<PAGE> 1
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ____________ to
____________
Commission file number: 0-21282
SWISHER INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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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 offices) (ZIP Code)
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(704) 364-7707
(Issuer's telephone number)
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 [X]
The registrant's losses for the fiscal year ended October 31, 1999 were
($397,391).
The aggregate market value of the 1,634,438 shares of Common Stock held by
non-affiliates was $2,043,047 as of October 31, 1999. 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, 1999, 2,208,271 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Proxy.
See Part III hereof with reference to incorporation by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A
under the Exchange Act.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
<PAGE> 2
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 126 franchises and 14 master franchises
included within the Company's Hygiene, Swisher Maids, and Swisher Pest Control
divisions.
BUSINESS OF ISSUER
The Company's Hygiene division offers services and products to a broad
spectrum of businesses in 40 states and Canada, through approximately 109
franchises, including one Company-owned franchise in Florida and 13
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, a chemical rack
system, and drain line cleaners. The Company is an approved vendor for such
national accounts as Burger King, Wendy's, AMF, 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 6 home-cleaning franchises including a corporate-owned
home-cleaning operation based in Charlotte, North Carolina. Subsequent to year
end, in December, 1999, the Company sold its Company-owned operation 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 October, 1999,
the Company sold certain assets and all national and international franchise
agreements of Surface Doctor, a provider of bath and kitchen restoration
services, to Surface Doctor, LLC, a Colorado limited liability company.
At October 31, 1999, the Company had one separate pest control
franchisee located in North Carolina, ten (10) Hygiene franchisees providing, or
with the ability to provide, pest control services, and one international master
licensee providing pest control services.
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 three 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.
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
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, 1999, the Company operates nationally
through approximately 109 Hygiene domestic and Canadian franchisees including
one Company-owned operation. The Company began to offer Hygiene licenses on an
international basis in 1996, and has entered into thirteen international master
license agreements covering the United Kingdom, Ireland, Germany, Austria, the
Netherlands, the Caribbean, Korea, Hong Kong/Macau/China, Australia/New Zealand,
France, Spain, Denmark, and Sweden/Finland/Norway.
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, 1999, the Company had
109 Hygiene franchises and one Company-owned operation conducting business in
40 states, the District of Columbia and Canada. This compares to 106 and 105
franchises as of October 31, 1998 and 1997, respectively. The lack of growth in
the number of domestic franchises in 1999 reflects the Company's broad
geographic market penetration and the limited number of major domestic unsold
markets.
COMPANY-OWNED HYGIENE OPERATIONS
As of October 31, 1999, the Company had a Company-owned hygiene
operation in Florida. A Tulsa, Oklahoma operation was sold in the fourth quarter
of 1998. A West Virginia operation was sold in July, 1999. Company-owned hygiene
revenues for the year ended October 31, 1999 and 1998 were $324,276 and
$2,232,846, respectively.
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
HYGIENE OPERATIONS (CONTINUED)
INTERNATIONAL HYGIENE LICENSE AGREEMENTS
During 1996 the Company implemented an international Hygiene marketing
program. As of October 31, 1999 the Company has entered into Master License
Agreements covering the United Kingdom, Ireland, Germany, Austria, the
Netherlands, the Caribbean, Korea, Hong Kong/Macau/China, Australia/New Zealand,
France, Spain, Denmark, and Sweden/Finland/Norway.
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.
The licensee is required to pay an initial license fee, which has
ranged from approximately $65,000 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
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 2000. 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.
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 1998, the Company
sold Hygiene Master Licenses for the Netherlands, Germany and Austria, and
subsequently sold France, Spain, Denmark, and Sweden/Finland/Norway in 1999.
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, 1999, 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. Subsequent to year-end, in December, 1999, the Company sold its
Company owned Maids operation in Charlotte, North Carolina.
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
SWISHER MAIDS OPERATIONS (CONTINUED)
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.
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, 1999, 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.
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, 1999 and 1998 were $296,215 and $348,000, respectively. Subsequent to
year-end, in December, 1999, the Company sold its Company owned Maids operation
in Charlotte, North Carolina.
SURFACE DOCTOR OPERATIONS
SURFACE DOCTOR SERVICES
On October 1, 1999, the Company sold the Surface Doctor franchise
operations to Surface Doctor, LLC, a Colorado limited liability company. The
purchased assets consisted of all of Seller's rights under Surface Doctor
franchise agreements and all trademarks, and service marks, inventories and
equipment relating to the Surface Doctor operations. The Company retained its
Surface Doctor accounts and notes receivable.
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.
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
SURFACE DOCTOR OPERATIONS (CONTINUED)
SURFACE DOCTOR REVENUES
Prior to the Surface Doctor sale, the Company generated 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 was a flat fee, which occasionally was financed on a short-term basis.
Product Sales To Surface Doctor Franchisees - A Surface Doctor
franchise agreement required franchisees to purchase Surface Doctor products
from approved vendors, which allowed the Company to maintain the quality and
integrity of the products delivered by franchisees to the retail business
customer. During 1999, the franchisees ordered products directly from the
manufacturers, and the Company received a percentage of these sales in the form
of product commissions.
Royalties And Marketing Fees - Pursuant to the Company's franchise
agreement, the Company received royalties and marketing fees based on the
franchisees' gross revenues. The majority of franchisees as of October 31, 1999
were governed by the prior Surface Doctor franchise agreement, which required
fixed monthly payments.
PEST CONTROL
The Company initially started a Pest Control division with the intent to develop
a franchise system primarily through the addition of independently owned
franchise operations. During 1999, the Company began transitioning to provide
Pest Control services through its Hygiene franchise system. As of October 31,
1999, there was one independent Pest Control franchise and 10 Hygiene
franchisees who were providing, or had the ability to provide, pest control
services.
PROPRIETARY RIGHTS
The "SWISHER," "Swisher Maids," and "S" design 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, both domestically and internationally. 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, 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. Pest Control competitors consist of both national
organizations and individually-owned local operations.
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
PEST CONTROL (CONTINUED)
The success of the Company depends in great part on the operating
performance of its Hygiene, Swisher Maids, 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 and Swisher Maids industries are quality and timeliness of services,
price, convenience and the mix of services offered. Management believes that
Hygiene franchises compete effectively on the basis of price, convenience and
quality and timeliness of services. After year-end, in December, 1999, the
Company sold its Company-owned Charlotte, North Carolina Swisher Maids
franchise.
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.
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, 1999, 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.
REGULATION
The Company is also subject to the Fair Labor Standards Act, which
governs such matters as minimum wages, overtime and other working conditions. A
significant number of the personnel employed by the Company are paid at rates
related to the federal minimum wage and, accordingly, increases in the minimum
wage will increase the Company's labor costs.
Federal and state environmental regulations have not had a material
adverse effect on the Company's operations.
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
PEST CONTROL (CONTINUED)
EMPLOYEES
The Company employed approximately 97 persons at October 31, 1999.
Approximately 77 persons are employed in the Company's franchise operations, and
approximately 20 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
Brian Wilcox, et al. v. Swisher International, Inc., Patrick Swisher, Chris
Lazenby, Garnett Mucha, Tom Reeder and Charles Cendrowski, United States
District Court of the Western District of North Carolina, Case No. 3:98CV403-MU.
On September 10, 1998, Brian Wilcox filed a putative class action suit
on behalf of the stockholders of Swisher International, Inc. On November 10,
1998, a group composed of Brian Wilcox and 18 other stockholders ("Plaintiffs")
filed a motion to be appointed as lead plaintiff in the case. Plaintiffs alleged
that Swisher International violated federal securities law by making false
statements that were reflected in the company's 1996 and 1997 financial reports
and related press releases, and that had the effect of causing Plaintiffs to
purchase company stock at artificially inflated prices. Plaintiffs alleged that
the individual defendants were liable for the violations as "persons
controlling" Swisher International. Plaintiffs sought damages of an unspecified
amount (later alleged by Plaintiffs to be as much as $9,986,400), plus interest,
attorneys' fees and costs.
On June 3, 1999, Swisher International, Patrick Swisher and Tom Reeder
(the "Settling Defendants"), denying any liability, agreed to settle the case as
to them for $742,100. The Settling Defendants also agreed to cooperate with
Plaintiffs in their lawsuit against the remaining defendants, to share with
Plaintiffs any future recovery against McGladrey & Pullen, LLP in a related
lawsuit against that accounting firm (25% of any amount up to $333,333 and 50%
of any remaining amount), and to limit recovery for expenses to $250,000 in the
related lawsuit.
On October 18, 1999, a final order was entered approving a complete
settlement of the class action suit.
The Securities and Exchange Commission is conducting a formal
investigation regarding circumstances surrounding the withdrawal of the
Company's former auditors. The effects of this investigation, if any, is
indeterminable.
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.
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, 1999.
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and public warrants were quoted on the
NASDAQ National Market under the 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 1998
and the first and second quarters of 1999. The prices for the third and fourth
quarters of 1999, set forth below reflect inter-dealer quotations, without
retail markups, markdowns or commissions, and do not necessarily represent
actual transactions.
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HIGH LOW
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1999 FISCAL YEAR
First quarter...................... 1.750 .120
Second quarter..................... 2.250 .500
Third quarter...................... 1.500 .625
Fourth quarter..................... 1.500 1.000
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
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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, 1999, there were approximately 834 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.
On October 4, 1999, the Board of Directors authorized the purchase of
up to 100,000 shares of the Company's Common Stock. As of October 31, 1999,
10,000 shares have been purchased.
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SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(CONTINUED)
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 Board of Directors deems
relevant. The loan agreement between the Company and its bank prohibits the
payment of dividends without the bank's prior written consent.
RECENT SALES OF UNREGISTERED SECURITIES
The Research Works, Inc. exercised a warrant to purchase 40,000 Swisher
restricted shares of common stock on October 27, 1997. The warrants were
exercised at a rate of $2.875 per share or a total of $115,000. A one-year
holding period 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 three principal business divisions: Hygiene,
Swisher Maids, 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). These divisions
also conduct certain Company-owned operations and all, 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, 1999, the
Company maintains one Company-owned Hygiene operations servicing portions of
Florida.
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 franchises. In July 1996, the Company acquired Surface Doctor,
which then had 92 domestic and 9 Canadian franchises in operation. In September
1997, the Company commenced operations of Swisher Pest Control. As part of its
geographic expansion, the Company began offering Hygiene and Surface Doctor
master licenses in certain foreign markets in 1996.
Management's decisions to reposition the Company as a franchisor and to
then focus primarily on its Hygiene franchise system has resulted in substantial
decreases in Company-owned operations, but substantial increases in revenues
from franchise operations. Revenues from franchise operations have increased
consistently from $1,412,000 in fiscal 1991 to $13,699,000 in fiscal year 1999.
One component of franchise revenues is annuity revenues, consisting of product
sales, royalties and marketing fees paid by franchisees, which represented
approximately 88% and 77% of the Company's revenues in fiscal years 1999 and
1998, respectively. The Company's profitability will continue to be largely
dependent upon annuity revenues.
10
<PAGE> 11
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT'D)
During 1999, the Company made significant strides to reduce overhead
expenses and focus on the core Hygiene business. The sale of the Surface Doctor
franchise system, repositioning of Swisher Pest Control primarily through
Hygiene franchisees, and sale of the West Virginia Company-owned operation are a
result of this strategy.
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
1999 and 1998, respectively. From April 1993 to October 1999 the total number of
Swisher Hygiene franchises grew from 46 to 106. Swisher Maids franchises
decreased from 19 in 1995 to 6 in 1999 due to the consolidation of certain
franchise markets. At October 31, 1999, the Company held one Swisher Maids
franchise for sale. However, after year-end, in December, 1999, the Company sold
its Company-owned Charlotte, North Carolina Swisher Maids franchise.
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. As of October 31, 1999, the Company holds one Hygiene franchise 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 $3,256,000 and
$3,944,000 as of October 31, 1999 and 1998, respectively.
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
---------------
1999 1998
---- ----
<S> <C> <C>
REVENUES:
Product sales 49.6% 45.1%
Fees (Service, Royalties, Marketing) 38.0% 32.1%
Initial franchise fees 6.5% 5.7%
Company-owned operations 4.3% 15.1%
Interest income 2.3% 2.0%
Gain on sale of Company-owned hygiene operations (1.8%) (.4)%
Other income 1.1% .4%
----- -----
Total Revenues 100.0% 100.0%
EXPENSES:
Selling, general and administrative expenses 53.1% 50.9%
Cost of product sales 42.3% 33.6%
Company-owned operations 3.0% 13.5%
Interest expense 1.6% 2.0%
----- -----
Total Expenses 100.0% 100.0%
</TABLE>
11
<PAGE> 12
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED OCTOBER 31, 1999 ("1999 FISCAL YEAR") AND OCTOBER 31,
1998 ("1998 FISCAL YEAR").
Total revenues decreased by approximately $314,000 (2%) to $14,571,000
in the 1999 fiscal year from $14,886,000 in the 1998 fiscal year. The decrease
in revenues was due primarily to a decrease of $1,613,000 in revenue from
Company-owned operations. Annuity revenues (consisting of product sales, service
fees, and royalties and marketing fees) increased approximately (11%) $1,254,000
to $12,751,000 from $11,497,000 in the prior year, partially offsetting
decreases.
Revenue from Company-owned operations decreased $1,613,000 to $620,000
in fiscal 1999 from $2,233,000 in fiscal 1998. At the end of fiscal 1998, the
Company sold its Pest Control operation in Monroe, NC and a Hygiene operation in
Tulsa, Oklahoma. The sales of these two operations resulted in revenue from
Company-owned operations in 1998, which did not occur in 1999.
The 11% increase in annuity revenues to $12,751,000 reflects the
continued growth of the Hygiene franchisees in both products and services.
Franchise sales revenue of $968,000 increased $115,000 from the prior
year amount of $853,000. Included in franchise sales are international Master
License agreements for France, Denmark, the Netherlands, and
Norway/Sweden/Finland.
As part of its strategic plan to focus on its Hygiene franchise system,
in October, 1999 the Company sold all national and international franchise
agreements and certain other assets of the Surface Doctor franchise system. The
Company recorded a loss of approximately $254,000 on the transaction.
As a result of the Company's efforts to streamline operations, total
expenses decreased approximately $2,687,000 to $14,955,000 in 1999 from
$17,642,000 in 1998. Costs of product sold increased $1,290,000 corresponding to
the increase in product sales, while costs related to Company-owned operations
decreased approximately $1,932,000 consistent with the decrease in revenue
following the sale of certain operations in 1998.
Selling, general and administrative expenses decreased $1,046,000 to
$7,943,000 from $8,978,000 in 1998 reflecting the Company's efforts to reduce
overhead. The decrease included approximately $200,000 paid during 1999 towards
the settlement of the class action lawsuit and legal and professional fees at
levels above what would be considered normal for operations.
A loss before taxes of ($397,000) in 1999 was an improvement of
$2,285,000 from the prior year loss of ($2,757,000). The Company recognized
no income tax benefit or expense in 1999 resulting in a net loss of ($397,000)
compared to a tax benefit of $75,000 in 1998 resulting in a net loss of
($2,682,000) for the 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. In June, 1999, the
Company entered into a three (3) year agreement for a line of credit.
Substantially all of the Company's assets are being used as collateral for the
line of credit. The Company believes that the cash flow anticipated from its
future operations along with borrowings under its line of credit 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.
12
<PAGE> 13
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
During the 1999 fiscal year, net cash used by operations was
approximately ($562,000) primarily due to the net loss of ($397,000) reported
for the year. The Company made certain reductions to its overhead structure
which helped improve operating performance and cash usage in 1999.
Working capital at year-end October 31, 1999, including the Company's
revolving line of credit, was ($851,000) compared to ($1,223,000). The primary
change was the result of a decrease in the line of credit balance. At October
31, 1999, the line of credit balance was $1,105,000 compared to $1,706,000 at
year-end October 31, 1998.
At October 31, 1999, other assets consisted principally of notes
receivable in the amount of $3,688,000. Notes receivable are primarily comprised
of notes executed by franchisees for payment of initial franchise fees which are
due beyond the ensuing year.
The Company's total current liabilities were $4,738,000 at October 31,
1999, a decrease of $1,191,000 over total current liabilities of $5,929,000 at
October 31, 1998. Long-term debt was $199,034 at October 31, 1999, a decrease of
$184,966 over long-term debt of $384,000 at October 31, 1998.
The Company's material commitments at October 31, 1999 consisted
primarily of office facility, equipment and vehicle leases in varying amounts
through 2002.
In September 1998, Messrs. Swisher and Reeder made advances to the
Company totaling $340,000. As of October 31, 1999, the outstanding amount of
those advances was $367,435.
INFLATION
The Company does not believe that inflation will have a material impact
on the Company's future operations.
ADDITIONAL FACTS TO CONSIDER
Forward-Looking Statements. This report contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act and are subject to the safe harbors
created thereby. These forward-looking statements include the plans and
objectives of management for future operations, including plans and objectives
relating to (i) the continued expansion of the Company's Hygiene and Pest
Control franchise programs, (ii) the introduction of new products to be sold to
franchisees, (iii) the continued successful operation of franchised businesses
by Hygiene, 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,
and Pest Control 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.
13
<PAGE> 14
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
ADDITIONAL FACTS TO CONSIDER (CONTINUED)
Safe Harbor Statement. Cautionary Safe Harbor Disclosure for Forward
Looking Statements under the Private Securities Litigation Reform Act of 1995:
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 that are subject to meaningful risks and uncertainties, including,
but not limited to the following additional facts to consider.
Dependence On Performance Of Franchisees. The Company derived
approximately 88% and 77% of its revenues in the 1999 and 1998 fiscal years,
respectively, from annuity revenues. Annuity revenues consist of product sales,
royalties and marketing fees paid by franchisees. Royalties and marketing fees
are generally calculated based on a percentage of gross revenues or sales
generated by the franchisee. Although franchisees generate a portion of their
gross revenues from national accounts secured by the Company, the generation of
a majority of gross revenues is directly dependent upon the franchisee's own
marketing efforts. While the Company's franchise support and marketing services
are intended to maximize the marketing results obtained by the franchisee, there
is no assurance that marketing undertaken by franchisees will be successful or
result in any increase in gross revenues. The Company's profitability will be
largely dependent upon revenues from product sales to franchisees and revenues
from royalties, marketing fees and service fees for the foreseeable future.
Reliance On Franchise Sales. During the fiscal years ended October 31,
1999 and 1998, initial franchise fees charged to franchisees accounted for
approximately 7% and 6% 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 6 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 franchises. However, there can
be no assurance the Company will continue to sell franchises at historical
levels. A decline in franchise sales may have an adverse impact on the Company's
operations.
Risk Of Financing Franchise Fees. The Company may finance a portion of
the initial franchise fee payable in connection with the purchase of a
franchise. The Company attempts to qualify each franchisee to whom financing may
be provided, and generally receives a security interest in the franchise rights,
equipment, accounts receivable and inventory of the franchise to secure the
amount financed. For so long as the Company continues to finance new franchise
sales, the Company will be exposed to a risk of defaults or delinquencies in
payments. A significant rate of defaults or delinquencies on notes receivable
would likely have a material adverse effect on the Company's operating results
and financial condition.
Risk Of Franchise Termination. Should a franchisee fail to comply with
the terms of its franchise agreement, the Company would generally 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, 1999, the Company owns and operates a total of
two franchises acquired from a 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. Subsequent to year-end, the Company sold
one of the franchises, leaving only one Hygiene franchise remaining in Florida.
ADDITIONAL FACTS TO CONSIDER (CONTINUED)
14
<PAGE> 15
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
Future Capital Requirements. At October 31, 1999, the Company had
current assets of approximately $3.9 million and current liabilities of
approximately $4.7 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, 1999, 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 are 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. The Surface Doctor franchise system
purchased in July, 1996, was sold in October, 1999. Acquisitions typically
require investment of operational and financial resources, integration of
dissimilar operations, assimilation of new employees, diversion of management
time and resources, increases in administrative costs, and additional costs
associated with debt or equity financing. There can be no assurance that any
future acquisition by the Company will not have an adverse effect on the
Company's results of operations or result in dilution to the existing
shareholders.
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 Small Cap 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 materially adversely affected the
trading market for the Common Stock and/or the Public Warrants. Since that date
the Company's securities have not been listed or quoted on any exchange or
quotation system. The Company's securities, however, are being traded on certain
proprietary trading systems operated by various broker-dealers.
15
<PAGE> 16
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
ADDITIONAL FACTS TO CONSIDER (CONTINUED)
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. The initial listing criteria for the NASDAQ National Market,
insofar as they would be applicable to the Company, require, generally, net
tangible assets of $6,000,000, pretax income (in the latest fiscal year or 2 of
the last 3 fiscal years) of $1,000,000, a public float of 1,100,000 shares, a
market value of the public float of not less than $8,000,000, and a minimum bid
price of $5.00. Once a company is accepted for relisting on the NASDAQ National
Market, it will be required to maintain, among other requirements, net tangible
assets of $4,000,000, a public float of 750,000 shares, a market value of the
public float of not less than $5,000,000, and a minimum bid price of $1.00. At
the date of the filing of this report, the Company would not qualify for initial
listing on the NASDAQ National Market.
The Company is not certain when it will be able to meet the initial
listing requirements for the NASDAQ National Market. Although the Company is
considering possible alternatives for meeting the asset requirements, there is
no assurance that the Company will be successful in meeting the requirements for
relisting on the NASDAQ National Market.
If the Company cannot meet the criteria for initial listing on the
NASDAQ National Market, then the Company may decide to apply for listing on the
NASDAQ SmallCap Market or on another exchange. The initial listing criteria for
the NASDAQ SmallCap Market, insofar as they would be applicable to the Company,
require, generally, net tangible assets of $4,000,000, a public float of
1,000,000 shares, a market value of the public float of not less than
$5,000,000, and a minimum bid price of $4.00. Once a company is accepted for
listing on the NASDAQ SmallCap Market, it will be required to maintain, among
other requirements, net tangible assets of $2,000,000, a public float of 500,000
shares, a market value of the public float of not less than $1,000,000, and a
minimum bid price of $1.00.
Penny Stock Regulation. If the Company's Common Stock has a trading
price less than $5.00 per share, trading in the Common Stock will also subject
to the requirements of Rule 15g-9 promulgated under the Exchange Act. Under such
rule, broker/dealers who recommend such low-priced securities to persons other
than established customers and accredited investors must satisfy special sales
practice requirements, including a requirement that they make an individualized
written suitability determination for the purchaser and receive the purchaser's
written consent prior to the transaction. The Securities Enforcement Remedies
and Penny Stock Reform Act of 1990 also require additional disclosure in
connection with any trades involving a stock defined as a "penny stock"
(generally, according to recent regulations adopted by the Securities and
Exchange Commission (the "Commission"), any non-NASDAQ equity security that has
a market price of less than $5.00 per share, subject to certain exceptions),
including the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith.
Such requirements could severely limit the market liquidity of the Common Stock
and the ability of investors to sell their securities in the secondary market.
Possible Adverse Impact On Market Of Warrant Exercise. In the event of
the exercise of a substantial number of Public Warrants within a reasonably
short period of time after the right to exercise commences, the resulting
increase in the amount of Common Stock of the Company in the trading market
could substantially affect the market price of the Common Stock.
16
<PAGE> 17
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
ADDITIONAL FACTS TO CONSIDER (CONTINUED)
Limitations On Liability Of Directors And Officers. The Company's Articles of
Incorporation, as amended, include provisions to eliminate, to the full extent
permitted by Nevada General Corporation Law as in effect from time to time, the
personal liability of directors of the Company for damages arising from a breach
of their fiduciary duties as directors. The Company's Articles of Incorporation
also include provisions to the effect that the Company shall indemnify any
director or officer to the maximum extent that such indemnification is permitted
by the law of the State of Nevada, as it may from time to time be in effect, or
by public policy. However, insofar as indemnification for liabilities arising
under the Securities Act of 1933, as amended (the "Securities Act"), may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing, the Company has been informed that in the opinion of the
Securities and Exchange Commission (the "SEC"), such indemnification is against
public policy as expressed in the Securities Act, and is, therefore,
unenforceable.
Possible Dilutive Effect Of Options And Warrants And Adverse Effect On
Market Price. No assurance can be given as to the effect, if any, that future
sales of Common Stock, or the availability of shares of Common Stock for future
sales, will have on the market price of the Common Stock from time to time.
Sales of substantial amounts of Common Stock (including shares issued upon the
exercise of warrants or stock options), or the possibility that such sales could
occur, could adversely affect the market price of the Common Stock and could
also impair the Company's ability to raise capital through an offering of its
equity securities in the future. As of October 31, 1999, there were 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
were 760,000 Public Warrants, exercisable for $7.80 per each two Public
Warrants. These warrants have been extended by the Company until June 30, 2000.
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
authorizes 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 shareholder vote, including voting, dividend or liquidation rights that
could be greater than or senior to the rights of holders of Common Stock. The
rights of holders of Common Stock will be subject to, and may be materially
adversely affected by the rights of the holders of any preferred stock that may
be issued in the future. The issuance of preferred stock could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company's articles of
incorporation, as amended, also do not opt out of the "control shares" statute
set forth in Sections 78.378 through 78.3793 of the General Corporation Law of
Nevada which limits the acquisition of a "controlling interest" in the
corporation. This statute is designed to prevent an "acquiring person" from
gaining voting control of the corporation without the approval of the
corporation's stockholders. It provides that an acquiring person obtains only
such voting rights in the control shares as are conferred by a resolution of a
200 or more stockholders, at least 100 of whom are stockholders of record and
residents of Nevada. The Company is also subject to the provisions of Sections
78.411 through 78.444 of the General Corporation Law of Nevada. In general, this
statute prohibits a publicly held Nevada corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person becomes an
interested stockholder, unless the business combination is approved in a
prescribed manner. An "interested stockholder" is a person who, directly or
indirectly, owns (or within the prior three years did own) 10% or more of the
corporation's voting stock. The Board's authority to issue preferred stock and
the provisions of Sections 78.378 through 78.3793 and Sections 78.411 through
78.444 could impede any merger, consolidation, takeover or other business
combination involving the Company or discourage a potential acquirer from making
a tender offer or otherwise attempting to obtain control of the Company, and any
such impediment could serve to entrench management and may not be in the best
interests of the Company's shareholders.
17
<PAGE> 18
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
ADDITIONAL FACTS TO CONSIDER (CONTINUED)
Year 2000 Compliance. In response to the Year 2000 issue, the Company \
implemented a company-wide Year 2000 program designed to identify, assess and
address significant Year 2000 issues. These included the Company's key business
operations, services, business applications, and information technology systems
and facilities. Additional tasking included identification of the Company's
customers, major vendors and other third parties with whom the Company had
material relationships that might have had Year 2000 issues with which to
contend.
Subsequent to year-end, the Company has not yet identified any
significant adverse effects from a year 2000 computer issue, from its systems,
suppliers, or other business partners.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements are included on pages
F-1 to F-47.
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
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.
18
<PAGE> 19
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE (CONT'D)
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.
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.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
Incorporated by reference from the Registrant's definitive proxy
statement to be filed pursuant to Regulation 14A.
ITEM 10. EXECUTIVE COMPENSATION.
Incorporated by reference from the Registrant's definitive proxy
statement to be filed pursuant to Regulation 14A.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference from the Registrant's definitive proxy
statement to be filed pursuant to Regulation 14A.
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.
19
<PAGE> 20
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
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 aggregating $73,000
and $57,000, respectively, during the fiscal years ended October 31, 1999 and
1998.
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. As part of the lease agreement, Mr. Swisher was required to
provide a personal guarantee for the term of the lease. For his personal
guarantee, Mr. Swisher was granted 25,000 stock options, at the then current
market price. During the fiscal year ended October 31, 1998, the Company made
lease payments of $104,000, to businesses in which Mr. Swisher had a beneficial
interest.
During 1999 and 1998, 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 $25,000.
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, or 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, 1999, the balance remaining outstanding on the
short-term note payable was $71,000. 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. The amounts were
subsequently repaid in full with no amount outstanding as of October 31, 1999.
In fiscal year 1999, Mr. Swisher, as manager of Lone Star Hygiene, LLC,
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.
20
<PAGE> 21
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
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 to a note receivable amortized on a straight-line basis over ten years.
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.
In February 1999, the Company entered into a 3 year agreement with the
Houston Hygiene Franchise to provide training and product research and
development services, at a rate of $24,000 per quarter. For the fiscal
year-ended October 31, 1999, the Company paid $72,000 for these services.
In fiscal year 1999, the Company received a pre-payment of
approximately $165,000 towards the outstanding note receivable related to the
purchase of the Houston Hygiene franchise.
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 to a note amortized on a straight-line basis over ten
years. The interest rate remained at 11.0%. Additionally, the Charlotte Hygiene
franchise assumed a $67,817 note receivable to the Company, as part of the
purchase of an existing franchise operation. The terms of the note remained the
same with 95 monthly installments and having an interest rate 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.
During fiscal 1999, the Company paid a CPA Consultant the sum of
$98,000 pursuant to a Consulting Agreement. Under the terms of the Consulting
Agreement, the Company also provided office space with a rental value of $6,300
to the Consultant. The Consultant previously served as a Member of the Board of
Directors and resigned effective December 16, 1998.
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, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity for
the years ended October 31, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the years
ended October 31, 1999 and 1998 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
-------
<S> <C>
*3.1.1 Articles of Incorporation, as amended, of the Company as filed
on October 10, 1986 with the Secretary of State of the State
of Nevada.
*3.1.2 Certificate of Amendment of Articles of Incorporation of the
Company as filed on January 19, 1993, with the Secretary of
State of the State of Nevada.
#3.1.3 Certificate of Designations of Series A Junior Participating
Preferred Stock.
*3.2.1 Amended and Restated By-Laws of the Company.
*4.1.1 Form of specimen certificate for Common Stock of the Company.
</TABLE>
21
<PAGE> 22
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
<TABLE>
<CAPTION>
EXHIBIT
-------
<S> <C>
*4.1.2 Form of specimen certificate for Warrants of the Company.
**4.1.3 Form of Warrant Agreement, dated April 12, 1993, between
American Securities Transfer & Trust Co. and the Company.
**4.2 Form of specimen certificate for Underwriter's Warrant of the
Company.
#4.3 Form of Rights Agreement and Form of Rights Certificate.
ooo10.1.1 Asset Purchase Agreement dated September 1, 1997, by and
among Carolina Termite and Pest Control, Inc., et al. and
Swisher Pest Control Group.
*10.1.2 Amended Employment Agreement, effective January 1, 1993,
between Patrick L. Swisher and the Company.
ooo10.1.3 Non Competition Agreement dated September 1, 1997, between
Robert M. McCain, Jr. and Swisher Pest Control Group.
*10.2.1 1992 Incentive Stock Option Plan, effective April 29, 1992,
authorizing 58,334 shares of Common Stock for issuance
pursuant to the Plan.
*10.2.2 1992 Non-Qualified Stock Option Plan, effective April 29,
1992, authorizing 133,333 shares of Common Stock for issuance
pursuant to the Plan.
***10.2.3 Amendment to 1992 Incentive Stock Option Plan, effective
April 12, 1994, authorizing 250,000 shares of Common Stock for
issuance pursuant to the Plan.
***10.2.4 Amendment to 1992 Non-Qualified Stock Option Plan, effective
April 12, 1994, authorizing 150,000 shares of Common Stock for
issuance pursuant to the Plan.
10.3 Franchise Agreements by and between the Company and its
franchisees, effective dates set forth below:
* (i) Form of Franchise Agreement by and between the Company
and certain franchisees.
* (ii) Form of Franchise Agreement by and between the Company
and certain franchisees.
* (iii) Form of Franchise Agreement by and between the Company
and certain franchisees.
* (iv) Franchise Agreement, dated August 20, 1990, by and
between the Company and J/S Enterprises, Inc. for
Louisville territory, subsequently transferred to
Louisville Restroom Sanitation Services, Inc. on
August 31, 1990.
* (v) Franchise Agreement, dated October 31, 1990, by and
between the Company and Rice & Rice Corporation for
Richmond territory.
** (vi) Form of Franchise Agreement, dated October 31, 1990, by
and between the Company and maid service franchisees.
oo (v) Form of Master License Agreement relating to
international licenses by and between the Company's
wholly-owned subsidiary, F.M.S., Inc., and certain
licensees.
</TABLE>
22
<PAGE> 23
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
<TABLE>
<CAPTION>
EXHIBIT
-------
<S> <C>
*10.4 Lease, dated April 20, 1992, by and between B.S. Associates
Partnership and the Company.
*10.5 Lease Agreement, dated August 6, 1992, by and between Economy
Air, Inc. and the Company.
*10.6 Agreement, dated February 11, 1993, by and among Locke
Burgess, Ross Burgess, Lynn Smith and Austin-San Antonio
Hygiene Services, Inc, the Company and Swisher Hygiene
Franchise Corp.
*10.7 Promissory Note and Guaranty, dated December 17, 1992, by and
between Wachovia Bank of North Carolina, N.A. and the Company
(terminated).
oo10.7.1 Revolving Note and Loan Agreement, dated September 19, 1996,
by and between SouthTrust Bank of North Carolina and the
Company.
*10.8 Letter of Intent, dated February 11, 1993, by and between
Consolidated Products, Inc. and the Company.
*10.9.1 Asset Purchase and Sale Agreement, dated March 12, 1993, by
and between Consolidated Products, Inc. and Swisher Products,
Inc.
+10.9.2 Asset Purchase Agreement effective July 1, 1996, relating to
the sale of Surface Doctor by Professional Carpet Systems,
Inc. and Old Dixie Supply Company to the Company.
*10.10.1 Promissory Note, dated April 1, 1993, by and between Branch
Banking and Trust Company and the Company.
*10.10.2 Loan Agreement, dated April 1, 1993, by and between Branch
Banking and Trust Company and the Company.
o10.10.3 Loan Agreement, dated April 21, 1995, by and between First
Union National Bank of North Carolina and the Company
(terminated).
o10.10.4 Loan Agreement, dated May 18, 1995, by and between Stephens
Diversified Leasing, Inc., d/b/a Stephens Franchise Finance,
and the Company.
ooo21.1 Updated List of Subsidiaries of the Company
-23.1 Consent of Scharf Pera & Co.
27. Financial Data Schedule.
ooo99.1 Letter from McGladrey & Pullen, LLP.
</TABLE>
- -------------
- - Filed herewith.
ooo Previously filed.
* Previously filed and incorporated by reference from the Company's
Registration Statement on Form S-1 (SEC File No. 33-58320), filed
February 18, 1993, as subsequently amended and declared effective April
21, 1993.
23
<PAGE> 24
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
** 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.
o 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).
oo 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).
(c) CURRENT REPORTS ON FORM 8-K.
The Company filed current reports during the 1999 Fiscal Year as
follows:
1. A report on Form 8-K was filed July 13, 1999, relating to the
preliminary order which was entered approving a complete
settlement of the class action suit filed against the Company
in September of 1998 in the United States District Court,
Western District of North Carolina.
2. A report on Form 8-K was filed July 13, 1999, relating to the
extension of 760,000 Public Warrants of Swisher International,
Inc. until June 30, 2000, which had been scheduled to expire
effective June 30, 1999. The warrants may be exercised any
time prior to 5:00 P.M. Eastern Time on June 30, 2000, to
purchase one share of Common Stock for $7.80 per each two
Public Warrants.
3. A report on Form 8-K was filed July 21, 1999, relating to the
Company entering into a $1.75 million revolving line of credit
agreement with Capital Factors, Inc., replacing the Company's
then existing $1.75 million revolving line of credit with
another lender.
24
<PAGE> 25
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
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, 1999, 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, 1999, and the results of
their operations and their cash flows for each of the two years then ended, in
conformity with generally accepted accounting principles.
/s/ Scharf Pera & Co.
---------------------
Charlotte, North Carolina
January 28, 2000
F-25
<PAGE> 26
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 31,
1999
-------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents (Note 2) $ 128,742
Accounts receivable, franchisees, net of allowance
for doubtful accounts of $413,083 2,248,668
Other receivables 215,622
Current portion of notes receivable, franchisees
(Notes 3 and 8) 603,706
Current portion of notes receivable - related
parties (Note 4) 35,000
Current portion of notes receivable - other (Note 6) 7,020
Inventories 25,070
Prepaid expenses 32,312
Income tax refunds receivable (Note 13) 627,437
-------------
TOTAL CURRENT ASSETS $3,923,577
-------------
Property and equipment (Note 7)
Property, furniture and equipment 1,741,832
Less: accumulated depreciation (999,476)
-------------
TOTAL PROPERTY AND EQUIPMENT 742,356
-------------
Other assets
Notes receivable - related parties, (Note 4) 331,996
Notes receivable, franchisees (Notes 3 and 8) 2,651,808
Notes receivable - related parties for stock (Note 5) 435,891
Notes receivable - other (Note 6) 260,236
Intangible assets, net of accumulated amortization
of $8,863 31,025
Assets held for sale (Note 17) 217,811
Cash surrender value of officers' life insurance 25,199
Deposits and other assets 133,981
-------------
TOTAL OTHER ASSETS 4,087,947
-------------
TOTAL ASSETS $8,753,880
=============
</TABLE>
See Notes to Consolidated Financial Statements.
F-26
<PAGE> 27
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 31,
1999
-------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft $ 201,521
Line of credit, (Note 8) 1,104,618
Note payable - related parties, (Note 9) 367,435
Current portion of long-term debt, (Note 10) 198,942
Accounts payable 2,456,742
Accrued expenses 410,768
----------
TOTAL CURRENT LIABILITIES 4,740,026
Long-term debt, less current portion, (Note 10) 199,034
Deferred revenues 316,913
Commitments and contingencies, (Notes 14 and 21) --
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 (1,237,103)
Treasury Stock, at cost (10,000 shares) (15,468)
-----------
TOTAL STOCKHOLDERS' EQUITY 3,497,907
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,753,880
==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-27
<PAGE> 28
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
OCTOBER 31,
1999 1998
------------ ------------
<S> <C> <C>
REVENUES
Annuity revenues
Product sales $ 7,204,873 $ 6,718,955
Service fees 2,254,349 2,088,301
Royalties 3,165,123 2,609,794
Marketing fees 106,420 79,808
Product Commissions 20,634 --
------------ ------------
TOTAL ANNUITY REVENUES 12,751,399 11,496,858
------------ ------------
Initial franchise sales (Notes 3 and 15) 947,182 853,387
Revenue from Company-owned operations 620,491 2,232,846
Interest income 332,399 304,644
Loss on sale of Company-owned operations (255,554) (56,187)
Other revenue 161,233 54,207
------------ ------------
1,805,751 3,388,897
TOTAL REVENUES 14,557,150 $ 14,885,755
------------ ------------
EXPENSES
Selling, general and administrative 7,942,865 8,977,524
Costs of product sales to franchises 6,330,160 5,926,549
Costs related to Company-owned operations 444,097 2,376,588
Interest 237,419 361,692
------------ ------------
TOTAL EXPENSES 14,954,541 17,642,353
------------ ------------
LOSS BEFORE INCOME TAXES $ (397,391) $ (2,756,598)
Income tax benefit (Note 13) -- (74,831)
------------ ------------
NET LOSS $ (397,391) $ (2,681,767)
============ ============
Loss
Basic $ (0.18) $ (1.23)
Diluted $ (0.18) $ (1.23)
Weighted-average number of common shares and
common share equivalents outstanding:
Basic 2,208,189 2,181,849
Diluted 2,208,189 2,181,849
</TABLE>
See Notes to Consolidated Financial Statements.
F-28
<PAGE> 29
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
--------------------- PAID-IN EARNINGS TREASURY TREASURY
SHARES AMOUNTS CAPITAL (DEFICIT) SHARES STOCK TOTAL
--------- -------- ----------- ----------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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 13) -- -- 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 11) -- -- (73,500) -- (73,500)
Grant of stock options (Note 11) -- -- 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
Purchase of treasury stock 10,000 (15,468) (15,468)
Net loss (397,391) (397,391)
--------- -------- ----------- ----------- ------- -------- -----------
BALANCE, OCTOBER 31, 1999 2,208,271 $ 22,083 $ 4,728,395 $(1,237,103) 10,000 $(15,468) $ 3,497,907
========= ======== =========== =========== ======= ======== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-29
<PAGE> 30
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(397,391) $(2,681,767)
Adjustments to reconcile net (loss)/income to net
cash used in operating activities:
Depreciation 287,659 276,604
Amortization 49,470 236,966
Compensation for guarantee of leases -- 13,750
Deferred income taxes -- (97,000)
Loss on disposal of Company-owned operations 2,012 56,396
Loss on disposal of Surface Doctor 253,542 --
Loss on sale of property -- 40,856
Franchise fee revenue financed through notes receivable (333,145) (415,968)
Provision for doubtful notes receivable (91,862) 256,202
Provision for doubtful accounts receivable (22,353) 505,951
Change in working capital components:
Decrease/(increase) in accounts receivable 147,924 (462,386)
Decrease in inventories 31,084 24,808
Decrease in prepaid expenses 22,815 129,128
Decrease in income tax receivable 1,047 --
Decrease in deferred franchise costs -- 77,957
Increase in allowance for valuation of
assets held for sale -- 44,534
(Decrease)/increase in accounts payable (141,280) 556,317
Increase in accrued expenses 7,404 180,816
Decrease in income taxes payable -- (357,341)
(Decrease)/increase in deferred revenue (379,408) 367,123
--------- -----------
NET CASH USED IN OPERATING ACTIVITIES (562,482) (1,247,054)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (74,280) (172,604)
Advances to officer -- 50,136
Notes receivable proceeds -- (860,978)
Notes receivable-related parties proceeds (net) (32,007) (3,925)
Notes receivable payments 1,004,630 1,075,936
Cash received on sale of assets held for sale 10,000 180,742
Proceeds from sale of Surface Doctor 479,256 --
Increase/(decrease) in intangible assets and other assets (22,830) 90,477
--------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 1,364,769 359,784
--------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
F-30
<PAGE> 31
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
<TABLE>
<CAPTION>
OCTOBER 31,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (15,467) -
(Decrease)/increased in bank overdraft (296,416) 497,937
(Decrease)/increase in restricted cash 272,989 (15,087)
Net (payments)/advances on line-of-credit and
short-term notes payable (601,380) 324,000
Net payments on notes to related parties 147,435 220,000
Net principal payments on long-term debt obligations (364,058) (619,108)
=========== ===========
Net cash (used in)/provided by financing activities (856,897) 407,742
=========== ===========
Net decrease in cash and cash equivalents (54,610) (479,528)
=========== ===========
Cash and cash equivalents at beginning of year 183,352 662,880
=========== ===========
Cash and cash equivalents at end of year $ 128,742 $ 183,352
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH RECEIVED DURING THE YEAR FOR:
Income tax refunds $ 1,047 --
Interest 332,399 --
CASH PAID DURING THE YEAR FOR:
Interest $ 237,419 $ 364,888
Income taxes -- 331,911
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Notes receivable, included in deferred revenue $ 128,893 $ 367,123
Transfer of accounts receivable to assets held for sale -- 81,000
Notes receivable on sale of franchises 341,250 818,175
Accounts receivable settled with cancellation of options -- 73,500
Accounts receivable rolled into notes receivable 285,427 --
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 SURFACE DOCTOR OPERATIONS:
Sales price:
Cash $ 212,000
Note receivable 267,256
-----------
$ 479,256
===========
Assets disposed of:
Goodwill (net) $ 596,455
Trademarks (net) 79,386
Fixed Assets (net) 48,880
Inventory and other 8,077
-----------
732,798
Loss on sale 253,542
-----------
$ 479,256
===========
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-31
<PAGE> 32
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICES
Nature Of Business: The Company is engaged in the marketing of franchises which
provide hygiene services and products for public restrooms, residential maid
services and residential and commercial pest control services under the service
marks "Swisher" and "Swisher Pest Control" 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, 1998 may have been reclassified from the previously
issued report in order to make the financial statements comparable to the
presentation for October 31, 1999.
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 No. 121 (SFAS 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, 1999 and 1998.
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 approximately $1,132,000 at October 31, 1999.
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. These costs include
development of the franchise document and development of marketing tools for
future use by franchisees.
F-32
<PAGE> 33
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICES (CONTINUED)
The Company typically finances part of the initial franchise fee payable by new
franchisees and from time to time has financed 100% of certain franchise fees.
The Company typically 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.
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 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).
Treasury Stock: Shares of Swisher International common stock purchased at
current market prices which have not been resold, reissued or cancelled are
included in treasury stock at cost.
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 $199,000 at October 31, 1999.
Additionally, the Company maintains deposits in foreign accounts, not insured,
in the amount of $230,000 at October 31, 1999.
F-33
<PAGE> 34
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTE 3. NOTES RECEIVABLE - FRANCHISEES
Notes receivable consists primarily of all or a portion of the initial franchise
fees financed by the Company. The notes are collateralized by the underlying
franchise and by essentially all of the franchisees' assets incidental to the
operation of the franchise and, for certain franchises, are personally
guaranteed by the owners. The interest rates associated with the majority of
these notes range from 7.75% to 13% with monthly principal and interest payments
ranging from approximately $90 to $5,600 over periods ranging from 12 to 120
months, with the first note maturing in 1999 and the last one in 2010.
Notes receivable - franchisees at October 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
1999
----------
<S> <C>
Notes receivable - franchisees $2,763,614
Notes receivable - related party - franchisees
(Note 4) 922,949
----------
Total notes receivable $3,686,563
Less imputed discount 191,049
----------
Net present value of notes receivable 3,495,514
Less allowance for doubtful accounts 240,000
----------
Balance of notes receivable - franchisees $3,255,514
==========
Current portion $ 603,706
Long-term portion $2,651,808
</TABLE>
The notes receivable - franchisees have been reduced to net present value at
October 31, 1999 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.
F-34
<PAGE> 35
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTE 3. NOTES RECEIVABLE - FRANCHISEES (CONTINUED)
Future minimum principal payments to be received pursuant to the notes are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31
----------------------
<S> <C>
2000 $ 603,706
2001 505,741
2002 391,873
2003 510,524
2004 400,777
Thereafter 1,273,942
----------
Total 3,686,563
Less imputed discounts 191,049
Less allowance for doubtful accounts 240,000
----------
$3,255,514
==========
</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.
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, 1999:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Notes receivable from the President for: life insurance policies paid by the $227,671
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.
Notes receivable from an Executive Vice President for: life insurance $139,325
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 Executive Vice President.
Notes receivable bears interest rates of 6 to 12 percent. --------
Total accounts and notes receivable from officers 366,996
Current portion 35,000
--------
Long-term portion $331,996
========
</TABLE>
F-35
<PAGE> 36
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTE 4. NOTES AND ACCOUNTS RECEIVABLE - RELATED PARTIES AND RELATED PARTY
TRANSACTIONS: (CONTINUED)
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 during the year ended October 31, 1998 was
$103,719.
During the years ended October 31, 1999 and 1998, the Company paid the President
and/or a corporation in which the President is a major stockholder $72,621 and
$57,427 respectively, for the use of an airplane for business travel.
During the year ended October 31, 1997, the Company paid a CPA consultant the
sum of $98,000 pursuant to a Consulting Agreement. Under the terms of the
Consulting Agreement, the Company also provided office space with a rental value
of $6,300 to the consultant. During the year ended October 31, 1998, the
consultant was paid $121,453 for consulting services and was provided office
space with a rental value of $6,300 for the same period. The consultant
previously served as a Member of the Board of Directors and resigned effective
December 16, 1998.
As shown in Note 3 above, there are notes receivable with a total outstanding
balance of $922,349 from related parties for franchise sales. A note with a
balance of $238,343 results from the purchase of a franchise by a company that
is 51 percent owned by the President of the Company. The terms of the 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 Swisher
International, Inc. common stock owned by the President. For the years ended
October 31, 1999 and 1998, the Company realized revenues from this franchise of
$237,852 and $182,753 for product sales, $30,410 and $21,602 for marketing fees,
$91,230 and $64,805 for royalty fees, and $62,804 and $46,500 for service fees,
totaling $422,296 and $315,660, respectively. In addition, the Company entered
into an agreement with this franchise to provide training and product research
services to the Company at the rate of $8,000 per month. The Company paid the
franchise $72,000 for these services for the year-ended October 31, 1999.
A second note with a balance of $381,235 results from the purchase of a
Company-owned franchise by a company that was owned by an Executive Vice
President of the Company. The terms of the note call for 120 monthly
installments of principal and interest of $5,510 beginning August 1, 1998 and
ending July 1, 2008. The franchise and its assets secure this note, with
additional security pledged by 20,000 shares of Swisher International, Inc.
stock owned by the Vice President. For the years ended October 31, 1999 and
1998, the Company realized $276,310 and $171,599 in revenues from this franchise
for product sales, $26,621 and $18,686 for marketing fees, $79,864 and $56,059
for royalty fees, and $48,154 and $36,800 for service fees totaling $430,954 and
$283,144, respectively.
A third note with a balance of $63,629 was assumed during the year ended
October 31, 1998 by the same company owned by the Executive Vice President as
part of the purchase of an existing franchise operation. At October 31, 1999,
the remaining balance on this note was payable in 86 monthly installments of
principal and interest at 9 percent of $1,001. The franchise and its assets
secure this note. The Company recognized no income on this transaction.
A fourth note with a balance 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 18). The
President
F-36
<PAGE> 37
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTE 4. NOTES AND ACCOUNTS RECEIVABLE - RELATED PARTIES AND RELATED PARTY
TRANSACTIONS: (CONTINUED)
of Swisher Pest Control Corporation owns Carolina Pest Management LLC. This note
is payable in 12 quarterly installments of interest only at the prime rate.
Beginning on November 26, 2002 this note is payable in 60 monthly installments
of principal and interest of $4,861. All the fixed assets of Carolina Pest
Management, LLC, secure $100,000 of this note. The balance of the note
receivable is unsecured. During the year-ended October 31, 1998, 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 three officers 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 requires 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 lease
85 percent of the closing bid price of March 19, 1998, which was $7.625). The
amortization of interest is included in deferred revenues for the year-ended
October 31, 1999.
The discounted balances of these notes at October 31, 1999 are as follows:
<TABLE>
<CAPTION>
INTEREST
DISCOUNTED AMORTIZED BALANCE
NOTE DURING YEAR 10/31/99
----------------------------------
<S> <C> <C> <C>
Notes receivable from the President for the
purchase of 57,600 shares $248,167 $21,936 $270,103
Notes receivable from an Executive Vice President
for the purchase of 19,000 shares 74,419 6,578 80,997
Notes receivable from a former member of the Board
of Directors for the purchase of 23,400 shares 77,905 6,886 84,791
$400,491 $35,400 $435,891
</TABLE>
NOTE 6. NOTES RECEIVABLE -- OTHER
A note in the amount of $267,256 was received on October 4, 1999, in connection
with the sale of Surface Doctor, Inc. business. (Note 18). The note is payable
to the Company in 120 fixed monthly installments of principal and interest
totaling $2,554 beginning December 1, 1999. The outstanding balance will be due
in full on December 1, 2009.
Notes receivable -- other at October 31, 1999 consisted of the following:
<TABLE>
<S> <C>
Notes receivable -- other 267,256
=======
Current portion 7,020
Long-term portion 260,236
</TABLE>
Future minimum principal payments to be received pursuant to the note are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31, 1999
<S> <C>
2000 7,020
2001 10,198
2002 11,045
2003 11,961
2004 12,954
Thereafter 214,078
-------
267,256
=======
</TABLE>
NOTE 7. PROPERTY AND EQUIPMENT
Property and equipment is comprised of:
<TABLE>
<CAPTION>
ESTIMATED
1999 USEFUL LIFE
--------- -----------
<S> <C> <C>
Office equipment 40,881 5-7 yrs
Office furniture 226,612 5-7 yrs
Computer hardware 266,987 5 yrs
Computer software 744,686 5 yrs
Leased computer equipment 365,835 5 yrs
Leasehold improvements 96,831 5-31.5 yrs
---------
1,741,832
=========
</TABLE>
F-37
<PAGE> 38
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTE 8. LINE OF CREDIT AND PLEDGED ASSETS
The Company entered into a loan agreement with a financial institution
on June 30, 1999, providing the Company with a maximum credit line of
$1,750,000. The term of the agreement is for 3 years. The Company may only
borrow up to 80% of domestic and Canadian accounts receivable aged at 120 days
or less. Borrowings under the agreement bear interest at the prime rate plus 2
percent (10.25 percent at October 31, 1999). In addition, the loan is
collateralized by substantially all assets of the Company (not specifically
pledged in Note 10). Outstanding borrowings under the loan agreement were
$1,104,618 at October 31, 1999.
This loan agreement contains financial covenants, which require
specified levels of equity and working capital, and the maintenance of a
financial ratio related to total debt. At October 31, 1999, the Company was in
violation of one of these covenants and the financial institution waived this
violation.
NOTE 9. NOTES PAYABLE RELATED PARTIES
Notes payable to related parties at October 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
1999
-----------
<S> <C>
Note payable to Franchise owned 51% by the
President, dated December 2, 1998, payable
on demand, interest accrued at 10 percent
is included in note balance at October
31, 1999. $296,038
Note payable to the President, dated March 11,
1999 payable on demand, interest at 10 percent
(being paid monthly during the year ended
October 31, 1999) 71,397
-----------
$367,435
===========
</TABLE>
The above notes payable to the President are collateralized by
$475,000 of federal tax refunds due the Company.
F-38
<PAGE> 39
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTE 10. LONG-TERM DEBT AND PLEDGED ASSETS
Long-term debt at October 31, 1999 consisted of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
1999
-----------
<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. $120,510
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. 37,609
Capitalized lease due in monthly
installments of $240, including interest at
15.31 percent, through July 2002; secured by
telephone equipment costing $8,704. 6,606
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. 38,255
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. 143,988
Notes payable, vendors, due in monthly
installments of $1,347, including interest at
9 percent through December 1999; unsecured. 1,337
Note payable, individuals, due in monthly
installments of $1,245, including interest
at 9 percent through May 2000; unsecured. 8,463
Note payable, finance company, due in
monthly installments of $1,464, including
interest at 12.5 percent through June 2001;
collateralized by notes receivable with a
balance at October 31, 1999 of $79,101. 25,832
Capitalized lease due in monthly installments of
$512, including interest at 12.2 percent, through
November 2002; secured by computer equipment
costing $21,789. 15,376
--------
397,976
Less current portion 198,942
--------
$199,034
========
</TABLE>
Aggregate maturities required on the long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending October 31
----------------------
<S> <C>
2000 $198,942
2001 110,030
2002 85,449
2003 3,555
Thereafter --
--------
$397,976
========
</TABLE>
F-39
<PAGE> 40
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTE 11. 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, 2000. 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, 1999.
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, 1999.
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 Rights were outstanding at
October 31, 1999.
Stock Option Plans: In August 1992, the Company adopted an Incentive Stock
Option Plan (the "Incentive Plan"). The Incentive Plan covers an aggregate of
133,333 shares. In fiscal 1994, the Incentive Plan was amended by a shareholder
vote to reserve 250,000 shares of common stock for issuance under the Incentive
Plan. In fiscal 1997, the Plan was amended by the Board of Directors to
authorize 500,000 shares of common stock under the incentive plan. 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 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, 1999. 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 covers a total of 58,334
shares. In fiscal 1994, the Non-Qualified Plan was amended by a shareholder
vote to authorize 150,000 shares of common stock for issuance under the
Non-qualified Plan. In fiscal 1997, the Plan was amended by the Board of
Directors to authorize 400,000 shares of common stock under the incentive plan.
In October 1999, the Plan was amended by the Board of Directors to increase the
number of options by 400,000. The Non-Qualified Plan provides that options may
be granted at exercise price not less than 85 percent of the fair market value
of the Common Shares of the Company on the date of grant. The committee is
empowered to grant bonuses at the time of issuance of non-qualified stock
options in an amount sufficient to cover the tax liability incurred by the
recipient at the date of grant. Options to purchase 549,000 shares of the
Company's $.01 par value common stock are outstanding pursuant to the
Non-Qualified Plan at October 31, 1999. 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
F-40
<PAGE> 41
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTE 11. STOCK AND STOCK OPTIONS (CONTINUED)
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, 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
Options issued 425,000 $1.34
Outstanding October 31, 1999 608,700 $2.22
</TABLE>
Non-Plan Options:
In June, 1996, the Company entered into an agreement with a public relations
firm whereby the Company granted the public relations firm options to purchase
25,000 shares of the Company's common stock at a price of $5.75 per share. In
accordance with 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. 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
F-41
<PAGE> 42
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTE 11. STOCK AND STOCK OPTIONS (CONTINUED)
with SFAS 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 Statement of Financial Accounting Standards, No. 123,
("SFAS"), "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,
1999. In computing the pro forma effects of the SFAS No. 123 compensation cost,
the Company used a 6% risk-free interest rate, an expected life of five
years, and expected volatility of 60 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, 1999.
<TABLE>
<CAPTION>
BASIC LOSS DILUTED LOSS
NET LOSS PER SHARE PER SHARE
----------------------------------------------
<S> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1999:
As reported $(397,391) $(0.18) $(0.18)
Pro-forma $(590,447) $(0.27) $(0.27)
</TABLE>
NOTE 12 EARNINGS PER SHARE:
A reconciliation of basic earnings per share to diluted earnings per share is
presented below:
<TABLE>
<CAPTION>
PER SHARE
NET LOSS SHARES AMOUNT
--------------------------------------
<S> <C> <C> <C>
YEAR ENDED OCTOBER 31, 1999:
Basic EPS
Income available to common shareholders $(397,391) 2,208,189 $(0.18)
Effect of Dilutive Securities
Stock options and warrants -- -- --
--------------------------------------
Diluted EPS
Income available to common shareholders
plus assumed conversions $(397,391) 2,208,189 $(0.18)
======================================
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)
======================================
</TABLE>
F-42
<PAGE> 43
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTE 13. INCOME TAXES
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, 1999:
<TABLE>
<CAPTION>
CURRENT LONG-TERM TOTAL
---------------------------------
<S> <C> <C> <C>
DEFERRED TAX ASSETS:
RECEIVABLE ALLOWANCES $342,894 -- $ 342,894
NET OPERATING LOSS CARRYFORWARDS -- 987,551 987,551
--------- --------- ---------
342,894 987,551 1,330,445
--------- --------- ---------
DEFERRED TAX LIABILITIES
PROPERTY AND EQUIPMENT -- (101,212) (101,212)
INTANGIBLE ASSETS -- (4,634) (4,634)
--------- --------- ---------
-- (105,846) (105,846)
--------- --------- ---------
342,894 881,705 1,224,599
--------- --------- ---------
(342,894) (881,705) (1,224,599)
--------- --------- ---------
-- -- --
========= ========= =========
</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.
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, 1999 and 1998 due to the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Computed "expected" tax benefit $ 135,113 $ 960,000
Increase/(decrease) in income taxes resulting from:
Disqualifying disposition of ISO shares -- (380,966)
Permanent differences (23,723) (18,920)
Temporary differences (111,390) (438,533)
Other -- (46,750)
========== ==========
-- $ 74,831
========== ==========
</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 recorded additional
income taxes receivable of $380,966 and increased additional paid-in capital for
the same amount. As a result of this disqualifying disposition and the amended
tax filings, the Company lost the benefit of carrying back its net operating
loss for the year ended October 31, 1998, thus reducing income tax benefits by
$380,966.
F-43
<PAGE> 44
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTE 13. INCOME TAXES (CONTINUED)
As of October 31, 1999, the Company has net operating loss carryforwards
available for federal and state income tax reporting purposes on a consolidated
basis of approximately $2,172,000 And $4,175,000, respectively. These net
operating loss carryforwards expire between 2000 and 2018.
NOTE 14. LEASE COMMITMENTS AND RENT EXPENSE
The Company leases other facilities, equipment and vehicles under operating
leases, which expire in varying amounts through 2004.
Future minimum lease payments pursuant to these leases are as follows:
<TABLE>
<CAPTION>
Year Ending October 31,
-----------------------
<S> <C>
2000 $ 318,561
2001 279,916
2002 280,618
2003 290,387
2004 46,038
----------
$1,215,520
==========
</TABLE>
For the years ended October 31, 1999 and 1998, operating lease expense was
$405,100 and $371,863, respectively.
NOTE 15. FRANCHISES
The following table summarizes the number of franchised operations of Swisher
International, Inc. for the year ended October 31, 1999:
<TABLE>
<CAPTION>
Swisher Swisher Swisher
Hygiene Maids Pest Control
------- ------- ------------
<S> <C> <C> <C>
Franchises at the beginning of the year 106 6 7
Franchises sold 7 10
Closed/transferred (4) (6)
Repurchased/transferred
--- - --
Franchises at the end of the year 109 6 11
=== = ==
</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 and Swisher Maids, the number of signed territories defines a
franchise. For Swisher Pest Control, franchises are defined by a combination of
the number of signed territories for independent operations. 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, 1999:
F-44
<PAGE> 45
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTE 15. FRANCHISES (CONTINUED)
<TABLE>
<CAPTION>
Swisher Swisher Swisher
Hygiene Maids Pest Control
------- ------- ------------
<S> <C> <C> <C>
Master license agreements at the beginning of the year 9 -- 1
Master license agreements sold 4
Master license agreements closed --
------- ------- --------
Master license agreements at the end of the year 13 -- 1
======= ======= ========
</TABLE>
NOTE 16. SEGMENT INFORMATION
The Company operates three principal franchise systems: hygiene, residential
maid services, and commercial pest control services. Selected financial
information is presented below for the years ended October 31, 1999 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, 1999 and 1998 foreign sales totaled $716,000
and $485,000, respectively.
<TABLE>
<CAPTION>
COMPANY-
OWNED FRANCHISE
1999 OPERATIONS OPERATIONS TOTAL
----------------------- ---------- ---------- -----
<S> <C> <C> <C>
Net revenues 620,491 13,936,659 14,557,150
Operating income (loss) (114,913) (282,478) (397,391)
Identifiable assets 42,812 8,711,068 8,753,880
Capital Expenditures -- 74,280 74,280
Depreciation and
amortization 21,954 315,175 337,129
</TABLE>
NOTE 17. ASSETS HELD FOR SALE
As of October 31, 1999 the Company had two 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. Goodwill is amortized using a straight-line method over 20 years.
<TABLE>
<CAPTION>
1999
---------
<S> <C>
Cost basis of assets, including goodwill of $79,382 $ 241,501
Less: accumulated amortization of goodwill (23,690)
=========
Assets held for sale, net $ 217,811
=========
</TABLE>
NOTE 18. BUSINESS COMBINATION
F-45
<PAGE> 46
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTE 18. ACQUISITIONS AND DISPOSITIONS
On October 4, 1999, the Company sold all national and international franchise
agreements, and certain other specified assets, of the Surface Doctor franchise
system. The Company received proceeds of $212,000 cash and a note receivable in
the amount of $267,256. The note bears an interest rate of 8% and is payable in
120 payments of $2,554, at which time the remaining balance is due.
Assets disposed of in connection with the sale are as follows:
<TABLE>
<S> <C>
Goodwill (net) $596,455
Trademarks (net) 79,386
Fixed assets (net) 48,880
Inventory and other 8,077
--------
$732,798
========
</TABLE>
Proceeds in connection with the sale are as follows:
<TABLE>
<CAPTION>
<S> <C>
Note receivable $267,256
Cash 212,000
--------
479,256
Loss on sale 253,542
--------
$732,798
========
</TABLE>
The Company recorded a loss of $253,542 on the sale. The following pro forma
data summarizes the results of operations for the periods indicated as if the
sale had been completed November 1, 1998, the beginning of the 1999 fiscal year:
<TABLE>
<S> <C>
Total revenue $14,205,275
Net income 51,037
Basic income per share $0.02
Diluted income per share $0.02
</TABLE>
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
At October 31, 1999, 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, 1999 due to
rates being at current market rates.
F-46
<PAGE> 47
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
NOTE 20. ADVERTISING COSTS
Total advertising costs were $375,000 and $486,000 for the years ended October
31, 1999 and 1998, respectively.
NOTE 21. OTHER MATTERS
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
alleged violations of certain sections of the Securities and Exchange Act of
1934 by the Company and the individuals named, and followed the withdrawal of
the Company's former auditors. On October 18, 1999 a final order was entered
approving a complete settlement of the class action suit. The lawsuit was
settled, for $742,100. An insurance policy maintained by the Company covered all
but the $200,000 deductible.
The Securities and Exchange Commission is conducting a formal
investigation regarding circumstances surrounding the withdrawal of the
Company's former auditors. The effects of this investigation, if any, are
indeterminable.
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.
The Company sold the assets of its Swisher Maids division, subsequent
to October 31, 1999. The sale price of the asset sale totaled $140,000, which
was the carrying value of this asset held for sale on the October 31, 1999
balance sheet. The sale was made to a former employee of the Company and a
relative of the President of the Company.
F-47
<PAGE> 48
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
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>
<S> <C>
/s/ M. Hunt Broyhill /s/ Thomas W. Busch
- ---------------------------------------- ------------------------------
By: M. Hunt Broyhill By: Thomas W. Busch
Title: Director/Chairman of the Board Title: Chief Financial Officer
/s/ Anne Parish Corley /s/ Richard G. Long, Jr.
- ---------------------------------------- ------------------------------
By: Anne Parish Corley By: Richard G. Long, Jr.
Title: Director Title: Director
/s/ John O. Summey, Jr. /s/ Patrick L. Swisher
- ---------------------------------------- ------------------------------
By: John O. Summey, Jr. By: Patrick L. Swisher
Title: Director Title: Director/President/CEO
/s/ W. Tom Reeder, III
- ----------------------------------------
By: W. Tom Reeder, III
Title: Director/Executive Vice President
</TABLE>
Dated: January 31, 2000
<PAGE> 49
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
23.1 Consent of Scharf Pera & Co.
27 Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 1
SWISHER INTERNATIONAL, INC. AND ITS SUBSIDIARIES
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 January 28, 2000
with respect to the consolidated financial statements of Swisher International,
Inc. as of and for the year ended October 31, 1999 and 1998.
/s/ Scharf Pera & Co.
----------------------
Scharf Pera & Co.
January 28, 2000
Charlotte, North Carolina
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 128,742
<SECURITIES> 0
<RECEIVABLES> 2,248,668
<ALLOWANCES> 413,083
<INVENTORY> 25,070
<CURRENT-ASSETS> 3,923,577
<PP&E> 1,741,832
<DEPRECIATION> 999,476
<TOTAL-ASSETS> 8,753,880
<CURRENT-LIABILITIES> 4,740,026
<BONDS> 0
0
0
<COMMON> 22,083
<OTHER-SE> 4,728,395
<TOTAL-LIABILITY-AND-EQUITY> 8,753,880
<SALES> 7,204,873
<TOTAL-REVENUES> 14,557,150
<CGS> 6,330,160
<TOTAL-COSTS> 14,954,541
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 237,419
<INCOME-PRETAX> (397,391)
<INCOME-TAX> 0
<INCOME-CONTINUING> (397,391)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (397,391)
<EPS-BASIC> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
