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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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<S> <C>
(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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER: 0-21282
SWISHER INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
NEVADA 56-1541396
(State of Incorporation) (I.R.S. Employer Identification No.)
6849 FAIRVIEW ROAD, CHARLOTTE, NC 28210
(Address of principal executive (ZIP Code)
offices)
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(704) 364-7707
(Issuer's telephone number)
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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-KSB or any amendment to
this Form 10-KSB [ ]
The registrant's losses for the fiscal year ended October 31, 1998 were
($2,681,767).
The aggregate market value of the 1,701,854 shares of Common Stock held by
non-affiliates was $1,329,573 as of October 31, 1998. The market value of the
shares was calculated based on the price of such shares for the last trade as
reported by certain broker-dealer proprietary trading systems on such date.
As of October 31, 1998, 2,208,271 shares of the registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Swisher International, Inc. and its wholly owned subsidiaries
(collectively, the "Company") are engaged in the sale of certain products and
services primarily through approximately 199 franchises and 14 master franchises
included within the Company's Hygiene, Swisher Maids, Surface Doctor and Swisher
Pest Control divisions.
BUSINESS OF ISSUER
The Company's Hygiene division offers services and products to a broad
spectrum of businesses in 39 states and Canada, through approximately 106
franchises, including two Company-owned franchises in West Virginia and Florida
and nine international master licenses. The Company's hygiene services and
products include restroom sanitization, anti-bacterial and degreasing handsoap,
flying insect control, air sanitizers and biological greasetrap and drain line
cleaners. The Company is an approved vendor for such national accounts as Burger
King, Wendy's, Shell and Dunkin' Donuts.
In February 1994, Swisher Maids, Inc., a wholly owned subsidiary of the
Company, began operating a home cleaning business in Charlotte, North Carolina,
in order to introduce a home-cleaning franchise-marketing program. Swisher Maids
currently has six home-cleaning franchises including a corporate-owned
home-cleaning operation based in Charlotte, North Carolina.
In July 1996, the Company acquired substantially all of the assets and
business operations of Surface Doctor, a provider of bath and kitchen
restoration services, from Professional Carpet Systems ("PCS"). Surface Doctor
has provided on-site bath and kitchen restoration services since November 1994
and has conducted its franchise program since 1994. Surface Doctor operates
through approximately 81 domestic franchises, four Canadian franchises and four
international master licenses. Since July 1996, the Company has conducted
Surface Doctor operations through a wholly owned subsidiary.
In September 1997, the Company acquired Carolina Termite & Pest Control
("CTPC"), a pest control business based in North Carolina. The Company
subsequently sold this Pest Control operation in October 1998. At October 31,
1998, the Company had seven pest control franchises located in North Carolina
and one international master licensee.
The principal sources of the Company's revenues are initial franchise fees
and recurring franchise revenues (consisting of product sales, royalties,
service fees and marketing fees) relating to the Company's operations in each of
its four divisions. Revenues are also generated by Company-owned operations. The
Company provides a range of support services to franchisees, including training,
sales and service support, and volume pricing on products and supplies.
HYGIENE OPERATIONS
Hygiene Franchise Services
The Company's Hygiene services and products are sold principally through
franchises to a broad spectrum of businesses throughout the United States and
Canada, including restaurants, retail stores, manufacturers, commercial office
buildings, health and childcare facilities, schools, military bases and hotels.
As of October 31, 1998, the Company operates nationally through approximately
106 Hygiene domestic and Canadian franchisees including two Company-owned
operations. The Company began to offer Hygiene licenses on an international
basis in 1996, and has entered into nine international master license agreements
covering the United Kingdom, Ireland, Germany, Austria, the Netherlands, the
Caribbean, Korea, Hong Kong/Macau/China and Australia/New Zealand.
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
Franchisees generally visit retail business customers every seven to ten
days to replenish supplies and perform services. The Company's Hygiene
franchisees market their services and products to retail business customers
based on factors such as enhanced appearance of the customer's business
premises, cost savings, convenience, reliability, cleanliness and hygiene. The
services offered by the Hygiene franchisees also enable retail businesses to
decrease operating costs by reducing pilferage of supplies, inventory carrying
costs, and training expense.
Hygiene Revenues
The Company generates revenue through its Hygiene franchise operations in
the form of (i) initial franchise fees, (ii) product sales to franchisees, (iii)
royalties, service fees, and marketing fees and, (iv) interest.
(i) Initial Franchise Fees -- On the sale of a Hygiene franchise, the
Company receives an initial franchise fee, which is calculated based upon the
population of the territory purchased by the franchisee. The Company
historically has financed a significant portion of the initial Hygiene franchise
fee payable by new franchisees and from time to time has financed 100% of
certain franchise fees.
(ii) Product Sales to Hygiene Franchisees -- The franchise agreement
requires franchisees to purchase Hygiene products from approved vendors, which
allows the Company to maintain the quality and integrity of the products
delivered by franchisees to the retail business customer. The Company is the
primary approved product vendor. Management believes that through the Company's
volume buying of Hygiene products; the Company can provide quality Hygiene
products at competitive prices.
(iii) Royalties Service Fees and Marketing Fees -- The Company receives
royalties and marketing fees based on a percentage of gross revenues while
service fees are received based on the franchisee's annualized sales.
(iv) Interest Income -- Interest income received by the Company from
franchise operations represents income derived from financing franchise fees,
acquiring competitors, and purchases of short-term investments.
Hygiene Franchise Development -- As of October 31, 1998, the Company had
106 Hygiene franchises and Company-owned operations conducting business in 39
states, the District of Columbia and Canada. This compares to 105 and 99
franchises as of October 31, 1997 and 1996, respectively. The lack of growth in
the number of domestic franchises in 1998 reflects the Company's broad
geographic market penetration and the limited number of major domestic unsold
markets.
Company-Owned Hygiene Operations
The Company-owned hygiene operations as of October 31, 1998 consisted of
operations in Florida and West Virginia. A Charlotte, North Carolina operation
was sold in the third quarter of 1997, and a Tulsa, Oklahoma operation was sold
in the fourth quarter of 1998. Company-owned hygiene revenues for the year ended
October 31, 1998 and 1997 were $732,000 and $675,000, respectively.
International Hygiene License Agreements
During 1996 the Company implemented an international Hygiene marketing
program. As of October 31, 1998 the Company has entered into Master License
Agreements covering the United Kingdom, Ireland, Germany, Austria, the
Netherlands, the Caribbean, Korea, Hong Kong/Macau/China and Australia/New
Zealand.
A Master License Agreement typically grants a ten year, exclusive license
to conduct a Swisher Hygiene business using the Company's trademarks, service
marks, procedures and techniques within a specified country or territory. The
Company retains a right of first refusal to repurchase the Master License and
also retains the right to approve of any proposed transfer of the Master
License.
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
The licensee is required to pay an initial license fee, which has ranged
from approximately $60,000 to $280,000. The Company has occasionally granted
financing for portions of the initial license fee. The licensee is also
typically required to pay minimum monthly royalties based upon ongoing revenues
attributable to the Hygiene operations of the licensee and any of its
sub-licensees, and to typically pay a percentage of initial fees received from
sub-licensees.
Hygiene Market and Growth Strategy
The Company estimates that there are approximately 10 significant
territories in the United States not currently served by the Company or its
existing Hygiene franchisees. Through the addition of new products and services
the Company believes that new opportunities exist in the United States in
territories previously considered not to have an adequate population base to
support a viable franchise. The Company intends to actively market these
territories in 1999. In order to expand the market for Hygiene franchises, the
Company has developed a Canadian franchise sales program. Since 1993, the
Company has sold eight franchises in Canada. The Canadian franchise sales
program is similar to the Company's franchise sales program in the United
States. The Company focuses its franchising activities on selected areas in an
effort to establish multiple franchises within a particular geographic area.
However, the Company has not had extensive experience with international
franchise operations in the past and, accordingly, the Company may be subject to
a number of risks in the development of international franchises.
The Company's Master License program represents the Company's effort to
expand its Hygiene Market. Given the penetration already achieved by the
Company's domestic Hygiene operations, the Company believes that international
markets offer a growth opportunity for Hygiene revenues. In 1997, the Company
sold Hygiene Master Licenses for the United Kingdom, Ireland, the Caribbean,
Hong Kong, Korea and Australia, and subsequently sold Germany, Austria and the
Netherlands in 1998.
The Company expects that its future growth in Hygiene revenues will be
derived from continued penetration of international markets, increased product
sales to franchisees, expansion of business accounts serviced by franchisees,
sale of additional franchises, and introduction of new products and services.
The sale of new franchises has the potential to generate franchise fees as well
as increase continuing revenues attributable to continuing product sales,
royalties and/or service fees. The Company markets its franchises and Master
Licenses directly through sales personnel located at the Company's headquarters.
SWISHER MAIDS OPERATIONS
Swisher Maids Services
As of October 31, 1998, the Company had 6 Swisher Maids franchises in
operation including a Company-owned residential maid services in Charlotte,
North Carolina. A Swisher Maids franchisee provides residential maid services to
its customers.
Franchises are granted for a specific geographic territory, but unlike the
Hygiene franchise, a Swisher Maids franchise entitles the franchisee to operate
from a single location within the specified territory. Each Swisher Maids
franchisee may offer and provide services to only residential customers located
within its franchised territory.
Swisher Maids Revenues
The Company generates revenues from its Swisher Maids franchise operations
in the form of franchise fees, royalties, service fees, marketing fees and
interest income.
Initial Franchise Fees -- The initial franchise fee payable to Swisher
Maids is a flat fee, plus a fee for "qualified households" defined by specified
annual income for the franchisee's territory. As with its sale of Hygiene
franchises, the Company may finance all or a portion of the initial franchise
fee payable by a franchisee.
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
Product Purchases by Franchisees -- The Swisher Maids franchise agreement
requires franchisees to purchase house-cleaning supplies and equipment from
approved vendors, which allows the Company to maintain the quality and integrity
of the products delivered by franchisees to the retail customer. The Company
does not offer products to franchisees and does not receive any fee in
connection with purchases made by franchisees.
Royalties and Marketing Fees -- The Company is entitled to receive
royalties and marketing fees based on a percentage of gross revenues.
Swisher Maids Franchise Development -- As of October 31, 1998, the Company
had 6 franchises including a Company-owned operation in Charlotte, North
Carolina. Following an attempt to reorganize the Scottsdale, Arizona operation
in 1997, the Company closed the Company-owned operation during 1998. The Company
intends to continue Swisher Maids operations at their existing level for the
immediate future.
Company-Owned Swisher Maids Operations
Since 1996, the Company has repurchased a total of four Swisher Maids
franchises, of which two have been closed, one has been consolidated with
another, and one is currently owned and operated by the Company. Revenues
derived from Company-owned Swisher Maids operations for the year ended October
31, 1998 and 1997 were $348,000 and $446,000, respectively.
SURFACE DOCTOR OPERATIONS
Surface Doctor Services
The Company acquired the Surface Doctor franchise operations effective July
1, 1996, from Professional Carpet Systems, Inc. ("Seller"). The purchased assets
consisted of all of Seller's rights under Surface Doctor franchise agreements
and all trademarks, and service marks, accounts and notes receivable,
inventories and equipment relating to the Surface Doctor operations.
When the Company acquired Surface Doctor, there were approximately 92
domestic and 9 foreign Surface Doctor franchisees. The Company began to offer
Surface Doctor franchisees in August 1996. As of October 31, 1998, there were 81
domestic, 4 Canadian Surface Doctor franchises, and 4 international master
licenses. Surface Doctor franchises offer mobile, on-location kitchen and bath
restoration services on cabinets, counter tops, and fixtures. Surface Doctor
restoration services offer customers a low-cost alternative to the replacement
of laminate, porcelain, fiberglass, tile, cultured marble, metal and related
surfaces. Restoration services are typically marketed to homeowners, hotels,
apartment complexes, office and industrial facilities, appliance rental
companies, and managers of residential and commercial properties.
Surface Doctor Revenues
The Company generates revenue through its Surface Doctor franchise
operations in the form of initial franchise fees, product sales to franchisees,
royalties, and marketing fees.
Initial Franchise Fees -- The initial franchise fee payable to Surface
Doctor is a flat fee, which occasionally is financed on a short-term basis.
Product Sales To Surface Doctor Franchisees -- A Surface Doctor franchise
agreement requires franchisees to purchase Surface Doctor products from approved
vendors, which allows the Company to maintain the quality and integrity of the
products delivered by franchisees to the retail business customer. During 1998,
as part of a divisional operational reorganization, the amount of products sold
directly to the franchisees by the Company was reduced and replaced by a system
whereby the franchisees order products directly from the manufacturers, and the
Company receives a percentage of these sales in the form of product commissions.
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
Royalties And Marketing Fees -- Pursuant to the Company's current franchise
agreement, the Company receives royalties and marketing fees based on the
franchisees' gross revenues. The majority of franchisees as of October 31, 1998
are governed by the prior Surface Doctor franchise agreement, which requires
fixed monthly payments.
Surface Doctor Franchise Development -- As of October 31, 1998, the Company
had approximately 85 Surface Doctor franchises conducting business in the United
States and Canada, and has entered into 4 Master Licenses agreements in Ireland,
the United Kingdom, Brazil, and Singapore/Indonesia/Malaysia.
Surface Doctor Franchise Agreement
The Company's Surface Doctor franchise agreement grants the franchisee a
nonexclusive geographical territory for a ten-year period, subject to
termination by the Company upon the occurrence of certain events, including
insolvency of the franchisee, and breach of the franchise agreement by the
franchisee. The franchisee has the right to terminate the franchise agreement
upon giving 60 days' prior notice to the Company. The franchise agreement
permits successive renewal terms following expiration of the initial term if the
franchisee is in compliance with the terms of the agreement.
Company-Owned Surface Doctor Operations
Company-owned Surface Doctor operations generated revenues of $45,000 for
the fiscal year ended October 31, 1997. Because the Atlanta, Georgia operation
was sold in January 1997, there are no revenues or operating results for the
fiscal year ending October 31, 1998. A gain on the sale in 1997 of approximately
$38,000 was recognized.
Surface Doctor Market and Growth Strategy
The Company expects that future growth of Surface Doctor operations will be
derived from the sale of additional franchises. The sale of new franchises has
the potential to generate franchise fees, royalties and service fees. The
Company believes that substantial growth opportunities continue to exist for
Surface Doctor in the United States, since franchises are granted on a
nonexclusive basis with a population requirement of just 100,000 people per
franchise. The Company also believes that a demand exists for Surface Doctor
franchises in foreign countries, and has as of October 31, 1998 a total of 8
franchises and master license agreements located in Ireland, the United Kingdom,
Canada, Brazil and Singapore/Indonesia/Malaysia. The Company markets Surface
Doctor franchises directly through sales personnel located at the Company's
headquarters, and through advertisements placed in magazines and other business
publications.
PEST CONTROL
The Company acquired Carolina Termite and Pest Control ("CTPC"), in
September 1997. The Company-owned operation, located in Monroe, North Carolina,
produced approximately $171,000 in revenues and operating income of $2,000 in
the two months the Company owned it in the 1997 fiscal year, and $1,155,000 in
revenues and $109,000 operating losses in fiscal year 1998.
As part of its strategic decision to focus on franchising and reduce the
number of Company-owned operations, the Company sold CTPC in October 1998 to one
of its former owners, E. David Dodd, the President of Swisher Pest Control
division. The Company recorded a net loss of less than $1,000 on the
transaction.
The Company believes the Swisher Pest Control division has varied
opportunities for expansion, including the incorporation of pest control
services into its Hygiene operations, both domestically and internationally. In
September 1998, the Company entered into an agreement with its Ireland Hygiene
Master Licensee to add pest control services.
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
Proprietary Rights
The "SWISHER," "Swisher Maids," "S" design and "Surface Doctor" marks have
been registered as service marks on the principal register of the United States
Patent and Trademark Office. Management of the Company also believes the Company
has developed proprietary rights in the Swisher trade name and in associated
common law trademarks including "Sanitized by Swisher," "Swisher System" and
"Swisher Hygiene." All of the Company's service marks, trade names and common
law trademarks are licensed to franchisees under franchise agreement provisions
strictly regulating their use.
The Company intends to file all required renewal applications and to take
other steps reasonably necessary to maintain the integrity of its services
marks, trade names and other proprietary names and marks and to protect them
against unauthorized use. Failure to defend and protect such service marks and
other proprietary names and marks could adversely affect the Company's sales of
franchises and continuing operations. The Company knows of no current infringing
uses.
Competition
The Company believes that the markets for its Hygiene, Maids, Surface
Doctor, and Pest Control services are highly fragmented. The barriers to entry
in each market are low and, accordingly, competition is intense. The vast
majority of the Company's Hygiene competitors are small, locally-owned
janitorial or hygiene service firms, as well as a number of regional hygiene
competitors based in Florida, Texas and Missouri, while Maids Service
competitors consist generally of local independent operators and a small number
of national or regional companies, including franchise operators. Surface Doctor
competitors consist primarily of providers of traditional remodeling services,
as well as small operators who offer refinishing services similar to those
provided by Surface Doctor franchises. Pest Control competitors consist of both
national organizations and individually-owned local operations.
The success of the Company depends in great part on the operating
performance of its Hygiene, Swisher Maids, Surface Doctor, and Pest Control
franchisees and the franchisee's ability to increase market penetration and
establish name awareness. The Company believes that the principal competitive
factors in the Hygiene, Swisher Maids and Surface Doctor industries are quality
and timeliness of services, price, convenience and the mix of services offered.
Management believes that both Hygiene and Surface Doctor franchises compete
effectively on the basis of price, convenience and quality and timeliness of
services. Swisher Maids franchises have, for a variety of reasons, competed less
favorably in the market for residential maid services. The Company intends to
review methods to improve the competitive position of the Company's Maids
operation.
Regulation
The Company is subject to Federal Trade Commission ("FTC") regulation and
state laws regulating the offering and sale of franchises. The Company is also
subject to a number of state laws regulating substantive aspects of the
franchise/franchisee relationship, such as business opportunity laws. The FTC's
Trade Regulation Rule on Franchising ("FTC Rule") requires the Company to
furnish all prospective franchisees with a franchise offering circular
containing information prescribed by the FTC Rule.
Several states regulate the offer and sale of franchises by requiring both
disclosure to prospective franchisees and, in almost all cases, registration of
the franchise offering. Certain states also regulate the franchise relationship
by requiring that the franchisor deal with its franchisees in good faith,
prohibiting interference with the right of free association among franchisees,
limit the imposition of standards of performance on a franchisee, and regulating
discrimination among franchisees in charges, royalties and fees. Such laws also
restrict a franchisor's right to terminate a franchise agreement by, for
example, requiring "good cause" to exist as a basis for the termination, advance
notice to the franchisee of the termination, an opportunity to cure and an
obligation to repurchase inventory or pay other compensation. These provisions
have not had a material effect on the Company's operations.
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
Although the Company is not aware of any pending franchise legislation
likely to affect its operations, there can be no assurance that future franchise
legislation will not impose additional requirements or expenses on the Company's
business. The Company believes that as of October 31, 1998, its operations are
in compliance with the FTC Rule and state franchise laws.
The Company may also be subject to government regulation concerning the
offer and sale of licenses and franchises in foreign countries. However, by
offering a master franchise or master license covering an entire country, the
Company expects to minimize the extent to which its international operations
will be governed by the laws of foreign jurisdictions. The Company's master
licensee or master franchisee will, however, be required to comply with the laws
and regulations, if any, governing the sale of franchises within its country or
territory. Government regulations in foreign jurisdictions may, therefore, slow
the development of international franchise operations.
The Company is also subject to the Fair Labor Standards Act, which governs
such matters as minimum wages, overtime and other working conditions. A
significant number of the personnel employed by the Company are paid at rates
related to the federal minimum wage and, accordingly, increases in the minimum
wage will increase the Company's labor costs.
Federal and state environmental regulations have not had a material adverse
effect on the Company's operations.
Employees
The Company employed approximately 98 persons at October 31, 1998.
Approximately 68 persons are employed in the Company's franchise operations, and
approximately 30 persons are employed in the Company-owned Hygiene and Swisher
Maids operations. The Company's employees are not covered by any collective
bargaining agreements. Management believes that its relations with employees are
satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains its headquarters and administrative facilities at
6849 Fairview Road, Charlotte, North Carolina 28210. These facilities consist of
approximately 11,500 square feet of office space. Until May 1998, the Company
leased the facility from a partnership beneficially owned 100% by Mr. Swisher.
In May 1998, the building was sold to an unrelated party (Old Dowd Properties,
Inc.), from which the Company continues to lease space. The Company's lease
extends through December 2003, and requires monthly rental payments of between
$19,678 and $23,019 over the term of the lease.
ITEM 3. LEGAL PROCEEDINGS
On September 18, 1998, Brian Cox, individually and on behalf of all others
similarly situated (the "Plaintiffs"), filed a class action law suit (Case No.
3:98 CV403-MU) (the "Lawsuit") in the U.S. District Court for the Western
District of North Carolina, Charlotte Division, against the Company and certain
current or former officers and directors of the Company including Patrick L.
Swisher, W. Tom Reeder III, D. Chris Lazenby, Garnet R. Mucha and Charles H.
Cendrowski (collectively, the "Individual Defendants"). The Lawsuit was amended
by the Plaintiffs on February 19, 1999 to, among other things, add the Company's
former independent auditors, McGladrey & Pullen LLP, as a defendant. The
Lawsuit, as amended, alleges violations of Section 10(b) of the Securities
Exchange Act of 1934, as amended, against the Company and the Individual
Defendants and violations of Section 20(a) of the Exchange Act against the
Individual Defendants. The Plaintiffs are seeking damages for the alleged
violations, attorneys fees in connection with their prosecution of the Lawsuit
and such other relief as a court may deem just and proper.
The facts alleged by the Plaintiffs are substantially similar to the
matters that are asserted by the Company's former auditors in their February 20,
1998 withdrawal letter, filed by the Company on or about February 27, 1998 as an
exhibit to a Current Report on Form 8-K.
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
The Company has obtained an extension of time to respond to the Plaintiffs.
The Company intends to vigorously defend the Lawsuit. At this point, the Company
cannot determine the likelihood of any outcome that would be material to the
Company, or the magnitude of any potential gain or loss arising from the
Lawsuit.
On February 17, 1999, the Company filed an action directly against its
former independent accountants, McGladrey & Pullen LLP (Civil Action No. 3:99
CV56-MU), alleging, among other things, McGladrey & Pullen's negligence in the
conduct of their audits of the Company's financial statements and in the manner
in which they withdrew from their relationship with the Company. McGladrey &
Pullen has not yet filed a response to this action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the three months ended October 31, 1998.
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and public common stock purchase warrants
("Public Warrants") were quoted on the Nasdaq National Market System under the
symbols "SWSH" and "SWSHW" until May 11, 1998, at which time Nasdaq de-listed
the Company's stock due to (i) the Company's delinquent filings with respect to
Form 10-KSB for the fiscal year ended October 31, 1997 and the Form 10-QSB for
the quarter ended January 31, 1998, and (ii) the failure of the Company to
satisfy the filing requirement set forth in NASD Marketplace Rule 4310(c)(14).
The Company's Common Stock and Public Warrants are not listed or quoted on any
exchange. The Company's securities, however, may be traded on certain
proprietary trading systems operated by various broker-dealers. The Company is
in the process of bringing its filings current and working toward relisting on
Nasdaq or another exchange. See "Management's Discussion and Analysis of Results
of Operations -- Additional Factors to Consider." The following table sets forth
the range of high and low closing bid prices, as reported by the Nasdaq National
Market System for fiscal year 1997 and the first and second quarters of 1998.
The prices for the third and fourth quarters of 1998, set forth below reflect
inter-dealer quotations, without retail markups, markdowns or commissions, and
do not necessarily represent actual transactions.
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<CAPTION>
HIGH LOW
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<S> <C> <C>
1998 FISCAL YEAR
First quarter............................................... 9.000 6.750
Second quarter.............................................. 8.875 6.125
Third quarter............................................... 6.375 1.750
Fourth quarter.............................................. 1.250 .375
1997 FISCAL YEAR
First quarter............................................... 9.125 4.875
Second quarter.............................................. 13.000 7.125
Third quarter............................................... 12.625 6.250
Fourth quarter.............................................. 9.625 7.125
</TABLE>
Neither the Company's Common Stock nor its Public Warrants have been listed
or quoted on any exchange since May 11, 1998. The last sale price of a share of
Common Stock as reported by the Nasdaq National Market System on May 10, 1998
was $5.75.
As of October 31, 1998, there were approximately 109 record owners of the
Company's Common Stock.
The Company's Common Stock historically has experienced significant price
fluctuations. Any purchase or sale of a significant number of shares during a
relatively short time period may have significantly affected the bid and asked
quotations for the Common Stock. Other factors that may cause the market price
of the Common Stock to fluctuate include quarterly fluctuations in results of
operations, announcements of new services or products by the Company, market
conditions specific to the Company's industry and market conditions in general.
In addition, in recent years the stock market in general has experienced
significant price and volume fluctuations. These fluctuations, which may be
unrelated to the operating performance of specific companies, have had a
substantial effect on the market price for many small capitalization companies
such as the Company. Factors such as those cited above, as well as other factors
that may be unrelated to the operating performance of the Company, may adversely
affect the price of the Common Stock.
DIVIDENDS
The Company has never paid any cash dividends on its Common Stock. It is
the current policy of the Company not to pay cash dividends on the Common Stock.
Any payment of cash dividends in the future will be dependent upon the Company's
financial condition, results of operations, current and anticipated cash
requirements, plans for expansion, restrictions, if any, under debt obligations,
as well as other factors that the
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
Board of Directors deems relevant. The loan agreement between the Company and
its bank prohibits the payment of dividends without the bank's prior written
consent.
RECENT SALES OF UNREGISTERED SECURITIES
The Research Works, Inc. exercised a warrant to purchase 40,000 restricted
shares of Common Stock on October 27, 1997. The warrants were exercised at a
rate of $2.875 per share or a total of $115,000. A one-year holding period
applied to the shares unless registered sooner with the United States Securities
and Exchange Commission. The shares remain restricted and have not yet been
registered.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto and selected financial data
appearing elsewhere in this annual report.
The Company operates in four principal business divisions: Hygiene, Swisher
Maids, Surface Doctor, and Swisher Pest Control. Each division operates
primarily through franchises which generate franchise sales and annuity revenues
(i.e., services fees, product sales, royalties and marketing fees). Three of the
divisions also conduct certain Company-owned operations and all of the
divisions, on occasion, may repurchase and operate franchises until the
franchise can be resold.
Initially, the Company derived its revenues exclusively from Company-owned
Hygiene operations. During fiscal year 1990, the Company began selling its 18
majority-owned Hygiene subsidiaries as franchises in their existing markets and
began selling other franchises in new markets. This repositioning of the Company
was a direct result of management's determination in late 1989 that an
opportunity existed to accelerate the Company's penetration of the hygiene
market and increase its profitability through a program of selling franchises.
At the end of fiscal year 1993, the Company had substantially completed its
repositioning to a franchise business having sold as franchises all of its
majority-owned subsidiaries. As of October 31, 1998, the Company maintained two
Company-owned Hygiene operations, servicing portions of Florida and West
Virginia.
As part of its strategy for expanding franchise operations, the Company
began expansion into other business markets and into other geographic markets.
In February 1994, the Company's wholly owned Swisher Maids subsidiary began
operating in Charlotte, North Carolina in preparation for initiating the Swisher
Maid franchise marketing program. In October 1994, the Company sold its first
Swisher Maids franchise. In July 1996, the Company acquired Surface Doctor,
which then had 92 domestic and 9 Canadian franchises in operation. As part of
its geographic expansion, the Company began offering Hygiene and Surface Doctor
master licenses in certain foreign markets in 1996. In September 1997, the
Company commenced operations of Swisher Pest Control.
Management's decision to reposition the Company as a franchisor and to
operate in several markets has resulted in substantial decreases in revenues
from Company-owned operations, offset by increases in revenues from franchise
operations. Revenues from franchise operations have increased consistently from
$1,412,000 in fiscal year 1991 to $12,294,000 in fiscal year 1998. One component
of franchise revenues is annuity revenues, consisting of product sales,
royalties and marketing fees paid by franchisees, which represented
approximately 77% and 71% of the Company's revenues in fiscal years 1998 and
1997, respectively. The Company's profitability will continue to be largely
dependent upon annuity revenues.
The other component of franchise revenues is franchise sales. Initial
franchise fees have accounted for 6% and 10% of the Company's revenues in fiscal
years 1998 and 1997, respectively. From April 1993 to October 1998 the total
number of Swisher Hygiene franchises grew from 46 to 106. Since the Company
acquired Surface Doctor in July 1996, the Surface Doctor domestic and Canadian
franchises decreased from 92 to 85 and international franchises decreased to 8.
Swisher Maids franchises decreased from 19 in 1995 to 6 in 1998 due to the
consolidation of certain franchise markets.
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
Assets held for sale consist of assets purchased by the Company from
certain franchisees who failed to comply with the terms of their franchise
agreements. During fiscal 1998, the Company acquired a Hygiene business in West
Virginia, sold a Hygiene operation in Oklahoma, and closed a Maids operation in
Arizona. As of October 31, 1998, the Company held three franchises for sale. The
Company intends to sell such assets as soon as possible. Notes receivable
primarily consists of all or a portion of the initial franchise fees financed by
the Company. The notes are collateralized by the franchises' assets and, in some
cases, are personally guaranteed by the franchisees. Notes receivable, net of
imputed discounts and allowances, were $3,944,164 and $3,743,000 as of October
31, 1998 and 1997, respectively. Goodwill includes the excess of acquisition
costs over fair value of the net assets acquired in the Surface Doctor
transaction, amortized over a 20-year period.
The following table sets forth the percentage of total revenues of certain
items included in the Company's statement of operations for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
--------------
1998 1997
----- -----
<S> <C> <C>
REVENUES:
Product sales............................................... 45.1% 40.4%
Fees (Service, Royalties, Marketing)........................ 32.1 30.4
Initial franchise fees...................................... 5.7 10.2
Company-owned operations.................................... 15.1 12.8
Interest income............................................. 2.0 2.1
(Loss)/gain on sale of Company-owned hygiene operations..... (0.4) 3.7
Other income................................................ 0.4 0.4
----- -----
Total Revenues.................................... 100.0% 100.0%
EXPENSES:
Selling, general and administrative expenses................ 50.9% 50.1%
Cost of product sales....................................... 33.6 34.5
Company-owned operations.................................... 13.5 13.7
Interest expense............................................ 2.0 1.7
----- -----
Total Expenses.................................... 100.0% 100.0%
</TABLE>
RESULTS OF OPERATIONS
Comparison of years ended October 31, 1998 ("1998 fiscal year") and October
31, 1997 ("1997 fiscal year")
Total revenues increased by approximately 12% to $14,886,000 in the 1998
fiscal year from $13,276,000 in the 1997 fiscal year. The increase in revenues
was due primarily to a 22.3% increase in the Company's franchise annuity
revenues (consisting of product sales, service fees, and royalties and marketing
fees), which totaled $11,497,000 in the 1998 fiscal year as compared to
$9,399,000 in the 1997 fiscal year.
Offsetting increased annuity revenues was a $1,048,000 decrease in combined
initial franchise sales and gain on the sale of Company-owned operations from
$1,845,000 in fiscal year 1997 to $797,000 in fiscal year 1998. The initial
franchise sales do not include a $350,000 Master License sale being recorded on
an installment sales basis in deferred revenue and in notes receivable at
October 31, 1998.
During a portion of the 1998 fiscal year, the Company was unable to sell
domestic franchises until it met certain FTC reporting requirements. This
inability to sell franchises affected primarily the growth of the Company's
Surface Doctor and Pest Control franchise systems during the 1998 fiscal year.
The Company was permitted to recommence its sales of domestic franchises in July
1998, and recorded approximately $186,000 in domestic franchise sales from July
through October 31, 1998, which are included in initial franchise sales.
12
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
Revenue from Company-owned Hygiene, Surface Doctor, Pest Control, and Maids
operations totaled $2,233,000 and $1,703,000 during the 1998 and 1997 fiscal
year, respectively. The increase in revenues from Company-owned operations
resulted primarily from the acquisition of Carolina Termite and Pest Control
(CTPC) in the fourth quarter of 1997, which was included in operations for the
12 months of the 1998 fiscal year. CTPC was sold by the Company in October 1998.
The net loss recorded on sales of Company-owned operations reflects the
closure of the Scottsdale Maids operation in July 1998. The sale of the
Charlotte franchise in July 1997 was the main component of the gain recorded on
sales of Company-owned Hygiene operations for the 1997 fiscal year.
Total expenses increased by approximately $5,237,000, or 42.2% to
$17,642,000 in the 1998 fiscal year compared to $12,406,000 in the 1997 fiscal
year. Selling, general and administrative expenses increased by approximately
$2,757,000, or 44.3% to $8,978,000 in the 1998 fiscal year compared to
$6,221,000 in the 1997 fiscal year.
Increased expenses in product costs are consistent with increased product
sales. The gross margin percentage decreased from prior periods, reflecting an
increased volume in certain lower gross margin products. Costs of Company-owned
operations increased primarily due to the inclusion of CTPC in operations for
fiscal year 1998, consistent with increased revenues from Company-owned
operations.
The $2,757,000 increase in selling general and administrative expenses from
the 1997 fiscal year consisted primarily of the following increased amounts:
$775,000, salaries and wages, $663,000 in legal and accounting fees, $535,000 in
bad debt and valuation reserves, $463,000 in Corporate Pest Control operations,
and $178,000 in computer-related expenses.
The start-up of a Charlotte-based telemarketing system, enhancements to
computer systems, improvements to franchisee credit and collections programs and
general administrative overhead contributed to the increased salaries and wages
during fiscal year 1998. Following the initial start-up of telemarketing and the
completion of the systems improvements, incremental expenses in these areas are
not expected to reoccur in the future. The Company reviewed its general
administrative overhead during fiscal year 1998 and believes it has taken
necessary actions to reduce overhead levels to reasonably appropriate levels,
while still supplying necessary support services.
The withdrawal of the Company's former auditors in February 1998 and the
subsequent delisting of the Company's securities from Nasdaq in May 1998
affected the increase in legal and accounting fees. The level of legal and
accounting fees incurred in fiscal year 1998 are not expected to reoccur.
However, the Company expects that certain outstanding issues will continue to
produce higher professional fees for fiscal year 1999 than historically
obtained. (See also Items 5 and 8, Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure).
Included in the increased bad debt provisions were increased valuation
reserves relating to assets held for sale, increasing reserves, and discounts
relating to notes receivable, and increasing reserves for accounts receivable.
The increased valuation and bad debt reserves represent management's estimate of
either expected recoverability of bad debt or the fair market value, and were
based on a combination of actual performance, historical trends, and
management's estimates of the fair market value.
As the Company began developing a Pest Control system, corporate expenses
relating thereto increased approximately $463,000 from fiscal year 1997, when
the concept was initially developed. The largest components of the increased
expenses in Pest Control were salaries, and the amortization of a non-compete
agreement, and goodwill. During fiscal year 1998, reductions were made to
corporate staffing levels, which will reduce future overhead levels. Following
the sale of CTPC, the amortization of non-compete agreements will be eliminated.
Gross income (before taxes) decreased to a loss of ($2,757,000) in the 1998
fiscal year from income of $871,000 for the 1997 fiscal year. The Company's
income tax expense decreased, and resulted in a benefit of
13
<PAGE> 14
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
$75,000 in the 1998 fiscal year compared to a $339,000 expense in the 1997
fiscal year, resulting in a net loss of ($2,682,000) in the 1998 fiscal year to
compared to net income of $532,000 in the 1997 fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its growth through cash from
operations. In addition, the Company used the proceeds of a public offering
completed in April 1993 to finance the expansion of its franchise system.
The Company's principal sources of liquidity, both on a short-term and a
long-term basis, are cash flow from operations and borrowings under a commercial
revolving credit facility. The Company has also previously received advances on
long-term notes receivable for working capital. Subsequent to the 1998 fiscal
year-end, on February 17, 1999, the Company extended its revolving line of
credit with its existing lender through June 30, 1999. The lender has indicated
to the Company its intent not to renew the line of credit at that time. The
Company believes it has found alternative financing sources to replace this
credit facility. With the completion of alternative financing arrangements, the
Company believes that the cash flow anticipated from its future operations will
be adequate to meet the financing requirements it anticipates during the next
twelve months. There can be no assurance, however, that future developments and
general economic trends will not adversely affect the Company's operations and,
hence, it's anticipated cash flow.
During the 1998 fiscal year, net cash used by operations was approximately
($1,247,000) primarily due to the net loss of ($2,682,000) reported for the
year. The net cash used by operations was partially offset by $360,000 cash
provided by investing, and $408,000 provided by financing activities: however, a
net decrease in cash and cash equivalents of ($480,000) resulted for the 1998
fiscal year. The Company believes that a substantial portion of the decrease in
working capital reflects a combination of certain improvements to the Company's
systems and the start-up of new activities, such as the telemarketing center,
which are not expected to reoccur in the near future. Additionally, the Company
has made certain reductions to its overhead structure, which are not fully
reflected in the Company's financial results for fiscal 1998. These reductions
in overhead structure are expected to help reverse the trend of net cash being
used by operations, as experienced in fiscal 1998.
Working capital, including the Company's revolving line of credit of
$1,706,000 and notes payable to related parties, decreased to a negative
($1,223,000) at October 31, 1998, down from working capital of $1,007,000 at
October 31, 1997. An increase of $556,000 in accounts payable and $324,000 of
additional borrowings from the Company's revolving line of credit contributed to
the decrease in working capital. A decrease of $480,000 in cash and cash
equivalents, a $321,000 reduction in net accounts receivable, a $159,000
decrease in other receivables, and a $302,000 decrease in the current notes
receivable, were partially offset by an increase of $628,000 in income tax
refunds receivable.
Subsequent to the 1998 fiscal year end, in November 1998, Mr. Swisher
advanced the Company $275,000, in the form of a short-term note. Also in
November 1998, a pre-payment of $165,000 was received by the Company towards an
outstanding note receivable from the Houston Hygiene franchise. The note
receivable due from the Houston Hygiene franchise relates to the purchase of
this franchise from the Company, by a company in which Mr. Swisher is a majority
owner.
At October 31, 1998, other assets consisted principally of notes receivable
in the amount of $3,230,000, and goodwill (net of accumulated amortization) of
$632,000. Notes receivable are comprised of notes executed by franchisees for
payment of initial franchise fees which are due beyond the ensuing year;
goodwill relates primarily to the purchase of the Surface Doctor system. As part
of the sale of CTPC in October 1998, approximately $474,000 in non-competition
agreements and $499,000 in goodwill (net of amortization) were included in the
sales price, and therefore are not included in other assets at October 31, 1998.
The Company's total current liabilities are $5,929,000 at October 31, 1998,
an increase of $1,247,000 over total current liabilities of $4,682,000 at
October 31, 1997. Long-term debt was $384,000 at October 31, 1998, a
14
<PAGE> 15
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
decrease of $1,093,000 over long-term debt of $1,477,000 at October 31, 1997,
primarily due to a $995,000 decrease following the sale of CTPC, and a decrease
of $339,000 in a note payable to a finance company.
The Company's material commitments at October 31, 1998 consisted primarily
of its office facility, equipment and vehicle leases in varying amounts through
2003.
In September 1998, Messers. Swisher and Reeder made advances to the Company
totaling $340,000. As of October 31, 1998, the outstanding amount of those
advances was $220,000.
INFLATION
The Company does not believe that inflation will have a material impact on
the Company's future operations.
ADDITIONAL FACTS TO CONSIDER
Forward-Looking Statements. This report contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act, Section 21E
of the Exchange Act and the Cautionary Safe Harbor Disclosure for Forward
Looking Statements under the Private Securities Litigation Reform Act of 1995,
which provide that, because of the factors set forth below, as well as other
variables affecting the Company's operating results, past financial performance
should not be considered a reliable indicator of future performance and
investors should not use historical trends to anticipate results or trends in
future periods. The statements contained herein, which are not historical facts,
are forward-looking statements subject to meaningful risks and uncertainties,
including, but not limited to, the following additional facts to consider. These
forward-looking statements include the plans and objectives of management for
future operations, including plans and objectives relating to (i) the continued
expansion of the Company's Hygiene, Swisher Maids, Pest Control and Surface
Doctor franchise programs, (ii) the introduction of new products to be sold to
franchisees, (iii) the continued successful operation of franchised businesses
by Hygiene, Surface Doctor, Pest Control and Swisher Maids franchisees, (iv)
successful collection of the Company's notes receivable, particularly those
executed by franchisees relating to the payment of initial franchise fees, (iv)
the Company's ability to resell certain Hygiene businesses which have been
repurchased from franchisees, and (v) the Company's ability to expand into
international and new domestic markets. The forward-looking statements included
herein are based on current expectations that involve a number of risks and
uncertainties. These forward-looking statements were based on assumptions that
the Company would continue to develop and introduce new products on a timely
basis, that competitive conditions within the Company's markets would not change
materially or adversely, that demand for the Company's Hygiene, Swisher Maids,
Pest Control and Surface Doctor franchises would remain strong, and that there
would be no material adverse change in the Company's operations or business.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions, and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking information will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
Dependence On Performance Of Franchisees. The Company derived
approximately 77% and 71% of its revenues in the 1998 and 1997 fiscal years,
respectively, from annuity revenues. Annuity revenues consist of product sales,
royalties and marketing fees paid by franchisees. Royalties and marketing fees
are generally calculated based on a percentage of gross revenues or sales
generated by the franchisee. Although franchisees generate a portion of their
gross revenues from national accounts secured by the Company, the generation of
a majority of gross revenues is directly dependent upon the franchisee's own
marketing efforts. While the Company's franchise support and marketing services
are intended to maximize the marketing results obtained
15
<PAGE> 16
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
by the franchisee, there is no assurance that marketing undertaken by
franchisees will be successful or result in any increase in gross revenues. The
Company's profitability will be largely dependent upon revenues from product
sales to franchisees and revenues from royalties, marketing fees and service
fees for the foreseeable future.
Reliance On Franchise Sales. During the fiscal years ended October 31,
1998 and 1997, initial franchise fees charged to franchisees accounted for
approximately 6% and 10%, respectively, of the Company's revenues. As the number
of Company franchises and resulting annuity revenues have increased, the
Company's dependence on new franchise sales has declined. However, the Company's
future revenue growth will continue to depend, in part, upon sales of new
franchises. The Company's ability to sell franchises is impacted by a number of
factors including, among others, availability of qualified franchise candidates
located within specific geographic markets, competition and general economic
conditions. For approximately 4 months in 1998, the Company was not in
compliance with the FTC Rule on Franchise Sales due to unavailability of audited
financial statements, which affected the Company's ability to sell certain
United States franchises. Following the filing of these outstanding documents,
the Company received a return of its eligibility to sell domestic franchises. In
order to expand its geographic markets, the Company has established
international marketing programs for its Hygiene and Surface Doctor franchises.
However, there can be no assurance the Company will continue to sell franchises
consistent with its historical levels. A decline in franchise sales may have an
adverse impact on the Company's operations and financial condition.
Risk Of Financing Franchise Fees. The Company may finance a portion of the
initial franchise fee payable in connection with the purchase of a franchise.
The Company attempts to qualify each franchisee to whom financing may be
provided, and generally receives a security interest in the franchise rights,
equipment, accounts receivable and inventory of the franchise to secure the
amount financed. For so long as the Company continues to finance new franchise
sales, the Company will be exposed to a risk of defaults or delinquencies in
payments. A significant rate of defaults or delinquencies on notes receivable
would likely have a material adverse effect on the Company's operating results
and financial condition.
Risk Of Franchise Termination. Should a franchisee fail to comply with the
terms of its franchise agreement, the Company would generally re-market the
franchise on behalf of the franchisee. The Company might also acquire and
operate the franchise during the period of time in which it is being
re-marketed. As of October 31, 1998, the Company owns and operates a total of
three franchises which were acquired from certain franchisees. The Company is
subject to a number of risks and competitive factors with respect to
Company-owned franchises, and there can be no assurance the Company will be
successful in operating or re-marketing franchises.
Future Capital Requirements. At October 31, 1998, the Company had current
assets of approximately $4.7 million and current liabilities of approximately
$5.9 million. However, approximately $3.2 million of the Company's current
assets consisted of net accounts receivable and current notes receivable. Also
at October 31, 1998, the Company had other assets of approximately $5.1 million,
consisting primarily of long-term notes receivable and intangible assets. The
inability to timely collect accounts and notes receivable could have an adverse
affect on the Company's ability to fund its future operations. The inability to
collect long-term notes receivable or to realize the value attributed to
intangible assets could also have an adverse affect on the Company's future
liquidity and financial condition. There can be no assurance that the Company
will be able to raise any additional capital which might be required, or that
the terms on which such capital is available will be acceptable to the Company.
Acquisition Strategy. The Company completed the acquisition of Carolina
Termite and Pest Control ("CTPC") in September 1997. In October 1998, the
Company sold CTPC back to its former owner, as the Company moved to focus
attention on developing and expanding existing franchise systems, instead of
overseeing Company-owned operations. Acquisitions typically require investment
of operational and financial resources, integration of dissimilar operations,
assimilation of new employees, diversion of management time and resources,
increases in administrative costs, and additional costs associated with debt or
equity financing.
16
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
There can be no assurance that any future acquisition by the Company will not
have an adverse effect on the Company's results of operations or result in
dilution to the existing stockholders.
Price Fluctuations. The public market for the Company's Common Stock has
experienced significant price fluctuations. Factors such as fluctuations in
results of operations, conditions specific to the Company's markets, and
conditions in securities markets in general, may cause the market price of the
Company's securities to fluctuate, perhaps substantially. In addition, in recent
years the stock market has experienced significant price and volume
fluctuations. These fluctuations, which are often unrelated to the operating
performance of specific companies, have had a substantial effect on the market
price for many small capitalization companies. Factors such as those cited
above, as well as other factors which may be unrelated to the operating
performance of the Company, may adversely affect the price of the Company's
securities in future periods.
Key Employee. The Company's success depends to a significant extent upon
the continued efforts of Patrick L. Swisher, its President and Chief Executive
Officer. The Company maintains a key-man life insurance policy of $500,000 on
the life of Mr. Swisher. The loss of the services of Mr. Swisher could have a
material adverse effect on the Company. The Company's future success will depend
in part upon its continuing ability to attract and retain highly qualified
personnel to manage the future growth of the Company.
Competition. The sale of franchise businesses is highly competitive. In
marketing its franchises, the Company must compete with a rapidly growing number
of large, well-capitalized organizations selling franchises on a regional or
national basis. Many of these firms have significantly greater financial,
marketing and personnel resources than the Company. There is no assurance the
Company will continue to compete successfully for qualified franchise
candidates.
No Dividends Anticipated. The Company does not anticipate paying any
dividends on its Common Stock in the foreseeable future. The Company intends to
retain profits to fund growth and expansion. The Company's bank loan agreement
prohibits the payment of dividends without the bank's prior consent.
Delisting Of Securities From Nasdaq National Market. On May 11, 1998, the
Company's securities were de-listed from the Nasdaq National Market for (i) the
Company's delinquent filing of its Form 10-KSB for the fiscal year ended October
31, 1997 and the Form 10-QSB for the quarter ended January 31, 1998, and (ii)
the Company's failure to satisfy the filing requirement set forth in NASD
Marketplace Rule 4310(c)(14). The delisting has and could continue to materially
adversely affect the trading market for the Common Stock. Since that date the
Company's securities have not been listed or quoted on any exchange. The Company
believes, however, that its securities are being traded on the pink sheets.
A request filed with the NASD Review Counsel to review the Hearing Panel's
decision to delist its securities was denied. In order to be relisted on the
Nasdaq National Market, it will be necessary for the Company to re-apply for
initial listing once it determines that it can meet the initial listing
requirements. At the date of the filing of this report, the Company would not
qualify for initial listing on the Nasdaq National Market. The Company is not
certain when, or if at all, it will be able to meet the initial listing
requirements to be quoted on the Nasdaq National Market or the Nasdaq SmallCap
Market or any other exchange or quotation system.
17
<PAGE> 18
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
Penny Stock Regulation. Since the Company's Common Stock has a trading
price less than $5.00 per share, trading in the Common Stock subjects the
Company to the requirements of Rule 15g-9 promulgated under the Exchange Act.
Under such rule, broker/dealers who recommend such low-priced securities to
persons other than established customers and accredited investors must satisfy
special sales practice requirements, including a requirement that they make an
individualized written suitability determination for the purchaser and receive
the purchaser's written consent prior to the transaction. The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional
disclosure in connection with any trades involving a stock defined as a "penny
stock" (generally, according to recent regulations adopted by the Securities and
Exchange Commission, any non-Nasdaq equity security that has a market price of
less than $5.00 per share, subject to certain exceptions), including the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith. Such
requirements could severely limit the market liquidity of the Common Stock and
the ability of investors to sell their securities in the secondary market.
Possible Adverse Impact On Market Of Warrant Exercise. In the event of the
exercise of a substantial number of Public Warrants within a reasonably short
period of time after the right to exercise commences, the resulting increase in
the amount of Common Stock of the Company in the trading market could
substantially affect the market price of the Common Stock.
Limitations On Liability Of Directors And Officers. The Company's Articles
of Incorporation, as amended, include provisions to eliminate, to the full
extent permitted by the General Corporation Law of Nevada as in effect from time
to time, the personal liability of directors of the Company for damages arising
from a breach of their fiduciary duties as directors. The Company's Articles of
Incorporation also include provisions to the effect that the Company shall
indemnify any director or officer to the maximum extent that such
indemnification is permitted by the laws of the State of Nevada, as it may from
time to time be in effect, or by public policy. However, insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended (the "Securities Act"), may be permitted to directors, officers or
persons controlling the Company pursuant to the foregoing, the Company has been
informed that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable.
Possible Dilutive Effect Of Options And Warrants And Adverse Effect On
Market Price. No assurance can be given as to the effect, if any, that future
sales of Common Stock, or the availability of shares of Common Stock for future
sales, will have on the market price of the Common Stock from time to time.
Sales of substantial amounts of Common Stock (including shares issued upon the
exercise of warrants or stock options), or the possibility that such sales could
occur, could adversely affect the market price of the Common Stock and could
also impair the Company's ability to raise capital through an offering of its
equity securities in the future. As of October 31, 1998, there are outstanding
options for 238,700 (183,700 plan options and 55,000 non-plan options) shares of
Common Stock exercisable at prices ranging from $2.25 to $8.13 per share. There
are 760,000 Public Warrants, exercisable to purchase one share of Common Stock
for $7.80 per each two Public Warrants. The Company has extended the expiration
of the Public Warrants through June 30, 1999. The issuance of any additional
shares by the Company in the future may result in a reduction of the book value
or market price of the then outstanding Common Stock. For the life of the
warrants and options, the holders thereof are given the opportunity to profit
from a rise in the market price of the Common Stock. Any rise in the market
price of the Common Stock may encourage the holders to exercise such warrants or
options, which may result in a dilution of the interests of other stockholders.
As a result, the Company may find it more difficult to raise additional equity
capital if it should be needed for the business of the Company while such
warrants and options are outstanding.
Anti-Takeover Considerations Including Possibility Of Future Issuance Of
Preferred Stock. The Company's articles of incorporation, as amended, authorize
the Board of Directors to issue up to 1,500,000 shares of preferred stock in one
or more series, having terms fixed by the Board of Directors without stockholder
vote, including voting, dividend or liquidation rights that could be greater
than or senior to the
18
<PAGE> 19
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
rights of holders of Common Stock. The rights of holders of Common Stock will be
subject to, and may be materially adversely affected by the rights of the
holders of any preferred stock that may be issued in the future. The issuance of
preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company. The
Company's articles of incorporation, as amended, also do not opt out of the
"control shares" statute set forth in Sections 78.378 through 78.3793 of the
General Corporation Law of Nevada, which limits the acquisition of a
"controlling interest" in the Company. These statutes are designed to prevent an
"acquiring person" from gaining voting control of the Company without the
approval of the Company stockholders. It provides that an acquiring person
obtains only such voting rights in the control shares as are conferred by a
resolution of a 200 or more stockholders, at least 100 of whom are stockholders
of record and residents of Nevada. The Company is also subject to the provisions
of Sections 78.411 through 78.444 of General Corporation Law of Nevada. In
general, these statutes prohibit a publicly held Nevada corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
becomes an interested stockholder, unless the business combination is approved
in a prescribed manner. An "interested stockholder" is a person who, directly or
indirectly, owns (or within the prior three years did own) 10% or more of the
corporation's voting stock. The Board's authority to issue preferred stock and
the provisions of Sections 78.378 through 78.3793 and Sections 78.411 through
78.444 could impede any merger, consolidation, takeover or other business
combination involving the Company or discourage a potential acquirer from making
a tender offer or otherwise attempting to obtain control of the Company, and any
such impediment could serve to entrench management and may not be in the best
interests of the Company's stockholders.
Year 2000 Compliance. Many existing computer systems and applications and
other control devices use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century. The Year
2000 issue is the risk that systems, products and equipment utilizing
date-sensitive software or computer chips with two-digit date fields will fail
to properly recognize the Year 2000. Such failures by the Company's software or
hardware or that of government entities, customers, major vendors and other
third parties with whom the Company has material relationships could result in
interruptions of the Company's business which could have a material adverse
effect on the Company.
In response to the Year 2000 issue, the Company has implemented a Year 2000
program designed to identify, assess and address significant Year 2000 issues.
This includes the Company's key business operations, services, business
applications, and information technology systems and facilities. Additional
tasking includes identification of the Company's customers, major vendors and
other third parties with whom the Company has material relationships that may
have Year 2000 issues with which to contend.
The Company's Year 2000 readiness program applies to all hardware and
software, whether developed internally or purchased from an outside supplier.
Management has been assured through letters of attestation from most major
software and hardware suppliers that mission critical Company software and
hardware platforms are Year 2000 compliant. The Company believes that if any
systems need to be repaired or replaced the repair or replacement would be
minimal and could be handled within our normal budget for computer system
upgrades and replacements. The Company is encouraging its subsidiaries and
franchisees to take the appropriate precautionary steps necessary to ensure
their computers systems are Year 2000 compliant, well in advance of the January
1, 2000 timeframe.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements are included on pages F-1
to F-23.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
McGladrey & Pullen, LLP ("Former Auditor") was engaged as auditors for the
Company from December 3, 1996 to February 20, 1998. On February 20, 1998, the
Former Auditor unexpectedly resigned as the Company's auditors, prior to
completion of the audit for the fiscal year ended October 31, 1997, identifying
19
<PAGE> 20
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
certain concerns in their letter of resignation. On March 11, 1998, the Former
Auditor withdrew its auditor's report dated January 30, 1997 on the financial
statements for the fiscal year ended October 31, 1996. The Former Auditor
advised the Company that its decision to resign and withdraw was the result of
(i) its conclusion that it was no longer able to rely on management's
representations, and (ii) the existence of significant unresolved accounting
matters relating to the Company's financial statements as of and for the years
ended October 31, 1997 and 1996.
More specifically, the Former Auditor was concerned about the timing of
revenue recognition following the reported gain of $284,017 on the sale of a
Houston, Texas franchise, recorded in the third quarter of 1996, and whether
adequate disclosure was made regarding related parties. Similar concerns were
raised regarding the timing of revenue recognition following the reported gain
on the sale of a Charlotte, North Carolina franchise and the disclosure of
related party involvement, recorded in the third quarter of 1997. The audited
financial statements in the Company's 10-KSB for the year ended October 31, 1997
included increased disclosure on the related party nature of the Houston
franchise sale. Per the Company's Annual Report on Form 10-KSB for fiscal year
ended October 31, 1997, the Houston franchise sale was recorded in fiscal 1996,
and the sale of the Charlotte franchise was recorded in fiscal 1997.
Additionally, according to the Former Auditor, the Company recorded
personal expenses of certain management employees as accounts receivable in
1996, which were expected to be repaid to the Company in 1997, but, were in
fact, not repaid until a later date.
Further, in addition to the effects on the financial statements for fiscal
years 1996 and 1997, the Former Auditor and the Company, during second quarter
1998, discussed other concerns of the Former Auditor relating to the timing of
revenue recognition and the need for additional accounting reserves to
adequately address the valuation of accounts receivable, notes receivable
relating to previously recorded franchise sales revenues, and the value of
assets held for sale. The audit work in these matters was not completed at the
time of the Former Auditor's resignation; however, the Former Auditor believed
it likely that it could have issued a modified opinion if such matters were not
ultimately resolved to its satisfaction.
Prior to submitting its resignation on February 20, 1998, the Former
Auditor met with an officer and a director of the Company on February 17, 1998
to review the matters later summarized in the Former Auditor's February 20, 1998
letter.
In order to appropriately address the issues of concern indicated by the
Former Auditor, on March 16, 1998, the Company engaged the firm of Scharf Pera &
Co. of Charlotte, North Carolina as its new auditor (the "New Auditor") and
authorized the Former Auditor to respond fully to inquiries of the New Auditors
concerning each disagreement and event. During the Company's fiscal year ended
October 31, 1997 and during the subsequent interim period through March 16,
1998, the Company had not consulted with the New Auditor with respect to the
application of accounting principles to any specified transactions or the
specific type of audit opinion that might be rendered on the Company's financial
statements. No written report or oral advice was given to the Company by the New
Auditor during this time other than a general discussion of proposed services
and anticipated fees. The Company did not consult with the New Auditor regarding
the disagreement with the Former Auditor. On February 17, 1999, the Company
filed an action directly against the Former Auditor. See "Item 3. Legal
Proceedings".
The Company's results of operations for the years ended October 31, 1997
and 1996 were reported on the Company's Form 10-KSB, and filed with the SEC and
included audited financial statements prepared by the New Auditors.
20
<PAGE> 21
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
PART III
The following table sets forth information as of October 31, 1998 regarding
the directors and executive officers of the Company:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
---- --- ----------------------------- --------
<S> <C> <C> <C>
Patrick L. Swisher(1) 44 President, Chief Executive 1986
Officer and Director
W. Tom Reeder, III 46 Vice President and Director 1988
Thomas W. Busch 44 Vice President -- Finance
Bruce Mullan 46 Vice President of Sales
Amy K. Simpson 43 Secretary
George K. Moore(1) 66 Director 1993
Richard G. Long Jr. 41 Director 1998
John O. Summey Jr. 62 Director 1998
</TABLE>
- - ---------------
(1) Member of Compensation Committee and Audit Committee.
Patrick L. Swisher. Mr. Swisher has been Chief Executive Officer,
President and a director of the Company since October 1986. In addition, as of
October 31, 1998, Mr. Swisher served as a non-voting member of the Compensation
and Audit Committees. From July 1983 to October 1986, Mr. Swisher also served as
Chief Executive Officer and a director of Swisher Services, Inc., which was
subsequently merged into The Company, Inc. in October 1986. In 1980, Mr. Swisher
co-founded PSTV Corporation, a private cable television company, and he served
as President of its construction division until 1983. From 1977 to 1980, Mr.
Swisher was an owner and co-founder of Whispers Corporation, which operated a
restaurant located in Charlotte, North Carolina. Mr. Swisher received his
Bachelors of Science degree from Appalachian State University in 1977.
W. Tom Reeder III. Mr. Reeder has served as Vice President and a director
of the Company since March 1988. From 1977 through March 1988, Mr. Reeder was a
manufacturer's representative for a wholesale apparel company in Charlotte,
North Carolina. Mr. Reeder received his Bachelors of Science degree from Western
Carolina University in 1975.
Thomas W. Busch. Mr. Busch has been Vice President -- Finance of the
Company since April 1998. From April 1991 to March 1998, Mr. Busch was employed
by Salant Corporation, an apparel manufacturer, serving as Corporate Controller
from March 1994 through March 1997. From January 1988 to March 1991, Mr. Busch
was employed in the audit department of the Atlanta office of Deloitte & Touche,
an international accounting and consulting firm. Mr. Busch received his Master
of Accountancy from the University of South Carolina in December 1997.
Bruce Mullan. Mr. Mullan has been the Company's Vice President of Sales
since January 1994. From 1981 through January 1994, he was employed by US Safety
Company in Kansas City, Missouri, where he served as National Accounts Manager
from 1988 until January 1994. Mr. Mullan received his Bachelor of Arts degree in
Economics from Hampden-Sydney College in 1975.
Amy K. King-Simpson. Ms. King-Simpson has served as Secretary of the
Company since November 1996. Prior to that she served as Director of Franchise
Administration of the Company from 1991 to November 1996. From 1984 to 1991 she
served as Vice President of Franchise Administration with Econo Lodges of
America, Inc.
George K. Moore. Mr. Moore has served as a director of the Company since
1993 and as the sole voting member of the Compensation and Audit Committees of
the Board of Directors through fiscal year end 1998. Mr. Moore is a certified
public accountant in the States of North Carolina and Florida. Since 1984,
21
<PAGE> 22
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
Mr. Moore has provided financial and management consulting to businesses located
in and around the Charlotte, North Carolina area. Prior to 1984, Mr. Moore was a
partner with the accounting firm of Main Hurdman and a predecessor, which
subsequently merged into KPMG Peat Marwick.
Richard G. Long Jr. Mr. Long has served as a director of the Company since
July 1998. Since February 1995, Mr. Long has been a partner with Perry, Bundy,
Plyler and Long, LLP and, prior to that, from March 1991 to February 1995, Mr.
Long was a partner with Steelman and Long, both involving the practice of law.
Mr. Long received his J.D. from Wake Forest University in 1982 and is a member
of the North Carolina State Bar and the Union County Bar Association. Mr. Long
has served as President and Treasurer of the Union County Bar and has served as
President of the 20th Judicial District Bar.
John O. Summey Jr. Mr. Summey has served as a director of the Company
since July 1998. Prior to that, from April 1997 to July 1998, Mr. Summey worked
as an independent consultant, during which time he helped establish American
Community Bank, a local bank in Monroe, North Carolina. Prior to that, from June
1995 to April 1997, Mr. Summey served as a director, and from June 1996 to April
1997 also as the Chief Financial Officer, of ProtoCorp International, Inc., a
software development company in Monroe, North Carolina. From 1984 to June 1995,
Mr. Summey was a director and Chief Financial Officer of American Commercial
Bank, which was acquired by a national banking association in June 1995.
Board Committees
The Board of Directors has delegated certain of its authority to two
permanent committees: the Audit Committee and the Compensation Committee.
Through fiscal year ended October 31, 1998, Messrs. Patrick L. Swisher (a
non-voting member) and George K. Moore (the sole voting member) served as
members of the Audit Committee. The Audit Committee met four times during fiscal
year ended 1998. Subsequent to fiscal year end 1998, on December 16, 1998, Mr.
Moore resigned from the Board of Directors and the Audit Committee. The Board of
Directors subsequently appointed Richard Long and John Summey to serve as
outside directors on the Committee. The primary function of the Audit Committee
is to review and approve audit reports rendered by the Company's independent
auditors and to approve the fee charged by the independent auditors. The Audit
Committee reports to the Board of Directors with respect to such matters and
recommends the selection of independent auditors.
Also through fiscal year ended October 31, 1998, Messrs. Patrick L. Swisher
(a non-voting member) and George K. Moore (the sole voting member) served as
members of the Compensation Committee. The Compensation Committee met one time
during fiscal year ended 1998. Subsequent to fiscal year end 1998, on December
16, 1998, Mr. Moore resigned from the Board of Directors and the Compensation
Committee. The Board of Directors subsequently appointed M. Hunt Broyhill and
Anne P. Corley to serve as outside directors on the Committee. The primary
function of the Compensation Committee is to review and make recommendations to
the Board of Directors with respect to the compensation, including bonuses, of
the Company's officers and directors and to administer the Company's benefit
plans.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the annual and
long-term compensation for services in all capacity to the Company for the three
fiscal years ended October 31, 1998, 1997, and 1996 for the Chief Executive
Officer and the Company's other two most highly compensated (i.e., over $100,000
per year) executive officers.
22
<PAGE> 23
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -----------------------------
------------------------ OPTIONS ALL OTHER
YEAR SALARY(1) BONUS OTHER(2) # OF SHARES COMPENSATION(3)
---- --------- ----- -------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Patrick L. Swisher................... 1998 $200,554 -- $14,072 25,000 $1,523
President and Chief 1997 198,198 -- 14,072 77,600 1,425
Executive Officer 1996 198,198 -- 14,072 33,000 1,846
W. Tom Reeder III.................... 1998 129,209 -- 5,909 -- 495
Vice President 1997 105,000 -- 5,909 39,000 475
1996 105,000 -- 5,909 23,000 525
Bruce Mullan......................... 1998 123,521 -- -- -- 1,316
Vice President of Sales 1997 126,038 -- -- -- 1,322
1996 102,328 -- -- 2,500 1,334
</TABLE>
- - ---------------
(1) This amount includes amounts contributed to the Company's 401(k) by each of
the officers named above.
(2) This amount includes automobile lease payments made by the Company for
vehicles leased by the executive officers named above.
(3) This amount includes amounts contributed by the Company to the executive
officers' 401(k) accounts named above. It excludes (i) aircraft lease
payments made by the Company to Economy Air, Inc. and (ii) office lease
payments paid to SSSW Enterprises or Fairview Family Limited Partnership by
the Company. For more information, see "Item 12. Certain Relationships and
Related Transactions".
Option Grants Table. The following table sets forth information concerning
grants of stock options to the executive officers pursuant to the Company's
stock option plans or otherwise during fiscal year 1998.
OPTION GRANTS DURING FISCAL YEAR 1998
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS EXERCISE
GRANTED TO OR BASE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (SHARES) FISCAL YEAR ($/SHARE) DATE
---- ---------------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
Patrick L. Swisher(1)...................... 25,000 100% $0.65 12/31/2003
</TABLE>
- - ---------------
(1) These options were granted to Mr. Swisher in consideration of Mr. Swisher's
personal guarantee on the lease for the Company's headquarters. For more
information about this guarantee, see "Item 12. Certain Relationships and
Related Transactions".
Fiscal Year End Options/Option Values Table. Certain executive officers,
as a group, exercised a total of 100,000 options during fiscal year 1998. For
more information about the exercise of these options, see
23
<PAGE> 24
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
"Item 12. Certain Relationships and Related Transactions". The following table
shows information about the value of exercised and unexercised stock options on
October 31, 1998 for the executive officers listed below.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT OCTOBER 31, THE-MONEY OPTIONS AT
NUMBER OF 1998 OCTOBER 31, 1998(2)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Patrick L. Swisher....... 57,600 $122,400 70,200 -- $3,821 --
George K. Moore.......... 23,400 78,795 60,000 -- -- --
W. Tom Reeder III........ 19,000 49,875 50,500 -- -- --
Bruce Mullan............. -- -- 3,500 -- -- --
</TABLE>
- - ---------------
(1) The dollar values are calculated by determining the difference between
$7.625, the closing bid price of common stock on March 19, 1998, and the
exercise price of the stock options.
(2) The dollar value is calculated by determining the difference between
$0.78125 per share, the closing bid price of common stock on October 31,
1998, and the exercise price of the stock options. "In-the-Money" stock
options are options for which the exercise price is less than the market
price of the underlying stock on a particular date.
No employee of the Company receives any additional compensation for his or
her services as a director. Non-management directors receive a fee of $500 per
meeting attended plus reasonable travel and other out-of-pocket expenses.
Other than a 401(k) retirement plan for the benefit of all employees and a
split dollar life insurance policy for certain officers, the Company has no
retirement, pension or profit-sharing program for the benefit of its directors,
officers, or other employees, but the Board of Directors may recommend one or
more such programs for adoption in the future. For more information, see Note 4
to the Company's Consolidated Financial Statements attached hereto.
Stock Option Plans
The Company adopted an Incentive Stock Option Plan in 1992 (the "Incentive
Plan"). The Incentive Plan, as amended, covers an aggregate of 250,000 shares.
The Plan, designed as an incentive for executive and other key employees, is
administered by the Compensation Committee of the Board of Directors. The
Incentive Plan provides that no option may be granted at an exercise price less
than the fair market value of the Common Stock of the Company on the date of
grant. Unless otherwise specified, the options expire up to ten years from date
of grant and may not be exercised during the initial one-year period from date
of grant. Thereafter, options may be exercised in whole or in part, depending on
terms of the particular option. At October 31, 1998, 59,700 options had been
granted and were outstanding pursuant to the Incentive Plan, of which 59,700
were exercisable.
The Company also adopted a Non-Qualified Stock Option Plan in 1992 (the
"Non-Qualified Plan"). The Non-Qualified Plan is also administered by the
Compensation Committee of the Board of Directors and, as amended, covers a total
of 400,000 shares. The Non-Qualified Plan provides that options may be granted
at exercise prices not less than 85% of the fair market value of the Common
Stock of the Company on the date of grant. The Compensation Committee is
empowered to grant bonuses at the time of issuance of non-qualified stock
options in an amount sufficient to cover the tax liability incurred by the
recipient at the date of grant. At October 31, 1998, 124,000 options had been
granted and were outstanding under the Non-Qualified Plan, of which 124,000 were
exercisable.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the directors, executive officers and greater-than-10% stockholders to file
reports of ownership (Form 3) and changes in ownership
24
<PAGE> 25
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
(Form 4) with the Securities and Exchange Commission and Nasdaq and to provide
the Company with copies of the reports. Based solely on its review of the copies
of such forms received or written representations from reporting persons that no
Forms 5 were required, the Company believes that with respect to fiscal year
ended October 31, 1998, all the reporting persons complied with all applicable
filing requirements, except that Forms 4 were not filed with respect to the
grant or exercise of 100,000 options by certain officers and directors in
November 1996 and March 1998, respectively, or upon the grant of 25,000 options
to Mr. Swisher in September 1998. For more information, see "Item 12. Certain
Relationships and Related Transactions".
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows, as of January 31, 1999, (a) all persons that the
Company knows to be "beneficial owners" of more than five percent of the
outstanding common stock of the Company, and (b) the common stock owned
beneficially by the Company's directors and executive officers and all executive
officers and directors as a group. Each person has sole voting and sole
investment power with respect to the shares shown, except as noted.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(2)
-------------------
NAME AND ADDRESS(1) NUMBER PERCENT
------------------- -------- --------
<S> <C> <C>
Patrick L. Swisher(3)....................................... 520,217 18.8%
George K. Moore(4).......................................... 83,400 3.0%
W. Tom Reeder III(5)........................................ 74,500 2.7%
M. Hunt Broyhill............................................ 33,000 1.2%
Thomas W. Busch(6).......................................... 17,200 **
John O. Summey, Jr. ........................................ 4,000 **
Bruce Mullan(7)............................................. 3,000 **
Richard G. Long, Jr. ....................................... 1,500 **
Anne P. Corley.............................................. 616 **
Providence LLC(8)........................................... 259,000 9.3%
All Directors and Executive Officers as a Group (eight
persons)(9)............................................... 654,033 23.6%
</TABLE>
- - ---------------
** Represents a percentage of beneficial ownership that is less than 1%.
(1) Unless otherwise stated, the address for all persons listed above is 6849
Fairview Road, Charlotte, North Carolina 28210.
(2) "Beneficial ownership" is a technical term broadly defined by the Securities
and Exchange Commission to mean more than ownership in the usual sense. For
example, a person "beneficially" owns the Company's common stock not only if
such person holds it directly, but also if such person indirectly (through a
relationship, a position as a director or trustee, or a contract or
understanding) has (or shares) the power to vote the stock, or to sell it,
or such person has the right to acquire it within 60 days. The percent of
shares beneficially owned as of January 31, 1999 was calculated based upon
2,771,971 "shares", consisting of 2,208,271 shares of common stock
outstanding plus 563,700 options to purchase common stock.
(3) This amount includes 320,200 shares of common stock that may be acquired
upon exercise of stock options that were exercisable as of January 31, 1999,
or that will become exercisable within 60 days after January 31, 1999.
(4) This amount includes 60,000 shares of common stock that may be acquired upon
exercise of stock options that were exercisable as of January 31, 1999, or
that will become exercisable within 60 days after January 31, 1999.
(5) This amount includes 50,500 shares of common stock that may be acquired upon
exercise of stock options that were exercisable as of January 31, 1999, or
that will become exercisable within 60 days after January 31, 1999.
(6) This amount includes 15,000 shares of common stock that may be acquired upon
exercise of stock options that were exercisable as of January 31, 1999, or
that will become exercisable within 60 days after January 31, 1999.
25
<PAGE> 26
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
(7) This amount represents shares of common stock that may be acquired upon
exercise of stock options that were exercisable as of January 31, 1999, or
that will become exercisable within 60 days after January 31, 1999.
(8) During 1997, Providence LLC assumed the obligation of the estate planning
program and was assigned the shares of common stock by Armand Investment
Corporation. Armand Investment Corporation acquired its shares from Patrick
L. Swisher in connection with an estate planning program for Mr. Swisher.
Mr. Swisher disclaims beneficial ownership of such shares.
(9) This amount includes 388,700 shares of common stock that may be acquired
upon exercise of stock options that were exercisable as of January 31, 1999,
or that will become exercisable within 60 days after January 31, 1999.
Please note that, subsequent to October 31, 1998, Mr. Moore resigned as a
director of the Company. However, as of January 31, 1999 Mr. Moore still
owned the shares shown in the above table. These shares have not been
included in the calculation of shares held beneficially by all directors and
executive officers as of January 31, 1999.
ITEM 12. 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 December 31, 2000, 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 from the Company
aggregating $57,000 and $109,000, respectively, during the fiscal years ended
October 31, 1998 and 1997.
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 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. In
May 1998, the office building was sold to Old Dowd Properties, Inc., an
unrelated party. On September 29, 1998, Mr. Swisher agreed to provide a personal
guarantee for the lease during the first year of the new lease agreement;
however, should the Company operate profitably for two consecutive quarters, Mr.
Swisher will be released from this guarantee prior to the end of the first year
of the new lease. For his personal guarantee, Mr. Swisher was granted 25,000
stock options, at the then current market price of $0.65. During the fiscal
years ended October 31, 1998 and 1997, the Company made lease payments of
$104,000 and $153,000, respectively to businesses in which Mr. Swisher had a
beneficial interest.
From time to time, during fiscal years 1998 and 1997, the Company made
advances to Mr. Swisher on an unsecured, interest-free basis, payable on demand.
The outstanding balance of these advances is typically less than $60,000.
26
<PAGE> 27
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
Certain officers and directors exercised stock options for 100,000 shares
of common stock on March 19, 1998. The exercising of these options created a
note receivable to the Company in the amount of $511,250 and is included in the
long-term note receivable related parties' balance. The following table
summarizes the options exercised and related amount of the non-discounted notes
receivable:
<TABLE>
<CAPTION>
OFFICER/DIRECTORS OPTIONS EXERCISED STRIKE PRICE NOTES RECEIVABLE
----------------- ----------------- --------------- ----------------
<S> <C> <C> <C>
Patrick L. Swisher....................... 57,600 $5.50 per share $ 316,800
W. Tom Reeder, III....................... 19,000 $5.00 per share 95,000
George K. Moore.......................... 23,400 $4.25 per share 99,450
</TABLE>
The notes receivable include provisions to extend the due date with no
interest accrued for any period where the Company does not have its securities
actively traded on the Nasdaq system, and if the closing bid price of the
Company's stock is less than 85% of the closing bid price of the Company's
securities on March 19, 1998, which was $7.625.
In September 1998, Mr. Swisher made an advance of $300,000 to the Company,
in the form of a short-term note payable bearing an annual interest rate of
10.0%. As of October 31, 1998, the balance remaining outstanding on the
short-term note payable was $200,000. Certain income tax refunds due to the
Company collateralized the note payable.
In September 1998, Mr. Reeder advanced the Company $40,000, in the form of
a short-term note payable, on an interest free basis. As of October 31, 1998,
the balance remaining outstanding on the note payable was $20,000.
Subsequent to the 1998 fiscal year end, Mr. Swisher advanced the Company
$275,000, in the form of a short-term note payable, bearing an annual interest
rate of 10.0%. Certain income tax refunds due to the Company collateralized the
note payable.
A note receivable to the Company for the purchase of the Houston Hygiene
franchise was restructured in 1998 from a seven year note with a balloon payment
and no monthly payments of principal or interest to a note receivable amortized
on a straight-line basis over ten years with monthly payments of both principal
and interest. The interest rate was reduced from 12.0% to 11.0% to more closely
reflect current market rates. Mr. Swisher is a majority owner of the company
that owns the Houston Hygiene franchise. For the years ended October 31, 1998
and 1997, the Company realized revenues from this franchise of $182,753 and
$119,607 for product sales, $21,602 and $15,915 for marketing fees, $64,805 and
$47,746 for royalty fees, and $46,500 and $38,250 for service fees, totaling
$315,660 and $221,518, respectively. For more information see Note 4 to the
Consolidated Financial Statements attached hereto.
Subsequent to the 1998 fiscal year end, the Company received a pre-payment
of approximately $165,000 towards the outstanding note receivable related to the
purchase of the Houston Hygiene franchise.
On July 30, 1997, the Company-owned Charlotte Hygiene operation was sold to
Charlotte Hygiene Associates, Inc. (CHA) for $415,000. A Vice President of the
Company is the majority partner in CHA. The Company recognized a gain of
$392,000 and $26,000 in management fee income in 1997 as disclosed in Note 4 to
the Financial Statements. For the year ended October 31, 1998, the Company
realized $171,599 in revenues from this franchise for product sales, $18,686 for
marketing fees, $56,059 for royalty fees, and $36,800 for service fees, totaling
$283,144.
A note receivable to the Company from Mr. Reeder for the purchase of the
Charlotte Hygiene franchise was restructured in 1998 from a seven year note with
a balloon payment and no monthly payments of principal or interest to a note
amortized on a straight-line basis over ten years with monthly payments of both
principal and interest. These new terms take into consideration $15,000 in
principal prepayments made between December 1997 and February 1998. The interest
rate remained at 11.0%. The Charlotte Hygiene franchise assumed a $67,817 note
receivable to the Company, as part of the purchase of an additional existing
franchise operation. The terms of the note remained the same with 95 monthly
installments and having an interest rate
27
<PAGE> 28
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
of 9.0%. The Company received no income on this transaction. Mr. Reeder is a
majority owner of the company that owns the Charlotte Hygiene franchise. For
more information see Note 4 to the Consolidated Financial Statements attached
hereto.
During the year ended October 31, 1998, the Company paid a member of the
Board of Directors $121,453 for consulting services. Additionally, the Company
provided this director office space worth a rental value of $6,300 for the same
period.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Consolidated Financial Statements.
<TABLE>
<S> <C>
Independent Auditor's Report of Scharf Pera & Co............ F-1
Consolidated Balance Sheet as of October 31, 1998........... F-2
Consolidated Statements of Operations for the years ended
October 31, 1998 and 1997................................. F-4
Consolidated Statements of Stockholders' Equity for the
years ended October 31, 1998 and 1997..................... F-5
Consolidated Statements of Cash Flows for the years ended
October 31, 1998 and 1997................................. F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
(b) Exhibits.
The following is a complete list of Exhibits filed as part of this report
and which are incorporated herein.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
------- --------
<S> <C> <C>
*3.1.1 -- Articles of Incorporation, as amended, of the Company as
filed on October 10, 1986 with the Secretary of State of the
State of Nevada.
*3.1.2 -- Certificate of Amendment of Articles of Incorporation of the
Company as filed on January 19, 1993, with the Secretary of
State of the State of Nevada.
#3.1.3 -- Certificate of Designations of Series A Junior Participating
Preferred Stock.
*3.2.1 -- Amended and Restated By-Laws of the Company.
*4.1.1 -- Form of specimen certificate for Common Stock of the
Company.
*4.1.2 -- Form of specimen certificate for Warrants of the Company.
**4.1.3 -- Form of Warrant Agreement, dated April 12, 1993, between
American Securities Transfer & Trust Co. and the Company.
**4.2 -- Form of specimen certificate for Underwriter's Warrant of
the Company.
#4.3 -- Form of Rights Agreement and Form of Rights Certificate.
---10.1.1 -- Asset Purchase Agreement dated September 1, 1997, by and
among Carolina Termite and Pest Control, Inc., et al. and
Swisher Pest Control Group.
*10.1.2 -- Amended Employment Agreement, effective January 1, 1993,
between Patrick L. Swisher and the Company.
---10.1.3 -- Non Competition Agreement dated September 1, 1997, between
Robert M. McCain, Jr. and Swisher Pest Control Group.
*10.2.1 -- 1992 Incentive Stock Option Plan, effective April 29, 1992,
authorizing 58,334 shares of Common Stock for issuance
pursuant to the Plan.
*10.2.2 -- 1992 Non-Qualified Stock Option Plan, effective April 29,
1992, authorizing 133,333 shares of Common Stock for
issuance pursuant to the Plan.
</TABLE>
28
<PAGE> 29
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
------- --------
<S> <C> <C>
***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.
***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.
-- -- (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).
--10.7.1 -- 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.
</TABLE>
29
<PAGE> 30
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
------- --------
<S> <C> <C>
-10.10.3 -- Loan Agreement, dated April 21, 1995, by and between First
Union National Bank of North Carolina and the Company
(terminated).
-10.10.4 -- Loan Agreement, dated May 18, 1995, by and between Stephens
Diversified Leasing, Inc., d/b/a Stephens Franchise Finance,
and the Company.
---21.1 -- Updated List of Subsidiaries of the Company
@23.1 -- Consent of Scharf Pera & Co.
@27. -- Financial Data Schedule (for SEC use only).
---99.1 -- Letter from McGladrey & Pullen, LLP.
</TABLE>
- - ---------------
<TABLE>
<S> <C>
@ Filed herewith.
- - --- Previously filed.
* Previously filed and incorporated by reference from the
Company's Registration Statement on Form S-1 (SEC 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 (SEC 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. (SEC 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.
- - - Previously filed and incorporated by reference from the
Company's Form 10-K for the fiscal year ended October 31,
1995. (SEC File No. 0-21282).
- - -- Previously filed and incorporated in reference from the
Company's Form 10-K per the fiscal year ended October 31,
1996. (SEC File No. 0-21282).
</TABLE>
(c) CURRENT REPORTS ON FORM 8-K.
The Company filed current reports during the 1998 Fiscal Year as follows:
1. A report on Form 8-K was filed on February 27, 1998, relating to
the withdrawal of the Company's Certifying Accountants.
2. A report on Form 8-K was filed on March 13, 1998, relating to the
Company's former Certifying Accountants response to the Company's report
filed on February 27, 1998.
3. Amendment No. 1 to the report on Form 8-K originally filed on March
13, 1998 was filed on March 24, 1998, relating to the withdrawal of the
Company's Certifying Accountants.
4. Amendment No. 2 to the report on Form 8-K originally filed on March
13, 1998 was filed on April 24, 1998, relating to retention of new
Certifying Accountants for the Company.
5. A report on Form 8-K was filed on May 18, 1998, relating to the
delisting of the Company's securities from the Nasdaq National Market.
6. A report on Form 8-K was filed on June 3, 1998, relating to the
announcement of the Company's earnings for fiscal year ended October 31,
1997 and the restatement of the Company's earnings for the prior fiscal
year ended October 31, 1996.
30
<PAGE> 31
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
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, 1998, 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, 1998, 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.
SCHARF PERA & CO.
Charlotte, North Carolina
February 19, 1999
F-1
<PAGE> 32
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 31,
1998
-----------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents (Note 2)........................ $ 183,352
Restricted cash (Note 7).................................. 272,989
Accounts receivable, franchisees, net of allowance for
doubtful accounts of $596,000........................... 2,501,024
Other receivables......................................... 124,759
Current portion of notes receivable, franchisees (Notes 3
and 7).................................................. 713,729
Current portion of notes receivable -- related parties
(Note 4)................................................ 160,000
Inventories............................................... 63,978
Prepaid expenses.......................................... 55,380
Income tax refunds receivable (Note 12)................... 628,484
-----------
Total current assets............................... 4,703,695
-----------
Property and equipment (Note 5)
Property, furniture and equipment......................... 1,788,021
Less: accumulated depreciation............................ (773,832)
-----------
Total property and equipment....................... 1,014,189
-----------
Other assets
Notes receivable -- related parties, (Note 4)............. 245,389
Notes receivable, franchisees (Notes 3 and 7)............. 3,230,435
Notes receivable -- related parties for stock (Note 5).... 400,491
Intangible assets, net of accumulated amortization of
$21,848................................................. 112,358
Goodwill, net of accumulated amortization of $82,553...... 632,410
Assets held for sale (Note 16)............................ 301,693
Cash surrender value of officers' life insurance.......... 22,958
Deposits and other assets................................. 111,445
-----------
Total other assets................................. 5,057,179
-----------
Total assets....................................... $10,775,063
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft............................................ $ 497,937
Line of credit, (Note 7).................................. 1,705,998
Note payable -- related parties, (Note 8)................. 220,000
Current portion of long-term debt, (Note 9)............... 358,452
Accounts payable.......................................... 2,598,022
Accrued expenses.......................................... 403,364
Deferred revenue.......................................... 145,521
-----------
Total current liabilities.......................... 5,929,294
-----------
Long-term debt, less current portion, (Note 9).............. 384,203
Deferred revenues, less current portion..................... 550,800
Commitments and contingencies, (Notes 13 and 20)............ --
Stockholders' equity
Common stock, par value $0.01, authorized 15,000,000
shares; issued 2,208,271 shares......................... 22,083
Additional paid-in capital................................ 4,728,395
Retained earnings......................................... (839,712)
-----------
Total stockholders' equity......................... 3,910,766
-----------
Total liabilities and stockholders' equity......... $10,775,063
===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE> 33
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUES
Annuity revenues
Product sales............................................. $ 6,718,955 $ 5,366,127
Service fees.............................................. 2,088,301 1,832,962
Royalties................................................. 2,609,794 2,126,369
Marketing fees............................................ 79,808 73,226
----------- -----------
Total annuity revenues............................ 11,496,858 9,398,684
----------- -----------
Initial franchise sales (Notes 3 and 11).................... 853,387 1,347,312
Revenue from Company-owned operations....................... 2,232,846 1,703,120
Interest income............................................. 304,644 283,354
(Loss)/gain on sale of Company-owned operations............. (56,187) 497,189
Other revenue............................................... 54,207 46,672
----------- -----------
3,388,897 3,877,647
Total revenues.................................... 14,885,755 13,276,331
----------- -----------
EXPENSES
Selling, general and administrative....................... $ 8,977,524 $ 6,220,475
Costs of product sales to franchises...................... 5,926,549 4,274,019
Costs related to Company-owned operations................. 2,376,588 1,700,340
Interest.................................................. 361,692 210,721
----------- -----------
Total expenses.................................... 17,642,353 12,405,555
----------- -----------
(Loss)/income before income taxes........................... (2,756,598) 870,776
Income tax (benefit)/expense (Note 12).................... (74,831) 338,868
Net/(loss)/income........................................... $(2,681,767) $ 531,908
=========== ===========
(loss)/income per share:
Basic..................................................... $ (1.23) $ 0.26
Diluted................................................... $ (1.23) $ 0.23
Weighted-average number of common shares and common share
equivalents outstanding:
Basic..................................................... 2,181,849 2,060,377
Diluted................................................... 2,181,849 2,367,628
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 34
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------- PAID-IN EARNINGS
SHARES AMOUNTS CAPITAL (DEFICIT) TOTAL
--------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1996............... 1,935,799 $19,359 $4,006,659 $1,310,147 $5,336,165
Other................................... 8,928 8,928
Issuance of common stock in connection
with the exercise of stock options.... 186,472 1,864 113,136 115,000
Net income.............................. 531,908 531,908
--------- ------- ---------- ---------- ----------
BALANCE, OCTOBER 31, 1997............... 2,122,271 21,223 4,128,723 1,842,055 5,992,001
Tax benefit of compensation deduction
related to stock options (Note 12).... -- -- 380,966 -- 380,966
Retirement of common stock (Note 4)..... (14,000) (140) (117,110) -- (117,250)
Issuance of common stock in connection
with the exercise of stock options,
(Note 5).............................. 100,000 1,000 395,566 -- 396,566
Cancellation of stock options, (Note
10)................................... -- -- (73,500) -- (73,500)
Grant of stock options (Note 10)........ -- -- 13,750 -- 13,750
Net loss................................ -- -- -- (2,681,767) (2,681,767)
--------- ------- ---------- ---------- ----------
BALANCE, OCTOBER 31, 1998............... 2,208,271 $22,083 $4,728,395 $ (839,712) $3,910,766
========= ======= ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 35
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)/income........................................... $(2,681,767) $ 531,908
Adjustments to reconcile net (loss)/income to net cash (used
in) provided by operating activities:
Depreciation.............................................. 276,604 187,772
Amortization.............................................. 236,966 139,793
Compensation for guarantee of leases...................... 13,750 --
Deferred income taxes..................................... (97,000) 94,000
Loss/(gain) on disposal of Company-owned operations....... 56,396 (497,189)
Loss on sale of property.................................. 40,856 --
Franchise fee revenue financed through notes receivable... (415,968) (496,840)
Provision for doubtful notes receivable................... 256,202 257,688
Provision for doubtful accounts receivable................ 505,951 22,000
Change in working capital components:
(Increase) in accounts receivable...................... (462,386) (1,371,232)
Decrease/(increase) in inventories..................... 24,808 (1,507)
Decrease/(increase) in prepaid expenses................ 129,128 (29,922)
Decrease/(increase) in deferred franchise costs........ 77,957 --
Increase/(decrease) in allowance for valuation of
assets held for sale.................................. 44,534 (256,030)
Increase in accounts payable........................... 556,317 789,109
Increase in accrued expenses........................... 180,816 41,413
(Decrease)/increase in income taxes payable............ (357,341) 8,653
Increase in deferred revenue........................... 367,123 20,074
----------- -----------
Net cash used in operating activities.................. (1,247,054) (560,310)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment....................................... (172,604) (612,770)
Advances to officer......................................... 50,136 204,732
Notes receivable proceeds................................... (860,978) (1,598,520)
Notes receivable-related parties proceeds................... (3,925) (196,449)
Notes receivable payments................................... 1,075,936 1,160,385
Sale of assets held for sale................................ 180,742 --
Proceeds from sale of property.............................. -- 162,431
Decrease/(increase) in intangible assets and other assets... 90,477 (879,640)
----------- -----------
Net cash provided by/(used in) investing activities....... 359,784 (1,759,831)
----------- -----------
</TABLE>
F-5
<PAGE> 36
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock transactions............................ -- 123,928
Increases in bank overdraft................................. 497,937 --
(Increase) decrease in restricted cash...................... (15,087) 2,925
Net proceeds from advances on line-of-credit and short-term
notes payable............................................. 324,000 347,956
Net proceeds from issuance of notes payable to related
parties................................................... 220,000 --
Proceeds from long-term debt................................ -- 1,232,673
Net principal payments on long-term debt obligations........ (619,108) (534,051)
----------- -----------
Net cash from financing activities........................ 407,742 1,173,431
----------- -----------
Net (decrease) in cash and cash equivalents............... (479,528) (1,146,710)
Cash and cash equivalents at beginning of year............ $ 662,880 $ 1,809,590
----------- -----------
Cash and cash equivalents at end of year.................. $ 183,352 $ 662,880
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest.................................................. $ 364,888 $ 218,121
Income taxes.............................................. 331,911 236,215
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Notes receivable, included in deferred revenue............ 367,123 329,198
Transfer of accounts receivable to assets held for sale... 81,000 10,982
Notes receivable on sale of franchises.................... 818,175 496,840
Accounts receivable settled with cancellation of
options................................................ 73,500 --
Accounts receivable -- officers settled with assignment of
Company stock.......................................... 117,250 --
Options granted in exchange for personal guarantee on
lease.................................................. 13,750 --
Options issued for notes receivable....................... 396,566 --
Property acquired through capital leases.................. 118,132 --
Tax benefit of compensation deduction related to stock
options................................................ 386,966 --
----------- -----------
SALE OF PEST CONTROL OPERATIONS:
Assets disposed of:
Cash................................................... --
Accounts receivable.................................... 163,921
Inventories............................................ 13,368
Prepaid expenses....................................... 474,774
Equipment.............................................. 85,532
Goodwill............................................... 499,019
-----------
$ 1,236,614
===========
Liabilities assumed:
Accounts payable....................................... $ 25,796
Accrued expenses....................................... 77,093
Notes payable.......................................... 844,522
-----------
947,411
Notes receivable issued as consideration.................... 289,144
Loss on sale.............................................. 59
-----------
$ 1,236,614
===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 37
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
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 inter-company accounts and transactions.
RECLASSIFICATIONS
Certain amounts in the financial statements for the year-ended October 31,
1997 have been reclassified from the previously issued report in order to make
the financial statements comparable to the presentation for October 31, 1998.
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.
IMPAIRMENT OF LONG-LIVED ASSETS
At each balance sheet date, the Company assesses whether there has been an
impairment in the value of all long-lived assets (including intangibles) by
determining whether projected undiscounted future cash flows from such assets,
as defined in Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of, exceed its net book value as of the assessment date. A new cost
basis is established for impaired assets based on the fair value of these assets
as of the date the assets are determined to be impaired. There was not a
material impact from these assessments on the Company's financial position,
results of operations, or liquidity for the years ended October 31, 1997 and
1998.
F-7
<PAGE> 38
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
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. amortized on the straight-line basis over a
twenty year period.
ACCOUNTS PAYABLE
The Company collects substantially all of their franchisees' accounts
receivable. The Company deposits all of these remittances into its bank accounts
and generally remits these monies to the franchisees in the week following
collection after deduction of fees and receivables due the Company. The
liability for these funds due the franchisees are included in the Company's
accounts payable and the gross amount, before deductions for fees and
receivables, totals $1,029,000 at October 31, 1998.
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.
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. For financed franchise sales
where collections are not predictable, the Company uses the installment sales
method for revenue recognition in accordance with SFAS No. 45, "Accounting for
Franchise Fee Revenue." The Company records the note receivable on these sales
and the revenue is included as a liability on the balance sheet as deferred
revenues.
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.
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
F-8
<PAGE> 39
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
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.
EARNINGS PER SHARE
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 (SFAS 128), Earnings per Share, which
requires the presentation of basic and diluted earnings per share. Basic
earnings per share exclude dilution and are computed by dividing income (or
loss) by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Potential common shares are excluded
from the computation of diluted earnings per share when a loss exists because
the effect would be antidilutive (Note 11).
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.
NOTE 2. CASH
The Company maintains deposits with financial institutions, which exceed
the federally insured amounts in the amount of $472,000 at October 31, 1998.
Additionally, the Company maintains deposits in foreign accounts, not insured,
in the amount of $128,000 at October 31, 1998.
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 8% to 13% with monthly principal and interest
payments ranging from $70 to $6,199 over periods ranging from 12 to 120 months,
with the first note maturing in 1999 and the last one in 2009.
F-9
<PAGE> 40
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
Notes receivable -- franchisees at October 31, 1998 consisted of the
following:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Notes receivable -- franchisees at face value............... $3,244,813
Notes receivable -- related parties at face value (Note
4)........................................................ 1,246,851
----------
Total notes receivable -- face value........................ 4,491,664
Less imputed discount....................................... (291,000)
----------
Net present value of notes receivable....................... 4,200,664
Less allowance for doubtful accounts........................ (256,500)
----------
Balance of notes receivable -- franchisees.................. $3,944,164
==========
Current portion............................................. $ 713,729
Long-term portion........................................... $3,230,435
</TABLE>
The notes receivable -- franchisees at face value have been reduced to net
present value at October 31, 1998 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>
1999........................................................ $ 713,729
2000........................................................ 601,726
2001........................................................ 486,305
2002........................................................ 469,239
2003........................................................ 492,712
Thereafter.................................................. 1,727,953
----------
4,491,664
Less imputed discounts...................................... 291,000
Less allowance for doubtful accounts........................ 256,500
----------
$3,944,164
==========
</TABLE>
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-10
<PAGE> 41
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
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, 1998:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Notes receivable from the President for: life insurance
policies paid by the Company pursuant to a split dollar
life insurance plan, advances and personal expenses paid
by the Company, and for third party accounts receivable
collected by the franchise owned 51 percent by the
President. Notes receivable bears interest rates of 6 to
12 percent................................................ $259,290
Notes receivable from a Vice President for: life insurance
policies paid by the Company pursuant to a split dollar
life insurance plan, and for third party accounts
receivable collected by the franchise owned 51 percent by
the Vice President. Notes receivable bears interest rates
of 6 to 12 percent........................................ 141,465
Others...................................................... 4,634
--------
Total accounts and notes receivable from officers........... 405,389
Current portion............................................. 160,000
--------
Long-term portion........................................... $245,389
========
</TABLE>
On February 2, 1998, the President delivered 14,000 shares of common stock
to the Company to be applied as a payment on the note above. The note was
reduced by the total market value of those shares, $117,250, based on the
closing price of $8.375 on that day. The stock shares involved were subsequently
retired.
Until May of 1998, the Company leased its operating facility from a
partnership in which the President of the Company was a 100 percent beneficial
owner. Rent expense relating to the lease payments made to businesses in which
Mr. Swisher had a beneficial interest during the years ended October 31, 1998
and 1997 was $103,719 and $153,112, respectively.
During the years ended October 31, 1998 and 1997, the Company paid the
President and/or a corporation in which the President is a major stockholder
$57,427 and $109,078, respectively, for the use of an airplane for business
travel.
During the year ended October 31, 1998, the Company paid a member of the
Board of Directors $121,453 for consulting services. Additionally, the Company
provided this director office space worth a rental value of $6,300 for the same
period.
As shown in Note 3 above, there are notes receivable with a total face
value of $1,246,851 from related parties for franchise sales. A $443,722 note
results from the purchase of a franchise by a company that is 51 percent owned
by the President of the Company. The original note, dated July 19, 1996, was for
the entire amount ($450,000) of the purchase and was interest-free until
payments of monthly interest at the rate of 12 percent per annum began May 1,
1997. The original note called for 84 monthly payments of principal and interest
of $5,401 beginning May 1, 1998 and a balloon payment of $330,218 due May 1,
2005. On July 6, 1998, this note was revised to eliminate the balloon payment
from the original note and to lower the interest rate to 11 percent per annum.
The terms of the new note call for 120 monthly installments of principal and
interest of $6,199 beginning August 1, 1998 and ending July 1, 2008. The
franchise and its assets secure this note, with additional security pledged by
25,000 shares of restricted Swisher International, Inc. common stock owned by
the President. Subsequent to October 31, 1998, in November 1998, the Company
received a payment of $165,000 on this note. For the years ended October 31,
1998 and 1997, the Company realized revenues from this franchise of $182,753 and
$119,607 for product sales, $21,602 and $15,915 for marketing fees, $64,805 and
$47,746 for royalty fees, and $46,500 and $38,250 for service fees, totaling
$315,660 and $221,518, respectively.
F-11
<PAGE> 42
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
A second note of $394,419 results from the purchase of a Company-owned
franchise by a company that was owned by a Vice President of the Company. The
original note, dated July 30, 1997, was for the entire amount ($415,000) of the
purchase and was interest-free until payments of monthly interest at the rate of
11 percent began May 1, 1998 for a period of 12 months. The original note called
for 84 monthly payments of principal and interest of $5,000 beginning May 1,
1999 and a balloon payment of $267,116 due May 1, 2006. On July 6, 1998, this
note was revised to eliminate the balloon payment from the original note. The
terms of the new note call for 120 monthly installments of principal and
interest of $5,510 beginning August 1, 1998 and ending July 1, 2008. These new
terms take into consideration $15,000 in principal prepayments made between
December 1997 and February 1998. The franchise and its assets secure this note,
with additional security pledged by 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. For the year ended October 31,
1998, the Company realized $171,599 in revenues from this franchise for product
sales, $18,686 for marketing fees, $56,059 for royalty fees, and $36,800 for
service fees, totaling $283,144.
A third note, bearing interest at 9 percent, in the total aggregate amount
of $67,817 was assumed by the same company owned by the Vice President as part
of the purchase of an existing franchise operation. At October 31, 1998, the
remaining balance on this note was payable in 95 monthly installments of
principal and interest of $1,001. The franchise and its assets secure this note.
The Company recognized no income on this transaction.
A fourth note of $239,742 results from the "Agreement for Purchase and Sale
of Assets" dated October 26, 1998 by and between Swisher Pest Control
Corporation and Carolina Pest Management, LLC (See Note 17). The President of
Swisher Pest Control Corporation owns Carolina Pest Management LLC. This note is
payable in 16 quarterly installments of interest only at the prime rate, with
the first quarterly installment due January 26, 1999. Beginning on November 26,
2002 this note is payable in 60 monthly installments of principal and interest
of $4,861. In addition, as part of this transaction, Carolina Pest Management,
LLC issued the Company a short-term note receivable in the amount of $75,000 and
owed the Company an additional $26,151 down payment. The $26,151 down payment
was received in November 1998. The $75,000 short-term note receivable is
interest free and was payable in full on January 26, 1999. In December 1998, the
Company received $25,000 on this short-term note and extended the payment of the
remaining $50,000 until June 10, 1999. All the fixed assets of Carolina Pest
Management, LLC, secure $100,000 of these notes. The balance of the notes
receivable are unsecured. The Company realized a net loss on the sale to
Carolina Pest Management, LLC of $59.
NOTE 5. NOTES RECEIVABLE FOR STOCK
On March 19, 1998, the Company's Board of Directors authorized the
immediate exercise of certain stock options that were originally granted in
November 1996. The Company accepted notes from the officers and directors
involved in the transaction in exchange for the stock issued. The terms of the
notes include a provision that the notes would not bear interest should the
shares acquired be de-listed from Nasdaq. Nasdaq de-listed the Company's
securities in May 1998. The notes given in consideration of the stock have been
discounted to a net present value using an interest factor of 8.5 percent, and
the notes will amortize over the expected life of the notes. The terms of the
notes require payment in full, when the de-listing period has ended and the
closing bid price for the Company's stock, for five consecutive trading days,
shall equal $6.50 per share (at least 85 percent of the closing bid price of
March 19, 1998, which was $7.625).
F-12
<PAGE> 43
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
The discounted balances of these notes at October 31, 1998 are as follows:
<TABLE>
<CAPTION>
INTEREST
DISCOUNTED AMORTIZED BALANCE
NOTE DURING YEAR 10/31/98
---------- ----------- --------
<S> <C> <C> <C>
Notes receivable from the President for the purchase
of 57,600 shares.................................... $245,735 $2,432 $248,167
Notes receivable from a Vice President for the
purchase of 19,000 shares........................... 73,690 729 74,419
Notes receivable from a member of the Board of
Directors for the purchase of 23,400 shares......... 77,141 764 77,905
-------- ------ --------
$396,566 $3,925 $400,491
======== ====== ========
</TABLE>
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment is comprised of:
<TABLE>
<CAPTION>
ESTIMATED
1998 USEFUL LIFE
---------- -----------
<S> <C> <C>
Operating equipment......................................... $ 82,618 7 yrs
Office equipment............................................ 35,912 5-7 yrs
Office furniture............................................ 247,494 5-7 yrs
Computer hardware........................................... 248,673 5 yrs
Computer software........................................... 714,272 5 yrs
Leased computer equipment................................... 343,046 5 yrs
Leasehold improvements...................................... 116,005 31.5 yrs
----------
$1,788,020
==========
</TABLE>
NOTE 7. LINE OF CREDIT, NOTE PAYABLE AND PLEDGED ASSETS
The Company has a $1,750,000 line-of-credit agreement with a bank.
Borrowings under the agreement bear interest at 2.85 percent above the LIBOR
(8.194 percent at October 31, 1998) 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 $1,705,998 at October 31, 1998. This line-of-credit agreement contains
financial covenants, which require specified levels of equity and the
maintenance of certain financial ratios. At October 31, 1998, the Company was in
violation of these three covenants, and the bank waived these violations. At
October 31, 1997, the Company was in violation of one of these covenants and the
bank waived this violation.
Subsequent to October 31, 1998, on February 17, 1999, this bank extended
the line-of-credit until June 30, 1999 at which time full payment of principal
and interest is required. The extension was contingent upon the personal
guarantee of the President, which was provided. The Company has received a
letter of intent for alternative financing, however, negotiations of final terms
are not complete.
In connection with the provision of the personal guarantee by the
President, the Board of Directors approved and granted to the President 250,000
stock options, exercisable at a price equal to the average market price of the
Company's stock for the twenty day period preceding February 16, 1999.
F-13
<PAGE> 44
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
NOTE 8. NOTES PAYABLE RELATED PARTIES
Notes payable to related parties at October 31, 1998 consisted of the
following:
<TABLE>
<CAPTION>
OCTOBER 31,
1998
-----------
<S> <C>
Note payable to the President, dated October 26, 1998,
payable on demand 60 days after date of the note, interest
at 10 percent............................................. $200,000
Note payable to a Vice President, dated October 30, 1998,
payable on demand 30 days after date of the note, no
interest terms stated..................................... 20,000
--------
$220,000
========
</TABLE>
Certain income tax refunds due to the Company collateralized the note
payable to the President. Subsequent to October 31, 1998, in November 1998, the
President made an additional loan to the Company of $275,000.
NOTE 9. LONG-TERM DEBT AND PLEDGED ASSETS
Long-term debt at October 31, 1998 consisted of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
1998
-----------
<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............................... $372,684
Capitalized lease due in monthly installments of $1,244,
including interest at 11.86 percent, through October 2002;
secured by telephone equipment costing $56,098............ 46,360
Capitalized lease due in monthly installments of $240,
including interest at 15.31 percent, through July 2002;
secured by telephone equipment costing $8,704............. 8,313
Capitalized lease due in monthly installments of $1,211,
including interest at 12.9 percent, through December 2002;
secured by computer equipment costing $53,330............. 47,340
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..................... 180,913
Notes payable, vendors, due in monthly installments of
$1,347 including interest at 9 percent through December
1999; unsecured........................................... 16,627
Note payable, individuals, due in monthly installments of
$1,245, including interest at 9% through May 2000;
unsecured................................................. 21,980
Note payable, individual, due in monthly installments of
$1,065, including interest at 10 percent through July
1999; unsecured........................................... 9,196
Note payable, 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, 1998 of
$86,359................................................... 39,242
--------
742,655
Less current portion........................................ 358,452
--------
$384,203
========
</TABLE>
F-14
<PAGE> 45
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
Aggregate maturities required on the long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31
- - ----------------------
<S> <C>
1999........................................................ $358,452
2000........................................................ 195,011
2001........................................................ 104,412
2002........................................................ 83,069
2003........................................................ 1,711
Thereafter.................................................. --
--------
$742,655
========
</TABLE>
NOTE 10. STOCK AND STOCK OPTIONS
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. Each two warrants entitled the holder to purchase one share of
common stock at $7.80 per share. The warrants were extended by the Company until
June 30, 1999. A warrant to purchase up to 76,000 units, with an exercise price
of $7.20 per unit, issued to the Company's Underwriter for $100 in connection
with the offering expired in April 1998.
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, 1998
and 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, 1998 and 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.
2,208,271 and 2,122,271 Rights were outstanding at October 31, 1998 and 1997,
respectively.
STOCK OPTION PLANS
In August 1992, the Company adopted an Incentive Stock Option Plan (the
"Incentive Plan"). The Incentive Plan covered 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. This amendment is still subject to
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
F-15
<PAGE> 46
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
date of grant. Options to purchase 59,700 shares of the Company's $.01 par value
common stock are outstanding pursuant to the Incentive Plan at October 31, 1998.
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. During the
year-ended October 31, 1998, stock options to purchase 37,182 shares of common
stock were exercised for notes receivable, (See Note 5).
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 covered 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 Non-Qualified Plan. This
amendment is still subject to the stockholders' approval. 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 Compensation Committee is empowered to grant bonuses at the time of
issuance of non-qualified stock options in an amount sufficient to cover the tax
liability incurred by the recipient at the date of grant. Options to purchase
124,000 shares of the Company's $.01 par value common stock are outstanding
pursuant to the Non-Qualified Plan at October 31, 1998. The exercise price of
the options approximated the fair market value of the Company's common stock at
the date of grant. During the year-ended October 31, 1998, stock options to
purchase 62,818 shares of common stock were exercised for notes receivable,
(Note 5).
The following is a summary of Plan options granted:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
<S> <C> <C>
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
Options exercised........................................... (100,000) 3.97
Options expired............................................. (25,534) 3.30
-------- -----
Outstanding October 31, 1998................................ 183,700 $4.24
======== =====
</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 SFAS No. 123, the transaction was recorded based on
the value of the services received. On January 17, 1997 the investment banking
firm exercised its 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
F-16
<PAGE> 47
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
at a price of $5.75 per share. In accordance with SFAS 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 SFAS No. 123, the transaction was recorded based on
the value of the services received, $5,000.
In July 1996, the Company, in conjunction with an Asset Purchase Agreement
of its Surface Doctor Division, granted the sellers an option to purchase 75,000
shares of the Company's common stock at $6.00 per share. These options were
valued at $73,500 in the transaction. In April 1998, these options were canceled
in exchange for $73,500 of accounts receivable due from the sellers.
In September 1998, the Company entered into an agreement with the President
of the Company whereby the Company granted the President options to purchase
25,000 shares of the Company's common stock at a price equal to the average bid
and ask price per share on September 29, 1998, $0.65. The options were granted
to the President in exchange for the President executing lease guaranty to the
lessors of the Company's office building. In accordance with SFAS No. 123, the
transaction was recorded based on the value of options given of $13,750 (which
value is more readily measurable than the value of the guaranty).
The Company has adopted SFAS, No. 123, "Accounting for Stock-Based
Compensation". SFAS 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 Stock Option Plan and Non-Qualified Stock
Option Plan discussed above. The pro forma effects of not utilizing the fair
value method prescribed in SFAS No. 123 for the Company's stock options is shown
in the following table for the year ended October 31, 1997. 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, assumed no dividends, and assumed that such cost could not be
tax effected. There were no options granted under the Incentive Stock Option
Plan or the Non-Qualified Stock Option Plan for the year-ended October 31, 1998.
<TABLE>
<CAPTION>
BASIC EARNINGS DILUTED EARNINGS
NET INCOME PER SHARE PER SHARE
---------- -------------- ----------------
<S> <C> <C> <C>
Year Ended October 31, 1997:
As reported................................... $531,908 $0.26 $0.23
Pro-forma..................................... $383,631 $0.18 $0.15
</TABLE>
F-17
<PAGE> 48
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
NOTE 11. EARNINGS PER SHARE
A reconciliation of basic earnings per share to diluted earnings per share
is presented below:
<TABLE>
<CAPTION>
PER SHARE
NET INCOME/(LOSS) SHARES AMOUNT
----------------- --------- ---------
<S> <C> <C> <C>
Year Ended October 31, 1998:
Basic EPS
Income available to common shareholders..... $ (2,681,767) 2,181,849 $ (1.23)
Effect of Dilutive Securities
Stock options and warrants.................. -- -- --
------------ --------- -------
Diluted EPS
Income available to common shareholders plus
assumed conversions....................... $ (2,681,767) 2,181,849 $ (1.23)
============ ========= =======
Year Ended October 31, 1997:
Basic EPS
Income available to common shareholders..... $ 531,908 2,060,377 $ 0.26
Effect of Dilutive Securities
Stock options and warrants.................. -- 307,251 --
------------ --------- -------
Diluted EPS
Income available to common shareholders plus
assumed conversions....................... $ 531,908 2,367,628 $ 0.23
============ ========= =======
</TABLE>
NOTE 12. INCOME TAXES
For the year ended October 31, 1998, the income tax benefit of $74,831 was
comprised of a current tax benefit of $24,581, a foreign tax expense of $46,750
and a deferred tax benefit of $97,000.
Deferred income taxes are provided in recognition of temporary differences
in reporting certain revenues and expenses for financial statement and income
tax purposes.
Net deferred tax assets/(liabilities) consisted of the following components
as of October 31, 1998:
<TABLE>
<CAPTION>
CURRENT LONG-TERM TOTAL
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Receivable allowances............................. $ 226,590 $ -- $ 226,590
Net operating loss carryforwards.................. -- 663,148 663,148
--------- --------- ---------
226,590 663,148 889,738
Deferred tax liabilities
Property and equipment............................ -- (89,349) (89,349)
Intangible assets................................. -- (45,953) (45,953)
--------- --------- ---------
-- (135,302) (135,302)
226,590 527,846 754,436
(226,590) (527,846) (754,436)
--------- --------- ---------
$ -- $ -- $ --
========= ========= =========
</TABLE>
The ultimate realization of these assets is dependent upon the generation
of future taxable income sufficient to offset the related deductions and loss
carryforwards within the applicable carryforward period. The valuation allowance
is based on the uncertainty of the Company's ability to generate sufficient
taxable income in future years to fully utilize the net operating loss
carryforwards.
F-18
<PAGE> 49
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
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, 1998 and 1997 due to the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Computed "expected" tax benefit (expense)................... $ 960,000 $(296,063)
Increase/(decrease) in income taxes resulting from:
State income taxes........................................ -- (40,817)
Disqualifying disposition of ISO shares................... (380,966) --
Permanent differences..................................... (18,920) (17,455)
Temporary differences..................................... (438,533) (8,620)
Other..................................................... (46,750) 24,087
--------- ---------
Income tax benefit/(expense)................................ $ 74,831 $(338,868)
========= =========
</TABLE>
During the year ended October 31, 1998, the Company was informed by the
Company's President that a disqualifying disposition of incentive stock options
(ISO's) had occurred. As a result, the Company amended their October 31, 1997
federal and state income tax returns to reflect an additional tax deduction of
$962,473. As a result of the amended returns, the Company has recorded
additional income taxes receivable of $380,966 and increased additional paid-in
capital for the same. As a result of this disqualifying disposition and the
amended tax filings, the Company lost the benefit of carrying back its current
year net operating loss thus reducing current year income tax benefits by
$380,966.
As of October 31, 1998, the Company has net operating loss carryforwards
available for federal and state income tax reporting purposes on a consolidated
basis of approximately $1,745,000 and $3,650,000, respectively. These net
operating loss carryforwards expire between 2000 and 2018.
NOTE 13. LEASE COMMITMENTS AND RENT EXPENSE
The Company leases other facilities, equipment and vehicles under operating
leases, which expire in varying amounts through 2003.
Future minimum lease payments pursuant to these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31,
- - -----------------------
<S> <C>
1999................................................... $ 387,898
2000................................................... 351,527
2001................................................... 301,690
2002................................................... 267,340
2003................................................... 320,497
----------
$1,628,952
==========
</TABLE>
For the years ended October 31, 1998 and 1997, operating lease expense was
$371,863 and $321,198, respectively.
F-19
<PAGE> 50
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
NOTE 14. FRANCHISES
The following table summarizes the number of franchised operations of
Swisher International, Inc. for the year ended October 31, 1998:
<TABLE>
<CAPTION>
SWISHER SURFACE SWISHER SWISHER
HYGIENE DOCTOR MAIDS PEST CONTROL
------- ------- ------- ------------
<S> <C> <C> <C> <C>
Franchises at the beginning of the year............ 102 104 7 4
Franchises sold.................................... 5 9 -- 4
Closed/transferred................................. (2) (28) (1) (1)
Repurchased/transferred............................ 1 -- -- --
--- --- --- ---
Franchises at the end of the year.................. 106 85 6 7
=== === === ===
</TABLE>
Franchised operations noted above include Canadian franchisees,
Company-owned operations, plus US franchises. The term "franchise" is defined
for each franchise system consistently with the way management reviews the
systems. For Swisher Hygiene, Swisher Maids, and Swisher Pest Control, the
number of signed territories defines a franchise. For Surface Doctor, the number
of individual franchisees defines a franchise. For presentation purposes
"closed" includes consolidation of territories, franchisees that either
voluntarily or involuntarily ceased to do business and Company-owned operations
which are resold. Some items in prior periods have been reclassified to conform
to the current presentation format.
The Company's Master Franchise License program enables the purchaser to
sell sub-franchises in certain territories and/or countries. The following table
summarizes the number of signed master license agreements of Swisher
International, Inc. for the year ended October 31, 1998:
<TABLE>
<CAPTION>
SWISHER SURFACE SWISHER SWISHER
HYGIENE DOCTOR MAIDS PEST CONTROL
------- ------- ------- ------------
<S> <C> <C> <C> <C>
Master license agreements at the beginning of the
year............................................. 5 2 -- --
Master license agreements sold..................... 4 2 -- 1
Master license agreements closed................... -- -- -- --
--- --- --- ---
Master license agreements at the end of the year... 9 4 -- 1
=== === === ===
</TABLE>
NOTE 15. SEGMENT INFORMATION
The Company operates four principal franchise systems: hygiene, residential
maid services, residential and commercial resurfacing services, and residential
and commercial pest control services. Selected financial information is
presented below for the years ended October 31, 1998 for franchise operations
and Company-owned operations.
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, 1998 and 1997 foreign sales totaled
$485,000 and $876,845, respectively.
<TABLE>
<CAPTION>
COMPANY-
OWNED FRANCHISE
1998 OPERATIONS OPERATIONS TOTAL
- - ---- ---------- ----------- -----------
<S> <C> <C> <C>
Net revenues..................................... $2,232,846 $12,652,909 $14,885,755
Operating income (loss).......................... (199,929) (2,556,669) (2,756,598)
Identifiable assets.............................. 84,083 10,640,980 10,725,063
Capital Expenditures............................. -- 172,604 172,604
Depreciation and amortization.................... 19,919 493,651 513,570
</TABLE>
F-20
<PAGE> 51
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
NOTE 16. ASSETS HELD FOR SALE
As of October 31, 1998 the Company had three 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>
1998
--------
<S> <C>
Cost basis of assets........................................ $495,805
Less: valuation allowance to fair market value.............. (168,805)
--------
327,000
Less: accumulated amortization of goodwill.................. (25,307)
========
Assets held for sale, net................................... $301,693
========
</TABLE>
NOTE 17. BUSINESS COMBINATION
PEST CONTROL
Effective September 1, 1997, the Company, pursuant to an Asset Purchase
Agreement, completed the acquisition of certain assets and assumption of certain
liabilities of Carolina Termite & Pest Control, Inc. ("CTPC"). 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 CTPC for the
Company pursuant to a promissory note, payable over 60 months, with interest at
10 percent, for a total of $588,489.
Assets acquired in connection with the acquisition are as follows:
<TABLE>
<S> <C>
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 CTPC, the Company acquired covenants not
to compete from two of the principals of CTPC who were subsequently employed by
the Company pursuant to 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.
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, 1996, the beginning of the 1997 fiscal year.
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Total revenue............................................... $13,042,468
Net income.................................................. 517,625
Basic income per share...................................... 0.25
Diluted income per share.................................... 0.22
</TABLE>
In October 1998, the Company sold CTPC back to one of the original owners
who is also an employee of the Company. Pursuant to the "Agreement for Purchase
and Sale of Assets" the Company received cash and notes receivable as proceeds
from this sale (Note 4). The Company recorded a loss of $59 on the transaction.
F-21
<PAGE> 52
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
At October 31, 1998, the Company did not have any outstanding financial
derivative instruments. The carrying amounts of cash and the current portion of
receivables approximate fair value because of the short maturity of these
instruments. Noncurrent notes receivable are presented at fair value (Note 3).
The fair value of the Company's long-term debt, estimated based on the current
borrowing rates available to the Company for bank loans with similar terms and
maturities, approximates the carrying value of these liabilities.
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, 1998 due to
rates being at current market rates.
NOTE 19. ADVERTISING COSTS
Total advertising costs were $486,000 and $437,000 for the years ended
October 31, 1998 and 1997, respectively.
NOTE 20. LITIGATION
In September 1998, a class action lawsuit was filed in the U.S. District
Court for the Western District of North Carolina against the Company and certain
current and former officers and directors of the Company. The suit alleges
violations of certain sections of the Securities and Exchange Act of 1934 by the
Company and the individuals named. The Company intends to vigorously defend the
litigation, and to deny the occurrence and/or materiality of the events alleged
in the complaint. Attorneys for the Company are still in the preliminary
investigation of the circumstances surrounding the litigation and cannot
determine the likelihood of any outcome that would be material to the Company,
or the magnitude of any gain or loss arising from the litigation.
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-22
<PAGE> 53
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES -- (CONTINUED)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused Form 10-KSB to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ M. HUNT BROYHILL Director/Chairman of the Board March 1, 1999
- - -----------------------------------------------------
M. Hunt Broyhill
Director March 1, 1999
- - -----------------------------------------------------
Anne Parrish Corley
/s/ JOHN O. SUMMEY, JR. Director March 1, 1999
- - -----------------------------------------------------
John O. Summey, Jr.
/s/ W. TOM REEDER, III Director March 1, 1999
- - -----------------------------------------------------
W. Tom Reeder, III
/s/ THOMAS W. BUSCH Chief Financial Officer March 1, 1999
- - -----------------------------------------------------
Thomas W. Busch
/s/ RICHARD G. LONG, JR. Director March 1, 1999
- - -----------------------------------------------------
Richard G. Long, Jr.
/s/ PATRICK L. SWISHER Director/President/CEO March 1, 1999
- - -----------------------------------------------------
Patrick L. Swisher
</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 February 19, 1999 with
respect to the consolidated financial statements of Swisher International, Inc.
as of and for the year ended October 31, 1998 and 1997.
/s/ SCHARF PERA & CO.
--------------------------------------
Scharf Pera & Co.
February 19, 1999
Charlotte, North Carolina
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> OCT-31-1998
<CASH> 456,341
<SECURITIES> 0
<RECEIVABLES> 3,097,024
<ALLOWANCES> 596,000
<INVENTORY> 63,978
<CURRENT-ASSETS> 4,703,695
<PP&E> 1,788,021
<DEPRECIATION> 773,832
<TOTAL-ASSETS> 10,775,063
<CURRENT-LIABILITIES> 5,929,294
<BONDS> 0
0
0
<COMMON> 22,083
<OTHER-SE> 4,728,395
<TOTAL-LIABILITY-AND-EQUITY> 10,775,063
<SALES> 6,718,955
<TOTAL-REVENUES> 14,885,755
<CGS> 5,926,549
<TOTAL-COSTS> 17,642,353
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 361,692
<INCOME-PRETAX> (2,756,598)
<INCOME-TAX> (74,831)
<INCOME-CONTINUING> (2,681,767)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,681,767)
<EPS-PRIMARY> (1.23)
<EPS-DILUTED> (1.23)
</TABLE>
