<PAGE> 1
FORM 10-KSB/A-1
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
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6849 FAIRVIEW ROAD
CHARLOTTE, NORTH CAROLINA 28210
------------------------- -----
(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 as 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
--- ---
<PAGE> 2
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 12.2%
W. Tom Reeder, III(3)............................................ 88,167 4.1%
Bruce Mullan(4).................................................. 3,000 0.1%
Amy K. King...................................................... -- --
George K. Moore(4)............................................... 85,067 4.0%
Providence LLC(5)................................................ 259,000 12.2%
All Directors and Officers as a Group (five persons)(6).......... 435,451 20.5%
</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> 3
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> 4
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.
OOO10.1.1 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.
OOO10.1.3 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> 5
<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> 6
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
OOO21.1 List of Subsidiaries of the Company
-23.1 Consent of Scharf Pera & Co.
OOO27. Financial Data Schedule.
-99.1 Letter from McGladrey & Pullen, LLP.
</TABLE>
- -------------
- - Filed herewith.
OOO 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).
OO Previously filed and incorporated in reference from the Company's Form
10-K per the fiscal year ended October 31, 1996. (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> 7
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> 8
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> 9
<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> 10
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) 348,805 353,983
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 579,174 1,432,609
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> 11
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> 12
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> 13
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> 14
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> 15
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> 16
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> 17
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> 18
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> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
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> 26
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> 27
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> 28
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> 29
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>
F-23
<PAGE> 30
'
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> 31
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> 32
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> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to the
report on Form 10KSB to be signed on its behalf by the undersigned, thereunto
duly authorized.
SWISHER INTERNATIONAL, INC.
By: /s/ Thomas W. Busch
-------------------------------------
Thomas W. Busch
Principal Accounting Officer
Dated: July 16, 1998
<PAGE> 34
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
23.1 Consent of Scharf Pera & Co.
99.1 Letter from McGladrey & Pullen, LLC
</TABLE>
<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 Amendment No. 1
to 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.
July 16, 1998
Charlotte, North Carolina
<PAGE> 1
EXHIBIT 99.1
July 13, 1998
Securities and Exchange Commission
Mail Stop 9-5
450 5th Street, N.W.
Washington, D.C. 20549
We were previously the independent accountants for Swisher International, Inc.
On February 20, 1988, we resigned as independent accountants of Swisher
International, Inc. (hereinafter "Swisher" or "Company").
We have read Swisher's statements included under Item 9 of its Form 10-KSB
dated June 30, 1998, and we agree with such statements, except for the
following:
- We have no basis to conclude on the Company's use of the term
"unexpectedly" in the first sentence of paragraph one.
- We disagree with the last sentence of paragraph one. Our March 11,
1998 letter to the Swisher Board of Directors, which was included in
the Company's Form 8-K dated March 11, 1998, sets forth our reasons
for the withdrawal of our report on the Company's 1996 financial
statements. These reasons are summarized as follows: (i) our
conclusion that we were no longer able to rely on management's
representations, (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 (as summarized
in paragraph two of Item 9 of the Company's Form 10-KSB for the year
ended October 31, 1997), and (iii) the threat of litigation against
McGladrey, as evidenced in a letter to McGladrey from the Company's
General Counsel dated February 27, 1998, thus impeding our further
investigative efforts and impairing our independence with respect to
Swisher.
- We have no basis to conclude on the Company's comments in the last
two paragraphs of Item 9.
/s/ McGladrey & Pullen, LLP
-------------------------------------
McGLADREY & PULLEN, LLP
