SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): February 18, 1998
SWISHER INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Nevada 0-21282 56-1541396
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(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
6849 Fairview Road, Charlotte, North Carolina 28210
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(Address of principal executive office) (Zip code)
Registrant's telephone number including area code: (704) 364-7707
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(Former name or former address, if changed since last report)
Exhibit Index on Page 5<PAGE>
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ITEM 4. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT.
WITHDRAWAL OF REPORT; RESIGNATION OF AUDITOR. On Friday, February 20,
1998, Swisher International, Inc. (the "Company"), received a letter from its
former auditor, McGladrey & Pullen, LLP (the "Former Auditor"), resigning
"effective immediately" as auditor of the Company and withdrawing their report
dated January 30, 1997, on the Company's financial statements for the year
ended October 31, 1996. The Former Auditor's letter stated that the decision
to resign and withdraw "is the result of (i) our conclusion that we are 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
extended date for the filing the Company's form 10-KSB with the SEC was
February 13, 1998. Not until February 17, 1998, was the Company asked,
through a member of its Board of Directors, to meet with the Former Auditor.
The purpose of the meeting was not stated until the meeting began. The Board
Member promised to address each concern forthwith and respond to the Former
Auditor the following morning. On February 18 and 19, 1998, the Former
Auditor, without waiting for additional information that the Company was
prepared to provide, indicated that it intended to resign and that it was
withdrawing its opinion for fiscal year 1996 as stated above.
The February 20, 1998, letter identifies seven areas of concern to the Former
Auditor, which are briefly identified below. The Company believes that
significant information affecting these issues has not been reviewed by the
Former Auditor. The Company has determined that, in addition to retaining new
auditors and authorizing the Former Auditor to respond fully to inquiries of
the successor accountant concerning each disagreement and event, the Company
will:
-- appoint a three-member special committee comprised of individuals
not involved in the issues of concern to the Former Auditor,
which special committee will direct an independent internal
investigation as described below;
-- retain the law firm of Swidler & Berlin, Chartered, to conduct the
independent internal investigation under the direction of the
independent special committee;
-- obtain at the earliest possible time the report of the independent
special committee along with its recommendations, if any, for
steps to be taken in response to the internal investigative
report; and
-- publicly announce the actions recommended and adopted by the
Board.
Based upon the Company's adoption of the foregoing plan, the Former Auditor
has agreed, with respect to its opinion on the Company's financial statements
for fiscal year ended October 31, 1996, to consider the Company's comments and
any evidence that amplifies or supplements the evidence as currently known and
will delay taking further action until such time as it receives the Company's
written responses to the enumerated matters. The Former Auditor also has
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requested the results of the independent investigation by March 9, 1998. The
Company has taken that request under advisement .
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 (the question
presented for the financial statements being whether the sale should be
recognized under applicable accounting principles in fiscal year
1996 or fiscal year 1997);
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 (the Former
Auditor acknowledged that it knew in April 1997 that the agreements in
question had not been approved by the Swisher Board of Directors
which subsequently determined the agreements were unenforceable
because they were unauthorized and caused the Company and other
involved parties to agree that the agreements were not legally
enforceable; thus, the agreements were never effected);
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
(because they did not complete the audit of the Company's 1997
financial statements, the Former Auditor formed no conclusion as to
when the sale should be recorded);
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 have now been 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,
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agreement with a principal in PCS which, if valid, could mean that
Swisher potentially overstated its receivable (that litigation is
ongoing, the issue has not been resolved therein, and
the Former Auditor acknowledges that the foregoing facts "raise a
question as to whether Swisher management misrepresented the fact
that no other side agreements existed" but does not resolve that
question); 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.
Finally, in addition to these 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.
ITEM 5. OTHER EVENTS.
The Company reported the following additional events:
1. The Company has undertaken to appoint a three-member special
committee to oversee an independent internal investigation of these and any
related issues, which will include company General Counsel James A. Marshall
and two outside individuals with appropriate backgrounds and experience.
2. The Company has retained the law firm of Swidler & Berlin,
Chartered, to conduct the investigation under the direction of, and reporting
to, the special committee.
3. The special committee will recommend appropriate responses,
including any corporate governance and/or structural changes, which may be
advisable in light of the issues raised by the Former Auditor.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
c) Exhibits
16.1 Letter from McGladrey & Pullen, LLP, to the Company dated
February 20, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SWISHER INTERNATIONAL, INC.
Date: February 27, 1998 By: /s/ Patrick L. Swisher
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Patrick L. Swisher,
President and CEO
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INDEX TO EXHIBITS
FORM 8-K
Exhibit Page
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16.1 Letter from McGladrey & Pullen, LLP, to the Company
dated February 20, 1998.
This letter constitutes our written notification to the Board of Directors of
Swisher International, Inc. regarding certain acts and matters enumerated
below. To that end this letter replaces our letter to you dated February 19,
1998.
We confirm our verbal discussion with George Moore on February 18, 1998 of our
decision to resign as auditors of Swisher International, Inc. (Swisher or the
Company) (Commission File Number 0-21282), effective immediately.
Additionally, we hereby withdraw our report, dated January 30, 1997, on the
Company's financial statements for the year ended October 31, 1996. Our
decision is the result of (i) our conclusion that we are 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.
We believe that certain of the matters discussed below have a materially
adverse impact on the Company's 1996 and 1997 financial statements. We
strongly recommend that the Board of Directors assess the significance of
these matters and, where necessary, take timely and appropriate remedial
action.
MANAGEMENT REPRESENTATIONS AND FINANCIAL STATEMENT MATTERS
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Summarized below are the principal matters that caused us to conclude that we
are no longer able to rely on management's representations and that there may
be illegal acts which could have a material effect on the Company's 1997 and
1996 financial statements. These matters have been previously communicated to
various members of the Company's management and the Board of Directors.
1. The most significant issue was our discovery last weekend of a
salesman's activity log which contains information that contradicts
management's representations to us regarding the consummation of the sale of a
franchise in Ireland. The information contained in that log causes us to (i)
conclude that a sale of the franchise had not occurred as of October 31, 1997,
and (ii) to further reevaluate the truthfulness and completeness of
management's representations to us relating to certain other matters that
occurred in the past year. A copy of the salesman's activity log is attached
as Exhibit A and a copy of management's memo is attached as Exhibit B.
2. In March 1997 we were informed by Mike Bernard, the new CFO for
Swisher, that there were certain option and warrant agreements that had been
executed by management during 1996 that were not disclosed nor accounted for
in the Company's financial statements. As part of our audit procedures for
1996 we inquired of management as to the existence of any such agreements.
Management failed to inform us of the existence of these agreements.
Furthermore, the fiscal 1996 representation letter signed by management
asserts that no such agreements existed, other than those disclosed in the
financial statements. Upon further inquiry in April 1997, we discovered that
these agreements had not been approved by the Swisher Board of Directors.
subsequently, the Swisher Board of Directors (i) determined that these
agreements were nonenforceable because they were unauthorized, and (ii) caused
the Company and the other involved parties to agree that the agreements were
not legally enforceable and, therefore, were never effected.<PAGE>
<PAGE>
3. During the performance of our 1997 audit fieldwork, we became aware
of two important facts relating to the sale of the Houston franchise by the
Company in the third quarter of 1996 that were not previously disclosed to us.
This transaction resulted in a gain of $284,017 being recorded by the Company
in the third quarter of 1996. The two additional facts are discussed below:
- The first fact is that the transaction was with Lone Star Hygiene,
L.L.C., an entity that was 51 percent owned by Pat Swisher, CEO of
the Company. This fact was not disclosed to us nor to the
Company's legal counsel who was assisting the Company in the
preparation of the Form 10-K for 1996. The related party nature of
this transaction was not disclosed in the Company's 1996 financial
statements nor in the 1996 Form 10-K. Furthermore, management did
not inform us of Pat Swisher's involvement in this transaction
when, as a part of our 1996 audit procedures, we inquired about the
terms of the transaction and had questions regarding the receivable
confirmation response. We were directed by Swisher management to
contact Alex Arriaga (the minority shareholder of Lone Star
Hygiene, L.L.C. who was otherwise unrelated to the Company) rather
than to Pat Swisher, the 51 percent owner of the franchisee.
- During our 1997 audit procedures, we discovered that there was a
management agreement in place relating to this franchise sale. The
management agreement covered the period from the date of sale to
October 31, 1996. The agreement required the Company to continue
to operate the franchise and, as compensation, to retain the
revenues and the net profits of such franchise during the period of
the agreement. We believe that this agreement indicates the
Company retained the control of this franchise during the term of
the management agreement and, therefore, the sale should not have
been recognized in the third quarter of 1996.
4. Our 1997 audit procedures identified that there was a related party
transaction recorded in the third quarter of 1997, similar to the third
quarter 1996 transaction discussed above. In the third quarter of 1997, the
Company recorded a $381,000 gain on the sale of the Charlotte Hygiene
franchise to Charlotte Hygiene Assoc., a company that is 51 percent owned by
Tom Reeder, the Company's Vice President. This transaction was not disclosed
in the Company's 1997 third quarter Form 10-Q as a related party transaction.
Additionally, this transaction included a management agreement for the period
from the sale date to October 31, 1997. We believe this transaction should be
disclosed as a related party transaction and that the sale should not have
been recorded in the third quarter of 1997. Because we did not complete the
audit of the Company's 1997 financial statements, we have formed no conclusion
as to when such sale should be recorded.
5. Our audit procedures in 1996 discovered that the Company had paid
the personal expenses of certain management employees. At October 31, 1996,
the Company recorded receivables totaling $138,000 from the individuals
involved. The 1996 representation letter included management's
representations that these amounts would be repaid to the Company in 1997,
without the use of any special management compensation or bonuses to cover the
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amounts owed. However, such amounts were not repaid in 1997 and certain
Company payments have continued on behalf of these individuals. During our
1997 audit fieldwork, Pat Swisher and Tom Reeder stated that they will repay
the amounts owed by surrendering shares of the Company's common stock. A
summary of the issues follows:
- In 1996, the Company was paying certain split dollar life insurance
premiums for Pat Swisher and Tom Reeder. Upon further
investigation, we determined that these policies and the related
premium payments were not approved by the Company's Board of
directors and that such policies were owned by the individuals and
not the Company. As a result of this discovery, the individuals
involved agreed to repay the Company in 1997 for the amount of
premiums paid, which totaled $61,000. No payments had been
received by the Company as of the dates of our fiscal 1997 audit
fieldwork. When questioned about these unpaid amounts, we were
informed by management that the cash surrender value is the
property of the Company and that the repayment is not required.
- During the 1996 audit fieldwork, we were asked by George Moore, an
independent Director of the Company, to test certain management
expense reports. Our procedures indicated that Pat Swisher had
submitted multiple reimbursement requests using the same receipt.
As a result, Mr. Moore was informed of such payments and,
subsequently, the Company recorded a $77,000 receivable from Pat
Swisher at October 31, 1996 relating to certain of these
overpayments. Similar to the above item, our understanding is that
such amounts would be repaid by Mr. Swisher during 1997. However,
no payments had been received as of the dates of our 1997 audit
fieldwork.
6. At October 31, 1996, Swisher had a $105,000 receivable from
Professional Carpet Systems, Inc. (PCS) that arose from transactions during a
period of transition of the Surface Dr. operations from PCS to Swisher.
During our 1996 audit fieldwork, we attempted to confirm this receivable with
PCS. However, PCS disagreed with the amount recorded by the Company and
confirmed an amount that was approximately $75,000 less than the amount
Swisher had recorded. In February 1997, representatives of PCS met at
Swisher's offices to resolve the difference. Craig Radke, McGladrey's audit
partner, obtained verbal representations from both Swisher management and the
PCS representatives of the agreed upon amount, which resulted in no adjustment
to the receivable amount recorded on Swisher's accounting records. This
amount was subsequently confirmed to us in writing by PCS in February 1997,
prior to the issuance of our report. Mr. Radke also obtained a verbal
representation from both Swisher management and PCS representatives that the
amount was agreed to in total resolution of the issue and that no other side
agreements existed and no other cash was to be exchanged. However, in August
1997, PCS brought a lawsuit against Swisher with respect to several items in
connection with the sale of Surface Dr. from PCS to Swisher. This lawsuit
includes a demand for payment of amounts due under a consulting agreement with
Joe Lundsford, a principle in PCS. This consulting agreement was entered into
on February 10, 1997 and required Swisher to pay him $80,000 in consulting
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fees. These events raise a question as to whether Swisher management
misrepresented the fact that no other side agreements existed. If Swisher
management failed to disclose an existing side agreement Swisher has
potentially overstated its receivable from PCS at October 31, 1996.
7. During the course of our 1996 audit fieldwork, we received
representations from Swisher management with respect to certain notes
receivable and repurchased franchise assets that were being held for resale.
- Tom Reeder stated to us that the franchise in Mobile was
operational and that the note receivable from this franchisee was
valid and should be recognized as revenue. During 1997, this
$45,000 note receivable was written off as uncollectible.
Additionally, Mr. Reeder now states that the franchise was not
really operational at October 31, 1996, but that some business was
being done by the franchisee through other franchises that he
operates in adjacent territories.
- We received written representation from management that the
Scottsdale franchise had operating revenue of $200,000 as of
October 31, 1996. This information was used in our assessment of
whether an impairment of this $143,000 asset existed at that date.
During our 1997 audit fieldwork, we discovered that this franchise
only had revenues of approximately $80,000 for the year and that in
1997 the Company had reduced the carrying value of the franchise by
$53,000 as a result of the impairment in value.
WITHDRAWAL OF OUR OPINION ON THE SWISHER FISCAL 1996 FINANCIAL STATEMENTS
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The significance of the information discussed above indicates the Company's
October 31, 1996 financial statements may be materially misstated. As a
result, we hereby withdraw our auditor's report dated January 30, 1997 on the
October 31, 1996 financial statements of Swisher International, Inc. You
should notify those parties who have been provided copies of those financial
statements that we have withdrawn our report and that they may no longer rely
on our report. The parties to be notified include, but are not limited to,
the SEC, any applicable securities exchange, the state franchise board,
lenders and other creditors. By February 27, 1998, please provide us with a
copy of the correspondence you furnish to these parties notifying them of the
withdrawal of our report.
UNRESOLVED ACCOUNTING ISSUES RELATING TO THE FISCAL 1997 FINANCIAL STATEMENTS
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In addition to the matters discussed above, at the date of this letter we were
having discussions with Swisher management regarding the resolution of certain
accounting issues. In particular, we had raised certain concerns regarding
the 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 (acquired as a result of the repossession or
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repurchase of certain franchises). Our audit work in these matters has not
been completed. However, it is likely we would have issued a modified opinion
if such matters were not ultimately resolved to our satisfaction.
If you have any questions regarding this communication, please contact Mr.
William D. Travis, Executive Partner-Audit and Accounting at (612) 921-7780 or
Mr. Craig Radke at 704-367-6250. Mr. Travis address is McGladrey and Pullen,
LLP, 3600 West 80th Street, Suite 500, Minneapolis, Minnesota 55431.
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Notepad:
09-02-97 - JBM - DQ.
09-04-97 - JDR - Sending FedEx 9/3/97.
*******************************
Shane Kennelly
Snap-on Tools
5 Balaly Avenue
Dundrum
Dublin 14,
Ireland
Home Phone: 353-129-40261 fax Work Phone: 353-86-538079 cell
Territory: Ireland Source: Local ad
First Call: 09-03-97 JBM Activity Tracking:
Type: Surface Doctor
Notepad:
02-10-98 17:10 - JBM - Shane has arrived for training and has paid another
$25,000. Still owes another $25,000 and that will be due 3/1.
01-23-98 17:03 - JBM - I met with Shane earlier in the week and interviewed
franchise candidates. All is going well but he needs training.
01-20-98 17:12 - VRM - Sent 20 SD packets and PAL videos via Fed. Exp.
12-31-97 08:54 - JBM - Called to say Happy New Year.
12-09-97 - JBM - Lined up meeting for Hugh in Phoenix.
11-26-97 - JBM - I called Shane for an update: He has received ops manual and
related stuff I sent. One of the guys we met when I was there last has agreed
to come on board and his brother wants another territory. Shane is trying to
close down prior to the end of the year. Mentioned Tom's visit in January and
he may tie some ads around that. I asked Shane about the training letter and
that should not be a big deal.
11-21-97 - JBM - Sent Ops Manual, leads, Franchise agreements and computer
books, etc. NEED TO GET TRAINING LETTER.
11-17-97 - JBM - Closed! I met Shane in Dublin and he and his wife (Maura)
had dinner with Pat and Pauline Lee. Received docs and money and he is
excited. Met three potential buyers and gave him info on McDonagh and
O'Brien. Need to send additional information and Ops manual to him and get a
training letter.
11-08-97 - JBM - Received fax from Shane saying he is mailing the docs and
will wire the Money on Monday. Also, he has set two appointments. I sent fax
saying I would pick up everything next Friday and that he should meet me at
the hotel at 10:15 on Friday.
11-05-97 - JBM - Tried to call Shane but got fax. Sent fax offering to come
to Dublin to help sell subs if we can get paperwork and check back in time.
11-03-97 - JBM - Got lawyer' comments and it was a bit more detailed than
Shane let on. Worked thru them and faxed the LOC and the wiring instructions.
Holding out a visit next week in case there is a problem.
10-30-97 - JBM - Shane called today to say that he has pushed his lawyer and
that he is in agreement with the fax I sent him last night. All is well and
moving forward.
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10-29-97 - JBM - I called Shane again and got him. He was in to see the
lawyer today and should have any concerns by the end of the week. Sending fax
explaining how everything is to go down and sending the MLA's out today and
will do a "LETTER" on Friday.
10-29-97 - JBM - I tried Shane last nite and again this morning and there is
no answer at his home. Left message on his cell phone today. Running?
10-25-97 - JBM - Shane visited for a walk thru and has agreed to buy the ML.
He will visit with his lawyer on the 28th and fax to me any questions - we
have gone thru the Agreement and there is not a major problem. I will send
out two copies of the docs on the 29th and he will sign and return one set
with the $25K. Need to send the training letter as well.
10-15-97 - JBM - Sent a fax saying I will pick up at the airport and gave
general weather and itenerary information.
10-12-97 - JBM - Sent fax saying I will make hotel reservation and send rough
itenerary.
10-08-97 - RPM - Spoke with Shane and told him a schedule and will make hotel.
10-01-97 - JBM - Received fax saying he is coming to visit on the 22nd and I
replied to him that is fine and we will pay for hotel costs. He is to advise
when flight is booked.
09-23-97 - JBM - Received a fax from Shane that says he wants to meet again
and also wants to meet Pat Lee. EXTREMELY interested in moving forward. Sent
reply.
09-20-97 - JBM - Met with Shane and he is our number 1 guy considering
everything. Distributor for Snap-On and knows franchising. Has the money and
wouldn't be strapped. Very interested and we should get him here.
09-09-97 - JBM - Sent fax asking if received and if interested.
09-04-97 - JDR - Sending video/pkt. via Federal Express 9/3/97.
********************************************
Michael Kilkelly
43 Westbrook
Barna Road
Galway,
Ireland
Home Phone: Work Phone:
Territory: Ireland Source: Ad
First Call: 09-08-97 JBM Activity Tracking:
Type: Surface Doctor
Notepad:
09-20-97 - JBM - DQ.
09-16-97 - RPM - Email did not go thru. Gave Bruce a phone number to call.
09-16-97 - RPM - Email out requesting call for appt. Hotel in Ireland given.
09-09-97 - VRM - Package sent.
******************************************
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Richard Lewis
Barrack Street
Templemore
County Tipperary,
Ireland
Home Phone: Work Phone: 0504-31220
Territory: Ireland Source: Ad
First Call: 09-08-97 JBM Activity Tracking:
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February 13, 1998
TO: Mr. Chuck Cendrowski
FROM: Bruce Mullan
SUBJECT: Sale of "Ireland" for Surface Doctor
Shane Kennelly
5 Balaly Avenue
Dundrum
Dublin 14 Ireland
TEL: 353-129-40261
Dear Chuck:
Per your request, I have listed below the time line concerning the sale of our
Surface Doctor Master License to Mr. Shane Kennelly:
Aug. 31, 1997 - Ran ad in the "Irish Independent"
newspaper
Sept. 7, 1997 - Ran second ad in the "Irish Independent"
Sept. 15-20-1997 - Interviewed Irish prospects in Ireland,
including Mr. Kennelly.
Oct. 22-25, 1997 - Mr. Kennelly visits Charlotte, tours
Charlotte Corporate operation and spends time
with department heads covering franchise support
structure. I cover franchise sales -- Mr.
Kennelly agrees to purchase pending review by
his attorney.
Oct. 30, 1997 - Deal closed after acceptance of "Letter of
Clarification".
Nov. 3, 1997 - I was scheduled to visit Ireland to
interview prospective subfranchisees and
to pick up the Agreement -- this visit was
delayed a week due to problems in other
areas.
Nov. 10-15, 1997 - Visited the UK and then Ireland where I picked
up the Agreement and interviewed prospective
subfranchisees.
Chuck, I trust that this will clarify the situation satisfactorily. Please
let me know if you have further questions.
Bruce
