CAPTION>
Year Ending October 31,
-----------------------
<S> <C>
1998 $ 309,573
1999 283,148
2000 213,639
2001 28,335
2002 15,824
---------
$ 850,519
=========
</TABLE>
For the years ended October 31, 1997 and 1996, operating lease expense was
$321,198 and $206,514, respectively.
NOTE 11. FRANCHISES
The following table summarizes the number of hygiene franchised operations of
Swisher International, Inc. for the year ended October 31, 1997:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Franchises at the beginning of the year 99
Franchises sold 9
Closed (3)
Repurchased --
----
Franchises at the end of the year 105
====
Franchises sold and not open at year end 0
====
</TABLE>
The following table summarizes the number of maids operations of Swisher
International, Inc. for the year ended October 31, 1997:
<TABLE>
<CAPTION>
1997
-----
<S> <C>
Franchises at the beginning of the year 11
Franchises sold --
Consolidated (2)
Repurchased --
Closed (2)
====
Franchises at the end of the year 7
====
Franchises sold and not open at year end 2
====
</TABLE>
F-21
<PAGE> 51
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. FRANCHISES (CONTINUED)
The following table summarizes the number of Surface Doctor operations of
Swisher International, Inc. for the year ended October 31, 1997:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Franchises at the beginning of the year 117
Franchises sold 17
Closed (32)
----
Franchises at the end of the year 102
====
Franchises sold and not open at year end 0
====
</TABLE>
The following table summarizes the number of Pest Control operations of Swisher
International, Inc. for the year ended October 31, 1997:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Franchises sold 4
-----
Franchises at the end of the year 4
=====
Franchises sold and not open at year end 0
=====
</TABLE>
NOTE 12. SEGMENT INFORMATION
The Company operates in four principal business segments: hygiene, residential
maid services and residential and commercial resurfacing services, and
residential and commercial pest control services conducted through Company-owned
operations and hygiene, residential maid services and residential and commercial
resurfacing services, and residential and commercial pest control services
conducted through franchised operations. Selected financial information is
presented below for the years ended October 31, 1997 and 1996.
Operating income (loss) is revenue less related costs and direct and allocated
operating expenses, excluding interest and the unallocated portion of corporate
expenses.
During the year ended October 31, 1997 and 1996 foreign sales totaled $876,845
and $256,024, respectively.
F-22
<PAGE> 52
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
Pest Control Maid Hygiene Surface Doctor
Company Company Company Company Franchise
1997 Operations Operations Operations Operations Operations Total
- ---- ---------- ---------- ---------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Net revenues $171,124 $812,212 $674,742 $ 45,042 $11,573,211 $13,276,331
Operating income (loss) 1,594 8,754 95,568 (103,136) 867,996 870,776
Identifiable assets 721,854 130,377 104,811 -- 11,293,908 12,250,950
Capital Expenditures -- -- -- -- 612,770 612,770
Depreciation and
amortization 13,658 75,290 -- -- 238,617 327,565
<CAPTION>
Maid Hygiene Surface Doctor
Company Company Company Franchise
1996 Operations Operations Operations Operations Total
- ---- ----------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 855,181 $1,672,947 $ 84,427 $ 7,974,010 $ 10,586,565
Operating income (loss) (135,878) 240,338 (32,709) (159,910) (88,159)
Identifiable assets 219,645 300,201 27,943 9,044,498 9,592,287
Capital expenditures -- -- -- 235,176 235,176
Depreciation and
amortization 10,662 21,893 1,627 242,816 276,998
</TABLE>
NOTE 13. ASSETS HELD FOR SALE
As of October 31, 1997 the Company had four franchises, that it had reacquired
from franchisees. The results of operations for the period since acquisition are
included in Company-owned operations in the accompanying statements of
operations.
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Cost basis of assets $511,275
Less: valuation allowance to
fair market value
--
--------
511,275
Less: accumulated amortization
of goodwill
(35,303)
========
$475,972
========
</TABLE>
<PAGE> 53
'
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. BUSINESS COMBINATION
Surface Doctor
Effective July 1, 1996, the Company, pursuant to an Asset Purchase Agreement
completed the acquisition of certain assets and assumption of certain
liabilities of the Surface Doctor division of Professional Carpet Systems, Inc.
The Surface Doctor Division specializes in resurfacing appliances, counter tops,
and fixtures. The acquisition was accounted for under the purchase method
whereby assets and liabilities were recorded at their fair value and the excess
purchase price over fair value of net assets is recognized as goodwill.
The purchase price for the assets acquired consisted of issuance to the sellers
of an aggregate of 200,000 shares of the Company's previously authorized but
unissued common stock, $.01 par value. The shares issued are subject to demand
and piggyback registration rights.
In addition, the sellers were granted an option to purchase 75,000 shares of the
Company's common stock at a purchase price of $6.00 per share. The option must
be exercised on or before July 31, 2001.
Assets acquired in connection with the acquisition are as follows:
<TABLE>
<S> <C>
Accounts receivable $ 120,639
Inventories 75,000
Prepaid expenses 40,504
Notes receivable 79,687
Equipment 56,233
Intangibles 100,000
Goodwill 714,963
------------
$ 1,187,026
============
</TABLE>
Liabilities assumed and common stock and options to purchase common stock issued
in connection with the acquisition are as follows:
<TABLE>
<S> <C>
Accounts payable $ 54,281
Accrued expenses 27,468
Deferred revenue 116,215
------------
197,964
Consideration paid 989,062
------------
$ 1,187,026
============
</TABLE>
Pest Control
Effective September 1, 1997, the Company, pursuant to an Asset Purchase
Agreement completed the acquisition of certain liabilities of Carolina Termite &
Pest Control, Inc. The acquisition was accounted for under the purchase method
whereby assets and liabilities were recorded at their fair value and the excess
purchase price over fair value of net assets is recognized as goodwill.
The purchase price for the assets acquired was financed by the Sellers with a
promissory note for $588,489. The note is payable over 60 months including
interest at 10 percent (See Note 7)
F-24
<PAGE> 54
Assets acquired in connection with the acquisition are as follows:
<TABLE>
<S> <S>
Inventories $ 21,113
Equipment 99,473
Goodwill 503,212
-----------
$ 623,798
===========
</TABLE>
Liabilities assumed and issuance of a promissory note in connection with the
acquisition are as follows:
<TABLE>
<S> <C>
Unearned service fees $ 35,309
Consideration paid 588,489
-----------
$ 623,798
===========
</TABLE>
In connection with the purchase of Carolina Termite & Pest Control, Inc. the
Company acquired covenants not to compete from two of the principals of Carolina
Termite & Pest Control, Inc. who were employed by the Company in the terms of
the acquisition. The Company paid a total of $619,270 for these covenants by
paying $200,000 at closing and issuing promissory notes for $419,270 payable
over 60 months (See Note 7).
The following unaudited pro forma data summarize the results of operations for
the periods indicated as if these acquisitions had been completed on November 1,
1995, the beginning of the 1996 fiscal year
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Total revenue $13,042,468 $11,456,034
Net income 517,625 (146,214)
Net income per common share 0.25 (.08)
</TABLE>
F-25
<PAGE> 55
SWISHER INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of Financial Accounting Standards Board
Statement No. 107, Disclosure About Fair Value of Financial Instruments. The
estimated fair value amounts have been determined by the Company using available
market information and valuation methodologies described below. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein may not be
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions or valuation methodologies may
have a material effect on the estimated fair value amounts.
The carrying values of accounts and notes receivable, accounts payable, note
payable and line-of-credit borrowings approximate their fair value due to the
short-term maturities of these instruments. The carrying values of notes
receivable and long-term debt approximate fair values at October 31, 1997 due to
rates being at current market rates.
NOTE 16. ADVERTISING COSTS:
Prepaid expenses include advertising of $33,322 at October 31, 1997.
Total advertising costs were $437,128 and $405,298 for the years ended October
31, 1997 and 1996, respectively.
NOTE 17. LITIGATION:
In August, 1997 the previous owners of the Surface Doctor division filed suit
against certain officers of the Company and the Company. The suit has been
subsequently settled without adverse effect to the Company.
The Company is also subject to other legal proceedings and claims which arise in
the ordinary course of its business. Although occasional adverse decisions (or
settlements) may occur, the Company believes that the final disposition of such
matters will not have a material adverse effect on the financial position or
results of operations of the Company.
F-26
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SWISHER INTERNATIONAL, INC.
By: /s/ Patrick L. Swisher
-------------------------------------
Patrick L. Swisher
President and Chief Executive Officer
and Interim Principal Accounting
Officer
Dated: June 30, 1998
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- -----
<S> <C> <C>
/s/ Patrick L. Swisher
- -------------------------- President, Chief Executive and June 30, 1998
Patrick L. Swisher Financial Officer and Director
/s/ George K. Moore
- -------------------------- Director June 30, 1998
George K. Moore
</TABLE>
F-27
<PAGE> 57
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
10.1.1 Asset Purchase Agreement dated 9/1/97
by and among Carolina Termite & Pest
Control, Inc., et al. and Swisher Pest
Control Group
10.1.3 Non-Competition Agreement dated
9/1/97 between Robert M. McCain, Jr.
and Swisher Pest Control Group
21.1 List of Registrant's Subsidiaries
23.1 Consent of Scharf Pera & Co.
27 Financial Data Schedule
99.1 Letter from McGladrey & Pullen, LLC
(to be filed by amendment)
</TABLE>
<PAGE> 1
EXHIBIT 10.1.1
ASSET PURCHASE AGREEMENT
BY AND AMONG
CAROLINA TERMITE & PEST CONTROL, INC.
E. DAVID DODD, III
DRAKE DODD MCCAIN
LAURA MIDDLETON DODD
SARAH CURRENT DODD
AND
SWISHER PEST CONTROL CORP.
EFFECTIVE
SEPTEMBER 1, 1997
<PAGE> 2
ASSET PURCHASE AGREEMENT
AGREEMENT made and entered into as of the 1st day of September, 1997, by
and among Carolina Termite and Pest Control, a North Carolina Corporation (the
"Seller"), E. David Dodd, III and Drake Dodd McCain, Sarah Current Dodd, and
Laura Middleton Dodd (individually a "Stockholder" and collectively the
"Stockholders"), Swisher Pest Control Corp., a North Carolina corporation
("Swisher").
WITNESSETH
WHEREAS, Seller is engaged in the termite and pest control business (the
"Business"),
WHEREAS, the Stockholders own 100% of the capital stock of the Seller;
WHEREAS, Swisher desires to purchase from Seller, and Seller desires to
sell to Swisher, substantially all of the assets of the Business;
WHEREAS, the Stockholders desire to induce Swisher to enter into and
perform this Agreement;
NOW, THEREFORE, it is agreed as follows:
ARTICLE I
CERTAIN DEFINITIONS
1.1 DEFINITIONS. As used in this Agreement the following terms shall have
the following meanings:
(a) "Acquired Assets" means the Fixed Assets, the Customer Contracts
and Product Inventory and Customer Lists.
(b) "Assumed Liabilities" means only such liabilities as are shown on
Schedule 1.1(b).
<PAGE> 3
(c) "Closing" shall mean the consummation of the transactions
contemplated by this Agreement on the Closing Date.
(d) "Closing Date" shall mean September 1, 1997, or such other date
as may be agreed upon in writing by the parties.
(e) "Customer Contracts" shall mean contracts (whether written or
oral) entered into by Seller to provide termite and pest control services as
part of the Business.
(f) "Excluded Assets" means the assets shown on Schedule 1.1(f).
(g) "Excluded Liabilities" means all liabilities which are not
Assumed Liabilities.
(h) "Fixed Assets" means the tangible fixed assets owned by Sellers
used by Sellers in connection with the operation of the Business, including,
without limitation, motor vehicles; and generally by type, computer equipment,
routeman's equipment, warehouse equipment, office furniture, office fixtures,
communications equipment and software, shop equipment and fleet equipment
(excluding Product Inventory), used by the Sellers in connection with the
operation of the Business.
(i) "Other Contracts and Leases" shall mean contracts and leases
(whether written or oral) other than Customer Contracts or real property leases.
(j) "Product Inventory" means all inventories of Seller's
insecticides, pesticides, termiticides, repellents and other chemicals used in
the Business.
(k) "Schedules" shall mean the documents delivered with this
Agreement and specifically marked as Schedules. The Schedules are an integral
part of this Agreement.
- 2 -
<PAGE> 4
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER AND STOCKHOLDERS
The Seller and the Stockholders, jointly and severally, represent and
warrant to Swisher that:
2.1 CORPORATE ORGANIZATION AND CAPITALIZATION. The Seller is a corporation
duly organized, validly existing and in good standing under the laws of the
State of North Carolina, is duly qualified to do business and is in good
standing as a foreign corporation in each State where the nature of its
respective business or activities requires it to be so qualified, has the
corporate power and authority to own and operate its properties and to carry on
its business as currently conducted, to enter into this Agreement and to carry
out the transactions contemplated hereby, has all necessary licenses, permits,
consents or approvals from or by, and has made all necessary filings with, all
governmental instrumentalities or authorities having jurisdiction to the extent
requisite for ownership, operation and conduct of its business.
2.2 AUTHORITY. The execution and delivery of this Agreement by the Seller
and the due consummation of the transactions contemplated hereby have been duly
and validly authorized by all necessary corporate action on the part of the
Seller and this Agreement constitutes a valid and legally binding Agreement of
the Seller and neither the execution and delivery of this Agreement nor the
consummation by the Seller of the transactions contemplated hereby will (i)
constitute a violation of any provision of law or of the Seller's Articles of
Incorporation or Bylaws, (ii) result in the breach of, or the imposition of any
lien on, or constitute a default under, any indenture or bank loan or credit
agreement, license, permit, trust, pledge, agreement, custodianship or other
restriction or (iii) is prevented or otherwise limited by
- 3 -
<PAGE> 5
any judgment, order, writ, injunction or decree of, or is prevented or otherwise
limited by any proceeding before, any court, governmental body, administrative
agency or arbitrator to which the Seller is a party or by which it or its
properties may be bound or affected. Except for consents, approvals,
authorizations and actions which are disclosed in Schedule 2.2, no consent,
approval, authorization or other action of, or designation, declaration, filing,
registration or qualification with, any governmental authority or any person
having legal rights against or jurisdiction over the Seller, or the Seller's
assets is required for: (a) the execution, delivery or performance by the Seller
of this Agreement; (b) the assignment, conveyance or other transfer to Swisher
in accordance with this Agreement of all of the Acquired Assets of Seller,
without the acceleration of, or creation of the right to accelerate, any
maturity date of any debt, liability or other obligation, or any increase in the
interest rate of any instrument evidencing such debt, liability or other
obligation, or any cancellation or other diminution in value of any right, title
or interest thereto; or (c) the consummation by Seller and/or the Stockholders
of any other transaction contemplated hereby.
2.3 FINANCIAL STATEMENTS. Seller and/or the Stockholders have furnished
Swisher with the balance sheet of Seller and related statement of income and by
Seller retained earnings and statement of cash flows for the period ending July
31, 1997 prepared by Seller. Seller and/or the Stockholders have also furnished
Swisher with the balance sheets of Seller as at December 31, 1996 and December
31, 1995 and related statements of income and retained earnings and statement of
cash flows for the years ended on such dates, respectively, internally generated
by Seller (the "Financial Statements"). The Financial Statements are complete
and correct. All such Financial Statements fairly present the financial position
of the respective corporations as at the
- 4 -
<PAGE> 6
respective dates thereof, and the statements of income and statement of cash
flows for said periods, fairly present the results of the operations of the
respective corporations for the periods indicated, in each case in accordance
with generally accepted accounting principles, consistently applied. The
Financial Statements make full and adequate provision for all obligations and
liabilities (fixed and contingent) of the Seller which have accrued or are
properly accruable in accordance with generally accepted accounting principles
as of their respective dates.
2.4 UNDISCLOSED LIABILITIES. Seller has no material liabilities of any
nature, whether absolute, accrued or contingent and whether due or to become
due, which were not reflected on the Financial Statements or which are not
listed in Schedule 2.4. There has been no material adverse change in the
business, condition or operations (financial or otherwise) of Seller or any of
them since July 31, 1997.
2.5 TITLE TO ASSETS. Seller has good, valid and marketable title to all
its assets (real and personal, tangible and intangible), subject to no liens,
encumbrances or other restrictions.
2.6 OWNED REAL ESTATE. Stockholders own real property which is used in
the conduct of the Business through a North Carolina partnership. The
Stockholders lease the real estate to Seller.
2.7 REAL ESTATE LEASE. The Seller has a valid and enforceable real
property lease (the "Realty") used in the conduct of the Business which is not
in default with respect to the premises purported to be leased by it (and there
are no events which have occurred which can or may constitute such a default
under such leases), has performed all obligations required to be performed by it
under such lease, has not performed any act prohibited under such leases and
possesses and quietly enjoys the Realty under such lease. The Realty is not
subject to any
- 5 -
<PAGE> 7
restrictions, exceptions, reservations or limitations which might
affect its use or value to Swisher, except as set forth in Schedule 2.7. The
buildings, fixtures or improvements on the Realty and the operations therein
conducted conform to any and all laws, including, without limitation, applicable
health, fire, environment, safety, zoning and building laws. The buildings,
structures and fixtures used by Seller in the conduct of its business are in
good operating condition and repair and have been maintained and repaired on a
regular basis and are adequate for the conduct of the Business. Except as set
forth on Schedule 2.7, no mortgage, deed of trust, financing statement or
continuation statement with respect to the Realty has been recorded in any state
or other jurisdiction and Seller has not signed any such statement or agreement
authorizing or permitting any such encumbrance whether recorded or not.
2.8 ENVIRONMENTAL MATTERS. Except as set forth on Schedule 2.8. attached
hereto, Seller and Stockholders have no knowledge that the Realty contains any
hazardous waste, hazardous substances, hazardous materials, toxic substances,
hazardous air pollutants, or toxic pollutants, as those terms are used in the
Resource Conservation Recovery Act (42 USC ss. 1251 (et. seq.), or in any
amendments thereto, or in any regulation promulgated pursuant thereto, or in any
applicable state or local law, regulation or ordinance. Except as set forth on
Schedule 2.8, Seller and Stockholders have no knowledge that any part of the
Realty currently or potentially subject to any federal, state or local
compliance or enforcement action, cleanup action, or other action because of the
presence of stored, leaked, spilled or disposed products, waste materials or
debris, "PCB's" or "PCB items" (as defined in 40 CFR ss. 761.3), underground
storage tanks, "asbestos" (as defined in 40 CFR ss. 763.63), or the past or
present accumulation, treatment, storage, disposal, spillage or leakage of any
dangerous, hazardous or toxic substance as defined
- 6 -
<PAGE> 8
in or regulated by any federal, state or local laws, regulations or orders.
Except as set forth on Schedule 2.8, no portion of the Realty has been filled
with rock, soil, gravel, debris, garbage, stumps or other fill materials which
to the best knowledge of the Seller and Stockholders presents an actual or
potential threat to public health or the environment or which may require
environmental investigation, cleanup or remediation, and no condition currently
exists which is or may be characterized by any federal, state or local
government or agency as an actual or potential threat or danger to public health
or the environment.
2.9 PERSONAL PROPERTY LEASES. Schedule 2.9 contains a list and brief
description of the terms of each personal property lease used by Seller in the
conduct of the Business. All such leases are in full force and effect.
2.10 EMPLOYEE COMPENSATION. Seller has delivered to Purchaser herewith
Schedule 2.10 containing the names and current annual salary rates of all
present officers and employees of Seller who received during the calendar year
1996, or will receive during the calendar year 1997, $30,000 or more in the
aggregate compensation, whether in salary, bonus or otherwise.
2.11 EMPLOYEE BENEFIT PLANS. Schedule 2.11 contains a list of all bonus,
incentive compensation, retirement, pension, group insurance, death benefit or
other benefit plans, trust agreements or arrangements affecting employees of
Seller.
2.12 INSURANCE POLICIES. Schedule 2.12 contains a list of all insurance
policies used in the Seller's Business. All insurance policies set forth in
Schedule 2.12 are in full force and effect; sufficient for compliance by Seller
with all requirements of law and all agreements to which they are a party; are
valid, outstanding and enforceable policies; in the judgment of the management
of Seller, which to the best knowledge of Seller and Stockholders insure against
- 7 -
<PAGE> 9
risks customarily insured against in amounts customarily carried by business
enterprises of similar size engaged in the Business of similar size and provide
adequate insurance coverage for the assets and operations of the Business (and
will remain in full force and effect through the Closing Date); and, will not in
any way be affected by, or terminate or lapse by reason of, the transactions
contemplated by this Agreement.
2.13 LABOR RELATIONS. Schedule 2.13 contains a list of all collective
bargaining agreements with all labor unions or other representatives of
employees which are binding upon Seller and a description of any attempts to
organize a collective bargaining unit.
2.14 LITIGATION. Except as set forth in Schedule 2.14 there is no known
action, suit, proceeding or known investigation pending or, threatened against
or affecting Seller, or the Stockholders in any court or by or before any
arbitrator or governmental agency or authority which might result, either
individually or in the aggregate, in any adverse change in the condition,
financial or otherwise, results of operations, business, assets, profit or
prospects of Seller or Stockholders, or the ability of Seller or Stockholders to
perform their obligations hereunder. There is no known action, suit, proceeding
or investigation pending or, threatened against or affecting Seller or the
Stockholders in any court or by or before any arbitrator or governmental
instrumentality or authority which questions the validity of this Agreement, any
of the transactions contemplated hereby, or any action taken or to be taken in
connection with this Agreement.
2.15 CUSTOMER CONTRACTS. Schedule 2.15 contains an accurate and complete
list of all of the Customer Contracts which Seller has or will transfer to
Swisher and to which Swisher will be a party. The Customer Contracts are valid
and in full force and effect, and Seller has not
- 8 -
<PAGE> 10
breached any provision of, and is not in default in any respect under, the terms
of any such contract. Seller has the right to transfer the Customer Contracts
without obtaining customer consents.
2.16 OTHER CONTRACTS. Schedule 2.16 contains an accurate and complete list
of Other Contracts and Leases used by Seller in the Business to be transferred
to Swisher. Except as shown on Schedule 2.16, no consents from third parties are
necessary to transfer any of the Other Contracts and Leases.
2.17 INTELLECTUAL PROPERTY. Seller owns or holds common law rights to use
all trademarks, service marks, and trade names used in or necessary for the
ordinary conduct of the Business of Seller as heretofore conducted, as set forth
in Schedule 2.17, and the consummation of the transactions contemplated hereby
will not alter or impair Swisher's exercise of any such rights after the
Closing. No claims have been asserted and no claims are pending, by any person
to the use of any such trademarks, service marks, or trade names, or challenging
or questioning the validity or effectiveness of them, and Seller and
Stockholders are not aware of any basis for such a claim.
2.18 ABSENCE OF CHANGES. Except for changes required by the transactions
contemplated herein, there has not been with respect to Seller either
individually or in the aggregate, nor will there be through the Closing Date:
(i) any material adverse change in its condition, financial
or otherwise, results of operations, business, assets or profits
which, individually or in the aggregate, have been or will be
materially adverse to such conditions, financial or otherwise, results
of operations, business, assets or profits nor has there been any
change in such conditions, results of operations, the Business, assets
or profits occurring otherwise than in the ordinary course of
business;
- 9 -
<PAGE> 11
(ii) any damage, destruction or loss (whether or not covered
by insurance) materially and adversely affecting the Business or
assets of Seller,
(iii) any labor trouble materially and adversely affecting
its Business or assets;
(iv) any mortgage, pledge, lien or other encumbrances or
security interest (other than liens for current taxes not yet due)
created on any of the assets of Seller;
(v) any sale, transfer or other disposition of any of
Seller's assets except in the ordinary course of business;
(vi) any amendment, termination, cancellation or waiver of
any right of substantial value belonging to Seller except in the
ordinary course of business;
(vii) any increase in the compensation payable or to become
payable by Seller to any of its officers or employees listed in
Schedule 2.8 or any general uniform increase for other employees,
other than normal merit and cost-of-living increases required by union
contracts or by Seller's general prevailing practices, (with any
increases to be agreed to by Swisher);
(viii) any write-down of the value of any inventory;
(ix) any disposition or diminution of, or lapse of any
rights to the use of any Intellectual Property of Seller or the
disposition of, or disclosure to, any person of any trade secret
related to the business of Seller and not previously a matter of
public knowledge;
(x) any capital expenditures or commitment for additions to
properties, plant or equipment, except in the ordinary course of '
business or as disclosed in Schedule 2.25;
(xi) any material change in the method of accounting or
accounting practices of Seller;
(xii) any incurrence of any liability or obligation of any
nature (whether absolute, accrued, contingent or otherwise)
affecting Seller except in the ordinary course of business, or any
- 10 -
<PAGE> 12
increase in, or experiencing of any significant change in the
assumption underlying or methods of calculating any bad debt,
contingency or other reserves;
(xiii) any agreements or arrangements with, or assets of the
Business of Seller sold to, any of the officers or directors of
Seller or the Stockholders or any of their "affiliates" or
"associates" (as such terms are defined in the rules and regulations
of the Securities and Exchange Commission under the Securities Act
of 1933, as amended), except for purchases and sales in the ordinary
course of business effected at competitive prices or except as
disclosed on Schedule 2.18; or
(xiv) any declaration or set aside or payment or redemption
or other distribution in respect of, the capital stock of Seller;
and there has been no agreement on the part of the Seller or the Stockholders,
whether in writing or not, to do any of the foregoing.
2.19 BROKER, AGENT, FINDER. Neither Seller nor the Stockholders has
employed any broker, agent or finder or incurred any liability for any
brokerage fee, agents' commissions or finders' fees in connection with the
transactions contemplated herein.
2.20 CONDITION OF ASSETS. Except as shown on Schedule 2.20, all of the
structures, equipment, furniture and fixtures of the Business and the Fixed
Assets of Seller are in good operating condition and repair for the conduct of
the Business as presently conducted.
2.21 PRODUCT INVENTORIES. Except as shown on Schedule 2.21, the
inventories of the products of Seller transferred to Swisher and shown on the
Financial Statements and the inventories accumulated by Seller subsequent to
July 31, 1997 include no items which are obsolete, beyond normal shelf life,
or below standard quality or of any quality or quantity not usable or saleable
in the ordinary course of business of Seller.
- 11 -
<PAGE> 13
2.22 FIXED ASSETS. Schedule 2.22 contains a full and complete list of the
Fixed Assets used by Seller in the Business to be transferred to Swisher, and
Seller has full right and title to transfer the Fixed Assets to Swisher.
2.23 NO DEMAND INDEBTEDNESS. Seller and/or the Stockholders are not a
party to any indenture or bank loan or credit agreement or any other agreement
or instrument under which the Seller is or will be required to place (or under
which a third party may place) a lien upon any of the Acquired Assets securing
indebtedness, either upon demand of the holder of such indebtedness or upon
the happening of a condition, with or without such demand.
2.24 NO DEFAULTS. No event or condition has occurred and is continuing
which would constitute an event of default or with the giving of notice or
lapse of time or both would constitute an event of default or with the giving
of notice or lapse of time or both would constitute an event of default under
any agreement, indenture, bank loan, credit agreement or lease under which the
property or assets of the Seller are bound.
2.25 CAPITAL COMMITMENTS. Schedule 2.25 contains a list of all capital
commitments or capital expenditures ("Cap. Ex.") made by Seller during
calendar year 1996. All Cap. Ex. commitments have been paid or adequately
reserved on the Seller's balance sheet. There are no Cap. Ex. commitments made
during 1997 by Seller which are to be assumed by Swisher as part of the
transactions contemplated hereby.
2.26 LETTERS OF CREDIT AND BONDS. Schedule 2.26 sets forth all letters of
credit and bonds together with face amounts and a description as to their
character (i.e. standby, irrevocable, etc.) which are obligations of the
Seller or the Stockholders and which have been incurred in connection with the
Business.
- 12 -
<PAGE> 14
2.27 TAX MATTERS. Seller has furnished to Purchaser true and complete
copies of all federal and state income tax returns and all property tax
returns, reports and schedules filed on behalf of or with respect to Seller
for all tax periods during the current calendar year and each of its last
three calendar years. All federal, state and local tax returns and tax reports
required to be filed by Seller, have been timely filed with the appropriate
governmental agencies in all jurisdictions in which such returns and reports
are required to be filed. All federal, state and local income, profits,
franchise, sales, use, occupation, property, excise and other taxes (including
interest and penalties) due from either Seller (a) have been fully paid or
adequately provided for on the books and financial statements of Seller, or
(b) are being contested in good faith by appropriate proceedings. No issues
have been raised (or might reasonably be expected to be raised) by the
Internal Revenue Service or any other taxing authority in connection with any
of the returns and reports referred to in the foregoing clause (i) which,
individually or in the aggregate, might have a material adverse effect on the
Business; and (iv) no waivers of statutes of limitation have been given or
requested with respect to the affiliated group, except as noted in Schedule
2.27.
2.28 REVENUE RUN-RATE. Revenues of the Business for calendar year 1997
are running at an annualized rate of not less than Eight Hundred Sixty-Three
Thousand Dollars ($863,000).
2.29 DISCLOSURES. Neither the Financial Statements referred to in Section
2.3, nor this Agreement, nor any certificate or Schedule furnished by or on
behalf of Seller or the Stockholders pursuant to this Agreement, contains any
untrue statement of material fact or, when this Agreement and such Schedules
and certificates are taken in their entirety, contains any
- 13 -
<PAGE> 15
untrue statement of a material fact or omits to state a material fact
necessary to make the statements contained therein not misleading as of the
date hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SWISHER
Swisher represents and warrants to Seller and the Stockholders that:
3.1 ORGANIZATION. Swisher is a corporation duly incorporated and validly
existing under the laws of the State of North Carolina, is duly qualified to
do business, and is in good standing as a foreign corporation in each State
where the nature of its business or activities require it to be so qualified,
has the corporate power and authority to own and operate its properties and to
carry on its business as currently conducted, to enter into this Agreement and
to carry out the transactions contemplated hereby.
3.2 AUTHORITY. The execution and delivery of this Agreement by Swisher
and the due consummation of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action on the part of
Swisher; this Agreement constitutes a valid and binding Agreement of Swisher;
neither the execution and delivery of this Agreement nor the consummation by
Swisher of the transactions contemplated hereby will constitute a violation of
any provision of law or of the Articles of Incorporation or Bylaws of Swisher,
result in the breach of, or the imposition of any lien on, or constitute a
default under, any indenture or bank loan or credit agreement, license,
permit, trust, custodianship or other restriction, which violation, breach,
imposition of lien or default would affect the validity of the sale of the
capital stock to Swisher.
- 14 -
<PAGE> 16
3.3 LITIGATION. There is no known action, suit, proceeding, or
investigation pending or threatened against Swisher which challenges or
questions the legality or validity of this Agreement or any of the
transactions contemplated hereby.
3.4 BROKERS, AGENTS, FINDERS. Neither Swisher nor any of its officers,
directors or employees have employed any broker, agent or finder, or incurred
any liability for any brokerage fee, agents' commissions or finders' fees in
connection with the transactions contemplated herein.
ARTICLE IV
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; LIABILITY
4.1 SURVIVAL. The representations, warranties, undertakings and
agreements of Seller, Stockholders and Swisher contained herein, or in the
certificates or other instruments delivered by or on behalf of such party
pursuant to this Agreement, shall survive the Closing Date and any
investigation made by or on behalf of the other party.
ARTICLE V
PURCHASE AND SALE, PURCHASE PRICE
5.1 PURCHASE PRICE. At the Closing, Sellers will sell and Swisher will
purchase all of the Acquired Assets of Seller. The purchase price for the
Acquired Assets shall be Five Hundred Eighty Eight Thousand Four Hundred
Eighty Eight and 67/100 Dollars ($588,488.67) (the "Purchase Price").
At the Closing, Swisher shall pay to the Seller the Purchase Price in the
form of an Installment Promissory Note with a face amount of Five Hundred
Eighty Eight Thousand Four Hundred Eighty Eight and 67/100 Dollars
($588,488.67) amortized over sixty (60) months from
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<PAGE> 17
the Closing Date, which shall bear interest at a per annum rate of ten percent
(10%) (the "Note"), a copy of which is attached hereto and made a part hereof
as Exhibit A.
Swisher shall have a right of set-off against amounts owed under the Note
for any amounts owed by Seller and/or Stockholders due to the breach of any
representation, warranty or covenant contained in this Agreement. Swisher
International, Inc. shall unconditionally guaranty the payment of the Note
upon its terms.
5.2 TRANSFER OF ACQUIRED ASSETS. In exchange for the payment by Swisher
of the Purchase Price, Seller and/or Stockholders shall convey all of the
Acquired Assets of Seller to Swisher on the Closing Date and Swisher shall
assume the Assumed Liabilities shown on Schedule 1.1(b).
5.3 INVENTORY. The purchase price includes the value of the Fixed Assets
and the Product Inventory. However, the purchase price shall be adjusted to
reflect the current value of the Product Inventory on the Closing Date
established by an inventory to be completed by representatives of each company
on the day before the Closing Date. Swisher shall have no obligation to pay
for Fixed Assets which are obsolete or unusable, nor for Product Inventory if
it is past its normal shelf life, or is prohibited by law to be used in the
Business.
5.4 LEASE. The Stockholders through their Realty partnership shall lease
the Realty to Swisher upon the terms and conditions of the Lease attached
hereto and made a part hereof as Exhibit B.
5.5 PRORATIONS. Unless otherwise provided, all taxes, water and sewer
charges, rent, employees bonuses, salaries and commission shall be prorated
between Swisher and the Seller as of the Closing Date. Schedule 5.5 is a list
of prepaid Customer Contracts. Swisher has received
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<PAGE> 18
a reduction in the purchase price and in consideration therefor will assume
the obligations under those Contracts.
ARTICLE VI
ACCESS TO RECORDS AND PROPERTIES
6.1 Swisher may, prior to the Closing Date, through its employees, agents
and representatives, make or cause to be made such investigation of the
business of Seller as it deems necessary or advisable, but such investigation
shall not affect the Seller's or the Stockholders' representations and
warranties hereunder nor prejudice Swisher's night to terminate this Agreement
as provided in Article XII. Seller and the Stockholders agree to permit
Swisher and its employees, agents and representatives to have, after the date
of execution hereof, fall access to its premises on reasonable notice and to
Seller's books and records and Seller will make available such financial and
operating data and other information with respect to its business and
properties as Swisher shall from time to time reasonably request. In the event
of termination of this Agreement, Swisher will return all originals and copies
of documents, work papers and other material obtained hereunder, whether
obtained before or after the execution hereof, and Purchaser agrees that it
will not disclose or divulge any such information to any other person, and
will keep any information so obtained confidential; provided, however, that
Swisher shall not be obligated to treat as confidential any information which
was known to it at the time of disclosure or which becomes publicly known or
available thereafter or its rightfully receive by it from a third party, or
required to be disclosed by order of any duly constituted governmental
authority.
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<PAGE> 19
ARTICLE VII
CONDUCT OF SELLER AND STOCKHOLDERS PENDING THE CLOSING
Seller and the Stockholders agree that from the date of this Agreement to
the Closing Date, that they will operate the Business as presently operated
and only in the ordinary- course of business and to the extent of, and
consistent with, such operation, they will preserve intact the present
business organization of the Seller and preserve the relationships of Seller
with persons having business dealings with it. Specifically, Seller and the
Stockholders agree that:
7.1 MAINTAIN ASSETS. They will maintain all of the properties of Seller
in customary repair, order and condition, reasonable wear and use and damage
by fire or unavoidable casualty excepted, and take all steps reasonably
necessary to maintain the intangible assets of Seller.
7.2 SALARY INCREASES. They will not (i) grant any salary increase in
excess of four percent (4%) to any officer or employee of Seller who would
receive, after giving effect to such increase, aggregate compensation at an
annual rate exceeding $30,000, or (11) enter into or amend or alter materially
any bonus, incentive compensation, deferred compensation, retirement, pension,
group insurance, death benefit or other fringe benefit plan, trust agreement
or arrangement affecting employees of Seller.
7.3 TAX PAYMENTS. Except for taxes contested in good faith, they will
pay all ad valorem and other taxes upon the properties and business of Seller
as they become due.
7.4 NO ASSET SALES; ENCUMBRANCES. They will refrain from disposing of
or encumbering any of the properties of Seller to be transferred to Swisher on
the Closing Date.
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<PAGE> 20
7.5 INDEBTEDNESS. They will not enter into or assume any contract,
agreement, obligation, lease, debt instrument, license or commitment, except
in the ordinary course of business or as contemplated by this Agreement.
7.6 BREACH OF CONTRACT. They will not do any act, or omit to do any
act, which will cause a material breach of any contract, commitment or
obligation of Seller.
7.7 COMPLIANCE WITH LAWS. They will duly comply with all laws
applicable to Seller or to the Business.
7.8 WAIVERS. They will not amend, terminate, cancel or waive any right
of substantial value relating to the business of Seller.
7.9 INTELLECTUAL PROPERTY. They will not dispose of, diminish or permit
to lapse any rights to the use of any Intellectual Property material to
Seller, or dispose of or disclose to any person any trade secret, formula,
process or know-how of Seller not previously a matter of public knowledge.
7.10 CAPITAL COMMITMENTS. They will not commit to, or make, any Cap.
Ex. for additions to property or equipment of Seller, except in the ordinary
course of business and in any event in excess of $1,000, except as approved
in writing by Purchaser.
7.11 MATERIALS PURCHASES. They will not incur any obligation for the
purchase or payment of materials in excess of $5,000, except for the purchase
or payment for inventory, material and supplies required in the ordinary
course of Seller's Business, in amounts and quantities consistent with past
purchasing policies for such materials and supplies at current levels of
business and operation.
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<PAGE> 21
7.12 CORPORATE GOVERNANCE. They will not amend the Articles of
Incorporation or Bylaws of Seller.
7.13 MERGERS. They will not merge, agree to merge with, acquire, agree
to acquire, or agree to be acquired by or combine with any other business
entity.
7.14 AFFILIATE ARRANGEMENTS. They will not sell any assets of Seller
to, or enter into any agreement or arrangement relating to the Seller with,
any of the officers or directors of Seller or any of their "affiliates" or
"associates" (as such terms are defined in the rules and regulations of the
Securities and Exchange Commission under the Securities Act of 1933, as
amended).
7.15 REDEMPTIONS, DIVIDENDS. They will not permit Seller to redeem
any, or declare or set aside or pay any, dividend (whether in cash or
property) or other distribution in respect of the capital stock of Seller.
ARTICLE VIII
CONDITIONS TO SWISHER'S OBLIGATIONS
The obligation of Swisher to perform this Agreement is subject to the
satisfaction in all material respects on or before the Closing Date of the
following conditions, unless waived by Swisher in writing:
8.1 INACCURACY OF SELLER/STOCKHOLDERS REPRESENTATIONS AND WARRANTIES.
Examination by Swisher shall not have disclosed any material inaccuracy in the
representations and warranties of Seller or the Stockholders set forth in
Article II. Such representations and warranties shall be true and correct in
all material respects on and as of the Closing Date, as though made on and as
of the Closing Date, and Swisher shall have received certificates signed by
the President or Vice President of Seller and by the Stockholders to that
effect.
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<PAGE> 22
8.2 SELLER/STOCKHOLDERS PERFORMANCE OF OBLIGATIONS. Seller and the
Stockholders shall have performed all obligations required to be performed by
them prior to the Closing Date under this Agreement.
8.3 APPROVAL OF DOCUMENTS. The form and substance of all documents
delivered hereunder by Seller and the Stockholders shall be acceptable to
counsel for Swisher, acceptance not to be unreasonably withheld.
8.4 BOARD APPROVAL. All of the transactions contemplated under this
Agreement must be approved by Swisher's Board of Directors.
ARTICLE IX
CONDITIONS OF SELLER'S OBLIGATIONS
The obligations of Seller and the Stockholders to perform this Agreement
are subject to the satisfaction in all material respects on or before the
Closing Date of the following conditions, unless waived by Seller or the
Stockholders in writing:
9.1 INACCURACY OF SWISHER REPRESENTATIONS AND WARRANTIES. Examination
by Seller and the Stockholders shall not have disclosed any material
inaccuracy in the representations and warranties of Swisher set forth in
Article III. Such representations and warranties shall be true and correct in
all material respects on and as of the Closing Date as though made on and as
of the Closing Date and Seller shall have received a certificate or
certificates signed by the President or a Vice President of Swisher to that
effect.
9.2 SWISHER PERFORMANCE OF OBLIGATIONS. Swisher shall have performed
all obligations required to be performed by it prior to the Closing Date under
this Agreement.
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<PAGE> 23
9.3 APPROVAL OF DOCUMENTS. The form and substance of all documents
delivered hereunder by Swisher shall be acceptable to counsel for Seller and
Stockholders acceptance not to be unreasonably withheld.
9.4 RESOLUTIONS. The delivery by Swisher of the Board of Directors of
Swisher International approving the guaranty of all payments under the Note.
ARTICLE X
RISK OF LOSS
10.1 DAMAGE OR DESTRUCTION. If, prior to the Closing Date, the Acquired
Assets to be transferred from Seller to Swisher are damaged or destroyed to
the extent that the cost of reconstruction or repair would exceed Fifty
Thousand Dollars ($50,000), or damage to the Realty so that the conduct of the
Business would be materially impaired, Swisher, at its election, may terminate
this Agreement and, upon such termination, neither party shall have any
obligation hereunder to the other. If Swisher does not exercise such election
to terminate, or if the damage or destruction is less extensive than referred
to in the preceding sentence, Seller shall, at the Closing Date or as soon
thereafter as received, pay over to Swisher the insurance proceeds recovered
on account of such damage or destruction.
ARTICLE XI
THE CLOSING
11.1 TIME AND PLACE. The Closing of the transactions provided for in
this Agreement shall be held on the Closing Date at the offices of Swisher
International, Inc., 6849 Fairview Road, Charlotte, North Carolina at 10:00
a.m. on September 3, 1997 or at such other time or place as the parties may
agree upon in writing.
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<PAGE> 24
11.2 DELIVERIES BY SELLER/STOCKHOLDERS. At the Closing, Seller and/or
Stockholders shall deliver or cause to be delivered to Swisher:
(a) a Bill of Sale transferring all of the Acquired Assets to
Swisher;
(b) the Lease referred to in Section 5.5 of this Agreement;
(c) the Non-Compete Agreements required by Section 14.3;
(d) an assignment of all Customer Contracts;
(e) an assignment of all Other Contracts and Leases;
(f) any and all consents necessary to the transfer of the Acquired
Assets;
(g) evidence of the termination of the lease between Stockholders
partnership and the Seller;
(h) resolutions of Seller's Board of Directors approving the
transaction; and
(i) such other certificates and instruments and documents of
transfer executed by Seller and/or the Stockholders as Swisher may reasonably
request with respect to the consummation of the transactions contemplated
hereby.
Seller and the Stockholders shall take all other steps requisite to put
Swisher in actual possession and operating control of the Business on the
Closing Date.
11.3 DELIVERIES BY SWISHER. At the Closing, Swisher shall deliver to
Seller:
(a) the Note, as provided in Section 5.1(b);
(b) the Guaranty of the Note by Swisher International, Inc. as
required by Section 5.1(b) of this Agreement;
(c) the Employment Agreement as required pursuant to Article XIV;
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<PAGE> 25
(d) Resolutions of the Board of Directors of Swisher International
required by Section 9.4;
(e) Non-Compete payment for Robert M. McCain, Jr.; and
(f) such other certificates and instruments and documents of
transfer executed by Swisher as Seller and/or the Stockholders may reasonably
request with respect to the consummation of the transactions contemplated
hereby.
ARTICLE XII
TERMINATION, WAIVER AND AMENDMENT
12.1 TERMINATION BY LAPSE OF TIME. This Agreement may be terminated by
either party at any time after September 30, 1997 (or such later date as shall
have been specified in writing signed by the parties), if at the time of such
notice of such termination the Closing for any reason shall not have been
consummated.
12.2 TERMINATION BY SWISHER. This Agreement may be terminated by
Swisher if there has been a material misrepresentation or breach on the part
of Seller or the Stockholders in the representations and warranties of Seller
or the Stockholders set forth herein, or if there has been any failure in any
material respect on the part of Seller or the Stockholders to comply with
their obligations hereunder.
12.3 TERMINATION BY SELLER OR STOCKHOLDERS. This Agreement may be
terminated by Seller or the Stockholders if there has been a material
misrepresentation or breach on the part of Swisher in the representations and
warranties of Swisher set forth herein, or if there has been any failure in
any material respect on the part of Swisher to comply with their obligations
hereunder.
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<PAGE> 26
12.4 WRITTEN NOTICE. The power of termination provided for herein may
be exercised only by written notice signed on behalf of the party for whom it
is given and in the case of a termination on behalf of a corporate party, such
written notice must be executed by a duly authorized officer.
12.5 WAIVERS. Any term or provision of this Agreement may be waived at
any time by the party which is entitled to the benefit thereof, but only by a
written instrument and in the case of a corporate waiver by a written
instrument, accompanied by a certified copy of the resolution of the board of
directors authorizing such waiver and executed by a duly authorized officer of
the party waiving compliance.
12.6 AMENDMENT. This Agreement may be amended or supplemented at any
time but only by a written instrument executed by a duly authorized officer of
each of the corporate parties and by the Stockholders.
ARTICLE XIII
FURTHER COVENANTS AND AGREEMENTS
13.1 USE OF INTELLECTUAL PROPERTY. At the Closing Seller and the
Stockholders shall convey all right title and interest they may have in the
names Carolina Termite & Pest Control or Carolina Pest Control. Seller and the
Stockholders agree that from and after the Closing Date they will not directly
or indirectly use any of the Intellectual Property, including, but not limited
to Carolina Termite & Pest Control or Carolina Pest Control either alone or in
conjunction with other words, letters or symbols or any know-how, drawings,
styles or other proprietary asset or right owned by the Seller, or use any
other identification which is confusingly similar or would tend to mislead the
public.
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<PAGE> 27
13.2 CHANGE OF CORPORATE NAME. On or before the Closing Date the
Stockholders will cause Seller to change its corporate name to eliminate the
words Carolina Termite & Pest Control in accordance with Section 13.l. The new
corporate name to be used by Seller shall be subject to the approval of
Swisher; provided that Swisher shall grant Seller a limited license for a
period of twelve (12) so that Seller may use it in collecting accounts
receivable and to satisfy its accounts payable.
13.3 ALLOCATIONS. Swisher, Seller and the Stockholders covenant and
agree that the allocation of the Purchase Price shall be treated consistently
by the parties for federal, state and local tax purposes.
13.4 ACCOUNTS RECEIVABLE. Accounts receivable payable to Seller prior
to the Closing Date shall be for the account of Seller. Seller shall be
responsible for the collection of such accounts receivable.
13.5 ACCOUNTS PAYABLE. Seller shall be responsible for the payment of
all accounts payable incurred prior to the Closing Date, including all
prepaids. Seller shall satisfy all accounts payable on or prior to the Closing
Date.
13.6 CASH. Seller's cash is not included within the Purchase Price and
Seller shall retain all cash on hand prior to the Closing Date; provided,
however, that Swisher shall be entitled to all cash received by Seller before
Closing if inspection of the work occurs on or after the Closing Date.
13.7 EMPLOYEE LOANS. Swisher shall assume all rights and obligations
related to loans made by Seller to employees prior to Closing Date.
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<PAGE> 28
ARTICLE XIV
EMPLOYMENT ISSUES
14.1 EMPLOYMENT AGREEMENT. It is the intention of the parties to create
a nationwide chain of quality termite and pest control businesses in various
locations throughout the United States. The precise locations of these
businesses shall be determined at a later date. In this connection,
Stockholder E. David Dodd, III ("Mr. Dodd") has been offered and has accepted
employment with Purchaser following consummation of the transactions
contemplated hereby. The Stockholder possesses certain knowledge, skills and
expertise in the operation of the Business which are critical to the success
of the venture. Swisher also possesses certain knowledge, skills and expertise
which are critical to the success of the venture, which knowledge, skills and
expertise will be imparted to the Stockholder during the course of his
employment with Swisher. Swisher has expended and expects to continue to
expend considerable sums of money in furtherance of the development and
implementation of a nationwide franchised chain of quality termite and pest
control businesses. Therefore, Mr. Dodd, individually, and Swisher agree to
enter into an Employment Agreement with Purchaser at Closing in substantially
the form attached hereto and made a part hereof as Exhibit C which shall
contain a covenant not to compete payable in the amount Three Hundred Sixty
Seven Thousand Three Hundred Ninety Four and 00/100 Dollars ($367,394.00) as
follows: One Hundred Thousand and 00/100 Dollars ($100,000.00) at Closing and
commencing October 3, 1997 sixty (60) equal monthly installment payments of
Four Thousand Four Hundred Fifty Six and 57/100 Dollars ($4,456.57) until
fully paid.
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<PAGE> 29
14.2 ROBERT M. MCCAIN, JR. Mr. Dodd will obtain a covenant not to
compete from Robert M. McCain, Jr. satisfactory to Swisher in substantially
the form of Mr. Dodd's covenant not to compete in consideration of the payment
of Three Hundred Sixty Seven Thousand Three Hundred Ninety Four and 00/100
Dollars ($367,394.00) by Swisher upon the same payment schedule as Mr. Dodd.
14.3 EMPLOYEE NON-COMPETES. Prior to Closing Seller shall obtain a
Non-Compete and Non-Solicitation Agreement (the "Non-Competes") from each of
its employees in the form attached hereto and made a part hereof as Exhibit D.
Seller shall assign the Non-Competes to Swisher on the Closing Date.
14.4 SEVERANCE ARRANGEMENTS. Any arrangements for severance pay made by
Seller shall be solely at the expense of Seller.
14.5 EMPLOYEE PAYROLL. Seller shall retain the liability for payment of
employee commissions and all other payroll accrued prior to September 1, 1997.
14.6 EMPLOYEE BENEFIT PLANS. Swisher shall not be obligated to assume
any of Seller's employee benefit plans.
ARTICLE XV
CLAIMS ARISING OUT OF THE OPERATION OF SELLER'S BUSINESS, INDEMNIFICATION
15.1 With respect to any claims or liabilities arising out of the
operation of Seller's business:
(a) Seller and the Stockholders shall remain liable for and shall
indemnify and hold Swisher and any guarantor harmless against all such claims,
demands, causes of action, suits, judgments, liabilities and expenses of any
and every kind (including attorney's fees),
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<PAGE> 30
arising out of or based on the acts or omissions of Seller or the Stockholders
(or any predecessor corporation) in their conduct of the Business prior to the
Closing Date; provided, however, that Seller and Stockholders shall be liable
for warranty claims only for ninety (90) days after August 31, 1997 for
Customer Contracts that are in effect as of September 1, 1997. There shall be
no time limit on the obligation of Seller and Stockholders to indemnify
Swisher for warranty work for Customer Contracts that predate September 1,
1997 and not in effect on September 1, 1997. Swisher shall cooperate with
Seller and/or the Stockholders in the defense of such claims or suits and to
such end shall make available to counsel for Seller and/or the Stockholders or
their insurer such of Swisher's books and records as in the judgment of said
counsel may be helpful in the defense.
(b) Swisher shall assume liability for and shall indemnify and hold
Seller and the Stockholders harmless against all such claims, demands, causes
of action, suits, judgments, liabilities and expenses of any and every kind
arising out of Swisher's conduct of the Business on and after the Closing
Date. Seller and/or Stockholders shall cooperate with Swisher in the defense
of such claims or suits and to such end shall make available to counsel for
Swisher or their insurer such of Seller's books and records as in the judgment
of said counsel or insurer may be helpful in the defense.
15.2 NOTICE. Promptly after receipt by Swisher of any claim or notice
of the commencement of any action or administrative or legal proceedings or
investigation, Swisher shall, if a claim in respect thereof is or may be made
against Seller and/or the Stockholders under this Agreement, notify Seller
and/or the Stockholders in writing of such fact. Seller and/or the
Stockholders shall be entitled to participate in, and, to the extent that they
shall wish, to assume
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<PAGE> 31
the defense thereof, with counsel designated by Seller and/or the Stockholders
and satisfactory to Swisher or Newco. After notice from Seller and/or the
Stockholders to Swisher of the election of Seller and/or the Stockholders so
to assume the defense thereof, Seller and/or the Stockholders shall not be
liable to Swisher under this Agreement or otherwise for any legal or other
expenses subsequently incurred by Swisher in connection with the defense
thereof other than Swisher's reasonable costs of investigation. If Seller
and/or the Stockholders elect to assume the defense thereof, Swisher will make
available to Seller and/or the Stockholders and their counsel books and of
records, Swisher, as may be reasonably required for such defense.
(a) Should Swisher or any guarantor be entitled to indemnification
under this Agreement as a result of a claim by a third party, and Seller
and/or the Stockholders do not assume the defense of such claim, Swisher shall
at the expense of Seller and/or the Stockholders contest (or, with the prior
written consent of the Seller and/or the Stockholders, settle) such claim,
provided that no such contest need be made and settlement or full payment of
any such claim may be made without consent of Seller and/or the Stockholders
(with Seller and/or the Stockholders then being obligated to indemnify Swisher
under this Agreement), if, in the opinion of Swisher's counsel, as the case
may be, such claim has colorable merit.
15.3 BULK SALES. Seller and Stockholders shall indemnify and hold
Swisher and any guarantor harmless against all claims, demands, causes of
action, suits, Judgments, liabilities and expenses of any and every kind
(including attorney's fees) arising out of or based upon a claim pursuant to
the Bulk Sales Law of the State of North Carolina.
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<PAGE> 32
ARTICLE XVI
FURTHER ASSURANCES, PAROLE EVIDENCE, COUNTERPARTS, NOTICES, ETC.
16.1 FURTHER ASSURANCES. If, at any time after the Closing Date, any
party hereto shall consider or be advised that any further instruments or
assurances or any other things are necessary or desirable to carry out the
terms of this Agreement, the other party shall execute and deliver all such
instruments and assurances and do all things reasonably necessary and proper
to carry out the terms of this Agreement.
16.2 ENTIRE AGREEMENT. This Agreement and the documents delivered
pursuant hereto contain the entire agreement among the parties with respect to
the subject matter hereof and supersede all prior negotiations. None of the
parties shall be bound by nor shall be deemed to have made any
representations, warranties or commitments except those contained herein or in
the documents delivered pursuant hereto.
16.3 MISCELLANEOUS. This Agreement:
(a) may be executed in any number of counterparts and each such
counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one Agreement;
(b) shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns; provided, however,
that this Agreement shall not be assignable by either the Seller or the
Stockholders; and
(c) shall be governed by and construed in accordance with the laws
of the State of North Carolina.
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<PAGE> 33
16.4 ALTERNATE DISPUTE RESOLUTION. Except insofar as Swisher elects at
any time to enforce this Agreement by any judicial process, injunction or
specific performance, any controversy, dispute, question or claim arising out
of this Agreement or its interpretation, performance, or nonperformance, or
any breach hereof, including, without limitation, any claim that this
Agreement or any part thereof is invalid, illegal or otherwise voidable or
void, shall be submitted first to nonbinding mediation, then to final and
binding arbitration process as it relates to each individual franchisee in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association or similar association, and judgment on the arbitration award may
be entered in the highest state, provincial, or federal court having
jurisdiction thereof, provided, however that this provision shall not be
construed to limit any rights which Swisher may have to apply to any court of
competent jurisdiction for injunctive or similar provisional relief. No
arbitration decision shall have a binding or collateral estoppel effect in any
other arbitration or judicial proceeding. The substantive law of the state of
North Carolina shall be applied by the arbitrators, and this requirement shall
be deemed jurisdictional. This mediation/arbitration provision shall be deemed
self-executing, and in the event that any party fails to appear at any
properly noticed arbitration proceeding, an award may be entered against such
party notwithstanding said failure to appear. The parties agree that such
mediation or arbitration shall be conducted in Charlotte, North Carolina and
shall remain confidential between the parties except as required by law.
16.5 HEADINGS. The headings used in this Agreement and in the Table of
Contents are for convenience only and shall not affect the construction of any
of the terms of this Agreement.
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<PAGE> 34
16.6 NOTICES. All notices or other communications which are required or
permitted hereunder shall be sufficient if delivered personally or by
registered or certified mail, postage prepaid, as follows:
if to Seller or Stockholders:
P.O. Box 368
Monroe, NC 28110
if to the Purchaser or Swisher:
Swisher International, Inc.
6849 Fairview Road
Charlotte, NC 28210
Attention: General Counsel
16.7 COSTS AND EXPENSES. Each party to this Agreement shall pay its own
costs and expenses (including, without limitation, the fees and expenses of
its agents, representatives, counsel and accountants) necessary to its
performance of and compliance with this Agreement.
ATTEST CAROLINA TERMITE & PEST CONTROL, INC.
By:
- ------------------------------ ------------------------------------------
Secretary President
ATTEST SWISHER PEST CONTROL CORP.
By:
- ------------------------------ ------------------------------------------
Secretary President
WITNESS E. DAVID DODD, II
- ------------------------------ ---------------------------------------------
An Individual
WITNESS
- ------------------------------
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<PAGE> 35
WITNESS DRAKE DODD MCCAIN
- ------------------------------ ---------------------------------------------
An Individual
WITNESS
- ------------------------------
WITNESS E. DAVID DODD, III AS CUSTODIAN FOR LAURA
MIDDLETON DODD, A MINOR
- ------------------------------ ---------------------------------------------
An Individual
WITNESS
- ------------------------------
WITNESS SARAH CURRENT DODD
- ------------------------------ ---------------------------------------------
An Individual
WITNESS
- ------------------------------
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<PAGE> 36
CLOSING STATEMENT
SELLER: Carolina Termite & Pest Control, et. al
PURCHASER: Swisher Pest Control Corp.
DATE: As of September 1, 1997
<TABLE>
<S> <C> <C>
PURCHASE PRICE: Acquired Assets $ 588,488.67
COVENANTS NOT TO COMPETE:
E. David Dodd, III 367,394.00
Robert M. McCain, Jr. 367,394.00
-------------
$1,323,274.67
LESS: CREDITS TO BUYER
Promissory Note
Covenants Not To Compete
E. David Dodd, III ($100,000.00 payable at Closing) 367,394.00
Robert M. McCain, Jr. ($100,000.00 payable at Closing) 367,394.00
-------------
$1,323,274.67
</TABLE>
NET TO PURCHASER/SELLER:
SELLER: PURCHASER:
Carolina Termite & Pest Control, Inc. Swisher Pest Control Corp.
By: By:
---------------------------------- --------------------------------
President President
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<PAGE> 37
ADDENDUM
TO
CLOSING STATEMENT
1. Personal property taxes shall be pro-rated from September 1, 1997 and
billed to Purchaser when paid by Seller.
2. Utilities shall be settle between Seller and Purchaser subsequent to
Closing as final bills are received from utility companies.
3. Vehicles titles shall be transferred promptly after Closing. Swisher to
pay vehicle transfer taxes.
4. Seller will provide employee Non-Competes promptly after Closing.
SELLER: PURCHASER:
Carolina Termite & Pest Control, Inc. Swisher Pest Control Corp.
By: By:
---------------------------------- --------------------------------
President President
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<PAGE> 1
EXHIBIT 10.1.3
NON-COMPETITION AGREEMENT
This Non-Competition Agreement (the "Agreement") is made and entered into
this 1st day of September, 1997 by and between Swisher Pest Control Corp. (the
"Company") and Robert M. McCain, Jr. (the "Executive").
WHEREAS, Executive has accepted employment with Swisher in connection with
that certain Asset Purchase Agreement of even date herewith; and
WHEREAS, during his employment with Swisher, Executive shall receive
valuable proprietary information of Swisher;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and obligations hereinafter set forth, the parties agree as follows:
1. The Executive hereby recognizes and acknowledges that during the
course of his employment by the Company, the Company has disclosed and will
furnish, disclose, or make available to the Executive confidential and
proprietary information related to the Company's business including, without
limitation, customer lists, financial information, ideas, processes, inventions,
and devices (the "Confidential Information"), that such Confidential Information
has been developed and will be developed through the expenditure by the Company
of substantial time and money and that all such Confidential Information, except
to the extent it is in the public domain, shall constitute trade secrets
protected under applicable law. The Executive further agrees to use such
Confidential Information only for the purpose of carrying out his duties with
the Company and agrees that he will not, after his last day of employment with
the Company, misappropriate for himself or others or disclose to any third
party, either directly or indirectly, any Confidential Information. It is
expressly understood that Executive shall not be in breach of this Agreement for
any disclosure he is required to make by virtue of a final unappealable order of
a court of competent jurisdiction. It is further expressly agreed that Executive
shall return to the Company at the time of termination and not retain any
property belonging to the Company, including, without limitation, any and all
originals and copies of documents referencing or containing any Confidential
Information.
2. The Executive hereby agrees that for a period of thirty-six (36)
months, following his last day of employment by the Company, Executive shall
not, without the written consent of the Company, solicit, entice, or persuade
any other employees of the Company or any affiliate of the Company to leave the
services of the Company or such affiliate for any reason.
3. It is the intention of the parties to create a nationwide chain of
quality termite and pest control operations. Company has expended and will
continue to expend considerable sums to further the development of the chain.
Executive possesses the knowledge, skills and expertise necessary to further
development of the chain. The Executive agrees that during the course of his
employment with the Company, he will not enter into any relationship whatsoever,
either directly or indirectly, alone or in a partnership, or as an officer,
director,
<PAGE> 2
employee or stockholder of any corporation or other business entity (other than
the Company), or otherwise acquire or agree to acquire a significant present or
future equity or other proprietorship interest, whether as a stockholder,
partner, proprietor, or otherwise, with any enterprise, business, or division
thereof (other than the Company), which is engaged in a business or businesses
similar to those engaged in by the Company and (i) for a period of twelve (12)
months in those DMA's within the United States in which the Company is
conducting business at the time of Executive's proposed new employment and (ii)
for a period of twenty-four (24) months within the states of North Carolina and
South Carolina and neither actively nor as an investor in Union County, North
Carolina and a fifty (50) mile radius around Union County, unless as an investor
in a Swisher Pest Control franchise. For purposes of this Agreement, "DMA" means
Designated Market Area as determined by the A. C. Nielsen Company from time to
time; provided that, this covenant shall be void and of no further force and
effect if the Company defaults (beyond any cure period) in any payments due and
payable under that certain Installment Promissory Note of even date herewith
payable to Carolina Termite & Pest Control, Inc. or pursuant to this covenant
not to compete.
4. The Executive acknowledges that the restrictions placed upon him by
this Agreement are reasonable, given the nature of his position, and that there
is sufficient consideration promised him pursuant to this Agreement to support
these restrictions.
5. The restrictions of this Agreement shall survive Executive's last
day of employment by the Company and shall be in addition to any restrictions
imposed upon the Executive by statute or at common law.
6. In consideration of the covenant not to compete provided in this
Agreement Company agrees to pay Employee a total of Three Hundred Sixty Seven
Thousand Three Hundred Ninety Four and 00/l00 Dollars ($367,394.00). Payment
shall be made as follows: One Hundred Thousand and 00/l00 Dollars ($100,000.00)
at Closing as defined in the Asset Purchase Agreement. Monthly installment
payments in the amount of Four Thousand Four Hundred Fifty Six and 57/100
Dollars ($4,456.57) commencing October 1, 1997 until fully paid. The obligation
to make the payments required under this Section 6 shall survive the termination
(but not the breach) of this Agreement and the death of the Executive.
7. The Executive hereby expressly acknowledges that any breach or
threatened breach by the Executive of any of the terms set forth in Section 3 of
this Agreement may result in significant and continuing injury to the Company,
the monetary value of which may be impossible to establish. Therefore, the
Executive agrees that the Company shall be entitled to apply for injunctive
relief in North Carolina or any other court of appropriate jurisdiction. The
provisions of this Section 7 shall survive the Employment Term.
8. This Agreement shall be binding upon the Executive, the heirs and
personal representative or representatives of the Executive and upon the Company
and its successors and assigns. Neither this Agreement nor any rights or
obligations hereunder may be assigned by the Executive.
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<PAGE> 3
9. Any notice required or permitted by this Agreement shall be in
writing, sent by personal delivery, or by registered or certified mail, return
receipt requested, addressed to Executive's immediate supervisor and the Company
at its then principal office, or to the Executive at his then current address,
as the case may be, or to such other address or addresses as any party hereto
may from time to time specify in writing for the purpose of a notice given to
the other party in compliance with this Section 9. Notices shall be deemed given
when received.
10. This Agreement shall be governed by, construed and enforced in
accordance with the laws of the State of North Carolina without regard to
conflict of law principles and the parties agree to submit themselves to the
jurisdiction of the federal or state courts of the State of North Carolina for
any claim arising under this Agreement which is brought by the other party in
North Carolina.
11. Except insofar as Company elects at any time to enforce this
Agreement by any judicial process, injunction or specific performance, any
controversy, dispute, question or claim arising out of or relating to this
Agreement or its interpretation, performance, or non-performance, or any breach
hereof, including, without limitation, any claim that this Agreement or any part
thereof is invalid, illegal or otherwise voidable or void, shall be submitted to
final and binding arbitration process in accordance with the Rules of the
American Arbitration Association. Judgment on the arbitration award may be
entered in the highest state court in the State of North Carolina having
jurisdiction thereof, provided, however that this provision shall not construed
to limit any rights which Company may have to apply to any court of competent
jurisdiction for injunctive or similar provisional relief. The substantive law
of the State of North Carolina shall be applied by the arbitrators and this
requirement shall be deemed jurisdictional. This arbitration provision shall be
deemed self-executing, and in the event that any party fails to appear at any
properly noticed arbitration proceeding, an award may be entered against such
party notwithstanding said failure to appear. The parties agree that such
arbitration shall be conducted in Charlotte, North Carolina and shall remain
confidential between the parties except as required by law. Any dollar judgment
against Company shall not provide for punitive or exemplary damages.
12. This Agreement contains the entire agreement of the parties
relating to the subject matter hereof. This Agreement supersedes any prior
written or oral agreements or understandings between the parties relating to the
employment of Executive, the compensation or benefits promised to Executive or
any other agreement or understanding relating in any way to the subject matter
in this Agreement. No modification or amendment of this Agreement shall be valid
unless in writing and signed by or on behalf of the parties hereto. A waiver of
the breach of any term or condition of this Agreement shall not be deemed to
constitute a waiver of any subsequent breach of the same or any other term or
condition. This Agreement is intended to be performed in accordance with, and
only to the extent permitted by, all applicable laws, ordinances, rules and
regulations. If any provision of this Agreement, or the application thereof to
any person or circumstance, shall, for any reason and to any extent, be held
invalid or unenforceable, such invalidity and unenforceable shall not affect the
remaining provisions hereof
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<PAGE> 4
and the application of such provisions to other persons or circumstances, all of
which shall be enforced to the greatest extent permitted by law. The
compensation provided to the Executive pursuant to this Agreement shall be
subject to any withholding and deductions required by any applicable tax laws.
Any amounts payable to the Executive hereunder after the death of the Executive
shall be paid to the Executive's estate or legal representative.
IN WITNESS WHEREOF the parties have duly executed and delivered this
Agreement as of the day and year first above written.
SWISHER PEST CONTROL CORP.
By:
-------------------------------------
President
----------------------------------------
Robert M. McCain, Jr.
GUARANTY
FOR VALUE RECEIVED, the undersigned hereby unconditionally guarantees the
payment required by this Agreement when due, and hereby waives (i) notice of
acceptance hereof and of any defaults of the Maker in the making of any such
payment and (ii) any presentiment, demand, protest or notice of any kind. The
undersigned hereby agrees that said Agreement- may be modified, amended and
supplemented in any manner, including the renewal or extension of any kind of
said Agreement, without their consent, and that no such modification, amendment,
supplement, renewal or extension and no invalidity of said agreement shall
release, affect or impair the liability of the undersigned hereunder.
SWISHER INTERNATIONAL, INC.
By:
-------------------------------------
President & Chief Executive Officer
4
<PAGE> 1
EXHIBIT 21.1
List of Registrant's Subsidiaries
Swisher Hygiene Franchise Corporation
Swisher International of Charlotte, Inc.
Swisher International of South Carolina, Inc.
Swisher Maids, Inc.
Swisher Hygienic Services, Inc.
Jacksonville Hygiene, Inc.
Surface Doctor, Inc.
F.M.S., Inc.
Swisher Pest Control Corporation
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Swisher International, Inc.
Charlotte, North Carolina
We consent to the incorporation of our report dated May 20, 1998 with
respect to the consolidated financial statements of Swisher International, Inc.
as of and for the year ended October 31, 1997 and 1996 in the Annual Report on
Form 10-KSB for the fiscal year ended October 31, 1997 of Swisher International,
Inc.
/s/ Scharf Pera & Co.
------------------------------------
Scharf Pera & Co.
June 29, 1998
Charlotte, North Carolina
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SWISHER
INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENT FOR
OCTOBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 920,782
<SECURITIES> 0
<RECEIVABLES> 2,994,399
<ALLOWANCES> 172,000
<INVENTORY> 88,786
<CURRENT-ASSETS> 5,689,377
<PP&E> 1,760,087
<DEPRECIATION> 652,901
<TOTAL-ASSETS> 12,250,950
<CURRENT-LIABILITIES> 4,682,258
<BONDS> 0
0
0
<COMMON> 21,223
<OTHER-SE> 4,128,723
<TOTAL-LIABILITY-AND-EQUITY> 12,250,950
<SALES> 5,366,127
<TOTAL-REVENUES> 13,276,331
<CGS> 4,274,019
<TOTAL-COSTS> 12,405,555
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 210,721
<INCOME-PRETAX> 870,776
<INCOME-TAX> 338,868
<INCOME-CONTINUING> 531,908
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 531,908
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
