As filed
with the Securities and Exchange Commission on August 5,
2011
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SWISHER HYGIENE INC.
(Exact Name of registrant as
specified in its charter)
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Delaware
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7342
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27-3819646
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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4725 Piedmont Row Drive,
Suite 400, Charlotte, North Carolina 28210,
(704) 364-7707
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
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Steven R. Berrard, President
and Chief Executive Officer
Swisher Hygiene Inc.
4725 Piedmont Row Drive, Suite 400,
Charlotte, North Carolina 28210
Telephone:
(704) 364-7707
Fax:
(704) 602-7980
(Name, address, including
zip code, and telephone number,
including area code, of agent for service)
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Please send a copy of all communications to:
Edward L. Ristaino Esq.
Michael Francis Esq.
Akerman Senterfitt
One Southeast Third Ave., 25th Floor
Miami, Florida 33131-1714
Telephone: (305) 982-5581
Fax: (305) 374-5095
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Approximate date of commencement of proposed sale to the
public: From time to time after the effective
date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the
following
box. þ
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Amount of
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Title of Each Class of
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Amount to be
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Offering
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Aggregate
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Registration
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Securities to be Registered
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Registered
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Price per Unit(1)
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Offering Price(1)
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Fee
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Common Stock, par value $0.001 per share
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9,857,143
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$
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4.60
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$
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45,342,858
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$
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5,265
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Common Stock, par value $0.001 per share, underlying outstanding
promissory notes
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201,925
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4.60
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$
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928,855
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$
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108
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Total
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$
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5,373
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(1)
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Estimated solely for the purpose of
calculating the registration fee which was computed in
accordance with Rule 457(c) under the Securities Act of
1933, as amended (the Securities Act), on the basis
of the average high and low sales prices as reported on the
NASDAQ Global Market on August 2, 2011.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. The selling stockholders may not sell these securities
until the registration statement filed with the Securities and
Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer
to buy these securities in any state where the offer or sale is
not permitted.
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PRELIMINARY PROSPECTUS SUBJECT
TO COMPLETION DATED AUGUST 5, 2011.
10,059,068 Shares
SWISHER HYGIENE INC.
The selling stockholders may offer and sell from time to time up
to an aggregate of 10,059,068 shares of Swisher Hygiene
Inc. common stock that they own. These shares include up to
201,925 shares issuable upon the conversion of outstanding
promissory notes. For information concerning the selling
stockholders and the manner in which they may offer and sell
shares of our common stock, see Selling Stockholders
and Plan of Distribution in this prospectus.
We are not selling any securities under this prospectus and we
will not receive any proceeds from the sale by the selling
stockholders of their shares of common stock.
Our common stock trades on the NASDAQ Global Market
(NASDAQ) and the Toronto Stock Exchange
(TSX). On August 4, 2011, the last reported
sales price of our common stock on the NASDAQ was $3.96 per
share. On August 4, 2011, the last reported sale price for
our common stock on the TSX was $3.99 per share (in
U.S. dollars).
Investing in the shares involves risks. See Risk
Factors, beginning on page 4.
You should rely only on the information contained in this
prospectus. We have not authorized any dealer, salesperson or
other person to provide you with information concerning us,
except for the information contained in this prospectus. The
information contained in this prospectus is complete and
accurate only as of the date on the front cover page of this
prospectus, regardless of the time of delivery of this
prospectus or the sale of any common stock. This prospectus is
not an offer to sell these securities and we are not soliciting
an offer to buy these securities in any state where the offer or
sale is not permitted.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The date of this prospectus
is , 2011.
This summary does not contain all of the information that is
important to you. You should read the entire prospectus,
including the Risk Factors and our consolidated financial
statements and related notes appearing elsewhere in this
prospectus before making an investment decision.
Our
Business
Swisher Hygiene, Inc. provides essential hygiene and sanitation
solutions to customers throughout much of North America and
internationally through its global network of company owned
operations, franchises and master licensees. These solutions
include essential products and services that are designed to
promote superior cleanliness and sanitation in commercial
environments, while enhancing the safety, satisfaction and
well-being of employees and patrons. These solutions are
typically delivered by employees on a regularly scheduled basis
and involve providing our customers with: (i) consumable
products such as soap, paper, cleaning chemicals, detergents,
and supplies, together with the rental and servicing of dish
machines and other equipment for the dispensing of those
products; (ii) the rental of facility service items
requiring regular maintenance and cleaning, such as floor mats,
mops, bar towels and linens; (iii) manual cleaning of their
facilities; and (iv) solid waste collection services. We
serve customers in a wide range of end-markets, with a
particular emphasis on the foodservice, hospitality, retail,
industrial, and healthcare industries. In addition our solid
waste collection services provide services primarily to
commercial and residential customers through contracts with
municipalities or other agencies.
Prospectively, we intend to grow in both existing and new
geographic markets through a combination of organic and
acquisition growth. However, we will continue to focus our
investments towards those opportunities which will most benefit
our core businesses, chemical and waste collection services.
As of July 15, 2011, we have company owned operations and
franchise operations located throughout the United States and
Canada and have entered into 10 Master License Agreements
covering the United Kingdom, Ireland, Portugal, the Netherlands,
Singapore, the Philippines, Taiwan, Korea, Hong
Kong/Macau/China, and Mexico.
We are a Delaware corporation, originally organized in Canada in
1994. Our principal executive offices are located at 4725
Piedmont Row Drive, Suite 400, Charlotte, North Carolina,
28210. On November 1, 2010, Swisher Hygiene redomiciled to
Delaware from Canada, where it had been a publicly-traded
corporation, listed on the TSX under the name CoolBrands
International Inc. (CoolBrands), and trading under
the symbol COB. We refer to this event as the
Redomestication. On November 2, 2010, one day after
completion of the Redomestication, CoolBrands Nevada, Inc.
(CoolBrands Nevada), a wholly-owned subsidiary of
Swisher Hygiene, merged with and into Swisher International,
with Swisher International continuing as the surviving
corporation. We refer to this event as the Merger. CoolBrands
was a Canadian company that historically focused on marketing
and selling a broad range of ice creams and frozen snacks. Since
the end of the 2005 financial year, subsidiaries of CoolBrands
disposed of a majority of CoolBrands business operations.
Since that time, CoolBrands principal operations consisted
of the management of its cash resources and reviewing potential
opportunities to invest such cash resources. CoolBrands held
$61,850,226 in cash and cash equivalents as of the closing date
of the Merger.
In the Merger, the former stockholders of Swisher International
received 57,789,630 shares of Swisher Hygiene common stock,
representing, on a fully diluted basis, a 48% ownership interest
in Swisher Hygiene at such time. The stockholders of CoolBrands
retained 56,225,433 shares of Swisher Hygiene common stock,
representing, on a fully diluted basis, a 52% ownership interest
in Swisher Hygiene at such time. 55,789,632 of the shares issued
to former shareholders of Swisher International are subject to
lock-up
agreements.
As a result of the Merger, Swisher International became a
wholly-owned subsidiary of Swisher Hygiene. Upon completion of
the Merger and the Redomestication, Swisher Hygiene inherited
the reporting issuer status of CoolBrands. Swisher
Hygienes shares of common stock began trading on the TSX
under the symbol SWI on November 4, 2010. As
CoolBrands was a reporting issuer (or equivalent) in each of the
provinces of Canada, Swisher Hygiene became a reporting issuer
in each of the provinces in Canada. On November 9,
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2010, we filed a Registration Statement on Form 10 (the
Form 10) with the Securities Exchange
Commission (SEC). The Form 10 was deemed
effective on January 10, 2011, and since that date, we have
been a U.S. reporting company, subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended
(the Exchange Act), and the rules and regulations
thereunder. On February 2, 2011, we began trading on NASDAQ
under the ticker symbol SWSH. Our common stock is
currently listed on both the NASDAQ and TSX exchanges.
All references in this registration statement to
Swisher, Swisher Hygiene, the
Company, we, us, and
our refer to Swisher Hygiene Inc. and its
consolidated subsidiaries, except where the discussion relates
to times or matters occurring before the Merger, as defined
below, in which case these words, as well as Swisher
International, refer to Swisher International, Inc. and
its consolidated subsidiaries.
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THE
OFFERING
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Common Stock Offered: |
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The selling stockholders are offering a total of
10,059,068 shares of common stock. |
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Outstanding Shares of Common Stock: |
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As of July 31, 2011, 173,473,566 shares of our common
stock were issued and outstanding. |
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Use of Proceeds: |
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We are not selling any securities under this prospectus and we
will not receive any proceeds from the sale of shares by the
selling stockholders. |
3
RISK
FACTORS
Our business, financial condition, results of operations,
cash flows and prospects, and the prevailing market price and
performance of our common stock, may be adversely affected by a
number of factors, including the matters discussed below.
Certain statements and information set forth in this
registration statement, as well as other written or oral
statements made from time to time by us or by our authorized
officers on our behalf, constitute forward-looking
statements within the meaning of the Federal Private
Securities Litigation Reform Act of 1995. We intend for our
forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. You should
note that forward-looking statements in this document speak only
as of the date of this registration statement and we undertake
no duty or obligation to update or revise our forward-looking
statements, whether as a result of new information, future
events or otherwise. Although we believe that the expectations,
plans, intentions and projections reflected in our
forward-looking statements are reasonable, such statements are
subject to risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially
different from any future results, performance or achievements
expressed or implied by the forward-looking statements. The
risks, uncertainties and other factors that our stockholders and
prospective investors should consider include the following:
We
have a history of significant operating losses and as such our
future revenue and operating profitability are
uncertain.
Our future revenue and operating profitability are difficult to
predict and are uncertain. We recorded an operating loss of
$5.7 million for the three months ended March 31, 2011
and $15.1 million for the year ended December 31,
2010, and have accumulated operating losses of
$70.3 million since January 1, 2005. In addition, we
recorded operating losses of approximately $6.8 million and
$10.4 million for the years ended December 31, 2009
and 2008, respectively. We may continue to incur operating
losses for the foreseeable future, and such losses may be
substantial. We will need to increase revenue in order to
generate sustainable operating profit. Given our history of
operating losses, we cannot assure you that we will be able to
achieve or maintain operating profitability on an annual or
quarterly basis or at all.
We may
be harmed if we do not penetrate markets and grow our current
business operations.
If we fail to further penetrate our core and existing geographic
markets, or to successfully expand our business into new markets
or through the right sales channels, the growth in sales of our
products and services, along with our operating results, could
be materially adversely impacted. One of our key business
strategies is to grow our business through acquisitions.
Acquisitions involve many different risks, including
(1) the ability to finance acquisitions, either with cash,
debt, or equity issuances; (2) the ability to integrate
acquisitions; (3) the ability to realize anticipated
benefits of the acquisitions; (4) the potential to incur
unexpected costs, expenses, or liabilities; and (5) the
diversion of management attention and company resources. Many of
our competitors may also compete with us for acquisition
candidates, which can increase the price of acquisitions and
reduce the number of available acquisition candidates. We cannot
assure you that efforts to increase market penetration in our
core markets and existing geographic markets will be successful.
Further, we cannot ensure that we will be able to acquire
businesses at the same rate that we have in the past. Failure to
do so could have a material adverse effect on our business,
financial condition and results of operations.
We may
require additional capital in the future and no assurance can be
given that such capital will be available on terms acceptable to
us, or at all.
We will require substantial capital or available debt or equity
financing to execute on acquisition and expansion opportunities
that may come available. We cannot assure you that we will be
able to obtain additional financial resources on terms
acceptable to us, or at all. Failure to obtain such financial
resources could adversely affect our plans for growth, or result
in our being unable to satisfy financial or other obligations as
they come due, either of which could have a material adverse
effect on our business and financial condition.
4
Although the current credit environment has not had a
significant adverse impact on our liquidity or cost of
borrowing, the availability of funds has tightened and credit
spreads on corporate debt have increased. Therefore, obtaining
additional or replacement financing may be more difficult and
the cost of issuing new debt or replacing a credit facility will
likely be at a higher cost than under our current credit
facilities. In addition, the current credit and capital markets
could adversely impact the liquidity or financial conditions of
suppliers or customers, which could, in turn, impact our
business or financial results.
Until we completed the Merger, a significant amount of our cash
requirements were met through loans or advances from the former
Swisher International stockholders; however, none of these
former stockholders have agreed to provide the company
additional loans, advances, or guarantees in the future.
We have completed a $100 million senior secured credit
facility, which we refer to as the credit facility. Borrowings
under the credit facility are subject to compliance with
financial covenants, including achieving specified Consolidated
EBITDA levels (as such term is defined under the credit
agreement, which includes specified adjustments and allowances
authorized by the lender, as provided for in such definition),
which will depend on the success of our acquisition strategy,
and maintaining specified leverage and coverage ratios and a
minimum liquidity requirement. The credit facility also places
restrictions on our ability to incur additional indebtedness,
make certain acquisitions, create liens or other encumbrances,
sell or otherwise dispose of assets, and merge or consolidate
with other entities or enter into a change of control
transaction. Failure to achieve or maintain the financial
covenants in the credit facility or failure to comply with one
or more of the operational covenants could adversely affect our
ability to borrow monies and could result in a default under the
credit facility. We cannot assure you that we will achieve or
maintain compliance with the financial and operational covenants
in the credit facility.
We cannot assure you that sufficient financing will be available
in the future on a timely basis, on terms that are acceptable to
us or at all. In the event that financing is not available or is
not available in the amounts or on terms acceptable to us, the
implementation of our acquisition strategy could be impeded,
which could have a material adverse effect on our business,
financial condition, results of operations and future prospects.
Failure
to attract, train, and retain personnel to manage our growth
could adversely impact our operating results.
Our strategy to grow our operations may place a greater strain
on our managerial, financial and human resources than that
experienced by our larger competitors, as they have a larger
employee base and administrative support group. As we grow we
will need to:
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build and train sales and marketing staff to create an expanding
presence in the evolving marketplace for our products and
services, and to keep staff informed regarding the features,
issues and key selling points of our products and services;
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attract and retain qualified personnel in order to continue to
develop reliable and saleable products and services that respond
to evolving customer needs; and
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focus personnel on expanding our internal management, financial
and product controls significantly, so that we can maintain
control over our operations and provide support to other
functional areas within our business as the number of personnel
and the size of our operations increases.
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Competition for such personnel can be intense, and we cannot
assure you that we will be able to attract or retain highly
qualified marketing, sales and managerial personnel in the
future. Our inability to attract and retain the necessary
management, technical, sales and marketing personnel may
adversely affect our future growth and profitability. It may be
necessary for us to increase the level of compensation paid to
existing or new employees to a degree that our operating
expenses could be materially increased, which could have a
material adverse effect on our business, financial condition and
results of operations.
5
We may
not be able to properly integrate the operations of acquired
businesses and achieve anticipated benefits of cost savings or
revenue enhancements.
Our business strategy includes growing our business through
acquisitions. The success of any business combination depends on
managements ability following the transaction to
consolidate operations and integrate departments, systems and
procedures, and thereby create business efficiencies, economies
of scale, and related cost savings. In addition, the acquired
customer base must be integrated into the existing service route
structure to improve absorption of fixed costs and create
operational efficiencies. The retention and integration of the
acquired customer base will be a key factor in realizing the
revenue enhancements that should accompany each acquired
business. We cannot assure you that future results will improve
as a result of cost savings and efficiencies or revenue
enhancements from any future acquisitions or proposed
acquisitions, and we cannot predict the timing or extent to
which cost savings and efficiencies or revenue enhancements will
be achieved, if at all. For these reasons, if we are not
successful in timely and cost-effectively integrating future
acquisitions and realizing the benefits of such acquisitions, it
could have a material adverse effect on our business, financial
condition, results of operations and prospects.
We may
incur unexpected costs, expenses, or liabilities relating to
undisclosed liabilities of our acquired
businesses.
In the course of performing due diligence investigations on the
companies or businesses we may seek to acquire, we may fail or
be unable to discover liabilities of the acquisition candidate
that have not otherwise been disclosed. These may include
liabilities arising from non-compliance with federal, state or
local environmental laws by prior owners, pending or threatened
litigation, and undisclosed contractual obligations, for each of
which we, as a successor owner, may be responsible. Although we
will generally seek to minimize exposure to such liabilities by
obtaining indemnification from the sellers of the acquired
companies, we cannot assure you that such indemnifications, even
if obtainable, will be enforceable, collectible, or sufficient
in amount, scope, or duration to fully offset the potential
liabilities arising from the acquisitions.
We may
recognize impairment charges which could adversely affect our
results of operations and financial condition.
We assess our goodwill and other intangible assets and
long-lived assets for impairment when required by generally
accepted accounting principles in the United States of America
(GAAP). These accounting principles require that we
record an impairment charge if circumstances indicate that the
asset carrying values exceed their fair values. Our assessment
of goodwill, other intangible assets, or long-lived assets could
indicate that an impairment of the carrying value of such assets
may have occurred that could result in a material, non-cash
write-down of such assets, which could have a material adverse
effect on our results of operations.
Goodwill
resulting from acquisitions may adversely affect our results of
operations.
Goodwill and other intangible assets are expected to increase
principally as a result of future acquisitions, and potential
impairment of goodwill and amortization of other intangible
assets could adversely affect our financial condition and
results of operations. We consider various factors in
determining the purchase prices of acquired businesses, and it
is not anticipated that any material portion of the goodwill
related to any of these acquisitions will become impaired or
that other intangible assets will be required to be amortized
over a period shorter than their expected useful lives. However,
future earnings could be materially adversely affected if
management later determines either that the remaining balance of
goodwill is impaired or that shorter amortization periods for
other intangible assets are required.
Future
issuances of shares of our common stock in connection with
acquisitions or pursuant to our stock incentive plan could have
a dilutive effect on your investment.
Since the Merger through July 31, 2011, we have issued up
to 60,739,063 shares of common stock and shares underlying
convertible notes and we will continue to issue additional
shares of our common stock in connection with future
acquisitions or for other business purposes, or under the
Amended and Restated
6
Swisher Hygiene Inc. 2010 Stock Incentive Plan (the
Plan). Future acquisitions may involve the issuance
of our common stock as payment, in part or in full, for the
businesses or assets acquired. The benefits derived by us from
an acquisition might not exceed the dilutive effect of the
acquisition. Pursuant to the Plan, our board of directors may
grant stock options, restricted stock units, or other equity
awards to our directors and employees. When these awards vest or
are exercised, the issuance of shares of our common stock
underlying these awards may have a dilutive effect on our common
stock.
Future
sales of Swisher Hygiene shares by our stockholders could affect
the market price of our shares.
We issued an aggregate of 57,789,630 shares of Swisher
Hygiene common stock in the Merger and up to an additional
54,134,290 shares or shares underlying convertible notes
through July 31, 2011 in connection with acquisitions and
in private placement transactions. Of the shares issued,
5,837,035 shares were issued in connection with
acquisitions under a Registration Statement on Form S-4. All
other shares issued are subject to registration rights, and we
filed, or intend to file, a registration statement to register
these shares for resale. Any sales of the shares in the open
market pursuant to the registration statements could cause the
price of our shares to decline.
Of the Swisher Hygiene shares issued in the Merger,
55,789,632 shares issued to the former Swisher
International shareholders, including shares held by H. Wayne
Huizenga and Steven R. Berrard, are subject to
lock-up
agreements. Pursuant to the
lock-up
agreements, the
locked-up
stockholders may not, subject to certain exceptions, offer,
sell, contract to sell or enter into any other agreement to
transfer the economic consequences of any Swisher Hygiene shares
for a period ending the earlier of (i) the date of the
public release of Swisher Hygienes earnings for the year
ended December 31, 2011 and (ii) March 31, 2012.
In addition, an aggregate of 9,857,143 shares issued in a
private placement transaction are subject to
lock-up
agreements that expire July 24, 2011. After these
lock-up
agreements terminate, the market price of Swisher Hygiene shares
could decline as a result of sales of our shares by these
stockholders, or the perception that such sales could occur.
These sales, or the perception that such sales could occur,
might also make it more difficult for Swisher Hygiene to sell
equity securities at a time and price that is deemed appropriate.
In addition, Swisher Hygiene may issue additional shares of
common stock as part of the purchase price of future
acquisitions or in connection with future financings. Any actual
sales, or any perception that sales of a substantial number of
shares may occur, could adversely affect the market price of
Swisher Hygiene common stock.
Our
business and growth strategy depends in large part on the
success of our franchisees and international licensees, and our
brand reputation may be harmed by actions out of our control
that are taken by franchisees and international
licensees.
A portion of our earnings are expected to come from royalties
and other amounts paid to us by our franchisees and
international licensees. Franchisees and licensees are
independent operators and have a significant amount of
flexibility in running their operations, and their employees are
not our employees. We provide training and support to, and
monitor the operations of, franchisees, but the quality of their
operations may be diminished by any number of factors beyond our
control. Despite the operating obligations the franchisees and
licensees are subject to pursuant to our operations manual or
the franchise or licensee agreements, franchisees may not
successfully operate their business in a manner consistent with
our standards and requirements and may not hire and train
qualified managers and other personnel. While we may ultimately
take action to terminate franchisees and licensees that do not
comply with the standards contained in the franchise or licensee
agreements and our operations manual, we may not be able to
identify problems and take action quickly enough and, as a
result, our image and reputation may suffer, potentially causing
revenue to decline. Any operational shortcoming of a franchisee
is likely to be attributed by the public to our entire system,
thus damaging our brand reputation and potentially affecting
revenue and operating results. Furthermore, if a significant
number of the franchisees were to become insolvent or otherwise
were unwilling or unable to pay for products and supplies
purchased from us or pay royalties, rent or other fees, we would
experience a decrease in our revenue, which could have a
material adverse effect on our business, financial condition and
results of operations.
7
Failure
to retain our current customers and renew existing customer
contracts could adversely affect our business.
Our success depends in part on our ability to retain current
customers and renew existing customer service agreements. Our
ability to retain current customers depends on a variety of
factors, including the quality, price, and responsiveness of the
services we offer, as well as our ability to market these
services effectively and differentiate our offerings from those
of our competitors. We cannot assure you that we will be able to
renew existing customer contracts at the same or higher rates or
that our current customers will not turn to competitors, cease
operations, elect to bring the services we provide in-house, or
terminate existing service agreements. The failure to renew
existing service agreements or the loss of a significant number
of existing service agreements would have a material adverse
effect on our business, financial condition, and results of
operations.
The
pricing, terms, and length of customer service agreements may
constrain our ability to recover costs and to make a profit on
our contracts.
The amount of risk we bear and our profit potential will vary
depending on the type of service agreements under which products
and services are provided. We may be unable to fully recover
costs on service agreements that limit our ability to increase
prices, particularly on multi-year service agreements. In
addition, we may provide services under multi-year service
agreements that guarantee maximum costs for the customer based
on specific criteria, for example, cost per diner, or cost per
passenger day, putting us at risk if we do not effectively
manage customer consumption. Our ability to manage our business
under the constraints of these service agreements may have a
material adverse effect on our business, financial condition,
and results of operations.
Changes
in economic conditions that impact the industries in which our
end-users primarily operate in could adversely affect our
business.
During the last few years, conditions throughout the
U.S. and worldwide have been extremely weak and those
conditions may not improve in the foreseeable future. As a
result, our customers or vendors may have financial challenges,
unrelated to us that could impact their ability to continue
doing business with us. Economic downturns, and in particular
downturns in the foodservice, hospitality, travel, and food
processing industries, can adversely impact our end-users, who
are sensitive to changes in travel and dining activities. The
recent decline in economic activity is adversely affecting these
markets. During such downturns, these end-users typically reduce
their volume of purchases of cleaning and sanitizing products,
which may have an adverse impact on our business. We cannot
assure you that current or future economic conditions, and the
impact of those conditions on our customer base, will not have a
material adverse effect on our business, financial condition and
results of operations.
Our
solid waste collection operations are geographically
concentrated and are therefore subject to regional economic
downturns and other regional factors.
Our solid waste collection operations and customers are located
in Florida. Therefore, our business, financial condition and
results of operations are susceptible to regional economic
downturns and other regional factors, including state
regulations and budget constraints and severe weather
conditions. In addition, as we seek to expand in our existing
markets, opportunities for growth within this region will become
more limited and the geographic concentration of our business
will increase.
If we
are required to change the pricing models for our products or
services to compete successfully, our margins and operating
results may be adversely affected.
The cleaning and maintenance solutions and the solid waste
services industries are highly competitive. We compete with
national, regional, and local providers, many of whom have
greater financial and marketing resources than us, in the same
markets primarily on the basis of brand name recognition, price,
product quality, and customer service. To remain competitive in
these markets, we may be required to reduce our
8
prices for products and services. If our competitors offer
discounts on certain products or services in an effort to
recapture or gain market share, we may be required to lower
prices or offer other favorable terms to compete successfully.
Any such change would likely reduce margins and could adversely
affect operating results. Some of our competitors may bundle
products and services that compete with our products and
services for promotional purposes as a long-term pricing
strategy or may provide guarantees of prices and product
implementations. Also, competitors may develop new or enhanced
products and services more successfully and sell existing or new
products and services better than we do. In addition, new
competitors may emerge. These practices could, over time, limit
the prices that we can charge for our products and services. If
we cannot offset price reductions or other pricing strategies
with a corresponding increase in sales or decrease in spending,
then the reduced revenue resulting from lower prices would
adversely affect our margins, operating costs, and profitability.
Furthermore, as is generally the case in the solid waste
services industry; some municipal contracts are subject to
periodic competitive bidding. We may not be the successful
bidder to obtain or retain these contracts. If we are unable to
compete with larger and better capitalized companies, or to
replace municipal contracts lost through the competitive bidding
process with comparable contracts or other revenue sources
within a reasonable time period, our revenue would decrease and
our operating results would be harmed.
In our solid waste disposal markets we also compete with
operators of alternative disposal and recycling facilities and
with counties, municipalities and solid waste districts that
maintain their own waste collection, recycling and disposal
operations. We are also increasingly competing with companies
which seek to use parts of the waste stream as feedstock for
renewable energy supplies. These entities may have financial
advantages because of their ability to charge user fees or
similar charges, impose tax revenue, access tax-exempt financing
and in some cases utilize government subsidies.
Several
members of our senior management team are critical to our
business and if these individuals do not remain with us in the
future, it could have a material adverse impact on our business,
financial condition and results of operations.
Our future success depends, in part, on the continued efforts
and abilities of our senior management team. Their skills,
experience and industry contacts are expected to significantly
benefit our business. The loss of any member of our senior
management team would disrupt our operations and divert the time
and attention of the remaining members of the senior management
team, which could have a material adverse effect on our
business, financial condition and results of operations. Because
the market for qualified management is highly competitive, we
may not be able to retain our leadership team or fill new
management positions or vacancies created by expansion or
turnover at existing compensation levels. We do not carry
key-person insurance on the lives of our senior
management team or management personnel to mitigate the impact
that the loss of a key member of our management team would
cause. The loss of services of one or more of these individuals,
or if one or more of them decide to join a competitor or
otherwise compete directly with us, our business could have a
material adverse effect on our financial condition and results
of operations.
The
financial condition and operating ability of third parties may
adversely affect our business.
We have manufacturing operations, however, we depend, and for
the foreseeable future will continue to depend, on third parties
for the manufacture of the products we sell. We will rely on
third party suppliers to provide us with components and services
necessary for the completion and delivery of our products and
services. We expect to significantly expand our customer base
and product offerings, but our expansion may be limited by the
manufacturing capacity of third party manufacturers. Such
manufacturers may not be able to meet our needs in a
satisfactory and timely manner, particularly if there are raw
material shortages.
We purchase the majority of our chemicals from independent
manufacturers and our dispensing equipment and dish machines are
also primarily supplied by a limited number of suppliers. Should
any of these third party suppliers experience production delays,
we may need to identify additional suppliers, which may not be
possible on a timely basis or on favorable terms, if at all. A
delay in the supply of our chemicals
9
or equipment could adversely affect relationships with our
customer base and could cause potential customers to delay their
decision to purchase services or cause them not to purchase our
services at all.
In the event that any of the third parties with whom we have
significant relationships files a petition in or is assigned
into bankruptcy or becomes insolvent, or makes an assignment for
the benefit of creditors or makes any arrangements or otherwise
becomes subject to any proceedings under bankruptcy or
insolvency laws with a trustee, or a receiver is appointed in
respect of a substantial portion of its property, or such third
party liquidates or winds up its daily operations for any reason
whatsoever, then our business, financial position and results of
operations may be materially and adversely affected.
The
volatility of our raw material costs may adversely affect our
operations.
We use a number of key raw materials in our business. The prices
of many of these raw materials are cyclical. If we are unable to
minimize the effects of increased raw material costs through
sourcing or pricing actions, future increases in costs of raw
materials could have a material adverse effect on our business,
financial condition, results of operations and prospects.
Increases
in fuel and energy costs could adversely affect our results of
operations and financial condition.
The price of fuel is unpredictable and fluctuates based on
events outside our control, including geopolitical developments,
supply and demand for oil and gas, actions by the Organization
of the Petroleum Exporting Countries (OPEC) and
other oil and gas producers, war and unrest in oil producing
countries, regional production patterns, limits on refining
capacities, natural disasters and environmental concerns. In
recent years, fuel prices have fluctuated widely and have
generally increased. Fuel price increases raise the costs of
operating vehicles and equipment. We cannot predict the extent
to which we may experience future increases in fuel costs or
whether we will be able to pass these increased costs through to
our customers. If fuel costs rise, the operating costs of our
solid waste collection operations and distribution operations
would increase, resulting in a decrease in margins and
profitability. A fuel shortage, higher transportation costs or
the curtailment of scheduled service could adversely impact our
relationship with customers and franchisees and reduce our
profitability. If we experience delays in the delivery of
products to our customers, or if the services or products are
not provided to the customers at all, relationships with our
customers could be adversely impacted, which could have a
material adverse effect on our business and prospects. As a
result, future increases in fuel costs could have a material
adverse effect on our business, financial condition, results of
operations, and prospects.
Our
products contain hazardous materials and chemicals, which could
result in claims against us.
We use and sell a variety of products that contain hazardous
materials and chemicals. There are hazardous chemicals in some
of our products but in all cases these materials have short term
hazardous actions that can easily be neutralized or disposed of
with minimal effect on the environment or situations that would
require long term remediation treatments due to environmental
contamination. Like all products of this nature, misuse of the
hazardous material based products can lead to injuries and
damages but in all cases if these products are used at the
prescribed usage levels with the proper PPEs (Personal
Protection Equipment) and procedures the chances of injuries and
accidents are extremely rare. Nevertheless, because of the
nature of these substances or related residues, we may be liable
for certain costs, including, among others, costs for
health-related claims, or removal or remediation of such
substances. We may be involved in claims and litigation filed on
behalf of persons alleging injury as a result of exposure to
such substances or by governmental or regulatory bodies related
to our handling and disposing of these substances. Because of
the unpredictable nature of personal injury and property damage
litigation and governmental enforcement, it is not possible to
predict the ultimate outcome of any such claims or lawsuits that
may arise. Any such claims and lawsuits, individually or in the
aggregate, that are resolved against us, could have a material
adverse effect on our business, financial condition and results
of operations.
10
We are
subject to environmental, health and safety regulations, and may
be adversely affected by new and changing laws and regulations,
that generate ongoing environmental costs and could subject us
to liability.
We are subject to laws and regulations relating to the
protection of the environment and natural resources, and
workplace health and safety. These include, among other things,
reporting on chemical inventories and risk management plans, and
the management of hazardous substances. Violations of existing
laws and enactment of future legislation and regulations could
result in substantial penalties, temporary or permanent facility
closures, and legal consequences. Moreover, the nature of our
existing and historical operations exposes us to the risk of
liability to third parties. The potential costs relating to
environmental, solid waste, and product registration laws and
regulations are uncertain due to factors such as the unknown
magnitude and type of possible contamination and
clean-up
costs, the complexity and evolving nature of laws and
regulations, and the timing and expense of compliance. Changes
to current laws, regulations or policies could impose new
restrictions, costs, or prohibitions on our current practices
would have a material adverse effect on our business, results of
operations, and financial condition.
Future
changes in laws or renewed enforcement of laws regulating the
flow of solid waste in interstate commerce could adversely
affect our operating results.
Various states and local governments have enacted, or are
considering enacting, laws and regulations that restrict the
disposal within the jurisdiction of solid waste generated
outside the jurisdiction. In addition, some state and local
governments have promulgated, or are considering promulgating,
laws and regulations which govern the flow of waste generated
within their respective jurisdictions. Additionally, public
interest and pressure from competing industry segments has
caused some trade associations and environmental activists to
seek enforcement of laws regulating the flow of solid waste. If
successful, these groups may advocate for the enactment of
similar laws in neighboring jurisdictions through local ballot
initiatives or otherwise. All such waste disposal laws and
regulations are subject to judicial interpretation and review.
Court decisions, congressional legislation, and state and local
regulation in the waste disposal area could adversely affect our
business, results of operations, and financial condition.
If our
products are improperly manufactured, packaged, or labeled or
become adulterated, those items may need to be
recalled.
We may need to recall the products we sell if products are
improperly manufactured, packaged, or labeled or if they become
adulterated. Widespread product recalls could result in
significant losses due to the costs of a recall and lost sales
due to the unavailability of product for a period of time. A
significant product recall could also result in adverse
publicity, damage to our reputation, and loss of customer
confidence in our products, which could have a material adverse
effect on our business, financial condition, results of
operations, and prospects.
Changes
in the types or variety of our service offerings could affect
our financial performance.
Our financial performance is affected by changes in the types or
variety of products and services offered to our customers. For
example, as we begin to evolve our business to include a greater
combination of products with our services, the amount of money
required for the purchase of additional equipment and training
for associates may increase. Additionally, the gross margin on
product sales is often less than gross margin on service
revenue. These changes in variety or adjustment to product and
service offerings could have a material adverse effect on our
financial performance.
We may
not be able to adequately protect our intellectual property and
other proprietary rights that are material to our
business.
Our ability to compete effectively depends in part on our rights
to service marks, trademarks, trade names and other intellectual
property rights we own or license, particularly our registered
brand names, including Swisher and
Sani-Service. We may not seek to register every one
of our marks either in the U.S. or in
11
every country in which it is used. As a result, we may not be
able to adequately protect those unregistered marks.
Furthermore, because of the differences in foreign trademark,
patent and other intellectual property or proprietary rights
laws, we may not receive the same protection in other countries
as we would in the U.S. and Canada. Failure to protect such
proprietary information and brand names could impact our ability
to compete effectively and could adversely affect our business,
financial condition, or results of operations.
Litigation may be necessary to enforce our intellectual property
rights and protect our proprietary information, or to defend
against claims by third parties that our products or services
infringe on their intellectual property rights. Any litigation
or claims brought by or against us could result in substantial
costs and diversion of our resources. A successful claim of
trademark, patent or other intellectual property infringement
against us, or any other successful challenge to the use of our
intellectual property, could subject us to damages or prevent us
from providing certain services under our recognized brand
names, which could have a material adverse effect on our
business, financial condition, and results of operations.
If we
are unable to protect our information and telecommunication
systems against disruptions or failures, our operations could be
disrupted.
We are dependent on internal and third party information
technology networks and systems, including the Internet, to
process, transmit and store electronic information. In
particular, we depend on our information technology
infrastructure for fulfilling and invoicing customer orders,
applying cash receipts, determining reorder points and placing
purchase orders with suppliers, making cash disbursements, and
conducting digital marketing activities, data processing, and
electronic communications among business locations. We also
depend on telecommunication systems for communications between
company personnel and our customers and suppliers. Future system
disruptions, security breaches, or shutdowns could significantly
disrupt our operations or may result in financial damage or loss
due to lost or misappropriated information.
Insurance
policies may not cover all operating risks and a casualty loss
beyond the limits of our coverage could adversely impact our
business.
Our business is subject to all of the operating hazards and
risks normally incidental to the operations of a company in the
cleaning and maintenance solutions and the solid waste services
industries. We maintain insurance policies in such amounts and
with such coverage and deductibles that we believe are
reasonable and prudent. Nevertheless, our insurance coverage may
not be adequate to protect us from all liabilities and expenses
that may arise from claims for personal injury or death,
property damage, or environmental liabilities arising in the
ordinary course of business and our current levels of insurance
may not be able to be maintained or available at economical
prices. If a significant liability claim is brought against us
that is not covered by insurance, we may have to pay the claim
with our own funds, which could have a material adverse effect
on our business, financial condition, and results of operations.
Our
current size and growth strategy could cause our revenue and
operating results to fluctuate more than some of our larger,
more established competitors or other public
companies.
Our revenue is difficult to forecast and we believe it is likely
to fluctuate significantly from quarter to quarter as we
continue to grow. Some of the factors affecting our future
revenue and results, many of which will be outside of our
control and are discussed elsewhere in the Risk Factors, include:
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competitive conditions in our industries, including new products
and services, product announcements and incentive pricing
offered by our competitors;
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the ability to hire, train and retain sufficient sales and
professional services staff;
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the ability to develop and maintain relationships with partners,
franchisees, distributors, and service providers;
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the discretionary nature of our customers purchase and
budget cycles and changes in their budgets for, and timing of,
chemical, equipment and services purchases;
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12
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the length and variability of the sales cycles for our products
and services;
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strategic decisions by us or our competitors, such as
acquisitions, divestitures, spin-offs, joint ventures, strategic
investments or changes in business strategy;
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our ability to complete our service obligations in a timely
manner; and
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timing of product development and new product and service
initiatives.
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Given our current amount of revenue, particularly as compared
with some of our competitors, even minor variations in the rate
and timing of conversion of our sales prospects into revenue
could cause us to plan or budget inaccurately, and have a
greater impact on our results than the same variations would
have on the results of our larger competitors.
In light of the foregoing,
quarter-to-quarter
comparisons of our operating results are not necessarily
representative of future results and should not be relied upon
as indications of likely future performance or annual operating
results. Any failure to achieve expected quarterly earnings per
share or other operating results could cause the market price of
our common shares to decline or have a material adverse effect
on our business, financial condition and results of operations.
Certain
stockholders may exert significant influence over any corporate
action requiring stockholder approval.
As of July 31, 2011, Messrs. Huizenga and Berrard own
26.9% of our common stock on a fully diluted basis. As a result,
these stockholders may be in a position to exert significant
influence over any corporate action requiring stockholder
approval, including the election of directors, determination of
significant corporate actions, amendments to Swishers
certificate of incorporation and by-laws, and the approval of
any business transaction, such as mergers or takeover attempts,
in a manner that could conflict with the interests of other
stockholders. Although there are no agreements or understandings
between the former Swisher International stockholders as to
voting, if they voted in concert, they would exert control over
Swisher Hygiene.
Provisions
of Delaware law and our organizational documents may delay or
prevent an acquisition of our company, even if the acquisition
would be beneficial to our stockholders.
Provisions of Delaware law and our certificate of incorporation
and bylaws may discourage, delay or prevent a change of control
that our stockholders may consider favorable, including
transactions in which stockholders might otherwise receive a
premium for their shares. These provisions may also prevent or
delay attempts by stockholders to replace or remove management
or members of our board of directors. These provisions include:
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the absence of cumulative voting in the election of directors,
which means that the holders of a majority of our common stock
may elect all of the directors standing for election;
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the inability of our stockholders to call special meetings;
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the requirement that our stockholders provide advance notice
when nominating director candidates or proposing business to be
considered by the stockholders at an annual meeting of
stockholders;
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the ability of the our board of directors to make, alter or
repeal our bylaws;
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the requirement that the authorized number of directors be
changed only by resolution of the board of directors; and
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the inability of stockholders to act by written consent.
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13
USE OF
PROCEEDS
We are not selling any securities under this prospectus and we
will not receive any proceeds from the sale of shares by the
selling stockholders.
DILUTION
There will be no dilution to our existing stockholders in
connection with the offer and sale by the selling stockholders
of the shares of common stock under this prospectus.
SELLING
STOCKHOLDERS
The selling stockholders may offer and sell from time to time up
to an aggregate of 10,059,068 shares of Swisher Hygiene
common stock held by them. These shares also include up to
201,925 shares issuable upon the conversion of outstanding
promissory notes
Except as otherwise indicated, the following table sets forth
certain information with respect to the beneficial ownership of
our common stock including the names of the selling
stockholders, the number of shares of common stock known by the
company to be owned beneficially by the selling stockholders as
of August 2, 2011, the number of shares of our common stock
that may be offered by the selling stockholders pursuant to this
prospectus, the number of shares owned by the selling
stockholders after completion of the offering and the percentage
of shares to be owned by the selling stockholders after
completion of the offering. The table has been prepared based
upon a review of information furnished to us by or on behalf of
the selling stockholders.
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Percent of
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Common
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Stock to be
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Shares of
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Owned by the
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Shares of Stock
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Stock Owned
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Selling
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to be Offered
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by the Selling Stockholder
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Stockholder
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Shares of Stock
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for the Selling
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after
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after
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Owned Prior to
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Stockholders
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Completion of
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Completion of
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Name of Selling Stockholder
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Offering
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Account
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the Offering
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the Offering
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Fidelity Independence Fund
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1,531,745
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1,167,445
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364,300
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+
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Variable Insurance Products Fund V: Asset Manager Portfolio
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135,158
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135,158
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Variable Insurance Products Fund V: Asset Manager: Growth
Portfolio
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24,821
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24,821
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Fidelity Materials Central Fund
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264,870
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23,760
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223,110
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+
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Fidelity Select Portfolios: Materials
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881,771
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141,551
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740,220
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+
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Variable Insurance Products Fund IV:
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Materials Portfolio
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97,633
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10,563
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87,070
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Fidelity Blue Chip Growth Fund
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2,095,491
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935,531
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1,159,960
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Fidelity Select Portfolios: Chemicals Portfolio
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1,108,940
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492,860
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616,080
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+
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Variable Insurance Products Fund III:
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Balanced Portfolio
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261,817
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148,167
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113,650
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Fidelity Dividend Growth Fund
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2,081,064
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1,177,734
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903,330
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Fidelity Advisor Dividend Growth Fund
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202,331
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114,531
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87,800
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+
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Variable Insurance Products Fund II:
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Contrafund Portfolio
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1,934,695
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523,085
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1,411,610
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+
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Fidelity Advisor Series I: Fidelity Advisor Balanced Fund
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78,700
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78,700
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Fidelity Puritan Trust: Fidelity Balanced Fund
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1,582,581
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1,582,581
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14
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Percent of
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Common
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Stock to be
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Shares of
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Owned by the
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Shares of Stock
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Stock Owned
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Selling
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to be Offered
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by the Selling Stockholder
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Stockholder
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Shares of Stock
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for the Selling
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after
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after
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|
|
|
Owned Prior to
|
|
|
Stockholders
|
|
|
Completion of
|
|
|
Completion of
|
|
Name of Selling Stockholder
|
|
Offering
|
|
|
Account
|
|
|
the Offering
|
|
|
the Offering
|
|
|
Fidelity Devonshire Trust: Fidelity
Series All-Sector
Equity Fund
|
|
|
1,352,605
|
|
|
|
1,352,605
|
|
|
|
|
|
|
|
|
|
Fidelity Capital Trust: Fidelity Stock Selector Small Cap Fund
|
|
|
986,560
|
|
|
|
986,560
|
|
|
|
|
|
|
|
|
|
Fidelity Securities Fund: Fidelity Series Small Cap
Opportunities Fund
|
|
|
961,491
|
|
|
|
961,491
|
|
|
|
|
|
|
|
|
|
Donald
Gravette(1)
|
|
|
201,925
|
|
|
|
201,925
|
|
|
|
|
|
|
|
|
|
|
|
|
+
|
|
Less than 1%.
|
|
(1) |
|
Registering the resale of
201,925 shares underlying a convertible promissory note
issued in connection with our acquisition of GLC Linen, LLC.
|
None of the selling stockholders has, or within the past three
years has had, any position, office or material relationship
with us or any of our predecessors or affiliates except as
follows:
|
|
|
|
|
Fidelity Management & Research Company
(Fidelity), 82 Devonshire Street, Boston,
Massachusetts 02109, a wholly-owned subsidiary of FMR LLC and an
investment adviser registered under Section 203 of the
Investment Advisers Act of 1940, is the beneficial owner of
23,813,743 shares of Swisher Hygiene Inc. as a result of
acting as investment adviser to various investment companies
registered under Section 8 of the Investment Company Act of
1940 (the Funds).
|
|
|
|
Edward C. Johnson 3d and FMR LLC, through its control of
Fidelity and the Funds, each has sole power to dispose of the
23,813,743 shares owned by the Funds.
|
|
|
|
Members of the family of Edward C. Johnson 3d, Chairman of FMR
LLC, are the predominant owners, directly or through trusts, of
Series B voting common shares of FMR LLC, representing 49%
of the voting power of FMR LLC. The Johnson family group and all
other Series B shareholders have entered into a
shareholders voting agreement under which all
Series B voting common shares will be voted in accordance
with the majority vote of Series B voting common shares.
Accordingly, through their ownership of voting common shares and
the execution of the shareholders voting agreement,
members of the Johnson family may be deemed, under the
Investment Company Act of 1940, to form a controlling group with
respect to FMR LLC.
|
|
|
|
Neither FMR LLC nor Edward C. Johnson 3d, Chairman of FMR LLC,
has the sole power to vote or direct the voting of the shares
owned directly by the Funds, which power resides with the
Funds Boards of Trustees. Fidelity carries out the voting
of the shares under written guidelines established by the
Funds Boards of Trustees.
|
|
|
|
On July 22, 2011, in connection with the acquisition of
certain assets of GLC Linen, LLC, Swisher Hygiene issued a
promissory note to Donald Gravette, which note is convertible
for up to 201,925 shares of our common stock.
Mr. Gravette has no other relationship with the Company as
set forth in Item 507 of Regulation S-K.
|
15
MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANTS COMMON
STOCK
Our common stock is listed and posted for trading on NASDAQ
under the trading symbol SWSH and on the TSX under
the trading symbol SWI. Our common stock commenced
trading on NASDAQ on February 2, 2011.
The following table sets out the reported high and low sale
prices in U.S. dollars on the TSX for the periods indicated
as reported by the exchange:
|
|
|
|
|
|
|
|
|
|
|
TSX
|
|
|
High
|
|
Low
|
|
Fiscal Year 2009
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
0.64
|
|
|
$
|
0.37
|
|
Second Quarter
|
|
$
|
0.69
|
|
|
$
|
0.48
|
|
Third Quarter
|
|
$
|
0.94
|
|
|
$
|
0.55
|
|
Fourth Quarter
|
|
$
|
1.26
|
|
|
$
|
0.76
|
|
Fiscal Year 2010
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
1.23
|
|
|
$
|
1.02
|
|
Second Quarter
|
|
$
|
1.54
|
|
|
$
|
1.04
|
|
Third Quarter
|
|
$
|
3.91
|
|
|
$
|
1.04
|
|
Fourth Quarter
|
|
$
|
5.97
|
|
|
$
|
3.39
|
|
Fiscal Year 2011
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
6.83
|
|
|
$
|
4.76
|
|
Second Quarter
|
|
$
|
11.44
|
|
|
$
|
4.87
|
|
Third Quarter (through August 4, 2011)
|
|
$
|
5.87
|
|
|
$
|
3.97
|
|
The following table sets out the reported high and low sale
prices on NASDAQ for the periods indicated as reported by the
exchange:
|
|
|
|
|
|
|
|
|
|
|
NASDAQ
|
|
|
High
|
|
Low
|
|
Fiscal Year 2011
|
|
|
|
|
|
|
|
|
First Quarter (commencing on February 2, 2011)
|
|
$
|
6.83
|
|
|
$
|
5.50
|
|
Second Quarter
|
|
$
|
11.43
|
|
|
$
|
4.87
|
|
Third Quarter (through August 4, 2011)
|
|
$
|
5.80
|
|
|
$
|
3.96
|
|
As of July 31, 2011, there were 173,473,566 shares of
our common stock issued and outstanding. As of July 31,
2011, we had 1,125 registered stockholders of record.
We have not paid any cash dividends on our common stock and do
not plan to pay any cash dividends in the foreseeable future.
Our board of directors will determine our future dividend policy
on the basis of many factors, including results of operations,
capital requirements, and general business conditions, subject
to the covenant in our senior credit facility, which prohibits
us from declaring cash dividends on our common stock.
AUDITORS
The consolidated financial statements of Swisher Hygiene Inc. at
and for the two years ended December 31, 2009 included in
this registration statement, to the extent and for the periods
indicated in their report, have been audited by Scharf
Pera & Co., PLLC (Scharf), independent
registered public accountants, and are included herein in
reliance upon the authority of such firm as experts in
accounting and auditing in giving such report. The offices of
Scharf are located at 4600 Park Road, Suite 112, Charlotte,
North Carolina 28209.
On November 2, 2010, we terminated the engagement of
Scharf, which had previously served as the independent
registered public accounting firm for Swisher International. Our
Audit Committee recommended and approved the decision to
terminate Scharf. Scharfs reports on the financial
statements of Swisher International for the fiscal years ended
December 31, 2009 and December 31, 2008 did not
contain an adverse
16
opinion nor a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope, or accounting
principles.
In connection with its audits of Swisher International financial
statements for the fiscal years ended December 31, 2009 and
December 31, 2008, and through the interim period ended
November 2, 2010, we have had no disagreements with Scharf
on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Scharf,
would have caused Scharf to make a reference to the subject
matter of the disagreements in connection with its reports on
the consolidated financial statements for the fiscal years ended
December 31, 2009 and December 31, 2008.
A letter from Scharf dated November 16, 2010 is filed as
Exhibit 16.1 to this registration statement.
On November 1, 2010, we terminated the engagement of
PricewaterhouseCoopers LLP (PWC), which have
previously served as the independent registered public
accounting firm for CoolBrands. Our Board of Directors
recommended and approved the decision to terminate PWC.
PWCs reports on the financial statements of CoolBrands for
the fiscal year ended August 31, 2010 and August 31,
2009 did not contain an adverse opinion nor a disclaimer of
opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
In connection with CoolBrands audits of its financial
statements for the fiscal years ended August 31, 2010 and
August 31, 2009, and through the interim period ended
November 1, 2010, we have had no disagreements with PWC on
any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of PWC, would
have caused PWC to make a reference to the subject matter of the
disagreements in connection with its reports on the
consolidated financial statements for the fiscal years ended
August 31, 2010 and August 31, 2009.
Effective November 2, 2010, our Audit Committee engaged BDO
USA, LLP (BDO) as the Companys independent
registered public accounting firm for the fiscal year ended
December 31, 2010. Before engaging BDO, neither Swisher
Hygiene nor anyone acting on Swisher Hygienes behalf,
consulted BDO regarding the application of accounting principles
to a specific completed or contemplated transaction, or the type
of audit opinion that might be rendered on Swisher
Hygienes financial statements, and no written or oral
advice was provided that was an important factor considered by
Swisher Hygiene in reaching a decision as to any accounting,
auditing, or financial reporting issues.
INFORMATION
WITH RESPECT TO THE REGISTRANT
Overview
Swisher Hygiene, Inc. provides essential hygiene and sanitation
solutions to customers throughout much of North America and
internationally through its global network of company owned
operations, franchises and master licensees. These solutions
include essential products and services that are designed to
promote superior cleanliness and sanitation in commercial
environments, while enhancing the safety, satisfaction and
well-being of employees and patrons. These solutions are
typically delivered by employees on a regularly scheduled basis
and involve providing our customers with: (i) consumable
products such as soap, paper, cleaning chemicals, detergents,
and supplies, together with the rental and servicing of dish
machines and other equipment for the dispensing of those
products; (ii) the rental of facility service items
requiring regular maintenance and cleaning, such as floor mats,
mops, bar towels and linens; (iii) manual cleaning of their
facilities; and (iv) solid waste collection services. We
serve customers in a wide range of end-markets, with a
particular emphasis on the foodservice, hospitality, retail,
industrial, and healthcare industries. In addition our solid
waste collection services provide services primarily to
commercial and residential customers through contracts with
municipalities or other agencies.
Prospectively, we intend to grow in both existing and new
geographic markets through a combination of organic and
acquisition growth. However, we will continue to focus our
investments towards those opportunities which will most benefit
our core businesses, chemical and waste collection services.
As of July 15, 2011, we have company owned operations and
franchise operations located throughout the United States and
Canada and have entered into 10 Master License Agreements
covering the United Kingdom,
17
Ireland, Portugal, the Netherlands, Singapore, the Philippines,
Taiwan, Korea, Hong Kong/Macau/China, and Mexico.
We are a Delaware corporation, originally organized in Canada in
1994. Our principal executive offices are located at 4725
Piedmont Row Drive, Suite 400, Charlotte, North Carolina,
28210. The financial information about our segments and
geographical revenue information appearing in Notes 2 and
13, respectively, to the Notes to Consolidated Financial
Statements in this registration statement are incorporated
herein by this reference.
Our
Strategy
We believe we are well positioned to take advantage of the
markets we serve. Our ability to service customers throughout
the United States and parts of Canada, our broad customer base
and our strategy of combining a service-based platform with
opportunities to leverage internal and external distribution
capabilities, provide multiple avenues for organic revenue
growth. We believe our recently introduced service and product
offerings, including our ware wash, laundry, and cleaning
chemical service and product offerings along with our solid
waste collection services, will allow us to continue to increase
revenue through existing customers, who will be able to benefit
from the breadth and depth of our current product and service
offerings.
Organic
Growth
Government regulations focusing on hygiene, food safety, and
cleanliness have increased significantly locally, nationally and
worldwide. Climate change, water scarcity, and environmental
concerns have combined to create further demand for products,
services, and solutions designed to minimize waste and support
broader sustainability. In addition, many of our customers
require tailored cleaning solutions that can assist in reducing
labor, energy, and water use, and the costs related to cleaning,
sanitation and hygiene activities.
We intend to capitalize on these industry dynamics by offering
customers a one-stop shopping partner focused on
their essential commercial hygiene and sanitation needs. This
entails leveraging our route-based weekly cleaning service and
restroom product platform with additional complementary chemical
and facility service products and other services, including ware
washing and laundry detergents, cleaning chemicals,
disinfectants, sanitizers, and solid waste collection services.
We believe our suite of products and services is a
customer-facing portfolio which none of our competitors offer in
full and, as a result, the customer need not shop for its
essential commercial hygiene and sanitation needs on a
piece-meal basis. In addition, our management believes that we
provide our customers with more frequent service, better
results, and lower pricing than our competitors. As a result, we
believe we can increase our total revenue per customer stop for
such items and that we are well positioned to secure new
accounts.
Our national footprint and existing route structure provides us
with a highly scalable service infrastructure, which we believe
gives us a lower relative cost of service compared to local and
regional competitors, and an attractive margin on incremental
revenue from existing customers as well as revenue from new
customers. We also believe the current density of our routes
coupled with our
go-to-market
strategy of utilizing both third-party distributors and company
personnel to deliver products and perform services, provides us
sufficient capacity in our current route structure to
efficiently service additional customer locations with minimal,
if any, incremental infrastructure or personnel costs.
Acquisition
Growth
We believe our markets for chemical service, facility service,
and solid waste collection providers are highly fragmented with
many small, private local and regional businesses in each of our
core marketplaces. These independent market participants
generally are not able to benefit from economies of scale in
purchasing, offering a full range of products or services, or
providing the necessary level of support and customer service to
larger regional and national accounts within their specific
markets.
We believe the range of our product and service offerings in the
commercial hygiene and sanitation industries, coupled with our
national service infrastructure makes us the acquiror of
choice in the industry. As such, we believe that targeted
strategic acquisitions provide us the opportunity to increase
revenue of the acquired business or assets by providing access
to corporate accounts, access to additional products and
18
services, and access to our broader marketing strategy. In
addition, we believe these strategic acquisitions will result in
improved gross margin and route margin of the acquired revenue
through greater purchasing efficiencies, route consolidation,
and consolidation of back office and administrative support.
Our essential hygiene and sanitation solutions typically involve
providing our customers with: (i) consumable products such
as soap, paper, cleaning chemicals, detergents, and supplies,
together with the rental and servicing of dish machines and
other equipment for the dispensing of those products;
(ii) the rental of facility service items requiring regular
maintenance and cleaning, such as floor mats, mops, and bar
towels; (iii) manual cleaning of their facilities; and
(iv) solid waste collection services. We serve customers in
a wide range of end-markets, with a particular emphasis on the
foodservice, hospitality, retail, industrial, and healthcare
industries. Many of our products are consumable and require the
use of a dispensing system installed by us. Our services on
those systems are typically preventative in nature and are
required on a regularly scheduled basis. We strive to position
ourselves to customers as the one-stop-shop for the
full breadth of products and services we offer. We believe this
comprehensive approach to providing complete hygiene and
sanitation solutions to our customers, coupled with the rental,
installation, and service of dish machines and dispensing
equipment that provide rental income and require the use of our
products helps provide stability in our business and discourages
customers from switching vendors.
We typically enter into service agreements with various terms
with customers that outline the scope and frequency of services
we will provide, as well as the pricing of the products and
services the customer requires. Given that we typically install,
at no charge, dispensers for many of the consumable products we
sell to customers, our service agreements usually provide for an
early termination fee.
Our
History
Swisher International, Inc. was originally founded in 1986 as a
Nevada corporation. From our founding through 2004, we operated
primarily as a franchisor and licensor of restroom hygiene
services offering: (i) weekly cleaning and sanitizing
services of our customers restroom fixtures, along with
the restocking of soap and air freshener dispensers and
(ii) the sale of restroom paper products, such as toilet
paper and hand towels. We provided these services to a customer
base largely comprised of small, locally owned bars,
restaurants, and retail locations. Franchisees had rights to use
the Swisher name and business processes in designated United
States and Canadian geographic markets typically ranging in size
from 500,000 to 3,000,000 persons. International licensees
had substantially similar rights in the respective countries in
which they operated. Although franchisees licensed the same
business model, the manner in which they executed and adopted
Swisher programs varied greatly, resulting in inconsistent
levels of service and differing product offerings across
geographic markets.
In November 2004, H. Wayne Huizenga and Steve Berrard acquired a
majority interest in Swisher, which at the time was a publicly
traded company. Subsequently, in May 2006, Messrs. Huizenga
and Berrard acquired the remaining outstanding shares of Swisher
and began operating Swisher as a private company.
The primary goal of acquiring ownership of Swisher was to
transition the business to take greater advantage of the Swisher
brand and nationwide service and distribution network, and to
better leverage the under-utilized platform to expand both
product and service offerings. Specifically,
Messrs. Huizenga and Berrard planned to transition the
Companys focus from generating revenue almost exclusively
from restroom cleaning services to building a full-service
provider of essential hygiene and sanitation solutions offering
a broad complement of products and services, addressing the
complete hygiene, cleaning and sanitation needs of our customers
throughout their facilities. We believed that such a transition
would provide Swisher with a competitive advantage, allowing us
to retain existing customers over time and provide them with
additional products and services that were essential to the
operations of their businesses. Moreover, we sought to leverage
Swishers national infrastructure with product offerings
and service expertise in core lines of products, including
cleaning chemicals, required by larger corporate customers
nationwide. In addition, we expanded from nice to
have services to essential products and
services and eliminated customers that were unprofitable. An
important component of this business strategy was the
acquisition of a sufficient number of franchise locations or
other similar businesses, providing us direct control over the
implementation of changes to a consistent business model.
19
In summary, our transition from a restroom cleaning services
business to a full service hygiene and sanitation solutions
provider offering a complete chemical and facility service
program and solid waste collection services has required
significant investments. Through July 15, 2011, these
investments include:
|
|
|
|
|
Acquisitions of 122 businesses, including 75 franchises, and the
acquisition of Choice Environmental Services, Inc,
(Choice), a Florida based, solid waste collection
service provider;
|
|
|
|
Replacement of management information systems;
|
|
|
|
Introduction of delivery service vehicles;
|
|
|
|
Addition of substantial industry experience throughout the
organization;
|
|
|
|
Upgrade of branch facilities;
|
|
|
|
Significant expansion of essential product lines and services to
include dust control and a complete chemical program; and
|
|
|
|
Development of a corporate account and distributor sales
organization.
|
We have franchises located throughout the U.S. and Canada
and ten master license agreements covering the United Kingdom
(U.K.), Ireland, Portugal, the Netherlands, Singapore, the
Philippines, Taiwan, Korea, Hong Kong/Macau/China, and Mexico.
The number of franchises, and international master licenses
since the end of 2006 and through July 15, 2011 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
Franchises
|
|
|
4
|
|
|
|
10
|
|
|
|
15
|
|
|
|
35
|
|
|
|
39
|
|
|
|
45
|
|
International Master Licenses(1)
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
|
|
11
|
|
|
|
11
|
|
|
|
13
|
|
|
|
|
(1) |
|
Number of countries in which Swisher licensees operate. |
Prospectively, we intend to grow in both existing and new
geographic markets through a combination of organic and
acquisition growth. However, we will continue to focus our
investments towards those opportunities which will most benefit
or core businesses, chemical and waste collection services.
Additionally, we will be opportunistic as it relates to
acquiring or partnering with complementary businesses that
(i) can provide us a competitive advantage;
(ii) leverage, expand, or benefit from our distribution
network; or (iii) provide us economies of scale or cost
advantages over our existing supply chain. Collectively, these
efforts are centered on making us an attractive alternative for
larger customers in foodservice, hospitality, healthcare,
retail, and industrial markets. In addition, we will seek to
aggressively license our business model internationally. Our
success largely depends on our ability to execute on these
strategies and increase the sales of our products and services
to corporate accounts and distribution partners.
The
Merger
On November 1, 2010, Swisher Hygiene redomiciled to
Delaware from Canada, where it had been a publicly-traded
corporation, listed on the TSX under the name CoolBrands
International Inc., and trading under the symbol
COB. We refer to this event as the Redomestication.
CoolBrands was a Canadian company that historically focused on
marketing and selling a broad range of ice creams and frozen
snacks. Since the end of the 2005 financial year, subsidiaries
of CoolBrands disposed of a majority of CoolBrands
business operations. Since that time, CoolBrands principal
operations consisted of the management of its cash resources,
reviewing and considering potential opportunities to invest such
cash resources. CoolBrands held $61,850,226 in cash and cash
equivalents at the effective time of the Merger, as defined
below.
On November 2, 2010, one day after completion of the
Redomestication, CoolBrands Nevada, Inc., a wholly-owned
subsidiary of Swisher Hygiene, merged with and into Swisher
International, with Swisher International continuing as the
surviving corporation. We refer to this event as the Merger.
20
In the Merger, the former stockholders of Swisher International
received 57,789,630 shares of Swisher Hygiene common stock,
representing, on a fully diluted basis, a 48% ownership interest
in Swisher Hygiene at such time. The stockholders of CoolBrands
retained 56,225,433 shares of Swisher Hygiene common stock,
representing, on a fully diluted basis, a 52% ownership interest
in Swisher Hygiene at such time. 55,789,632 of the shares issued
to former shareholders of Swisher International are subject to
lock-up
agreements. Pursuant to the
lock-up
agreements, the
locked-up
shareholders may not offer, sell, contract to sell or enter into
any other agreement to transfer the economic consequences of any
Swisher Hygiene shares for a period ending the earlier of
(i) the public release of Swisher Hygienes earnings
for the year ending December 31, 2011 or
(ii) March 31, 2012. Under the
lock-up
agreements, transfers may be made to family members, trusts and
similar entities for estate planning purposes, and to affiliated
entities that are wholly-owned by the transferring shareholder.
In each of these situations, the recipient of the shares must
execute an agreement stating that the recipient is receiving and
holding the shares subject to the provisions of the
lock-up
agreement. Shareholders subject to the
lock-up
agreement may also pledge the subject shares as collateral for
debt.
As a result of the Merger, Swisher International became a
wholly-owned subsidiary of Swisher Hygiene. Upon completion of
the Merger and the Redomestication, Swisher Hygiene inherited
the reporting issuer status of CoolBrands. Swisher
Hygienes shares of common stock began trading on the TSX
under the symbol SWI on November 4, 2010. As
CoolBrands was a reporting issuer (or equivalent) in each of the
provinces of Canada, Swisher Hygiene became a reporting issuer
in each of the provinces in Canada. On November 9, 2010, we
filed the Form 10 with the SEC. The Form 10 was deemed
effective on January 10, 2011, and since that date, we have
been a U.S. reporting company, subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended
(the Exchange Act), and the rules and regulations
thereunder. On February 2, 2011, we began trading on NASDAQ
under the ticker symbol SWSH. Our common stock is
currently listed on both the NASDAQ and TSX exchanges.
The following chart shows the corporate structure of Swisher
Hygiene Inc. at July 15, 2011 and includes our key
subsidiaries, all of which are wholly-owned.
Swisher
Hygiene Inc. Corporate Structure
Recent
Developments
Private
Placement
On April 15, 2011, we entered into a series of arms
length securities purchase agreements to sell
9,857,143 shares of our common stock at a price of $7.70
per share, for aggregate proceeds of $75,900,000 to certain
funds of a global financial institution. We completed this
transaction on April 19, 2011 and intend to use the
proceeds from this transaction to further our organic and
acquisition growth strategy, as well as for working capital
purposes.
21
Recent
Acquisitions
Since March 31, 2011, the Company has acquired several
businesses. While the terms, price, and conditions of each of
these acquisitions were negotiated individually, consideration
to the sellers typically consists of a combination of cash and
our common stock. Aggregate consideration paid for these
acquired businesses was approximately $124,330,471 consisting of
approximately (1) $67,057,500 in cash,
(2) 6,801,109 shares of our common stock,
(3) $2,517,000 in assumed or issued debt, (4) a
promissory note in the principal amount of
$595,000 convertible for up to 201,925 shares of our
common stock, and (5) $1,828,000 in contingent
consideration.
We have on file with the SEC a Registration Statement on Form
S-4 which relates to an aggregate of 15,000,000 shares of
our common stock that we may issue from time to time in
connection with acquisitions of assets, businesses, or
securities in the essential commercial hygiene industries. As of
July 31, 2011 we have issued an aggregate of
5,837,035 shares of our common stock in connection with
such acquisitions as set forth below.
|
|
|
|
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On May 2, 2011, we completed the acquisition of
substantially all the assets of Sarner Enterprises, Inc.
(Sarner), a Swisher Hygiene franchisee located in
Redondo Beach, California. Sarner has been a Swisher Hygiene
franchisee since 1992 and became Swisher Hygiene largest
U.S. franchisee. Sarners franchise territory
encompasses a significant portion of Central Los Angeles County,
as well as Riverside and San Bernardino Counties further
inland, stretching from the Pacific Ocean to the Arizona border.
We completed the acquisition of the hygiene and chemical
business of Sarner for consideration consisting of
(1) 729,246 shares of Swisher Hygiene common stock at
a value of $8.70 per share and (2) contingent consideration
of approximately $383,000.
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On May 3, 2011, we completed the acquisition of
substantially all the assets of ProClean of Arizona, Inc.
(ProClean), the leading independent hygiene and
chemical provider in the Southwest. ProClean has been in
business since 1976 and serves over 4,000 commercial customers
in Arizona, Southern California, Southern Nevada, New Mexico and
West Texas through its more than 100 employees by offering
a complete range of specialty chemicals and service programs to
the foodservice and hospitality industries, including ware
washing, general cleaning, laundry and housekeeping services. We
completed the acquisition of substantially all the assets of
ProClean for consideration consisting of (1) $8,500,000 in
cash, (2) 1,218,027 shares of Swisher Hygiene common
stock at a value of $7.99 per share, (3) assumed debt of
approximately $622,000.
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On May 4, 2011, we completed the acquisition of
substantially all the assets of American Chemical Concepts, Inc.
(American Chemicals), a Virginia-based hygiene and
chemicals company. American Chemicals serves the Eastern and
Central Virginia markets and provides specialty chemical and
warewash service programs to the foodservice and hospitality
industries. We completed the acquisition of substantially all
the assets of American Chemicals for consideration consisting of
(1) $212,500 in cash, (2) 68,543 shares of
Swisher Hygiene common stock at a value of $6.64 per share, and
(3) contingent consideration of approximately $59,000.
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On May 4, 2011, we completed the acquisition of
substantially all the assets of Chem Serve, Inc. (Chem
Serve), a California-based hygiene and chemicals company.
Chem Serve serves the San Luis Obispo and central coast of
California markets and provides specialty chemical and warewash
service programs to the foodservice and hospitality industries.
We completed the acquisition of substantially all the assets of
Chem Serve for consideration consisting of (1)$100,000 in cash
and (2) 35,000 shares of Swisher Hygiene common stock
at a value of $6.64 per share.
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On May 9, 2011, we completed the acquisition of
substantially all the assets of Mt. Hood Solutions Company
(Mt. Hood) an independent hygiene and chemical
provider in the Northwest. Mt. Hood has been in business since
1902 and serves over 4,000 commercial and industrial customers
in Oregon, Washington, Northern California, Idaho, Utah and
Colorado through its more than 100 employees by offering a
complete range of specialty chemicals and service programs to
the foodservice, hospitality and healthcare industries,
including ware washing, general cleaning, laundry and
housekeeping services,
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as well as a line of products for manufacturing companies
including industrial and water treatment products. We completed
the acquisition of substantially all the assets of Mt. Hood for
consideration consisting of (1) $22,000,000 in cash,
(2) 1,857,143 shares of Swisher Hygiene common stock
at a value of $7.00 per share, and (3) contingent
consideration of approximately $812,000.
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On May 19, 2011, we completed the acquisition of
substantially all of assets of Wingspan Service Corporation
(Wingspan), the sole remaining California Swisher
Hygiene franchisee. Wingspan has been a Swisher Hygiene
franchisee since 1996. Wingspans franchise territory
encompasses the greater San Francisco, Marin, Napa, and
Sacramento markets, extending from San Francisco to the
Nevada border. We completed the acquisition of the hygiene and
chemical business of Wingspan for consideration consisting of
(1) $750,000 in cash and (2) 220,834 shares of
Swisher Hygiene common stock at a value of $6.18 per share.
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On May 19, 2011, we completed the acquisition of
substantially all the assets of Chemical Sanitizing Systems,
LTD. (Chemical Sanitizing Systems), an Iowa-based
hygiene and chemicals company. Chemical Sanitizing Systems has
been in business since 1990 and serves Iowa, Nebraska, North
Dakota, South Dakota, and Minnesota along with parts of eastern
and provides specialty chemical and warewash service programs to
the foodservice and hospitality industries. We completed the
acquisition of substantially all the assets of Chemical
Sanitizing Systems for consideration consisting of
(1) $100,000 in cash and (2) 98,381 shares of
Swisher Hygiene common stock at a value of $6.18 per share.
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On May 26, 2011, we completed the acquisition of
substantially all the assets of Bussey Dishwater Service, Inc.
(Bussey), a Wisconsin-based hygiene and chemicals
company. Bussey serves the Wisconsin and Northern Illinois
markets and provides specialty chemical and warewash service
programs to the foodservice and hospitality industries. We
completed the acquisition of substantially all the assets of
Bussey for consideration consisting of (1) $250,000 in
cash, (2) 126,283 shares of Swisher Hygiene common
stock at a value of $5.95 per share, and (3) assumed debt
of approximately $95,000.
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On May 30, 2011, we completed the acquisition of
substantially all the assets of Pro-Chem Industrial, Inc.
(Pro-Chem), a Wyoming-based hygiene and chemicals
company. Pro-Chem serves the Wyoming, Montana, North Dakota, and
South Dakota markets and provides specialty chemical and
warewash service programs to the foodservice and hospitality
industries. Pro-Chem is one of the largest chemical service
companies in the region and extends the coverage area of Swisher
Hygienes acquisition of Mt. Hood, described above. We
completed the acquisition of substantially all the assets of
Pro-Chem for consideration consisting of (1) $1,300,000 in
cash, (2) 340,958 shares of Swisher Hygiene common
stock at a value of $6.60 per share, and (3) assumed debt
of approximately $150,000.
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On June 15, 2011 we completed the acquisition of
substantially all the assets of Prinova Company, Inc.
(Prinova), a Northern California-based hygiene and
chemicals company. Prinova covers the Northern and Central
California markets and provides specialty chemicals and service
programs to the foodservice and hospitality industries,
including warewashing and laundry services. We completed the
acquisition of substantially all the assets of Prinova for
consideration consisting of (1) $725,000 in cash and
(2) 35,003 shares of Swisher Hygiene common stock at a
value of $5.97 per share.
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On June 29, 2011 we completed the acquisition of
substantially all the assets of ProClean Systems, Inc.
(ProClean Systems) a southeast Pennsylvania-based
hygiene and chemicals company. Proclean Systems covers the
greater Philadelphia and adjacent markets and provides specialty
chemicals and service programs to the foodservice and
hospitality industries, including warewashing and laundry
services. We completed the acquisition of substantially all the
assets of ProClean Systems for consideration consisting of
(1) $700,000 in cash and (2) 291,891 shares of
Swisher Hygiene common stock at a value of $5.15 per share.
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On July 1, 2011, we completed the acquisition of Sanolite
(Sanolite), the leading independent hygiene and
chemical provider in the Northeast. Sanolite was founded in 1949
by Norman Lubin and has grown to serve over 3,000 commercial and
industrial customers throughout New York, New Jersey,
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Connecticut, Maryland, Pennsylvania and Florida by offering a
complete suite of specialty chemicals and service programs to
the foodservice and hospitality industries, including
warewashing, housekeeping and laundry services. We completed the
acquisition of substantially all the assets of Sanolite for
consideration consisting of (1) $8,000,000 in cash,
(2) 815,726 shares of Swisher Hygiene common stock at
a value of $5.63 per share, and (3) a $1,500,000 promissory
note.
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Promissory
Note Conversions and Exercise of Warrants
Since March 31, 2011, convertible promissory notes with an
aggregate principal amount of $8,621,480 and a fair value of
$12,080,344, included in short term obligations on the Unaudited
Condensed Consolidated Balance Sheets as of March 31, 2011
were converted into 1,921,899 shares of the Companys
common stock.
In May 2011, all 5,500,000 warrants with an exercise price of
$0.50 per warrant issued to a director of CoolBrands and the
Company, and certain parties related to the director, were
exercised and as a result, we received cash of $2,750,000 in
Canadian dollars.
$100
Million Credit Facility
On March 30, 2011, we entered into a $100 million
senior secured revolving credit facility with Wells Fargo.
Borrowings under the facility are secured by a first priority
lien on substantially all of our existing and hereafter acquired
assets, including $25 million of cash on borrowings in
excess of $75 million. Furthermore, borrowings under the
facility are guaranteed by all of our domestic subsidiaries and
secured by substantially all the assets and stock of our
domestic subsidiaries and substantially all of the stock of our
foreign subsidiaries.
Interest on borrowings under the credit facility will typically
accrue at London Interbank Offered Rate (LIBOR) plus
2.5% to 4.0%, depending on the ratio of senior debt to
Consolidated EBITDA (as such term is defined in the credit
facility, which includes specified adjustments and allowances
authorized by the lender, as provided for in such definition).
We also have the option to request swingline loans and
borrowings using a base rate. Interest is payable no more
frequently than monthly on all outstanding borrowings. The
credit facility matures on July 31, 2013.
Borrowings and availability under the credit facility are
subject to compliance with financial covenants, including
achieving specified Consolidated EBITDA levels, which will
depend on the success of our acquisition strategy, and
maintaining leverage and coverage ratios and a minimum liquidity
requirement. The Consolidated EBITDA covenant, the leverage and
coverage ratios, and the minimum liquidity requirements should
not be considered indicative of Swisher Hygienes
expectations regarding future performance. The credit facility
also places restrictions on our ability to incur additional
indebtedness, make certain acquisitions, create liens or other
encumbrances, sell or otherwise dispose of assets, and merge or
consolidate with other entities or enter into a change of
control transaction. Failure to achieve or maintain the
financial covenants in the credit facility or failure to comply
with one or more of the operational covenants could adversely
affect our ability to borrow monies and could result in a
default under the credit facility. The credit facility is
subject to other standard default provisions.
The credit facility replaces our current aggregated
$25 million credit facilities, which are discussed in
Note 6 to the Notes to Consolidated Financial Statements.
Our
Market
We compete in many markets, including institutional and
industrial cleaning chemicals, foodservice chemicals, restroom
hygiene and supply services, paper, and other facility products
and services, including floor mats and other facility service
rental items, as well as solid waste collection. In each of
these markets, there are numerous participants ranging from
large multi-national companies to local and regional
competitors. The focus of our company-owned operations remains
the U.S. and Canada; however, we may pursue new
international opportunities in the future through additional
licensing, joint ventures, or other forms of company expansion.
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Based on our analysis of publicly available industry research
and trade reports, as well as our competitors public
filings, we estimate that the combined addressable market in the
U.S. and Canada for the products and services we currently
offer exceeds $92.8 billion, in aggregate, as the pie chart
and corresponding table below highlights.
Current
Addressable U.S. and Canadian Market(1)
$92.8 billion
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We consider the addressable market as our estimate
of the aggregate market potential of the products and services
we currently offer and is not necessarily indicative of the
actual market size today. |
We believe our primary competitors in our legacy hygiene
services, paper, and facilities service rental market are large
facility service and uniform providers, as well as numerous
small local and regional providers, many of whom may focus on
one particular product offering, such as floor mat rentals. The
paper distribution market for the customers we target not only
has competition among the providers listed above, but also from
the foodservice, broad-line and janitorial-sanitation
distributors.
We believe the chemical, institutional, and industrial cleaning
chemical market is addressed both by large manufacturers as well
as a number of local and regional competitors. However, we
believe that we are one of the only competitors to maintain the
service employees necessary to effectively service national and
regional restaurant and other
multi-unit
facilities.
We believe the solid waste industry is addressed by a few large,
national publicly owned companies, as well as several regional
publicly and privately owned solid waste companies, and a number
of small privately owned companies. In any given market,
competitors may have larger operations and greater resources
than we have. The competition for collection accounts is
primarily on the basis of price and the quality of services
offered. From time to time, competitors may reduce the price of
their services in an effort to expand market share or to win a
competitively bid contracts. Reducing the price of our service
to better compete in these markets may have an adverse impact on
our future revenue and profitability.
Our
Products and Services
We provide products and services to end-customers, through our
company-owned locations, and to our franchisees and licensees.
While we report sales to and royalty revenue from franchisees
and licensees separately, we utilize the same administrative and
management personnel to oversee the daily operations of our
company-owned operations, franchisees, and licensees.
Chemical sales, which include our laundry, ware washing, and
concentrated and
ready-to-use
chemical products and cleaners, and soap, accounted for 34.6%
and 26.5% of consolidated revenue during three months
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ended March 31, 2011 and 2010, respectively, and 29.9%,
18.2% and 10.8% of consolidated revenue in 2010, 2009 and 2008,
respectively. The sale of paper items, including hand towels and
tissue paper accounted for 13.5% and 19.8% of consolidated
revenue during the first three months ended March 31, 2011
and 2010, respectively, and 19.4%, 20.3% and 19.9%, of
consolidated revenue in 2010, 2009 and 2008, respectively. The
service component of our hygiene and facility service offering,
which includes both the manual cleaning services as well as
service delivery fees, represented 19.6% and 29.7% of
consolidated revenue during the first three months ended
March 31, 2011 and 2010, respectively, and 27.9%, 29.2% and
31.0% of consolidated revenue in 2010, 2009 and 2008,
respectively. The rental and other component of our business
consists of rental fees and ancillary other product sales and
represented 5.6% and 9.2% of consolidated revenue during the
first three months ended March 31, 2011 and 2010,
respectively, and 9.9%, 9.6% and 9.8% of consolidated revenue in
the 2010, 2009 and 2008, respectively. We anticipate that over
time, our revenue from chemical sales will grow at a faster rate
than any of our other product lines.
Hygiene
and Facility Service
Our legacy business was restroom hygiene, offering a regularly
scheduled service that typically included cleaning the bowls,
urinals, and sinks in a restroom, the application of a germicide
to such surfaces to inhibit bacteria growth, and the restocking
of air-fresheners and soap dispensers, all for a fixed weekly
fee. Additionally, we managed the customers restroom paper
needs by providing and installing the tissue and hand towel
dispensers, and selling and re-stocking the paper in such
dispensers on an as-needed basis. This entire offering was
intended to supplement the daily janitorial or custodial
requirements of our customers and free customers from purchasing
and securing an inventory of paper products.
From 2004 through 2009, we greatly modified and expanded our
hygiene and facility service business by un-bundling, where
appropriate, the air-freshener and soap sales from the overall
service price in order to economically provide more hygienic and
sanitary single use products. We also introduced a more complete
line of specialized soaps as well as various grades of paper and
associated dispensing options, including hands-free soap
dispensers. Additionally, we introduced a number of new
complementary products and solutions required by our customers
both inside and outside of restrooms, including power washing of
restrooms and other areas, and the rental and cleaning of floor
mats, mops, and linens.
These products and services are delivered to customers by our
employees in company vehicles. We utilize GPS technology to
monitor various driving habits, mileage, and vehicle diagnostic
information. In several markets, we operate our own laundry
processing facilities to maintain and clean rental items such as
floor mats, mops, and linens, while, in other markets where we
offer dust control, we outsource the processing to third parties.
Chemicals
Since early 2009, we have placed particular emphasis on the
development of our chemical offering, particularly as it relates
to ware washing and laundry solutions. Ware washing products
consist of cleaners and sanitizers for washing glassware,
flatware, dishes, foodservice utensils, and kitchen equipment,
while laundry products include detergents, stain removers,
fabric conditioners, softeners, and bleaches in liquid, powder,
and concentrated forms to clean items such as bed linen,
clothing, and table linen. Our ware washing and laundry
solutions are designed to address the needs of small and large
customers alike, ranging from single store operators to
multi-unit
chains and large resorts. We often consult with customers that
may have specialized needs or require custom programs to address
different fabric or soil types. For ware washing customers, we
sell, rent, lease, or make available, as well as install and
service, dishwashing machines, pre-rinse units, chemical
dispensing units, dish tables and racks, food handling and
storage products, and parts. Customers using our laundry
services are offered various dispensing systems. We enter into
service agreements with customers using our chemical services to
which we rent or lease equipment pursuant to which we provide
24 hour, seven
days-a-week
customer service, and perform regularly scheduled preventative
maintenance. Typically, these agreements require customers to
purchase from us all of the products used in the rented
equipment. The chemicals themselves may be delivered to the
customer by a Swisher technician or one of our distributor
partners; however, the service and maintenance is provided by a
Swisher technician. We also
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provide a full line of concentrated and
ready-to-use
chemicals and cleaning products. This product line includes
general purpose cleaners, disinfectants, detergents, oven and
grill cleaners, general surface degreasers, floor cleaners, and
specialty cleaning products, which when in concentrated form,
benefit from the use of a dilution system to ensure the proper
mix of chemicals for safe and effective use.
Waste
Collection
Our most recent strategic initiative is the entry into the
sanitation market place with our March 2011 acquisition of
Choice, a solid waste collection business. Choice has been in
business since 2004 and serves more than 150,000 residential and
7,500 commercial customers in the Southern and Central Florida
regions through its 320 employees and over 150 collection
vehicles by offering a complete range of solid waste and
recycling collection, transportation, processing and disposal
services. Choice operates six hauling operations, three transfer
and materials recovery facilities.
Solid waste collection involves picking up and transporting
waste and recyclable materials from where they were generated to
a transfer station, material recovery facility or disposal site.
We generally provide collection services under one of two types
of arrangements:
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For commercial and industrial collection services, typically we
operate under a fixed period service agreement. The fees under
the agreements are influenced by factors such as collection
frequency, type of collection equipment we furnish, type and
volume or weight of the waste collected, distance to the
disposal facility, labor costs, cost of disposal and general
market factors. As part of the service, we provide steel
containers to most customers to store their solid waste between
pick-up
dates. Containers vary in size and type according to the needs
of our customers and the restrictions of their communities. Many
are designed to be lifted mechanically and either emptied into a
trucks compaction hopper or directly into a disposal site.
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For residential collection services, we have a contract with, or
a franchise granted by, a municipality, homeowners
association or some other regional authority that gives us the
exclusive right to service all or a portion of the homes in an
area. These contracts or franchises are typically for periods of
3 years to 8 years and generally include an option to
renew. We also provide services under individual monthly
subscriptions directly to households. The fees for residential
collection are either paid by the municipality or authority from
their tax revenue or service charges, or are paid directly by
the residents receiving the service.
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The addition of this service expands our ability to offer our
customer the broadest portfolio of hygiene and sanitation
products and services. On a pro forma basis, as presented in
Note 16 of the Notes to Consolidated Financial Statements,
solid waste collections accounts for in excess of 40% of our
2010 pro forma revenue.
Franchise
Operations
As of July 15, 2011, we had 4 franchises located throughout
the U.S. and Canada as well as 10 master licensees
operating in the U.K., Ireland, Portugal, the Netherlands,
Singapore, the Philippines, Taiwan, Korea, Hong
Kong/Macau/China, and Mexico.
We collect royalty, marketing,
and/or
business service fees from our franchisees and licensees in
exchange for maintaining and promoting the Swisher marks,
continuing to develop the Swisher offering, managing vendors and
sourcing new products, marketing and selling Swisher services to
prospective customers that may have locations in franchise
territories, and providing various ancillary services, including
billing and collections on their behalf. Franchisees are
obligated to buy most of the products used in their business
from us. Further discussion of revenue received from our
franchisees and licensees, including royalties, revenue from
product sales, and business service fees, is included in
Managements Discussion and Analysis of Financial Condition
and Results of Operations, included in this registration
statement.
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Manufacturing,
Sales, and Distribution
We manufacture certain of the products we sell through leased
facilities located in the Northwest and Southwest region of the
United States and in the Caribbean. We also purchase, and will
continue to purchase for the foreseeable future, products we
sell from third-party manufacturers and suppliers The key raw
materials we use in our chemical products, are caustic soda,
solvents, waxes, phosphates, surfactants, polymers and resins,
chelates and fragrances and packaging materials. Many of the raw
materials we use are petroleum-based and, therefore, are subject
to the availability and price of oil or its derivatives. We
purchase most chemical raw materials on the open market.
We market and sell our products and services primarily through:
(i) our field sales group, including the service
technicians, which pursues new customers and offers existing
customers who typically operate single or several smaller
locations additional products and service; (ii) our
corporate account sales team, which focuses on larger regional
or national customers in the markets previously identified;
(iii) independent third-party distributor partners; and
(iv) our franchise agreements with municipalities.
Selling to a new corporate account is an involved and lengthy
process that includes either displacing an existing supplier of
the products and services or working with the customer to
centralize and consolidate disparate purchasing decisions. These
prospective customers often go through a vendor qualification
process that may involve multiple criteria, and we often work
with them in various test locations to validate both product
efficacy and our ability to deliver the services on a national
level. Additionally, large corporate accounts may operate via a
franchise network of their own; the selection process with such
corporate accounts may only result in a vendor qualification
allowing us the right to sell our products and services to their
franchisees. We believe that as we continue to grow, the time to
close such sales or qualify as a provider to franchisees of
corporate account prospects will shorten. To date, we have been
in vendor qualification processes with larger accounts that have
ranged from less than three months to over 12 months.
Contract terms on corporate account customers typically range
from three to five years and we generally provide all services
to these accounts, although our larger corporate accounts may
request that we deliver the consumable products through specific
distribution partners with whom they coordinate the delivery and
procurement of other products.
We believe expanding our distributor program provides additional
opportunities for organic growth. Sales to and through
distributors are targeted toward regional and local foodservice
and other distributors that are seeking not only to increase the
revenue and margin they can drive by increasing the number of
products they deliver to each customer, but also to provide such
distributors a hook into customers that reduces
their customer attrition. Foodservice distribution is a highly
competitive business operating on low margins and with minimal
switching costs for their customers, who generally only purchase
commodities and widely manufactured consumables. We work with
distributors as their chemical supplier, dispensing product, and
dish machine provider, including the service arm required for
such equipment. As such, the distributor can typically earn a
higher profit margin on the chemicals it sells to end customers
as compared to its food items. Moreover, a distributor partner
is then able to market to its end customers the
service required to maintain their dish machines and
chemical dispensing equipment. This service is provided by
Swisher and documented under a separate contract between Swisher
and the end customer. In effect, by Swisher partnering to be the
service arm for the distributor, we help to generate demand for
our rental equipment and our consumable products, while
providing the distributor a competitive advantage. We contract
with distributors on an exclusive or non-exclusive basis,
depending on the markets they serve and the size of their
customer base.
With the exception of product sales delivered via distributors,
and select remote markets in the northern plains states,
including North and South Dakota, and Montana, the majority of
our services and products in the U.S. are delivered through
delivery vehicles operated by company-owned branches and
franchisees. Our field-based sales force focuses its efforts on
increasing route density and lowering the average time and
distance traveled between stops, thereby reducing the average
cost per delivery and optimizing fixed cost absorption.
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Customer
Dependence
Our business is not materially dependent upon a single customer,
and no one customer accounts for 10% or more of our consolidated
revenue. Our customer base ranges from large multi-national
companies to entrepreneurs who operate a single location. We
believe more than 50% of our revenue is attributable to
customers we consider as foodservice and hospitality related
customers, including quick-service and full-service restaurants.
Sources
and Availability of Raw Materials
As the result of our acquisitions of Mt. Hood and ProClean, and
Total Services, we have manufacturing operations in the Pacific
Northwest, Southwest and Caribbean, which we currently plan to
expand these operations to serve our existing customers in these
regions. For the other regions, we primarily purchase the
products we sell from third-party manufacturers and suppliers
with whom we believe we have good relations. Most of the items
we sell are readily available from multiple suppliers in the
quantities and quality acceptable to both us and our customers.
We do not have any minimum annual or other periodic purchase
requirements with any vendors for any of the finished products
we use or sell. We are not currently party to any agreement,
including with our chemical manufacturer, where we bear the
commodity risk of the raw materials used in manufacturing;
however, nothing prevents (i) the vendor from attempting to
pass through the incremental costs of raw materials or
(ii) us from considering alternative suppliers or vendors.
We believe the raw materials used by the manufacturers of the
products we currently sell, including petroleum-based
surfactants, detergents, solvents, chlorine, caustic soda, and
paper, are readily available; however, pricing pressure or
temporary shortages may from time to time arise, resulting in
increased costs and, we believe, under extreme conditions only,
a loss in revenue from our inability to sell certain products.
We purchased 66.3% and 43.3% during the first three months of
March 31, 2011 and 2010, respectively, and 76.7% and 43.4%
of the chemicals required for company-owned operations in 2010
and 2009, respectively, from one supplier that operates from a
single manufacturing location. We have contingency plans to
outsource production to other parties in the event that we need
to, which we believe could mitigate any disruptions in the
supply of chemicals from this supplier.
Patents
and Trademarks
We maintain a number of trademarks in the U.S., Canada and in
certain other countries. We believe that many of these
trademarks, including Swisher, the
Swisher design, the Swisher Hygiene
design, the S design, and PRO CLEAN are
important to our business. Our trademark registrations in the
U.S. are renewable for ten-year successive terms and
maintenance filings must be made as follows:
(i) for Swisher by January 2014, (ii) for
the Swisher design by January 2013, (iii) for
the Swisher Hygiene design by April 2015,
(iv) for the S design by February 2012 and
(v) for PRO CLEAN by July 14, 2016. In
Canada, we have agreed not to: (i) use the word SWISHER in
association with any wares/services relating to or used in
association with residential maid services other than as
depicted in our trademark application and (ii) use the word
SWISHER with our S design mark or by itself as a
trade mark at any time in association with wares/services
relating to or used in association with cleaning and sanitation
of restrooms in commercial buildings. Thus, our franchisees
operate as
SaniService®
in Canada. We own, have registered, or have applied to register
the Swisher trademark in every other country in which our
franchisees or licensees operate.
We market the majority of our chemical products under the
Swisher, Mt. Hood, and ProClean branded labeling and product
names. The majority of the chemical products formulas are owned
by us. The remaining chemical products are manufactured by third
parties who manufacture our products based on our specifications.
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Seasonality
In the aggregate, our business is typically not seasonal in
nature, with revenue occurring relatively evenly throughout the
year. However, our operating results may fluctuate from quarter
to quarter or year to year due to factors beyond our control,
including unusual weather patterns or other events that
negatively impact the foodservice and hospitality industries.
The majority of our customers are in the restaurant or
hospitality industries, and the revenue we earn from these
customers is directly related to the number of patrons they
service. As such, events adversely affecting the business of the
customer may have an adverse impact on our business.
Regulatory
and Environmental
We are subject to numerous U.S. federal, state, local, and
foreign laws that regulate the manufacture, storage,
distribution, transportation, and labeling of many of our
products, including all of our disinfecting, sanitizing, and
antimicrobial products. Operating and other permits, licenses
and other approvals generally are required for transfer
stations, certain solid waste collection vehicles, fuel storage
tanks and other facilities such as production and warehouse
facilities, and operations. In the event of a violation of these
laws, we may be liable for damages and the costs of remedial
actions, and may also be subject to revocation, non-renewal, or
modification of our operating and discharge permits and
revocation of product registrations. Federal, state and local
laws and regulations vary, but generally govern wastewater or
storm water discharges, air emissions, the handling,
transportation, treatment, storage and disposal of hazardous and
non-hazardous waste, and the remediation of contamination
associated with the release or threatened release of hazardous
substances. These laws and regulations provide governmental
authorities with strict powers of enforcement, which include the
ability to revoke or decline to renew any of our operating
permits, obtain injunctions, or impose fines or penalties in the
event of violations, including criminal penalties. The
U.S. Environmental Protection Agency (EPA) and
various other federal, state and local authorities administer
these regulations.
We strive to conduct our operations in compliance with
applicable laws, regulations and permits. However, we cannot
assure you that citations and notices will not be issued in the
future despite our regulatory compliance efforts. While we have
not yet been subject to any such action, any revocation,
non-renewal, or modification that may require us to cease or
limit the sale of products from one or more of our facilities
and may have a material adverse effect on our business,
financial condition, results of operations, and cash flows. The
environmental regulatory matters most significant to us are
discussed below.
Product
Registration and Compliance
Various U.S. federal, state, local, and foreign laws and
regulations govern some of our products and require us to
register our products and to comply with specified requirements.
In the U.S., we must register our sanitizing and disinfecting
products with the EPA. When we register these products, or our
registered supplier if we are subregistering, we must also
submit to the EPA information regarding the chemistry,
toxicology, and antimicrobial efficacy for the agencys
review. Data must be identical to the claims stated on the
product label. In addition, each state where these products are
sold requires registration and payment of a fee.
Numerous U.S. federal, state, local, and foreign laws and
regulations relate to the sale of products containing
ingredients such as phosphorous, volatile organic compounds, or
other ingredients that may impact human health and the
environment. Specifically, the State of California has enacted
Proposition 65, which requires us to disclose specified
ingredient chemicals on the labels of our products. To date,
compliance with these laws and regulations has not had a
material adverse effect on our business, financial condition,
results of operations, or cash flows.
30
Federal
Regulation
The following summarizes the primary federal environmental and
occupational health and safety-related statutes that affect our
facilities and operations:
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The Solid Waste Disposal Act, including the Resource
Conservation and Recovery Act
(RCRA). RCRA establishes a
framework for regulating the handling, transportation,
treatment, storage and disposal of hazardous and non-hazardous
solid waste, and requires states to develop programs to ensure
the safe disposal of solid waste in sanitary landfills.
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Subtitle D of RCRA establishes a framework for regulating the
disposal of municipal solid waste. Regulations under Subtitle D
currently include minimum comprehensive solid waste management
criteria and guidelines. Our failure to comply with the
implementation of federal environmental requirements by state
and local authorities at any of our locations may lead to
temporary or permanent loss of an operating permit, which would
result in costs in connection with securing new permits and
reduced revenue from lost operational time.
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The Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (CERCLA). CERCLA, among
other things, provides for the cleanup of sites from which there
is a release or threatened release of a hazardous substance into
the environment. CERCLA may impose strict joint and several
liability for the costs of cleanup and for damages to natural
resources upon current owners and operators of a site, parties
who were owners or operators of a site at the time the hazardous
substances were disposed of, parties who transported the
hazardous substances to a site, and parties who arranged for the
disposal of the hazardous substances at a site. Under the
authority of CERCLA and its implementing regulations, detailed
requirements apply to the manner and degree of investigation and
remediation of facilities and sites where hazardous substances
have been or are threatened to be released into the environment.
Liability under CERCLA is not dependent on the existence or
disposal of only hazardous wastes, but also can be
based upon the existence of small quantities of more than 700
substances, characterized by the EPA as
hazardous many of which are found in common
household waste.
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Among other things, CERCLA authorizes the federal government to
investigate and remediate sites at which hazardous substances
have been or are threatened to be released into the environment
or to order persons potentially liable for the cleanup of the
hazardous substances to do so themselves. In addition, the EPA
has established a National Priorities List of sites at which
hazardous substances have been or are threatened to be released
and which require investigation or cleanup.
CERCLA liability is strict liability. It can be founded upon the
release or threatened release, even as a result of
unintentional, non-negligent or lawful action, of hazardous
substances, including very small quantities of such substances.
Thus, even if we have never knowingly transported or received
hazardous waste, it is likely that hazardous substances have
been deposited or released at landfills or other
facilities owned by third parties to which we have transported
waste. Therefore, we could be liable under CERCLA for the cost
of cleaning up such hazardous substances at such sites and for
damages to natural resources. The costs of a CERCLA cleanup can
be very expensive and can include the costs of disposing
remediation wastes at appropriately-licensed facilities. Given
the difficulty of obtaining insurance for environmental
impairment liability, such liability could have a material
impact on our business, financial condition, results of
operations and cash flows.
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The Federal Water Pollution Control Act of 1972 (the
Clean Water Act). This act regulates the
discharge of pollutants from a variety of sources, including
solid waste disposal sites, into streams, rivers and other
waters of the United States. Runoff from our transfer stations
that is discharged into surface waters through discrete
conveyances must be covered by discharge permits that generally
require us to conduct sampling and monitoring, and, under
certain circumstances, to reduce the quantity of pollutants in
those discharges. Storm water discharge regulations under the
Clean Water Act require a permit for certain construction
activities and for runoff from industrial operations and
facilities, which may affect our operations. If a transfer
station discharges wastewater through a sewage system to a
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31
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publicly owned treatment works, the facility must comply with
discharge limits imposed by that treatment works.
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The Clean Air Act. The Clean Air Act imposes
limitations on emissions from various sources, including our
vehicle fleet.
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Occupational Safety and Health Act. The
Occupational Safety and Health Act of 1970, as amended
(OSHA), establishes certain employer
responsibilities, including maintenance of a workplace free of
recognized hazards likely to cause death or serious injury,
compliance with standards promulgated by OSHA, and various
record keeping, disclosure, and procedural requirements. Various
OSHA standards may apply to our operations.
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State
and Local Regulation
Each state in which we operate has its own laws and regulations
governing solid waste disposal, water and air pollution, and, in
most cases, releases and cleanup of hazardous substances and
liabilities for such matters. States also have adopted
regulations governing the design, operation, maintenance and
closure of transfer stations. Some counties, municipalities and
other local governments have adopted similar laws and
regulations. Our facilities and operations are likely to be
subject to these types of requirements. In addition, our
operations may be affected by the trend toward requiring the
development of solid waste reduction and recycling programs. For
example, several states have enacted laws that require counties
or municipalities to adopt comprehensive plans to reduce,
through solid waste planning, composting, recycling or other
programs, the volume of solid waste deposited in landfills.
Additionally, laws and regulations restricting the disposal of
certain waste in solid waste landfills, including yard waste,
newspapers, beverage containers, unshredded tires, lead-acid
batteries, electronic wastes and household appliances, have been
promulgated in several states and are being considered in
others. Legislative and regulatory measures to mandate or
encourage waste reduction at the source and waste recycling also
have been or are under consideration by the U.S. Congress
and the EPA.
Other
Regulations
Many of our facilities own and operate aboveground storage tanks
that are generally used to store petroleum-based products. These
tanks are generally subject to federal, state and local laws and
regulations that mandate their permitting, containment, closure
and removal. In the event of leaks or releases from these tanks,
these regulations require that polluted groundwater and soils be
remediated. We believe that all of our storage tanks meet all
applicable regulations.
With regard to our solid waste transportation operations, we are
subject to the jurisdiction of the Surface Transportation Board
and are regulated by the Federal Highway Administration, Office
of Motor Carriers, and by regulatory agencies in states that
regulate such matters. Various state and local government
authorities have enacted or promulgated, or are considering
enacting or promulgating, laws and regulations that would
restrict the transportation of solid waste across state, county,
or other jurisdiction lines. In 1978, the U.S. Supreme
Court ruled that a law that restricts the importation of
out-of-state
solid waste is unconstitutional; however, states have attempted
to distinguish proposed laws from those involved in and
implicated by that ruling. In 1994, the Supreme Court ruled that
a flow control law, which attempted to restrict solid waste from
leaving its place of generation, imposes an impermissible burden
upon interstate commerce, and, therefore, is unconstitutional.
In 2007, the Supreme Court upheld the right of a local
government to direct the flow of solid waste to a publicly owned
and publicly operated waste facility. A number of county and
other local jurisdictions have enacted ordinances or other
regulations restricting the free movement of solid waste across
jurisdictional boundaries. Other governments may enact similar
regulations in the future. These regulations may, in some cases,
cause a decline in volumes of waste delivered to our transfer
stations and may increase our costs of disposal, thereby
adversely affecting our operations.
32
Employees
As of July 15, 2011, we had 1,631 employees. We are
not a party to any collective bargaining agreement and have
never experienced a work stoppage. We consider our employee
relations to be good.
Properties
We lease our current corporate headquarters facility in
Charlotte, North Carolina, pursuant to a lease expiring in
February 2017. As of July 15, 2011, we also lease numerous
facilities relating to our operations. These facilities are
located in the following 37 states and territory: Alabama,
Alaska, Arizona, California, Colorado, Connecticut, Florida,
Georgia, Hawaii, Idaho, Iowa, Kansas, Kentucky, Massachusetts,
Maryland, Michigan, Minnesota, Missouri, Nebraska, New Jersey,
North Carolina, Nevada, New Mexico, New York, Ohio, Oklahoma,
Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Carolina,
Tennessee, Texas, Utah, Virginia, Washington, Wyoming, and
Wisconsin. We also lease facilities related to our Canadian
operations in Vancouver, British Columbia, Edmonton and Calgary,
Alberta, and Toronto, Ontario. These facilities consist
primarily of warehouses and office buildings. We believe that
our facilities are sufficient for our current needs and are in
good condition in all material respects.
Legal
Proceedings
We may be involved in litigation from time to time in the
ordinary course of business. We do not believe that the ultimate
resolution of these matters will have a material adverse effect
on our business, financial condition or results of operations.
However, the results of these matters cannot be predicted with
certainty and we cannot assure you that the ultimate resolution
of any legal or administrative proceedings or disputes will not
have a material adverse effect on our business, financial
condition and results of operations.
33
SELECTED
FINANCIAL DATA
The following selected consolidated financial data should be
read in conjunction with our Audited Consolidated Financial
Statements and Notes to Consolidated Financial Statements and
our Unaudited Condensed Consolidated Financials Statements and
Notes to the Condensed Consolidated Financial Statements
included in this registration statement.
The selected consolidated balance sheet data set forth below as
of March 31, 2011, December 31, 2010,
December 31, 2009 and the selected consolidated income
statement data for the three months ended March 31, 2011
and 2010, and the three years in the period ended
December 31, 2010 are derived from our Audited Consolidated
Financial Statements and our Unaudited Condensed Consolidated
Financial Statements and Notes to the Condensed Consolidated
Financial Statements included in this registration statement.
All other selected consolidated financial data set forth below
are derived from our financial statements not included in this
registration statement.
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For the Three Months
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Ended March 31,
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For the Year Ended December 31,
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2011
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2010
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2010
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2009
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2008
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2007
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2006
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Selected Income Statement Data:
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Revenue
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$
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27,396,303
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$
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14,728,933
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$
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63,652,318
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$
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56,814,024
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$
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64,108,891
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$
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65,190,254
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$
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54,707,906
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Loss from operations
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$
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(5,651,252
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)
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$
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(1,304,176
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)
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$
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(15,113,172
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)
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$
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(6,849,135
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)
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$
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(10,427,572
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)
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$
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(9,271,518
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)
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$
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(13,317,705
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)
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Net loss
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$
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(3,214,578
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)
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$
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(1,595,441
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)
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$
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(17,570,004
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)
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$
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(7,258,989
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)
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$
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(11,987,871
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)
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$
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(10,568,357
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)
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$
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(14,775,179
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)
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Loss per share:
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Basic and diluted EPS
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$
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(0.03
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$
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(0.03
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)
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$
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(0.26
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)
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$
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(0.13
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)
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$
|
(0.21
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)
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|
$
|
(0.18
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)
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|
$
|
(0.26
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)
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Selected Balance Sheet Data:
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Total assets
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$
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306,419,830
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$
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106,234,262
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|
|
$
|
38,917,939
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|
|
$
|
30,280,958
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|
|
$
|
34,363,938
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|
|
$
|
31,946,669
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|
|
|
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Swisher Hygiene Inc. stockholders equity (deficit)
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$
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215,728,870
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|
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$
|
45,917,138
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|
|
$
|
(19,455,206
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)
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|
$
|
(12,300,787
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)
|
|
$
|
172,410
|
|
|
$
|
8,366,774
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|
|
|
|
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|
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|
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|
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|
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|
|
|
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Long term obligations
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|
$
|
37,527,478
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|
|
|
|
|
|
$
|
31,028,992
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|
|
$
|
48,874,841
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|
|
$
|
6,343,346
|
|
|
$
|
20,927,665
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|
|
$
|
12,809,934
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|
|
|
|
|
|
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34
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in
conjunction with the Selected Financial Data and our
audited Consolidated Financial Statements and the related notes
thereto included in this registration statement. In addition to
historical consolidated financial information, this discussion
contains forward-looking statements that reflect our plans,
estimates, and beliefs. Actual results could differ from these
expectations as a result of factors including those described
under Risk Factors, Special Note Regarding
Forward-Looking Statements and elsewhere in this
registration statement.
Executive
Overview
Swisher Hygiene, Inc. provides essential hygiene and sanitation
solutions to customers throughout much of North America and
internationally through its global network of company owned
operations, franchises and master licensees. These solutions
include essential products and services that are designed to
promote superior cleanliness and sanitation in commercial
environments, while enhancing the safety, satisfaction and
well-being of employees and patrons. These solutions are
typically delivered by employees on a regularly scheduled basis
and involve providing our customers with: (i) consumable
products such as soap, paper, cleaning chemicals, detergents,
and supplies, together with the rental and servicing of dish
machines and other equipment for the dispensing of those
products; (ii) the rental of facility service items
requiring regular maintenance and cleaning, such as floor mats,
mops, bar towels and linens; (iii) manual cleaning of their
facilities; and (iv) solid waste collection services. We
serve customers in a wide range of end-markets, with a
particular emphasis on the foodservice, hospitality, retail,
industrial, and healthcare industries. In addition our solid
waste collection services provide services primarily to
commercial and residential customers through contracts with
municipalities or other agencies.
Prospectively, we intend to grow in both existing and new
geographic markets through a combination of organic and
acquisition growth. However, we will continue to focus our
investments towards those opportunities which will most benefit
our core businesses, chemical and waste collection services.
As of July 15, 2011, we have company owned operations and
franchise operations located throughout the United States and
Canada and have entered into 10 Master License Agreements
covering the United Kingdom, Ireland, Portugal, the Netherlands,
Singapore, the Philippines, Taiwan, Korea, Hong
Kong/Macau/China, and Mexico.
Our
Strategy
We believe we are well positioned to take advantage of the
markets we serve. Our ability to service customers throughout
the U.S. and parts of Canada, our broad customer base and
our strategy of combining a service-based platform with
opportunities to leverage internal and external distribution
capabilities, provide multiple avenues for organic revenue
growth. We believe our recently introduced service and product
offerings, including our ware wash, laundry, and cleaning
chemical initiative along with our solid waste collection
services, will allow us to continue to increase revenue through
existing customers, who will be able to benefit from the breadth
and depth of our current product and service offerings.
Organic
Growth
Government regulations focusing on hygiene, food safety, and
cleanliness have increased significantly locally, nationally and
worldwide. Climate change, water scarcity, and environmental
concerns have combined to create further demand for products,
services, and solutions designed to minimize waste and support
broader sustainability. In addition, many of our customers
require tailored cleaning solutions that can assist in reducing
labor, energy, and water use, and the costs related to cleaning,
sanitation and hygiene activities.
We intend to capitalize on these industry dynamics by offering
customers a one-stop shopping partner focused on
their essential commercial hygiene and sanitation needs. This
entails leveraging our route-based weekly cleaning service and
restroom product platform with additional complementary chemical
and facility
35
service products and other services, including ware washing and
laundry detergents, cleaning chemicals, disinfectants,
sanitizers, and solid waste collection services. We believe our
suite of products and services is a customer-facing portfolio
which none of our competitors offer in full and, as a result,
the customer need not shop for its essential commercial hygiene
and sanitation needs on a piece-meal basis. In addition, our
management believes that we provide our customers with more
frequent service, better results, and lower pricing than our
competitors. As a result, we believe we can increase our total
revenue per customer stop for such items and that we are well
positioned to secure new accounts.
Our national footprint and existing route structure provides us
with a highly scalable service infrastructure, which we believe
gives us a lower relative cost of service compared to local and
regional competitors, and an attractive margin on incremental
revenue from existing customers as well as revenue from new
customers. We also believe the current density of our routes
coupled with our
go-to-market
strategy of utilizing both third-party distributors and company
personnel to deliver products and perform services, provides us
sufficient capacity in our current route structure to
efficiently service additional customer locations with minimal,
if any, incremental infrastructure or personnel costs.
Acquisition
Growth
We believe our markets for chemical service, facility service,
and solid waste collection providers are highly fragmented with
many small, private local and regional businesses in each of our
core marketplaces. These independent market participants
generally are not able to benefit from economies of scale in
purchasing, offer a full range of products or services, or
provide the necessary level of support and customer service to
larger regional and national accounts within their specific
markets.
We believe the range of our product and service offerings in the
commercial hygiene and sanitation industries, coupled with our
national service infrastructure makes us the acquiror of
choice in the industry. As such, we believe that targeted
strategic acquisitions provide us the opportunity to increase
revenue of the acquired business or assets by providing access
to corporate accounts, access to additional products and
services, and access to our broader marketing strategy. In
addition these strategic acquisitions will, we believe, result
in improved gross margin and route margin of the acquired
revenue through greater purchasing efficiencies, route
consolidation, and consolidation of back office and
administrative support.
Our essential hygiene and sanitation solutions typically involve
providing our customers with: (i) consumable products such
as soap, paper, cleaning chemicals, detergents, and supplies,
together with the rental and servicing of dish machines and
other equipment for the dispensing of those products;
(ii) the rental of facility service items requiring regular
maintenance and cleaning, such as floor mats, mops, and bar
towels; (iii) manual cleaning of their facilities; and
(iv) solid waste collection services. We serve customers in
a wide range of end-markets, with a particular emphasis on the
foodservice, hospitality, retail, industrial, and healthcare
industries. Many of our products are consumable and require the
use of a dispensing system installed by us. Our services on
those systems are typically preventative in nature and are
required on a regularly scheduled basis. We strive to position
ourselves to customers as the one-stop-shop for the
full breadth of products and services we offer. We believe this
comprehensive approach to providing complete hygiene and
sanitation solutions to our customers, coupled with the rental,
installation, and service of dish machines and dispensing
equipment that provide rental income and require the use of our
products helps provide stability in our business and discourages
customers from switching vendors.
We typically enter into service agreements with various terms
with customers which outline the scope and frequency of services
we will provide, as well as the pricing of the products and
services the customer requires. Given that we typically install,
at no charge, dispensers for many of the consumable products we
sell to customers, our service agreements usually provide for an
early termination fee.
Our
History
Swisher International, Inc. was originally founded in 1986 as a
Nevada corporation. From our founding through 2004, we operated
primarily as a franchisor and licensor of restroom hygiene
services offering: (i) weekly cleaning and sanitizing
services of our customers restroom fixtures, along with
the restocking of
36
soap and air freshener dispensers and (ii) the sale of
restroom paper products, such as toilet paper and hand towels.
We provided these services to a customer base largely comprised
of small, locally owned bars, restaurants, and retail locations.
Franchisees had rights to use the Swisher name and business
processes in designated United States and Canadian geographic
markets typically ranging in size from 500,000 to
3,000,000 persons. International licensees had
substantially similar rights in the respective countries in
which they operated. Although franchisees licensed the same
business model, the manner in which they executed and adopted
Swisher programs varied greatly, resulting in inconsistent
levels of service and differing product offerings across
geographic markets.
In November 2004, H. Wayne Huizenga and Steve Berrard acquired a
majority interest in Swisher, which at the time was a publicly
traded company. Subsequently, in May 2006, Messrs. Huizenga
and Berrard acquired the remaining outstanding shares of Swisher
and began operating Swisher as a private company.
The primary goal of acquiring ownership of Swisher was to
transition the business to take greater advantage of the Swisher
brand and nationwide service and distribution network, and to
better leverage the under-utilized platform to expand both
product and service offerings. Specifically,
Messrs. Huizenga and Berrard planned to transition the
Companys focus from generating revenue almost exclusively
from restroom cleaning services to building a full-service
provider of essential hygiene and sanitation solutions offering
a broad complement of products and services, addressing the
complete hygiene, cleaning and sanitation needs of our customers
throughout their facilities. We believed that such a transition
would provide Swisher with a competitive advantage, allowing us
to retain existing customers over time and provide them with
additional products and services that were essential to the
operations of their businesses. Moreover, we sought to leverage
Swishers national infrastructure with product offerings
and service expertise in core lines of products, including
cleaning chemicals, required by larger corporate customers
nationwide. In addition, we expanded from nice to
have services to essential products and
services and eliminated customers that were unprofitable. An
important component of this business strategy was the
acquisition of a sufficient number of franchise locations or
other similar businesses, providing us direct control over the
implementation of changes to a consistent business model.
In summary, our transition from a restroom cleaning services
business to a full service hygiene and sanitation solutions
provider offering a complete chemical and facility service
program and solid waste collection services has required
significant investments. Through July 15, 2011, these
investments include:
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Acquisitions of 122 businesses, including 75 franchises, and the
acquisition of Choice, a Florida based, solid waste collection
service provider
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Replacement of management information systems;
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Introduction of delivery service vehicles;
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Addition of substantial industry experience throughout the
organization;
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Upgrade of branch facilities;
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Significant expansion of essential product lines and services to
include dust control and a complete chemical program; and
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Development of a corporate account and distributor sales
organization.
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We have franchises located throughout the U.S. and Canada
and ten master license agreements covering the United Kingdom
(U.K.), Ireland, Portugal, the Netherlands, Singapore, the
Philippines, Taiwan, Korea, Hong Kong/Macau/China, and Mexico.
The number of franchises and international master licenses since
the end of 2006 and through July 15, 2011 are as follows:
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2011
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2010
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2009
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2008
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2007
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2006
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Franchises
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4
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10
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15
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35
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39
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45
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International Master Licenses(1)
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10
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10
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10
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11
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11
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13
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(1) |
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Number of countries in which Swisher licensees operate. |
37
Prospectively, we intend to grow in both existing and new
geographic markets through a combination of organic and
acquisition growth. However, we will continue to focus our
investments towards those opportunities which will most benefit
or core businesses, chemical and waste collection services.
Additionally, we will be opportunistic as it relates to
acquiring or partnering with complementary businesses that
(i) can provide us a competitive advantage;
(ii) leverage, expand, or benefit from our distribution
network; or (iii) provide us economies of scale or cost
advantages over our existing supply chain. Collectively, these
efforts are centered on making us an attractive alternative for
larger customers in foodservice, hospitality, healthcare,
retail, and industrial markets. In addition, we will seek to
aggressively license our business model internationally. Our
success largely depends on our ability to execute on these
strategies and increase the sales of our products and services
to corporate accounts and distribution partners.
Recent
Developments
Private
Placement
On April 15, 2011, we entered into a series of arms
length securities purchase agreements to sell
9,857,143 shares of our common stock at a price of $7.70
per share, for aggregate proceeds of $75,900,000 to certain
funds of a global financial institution. We completed this
transaction on April 19, 2011 and intend to use the
proceeds from this transaction to further our organic and
acquisition growth strategy, as well as for working capital
purposes.
Recent
Acquisitions
Since March 31, 2011, the Company has acquired several
businesses. While the terms, price, and conditions of each of
these acquisitions were negotiated individually, consideration
to the sellers typically consists of a combination of cash and
our common stock. Aggregate consideration paid for these
acquired businesses was approximately $124,330,471 consisting of
approximately (1) $67,057,500 in cash,
(2) 6,801,109 shares of our common stock,
(3) $2,517,000 in assumed or issued debt, (4) a
promissory note in the principal amount of
$595,000 convertible for up to 201,925 shares of our
common stock, and (5) $1,828,000 in contingent
consideration.
We have on file with the SEC a Registration Statement on Form
S-4 which relates to an aggregate of 15,000,000 shares of
our common stock that we may issue from time to time in
connection with acquisitions of assets, businesses, or
securities in the essential commercial hygiene industries. As of
July 31, 2011 we have issued an aggregate of
5,837,035 shares of our common stock in connection with
such acquisitions as set forth below.
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On May 2, 2011, we completed the acquisition of
substantially all the assets of Sarner Enterprises, Inc.
(Sarner), a Swisher Hygiene franchisee located in
Redondo Beach, California. Sarner has been a Swisher Hygiene
franchisee since 1992 and became Swisher Hygiene largest
U.S. franchisee. Sarners franchise territory
encompasses a significant portion of Central Los Angeles County,
as well as Riverside and San Bernardino Counties further
inland, stretching from the Pacific Ocean to the Arizona border.
We completed the acquisition of the hygiene and chemical
business of Sarner for consideration consisting of
(1) 729,246 shares of Swisher Hygiene common stock at
a value of $8.70 per share and (2) contingent consideration
of approximately $383,000.
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On May 3, 2011, we completed the acquisition of
substantially all the assets of ProClean of Arizona, Inc.
(ProClean), the leading independent hygiene and
chemical provider in the Southwest. ProClean has been in
business since 1976 and serves over 4,000 commercial customers
in Arizona, Southern California, Southern Nevada, New Mexico and
West Texas through its more than 100 employees by offering
a complete range of specialty chemicals and service programs to
the foodservice and hospitality industries, including ware
washing, general cleaning, laundry and housekeeping services. We
completed the acquisition of substantially all the assets of
ProClean for consideration consisting of (1) $8,500,000 in
cash, (2) 1,218,027 shares of Swisher Hygiene common
stock at a value of $7.99 per share, and (3) assumed debt
of approximately $622,000.
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On May 4, 2011, we completed the acquisition of
substantially all the assets of American Chemical Concepts, Inc.
(American Chemicals), a Virginia-based hygiene and
chemicals company. American Chemicals serves the Eastern and
Central Virginia markets and provides specialty chemical and
warewash service programs to the foodservice and hospitality
industries. We completed the acquisition of substantially all
the assets of American Chemicals for consideration consisting of
(1) $212,500 in cash, (2) 68,543 shares of
Swisher Hygiene common stock at a value of $6.64 per share, and
(3) contingent consideration of approximately $59,000.
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On May 4, 2011, we completed the acquisition of
substantially all the assets of Chem Serve, Inc. (Chem
Serve), a California-based hygiene and chemicals company.
Chem Serve serves the San Luis Obispo and central coast of
California markets and provides specialty chemical and warewash
service programs to the foodservice and hospitality industries.
We completed the acquisition of substantially all the assets of
Chem Serve for consideration consisting of (1) $100,000 in
cash and (2) 35,000 shares of Swisher Hygiene common
stock at a value of $6.64 per share.
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On May 9, 2011, we completed the acquisition of
substantially all the assets of Mt. Hood Solutions Company
(Mt. Hood) an independent hygiene and chemical
provider in the Northwest. Mt. Hood has been in business since
1902 and serves over 4,000 commercial and industrial customers
in Oregon, Washington, Northern California, Idaho, Utah and
Colorado through its more than 100 employees by offering a
complete range of specialty chemicals and service programs to
the foodservice, hospitality and healthcare industries,
including ware washing, general cleaning, laundry and
housekeeping services, as well as a line of products for
manufacturing companies including industrial and water treatment
products. We completed the acquisition of substantially all the
assets of Mt. Hood for consideration consisting of
(1) $22,000,000 in cash, (2) 1,857,143 shares of
Swisher Hygiene common stock at a value of $7.00 per share, and
(3) contingent consideration of approximately $812,000.
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On May 19, 2011, we completed the acquisition of
substantially all the assets of Wingspan Service Corporation
(Wingspan), the sole remaining California Swisher
Hygiene franchisee. Wingspan has been a Swisher Hygiene
franchisee since 1996. Wingspans franchise territory
encompasses the greater San Francisco, Marin, Napa, and
Sacramento markets, extending from San Francisco to the
Nevada border. We completed the acquisition of the hygiene and
chemical business of Wingspan for consideration consisting of
(1) $750,000 in cash and (2) 220,834 shares of
Swisher Hygiene common stock at a value of $6.18 per share.
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On May 19, 2011, we completed the acquisition of
substantially all the assets of Chemical Sanitizing Systems,
LTD. (Chemical Sanitizing Systems), an Iowa-based
hygiene and chemicals company. Chemical Sanitizing Systems has
been in business since 1990 and serves Iowa, Nebraska, North
Dakota, South Dakota, and Minnesota along with parts of eastern
and provides specialty chemical and warewash service programs to
the foodservice and hospitality industries. We completed the
acquisition of substantially all the assets of Chemical
Sanitizing Systems for consideration consisting of
(1) $100,000 in cash and (2) 98,381 shares of
Swisher Hygiene common stock at a value of $6.18 per share.
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On May 26, 2011, we completed the acquisition of
substantially all the assets of Bussey Dishwater Service, Inc.
(Bussey), a Wisconsin-based hygiene and chemicals
company. Bussey serves the Wisconsin and Northern Illinois
markets and provides specialty chemical and warewash service
programs to the foodservice and hospitality industries. We
completed the acquisition of substantially all the assets of
Bussey for consideration consisting of (1) $250,000 in
cash, (2) 126,283 shares of Swisher Hygiene common
stock at a value of $5.95 per share, and (3) assumed debt
of approximately $95,000.
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On May 30, 2011, we completed the acquisition of
substantially all the assets of Pro-Chem Industrial, Inc.
(Pro-Chem), a Wyoming-based hygiene and chemicals
company. Pro-Chem serves the Wyoming, Montana, North Dakota, and
South Dakota m markets and provides specialty chemical and
warewash service programs to the foodservice and hospitality
industries. Pro-Chem is one of the largest chemical service
companies in the region and extends the coverage area of Swisher
Hygienes acquisition of Mt. Hood, described above. We
completed the acquisition of substantially all the assets of
Pro-Chem for
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39
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consideration consisting of (1) $1,300,000 in cash,
(2) 340,958 shares of Swisher Hygiene common stock at
a value of $6.60 per share, and (3) assumed debt of
approximately $150,000.
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On June 15, 2011 we completed the acquisition of
substantially all the assets of Prinova Company, Inc.
(Prinova), a Northern California-based hygiene and
chemicals company. Prinova covers the Northern and Central
California markets and provides specialty chemicals and service
programs to the foodservice and hospitality industries,
including warewashing and laundry services. We completed the
acquisition of substantially all the assets of Prinova for
consideration consisting of (1) $725,000 in cash and
(2) 35,003 shares of Swisher Hygiene common stock at a
value of $5.97 per share.
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On June 29, 2011 we completed the acquisition of
substantially all the assets of ProClean Systems, Inc.
(ProClean Systems) a southeast Pennsylvania-based
hygiene and chemicals company. Proclean Systems covers the
greater Philadelphia and adjacent markets and provides specialty
chemicals and service programs to the foodservice and
hospitality industries, including warewashing and laundry
services. We completed the acquisition of substantially all the
assets of ProClean Systems for consideration consisting of
(1) $700,000 in cash and (2) 291,891 shares of
Swisher Hygiene common stock at a value of $5.15 per share.
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On July 1, 2011, we completed the acquisition of
substantially all the assets of Sanolite (Sanolite),
the leading independent hygiene and chemical provider in the
Northeast. Sanolite was founded in 1949 by Norman Lubin and has
grown to serve over 3,000 commercial and industrial customers
throughout New York, New Jersey, Connecticut, Maryland,
Pennsylvania and Florida by offering a complete suite of
specialty chemicals and service programs to the foodservice and
hospitality industries, including warewashing, housekeeping and
laundry services. We completed the acquisition of substantially
all the assets of Sanolite for consideration consisting of
(1) $8,000,000 in cash, (2) 815,726 shares of
Swisher Hygiene common stock at a value of $5.63 per share, and
(3) a $1,500,000 promissory note.
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Promissory
Note Conversions and Exercise of Warrants
Since March 31, 2011, convertible promissory notes with an
aggregate principal amount of $8,621,480 and an aggregate fair
value of $12,080,344, included in short term obligations on the
Unaudited Condensed Consolidated Balance Sheets as of
March 31, 2011 were converted into 1,921,899 shares of
the Companys common stock.
In May 2011, all 5,500,000 warrants with an exercise price of
$0.50 per warrant issued to a director of CoolBrands and the
Company, and certain parties related to the director, were
exercised and as a result, we received cash of $2,750,000 in
Canadian dollars.
$100
Million Credit Facility
On March 30, 2011, we entered into a $100 million
senior secured revolving credit facility with Wells Fargo.
Borrowings under the facility are secured by a first priority
lien on substantially all of our existing and hereafter acquired
assets, including $25 million of cash on borrowings in
excess of $75 million. Furthermore, borrowings under the
facility are guaranteed by all of our domestic subsidiaries and
secured by substantially all the assets and stock of our
domestic subsidiaries and substantially all of the stock of our
foreign subsidiaries.
Interest on borrowings under the credit facility will typically
accrue at London Interbank Offered Rate (LIBOR) plus
2.5% to 4.0%, depending on the ratio of senior debt to
Consolidated EBITDA (as such term is defined in the new credit
facility, which includes specified adjustments and allowances
authorized by the lender, as provided for in such definition).
We also have the option to request swingline loans and
borrowings using a base rate. Interest is payable no more
frequently than monthly on all outstanding borrowings. The
credit facility matures on July 31, 2013.
Borrowings and availability under the credit facility are
subject to compliance with financial covenants, including
achieving specified Consolidated EBITDA levels, which will
depend on the success of our acquisition strategy, and
maintaining leverage and coverage ratios and a minimum liquidity
requirement. The
40
Consolidated EBITDA covenant, the leverage and coverage ratios,
and the minimum liquidity requirements should not be considered
indicative of Swisher Hygienes expectations regarding
future performance. The credit facility also places restrictions
on our ability to incur additional indebtedness, make certain
acquisitions, create liens or other encumbrances, sell or
otherwise dispose of assets, and merge or consolidate with other
entities or enter into a change of control transaction. Failure
to achieve or maintain the financial covenants in the credit
facility or failure to comply with one or more of the
operational covenants could adversely affect our ability to
borrow monies and could result in a default under the credit
facility. The credit facility is subject to other standard
default provisions.
The credit facility replaces our current aggregated
$25 million credit facilities, which are discussed in
Note 6 to the Notes to Consolidated Financial Statements.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The discussion of the financial condition and the results of
operations are based on the Consolidated Financial Statements,
which have been prepared in conformity with United States
generally accepted accounting principles. As such, management is
required to make certain estimates, judgments and assumptions
that are believed to be reasonable based on the information
available. These estimates and assumptions affect the reported
amount of assets and liabilities, revenue and expenses, and
disclosure of contingent assets and liabilities at the date of
the financial statements. Actual results may differ from these
estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are
reflective of significant judgments and uncertainties, the most
important and pervasive accounting policies used and areas most
sensitive to material changes from external factors. See
Note 2 to the Notes to Consolidated Financial Statements
for additional discussion of the application of these and other
accounting policies.
Revenue
Recognition
Revenue from product sales and services is recognized when
services are performed or the products are delivered to the
customer. Franchise and other revenue include product sales,
royalties and other fees charged to franchisees in accordance
with the terms of their franchise agreements. Royalties and fees
are recognized when earned.
We have entered into franchise and license agreements which
grant the exclusive rights to develop and operate within
specified geographic territories for a fee. The initial
franchise or license fee is deferred and recognized as revenue
when substantially all significant services to be provided by us
are performed. Direct incremental costs related to franchise or
license sales for which revenue has not been recognized is
deferred until the related revenue is recognized.
Valuation
Allowances for Doubtful Accounts
We estimate the allowance for doubtful accounts by considering a
number of factors, including overall credit quality, age of
outstanding balances, historical write-off experience and
specific account analysis that projects the ultimate
collectability of the outstanding balances. Actual results could
differ from these assumptions. Our allowance for doubtful
accounts for accounts receivable was $364,234 and $334,156 as of
December 31, 2010 and 2009, respectively.
Long-Lived
and Intangible Assets
We recognize losses related to the impairment of long-lived
assets when the carrying amount is not recoverable and exceeds
its fair value. When facts and circumstances indicate that the
carrying values of long-lived assets may be impaired, our
management evaluates recoverability by comparing the carrying
value of the assets to projected future cash flows, in addition
to other qualitative and quantitative analyses. We also perform
a periodic assessment of the useful lives assigned to our
long-lived assets. Changes to the useful lives of our long-lived
assets would impact the amount of depreciation expense recorded
in our statement of
41
operations. We have not experienced any significant changes to
our carry amount or estimated useful lives of our long-lived
assets.
Goodwill represents the excess of cost of an acquired business
over the fair value of the identifiable tangible and intangible
assets and liabilities assumed in a business combination.
Identifiable intangible assets include customer relationships
and noncompete agreements. The fair value of these intangible
assets at the time of acquisition is estimated based upon
discounted future cash flow projections. The customer
relationships are amortized on a straight-line basis over the
expected average life of the acquired accounts, which is based
upon a number of factors, including longevity of customers
acquired and historical retention rates. The non-compete
agreements are amortized on a straight-line basis over the term
of the agreements.
We test goodwill and intangible assets for impairment annually
or more frequently if indicators for potential impairment exist.
Impairment testing is performed at the reporting unit level.
Under generally accepted accounting principles, a reporting unit
is either the equivalent to, or one level below, an operating
segment.
The test to evaluate for impairment is a two-step process. In
the first step, we compare the fair value of each reporting unit
to its carrying value. If the fair value of the reporting unit
is less than its carrying value, we perform a second step to
determine the implied fair value of goodwill associated with
that reporting unit. If the carrying value of goodwill exceeds
the implied fair value of goodwill, such excess represents the
amount of goodwill impairment.
Determining the fair value of a reporting unit includes the use
of significant estimates and assumptions. Management utilizes a
discounted cash flow technique as a means for estimating fair
value. This discounted cash flow analysis requires various
judgmental assumptions including assumptions about future cash
flows, customer growth rates and discount rates. Expected cash
flows are based on historical customer growth, including
attrition, and continued long term growth of the business. The
discount rates used for the analysis reflect a weighted average
cost of capital based on industry and capital structure adjusted
for equity and size risk premiums. These estimates can be
affected by factors such as customer growth, pricing, and
economic conditions that can be difficult to predict.
As part of this impairment testing, management also assesses the
useful lives assigned to the customer relationships and
non-compete agreements. Changes to the useful lives of our other
intangible assets would impact the amount of amortization
expense recorded in our statements of operations. We have not
experienced any significant changes to our carry amount or
estimated useful lives of our other intangible assets.
There were no impairment losses on goodwill or other intangible
assets for the year ended December 31, 2010. For the years
ended December 31, 2009 and 2008, we recognized impairment
losses on goodwill and other intangible assets of $30,000 and
$223,000, respectively.
A hypothetical 10% decrease in the fair value of our reporting
units as of December 31, 2010 would have no impact on the
carrying value of our goodwill. We believe that the assessment
for such potential impairment losses is a critical accounting
estimate as it is dependent upon future events and requires
substantial judgment. Any resulting impairment loss could have a
material impact on our financial condition and the results of
operations.
Segments
On March 1, 2011, we completed our acquisition of Choice, a
Florida based company that provides a complete range of solid
waste and recycling collection, transportation, processing and
disposal services. As a result of the acquisition of Choice, the
Company now has two segments 1) Hygiene and 2) Waste.
Our hygiene segment primarily provides commercial hygiene
services and products throughout much of the United States, and
additionally operates a worldwide franchise and license system
to provide the same products and services in markets where our
owned operations do not exist. Our waste segment primarily
consists of the operations of Choice and future acquisition of
solid waste collection businesses. Prior to the acquisition of
Choice, we managed, allocated resources, and reported in one
segment, hygiene. See Note 13 in the Notes to the
42
Unaudited Condensed Consolidated Financial Statements. The
results of operations for the three months ended March 31,
2011 have been presented in our two segments.
Acquisition
and merger expenses
Acquisition and merger expenses include costs directly-related
to the acquisition of our four franchisees and ten independent
companies during the three months ended March 31, 2011, and
costs directly-related to the merger with CoolBrands
International, Inc. as discussed in Note 1 of our 2010
Annual Report. These costs include costs directly-related to
acquisitions and the merger and include third party due
diligence, legal, accounting and professional service expenses.
Income
Taxes
Effective on January 1, 2007, Swisher Internationals
shareholders elected that the corporation be taxed under the
provisions of Subchapter S of the Internal Revenue Code of 1986,
as amended (the Code). Under this provision, the
shareholders were taxed on their proportionate share of Swisher
Internationals taxable income. As a Subchapter
S corporation, Swisher International bore no liability or
expense for income taxes.
As a result of the Merger in November 2010, Swisher
International converted from a corporation taxed under the
provisions of Subchapter S of the Internal Revenue Code (S
Corp) to a tax-paying entity and accounts for income taxes
under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to the differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and net operating loss carryforwards.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that
includes the enactment date. Valuation allowances are
established when necessary to reduce deferred tax assets where
it is more likely than not that deferred tax assets will not be
realized. In addition, the undistributed earnings on the date
the Company terminated the S Corp election was recorded as
Additional paid-in capital on the Consolidated Financial
Statements since the termination of the S Corp election assumes
a constructive distribution to the owners followed by a
contribution of capital to the corporation.
As of the Merger date, the cumulative timing differences between
book income and taxable income were recorded. A full valuation
allowance has been provided against the deferred tax benefit
attributable to the net loss from operations. The opening
balance of our net deferred taxes was recorded as income tax
expense in the Consolidated Financial Statements. For the year
ended December 31, 2010, we recorded $1,700,000 of income
tax expense because the deferred tax liability related to
goodwill, an indefinite lived asset, cannot be offset against
our deferred tax assets related to finite lived assets. Future
additions of indefinite lived assets that are tax deductible
will continue to increase the amount recognized in the
Consolidated Statement of Operations as the difference between
the book basis and the tax basis increases.
As of January 1, 2009, we adopted the provisions related to
accounting for uncertainty in income taxes, which prescribes how
a Company should recognize, measure, present and disclose in its
financial statements uncertain tax positions that the Company
has taken or expects to take on a tax return. The adoption of
these provisions did not have a material impact on our
Consolidated Financial Statements.
We include interest and penalties accrued in the Consolidated
Financial Statements as a component of interest expenses. No
significant amounts were required to be recorded as of
December 31, 2010, 2009 and 2008. As of December 31,
2010, tax years of 2007 through 2010 remain open to inspection
by the Internal Revenue Service.
Financial
Instruments Convertible Promissory Notes
We determine the fair value of certain convertible debt
instruments issued as part of business combinations based on
assumptions that market participants would use in pricing the
liabilities. We have used a Black Scholes pricing model to
estimate fair value of our convertible promissory notes, which
requires the
43
use of certain assumptions such as expected term and volatility
of our common stock. The expected volatility was based on an
analysis of industry peers historical stock price over the
term of the notes as we currently do not have our own stock
price history and was estimated at approximately 25%. Changes in
the fair value of certain convertible debt instruments are
recorded in Other income (expense) on the Consolidated Statement
of Operations. The following reflects the sensitivity of the
fair value of these instruments held at December 31, 2010,
by maturity date, to changes in our stock price at
December 31, 2010:
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Increase in
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Increase in
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Maturity Date
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Stock Price
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Expense
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June 30, 2011
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$
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2.00
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$
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2,002,000
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September 30, 2011
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$
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2.00
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$
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378,000
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Subsequent to March 31, 2011, $8,621,480 of these
convertible promissory notes with an aggregate fair value of
$12,080,344 converted into 1,921,899 shares of our common
stock and as a result we will record $3,919,400 of expense for
the fair value adjustment on the conversion date in our
Consolidated Statement of Operations for the quarter ending
June 30, 2011. In addition, for the remaining convertible
promissory notes that have not converted subsequent to
March 31, 2011, we would record approximately $590,000 of
expense for every $1.00 increase in our stock price. Increases
or decreases in the market value of our stock price could affect
the fair value of these instruments and our earnings.
Share
Based Compensation
We measure and recognize all share based compensation at fair
value at the date of grant and recognizes compensation expense
over the service period for awards expected to vest. Determining
the fair value of share based awards at the grant date requires
judgment, including estimating the share volatility, the
expected term the award will be outstanding, and the amount of
the awards that are expected to be forfeited. We utilize the
Black-Scholes option pricing model to determine the fair value.
See Note 10 to the Notes to Consolidated Financial
Statements for further information on these assumptions.
Actuarially
Determined Liabilities
We administer a defined benefit plan for certain retired
employees. The plan has not allowed for new participants since
October 2000. As of the date of the Merger, we recorded the net
underfunded pension obligation of $560,931 for this plan.
The measurement of our pension obligation is dependent on a
variety of assumptions determined by management and used by our
actuaries. Significant actuarial assumptions used in determining
the pension obligation include the discount rate and expected
long term rate of return on plan assets. The discount rate
assumption is calculated using a bond yield curve constructed
from a population of high-quality, non-callable corporate bonds.
The discount rate is calculated by matching the plans
projected cash flows to the yield curve. The expected return on
plan assets reflects asset allocations, investment strategies,
and actual historical returns. Changes in benefit obligations
associated with these assumptions may not be recognized as costs
on the statement of income. Differences between actuarial
assumptions and actual plan results are deferred in Accumulated
other comprehensive (loss) income and are amortized into cost
only when the accumulated differences exceed 10% of the greater
of the projected benefit obligation or the market value of the
related plan assets. We recognize the funded status of the plan
on the Consolidated Balance Sheet with the offsetting entry to
Accumulated other comprehensive (loss) income.
The plan assets are invested in U.S. equities,
non-U.S. equities,
and fixed income securities. Investment securities are exposed
to various risks, including interest rate risk, credit risk, and
overall market volatility. As a result of these risks, it is
reasonably possible that the market values of investment
securities could increase or decrease in the near term.
Increases or decreases in market values could affect the current
value of the plan assets and, as a result, the future level of
net periodic benefit cost.
Expected rate of return on plan assets was developed by
determining projected returns and then applying these returns to
the target asset allocations of the plan assets, resulting in a
weighted average rate of return on plan assets. The assumed
return of 7.5% compares to an actual return of 7.4% since
inception.
44
A one percent decrease in the discount rate assumption of 5.37%
would result in an increase in the projected benefit obligation
at December 31, 2010 of approximately $297,000. Based on
the latest actuarial report as of December 31, 2010, we
expect to make a minimum regulatory funding contribution of
$78,880 during 2011.
Recently
Adopted Accounting Pronouncements
Accounting Standards
Codificationtm: Effective
July 1, 2009, we adopted the Financial Accounting Standards
Board (FASB) Accounting Standards
Codificationtm
(ASC or Codification) as the source of
authoritative GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the
U.S. SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. The
Codification superseded all then-existing non-SEC accounting and
reporting standards. The adoption of the Codification did not
have a material effect on our Consolidated Financial Statements.
Fair Value Measurements and
Disclosures: Effective January 1, 2009, we
adopted amended standards on two issues: 1) determining the
fair value of a liability when a quoted price in an active
market for an identical liability is not available and
2) measuring and disclosing the fair value of certain
investments on the basis of the investments net asset
value per share or its equivalent. This adoption did not have a
material effect on our Consolidated Financial Statements.
In December 2008, the FASB issued guidance on employers
disclosures about plan assets of a defined benefit plan or other
post retirement plan, which requires more detailed disclosures
regarding employers plan assets, including their
investment strategies, major categories of plan assets,
concentration of risk, and valuation methods used to measure the
fair value of plan assets. The guidance is effective for fiscal
years ending after December 15, 2009. We have included the
required disclosures in Note 11 of the Consolidated
Financial Statements.
In January 2010, the FASB issued new standards for new
disclosures regarding transfers in and out of Level 1 and
Level 2 fair value measurements, as well as requiring
presentation on a gross basis information about purchases,
sales, issuances and settlements in Level 3 fair value
measurements. The standards also clarified existing disclosures
regarding level of disaggregation, inputs and valuation
techniques. The standards are effective for interim and annual
reporting periods beginning after December 15, 2009 and
became effective for the Company on January 1, 2010.
Disclosures about purchases, sales, issuances and settlements in
the roll forward of activity in Level 3 fair value
measurements are effective for fiscal years beginning after
December 15, 2010 and will be effective for the Company on
January 1, 2011. We are currently evaluating the effect of
these standards on our Consolidated Financial Statements.
Business Combinations: In December 2007 the
FASB issued new guidance on business combinations. The revised
guidance establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the
identifiable assets and goodwill acquired, liabilities assumed
and any noncontrolling interest in the acquiree in a business
combination. The guidance also provides disclosure requirements
to enable users of the financial statements to evaluate the
nature and financial effects of the business combination. We
adopted this guidance effective January 1, 2009. The
adoption did not have a material effect on our Consolidated
Financial Statements.
In December 2010, the FASB issued new standards that clarify
that if comparative financial statements are presented the
entity should disclose revenue and earnings of the combined
entity as though the business combination(s) that occurred
during the current year had occurred as of the beginning of the
comparable prior annual reporting period only. The update also
expands the supplemental pro forma disclosures to include a
description of the nature and amount of material, nonrecurring
pro forma adjustments directly attributable to the business
combination included in the reported pro forma revenue and
earnings. The standards are effective prospectively for material
(either on an individual or aggregate basis) business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2010, with early adoption permitted. The
Company has included the required disclosures in Note 3 to
the Unaudited Condensed Consolidated Financial Statements.
45
Consolidation: In December 2007 the FASB
issued new guidance on noncontrolling interests in Consolidated
Financial Statements. The guidance requires reporting entities
to present noncontrolling interests in any of their consolidated
entities as equity (as opposed to a liability or mezzanine
equity) and provide guidance on the accounting for transactions
between an entity and noncontrolling interests. We adopted this
guidance effective January 1, 2009. This adoption did not
have a material effect on our Consolidated Financial Statements.
Intangibles Goodwill and Other: On
January 1, 2009, we adopted two new standards affecting
intangible assets. One of the standards addressed factors that
should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized
intangible asset. The second standard affected accounting for
defensive intangible assets, which are acquired assets that an
entity does not intend to actively use, but will hold (lock up)
to prevent others from obtaining access to them. These standards
do not address intangible assets that are used in research and
development activities. Neither of these standards had a
material effect on our Consolidated Financial Statements.
On January 1, 2011, we adopted new accounting standards
defining when step 2 of the goodwill impairment test for
reporting units with zero or negative carrying amounts should be
performed and modifies Step 1 of the goodwill impairment test
for reporting units with zero or negative carrying amounts. For
reporting units with zero or negative carrying amounts an entity
is required to perform Step 2 of the goodwill impairment test if
it is more likely than not that a goodwill impairment exists. In
determining whether it is more likely than not that a goodwill
impairment exists, an entity should consider whether there are
any adverse qualitative factors indicating that an impairment
may exist. The adoption of this accounting standard did not have
a material impact on the Companys Unaudited Condensed
Consolidated Financial Statements.
Subsequent Events: In May 2009, the FASB
issued new standards that establish general guidance for
accounting and disclosures of events that occur after the
balance sheet date but before financial statements are issued or
are available to be issued. The adoption of these standards
require us to evaluate all subsequent events that occur after
the balance sheet date through the date and time our
Consolidated Financial Statements are issued. This adoption did
not have a material effect on our Consolidated Financial
Statements.
In February 2010, the FASB amended these standards to remove the
requirement for a SEC filer to disclose a date in both issued
and revised financial statements. The amended standards
clarified the definition of revised as being the
result of either correction of an error or retrospective
application of GAAP. We adopted these amended standards upon
their issuance; they did not have a material effect on our
Consolidated Financial Statements.
Revenue Recognition: In October 2009, the FASB
issued new standards for multiple-deliverable revenue
arrangements. These new standards affect the determination of
when individual deliverables included in a multiple-element
arrangement may be treated as separate units of accounting. In
addition, these new standards modify the manner in which the
transaction consideration is allocated across separately
identified deliverables, eliminate the use of the residual value
method of allocating arrangement consideration and require
expanded disclosure. These new standards will become effective
for multiple-element arrangements entered into or materially
modified on or after January 1, 2011. Earlier application
is permitted with required transition disclosures based on the
period of adoption. We adopted these standards for
multiple-element arrangements entered into or materially
modified on or after January 1, 2011. The adoption of this
accounting standard did not have a material impact on the
Companys Unaudited Condensed Consolidated Financial
Statements.
Compensation: In April 2010, the FASB issued
new standards to clarify that an employee share-based payment
award with an exercise price denominated in the currency of a
market in which a substantial portion of the entitys
equity securities trades should not be considered to contain a
condition that is not a market, performance, or service
condition. Therefore, an entity would not classify such an award
as a liability if it otherwise qualifies as equity. These new
standards are effective for fiscal years beginning on or after
December 15, 2010. Either application is permitted. We
applied these amended standards upon their issuance; they did
not have a material effect on our Consolidated Financial
Statements.
46
Newly
Issued Accounting Pronouncements
Comprehensive income: In June 2011, the FASB
issued new standards to improve the comparability, consistency,
and transparency of financial reporting and to increase the
prominence of items reported in other comprehensive income. This
standard eliminates the option to present components of other
comprehensive income as part of the statement of changes in
stockholders equity. These standards are to be applied
retrospectively and are effective for fiscal years, and interim
periods within those years, beginning after December 15,
2011. Early application is permitted. We are currently
evaluating the effect of these standards on our Consolidated
Financial Statements.
Fair value measurements: In May 2011, the FASB
issued new standards clarifying the wording used to describe the
requirements for measuring fair value and for disclosing
information about fair value measurements and expands fair value
disclosures. These standards are to be applied prospectively and
are effective for fiscal years, and interim periods within those
years, beginning after December 15, 2011. Early application
is not permitted. We are currently evaluating the effect of
these standards on our Consolidated Financial Statements.
****
47
SWISHER
HYGIENE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 2011 AS COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2010 (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
15,426,822
|
|
|
$
|
8,164,028
|
|
Services
|
|
|
10,458,452
|
|
|
|
4,378,544
|
|
Franchise and other
|
|
|
1,511,029
|
|
|
|
2,186,361
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
27,396,303
|
|
|
|
14,728,933
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
9,583,685
|
|
|
|
5,308,948
|
|
Route expenses
|
|
|
7,115,071
|
|
|
|
3,174,176
|
|
Selling, general and administrative
|
|
|
12,324,869
|
|
|
|
6,507,155
|
|
Acquisition and merger expenses
|
|
|
1,315,978
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,707,952
|
|
|
|
1,042,830
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
33,047,555
|
|
|
|
16,033,109
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,651,252
|
)
|
|
|
(1,304,176
|
)
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(2,273,119
|
)
|
|
|
(291,265
|
)
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(7,924,371
|
)
|
|
|
(1,595,441
|
)
|
Income taxes benefit
|
|
|
4,709,793
|
|
|
|
|
|
Net loss
|
|
$
|
(3,214,578
|
)
|
|
$
|
(1,595,441
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares used in the computation of
loss per share
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
122,780,115
|
|
|
|
57,829,630
|
|
|
|
|
|
|
|
|
|
|
Impact of
Acquisitions
During the year ended December 31, 2010, we acquired four
franchisees and five independent businesses. In addition we
acquired four franchises and ten independent businesses,
including Choice, during the first three months of 2011. These
acquisitions have had a significant impact on the comparability
of our financial results and, therefore, management believes
that the best presentation of the Companys results of
operations is based on those companies or acquisitions that the
Company has operated for a full twelve months in both periods.
The term Acquisitions refers to the four franchisees
and five independent businesses acquired during the year ended
December 31, 2010 and the four franchisees and the nine
independent businesses, excluding Choice, acquired during the
three months ended March 31, 2011.
Revenue
We derive our revenue through the delivery of a wide-variety of
hygiene products and services. We deliver hygiene products and
services on a regularly scheduled basis which include providing
our customers with (i) consumable products such as soap,
paper, cleaning chemicals, detergents, and supplies, together
with the rental and servicing of dish machines and other
equipment for the dispensing of those products; (ii) the
rental of facility service items requiring regular maintenance
and cleaning, such as floor mats, mops, bar towels, and linens;
(iii) manual cleaning of their facilities; and
(iv) solid waste collection and recycling services. We
serve customers in a wide range of end-markets, with a
particular emphasis on the foodservice,
48
hospitality, retail, industrial, and healthcare industries. Our
waste segment primarily provides services to commercial and
residential customers through contracts with municipalities or
other agencies.
Total revenue and the revenue derived from each revenue type by
segment for the three months ended March 31, 2011 and 2010
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
2011
|
|
|
Revenue
|
|
|
2010
|
|
|
Revenue
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hygiene products and services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemical
|
|
$
|
9,474,019
|
|
|
|
34.6
|
%
|
|
$
|
3,899,903
|
|
|
|
26.5
|
%
|
Hygiene services
|
|
|
5,368,126
|
|
|
|
19.6
|
|
|
|
4,378,543
|
|
|
|
29.7
|
|
Paper and supplies
|
|
|
3,685,810
|
|
|
|
13.5
|
|
|
|
2,911,273
|
|
|
|
19.8
|
|
Rental and other
|
|
|
1,553,504
|
|
|
|
5.6
|
|
|
|
1,352,853
|
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hygiene product and services
|
|
|
20,081,459
|
|
|
|
73.3
|
|
|
|
12,542,572
|
|
|
|
85.2
|
|
Waste products and services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collection
|
|
|
4,494,040
|
|
|
|
16.4
|
|
|
|
|
|
|
|
|
|
Transfer
|
|
|
713,489
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
Recycling and other
|
|
|
596,286
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total waste products and services
|
|
|
5,803,815
|
|
|
|
21.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total products and service
|
|
|
25,885,274
|
|
|
|
94.5
|
|
|
|
12,542,572
|
|
|
|
85.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hygiene franchise and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
|
1,055,627
|
|
|
|
3.9
|
|
|
|
1,422,331
|
|
|
|
9.7
|
|
Fees
|
|
|
455,402
|
|
|
|
1.6
|
|
|
|
764,030
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,511,029
|
|
|
|
5.5
|
|
|
|
2,186,361
|
|
|
|
14.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
27,396,303
|
|
|
|
100.0
|
%
|
|
$
|
14,728,933
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated revenue increased $12,667,370 or 86.0% to
$27,396,303 for the three months ended March 31, 2011 as
compared to the same period in 2010. This increase includes
$5,803,815 or 21.2% of consolidated revenue related to the
acquisition of Choice on March 1, 2011 and an increase of
$5,403,219 from Acquisitions. Excluding the impact of these
acquisitions, consolidated revenue increased $2,146,837 or 14.6%
to $15,915,138 for the three months ended March 31, 2011 as
compared to $13,768,302 for the three months ended
March 31, 2010. This increase is comprised of an increase
of $2,135,699 in hygiene products and services revenue and an
increase of $11,138 in hygiene franchise and other revenue.
Hygiene products and services revenue increased $7,538,887 or
60.1% during the three months ended March 31, 2011 as
compared to the same period in 2010. This increase includes
$5,403,219 related to Acquisitions. Excluding the impact from
acquisitions, hygiene products and services revenue increased
$2,135,668 or 17.0% and is primarily from an increase of
chemical sales of $2,671,604 or 68.5% and $12,152 or 0.4% in
paper and supplies, which was offset by decreases of $519,931 or
11.9% in hygiene services and $28,157 or 2.1% in rental and
other.
During the first three months of 2011, our sales mix has
continued to shift towards our core chemical product sales from
our legacy hygiene business. Three principal factors have
contributed to this trend: (i) since 2009, we have placed
particular emphasis on the development of our core markets
including our chemical offering, particularly as it relates to
ware washing and laundry solutions and a lesser focus on our
legacy hygiene service offerings; (ii) over this same
period, we have aggressively managed customer profitability
terminating less favorable arrangements; and (iii) we have
been impacted by the prolonged effects of challenging economic
conditions that has resulted in customer attrition, lower
consumption levels of products and services, and a reduction or
elimination in spending for hygiene-related products and
services by our customers.
49
Hygiene franchise and other revenue decreased $675,333 or 30.9%
for the three months ended March 31, 2011 as compared to
the same period in 2010 and includes of $686,501 from
Acquisitions. Acquisitions of franchisees during the period
result in less revenue from franchisee product sales and fees,
offset by revenue subsequent to the acquisition of the
franchisee included in hygiene product and services revenue
above. Excluding the impact from acquisitions, hygiene franchise
and other revenue increased $11,168 or 0.5%.
Cost of
Sales
Hygiene cost of sales consists primarily of paper, air
freshener, chemical and other consumable products sold to our
customers, franchisees and international licensees. Waste costs
of sales include costs related to the disposal of collections
and cost of recycled paper purchases. Cost of sales for the
three months ended March 31, 2011 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
%(1)
|
|
|
2010
|
|
|
%(1)
|
|
|
Hygiene
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned operations
|
|
$
|
6,697,484
|
|
|
|
33.4
|
%
|
|
$
|
4,006,081
|
|
|
|
31.9
|
%
|
Franchisee product sales
|
|
|
972,685
|
|
|
|
92.1
|
|
|
|
1,302,867
|
|
|
|
91.6
|
|
Waste
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal
|
|
|
1,496,769
|
|
|
|
28.7
|
|
|
|
|
|
|
|
|
|
Paper purchases
|
|
|
416,747
|
|
|
|
31.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$
|
9,583,685
|
|
|
|
35.0
|
%
|
|
$
|
5,308,948
|
|
|
|
36.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents cost as a percentage of the respective segments
product and service line revenue. |
Consolidated cost of sales for the three months ended
March 31, 2011 increased $4,274,737 or 80.5% to $9,583,685
as compared to the same period in 2010. This increase includes
$1,913,516, or 19.8% of consolidated cost of sales, related to
the acquisition of Choice and $1,568,349 or 29.5% from
Acquisitions in the three months ended March 31, 2011 as
compared to the same period of 2010. Excluding the impact from
these acquisitions, consolidated cost of sales increased
$792,872 or 14.9% to $6,101,820 for the three months ended
March 31, 2011 as compared to the same period in 2010.
Hygiene company-owned operations cost of sales for the three
months ended March 31, 2011 increased $2,691,403 or 67.2%
to $6,697,484 as compared to the same period in 2010 and
includes $1,568,349 related to Acquisitions. Excluding the
impact of Acquisitions, cost of sales for company-owned
operations increased to 32.2% of related revenue for the three
months ended March 31, 2011 as compared to 31.9% for the
same period in 2010, primarily due to the change in sales mix
from lower cost hygiene services to higher cost chemical product
sales. Excluding the impact from Acquisitions, cost of sales for
company-owned operations increased $1,123,054 or 28.0% to
$5,129,135 as compared to the same period in 2010. This increase
consisted primarily of approximately $493,000 in sales mix
change from lower cost hygiene services to higher cost chemical
product sales, approximately $691,000 due to the current periods
higher product sales volume, offset by approximately $61,000
related to product cost.
Hygiene cost of sales to franchisees for the three months ended
March 31, 2011 decreased $330,182 or 25.3% to $972,685 as
compared to the same period in 2010 in part due to acquisitions.
We charge franchisees a percentage of our costs up to a set
base. Product sales above this base are at a more favorable
margin for the franchisee. Cost of sales to franchisees was
92.1% of franchisee product revenue for the three months ended
March 31, 2011 as compared to 91.6% for the same period in
2010. Excluding the effect of acquisitions, cost of goods sold
increased $62,686 or 4.8% during the three months ended
March 31, 2011 as compared to the same period in 2010.
50
Route
Expenses
Route expenses consist primarily of the costs incurred by the
Company for the delivery of products and providing services to
customers. The details of route expenses for the three months
ended March 31, 2011 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
%(1)
|
|
|
2010
|
|
|
%(1)
|
|
|
Hygiene
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
$
|
3,899,215
|
|
|
|
19.4
|
%
|
|
$
|
2,266,966
|
|
|
|
18.1
|
%
|
Vehicle and other expenses
|
|
|
1,264,583
|
|
|
|
6.3
|
|
|
|
907,211
|
|
|
|
7.2
|
|
Waste
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
1,119,264
|
|
|
|
19.3
|
|
|
|
|
|
|
|
|
|
Vehicle and other expenses
|
|
|
832,009
|
|
|
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total route expenses
|
|
$
|
7,115,071
|
|
|
|
27.5
|
%
|
|
$
|
3,174,176
|
|
|
|
25.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents cost as a percentage of Products and Services revenue
for the respective operating segment. |
Consolidated route expenses for the three months ended
March 31, 2011 increased $3,940,895 or 124.2% to $7,115,071
as compared to the same period in 2010. This increase includes
$1,951,273, which is 38.3% of waste service revenue, related to
the acquisition of Choice, and $1,316,530 related to
Acquisitions. Excluding the impact of these acquisitions, route
expenses increased $673,092 or 21.2% to $3,847,268 for the three
months ended March 31, 2011 as compared to the same period
in 2010. This increase consisted primarily of $486,467 or 21.5%
in compensation and $186,625 or 20.6% in vehicle and other route
expenses. These increases are primarily the result of headcount
and vehicles added as part of a distribution agreement entered
into in December 2010 and increasing fuel costs.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses consist primarily
of the costs incurred for:
|
|
|
|
|
Branch office and field management support costs that are
related to field operations. These costs include compensation,
occupancy expense and other general and administrative expenses.
|
|
|
|
Sales expenses, which include marketing expenses and
compensation and commission for branch sales representatives and
corporate account executives.
|
|
|
|
Corporate office expenses that are related to general support
services, which include executive management compensation and
related costs, as well as department cost for information
technology, human resources, accounting, purchasing and other
support functions.
|
The details of selling, general and administrative expenses for
the three months ended March 31, 2011 and 2010 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
2011
|
|
|
Revenue(1)
|
|
|
2010
|
|
|
Revenue(1)
|
|
|
Hygiene
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
$
|
8,011,897
|
|
|
|
37.1
|
%
|
|
$
|
4,474,667
|
|
|
|
30.4
|
%
|
Occupancy
|
|
|
1,076,222
|
|
|
|
5.0
|
|
|
|
848,484
|
|
|
|
5.7
|
|
Other
|
|
|
1,974,045
|
|
|
|
9.1
|
|
|
|
1,184,004
|
|
|
|
8.1
|
|
Waste
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
659,421
|
|
|
|
11.4
|
|
|
|
|
|
|
|
|
|
Occupancy
|
|
|
60,685
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
542,599
|
|
|
|
9.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general, and administrative
|
|
$
|
12,324,869
|
|
|
|
45.0
|
%
|
|
$
|
6,507,155
|
|
|
|
44.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents cost as a percentage of revenue for the respective
segment. |
51
Consolidated selling, general, and administrative expenses for
the three months ended March 31, 2011 increased $5,817,714
or 89.4% as compared to the same period of 2010. This increase
includes $1,262,705, which is 21.8% of waste revenue, related to
the acquisition of Choice and $1,247,005 related to
Acquisitions. Excluding the impact of these acquisitions,
selling, general, and administrative expenses increased
$3,308,004 or 50.8%.
Hygiene compensation for the three months ended March 31,
2011 increased $3,537,230 or 79.1% to $8,011,897 as compared to
the same period of 2010 and includes an increase of $897,463
related to Acquisitions offset by a corporate allocation of
$221,000 to the waste segment. Excluding the impact of these
acquisitions and corporate allocation, hygiene compensation
expense for the three months ended March 31, 2011 as
compared to the same period in 2010 increased $2,860,767 or
63.9% to $7,335,434. This increase was primarily the result of
an increase of approximately $1,227,000 in costs and expenses
related primarily to our expansion of our corporate, field and
distribution sales organizations that began in 2009 and has
continued into 2011 to accelerate the growth in the our core
chemical program, and an increase of approximately $1,633,000 of
salaries and other costs largely associated with our transition
from a private company to a public company.
Occupancy expenses for the three months ended March 31,
2011 increased $227,738 or 26.8% to $1,076,222 as compared to
the same period of 2010, which includes an increase of $176,729
related to Acquisitions. Excluding the impact of these
acquisitions, occupancy expenses for three months ended
March 31, 2011, as compared to the same period of 2010,
increased $51, 009 or 6.0% to $899,493 primarily due to
utilities and telephone changes.
Other expenses for three months ended March 31, 2011
increased $790,041 or 66.7% to $1,974,045 as compared to the
same period in 2010 and includes an increase of $172,813 for
Acquisitions. Excluding the impact of these acquisitions, other
expenses for the three months ended March 31, 2011 as
compared to the same period of 2010, increased $617,228 or 52.1%
to $1,801,232. This increase was primarily due to the expansion
of our business and included the following: marketing expenses
of $106,000, travel costs of $250,000, insurance of $107,000,
and other office and administrative expenses of $154,000.
Acquisition
and merger expenses
Acquisition and merger expenses of $1,315,978 include costs of
$352,106 directly-related to the acquisition of our four
franchisees and ten independent companies during the three
months ended March 31, 2011. In addition $963,872 of these
costs are related to the merger with CoolBrands International,
Inc. as discussed in Note 1 of our 2010 Annual Report.
These costs include costs for third party due diligence, legal,
accounting and professional service expenses.
Depreciation
and amortization
Depreciation and amortization consists of depreciation of
property and equipment and the amortization of intangible
assets. Depreciation and amortization for the three months ended
March 31, 2011 increased $1,665,122 or 159.7% to $2,707,952
as compared to $1,042,830 during the same period of 2010. This
increase includes $809,172 related to the acquisition of Choice
and $359,422 for Acquisitions and is primarily the result of
amortization for acquired other intangible assets including
customer relationships and non-compete agreements obtained as
part of these acquisitions. The remaining increase is primarily
related to depreciation on capital expenditures of approximately
$7,156,000 made since March 31, 2010.
52
Other
expense, net
Other expense, net for the three months ended March 31,
2011 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
2011
|
|
|
Revenue
|
|
|
2010
|
|
|
Revenue
|
|
|
Interest income
|
|
$
|
15,746
|
|
|
|
0.1
|
%
|
|
$
|
15,006
|
|
|
|
0.1
|
%
|
Interest expense
|
|
|
(363,168
|
)
|
|
|
(1.3
|
)
|
|
|
(306,271
|
)
|
|
|
(2.1
|
)
|
Unrealized loss on convertible promissory notes
|
|
|
(1,961,100
|
)
|
|
|
(7.2
|
)
|
|
|
|
|
|
|
|
|
Gain on foreign currency
|
|
|
35,403
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
$
|
(2,273,119
|
)
|
|
|
(8.3
|
)%
|
|
$
|
(291,265
|
)
|
|
|
(2.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense represents interest on borrowings under our
credit facilities, notes incurred in connection with
acquisitions, advances from shareholders and the purchase of
equipment and software. Interest expense for the three months
ended March 31, 2011 increased $56,897 or 18.6% to $363,168
as compared to the same period of 2010. This increase is
primarily the result of an increase in debt of approximately
$6,567,000.
The unrealized loss on convertible promissory notes of
$1,961,100 is the result of the adjustment for fair value of the
convertible promissory notes issued during the last part of 2010
and 2011 required at each reporting period. The fair value of
these convertible promissory notes is impacted by the market
price of our stock. See Note 6 of the Unaudited Condensed
Consolidated Financial Statements.
53
SWISHER
HYGIENE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 2010 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
%(1)
|
|
|
2009
|
|
|
%(1)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
37,690,324
|
|
|
|
59.2
|
%
|
|
$
|
27,316,876
|
|
|
|
48.1
|
%
|
Services
|
|
|
17,737,440
|
|
|
|
27.9
|
|
|
|
16,573,821
|
|
|
|
29.2
|
|
Franchise and other
|
|
|
8,224,554
|
|
|
|
12.9
|
|
|
|
12,923,327
|
|
|
|
22.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
63,652,318
|
|
|
|
100.0
|
|
|
|
56,814,024
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
23,597,229
|
|
|
|
37.1
|
|
|
|
22,304,515
|
|
|
|
39.3
|
|
Route expenses
|
|
|
13,930,653
|
|
|
|
25.1
|
|
|
|
12,519,891
|
|
|
|
28.5
|
|
Selling, general and administrative
|
|
|
31,258,368
|
|
|
|
49.1
|
|
|
|
24,094,701
|
|
|
|
42.4
|
|
Merger expenses
|
|
|
5,122,067
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,857,173
|
|
|
|
7.6
|
|
|
|
4,744,052
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
78,765,490
|
|
|
|
123.7
|
|
|
|
63,663,159
|
|
|
|
112.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(15,113,172
|
)
|
|
|
(23.7
|
)
|
|
|
(6,849,135
|
)
|
|
|
(12.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(756,832
|
)
|
|
|
(1.2
|
)
|
|
|
(409,854
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(15,870,004
|
)
|
|
|
(24.9
|
)
|
|
|
(7,258,989
|
)
|
|
|
(12.8
|
)
|
Income taxes
|
|
|
1,700,000
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,570,004
|
)
|
|
|
(27.6
|
)%
|
|
$
|
(7,258,989
|
)
|
|
|
(12.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share basic and diluted
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Company-owned locations
|
|
|
69
|
|
|
|
60
|
|
Franchises
|
|
|
8
|
|
|
|
15
|
|
International Master Licenses
|
|
|
10
|
|
|
|
10
|
|
|
|
|
(1) |
|
Calculated as a percentage of total revenue, except for Route
expenses which are calculated as a percentage of Products and
Services revenue. |
Revenue
We derive our revenue through the delivery of a wide-variety of
hygiene products and services. We deliver hygiene products and
services on a regularly scheduled basis which include providing
our customers with (i) the sale of consumable products such
as soap, paper, cleaning chemicals, detergents, and supplies,
together with the rental and servicing of dish machines and
other equipment for the dispensing of those products;
(ii) the rental of facility service items requiring regular
maintenance and cleaning, such as floor mats, mops, and bar
towels; and (iii) manual cleaning of their facilities. We
serve customers in a wide range of end-markets, with a
particular emphasis on the foodservice, hospitality, retail,
industrial, and healthcare industries.
54
Total revenue and the revenue derived from each revenue type for
the year ended December 31, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
2010
|
|
|
Revenue
|
|
|
2009
|
|
|
Revenue
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and service:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hygiene services
|
|
$
|
17,737,440
|
|
|
|
27.9
|
%
|
|
$
|
16,573,821
|
|
|
|
29.2
|
%
|
Chemical
|
|
|
19,062,809
|
|
|
|
29.9
|
|
|
|
10,319,434
|
|
|
|
18.2
|
|
Paper
|
|
|
12,337,886
|
|
|
|
19.4
|
|
|
|
11,549,037
|
|
|
|
20.3
|
|
Rental and other
|
|
|
6,289,629
|
|
|
|
9.9
|
|
|
|
5,448,405
|
|
|
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product and service
|
|
|
55,427,764
|
|
|
|
87.1
|
|
|
|
43,890,697
|
|
|
|
77.3
|
|
Franchise and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
|
5,395,614
|
|
|
|
8.5
|
|
|
|
8,732,038
|
|
|
|
15.4
|
|
Fees
|
|
|
2,828,940
|
|
|
|
4.4
|
|
|
|
4,191,289
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total franchise and other
|
|
|
8,224,554
|
|
|
|
12.9
|
|
|
|
12,923,327
|
|
|
|
22.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
63,652,318
|
|
|
|
100.0
|
%
|
|
$
|
56,814,024
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue increased $6,838,294 or 12.0% to $63,652,318 for
the year ended December 31, 2010 as compared to 2009. This
increase includes an increase of $11,246,330 from the
acquisition of the four franchises and five independent
companies acquired in 2010 and 18 franchises acquired and the
independent chemical company acquired in 2009. Excluding the
impact of acquisitions, product and service revenue increased by
$290,738 and was offset by a decline in product sales and fees
to franchisees of $4,698,774. Excluding the impact of these
acquisitions, total revenue decreased by $4,408,036 or 7.8% as
compared to 2009 primarily from decreases of:
(i) $3,321,529 or 20.0% in hygiene services;
(ii) $1,302,237 or 11.3% in paper; (iii) $120,664 or
2.2% in rental and other; and (iv) $4,698,773 or 36.4% in
product sales and fees earned from the Companys remaining
franchises, which were offset by an increase of $5,035,167 or
48.8% in chemical sales.
During 2010, our sales mix has continued to shift towards
chemical product sales from our legacy hygiene business. Three
principal factors have contributed to this trend: (i) since
2009, we have placed particular emphasis on the development of
our chemical offering, particularly as it relates to ware
washing and laundry solutions and a lesser focus on our legacy
hygiene service offerings; (ii) over this same period, we
have aggressively managed customer profitability terminating
less favorable arrangements and; (iii) we have been
impacted by the prolonged effects of challenging economic
conditions that has resulted in customer attrition, lower
consumption levels of products and services, and a reduction or
elimination in spending for hygiene-related products and
services by our customers.
Total franchise and other revenue decreased $4,698,773 or 36.4%
for the year ended December 31, 2010 as compared to 2009.
This decrease includes the impact of the acquisition of four
franchises in 2010 and 18 franchisees in 2009, which results in
less revenue from franchisees and increased revenue related to
acquisitions as discussed above. During the year ended
December 31, 2010, revenue from franchisee product sales
and fees from franchises that we acquired in 2010 were
$1,888,510 compared to $6,090,630 of revenue from franchisee
product sales and fees that we acquired in 2009 and 2010.
Excluding the effect of the acquisitions, product sales and fees
declined $496,654 or 7.3% during 2010 as compared to 2009. This
decline includes decreased product sales of $542,408 or 6.2%,
offset by increase in fees of $45,754 or 1.1%. This decline is
primarily attributed to the prolonged effect of the challenging
economic conditions being experienced by our franchisees. These
economic conditions resulted in customer attrition, lower
consumption levels of products and services and a reduction or
elimination in spending for hygiene related products and
services by franchise customers.
55
Cost of
Sales
Cost of sales for the year ended December 31, 2010 and 2009
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
%(1)
|
|
|
2009
|
|
|
%(1)
|
|
|
Company-owned operations
|
|
$
|
18,542,802
|
|
|
|
33.5
|
%
|
|
$
|
14,385,596
|
|
|
|
32.8
|
%
|
Franchisee product sales
|
|
|
5,054,427
|
|
|
|
93.7
|
%
|
|
|
7,918,919
|
|
|
|
90.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$
|
23,597,229
|
|
|
|
37.1
|
%
|
|
$
|
22,304,515
|
|
|
|
39.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents cost as a percentage of the respective product line
revenue. |
Cost of sales consists primarily of paper, air freshener,
chemical and other consumable products sold to our customers,
franchisees and international licensees. Total cost of sales for
2010 increased $1,292,714 or 5.8% to $23,597,229 as compared to
2009. This increase includes an increase of $248,616 related to
the acquisition of four franchises and five independent
companies in 2010 and 18 franchisees and an independent chemical
company in 2009. Excluding the effect of these acquisitions,
total cost of sales for 2010 as compared to 2009 increased
$1,044,098 or 4.7%.
The cost of sales for company-owned operations for the year
ended December 31, 2010 increased $4,157,206 or 28.9% to
$18,542,802 as compared to 2009. This increase included
$3,050,424 related to the acquisition of four franchises and
five independent chemical companies in 2010 and 18 franchises
and an independent chemical company in 2009. Cost of sales for
company-owned operations, excluding the impact of acquisitions,
increased to 36.6% of related revenue for the year ended
December 31, 2010 as compared to 33.5% for 2009, primarily
due to the change in sales mix from lower cost hygiene services
to higher cost chemical product sales. Excluding the impact of
the acquisitions, cost of sales for company-owned operations
increased $1,106,782 or 7.7% to $15,492,378 as compared to 2009.
This increase consisted primarily of $1,304,414 in sales mix
change from lower cost hygiene services to higher cost chemical
product sales, $130,927 due to the current periods higher
product sales volume, and partly offset by $328,559 improved
product cost.
The cost of sales to franchisees for the year ended
December 31, 2010 decreased $2,864,492 or 36.2% to
$5,054,427 as compared to 2009 in part due to the acquisition of
four franchises and five independent chemical companies in 2010
and 18 franchises and an independent chemical company in 2009.
We charge franchisees a percentage of our costs up to a set
base. Product sales above this base are at more favorable margin
for the franchisee. Cost of sales to franchisees was 93.7% of
franchisee product revenue for the year ended December 31,
2010 as compared to 90.7% for 2009, which was due to product
sales above the base at certain franchisees as compared to 2009.
Excluding the effect of acquisitions, cost of goods sold
decreased $390,812 or 4.9% in year ended December 31, 2010
compared to 2009. This decrease was primarily a result of lower
product sales to its remaining franchisees.
Route
Expenses
Route expenses consist primarily of the costs incurred by the
Company for the delivery of products and providing services to
customers. The details of route expenses for the year ended
December 31, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
%(1)
|
|
|
2009
|
|
|
%(1)
|
|
|
Compensation
|
|
$
|
9,930,118
|
|
|
|
17.9
|
%
|
|
$
|
9,085,209
|
|
|
|
20.7
|
%
|
Vehicle expenses
|
|
|
3,660,105
|
|
|
|
6.6
|
%
|
|
|
3,144,603
|
|
|
|
7.2
|
|
Other
|
|
|
340,430
|
|
|
|
0.6
|
%
|
|
|
290,079
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total route expenses
|
|
$
|
13,930,653
|
|
|
|
25.1
|
%
|
|
$
|
12,519,891
|
|
|
|
28.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents cost as a percentage of Products and Services revenue. |
56
Route expenses for the year ended December 31, 2010
increased $1,410,762 or 11.3% to $13,930,653 as compared to
2009. This increase includes an increase of $3,166,809 related
to the acquisition of four franchises and five independent
companies in 2010 and 18 franchises and an independent chemical
company in 2009. Excluding the impact of acquisitions, route
expenses for the year ended December 31, 2010 as compared
to 2009 decreased $1,756,047 or 14.0% to $10,763,844. The
decrease consisted primarily of $1,571,635 or 17.3% in
compensation, $162,486 or 5.2% in vehicle expenses and $21,925
or 7.6% in other route expenses. These decreases are a result of
route consolidation and optimization initiatives made in
response to the prolonged effect of the challenging economic
conditions we have experienced. These economic conditions
resulted in customer attrition, lower consumption levels of
products and services and a reduction or elimination in spending
for hygiene-related products and services by our customers.
During the year ended December 31, 2010 compared to 2009,
excluding the effect of acquisitions, the average number of
route technicians decreased 13.4%. Along with its staffing
initiatives, we have continued to focus on the improvement of
route efficiencies. Since 2009, we have implemented programs to
optimize our service frequency, minimize miles driven, and
balance the number of stops with the average revenue generated
per stop.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses consist primarily
of the costs incurred by us for:
|
|
|
|
|
Branch office and field management support costs that are
related to field operations. These costs include compensation,
occupancy expense and other general and administrative expenses.
|
|
|
|
Sales expenses, which include marketing expenses and
compensation and commission for branch sales representatives and
corporate account executives.
|
|
|
|
Corporate office expenses that are related to general support
services, which include executive management compensation and
related costs, as well as department cost for information
technology, human resources, accounting, purchasing and other
support functions.
|
The details of selling, general and administrative expenses for
the year ended December 31, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
2010
|
|
|
Revenue
|
|
|
2009
|
|
|
Revenue
|
|
|
Compensation
|
|
$
|
21,422,692
|
|
|
|
33.7
|
%
|
|
$
|
16,975,556
|
|
|
|
29.9
|
%
|
Occupancy
|
|
|
3,487,994
|
|
|
|
5.5
|
|
|
|
3,124,466
|
|
|
|
5.5
|
|
Other
|
|
|
6,347,682
|
|
|
|
10.0
|
|
|
|
3,994,679
|
|
|
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general, and administrative
|
|
$
|
31,258,368
|
|
|
|
49.1
|
%
|
|
$
|
24,094,701
|
|
|
|
42.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general, and administrative expenses for the year
ended December 31, 2010 increased $7,163,667 or 29.7% as
compared to 2009. This increase includes $3,099,557 related to
the acquisition of four franchises and five independent
companies in 2010 and 18 franchises and an independent chemical
company in 2009. Excluding the impact of acquisitions, selling,
general, and administrative expenses increased $4,064,110 or
16.9%.
Compensation for the year ended December 31, 2010 increased
$4,447,136 or 26.2%% to $21,422,692 as compared to the same
period of 2009. This increase includes an increase of $2,233,806
related to the acquisition of four franchises and five
independent chemical companies in 2010 and 18 franchises and an
independent chemical company in 2009. Excluding the impact of
acquisitions, compensation expense for the year ended
December 31, 2010 as compared to the same period of 2009
increased $2,213,330 or 13.0% to $19,188,886. This increase was
primarily the result of an increase of $1,024,700 in costs and
expenses related primarily our expansion of its corporate, field
and distribution sales organizations that began in 2009 and
continued into 2010 to accelerate the growth in the our chemical
program, an increase of $873,586 of salaries and other costs
largely associated with our transition from a private company to
a public company, and $315,044 of other increase associated with
our planned growth.
57
Occupancy expenses for the year ended December 31, 2010
increased $363,528 or 11.6% to $3,487,994 as compared to 2009.
This increase includes $382,648 related to the acquisition of
four franchises and five independent companies in 2010 and 18
franchises and an independent chemical company in 2009.
Excluding the impact of acquisitions, occupancy expenses for
year ended December 31, 2010, as compared to 2009,
decreased $19,120 or 0.6% to $3,105,346.
Other expenses for year ended December 31, 2010 increased
$2,353,003 or 58.9% to $6,347,682 as compared to 2009. This
increase includes $483,103 related to the acquisition of four
franchises and five independent companies in 2010 and 18
franchises and an independent chemical company in 2009.
Excluding the impact of acquisitions, other expenses for the
year ended December 31, 2010 as compared to 2009, increased
$1,869,900 or 46.8% to $5,864,579. This increase was primarily
due to increases in the following: marketing expenses of
$224,000, travel costs of $235,000, consulting and professional
services of $474,000 largely associated with our transition from
a private company to a public company, property taxes of
$121,000, and other office and administrative expenses of
$336,000 related to the expansion of our business.
Merger
and Acquisition Expenses
As discussed more fully in Note 1 to the Notes to
Consolidated Financial Statements, on November 2, 2010
Swisher International entered into a merger agreement under
which all of the outstanding common shares of Swisher
International were exchanged for 57,789,630 common shares of
Swisher Hygiene, formerly named CoolBrands International, Inc.,
such that Swisher International became a wholly-owned subsidiary
of Swisher Hygiene. In connection with this transaction, we
incurred certain directly-related legal, accounting and other
professional expenses. These expenses totaled $5,122,067 and
were incurred entirely in our third and fourth quarters in 2010.
Depreciation
and Amortization
Depreciation and amortization consists of depreciation of
property and equipment and the amortization of intangible
assets. Depreciation and amortization for the year ended
December 31, 2010 increased $113,121 or 2.4% to $4,857,173
as compared to $4,744,052 in 2009. This increase includes
$869,121 related to the acquisition of four franchises and five
independent companies in 2010 and 2009 and is primarily the
result of amortization for acquired other intangible assets
including customer relationships and non-compete agreements
obtained as part of these acquisitions. This increase is offset
by approximately $446,000 of amortization related to other
intangibles that were fully amortized in 2010, and approximately
$419,000 for items in services included in property and
equipment that were fully amortized in 2010, offset by
depreciation for additional capital expenditures.
Other
expense, net
Other expense, net for the years ended December 31, 2010
and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
2010
|
|
|
Revenue
|
|
|
2009
|
|
|
Revenue
|
|
|
Interest Income
|
|
$
|
100,212
|
|
|
|
0.2
|
%
|
|
$
|
54,797
|
|
|
|
0.1
|
%
|
Interest expense
|
|
|
(1,677,076
|
)
|
|
|
(2.6
|
)
|
|
|
(1,063,411
|
)
|
|
|
(1.9
|
)
|
Gain on foreign currency
|
|
|
820,032
|
|
|
|
1.3
|
|
|
|
34,653
|
|
|
|
0.1
|
|
Forgiveness of debt
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
|
|
0.9
|
|
Gain on bargain purchase
|
|
|
|
|
|
|
|
|
|
|
94,107
|
|
|
|
0.2
|
|
Impairment losses
|
|
|
|
|
|
|
|
|
|
|
(30,000
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
$
|
(756,832
|
)
|
|
|
(1.2
|
)%
|
|
$
|
(409,854
|
)
|
|
|
(0.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income primarily relates to a note receivable from our
master licensee in the U.K. and interest earned on cash and cash
equivalents balances. Interest income increased in 2010 by
$45,415 as compared to 2009 due primarily to increased interest
earned on the cash received from the Merger.
58
Interest expense represents interest on borrowings under our
credit facilities, notes incurred in connection with
acquisitions, advances from shareholders and the purchase of
equipment and software. Interest expenses for 2010 increased
$613,665 or 57.7% to $1,677,076 as compared to 2009. The
$613,665 increase is primarily the result of a
$15,882,571 year-to-year
increase in debt and shareholder advances, including the
$21,445,000 of shareholder advances that were converted to
equity on November 2, 2010 as a result of the Merger.
Gain on foreign currency represents the foreign currency
translation adjustments. During 2010, we converted $50,461,794
of cash held in Canadian dollars at favorable U.S. exchange
rates, which resulted in a realized gain of $838,266 in 2010.
From 2005 until 2008, we agreed to pay a company owned by a
shareholder a fee for services provided, including product
development, marketing and branding strategy, and management
advisory assistance totaling $500,000. In 2009, the related
company waived it rights to these fees and accordingly, the
accrued balance of $500,000, which was outstanding as of
December 31, 2008, has been recorded as forgiveness of
debt. We considered the accounting alternatives for the
treatment of this transaction and concluded that since the
transaction represented the forgiveness of a previously expensed
liability, it was most appropriately reflected in other income.
The gain from bargain purchases recognized in 2009 was related
to our acquisition of franchisees where the fair value of the
assets acquired exceeded the purchase price. The impairment
losses recognized in 2009 were related to customer lists whose
carrying value was determined to be less than their fair value.
59
SWISHER
HYGIENE INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 2009 AS COMPARED
TO THE YEAR ENDED DECEMBER 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
%(1)
|
|
|
2008
|
|
|
%(1)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
27,316,876
|
|
|
|
48.1
|
%
|
|
$
|
25,935,493
|
|
|
|
40.5
|
%
|
Service
|
|
|
16,573,821
|
|
|
|
29.2
|
|
|
|
19,895,990
|
|
|
|
31.0
|
|
Franchise and other
|
|
|
12,923,327
|
|
|
|
22.7
|
|
|
|
18,277,408
|
|
|
|
28.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
56,814,024
|
|
|
|
100.0
|
|
|
|
64,108,891
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
22,304,515
|
|
|
|
39.3
|
|
|
|
25,071,410
|
|
|
|
39.1
|
|
Route expenses
|
|
|
12,519,891
|
|
|
|
28.5
|
|
|
|
14,201,243
|
|
|
|
31.0
|
|
Selling, general and administrative
|
|
|
24,094,701
|
|
|
|
42.4
|
|
|
|
30,057,178
|
|
|
|
46.9
|
|
Depreciation and amortization
|
|
|
4,744,052
|
|
|
|
8.4
|
|
|
|
5,206,632
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
63,663,159
|
|
|
|
112.1
|
|
|
|
74,536,463
|
|
|
|
116.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(6,849,135
|
)
|
|
|
(12.1
|
)
|
|
|
(10,427,572
|
)
|
|
|
(16.3
|
)
|
Other expense, net
|
|
|
(409,854
|
)
|
|
|
(0.7
|
)
|
|
|
(1,560,299
|
)
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(7,258,989
|
)
|
|
|
(12.8
|
)%
|
|
$
|
(11,987,871
|
)
|
|
|
(18.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share basic and diluted
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
(1) |
|
Calculated as a percentage of total revenue, except for Route
Expenses which is calculated as a percentage of revenue from
Products and Services, as route expenses relate solely to
revenue from operations for sales of Products and Services. |
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Company-owned locations
|
|
|
60
|
|
|
|
44
|
|
Franchises
|
|
|
15
|
|
|
|
35
|
|
International Master Licenses
|
|
|
10
|
|
|
|
11
|
|
|
|
|
(1) |
|
Calculated as a percentage of total revenue, except for Route
Expenses which is calculated as a percentage of revenue from
Products and Services, as route expenses relate solely to
revenue from operations for sales of Products and Services. |
60
Revenue
Total revenue and the revenue derived from each revenue type for
the years ended December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
2009
|
|
|
Revenue
|
|
|
2008
|
|
|
Revenue
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products and service:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hygiene services
|
|
$
|
16,573,821
|
|
|
|
29.2
|
%
|
|
$
|
19,895,990
|
|
|
|
31.0
|
%
|
Chemical
|
|
|
10,319,434
|
|
|
|
18.2
|
|
|
|
6,914,652
|
|
|
|
10.8
|
|
Paper
|
|
|
11,549,037
|
|
|
|
20.3
|
|
|
|
12,760,759
|
|
|
|
19.9
|
|
Rental and other
|
|
|
5,448,405
|
|
|
|
9.6
|
|
|
|
6,260,082
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product and service
|
|
|
43,890,697
|
|
|
|
77.3
|
|
|
|
45,831,483
|
|
|
|
71.5
|
|
Franchise and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
|
8,732,038
|
|
|
|
15.4
|
|
|
|
11,904,308
|
|
|
|
18.6
|
|
Fees
|
|
|
4,191,289
|
|
|
|
7.3
|
|
|
|
6,373,100
|
|
|
|
9.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total franchise and other
|
|
|
12,923,327
|
|
|
|
22.7
|
|
|
|
18,277,408
|
|
|
|
28.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
56,814,024
|
|
|
|
100.0
|
%
|
|
$
|
64,108,891
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue for the year ended December 31, 2009
decreased $7,294,867 or 11.4% to $56,814,024 as compared to the
same period of 2008. This decrease includes an increase of
$4,321,596 in revenue from the acquisition of 18 franchises and
an independent chemical company in 2009 and two franchises in
2008, which was offset by a $2,294,328 loss in franchise
products sales and fees earned in 2008 from the acquired
franchises. Excluding the effect of these acquisitions, revenue
for the years ended December 31, 2009 as compared to the
same period of 2008 decreased $9,322,135 or 14.5% primarily from
decreases of: (i) $5,855,055 or 29.4% in hygiene services;
(ii) $2,168,996 or 17.0% in paper; (iii) $1,130,467 or
18.1% in rental; and (iv) $3,059,753 or 16.7% in product
sales and fees earned from our remaining franchises. These
decreases were partially offset by a $2,892,136 or 41.8%
increase in chemical revenue.
The increase in chemical revenue is attributable to the success
of our corporate account and distributor sales programs that
were launched during 2008, as well as sales by our field
employees. The decrease in hygiene, paper and rental and other
revenue was primarily a result of the prolonged effect of the
challenging economic conditions we have experienced. These
economic conditions resulted in customer attrition, lower
consumption levels of products and services and a reduction or
elimination in spending for hygiene-related products and
services by our customers.
The decrease in product sales and fees from our remaining
franchisees was a result of: (i) lower sales in our U.K.
operation of $1,708,738, due to the sale of that operation in
January 2009; (ii) the impact of the acquisition of certain
franchises of $2,294,328; and (iii) a $1,351,016 decline in
product sales and fees resulting from a 31.4% decrease in
customer revenue experienced by our franchises. This decline is
attributed to the prolonged effect of the challenging economic
conditions being experienced by our franchisees. These economic
conditions resulted in customer attrition, lower consumption
levels of products and services and a reduction or elimination
in spending for hygiene related products and services by
franchisee customers.
Cost of
Sales
Cost of sales for the years ended December 31, 2009 and
2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
%(1)
|
|
|
2008
|
|
|
%(1)
|
|
|
Company-owned operations
|
|
$
|
14,385,596
|
|
|
|
32.8
|
%
|
|
$
|
14,329,153
|
|
|
|
31.3
|
%
|
Franchisee product sales
|
|
|
7,918,919
|
|
|
|
90.7
|
|
|
|
10,742,257
|
|
|
|
90.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$
|
22,304,515
|
|
|
|
39.3
|
%
|
|
$
|
25,071,410
|
|
|
|
39.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents cost as a percentage of the respective product line
revenue. |
61
Cost of sales consists primarily of paper, air freshener,
chemicals and other consumable products sold to our customers,
franchisees and international licensees. Total cost of sales for
the year ended December 31, 2009 decreased $2,766,895 or
11.0% to $22,304,515 as compared to the same period of 2008.
This decrease included an increase of $806,117 related to the
acquisition of 18 franchises and an independent chemical company
in 2009 and two franchises in 2008. Excluding the impact of
acquisitions, total cost of sales for the years ended
December 31, 2009 as compared to the same period of 2008
decreased $3,573,012 or 14.3%.
The cost of sales for company-owned operations for the year
ended December 31, 2009 increased $56,443 or 0.4% to
$14,385,596 as compared to the same period of 2008. This
included an increase of $806,117 in cost of sales related to the
acquisition of 18 franchises and an independent chemical company
in 2009 and two franchises in 2008. Cost of sales for
company-owned operations, excluding the impact of acquisitions,
was 34.2% of related revenue for the year ended
December 31, 2009 as compared to 31.3% for the same period
of 2008. Excluding the impact of the acquisitions, cost of sales
for company-owned operations decreased $749,674 or 5.2% to
$13,579,479 as compared to the same period of 2009. The $749,674
decrease consisted primarily of a $1,655,760 decrease due to
lower revenue volume in 2009 and $911,045 in cost reductions
resulting from purchasing and operational efficiencies in 2009.
These decreases were offset by an increase of $1,283,317 in
sales mix shift change from lower cost hygiene services to
higher cost chemical product sales and $533,814 higher freight
expenses.
Cost of sales to franchisees for the year ended
December 31, 2009 decreased $2,823,338 or 26.3% to
$7,918,919 as compared to the same period of 2008. This included
a decrease of $1,306,409 related to the acquisition of 18
franchises and an independent chemical company in 2009 and two
franchises in 2008. Cost of sales to franchisees, excluding the
impact of acquisitions, was 90.6% of franchisee product revenue
for the year ended December 31, 2009 as compared to 88.5%
for the same period of 2008. Excluding the impact of
acquisitions, cost of sales to franchisees for the year ended
December 31, 2009, decreased $1,516,929 or 14.1% as
compared to the same period of 2008. The $1,516,929 decrease was
primarily a result of (i) a decline in products purchased
by franchisees due to a 31.4% decrease in customer revenue
experienced by our franchisees; (ii) and the effect of a
50% reduction in the
mark-up on
certain products we sell to franchisees; and (iii) the
reduction in revenue related to our U.K. operation, which was
sold in January 2009.
Route
Expenses
Route expenses consist primarily of the costs incurred by us for
the delivery of products and providing services to customers.
The details of route expenses for the years ended
December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
%(1)
|
|
|
2008
|
|
|
%(1)
|
|
|
Compensation
|
|
$
|
9,085,209
|
|
|
|
20.7
|
%
|
|
$
|
9,990,412
|
|
|
|
21.8
|
%
|
Vehicle expenses
|
|
|
3,144,603
|
|
|
|
7.2
|
|
|
|
3,810,394
|
|
|
|
8.3
|
|
Other
|
|
|
290,079
|
|
|
|
0.7
|
|
|
|
400,437
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total route expenses
|
|
$
|
12,519,891
|
|
|
|
28.5
|
%
|
|
$
|
14,201,243
|
|
|
|
31.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents cost as a percentage of Products and Services revenue. |
Route expenses for the year ended December 31, 2009
decreased $1,681,352 or 11.8% to $12,519,891 as compared to the
same period of 2008. This decrease included an increase of
$1,064,676 related to the acquisition of 18 franchises and an
independent chemical company in 2009 and two franchises in 2008.
Excluding the impact of acquisitions, route expenses for the
years ended December 31, 2009 as compared to the same
period of 2008 decreased $2,746,028 or 19.3% to $11,455,215. The
decrease consisted primarily of $1,838,795 in compensation and
$784,045 in vehicle expenses. These cost reductions were a
result of route consolidation and optimization initiatives made
in response to the prolonged effect of the challenging economic
conditions we have experienced. These economic conditions
resulted in customer attrition, lower consumption levels of
products and services and a reduction or elimination in spending
for hygiene-related products and services by our customers.
62
Selling,
General and Administrative Expenses
The details of selling, general and administrative expenses for
the years ended December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
2009
|
|
|
Revenue
|
|
|
2008
|
|
|
Revenue
|
|
|
Compensation
|
|
$
|
16,975,556
|
|
|
|
29.9
|
%
|
|
$
|
20,356,810
|
|
|
|
31.8
|
%
|
Occupancy
|
|
|
3,124,466
|
|
|
|
5.5
|
|
|
|
2,934,305
|
|
|
|
4.6
|
|
Other
|
|
|
3,994,679
|
|
|
|
7.0
|
|
|
|
6,766,063
|
|
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general, and administrative
|
|
$
|
24,094,701
|
|
|
|
42.4
|
%
|
|
$
|
30,057,178
|
|
|
|
46.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses for the years ended
December 31, 2009 decreased $5,962,477, or 19.8%, to
$24,094,701 as compared to 2008. This decrease included an
increase of $1,069,087 in expenses related to the acquisition of
18 franchises and an independent chemical company in 2009 and
two franchises in 2008. Excluding the impact of acquisitions,
selling, general and administrative expenses for the years ended
December 31, 2009 as compared to the same period of 2008
decreased $7,031,564, or 23.4%.
Compensation for the year ended December 31, 2009 decreased
$3,381,254, or 16.6%, to $16,975,556, as compared to the same
period of 2008. This decrease included an increase of $911,335
related to the acquisition of 18 franchises and an independent
chemical company in 2009 and two franchises in 2008. Excluding
the impact of acquisitions, compensation expenses for the year
ended December 31, 2009 as compared to the same period of
2008 decreased $4,292,589, or 21.1% to $16,064,221. This
decrease was primarily a result of reductions in compensation
of: (i) $2,955,479 in field operating and sales personal in
response to changing economic conditions; (ii) $362,212 of
corporate staff resulting from the discontinuation of providing
certain business services to franchisees; and
(iii) $974,898 related to our U.K. operation, which was
sold in January 2009.
Occupancy expenses for the year ended December 31, 2009
increased $190,161, or 6.5%, to $3,124,466, as compared to the
same period of 2008. The increase of $190,161 included an
increase of $138,589 related to the acquisition of 18 franchises
and an independent chemical company in 2009 and two franchises
in 2008. Excluding the impact of acquisitions, occupancy
expenses for the year ended December 31, 2009 as compared
to the same period of 2008 increased $51,572, or 1.8% to
$2,985,877.
Other expenses for the year ended December 31, 2009
decreased $2,771,384, or 41.0%, to $3,994,679 as compared to
2008. This decrease included an increase of $19,163 related to
the acquisition of 18 franchises and an independent chemical
company in 2009 and two franchises in 2008. Excluding the impact
of the acquisitions, other expenses for the years ended
December 31, 2009 as compared to the same period of 2008
decreased $2,790,547, or 41.2% to $3,975,516. This decrease was
a result of: (i) $1,065,707 in marketing and office support
costs resulting from the elimination of field operating and
sales personnel; (ii) $167,803 in printing and other costs
associated with the discontinuation of providing certain
business services to franchisees; (iii) $537,490 of costs
related to our U.K. operation, which was sold in January 2009;
(iv) $392,609 in costs related to the implementation of our
technology platform; and (v) $626,938 in bad debt expense.
Depreciation
and Amortization
Depreciation and amortization consists of depreciation of
property and equipment and the amortization of intangible
assets. Depreciation and amortization for the year ended
December 31, 2009 decreased $462,580 or 8.9% to $4,744,052
as compared to $5,206,632 in 2008. This decrease is primarily a
result of: (i) lower depreciation of $876,580 as property
and equipment purchased in earlier years which has now fully
depreciated and was partly offset by (ii) increased
depreciation on ware washing and chemical dispensing equipment
as we continued expanding our chemical sales programs and
(iii) $61,065 of increased amortization of intangibles
related to certain new business acquisitions.
63
Other
expense, net
Other expense, net for the years ended December 31, 2009
and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
2009
|
|
|
Revenue
|
|
|
2008
|
|
|
Revenue
|
|
|
Interest income
|
|
$
|
54,797
|
|
|
|
0.1
|
|
|
$
|
10,337
|
|
|
|
|
|
Interest expense
|
|
|
(1,063,411
|
)
|
|
|
(1.9
|
)
|
|
|
(1,292,664
|
)
|
|
|
(2.0
|
)
|
Gain (loss) on foreign currency
|
|
|
34,653
|
|
|
|
0.1
|
|
|
|
(54,972
|
)
|
|
|
(0.1
|
)
|
Forgiveness of debt
|
|
|
500,000
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
Gain on bargain purchase
|
|
|
94,107
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Impairment losses
|
|
|
(30,000
|
)
|
|
|
(0.1
|
)
|
|
|
(223,000
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
$
|
(409,854
|
)
|
|
|
(0.7
|
)%
|
|
$
|
(1,560,299
|
)
|
|
|
(2.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense represents interest on borrowings under our
credit facility, notes incurred in connection with acquisitions
and for the purchases of equipment and software. Interest
expenses for the year ended December 31, 2009 decreased
$229,253 or 17.7% to $1,063,411 as compared to the same period
of 2008. The $229,253 decrease is primarily a result of lower
interest rates on bank lines of credit offset by increased
interest expense on notes incurred in connection with the 2009
acquisitions.
From 2005 until 2008, we agreed to pay a company owned by a
shareholder a fee for services provided, including product
development, marketing and branding strategy, and management
advisory assistance totaling $500,000. In 2009, the related
company waived it rights to these fees and accordingly, the
accrued balance of $500,000, which was outstanding as of
December 31, 2008, has been recorded as forgiveness of
debt. We considered the accounting alternatives for the
treatment of this transaction and concluded that since the
transaction represented the forgiveness of a previously expensed
liability, it was most appropriately reflected in other income.
The gain on bargain purchase recognized in 2009 was related to
the acquisition of franchisees where the fair value of the
assets acquired exceeded purchase price.
We test goodwill and other intangible assets for impairment on
an annual basis or when circumstances change that would more
likely than not reduce the fair value of the goodwill and
intangible assets to amounts that are less than their carrying
amounts. For the years ended December 31, 2009 and 2008,
impairment losses were recognized on goodwill and other
intangible assets totaling $30,000 and $223,000, respectively.
Cash Flow
Summary
The following table summarizes cash flows for the three months
ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Net cash used in operating activities
|
|
$
|
(2,838,922
|
)
|
|
$
|
(75,322
|
)
|
Net cash used in investing activities
|
|
|
(10,144,689
|
)
|
|
|
(1,002,528
|
)
|
Net cash provided by financing activities
|
|
|
79,121,721
|
|
|
|
724,701
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
66,138,110
|
|
|
$
|
(353,149
|
)
|
|
|
|
|
|
|
|
|
|
The following table summarizes cash flows for the years ended
December 31, 2010, 2009, and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net cash used in operating activities
|
|
$
|
(11,519,604
|
)
|
|
$
|
(5,700,320
|
)
|
|
$
|
(6,770,438
|
)
|
Net cash used in investing activities
|
|
|
(14,799,196
|
)
|
|
|
(4,385,655
|
)
|
|
|
(3,654,597
|
)
|
Net cash provided by financing activities
|
|
|
63,980,211
|
|
|
|
11,014,580
|
|
|
|
9,693,281
|
|
Effect of foreign exchange rates on cash
|
|
|
|
|
|
|
|
|
|
|
(160,611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
37,661,411
|
|
|
$
|
928,605
|
|
|
$
|
(892,365
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
Operating
Activities
For the three months ended March 31, 2011, net cash used in
operating activities increased $2,763,600 to $2,838,922,
compared with net cash used in operating activities of $75,322
for the same period of 2010. The increase includes $1,619,137
higher loss, which includes $1,315,978 of acquisition and merger
expenses, and is offset by non-cash items including an increase
of $1,665,122 in depreciation and amortization, and changes in
working capital of $1,480,733.
For the year ended December 31, 2010, net cash used in
operating activities increased $5,819,284 or 102.1% to
$11,519,604, compared with net cash used in operating activities
of $5,700,320 for the same period of 2009. The increase includes
$10,311,015 higher loss, net of non-cash items, which as
described above includes $5,122,067 of merger expenses. This
higher year to year loss was partly offset by increased
depreciation and amortization of $133,121, and improved changes
in working capital of $4,378,611.
For the year ended December 31, 2009, net cash used in
operating activities decreased $1,070,118 or 15.8% to
$5,700,320, compared with net cash used in operating activities
of $6,770,438 for the same period of 2008. The $1,070,118
decrease consisted of a $4,728,882 decreased net loss, a lower
adjustment for depreciation and amortization of $462,580 and a
$3,196,184 change in working capital and other non-cash items.
Investing
Activities
For the three months ended March 31, 2011, net cash used in
investing activities increased $9,142,161 to $10,144,689
compared with net cash used in investing activities of
$1,002,528 for the same period of 2010. This increase is due to
cash paid for acquisitions of $12,318,774, an increase in
capital expenditures of $2,016,720, offset by the release of
restrictions on certain cash balances of $5,193,333. Cash paid
for acquisitions consists of $7,553,784 for Choice and
$4,764,990 for all other acquisitions. There were no
acquisitions during the three months ended March 31, 2010.
For the year ended December 31, 2010, net cash used in
investing activities increased $10,413,541 to $14,799,196 or
237.5% compared with net cash used in investing activities of
$4,385,655 for the same period of 2009. For the year ended
December 31, 2009, net cash used in investing activities
increased $731,058 to $4,385,655 compared with net cash used in
investing activities of $3,654,597 for the same period of 2008.
The 2010 increase of $10,413,541 is the result an increase in
payments received on notes receivable of $454,507 offset by
increased capital expenditures of $1,612,738 including
$1,191,520 of dish machines, dispensers and other service items,
an increase of $4,061,977 for additional acquisitions and
$5,193,333 of restricted cash in support of a convertible
promissory note issued in connection with an acquisition in 2010.
The 2009 increase is due to higher capital expenditures in 2009
of $174,943, increased acquisitions of $548,023, and lower
collections on notes receivable of $8,092.
Financing
Activities
For the three months ended March 31, 2011, cash provided by
financing activities increased $78,397,020 to $79,121,721,
compared with net cash provided by financing activities of
$724,701 during the same period in 2010. Net cash provided from
financing activities consists primarily of: (i) cash
received from private placements; (ii) principal payments
of debt, including debt assumed in the acquisition of Choice;
(iii) proceeds from advances and distributions to
shareholders; (iv) net borrowing under credit facilities;
and (v) stock option exercises.
During the three months ended March 31, 2011, we received
$116,253,791, net of issuance costs of $3,454,974, from the
issuance of 24,262,500 shares of our common stock; we
repaid $39,219,160 of debt assumed in the acquisition of Choice;
we had net borrowings of $2,692,424 on our line of credit; and
received $209,265 from the exercise of stock options. During the
three months ended March 31, 2011 as compared to the same
period in 2010, principal payments on debt increased by
$250,900, and net proceeds and payment of shareholder advances
decreased by $1,300,000.
65
For the year ended December 31, 2010, cash provided by
financing activities increased $52,965,631 to $63,980,211 or
480.9%, compared with net cash provided by financing activities
of $11,014,580 during 2009. For the year ended December 31,
2009, cash provided by financing activities increased $1,321,299
to $11,014,580, compared with net cash provided by financing
activities of $9,693,281 during 2008. Net cash provided from
financing activities consists primarily of: (i) cash
received in the Merger; (ii) proceeds from advances and
distributions to shareholders; (iii) borrowing under credit
facilities; and (iv) payments made on long term obligations.
The proceeds from advances and distributions to shareholders
were $7,870,000 for the year ended December 31, 2010 as
compared to $12,645,000 during 2009 and $5,000,000 during 2008.
We made repayments to shareholders of $2,070,000, $115,000, and
$715,845 for the years ended December 31, 2010, 2009, and
2008, respectively. As part of the Merger in November 2010,
$22,198,194 of the advances from shareholders, including
interest, were converted into equity. As of December 31,
2010, there is $2,000,000 of shareholder advances outstanding
that are due in November 2011. In addition, we received cash of
$61,850,226 in the Merger on November 2, 2010.
During the year ended December 31, 2008, we borrowed
$6,296,118 under the credit facilities. There were no borrowings
under the credit facilities for the year ended December 31,
2010 and 2009, since we had borrowed the maximum available under
the credit facilities in 2008. For the year ended December 2010,
2009 and 2008, the payments on long term debt were $3,670,015,
$1,515,420, and $886,995, respectively. The increasing payments
on long term obligations are primarily due to additional debt
assumed as part of acquisitions.
Liquidity
and Capital Resources
We fund the development and growth of our business with cash
generated from operations, shareholder advances, bank credit
facilities, the sale of equity, third party financing for
acquisitions, and capital leases for equipment.
Revolving
credit facilities
In November 2005, we entered into a revolving line of credit for
a maximum borrowing of up to $5,000,000 which was to expire in
November 2008. In March 2008, this line was replaced with a new
line of credit for a maximum borrowing of up to $10,000,000,
which we refer to as the $10 million credit facility.
Borrowings under the $10 million credit facility are used
for general working capital purposes, capital expenditures and
acquisitions. Our obligations under the $10 million credit
facility are guaranteed by certain of our subsidiaries, and HB
Services and its subsidiaries. In addition, Mr. Huizenga
had guaranteed up to $5,000,000 of our obligations under the
$10 million credit facility; however, this guarantee was
released in 2011. Our obligations under the $10 million
credit facility are secured by a lien on our assets, including
the assets of our subsidiaries, HB Services, and its
subsidiaries. Outstanding principal, accrued and unpaid interest
and other amounts payable under the $10 million credit
facility may be accelerated upon an event of default. The line
of credit was modified in February 2011 to extend the maturity
date to January 2012. Currently, borrowings under the
$10 million credit facility bear interest at 3.11%.
In June 2008, we entered into a revolving credit facility for a
maximum borrowing of up to $15,000,000 with a maturity of June
2009, which we refer to as the $15 million credit facility
and together with the $10 million credit facility, our
credit facilities. The $15 million credit facility was
modified in 2009 to extend the maturity date to January 1,
2010, in 2010 to extend the maturity date further to
February 28, 2011, and in February 2011 to extend the
maturity date to January 2012. Borrowings under the
$15 million credit facility are used for general working
capital purposes, capital expenditures and acquisitions. HB
Services obligations under the $15 million credit
facility were fully guaranteed by Mr. Huizenga; however,
this guarantee was released in 2011. Outstanding principal,
accrued and unpaid interest and other amounts payable under the
$15 million credit facility may be accelerated upon an
event of default. Currently, borrowings under the
$15 million credit facility bear interest at 1.76%.
66
The credit facilities contain various restrictive covenants
which limit or prevent, without the express consent of the bank,
making loans, advances, or other extensions of credit, change in
control, consolidation, mergers or acquisitions, issuing
dividends, selling, assigning, leasing, transferring or
disposing of any part of the business and incurring indebtedness.
As of November 5, 2010, we have amended our credit
facilities to eliminate all restrictive and financial covenants
currently included in the credit facilities, except the
following: (i) we must maintain, at all times, unencumbered
cash and cash equivalents in excess of $15,000,000 and
(ii) we may not without the consent incur or permit our
subsidiaries to incur new indebtedness or make new investments
(except for investments in franchisees) in connection with the
acquisition of franchisees and other businesses within our same
line of business in excess of $25 million in the aggregate
at any time.
In February 2011, we amended both credit facilities under
essentially the same terms and conditions as the original
agreements except for: (i) the maturity date was extended
to January 2012, and (ii) Mr. Huizenga was released
from his personnel guarantee under the credit facilities.
In March 2011, we entered into a $100 million senior
secured revolving credit facility (the credit
facility). Borrowings under the credit facility are
secured by a first priority lien on substantially all of our
existing and hereafter acquired assets, including
$25 million of cash on borrowings in excess of
$75 million. Furthermore, borrowings under the facility are
guaranteed by all of our domestic subsidiaries and secured by
substantially all the assets and stock of our domestic
subsidiaries and substantially all of the stock of our foreign
subsidiaries. Interest on borrowings under the credit facility
will typically accrue at London Interbank Offered Rate
(LIBOR) plus 2.5% to 4.0%, depending on the ratio of
senior debt to consolidated earnings before interest, taxes,
depreciation and amortization (EBITDA) (as such term
is defined in the credit facility, which includes specified
adjustments and allowances authorized by the lender, as provided
for in such definition). We also have the option to request
swingline loans and borrowings using a base rate. Interest is
payable monthly or quarterly on all outstanding borrowings. The
credit facility matures on July 31, 2013.
Borrowings and availability under the credit facility are
subject to compliance with financial covenants, including
achieving specified consolidated EBITDA levels, which will
depend on the success of our acquisition strategy, and
maintaining leverage and coverage ratios and a minimum liquidity
requirement. The consolidated EBITDA covenant, the leverage and
coverage ratios, and the minimum liquidity requirements should
not be considered indicative of the Companys expectations
regarding future performance. The credit facility also places
restrictions on our ability to incur additional indebtedness,
make certain acquisitions, create liens or other encumbrances,
sell or otherwise dispose of assets, and merge or consolidate
with other entities or enter into a change of control
transaction. Failure to achieve or maintain the financial
covenants in the credit facility or failure to comply with one
or more of the operational covenants could adversely affect our
ability to borrow monies and could result in a default under the
credit facility. The credit facility is subject to other
standard default provisions.
The credit facility replaces our current aggregated
$25 million credit facilities, which are discussed in the
2010 Annual Report.
Shareholder
advances
Beginning in May 2008 through June 2010, we borrowed an
aggregate of $21,445,000 from Royal Palm Mortgage Group LLC
(Royal Palm), an affiliate of Mr. Huizenga,
pursuant to an unsecured promissory note. The note matures in
June 2011. The note bears interest at the one-month LIBOR plus
2.0%. Interest was 2.23% at December 31, 2009. In July
2010, Mr. Berrard purchased $10,722,500 of the total debt,
plus accrued interest, represented by this note. In connection
with and immediately before the Merger, the note was cancelled
and the amounts owing there under, plus accrued interest, were
contributed as capital.
In the latter part of 2009, Mr. Berrard advanced us
$800,000 pursuant to an unsecured promissory note. The advance
was repaid in March 2010.
In August 2010, we borrowed $2,000,000 from Royal Palm pursuant
to an unsecured promissory note. The note matures on the earlier
of the one year anniversary of the effective time of the Merger
or January 1,
67
2012. The note bears interest at the short-term Applicable
Federal Rate and the interest rate will adjust on a monthly
basis as the short-term Applicable Federal Rate adjusts. As of
December 31, 2010 the outstanding amount owed under the
note was $2,004,444. No interest or principal has been paid as
of December 31, 2010.
In August 2010, we borrowed $950,000 from Royal Palm pursuant to
an unsecured promissory note. The note bears interest at the
short-term Applicable Federal Rate and the interest rate adjusts
on a monthly basis as the short-term Applicable Federal Rate
adjusts. The note matured at the effective time of the Merger
and was paid in connection with the closing.
Acquisition-related
notes payables
During the year ended December 31, 2010 and 2009, we
incurred or assumed $12,883,089 and $7,954,305, respectively, of
debt to sellers in connection with certain acquisitions. Two
seller notes payable relating to this debt, totaling $3,050,000,
are secured by letters of credit, which are secured by certain
assets of Messrs. Huizenga and Berrard. The remaining notes
payable are secured by the assets of the acquired businesses or
our assets. At December 31, 2010, total seller notes
payable were due in monthly installments and bore interest at
rates ranging between 2.5% 11%. The obligations
mature at various times through 2019.
On March 1, 2011, we closed the acquisition of Choice and
issued approximately 8.3 million shares of its common stock
to the former shareholders of Choice and assumed approximately
$40.9 million in debt, which $39.2 million was paid
down with proceeds from the private placement of the
Subscription Receipts. In addition, certain shareholders of
Choice received $5.7 million in cash and warrants to
purchase an additional 0.9 million shares at an exercise
price of $6.21. The warrants expired unexercised on
March 31, 2011.
Private
Placements
In connection with the merger with Choice, on February 23,
2011, we entered into an agency agreement, which the agents
agreed to market, on a best efforts basis 12,262,500
subscription receipts (Subscription Receipts) at a
price of $4.80 per Subscription Receipt for gross proceeds of up
to $58,859,594. Each Subscription Receipt entitled the holder to
acquire one share of our common stock, without payment of any
additional consideration, upon completion of our acquisition of
Choice.
On March 1, 2011, we closed the acquisition of Choice and
issued 8,281,923 shares of our common stock to the former
shareholders of Choice and assumed $40,941,484 of debt, of which
$39,219,160 was paid down with proceeds from the private
placement of the Subscription Receipts, which we received cash
of $56,253,791, net of issuance costs.
In connection with the closing of acquisition of Choice, the
12,262,500 Subscription Receipts were exchanged for
12,262,500 shares of our common stock. We agreed to use
commercially reasonable efforts to file a resale registration
statement with the SEC relating to the shares of common stock
underlying the Subscription Receipts. If the registration
statement is not filed or declared effective within specified
time periods, or if it ceases to be effective for periods of
time exceeding certain grace periods, the initial subscribers of
Subscription Receipts will be entitled to receive an additional
0.1 share of common stock for each share of common stock
underlying Subscription Receipts held by any such initial
subscriber at that time. Our Registration Statement was declared
effective on April 21, 2011 and remains effective as of the
date of this report.
On March 22, 2011, we entered into a series of arms
length securities purchase agreements to sell
12,000,000 shares of our common stock at a price of $5.00
per share, for aggregate proceeds of $60,000,000 to certain
funds of a global financial institution (the Private
Placement). We intend to use the proceeds from the Private
Placement to further our organic and acquisition growth
strategy, as well as for working capital purposes.
On March 23, 2011, we closed the Private Placement and
issued 12,000,000 shares of our common stock. Pursuant to
the securities purchase agreements, the shares of common stock
issued in the Private Placement may not be transferred on or
before June 24, 2011 without our consent. We agreed to use
our commercially
68
reasonable efforts to file a resale registration statement with
the SEC relating to the shares of common stock sold in the
Private Placement. If the registration statement is not filed or
declared effective within specified time periods, the investors
will be entitled to receive liquidated damages in cash equal to
one percent of the original offering price for each share that
at such time remains subject to resale restrictions.
On April 15, 2011, we entered into a series of arms
length securities purchase agreements to sell
9,857,143 shares of our common stock at a price of $7.70
per share, for aggregate proceeds of $75,900,000 to certain
funds of a global financial institution. We completed this
transaction on April 19, 2011 and we intend to use the
proceeds from this transaction to further our organic and
acquisition growth strategy, as well as for working capital
purposes.
Recent
Acquisitions
Since March 31, 2011, the Company has acquired several
businesses. While the terms, price, and conditions of each of
these acquisitions were negotiated individually, consideration
to the sellers typically consists of a combination of cash and
our common stock. Aggregate consideration paid for these
acquired businesses was approximately $120,280,471 consisting of
approximately (1) $63,602,500 in cash,
(2) 6,801,109 shares of our common stock,
(3) $2,517,000 in assumed or issued debt, and
(4) $1,828,000 in contingent consideration.
Promissory
Note Conversions and Exercise of Warrants
Since March 31, 2011, convertible promissory notes with an
aggregate principal amount of $8,621,480 and an aggregate fair
value of $12,080,344, included in short term obligations on the
Unaudited Condensed Consolidated Balance Sheets as of
March 31, 2011 were converted into 1,921,899 shares of
the Companys common stock.
In May 2011, all 5,500,000 warrants with an exercise price of
$0.50 per warrant issued to a director of CoolBrands and the
Company, and certain parties related to the director, were
exercised and as a result, we received cash of $2,750,000 in
Canadian dollars.
Cash
Requirements
Our cash requirements for the next twelve months consist
primarily of: (i) capital expenditures associated with
dispensing equipment, dish machines and other items in service
at customer locations and equipment and software;
(ii) financing for acquisitions; (iii) working
capital; and (iv) payment of principal and interest on
borrowings under our credit facility, debt obligations incurred
or assumed in connection with acquisitions, and other notes
payable for equipment and software.
As a result of the Merger, on November 2, 2010, our cash
and cash equivalents increased by $61,850,226. As a result of
the Subscription Receipts offering in connection with the Choice
acquisition on March 1, 2011, our cash and cash equivalents
increased by $341,000. In addition, as a result of the Private
Placement, on March 23, 2011, our cash and cash equivalents
increased by $58,860,000. In addition, as a result of the
Private Placement, on March 23, 2011, our cash and cash
equivalents increased by $58,860,000. As a result of the Private
Placements discussed above our cash and cash equivalents
increased by $116,253,791 and on April 15, 2011 our cash
and cash equivalents increased by an additional $75,900,000.
We expect that our cash on hand and the cash flow provided by
operating activities will be sufficient to fund working capital,
general corporate needs and planned capital expenditure for the
next 12 months. However, there is no assurance that these
sources of liquidity will be sufficient to fund our internal
growth initiatives or the investments and acquisition activities
that we may wish to pursue. If we pursue significant internal
growth initiatives or if we wish to acquire additional
businesses in transactions that include cash payments as part of
the purchase price, we may pursue additional debt or equity
sources to finance such transactions and activities, depending
on market conditions.
69
Contractual
Obligations
Long-term contractual obligations at December 31, 2010 are
as follows:
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|
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|
|
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|
|
|
|
|
|
|
|
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|
Less than
|
|
|
|
|
|
|
|
|
5 or More
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|
|
|
Total
|
|
|
1 Year
|
|
|
1-2 Years
|
|
|
3-4 Years
|
|
|
Years
|
|
|
Long term obligations
|
|
$
|
43,382,702
|
|
|
$
|
12,352,850
|
|
|
$
|
27,318,652
|
|
|
$
|
1,758,350
|
|
|
$
|
1,952,850
|
|
Shareholder loans
|
|
$
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
6,721,480
|
|
|
|
2,031,400
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|
|
|
1,547,400
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|
|
|
1,076,490
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|
|
|
2,066,190
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|
Interest payments
|
|
$
|
1,094,640
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|
|
|
544,729
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|
|
|
193,575
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|
|
|
119,504
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|
|
|
236,831
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
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Total long-term contractual cash obligations
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|
$
|
53,198,822
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|
|
$
|
16,928,979
|
|
|
$
|
29,059,627
|
|
|
$
|
2,954,344
|
|
|
$
|
4,255,871
|
|
|
|
|
|
|
|
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Note 1 Shareholder loans of $2,000,000
mature in November 2011. This balance excludes the liability
component related to the conversion feature of the convertible
promissory notes that is included in short term obligations on
the Consolidated Balance Sheets. See Note 6 to the Notes to
Consolidated Financial Statements for a detailed discussion of
long term obligations.
Note 2 Operating leases consist
primarily of facility and vehicle leases.
Note 3 Interest payments include
interest on both fixed and variable rate debt. Rates have been
assumed to increase 75 basis points in fiscal 2011,
increase 75 basis points in fiscal 2012, increase
100 basis points in fiscal 2013, increase 100 basis
points in both fiscal 2014 and 2015 and increase additional
100 basis points in each year thereafter.
Inflation
and Changing Prices
Changes in wages, benefits and energy costs have the potential
to materially impact our financial results. We believe that we
are able to increase prices to counteract the majority of the
inflationary effects of increasing costs and to generate
sufficient cash flows to maintain our productive capability.
During the year ended December 31, 2010 and 2009, we do not
believe that inflation has had a material impact on our
financial position or results of operations. However, we cannot
predict what effect inflation may have on our operations in the
future.
Litigation
and Other Contingencies
We are subject to legal proceedings and claims which arise in
the ordinary course of our business. Although occasional adverse
decisions (or settlements) may occur, we believe that the final
disposition of such matters will not have a material adverse
effect on our financial position, results of operations or cash
flows.
Off-Balance
Sheet Arrangements
Other than operating leases, there are no off-balance sheet
financing arrangements or relationships with unconsolidated
entities or financial partnerships, which are often referred to
as special purpose entities. Therefore, there is no
exposure to any financing, liquidity, market or credit risk that
could arise, had we engaged in such relationships.
In connection with a distribution agreement entered into in
December 2010, we provided a guarantee that the
distributors operating cash flows associated with the
agreement would not fall below certain agreed-to minimums,
subject to certain pre-defined conditions, over the ten year
term of the distribution agreement. If the distributors
annual operating cash flow does fall below the agreed-to annual
minimums, we will reimburse the distributor for any such short
fall up to a pre-designated amount. No value was assigned to the
fair value of the guarantee at March 31, 2011 and
December 31, 2010 based on a probability assessment of the
projected cash flows. Management currently does not believe that
it is probable that any amounts will be paid under this
agreement and thus there is no amount accrued for the guarantee
in the Unaudited Condensed Consolidated Financial Statements.
70
Adjusted
EBITDA
In addition to net income determined in accordance with GAAP, we
use certain non-GAAP measures, such as Adjusted
EBITDA, in assessing our operating performance. We believe
the non-GAAP measure serves as an appropriate measure to be used
in evaluating the performance of our business. We define
Adjusted EBITDA as net loss excluding the impact of income
taxes, depreciation and amortization expense, interest expense
and income, gains on foreign currency, unrealized loss on
convertible debt, stock based compensation, and third party
costs directly related to merger and acquisitions. We present
Adjusted EBITDA because we consider it an important supplemental
measure of our operating performance and believe it is
frequently used by securities analysts, investors and other
interested parties in the evaluation of our results. Management
uses this non-GAAP financial measure frequently in our
decision-making because it provides supplemental information
that facilitates internal comparisons to the historical
operating performance of prior periods and gives a better
indication of our core operating performance. We include this
non-GAAP financial measure in our earnings announcement and
guidance in order to provide transparency to our investors and
enable investors to better compare our operating performance
with the operating performance of our competitors. Adjusted
EBITDA should not be considered in isolation from, and is not
intended to represent an alternative measure of, operating
results or of cash flows from operating activities, as
determined in accordance with GAAP. Additionally, our definition
of Adjusted EBITDA may not be comparable to similarly titled
measures reported by other companies.
Under SEC rules, we are required to provide a reconciliation of
non-GAAP measures to the most directly comparable GAAP measures.
Accordingly, the following is a reconciliation of Adjusted
EBITDA to our net losses for the three month periods ended
March 31, 2011 and 2010:
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2011
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|
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2010
|
|
|
Net loss
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|
$
|
(3,214,578
|
)
|
|
$
|
(1,595,441
|
)
|
Income tax benefit
|
|
|
(4,709,793
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)
|
|
|
|
|
Depreciation and amortization expense
|
|
|
2,707,952
|
|
|
|
1,042,830
|
|
Interest expense, net
|
|
|
347,422
|
|
|
|
291,265
|
|
Gains on foreign currency
|
|
|
(35,403
|
)
|
|
|
|
|
Unrealized loss on convertible debt
|
|
|
1,961,100
|
|
|
|
|
|
Stock based compensation
|
|
|
664,842
|
|
|
|
|
|
Acquisition and merger expenses
|
|
|
1,315,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(962,480
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)
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|
$
|
(261,346
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)
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Quantitative
and Qualitative Disclosures About Market Risk.
We are exposed to market risks, including changes in interest
rates and fuel prices. We do not use financial instruments for
speculative trading purposes and we do not hold derivative
financial instruments that could expose us to significant market
risk. We do not currently have any contract with vendors where
we have exposure to the underlying commodity prices. In such
event, we would consider implementing price increases and pursue
cost reduction initiatives; however, we may not be able to pass
on these increases in whole or in part to our customers or
realize costs savings needed to offset these increases. The
following discussion does not consider the effects that may have
an adverse change on the overall economy, and it also does not
consider actions we may take to mitigate our exposer to these
changes. We cannot guarantee that the action we take to mitigate
these exposures will be successful.
Interest
Rate Risk
At December 31, 2010, we had variable rate debt of
$24,946,932 under two lines of credit with an average periodic
interest rate on outstanding balances that fluctuates based on
LIBOR plus 1.5% 2.35%. At the above level of
borrowings, for every 50 basis point change in LIBOR,
interest expense associated with such borrowings would
correspondingly increase or decrease by approximately $43,000.
This analysis does not consider the effects of any other changes
to our capital structure. A 10% change in interest rates would
have an immaterial effect on the fair value of our final rate
debt.
71
Fuel
Fuel costs represent a significant operating expense. To date,
we have not entered into any contracts or employed any
strategies to mitigate our exposure to fuel costs. Historically,
we have made limited use of fuel surcharges or delivery fees to
help offset rises in fuel costs. Such charges have not been in
the past, and we believe will not be going forward, applicable
to all customers. Consequently, an increase in fuel costs
results in a decrease in our operating margin percentage. At
current consumption level, a $0.50 change in the price of fuel
changes our fuel costs by approximately $266,000 on an annual
basis.
FORWARD-LOOKING
STATEMENTS
Our business, financial condition, results of operations, cash
flows and prospects, and the prevailing market price and
performance of our common stock, may be adversely affected by a
number of factors, including the matters discussed below.
Certain statements and information set forth in this
registration statement, as well as other written or oral
statements made from time to time by us or by our authorized
executive officers on our behalf, constitute
forward-looking statements within the meaning of the
Federal Private Securities Litigation Reform Act of 1995. We
intend for our forward-looking statements to be covered by the
safe harbor provisions for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995, and we
set forth this statement and these risk factors in order to
comply with such safe harbor provisions. You should note that
our forward-looking statements speak only as of the date of this
registration statement or when made and we undertake no duty or
obligation to update or revise our forward-looking statements,
whether as a result of new information, future events or
otherwise. Although we believe that the expectations, plans,
intentions and projections reflected in our forward-looking
statements are reasonable, such statements are subject to risks,
uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different
from any future results, performance or achievements expressed
or implied by the forward-looking statements. The risks,
uncertainties and other factors that our stockholders and
prospective investors should consider include the following:
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We have a history of significant operating losses and as such
our future revenue and operating profitability are uncertain;
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We may be harmed if we do not penetrate markets and grow our
current business operations;
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We may require additional capital in the future and no assurance
can be given that such capital will be available on terms
acceptable to us, or at all;
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Failure to attract, train, and retain personnel to manage our
growth could adversely impact our operating results;
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We may not be able to properly integrate the operations of
acquired businesses and achieve anticipated benefits of cost
savings or revenue enhancements;
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We may incur unexpected costs, expenses, or liabilities relating
to undisclosed liabilities of our acquired businesses;
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We may recognize impairment charges which could adversely affect
our results of operations and financial condition;
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Goodwill resulting from acquisitions may adversely affect our
results of operations;
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Future issuances of our common stock in connection with
acquisitions could have a dilutive effect on your investment;
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Future sales of Swisher Hygiene shares by our stockholders could
affect the market price of our shares;
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Our business and growth strategy depends in large part on the
success of our franchisees and international licensees, and our
brand reputation may be harmed by actions out of our control
that are taken by franchisees and international licensees;
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Failure to retain our current customers and renew existing
customer contracts could adversely affect our business;
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The pricing, terms, and length of customer service agreements
may constrain our ability to recover costs and to make a profit
on our contracts;
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Changes in economic conditions that impact the industries in
which our end-users primarily operate in could adversely affect
our business;
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Our solid waste collection operations are geographically
concentrated and are therefore subject to regional economic
downturns and other regional factors;
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If we are required to change the pricing models for our products
or services to compete successfully, our margins and operating
results may be adversely affected;
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Several members of our senior management team are critical to
our business and if these individuals do not remain with us in
the future, it could have a material adverse impact on our
business, financial condition and results of operations;
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The financial condition and operating ability of third parties
may adversely affect our business;
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The volatility of our raw material costs may adversely affect
our operations;
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Increases in fuel and energy costs could adversely affect our
results of operations and financial condition;
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Our products contain hazardous materials and chemicals, which
could result in claims against us;
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We are subject to environmental, health and safety regulations,
and may be adversely affected by new and changing laws and
regulations, that generate ongoing environmental costs and could
subject us to liability;
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Future changes in laws or renewal enforcement of laws regulating
the flow of solid waste in interstate commerce could adversely
affect our operating results;
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If our products are improperly manufactured, packaged, or
labeled or become adulterated, those items may need to be
recalled;
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Changes in the types or variety of our service offerings could
affect our financial performance;
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We may not be able to adequately protect our intellectual
property and other proprietary rights that are material to our
business;
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If we are unable to protect our information and
telecommunication systems against disruptions or failures, our
operations could be disrupted;
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Insurance policies may not cover all operating risks and a
casualty loss beyond the limits of our coverage could adversely
impact our business;
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Our current size and growth strategy could cause our revenue and
operating results to fluctuate more than some of our larger,
more established competitors or other public companies;
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Certain stockholders may exert significant influence over any
corporate action requiring stockholder approval; and
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Provisions of Delaware law and our organizational documents may
delay or prevent an acquisition of our company, even if the
acquisition would be beneficial to our stockholders.
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73
DIRECTORS
AND EXECUTIVE OFFICERS
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Director/
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Officer
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Name
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Age
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Position
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Since(1)
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H. Wayne Huizenga
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Chairman
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2010
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Steven R. Berrard
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President, Chief Executive Officer and Director
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2004
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Thomas Aucamp
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Executive Vice President and Secretary
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2006
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Thomas Byrne
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Executive Vice President
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2004
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Michael Kipp
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Senior Vice President and Chief Financial Officer
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2010
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Hugh H. Cooper
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Senior Vice President and Treasurer
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2005
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David Braley
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Director
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2010
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John Ellis Bush
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Director
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2010
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Harris W. Hudson
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Director
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2011
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William D. Pruitt
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Director
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2011
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David Prussky
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Director
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2010
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Michael Serruya
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Director
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2010
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Except for Messrs. Hudson and Pruitt, all directors were
appointed on November 1, 2010 in connection with the
Merger. Mr. Berrard has served as a director of Swisher
International since 2004. Mr. Prussky served an initial
term as a director of CoolBrands from 1994 to 1998 and rejoined
the CoolBrands board of directors in February 2010.
Mr. Serruya served as a director of CoolBrands since 1994. |
We have set forth below certain information regarding each
nominee, including the specific experience, qualifications,
attributes, or skills that contributed to the Boards
conclusion that such nominee should serve as a director.
Directors
H. Wayne
Huizenga
Chairman
Mr. Huizenga has been an investor in and stockholder of
Swisher International, which we acquired in the Merger, since
2004. Over his 39 year career, he has also served as an
executive officer and director of several public and private
companies. Mr. Huizenga co-founded Waste Management, Inc.
in 1971, which he helped build into the worlds largest
integrated solid waste services company. Mr. Huizenga has
served as Vice Chairman of Viacom Inc. and also served as
Chairman and Chief Executive Officer of Blockbuster
Entertainment Group, a division of Viacom, which he helped to
grow from a small retail chain into the worlds largest
video store operator. Mr. Huizenga has served as Chairman
and Chief Executive Officer of Boca Resorts, Inc. until its
acquisition by The Blackstone Group, as well as AutoNation,
Inc., a leading North American automotive retail company. He has
also served as Chairman of Republic Services, Inc. and Extended
Stay America, Inc.
Mr. Huizenga is an experienced former executive officer and
director of public companies with the skills necessary to serve
as Chairman of the Board. Over his
39-year
career, Mr. Huizenga has founded and developed multiple
companies into industry leaders. As a member of the board of
directors of several public companies, Mr. Huizenga has
developed knowledge and experience leading public companies from
the early stages of development to industry leaders in various
service industries. Mr. Huizenga also provides substantial
management experience gained from his years as an executive
officer of Waste Management, Inc., Blockbuster Entertainment
Group, AutoNation, Inc., and Boca Resorts, Inc.
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Steven R.
Berrard
Director,
President and Chief Executive Officer
Mr. Berrard has served as Chief Executive Officer and a
director of Swisher International, which we acquired in the
Merger, since 2004. Mr. Berrard is currently a director and
Audit and Compensation Committee member of Walter Investment
Management Corp., and director of Pivotal Fitness.
Mr. Berrard served as the Managing Partner of private
equity fund New River Capital Partners, which he co-founded
in 1997, from 1997 to 2011. Throughout most of the 1980s,
Mr. Berrard served as President of Huizenga Holdings, Inc.
as well as in various positions with subsidiaries of Huizenga
Holdings. He has served as Chief Executive Officer of
Blockbuster Entertainment Group (a division of Viacom, Inc.),
Chief Executive Officer and Chairman of Jamba, Inc. (parent
company of Jamba Juice Company), and co-founded and served as
co-Chief Executive Officer of retail automotive industry leader
AutoNation, Inc. Mr. Berrard has served as a director of
numerous public and private companies including Viacom, Inc.,
AutoNation, Inc., Boca Resorts, Inc., Birmingham Steel Inc.,
Blockbuster Entertainment Group, Republic Industries Inc. and
HealthSouth Corp.
Mr. Berrard is an experienced executive officer and
director of public companies with relevant industry knowledge
and skills necessary to serve as a director. Mr. Berrard
developed the relevant industry experience and expertise while
serving as the Chief Executive Officer and director of the
company over the last six years. He combines this experience and
expertise with experience as a public company director through
his board memberships at Jamba, Inc., Walter Investment
Management Corp., HealthSouth Corp., Birmingham Steel Inc., Boca
Resorts, Inc. and Viacom, Inc. Mr. Berrard also has
experience and knowledge leading public companies from the early
stages of development to the position of an industry leader
based on his work with AutoNation, Inc., Republic Industries
Inc. and Blockbuster Entertainment Group.
Senator
David Braley
Director
Senator Braley was appointed to the Canadian Senate in May 2010.
He is a highly respected Canadian entrepreneur with numerous
business interests including real estate development, and has
extensive experience leading both private operations and sports
franchises. Senator Braley has been the owner and president of
Orlick Industries Limited, an automotive die cast and machining
organization, since 1969 and is the owner of the B.C. Lions and
the Toronto Argonauts of the Canadian Football League (CFL).
Senator Braley was formerly Chairman of the Board of Governors
and Interim Commissioner of the CFL and was founding Chairman of
the Hamilton Entertainment and Convention Facilities Inc.,
operator of several venues in the city of Hamilton, Ontario.
Senator Braley brings to the Board his experience leading a
private machining organization and multiple sports franchises.
As the owner and President of Orlick Industries Limited, Senator
Braley has experience and knowledge of financial, operational,
and managerial issues faced by private companies. As an owner of
two franchises of the Canadian Football League and as a member
of the Board of Governors, Senator Braley has knowledge and
skills regarding franchise matters.
John
Ellis (Jeb) Bush
Director
Mr. Bush is currently President and Chief Executive Officer
of the consulting firm Jeb Bush and Associates. Mr. Bush
served in that role since June 2007. Mr. Bush served as the
Governor and Secretary of Commerce of the State of Florida from
January 2000 to January 2007. He is an experienced director of
public companies, currently serving as a director of Rayonier
Inc. and Tenet Healthcare Corporation. Mr. Bush also
established and serves as Chairman of both the Foundation for
Excellence in Education, a
not-for-profit
charitable organization, and The Foundation for Floridas
Future, a
not-for-profit
public policy organization.
Mr. Bush is an experienced director of public companies
with the skills necessary to serve as a director. As a member of
the board of directors of public companies and former Governor
of the State of Florida, Mr. Bush has developed knowledge
and experience of financial, operational and managerial matters.
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Harris W.
Hudson
Director
Harris W. Hudson is currently chairman and owner of Hudson
Capital Group, an investment company located in
Fort Lauderdale, Florida founded by Mr. Hudson in
1997. Mr. Hudson most recently served as Vice Chairman,
Secretary and a director of Republic Services Inc. from 1995 to
2008. Prior to that period, he served in various executive roles
from 1995 to 1998 with Republic Service Inc.s former
parent company (then known as Republic Waste Industries, Inc.),
including as Chairman of its Solid Waste Group and its
President. From 1983 to 1995, Mr. Hudson was Chairman, CEO
and President of Hudson Management Corporation, a solid waste
collection company that he founded and later merged with
Republic Waste Industries. Mr. Hudson also served as Vice
President of Waste Management of Florida, Inc. and its
predecessor from 1964 until 1982.
Mr. Hudson is an experienced public company officer and
director. As a result of his experiences, Mr. Hudson has a
thorough knowledge and understanding of financial, operational,
compensatory and other issues faced by a public company.
William
D. Pruitt
Director
William D. Pruitt has served as general manager of Pruitt
Enterprises, LP. and president of Pruitt Ventures, Inc. since
2000. Mr. Pruitt has been an independent board member of
the MAKO Surgical Corp., a developer of robots for knee and hip
surgery, since 2008, and is a member of the MAKO audit
committee. Mr. Pruitt served as an independent board member
of The PBSJ Corporation, an international professional services
firm, from 2005 to 2010. Mr. Pruitt served as chairman of
the audit committee of KOS Pharmaceuticals, Inc., a fully
integrated specialty pharmaceutical company, from 2004 until its
sale in 2006. He was also chairman of the audit committee for
Adjoined Consulting, Inc., a full-service management consulting
firm, from 2000 until it was merged into Kanbay International, a
global consulting firm, in 2006. From 1980 to 1999,
Mr. Pruitt served as the managing partner for the Florida,
Caribbean and Venezuela operations of the independent auditing
firm of Arthur Andersen LLP. Mr. Pruitt holds a Bachelor of
Business Administration from the University of Miami and is a
Certified Public Accountant (inactive).
Mr. Pruitt is an experienced director of public companies
with the skills necessary to serve as a director.
Mr. Pruitt also has extensive experience in financial
matters as a certified public accountant and as a former
managing partner of an accounting firm.
David
Prussky
Director
Mr. Prussky was a director and Chair of the Audit Committee
of CoolBrands. He was an original director of the predecessor to
CoolBrands, Yogen Früz World-Wide Inc. Mr. Prussky has
served as an investment banker for Patica Securities Limited
since August 2002. Mr. Prussky has served as director of
numerous public and private companies over the past
16 years, including Carfinco Income Fund, Canadas
largest public specialty auto finance business, and Lonestar
West Inc. Mr. Prussky is also a director of exempt market
dealer Patica Securities Limited which specializes in financing
junior growth and mid-market businesses, and acts as a director
or adviser to several private companies, having helped many grow
from early-stage to significant operating entities.
Mr. Prussky is an experienced director of public companies
with the skills necessary to serve as a director. He has helped
build numerous public and private entities from the early stages
to significant operating entities.
Michael
Serruya
Director
Mr. Serruya is an experienced director and executive
officer of public companies. He is co-founder, past Chairman,
President, Chief Executive Officer and director of CoolBrands.
Mr. Serruya served as Co-President
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and Co-Chief Executive Officer of CoolBrands from 1994 to 2000,
as Co-Chairman of CoolBrands in 2005, as President and Chief
Executive Officer of CoolBrands from 2006 until the Merger in
November 2010. Mr. Serruya served as a director of
CoolBrands since 1994 until the Merger in November 2010.
Mr. Serruya was also President, Chief Executive Officer and
Chairman of CoolBrands predecessor, Yogen Früz
World-Wide Inc. He is also director of Jamba, Inc. (owner of
Jamba Juice Company) and a director and member of the Audit
Committee of Response Genetics, Inc.
Mr. Serruya is an experienced executive officer and
director of public companies with the skills necessary to serve
as a director. Mr. Serruya has experience leading a
franchise organization. He combines that franchise experience
with licensing and consumer products expertise.
Executive
Officers
Thomas
Aucamp
Executive
Vice President and Secretary
Mr. Aucamp has served as Executive Vice President of
Swisher International since 2006. He brings public equity,
business development and management experience to Swisher.
Mr. Aucamp is also a Partner of New River Capital Partners,
a private equity fund, which he co-founded in 1997.
Mr. Aucamp was a founder, Vice President, and on the board
of directors of Services Acquisition Corp. International from
its initial public offering in 2005 through its merger with
Jamba Juice, Inc. in 2006. Previously, Mr. Aucamp was Vice
President of Corporate Development and Strategic Planning for
Blockbuster Entertainment Group and prior to joining Blockbuster
in 1995, he was in the mergers and acquisitions department of
W.R. Grace & Co., Inc.
Thomas
Byrne
Executive
Vice President
Mr. Byrne has served as Executive Vice President of Swisher
International since 2004 and Director of Swisher International
from 2004 until the Merger. He has served as a director of
numerous public and private companies and brings experience in
public equity investment and accounting to Swisher.
Mr. Byrne is a director of Certilearn, Inc., ITC Learning,
Pivotal Fitness and the Private Equity Committee of the
University of Florida Foundation, and has also served as a
director of Jamba, Inc. Previously, Mr. Byrne was
Administrative Partner of New River Capital Partners, a private
equity fund, which he co-founded in 1997, Vice Chairman of
Blockbuster Entertainment Group (a division of Viacom, Inc.) and
was also President of the Viacom Retail Group. Additionally,
from 1984 to 1988 Mr. Byrne was employed by KPMG Peat
Marwick.
Hugh H.
Cooper
Senior
Vice President and Treasurer
Mr. Cooper has served as Senior Vice President and
Treasurer since May 2011 and previously served as Chief
Financial Officer and Treasurer of Swisher International since
2005. Prior to joining Swisher, Mr. Cooper co-founded
CoreVision Strategies, an enterprise that works with companies
to create and implement successful financial and management
strategies. Mr. Cooper has over 33 years of diverse
general management, operations and accounting experience in a
variety of industries. During the saving and loan crisis, from
1983 to 1987, Mr. Cooper provided nationwide management and
consulting services to the Resolution Trust Corporation,
assisting regulators with the management and disposition of
several financial institutions. Mr. Cooper was employed by
Deloitte LLP, then Haskins and Sells. Mr. Cooper has a B.S.
in Accounting from Florida Atlantic University.
Michael
Kipp
Senior
Vice President and Chief Financial Officer
Mr. Kipp has served as Senior Vice President and Chief
Financial Officer since May 2011 and previously served as Chief
Accounting Officer of Swisher since July 2010. Prior to joining
Swisher, Mr. Kipp was the co-Founder and President of
Strategic Advisory Service, a business advisory firm which he
co-founded in 2008. From 2003 through 2008, Mr. Kipp served
as President and Chief Financial Officer of SUSS MicroTec Inc.,
a
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leading public company manufacturer of capital equipment to the
semiconductor marketplace. From 1999 to 2003, Mr. Kipp
served as Vice President, Corporate Controller of ANC Rental
Corporation, the parent company of Alamo and National Car
Rental. From 1997 to 1999, Mr. Kipp was Vice President,
Finance for AutoNation, Inc. From 1991 to 1996, he was Vice
President of Financial Planning and Reporting of Blockbuster
Entertainment. Before 1991, Mr. Kipp held various senior
financial positions for other international public companies.
Family
Relationships and Involvement in Certain Legal
Proceedings
There are no family relationships between any of our executive
officer or directors.
None of our directors or executive officers have been, within
the 10 years before the date of this registration
statement, a director or executive officer of any company that,
while that person was acting in that capacity, or within two
years before the time of such filing, became bankrupt, made a
proposal under any legislation relating to bankruptcy or
insolvency or was subject to or instituted any proceedings,
arrangement or compromise with creditors or had a receiver,
receiver manager or trustee appointed to hold its assets,
except: (1) Mr. Berrard served as Chairman of the
Board of Directors of Gerald Stevens, Inc., when it filed a
petition for bankruptcy in April 2001;
(2) Mr. Huizenga served as a director of NationsRent,
Inc. and resigned from the board of directors approximately six
months prior to the time that NationsRent, Inc. filed a
voluntary petition for bankruptcy in December 2001;
(3) Mr. Cooper served as Chief Financial Officer of
Fuzion Technologies, Inc. and resigned as an officer of the
company prior to the time that Fuzion Technologies, Inc. filed a
petition for bankruptcy in December 2001;
(4) Mr. Byrne served as a director of ITC Learning,
Inc. when it filed a petition for bankruptcy in July 2002; and
(5) Mr. Prussky served as a director of Hamilton Tool
Corp. when it filed a petition for bankruptcy in April 2003.
CORPORATE
GOVERNANCE
Corporate
Governance Principles and Code of Ethics
The Board is committed to sound corporate governance principles
and practices. The Boards core principles of corporate
governance are set forth in the Swisher Hygiene Corporate
Governance Principles (the Principles), which were
adopted by the Board in November 2010. In order to clearly set
forth our commitment to conduct our operations in accordance
with our high standards of business ethics and applicable laws
and regulations, the Board also adopted a Code of Business
Conduct and Ethics (Code of Ethics), which is
applicable to all directors, officers and employees. A copy of
the Code of Ethics and the Principles are available on our
corporate website at www.swisherhygiene.com. You also may
obtain a printed copy of the Code of Ethics and Principles by
sending a written request to: Investor Relations, Swisher
Hygiene Inc., 4725 Piedmont Row Drive, Suite 400,
Charlotte, North Carolina 28210.
Board of
Directors
The business and affairs of the company are managed by or under
the direction of the Board. Pursuant to our bylaws, the Board
may establish one or more committees of the Board, however
designated, and delegate to any such committee the full power of
the Board, to the fullest extent permitted by law.
The Board intends to have regularly scheduled meetings and at
such meetings our independent directors will meet in executive
session.
The Board held one meeting and took three actions by unanimous
written consent following the Merger during 2010. In 2010, each
person serving as a director attended at least 75% of the total
number of meetings of our Board and any Board committee on which
he or she served.
Our independent directors held one executive session without
management present following the Merger during 2010. Our Board
has not appointed a lead independent director; instead the
presiding director for each executive session is rotated among
the Chairs of our Board committees.
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Composition. The Board currently consists of
the following eight members: H. Wayne Huizenga, (Chairman);
Steven R. Berrard; David Braley; John Ellis Bush; Harris W.
Hudson; William D. Pruitt; David Prussky, and Michael Serruya.
Messrs. Hudson and Pruitt were appointed as members of the
Board on January 28, 2011 to fill the vacancies resulting
from the resignations of James OConnor and Ramon
Rodriguez. See Directors above for biographical
information regarding the members of the Board.
Orientation and Continuing Education. The
Board will hold a meeting shortly after a new member joins the
Board to provide such new member with an overview of the
responsibilities of the Board and information regarding our
business. The Board will hold meetings, as deemed appropriate,
to provide continuing education to its directors.
Our directors are expected to attend our Annual Meeting of
Stockholders. Any director who is unable to attend our Annual
Meeting is expected to notify the Chairman of the Board in
advance of the Annual Meeting.
Director
Independence
The Board has determined that the following non-employee
directors are independent in accordance with the
NASDAQ rules and Canadian securities laws and have no material
relationship with the Company, except as a director and a
stockholder of the Company: Senator Braley; Mr. Bush;
Mr. Hudson; Mr. Pruitt; and Mr. Prussky. In
determining the independence of each of the non-employee
directors, the Board considered the relationships described
under Related Party Transactions. In each case, the
relationships did not violate NASDAQ listing standards or our
Principles, and the Board concluded that such relationships
would not impair the independence of our non-employee directors.
Board
Committees
Pursuant to our bylaws, the Board may establish one or more
committees of the Board, however designated, and delegate to any
such committee the full power of the Board, to the fullest
extent permitted by law.
Our Board has established three separately designated standing
committees to assist the Board in discharging its
responsibilities: the Audit Committee, the Compensation
Committee, and the Nominating and Corporate Governance
Committee. The charters for our Board committees set forth the
scope of the responsibilities of that committee. The Board will
assess the effectiveness and contribution of each committee on
an annual basis. These charters are available at
www.swisherhygiene.com, and you may obtain a printed copy
of any of these charters by sending a written request to:
Investor Relations, Swisher Hygiene Inc., 4725 Piedmont Row
Drive, Suite 400, Charlotte, North Carolina 28210.
The following table sets forth the current membership of each of
our Boards committees:
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Nominating and
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Corporate
|
|
|
Audit
|
|
Compensation
|
|
Governance
|
Name
|
|
Committee
|
|
Committee
|
|
Committee
|
|
Steven R. Berrard
|
|
|
|
|
|
|
|
|
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|
|
Senator David Braley
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
John Ellis Bush
|
|
|
|
|
|
|
|
*
|
|
|
|
**
|
Harris W. Hudson
|
|
|
|
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|
|
|
**
|
|
|
|
|
H. Wayne Huizenga
|
|
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|
|
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|
|
|
|
|
William D. Pruitt
|
|
|
|
**
|
|
|
|
*
|
|
|
|
|
David Prussky
|
|
|
|
*
|
|
|
|
|
|
|
|
*
|
Michael Serruya
|
|
|
|
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|
|
|
|
|
|
79
Audit Committee. The primary function of the
Audit Committee is to assist the Board in fulfilling its
responsibilities by overseeing our accounting and financial
processes and the audits of our financial statements. The
independent auditor is ultimately accountable to the Audit
Committee, as representatives of the stockholders. The Audit
Committee has the ultimate authority and direct responsibility
for the selection, appointment, compensation, retention and
oversight of the work of the companys independent auditor
that is engaged for the purpose of preparing or issuing an audit
report or performing other audit, review or attest services for
the company (including the resolution of disagreements between
management and the independent auditors regarding financial
reporting), and the independent auditor must report directly to
the Audit Committee. The Audit Committee also is responsible for
the review of proposed transactions between the company and
related parties. For a complete description of our Audit
Committees responsibilities, you should refer to the Audit
Committee Charter.
The Audit Committee currently consists of three members,
Messrs. Pruitt (Chairman), Braley, and Prussky. The Board
has determined that the Audit Committee members have the
requisite independence and other qualifications for audit
committee membership under applicable rules under the Securities
Exchange Act of 1934, as amended (the Exchange Act),
NASDAQ rules, and Canadian securities laws. The Board also has
determined that Mr. Pruitt is an audit committee
financial expert within the meaning of Item 407(d)(5)
of
Regulation S-K
under the Exchange Act. The Audit Committee held one meeting and
took no action by unanimous written consent following the Merger
during 2010. The Audit Committee Report for fiscal year 2010,
which contains a description of the Audit Committees
responsibilities and its recommendation with respect to our
audited consolidated financial statements for the year ended
December 31, 2010, is set forth below.
Compensation Committee. The Board established
a Compensation Committee comprised solely of independent
directors as defined in the NASDAQ rules and Canadian securities
laws. The Compensation Committee held one meeting and took no
action by unanimous written consent following the Merger during
2010. The Compensation Committee currently consists of three
members, Messrs. Hudson (Chairman), Bush, and Pruitt.
Messrs. Hudson and Pruitt were appointed members of the
Compensation Committee following James OConnor and Ramon
Rodriguezs resignations from the Board on January 28,
2011. See the Compensation Discussion and Analysis
below for a discussion of the Compensation Committees
process for determining compensation and responsibilities.
Nominating and Corporate Governance
Committee. The primary function of the Nominating
and Corporate Governance Committee is to assist the Board in
monitoring and overseeing matters of corporate governance and
selecting, evaluating and recommending to the Board qualified
candidates for election or appointment to the Board. The
Nominating and Corporate Governance Committee currently consists
of three members, Messrs. Bush (Chairman), Braley, and
Prussky. The Board has determined that each of the Nominating
and Corporate Governance Committee members has the requisite
independence for nominating and corporate governance committee
membership under applicable NASDAQ rules and Canadian securities
laws. The Nominating and Corporate Governance Committee held one
meeting and took no action by unanimous written consent
following the Merger during 2010. The Nominating and Corporate
Governance Committee will consider all qualified director
candidates identified by various sources, including members of
the Board, management and stockholders. Candidates for directors
recommended by stockholders will be given the same consideration
as those identified from other sources. The Nominating and
Corporate Governance Committee is responsible for reviewing each
candidates biographical information, meeting with each
candidate and assessing each candidates independence,
skills and expertise based on a number of factors. While we do
not have a formal policy on diversity, when considering the
selection of director nominees, the Nominating and Corporate
Governance Committee considers individuals with diverse
backgrounds, viewpoints, accomplishments, cultural background
and professional expertise, among other factors.
Board
Leadership
The Board has no policy regarding the need to separate or
combine the offices of Chairman of the Board and Chief Executive
Officer and instead the Board remains free to make this
determination from time to time in a manner that seems most
appropriate for the Company. Currently, the positions of
Chairman and Chief
80
Executive Officer are separate at Swisher Hygiene. H. Wayne
Huizenga serves as our Chairman and Steven Berrard serves as our
President and Chief Executive Officer. At this time, the Board
believes that this segregation avoids conflicts that may arise
as the result of combining the roles, and effectively maintains
independent oversight of management.
Board
Oversight of Enterprise Risk
The Board is actively involved in the oversight and management
of risks that could affect the Company. This oversight and
management is conducted primarily through the committees of the
Board identified above but the full Board has retained
responsibility for general oversight of risks. The Audit
Committee is primarily responsible for overseeing the risk
management function, specifically with respect to
managements assessment of risk exposures (including risks
related to liquidity, credit, operations and regulatory
compliance, among others), and the processes in place to monitor
and control such exposures. The other committees of the Board
consider the risks within their areas of responsibility. The
Board satisfies its oversight responsibility through full
reports by each committee chair regarding the committees
considerations and actions, as well as through regular reports
directly from officers responsible for oversight of particular
risks within the Company.
Compensation
Committee Interlocks and Insider Participation
The 2010 Compensation Committee was comprised of James
OConnor (Chairman), Ramon A. Rodriguez, and John Ellis
Bush. None of these Committee members have ever been an officer
or employee of Swisher Hygiene or any of our subsidiaries and
none of our executive officers has served on the compensation
committee or board of directors of any company of which any of
our other directors is an executive officer.
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Overview
This discussion and analysis describes the material elements of
compensation awarded to, earned by, or paid to the named
executive officers of Swisher during 2009 and 2010, and provides
a brief summary of the compensation to be paid to the named
executive officers in 2011. Throughout this analysis, the
individuals who served as the Chief Executive Officer and Chief
Financial Officer during 2009 and 2010, as well as other
individuals included in the Summary Compensation Table below,
are referred to as the named executive officers.
During 2009, Swisher was a private company and its executive
officers consisted of Steven R. Berrard, Thomas Aucamp, Thomas
Byrne, and Hugh H. Cooper. Before the Merger, we did not have an
established Compensation Committee, and all compensation
decisions were made by the Chief Executive Officer. After the
Merger, on November 2, 2010, the Board established a
Compensation Committee comprised of Messrs. OConnor
(Chairman), Rodriguez, and Bush. On January 28, 2011,
Messrs. OConnor and Rodriguez resigned as directors
of the Company and members of the Compensation Committee. On
January 28, 2011, Messrs. Hudson and Pruitt were
appointed directors of the Company and members of the
Compensation Committee. Mr. Hudson currently serves as the
Chairman of the Compensation Committee. The Compensation
Committee is responsible for the oversight, implementation, and
administration of all of the executive compensation plans and
programs after the Merger.
Compensation
Policies and Practices for 2009
The core objective of our compensation programs for 2009 was to
secure and retain the services of high quality executives. For
2009, base salary was the principal component of compensation
for the named executive officers. When determining base salary
for 2009, Mr. Berrard did not use any specific formula,
factors, or particular criteria to be met by a named executive
officer and did not assign any relative weight to any factors or
criteria he considered. Rather, Mr. Berrard exercised his
judgment, discretion, and experience
81
with route-based, recurring revenue businesses and industries by
considering all factors he deemed relevant. In determining base
salaries for 2009, Mr. Berrard considered, the experience,
skills, knowledge and responsibilities of the named executive
officers in their respective roles. Mr. Berrard determined
to forgo any salary during 2009. Base salaries for 2009 for the
remaining named executive officers were $207,692 each.
In 2009, the named executive officers received additional
compensation in the form of vacation, medical, 401(k), and other
benefits generally available to all of our full time employees.
Compensation
Policies and Practices for 2010
The core objectives of our compensation programs for 2010 were
to secure and retain the services of high quality executives and
to provide compensation to our executives that was commensurate
and aligned with our performance and advances both short and
long-term interests of ours and our stockholders. We seek to
achieve these objectives through two principal compensation
programs: (1) a base salary and (2) long-term equity
incentives. Base salaries are designed primarily to attract and
retain talented executives. Grants of equity awards are designed
to provide a strong incentive for achieving long-term results by
aligning interests of our executives with those of our
stockholders, while at the same time encouraging our executives
to remain with the company. The Compensation Committee believes
that our compensation programs for the named executive officers
is appropriately based upon our performance and the performance
and level of responsibility of the executive officer.
Named
Executive Officer Compensation Components for 2010
For 2010, base salary and long-term equity incentive
compensation, were the principal components of compensation for
the named executive officers.
Base
Salary
A significant portion of total compensation for 2010 was
comprised of base salary, which enables us to attract and retain
talented executive management through the payment of reasonable
current income. When determining base salary, Mr. Berrard
did not use any specific formula, factors, or particular
criteria to be met by a named executive officer and did not
assign any relative weight to any factors or criteria he
considered. Rather, Mr. Berrard exercised his judgment,
discretion, and experience with route-based, recurring revenue
businesses and industries by considering all factors he deemed
relevant. In determining base salaries for 2010,
Mr. Berrard considered, the experience, skills, knowledge
and responsibilities of the named executive officers in their
respective roles. During 2010, Mr. Berrard received
$192,308 in salary. Base salaries for 2010 for the remaining
named executive officer were $200,000 for Mr. Cooper,
$203,077 for Mr. Aucamp, and $204,615 for Mr. Byrne.
The Compensation Committee held its first meeting on
November 2, 2010. At this meeting, the Compensation
Committee determined not to modify the executive officers 2010
base salaries.
Long-Term
Equity Incentive Compensation
On November 2, 2010, our Board approved the Swisher Hygiene
Inc. 2010 Stock Incentive Plan to attract, retain, motivate and
reward key officers and employees. The Plan initially allowed
for the grant of stock options, restricted stock units and other
equity instruments up to a total of 6,000,000 shares of our
common stock. On February 10, 2011, our Board amended and
restated the Swisher Hygiene Inc. 2010 Stock Incentive Plan. The
sole purpose of the amendment was to increase the total amount
of shares of our common stock issuable under the Plan from
6,000,000 shares to 11,400,000 shares (representing
8.9% of the issued and outstanding shares as of March 21,
2011) and to increase the number of such shares that may be
issued in connection with awards, other than stock options and
stock appreciation rights, that are settled in common stock from
3,000,000 shares to 5,700,000 shares.
Under the Plan, the Board has approved awards of options to
purchase 1,521,825 shares of our common stock (representing
1.2% of the issued and outstanding shares as of March 21,
2011). The options vest in four
82
equal annual installments beginning on the first anniversary of
the grant date and are exercisable at prices between $4.18 to
$6.32 per share. The options expire in ten years from the date
of grant. The Board has also approved the award of 2,938,602
restricted stock units (representing 2.3% of the issued and
outstanding shares as of March 21, 2011) at prices
between $4.18 and $6.25 per share. The restricted stock units
vest in four equal annual installments beginning on the first
anniversary of the grant date.
Among the awards made under the Plan, the Compensation Committee
granted equity awards to our named executive officers as follows:
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
|
|
Stock
|
|
Stock
|
Name
|
|
Units
|
|
Options
|
|
Steve Berrard
|
|
|
251,196
|
|
|
|
107,656
|
|
Thomas Byrne
|
|
|
115,550
|
|
|
|
49,522
|
|
Thomas Aucamp
|
|
|
110,526
|
|
|
|
47,368
|
|
Hugh Cooper
|
|
|
122,500
|
|
|
|
52,500
|
|
The Compensation Committees grant of equity awards to the
named executive officers was entirely discretionary, subject to
limitations set by the Plan. Decisions by the Compensation
Committee regarding grants of equity awards to the named
executive officers (other than the Chief Executive Officer) were
made based upon the recommendation of the Chief Executive
Officer, and included the consideration of the executive
officers current position with us, and the executive
officers past and expected future performance. The
Compensation Committee did not use any specific factors, or
particular criteria that was to be met by each executive officer
and did not assign any relative weight to any factors or
criteria it considered when granting equity awards. Rather, the
Compensation Committee exercised its judgment and discretion by
considering all factors that it deemed relevant at the time of
the grants. For example, in determining grants of equity awards
in 2010, the Compensation Committee considered (i) the
executive officers service to the Company during the
months before and after the Merger, (ii) each executive
officers position with the Company, and (iii) each
executive officers past and expected future performance.
Moreover, these factors were not quantified or given any
particular weighting in determining grants of equity awards.
Rather, the Compensation Committee relied on its own business
experience and judgment in determining the grants. After
reviewing the factors set forth above, the Compensation
Committee determined the amounts of grants to be awarded based
on the Compensation Committees view of the relative
responsibility of each executive officers position with
the Company. The Companys Chief Executive Officer and
Executive Vice Presidents received grants of equity awards
valuing three times their 2011 annual base salary, as the
Committee viewed these grants as appropriate based on each of
the executive officers position and contribution to the
Company. The former Chief Financial Officer received grants of
equity awards valuing two times his 2011 annual base salary and
an additional grant of equity awards to compensate the former
Chief Financial Officer for his significant service to the
Company during the months before and after the Merger.
In 2010, the named executive officers received additional
compensation in the form of vacation, medical, 401(k), and other
benefits generally available to all of our full time employees.
Compensation
Policies and Practices for 2011
The core objectives of our compensation programs for 2011 are to
secure and retain the services of high quality executives and to
provide compensation to our executives that are commensurate and
aligned with our performance and advances both short and
long-term interests of ours and our stockholders. We seek to
achieve these objectives through three principal compensation
programs: (1) a base salary, (2) long-term equity
incentives, and (3) an annual cash incentive bonus. Base
salaries are designed primarily to attract and retain talented
executives. Grants of equity awards are designed to provide a
strong incentive for achieving long-term results by aligning
interests of our executives with those of our stockholders,
while at the same time encouraging our executives to remain with
the company. Annual cash incentives are designed to motivate and
reward the achievement of selected financial goals, generally
tied to profitability. The Compensation Committee believes that
our compensation programs for the named executive officers is
appropriately based upon our performance and the performance and
level of responsibility of the executive officer. In addition,
the risks
83
arising from our compensation policies and practices for our
employees are not reasonably likely to have a material adverse
effect on the Company.
Named
Executive Officer Compensation Components for 2011
For 2011, base salary, long-term equity incentive compensation,
and an annual cash incentive bonus opportunity are the principal
components of compensation for the named executive officers. In
determining compensation for 2011, the Compensation Committee
reviewed the compensation programs of other companies in our
industry for informational purposes. However, the Compensation
Committee did not use this information as a reference point,
either wholly or in part, to base, justify or provide a
framework for its compensation decisions and the Compensation
Committee did not engage in benchmarking.
Base
Salary
A significant portion of total compensation for 2011 will be
comprised of base salary, which enables us to attract and retain
talented executive management through the payment of reasonable
current income. On November 2, 2010, the Compensation
Committee approved, based on the recommendation of
Mr. Berrard, the 2011 compensation for our named executive
officers other than Mr. Berrard, and determined and
approved 2011 compensation for Mr. Berrard.
Mr. Berrard reviewed the performance of each of the named
executive officers (other than himself) and the compensation
paid to those individuals during the past fiscal year, and made
recommendations to the Compensation Committee regarding the
compensation to be paid to those individuals during 2011. When
determining base salary for 2011, the Compensation Committee did
not use any specific formula, factors, or particular criteria
that must be met by each named executive officer and did not
assign any relative weight to any factors or criteria it
considered. Rather, the Compensation Committee relied on its own
business experience, judgment and discretion by considering all
factors it deemed relevant. In determining base salaries for
2011, the Compensation Committee considered, the experience,
skills, knowledge and responsibilities of the named executive
officers in their respective roles. The Compensation Committee
increased Mr. Berrards salary for 2011 after
considering his responsibilities as a chief executive officer of
a public company with a significant growth strategy,
Mr. Berrards prior contributions to the company for
which he had not received commensurate compensation and
Mr. Berrards expected future contributions to the
company and its growth strategy. For 2011, base salary will be
$500,000 for Mr. Berrard, $230,000 for Mr. Byrne,
$220,000 for Mr. Aucamp, $220,000 for Mr. Kipp, and
$200,000 for Mr. Cooper.
Long-Term
Equity Incentive Compensation
At this time, the Compensation Committee has not approved the
terms of long-term equity incentive compensation for 2011.
Annual
Cash Incentive Bonus
On February 10, 2011, the Compensation Committee approved
2011 annual cash incentive bonus targets as a percentage of
annual base salaries for each of the named executive officers as
follows: Mr. Berrard 60%;
Mr. Byrne 50%; Mr. Aucamp 50%;
and Mr. Cooper 40%. On May 5, 2011, the
Compensation Committee approved a cash incentive bonus target of
50% of base salary for Mr. Kipp. The payment of such
bonuses is based on the Company achieving its budgeted EBITDA
for the fiscal year ending December 31, 2011.
The named executive officers will also receive additional
compensation in the form of vacation, medical, 401(k), and other
benefits generally available to all of our full time employees.
84
Summary
Compensation Table
The following table sets forth certain summary information
concerning compensation earned by, and paid to, the named
executive officers for 2009 and 2010.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Option
|
|
Non-Equity
|
|
Deferred
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
Awards
|
|
Awards
|
|
Incentive Plan
|
|
Compensation
|
|
Compensation
|
|
|
Name and Principal Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
(1)(2)
|
|
(1)(2)
|
|
Compensation
|
|
Earnings
|
|
(3)
|
|
Total
|
|
Steven R. Berrard
|
|
|
2010
|
|
|
$
|
192,308
|
|
|
|
|
|
|
$
|
1,049,999
|
|
|
$
|
160,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,403,253
|
|
President and Chief
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hugh H. Cooper
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|
|
2010
|
|
|
$
|
200,000
|
|
|
|
|
|
|
$
|
512,050
|
|
|
$
|
78,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
790,538
|
|
Chief Financial
|
|
|
2009
|
|
|
$
|
207,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
154
|
|
|
|
|
|
|
$
|
207,846
|
|
Officer and Treasurer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas Aucamp
|
|
|
2010
|
|
|
$
|
203,077
|
|
|
|
|
|
|
$
|
461,999
|
|
|
$
|
70,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
735,891
|
|
Executive Vice
|
|
|
2009
|
|
|
$
|
207,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
207,692
|
|
President and Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas Byrne
|
|
|
2010
|
|
|
$
|
204,615
|
|
|
|
|
|
|
$
|
482,999
|
|
|
$
|
74,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
761,649
|
|
Executive Vice President
|
|
|
2009
|
|
|
$
|
207,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
615
|
|
|
|
|
|
|
$
|
208,307
|
|
|
|
|
(1) |
|
Represents restricted stock units and stock options granted
under the Swisher Hygiene Inc. 2010 Stock Incentive Plan (the
Plan). |
|
(2) |
|
This column reflects the aggregate grant date fair value
computed in accordance with FASB ASC Topic 718. In determining
the grant date fair value for restricted stock units, the
Company used $4.18, the closing price of the Companys
common stock on the grant date. In determining the grant date
fair value for stock options, the Company used the Black-Scholes
option pricing model, and took into account the $4.18 closing
price of the Companys common stock on the grant date, the
$4.18 exercise price, the 6.25 year assumed period over
which the options will be outstanding, a 30.7% volatility rate,
and a 2.63% risk free rate. |
|
(3) |
|
No named executive officer received other compensation that
exceeded $10,000 during 2009 and 2010. |
Grants of
Plan-Based Awards Fiscal 2010
The following table sets forth certain information concerning
grants of awards to the named executive officers pursuant to the
Plan in the fiscal year ended December 31, 2010.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
All Other
|
|
|
|
|
|
Grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Exercise
|
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Awards:
|
|
|
or Base
|
|
|
Fair
|
|
|
|
|
|
|
Estimated Possible Payouts
|
|
|
Estimated Future Payouts
|
|
|
Number of
|
|
|
Number of
|
|
|
Price of
|
|
|
Value of
|
|
|
|
|
|
|
Under Non-Equity Incentive
|
|
|
Under Equity Incentive
|
|
|
Shares of
|
|
|
Securities
|
|
|
Option
|
|
|
Stock and
|
|
|
|
Grant
|
|
|
Plan Awards
|
|
|
Plan Awards
|
|
|
Stock or
|
|
|
Underlying
|
|
|
Awards
|
|
|
Option
|
|
Name
|
|
Date
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Units (#)(1)
|
|
|
Options (#)(2)
|
|
|
($/Sh)
|
|
|
Awards(3)
|
|
|
Steven R. Berrard
|
|
|
11/2/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251,196
|
|
|
|
107,656
|
|
|
$
|
4.18
|
|
|
$
|
1,210,945
|
|
Hugh H. Cooper
|
|
|
11/2/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,500
|
|
|
|
52,500
|
|
|
$
|
4.18
|
|
|
$
|
590,538
|
|
Thomas Aucamp
|
|
|
11/2/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,526
|
|
|
|
47,368
|
|
|
$
|
4.18
|
|
|
$
|
532,814
|
|
Thomas Byrne
|
|
|
11/2/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,550
|
|
|
|
49,522
|
|
|
$
|
4.18
|
|
|
$
|
557,034
|
|
|
|
|
(1) |
|
Represents restricted stock units granted under the Plan, which
vest in four equal annual installments beginning on the first
anniversary of the grant date. Each restricted stock unit
represents the right to receive one share of common stock upon
vesting. |
|
(2) |
|
Represents stock options granted under the Plan, which vest in
four equal annual installments beginning on the first
anniversary of the grant date. These grants of stock options are
subject to stockholder ratification and approval of the Plan. |
85
|
|
|
(3) |
|
Represents the aggregate grant date fair value computed in
accordance with FASB ASC Topic 718. In determining the grant
date fair value for restricted stock units, we used $4.18, the
closing price of our common stock on the grant date. In
determining the grant date fair value for stock options, we used
the Black-Scholes option pricing model, and took into account
the $4.18 closing price of our common stock on the grant date,
the $4.18 exercise price, the 6.25 year assumed period over
which the stock options will be outstanding, a 30.7% volatility
rate, and a 2.63% risk free rate. |
Outstanding
Equity Awards at Fiscal Year-End 2010
The following table sets forth certain information regarding
equity-based awards held by the named executive officers as of
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards(1)
|
|
Stock Awards(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan
|
|
Market or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
Payout
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
Number of
|
|
Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of
|
|
Unearned
|
|
Unearned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares or
|
|
Shares,
|
|
Shares,
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
Number of
|
|
Units of
|
|
Units or
|
|
Units or
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
Shares or
|
|
Stock
|
|
Other
|
|
Other
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
Units of
|
|
That
|
|
Rights
|
|
Rights
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
Stock That
|
|
Have Not
|
|
That Have
|
|
That Have
|
|
|
|
Options (#)
|
|
|
Options (#)
|
|
|
Exercise
|
|
|
Expiration
|
|
Have Not
|
|
Vested
|
|
Not Vested
|
|
Not
|
Name
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price ($)
|
|
|
Date
|
|
Vested (#)(2)
|
|
($)(3)
|
|
(#)
|
|
Vested ($)
|
Steven R. Berrard
|
|
|
|
|
|
|
|
|
107,656
|
|
|
|
$
|
4.18
|
|
|
|
|
11/2/2020
|
|
|
|
251,196
|
|
|
$
|
1,195,693
|
|
|
|
|
|
|
|
|
|
Hugh H. Cooper
|
|
|
|
|
|
|
|
|
52,500
|
|
|
|
$
|
4.18
|
|
|
|
|
11/2/2020
|
|
|
|
122,500
|
|
|
$
|
583,100
|
|
|
|
|
|
|
|
|
|
Thomas Aucamp
|
|
|
|
|
|
|
|
|
47,368
|
|
|
|
$
|
4.18
|
|
|
|
|
11/2/2020
|
|
|
|
110,526
|
|
|
$
|
526,104
|
|
|
|
|
|
|
|
|
|
Thomas Byrne
|
|
|
|
|
|
|
|
|
49,522
|
|
|
|
$
|
4.18
|
|
|
|
|
11/2/2020
|
|
|
|
115,550
|
|
|
$
|
550,018
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents stock options granted under the Plan, which vest in
four equal annual installments beginning on November 2,
2011. |
|
(2) |
|
Represents restricted stock units granted under the Plan, which
vest in four equal annual installments beginning on
November 2, 2011. Each restricted stock unit represents the
right to receive one share of common stock upon vesting. |
|
(3) |
|
Determined by multiplying the closing price of the
Companys common stock on December 31, 2010 ($4.76) by
the number of shares of common stock underlying the restricted
stock units. |
Potential
Payments upon Termination or
Change-in-Control
The named executive officers do not have employment agreements
with us and are all employed on an at will basis. We
do not have arrangements with any of our named executive
officers providing for additional benefits or payments in
connection with a termination of employment, change in job
responsibility, or a
change-in-control.
Director
Compensation
No director received compensation for services rendered during
2009 or for 2010 before the Merger.
Upon completion of the Merger, our Board approved director
compensation for our non-employee directors as follows:
|
|
|
|
|
an annual fee of $60,000, paid quarterly on a calendar year
basis;
|
|
|
|
an annual committee chairman fee of $10,000, paid quarterly on a
calendar year basis to the Chairman of each of our Audit
Committee, Compensation Committee, and Nominating and Corporate
Governance Committee;
|
86
|
|
|
|
|
a per Board meeting fee of $1,500, paid quarterly in arrears on
a calendar year basis;
|
|
|
|
a per committee meeting fee of $1,500, paid quarterly in arrears
on a calendar year basis;
|
|
|
|
an annual grant of $35,000 in restricted stock units, paid on
the first day of the month following our annual meeting of
stockholders; and
|
|
|
|
a one time grant of $25,000 in restricted stock units, paid to
each non-employee director upon their election or appointment to
the Board.
|
Fees not designated to be paid in restricted stock units may be
accepted as cash or restricted stock units at the
directors discretion.
Director
Compensation Fiscal 2010
The following table sets forth certain information regarding the
compensation paid to our non-employee directors for their
service during the fiscal year ended December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
Non-Equity
|
|
Deferred
|
|
|
|
|
|
|
or Paid in
|
|
Stock
|
|
Option
|
|
Incentive Plan
|
|
Compensation
|
|
All Other
|
|
|
Name
|
|
Cash
|
|
Awards(1)
|
|
Awards
|
|
Compensation
|
|
Earnings
|
|
Compensation
|
|
Total
|
|
H. Wayne Huizenga
|
|
$
|
13,000
|
|
|
$
|
56,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69,915
|
|
David Braley
|
|
$
|
16,000
|
|
|
$
|
58,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
74,416
|
|
John Ellis Bush
|
|
$
|
17,500
|
|
|
$
|
60,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
77,583
|
|
James E. OConnor(2)
|
|
$
|
16,000
|
|
|
$
|
60,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
76,083
|
|
David Prussky
|
|
$
|
16,000
|
|
|
$
|
58,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
74,416
|
|
Ramon A. Rodriguez(2)
|
|
$
|
17,500
|
|
|
$
|
61,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
79,084
|
|
Michael Serruya
|
|
$
|
13,000
|
|
|
$
|
56,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69,915
|
|
|
|
|
(1) |
|
Represents restricted stock units granted under the Plan. This
columns reflects the aggregate grant date fair value computed in
accordance with FASB ASC Topic 718. In determining the grant
date fair value for restricted stock units, the Company used
$4.18, the closing price of the Companys common stock on
the grant date. The table below sets forth the aggregate number
of restricted stock units and stock options of each non-employee
director outstanding as of December 31, 2010. The table
below does not include non-compensatory warrants to purchase
5,500,000 shares of common stock held by Mr. Serruya,
which were issued to him prior to the Merger. |
|
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
Stock
|
Name
|
|
Stock Units
|
|
Options
|
|
H. Wayne Huizenga
|
|
|
13,616
|
|
|
|
|
|
David Braley
|
|
|
13,975
|
|
|
|
|
|
John Ellis Bush
|
|
|
14,374
|
|
|
|
|
|
James E. OConnor(2)
|
|
|
14,374
|
|
|
|
|
|
David Prussky
|
|
|
13,975
|
|
|
|
20,000
|
|
Ramon A. Rodriguez(2)
|
|
|
14,733
|
|
|
|
|
|
Michael Serruya
|
|
|
13,616
|
|
|
|
|
|
|
|
|
(2) |
|
Messrs. OConnor and Rodriguez resigned as directors
on January 28, 2011. |
Related
Party Transactions
As set forth in the Audit Committee Charter, our Audit Committee
must approve all transactions with related persons as described
in Item 404 of
Regulation S-K
under the Exchange Act. The following is a summary of agreements
or transactions with parties related to our directors or us
since January 1, 2009. The
87
agreements or transactions listed below were entered into prior
to the establishment of our Audit Committee, which was
established on November 2, 2010.
Loans
and Advances from Stockholders
We have funded a significant amount of our growth and
development through stockholder loans and advances. From May
2008, through June 2010, we borrowed an aggregate of $21,445,000
from Royal Palm, an affiliate of Mr. Huizenga, pursuant to
an unsecured promissory note (the Royal Palm Note),
which has been amended as additional amounts have been advanced.
The note bears interest at LIBOR plus two basis points. A
schedule of the dates and amounts advanced by Royal Palm
pursuant to the Royal Palm Note through May, 2010 are as follows:
|
|
|
|
|
|
|
Principal
|
|
Date of Note
|
|
Amount
|
|
|
05/15/2008
|
|
$
|
2,500,000
|
|
09/16/2008
|
|
|
2,500,000
|
|
03/24/2009
|
|
|
1,200,000
|
|
06/02/2009
|
|
|
2,000,000
|
|
04/13/2009
|
|
|
250,000
|
|
07/10/2009
|
|
|
595,000
|
|
09/21/2009
|
|
|
250,000
|
|
10/14/2009
|
|
|
1,500,000
|
|
12/04/2009
|
|
|
250,000
|
|
12/09/2009
|
|
|
5,800,000
|
|
03/25/2010
|
|
|
2,100,000
|
|
5/26/2010
|
|
|
2,500,000
|
|
|
|
|
|
|
Total
|
|
$
|
21,445,000
|
|
|
|
|
|
|
In July 2010, Mr. Berrard purchased $10,722,500 of the
total debt, including accrued interest, represented by the Royal
Palm Note. $16,845,000 of the borrowings under the Royal Palm
Note are reported in our audited financial statements as of and
for the year ended December 31, 2009 as a long- term
liability. The aggregate $21,445,000, including $4,600,000
borrowed from Royal Palm during the six months ended
June 30, 2010 was contributed as capital on
November 2, 2010, in connection with the Merger.
Subsequent to June 30, 2010, we borrowed $2,000,000,
$950,000 and $320,000 from Royal Palm on August 9, 2010,
August 31, 2010, and October 25, 2010, respectively,
pursuant to unsecured promissory notes. The notes bear interest
at the short-term Applicable Federal Rate, as adjusted on a
monthly basis. The $2,000,000 note matures on November 2,
2011. The $1,270,000 note matured and was repaid on the closing
date of the Merger.
In November and December 2009, Mr. Berrard advanced
$800,000 to the company pursuant to an unsecured promissory
note. The advance was repaid in March 2010.
Stockholder
Guarantees
During the years ended December 31, 2009 and 2008, we
incurred or assumed $7,954,305 and $240,000, respectively, of
debt to sellers in connection with certain acquisitions. Two of
the seller notes payable, totaling $3,050,000, were secured by
letters of credit, which were guaranteed and secured by certain
assets of Messrs. Huizenga and Berrard. These guarantees
were released as of March 31, 2011.
Our prior revolving credit facilities, which provided for
borrowings in aggregate of up to $25,000,000, were personally
guaranteed for up to $20,000,000 by Mr. Huizenga through
February 28, 2011.
88
HB
Service, LLC
In March 2005, Messrs. Berrard and Huizenga formed HB
Service, LLC to acquire franchises and related businesses under
the Swisher name. Through September 2010, HB Service acquired
and operated 68 former franchises of the company and purchased
nine other related businesses, for an aggregate of $28,593,333.
Effective July 13, 2010, HB Service entered into a
Contribution Agreement with us pursuant to which
Messrs. Huizenga and Berrard contributed their membership
interests in HB Service to Swisher International, at which time
HB Service became a wholly-owned subsidiary of the company.
New
River Capital Partners
We paid $7,500 and $51,300 during the three months ended
March 31, 2011 and the fiscal year ended December 1,
2010, respectively, for training course development and
utilization of the delivery platform from CertiLearn, Inc., the
majority of which is owned by New River Capital Partners a
company owned by Messrs. Berrard, Byrne and Aucamp. In
February 2011, we paid $126,636 to CertiLearn, Inc. to satisfy
outstanding accrued expenses, which expenses were accrued
starting in the fiscal year ended December 31, 2009.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 15, 2011
information regarding the beneficial ownership of our common
stock by each director, each named executive officer, all of the
directors and executive officers as a group, and each other
person or entity known to us to be the beneficial owner of more
than five percent of our common stock. Unless noted otherwise,
the corporate address of each person listed below is 4725
Piedmont Row Drive, Suite 400, Charlotte, North Carolina,
28210.
|
|
|
|
|
|
|
|
|
|
|
Amount and
|
|
|
|
|
|
|
Nature of
|
|
|
|
|
|
|
Beneficial
|
|
|
Percent of
|
|
Name and Address of Beneficial Owner
|
|
Ownership
|
|
|
Class(1)
|
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
H. Wayne Huizenga
|
|
|
25,013,101
|
(2)
|
|
|
14.4
|
%
|
Steven R. Berrard
|
|
|
25,005,311
|
(3)
|
|
|
14.4
|
%
|
Thomas Aucamp
|
|
|
1,300,265
|
(3)
|
|
|
*
|
|
David Braley
|
|
|
5,200,103
|
(2)
|
|
|
3.0
|
%
|
John Ellis Bush
|
|
|
7,742
|
(2)
|
|
|
*
|
|
Thomas Byrne
|
|
|
1,300,265
|
(3)
|
|
|
*
|
|
Hugh H. Cooper
|
|
|
|
|
|
|
|
|
Harris W. Hudson
|
|
|
1,042,992
|
(4)
|
|
|
*
|
|
Michael Kipp
|
|
|
|
|
|
|
|
|
William D. Pruitt
|
|
|
23,742
|
(5)
|
|
|
*
|
|
David Prussky
|
|
|
268,303
|
(6)
|
|
|
*
|
|
Michael Serruya
|
|
|
2,447,745
|
(7)
|
|
|
1.4
|
%
|
Directors and Executive Officers as a group (12 persons)
|
|
|
61,639,569
|
(8)
|
|
|
35.5
|
%
|
5% Stockholders:
|
|
|
|
|
|
|
|
|
FMR LLC(9)(10)
|
|
|
23,729,043
|
|
|
|
13.7
|
%
|
|
|
|
* |
|
The person beneficially owns less than 1% of Swisher
Hygienes outstanding common stock. |
|
(1) |
|
Based on 173,473,566 shares of our common stock outstanding
as of July 15, 2011. |
|
(2) |
|
Includes 5,303 shares of common stock underlying fully
vested restricted stock units that will only be delivered
following the beneficial owners departure as a director. |
|
(3) |
|
The shares of common stock held by these executive officers have
been pledged to H. Wayne Huizenga as security for certain
obligations owing pursuant to stock pledge and security
agreements by each executive officer for the benefit of
Mr. Huizenga. |
89
|
|
|
(4) |
|
Includes 9,303 shares of common stock underlying fully
vested restricted stock units that will only be delivered
following the beneficial owners departure as a director. |
|
(5) |
|
Consists of 10,000 shares of common stock held by Pruitt
Enterprises, LP, 2,000 shares of common stock held by
Mr. Pruitts spouse, 2,439 shares of common stock
held by Mr. Pruitt, and 9,303 shares of common stock
underlying fully vested restricted stock units held by Pruitt
Enterprises, LP that will only be delivered following the
beneficial owners departure as a director. Mr. Pruitt
is one of five limited partners of Pruitt Enterprises, LP. The
general partner of Pruitt Enterprises, LP is Pruitt Ventures,
Inc. Mr. Pruitt is the President and sole director of
Pruitt Ventures, Inc. Mr. Pruitt and his wife own a
majority interest in Pruitt Ventures, Inc. The reporting person
disclaims beneficial ownership of the Pruitt Enterprises, LP
securities, except to the extent of any pecuniary interest
therein and this report shall not be deemed an admission that
the reporting person is the beneficial owner of the Pruitt
Enterprises, LP securities for any other purpose. |
|
(6) |
|
Consists of 210,000 shares of common stock held by
Mr. Prussky, 33,000 shares of common stock held by
Mr. Prusskys spouse, and 20,000 shares of common
stock underlying exercisable options. Also, includes
5,303 shares of common stock underlying fully vested
restricted stock units that will only be delivered following the
beneficial owners departure as a director. |
|
(7) |
|
Consists of 433,291 shares of common stock held by
Mr. Serruya, 2,039,151 shares of common stock held by
1082272 Ontario Inc., and 5,303 shares of common stock
underlying fully vested restricted stock units that will only be
delivered following the beneficial owners departure as a
director. 1082272 Ontario Inc., an entity owned 50% by Michael
Serruya and 50% by his brother, Aaron Serruya, owns
4,078,301 shares of common stock. Michael Serruya is a
director and President of 1082272 Ontario Inc., and exercises
voting and dispositive power over half the shares of common
stock held by 1082272 Ontario Inc. Aaron Serruya exercises
voting and dispositive power over the other shares of Swisher
Hygiene held by 1082272 Ontario Inc. |
|
(8) |
|
Includes 20,000 shares of common stock underlying
exercisable options and 45,121 shares of common stock
underlying fully vested restricted stock units that will only be
delivered following the beneficial owners departure as a
director. |
|
(9) |
|
Based on the Schedule 13G filed by FMR LLC with the SEC on
April 8, 2011. Fidelity Management & Research
Company (Fidelity), 82 Devonshire Street, Boston,
Massachusetts 02109, a wholly-owned subsidiary of FMR LLC and an
investment adviser registered under Section 203 of the
Investment Advisers Act of 1940, is the beneficial owner of
13,871,900 shares of Swisher Hygiene Inc. as a result of
acting as investment adviser to various investment companies
registered under Section 8 of the Investment Company Act of
1940 (the Funds). |
|
|
|
Edward C. Johnson 3d and FMR LLC, through its control of
Fidelity and the Funds, each has sole power to dispose of the
13,871,900 shares owned by the Funds. |
|
|
|
Members of the family of Edward C. Johnson 3d, Chairman of FMR
LLC, are the predominant owners, directly or through trusts, of
Series B voting common shares of FMR LLC, representing 49%
of the voting power of FMR LLC. The Johnson family group and all
other Series B shareholders have entered into a
shareholders voting agreement under which all
Series B voting common shares will be voted in accordance
with the majority vote of Series B voting common shares.
Accordingly, through their ownership of voting common shares and
the execution of the shareholders voting agreement,
members of the Johnson family may be deemed, under the
Investment Company Act of 1940, to form a controlling group with
respect to FMR LLC. |
|
|
|
Neither FMR LLC nor Edward C. Johnson 3d, Chairman of FMR LLC,
has the sole power to vote or direct the voting of the shares
owned directly by the Funds, which power resides with the
Funds Boards of Trustees. Fidelity carries out the voting
of the shares under written guidelines established by the
Funds Boards of Trustees. |
|
(10) |
|
Also, includes 9,857,143 shares of common stock acquired on
April 15, 2011, which are not reflected in Fidelitys
Schedule 13G filed on April 8, 2011, by certain funds
for which Fidelity acts as investment advisor pursuant to
securities purchase agreements. We completed this transaction on
April 19, 2011. |
90
PLAN OF
DISTRIBUTION
We are registering the shares of common stock to permit the
resale of these shares of common stock by the holders of the
common stock from time to time after the date of this
prospectus. We will not receive any of the proceeds from the
sale by the selling stockholders of the shares of common stock.
We will bear all fees and expenses incident to our obligation to
register the shares of common stock.
The selling securityholders, or their pledgees, donees,
transferees, or any of their successors in interest selling
shares received from a named selling securityholder as a gift,
partnership distribution or other non-sale-related transfer
after the date of this prospectus (all of whom may be selling
securityholders), may sell the securities from time to time on
any stock exchange or automated interdealer quotation system on
which the securities are listed, in the
over-the-counter
market, in privately negotiated transactions or otherwise, at
fixed prices that may be changed, at market prices prevailing at
the time of sale, at prices related to prevailing market prices
or at prices otherwise negotiated. The selling securityholders
may sell the securities by one or more of the following methods,
without limitation:
(a) block trades in which the broker or dealer so engaged
will attempt to sell the securities as agent but may position
and resell a portion of the block as principal to facilitate the
transaction;
(b) purchases by a broker or dealer as principal and resale
by the broker or dealer for its own account pursuant to this
prospectus;
(c) an exchange distribution in accordance with the rules
of any stock exchange on which the securities are listed;
(d) ordinary brokerage transactions and transactions in
which the broker solicits purchases;
(e) privately negotiated transactions;
(f) short sales;
(g) through the writing of options on the securities,
whether or not the options are listed on an options exchange;
(h) through the distribution of the securities by any
selling securityholder to its partners, members or stockholders;
(i) one or more underwritten offerings on a firm commitment
or best efforts basis; and
(j) any combination of any of these methods of sale.
The selling securityholders may also transfer the securities by
gift. We do not know of any arrangements by the selling
securityholders for the sale of any of the securities.
The selling securityholders may engage brokers and dealers, and
any brokers or dealers may arrange for other brokers or dealers
to participate in effecting sales of the securities. These
brokers, dealers or underwriters may act as principals, or as an
agent of a selling securityholder. Broker-dealers may agree with
a selling securityholder to sell a specified number of the
securities at a stipulated price per security. If the
broker-dealer is unable to sell securities acting as agent for a
selling securityholder, it may purchase as principal any unsold
securities at the stipulated price. Broker-dealers who acquire
securities as principals may thereafter resell the securities
from time to time in transactions in any stock exchange or
automated interdealer quotation system on which the securities
are then listed, at prices and on terms then prevailing at the
time of sale, at prices related to the then-current market price
or in negotiated transactions. Broker-dealers may use block
transactions and sales to and through broker-dealers, including
transactions of the nature described above. The selling
securityholders may also sell the securities in accordance with
Rule 144 under the Securities Act of 1933, as amended,
rather than pursuant to this prospectus, regardless of whether
the securities are covered by this prospectus.
From time to time, one or more of the selling securityholders
may pledge, hypothecate or grant a security interest in some or
all of the securities owned by them. The pledgees, secured
parties or persons to whom the
91
securities have been hypothecated will, upon foreclosure in the
event of default, be deemed to be selling securityholders. The
number of a selling securityholders securities offered
under this prospectus will decrease as and when it takes such
actions. The plan of distribution for that selling
securityholders securities will otherwise remain
unchanged. In addition, a selling securityholder may, from time
to time, sell the securities short, and, in those instances,
this prospectus may be delivered in connection with the short
sales and the securities offered under this prospectus may be
used to cover short sales.
To the extent required under the Securities Act of 1933, the
aggregate amount of selling securityholders securities
being offered and the terms of the offering, the names of any
agents, brokers, dealers or underwriters and any applicable
commission with respect to a particular offer will be set forth
in an accompanying prospectus supplement. Any underwriters,
dealers, brokers or agents participating in the distribution of
the securities may receive compensation in the form of
underwriting discounts, concessions, commissions or fees from a
selling securityholder
and/or
purchasers of selling securityholders securities of
securities, for whom they may act (which compensation as to a
particular broker-dealer might be in excess of customary
commissions).
The selling securityholders and any underwriters, brokers,
dealers or agents that participate in the distribution of the
securities may be deemed to be underwriters within
the meaning of the Securities Act of 1933, and any discounts,
concessions, commissions or fees received by them and any profit
on the resale of the securities sold by them may be deemed to be
underwriting discounts and commissions.
A selling securityholder may enter into hedging transactions
with broker-dealers and the broker-dealers may engage in short
sales of the securities in the course of hedging the positions
they assume with that selling securityholder, including, without
limitation, in connection with distributions of the securities
by those broker-dealers. A selling securityholder may enter into
option or other transactions with broker-dealers that involve
the delivery of the securities offered hereby to the
broker-dealers, who may then resell or otherwise transfer those
securities. A selling securityholder may also loan or pledge the
securities offered hereby to a broker-dealer and the
broker-dealer may sell the securities offered hereby so loaned
or upon a default may sell or otherwise transfer the pledged
securities offered hereby.
The selling securityholders and other persons participating in
the sale or distribution of the securities will be subject to
applicable provisions of the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder, including
Regulation M. This regulation may limit the timing of
purchases and sales of any of the securities by the selling
securityholders and any other person. The anti-manipulation
rules under the Securities Exchange Act of 1934 may apply
to sales of securities in the market and to the activities of
the selling securityholders and their affiliates. Furthermore,
Regulation M may restrict the ability of any person engaged
in the distribution of the securities to engage in market-making
activities with respect to the particular securities being
distributed for a period of up to five business days before the
distribution. These restrictions may affect the marketability of
the securities and the ability of any person or entity to engage
in market-making activities with respect to the securities.
We have agreed to indemnify in certain circumstances the selling
securityholders and any brokers, dealers and agents who may be
deemed to be underwriters, if any, of the securities covered by
the registration statement, against certain liabilities,
including liabilities under the Securities Act of 1933. The
selling securityholders have agreed to indemnify us in certain
circumstances against certain liabilities, including liabilities
under the Securities Act of 1933, as amended.
The securities of securities offered hereby were originally
issued to the selling securityholders pursuant to an exemption
from the registration requirements of the Securities Act of
1933, as amended. We have agreed to register the securities
under the Securities Act of 1933, and, subject to the
requirements if the securities laws or regulations, to keep the
registration statement of which this prospectus is a part
effective until the earlier of the date on which the selling
securityholders have sold all of the securities and two years
after the effective date of the registration statement. We have
agreed to pay all expenses in connection with this offering,
except for any underwriting discounts, concessions, commissions
or fees of the selling securityholders or any fees and expenses
of counsel or other advisors to the selling securityholders.
92
We will not receive any proceeds from sales of any securities by
the selling securityholders.
We cannot assure you that the selling securityholders will sell
all or any portion of the securities offered hereby.
DESCRIPTION
OF SECURITIES TO BE REGISTERED
The following summary description of our capital stock does not
purport to be complete and is qualified in its entirety by
reference to our certificate of incorporation and bylaws, copies
of which are listed as Exhibit 3.2 and Exhibit 3.3 to
this registration statement, respectively.
Our authorized capital stock consists of 400,000,000 shares
of common stock, par value $0.001 per share, of which
173,473,566 shares are issued and outstanding as of
July 31, 2011. Holders of our common stock are entitled to
one vote per share on all matters on which holders of common
stock are entitled to vote. Because holders of our common stock
do not have cumulative voting rights, the holders of a majority
of the shares of our common stock represented at a meeting for
the election of directors can elect all of the directors.
Holders of our common stock have equal ratable rights to
dividends from funds legally available if and when declared by
our board of directors and are entitled to share ratably in all
of our assets available for distribution to holders of our
common stock upon liquidation, dissolution or winding up of our
affairs. Holders of our common stock do not have subscription
rights, conversion rights, or preemptive rights with respect to
any additional shares of common stock that may be issued.
Therefore, we may sell shares of common stock without first
offering such shares to existing stockholders. All outstanding
shares of our common stock are fully paid and nonassessable.
Holders of our common stock are not entitled to take action by
written consent or to call special meetings of our stockholders.
INTERESTS
OF NAMED EXPERTS AND COUNSEL
None.
LEGAL
MATTERS
The validity of the shares of common stock offered through this
prospectus is passed on by Akerman Senterfitt.
EXPERTS
The consolidated financial statements and schedule as of
December 31, 2010 and for the year then ended included in
this Prospectus have been so included in reliance on the report
of BDO USA, LLP, an independent registered public accounting
firm, appearing elsewhere herein, given on the authority of said
firm as experts in auditing and accounting.
The consolidated financial statements of Swisher Hygiene Inc. at
and for the years ended December 31, 2009 and
December 31, 2008 included in this prospectus, to the
extent and for the periods indicated in their report, have been
audited by Scharf Pera & Co., PLLC, independent
registered public accountants, and are included herein in
reliance upon the authority of such firm as experts in
accounting and auditing in giving such report.
The consolidated financial statements of Choice at and for the
fiscal years ended September 30, 2010 and
September 30, 2009, included in this prospectus have been
audited by Kreischer Miller, independent auditor, and are
included herein in reliance upon the authority of such firm as
experts in the accounting and auditing in giving such report.
93
The consolidated financial statements of Mt. Hood, the financial
statements of ProClean, and the combined financial statements of
Central Carting Disposal, Inc. and CCI Hauling, Inc at and for
the fiscal year ended December 31, 2010, included in this
prospectus have been audited by Scharf Pera & Co.,
PLLC, independent registered public accountants, and are
included herein in reliance upon the authority of such firm as
experts in the accounting and auditing in giving such report.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
Registration Statement on Form 10 (the
Form 10). Pursuant to Section 12(g)(1) of
the Securities Exchange Act of 1934, as amended (the
Exchange Act) the Form 10 went effective on
January 10, 2011, and as of that date we are subject to the
reporting requirements of the Exchange Act, and the rules and
regulations thereunder. As such, we will file reports, proxy
statements, information statements, and other information with
the SEC.
We have filed with the SEC a Registration Statement on
Form S-1
under the Securities Act to register with the SEC the securities
described herein. This prospectus, which is a part of the
registration statement, does not contain all of the information
set forth in the registration statement. For further information
about us and our securities, you should refer to the
registration statement. You may read and, for a fee, copy this
information at the SECs Public Reference Room at
100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330
for more information on its Public Reference Rooms. Our SEC and
other public filings will also be available to the public from
commercial document retrieval services, and at the web site
maintained by the SEC at
http://www.sec.gov
and on the System for Electronic Document Analysis Retrieval
(SEDAR) website at
http://www.sedar.com.
Our Internet address is www.swisherhygiene.com. We will
make available through a link to the SECs web site,
electronic copies of the materials we file with the SEC
(including our annual reports on
Form 10-K,
our quarterly reports on
Form 10-Q,
our current reports on
Form 8-K,
the Section 16 reports filed by our executive officers,
directors, and 10% stockholders and amendments to those reports)
and electronic copies of the materials we file with Canadian
Securities Regulators through a link to SEDAR. To receive paper
copies of our SEC materials, please contact us by mail addressed
to Swisher Hygiene Inc., Investor Relations, 4725 Piedmont
Row Drive, Suite 400, Charlotte, North Carolina 28210.
You should rely only on the information contained in this
prospectus. We have not authorized any person to provide you
with any information that is different.
94
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
SWISHER HYGIENE INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Financial Statements As of
March 31, 2011 and 2010 (Unaudited)
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
|
|
Consolidated Financial Statements As of December 31,
2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
|
|
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-25
|
|
|
|
|
F-26
|
|
|
|
|
F-27
|
|
|
|
|
F-28
|
|
|
|
|
F-29
|
|
SUPPLEMENTAL SCHEDULES
|
|
|
|
|
|
|
|
F-55
|
|
|
|
|
|
|
CHOICE ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
|
|
|
|
|
Consolidated Financial Statements As of December 31,
2010 and 2009 (Unaudited)
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-56
|
|
|
|
|
F-57
|
|
|
|
|
F-58
|
|
|
|
|
F-59
|
|
|
|
|
F-60
|
|
SUPPLEMENTAL SCHEDULES
|
|
|
|
|
|
|
|
F-70
|
|
|
|
|
F-71
|
|
|
|
|
|
|
Consolidated Financial Statements As of September 30,
2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
F-72
|
|
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-73
|
|
|
|
|
F-74
|
|
|
|
|
F-75
|
|
|
|
|
F-76
|
|
|
|
|
F-77
|
|
SUPPLEMENTAL SCHEDULES
|
|
|
|
|
|
|
|
F-88
|
|
|
|
|
F-89
|
|
F-1
|
|
|
|
|
MT. HOOD SOLUTIONS COMPANY
|
|
|
|
|
Consolidated Financial Statements As of March 31, 2011
and 2010 (Unaudited)
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-90
|
|
|
|
|
F-91
|
|
|
|
|
F-92
|
|
|
|
|
F-93
|
|
|
|
|
F-94
|
|
|
|
|
|
|
Consolidated Financial Statements As of December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
F-101
|
|
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-102
|
|
|
|
|
F-103
|
|
|
|
|
F-104
|
|
|
|
|
F-105
|
|
|
|
|
F-106
|
|
|
|
|
|
|
PRO-CLEAN OF ARIZONA, INC.
|
|
|
|
|
Financial Statements As of March 31, 2011 and 2010
(Unaudited)
|
|
|
|
|
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-113
|
|
|
|
|
F-114
|
|
|
|
|
F-115
|
|
|
|
|
F-116
|
|
|
|
|
F-117
|
|
|
|
|
|
|
Financial Statements As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
F-123
|
|
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-124
|
|
|
|
|
F-125
|
|
|
|
|
F-126
|
|
|
|
|
F-127
|
|
|
|
|
F-128
|
|
F-2
|
|
|
|
|
CENTRAL CARTING DISPOSAL, INC.
AND CCI HAULING, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Financial Statements As of March 31, 2011 and
2010 (Unaudited)
|
|
|
|
|
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-134
|
|
|
|
|
F-135
|
|
|
|
|
F-136
|
|
|
|
|
F-137
|
|
|
|
|
F-138
|
|
|
|
|
|
|
Combined Financial Statements As of December 31, 2010
|
|
|
|
|
|
|
|
F-145
|
|
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-146
|
|
|
|
|
F-147
|
|
|
|
|
F-148
|
|
|
|
|
F-149
|
|
|
|
|
F-150
|
|
F-3
SWISHER
HYGIENE INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (unaudited)
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
105,069,848
|
|
|
$
|
38,931,738
|
|
Restricted cash
|
|
|
|
|
|
|
5,193,333
|
|
Accounts receivable (net of allowance for doubtful accounts of
$1,404,365 at March 31, 2011 and $334,156 at
December 31, 2010)
|
|
|
14,893,924
|
|
|
|
7,068,629
|
|
Inventory
|
|
|
3,765,159
|
|
|
|
2,968,076
|
|
Other assets
|
|
|
2,797,557
|
|
|
|
894,719
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
126,526,488
|
|
|
|
55,056,495
|
|
Property and equipment, net
|
|
|
44,202,516
|
|
|
|
11,324,055
|
|
Goodwill
|
|
|
87,877,874
|
|
|
|
29,660,309
|
|
Other intangibles, net
|
|
|
44,076,159
|
|
|
|
7,668,805
|
|
Other noncurrent assets
|
|
|
3,736,793
|
|
|
|
2,524,598
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
306,419,830
|
|
|
$
|
106,234,262
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses, and other current liabilities
|
|
$
|
18,024,044
|
|
|
$
|
9,335,932
|
|
Short term obligations
|
|
|
19,734,219
|
|
|
|
13,378,710
|
|
Advances from shareholder
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
39,758,263
|
|
|
|
24,714,642
|
|
Long term obligations
|
|
|
37,527,478
|
|
|
|
31,028,992
|
|
Deferred income tax liabilities
|
|
|
9,746,713
|
|
|
|
1,700,000
|
|
Other long term liabilities
|
|
|
3,554,802
|
|
|
|
2,763,051
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent liabilities
|
|
|
50,828,993
|
|
|
|
35,492,043
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Swisher Hygiene Inc. stockholders equity
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001, authorized
400,000,000 shares; 148,455,429 and 114,015,063 shares
issued and outstanding at March 31, 2011 and
December 31, 2010, respectively
|
|
|
148,455
|
|
|
|
114,015
|
|
Additional paid-in capital
|
|
|
227,569,009
|
|
|
|
54,725,897
|
|
Accumulated deficit
|
|
|
(12,204,602
|
)
|
|
|
(8,996,759
|
)
|
Accumulated other comprehensive income
|
|
|
216,008
|
|
|
|
73,985
|
|
|
|
|
|
|
|
|
|
|
Total Swisher Hygiene Inc. stockholders equity
|
|
|
215,728,870
|
|
|
|
45,917,138
|
|
Non-controlling interest
|
|
|
103,704
|
|
|
|
110,439
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
215,832,574
|
|
|
|
46,027,577
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
306,419,830
|
|
|
$
|
106,234,262
|
|
|
|
|
|
|
|
|
|
|
See Notes to the Condensed Consolidated Financial Statements
F-4
SWISHER
HYGIENE INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
15,426,822
|
|
|
$
|
8,164,028
|
|
Service
|
|
|
10,458,452
|
|
|
|
4,378,544
|
|
Franchise and other
|
|
|
1,511,029
|
|
|
|
2,186,361
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
27,396,303
|
|
|
|
14,728,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
9,583,685
|
|
|
|
5,308,948
|
|
Route expenses
|
|
|
7,115,071
|
|
|
|
3,174,176
|
|
Selling, general, and administrative
|
|
|
12,324,869
|
|
|
|
6,507,155
|
|
Acquisition and merger expenses
|
|
|
1,315,978
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,707,952
|
|
|
|
1,042,830
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
33,047,555
|
|
|
|
16,033,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,651,252
|
)
|
|
|
(1,304,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(2,273,119
|
)
|
|
|
(291,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(7,924,371
|
)
|
|
|
(1,595,441
|
)
|
Income tax benefit
|
|
|
4,709,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,214,578
|
)
|
|
$
|
(1,595,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares used in the computation of
loss per share
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
122,780,115
|
|
|
|
57,829,630
|
|
|
|
|
|
|
|
|
|
|
See Notes to the Condensed Consolidated Financial Statements
F-5
SWISHER
HYGIENE INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF EQUITY (unaudited)
FOR THE
THREE MONTHS ENDED MARCH 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Swisher
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Hygiene Inc.
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
Non-controlling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Loss) / Income
|
|
|
Equity
|
|
|
Interest
|
|
|
Equity
|
|
|
Balance as of December 31, 2010
|
|
|
114,015,063
|
|
|
$
|
114,015
|
|
|
$
|
54,725,897
|
|
|
$
|
(8,996,759
|
)
|
|
$
|
73,985
|
|
|
$
|
45,917,138
|
|
|
$
|
110,439
|
|
|
$
|
46,027,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in connection with private placements
|
|
|
24,262,500
|
|
|
|
24,262
|
|
|
|
115,969,530
|
|
|
|
|
|
|
|
|
|
|
|
115,993,792
|
|
|
|
|
|
|
|
115,993,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in connection with the acquisition of Choice
|
|
|
8,281,920
|
|
|
|
8,282
|
|
|
|
48,772,244
|
|
|
|
|
|
|
|
|
|
|
|
48,780,526
|
|
|
|
|
|
|
|
48,780,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in connection with acquisitions and purchases of
property and equipment
|
|
|
298,082
|
|
|
|
298
|
|
|
|
2,144,621
|
|
|
|
|
|
|
|
|
|
|
|
2,144,919
|
|
|
|
|
|
|
|
2,144,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of promissory note payable
|
|
|
1,312,864
|
|
|
|
1,313
|
|
|
|
5,076,160
|
|
|
|
|
|
|
|
|
|
|
|
5,077,473
|
|
|
|
|
|
|
|
5,077,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
664,842
|
|
|
|
|
|
|
|
|
|
|
|
664,842
|
|
|
|
|
|
|
|
664,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
285,000
|
|
|
|
285
|
|
|
|
215,715
|
|
|
|
|
|
|
|
|
|
|
|
216,000
|
|
|
|
|
|
|
|
216,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,023
|
|
|
|
142,023
|
|
|
|
|
|
|
|
142,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,207,843
|
)
|
|
|
|
|
|
|
(3,207,843
|
)
|
|
|
(6,735
|
)
|
|
|
(3,214,578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2011
|
|
|
148,455,429
|
|
|
$
|
148,455
|
|
|
$
|
227,569,009
|
|
|
$
|
(12,204,602
|
)
|
|
$
|
216,008
|
|
|
$
|
215,728,870
|
|
|
$
|
103,704
|
|
|
$
|
215,832,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to the Condensed Consolidated Financial Statements
F-6
SWISHER
HYGIENE INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Cash used in operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,214,578
|
)
|
|
$
|
(1,595,441
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,707,952
|
|
|
|
1,042,830
|
|
Stock based compensation
|
|
|
664,842
|
|
|
|
|
|
Unrealized loss on fair value of convertible promissory notes
|
|
|
1,961,100
|
|
|
|
|
|
Deferred income tax liabilities
|
|
|
(3,954,793
|
)
|
|
|
|
|
Changes in working capital components:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,052,100
|
)
|
|
|
(159,035
|
)
|
Inventory
|
|
|
(184,723
|
)
|
|
|
(221,921
|
)
|
Other assets and noncurrent assets
|
|
|
(945,709
|
)
|
|
|
(602,706
|
)
|
Accounts payable, accrued expenses, and other liabilities
|
|
|
1,179,087
|
|
|
|
1,460,951
|
|
|
|
|
|
|
|
|
|
|
Cash used in operating activities
|
|
|
(2,838,922
|
)
|
|
|
(75,322
|
)
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(3,019,248
|
)
|
|
|
(1,002,528
|
)
|
Acquisitions, net of cash acquired
|
|
|
(12,318,774
|
)
|
|
|
|
|
Restricted cash
|
|
|
5,193,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(10,144,689
|
)
|
|
|
(1,002,528
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by financing activities
|
|
|
|
|
|
|
|
|
Proceeds from private placements, net of issuance costs
|
|
|
116,253,791
|
|
|
|
|
|
Principal payments on acquired Choice debt
|
|
|
(39,219,160
|
)
|
|
|
|
|
Proceeds from line of credit, net of issuance costs
|
|
|
27,639,355
|
|
|
|
|
|
Payoff of lines of credit
|
|
|
(24,946,932
|
)
|
|
|
|
|
Principal payments on debt
|
|
|
(821,333
|
)
|
|
|
(575,299
|
)
|
Proceeds from exercise of stock options
|
|
|
216,000
|
|
|
|
|
|
Payment of shareholder advance
|
|
|
|
|
|
|
(800,000
|
)
|
Proceeds from advances from shareholders
|
|
|
|
|
|
|
2,100,000
|
|
|
|
|
|
|
|
|
|
|
Cash provided by financing activities
|
|
|
79,121,721
|
|
|
|
724,701
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
66,138,110
|
|
|
|
(353,149
|
)
|
Cash and cash equivalents at the beginning of the period
|
|
|
38,931,738
|
|
|
|
1,270,327
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
$
|
105,069,848
|
|
|
$
|
917,178
|
|
|
|
|
|
|
|
|
|
|
See Notes to the Condensed Consolidated Financial Statements
F-7
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
NOTE 1
|
BUSINESS
DESCRIPTION
|
Principal
Operations
Swisher Hygiene Inc. and its wholly-owned subsidiaries (the
Company or We or Our)
provide essential hygiene and sanitation solutions to customers
throughout much of North America and internationally through its
global network of company owned operations, franchises and
master licensees. These solutions include essential products and
services that are designed to promote superior cleanliness and
sanitation in commercial environments, while enhancing the
safety, satisfaction and well-being of employees and patrons.
These solutions are typically delivered by employees on a
regularly scheduled basis and involve providing our customers
with: (i) consumable products such as soap, paper, cleaning
chemicals, detergents, and supplies, together with the rental
and servicing of dish machines and other equipment for the
dispensing of those products; (ii) the rental of facility
service items requiring regular maintenance and cleaning, such
as floor mats, mops, bar towels and linens; (iii) manual
cleaning of their facilities; and (iv) solid waste
collection services. We serve customers in a wide range of
end-markets, with a particular emphasis on the foodservice,
hospitality, retail, industrial, and healthcare industries. In
addition, our solid waste collection services provide services
primarily to commercial and residential customers through
contracts with municipalities or other agencies.
As of March 31, 2011, the Company has 83 company owned
operations and 6 franchise operations located throughout the
United States and Canada and has entered into 10 Master License
Agreements covering the United Kingdom, Ireland, Portugal, the
Netherlands, Singapore, the Philippines, Taiwan, Korea, Hong
Kong/Macau/China, and Mexico.
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of
Presentation and Principles of Consolidation
The accompanying Condensed Consolidated Financial Statements
have been prepared in accordance with United States generally
accepted accounting principles (GAAP) for interim
financial information and in accordance with the instructions to
Form 10-Q
and
Rule 10-01
of
Regulation S-X
promulgated by the Securities and Exchange Commission
(SEC) and therefore do not contain all of the
information and footnotes required by GAAP and the SEC for
annual financial statements. The Companys Condensed
Consolidated Financial Statements reflect all adjustments
(consisting only of normal recurring adjustments) that
management believes are necessary for the fair presentation of
their financial condition, results of operations, and cash flows
for the periods presented. The information at December 31,
2010 in the Companys Condensed Consolidated Balance Sheets
included in this quarterly report was derived from the audited
Consolidated Balance Sheets included in the Companys
Annual Report on
Form 10-K
for the year ended December 31, 2010 filed with the SEC on
March 31, 2011. The Companys 2010 Annual Report on
Form 10-K,
together with the information included in such report, is
referred to in this quarterly report as the 2010 Annual
Report. This quarterly report should be read in
conjunction with the 2010 Annual Report.
All material intercompany balances and transactions have been
eliminated in consolidation. Certain adjustments have been made
to conform prior periods to the current year presentation.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and
expenses and disclosure of contingent assets and liabilities at
the date of the Condensed Consolidated Financial Statements.
Actual results could differ from those estimates and such
differences could affect the results of operations reported in
future periods.
F-8
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
The Companys significant accounting policies are discussed
in Note 2 of the Notes to Consolidated Financial Statements
in the 2010 Annual Report. Any significant changes to those
policies or new significant policies are described below.
Acquisition
and merger expenses
Acquisition and merger expenses include costs directly-related
to the acquisition of our four franchisees and ten independent
businesses during the three months ended March 31, 2011,
and costs directly-related to the merger with CoolBrands
International, Inc. as discussed in Note 1 of our 2010
Annual Report. These costs include third party due diligence,
legal, accounting and professional service expenses.
Segments
On March 1, 2011, the Company completed its acquisition of
Choice Environmental Services, Inc. (Choice), a
Florida based company that provides a complete range of solid
waste and recycling collection, transportation, processing and
disposal services. As a result of the acquisition of Choice, the
Company now has two segments 1) hygiene and 2) waste.
The Companys hygiene segment primarily provides commercial
hygiene services and products throughout much of the United
States, and additionally operates a worldwide franchise and
license system to provide the same products and services in
markets where Company owned operations do not exist. The
Companys waste segment primarily consists of the
operations of Choice and will include future acquisitions of
solid waste collection businesses. Prior to the acquisition of
Choice, the Company managed, allocated resources, and reported
in one segment or the hygiene segment. See Note 13 for
segment disclosures.
Adoption
of Newly Issued Accounting Pronouncements
Revenue Recognition: In October 2009, the FASB
issued new standards for multiple-deliverable revenue
arrangements. These new standards affect the determination of
when individual deliverables included in a multiple-element
arrangement may be treated as separate units of accounting. In
addition, these new standards modify the manner in which the
transaction consideration is allocated across separately
identified deliverables, eliminate the use of the residual value
method of allocating arrangement consideration and require
expanded disclosure. These new standards became effective for
multiple-element arrangements entered into or materially
modified on or after January 1, 2011. Earlier application
was permitted with required transition disclosures based on the
period of adoption. We adopted these standards for
multiple-element arrangements entered into or materially
modified on or after January 1, 2011. The adoption of this
accounting standard did not have a material impact on the
Companys Condensed Consolidated Financial Statements.
Goodwill: In December 2010, the FASB issued
new standards defining when step 2 of the goodwill impairment
test for reporting units with zero or negative carrying amounts
should be performed and modifies step 1 of the goodwill
impairment test for reporting units with zero or negative
carrying amounts. For reporting units with zero or negative
carrying amounts an entity is required to perform step 2 of the
goodwill impairment test if it is more likely than not that a
goodwill impairment exists. In determining whether it is more
likely than not that a goodwill impairment exists, an entity
should consider whether there are any adverse qualitative
factors indicating that an impairment may exist. The standards
are effective for fiscal years and interim periods within those
years, beginning after December 15, 2010 and were effective
for the Company on January 1, 2011. The adoption of this
accounting standard did not have a material impact on the
Companys Condensed Consolidated Financial Statements.
Business Combinations: In December 2010, the
FASB issued new standards that clarify that if comparative
financial statements are presented the entity should disclose
revenue and earnings of the combined entity as though the
business combination(s) that occurred during the current year
had occurred as of the beginning of the comparable prior annual
reporting period only. The update also expands the supplemental
pro
F-9
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
forma disclosures to include a description of the nature and
amount of material, nonrecurring pro forma adjustments directly
attributable to the business combination included in the
reported pro forma revenue and earnings. The standards are
effective prospectively for material (either on an individual or
aggregate basis) business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2010, with early
adoption permitted. The Company has included the required
disclosures in Note 3.
Choice
Acquisition
On February 13, 2011, we entered into an Agreement and Plan
of Merger (the Choice Agreement) by and among
Swisher Hygiene, Swsh Merger Sub, Inc., a Florida corporation
and wholly-owned subsidiary of Swisher Hygiene, Choice, and
other parties, as set forth in the Choice Agreement. The Choice
Agreement provided for the acquisition of Choice by Swisher
Hygiene by way of merger.
In connection with the merger with Choice, on February 23,
2011, we entered into an agency agreement, which the agents
agreed to market, on a best efforts basis 12,262,500
subscription receipts (Subscription Receipts) at a
price of $4.80 per Subscription Receipt for gross proceeds of up
to $58,859,594. Each Subscription Receipt entitled the holder to
acquire one share of our common stock, without payment of any
additional consideration, upon completion of our acquisition of
Choice.
On March 1, 2011, we closed the acquisition of Choice and
issued 8,281,920 shares of our common stock to the former
shareholders of Choice and assumed $40,941,484 of debt, which
$39,219,160 was paid down with proceeds from the private
placement of the Subscription Receipts. In addition, certain
shareholders of Choice received $5,700,000 in cash for warrants
to purchase an additional 918,076 shares at an exercise
price of $6.21, which expired on March 31, 2011 and were
not exercised.
On March 1, 2011, in connection with the closing of the
acquisition of Choice, the 12,262,500 Subscription Receipts were
exchanged for 12,262,500 shares of our common stock. We
agreed to use commercially reasonable efforts to file a resale
registration statement with the SEC relating to the shares of
common stock underlying the Subscription Receipts. If the
registration statement is not filed or declared effective within
specified time periods, or if it ceases to be effective for
periods of time exceeding certain grace periods, the initial
subscribers of Subscription Receipts will be entitled to receive
an additional 0.1 share of common stock for each share of
common stock underlying Subscription Receipts held by any such
initial subscriber at that time. The Companys Registration
Statement was declared effective on April 21, 2011 and
remains effective as of the date of this filing.
Choice has been in business since 2004 and serves more than
150,000 residential and 7,500 commercial customers in the
Southern and Central Florida regions through its
320 employees and over 150 collection vehicles by offering
a complete range of solid waste and recycling collection,
transportation, processing and disposal services. Choice
operates six hauling operations, three transfer and materials
recovery facilities.
The following table presents the purchase price consideration as
of March 1, 2011:
|
|
|
|
|
Consideration:
|
|
|
|
|
Issuance of shares at stock price of $5.89
|
|
$
|
48,780,526
|
|
Debt
|
|
|
40,941,484
|
|
Cash paid
|
|
|
7,553,784
|
|
|
|
|
|
|
|
|
$
|
97,275,794
|
|
|
|
|
|
|
The preliminary allocation of the purchase price is based on the
best information available to management. This allocation is
provisional, as the Company is required to recognize additional
assets or
F-10
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
liabilities if new information is obtained about facts and
circumstances that existed as of March 1, 2011 that, if
known, would have resulted in the recognition of those assets or
liabilities as of that date. The Company may adjust the
preliminary purchase price allocation after obtaining additional
information regarding asset valuation, liabilities assumed and
revisions of previous estimates. The following table summarizes
the preliminary allocation of the purchase price based on the
estimated fair value of the acquired assets and assumed
liabilities of Choice as of March 1, 2011 as follows:
|
|
|
|
|
Net tangible assets acquired:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
340,870
|
|
Receivables
|
|
|
6,095,801
|
|
Inventory
|
|
|
150,833
|
|
Property and equipment
|
|
|
29,618,377
|
|
Customer contracts
|
|
|
27,840,000
|
|
Non-compete agreements
|
|
|
2,880,000
|
|
Deferred income tax assets and other assets
|
|
|
2,234,452
|
|
Accounts payable and accrued expenses
|
|
|
(6,220,986
|
)
|
Capital lease obligations
|
|
|
(3,523,615
|
)
|
Deferred income tax liabilities
|
|
|
(12,001,506
|
)
|
|
|
|
|
|
Total tangible assets acquired
|
|
|
47,414,226
|
|
Goodwill
|
|
|
49,861,568
|
|
|
|
|
|
|
Total purchase price
|
|
|
97,275,794
|
|
Less: Debt assumed
|
|
|
(40,941,484
|
)
|
Less: Issuance of shares
|
|
|
(48,780,526
|
)
|
|
|
|
|
|
Cash paid (including prepayment penalty of $1,853,784)
|
|
$
|
7,553,784
|
|
|
|
|
|
|
Other assets include approximately $721,000 of notes receivable
from Choice shareholders. In addition, the Companys
Condensed Consolidated Financial Statements for the three months
ended March 31, 2011 includes $5,803,815 of revenue and
$368,061 of net loss before income taxes.
The following supplemental pro forma information presents the
financial results as if the acquisition of Choice had occurred
January 1, 2011 for the three months ended March 31,
2011 and on January 1, 2010 for the three months ended
March 31, 2010. This supplemental pro forma information has
been prepared for
F-11
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
comparative purposes and does not purport to be indicative of
what would have occurred had the acquisition of Choice been
completed on January 1, 2011 or January 1, 2010, nor
are they indicative of any future results:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Revenue
|
|
$
|
26,419,303
|
|
|
$
|
26,219,395
|
|
Costs and expenses
|
|
|
32,731,772
|
|
|
|
26,718,910
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(6,312,469
|
)
|
|
|
(499,515
|
)
|
Other expense, net
|
|
|
(2,028,786
|
)
|
|
|
(308,955
|
)
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(8,341,255
|
)
|
|
|
(808,470
|
)
|
Income tax benefit
|
|
|
4,853,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,487,994
|
)
|
|
$
|
(808,470
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares used in the computation of
loss per share
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
122,780,115
|
|
|
|
57,829,630
|
|
|
|
|
|
|
|
|
|
|
Pro forma adjustments include adjustments for
(a) additional amortization related to the acquired
identifiable intangibles; (b) additional depreciation as a
result of an adjustment to the fair value of the property and
equipment acquired; (c) a reduction of rent expense, offset
by an increase for depreciation for leased properties with
related parties that became capital leases in connection with
the acquisition and (d) a reduction for interest expense
and amortization of debt discounts and financing costs for debt
that was paid off as part of the acquisition, offset by interest
expense related to capital leases entered into in connection
with the acquisition.
Other
Acquisitions
During the three months ended March 31, 2011, the Company
acquired four of its franchisees and nine independent
businesses, in addition to the acquisition of Choice. The
results of operations of these acquisitions have been included
in the Companys Condensed Consolidated Financial
Statements since their respective acquisition dates. None of
these acquisitions were significant to the Companys
consolidated financial results and therefore, supplemental pro
forma financial information is not presented.
F-12
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
The following table summarizes the current estimated aggregate
fair values of the assets acquired and liabilities assumed at
the date of acquisition for these acquisitions made during the
three months ended March 31, 2011, excluding Choice:
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2011
|
|
|
Number of businesses acquired
|
|
|
13
|
|
|
|
|
|
|
Net tangible assets acquired
|
|
|
|
|
Accounts receivable and other assets
|
|
$
|
653,850
|
|
Inventory
|
|
|
457,090
|
|
Property and equipment
|
|
|
861,820
|
|
Accounts payable and accrued expenses
|
|
|
(526,970
|
)
|
|
|
|
|
|
Total
|
|
|
1,445,790
|
|
|
|
|
|
|
Identifiable intangible assets:
|
|
|
|
|
Customer relationships
|
|
|
5,446,400
|
|
Non-compete agreements
|
|
|
1,331,900
|
|
|
|
|
|
|
Total
|
|
|
6,778,300
|
|
|
|
|
|
|
Goodwill
|
|
|
8,273,100
|
|
|
|
|
|
|
Aggregate purchase price
|
|
|
16,497,190
|
|
Less: Stock issued
|
|
|
1,943,500
|
|
Less: Earn outs
|
|
|
1,190,000
|
|
Less: Notes issued or assumed on acquisition
|
|
|
8,598,700
|
|
|
|
|
|
|
Cash paid on acquisitions
|
|
$
|
4,764,990
|
|
|
|
|
|
|
Earn outs are based on the achievement of contractually
negotiated levels of performance by certain of our acquired
businesses and are payable quarterly for three years ending
March 31, 2014. See Note 15 for additional
acquisitions subsequent to March 31, 2011.
|
|
NOTE 4
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
Goodwill and other intangible assets have been recognized in
connection with the acquisitions described in Note 3 and
substantially all of the balance is expected to be fully
deductible for income tax purposes, except for goodwill related
to the acquisition of Choice, which was a stock acquisition.
Changes in the
F-13
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
carrying amount of goodwill and other intangibles for each of
the Companys segments during the three months ended
March 31, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Hygiene
|
|
|
Waste
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
Balance December 31
|
|
|
|
|
|
|
|
|
Gross goodwill
|
|
$
|
30,530,309
|
|
|
$
|
|
|
Accumulated impairment losses
|
|
|
(870,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,660,309
|
|
|
$
|
|
|
Goodwill acquired
|
|
|
8,273,100
|
|
|
$
|
49,861,568
|
|
Foreign exchange translation
|
|
|
82,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31
|
|
|
|
|
|
|
|
|
Gross goodwill
|
|
|
38,886,306
|
|
|
|
49,861,568
|
|
Accumulated impairment losses
|
|
|
(870,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
38,016,306
|
|
|
|
49,861,568
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
|
|
|
|
|
|
|
Balance December 31
|
|
$
|
5,779,980
|
|
|
$
|
|
|
Customers acquired
|
|
|
5,446,400
|
|
|
|
27,840,000
|
|
Amortization
|
|
|
(547,524
|
)
|
|
|
(331,429
|
)
|
Foreign exchange translation
|
|
|
75,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31
|
|
$
|
10,754,186
|
|
|
$
|
27,508,571
|
|
|
|
|
|
|
|
|
|
|
Non-compete Agreements
|
|
|
|
|
|
|
|
|
Balance December 31
|
|
$
|
1,888,825
|
|
|
$
|
|
|
Agreements
|
|
|
1,331,900
|
|
|
|
2,880,000
|
|
Amortization
|
|
|
(212,455
|
)
|
|
|
(96,000
|
)
|
Foreign exchange translation
|
|
|
21,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31
|
|
$
|
3,029,402
|
|
|
$
|
2,784,000
|
|
|
|
|
|
|
|
|
|
|
Hygiene
Segment
The fair value of the customer contracts acquired is based on
future discounted cash flows expected to be generated from those
customers. These customer relationships will be amortized on a
straight-line basis over five years, which is primarily based on
the Companys historical customer attrition rates. The fair
value of the non-compete agreements will be amortized on a
straight-line basis over the length of the agreements of four or
five years.
Waste
Segment
The fair value of the customer contracts acquired in the
acquisition of Choice was based on future discounted cash flows
expected to be generated from contracts with municipalities and
customers. These customer contracts will be amortized on a
straight-line basis over seven years, which is the weighted
average of the estimated life of the contracts acquired. The
fair value of the non-compete agreements will be amortized on a
straight-line basis over the length of the agreements or
2.5 years.
F-14
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
Changes in equity for the three months ended March 31, 2011
consisted of the following:
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
46,027,577
|
|
Issuance of shares in connection with Choice acquisition (See
Note 3)
|
|
|
48,780,526
|
|
Issuance of shares in connection with private placements
|
|
|
115,993,792
|
|
Issuance of shares in connection with acquisitions (See
Note 3)
|
|
|
1,943,500
|
|
Issuance of shares in connection with purchases of property and
equipment
|
|
|
201,419
|
|
Stock based compensation
|
|
|
880,842
|
|
Conversion of convertible promissory note payable (See
Note 6)
|
|
|
5,077,473
|
|
Foreign currency translation
|
|
|
142,023
|
|
Net loss
|
|
|
(3,214,578
|
)
|
|
|
|
|
|
Balance at March 31, 2011
|
|
$
|
215,832,574
|
|
|
|
|
|
|
Choice
As part of the purchase price of Choice we issued
8,281,920 shares of our common stock to the previous
shareholders of Choice. See Note 3.
Private
placements
As discussed in Note 3, on March 1, 2011, in
connection with the closing of acquisition of Choice, the
12,262,500 Subscription Receipts were exchanged for
12,262,500 shares of our common stock. As part of this
transaction, we received cash of $56,253,791, net of issuance
costs.
In addition on March 22, 2011, we entered into a series of
arms length securities purchase agreements to sell
12,000,000 shares of our common stock at a price of $5.00
per share, for aggregate proceeds of $60,000,000 to certain
funds of a global financial institution (the Private
Placement). We intend to use the proceeds from the Private
Placement to further our organic and acquisition growth
strategy, as well as for working capital purposes. On
March 23, 2011, we closed the Private Placement and issued
12,000,000 shares of our common stock. Pursuant to the
securities purchase agreements, the shares of common stock
issued in the Private Placement may not be transferred on or
before June 24, 2011 without our consent. We agreed to use
commercially reasonable efforts to file a resale registration
statement with the SEC relating to the shares of common stock
sold in the Private Placement. If the registration statement is
not filed or declared effective within specified time periods,
the investors will be entitled to receive liquidated damages in
cash equal to one percent of the original offering price for
each share that at such time remains subject to resale
restrictions. The Companys Registration Statement was
declared effective on April 21, 2011 and remains effective
as of the date of this filing.
Acquisitions
and asset purchases
We issued a total of 265,331 shares of our common stock in
connection with certain acquisitions of franchisees and
businesses during the three months ended March 31, 2011.
Our stock price was at a weighted average price of $5.97 at the
time these shares were issued. In addition during the three
months ended March 31, 2011, we issued 32,751 shares
at a fair value of $6.15 for purchases of property and equipment.
Stock
based compensation
Stock based compensation is the result of the recognition of the
fair value of share based compensation on the date of grant over
the service period for which the awards are expected to vest. In
addition 285,000
F-15
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
options were exercised at a weighted average exercise price of
$0.76 during the three months ended March 31, 2011.
Convertible
promissory note
In addition during the three months ended March 31, 2011, a
$5,000,000, 6% convertible promissory note issued in November
2010 as part of the consideration paid for an acquisition was
fully converted to 1,312,864 shares of our common stock.
|
|
NOTE 6
|
LONG TERM
OBLIGATIONS
|
Debt consisted of the following as of March 31, 2011 and
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Line of credit agreement dated March 2008. Interest is payable
monthly at one month LIBOR plus 2.85% at December 31, 2010.
Interest rate of 3.11% at December 31, 2010
|
|
$
|
|
|
|
$
|
9,946,932
|
|
Line of credit agreement dated June 2008. Interest is payable
monthly at one month LIBOR plus 1.50% at December 31, 2010.
Interest rate of 1.76% at December 31, 2010
|
|
|
|
|
|
|
15,000,000
|
|
Line of credit agreement dated March 2011 and matures in July
2013. Interest rate of 3.2% at March 31, 2011
|
|
|
27,779,355
|
|
|
|
|
|
Acquisition notes payables
|
|
|
9,041,013
|
|
|
|
7,891,209
|
|
Capitalized lease obligations with related parties
|
|
|
3,496,848
|
|
|
|
|
|
Capitalized lease obligations
|
|
|
784,153
|
|
|
|
549,504
|
|
Notes payable under Master Loan and Security Agreement, due in
monthly installments and maturing in 2012. Interest is payable
monthly at a weighted average interest rate of 8% at
March 31, 2011 and December 31, 2010
|
|
|
104,048
|
|
|
|
248,577
|
|
Convertible promissory notes:
|
|
|
|
|
|
|
|
|
6% Note due June 30, 2011
|
|
|
|
|
|
|
5,000,000
|
|
4% Notes at various dates through December 15, 2011
|
|
|
16,056,280
|
|
|
|
5,771,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,261,697
|
|
|
|
44,407,702
|
|
Short term obligations
|
|
|
(19,734,219
|
)
|
|
|
(13,378,710
|
)
|
|
|
|
|
|
|
|
|
|
Long term obligations
|
|
$
|
37,527,478
|
|
|
$
|
31,028,992
|
|
|
|
|
|
|
|
|
|
|
Revolving
Credit Facilities
In March 2011, we entered into a $100 million senior
secured revolving credit facility (the credit
facility). Under the credit facility, the Company has an
initial borrowing availability of $32.5 million, which will
increase to the fully committed $100 million upon delivery
of our unaudited quarterly financial statements for the quarter
ended March 31, 2011 and satisfaction of certain financial
covenants regarding leverage and coverage ratios and a minimum
liquidity requirement, which requirements we have met as of
March 31, 2011.
Borrowings under the credit facility are secured by a first
priority lien on substantially all of our existing and hereafter
acquired assets, including $25 million of cash on
borrowings in excess of $75 million. Furthermore,
borrowings under the facility are guaranteed by all of our
domestic subsidiaries and secured by substantially all the
assets and stock of our domestic subsidiaries and substantially
all of the stock of our foreign subsidiaries. Interest on
borrowings under the credit facility will typically accrue at
London Interbank
F-16
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
Offered Rate (LIBOR) plus 2.5% to 4.0%, depending on
the ratio of senior debt to consolidated earnings before
interest, taxes, depreciation and amortization
(EBITDA) (as such term is defined in the new credit
facility, which includes specified adjustments and allowances
authorized by the lender, as provided for in such definition).
We also have the option to request swingline loans and
borrowings using a base rate. Interest is payable monthly or
quarterly on all outstanding borrowings. The credit facility
matures on July 31, 2013.
Borrowings and availability under the new credit facility are
subject to compliance with financial covenants, including
achieving specified consolidated EBITDA levels, which will
depend on the success of our acquisition strategy, and
maintaining leverage and coverage ratios and a minimum liquidity
requirement. The consolidated EBITDA covenant, the leverage and
coverage ratios, and the minimum liquidity requirements should
not be considered indicative of the Companys expectations
regarding future performance. The credit facility also places
restrictions on our ability to incur additional indebtedness,
make certain acquisitions, create liens or other encumbrances,
sell or otherwise dispose of assets, and merge or consolidate
with other entities or enter into a change of control
transaction. Failure to achieve or maintain the financial
covenants in the credit facility or failure to comply with one
or more of the operational covenants could adversely affect our
ability to borrow monies and could result in a default under the
credit facility. The credit facility is subject to other
standard default provisions.
The credit facility replaces our current aggregated
$25 million credit facilities, which are discussed in the
2010 Annual Report.
Choice
debt assumed and capital lease obligations with related
parties
In connection with the acquisition of Choice, we assumed
$40,941,484 of debt of which $39,219,160 was paid off at the
time of the acquisition. The remaining debt was recorded at fair
value on the date of the acquisition and included in acquisition
notes payable above. Payments are made monthly and mature at
various dates through August 2018.
In addition, in connection with the acquisition of Choice we
entered into capital leases that have initial terms of five or
ten years with companies owned by shareholders of Choice to
finance the cost of leasing office buildings and properties,
including warehouses. Minimum payments under these leases for
the next five years are $534,000 each year and $1,920,000
thereafter. We also recorded the fair value of $3,074,000 for
these properties leased in property and equipment, which will be
depreciated over the term of the respective lease.
Convertible
notes
In February 2011, the 6% convertible promissory note of
$5,000,000 due on June 30, 2011 that was issued in November
2010 as part of consideration paid for an acquisition was
converted into 1,312,864 of the Companys common shares.
Since the convertible note was issued as part of a business
combination the note was recorded at fair value of $6,429,720 on
the date of issuance including $5,182,500 recorded as a current
liability and $1,247,220 recorded as Additional paid-in capital
reflecting the promissory notes beneficial conversion
feature. As of December 31, 2010, the net carrying amount
of this promissory note was $6,385,720 ($6,247,220 principal and
conversion feature and $138,500 unamortized premium). At
December 31, 2010 the fair value of this financial
instrument was $6,371,400.
In addition during 2010, the Company issued convertible
promissory notes, which the principal and interest are
convertible into a variable number of the Companys common
stock following both (i) conditional approval by the
Toronto Stock Exchange (TSX) of the listing of the
shares of Companys common shares issuable upon conversion
of each note and (ii) the date that the Companys
Registration Statement on
Form S-1
for the resale of the Companys common stock is declared
effective by the SEC but not later than the maturity date of
each note. The convertible notes had an aggregate principal
value of $4,746,480 with interest rates of
F-17
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
4%, mature at various times up to September 30, 2011, and
are convertible at conversion rates of between $3.88 and $4.18.
During the three months ended March 2011 and in connection with
certain acquisitions, the Company issued convertible promissory
notes with an aggregate principal value of $7,125,000. The notes
have a 4% interest rate and are convertible into a maximum
aggregate of 3,666,204 shares of our common stock from
$4.82 to $5.68. The holder may convert the principal and
interest into a variable number of the Companys common
stock at any time following both (i) conditional approval
by the TSX of the listing of the shares of Companys common
shares issuable upon conversion of each note and (ii) the
date that the Companys Registration Statement on
Form S-1
for the resale of the Companys common stock is declared
effective by the SEC but not later than the maturity date of
each note.
|
|
NOTE 7
|
FAIR
VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
|
The Company determines the fair value of certain assets and
liabilities based on assumptions that market participants would
use in pricing the assets or liabilities. Fair value is defined
as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date, or the exit
price. The Company utilizes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure
fair value and gives precedence to observable inputs in
determining fair value. The following levels were established
for each input:
Level 1: Observable inputs that
reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
Level 2: Include other inputs that
are observable for the asset or liability either directly or
indirectly in the marketplace.
Level 3: Unobservable inputs for
the asset or liability.
The above convertible promissory notes that are convertible into
a variable number of shares of the Companys common stock
are recorded at fair value on the date of issuance and
subsequently at each reporting period. The fair values of these
convertible promissory notes are based primarily on a
Black-Scholes pricing model. The significant management
assumptions and estimate used in determining the fair value
include the expected term and volatility of our common stock.
The expected volatility was based on an analysis of industry
peers historical stock price over the term of the notes as
we currently do not have sufficient history of our own stock
volatility, which was estimated at approximately 25%. Subsequent
changes in the fair value of these instruments are recorded in
Other expense, net on the Condensed Consolidated Statements of
Operations. Future movement in the market price of our stock
could significantly change the fair value of these instruments
and impact our earnings.
The convertible promissory notes that are convertible into a
variable number of the Companys shares issued during 2010
and 2011 are Level 3 financial instruments since they are
not traded on an active market and there are unobservable
inputs, such as expected volatility used to determine the fair
value of these instruments. The following table is a
reconciliation of changes in fair value of these notes that have
been classified as Level 3 in the fair value hierarchy for
the three months ended March 31, 2011:
|
|
|
|
|
Balance as of December 31, 2010
|
|
$
|
5,771,480
|
|
Issuance of convertible promissory notes
|
|
|
8,323,700
|
|
Unrealized losses included in earnings
|
|
|
1,961,100
|
|
|
|
|
|
|
Balance as of March 31, 2011
|
|
$
|
16,056,280
|
|
|
|
|
|
|
F-18
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
Financial
Instruments
The Companys financial instruments, which may expose the
Company to concentrations of credit risk, include cash and cash
equivalents, account receivables, accounts payable, and debt.
Cash and cash equivalents are maintained at financial
institutions and, at times, balances may exceed federally
insured limits. We have never experienced any losses related to
these balances. The carrying amounts of cash and the current
portion of accounts receivable and accounts payable approximate
fair value due to the short maturity of these instruments. The
fair value of the Companys debt is 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. In addition the convertible
promissory notes are recorded at fair value at each reporting
period date.
|
|
NOTE 8
|
OTHER
EXPENSE, NET
|
Other expense, net consists of the following for the three
months ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Interest expense
|
|
$
|
(363,168
|
)
|
|
$
|
(306,271
|
)
|
Unrealized loss on convertible promissory notes
payable (see Note 6 and 7)
|
|
|
(1,961,100
|
)
|
|
|
|
|
Interest income
|
|
|
15,746
|
|
|
|
15,006
|
|
Foreign currency gain
|
|
|
35,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,273,119
|
)
|
|
$
|
(291,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9
|
COMPREHENSIVE
LOSS
|
Comprehensive income consists of the following for the three
months ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Net loss
|
|
$
|
(3,214,578
|
)
|
|
$
|
(1,595,441
|
)
|
Foreign currency translation
|
|
|
142,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(3,072,555
|
)
|
|
$
|
(1,595,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
The following table includes supplemental cash flow information,
including noncash investing and financing activity for the three
months ended March 31, 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Cash received for interest
|
|
$
|
15,746
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
265,664
|
|
|
$
|
209,076
|
|
|
|
|
|
|
|
|
|
|
Notes payable issued or assumed on acquisition
|
|
$
|
49,540,184
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of promissory note
|
|
$
|
5,077,473
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares for acquisitions
|
|
$
|
1,943,500
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares for purchases of property and equipment
|
|
$
|
201,419
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Debt and private placement issuance costs financed
|
|
$
|
283,000
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
F-19
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
Net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding during the
period. The following were not included in the computation of
diluted net loss per share for the three months ended
March 31, 2011 and 2010 as their inclusion would be
antidilutive:
|
|
|
|
|
Warrants to purchase 5,500,000 shares of common stock at
$0.50 per share were outstanding and expire in November 2011.
|
|
|
|
Stock options and restricted units to purchase
5,055,428 shares of common stock.
|
|
|
|
Convertible promissory notes that if-converted would result in
2,602,811 shares of common stock.
|
As a result of the merger with CoolBrands International, Inc. on
November 2, 2010, as discussed in Note 1 in the 2010
Annual Report the Company converted from a corporation taxed
under the provisions of Subchapter S of the Internal Revenue
Code to a tax-paying entity and accounts for income taxes under
the asset and liability method. For the three months ended
March 31, 2011, the Company has recorded an estimate for
income taxes based on the Companys projected net income
for the year ending December 31, 2011 and an effective
income tax rate of 40.2%.
In addition, during the three months ended March 31, 2011,
the Company reversed the valuation allowance of $2,368,000
recorded as of December 31, 2010 as a result of the
Companys net deferred tax liability balance of $9,758,773
at March 31, 2011. The majority of these deferred tax
liabilities were recorded as part of the acquisition of Choice
on March 1, 2011 as discussed in Note 3.
On March 1, 2011 the Company completed its acquisition of
Choice, a Florida based company that provides a complete range
of solid waste and recycling collection, transportation,
processing and disposal services. As a result of the acquisition
of Choice, the Company now has two operating segments
1) hygiene and 2) waste. The Companys hygiene
operating segment primarily provides commercial hygiene services
and products throughout much of the United States, and
additionally operates a worldwide franchise and license system
to provide the same products and services in markets where
Company owned operations do not exist. The Companys waste
segment primary consists of the operations of Choice and future
acquisitions of solid waste collections acquisitions. Prior to
the acquisition of Choice, the Company managed, allocated
resources, and reported in one segment or hygiene.
The following table presents financial information for each of
the Companys reportable segments for the three months
ended and as of March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hygiene
|
|
|
Waste
|
|
|
Consolidated
|
|
|
Revenue
|
|
$
|
21,592,488
|
|
|
$
|
5,803,815
|
|
|
$
|
27,396,303
|
|
Depreciation and amortization
|
|
|
1,898,780
|
|
|
|
809,172
|
|
|
|
2,707,952
|
|
Loss from operations
|
|
|
(5,290,894
|
)
|
|
|
(360,358
|
)
|
|
|
(5,651,252
|
)
|
Interest expense and other, net
|
|
|
(2,265,416
|
)
|
|
|
(7,703
|
)
|
|
|
(2,273,119
|
)
|
Net loss before income taxes
|
|
|
(7,556,310
|
)
|
|
|
(368,061
|
)
|
|
|
(7,924,371
|
)
|
Capital expenditures
|
|
$
|
2,724,758
|
|
|
$
|
294,490
|
|
|
$
|
3,019,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
187,138,016
|
|
|
$
|
119,281,814
|
|
|
$
|
306,419,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
|
|
NOTE 14
|
COMMITMENTS
AND CONTINGENCIES
|
The Company is subject to 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 Companys
financial position, results of operations or cash flows.
In connection with a distribution agreement entered into in
December 2010, the Company provided a guarantee that the
distributors operating cash flows associated with the
agreement would not fall below certain agreed-to minimums,
subject to certain pre-defined conditions, over the ten year
term of the distribution agreement. If the distributors
annual operating cash flow does fall below the agreed-to annual
minimums, the Company will reimburse the distributor for any
such short fall up to a pre-designated amount. No value was
assigned to the fair value of the guarantee at March 31,
2011 and December 31, 2010 based on a probability
assessment of the projected cash flows. Management currently
does not believe that it is probable that any amounts will be
paid under this agreement and thus there is no amount accrued
for the guarantee in the Condensed Consolidated Financial
Statements. This liability would be considered a Level 3
financial instruments given the unobservable inputs used in the
projected cash flow model. See Note 7 for the fair value
hierarchy.
|
|
NOTE 15
|
SUBSEQUENT
EVENTS
|
Private
placement
On April 15, 2011, we entered into a series of arms
length securities purchase agreements to sell
9,857,143 shares of our common stock at a price of $7.70
per share, for aggregate proceeds of $75,900,000 to certain
funds of a global financial institution. We completed this
transaction on April 19, 2011 and we intend to use the
proceeds from this transaction to further our organic and
acquisition growth strategy, as well as for working capital
purposes.
Acquisitions
Subsequent to March 31, 2011, the Company acquired several
businesses. While the terms, price, and conditions of each of
these acquisitions were negotiated individually, consideration
to the sellers typically consists of a combination of cash and
our common stock. Aggregate consideration paid for these
acquired businesses was approximately $72,675,000 consisting of
approximately $36,602,000 in cash and 4,872,000 shares of
our common stock with a fair value of approximately $36,073,000.
These acquired businesses include the following acquisitions,
which have an aggregate consideration of approximately
$63,750,000, consisting of approximately $35,067,000 in cash and
3,997,000 shares of our common stock with a fair value of
approximately $28,683,000:
|
|
|
|
|
ProClean of Arizona, Inc. (ProClean), an independent
hygiene and chemical provider in the Southwest. ProClean has
been in business since 1976 and serves over 4,000 commercial
customers in Arizona, Southern California, Southern Nevada, New
Mexico and West Texas through its more than 100 employees
by offering a complete range of specialty chemicals and service
programs to the foodservice and hospitality industries,
including ware washing, general cleaning, laundry and
housekeeping services.
|
|
|
|
Mt. Hood Solutions (Mt. Hood) an independent
hygiene and chemical provider in the Northwest. Mt. Hood has
been in business since 1902 and serves over 4,000 commercial and
industrial customers in Oregon, Washington, Northern California,
Idaho, Utah and Colorado through its more than
100 employees by offering a complete range of specialty
chemicals and service programs to the foodservice, hospitality
and healthcare industries, including ware washing, general
cleaning,
|
F-21
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) (Continued)
|
|
|
|
|
laundry and housekeeping services, as well as a line of products
for manufacturing companies including industrial and water
treatment products.
|
|
|
|
|
|
Lawson Sanitation, LLC (Lawson), a Miami-based solid
waste services provider. Lawson has been in business since 2003
and serves commercial and multi-family commercial customers in
South Florida by offering a complete range of solid waste and
recycling collection, transportation, processing and disposal
services.
|
Conversion
of convertible promissory notes
Subsequent to March 31, 2011, convertible promissory notes
with an aggregate principal amount of $8,246,480 and an
aggregate fair value of $13,450,480, included in short term
obligations on the Condensed Consolidated Balance Sheets as of
March 31, 2011 were converted into 1,855,857 shares of
the Companys common stock.
F-22
Board of Directors
Swisher Hygiene Inc. and Subsidiaries
Charlotte, North Carolina
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheet of
Swisher Hygiene Inc. and Subsidiaries (the Company)
as of December 31, 2010, and the related consolidated
statements of operations and comprehensive loss, equity, and
cash flows for the year then ended. In connection with our audit
of the consolidated financial statements, we have also audited
the financial statement schedule listed in the accompanying
index for the year ended December 31, 2010. These financial
statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
controls over financial reporting. Our audit included
consideration of internal controls over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purposes of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
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 consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Swisher Hygiene Inc. and Subsidiaries as of
December 31, 2010, and the results of its operations and
its cash flows the year then ended, in conformity with
accounting principles generally accepted in the United States of
America.
Also, in our opinion, the financial statement schedule for the
year ended December 31, 2010, when considered in relation
to the basic financial statements taken as a whole, present
fairly, in all material respects, to information set forth
therein.
/s/ BDO USA, LLP
Charlotte, North Carolina
March 31, 2011
F-23
Board of Directors
Swisher Hygiene Inc. and Subsidiaries
Charlotte, North Carolina
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheet of
Swisher Hygiene Inc. and Subsidiaries as of December 31,
2009 and the related consolidated statements of operations and
comprehensive loss, stockholders deficit and accumulated
other comprehensive loss, and cash flows for the years ended
December 31, 2009 and 2008. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. Swisher Hygiene Inc. and
Subsidiaries is not required to have, nor were we engaged to
perform, an audit of its internal controls over financial
reporting. Our audits included consideration of internal
controls over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purposes of expressing an opinion on the effectiveness
of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Swisher Hygiene Inc. and Subsidiaries as of
December 31, 2009, and the results of its operations and
its cash flows for the years ended December 31, 2009 and
2008, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Scharf Pera & Co., PLLC
Charlotte, North Carolina
November 2, 2010
F-24
SWISHER
HYGIENE INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
38,931,738
|
|
|
$
|
1,270,327
|
|
Restricted cash
|
|
|
5,193,333
|
|
|
|
|
|
Accounts receivable, net
|
|
|
7,068,629
|
|
|
|
4,954,010
|
|
Inventory, net
|
|
|
2,968,076
|
|
|
|
1,295,784
|
|
Other assets
|
|
|
894,719
|
|
|
|
242,093
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
55,056,495
|
|
|
|
7,762,214
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
11,324,055
|
|
|
|
7,859,482
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
29,660,309
|
|
|
|
18,353,489
|
|
Other intangibles, net
|
|
|
7,668,805
|
|
|
|
3,580,458
|
|
Other noncurrent assets
|
|
|
2,524,598
|
|
|
|
1,362,296
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
39,853,712
|
|
|
|
23,296,243
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
106,234,262
|
|
|
$
|
38,917,939
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,615,467
|
|
|
$
|
3,604,266
|
|
Accrued expenses and other current liabilities
|
|
|
3,720,465
|
|
|
|
2,584,852
|
|
Short term obligations
|
|
|
13,378,710
|
|
|
|
2,295,290
|
|
Advances from shareholder
|
|
|
2,000,000
|
|
|
|
800,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
24,714,642
|
|
|
|
9,284,408
|
|
|
|
|
|
|
|
|
|
|
Long term obligations
|
|
|
31,028,992
|
|
|
|
32,029,841
|
|
Advances from shareholder
|
|
|
|
|
|
|
16,845,000
|
|
Deferred income tax liabilities
|
|
|
1,700,000
|
|
|
|
|
|
Other long term liabilities
|
|
|
2,763,051
|
|
|
|
112,000
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent liabilities
|
|
|
35,492,043
|
|
|
|
48,986,841
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Swisher Hygiene Inc. stockholders equity
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001, authorized
400,000,000 shares; 114,015,063 and 57,789,630 shares
issued and outstanding at December 31, 2010 and 2009,
respectively
|
|
|
114,015
|
|
|
|
57,790
|
|
Additional paid-in capital
|
|
|
54,725,897
|
|
|
|
27,487,740
|
|
Accumulated deficit
|
|
|
(8,996,759
|
)
|
|
|
(47,000,736
|
)
|
Accumulated other comprehensive income
|
|
|
73,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Swisher Hygiene Inc. stockholders equity
|
|
|
45,917,138
|
|
|
|
(19,455,206
|
)
|
Non-controlling interest
|
|
|
110,439
|
|
|
|
101,896
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
46,027,577
|
|
|
|
(19,353,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
106,234,262
|
|
|
$
|
38,917,939
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-25
SWISHER
HYGIENE INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE
THREE YEARS ENDED DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
37,690,324
|
|
|
$
|
27,316,876
|
|
|
$
|
25,935,493
|
|
Service
|
|
|
17,737,440
|
|
|
|
16,573,821
|
|
|
|
19,895,990
|
|
Franchise and other
|
|
|
8,224,554
|
|
|
|
12,923,327
|
|
|
|
18,277,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
63,652,318
|
|
|
|
56,814,024
|
|
|
|
64,108,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
23,597,229
|
|
|
|
22,304,515
|
|
|
|
25,071,410
|
|
Route expenses
|
|
|
13,930,653
|
|
|
|
12,519,891
|
|
|
|
14,201,243
|
|
Selling, general, and administrative
|
|
|
31,258,368
|
|
|
|
24,094,701
|
|
|
|
30,057,178
|
|
Merger expenses
|
|
|
5,122,067
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,857,173
|
|
|
|
4,744,052
|
|
|
|
5,206,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
78,765,490
|
|
|
|
63,663,159
|
|
|
|
74,536,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(15,113,172
|
)
|
|
|
(6,849,135
|
)
|
|
|
(10,427,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
100,212
|
|
|
|
54,797
|
|
|
|
10,337
|
|
Interest expense
|
|
|
(1,677,076
|
)
|
|
|
(1,063,411
|
)
|
|
|
(1,292,664
|
)
|
Gain (loss) on foreign currency
|
|
|
820,032
|
|
|
|
34,653
|
|
|
|
(54,972
|
)
|
Forgiveness of debt
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
Gain from bargain purchases
|
|
|
|
|
|
|
94,107
|
|
|
|
|
|
Impairment loss
|
|
|
|
|
|
|
(30,000
|
)
|
|
|
(223,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
|
(756,832
|
)
|
|
|
(409,854
|
)
|
|
|
(1,560,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(15,870,004
|
)
|
|
|
(7,258,989
|
)
|
|
|
(11,987,871
|
)
|
Income tax expense
|
|
|
1,700,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(17,570,004
|
)
|
|
|
(7,258,989
|
)
|
|
|
(11,987,871
|
)
|
Net (income) loss attributable to noncontrolling interest
|
|
|
(8,543
|
)
|
|
|
(1,896
|
)
|
|
|
17,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Swisher Hygiene Inc.
|
|
|
(17,578,547
|
)
|
|
|
(7,260,885
|
)
|
|
|
(11,970,857
|
)
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee benefit pension plan
|
|
|
73,985
|
|
|
|
|
|
|
|
|
|
Liquidation of a foreign subsidiary
|
|
|
|
|
|
|
221,466
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(195,446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(17,504,562
|
)
|
|
$
|
(7,039,419
|
)
|
|
$
|
(12,166,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.26
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares used in the computation of
loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
66,956,371
|
|
|
|
57,789,630
|
|
|
|
57,789,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-26
SWISHER
HYGIENE INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF EQUITY
FOR THE
THREE YEARS ENDED DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Swisher
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Hygiene Inc.
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Shareholders
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Loss) / Income
|
|
|
Equity
|
|
|
Interest
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2008
|
|
|
57,789,630
|
|
|
$
|
57,790
|
|
|
$
|
27,880,778
|
|
|
$
|
(27,768,994
|
)
|
|
$
|
(26,020
|
)
|
|
$
|
143,554
|
|
|
$
|
28,856
|
|
|
$
|
172,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(195,446
|
)
|
|
|
(195,446
|
)
|
|
|
|
|
|
|
(195,446
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions
|
|
|
|
|
|
|
|
|
|
|
461,962
|
|
|
|
|
|
|
|
|
|
|
|
461,962
|
|
|
|
|
|
|
|
461,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
(740,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(740,000
|
)
|
|
|
(11,842
|
)
|
|
|
(751,842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,970,857
|
)
|
|
|
|
|
|
|
(11,970,857
|
)
|
|
|
(17,014
|
)
|
|
|
(11,987,871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
57,789,630
|
|
|
|
57,790
|
|
|
|
27,602,740
|
|
|
|
(39,739,851
|
)
|
|
|
(221,466
|
)
|
|
|
(12,300,787
|
)
|
|
|
|
|
|
|
(12,300,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation of foreign subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
221,466
|
|
|
|
221,466
|
|
|
|
|
|
|
|
221,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
(115,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(115,000
|
)
|
|
|
|
|
|
|
(115,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution of equity on acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,260,885
|
)
|
|
|
|
|
|
|
(7,260,885
|
)
|
|
|
1,896
|
|
|
|
(7,258,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
57,789,630
|
|
|
$
|
57,790
|
|
|
$
|
27,487,740
|
|
|
$
|
(47,000,736
|
)
|
|
$
|
|
|
|
$
|
(19,455,206
|
)
|
|
$
|
101,896
|
|
|
$
|
(19,353,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss through November 1, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,581,788
|
)
|
|
|
|
|
|
|
(8,581,788
|
)
|
|
|
|
|
|
|
(8,581,788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution of capital as a result of the termination of the S
Corp election
|
|
|
|
|
|
|
|
|
|
|
(55,582,524
|
)
|
|
|
55,582,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in Merger with CoolBrands Inc.
|
|
|
56,225,433
|
|
|
|
56,225
|
|
|
|
58,977,112
|
|
|
|
|
|
|
|
|
|
|
|
59,033,337
|
|
|
|
|
|
|
|
59,033,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders advances converted to equity
|
|
|
|
|
|
|
|
|
|
|
22,198,194
|
|
|
|
|
|
|
|
|
|
|
|
22,198,194
|
|
|
|
|
|
|
|
22,198,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation
|
|
|
|
|
|
|
|
|
|
|
398,155
|
|
|
|
|
|
|
|
|
|
|
|
398,155
|
|
|
|
|
|
|
|
398,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion feature on promissory note payable
|
|
|
|
|
|
|
|
|
|
|
1,247,220
|
|
|
|
|
|
|
|
|
|
|
|
1,247,220
|
|
|
|
|
|
|
|
1,247,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee benefit plan adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,985
|
|
|
|
73,985
|
|
|
|
|
|
|
|
73,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,996,759
|
)
|
|
|
|
|
|
|
(8,996,759
|
)
|
|
|
8,543
|
|
|
|
(8,988,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
|
114,015,063
|
|
|
$
|
114,015
|
|
|
$
|
54,725,897
|
|
|
$
|
(8,996,759
|
)
|
|
$
|
73,985
|
|
|
$
|
45,917,138
|
|
|
$
|
110,439
|
|
|
$
|
46,027,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-27
SWISHER
HYGIENE INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
THREE YEARS ENDED DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash used in operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,570,004
|
)
|
|
$
|
(7,258,989
|
)
|
|
$
|
(11,987,871
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,857,173
|
|
|
|
4,744,052
|
|
|
|
5,206,632
|
|
Impairment loss
|
|
|
|
|
|
|
30,000
|
|
|
|
223,000
|
|
Gain from bargain purchases
|
|
|
|
|
|
|
(94,107
|
)
|
|
|
|
|
Provision for doubtful accounts
|
|
|
282,593
|
|
|
|
284,385
|
|
|
|
605,186
|
|
Stock based compensation
|
|
|
398,155
|
|
|
|
|
|
|
|
|
|
Unrealized loss on fair value of convertible promissory notes
|
|
|
277,000
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
1,700,000
|
|
|
|
|
|
|
|
|
|
Changes in working capital components:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,191,276
|
)
|
|
|
1,278,418
|
|
|
|
603,260
|
|
Inventory
|
|
|
(1,066,672
|
)
|
|
|
9,553
|
|
|
|
(52,590
|
)
|
Other assets and noncurrent assets
|
|
|
(702,727
|
)
|
|
|
(366,383
|
)
|
|
|
455,657
|
|
Accounts payable, accrued expenses, and other long term
liabilities
|
|
|
1,496,154
|
|
|
|
(4,327,249
|
)
|
|
|
(1,823,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in operating activities
|
|
|
(11,519,604
|
)
|
|
|
(5,700,320
|
)
|
|
|
(6,770,438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(5,178,717
|
)
|
|
|
(3,565,979
|
)
|
|
|
(3,391,036
|
)
|
Payments received on notes receivable
|
|
|
473,854
|
|
|
|
19,347
|
|
|
|
27,439
|
|
Acquisitions
|
|
|
(4,901,000
|
)
|
|
|
(839,023
|
)
|
|
|
(291,000
|
)
|
Restricted cash
|
|
|
(5,193,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(14,799,196
|
)
|
|
|
(4,385,655
|
)
|
|
|
(3,654,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received in Merger
|
|
|
61,850,226
|
|
|
|
|
|
|
|
|
|
Distributions to shareholders
|
|
|
(2,070,000
|
)
|
|
|
(115,000
|
)
|
|
|
(704,000
|
)
|
Distributions to non-controlling shareholder
|
|
|
|
|
|
|
|
|
|
|
(11,842
|
)
|
Proceeds from advances from shareholder
|
|
|
7,870,000
|
|
|
|
12,645,000
|
|
|
|
5,000,000
|
|
Proceeds from line of credit
|
|
|
|
|
|
|
|
|
|
|
6,296,118
|
|
Principal payments on debt
|
|
|
(3,670,015
|
)
|
|
|
(1,515,420
|
)
|
|
|
(886,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by financing activities
|
|
|
63,980,211
|
|
|
|
11,014,580
|
|
|
|
9,693,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
|
|
|
|
|
|
|
|
(160,611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
37,661,411
|
|
|
|
928,605
|
|
|
|
(892,365
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
1,270,327
|
|
|
|
341,722
|
|
|
|
1,234,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
38,931,738
|
|
|
$
|
1,270,327
|
|
|
$
|
341,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received during the year for interest
|
|
$
|
89,804
|
|
|
$
|
54,797
|
|
|
$
|
10,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
925,750
|
|
|
$
|
761,107
|
|
|
$
|
1,310,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable issued or assumed on acquisition
|
|
$
|
12,883,089
|
|
|
$
|
7,954,305
|
|
|
$
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder advances converted to equity
|
|
$
|
22,198,194
|
|
|
$
|
|
|
|
$
|
461,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-28
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
NOTE 1
|
BUSINESS
DESCRIPTION
|
Principal
Operations
Swisher Hygiene Inc. and its wholly-owned subsidiaries, formerly
named CoolBrands International Inc., (the Company or
We or Our) provide hygiene solutions to
customers throughout much of North America and internationally
through its global network of company owned operations,
franchises and master licensees. These solutions include
essential products and services that are designed to promote
superior cleanliness and sanitation in commercial environments,
while enhancing the safety, satisfaction and well-being of
employees and patrons. These solutions are typically delivered
by employees on a regularly scheduled basis and may involve
1) the sale of certain consumable products such as
chemicals, soap, paper and cleaning supplies, 2) the sale
and/or
rental of equipment for the dispensing of such products as well
as items that require regular maintenance and cleaning such as
floor mats, mops, linens and dish machines, and 3) the
performance of certain manual cleaning processes. The Company
serves customers in a wide range of end-markets, with a
particular emphasis on the foodservice, hospitality, retail,
industrial and healthcare industries across North America.
The Company has 69 company owned operations and 10
franchise operations located throughout the United States and
Canada and has entered into 10 Master License Agreements
covering the United Kingdom, Ireland, Portugal, the Netherlands,
Singapore, the Philippines, Taiwan, Korea, Hong
Kong/Macau/China, and Mexico.
Merger
and Reorganization
On August 17, 2010, Swisher International, Inc.
(Swisher International) entered into a merger
agreement (the Merger Agreement) that was completed
on November 2, 2010, under which all of the outstanding
common shares of Swisher International were exchanged for
57,789,630 common shares of CoolBrands International Inc.
(CoolBrands), and Swisher International become a
wholly-owned subsidiary of CoolBrands (the Merger).
Immediately before the Merger, CoolBrands completed its
redomestication to Delaware from Ontario, Canada and became
Swisher Hygiene Inc. The former shareholders of Swisher
International received 57,789,630 shares of Swisher Hygiene
Inc. common stock, representing, on a fully diluted basis, a 48%
ownership interest in Swisher Hygiene. The shareholders of
CoolBrands retained a 52% ownership interest of the Company, on
a fully diluted basis.
The share exchange was accounted as a reverse acquisition and is
considered to be a capital transaction, in substance, rather
than a business combination. The transaction was effectively a
reverse recapitalization equivalent to the issuance of stock by
a private company for the net monetary assets of the
non-operating corporation accompanied by the recapitalization.
Accordingly, the accounting for the share exchange was similar
to that resulting from a reverse acquisition; except that the
transaction was consummated at book value and no goodwill or
intangible assets were recognized. The accompanying Consolidated
Financial Statements have been adjusted to give retroactive
effect for the change in reporting entity from Swisher
International, Inc. to Swisher Hygiene, Inc., and to reflect the
change in capital structure as a result of the Merger.
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of
Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Swisher Hygiene Inc. and all its subsidiaries, which
are wholly-owned and include the historical financial statements
of HB Service, LLC. HB Service, LLC, a limited liability company
jointly owned by the shareholders of Swisher International, has
acquired and operated hygiene service businesses throughout the
United States since 2004. Effective July 13, 2010, Swisher
International entered into a merger agreement with HB Service,
LLC. This merger has been accounted for as a nonsubstantive
exchange as there was no significant economic effect to entering
into the
F-29
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
transaction. Accordingly, we have accounted for the merger by
recognizing the assets and liabilities of the two entities based
upon their respective carrying amounts as if the merger had
occurred as of January 1, 2007.
All material intercompany balances and transactions have been
eliminated in consolidation. Certain adjustments have been made
to conform prior periods to the current year presentation.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (GAAP) requires management to make estimates
and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses and disclosure of contingent
assets and liabilities at the date of the Consolidated Financial
Statements. Actual results could differ from those estimates and
such differences could affect the results of operations reported
in future periods.
Foreign
Currency Translation
Foreign currency denominated assets and liabilities are
translated into U.S. dollars using the exchange rates in
effect at the balance sheet date. The effect of exchange rate
fluctuations on translation of assets and liabilities at the
balance sheet date are recorded as a component of equity and
accumulated other comprehensive (loss) income. As of
December 31, 2008 $221,466 of foreign currency translation
loss was recorded. Amounts transferred from accumulated other
comprehensive (loss) income upon the sale or liquidation of an
investment in a foreign entity is reported as part of the gain
or loss on sale or liquidation, which occurred in 2009 with the
sale of the U.K. foreign subsidiary. Results of operations for
foreign operations are translated using the average exchange
rates throughout the period. During 2010, the Company recorded a
realized net gain of $820,032 in Other income (expense) on the
Consolidated Statement of Operations. This gain is primarily due
to the sale of cash held in Canadian dollars for
U.S. dollars at favorable conversion rates.
Financial
Instruments
The Companys financial instruments, which may expose the
Company to concentrations of credit risk, include cash and cash
equivalents, account receivables, accounts payable, and debt.
Cash and cash equivalents are maintained at financial
institutions and, at times, balances may exceed federally
insured limits. We have never experienced any losses related to
these balances. The Company has approximately $11,197,000 of
cash held in bank accounts above Federal Deposit Insurance
Corporation limits and approximately $30,388,000 of cash held in
Canadian bank accounts above Canada Deposit Insurance
Corporation limits. The carrying amounts of cash and the current
portion of accounts receivable and accounts payable approximate
fair value due to the short maturity of these instruments. The
fair value of the Companys debt is 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. Convertible notes that convert at a
fixed conversion price into a variable number of shares are
recorded at fair value at December 31, 2010. (See Note 6.)
Cash and
Cash Equivalents
The Company considers all cash accounts and all highly liquid
short term investments purchased with an original maturity of
three months or less to be cash or cash equivalents. As of
December 31, 2010 and 2009, the Company did not have any
investments with maturities greater than three months.
Accounts
Receivable, net
Accounts receivable, net consist of amounts due from customers
for product sales and services as well as from franchisees and
master licensees for product sales, royalties and fees for
marketing and administrative services. Accounts receivable are
reported net of an allowance for doubtful accounts. The
allowance is
F-30
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
managements best estimate of uncollectible amounts and is
based on a number of factors, including overall credit quality,
age of outstanding balances, historical write-off experience and
specific account analysis that projects the ultimate
collectability of the outstanding balances. The allowance was
$364,234 and $334,156 at December 31, 2010 and 2009,
respectively.
Inventory
Inventory consists of purchased items which are sold to
customers and are stated at the lower of cost or market
determined using the first in-first out cost method. The Company
routinely reviews inventory for excess and slow moving items as
well as for damaged or otherwise obsolete items and for items
selling at negative margins. When such items are identified, a
reserve is recorded to adjust their carrying value to their
estimated net realizable value. The reserve was $92,773 and
$50,000 at December 31, 2010 and 2009, respectively.
Property
and Equipment, net
Property and equipment, net is stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization is
provided using the straight-line method over the estimated
useful lives of individual assets or classes of assets as
follows:
|
|
|
Items in service
|
|
2 to 5 years
|
Equipment and furniture
|
|
3 to 10 years
|
Vehicles
|
|
3 years
|
Computer equipment
|
|
3 years
|
Computer software
|
|
3 to 7 years
|
Leasehold improvements
|
|
3 to 10 years
|
Items in service consist of various systems that dispense the
Companys cleaning and sanitizing, dish machine and dust
control products. Included in the cost of items in service are
costs incurred to install the equipment of significant customers
with long-term contracts. These costs include labor, parts and
supplies. Costs of significant additions, renewals and
betterments, are capitalized and depreciated. Maintenance and
repairs are charged to expense when incurred.
The Company capitalizes certain costs incurred during the
application development stage associated with the development of
new software products for internal use. Research and development
costs in the preliminary project stage are expensed. Internal
and external training costs and maintenance costs in the
post-implementation operation stage are also expensed.
Capitalized software costs are amortized over the estimated
useful lives of the software, ranging from 3 to 7 years and
commencing upon operational use.
Goodwill
and Other Intangible Assets
Goodwill represents the excess of the cost of an acquired
business over the fair value of the identifiable tangible and
intangible assets and liabilities assumed in a business
combination. Identifiable intangible assets include customer
relationships and non-compete agreements. The fair value of
these intangible assets at the time of acquisition is estimated
based upon discounted future cash flow projections. The customer
relationships are amortized on a straight-line basis over the
expected average life of the acquired accounts, which is
typically five years based upon a number of factors, including
longevity of customers acquired and historical retention rates.
The non-compete agreements are amortized on a straight-line
basis over the term of the agreements, which are between two to
five years.
The Company tests goodwill and intangible assets for impairment
annually or more frequently if indicators for potential
impairment exist. Impairment testing is performed at the
reporting unit level. Under
F-31
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
generally accepted accounting principles, a reporting unit is
either the equivalent to, or one level below, an operating
segment. The test to evaluate for impairment is a two-step
process. In the first step, we compare the fair value of each
reporting unit to its carrying value. If the fair value of the
reporting unit is less than its carrying value, we perform a
second step to determine the implied fair value of goodwill
associated with that reporting unit. If the carrying value of
goodwill exceeds the implied fair value of goodwill, such excess
represents the amount of goodwill impairment.
Determining the fair value of a reporting unit includes the use
of significant estimates and assumptions. Management utilizes a
discounted cash flow technique as a means for estimating fair
value. This discounted cash flow analysis requires various
judgmental assumptions including those about future cash flows,
customer growth rates and discount rates. Expected cash flows
are based on historical customer growth, including attrition,
and continued long term growth of the business. The discount
rates used for the analysis reflect a weighted average cost of
capital based on industry and capital structure adjusted for
equity risk and size risk premiums. These estimates can be
affected by factors such as customer growth, pricing, and
economic conditions that can be difficult to predict. As part of
this impairment testing, management also assesses the useful
lives assigned to the customer relationships and non-compete
agreements. There were no impairment losses on goodwill or other
intangible assets for the year ended December 31, 2010. For
the years ended December 31, 2009 and 2008, we recognized
impairment losses on goodwill and other intangible assets of
$30,000 and $223,000, respectively.
Long-lived
Assets
The Company recognizes losses related to the impairment of
long-lived assets when the carrying amount is not recoverable
and exceeds its fair value. When facts and circumstances
indicate that the carrying values of long-lived assets may be
impaired, management of the Company evaluates recoverability by
comparing the carrying value of the assets to projected future
cash flows, in addition to other qualitative and quantitative
analyses. The Company also performs a periodic assessment of the
useful lives assigned to the intangible assets, as previously
discussed. There were no impairment losses related to long-lived
assets for the years ended December 31, 2010, 2009 and 2008.
Noncontrolling
Interest
In the majority of its acquisitions, the Company acquires 100%
of the business; however, in a few instances, the former owner
retained a noncontrolling interest. Profit and loss are
allocated to the noncontrolling interest based on its pro-rata
share.
Revenue
Recognition
Revenue from product sales and services is recognized when
services are performed or the products are delivered to the
customer. Franchise and other revenue include product sales,
royalties and other fees charged to franchisees in accordance
with the terms of their franchise agreements. Royalties and fees
are recognized when earned.
The Company has entered into franchise and license agreements
which grant the exclusive rights to develop and operate within
specified geographic territories for a fee. The initial
franchise or license fee is deferred and recognized as revenue
when substantially all significant services to be provided by
the Company are performed. Direct incremental costs related to
franchise or license sales for which revenue has not been
recognized is deferred until the related revenue is recognized.
F-32
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
Taxes
Effective on January 1, 2007, Swisher Internationals
shareholders elected that the corporation be taxed under the
provisions of Subchapter S of the Internal Revenue Code of 1986,
as amended (the Code). Under this provision, the
shareholders were taxed on their proportionate share of Swisher
Internationals taxable income. As a Subchapter
S corporation, Swisher International bore no liability or
expense for income taxes.
As a result of the Merger in November 2010, Swisher
International converted from a corporation taxed under the
provisions of Subchapter S of the Internal Revenue Code (S
Corp) to a tax-paying entity and accounts for income taxes
under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to the differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and net operating loss carryforwards.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that
includes the enactment date. Valuation allowances are
established when necessary to reduce deferred tax assets where
it is more likely than not that deferred tax assets will not be
realized. In addition, the undistributed earnings on the date
the Company terminated the S Corp election were recorded as
Additional paid-in capital on the Consolidated Financial
Statements since the termination of the S Corp election assumes
a constructive distribution to the owners followed by a
contribution of capital to the corporation.
As of the Merger date, the cumulative timing differences between
book income and taxable income were recorded. A full valuation
allowance has been provided against the deferred tax benefit
attributable to the net loss from operations. The opening
balance of the Companys net deferred taxes was recorded as
income tax expense in the Consolidated Financial Statements.
As of January 1, 2009, the Company adopted the provisions
related to accounting for uncertainty in income taxes, which
prescribes how a Company should recognize, measure, present and
disclose in its financial statements uncertain tax positions
that the Company has taken or expects to take on a tax return.
The adoption of these provisions did not have a material impact
on the Companys Consolidated Financial Statements.
Share
Based Compensation
In November 2010, our board of directors approved the Swisher
Hygiene Inc. 2010 Stock Incentive Plan (the Plan) to
attract, retain, motivate and reward key officers and employees.
The Plan allows for grant of stock options, restricted stock
units and other equity instruments up to a total of
6,000,000 shares of our common stock. All options are
exercisable at a price equal to the fair market value of the
Companys common stock on the date of grant.
Options vest in four equal annual installments beginning on the
first anniversary of the grant date and expire in 2020.
Restricted stock units vest in four equal annual installments
beginning on the first anniversary of the grant date. Recipients
of restricted stock units may not sell or transfer their shares
until the shares vest. The restrictions of the common stock
units lapse ratably as vesting occurs over four years.
The Company measures and recognizes all share based compensation
at fair value at the date of grant and recognizes compensation
expense over the service period for awards expected to vest.
Determining the fair value of share based awards at the grant
dates requires judgment, including estimating the share
volatility, the expected term the award will be outstanding, and
the amount of the awards that are expected to be forfeited. The
Company utilizes the Black-Scholes option pricing model to
determine the fair value for stock options on the date of grant.
F-33
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pension
Plan
The Company administers a defined benefit plan for certain
retired employees. The plan has not allowed for new participants
since October 2000. As of the date of the Merger, the Company
recorded the underfunded pension obligation of $560,931 for this
plan.
The Company recognizes in its statement of financial position
the overfunded or underfunded status of the defined benefit plan
measured as the difference between the fair value of plan assets
and the benefit obligation. The Company recognizes as a separate
component of comprehensive loss the actuarial gains and losses
that arise during the period that are not recognized as
components of net periodic benefit cost. The Company measures
the defined benefit plan assets and the defined benefit plan
obligations as of December 31 and discloses additional
information in the notes to the Consolidated Financial
Statements about certain effects on net periodic benefit cost in
the upcoming fiscal year that arise from delayed recognition of
the actuarial gains and losses.
The calculation of net periodic benefit cost and the
corresponding net liability requires the use of critical
assumptions, including the expected long term rate of return on
plan assets and the assumed discount rate. Changes in these
assumptions can result in different expense and liability
amounts. Net periodic benefit cost increases as the expected
rate of return on pension plan assets decreases. Future changes
in plan asset returns, assumed discount rates and other factors
related to the participants in the Companys pension plans
will impact the Companys future net periodic benefit cost
and liabilities. The Company cannot predict with certainty what
these factors will be in the future.
Loss per
Common Share
Basic net loss attributable to common stockholders per share is
computed by dividing net loss by the weighted average number of
common shares outstanding during the period. Diluted net loss
per share was the same as basic net loss attributable to common
stockholders per share for all periods presented, since the
effects of any potentially dilutive securities are excluded as
they are antidilutive due to our net losses.
Comprehensive
Loss
Comprehensive loss includes net loss, foreign currency
translation adjustments, liquidation of a foreign subsidiary,
and unrecognized pension actuarial gains and losses.
Fair
Value Measurements
The Company determines the fair value of certain assets and
liabilities based on assumptions that market participants would
use in pricing the assets or liabilities. Fair value is defined
as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date, or the exit
price. The Company utilizes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure
fair value and gives precedence to observable inputs in
determining fair value. An instruments level within the
hierarchy is based on the lowest level of any significant input
to the fair value measurement. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for
identical assets or liabilities (Level 1 measurements) and
the lowest priority to unobservable inputs (Level 3
measurements). Assets and liabilities are classified based on
the lowest level of input that is significant to the fair value
measurement. The following levels were established for each
input:
Level 1: Inputs that are quoted
prices (unadjusted) in active markets for identical assets or
liabilities that the reporting entity has the ability to access
at the measurement date. Active markets are those in which
transactions for the asset or liability occur with sufficient
frequency and volume to provide pricing information on an
ongoing basis. Instruments classified as Level 1 consist of
financial instruments such listed equities and fixed income
securities. (See Note 11.)
F-34
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Level 2: Inputs other than quoted
prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. The
Company does not have any Level 2 financial instruments as
of December 31, 2010 and 2009.
Level 3: Unobservable inputs for
the asset or liability. These are inputs for which there
is no market data available or observable inputs that are
adjusted using Level 3 assumptions. Instruments classified
as Level 3 at December 31, 2010 include certain
convertible promissory notes and a certain guarantee, which are
not publically traded and have unobservable inputs. (See
Note 6 and Note 14.)
There were no Level 3 financial instruments as of or during
the year ended December 31, 2009. In addition there have
been no significant transfers into or between Level 1 and
Level 2 financial instruments during the years ended
December 31, 2010 and 2009.
Segments
The Company primarily provides commercial hygiene services and
products throughout much of the United States, and additionally
operates a worldwide franchise and license system to provide the
same products and services in markets where Company owned
operations do not exist. The Company manages, allocates
resources, and reports in one business segment.
Recently
Adopted Accounting Pronouncements
Accounting Standards
Codificationtm: Effective
July 1, 2009, we adopted the Financial Accounting Standards
Board (FASB) Accounting Standards
Codificationtm
(ASC or Codification) as the source of
authoritative GAAP recognized by the FASB to be applied by
nongovernmental entities. Rules and interpretive releases of the
U.S. Securities Exchange Commission (SEC) under
authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. The Codification
superseded all then-existing non-SEC accounting and reporting
standards. The adoption of the Codification did not have a
material effect on our Consolidated Financial Statements.
Fair Value Measurements and
Disclosures: Effective January 1, 2009, we
adopted amended standards on two issues: 1) determining the
fair value of a liability when a quoted price in an active
market for an identical liability is not available and
2) measuring and disclosing the fair value of certain
investments on the basis of the investments net asset
value per share or its equivalent. This adoption did not have a
material effect on our Consolidated Financial Statements.
In December 2008, the FASB issued guidance on employers
disclosures about plan assets of a defined benefit plan or other
post retirement plan, which requires more detailed disclosures
regarding employers plan assets, including their
investment strategies, major categories of plan assets,
concentration of risk, and valuation methods used to measure the
fair value of plan assets. The guidance is effective for fiscal
years ending after December 15, 2009. The Company has
included the required disclosures in Note 11 of the
Consolidated Financial Statements.
In January 2010, the FASB issued new standards for new
disclosures regarding transfers in and out of Level 1 and
Level 2 fair value measurements, as well as requiring
presentation on a gross basis information about purchases,
sales, issuances and settlements in Level 3 fair value
measurements. The standards also clarified existing disclosures
regarding level of disaggregation, inputs and valuation
techniques. The standards are effective for interim and annual
reporting periods beginning after December 15, 2009 and
became effective for the Company on January 1, 2010.
Disclosures about purchases, sales, issuances and settlements in
the roll forward of activity in Level 3 fair value
measurements are effective for fiscal years beginning after
December 15, 2010 and will be effective for the Company on
January 1, 2011. We are currently evaluating the effect of
these standards on our Consolidated Financial Statements.
F-35
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Business Combinations: In December 2007 the
FASB issued new guidance on business combinations. The revised
guidance establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the
identifiable assets and goodwill acquired, liabilities assumed
and any noncontrolling interest in the acquiree in a business
combination. The guidance also provides disclosure requirements
to enable users of the financial statements to evaluate the
nature and financial effects of the business combination. The
Company adopted this guidance effective January 1, 2009.
The adoption did not have a material effect on our Consolidated
Financial Statements.
Consolidation: In December 2007 the FASB
issued new guidance on noncontrolling interests in Consolidated
Financial Statements. The guidance requires reporting entities
to present noncontrolling interests in any of their consolidated
entities as equity (as opposed to a liability or mezzanine
equity) and provide guidance on the accounting for transactions
between an entity and noncontrolling interests. The Company
adopted this guidance effective January 1, 2009. This
adoption did not have a material effect on our Consolidated
Financial Statements.
Intangibles Goodwill and Other: On
January 1, 2009, we adopted two new standards affecting
intangible assets. One of the standards addressed factors that
should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized
intangible asset. The second standard affected accounting for
defensive intangible assets, which are acquired assets that an
entity does not intend to actively use, but will hold (lock up)
to prevent others from obtaining access to them. These standards
do not address intangible assets that are used in research and
development activities. Neither of these standards had a
material effect on our Consolidated Financial Statements.
Subsequent Events: In May 2009, the FASB
issued new standards that establish general guidance for
accounting and disclosures of events that occur after the
balance sheet date but before financial statements are issued or
are available to be issued. The adoption of these standards
require us to evaluate all subsequent events that occur after
the balance sheet date through the date and time our
Consolidated Financial Statements are issued. This adoption did
not have a material effect on our Consolidated Financial
Statements.
In February 2010, the FASB amended these standards to remove the
requirement for a Securities Exchange Commission filer to
disclose a date in both issued and revised financial statements.
The amended standards clarified the definition of
revised as being the result of either correction of
an error or retrospective application of GAAP. We adopted these
amended standards upon their issuance; they did not have a
material effect on our Consolidated Financial Statements.
Newly
Issued Accounting Pronouncements
Revenue Recognition: In October 2009, the FASB
issued new standards for multiple-deliverable revenue
arrangements. These new standards affect the determination of
when individual deliverables included in a multiple-element
arrangement may be treated as separate units of accounting. In
addition, these new standards modify the manner in which the
transaction consideration is allocated across separately
identified deliverables, eliminate the use of the residual value
method of allocating arrangement consideration and require
expanded disclosure. These new standards will become effective
for multiple-element arrangements entered into or materially
modified on or after January 1, 2011. Earlier application
is permitted with required transition disclosures based on the
period of adoption. We will adopt these standards for
multiple-element arrangements entered into or materially
modified on or after January 1, 2011 and are currently
evaluating the effect of these standards on our Consolidated
Financial Statements.
Compensation: In April 2010, the FASB issued
new standards to clarify that an employee share-based payment
award with an exercise price denominated in the currency of a
market in which a substantial portion of the entitys
equity securities trades should not be considered to contain a
condition that is not a market, performance, or service
condition. Therefore, an entity would not classify such an award
as a liability if it
F-36
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
otherwise qualifies as equity. These new standards are effective
for fiscal years beginning on or after December 15, 2010.
Either application is permitted. The Company applied these
amended standards upon their issuance; they did not have a
material effect on our Consolidated Financial Statements.
Goodwill: In December 2010, the FASB issued
new standards defining when step 2 of the goodwill impairment
test for reporting units with zero or negative carrying amounts
should be performed and modifies Step 1 of the goodwill
impairment test for reporting units with zero or negative
carrying amounts. For reporting units with zero or negative
carrying amounts an entity is required to perform Step 2 of the
goodwill impairment test if it is more likely than not that a
goodwill impairment exists. In determining whether it is more
likely than not that a goodwill impairment exists, an entity
should consider whether there are any adverse qualitative
factors indicating that an impairment may exist. The standards
are effective for fiscal years and interim periods within those
years, beginning December 15, 2010 and will be effective
for the Company on January 1, 2011. We are currently
evaluating the effect of these standards on our Consolidated
Financial Statements.
During the three years ended December 31, 2010, the Company
acquired 22 of its franchisees and 7 independent businesses. The
results of operations of these acquisitions have been included
in the Companys Consolidated Financial Statements since
their respective acquisition dates. None of these acquisitions
were significant to the Companys consolidated financial
results and therefore, supplemental pro forma financial
information is not presented.
The following table summarizes the current estimated aggregate
fair values of the assets acquired and liabilities assumed at
the date of acquisition for the acquisitions made during each of
the three years ended December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Number of businesses acquired
|
|
|
9
|
|
|
|
19
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tangible assets acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and other assets
|
|
$
|
1,275,694
|
|
|
$
|
935,943
|
|
|
$
|
61,000
|
|
Inventory
|
|
|
605,621
|
|
|
|
219,910
|
|
|
|
1,000
|
|
Property and equipment
|
|
|
883,837
|
|
|
|
676,548
|
|
|
|
18,879
|
|
Accounts payable and accrued expenses
|
|
|
(1,856,483
|
)
|
|
|
(808,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
908,669
|
|
|
|
1,024,290
|
|
|
|
80,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
4,121,300
|
|
|
|
2,210,000
|
|
|
|
128,000
|
|
Non-compete agreements
|
|
|
1,447,300
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,568,600
|
|
|
|
2,960,000
|
|
|
|
128,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
11,306,820
|
|
|
|
4,909,038
|
|
|
|
322,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate purchase price
|
|
|
17,784,089
|
|
|
|
8,893,328
|
|
|
|
531,000
|
|
Less: Noncontrolling interest
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
Less: Notes issued or assumed on acquisition
|
|
|
12,883,089
|
|
|
|
7,954,305
|
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid on acquisitions
|
|
$
|
4,901,000
|
|
|
$
|
839,023
|
|
|
$
|
291,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 4
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
Goodwill and other intangible assets have been recognized in
connection with the acquisitions described in Note 3 and
substantially all of the balance is expected to be fully
deductible for income tax purposes.
Changes in the carrying amount of goodwill and other intangibles
for December 31, 2010 and 2009, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
Balance January 1
|
|
|
|
|
|
|
|
|
Gross goodwill
|
|
$
|
19,223,489
|
|
|
$
|
14,538,316
|
|
Accumulated impairment losses
|
|
|
(870,000
|
)
|
|
|
(870,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
18,353,489
|
|
|
|
13,668,316
|
|
Goodwill acquired
|
|
|
11,306,820
|
|
|
|
5,003,145
|
|
Sale of UK subsidiary
|
|
|
|
|
|
|
(317,972
|
)
|
|
|
|
|
|
|
|
|
|
Balance December 31
|
|
|
|
|
|
|
|
|
Gross goodwill
|
|
|
30,530,309
|
|
|
|
19,223,489
|
|
Accumulated impairment losses
|
|
|
(870,000
|
)
|
|
|
(870,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,660,309
|
|
|
$
|
18,353,489
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
|
|
|
|
|
|
|
Balance January 1
|
|
$
|
2,766,016
|
|
|
$
|
1,744,981
|
|
Customers acquired
|
|
|
4,121,300
|
|
|
|
2,210,000
|
|
Amortization
|
|
|
(1,107,336
|
)
|
|
|
(1,158,965
|
)
|
Impairment
|
|
|
|
|
|
|
(30,000
|
)
|
|
|
|
|
|
|
|
|
|
Balance December 31
|
|
$
|
5,779,980
|
|
|
$
|
2,766,016
|
|
|
|
|
|
|
|
|
|
|
Non-compete Agreements
|
|
|
|
|
|
|
|
|
Balance January 1
|
|
$
|
814,442
|
|
|
$
|
631,070
|
|
Agreements
|
|
|
1,447,300
|
|
|
|
750,000
|
|
Amortization
|
|
|
(372,917
|
)
|
|
|
(566,628
|
)
|
|
|
|
|
|
|
|
|
|
Balance December 31
|
|
$
|
1,888,825
|
|
|
$
|
814,442
|
|
|
|
|
|
|
|
|
|
|
Information regarding customer relationships and non-compete
agreements is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Period (years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
5
|
|
|
$
|
11,716,300
|
|
|
$
|
(5,936,320
|
)
|
|
$
|
5,779,980
|
|
Non-compete agreements
|
|
|
4
|
|
|
|
2,752,300
|
|
|
|
(863,475
|
)
|
|
|
1,888,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,468,600
|
|
|
$
|
(6,799,795
|
)
|
|
$
|
7,668,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Period (years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
5
|
|
|
$
|
7,595,000
|
|
|
$
|
(4,828,984
|
)
|
|
$
|
2,766,016
|
|
Non-compete agreements
|
|
|
4
|
|
|
|
1,640,000
|
|
|
|
(825,558
|
)
|
|
|
814,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,235,000
|
|
|
$
|
(5,654,542
|
)
|
|
$
|
3,580,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $1,480,253, $1,725,593, and $1,664,571
for the fiscal years ended December 31, 2010, 2009 and
2008, respectively. As of December 31, 2010, estimated
future amortization of customer relationships and non-compete
agreements for the next five years is as follows:
|
|
|
|
|
2011
|
|
$
|
2,038,700
|
|
2012
|
|
|
1,860,300
|
|
2013
|
|
|
1,728,200
|
|
2014
|
|
|
1,361,900
|
|
2015
|
|
|
680,705
|
|
|
|
|
|
|
|
|
$
|
7,668,805
|
|
|
|
|
|
|
|
|
NOTE 5
|
PROPERTY
AND EQUIPMENT, NET
|
Property and equipment, net as of December 31, 2010 and
2009 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Items in service
|
|
$
|
16,280,177
|
|
|
$
|
10,264,929
|
|
Equipment and furniture
|
|
|
2,244,289
|
|
|
|
2,084,957
|
|
Vehicles
|
|
|
517,987
|
|
|
|
466,986
|
|
Computer equipment
|
|
|
973,524
|
|
|
|
895,171
|
|
Computer software
|
|
|
6,407,547
|
|
|
|
5,891,775
|
|
Leasehold improvements
|
|
|
344,494
|
|
|
|
322,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,768,018
|
|
|
|
19,926,525
|
|
Less: accumulated depreciation and amortization
|
|
|
(15,443,963
|
)
|
|
|
(12,067,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,324,055
|
|
|
$
|
7,859,482
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the years ended
December 2010, 2009 and 2008 was $3,376,920, $3,018,459, and
$3,542,061, respectively.
As of December 31, 2010 and 2009, computer software
includes costs of $5,068,556 and $4,688,063, respectively, for
the development of our technology platform for field service
operations, accounting, billing and collections. The accumulated
depreciation as of December 31, 2010 and 2009 was
$2,029,657 and $1,100,568, respectively. The weighted average
amortization period for capitalized software costs is
7 years. Depreciation and amortization expense for
capitalized computer software costs during the years ended
December 31, 2010, 2009 and 2008 was $929,089, $623,872 and
$476,676, respectively. The estimated
F-39
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
depreciation and amortization expense related to computer
software costs capitalized for the next five years is as follows:
|
|
|
|
|
2011
|
|
$
|
744,685
|
|
2012
|
|
|
740,616
|
|
2013
|
|
|
738,394
|
|
2014
|
|
|
690,726
|
|
2015
|
|
|
124,478
|
|
|
|
|
|
|
|
|
$
|
3,038,899
|
|
|
|
|
|
|
The major components of debt as of December 31, 2010 and
2009 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Line of credit agreement dated March 2008. Interest is payable
monthly at one month LIBOR plus 2.85% at December 31, 2010,
and one month LIBOR plus 2.35% at December 31, 2009,
maturing in January 2012. Interest rate of 3.11% and 2.58% at
December 31, 2010 and 2009, respectively
|
|
$
|
9,946,932
|
|
|
$
|
9,946,932
|
|
Line of credit agreement dated June 2008. Interest is payable
monthly at one month LIBOR plus 1.50% at December 31, 2010,
and one month LIBOR plus 1.50% at December 31, 2009,
maturing in January 2012. Interest rate of 1.76% and 1.73% at
December 31, 2010 and 2009, respectively
|
|
|
15,000,000
|
|
|
|
15,000,000
|
|
Notes payable under Master Loan and Security Agreement, due in
monthly installments at December 31, 2010 of $62,776,
maturing in 2012. Interest is payable monthly at a weighted
average interest rate of 8% and 6.64% at December 31, 2010
and 2009, respectively
|
|
|
248,577
|
|
|
|
899,977
|
|
Acquisitions notes payables
|
|
|
7,891,209
|
|
|
|
8,197,091
|
|
Convertible notes:
|
|
|
|
|
|
|
|
|
6% Note due June 30, 2011
|
|
|
5,000,000
|
|
|
|
|
|
4% Note due June 30, 2011
|
|
|
4,774,480
|
|
|
|
|
|
4% Note due September 30, 2011
|
|
|
997,000
|
|
|
|
|
|
Capitalized lease obligations
|
|
|
549,504
|
|
|
|
281,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,407,702
|
|
|
|
34,325,131
|
|
Short term obligations
|
|
|
(13,378,710
|
)
|
|
|
(2,295,290
|
)
|
|
|
|
|
|
|
|
|
|
Long term obligations
|
|
$
|
31,028,992
|
|
|
$
|
32,029,841
|
|
|
|
|
|
|
|
|
|
|
F-40
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2010, principal payments due on
long-term debt, including capital leases, is as follows:
|
|
|
|
|
2011
|
|
$
|
12,353,710
|
|
2012
|
|
|
27,289,104
|
|
2013
|
|
|
1,758,350
|
|
2014
|
|
|
726,790
|
|
2015
|
|
|
291,960
|
|
Thereafter
|
|
|
962,788
|
|
|
|
|
|
|
|
|
$
|
43,382,702
|
|
|
|
|
|
|
Convertible promissory notes conversion feature included in
short term obligations
|
|
|
1,025,000
|
|
|
|
|
|
|
|
|
$
|
44,407,702
|
|
|
|
|
|
|
Revolving
Credit Facilities
The Company has a revolving line of credit for a maximum
borrowing of up to $10,000,000 of which $5,000,000 is personally
guaranteed by a shareholder. This agreement had a maturity of
February 28, 2011 and was modified in February 2011 to
extend the maturity date to January 2012 and to release the
personal guarantee by a shareholder. Borrowings under the line
are used for general working capital purposes, capital
expenditures and acquisitions. The line is secured by
substantially all the assets of the Company not otherwise
encumbered. This credit facility contains various restrictive
covenants which limit or prevent, without the express consent of
the bank, making loans, advances, or other extensions of credit,
change in control, consolidation, mergers or acquisitions,
issuing dividends, selling, assigning, leasing, transferring, or
disposing of any part of the business and incurring indebtedness
(Loan and Security Agreement discussed below). The bank has
waived the Companys noncompliance with certain reporting
requirements and meeting minimum financial thresholds as of and
for the year ended December 31, 2010 and 2009.
In June 2008, the Company entered into a $15,000,000 revolving
credit facility, which had a maturity of June 2009. The credit
facility was modified in 2009 to extend the maturity date to
January 1, 2011 and modified in February 2011 to extend the
maturity date to January 2012. In addition in February 2011 the
personnel guarantee by a shareholder was released. The credit
facility contains various restrictive covenants which limit or
prevent, without the express consent of the bank, making loans,
advances, or other extensions of credit, change in control,
consolidation, mergers or acquisitions, issuing dividends,
selling, assigning, leasing, transferring or disposing of any
part of the business and incurring indebtedness. The bank has
waived the Companys noncompliance with certain reporting
requirements and meeting minimum financial thresholds as of and
for the year ended December 31, 2010 and 2009.
As of November 5, 2010, the Company amended its credit
facilities to eliminate all restrictive and financial covenants
currently included in the credit facilities, except the
following: (i) the Company must maintain, at all times,
unencumbered cash and cash equivalents in excess of $15,000,000
and (ii) the Company may not without the consent of the
lender, incur or permit its subsidiaries to incur new
indebtedness or make new investments (except for investments in
franchisees) in connection with the acquisition of franchisees
and other businesses within its same line of business in excess
of $25 million in the aggregate at any time.
See Note 16 for a discussion of our new $100 million
senior secured revolving credit facility, which we entered into
on March 31, 2011 and which replaces the credit facilities
described above.
Notes
Payable
In January 2006, the Company entered into an agreement for the
development of a new software platform for field service
operations, accounting, billings and collections. Substantially
all the software development
F-41
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
cost was financed through a Master Loan and Security Agreement
(the Agreement). Borrowings under the Agreement are
secured by a first security interest in the software or hardware
acquired. The Agreement prevents a change in control in excess
of 20 percent unless the acquiring entity assumes all the
obligations of the Company under the Agreement and the net
tangible assets and net worth after consolidation, sale or
merger is at least equal to the net tangible assets and the net
worth of the Company immediately before the consolidation, sale
or merger.
Acquisition-Related
Note Payables
During the year ended December 31, 2010, 2009, and 2008,
the Company incurred or assumed (excluding convertible notes
discussed below) $1,866,500, $7,954,304, and $240,000,
respectively, of debt to sellers in connection with certain
acquisitions (See Note 3). Two of the seller notes payable
totaling $3,050,000 are secured by letters of credit, which are
guaranteed by shareholders, the remaining notes payable are
secured by the Company. At December 31, 2010 and 2009 these
obligations bore interest at rates ranging between
2.5 11%. The obligations mature at various times
through 2019.
Convertible
Notes
In November 2010, the Company issued a 6% convertible promissory
note of $5,000,000 due on June 30, 2011 as part of
consideration paid for an acquisition. The note may be converted
by the holder at the conversion rate of $3.81 and up to
1,312,864 of our common shares before June 30, 2011 any
time following (i) conditional approval by the Toronto
Stock Exchange (TSX) of the listing of the
Companys shares of common stock and (ii) the date
that the Companys Registration Statement on Form
S-1 for the
resale of common stock is declared effective by the SEC. Since
the convertible note was issued as part of a business
combination the note was recorded at fair value of $6,429,720 on
the date of issuance including $5,182,500 recorded as a current
liability and $1,247,220 recorded as Additional paid-in capital
reflecting the promissory notes beneficial conversion
feature. As of December 31, 2010, the net carrying amount
of this promissory note was $6,385,720 ($6,247,220 principal and
conversion feature and $138,500 unamortized premium). The
premium will be amortized to interest income over the remaining
term of the note or 6 months. The fair value of this
financial instrument is $6,371,400 at December 31, 2010. If
the entire note would be converted on December 31, 2010, we
would issue 1,312,864 common shares which occurred during 2011.
In December 2010, the Company issued a 4% convertible promissory
note of $3,896,480 due on June 30, 2011 as part of an
acquisition. The note, principal plus accrued interest, is
convertible into a variable number of shares of the
Companys common stock at the election of the holder at a
fixed conversion price $3.88 any time following
(i) conditional approval by the TSX of the listing of the
Companys shares of common stock and (ii) the date
that the Companys Registration Statement on
Form S-1
for the resale of common stock is declared effective by the SEC
but no later than June 30, 2011. The note, plus accrued
interest, will automatically convert into the number of shares
of the Companys common stock on April 6, 2011,
provided (i) the Companys Registration Statement on
Form S-1
providing for resale of the Companys common stock is
effective and (ii) the Companys common stock has
traded on a stock exchange for 10 consecutive trading days
(which the combined average volume is at least
250,000 shares) equal to or exceeding 105% of $3.88. If the
note has not converted as of June 30, 2011, the Company has
the option to repay the note in a combination of cash and the
Companys common stock. The maximum number of shares
issuable in repayment of the note is 1,027,122 shares. The
fair value of the note on the date of issuance was $4,497,480
and subsequently increased to $4,774,480 as of December 31,
2010 and is recorded as a current liability on the Consolidated
Financial Statements. If the entire note would be converted on
December 31, 2010, we would issue 1,006,925 common shares
that have a fair value of $4.73 per share.
In December 2010, the Company issued a 4% convertible promissory
note of $500,000 due on September 30, 2011 and a 4%
convertible promissory note of $350,000 due on
September 30, 2011. The notes, principal plus interest, are
convertible into a variable number of shares of the
Companys common stock at the
F-42
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
election of the holder at a fixed conversion price of $4.18
anytime following (i) conditional approval by the TSX of
the listing of the Companys shares of common stock and
(ii) the date that the Companys Registration
Statement on
Form S-1
for the resale of common stock is declared effective by the SEC.
The fair value of the notes on the date of issuance and at
December 31, 2010 was $997,000 and is recorded as Short
term obligations on the Consolidated Financial Statements. If
the entire notes would be converted on December 31, 2010,
we would issue 203,349 common shares that have a fair value of
$4.73 per share.
The fair value of the convertible promissory notes issued during
2010 that are convertible into a variable number of the
Companys shares at a fixed conversion price are based
primarily on a Black-Scholes pricing model. The significant
management assumptions and estimate used in determining the fair
value include the expected term and volatility of our common
stock. The expected volatility was based on an analysis of
industry peers historical stock price over the term of the
notes as we currently do not have sufficient history of our own
stock volatility, which was estimated as approximately 25%. In
addition an adjustment is made based on our market interest rate
for a similar instrument. Subsequent changes in the fair value
of these instruments, except for the 6% convertible promissory
note of $5,000,000, will be recorded in Other expense, net on
the Consolidated Financial Statements. Future movement in the
market price of our stock could significantly change the fair
value of these instruments and impact our earnings.
The 4% convertible promissory note of $3,896,480 due on
June 30, 2011 and the 4% convertible promissory notes of
$850,000 due on September 30, 2011 are Level 3
financial instruments since they are not traded on an active
market and there are unobservable inputs, such as expected
volatility used to determine the fair value of these
instruments. See Note 2 for further discussion of the fair
value hierarchy utilized. The following table is a
reconciliation of changes in fair value of these notes that have
been classified as Level 3 in the fair value hierarchy for
the year ended December 31, 2010:
|
|
|
|
|
Balance as of January 1, 2010
|
|
$
|
|
|
Issuance of 4% convertible promissory notes
|
|
|
5,494,480
|
|
Unrealized losses included in earnings
|
|
|
277,000
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
$
|
5,771,480
|
|
|
|
|
|
|
Capital
lease obligations
The Company has entered into capitalized lease obligations with
third party finance companies to finance the cost of certain
ware washing equipment. At December 31, 2010 and 2009,
these obligations bear interest at rates ranging between
6.74% 14.06% and 6.74% 11.45%.
|
|
NOTE 7
|
ADVANCES
FROM SHAREHOLDERS
|
As of December 31, 2009, the Company had borrowed
$16,845,000 under an unsecured note payable to one of its
shareholders. The note matures in June 2011 and was reported in
noncurrent liabilities. During 2010, the Company borrowed an
additional $4,600,000 under this note. Thus, prior to the Merger
on November 2, 2010, the total balance outstanding was
$21,445,000. The note bore interest at the one month LIBOR plus
2%. Interest accrued on the note was included in accrued
expenses and was $753,194 prior to the merger on
November 2, 2010, and $348,586 as of December 31,
2009. These advances plus accrued interest were converted into
equity upon completion of the Merger.
The Company borrowed $1,270,000 from one of its shareholders
pursuant to an unsecured note that bore interest at the
short-term Applicable Federal Rate. These funds were used to
fund certain acquisitions made by the Company prior to the
Merger. The note matured at the effective time of the Merger and
was repaid to the shareholder in connection with the closing.
F-43
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In August 2010, the Company borrowed $2,000,000 for working
capital purposes, pursuant to an unsecured note payable to one
of its shareholders that bears interest at the short-term
Applicable Federal Rate (0.26% as of December 31, 2010).
The note matures on November 2, 2011. Accrued interest as
of December 31, 2010 is $4,444 and is included in accrued
expenses.
In 2009, another shareholder made non-interest bearing advances
to the Company of $800,000. These advances were repaid in March
2010.
|
|
NOTE 8
|
RELATED
PARTY TRANSACTIONS
|
For the years ended December 31, 2009 and 2008, the Company
incurred $46,200 and $60,399, respectively, for training course
development and utilization of the delivery platform from a
company, the majority of which is owned by a partnership in
which a shareholder and another director have a controlling
interest. Included in accrued expenses at both December 31,
2010 and 2009 is $145,586 due to this company.
The Company had agreed to pay a company, related by common
ownership with one of the shareholders, a fee for services
provided, including product development, marketing and branding
strategy, and management advisory assistance. The total of these
fees were $100,000 for the year ended December 31, 2008. In
2009, the related company waived it rights to these fees and
accordingly, the accrued balance of $500,000, which was
outstanding as of December 31, 2008, was recorded as a
forgiveness of debt in the 2009 Consolidated Statement of
Operations.
|
|
|
|
|
Domestic
|
|
$
|
(15,845,516
|
)
|
Foreign
|
|
|
(24,488
|
)
|
|
|
|
|
|
Net loss before tax
|
|
$
|
(15,870,004
|
)
|
|
|
|
|
|
The components of the provision for income taxes in 2010 are as
follows:
|
|
|
|
|
Current Federal, State, and Foreign
|
|
$
|
|
|
Deferred
|
|
|
|
|
Federal and state
|
|
|
1,537,000
|
|
Foreign
|
|
|
163,000
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
1,700,000
|
|
|
|
|
|
|
A reconciliation of the statutory U.S. Federal income tax rate
to the Companys effective income tax rate for the year
ended December 31, 2010 is as follows:
|
|
|
|
|
U.S. Federal statutory rate
|
|
|
35
|
%
|
State and local taxes, net of Federal benefit
|
|
|
4
|
|
Period not subject to income taxes
|
|
|
(22
|
)
|
Non deductible merger expenses
|
|
|
(9
|
)
|
Establishment of deferred tax liabilities upon conversion to
taxable status
|
|
|
(10
|
)
|
Change in deferred tax asset valuation
|
|
|
(9
|
)
|
|
|
|
|
|
Effective income tax rate
|
|
|
(11
|
)%
|
|
|
|
|
|
F-44
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred income taxes reflect the net tax effect of temporary
differences between amounts recorded for financial reporting
purposes and amounts used for tax purposes. The major components
of deferred tax assets and liabilities as of December 31,
2010 are as follows:
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
1,109,000
|
|
Basis difference in other intangible assets
|
|
|
2,124,000
|
|
Stock based compensation
|
|
|
150,000
|
|
Allowance for uncollectible receivables
|
|
|
249,000
|
|
Other
|
|
|
320,000
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
3,952,000
|
|
Valuation allowance
|
|
|
(2,368,000
|
)
|
|
|
|
|
|
Net deferred tax assets
|
|
|
1,584,000
|
|
Deferred tax liabilities
|
|
|
|
|
Basis difference in property and equipment
|
|
|
1,584,000
|
|
Basis difference in goodwill
|
|
|
1,700,000
|
|
Total deferred tax liabilities
|
|
|
3,284,000
|
|
|
|
|
|
|
Total net deferred income tax liabilities
|
|
$
|
1,700,000
|
|
|
|
|
|
|
As of the date of the Merger the net deferred tax balances were
recorded; however, the deferred tax liability related to
goodwill, an indefinite lived asset, cannot be offset against
the Companys deferred tax assets related to finite lived
assets and, therefore, the net deferred tax liability related to
goodwill is recorded as income tax expense on the Consolidated
Statement of Operations. Future additions of indefinite lived
assets that are tax deductible will continue to increase the
amount recognized in the Consolidated Statement of Operations as
the difference between the book basis and the tax basis
increases.
The Company has incurred significant net losses for financial
reporting purposes. Recognition of deferred tax assets will
require generation of future taxable income. A valuation
allowance is required to reduce the deferred tax assets reported
if, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not
be realized. After consideration of all the evidence, both
positive and negative, management has determined that a
valuation allowance estimated at $2,368,000 as of
December 31, 2010 is necessary to reduce the deferred tax
assets to the amount that will more likely than not be realized.
At December 31, 2010, net operating loss (NOL)
carryforwards for federal income tax purposes were approximately
$3,046,000, which will expire in 2030. For state income tax
purposes, the Company has net operating losses of approximately
$5,293,000, which begin to expire in 2017, some of which now may
be utilized since the Company has effectively revoked its
Subchapter S corporation status. The benefit from the NOL
carryforwards has been subject to a full valuation allowance on
the related deferred tax assets.
Prior to the Merger on November 2, 2010, Coolbrands and its
inactive U.S. subsidiaries had significant NOL
carryforwards for Canadian and U.S. income tax purposes for
which a full valuation allowance had been established due to the
uncertainty regarding future realization. As a result of the
Merger, the Company believes that the redomestication to the
U.S. of the Canadian companys operations as well as
the effect of an ownership change in the U.S. subsidiaries
have rendered those NOL carryforwards unusable in the future and
accordingly, no deferred tax assets have been provided.
As of January 1, 2009, the Company adopted the provisions
related to accounting for uncertainty in income taxes, which
prescribes how a company should recognize, measure, present and
disclose in its financial
F-45
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
statements uncertain tax positions that a company has taken or
expects to take on a tax return. This standard requires a
more-likely-than-not threshold for financial statement
recognition and measurement of tax positions taken or expected
to be taken in a tax return. The Company records a liability for
the difference between the benefit recognized and measured and
the tax position taken or expected to be taken on the
Companys tax return. To the extent that the assessment of
such tax positions changes, the change in estimate is recorded
in the period in which the determination is made. The Company
establishes reserves for tax-related uncertainties based on
estimates of whether, and the extent to which, additional taxes
will be due. These reserves are established when the Company
believes that certain positions might be challenged despite the
Companys belief that the tax return positions are fully
supportable. The reserves are adjusted in light of changing
facts and circumstances, such as the outcome of an income tax
audit.
The Company includes interest and penalties accrued in the
Consolidated Financial Statements as a component of interest
expense. No significant amounts were required to be recorded as
of December 31, 2010, 2009 and 2008. As of
December 31, 2010, tax years of 2007 through 2010 remain
open to inspection by the Internal Revenue Service.
|
|
NOTE 10
|
SHARE
BASED COMPENSATION
|
Under the Companys stock incentive plans, restricted stock
units and stock options to purchase the Companys common
shares have been issued to its directors and employees at prices
equal to the fair value of the stock at the date of grant.
Stock
Options
In 2010, 972,011 options were granted at an exercise price of
$4.18, a contractual life of 10 years, and an aggregate
intrinsic value of $534,056. The options granted in 2010 are
subject to stockholder approval of the Swisher Hygiene Inc. 2010
Stock Incentive Plan. No options vested or were exercised during
2010. As of December 31, 2010, 773,531 options are expected
to vest over their contractual life at an average of $4.18 per
share with an aggregate intrinsic value of $425,808. Stock
options of 53,469 were forfeited during 2010.
Stock based compensation expense of $398,155 was recognized
during 2010 in the Consolidated Statement of Operations for both
stock options and restricted stock units, as discussed below.
Stock options were valued at a weighted average fair value of
$1.50 using the Black-Scholes option pricing model. At
December 31, 2010, stock based compensation expense of
$8,686,978 for stock options and restricted stock units will be
recognized ratably over the remaining weighted average of period
of approximately four years.
The value of each option granted during 2010 is estimated on the
date of the grant using the Black-Scholes option pricing model
with the following assumptions:
|
|
|
|
|
Expected dividend yield
|
|
|
|
|
Risk-free interest rate
|
|
|
2.63%
|
|
Expected volatility
|
|
|
30.70%
|
|
Expected life
|
|
|
6.25 years
|
|
The risk-free interest rate is determined based on a yield curve
of U.S. treasury rates based on the expected life of the
options granted. The expected volatility is based on an analysis
of industry peers historical stock price as we currently do not
have sufficient history of our own stock volatility. The
expected life is based on the simplified method as we do not
have sufficient historical exercise data to provide a reasonable
basis upon which to estimate the expected life of our stock
options. The Company estimates forfeitures based on historic
turnover by relevant employee categories.
In connection with the Merger, options previously issued by
CoolBrands that were outstanding at the date of the Merger were
fully vested and all related compensation expense was recognized
by CoolBrands prior to
F-46
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
November 2, 2010, the Merger date. At December 31,
2010, 880,000 options remain outstanding and exercisable at a
weighted average price of $0.79, weighted average remaining
contractual life of 3.2 year and an aggregate intrinsic
value of $3,459,129.
Restricted
Stock Units
During 2010, the Company awarded 2,502,820 shares of
restricted common stock units at a weighted average grant date
fair value of $4.18. Recipients of restricted stock units may
not sell or transfer their shares until the shares vest. The
restrictions of the common stock units lapse ratably as vesting
occurs. As of December 31, 2010 there were
2,502,820 shares outstanding, with a weighted average
contractual life of 10 years, and an aggregate intrinsic
value of $11,838,338. There were 145,133 forfeitures of
restricted stock units during 2010. There were no restricted
common stock units vested or exercisable as of December 31,
2010. As of December 31, 2010, shares vested and expected
to vest are 2,008,903 with a weighted average contractual life
of 10 years, and an aggregate intrinsic value of $9,502,111.
Warrants
In November 2006, the board of directors of CoolBrands issued to
a director of the Company, and certain parties related to the
director, warrants to purchase up to 5,500,000 common shares of
CoolBrands. The warrants expire in November 2011 and the
exercise price is $0.50 per warrant. As part of the Merger the
holder of the warrants will receive common shares of Swisher
Hygiene Inc. in lieu of common shares of CoolBrands upon
exercise of the warrants.
|
|
NOTE 11
|
RETIREMENT
PLAN
|
An acquired subsidiary of CoolBrands maintained a defined
benefit pension plan covering substantially all salaried and
certain executive employees. Subsequent to the acquisition in
2000, all future participation and all benefits under the plan
were frozen. The plan provides retirement benefits based
primarily on employee compensation and years of service up to
the date of acquisition. As part of the Merger, on
November 2, 2010, Swisher recorded the net underfunded
pension obligation of $560,931.
The following table reconciles the changes in benefit
obligations and plan assets of the registered defined benefit
plan as of December 31, 2010 and reconciles the funded
status to accrued benefit cost at December 31, 2010:
|
|
|
|
|
Benefit obligation
|
|
|
|
|
Balance November 2, 2010
|
|
$
|
2,511,725
|
|
Interest cost
|
|
|
21,398
|
|
Actuarial loss
|
|
|
(7,745
|
)
|
Benefit payments
|
|
|
(16,254
|
)
|
|
|
|
|
|
Balance December 31, 2010
|
|
$
|
2,509,124
|
|
|
|
|
|
|
Plan assets
|
|
|
|
|
Balance November 2, 2010
|
|
$
|
1,950,794
|
|
Actual return on plan assets
|
|
|
89,290
|
|
Benefit payments
|
|
|
(16,254
|
)
|
|
|
|
|
|
Balance December 31, 2010
|
|
$
|
2,023,830
|
|
|
|
|
|
|
As of December 31, 2010, the net underfunded status of the
defined benefit plan is $485,294, which is recognized as accrued
benefit cost in Other long term liabilities on the Consolidated
Financial Statements. For
F-47
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the period November 2, 2010 through December 31, 2010
and as of December 31, 2010 there is an unrecognized gain
of $73,985 recorded in Accumulated other comprehensive income
(loss) in the Consolidated Financial Statements.
The following table provides the components of the net periodic
benefit cost for 2010:
|
|
|
|
|
Interest cost
|
|
$
|
21,398
|
|
Expected return on plan assets
|
|
|
(23,050
|
)
|
|
|
|
|
|
Net periodic benefit income
|
|
$
|
(1,625
|
)
|
|
|
|
|
|
The key assumptions used in the measurement of the benefit
obligation are the discount rate and the expected return on plan
assets. As of December 31, 2010, the discount rate was
5.37% and the expected return on plan assets was 7.5%.
The rate used to discount pension benefit plan liabilities was
based on a yield curve developed from market data of Aa-grade
non-callable bonds at December 31, 2010. This yield curve
has discount rates that vary based on the duration of the
obligations. The estimated future cash flows for the pension
obligation were matched to the corresponding rates on the yield
curve to derive a weighted average discount rate.
The expected return on plan assets was developed by determining
projected stock and bond returns and then applying these returns
to the target asset allocations of the employee benefit trusts,
resulting in a weighted average return on plan assets. The
actual historical returns of the plan assets were also
considered.
Based on the latest actuarial report as of December 31,
2010, the Company expects that there will be a minimum
regulatory funding requirements of $78,880 that will need to be
made during fiscal 2011.
Expected benefit payments under the defined benefit pension plan
over future years are as follows:
|
|
|
|
|
|
|
Pension
|
|
|
|
Benefits
|
|
|
Fiscal year
|
|
|
|
|
2011
|
|
$
|
101,209
|
|
2012
|
|
|
104,972
|
|
2013
|
|
|
117,472
|
|
2014
|
|
|
119,972
|
|
2015
|
|
|
117,004
|
|
2016 2020
|
|
|
691,862
|
|
F-48
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Plan
Assets
The Companys investment strategy is to obtain the highest
possible return commensurate with the level of assumed risk.
Investments are well diversified within each of the major asset
categories. The Companys allocation of pension assets and
target allocations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
of Plan
|
|
|
|
Target Allocation
|
|
|
2010
|
|
|
Assets
|
|
|
|
2011
|
|
|
2010
|
|
|
Level 1
|
|
|
2010
|
|
|
Equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
50
|
%
|
|
|
50
|
%
|
|
$
|
1,058,421
|
|
|
|
52
|
%
|
International
|
|
|
18
|
|
|
|
18
|
|
|
|
661,207
|
|
|
|
33
|
|
Fixed income
|
|
|
26
|
|
|
|
26
|
|
|
|
188,155
|
|
|
|
9
|
|
Cash, cash equivalents and other
|
|
|
6
|
|
|
|
6
|
|
|
|
116,047
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
$
|
2,023,830
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The U.S. and International equities are actively traded on a
public exchange. The fixed income securities are corporate and
government bonds that are valued based on prices in active
markets for identical transactions and are considered
Level 1 assets. There were no plan assets categorized as
Level 2 or Level 3 as of December 31, 2010. There
were no significant transfers between Level 1, 2, or
Level 3. See Note 2 for a description of the fair
value hierarchy.
Net loss attributable to common stockholders per share is
computed by dividing net loss attributable to common
stockholders by the weighted average number of common shares
outstanding during the period. The following were not included
in the computation of diluted net loss attributable to common
stockholders per share for 2010 as their inclusion would be
antidilutive:
|
|
|
|
|
Warrants to purchase 5,500,000 shares of common stock at
$0.50 per share were outstanding and expire in November 2011.
|
|
|
|
Stock options to purchase 880,000 shares of common stock.
|
|
|
|
Stock options and restricted units to purchase
3,376,168 shares of common stock.
|
|
|
|
Convertible promissory notes that if-converted would result in
2,520,460 shares of common stock.
|
For the years ended December 31, 2009 and 2008, there were
no securities that were not included in the computations of
diluted net loss attributable to common stockholders per share
because their inclusion would be antidilutive.
|
|
NOTE 13
|
GEOGRAPHIC
INFORMATION
|
The Company has entered into franchise and license agreements
which grant the exclusive rights to develop and operate within
specified geographic territories for a fee. The initial
franchise or license fee is deferred and recognized as revenue
when substantially all significant services to be provided by
the Company are performed. Direct incremental costs related to
franchise or license sales for which revenue has not been
recognized is deferred until the related revenue is recognized.
In 2008, through a wholly-owned subsidiary, Swisher Hygiene
Services U.K., Ltd. (SHS), the Company operated in
the UK in much the same fashion as in the US. As the franchisor,
SHS had both franchisees and company operations and serviced the
varied customer base on a weekly basis. In January 2009, the
Company sold its U.K. operations to a new Master Licensee.
During 2010, 2009 and 2008, SHS earned total revenue for
F-49
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fees and product sales of $88,954, $221,225, and $1,955,674,
respectively. In other international locations, the Company
earns royalty fees and product revenue from Master Licensees.
The following table includes our revenue from geographic
locations for the years ended December 31, 2010, 2009 and
2008 were:
Geographic
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
61,327,128
|
|
|
$
|
55,008,262
|
|
|
$
|
60,702,053
|
|
Other foreign countries
|
|
|
2,325,190
|
|
|
|
1,805,762
|
|
|
|
3,406,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
63,652,318
|
|
|
$
|
56,814,024
|
|
|
$
|
64,108,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2010 the Company acquired certain branches located in
Canada. We have no long lived assets in other foreign countries.
The following table summarizes our Canadian subsidiaries long
lived assets as of December 31, 2010:
|
|
|
|
|
Long Lived Assets
|
|
|
|
|
Property, plant, and equipment
|
|
$
|
115,561
|
|
Goodwill
|
|
$
|
2,422,729
|
|
Other intangibles, net
|
|
$
|
4,231,303
|
|
|
|
NOTE 14
|
COMMITMENTS
AND CONTINGENCIES
|
In connection with a distribution agreement entered into in
December 2010, the Company provided a guarantee that the
distributors operating cash flows associated with the
agreement would not fall below certain agreed-to minimums,
subject to certain pre-defined conditions, over the ten year
term of the distribution agreement. If the distributors
annual operating cash flow does fall below the agreed-to annual
minimums, the Company will reimburse the distributor for any
such short fall up to $1,447,000 per year. No value was assigned
to the fair value of the guarantee at December 31, 2010
based on a probability assessment of the projected cash flows.
Management currently does not believe that it is probable that
any amounts will be paid under this agreement and thus there is
no amount accrued for the guarantee in the Consolidated
Financial Statements. This liability would be considered a
Level 3 financial instruments given the unobservable inputs
used in the projected cash flow model. See Note 2 for the
fair value hierarchy.
The Company is subject to 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 Companys
financial position, results of operations or cash flows.
The Company leases its headquarters and other facilities,
equipment and vehicles under operating leases that expire at
varying times through 2017. Future minimum lease payments for
operating leases that had initial or remaining non-cancelable
lease terms in excess of one year as of December 31, 2010
are as follows:
|
|
|
|
|
2011
|
|
$
|
2,031,400
|
|
2012
|
|
|
1,547,400
|
|
2013
|
|
|
1,076,490
|
|
2014
|
|
|
785,280
|
|
2015 and Thereafter
|
|
|
1,280,910
|
|
|
|
|
|
|
|
|
$
|
6,721,480
|
|
|
|
|
|
|
F-50
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total rent expense for operating leases, including those with
terms of less than one year was $2,208,610, $2,352,469, and
$2,270,373 for the years ended December 31, 2010, 2009 and
2008, respectively.
|
|
NOTE 15
|
QUARTERLY
FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
14,728,933
|
|
|
$
|
15,163,556
|
|
|
$
|
16,061,079
|
|
|
$
|
17,698,750
|
|
|
$
|
63,652,318
|
|
Gross profit(1)
|
|
$
|
9,419,985
|
|
|
$
|
9,709,994
|
|
|
$
|
9,953,393
|
|
|
$
|
10,971,715
|
|
|
$
|
40,055,089
|
|
Loss from operations
|
|
$
|
(1,304,176
|
)
|
|
$
|
(1,415,164
|
)
|
|
$
|
(3,765,228
|
)
|
|
$
|
(8,628,604
|
)
|
|
$
|
(15,113,172
|
)
|
Net loss
|
|
$
|
(1,595,441
|
)
|
|
$
|
(1,769,638
|
)
|
|
$
|
(4,135,080
|
)
|
|
$
|
(10,069,845
|
)
|
|
$
|
(17,570,004
|
)
|
Basic and diluted EPS
|
|
$
|
(0.03
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
13,625,909
|
|
|
$
|
13,616,045
|
|
|
$
|
14,431,266
|
|
|
$
|
15,140,804
|
|
|
$
|
56,814,024
|
|
Gross profit(1)
|
|
$
|
8,491,366
|
|
|
$
|
8,267,063
|
|
|
$
|
8,620,990
|
|
|
$
|
9,130,090
|
|
|
$
|
34,509,509
|
|
Loss from operations
|
|
$
|
(870,182
|
)
|
|
$
|
(1,637,898
|
)
|
|
$
|
(2,138,787
|
)
|
|
$
|
(2,202,268
|
)
|
|
$
|
(6,849,135
|
)
|
Net loss
|
|
$
|
(1,202,493
|
)
|
|
$
|
(1,658,781
|
)
|
|
$
|
(2,262,612
|
)
|
|
$
|
(2,135,103
|
)
|
|
$
|
(7,258,989
|
)
|
Basic and diluted EPS
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
(1) |
|
Total revenue less cost of sales |
|
|
NOTE 16
|
SUBSEQUENT
EVENTS
|
Choice
Acquisition
On February 13, 2011, we entered into an Agreement and Plan
of Merger (the Choice Agreement) by and among
Swisher Hygiene, Swsh Merger Sub, Inc., a Florida corporation
and wholly-owned subsidiary of Swisher Hygiene, Choice
Environmental Services, Inc., a Florida corporation
(Choice), and other parties, as set forth in the
Choice Agreement. The Choice Agreement provided for the
acquisition of Choice by Swisher Hygiene by way of merger.
In connection with the proposed merger with Choice, on
February 23, 2011, we entered into an agency agreement,
which the agents agreed to market, on a best efforts basis
12,262,500 subscription receipts (Subscription
Receipts) at a price of $4.80 per Subscription Receipt for
gross proceeds of up to $58,859,594. Each Subscription Receipt
entitled the holder to acquire one share of our common stock,
without payment of any additional consideration, upon completion
of our acquisition of Choice.
On March 1, 2011, we closed the acquisition of Choice and
issued approximately 8.3 million shares of our common stock
to the former shareholders of Choice and assumed approximately
$40.9 million in debt, of which $39.2 million was paid
down with proceeds from the private placement of the
Subscription Receipts. In addition, certain shareholders of
Choice received $5.7 million in cash and warrants to
purchase an additional 0.9 million shares at an exercise
price of $6.21.
On March 1, 2011, in connection with the closing of
acquisition of Choice, the 12,262,500 Subscription Receipts were
exchanged for 12,262,500 shares of our common stock. We
agreed to use commercially reasonable efforts to file a resale
registration statement with the SEC relating to the shares of
common stock underlying the Subscription Receipts. If the
registration statement is not filed or declared effective within
F-51
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
specified time periods, or if it ceases to be effective for
periods of time exceeding certain grace periods, the initial
subscribers of Subscription Receipts will be entitled to receive
an additional 0.1 share of common stock for each share of
common stock underlying Subscription Receipts held by any such
initial subscriber at that time.
Choice has been in business since 2004 and serves more than
150,000 residential and 7,500 commercial customers in the
Southern and Central Florida regions through its
320 employees and over 150 collection vehicles by offering
a complete range of solid waste and recycling collection,
transportation, processing and disposal services. Choice
operates six hauling operations, three transfer and materials
recovery facilities.
The merger with Choice will be accounted for as a significant
business combination in the first quarter of 2011. The following
table presents the purchase price consideration as of
March 1, 2011 (in thousands):
|
|
|
|
|
Consideration:
|
|
|
|
|
Issuance of shares at stock price of $5.89
|
|
$
|
48,781
|
|
Debt assumed
|
|
|
42,798
|
|
Cash paid
|
|
|
5,700
|
|
|
|
|
|
|
|
|
$
|
97,279
|
|
|
|
|
|
|
The preliminary allocation of the purchase price is based on the
best information available to management. This allocation is
provisional, as the Company is required to recognize additional
assets or liabilities if new information is obtained about facts
and circumstances that existed as of March 1, 2011 that, if
known, would have resulted in the recognition of those assets or
liabilities as of that date. The Company may adjust the
preliminary purchase price allocation after obtaining additional
information regarding asset valuation, liabilities assumed and
revisions of previous estimates. The following table summarizes
the preliminary allocation of the purchase price based on the
estimated fair value of the acquired assets and assumed
liabilities of Choice as of March 1, 2011 as follows (in
thousands):
|
|
|
|
|
Net tangible assets acquired:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
341
|
|
Receivables, net
|
|
|
6,096
|
|
Inventory
|
|
|
151
|
|
Property and equipment
|
|
|
29,743
|
|
Franchise agreements
|
|
|
27,840
|
|
Non compete agreements
|
|
|
2,880
|
|
Deferred income tax assets and other assets
|
|
|
1,536
|
|
Accounts payable and expenses
|
|
|
(6,221
|
)
|
Capital lease obligations
|
|
|
(3,995
|
)
|
Deferred income tax liabilities
|
|
|
(11,605
|
)
|
|
|
|
|
|
Total tangible assets acquired
|
|
|
46,766
|
|
Goodwill
|
|
|
50,513
|
|
|
|
|
|
|
Total purchase price
|
|
|
97,279
|
|
Less: Debt assumed
|
|
|
40,944
|
|
Less: Issuance of shares
|
|
|
48,781
|
|
|
|
|
|
|
Cash paid (including prepayment penalty)
|
|
$
|
7,554
|
|
|
|
|
|
|
F-52
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the unaudited supplemental pro
forma information as if the acquisition of Choice occurred on
January 1, 2010 (in thousands, except share and per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical 2010 Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
Swisher
|
|
|
Choice
|
|
|
|
|
|
|
|
|
|
|
|
Hygiene
|
|
|
Environmental
|
|
|
Pro Forma
|
|
|
|
|
Combined
|
|
|
|
Inc.
|
|
|
Services, Inc.(1)
|
|
|
Adjustments
|
|
|
Notes
|
|
Pro Forma
|
|
|
Revenue
|
|
$
|
63,652
|
|
|
$
|
44,894
|
|
|
$
|
|
|
|
|
|
$
|
108,546
|
|
Costs and expenses
|
|
|
78,765
|
|
|
|
40,788
|
|
|
|
4,100
|
|
|
a, b, c
|
|
|
123,653
|
|
Income (loss) from operations
|
|
|
(15,113
|
)
|
|
|
4,106
|
|
|
|
(4,100
|
)
|
|
|
|
|
(15,107
|
)
|
Other income (expense)
|
|
|
(757
|
)
|
|
|
(3,164
|
)
|
|
|
1,466
|
|
|
d
|
|
|
(2,455
|
)
|
Net loss (income) before tax
|
|
|
(15, 870
|
)
|
|
|
942
|
|
|
|
(2,634
|
)
|
|
|
|
|
(17,562
|
)
|
Income tax
|
|
|
1,700
|
|
|
|
577
|
|
|
|
(577
|
)
|
|
e
|
|
|
1,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (income)
|
|
$
|
(17,570
|
)
|
|
$
|
365
|
|
|
$
|
(2,057
|
)
|
|
|
|
$
|
(19,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Common Shares Used in the Computation
of Loss per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
66,956,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,500,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Financial information for Choice is for the year ended
September 30, 2010. The difference between Choice fiscal
year end and our calendar year end would not be significant to
revenue or earnings presented. |
Pro forma adjustments include the following (in
thousands): (a) $4,250 related additional amortization
for the other intangibles acquired for franchise agreements and
non compete agreements; (b) $71 related to additional
amortization as a result of an adjustment to the fair value of
the property and equipment acquired; (c) a reduction of
$534 related to rent expense and an increase of $313 related to
depreciation for leased properties that became capital leases in
connection with the acquisition of Choice; (d) $1,696
related to interest expense and amortization of debt discounts
and financing costs for debt that was paid off as part of the
acquisition of Choice, offset by $230 for interest expense
related to capital lease obligations entered into in connection
with the acquisition of Choice; and (e) $577 related to
income tax expenses that would be offset by the combined
companys net operating loss.
Private
Placement
On March 22, 2011, we entered into a series of arms
length securities purchase agreements to sell
12,000,000 shares of our common stock at a price of $5.00
per share, for aggregate proceeds of $60,000,000 to certain
funds of a global financial institution (the Private
Placement). We intend to use the proceeds from the Private
Placement to further our organic and acquisition growth
strategy, as well as for working capital purposes.
On March 23, 2011, we closed the Private Placement and
issued 12,000,000 shares of our common stock. Pursuant to
the securities purchase agreements, the shares of common stock
issued in the Private Placement may not be transferred on or
before June 24, 2011 without our consent. We agreed to use
our commercially reasonable efforts to file a resale
registration statement with the SEC relating to the shares of
common stock sold in the Private Placement. If the registration
statement is not filed or declared effective within specified
time periods, the investors will be entitled to receive
liquidated damages in cash equal to one percent of the original
offering price for each share that at such time remains subject
to resale restrictions.
F-53
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Additional
Acquisitions and Promissory Note Conversion
During 2011, in addition to the Choice acquisition, we acquired
several smaller businesses. While the terms, price, and
conditions of each of these acquisitions were negotiated
individually, consideration to the sellers typically consists of
a combination of cash, convertible promissory notes having an
interest rate of 4% with maturities of up to 12 months, our
common stock, and earn-out provisions. Aggregate consideration
paid for the acquired businesses was approximately $15,700,000
consisting of $4,800,000 in cash and $7,125,000 in convertible
promissory notes, a $275,000 promissory note, and 380,727 shares
of our common stock, plus potential earn-outs of up to
$1,190,000. In addition, in March 2011, we entered into an asset
purchase agreement to purchase a solid waste services provider
based in Miami, Florida for a total purchase price of
approximately $10 million, consisting of $5,000,000 in cash
and 909,090 shares of our common stock. This transaction is
expected to close on April 1, 2011.
In addition, a $5,000,000, 6% convertible promissory note issued
in November 2010 issued as part of the consideration paid for an
acquisition was fully converted to 1,312,864 common shares in
2011.
New
Credit Facility
On March 30, 2011, we entered into a $100 million senior
secured revolving credit facility with Wells Fargo. Under the
new credit facility, Swisher Hygiene has initial borrowing
availability of $32.5 million, which we expect will
increase to the fully committed $100 million upon delivery
of our unaudited quarterly financial statements for the quarter
ended March 31, 2011. Borrowings under the facility are
secured by a first priority lien on substantially all our
existing and hereafter acquired assets, including
$25 million of cash on borrowings in excess of
$75 million.
Interest on borrowings under the credit facility accrues at
London Interbank Offered Rate (LIBOR) plus 2.5% to
4.0%, depending on the ratio of senior debt to Consolidated
EBITDA (as such term is defined in the credit agreement), and
interest is payable no more frequently than monthly on all
outstanding borrowings. The credit facility matures on
July 31, 2013.
Borrowings and availability under the credit facility are
subject to compliance with financial covenants, including
achieving specified Consolidated EBITDA targets and maintaining
specified leverage and liquidity ratios. The credit facility
also places restrictions on our ability to incur additional
indebtedness, make certain acquisitions, create liens or other
encumbrances, sell or otherwise dispose of assets, and merge or
consolidate with other entities.
Our obligations under the credit facility are guaranteed by all
our domestic subsidiaries and secured by all the assets and
stock of our domestic subsidiaries and substantially all of the
stock of our foreign subsidiaries. The new credit facility
replaces our current aggregated $25 million credit
facilities, which are discussed in Note 6 to the Notes to
Consolidated Financial Statements.
F-54
SWISHER
HYGIENE INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Deductions
|
|
|
Balance at
|
|
|
|
the Beginning
|
|
|
Costs and
|
|
|
from
|
|
|
the End
|
|
|
|
of the Year
|
|
|
Expenses
|
|
|
Allowance
|
|
|
of the Year
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for doubtful accounts receivable
|
|
$
|
334,156
|
|
|
$
|
182,593
|
|
|
$
|
152,515
|
|
|
$
|
364,234
|
|
Other allowances
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
334,156
|
|
|
$
|
282,593
|
|
|
$
|
152,515
|
|
|
$
|
464,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for doubtful accounts receivable
|
|
$
|
564,635
|
|
|
$
|
284,385
|
|
|
$
|
514,864
|
|
|
$
|
334,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for doubtful accounts receivable
|
|
$
|
517,838
|
|
|
$
|
605,186
|
|
|
$
|
558,389
|
|
|
$
|
564,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-55
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
428,264
|
|
|
$
|
415,422
|
|
Accounts receivable, net
|
|
|
6,141,132
|
|
|
|
4,732,050
|
|
Inventories
|
|
|
247,570
|
|
|
|
302,165
|
|
Prepaid expenses
|
|
|
782,772
|
|
|
|
576,475
|
|
Deposits
|
|
|
144,697
|
|
|
|
270,108
|
|
Deferred tax asset
|
|
|
181,222
|
|
|
|
203,808
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
7,925,657
|
|
|
|
6,500,028
|
|
Property and equipment, net
|
|
|
28,568,958
|
|
|
|
20,188,469
|
|
Goodwill
|
|
|
13,957,814
|
|
|
|
13,475,314
|
|
Intangible assets, net
|
|
|
3,250,677
|
|
|
|
3,545,689
|
|
Notes receivable, related party
|
|
|
352,159
|
|
|
|
|
|
Deferred financing costs, net
|
|
|
1,490,716
|
|
|
|
190,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,545,981
|
|
|
$
|
43,899,500
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
5,747,726
|
|
|
$
|
13,582,330
|
|
Current portion of long-term debt
|
|
|
3,875,125
|
|
|
|
16,944,194
|
|
Current portion of notes payable to related parties
|
|
|
77,542
|
|
|
|
68,814
|
|
Current portion of capital lease obligations
|
|
|
25,552
|
|
|
|
23,616
|
|
Accounts payable and accrued expenses
|
|
|
4,970,278
|
|
|
|
3,315,152
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
14,696,223
|
|
|
|
33,934,106
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
32,568,355
|
|
|
|
1,559,606
|
|
Notes payable to related parties, net of current portion
|
|
|
1,227,219
|
|
|
|
1,304,268
|
|
Capital lease obligations, net of current portion
|
|
|
8,964
|
|
|
|
34,518
|
|
Deferred tax liability
|
|
|
1,065,720
|
|
|
|
511,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,870,258
|
|
|
|
3,410,114
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
5,979,500
|
|
|
|
6,555,280
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,545,981
|
|
|
$
|
43,899,500
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-56
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Revenue
|
|
$
|
15,654,862
|
|
|
$
|
11,227,644
|
|
Cost of sales
|
|
|
11,387,460
|
|
|
|
8,555,081
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
4,267,402
|
|
|
|
2,672,563
|
|
Operating expenses
|
|
|
2,860,077
|
|
|
|
1,542,284
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,407,325
|
|
|
|
1,130,279
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
Interest and other, net
|
|
|
930,738
|
|
|
|
381,717
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
476,587
|
|
|
|
748,562
|
|
Net loss attributable to noncontrolling interest in VIE
|
|
|
5,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Choice Environmental Services, Inc.
and Subsidiaries
|
|
$
|
481,821
|
|
|
$
|
748,562
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
Additional
|
|
|
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Common
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Interest
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
in VIE
|
|
|
Total
|
|
|
Balance, September 30, 2009
|
|
$
|
2,092
|
|
|
$
|
1
|
|
|
$
|
2,191
|
|
|
$
|
5,383,378
|
|
|
$
|
419,056
|
|
|
$
|
|
|
|
$
|
5,806,718
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
748,562
|
|
|
|
|
|
|
|
748,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
2,092
|
|
|
|
1
|
|
|
|
2,191
|
|
|
|
5,383,378
|
|
|
|
1,167,618
|
|
|
|
|
|
|
|
6,555,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010
|
|
|
900
|
|
|
|
1
|
|
|
|
2,191
|
|
|
|
5,176,147
|
|
|
|
1,519,290
|
|
|
|
(2,803
|
)
|
|
|
6,695,726
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
481,821
|
|
|
|
(5,234
|
)
|
|
|
476,587
|
|
Recapitalization of shares
|
|
|
(900
|
)
|
|
|
227
|
|
|
|
(68
|
)
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,192,813
|
)
|
|
|
|
|
|
|
(1,192,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
$
|
|
|
|
$
|
228
|
|
|
$
|
2,123
|
|
|
$
|
5,176,888
|
|
|
$
|
808,298
|
|
|
$
|
(8,037
|
)
|
|
$
|
5,979,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-58
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
476,587
|
|
|
$
|
748,562
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operations:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,151,779
|
|
|
|
885,255
|
|
Allowance for doubtful accounts
|
|
|
111,502
|
|
|
|
15,188
|
|
Increase in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,543,700
|
)
|
|
|
(656,153
|
)
|
Inventories
|
|
|
(8,221
|
)
|
|
|
(106,264
|
)
|
Prepaid expenses
|
|
|
(324,758
|
)
|
|
|
(234,023
|
)
|
Deposits
|
|
|
(3,714
|
)
|
|
|
(81,387
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
(860,652
|
)
|
|
|
369,321
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(2,001,177
|
)
|
|
|
940,499
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(807,069
|
)
|
|
|
(3,726,434
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments of long-term debt and capital lease obligations
|
|
|
(888,497
|
)
|
|
|
(14,178,837
|
)
|
Proceeds from long-term debt
|
|
|
|
|
|
|
16,383,724
|
|
Net proceeds from line of credit
|
|
|
5,180,283
|
|
|
|
1,127,680
|
|
Repayments of notes payable to related parties
|
|
|
(17,852
|
)
|
|
|
(15,844
|
)
|
Payment of deferred financing costs
|
|
|
|
|
|
|
(190,000
|
)
|
Issuance of notes receivable, related party
|
|
|
(352,159
|
)
|
|
|
|
|
Distributions
|
|
|
(1,192,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
2,728,962
|
|
|
|
3,126,723
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(79,284
|
)
|
|
|
340,788
|
|
Cash, beginning of year
|
|
|
507,548
|
|
|
|
74,634
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
428,264
|
|
|
$
|
415,422
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
949,588
|
|
|
$
|
391,503
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-59
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
December 31, 2010 and 2009
Choice Environmental Services, Inc. and Subsidiaries (the
Company) is a solid waste services company that provides
collection, disposal and recycling services in the state of
Florida.
|
|
(2)
|
Principles
of Consolidation
|
The consolidated financial statements include the accounts of
Choice Environmental Services, Inc. (Choice) and its
wholly-owned subsidiaries, Choice Environmental Services of
Miami, Inc. (Miami), Choice Environmental Services of Broward,
Inc. (Broward), Choice Recycling Services of Broward, Inc.
(Broward Recycling), Choice Environmental Services of
Miami-Dade, Inc. (Miami-Dade), Choice Environmental Services of
Collier, Inc. (Immokalee), Choice Environmental Services of
Highlands County (Highlands), and Choice Environmental Services
of Lee County (Lee).
Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) 810, Consolidation,
provides guidance for the financial accounting and reporting of
interests in certain variable interest entities. In accordance
with FASB ASC 810, the Company must consolidate an entity
that receives support from the Company and does not have
sufficient financial resources to support its own activities.
The Company consolidates Choice Realty Holdings, LLC (Choice
Realty or Affiliate), a related party through common ownership,
which purchased commercial real estate from the Company in April
2010 and subsequently began leasing the property back to the
Company. Management believes there is no exposure to loss as a
result of the Companys involvement with Choice Realty.
In addition, Choice has an 80% ownership interest in Choice
Recycling Services of Miami, Inc. (Recycling). The
noncontrolling interest has not been recorded on the
accompanying financial statements because the minority
stockholder contributed no capital and the noncontrolling
interest is not significant to the consolidated financial
statements, as of December 31, 2010 and 2009.
All significant intercompany transactions and balances have been
eliminated in consolidation.
|
|
(3)
|
Summary
of Significant Accounting Policies
|
Revenue
Recognition
The Company recognizes collection, recycling and disposal
revenues as the services are provided.
Accounts
Receivable
Accounts receivable arise in the normal course of business and
are recorded when services are provided to customers. Accounts
are charged to the allowance for doubtful accounts as they are
deemed uncollectible based on a periodic review of the accounts.
The Company performs ongoing credit evaluations of its customers
and certain additional collection proceedings but generally does
not require collateral. The allowance for doubtful accounts is
estimated based on the historical bad debt expense and a review
of the accounts receivable at year end. The allowance for
doubtful accounts is $576,175 and $537,774 at December 31,
2010 and 2009, respectively.
Inventories
Inventories are stated at the lower of cost, using the
first-in,
first-out method, or market. Inventories primarily consist of
finished goods, primarily recycled paper.
F-60
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial
Statements (Continued)
Property
and Equipment
Property and equipment are recorded at cost. Major renewals and
betterments are capitalized; maintenance and minor repairs and
replacements that do not improve or extend the lives of the
respective assets are expensed currently. Depreciation is
recorded using straight line method over the estimated useful
lives of the assets, ranging from 2 to 40 years. When
properties are retired or otherwise disposed of, the assets and
accumulated depreciation accounts are adjusted accordingly and
the gain or loss, if any, arising from disposition, is credited
or charged to earnings.
Goodwill
The Companys goodwill was recorded as a result of the
Companys business acquisitions. The Company has recorded
these business acquisitions using the purchase method of
accounting. The Company tests its recorded goodwill for
impairment on an annual basis, or more often if indicators of
potential impairment exist, by determining if the carrying value
of each reporting unit exceeds its estimated fair value. Factors
that could trigger an interim impairment test include, but are
not limited to, underperformance relative to historical or
projected future operating results, significant changes in the
manner of use of the acquired assets or the Companys
overall business, significant negative industry or economic
trends and a sustained period where market capitalization, plus
an appropriate control premium, is less than stockholders
equity. During 2010 and 2009 the Company determined that no
impairment of goodwill existed because the estimated fair value
of each reporting unit exceeded its carrying amount. Future
impairment reviews may require write-downs in the Companys
goodwill and could have a material adverse impact on the
Companys operating results for the periods in which such
write-downs occur.
Intangible
Assets
The Company has non-compete agreements and customer routes that
were acquired in acquisitions. Non-compete agreements are
amortized on the straight-line basis over their terms of
5 years. Customer routes are amortized on the straight-line
basis over their estimated useful lives of 7 years.
Amortization expense for the three months ended
December 31, 2010 and 2009 was $246,243 and $214,663,
respectively.
Intangible assets comprised the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Non-compete agreements
|
|
$
|
1,634,705
|
|
|
$
|
1,492,906
|
|
Customer routes
|
|
|
4,015,000
|
|
|
|
3,925,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,649,705
|
|
|
|
5,417,906
|
|
Accumulated amortization
|
|
|
(2,399,028
|
)
|
|
|
(1,872,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,250,677
|
|
|
$
|
3,545,689
|
|
|
|
|
|
|
|
|
|
|
The estimated amortization for the subsequent five fiscal years
is as follows:
|
|
|
|
|
Year Ending
|
|
|
December 31,
|
|
Amount
|
|
2011
|
|
$
|
899,214
|
|
2012
|
|
$
|
878,380
|
|
2013
|
|
$
|
804,366
|
|
2014
|
|
$
|
562,860
|
|
2015
|
|
$
|
77,262
|
|
F-61
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial
Statements (Continued)
Fair
Value Measurements
FASB ASC 820, Fair Value Measurements and
Disclosures, provides the framework for measuring fair
value. That framework provides a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets
or liabilities (level 1 measurements) and the lowest
priority to unobservable inputs (level 3 measurements). The
three levels of the fair value hierarchy under FASB ASC 820
are described as follows:
Level 1: Quoted market prices in active
markets for identical assets or liabilities.
|
|
|
|
Level 2:
|
Observable market based inputs or unobservable inputs that are
corroborated by market data.
|
Level 3: Unobservable inputs that are not
corroborated by market data.
The asset or liabilitys fair value measurement level
within the fair value hierarchy is based on the lowest level of
any input that is significant to the fair value measurement.
Valuation techniques used need to maximize the use of observable
inputs and minimize the use of unobservable inputs.
Certain assets and liabilities are measured at fair value on a
nonrecurring basis. The amounts below represent only balances
measured at fair value during the year presented and still held
as of the reporting date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Acquisition of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
150,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Financing Costs
Deferred financing costs consist of costs incurred with
unrelated third parties to obtain debt financing and are
amortized over the contractual life of the note in such a way as
to result in a constant rate of interest when applied to the
outstanding note. Amortization expense on deferred financing
costs was $79,860 for the three months ended December 31,
2010. The estimated amortization for the subsequent five years
is approximately $319,000 through 2014 and $215,000 in 2015.
Advertising
Advertising costs are expensed as incurred. Advertising expense
for the three months ended December 31, 2010 and 2009 was
$41,680 and $10,735, respectively.
Income
Taxes
Deferred income taxes are recorded to include the future tax
consequences of differences between the tax bases of assets and
liabilities and their financial reporting amounts.
FASB ASC 740, Income Taxes, clarifies the accounting
for uncertainty in income taxes recognized in an
enterprises financial statements. FASB ASC 740
prescribes a more-likely-than-not recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken.
In addition, FASB ASC 740 provides guidance on
derecognition, classification, disclosure, and transition.
The Company files a federal income tax return and a state return
in Florida. With few exceptions, the Company is no longer
subject to federal or state income tax examinations by tax
authorities for tax years before 2006. It is difficult to
predict the final timing and resolution of any particular
uncertain tax position.
F-62
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial
Statements (Continued)
Based on the Companys assessment of many factors,
including past experience and judgments about future events, the
Company has concluded that there are no material uncertain tax
positions and the Company does not currently anticipate
significant changes in uncertain tax positions over the next
12 months.
Concentrations
of Risk
The Company places its cash with financial institutions and, at
times, such balances may be in excess of insurance limits
provided by the Federal Deposit Insurance Corporation.
Management regularly monitors the financial institutions, along
with its balance of cash, and attempts to keep this potential
risk to a minimum.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America 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. Significant estimates
include the valuation of goodwill and intangible assets and the
estimate of the allowance for doubtful accounts. Actual results
could differ from those estimates.
Subsequent
Events
The Company has performed an evaluation of subsequent events
through March 14, 2011, which is the date the consolidated
financial statements were available to be issued.
|
|
(4)
|
Property
and Equipment
|
Property and equipment comprise the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
2010
|
|
|
2009
|
|
|
Useful Lives
|
|
|
Choice Environmental Services, Inc. and Subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
|
|
|
$
|
1,128,119
|
|
|
|
N/A
|
|
Building
|
|
|
|
|
|
|
1,788,867
|
|
|
|
40 years
|
|
Machinery and equipment
|
|
|
9,643,331
|
|
|
|
8,876,668
|
|
|
|
2 - 10 years
|
|
Vehicles
|
|
|
23,909,488
|
|
|
|
15,820,810
|
|
|
|
3 - 10 years
|
|
Leasehold improvements
|
|
|
776,553
|
|
|
|
661,195
|
|
|
|
3 - 10 years
|
|
Office equipment
|
|
|
108,162
|
|
|
|
75,726
|
|
|
|
3 - 5 years
|
|
Choice Realty:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
1,128,119
|
|
|
|
|
|
|
|
N/A
|
|
Building
|
|
|
1,788,867
|
|
|
|
|
|
|
|
40 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,354,520
|
|
|
|
28,351,385
|
|
|
|
|
|
Accumulated depreciation
|
|
|
(8,785,562
|
)
|
|
|
(8,162,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,568,958
|
|
|
$
|
20,188,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the three months ended
December 31, 2010 and 2009 was $825,676 and $670,592,
respectively.
F-63
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial
Statements (Continued)
|
|
(5)
|
Revolving
Credit and Term Loans
|
The Company had a credit facility of $29,000,000, comprised of a
$13,000,000 Revolving Credit Note (Revolver), a $3,500,000
equipment loan, a $10,000,000 term loan, and a $2,500,000 term
loan. The agreement is secured by substantially all the
Companys assets, a stock pledge of the Companys
shares in each of its subsidiaries, stock pledge agreements from
certain stockholders, and an assignment of a life insurance
policy. The agreement is subject to a prepayment premium and
certain financial ratios and customary covenants as set forth in
the agreement.
In October 2009, the Company refinanced the equipment loan and
the $10,000,000 term loan to increase the credit facility to a
$14,000,000 term loan. In August 2010, the Company refinanced
this term loan into a $16,500,000 term loan.
As of December 31, 2010, borrowings under the Revolver are
$5,747,726. Under the agreement, the Revolver is subject to an
annual renewal on October 1. Borrowings bear interest at
the Eurodollar Rate or the Prime Rate plus a variable spread
ranging from 200 to 300 basis points, depending upon the
Companys ratio of Total Debt to EBITDA (4.26% at
December 31, 2010).
The remaining borrowings outstanding under the agreement are
discussed in Note 6.
Long-term debt consists of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Choice Environmental Services, Inc. and Subsidiaries and
Affiliate:
|
|
|
|
|
|
|
|
|
Notes payable finance companies, collateralized by
specific equipment, payable in monthly installments aggregating
$702, including interest, expiring in August 2013. These notes
bear interest at 9.69%.
|
|
$
|
19,557
|
|
|
$
|
30,876
|
|
Notes payable banks, collateralized by specific
equipment, payable in monthly installments aggregating $31,971,
including interest, expiring at various dates through July 2013.
These notes bear interest at various rates up to 6.75%.
|
|
|
619,982
|
|
|
|
950,801
|
|
Notes payable to companies as part of financing of
acquisitions. These notes are payable to the sellers in monthly
and yearly installments of $29,550 and $110,000 respectively,
including interest, expiring at various dates through August
2017. These notes bear interest at various rates up to 12.00%.
|
|
|
1,615,407
|
|
|
|
2,053,102
|
|
F-64
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Choice Environmental Services, Inc. and Subsidiaries and
Affiliate:
|
|
|
|
|
|
|
|
|
Notes payable Comerica Bank per the agreement
discussed in Note 5. These notes are payable in monthly
installments aggregating $273,176, including interest, expiring
in August 2013. The notes are recorded net of the unamortized
discount in 2009. These notes bear interest at various rates up
to 6.75%.
|
|
|
17,797,627
|
|
|
|
15,469,021
|
|
Note payable Penfund per the agreement discussed in
Note 7. The subordinated note is recorded net of the
unamortized discount.
|
|
|
14,940,900
|
|
|
|
|
|
Choice Realty:
|
|
|
|
|
|
|
|
|
Note payable Comerica Bank. The mortgage is payable
in monthly installments of $10,832, including interest, matures
in April 2015 with a balloon payment of remaining principal and
accrued interest. The mortgage bears interest at 6% and is
secured by commercial real estate and personal guarantees of the
stockholders.
|
|
|
1,450,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,443,480
|
|
|
|
18,503,800
|
|
Current maturities
|
|
|
(3,875,125
|
)
|
|
|
(16,944,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,568,355
|
|
|
$
|
1,559,606
|
|
|
|
|
|
|
|
|
|
|
The long-term debt is reflected net of unamortized discounts of
$287,310 and $312,476 at December 31, 2010 and 2009,
respectively.
Future maturities of long-term debt in each of the next five
years are as follows:
|
|
|
|
|
Year Ending December 31,
|
|
Amount
|
|
|
2011
|
|
$
|
3,875,125
|
|
2012
|
|
|
3,801,834
|
|
2013
|
|
|
5,445,090
|
|
2014
|
|
|
3,248,503
|
|
2015
|
|
|
19,707,063
|
|
Thereafter
|
|
|
653,175
|
|
|
|
|
|
|
|
|
$
|
36,730,790
|
|
|
|
|
|
|
Interest expense on all indebtedness was $930,741 and $381,718
for the three months ended December 31, 2010 and 2009,
respectively.
In August 2010, the Company entered into a subordinated credit
agreement with Penfund Capital Fund III Limited Partnership
(Penfund). The agreement established a non-revolving term loan
facility in a maximum initial principal amount of $15,000,000.
The agreement is secured by substantially all the Companys
assets, a stock pledge of the Companys shares in each of
its subsidiaries, stock pledge agreements from certain
stockholders, and an assignment of a life insurance policy. The
credit agreement is subordinated to the credit facility in
Note 5. The agreement is subject to a prepayment premium
based on an established percentage of the outstanding principal
and certain affirmative and negative covenants. Interest accrues
and is payable
F-65
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial
Statements (Continued)
monthly at a rate of 16% per annum. The Company may elect to
defer all or any portion of the interest in excess of 12%. The
outstanding principal, plus accrued interest is due in August
2015.
|
|
(8)
|
Related
Party Transactions
|
Solid
Waste Resources, Inc.
The majority stockholder of the Company is the sole stockholder
of Solid Waste Resources, Inc. The Company has an unsecured note
payable with an outstanding balance of $1,200,000 at
December 31, 2010 and 2009. The note bears interest at
8.33%. The entire principal balance is due in March 2016. The
note is subordinated to the Penfund debt (Note 7) and
the credit facility in Note 5.
Due to
Stockholders
The Company has a note payable to a stockholder that is due in
monthly installments of $7,118, including interest, and matures
in May 2012. The note bears interest at 12%. The outstanding
balance due the stockholder is $104,761 and $173,082 at
December 31, 2010 and 2009, respectively.
Operating
Lease
The Company leases office space from a related party. Rent
expense was $37,500 for the three months ended December 31,
2010 and 2009.
At December 31, 2010, the Companys capital stock
consists of:
Class A common stock, no par value; 50,000,000 shares
authorized; 1,238,002 shares issued and outstanding plus
the warrant to purchase the Companys Class A common
stock issued to Penfund by the Company.
Preferred Series A stock, $.001 par value;
228,000 shares authorized, issued and outstanding.
Preferred Series B stock, $.001 par value;
3,100,000 shares authorized; 2,123,000 shares issued
and outstanding.
At December 31, 2009, the Companys capital stock
consists of:
Class A common stock, $.001 par value;
50,000,000 shares authorized; 2,092,450 shares issued
and outstanding.
Preferred Series A stock, $.001 par value;
1,000 shares authorized, issued and outstanding.
Preferred Series B stock, $.001 par value;
3,100,000 shares authorized; 2,191,000 shares issued
and outstanding.
Class A
Common Stock
In December 31, 2010, the Company executed a 1,000 for 1
stock split of the Class A common stock. In August 2010,
the Company executed a 1 for 300,000 reverse stock split on the
Class A common stock of the Company. Subsequent to reverse
stock split, Class A common shares were repurchased and
retired from stockholders with less than one share.
F-66
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial
Statements (Continued)
Series A
Preferred Stock
The designated shares of Series A preferred stock are
convertible or exchangeable, and the holder is entitled to
dividends, on a pro rata, per share basis equivalent to
dividends on the Companys common stock, if declared and
paid. Dividends are not cumulative. The Company cannot redeem
Series A preferred stock without the prior written consent
of the holder. In December 2010, the Company executed a 228 for
1 stock split of the Series A preferred stock and
established the shares are convertible or exchangeable at the
option of the holders, at a ratio of 1 share of
Series A preferred stock for 1 share of Class A
common stock.
Series B
Preferred Stock
The designated shares of Series B preferred stock are
convertible into Class A common stock, at the option of the
holders, at a ratio of 1 share of Series B for
1 share of Class A common stock. Dividends are
cumulative at the rate of 10% per annum. Accumulated dividends
do not bear interest.
Voting
Rights
The holders of the Class A common stock, Series A
preferred stock and Series B preferred stock are entitled
to one vote for each share held. Series A preferred
stockholders have voting rights to elect a numerical majority of
the Board of Directors. Additional voting rights include the
ability to approve and disapprove any amendments to corporate
by-laws, articles of incorporation or creation of additional
classes of stock. Series B preferred stock shares have the
same voting rights as the Class A common stock of the
Company.
Warrants
In connection with the issuance of the Penfund debt on
August 25, 2010, the Company issued a warrant to purchase
shares of Class A common shares which represent 5% of the
fully diluted shares outstanding of the Company. The Company
valued the warrant at $287,310 using a Black-Scholes pricing
model, adjusted for the estimated impact on the value of the
restrictions related to the warrant and pricing volatility. The
warrant was recorded as a discount on long-term debt obligations
and additional paid in capital. The discount is being amortized
to interest expense over the term of the warrant.
The Company and its wholly-owned subsidiaries file consolidated
federal and state of Florida income tax returns. Consolidated
income tax expense is apportioned to each company based upon its
proportionate share of the consolidated net income.
At December 31, 2010 and 2009, the Company has deferred tax
assets of approximately $2.0 and $1.9 million,
respectively, and deferred tax liabilities of approximately $2.9
and $2.2 million, respectively. The temporary differences
are primarily related to net operating loss carryforwards,
depreciation, amortization, and the allowance for doubtful
accounts. The provision for income tax differs from the amount
of income tax determined by applying U.S. federal and state
statutory rates to pretax income because of a loss from the sale
of a property to a related entity that creates a permanent
difference for income tax purposes.
At December 31, 2010, the Company has net operating losses
available to offset future income for federal and state tax
purposes of approximately $4.7 million. The federal net
operating loss carryforwards will begin to expire in 2024, if
not utilized.
F-67
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial
Statements (Continued)
|
|
(11)
|
Commitments
and Contingencies
|
Capital
Leases
The Company leases equipment under noncancelable leases, which
meet the capital lease criteria as defined by FASB
ASC 840-30,
Capital Leases. Accordingly, the present value of future
minimum lease payments under such leases has been recorded on
the accompanying consolidated balance sheets as property and
equipment and capital lease obligations.
As of December 31, 2010, the future minimum lease payments
are as follows:
|
|
|
|
|
Year Ending
|
|
|
|
December 31,
|
|
Amount
|
|
|
2011
|
|
$
|
25,552
|
|
2012
|
|
|
8,984
|
|
|
|
|
|
|
|
|
|
34,536
|
|
Current maturities
|
|
|
(25,552
|
)
|
|
|
|
|
|
|
|
$
|
8,984
|
|
|
|
|
|
|
Assets acquired under capital leases are included in property
and equipment as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Machinery and equipment
|
|
$
|
112,736
|
|
|
$
|
112,736
|
|
Accumulated depreciation
|
|
|
(59,052
|
)
|
|
|
(42,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,684
|
|
|
$
|
69,789
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
The Company rents equipment and facilities under operating lease
agreements. The leases expire through September 2020. Total rent
expense under the operating leases was $277,351 and $196,602 for
the three months ended December 31, 2010 and 2009,
respectively. The future minimum lease payments are as follows:
|
|
|
|
|
Year Ending
|
|
|
|
December 31,
|
|
Amount
|
|
|
2011
|
|
$
|
1,091,036
|
|
2012
|
|
$
|
894,804
|
|
2013
|
|
$
|
749,480
|
|
2014
|
|
$
|
662,204
|
|
2015
|
|
$
|
699,110
|
|
|
|
|
.
|
|
Environmental
Liability
The Company is subject to liability for any environmental
damage, including personal injury and property damage that its
solid waste and recycling may cause to neighboring property
owners, particularly as a result of the contamination of
drinking water sources or soil, possibly including damage
resulting from conditions existing before the Company acquired
the facilities. The Company may also be subject to liability for
similar claims arising from off-site environmental contamination
caused by pollutants or hazardous substances if the Company or
its predecessors arrange to transport, treat or dispose of those
materials. Any substantial liability incurred by the Company
arising from environmental damage could have a material adverse
effect on the
F-68
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial
Statements (Continued)
Companys business, financial condition and results of
operations. The Company is not presently aware of any situations
that it expects would have a material adverse impact on its
results of operations or financial condition.
Litigation
The Company is subject to 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 Companys
financial position, results of operations or cash flows.
Revenue
Adjustments
From time to time, the Company is involved in discrepancies
regarding revenue adjustments or chargebacks with its carriers
and customers. Although these discrepancies can be material to
the Company if not resolved satisfactorily, the Company does not
believe that the ultimate resolution of these discrepancies will
have a material adverse impact on the Companys financial
position, results of operations or cash flows.
On February 14, 2011, the Company entered into a definitive
agreement with a wholly-owned subsidiary of Swisher Hygiene,
Inc. to transfer all of the shares of the Company by way of a
statutory merger. In the transaction, the stockholders of the
Company will be issued 9.2 million shares of Swisher
Hygiene, Inc.s common stock at the agreed upon value of
$50.1 million. In addition, Swisher Hygiene, Inc. will also
assume approximately $41.5 million of the Companys
debt. The agreement is subject to customary closing conditions
and regulatory approvals. Upon satisfaction of all conditions,
it is expected that the transaction will be completed no later
than March 31, 2011.
The Company implemented a 401(k) plan effective January 2011.
All full-time employees may become participants in the plan upon
obtaining 21 years of age and completing one year of
eligible employment. The Company will match 50% of the first 3%
of a participants compensation.
F-69
Schedule I
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Supplementary Information
Consolidating Balance Sheet
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Choice
|
|
|
Realty
|
|
|
Elimination
|
|
|
Consolidated
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
424,491
|
|
|
$
|
3,773
|
|
|
$
|
|
|
|
$
|
428,264
|
|
Accounts receivable, net
|
|
|
6,141,132
|
|
|
|
|
|
|
|
|
|
|
|
6,141,132
|
|
Inventories
|
|
|
247,570
|
|
|
|
|
|
|
|
|
|
|
|
247,570
|
|
Prepaid expenses
|
|
|
782,772
|
|
|
|
|
|
|
|
|
|
|
|
782,772
|
|
Deposits
|
|
|
144,697
|
|
|
|
|
|
|
|
|
|
|
|
144,697
|
|
Deferred tax asset
|
|
|
181,222
|
|
|
|
|
|
|
|
|
|
|
|
181,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
7,921,884
|
|
|
|
3,773
|
|
|
|
|
|
|
|
7,925,657
|
|
Property and equipment, net
|
|
|
25,787,229
|
|
|
|
1,827,000
|
|
|
|
954,729
|
|
|
|
28,568,958
|
|
Goodwill
|
|
|
13,957,814
|
|
|
|
|
|
|
|
|
|
|
|
13,957,814
|
|
Intangible assets, net
|
|
|
3,250,677
|
|
|
|
|
|
|
|
|
|
|
|
3,250,677
|
|
Notes receivable
|
|
|
725,584
|
|
|
|
|
|
|
|
(373,425
|
)
|
|
|
352,159
|
|
Deferred financing costs, net
|
|
|
1,490,716
|
|
|
|
|
|
|
|
|
|
|
|
1,490,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,133,904
|
|
|
$
|
1,830,773
|
|
|
$
|
581,304
|
|
|
$
|
55,545,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
5,747,726
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,747,726
|
|
Current portion of long-term debt
|
|
|
3,830,933
|
|
|
|
44,192
|
|
|
|
|
|
|
|
3,875,125
|
|
Current portion of notes payable to related parties
|
|
|
77,542
|
|
|
|
|
|
|
|
|
|
|
|
77,542
|
|
Current portion of capital lease obligations
|
|
|
25,552
|
|
|
|
|
|
|
|
|
|
|
|
25,552
|
|
Accounts payable and accrued expenses
|
|
|
4,954,900
|
|
|
|
15,378
|
|
|
|
|
|
|
|
4,970,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
14,636,653
|
|
|
|
59,570
|
|
|
|
|
|
|
|
14,696,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
31,162,540
|
|
|
|
1,405,815
|
|
|
|
|
|
|
|
32,568,355
|
|
Notes payable to related parties, net of current portion
|
|
|
1,227,219
|
|
|
|
373,425
|
|
|
|
(373,425
|
)
|
|
|
1,227,219
|
|
Capital lease obligations, net of current portion
|
|
|
8,964
|
|
|
|
|
|
|
|
|
|
|
|
8,964
|
|
Deferred tax liability
|
|
|
1,065,720
|
|
|
|
|
|
|
|
|
|
|
|
1,065,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,464,443
|
|
|
|
1,779,240
|
|
|
|
(373,425
|
)
|
|
|
34,870,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit)
|
|
|
5,032,808
|
|
|
|
(8,037
|
)
|
|
|
954,729
|
|
|
|
5,979,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
53,133,904
|
|
|
$
|
1,830,773
|
|
|
$
|
581,304
|
|
|
$
|
55,545,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-70
Schedule II
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Supplementary Information
Consolidating Statement of Operations
Three Months Ended December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Choice
|
|
|
Realty
|
|
|
Elimination
|
|
|
Consolidated
|
|
|
Revenue
|
|
$
|
15,654,862
|
|
|
$
|
44,520
|
|
|
$
|
(44,520
|
)
|
|
$
|
15,654,862
|
|
Cost of sales
|
|
|
11,387,460
|
|
|
|
|
|
|
|
|
|
|
|
11,387,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
4,267,402
|
|
|
|
44,520
|
|
|
|
(44,520
|
)
|
|
|
4,267,402
|
|
Operating expenses
|
|
|
2,876,702
|
|
|
|
27,895
|
|
|
|
(44,520
|
)
|
|
|
2,860,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,390,700
|
|
|
|
16,625
|
|
|
|
|
|
|
|
1,407,325
|
|
Other income expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other, net
|
|
|
908,879
|
|
|
|
21,859
|
|
|
|
|
|
|
|
930,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
481,821
|
|
|
$
|
(5,234
|
)
|
|
$
|
|
|
|
$
|
476,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-71
Independent
Auditors Report
The Stockholders
Choice Environmental Services, Inc.
and Subsidiaries and Affiliate
Ft. Lauderdale, Florida
We have audited the accompanying consolidated balance sheets of
Choice Environmental Services, Inc. and Subsidiaries and
Affiliate as of September 30, 2010 and 2009, and the
related consolidated statements of operations, changes in
stockholders equity, and cash flows for the years then
ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. 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 and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Choice Environmental Services, Inc. and Subsidiaries
and Affiliate as of September 30, 2010 and 2009, and the
results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally
accepted in the United States of America.
Our audits were made for the purpose of forming an opinion on
the basic consolidated financial statements taken as a whole.
The consolidating information included in Schedules I
and II is presented for purposes of additional analysis of
the basic consolidated financial statements rather than to
present the financial position, results of operations, and cash
flows of the individual companies. The consolidating information
has been subjected to the auditing procedures applied in the
audits of the basic consolidated financial statements and, in
our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as
a whole.
/s/ Kreischer Miller
Horsham, Pennsylvania
February 11, 2011
F-72
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
507,548
|
|
|
$
|
74,634
|
|
Accounts receivable, net
|
|
|
3,708,934
|
|
|
|
4,091,085
|
|
Inventories
|
|
|
239,349
|
|
|
|
195,901
|
|
Prepaid expenses
|
|
|
458,014
|
|
|
|
342,452
|
|
Deferred tax asset
|
|
|
181,222
|
|
|
|
203,808
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
5,095,067
|
|
|
|
4,907,880
|
|
Property and equipment, net
|
|
|
28,587,565
|
|
|
|
17,132,628
|
|
Goodwill
|
|
|
13,957,814
|
|
|
|
13,475,314
|
|
Intangible assets, net
|
|
|
3,346,920
|
|
|
|
3,756,552
|
|
Deferred financing costs, net
|
|
|
1,570,576
|
|
|
|
|
|
Deposits
|
|
|
140,983
|
|
|
|
188,721
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,698,925
|
|
|
$
|
39,461,095
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
567,443
|
|
|
$
|
12,454,650
|
|
Current portion of long-term debt
|
|
|
3,916,441
|
|
|
|
2,550,574
|
|
Current portion of notes payable to related parties
|
|
|
75,261
|
|
|
|
1,266,791
|
|
Current portion of capital lease obligations
|
|
|
25,053
|
|
|
|
23,156
|
|
Accounts payable and accrued expenses
|
|
|
5,830,930
|
|
|
|
2,945,831
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,415,128
|
|
|
|
19,241,002
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
33,259,456
|
|
|
|
13,738,920
|
|
Notes payable to related parties, net of current portion
|
|
|
1,247,352
|
|
|
|
122,135
|
|
Capital lease obligations, net of current portion
|
|
|
15,543
|
|
|
|
40,598
|
|
Deferred tax liability
|
|
|
1,065,720
|
|
|
|
511,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,588,071
|
|
|
|
14,413,375
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
6,695,726
|
|
|
|
5,806,718
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,698,925
|
|
|
$
|
39,461,095
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-73
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Revenue
|
|
$
|
44,893,686
|
|
|
$
|
37,533,524
|
|
Cost of sales
|
|
|
33,657,272
|
|
|
|
27,549,105
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
11,236,414
|
|
|
|
9,984,419
|
|
Operating expenses
|
|
|
7,099,813
|
|
|
|
5,958,991
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
4,136,601
|
|
|
|
4,025,428
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
Gain (loss) from the sale of property and equipment
|
|
|
(330,173
|
)
|
|
|
34,568
|
|
Interest and other, net
|
|
|
(1,913,213
|
)
|
|
|
(1,626,319
|
)
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
1,893,215
|
|
|
|
2,433,677
|
|
Provision for income taxes
|
|
|
(576,584
|
)
|
|
|
(307,914
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1,316,631
|
|
|
|
2,125,763
|
|
Net loss attributable to noncontrolling interest in VIE
|
|
|
2,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Choice Environmental Services, Inc.
and Subsidiaries
|
|
$
|
1,319,434
|
|
|
$
|
2,125,763
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Interest in VIE
|
|
|
Total
|
|
|
Balance, September 30, 2008
|
|
$
|
2,092
|
|
|
$
|
1
|
|
|
$
|
2,191
|
|
|
$
|
5,383,378
|
|
|
$
|
(1,112,607
|
)
|
|
$
|
|
|
|
$
|
4,275,055
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,125,763
|
|
|
|
|
|
|
|
2,125,763
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(594,100
|
)
|
|
|
|
|
|
|
(594,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009
|
|
|
2,092
|
|
|
|
1
|
|
|
|
2,191
|
|
|
|
5,383,378
|
|
|
|
419,056
|
|
|
|
|
|
|
|
5,806,718
|
|
Reverse stock split and repurchase of fractional shares
|
|
|
(1,192
|
)
|
|
|
|
|
|
|
|
|
|
|
(221,799
|
)
|
|
|
|
|
|
|
|
|
|
|
(222,991
|
)
|
Cancellation of outstanding warrants (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(272,742
|
)
|
|
|
|
|
|
|
|
|
|
|
(272,742
|
)
|
Issuance of warrants (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
287,310
|
|
|
|
|
|
|
|
|
|
|
|
287,310
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,319,434
|
|
|
|
(2,803
|
)
|
|
|
1,316,631
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(219,200
|
)
|
|
|
|
|
|
|
(219,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010
|
|
$
|
900
|
|
|
$
|
1
|
|
|
$
|
2,191
|
|
|
$
|
5,176,147
|
|
|
$
|
1,519,290
|
|
|
$
|
(2,803
|
)
|
|
$
|
6,695,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-75
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,316,631
|
|
|
$
|
2,125,763
|
|
Adjustments to reconcile net income to net cash provided by
operations:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,805,103
|
|
|
|
3,277,320
|
|
Allowance for doubtful accounts
|
|
|
(57,913
|
)
|
|
|
(16,237
|
)
|
(Gain) loss on sale of property and equipment
|
|
|
330,173
|
|
|
|
(34,568
|
)
|
Amortization of debt discount
|
|
|
39,735
|
|
|
|
39,735
|
|
Deferred taxes
|
|
|
576,584
|
|
|
|
307,914
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
440,064
|
|
|
|
(218,345
|
)
|
Inventories
|
|
|
(43,448
|
)
|
|
|
(127,676
|
)
|
Prepaid expenses
|
|
|
(115,562
|
)
|
|
|
(127,173
|
)
|
Deposits
|
|
|
47,738
|
|
|
|
(67,326
|
)
|
Increase in:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
2,885,099
|
|
|
|
663,870
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
9,224,204
|
|
|
|
5,823,277
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(14,640,923
|
)
|
|
|
(3,281,924
|
)
|
Acquisition of business
|
|
|
(662,500
|
)
|
|
|
(1,092,300
|
)
|
Payments for non-compete agreements
|
|
|
(379,608
|
)
|
|
|
|
|
Proceeds from sale of assets
|
|
|
46,570
|
|
|
|
56,235
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(15,636,461
|
)
|
|
|
(4,317,989
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments of long-term debt and capital lease obligations
|
|
|
(3,207,980
|
)
|
|
|
(2,684,384
|
)
|
Proceeds from long-term debt
|
|
|
24,046,058
|
|
|
|
|
|
Net proceeds from (repayments of) line of credit
|
|
|
(11,887,207
|
)
|
|
|
1,892,182
|
|
Repurchase of fractional shares
|
|
|
(222,991
|
)
|
|
|
|
|
Deferred financing costs
|
|
|
(1,597,196
|
)
|
|
|
|
|
Repayments of notes payable to related parties
|
|
|
(66,313
|
)
|
|
|
(58,849
|
)
|
Distributions
|
|
|
(219,200
|
)
|
|
|
(594,100
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
6,845,171
|
|
|
|
(1,445,151
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
432,914
|
|
|
|
60,137
|
|
Cash, beginning of year
|
|
|
74,634
|
|
|
|
14,497
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
507,548
|
|
|
$
|
74,634
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest
|
|
$
|
1,786,805
|
|
|
$
|
1,530,515
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedules of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment, intangibles, and goodwill
through the issuance of debt and common stock
|
|
$
|
|
|
|
$
|
1,590,000
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-76
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to
Consolidated Financial Statements
September 30, 2010 and 2009
Choice Environmental Services, Inc. and Subsidiaries (the
Company) is a solid waste services company that provides
collection, disposal and recycling services in the state of
Florida.
|
|
(2)
|
Principles
of Consolidation
|
The consolidated financial statements include the accounts of
Choice Environmental Services, Inc. (Choice) and its
wholly-owned subsidiaries, Choice Environmental Services of
Miami, Inc. (Miami), Choice Environmental Services of Broward,
Inc. (Broward), Choice Recycling Services of Broward, Inc.
(Broward Recycling), Choice Environmental Services of
Miami-Dade, Inc. (Miami-Dade), Choice Environmental Services of
Collier, Inc. (Immokalee), Choice Environmental Services of
Highlands County (Highlands), and Choice Environmental Services
of Lee County (Lee).
Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) 810, Consolidation,
provides guidance for the financial accounting and reporting
of interests in certain variable interest entities. In
accordance with FASB ASC 810, the Company must consolidate
an entity that receives support from the Company and does not
have sufficient financial resources to support its own
activities. The Company consolidates Choice Realty Holdings, LLC
(Choice Realty or Affiliate), a related party through common
ownership, which purchased commercial real estate from the
Company in April 2010 and subsequently began leasing the
property back to the Company. Management believes there is no
exposure to loss as a result of the Companys involvement
with Choice Realty.
In addition, Choice has an 80% ownership interest in Choice
Recycling Services of Miami, Inc. (Recycling). The
noncontrolling interest has not been recorded on the
accompanying financial statements because the minority
stockholder contributed no capital and the noncontrolling
interest is not significant to the consolidated financial
statements, as of September 30, 2010 and 2009.
All significant intercompany transactions and balances have been
eliminated in consolidation.
In April 2010, the Company entered into an agreement with Waste
Services of Florida (Waste Services) to acquire certain assets
of Waste Services. The aggregate purchase price that was
capitalized as part of the cost of acquisitions was $662,500.
The transaction was accounted for using the purchase method of
accounting and the excess of the purchase price over the fair
value of the net assets acquired was recorded as goodwill. The
fair value of assets acquired from Waste Services is as follows:
|
|
|
|
|
Property and equipment
|
|
$
|
90,000
|
|
Intangible assets
|
|
|
90,000
|
|
|
|
|
|
|
|
|
|
180,000
|
|
Excess of cost over fair value
|
|
|
482,500
|
|
|
|
|
|
|
Cash paid
|
|
$
|
662,500
|
|
|
|
|
|
|
|
|
(4)
|
Summary
of Significant Accounting Policies
|
Revenue
Recognition
The Company recognizes collection, recycling and disposal
revenues as the services are provided.
F-77
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial Statements
(Continued)
Accounts
Receivable
Accounts receivable arise in the normal course of business and
are recorded when services are provided to customers. Accounts
are charged to the allowance for doubtful accounts as they are
deemed uncollectible based on a periodic review of the accounts.
The Company performs ongoing credit evaluations of its customers
and certain additional collection proceedings but generally does
not require collateral. The allowance for doubtful accounts is
estimated based on the historical bad debt expense and a review
of the accounts receivable at year end. The allowance for
doubtful accounts is $464,673 and $522,586 at September 30,
2010 and 2009, respectively.
Inventories
Inventories are stated at the lower of cost, using the
first-in,
first-out method, or market. Inventories primarily consist of
finished goods, primarily recycled paper.
Property
and Equipment
Property and equipment are recorded at cost. Major renewals and
betterments are capitalized; maintenance and minor repairs and
replacements that do not improve or extend the lives of the
respective assets are expensed currently. Depreciation is
recorded using straight line method over the estimated useful
lives of the assets, ranging from 2 to 40 years. When
properties are retired or otherwise disposed of, the assets and
accumulated depreciation accounts are adjusted accordingly and
the gain or loss, if any, arising from disposition, is credited
or charged to earnings.
Goodwill
The Companys goodwill was recorded as a result of the
Companys business acquisitions. The Company has recorded
these business acquisitions using the purchase method of
accounting. The Company tests its recorded goodwill for
impairment on an annual basis, or more often if indicators of
potential impairment exist, by determining if the carrying value
of each reporting unit exceeds its estimated fair value. Factors
that could trigger an interim impairment test include, but are
not limited to, underperformance relative to historical or
projected future operating results, significant changes in the
manner of use of the acquired assets or the Companys
overall business, significant negative industry or economic
trends and a sustained period where market capitalization, plus
an appropriate control premium, is less than stockholders
equity. During 2010 and 2009 the Company determined that no
impairment of goodwill existed because the estimated fair value
of each reporting unit exceeded its carrying amount. Future
impairment reviews may require write-downs in the Companys
goodwill and could have a material adverse impact on the
Companys operating results for the periods in which such
write-downs occur.
Intangible
Assets
The Company has non-compete agreements and customer routes that
were acquired in acquisitions. Non-compete agreements are
amortized on the straight-line basis over their terms of
5 years. Customer routes are amortized on the straight-line
basis over their estimated useful lives of 7 years.
Amortization expense for the years ended September 30, 2010
and 2009 was $879,240 and $748,531, respectively.
F-78
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial Statements
(Continued)
Intangible assets comprised the following at September 30:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Non-compete agreements
|
|
$
|
1,484,705
|
|
|
$
|
1,489,106
|
|
Customer routes
|
|
|
4,015,000
|
|
|
|
3,925,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,499,705
|
|
|
|
5,414,106
|
|
Accumulated amortization
|
|
|
(2,152,785
|
)
|
|
|
(1,657,554
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,346,920
|
|
|
$
|
3,756,552
|
|
|
|
|
|
|
|
|
|
|
The estimated amortization for the subsequent five fiscal years
is as follows:
|
|
|
|
|
Year Ending
|
|
|
|
September 30,
|
|
Amount
|
|
|
2011
|
|
$
|
912,826
|
|
2012
|
|
$
|
858,382
|
|
2013
|
|
$
|
701,159
|
|
2014
|
|
$
|
615,326
|
|
2015
|
|
$
|
195,341
|
|
Fair
Value Measurements
FASB ASC 820, Fair Value Measurements and
Disclosures, provides the framework for measuring fair
value. That framework provides a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets
or liabilities (level 1 measurements) and the lowest
priority to unobservable inputs (level 3 measurements). The
three levels of the fair value hierarchy under FASB ASC 820
are described as follows:
Level 1: Quoted market prices in active
markets for identical assets or liabilities.
Level 2: Observable market based inputs
or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not
corroborated by market data.
The asset or liabilitys fair value measurement level
within the fair value hierarchy is based on the lowest level of
any input that is significant to the fair value measurement.
Valuation techniques used need to maximize the use of observable
inputs and minimize the use of unobservable inputs.
Certain assets and liabilities are measured at fair value on a
nonrecurring basis. The amounts below represent only balances
measured at fair value during the year presented and still held
as of the reporting date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Acquisition of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
90,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
90,000
|
|
Intangible assets
|
|
|
90,000
|
|
|
|
|
|
|
|
|
|
|
|
90,000
|
|
Excess of cost over fair value
|
|
|
482,500
|
|
|
|
|
|
|
|
|
|
|
|
482,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
662,500
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
662,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock warrant
|
|
$
|
287,310
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
287,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-79
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial Statements
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Acquisition of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
733,238
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
733,238
|
|
Intangible assets
|
|
|
1,050,000
|
|
|
|
|
|
|
|
|
|
|
|
1,050,000
|
|
Excess of cost over fair value
|
|
|
1,632,300
|
|
|
|
|
|
|
|
|
|
|
|
1,632,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,415,538
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,415,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Financing Costs
Deferred financing costs consist of costs incurred with
unrelated third parties to obtain debt financing and are
amortized over the contractual life of the note in such a way as
to result in a constant rate of interest when applied to the
outstanding note. Amortization expense on deferred financing
costs was $26,620 for the year ended September 30, 2010.
The estimated amortization for the subsequent five years is
approximately $319,000.
Advertising
Advertising costs are expensed as incurred. Advertising expense
for the years ended September 30, 2010 and 2009 was
$124,293 and $136,065, respectively.
Income
Taxes
Deferred income taxes are recorded to include the future tax
consequences of differences between the tax bases of assets and
liabilities and their financial reporting amounts.
FASB ASC 740, Income Taxes, clarifies the accounting
for uncertainty in income taxes recognized in an
enterprises financial statements. FASB ASC 740
prescribes a more-likely-than-not recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken.
In addition, FASB ASC 740 provides guidance on
derecognition, classification, disclosure, and transition. The
Company adopted the provisions of FASB ASC 740 on
November 1, 2008, and the adoption of FASB ASC 740 did
not have a material impact on the Companys financial
statements.
The Company files a federal income tax return and a state return
in Florida. With few exceptions, the Company is no longer
subject to federal or state income tax examinations by tax
authorities for tax years before 2006. It is difficult to
predict the final timing and resolution of any particular
uncertain tax position. Based on the Companys assessment
of many factors, including past experience and judgments about
future events, the Company has concluded that there are no
material uncertain tax positions and the Company does not
currently anticipate significant changes in uncertain tax
positions over the next 12 months.
Concentrations
of Risk
The Company places its cash with financial institutions and, at
times, such balances may be in excess of insurance limits
provided by the Federal Deposit Insurance Corporation.
Management regularly monitors the financial institutions, along
with its balance of cash, and attempts to keep this potential
risk to a minimum.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported
F-80
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial Statements
(Continued)
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. Significant estimates include the valuation of
goodwill and intangible assets and the estimate of the allowance
for doubtful accounts. Actual results could differ from those
estimates.
Subsequent
Events
The Company has performed an evaluation of subsequent events
through February 11, 2011, which is the date the financial
statements were available to be issued.
(5) Property
and Equipment
Property and equipment comprise the following at September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
2010
|
|
|
2009
|
|
|
Useful Lives
|
|
Choice Environmental Services, Inc. and Subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
|
|
|
$
|
1,128,119
|
|
|
N/A
|
Building
|
|
|
|
|
|
|
1,788,867
|
|
|
40 years
|
Machinery and equipment
|
|
|
9,301,812
|
|
|
|
8,471,009
|
|
|
2 - 10 years
|
Vehicles
|
|
|
23,708,300
|
|
|
|
12,506,836
|
|
|
3 - 10 years
|
Leasehold improvements
|
|
|
516,179
|
|
|
|
654,395
|
|
|
3 - 10 years
|
Office equipment
|
|
|
104,174
|
|
|
|
75,726
|
|
|
3 - 5 years
|
Choice Realty:
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
1,128,119
|
|
|
|
|
|
|
N/A
|
Building
|
|
|
1,788,867
|
|
|
|
|
|
|
40 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,547,451
|
|
|
|
24,624,952
|
|
|
|
Accumulated depreciation
|
|
|
(7,959,886
|
)
|
|
|
(7,492,324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,587,565
|
|
|
$
|
17,132,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended September 30, 2010
and 2009 was $2,899,243 and $2,528,789, respectively.
In April 2010, the Company sold land and a building to Choice
Realty at a contract price of $1,890,000. The effects of this
transaction have been eliminated in consolidation.
|
|
(6)
|
Revolving
Credit and Term Loans
|
The Company had a credit facility of $29,000,000, comprised of a
$13,000,000 Revolving Credit Note (Revolver), a $3,500,000
Equipment Loan, a $10,000,000 term loan, and a $2,500,000 term
loan. The agreement is secured by substantially all the
Companys assets, a stock pledge of the Companys
shares in each of its subsidiaries, stock pledge agreements from
certain stockholders, and an assignment of a life insurance
policy. The agreement is subject to a prepayment premium and
certain financial ratios and customary covenants as set forth in
the agreement.
In October 2009, the Company refinanced the Equipment Loan and
the $10,000,000 term loan to increase the credit facility to a
$14,000,000 term loan. In August 2010, the Company refinanced
this term loan into a $16,500,000 term loan.
F-81
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial Statements
(Continued)
As of September 30, 2010, borrowings under the Revolver are
$567,443. Under the agreement, the Revolver is subject to an
annual renewal on October 1. Borrowings bear interest at
the Eurodollar Rate or the Prime Rate plus a variable spread
ranging from 200 to 300 basis points, depending upon the
Companys ratio of Total Debt to EBITDA (4.26% at
September 30, 2010).
The remaining borrowings outstanding under the agreement are
discussed in Note 7.
Long-term debt consists of the following at September 30:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Choice Environmental Services, Inc. and Subsidiaries and
Affiliate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable finance companies, collateralized by
specific equipment, payable in monthly installments aggregating
$702, including interest, expiring in August 2013. These notes
bear interest at 9.69%.
|
|
$
|
21,163
|
|
|
$
|
34,524
|
|
|
|
|
|
|
|
|
|
|
Notes payable banks, collateralized by specific
equipment, payable in monthly installments aggregating $31,971,
including interest, expiring at various dates through July 2013.
These notes bear interest at various rates up to 6.75%.
|
|
|
704,751
|
|
|
|
1,030,140
|
|
|
|
|
|
|
|
|
|
|
Notes payable to companies as part of financing of
acquisitions. These notes are payable to the sellers in monthly
and yearly installments of $39,146 and $110,000 respectively,
including interest, expiring at various dates through August
2017. These notes bear interest at various rates up to 12.00%.
|
|
|
1,612,657
|
|
|
|
2,183,840
|
|
|
|
|
|
|
|
|
|
|
Notes payable Comerica Bank per the agreement
discussed in Note 6. These notes are payable in monthly
installments aggregating $273,176, including interest, expiring
in August 2013. The note is recorded net of the unamortized
discount in 2009. These notes bear interest at various rates up
to 6.75%.
|
|
|
18,577,469
|
|
|
|
13,040,990
|
|
|
|
|
|
|
|
|
|
|
Note payable Penfund per the agreement discussed in
Note 8. The subordinated note is recorded net of the
unamortized discount.
|
|
|
14,788,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Choice Realty:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable Comerica Bank. The mortgage is payable
in monthly installments of $10,832, including interest, matures
in April 2015 with a balloon payment of remaining principal and
accrued interest. The mortgage bears interest at 6% and is
secured by commercial real estate and personal guarantees of the
stockholders.
|
|
|
1,471,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,175,897
|
|
|
|
16,289,494
|
|
Current maturities
|
|
|
(3,916,441
|
)
|
|
|
(2,550,574
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,259,456
|
|
|
$
|
13,738,920
|
|
|
|
|
|
|
|
|
|
|
The long-term debt is reflected net of unamortized discounts of
$287,310 and $312,476 at September 30, 2010 and 2009,
respectively.
F-82
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial Statements
(Continued)
Future maturities of long-term debt in each of the next five
years are as follows:
|
|
|
|
|
Year Ending
|
|
|
|
September 30,
|
|
Amount
|
|
|
2011
|
|
$
|
3,916,441
|
|
2012
|
|
|
3,770,001
|
|
2013
|
|
|
5,484,961
|
|
2014
|
|
|
3,252,814
|
|
2015
|
|
|
19,564,580
|
|
Thereafter
|
|
|
1,474,410
|
|
|
|
|
|
|
|
|
$
|
37,463,207
|
|
|
|
|
|
|
Interest expense on all indebtedness was $1,820,511 and
$1,468,041 for the years ended September 30, 2010 and 2009,
respectively.
In August 2010, the Company entered into a subordinated credit
agreement with Penfund Capital Fund III Limited Partnership
(Penfund). The agreement established a non- revolving term loan
facility in a maximum initial principal amount of $15,000,000.
The agreement is secured by substantially all the Companys
assets, a stock pledge of the Companys shares in each of
its subsidiaries, stock pledge agreements from certain
stockholders, and an assignment of a life insurance policy. The
agreement is subject to a prepayment premium based on an
established percentage of the outstanding principal and certain
affirmative and negative covenants. Interest accrues and is
payable monthly at a rate of 16% per annum. The Company may
elect to defer all or any portion of the interest in excess of
12%. At September 30, 2010, the Company has deferred
$75,702 of interest. The outstanding principal, plus accrued
interest is due in August 2015.
|
|
(9)
|
Related
Party Transactions
|
Solid
Waste Resources, Inc.
The majority stockholder of the Company is the sole stockholder
of Solid Waste Resources, Inc. The Company has an unsecured note
payable with an outstanding balance of $1,200,000 at
September 30, 2010 and 2009. The note bears interest at
8.33%. The entire principal balance is due in March 2016. The
note is subordinated to the Penfund debt (Note 8) and
the credit facility in Note 6.
Due to
Stockholders
During the fiscal year ended September 30, 2008, the
Company borrowed $300,000 from a stockholder. The note is
payable in monthly installments of $7,118, including interest,
and matures in May 2012. The note bears interest at 12%. The
outstanding balance due the stockholder is $122,613 and $188,926
at September 30 2010 and 2009, respectively.
Operating
Lease
The Company leases office space from a related party. Rent
expense was $150,000 for the year ended September 30, 2010
and 2009.
F-83
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial Statements
(Continued)
(10) Stockholders
Equity
At September 30, 2010, the Companys capital stock
consists of:
Class A common stock, $300 par value;
50,000,000 shares authorized; 3 shares issued and
outstanding.
Preferred Series A stock, $.001 par value;
1,000 shares authorized, issued and outstanding.
Preferred Series B stock, $.001 par value;
3,100,000 shares authorized; 2,191,000 shares issued
and outstanding.
At September 30, 2009, the Companys capital stock
consists of:
Class A common stock, $.01 par value;
50,000,000 shares authorized; 2,092,450 shares issued
and outstanding.
Preferred Series A stock, $.001 par value;
1,000 shares authorized, issued and outstanding.
Preferred Series B stock, $.001 par value;
3,100,000 shares authorized; 2,191,000 shares issued
and outstanding.
Class A
Common Stock
In August 2010, the Company executed a 1 for 300,000 reverse
stock split on the Class A common stock of the Company.
Subsequent to reverse stock split, Class A common shares
were repurchased and retired from stockholders with less than
one share. The cost of the transaction was approximately
$223,000. Subsequent to year end, litigation was commenced and
settled by the Company against certain former stockholders in
relation to the reverse stock split of the Class A common
shares. The Company brought this litigation in order to provide
those stockholders with certain statutorily-mandated appraisal
rights inuring to dissenting shareholders.
Series A
Preferred Stock
The designated shares of Series A preferred stock are not
convertible or exchangeable, and the holder is entitled to
dividends, on a pro rata, per share basis equivalent to
dividends on the Companys common stock, if declared and
paid. Dividends are not cumulative. The Company cannot redeem
Series A preferred stock without the prior written consent
of the holder.
Series B
Preferred Stock
The designated shares of Series B preferred stock are
convertible into Class A common stock, at the option of the
holders, at a ratio of 1 share of Series B for
1 share of Class A common stock. Dividends are
cumulative at the rate of 10% per annum. Accumulated dividends
do not bear interest. At September 30, 2009, $219,200 of
dividends were in arrears, which were paid during the fiscal
year September 30, 2010.
Voting
Rights
The holders of the Class A common stock, Series A
preferred stock and Series B preferred stock are entitled
to one vote for each share held. Series A preferred
stockholders have voting rights to elect a numerical majority of
the Board of Directors. Additional voting rights include the
ability to approve and disapprove any amendments to corporate
by-laws, articles of incorporation or creation of additional
classes of stock. Series B preferred stock shares have the
same voting rights as the Class A common stock of the
Company.
F-84
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial Statements
(Continued)
Warrants
In connection with the issuance of the Penfund debt on
August 25, 2010, the Company issued a warrant to purchase
shares of Class A common shares which represent 5% of the
fully diluted shares outstanding of the Company. The Company has
valued the warrant at $287,310 using a Black-Scholes pricing
model, adjusted for the estimated impact on the value of the
restrictions related to the warrant and pricing volatility. The
warrant is recorded as a discount on long-term debt obligations
and additional paid in capital. The discount is being amortized
to interest expense over the term of the warrant.
The following table summarizes information with respect to
warrants outstanding and exercisable at September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
Expiration
|
|
Exercise Price
|
|
Outstanding
|
|
|
Date
|
|
|
$0.010
|
|
|
1,472,000
|
|
|
|
2/19/14
|
|
$0.070
|
|
|
21,429
|
|
|
|
2/19/14
|
|
$7.000
|
|
|
2,936
|
|
|
|
3/30/14
|
|
$0.070
|
|
|
500,000
|
|
|
|
10/15/14
|
|
$0.130
|
|
|
25,000
|
|
|
|
1/1/15
|
|
$0.250
|
|
|
1,000,000
|
|
|
|
6/1/15
|
|
$0.250
|
|
|
500,000
|
|
|
|
10/1/16
|
|
$0.250
|
|
|
1,500,000
|
|
|
|
10/15/17
|
|
$0.355
|
|
|
382,370
|
|
|
|
11/30/17
|
|
$1.000
|
|
|
150,000
|
|
|
|
12/1/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,553,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company originally valued the warrants outstanding as of
September 30, 2009 at $397,346 using a Black-Scholes
pricing model, adjusted for the estimated impact on the value of
the restrictions related to the warrants and pricing volatility.
The warrants were recorded as a discount on long term debt
obligations and additional paid in capital. The discount was
being amortized to interest expense over the term of the
warrants. These warrants were terminated in December 2009.
The Company and its wholly-owned subsidiaries file consolidated
federal and state of Florida income tax returns. Consolidated
income tax expense is apportioned to each company based upon its
proportionate share of the consolidated net income.
At September 30, 2010 and 2009, the Company has deferred
tax assets of approximately $2.0 and $1.9 million,
respectively, and deferred tax liabilities of approximately $2.9
and $2.2 million, respectively. The temporary differences
are primarily related to net operating loss carryforwards,
depreciation, amortization, and the allowance for doubtful
accounts. The provision for income tax differs from the amount
of income tax determined by applying U.S. federal and state
statutory rates to pretax income because of a loss from the sale
of a property to a related entity that creates a permanent
difference for income tax purposes.
At September 30, 2010, the Company has net operating losses
available to offset future income for federal and state tax
purposes of approximately $4.7 million. The federal net
operating loss carryforwards will begin to expire in 2024, if
not utilized.
F-85
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial Statements
(Continued)
|
|
(12)
|
Commitments
and Contingencies
|
Capital
Leases
The Company leases equipment under noncancelable leases, which
meet the capital lease criteria as defined by FASB
ASC 840-30,
Capital Leases. Accordingly, the present value of future
minimum lease payments under such leases has been recorded on
the accompanying consolidated balance sheets as property and
equipment and capital lease obligations.
As of September 30, 2010, the future minimum lease payments
are as follows:
|
|
|
|
|
|
|
|
|
Year Ending
|
|
|
|
|
|
|
September 30,
|
|
Amount
|
|
|
|
|
|
2011
|
|
$
|
27,368
|
|
|
|
|
|
2012
|
|
|
15,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,333
|
|
|
|
|
|
Amount representing interest
|
|
|
(2,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
|
40,596
|
|
|
|
|
|
Current maturities
|
|
|
(25,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired under capital leases are included in property
and equipment as follows at September 30:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Machinery and equipment
|
|
$
|
112,736
|
|
|
$
|
112,736
|
|
Accumulated depreciation
|
|
|
(55,026
|
)
|
|
|
(38,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,710
|
|
|
$
|
73,815
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
The Company rents equipment and facilities under operating lease
agreements. The leases expire through September 2020. Total rent
expense under the operating leases was $1,083,356 and $831,078
for the years ended September 30, 2010 and 2009,
respectively. The future minimum lease payments are as follows:
|
|
|
|
|
Year Ending
|
|
|
|
September 30,
|
|
Amount
|
|
|
2011
|
|
$
|
1,019,138
|
|
2012
|
|
$
|
1,004,888
|
|
2013
|
|
$
|
817,068
|
|
2014
|
|
$
|
691,375
|
|
2015
|
|
$
|
710,427
|
|
Environmental
Liability
The Company is subject to liability for any environmental
damage, including personal injury and property damage that its
solid waste and recycling may cause to neighboring property
owners, particularly as a result of the contamination of
drinking water sources or soil, possibly including damage
resulting from conditions existing before the Company acquired
the facilities. The Company may also be subject to liability for
similar claims arising from off-site environmental contamination
caused by pollutants or hazardous substances if the
F-86
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Notes to Consolidated Financial Statements
(Continued)
Company or its predecessors arrange to transport, treat or
dispose of those materials. Any substantial liability incurred
by the Company arising from environmental damage could have a
material adverse effect on the Companys business,
financial condition and results of operations. The Company is
not presently aware of any situations that it expects would have
a material adverse impact on its results of operations or
financial condition.
Litigation
The Company is subject to 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 Companys
financial position, results of operations or cash flows.
Revenue
Adjustments
From time to time, the Company is involved in discrepancies
regarding revenue adjustments or chargebacks with its carriers
and customers. Although these discrepancies can be material to
the Company if not resolved satisfactorily, the Company does not
believe that the ultimate resolution of these discrepancies will
have a material adverse impact on the Companys financial
position, results of operations or cash flows.
During December 2010, the Company executed a recapitalization of
the Companys capital stock. The Companys capital
stock consists of the following subsequent to the
recapitalization:
Class A common stock, no par value; 50,000,000 shares
authorized; 1,238,002 shares issued and outstanding. The
warrant to purchase the Companys Class A common stock
issued to Penfund by the Company remains outstanding.
Preferred Series A stock, $.001 par value;
228,000 shares authorized, issued and outstanding.
Preferred Series B stock, $.001 par value;
3,100,000 shares authorized; 2,123,000 shares issued
and outstanding.
On January 19, 2011, the Company received a letter from
Swisher Hygiene, Inc. (Swisher) which expressed an interest in
acquiring all of the equity capital interest of the Company.
Equity capital interest is defined as all of the Companys
common stock, preferred stock, warrants, options and rights to
acquire common stock, preferred stock or any of its other equity
capital interests including the warrants and other equity
capital interests owned by Penfund or its affiliates. The
Company and Swisher are negotiating an Agreement and Plan of
Merger.
The Company implemented a 401(k) plan effective January 2011.
All full-time employees may become participants in the plan upon
obtaining 21 years of age and completing one year of
eligible employment. The Company will match 50% of the first 3%
of a participants compensation.
F-87
Schedule I
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Supplementary Information
Consolidating Balance Sheet
Year Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Choice
|
|
|
Realty
|
|
|
Elimination
|
|
|
Consolidated
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
503,387
|
|
|
$
|
4,161
|
|
|
$
|
|
|
|
$
|
507,548
|
|
Accounts receivable, net
|
|
|
3,708,934
|
|
|
|
|
|
|
|
|
|
|
|
3,708,934
|
|
Inventories
|
|
|
239,349
|
|
|
|
|
|
|
|
|
|
|
|
239,349
|
|
Prepaid expenses
|
|
|
458,014
|
|
|
|
|
|
|
|
|
|
|
|
458,014
|
|
Deferred tax asset
|
|
|
181,222
|
|
|
|
|
|
|
|
|
|
|
|
181,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
5,090,906
|
|
|
|
4,161
|
|
|
|
|
|
|
|
5,095,067
|
|
Property and equipment, net
|
|
|
25,782,211
|
|
|
|
1,850,625
|
|
|
|
954,729
|
|
|
|
28,587,565
|
|
Goodwill
|
|
|
13,957,814
|
|
|
|
|
|
|
|
|
|
|
|
13,957,814
|
|
Intangible assets, net
|
|
|
3,346,920
|
|
|
|
|
|
|
|
|
|
|
|
3,346,920
|
|
Notes receivable
|
|
|
376,049
|
|
|
|
|
|
|
|
(376,049
|
)
|
|
|
|
|
Deferred financing costs, net
|
|
|
1,570,576
|
|
|
|
|
|
|
|
|
|
|
|
1,570,576
|
|
Deposits
|
|
|
140,983
|
|
|
|
|
|
|
|
|
|
|
|
140,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,265,459
|
|
|
$
|
1,854,786
|
|
|
$
|
578,680
|
|
|
$
|
52,698,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
567,443
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
567,443
|
|
Current portion of long-term debt
|
|
|
3,873,572
|
|
|
|
42,869
|
|
|
|
|
|
|
|
3,916,441
|
|
Current portion of notes payable to related parties
|
|
|
75,261
|
|
|
|
|
|
|
|
|
|
|
|
75,261
|
|
Current portion of capital lease obligations
|
|
|
25,053
|
|
|
|
|
|
|
|
|
|
|
|
25,053
|
|
Accounts payable and accrued expenses
|
|
|
5,820,854
|
|
|
|
10,076
|
|
|
|
|
|
|
|
5,830,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,362,183
|
|
|
|
52,945
|
|
|
|
|
|
|
|
10,415,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
|
31,830,861
|
|
|
|
1,428,595
|
|
|
|
|
|
|
|
33,259,456
|
|
Notes payable to related parties, net of current portion
|
|
|
1,247,352
|
|
|
|
376,049
|
|
|
|
(376,049
|
)
|
|
|
1,247,352
|
|
Capital lease obligations, net of current portion
|
|
|
15,543
|
|
|
|
|
|
|
|
|
|
|
|
15,543
|
|
Deferred tax liability
|
|
|
1,065,720
|
|
|
|
|
|
|
|
|
|
|
|
1,065,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,159,476
|
|
|
|
1,804,644
|
|
|
|
(376,049
|
)
|
|
|
35,588,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit)
|
|
|
5,743,800
|
|
|
|
(2,803
|
)
|
|
|
954,729
|
|
|
|
6,695,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,265,459
|
|
|
$
|
1,854,786
|
|
|
$
|
578,680
|
|
|
$
|
52,698,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-88
Schedule II
CHOICE
ENVIRONMENTAL SERVICES, INC.
AND SUBSIDIARIES AND AFFILIATE
Supplementary Information
Consolidating Statement of Operations
Year Ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Choice
|
|
|
Realty
|
|
|
Elimination
|
|
|
Consolidated
|
|
|
Revenue
|
|
$
|
44,893,686
|
|
|
$
|
74,206
|
|
|
$
|
(74,206
|
)
|
|
$
|
44,893,686
|
|
Cost of sales
|
|
|
33,657,272
|
|
|
|
|
|
|
|
|
|
|
|
33,657,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
11,236,414
|
|
|
|
74,206
|
|
|
|
(74,206
|
)
|
|
|
11,236,414
|
|
Operating expenses
|
|
|
7,131,111
|
|
|
|
42,908
|
|
|
|
(74,206
|
)
|
|
|
7,099,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
4,105,303
|
|
|
|
31,298
|
|
|
|
|
|
|
|
4,136,601
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from the sale of property and equipment
|
|
|
(1,284,902
|
)
|
|
|
|
|
|
|
954,729
|
|
|
|
(330,173
|
)
|
Interest and other, net
|
|
|
(1,879,112
|
)
|
|
|
(34,101
|
)
|
|
|
|
|
|
|
(1,913,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
941,289
|
|
|
|
(2,803
|
)
|
|
|
954,729
|
|
|
|
1,893,215
|
|
Provision for income taxes
|
|
|
(576,584
|
)
|
|
|
|
|
|
|
|
|
|
|
(576,584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
364,705
|
|
|
$
|
(2,803
|
)
|
|
$
|
954,729
|
|
|
$
|
1,316,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-89
MT. HOOD
SOLUTIONS COMPANY
CONSOLIDATED
BALANCE SHEETS
MARCH 31,
2011 AND DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
129,041
|
|
|
$
|
243,032
|
|
Marketable securities Note 3
|
|
|
28,798
|
|
|
|
28,884
|
|
Accounts and note receivable, net of allowance
Note 2
|
|
|
2,457,314
|
|
|
|
2,223,540
|
|
Employee receivables
|
|
|
27,084
|
|
|
|
27,353
|
|
Due from related party
|
|
|
10,000
|
|
|
|
10,000
|
|
Inventory
|
|
|
1,728,363
|
|
|
|
1,710,449
|
|
Prepaid expenses and other current assets
|
|
|
180,355
|
|
|
|
213,318
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
4,560,955
|
|
|
|
4,456,576
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net Note 4
|
|
|
4,440,051
|
|
|
|
4,474,925
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
Intangible assets, net Note 5
|
|
|
22,387
|
|
|
|
25,072
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,023,393
|
|
|
$
|
8,956,573
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Line of credit Note 6
|
|
$
|
625,155
|
|
|
$
|
738,210
|
|
Accounts payable
|
|
|
1,332,782
|
|
|
|
1,126,875
|
|
Deferred compensation Note 10
|
|
|
783,896
|
|
|
|
783,896
|
|
Accrued expenses and other current liabilities
Note 10
|
|
|
798,081
|
|
|
|
1,001,537
|
|
Income taxes payable
|
|
|
19,559
|
|
|
|
14,640
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,559,473
|
|
|
|
3,665,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies Note 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Common stock, no par value, authorized 1,000 shares,
37 shares issued and outstanding at March 31, 2011 and
December 31, 2010
|
|
|
95,738
|
|
|
|
95,738
|
|
Retained earnings
|
|
|
5,348,558
|
|
|
|
5,175,378
|
|
Accumulated other comprehensive loss
|
|
|
(8,029
|
)
|
|
|
(1,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
5,436,267
|
|
|
|
5,269,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
27,653
|
|
|
|
22,025
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,023,393
|
|
|
$
|
8,956,573
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-90
MT. HOOD
SOLUTIONS COMPANY
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
THREE
MONTHS ENDED MARCH 31, 2011 AND 2010
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Products and services
|
|
$
|
5,683,679
|
|
|
$
|
5,322,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
2,639,911
|
|
|
|
2,363,937
|
|
Selling, general and administrative
|
|
|
2,572,829
|
|
|
|
2,537,362
|
|
Depreciation and amortization
|
|
|
190,395
|
|
|
|
186,675
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
5,403,135
|
|
|
|
5,087,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
280,544
|
|
|
|
234,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,318
|
)
|
|
|
(1,577
|
)
|
Rental income
|
|
|
21,542
|
|
|
|
21,028
|
|
(Loss) gain on sale of property and equipment
|
|
|
(7,592
|
)
|
|
|
800
|
|
Other
|
|
|
8,784
|
|
|
|
5,774
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
19,416
|
|
|
|
26,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Before Income Taxes
|
|
|
299,960
|
|
|
|
260,498
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
|
(5,718
|
)
|
|
|
(4,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
294,242
|
|
|
|
256,488
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Attributable to Non-Controlling Equity
Interest
|
|
|
5,628
|
|
|
|
(975
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to Mt. Hood Solutions Company
|
|
|
299,870
|
|
|
|
255,513
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on marketable securities
|
|
|
(6,303
|
)
|
|
|
1,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$
|
293,567
|
|
|
$
|
257,137
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-91
MT. HOOD
SOLUTIONS COMPANY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE
LOSS
THREE
MONTHS ENDED MARCH 31, 2011 AND 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Other
|
|
|
Retained
|
|
|
Non-controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Comprehensive Loss
|
|
|
Earnings
|
|
|
Interest
|
|
|
Total
|
|
|
Balance as of December 31, 2009
|
|
|
37
|
|
|
$
|
95,738
|
|
|
$
|
(11,067
|
)
|
|
$
|
5,016,732
|
|
|
$
|
36,027
|
|
|
$
|
5,137,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(118,936
|
)
|
|
|
|
|
|
|
(118,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
255,513
|
|
|
|
975
|
|
|
|
256,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
1,624
|
|
|
|
|
|
|
|
|
|
|
|
1,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2010
|
|
|
37
|
|
|
|
95,738
|
|
|
|
(9,443
|
)
|
|
|
5,153,309
|
|
|
|
37,002
|
|
|
|
5,276,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(904,851
|
)
|
|
|
(19,374
|
)
|
|
|
(924,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
926,920
|
|
|
|
4,397
|
|
|
|
931,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
7,717
|
|
|
|
|
|
|
|
|
|
|
|
7,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
|
37
|
|
|
|
95,738
|
|
|
|
(1,726
|
)
|
|
|
5,175,378
|
|
|
|
22,025
|
|
|
|
5,291,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(121,062
|
)
|
|
|
|
|
|
|
(121,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
294,242
|
|
|
|
5,628
|
|
|
|
299,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
(6,303
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2011
|
|
|
37
|
|
|
$
|
95,738
|
|
|
$
|
(8,029
|
)
|
|
$
|
5,348,558
|
|
|
$
|
27,653
|
|
|
$
|
5,463,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-92
MT. HOOD
SOLUTIONS COMPANY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
THREE
MONTHS ENDED MARCH 31, 2011 AND 2010
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Cash provided by operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
299,870
|
|
|
$
|
256,488
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
190,395
|
|
|
|
178,741
|
|
Provision for doubtful accounts
|
|
|
12,000
|
|
|
|
12,000
|
|
Loss on sale of property and equipment
|
|
|
7,592
|
|
|
|
|
|
Changes in working capital components:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(245,774
|
)
|
|
|
(80,248
|
)
|
Investments
|
|
|
|
|
|
|
(81
|
)
|
Employee receivable
|
|
|
270
|
|
|
|
2,869
|
|
Inventory
|
|
|
(17,914
|
)
|
|
|
126,206
|
|
Prepaid expenses and other assets
|
|
|
32,962
|
|
|
|
47,263
|
|
Accounts payable and accrued expenses
|
|
|
2,451
|
|
|
|
(520,204
|
)
|
Accrued income taxes
|
|
|
4,918
|
|
|
|
4,010
|
|
Deferred compensation
|
|
|
|
|
|
|
7,839
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
286,770
|
|
|
|
34,883
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(160,426
|
)
|
|
|
(106,501
|
)
|
Purchase of marketable securities
|
|
|
(6,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(166,643
|
)
|
|
|
(106,501
|
)
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
|
|
|
|
|
|
Distributions to stockholder
|
|
|
(121,062
|
)
|
|
|
(118,936
|
)
|
Net advances from line of credit
|
|
|
(113,056
|
)
|
|
|
212,670
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
(234,118
|
)
|
|
|
93,734
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(113,991
|
)
|
|
|
22,116
|
|
Cash and cash equivalents at beginning of period
|
|
|
243,032
|
|
|
|
57,403
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
129,041
|
|
|
$
|
79,519
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-93
MT. HOOD
SOLUTIONS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
NOTE 1
|
BUSINESS
DESCRIPTION
|
Mt. Hood Solutions Company (MHS) is a manufacturer
and distributor of over 300 industrial detergents and other
cleaning compounds headquartered in Portland, Oregon. Its
customers primarily consist of institutional and commercial
enterprises in Oregon, Washington, Utah, Colorado, California
and Idaho.
AML2, LLC (AML2) was founded in 2008, to manufacture
a cleaning compound for use in institutional and commercial
enterprises. AML2 is headquartered in Portland, Oregon.
Principles
of Combination and Consolidation
MHS and AML2 (collectively the Company) have common
ownership and management. The financial statements of these two
companies have been consolidated in accordance with Financial
Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Topic 810
Consolidation.
The non-controlling equity interest amounts shown represent the
third-party ownership interest in AML2. All inter-company
transactions are eliminated in these consolidated financial
statements.
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue
and expenses and disclosure of contingent assets and liabilities
at the date of the financial statements. Actual results could
differ from those estimates and such differences could affect
the results of operations reported in future periods.
Cash and
Cash Equivalents
The Company considers all cash accounts and all highly liquid
short-term investments purchased with an original maturity of
three months or less to be cash or cash equivalents. As a result
of the Companys cash management system, checks issued but
not presented to the banks for payment may create negative book
cash balances. Such negative balances are included in trade
accounts payable and totaled $243,007 and $44,063 at
March 31, 2011 and December 31, 2010, respectively.
Marketable
Securities
At March 31, 2011 and December 31, 2010, the Company
held equity securities classified as available for sale.
Available for sale securities are carried at fair market value
with the unrealized holding gains and losses reported in other
comprehensive income. For determining gross realized gains and
losses, the cost of securities sold is based upon specific
identification. Quoted market prices are used in determining the
fair market value of the Companys investments.
Accounts
and Notes Receivable
Accounts and notes receivable consist of amounts due from
customers for product sales and services. Accounts and notes
receivable are reported net of an allowance for doubtful
accounts. The allowance is managements best estimate of
uncollectible amounts and is based on a number of factors,
including overall credit quality, age of outstanding balances,
historical write-off experience and specific account analysis
that projects the ultimate collectability of the outstanding
balances. As of March 31, 2011and December 31, 2010,
the allowance was $123,394 and $206,460, respectively.
F-94
MT. HOOD
SOLUTIONS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventory
Inventory is stated at the lower of cost or market determined
using the last in-first out (LIFO) cost method.
Property
and Equipment
Property and equipment is stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization is
provided using the straight-line method over the estimated
useful lives of individual assets or classes of assets as
follows:
|
|
|
|
|
Building Improvements
|
|
|
15 years
|
|
Dish Machines
|
|
|
5 years
|
|
Office Equipment and Furniture
|
|
|
5 years
|
|
Machinery and Equipment
|
|
|
5 years
|
|
Vehicles
|
|
|
5 years
|
|
When an asset is sold or otherwise disposed, the related cost
and accumulated depreciation or amortization are removed from
the respective accounts and the gain or loss is recognized.
Maintenance and repairs are charged to expense when incurred.
Intangible
Assets
Intangible assets include customer relationships and formulas
purchased during acquisitions. Customer relationships are
amortized on a straight-line basis over the expected average
life of the acquired accounts, which is five years.
Long-lived
Assets
In accordance with FASB ASC
360-10-35
Impairment of Disposal of Long-lived Assets, losses
related to the impairment of long-lived assets are recognized
when the carrying amount is not recoverable and exceeds its fair
value. When facts and circumstances indicate that the carrying
values of long-lived assets may be impaired, management of the
Company evaluates recoverability by comparing the carrying value
of the assets to projected future cash flows, in addition to
other qualitative and quantitative analyses.
Compensated
Absences
Employees of the Company are entitled to paid vacation, sick
days and personal days, depending on job classification, length
of service, and other factors. It is impractical to estimate the
amount of compensation for future absences and accordingly no
liability has been recorded in the accompanying financial
statements. The companys policy is to recognize the costs
of compensated absences when actually paid to employees.
Revenue
Recognition
Revenue from product sales and services is recognized when the
services are performed or the products are delivered to the
customer, provided that persuasive evidence of a sales
arrangement exists, both title and risk of loss have passed to
the customer, and collection is reasonably assured.
Advertising
The Company expenses non-direct advertising costs when incurred.
Advertising expense was $18,114 and $18,195 for the three months
ended March 31, 2011 and 2010, respectively.
F-95
MT. HOOD
SOLUTIONS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
Taxes
Effective July 1, 2003, the Companys stockholder
elected that the corporation be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Under this provision,
the stockholder is taxed on his proportionate share of the
Companys taxable income. As a Subchapter
S corporation, the Company bears no liability or expense
for federal income taxes. The Company is required to file income
tax returns in several states. Various states do not recognize
Subchapter S of the Internal Revenue Code and as such the
Company may incur income tax expense.
FASB ASC
740-10,
Income Taxes, clarifies the accounting for income
taxes, by prescribing a minimum recognition threshold a tax
position is required to meet before being recognized in the
balance sheet. It also provides guidance on derecognition,
measurement and classification of amounts related to uncertain
tax positions, accounting for and disclosure of interest and
penalties, accounting in interim period disclosures and
transition relating to the adoption of new accounting standards.
Under FASB ASC
740-10, the
recognition for uncertain tax positions should be based on a
more likely than not threshold that the tax position will be
sustained upon audit. The tax position is measured as the
largest amount of benefit that has a greater than fifty percent
probability of being realized upon settlement. Management has
determined that adoption of this topic has had no effect on the
Companys balance sheet.
Fair
Value of Financial Instruments
The Companys financial instruments include cash,
marketable securities, receivables and accrued liabilities. The
Company adopted the provisions of FASB ASC Topic 820 Fair
Value Measurements and Disclosures, effective
January 1, 2008. Under FASB ASC
820-10-30-2,
fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants.
FASB ASC
820-10-30-2
establishes a fair value hierarchy for inputs used in measuring
fair value that maximizes the use of observable inputs and
minimizes the use of unobservable inputs by requiring the most
observable inputs be used when available. Observable inputs are
from sources independent of the Company, whereas unobservable
inputs reflect the Companys assumptions about the inputs
market participants would use in pricing the asset or liability
developed on the best information available in the
circumstances. The fair value hierarchy is categorized into
three levels based on the inputs as follows:
Level 1 inputs are valuations based on unadjusted quoted
prices in active markets for identical assets or liabilities
that the Company has the ability to access. Since valuations are
based on quoted prices that are readily and regularly available
in an active market, valuation of these securities does not
entail a significant degree of judgment.
Level 2 inputs are valuations based on quoted prices in
markets that are not active or for which all significant inputs
are observable, either directly or indirectly.
Level 3 inputs are valuations that are unobservable and
significant to the overall fair value measurement.
The Company did not have any outstanding financial derivative
instruments.
Segment
Information
FASB ASC 280, Segment Reporting, establishes
standards for reporting information regarding operating segments
in annual financial statements. Operating segments are
identified as components of an enterprise for which separate
discrete financial information is available for evaluation by
the chief operating decision-maker, or decision-making group in
making decisions on how to allocate resources and assess
performance.
F-96
MT. HOOD
SOLUTIONS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company manages, allocates resources and reports in one
business segment. The Companys chief operating
decision-maker, as defined under FASB ASC 280, is the
Companys chief executive officer.
Based on the information reviewed by its chief executive
officer, the Company operates in one business segment.
|
|
NOTE 3
|
FAIR
VALUE MEASUREMENTS
|
The Companys assets and liabilities recorded at fair value
have been categorized based upon a fair value hierarchy in
accordance with FASB ASC
820-10-30-2,
as described in Note 2. The following table presents
information about the Companys marketable securities
measured at fair value as of March 31, 2011 and at
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Price in
|
|
|
|
|
|
Significant
|
|
|
(unaudited)
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
Balance as of
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
March 31,
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2011
|
|
|
Marketable securities actively traded
|
|
$
|
28,798
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,798
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Price in
|
|
|
|
|
|
Significant
|
|
|
(audited)
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
Balance as of
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
December 31,
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2010
|
|
|
Marketable securities actively traded
|
|
$
|
28,884
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,884
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4
|
PROPERTY
AND EQUIPMENT
|
Property and equipment as of March 31, 2011 and
December 31, 2010 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Building improvements
|
|
$
|
3,615,615
|
|
|
$
|
3,615,615
|
|
Dish machines
|
|
|
2,341,156
|
|
|
|
2,233,047
|
|
Office equipment and furniture
|
|
|
87,955
|
|
|
|
87,955
|
|
Machinery and equipment
|
|
|
818,283
|
|
|
|
812,966
|
|
Vehicles
|
|
|
1,205,870
|
|
|
|
1,180,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,068,879
|
|
|
|
7,930,330
|
|
Less: accumulated depreciation
|
|
|
(3,628,828
|
)
|
|
|
(3,455,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,440,051
|
|
|
$
|
4,474,925
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the three months ended March 31,
2011 and 2010 is $187,710 and $183,990, respectively.
F-97
MT. HOOD
SOLUTIONS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 5
|
INTANGIBLE
ASSETS
|
Intangible assets as of March 31, 2011 and
December 31, 2010 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Customer list
|
|
$
|
53,726
|
|
|
$
|
53,726
|
|
Less: accumulated amortization
|
|
|
(31,339
|
)
|
|
|
(28,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,387
|
|
|
$
|
25,072
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three months ended March 31,
2011 and 2010 is $2,685 and $2,685 respectively.
As of March 31, 2011, future amortization of customer
relationships for the next three years is as follows:
|
|
|
|
|
Twelve months ending March 31,
|
|
|
|
|
2012
|
|
$
|
8,060
|
|
2013
|
|
|
10,745
|
|
2014
|
|
|
3,582
|
|
|
|
|
|
|
|
|
$
|
22,387
|
|
|
|
|
|
|
In July 2010, the Company amended its revolving line of credit
with a financial institution having a maximum borrowing of up to
$3,000,000. The line of credit matures on March 31, 2012.
Borrowings under these lines are used for general working
capital purposes and capital expenditures. The line of credit is
collateralized by accounts receivable and substantially all
assets not otherwise encumbered. Interest is payable monthly at
the banks announced prime rate less 0.50%, which at
March 31, 2011 was 3.25%. The line of credit contains
financial covenants which the Company met at March 31,
2011. At March 31, 2011 and December 31, 2010, the
Company had borrowings totaling $625,155 and $738,210,
respectively.
|
|
NOTE 7
|
COMMITMENTS
AND CONTINGENCIES
|
The Company leases its headquarters and other facilities,
equipment and vehicles under operating leases that expire at
varying times through 2023. Future minimum lease payments for
operating leases that had initial or remaining non-cancelable
lease terms in excess of one year as of March 31, 2011 are
as follows:
|
|
|
|
|
Twelve months ending March 31,
|
|
|
|
|
2012
|
|
$
|
675,984
|
|
2013
|
|
|
675,984
|
|
2014
|
|
|
675,984
|
|
2015
|
|
|
675,984
|
|
2016
|
|
|
675,984
|
|
Thereafter
|
|
|
4,743,804
|
|
|
|
|
|
|
|
|
$
|
8,123,724
|
|
|
|
|
|
|
The Company leases its headquarters from a limited liability
company related through common ownership. The lease expires
March 2023 and has two five-year renewal options. Under terms of
the lease, the Company is responsible for utilities,
maintenance, taxes and insurance. Future payments under this
lease
F-98
MT. HOOD
SOLUTIONS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
totaling $8,059,200 are included in the above figures. During
the three months ended March 31, 2011 and 2010, the Company
paid this related party $160,810 and $166,950, respectively, as
rent for use of the facility.
Total rent expense for operating leases, including those with
terms of less than one year was approximately $189,734 for the
three months ended March 31, 2011.
The Company has determined that, as a potentially responsible
party, it is likely that it has incurred a liability for
environmental remediation costs resulting from leasing certain
real property in past years. The Company has accrued
approximately $150,000 of estimated environmental remediation
costs in accrued liabilities as of March 31, 2011 and
December 31, 2010.
|
|
NOTE 8
|
RELATED-PARTY
TRANSACTIONS
|
As of March 31, 2011, the Company had guaranteed the debt
of its related party lessor totaling approximately $4,655,159,
which is fully collateralized by property and facilities. The
Company is required to perform under the guaranty in the event
the related party fails to make contractual payments. The term
of the loan covered by this guaranty is through March 2018.
There is no recognition of any potential future payment
obligation as the Company believes the potential for making this
payment is remote.
|
|
NOTE 9
|
EMPLOYEE
BENEFIT PLAN
|
The Company has a 401(k) profit sharing plan which covers all
eligible employees. Plan participants can make voluntary
contributions of up to $16,500 of compensation, subject to
certain limitations. Under this plan, the Company may contribute
to participants accounts at managements discretion.
Total Company contributions to the plan for the three months
ended March 31, 2011 and 2010 was $60,000 and $60,000,
respectively. Accrued contributions of $59,859 and $230,000 are
included in accrued liabilities at March 31, 2011 and
December 31, 2010, respectively.
|
|
NOTE 10
|
SUPPLEMENTAL
FINANCIAL INFORMATION
|
Accrued
Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of
March 31, 2011 and December 31, 2010 consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Sales tax payable
|
|
$
|
89,546
|
|
|
$
|
85,806
|
|
Accrued commissions
|
|
|
151,231
|
|
|
|
136,620
|
|
Accrued payroll and payroll taxes
|
|
|
39,000
|
|
|
|
39,412
|
|
Profit sharing
|
|
|
59,859
|
|
|
|
230,000
|
|
Other accrued expenses
|
|
|
458,445
|
|
|
|
509,699
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
798,081
|
|
|
$
|
1,001,537
|
|
|
|
|
|
|
|
|
|
|
The Company entered into a deferred compensation agreement with
an employee in December 1993. The agreement provides that the
Company pay the employee an incentive bonus based upon the
number of full employment years and average monthly pay of the
employee at termination. The amount is fully vested. The
Companys liability is approximately $783,896 at
March 31, 2011 and December 31, 2010.
F-99
MT. HOOD
SOLUTIONS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Supplemental
Disclosure of Cash Flow Information
Supplemental cash flow information with respect to the three
months ended March 31, 2011 and the year ended
December 31, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
3,318
|
|
|
$
|
7,375
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
5,718
|
|
|
$
|
25,741
|
|
|
|
|
|
|
|
|
|
|
Shareholder loan converted to equity
|
|
$
|
|
|
|
$
|
585,481
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 11
|
SUBSEQUENT
EVENTS
|
The Company evaluated all events and transactions through
July 12, 2011, the date these financial statements were
issued. During this period, there were no material recognizable
or non-recognizable subsequent events except for the following:
On May 4, 2011, the Company entered into an agreement under
which it sold certain assets and liabilities of the Company to
Swisher Hygiene, Inc. Assets sold included substantially all
inventory and supplies, accounts receivable, property and
equipment, customer lists, and other assets.
F-100
Board of Directors
Mt. Hood Solutions Company
Portland, OR
INDEPENDENT
AUDITORS REPORT
We have audited the accompanying consolidated balance sheet of
Mt. Hood Solutions Company as of December 31, 2010, and the
related consolidated statements of operations and comprehensive
income, stockholders equity and comprehensive loss and
cash flows for the year then ended. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. 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 and 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 Mt. Hood Solutions Company as of December 31, 2010, and
the results of their operations and cash flows for the year then
ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Scharf Pera & Co., PLLC
Charlotte, North Carolina
July 12, 2011
F-101
MT. HOOD
SOLUTIONS COMPANY
DECEMBER
31, 2010
|
|
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
243,032
|
|
Marketable securities Note 3
|
|
|
28,884
|
|
Accounts receivable, net of allowance Note 2
|
|
|
2,223,540
|
|
Employee receivables
|
|
|
27,353
|
|
Due from related party
|
|
|
10,000
|
|
Inventory Note 4
|
|
|
1,710,449
|
|
Prepaid expenses and other current assets
|
|
|
213,318
|
|
|
|
|
|
|
Total current assets
|
|
$
|
4,456,576
|
|
|
|
|
|
|
Property and equipment, net Note 5
|
|
|
4,474,925
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
Intangible assets, net Note 6
|
|
|
25,072
|
|
|
|
|
|
|
|
|
$
|
8,956,573
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
Line of credit Note 7
|
|
$
|
738,210
|
|
Accounts payable
|
|
|
1,126,875
|
|
Deferred compensation Note 11
|
|
|
783,896
|
|
Accrued expenses and other current liabilities
Note 11
|
|
|
1,001,537
|
|
Income taxes payable
|
|
|
14,640
|
|
|
|
|
|
|
Total current liabilities
|
|
$
|
3,665,158
|
|
|
|
|
|
|
Commitments and contingencies Note 8
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
Common stock, no par value, authorized 1,000 shares,
37 shares issued and outstanding at December 31, 2010
|
|
|
95,738
|
|
Retained earnings
|
|
|
5,175,378
|
|
Accumulated other comprehensive loss
|
|
|
(1,726
|
)
|
|
|
|
|
|
Total Mt Hood Solutions Company stockholders equity
|
|
|
5,269,390
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
22,025
|
|
|
|
|
|
|
|
|
$
|
8,956,573
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-102
MT. HOOD
SOLUTIONS COMPANY
YEAR
ENDED DECEMBER 31, 2010
|
|
|
|
|
Revenue
|
|
|
|
|
Products and services
|
|
$
|
23,650,280
|
|
Costs and Expenses
|
|
|
|
|
Cost of sales
|
|
$
|
10,549,561
|
|
Selling, general and administrative
|
|
|
11,291,306
|
|
Depreciation and amortization
|
|
|
747,048
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
22,587,915
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
1,062,365
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
Interest expense
|
|
|
(7,375
|
)
|
Rental income
|
|
|
85,227
|
|
Gain on sale of property and equipment
|
|
|
57,513
|
|
Loss on marketable securities
|
|
|
(16,213
|
)
|
Other
|
|
|
19,239
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
138,391
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Before Income Taxes
|
|
|
1,200,756
|
|
|
|
|
|
|
Income Taxes
|
|
|
(12,951
|
)
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
1,187,805
|
|
Net Income Attributable to Non-Controlling Equity Interest
|
|
|
(5,372
|
)
|
|
|
|
|
|
|
|
|
|
|
Net Income Attributable to Mt Hood Solutions Company
|
|
|
1,182,433
|
|
|
|
|
|
|
Other Comprehensive Income
|
|
|
|
|
Unrealized gain on marketable securities
|
|
|
9,341
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$
|
1,191,774
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-103
MT. HOOD
SOLUTIONS COMPANY
YEAR
ENDED DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
Common Stock
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
controlling
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Loss
|
|
|
Earnings
|
|
|
Interest
|
|
|
Total
|
|
|
Balance as of December 31, 2009
|
|
|
37
|
|
|
$
|
95,738
|
|
|
$
|
(11,067
|
)
|
|
$
|
5,016,732
|
|
|
$
|
36,027
|
|
|
$
|
5,137,430
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,023,787
|
)
|
|
|
(19,374
|
)
|
|
|
(1,043,161
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,182,433
|
|
|
|
5,372
|
|
|
|
1,187,805
|
|
Unrealized gain on marketable securities
|
|
|
|
|
|
|
|
|
|
|
9,341
|
|
|
|
|
|
|
|
|
|
|
|
9,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
|
37
|
|
|
$
|
95,738
|
|
|
$
|
(1,726
|
)
|
|
$
|
5,175,378
|
|
|
$
|
22,025
|
|
|
$
|
5,291,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-104
MT. HOOD
SOLUTIONS COMPANY
YEAR
ENDED DECEMBER 31, 2010
|
|
|
|
|
Cash provided by operating activities
|
|
|
|
|
Net income
|
|
$
|
1,187,805
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
|
747,048
|
|
Provision for doubtful accounts
|
|
|
138,904
|
|
Realized loss on marketable securities
|
|
|
16,213
|
|
Gain on sale of property and equipment
|
|
|
(57,513
|
)
|
Changes in working capital components:
|
|
|
|
|
Accounts receivable
|
|
|
(246,403
|
)
|
Employee receivable
|
|
|
(12,497
|
)
|
Due from related party
|
|
|
10,000
|
|
Investment
|
|
|
(9,336
|
)
|
Inventory
|
|
|
(59,448
|
)
|
Prepaid expenses and other assets
|
|
|
(22,826
|
)
|
Accounts payable and accrued expenses
|
|
|
(118,815
|
)
|
Deferred compensation
|
|
|
31,356
|
|
Accrued income taxes
|
|
|
(10,586
|
)
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
1,593,902
|
|
Cash used in investing activities
|
|
|
|
|
Purchases of property and equipment
|
|
|
(556,639
|
)
|
Proceeds from sale of property and equipment
|
|
|
85,848
|
|
Proceeds from sale of marketable securities
|
|
|
827
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(469,964
|
)
|
Cash used in financing activities
|
|
|
|
|
Distributions to stockholder
|
|
|
(1,609,269
|
)
|
Distributions to non-controlling equity interest
|
|
|
(19,374
|
)
|
Net advances from line of credit
|
|
|
690,335
|
|
|
|
|
|
|
Cash used in financing activities
|
|
|
(938,308
|
)
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
185,630
|
|
Cash and cash equivalents at beginning of year
|
|
|
57,402
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
243,032
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-105
MT. HOOD
SOLUTIONS COMPANY
|
|
NOTE 1
|
BUSINESS
DESCRIPTION
|
Mt. Hood Solutions Company (MHS), is a manufacturer
and distributor of over 300 industrial detergents and other
cleaning compounds headquartered in Portland, Oregon. Its
customers primarily consist of institutional and commercial
enterprises in Oregon, Washington, Utah, Colorado, California
and Idaho.
AML2, LLC (AML2) was founded in 2008, to manufacture
a cleaning compound for use in institutional and commercial
enterprises. AML2 is headquartered in Portland, Oregon.
Principles
of Combination and Consolidation
MHS and AML2 (collectively the Company) have common
ownership and management. The financial statements of these two
companies have been consolidated in accordance with Financial
Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Topic 810
Consolidation.
The non-controlling equity interest amounts shown represent the
third-party ownership interest in AML2. All inter-company
transactions are eliminated in these consolidated financial
statements.
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue
and expenses and disclosure of contingent assets and liabilities
at the date of the financial statements. Actual results could
differ from those estimates and such differences could affect
the results of operations reported in future periods.
Cash and
Cash Equivalents
The Company considers all cash accounts and all highly liquid
short-term investments purchased with an original maturity of
three months or less to be cash or cash equivalents. As a result
of the Companys cash management system, checks issued but
not presented to the banks for payment may create negative book
cash balances. Such negative balances are included in trade
accounts payable and totaled $44,063 at December 31, 2010.
Marketable
Securities
At December 31, 2010, the Company held equity securities
classified as available for sale. Available for sale securities
are carried at fair market value with the unrealized holding
gains and losses reported in other comprehensive income. For
determining gross realized gains and losses, the cost of
securities sold is based upon specific identification. Quoted
market prices are used in determining the fair market value of
the Companys investments.
Accounts
Receivable
Accounts receivable consist of amounts due from customers for
product sales and services. Accounts receivable are reported net
of an allowance for doubtful accounts. The allowance is
managements best estimate of uncollectible amounts and is
based on a number of factors, including overall credit quality,
age of outstanding balances, historical write-off experience and
specific account analysis that projects the ultimate
collectability of the outstanding balances. As of
December 31, 2010, the allowance was $206,460.
F-106
MT. HOOD
SOLUTIONS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventory
Inventory is stated at the lower of cost or market determined
using the last in-first out (LIFO) cost method.
Property
and Equipment
Property and equipment is stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization is
provided using the straight-line method over the estimated
useful lives of individual assets or classes of assets as
follows:
|
|
|
|
|
Building Improvements
|
|
|
15 years
|
|
Dish Machines
|
|
|
5 years
|
|
Office Equipment and Furniture
|
|
|
5 years
|
|
Machinery and Equipment
|
|
|
5 years
|
|
Vehicles
|
|
|
5 years
|
|
When an asset is sold or otherwise disposed, the related cost
and accumulated depreciation or amortization are removed from
the respective accounts and the gain or loss is recognized.
Maintenance and repairs are charged to expense when incurred.
Intangible
Assets
Intangible assets include customer relationships and formulas
purchased during acquisitions. Customer relationships are
amortized on a straight-line basis over the expected average
life of the acquired accounts, which is five years.
Long-lived
Assets
In accordance with FASB ASC
360-10-35
Impairment of Disposal of Long-lived Assets, losses
related to the impairment of long-lived assets are recognized
when the carrying amount is not recoverable and exceeds its fair
value. When facts and circumstances indicate that the carrying
values of long-lived assets may be impaired, management of the
Company evaluates recoverability by comparing the carrying value
of the assets to projected future cash flows, in addition to
other qualitative and quantitative analyses.
Compensated
Absences
Employees of the Company are entitled to paid vacation, sick
days and personal days, depending on job classification, length
of service, and other factors. It is impractical to estimate the
amount of compensation for future absences and accordingly no
liability has been recorded in the accompanying financial
statements. The companys policy is to recognize the costs
of compensated absences when actually paid to employees.
Revenue
Recognition
Revenue from product sales and services is recognized when the
services are performed or the products are delivered to the
customer, provided that persuasive evidence of a sales
arrangement exists, both title and risk of loss have passed to
the customer, and collection is reasonably assured.
Advertising
The Company expenses non-direct advertising costs when incurred.
Advertising expense was $74,136 for the year ended
December 31, 2010.
F-107
MT. HOOD
SOLUTIONS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
Taxes
Effective July 1, 2003, the Companys stockholder
elected that the corporation be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Under this provision,
the stockholder is taxed on their proportionate share of the
Companys taxable income. As a Subchapter
S corporation, the Company bears no liability or expense
for federal income taxes. The Company is required to file income
tax returns in several states. Various states do not recognize
Subchapter S of the Internal Revenue Code and as such the
Company may incur income tax expense.
FASB ASC
740-10,
Income Taxes, clarifies the accounting for income
taxes, by prescribing a minimum recognition threshold a tax
position is required to meet before being recognized in the
balance sheet. It also provides guidance on derecognition,
measurement and classification of amounts related to uncertain
tax positions, accounting for and disclosure of interest and
penalties, accounting in interim period disclosures and
transition relating to the adoption of new accounting standards.
Under FASB ASC
740-10, the
recognition for uncertain tax positions should be based on a
more likely than not threshold that the tax position will be
sustained upon audit. The tax position is measured as the
largest amount of benefit that has a greater than fifty percent
probability of being realized upon settlement. Management has
determined that adoption of this topic has had no effect on the
Companys balance sheet.
Fair
Value of Financial Instruments
The Companys financial instruments include cash,
marketable securities, receivables and accrued liabilities. The
Company adopted the provisions of FASB ASC Topic 820 Fair
Value Measurements and Disclosures, effective
January 1, 2008. Under FASB ASC
820-10-30-2,
fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants.
FASB ASC
820-10-30-2
establishes a fair value hierarchy for inputs used in measuring
fair value that maximizes the use of observable inputs and
minimizes the use of unobservable inputs by requiring the most
observable inputs be used when available. Observable inputs are
from sources independent of the Company, whereas unobservable
inputs reflect the Companys assumptions about the inputs
market participants would use in pricing the asset or liability
developed on the best information available in the
circumstances. The fair value hierarchy is categorized into
three levels based on the inputs as follows:
Level 1 inputs are valuations based on unadjusted quoted
prices in active markets for identical assets or liabilities
that the Company has the ability to access. Since valuations are
based on quoted prices that are readily and regularly available
in an active market, valuation of these securities does not
entail a significant degree of judgment.
Level 2 inputs are valuations based on quoted prices in
markets that are not active or for which all significant inputs
are observable, either directly or indirectly.
Level 3 inputs are valuations that are unobservable and
significant to the overall fair value measurement.
The Company did not have any outstanding financial derivative
instruments.
Segment
Information
FASB ASC 280, Segment Reporting, establishes
standards for reporting information regarding operating segments
in annual financial statements. Operating segments are
identified as components of an enterprise for which separate
discrete financial information is available for evaluation by
the chief operating decision-maker, or decision-making group in
making decisions on how to allocate resources and assess
performance.
F-108
MT. HOOD
SOLUTIONS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company manages, allocates resources and reports in one
business segment. The Companys chief operating
decision-maker, as defined under FASB ASC 280, is the
Companys chief executive officer. Based on the information
reviewed by its chief executive officer, the Company operates in
one business segment.
|
|
NOTE 3
|
FAIR
VALUE MEASUREMENTS
|
The Companys assets and liabilities recorded at fair value
have been categorized based upon a fair value hierarchy in
accordance with FASB ASC
820-10-30-2,
as described in Note 2. The following table presents
information about the Companys marketable securities
measured at fair value as of December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Price in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
Balance as of
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
December 31,
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2010
|
|
|
Marketable securities actively traded
|
|
$
|
28,884
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,884
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory as of December 31, 2010 consists of the following
components:
|
|
|
|
|
Raw materials
|
|
$
|
923,211
|
|
Finished goods
|
|
|
880,565
|
|
Purchased goods
|
|
|
192,617
|
|
Supplies
|
|
|
65,224
|
|
LIFO reserve
|
|
|
(351,168
|
)
|
|
|
|
|
|
|
|
$
|
1,710,449
|
|
|
|
|
|
|
|
|
NOTE 5
|
PROPERTY
AND EQUIPMENT
|
Property and equipment as of December 31, 2010 consists of
the following:
|
|
|
|
|
Building improvements
|
|
$
|
3,615,615
|
|
Dish machines
|
|
|
2,233,047
|
|
Office equipment and furniture
|
|
|
87,955
|
|
Machinery and equipment
|
|
|
812,966
|
|
Vehicles
|
|
|
1,180,747
|
|
|
|
|
|
|
|
|
|
7,930,330
|
|
Less: accumulated depreciation
|
|
|
(3,455,405
|
)
|
|
|
|
|
|
|
|
$
|
4,474,925
|
|
|
|
|
|
|
Depreciation expense for the year ended December 31, 2010
is $736,303.
F-109
MT. HOOD
SOLUTIONS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 6
|
INTANGIBLE
ASSETS
|
Intangible assets as of December 31, 2010 consists of the
following:
|
|
|
|
|
Customer list
|
|
$
|
53,726
|
|
Less: accumulated amortization
|
|
|
(28,654
|
)
|
|
|
|
|
|
|
|
$
|
25,072
|
|
|
|
|
|
|
Amortization expense for the year ended December 31, 2010
is $10,745.
As of December 31, 2010, future amortization of customer
relationships for the next three years is as follows:
|
|
|
|
|
2011
|
|
$
|
10,745
|
|
2012
|
|
|
10,745
|
|
2013
|
|
|
3,582
|
|
|
|
|
|
|
|
|
$
|
25,072
|
|
|
|
|
|
|
In July 2010, the Company amended its revolving line of credit
with a financial institution having a maximum borrowing of up to
$3,000,000. The line of credit matures on July 31, 2011.
Borrowings under these lines are used for general working
capital purposes and capital expenditures. The line of credit is
collateralized by accounts receivable and substantially all
assets not otherwise encumbered. Interest is payable monthly at
the banks announced prime rate less 0.50%, which at
December 31, 2010 was 3.25%. The line of credit contains
financial covenants which the Company met at December 31,
2010. At December 31, 2010, the Company had borrowings
totaling $738,210 against the line of credit.
|
|
NOTE 8
|
COMMITMENTS
AND CONTINGENCIES
|
The Company leases its headquarters and other facilities,
equipment and vehicles under operating leases that expire at
varying times through 2023. Future minimum lease payments for
operating leases that had initial or remaining non-cancelable
lease terms in excess of one year as of December 31, 2010
are as follows:
|
|
|
|
|
Twelve months ended
|
|
|
|
|
December 31, 2011
|
|
$
|
675,984
|
|
December 31, 2012
|
|
|
675,984
|
|
December 31, 2013
|
|
|
675,984
|
|
December 31, 2014
|
|
|
675,984
|
|
December 31, 2015
|
|
|
672,588
|
|
Thereafter
|
|
|
4,747,200
|
|
|
|
|
|
|
|
|
$
|
8,123,724
|
|
|
|
|
|
|
The Company leases its headquarters from a limited liability
company related through common ownership. The lease expires
March 2023 and has two five-year renewal options. Under terms of
the lease, the Company is responsible for utilities,
maintenance, taxes and insurance. Future payments under this
lease totaling $8,059,200 are included in the above figures.
During the year ended December 31, 2010, the Company paid
this related party $662,400 as rent for use in the facility.
F-110
MT. HOOD
SOLUTIONS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total rent expense for operating leases, including those with
terms of less than one year was approximately $737,000 for the
year ended December 31, 2010.
The Company has determined that, as a potentially responsible
party, it is likely that it has incurred a liability for
environmental remediation costs resulting from leasing certain
real property in past years. The Company has accrued
approximately $150,000 of estimated environmental remediation
costs in accrued liabilities as of December 31, 2010.
|
|
NOTE 9
|
RELATED-PARTY
TRANSACTIONS
|
As of December 31, 2010, the Company had guaranteed the
debt of its related party lessor totaling approximately
$4,721,000, which is fully collateralized by property and
facilities. The Company is required to perform under the
guaranty in the event the related party fails to make
contractual payments. The term of the loan covered by this
guaranty is through March 2018. There is no recognition of any
potential future payment obligation as the Company believes the
potential for making this payment is remote.
|
|
NOTE 10
|
EMPLOYEE
BENEFIT PLAN
|
The Company has a 401(k) profit sharing plan which covers all
eligible employees. Plan participants can make voluntary
contributions of up to $16,500 of compensation, subject to
certain limitations. Under this plan, the Company may contribute
to participants accounts at managements discretion.
Total Company contributions to the plan for the year ended
December 31, 2010 was $230,000. Accrued contributions of
$230,000 are included in accrued liabilities at
December 31, 2010.
|
|
NOTE 11
|
SUPPLEMENTAL
FINANCIAL INFORMATION
|
Accrued
Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of
December 31, 2010 consists of the following:
|
|
|
|
|
Sales tax payable
|
|
$
|
85,806
|
|
Accrued commissions
|
|
|
136,620
|
|
Accrued payroll and payroll taxes
|
|
|
39,412
|
|
Profit sharing
|
|
|
230,000
|
|
Other accrued expenses
|
|
|
509,699
|
|
|
|
|
|
|
|
|
$
|
1,001,537
|
|
|
|
|
|
|
The Company entered into a deferred compensation agreement with
an employee in December 1993. The agreement provides that the
Company pay the employee an incentive bonus based upon the
number of full employment years and average monthly pay of the
employee at termination. The amount is fully vested. The
Companys liability is approximately $783,896 at
December 31, 2010.
Supplemental
Disclosure of Cash Flow Information
Supplemental cash flow information with respect to the year
ended December 31, 2010 is as follows:
|
|
|
|
|
Cash paid for:
|
|
|
|
|
Interest
|
|
$
|
7,375
|
|
|
|
|
|
|
Income taxes
|
|
$
|
25,741
|
|
|
|
|
|
|
Shareholder loan converted to equity
|
|
$
|
585,481
|
|
|
|
|
|
|
F-111
MT. HOOD
SOLUTIONS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 12
|
SUBSEQUENT
EVENTS
|
The Company evaluated all events and transactions through
July 12, 2011, the date these financial statements were
issued. During this period, there were no material recognizable
or non-recognizable subsequent events except for the following:
On May 4, 2011, the Company entered into an agreement under
which it sold certain assets and liabilities of the Company to
Swisher Hygiene Inc. Assets sold included substantially all
inventory and supplies, accounts receivable, property and
equipment, customer lists, and other assets.
F-112
PRO-CLEAN
OF ARIZONA, INC.
MARCH 31,
2011 AND DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
400
|
|
|
$
|
400
|
|
Accounts receivable, net of allowance Note 2
|
|
|
1,641,194
|
|
|
|
1,270,057
|
|
Inventory
|
|
|
1,247,212
|
|
|
|
1,203,319
|
|
Prepaid expenses and other current assets
|
|
|
74,659
|
|
|
|
98,866
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,963,465
|
|
|
|
2,572,642
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net Note 3
|
|
|
1,389,750
|
|
|
|
1,184,112
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
Goodwill Note 4
|
|
|
413,295
|
|
|
|
413,295
|
|
Intangible assets net of amortization
Note 4
|
|
|
120,000
|
|
|
|
132,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,886,510
|
|
|
$
|
4,302,049
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,536,679
|
|
|
$
|
1,219,639
|
|
Accrued expenses and other current liabilities
|
|
|
200,765
|
|
|
|
151,982
|
|
Stockholder loan Note 6
|
|
|
739,050
|
|
|
|
746,965
|
|
Long-term debt, current portion Note 5
|
|
|
858,099
|
|
|
|
737,236
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,334,593
|
|
|
|
2,855,822
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion Note 5
|
|
|
609,659
|
|
|
|
589,834
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies Note 7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Common stock, $1.00 par value, authorized
1,000,000 shares, 25,500 shares issued and outstanding
at March 31, 2011
|
|
|
25,500
|
|
|
|
25,500
|
|
Retained earnings
|
|
|
916,758
|
|
|
|
830,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
942,258
|
|
|
|
856,393
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,886,510
|
|
|
$
|
4,302,049
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements
F-113
PRO-CLEAN
OF ARIZONA, INC.
THREE
MONTHS ENDED MARCH 31, 2011 AND 2010
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Products and services
|
|
$
|
4,975,275
|
|
|
$
|
4,716,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
2,311,315
|
|
|
|
2,158,101
|
|
Selling, general and administrative
|
|
|
2,432,710
|
|
|
|
2,306,373
|
|
Depreciation and amortization
|
|
|
119,187
|
|
|
|
85,468
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
4,863,212
|
|
|
|
4,549,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
112,063
|
|
|
|
166,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(26,271
|
)
|
|
|
(28,122
|
)
|
Other income
|
|
|
73
|
|
|
|
8,400
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(26,198
|
)
|
|
|
(19,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
85,865
|
|
|
$
|
146,950
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements
F-114
PRO-CLEAN
OF ARIZONA, INC.
THREE
MONTHS ENDED MARCH 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Total
|
|
|
Balance as of December 31, 2009
|
|
|
25,500
|
|
|
$
|
25,500
|
|
|
$
|
632,103
|
|
|
$
|
657,603
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
146,950
|
|
|
|
146,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2010
|
|
|
25,500
|
|
|
|
25,500
|
|
|
|
779,053
|
|
|
|
804,553
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
(100,000
|
)
|
|
|
(100,000
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
151,840
|
|
|
|
151,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
|
25,500
|
|
|
|
25,500
|
|
|
|
830,893
|
|
|
|
856,393
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
85,865
|
|
|
|
85,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2011
|
|
|
25,500
|
|
|
$
|
25,500
|
|
|
$
|
916,758
|
|
|
$
|
942,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements
F-115
PRO-CLEAN
OF ARIZONA, INC.
THREE
MONTHS ENDED MARCH 31, 2011 AND 2010
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31, 2011
|
|
|
March 31, 2010
|
|
|
Cash provided by operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
85,865
|
|
|
$
|
146,950
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
124,682
|
|
|
|
90,963
|
|
Loss on disposal of property and equipment
|
|
|
3,425
|
|
|
|
9,170
|
|
Provision for doubtful accounts
|
|
|
10,472
|
|
|
|
7,539
|
|
Changes in working capital components:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(381,609
|
)
|
|
|
31,604
|
|
Inventory
|
|
|
(43,893
|
)
|
|
|
(123,595
|
)
|
Prepaid expenses and other assets
|
|
|
24,207
|
|
|
|
4,593
|
|
Accounts payable and accrued expenses
|
|
|
365,824
|
|
|
|
216,971
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
188,973
|
|
|
|
384,195
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(321,745
|
)
|
|
|
(95,681
|
)
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(321,745
|
)
|
|
|
(95,681
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities
|
|
|
|
|
|
|
|
|
Net (repayments) borrowings to stockholder
|
|
|
(7,915
|
)
|
|
|
43,348
|
|
Net borrowings (repayments) on long-term debt
|
|
|
140,687
|
|
|
|
(163,434
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities
|
|
|
132,772
|
|
|
|
(120,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
|
|
|
|
168,428
|
|
Cash and cash equivalents at beginning of period
|
|
|
400
|
|
|
|
68,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
400
|
|
|
$
|
236,841
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements
F-116
PRO-CLEAN
OF ARIZONA, INC.
|
|
NOTE 1
|
BUSINESS
DESCRIPTION
|
Pro-Clean of Arizona, Inc. (the Company),
established in 1976 and headquartered in Phoenix, Arizona,
provides cleaning and sanitizing solutions to its customers
located in Arizona, California, Nevada, New Mexico and Texas.
These services primarily include warewashing, housekeeping,
laundry and general cleaning, as well as leasing dish machines
to customers. The Company manufactures many of its cleaning
products in its Phoenix plant and serves its customers in a wide
range of end-markets, with a particular emphasis on the
foodservice and hospitality industries.
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Cash and
Cash Equivalents
The Company considers all cash accounts and all highly liquid
short-term investments purchased with an original maturity of
three months or less to be cash or cash equivalents. As of
March 31, 2011 and December 31, 2010, the Company did
not have any investments with maturities greater than three
months. As a result of the Companys cash management
system, checks issued but not presented to the bank for payment
may create negative book cash balances. Such negative balances
are included in trade accounts payable and totaled $150,167 and
$13,959 at March 31, 2011 and December 31, 2010,
respectively.
Accounts
Receivable
Accounts receivable consist of amounts due from customers for
product sales and services. Accounts receivable are reported net
of an allowance for doubtful accounts. The allowance is
managements best estimate of uncollectible amounts and is
based on a number of factors, including overall credit quality,
age of outstanding balances, historical write-off experience and
specific account analysis that projects the ultimate
collectability of the outstanding balances. As of March 31,
2011 and December 31, 2010, the allowance was $48,000.
Inventory
Inventories consisting of manufactured goods, raw materials,
purchased goods, and parts are stated at the lower of cost or
market determined using the first in-first out (FIFO) cost
method.
Property
and Equipment
Property and equipment is stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization is
provided using the straight-line method over the estimated
useful lives of individual assets or classes of assets as
follows:
|
|
|
|
|
Office Equipment and Furniture
|
|
|
5 years
|
|
Machinery and Equipment
|
|
|
5 10 years
|
|
Leasehold Improvements
|
|
|
Life of lease
|
|
Vehicles
|
|
|
5 years
|
|
When an asset is sold or otherwise disposed, the related cost
and accumulated depreciation or amortization are removed from
the respective accounts and the gain or loss is recognized.
Maintenance and repairs are charged to expense when incurred.
Goodwill
and Other Intangible Assets
The Company accounts for goodwill and other intangible assets
under Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) Topic 350,
Intangibles-Goodwill and Other under which
intangible assets are recorded at cost. The cost of acquisitions
in excess of the fair value of the
F-117
PRO-CLEAN
OF ARIZONA, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
identifiable net assets acquired is recorded as goodwill. The
fair value of the identifiable intangible assets consisting of
non-competition agreements and customer relationships are
estimated based upon discounted future cash flow projections.
Those identifiable intangible assets with a determinable
estimated life are amortized on a straight-line basis over their
estimated lives. Intangible assets with an indefinite life are
not subject to amortization. Non-competition and customer
relationship intangibles are being amortized over five years.
These assets are evaluated at least annually for impairment in
accordance with FASB ASC
350-30-35-1
Subsequent Measurement.
Long-lived
Assets
In accordance with FASB ASC
360-10-35
Impairment or Disposal of Long-lived Assets, losses
related to the impairment of long-lived assets are recognized
when the carrying amount is not recoverable and exceeds its fair
value. When facts and circumstances indicate that the carrying
values of long-lived assets may be impaired, management of the
Company evaluates recoverability by comparing the carrying value
of the assets to projected future cash flows, in addition to
other qualitative and quantitative analyses.
Revenue
Recognition
Revenue from product sales and services is recognized when the
services are performed or the products are delivered to the
customer, provided that persuasive evidence of a sales
arrangement exists, both title and risk of loss have passed to
the customer, and collection is reasonably assured.
Income
Taxes
Effective July 1, 2003, the Companys stockholders
elected that the corporation be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Under this provision,
the stockholders are taxed on their proportionate share of the
Companys taxable income. As a Subchapter
S corporation, the Company bears no liability or expense
for income taxes.
FASB ASC
740-10,
Income Taxes, clarifies the accounting for income
taxes, by prescribing a minimum recognition threshold a tax
position is required to meet before being recognized in the
balance sheet. It also provides guidance on derecognition,
measurement and classification of amounts related to uncertain
tax positions, accounting for and disclosure of interest and
penalties, accounting in interim period disclosures and
transition relating to the adoption of new accounting standards.
Under FASB ASC
740-10, the
recognition for uncertain tax positions should be based on a
more likely than not threshold that the tax position will be
sustained upon audit. The tax position is measured as the
largest amount of benefit that has a greater than fifty percent
probability of being realized upon settlement. Management has
determined that adoption of this topic has had no effect on the
Companys balance sheet.
Fair
Value of Financial Instruments
At March 31, 2011 and December 31, 2010, the Company
did not have any outstanding financial derivative instruments.
The carrying amounts of cash and accounts receivable approximate
fair value due to the short maturity of these instruments. The
fair value of the Companys 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.
Segment
Information
FASB ASC 280, Segment Reporting, establishes
standards for reporting information regarding operating segments
in annual financial statements. Operating segments are
identified as components of an enterprise for
F-118
PRO-CLEAN
OF ARIZONA, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
which separate discrete financial information is available for
evaluation by the chief operating decision-maker, or
decision-making group in making decisions on how to allocate
resources and assess performance.
The Company manages, allocates resources and reports in one
business segment. The Companys chief operating
decision-maker, as defined under FASB ASC 280, is the
Companys President. Based on the information reviewed by
its president, the Company operates in one business segment.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue
and expenses and disclosure of contingent assets and liabilities
at the date of the financial statements. Actual results could
differ from those estimates and such differences could affect
the results of operations reported in future periods.
|
|
NOTE 3
|
PROPERTY
AND EQUIPMENT
|
Property and equipment as of March 31, 2011 and
December 31, 2010 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Office equipment and furniture
|
|
$
|
250,411
|
|
|
$
|
221,857
|
|
Machinery and equipment
|
|
|
2,747,118
|
|
|
|
2,584,775
|
|
Leasehold improvements
|
|
|
39,735
|
|
|
|
39,735
|
|
Vehicles
|
|
|
454,583
|
|
|
|
328,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,491,847
|
|
|
|
3,175,084
|
|
Less: accumulated depreciation
|
|
|
(2,102,097
|
)
|
|
|
(1,990,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,389,750
|
|
|
$
|
1,184,112
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the three months ended March 31,
2011 and 2010 is $112,682 and $73,468 respectively, of which
$5,494 is included in cost of sales.
|
|
NOTE 4
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
Goodwill and other intangible assets were recorded on the
September 2008 purchase of substantially all the assets of a
corporation specializing in food service sanitation and related
products and supplies. The transaction was recorded under FASB
Statement of Financial Accounting Standards No. 141
Business Combinations. Purchase consideration
exceeding the fair market value of tangible and intangible
assets by $413,295 was recorded as goodwill. No impairment
losses were recognized through March 31, 2011. Separately
identifiable intangible assets related to this acquisition
included customer relationships and a non-
F-119
PRO-CLEAN
OF ARIZONA, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
competition agreement, both with estimated lives of five years.
Intangible assets as of March 31, 2011 and
December 31, 2010 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Customer relationships
|
|
$
|
120,000
|
|
|
$
|
120,000
|
|
Non-competition agreements
|
|
|
120,000
|
|
|
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
240,000
|
|
|
|
240,000
|
|
Less: accumulated amortization
|
|
|
(120,000
|
)
|
|
|
(108,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
120,000
|
|
|
$
|
132,000
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three months ended March 31,
2011 and 2010 was $12,000.
At March 31, 2011, projected aggregate annual amortization
expense is as follows:
|
|
|
|
|
Twelve Months Ending
|
|
|
|
|
March 31, 2012
|
|
$
|
48,000
|
|
March 31, 2013
|
|
|
48,000
|
|
March 31, 2014
|
|
|
24,000
|
|
|
|
|
|
|
|
|
$
|
120,000
|
|
|
|
|
|
|
Long-term debt as of March 31, 2011 and December 31,
2010 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Line of credit agreement, as amended, dated September 16,
2010. Interest is payable monthly with the principal amount due
in November 2011. Interest rate of 5.00 percent at
March 31, 2011
|
|
$
|
475,000
|
|
|
$
|
400,000
|
|
Notes payable on company vehicles and equipment dated 2009
through 2011, due in monthly installments totaling $13,049
including weighted average interest of 6.56 percent,
maturing through 2013, collateralized by vehicles and equipment
costing $474,826
|
|
|
368,278
|
|
|
|
242,128
|
|
Notes payable to a financial institution under various
promissory note agreements, due in monthly installments at
March 31, 2011 in aggregate of $9,035, maturing at various
times through March 2013. Interest is payable monthly at a
weighted average interest rate of 7.33 percent at
March 31, 2011
|
|
|
176,682
|
|
|
|
200,249
|
|
Note payable to owners of a company acquired, dated
September 30, 2008, maturing October 1, 2013 with
monthly payments of $12,377. Interest rate imputed at
5.16 percent
|
|
|
360,132
|
|
|
|
390,745
|
|
Note payable to former stockholder related to sale of shares
dated July 27, 2004, maturing June 27, 2014, with
monthly payments of $2,401. Interest rate at 4.00 percent
|
|
|
87,666
|
|
|
|
93,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,467,758
|
|
|
|
1,327,070
|
|
Current portion
|
|
|
(858,099
|
)
|
|
|
(737,236
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
609,659
|
|
|
$
|
589,834
|
|
|
|
|
|
|
|
|
|
|
F-120
PRO-CLEAN
OF ARIZONA, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
As of March 31, 2011, principal payments due on long-term
debt are as follows:
|
|
|
|
|
Twelve Months Ending
|
|
|
|
|
March 31, 2012
|
|
$
|
858,099
|
|
March 31, 2013
|
|
|
404,459
|
|
March 31, 2014
|
|
|
194,441
|
|
March 31, 2015
|
|
|
10,759
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,467,758
|
|
|
|
|
|
|
In September 2010, the Company amended its revolving line of
credit with a financial institution to raise its maximum
borrowing up to $475,000 and extend the line through
November 10, 2011. Interest is payable monthly at the
greater of Prime plus one percent or five percent. The line of
credit is collateralized by substantially all assets of the
Company and is guaranteed by stockholders of the Company. The
principal balance outstanding as of March 31, 2011 and
December 31, 2010 is $475,000 and $400,000, respectively.
In September 2008, the Company purchased substantially all the
assets of a corporation (see Note 4). Included in the
purchase consideration are monthly payments of $7,799 through
October 2013 under a consulting agreement to the former owner as
well as payments of $4,578 per month through October 2013
representing the excess amount of rent payments over fair market
value being paid to the former owner. The initial principal
value of these notes at September 30, 2008 was $653,295.
Interest was imputed at the Companys borrowing rate at the
time of 5.16 percent. The principal balance remaining on
these notes as of March 31, 2011 and December 31, 2010
is $360,132 and $390,745, respectively.
|
|
NOTE 6
|
STOCKHOLDER
LOAN
|
The stockholder loan consists of various cash advances by a
stockholder to the Company. Interest is compounded monthly at a
rate of 5.50 percent. The principal balance due on this
loan at March 31, 2011 and December 31, 2010 is
$739,050 and $746,965, respectively. The loan was subsequently
repaid in full in May 2011.
|
|
NOTE 7
|
COMMITMENTS
AND CONTINGENCIES
|
The Company leases its headquarters and other facilities,
equipment, and vehicles under operating leases that expire at
varying times through 2014. Future minimum lease payments for
operating leases that had initial or remaining non-cancelable
lease terms in excess of one year as of March 31, 2011 are
as follows:
|
|
|
|
|
Twelve Months Ending
|
|
|
|
|
March 31, 2012
|
|
$
|
484,050
|
|
March 31, 2013
|
|
|
169,176
|
|
March 31, 2014
|
|
|
74,216
|
|
March 31, 2015
|
|
|
12,797
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
740,239
|
|
|
|
|
|
|
Total rent expense for operating leases, including those with
terms of less than one year is $176,653 and $200,376 for the
three months ended March 31, 2011 and 2010, respectively.
F-121
PRO-CLEAN
OF ARIZONA, INC.
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
NOTE 8
|
EMPLOYEE
BENEFIT PLAN
|
The Company has a 401(k) plan which covers substantially all
employees. Plan participants can make voluntary contributions of
up to $16,500 of compensation for 2010, subject to certain
limitations. Under this plan, the Company may make matching,
profit sharing or safe harbor contributions into the Plan at the
discretion of management. No contributions were made for the
period ended March 31, 2011 and 2010.
|
|
NOTE 9
|
SUPPLEMENTAL
FINANCIAL INFORMATION
|
Supplemental
Disclosure of Cash Flow Information
Supplemental cash flow information with respect to the year
ended March 31, 2011 and 2010 is as follows:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
28,314
|
|
|
$
|
25,296
|
|
|
|
|
|
|
|
|
|
|
Advertising
The company expenses advertising costs as incurred. Advertising
expenses for the period ended March 31, 2011 and 2010 are
approximately $74,758 and $64,194, respectively.
|
|
NOTE 10
|
SUBSEQUENT
EVENTS
|
The Company evaluated all events and transactions through
July 12, 2011, the date these financial statements were
issued. During this period, there were no material recognizable
or non-recognizable subsequent events except for the following:
Effective April 30, 2011, the Company entered into an asset
purchase agreement under which it sold certain assets and
liabilities of the Company to Swisher Hygiene Inc. Assets sold
included substantially all inventory and supplies, accounts
receivable, property and equipment, rights under contracts,
deposits and prepaid expenses, customer lists, and other
intangible assets. Liabilities assumed by the purchaser included
accounts payable, accrued expenses, obligations under customer
contracts, and certain notes payable.
F-122
Board of Directors
Pro-Clean of Arizona, Inc.
Phoenix, AZ
INDEPENDENT
AUDITORS REPORT
We have audited the accompanying balance sheet of Pro-Clean of
Arizona, Inc. as of December 31, 2010, and the related
statements of operations, stockholders equity and cash
flows for the year then ended. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. 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 and 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 Pro-Clean of Arizona, Inc. as of December 31, 2010, and
the results of their operations and cash flows for the year then
ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Scharf Pera & Co. PLLC
Charlotte, North Carolina
July 6, 2011
F-123
PRO-CLEAN
OF ARIZONA, INC.
DECEMBER
31, 2010
|
|
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
400
|
|
Accounts receivable, net of allowance Note 2
|
|
|
1,270,057
|
|
Inventory
|
|
|
1,203,319
|
|
Prepaid expenses and other current assets
|
|
|
98,866
|
|
|
|
|
|
|
Total current assets
|
|
$
|
2,572,642
|
|
|
|
|
|
|
Property and equipment, net Note 3
|
|
|
1,184,112
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
Goodwill Note 4
|
|
|
413,295
|
|
Intangible assets net of amortization
Note 4
|
|
|
132,000
|
|
|
|
|
|
|
|
|
$
|
4,302,049
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
1,219,639
|
|
Accrued expenses and other current liabilities
Note 9
|
|
|
151,982
|
|
Stockholder loan Note 6
|
|
|
746,965
|
|
Long-term debt, current portion Note 5
|
|
|
737,236
|
|
|
|
|
|
|
Total current liabilities
|
|
$
|
2,855,822
|
|
|
|
|
|
|
Long-term debt, less current portion Note 5
|
|
|
589,834
|
|
|
|
|
|
|
Commitments and contingencies Note 7
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
Common stock, $1.00 par value, authorized
1,000,000 shares, 25,500 shares issued and outstanding
at December 31, 2010
|
|
|
25,500
|
|
Retained earnings
|
|
|
830,893
|
|
|
|
|
|
|
|
|
|
856,393
|
|
|
|
|
|
|
|
|
$
|
4,302,049
|
|
|
|
|
|
|
See Notes to Financial Statements
F-124
PRO-CLEAN
OF ARIZONA, INC.
YEAR
ENDED DECEMBER 31, 2010
|
|
|
|
|
Revenue
|
|
|
|
|
Products and services
|
|
$
|
19,232,347
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
Cost of sales
|
|
$
|
9,063,869
|
|
Selling, general and administrative
|
|
|
9,363,773
|
|
Depreciation and amortization
|
|
|
394,383
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
18,822,025
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
410,322
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
Interest expense
|
|
|
(117,406
|
)
|
Other income
|
|
|
5,874
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(111,532
|
)
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
298,790
|
|
|
|
|
|
|
See Notes to Financial Statements
F-125
PRO-CLEAN
OF ARIZONA, INC.
YEAR
ENDED DECEMBER 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Retained Earnings
|
|
|
Total
|
|
|
Balance as of December 31, 2009
|
|
|
25,500
|
|
|
$
|
25,500
|
|
|
$
|
632,103
|
|
|
$
|
657,603
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
(100,000
|
)
|
|
|
(100,000
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
298,790
|
|
|
|
298,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
|
25,500
|
|
|
$
|
25,500
|
|
|
$
|
830,893
|
|
|
$
|
856,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to
Financial Statements
F-126
PRO-CLEAN
OF ARIZONA, INC.
YEAR
ENDED DECEMBER 31, 2010
|
|
|
|
|
Cash provided by operating activities
|
|
|
|
|
Net income
|
|
$
|
298,790
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
|
416,365
|
|
Loss on disposal of property and equipment
|
|
|
5,874
|
|
Provision for doubtful accounts
|
|
|
8,539
|
|
Changes in working capital components:
|
|
|
|
|
Accounts receivable
|
|
|
177,281
|
|
Inventory
|
|
|
(173,661
|
)
|
Prepaid expenses and other assets
|
|
|
(57,133
|
)
|
Accounts payable and accrued expenses
|
|
|
168,617
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
844,672
|
|
Cash used in investing activities
|
|
|
|
|
Purchases of property and equipment
|
|
|
(629,998
|
)
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(629,998
|
)
|
Cash used in financing activities
|
|
|
|
|
Distributions to stockholders
|
|
|
(100,000
|
)
|
Net borrowings from stockholder
|
|
|
15,594
|
|
Proceeds from long-term debt
|
|
|
234,164
|
|
Payments on long-term debt
|
|
|
(432,445
|
)
|
|
|
|
|
|
Cash used in financing activities
|
|
|
(282,687
|
)
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(68,013
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
68,413
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
400
|
|
|
|
|
|
|
See Notes to Financial Statements
F-127
PRO-CLEAN
OF ARIZONA, INC.
|
|
NOTE 1
|
BUSINESS
DESCRIPTION
|
Pro-Clean of Arizona, Inc. (the Company),
established in 1976 and headquartered in Phoenix, Arizona,
provides cleaning and sanitizing solutions to its customers
located in Arizona, California, Nevada, New Mexico and Texas.
These services primarily include warewashing, housekeeping,
laundry and general cleaning, as well as leasing dish machines
to customers. The Company manufactures many of its cleaning
products in its Phoenix plant and serves its customers in a wide
range of end-markets, with a particular emphasis on the
foodservice and hospitality industries.
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Cash and
Cash Equivalents
The Company considers all cash accounts and all highly liquid
short-term investments purchased with an original maturity of
three months or less to be cash or cash equivalents. As of
December 31, 2010, the Company did not have any investments
with maturities greater than three months. As a result of the
Companys cash management system, checks issued but not
presented to the bank for payment may create negative book cash
balances. Such negative balances are included in trade accounts
payable and totaled $13,959 at December 31, 2010.
Accounts
Receivable
Accounts receivable consist of amounts due from customers for
product sales and services. Accounts receivable are reported net
of an allowance for doubtful accounts. The allowance is
managements best estimate of uncollectible amounts and is
based on a number of factors, including overall credit quality,
age of outstanding balances, historical write-off experience and
specific account analysis that projects the ultimate
collectability of the outstanding balances. As of
December 31, 2010, the allowance was $57,000.
Inventory
Inventories consisting of manufactured goods, raw materials,
purchased goods, and parts are stated at the lower of cost or
market determined using the first in-first out (FIFO) cost
method.
Property
and Equipment
Property and equipment is stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization is
provided using the straight-line method over the estimated
useful lives of individual assets or classes of assets as
follows:
|
|
|
|
|
Office Equipment and Furniture
|
|
|
5 years
|
|
Machinery and Equipment
|
|
|
5 10 years
|
|
Leasehold Improvements
|
|
|
Life of lease
|
|
Vehicles
|
|
|
5 years
|
|
When an asset is sold or otherwise disposed, the related cost
and accumulated depreciation or amortization are removed from
the respective accounts and the gain or loss is recognized.
Maintenance and repairs are charged to expense when incurred.
Goodwill
and Other Intangible Assets
The Company accounts for goodwill and other intangible assets
under Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) Topic 350,
Intangibles-Goodwill and Other under which
intangible assets are recorded at cost. The cost of acquisitions
in excess of the fair value of the identifiable net assets
acquired is recorded as goodwill. The fair value of the
identifiable intangible assets
F-128
PRO-CLEAN
OF ARIZONA, INC.
NOTES TO FINANCIAL
STATEMENTS (Continued)
consisting of non-competition agreements and customer
relationships are estimated based upon discounted future cash
flow projections. Those identifiable intangible assets with a
determinable estimated life are amortized on a straight-line
basis over their estimated lives. Intangible assets with an
indefinite life are not subject to amortization. Non-competition
and customer relationship intangibles are being amortized over
five years. These assets are evaluated at least annually for
impairment in accordance with FASB ASC
350-30-35-1
Subsequent Measurement.
Long-lived
Assets
In accordance with FASB ASC
360-10-35
Impairment of Disposal of Long-lived Assets, losses
related to the impairment of long-lived assets are recognized
when the carrying amount is not recoverable and exceeds its fair
value. When facts and circumstances indicate that the carrying
values of long-lived assets may be impaired, management of the
Company evaluates recoverability by comparing the carrying value
of the assets to projected future cash flows, in addition to
other qualitative and quantitative analyses.
Revenue
Recognition
Revenue from product sales and services is recognized when the
services are performed or the products are delivered to the
customer, provided that persuasive evidence of a sales
arrangement exists, both title and risk of loss have passed to
the customer, and collection is reasonably assured.
Income
Taxes
Effective July 1, 2003, the Companys stockholders
elected that the corporation be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Under this provision,
the stockholders are taxed on their proportionate share of the
Companys taxable income. As a Subchapter
S corporation, the Company bears no liability or expense
for income taxes.
FASB ASC
740-10,
Income Taxes, clarifies the accounting for income
taxes, by prescribing a minimum recognition threshold a tax
position is required to meet before being recognized in the
balance sheet. It also provides guidance on derecognition,
measurement and classification of amounts related to uncertain
tax positions, accounting for and disclosure of interest and
penalties, accounting in interim period disclosures and
transition relating to the adoption of new accounting standards.
Under FASB ASC
740-10, the
recognition for uncertain tax positions should be based on a
more likely than not threshold that the tax position will be
sustained upon audit. The tax position is measured as the
largest amount of benefit that has a greater than fifty percent
probability of being realized upon settlement. Management has
determined that adoption of this topic has had no effect on the
Companys balance sheet.
Fair
Value of Financial Instruments
At December 31, 2010, the Company did not have any
outstanding financial derivative instruments. The carrying
amounts of cash and accounts receivable approximate fair value
due to the short maturity of these instruments. The fair value
of the Companys 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.
Segment
Information
FASB ASC 280, Segment Reporting, establishes
standards for reporting information regarding operating segments
in annual financial statements. Operating segments are
identified as components of an enterprise for which separate
discrete financial information is available for evaluation by
the chief operating decision-maker, or decision-making group in
making decisions on how to allocate resources and assess
performance.
F-129
PRO-CLEAN
OF ARIZONA, INC.
NOTES TO FINANCIAL
STATEMENTS (Continued)
The Company manages, allocates resources and reports in one
business segment. The Companys chief operating
decision-maker, as defined under FASB ASC 280, is the
Companys President. Based on the information reviewed by
its president, the Company operates in one business segment.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue
and expenses and disclosure of contingent assets and liabilities
at the date of the financial statements. Actual results could
differ from those estimates and such differences could affect
the results of operations reported in future periods.
|
|
NOTE 3
|
PROPERTY
AND EQUIPMENT
|
Property and equipment as of December 31, 2010 consists of
the following:
|
|
|
|
|
Office equipment and furniture
|
|
$
|
221,857
|
|
Machinery and equipment
|
|
|
2,584,775
|
|
Leasehold improvements
|
|
|
39,735
|
|
Vehicles
|
|
|
328,717
|
|
|
|
|
|
|
|
|
|
3,175,084
|
|
Less: accumulated depreciation
|
|
|
(1,990,972
|
)
|
|
|
|
|
|
|
|
$
|
1,184,112
|
|
|
|
|
|
|
Depreciation expense for the year ended December 31, 2010
is $368,365, of which $21,981 is included in cost of sales.
|
|
NOTE 4
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
Goodwill and other intangible assets were recorded on the
September 2008 purchase of substantially all the assets of a
corporation specializing in food service sanitation and related
products and supplies. The transaction was recorded under FASB
Statement of Financial Accounting Standards No. 141
Business Combinations. Purchase consideration
exceeding the fair market value of tangible and intangible
assets by $413,295 was recorded as goodwill. No impairment
losses were recognized through December 31, 2010.
Separately identifiable intangible assets related to this
acquisition included customer relationships and a
non-competition agreement, both with estimated lives of five
years. Intangible assets as of December 31, 2010 consist of
the following:
|
|
|
|
|
Customer relationships
|
|
$
|
120,000
|
|
Non-competition agreements
|
|
|
120,000
|
|
|
|
|
|
|
|
|
|
240,000
|
|
Less: accumulated amortization
|
|
|
(108,000
|
)
|
|
|
|
|
|
|
|
$
|
132,000
|
|
|
|
|
|
|
Amortization expense for the year ended December 31, 2010
is $48,000.
F-130
PRO-CLEAN
OF ARIZONA, INC.
NOTES TO FINANCIAL
STATEMENTS (Continued)
At December 31, 2010, projected aggregate annual
amortization expense is as follows:
|
|
|
|
|
Twelve Months Ended
|
|
|
|
|
December 31, 2011
|
|
$
|
48,000
|
|
December 31, 2012
|
|
|
48,000
|
|
December 31, 2013
|
|
|
36,000
|
|
|
|
|
|
|
|
|
$
|
132,000
|
|
|
|
|
|
|
Long-term debt as of December 31, 2010 consists of the
following:
|
|
|
|
|
Line of credit agreement, as amended, dated September 16,
2010. Interest is payable monthly with the principal amount due
in November 2011. Interest rate of 5.00 percent at
December 31, 2010
|
|
$
|
400,000
|
|
Notes payable on company vehicles dated 2009 and 2010, due in
monthly installments totaling $8,277 including weighted average
interest of 6.74 percent, maturing through 2013,
collateralized by vehicles costing $318,691
|
|
|
242,128
|
|
Notes payable to a financial institution under various
promissory note agreements, due in monthly installments at
December 31, 2010 in aggregate of $9,035, maturing at
various times through March 2013. Interest is payable monthly at
a weighted average interest rate of 7.33 percent at
December 31, 2010
|
|
|
200,249
|
|
Note payable to owners of a company acquired, dated
September 30, 2008, maturing October 1, 2013, with
monthly payments of $12,377. Interest rate imputed at
5.16 percent
|
|
|
390,745
|
|
Note payable to former stockholder related to sale of shares
dated July 27, 2004, maturing June 27, 2014, payments
of $2,401 Interest rate at 4.00 percent
|
|
|
93,948
|
|
|
|
|
|
|
|
|
|
1,327,070
|
|
|
|
|
|
|
Current portion
|
|
|
(737,236
|
)
|
|
|
|
|
|
Long-term portion
|
|
$
|
589,834
|
|
|
|
|
|
|
As of December 31, 2010, principal payments due on
long-term debt are as follows:
|
|
|
|
|
Twelve Months Ended
|
|
|
|
|
December 31, 2011
|
|
$
|
737,236
|
|
December 31, 2012
|
|
|
338,687
|
|
December 31, 2013
|
|
|
229,586
|
|
December 31, 2014
|
|
|
21,561
|
|
|
|
|
|
|
|
|
$
|
1,327,070
|
|
|
|
|
|
|
In September 2010, the Company amended its revolving line of
credit with a financial institution to raise its maximum
borrowing up to $475,000 and extend the line through
November 10, 2011. Interest is payable monthly at the
greater of Prime plus one percent or five percent. The line of
credit is collateralized by substantially all assets of the
Company and is guaranteed by stockholders of the Company. The
principal balance outstanding as of December 31, 2010 is
$400,000.
In September 2008, the Company purchased substantially all the
assets of a corporation (see Note 4). Included in the
purchase consideration are monthly payments of $7,799 through
October 2013 under a consulting agreement to the former owner as
well as payments of $4,578 per month through October 2013
F-131
PRO-CLEAN
OF ARIZONA, INC.
NOTES TO FINANCIAL
STATEMENTS (Continued)
representing the excess amount of rent payments over fair market
value being paid to the former owner. The initial principal
value of these notes at September 30, 2008 was $653,295.
Interest was imputed at the Companys borrowing rate at the
time of 5.16 percent. The principal balance remaining on
these notes as of December 31, 2010 is $390,745.
|
|
NOTE 6
|
STOCKHOLDER
LOAN
|
The stockholder loan consists of various cash advances by a
stockholder to the Company. Interest is compounded monthly at a
rate of 5.50 percent. The principal balance due on this
loan at December 31, 2010 is $746,965. The loan was
subsequently repaid in full in May 2011.
|
|
NOTE 7
|
COMMITMENTS
AND CONTINGENCIES
|
The Company leases its headquarters and other facilities,
equipment, and vehicles under operating leases that expire at
varying times through 2014. Future minimum lease payments for
operating leases that had initial or remaining non-cancelable
lease terms in excess of one year as of December 31, 2010
are as follows:
|
|
|
|
|
Twelve months ended
|
|
|
|
|
December 31, 2011
|
|
$
|
546,078
|
|
December 31, 2012
|
|
|
231,282
|
|
December 31, 2013
|
|
|
90,955
|
|
December 31, 2014
|
|
|
26,552
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
894,867
|
|
|
|
|
|
|
Total rent expense for operating leases, including those with
terms of less than one year is $788,722 for the year ended
December 31, 2010.
|
|
NOTE 8
|
EMPLOYEE
BENEFIT PLAN
|
The Company has a 401(k) plan which covers substantially all
employees. Plan participants can make voluntary contributions of
up to $16,500 of compensation for 2010, subject to certain
limitations. Under this plan, the Company may make matching,
profit sharing or safe harbor contributions into the Plan at the
discretion of management. No contributions were made for the
year ended December 31, 2010.
|
|
NOTE 9
|
SUPPLEMENTAL
FINANCIAL INFORMATION
|
Accrued
Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of
December 31, 2010 consists of the following:
|
|
|
|
|
Sales tax payable
|
|
$
|
56,470
|
|
Accrued interest
|
|
|
6,441
|
|
Accrued payroll and payroll taxes
|
|
|
26,987
|
|
Other accrued expenses
|
|
|
62,084
|
|
|
|
|
|
|
|
|
$
|
151,982
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
|
Cash paid for:
|
|
|
|
|
Interest
|
|
$
|
117,797
|
|
|
|
|
|
|
F-132
PRO-CLEAN
OF ARIZONA, INC.
NOTES TO FINANCIAL
STATEMENTS (Continued)
Advertising
The company expenses advertising costs as incurred. Advertising
expenses for the year ended December 31, 2010 are
approximately $195,512.
|
|
NOTE 10
|
SUBSEQUENT
EVENTS
|
The Company evaluated all events and transactions through
June 30, 2011, the date these financial statements were
issued. During this period, there were no material recognizable
or non-recognizable subsequent events except for the following:
Effective April 30, 2011, the Company entered into an asset
purchase agreement under which it sold certain assets and
liabilities of the Company to Swisher Hygiene Inc. Assets sold
included substantially all inventory and supplies, accounts
receivable, property and equipment, rights under contracts,
deposits and prepaid expenses, customer lists, and other
intangible assets. Liabilities assumed by the purchaser included
accounts payable, accrued expenses, obligations under customer
contracts, and certain notes payable.
F-133
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
875,416
|
|
|
$
|
730,649
|
|
Accounts receivable, net of allowance Note 2
|
|
|
224,209
|
|
|
|
250,730
|
|
Prepaid expenses and other current assets
|
|
|
31,733
|
|
|
|
58,424
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,131,358
|
|
|
|
1,039,803
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net Note 3
|
|
|
2,046,317
|
|
|
|
1,880,020
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
Intangible assets Note 4
|
|
|
103,320
|
|
|
|
111,595
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,280,995
|
|
|
$
|
3,031,418
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
142,420
|
|
|
$
|
145,431
|
|
Deferred revenue Note 2
|
|
|
313,601
|
|
|
|
350,487
|
|
Long-term debt, current portion Note 5
|
|
|
353,538
|
|
|
|
370,808
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
809,559
|
|
|
|
866,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion Note 5
|
|
|
473,562
|
|
|
|
350,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Common stock of Central Carting Disposal, Inc., $1 par
value, authorized 10,000 shares, 10,000 shares issued
and outstanding at March 31, 2011
|
|
|
10,000
|
|
|
|
10,000
|
|
Common stock of CCI Hauling, Inc., $.10 par value,
authorized 1,000 shares, 1,000 shares issued and
outstanding at March 31, 2011
|
|
|
100
|
|
|
|
100
|
|
Additional paid-in capital
|
|
|
191,200
|
|
|
|
191,200
|
|
Retained earnings
|
|
|
1,796,574
|
|
|
|
1,613,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,997,874
|
|
|
|
1,814,556
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,280,995
|
|
|
$
|
3,031,418
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-134
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
1,530,891
|
|
|
$
|
1,470,724
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
401,994
|
|
|
|
317,245
|
|
Selling, general and administrative
|
|
|
492,495
|
|
|
|
496,703
|
|
Depreciation and amortization
|
|
|
141,277
|
|
|
|
130,007
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
1,035,766
|
|
|
|
943,955
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
495,125
|
|
|
|
526,769
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(17,001
|
)
|
|
|
(24,425
|
)
|
Other income
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(14,301
|
)
|
|
|
(24,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
480,824
|
|
|
$
|
502,344
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in Capital
|
|
|
Earnings
|
|
|
Total
|
|
|
Balance as of December 31, 2009
|
|
|
11,000
|
|
|
$
|
10,100
|
|
|
$
|
191,200
|
|
|
$
|
1,405,829
|
|
|
$
|
1,607,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(557,007
|
)
|
|
|
(557,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
502,344
|
|
|
|
502,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2010
|
|
|
11,000
|
|
|
|
10,100
|
|
|
|
191,200
|
|
|
|
1,351,166
|
|
|
|
1,552,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(794,430
|
)
|
|
|
(794,430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,056,520
|
|
|
|
1,056,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
|
11,000
|
|
|
|
10,100
|
|
|
|
191,200
|
|
|
|
1,613,256
|
|
|
|
1,814,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(297,506
|
)
|
|
|
(297,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
480,824
|
|
|
|
480,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2011
|
|
|
11,000
|
|
|
$
|
10,100
|
|
|
$
|
191,200
|
|
|
$
|
1,796,574
|
|
|
$
|
1,997,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-136
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Cash provided by operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
480,824
|
|
|
$
|
502,344
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
141,277
|
|
|
|
130,057
|
|
Provision for bad debt
|
|
|
|
|
|
|
25,000
|
|
Gain on the sale of property and equipment
|
|
|
(2,700
|
)
|
|
|
|
|
Changes in working capital components:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
26,521
|
|
|
|
(116,287
|
)
|
Prepaid expenses and other assets
|
|
|
26,692
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
(39,898
|
)
|
|
|
142,986
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
632,716
|
|
|
|
684,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
|
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
2,700
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(299,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(296,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in financing activities
|
|
|
|
|
|
|
|
|
Distributions to stockholder
|
|
|
(297,506
|
)
|
|
|
(557,007
|
)
|
Proceeds from long-term debt
|
|
|
225,580
|
|
|
|
|
|
Payments on long-term debt
|
|
|
(119,424
|
)
|
|
|
(117,155
|
)
|
|
|
|
|
|
|
|
|
|
Cash used in financing activities
|
|
|
(191,350
|
)
|
|
|
(674,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
144,767
|
|
|
|
9,938
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
730,649
|
|
|
|
361,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
875,416
|
|
|
$
|
371,744
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-137
|
|
NOTE 1
|
BUSINESS
DESCRIPTION
|
Nature of
Business
Central Carting Disposal, Inc. (CCD), founded in
1996 and headquartered in Dade City, Florida, provides refuse
collection and disposal services to its commercial and
residential customers located in the Florida counties of Pasco,
Citrus, Sumter, Hillsborough and Hernando.
CCI Hauling, Inc. (CCI), founded in 2002 and
headquartered in Dade City, Florida, provides roll-off refuse
collection and disposal services to commercial customers located
in the Florida counties of Pasco, Citrus, Sumter, Hillsborough
and Hernando.
Principles
of Combination and Consolidation
CCD and CCI (collectively the Company) have common
ownership and management. The financial statements of these two
companies have been combined in accordance with Financial
Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Topic 810
Consolidation. All inter-company transactions are
eliminated in these combined financial statements.
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue
and expenses and disclosure of contingent assets and liabilities
at the date of the financial statements. Actual results could
differ from those estimates and such differences could affect
the results of operations reported in future periods.
Cash and
Cash Equivalents
The Company considers all cash accounts and all highly liquid
short-term investments purchased with an original maturity of
three months or less to be cash or cash equivalents. As of
March 31, 2011 and December 31, 2010, the Company did
not have any investments with maturities greater than three
months.
Accounts
Receivable
Accounts receivable consist of amounts due from customers for
services. Accounts receivable are reported net of an allowance
for doubtful accounts. The allowance is managements best
estimate of uncollectible amounts and is based on a number of
factors, including overall credit quality, age of outstanding
balances, historical write-off experience and specific account
analysis that projects the ultimate collectability of the
outstanding balances. As of March 31, 2011 and
December 31, 2010, the allowance was $75,000 and $80,000,
respectively.
F-138
CENTRAL
CARTING DISPOSAL, INC. AND
CCI HAULING, INC.
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
Property
and Equipment
Property and equipment is stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization is
provided using the straight-line method over the estimated
useful lives of individual assets or classes of assets as
follows:
|
|
|
|
|
Office Equipment and Furniture
|
|
|
5 - 7 years
|
|
Containers
|
|
|
10 years
|
|
Leasehold Improvements
|
|
|
10 years
|
|
Vehicles
|
|
|
5 - 7 years
|
|
When an asset is sold or otherwise disposed, the related cost
and accumulated depreciation or amortization are removed from
the respective accounts and the gain or loss is recognized.
Maintenance and repairs are charged to expense when incurred.
Intangible
Assets
The Company accounts for intangible assets under FASB ASC Topic
350, Intangibles-Goodwill and Other under which
intangible assets are recorded at cost. Those assets with a
determinable estimated useful life are amortized on a
straight-line basis over their estimated lives. Intangible
assets with an indefinite life are not subject to amortization.
These assets are evaluated at least annually for impairment in
accordance with FASB ASC
350-30-35-1,
Subsequent Measurement.
Long-lived
Assets
In accordance with FASB ASC
360-10-35
Impairment of Disposal of Long-lived Assets, losses
related to the impairment of long-lived assets are recognized
when the carrying amount is not recoverable and exceeds its fair
value. When facts and circumstances indicate that the carrying
values of long-lived assets may be impaired, management of the
Company evaluates recoverability by comparing the carrying value
of the assets to projected future cash flows, in addition to
other qualitative and quantitative analyses.
Revenue
Recognition
Revenue is recognized when the collection and disposal services
are performed. Deferred revenue consists of amounts collected
from customers as of March 31, 2011 and December 31,
2010 for services to be performed in the future.
Income
Taxes
Effective January 1, 1997, CCDs stockholder and on
October 23, 2002, CCIs stockholder elected that the
corporations be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under this provision, the
stockholders are taxed on their proportionate share of the
Companys taxable income. As a Subchapter
S corporation, the Company bears no liability or expense
for income taxes.
FASB ASC
740-10,
Income Taxes, clarifies the accounting for income
taxes, by prescribing a minimum recognition threshold a tax
position is required to meet before being recognized in the
balance sheet. It also provides guidance on derecognition,
measurement and classification of amounts related to uncertain
tax positions, accounting for and disclosure of interest and
penalties, accounting in interim period disclosures and
transition relating to the adoption of new accounting standards.
Under FASB ASC
740-10, the
recognition for uncertain tax positions should be based on a
more likely than not threshold that the tax position will be
sustained upon audit. The tax position is measured as the
largest amount of benefit that has a greater than fifty
F-139
CENTRAL
CARTING DISPOSAL, INC. AND
CCI HAULING, INC.
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
percent probability of being realized upon settlement.
Management has determined that adoption of this topic has had no
effect on the Companys balance sheet.
Fair
Value of Financial Instruments
At March 31, 2011 and December 31, 2010, the Company
did not have any outstanding financial derivative instruments.
The carrying amounts of cash and the current portion of accounts
receivable approximate fair value due to the short maturity of
these instruments. The non-current notes receivable are
presented at fair value due to rates generally being at current
market rates. The fair value of the Companys 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.
Segment
Information
FASB ASC 280, Segment Reporting, establishes
standards for reporting information regarding operating segments
in annual financial statements. Operating segments are
identified as components of an enterprise for which separate
discrete financial information is available for evaluation by
the chief operating decision-maker, or decision-making group in
making decisions on how to allocate resources and assess
performance.
The Company manages, allocates resources and reports in one
business segment. The Companys chief operating
decision-maker, as defined under FASB ASC 280, is the
Companys chief executive officer. Based on the information
reviewed by its chief executive officer, the Company operates in
one business segment.
|
|
NOTE 3
|
PROPERTY
AND EQUIPMENT
|
Property and equipment as of March 31, 2011 and
December 31, 2010 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Office equipment and furniture
|
|
$
|
69,074
|
|
|
$
|
58,121
|
|
Containers
|
|
|
1,043,898
|
|
|
|
1,043,898
|
|
Leasehold improvements
|
|
|
88,290
|
|
|
|
88,290
|
|
Vehicles
|
|
|
3,715,480
|
|
|
|
3,427,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,916,742
|
|
|
|
4,617,443
|
|
Less: accumulated depreciation
|
|
|
(2,870,425
|
)
|
|
|
(2,737,423
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,046,317
|
|
|
$
|
1,880,020
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the three months ended March 31,
2011 and 2010 is $133,002 and $121,732, respectively.
F-140
CENTRAL
CARTING DISPOSAL, INC. AND
CCI HAULING, INC.
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 4
|
INTANGIBLE
ASSETS
|
Intangible assets as of March 31, 2011 and
December 31, 2010 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Customer lists
|
|
$
|
98,050
|
|
|
$
|
98,050
|
|
Non-compete agreements
|
|
|
67,450
|
|
|
|
67,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165,500
|
|
|
|
165,500
|
|
Less: accumulated amortization
|
|
|
(62,180
|
)
|
|
|
(53,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
103,320
|
|
|
$
|
111,595
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for the three months ended March 31,
2011 and 2010 is $8,275 and $8,275, respectively.
At March 31, 2011, projected aggregate annual amortization
expense is as follows:
|
|
|
|
|
Twelve months ending March 31,
|
|
|
|
|
2012
|
|
$
|
33,100
|
|
2013
|
|
|
32,413
|
|
2014
|
|
|
26,524
|
|
2015
|
|
|
11,283
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
103,320
|
|
|
|
|
|
|
F-141
CENTRAL
CARTING DISPOSAL, INC. AND
CCI HAULING, INC.
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
Long-term debt as of March 31, 2011 and December 31,
2010 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Note payable on a company vehicle dated October 2006, due in
monthly installments of $4,186, including interest of 10.24%,
maturing September 2011, collateralized by vehicle costing
$197,502
|
|
$
|
20,505
|
|
|
$
|
32,238
|
|
Note payable on company vehicles dated December 2009, due in
monthly installments of $6,762 including interest of 9.55%,
maturing October 2011, collateralized by vehicles costing
$326,680
|
|
|
46,012
|
|
|
|
64,752
|
|
Note payable on a company vehicle dated June 2007, due in
monthly installments of $3,699 including interest of 8.46%,
maturing April 2012, collateralized by vehicle costing $184,131
|
|
|
42,490
|
|
|
|
52,477
|
|
Note payable on company vehicles dated March 2008, due in
monthly installments of $4,070 including interest of 8.50%,
maturing December 2013, collateralized by vehicles costing
$203,764
|
|
|
79,233
|
|
|
|
89,541
|
|
Note payable on company vehicles dated September 2008, due in
monthly installments of $4,030 including interest of 5.18%,
maturing September 2013, collateralized by vehicles costing
$212,629
|
|
|
113,218
|
|
|
|
123,706
|
|
Note payable on a company vehicle dated April 2009, due in
monthly installments of $4,979, including interest of 9.73%,
maturing February 2014, collateralized by vehicle costing
$240,506
|
|
|
155,490
|
|
|
|
166,379
|
|
Note payable on a company vehicle dated July 2009, due in
monthly installments of $3,146, including interest of 10.34%,
maturing May 2014, collateralized by vehicle costing $225,580
|
|
|
99,708
|
|
|
|
106,396
|
|
Note payable on a company vehicle dated February 2011, due in
monthly installments of $4,763, including imputed interest of
9.73%, maturing February 2016, collateralized by vehicle costing
$150,000
|
|
|
222,646
|
|
|
|
|
|
Note payable to a former shareholder dated October 2002, due in
monthly installments of $2,125 including interest of 5.00%,
maturing October 2012, unsecured
|
|
|
36,802
|
|
|
|
42,643
|
|
Note payable for insurance financing agreement dated July 2010,
due in monthly installments of $10,868, including interest of
7.35%, maturing April 2011, unsecured
|
|
|
10,996
|
|
|
|
42,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
827,100
|
|
|
|
720,944
|
|
Current portion
|
|
|
(353,538
|
)
|
|
|
(370,808
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
473,562
|
|
|
$
|
350,136
|
|
|
|
|
|
|
|
|
|
|
F-142
CENTRAL
CARTING DISPOSAL, INC. AND
CCI HAULING, INC.
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
As of March 31, 2011, principal payments due on long-term
debt are as follows:
|
|
|
|
|
Twelve months ending March 31,
|
|
|
|
|
2012
|
|
$
|
353,538
|
|
2013
|
|
|
209,627
|
|
2014
|
|
|
160,273
|
|
2015
|
|
|
53,732
|
|
2016
|
|
|
49,930
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
827,100
|
|
|
|
|
|
|
The Company was making monthly payments of $2,125 to a former
shareholder of the Company. This note is payable as a result of
the purchase of Company stock from this shareholder in 2002. The
balance on this note was paid off subsequent to March 31,
2011.
|
|
NOTE 6
|
RELATED
PARTY TRANSACTIONS
|
The Company leases its headquarters from the stockholder on a
month-to-month basis. During the three months ended
March 31, 2011 and 2010, the Company paid this related
party $13,257 and $13,257, respectively, as rent for the use of
this facility.
|
|
NOTE 7
|
SUPPLEMENTAL
FINANCIAL INFORMATION
|
Supplemental
Disclosure of Cash Flow Information
Supplemental cash flow information with respect to the three
months ended March 31, 2011 and 2010 is as follows:
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
17,002
|
|
|
$
|
24,425
|
|
|
|
|
|
|
|
|
|
|
Advertising
The company expenses advertising costs as incurred. Advertising
expenses for the three months ended March 31, 2011 and 2010
are approximately $1,300 and $3,900, respectively.
Environmental
Liability
The Company is subject to liability for any environmental
damage, including personal injury and property damage arising
from off-site environmental contamination caused by pollutants
or hazardous substances if the Company arranges to transport,
treat or dispose of those materials. Any substantial liability
incurred by the Company arising from environmental damage could
have a material adverse effect on the Companys business,
financial condition and results of operations. The Company is
not presently aware of any situations that it expects would have
a material adverse impact on its results of operations or
financial condition.
F-143
CENTRAL
CARTING DISPOSAL, INC. AND
CCI HAULING, INC.
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 8
|
SUBSEQUENT
EVENTS
|
The Company evaluated all events and transactions through
July 8, 2011, the date these financial statements were
issued. During this period, there were no material recognizable
or non-recognizable subsequent events except for the following:
On June 6, 2011, the Company entered into an agreement
under which it sold certain assets and liabilities of the
Company to Choice Environmental Services, Inc., a wholly-owned
subsidiary of Swisher Hygiene, Inc. Assets sold included
substantially all supplies, accounts receivable, property and
equipment, rights under contracts, customer lists, and other
intangible assets.
F-144
Board of Directors
Central Carting Disposal, Inc. and
CCI Hauling, Inc.
Dade City, FL
INDEPENDENT
AUDITORS REPORT
We have audited the accompanying combined balance sheet of
Central Carting Disposal, Inc. and CCI Hauling, Inc. as of
December 31, 2010, and the related combined statement of
operations, stockholders equity and cash flows for the
year then ended. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. 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 and 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 combined financial statements referred to
above present fairly, in all material respects, the financial
position of Central Carting Disposal, Inc. and CCI Hauling, Inc.
as of December 31, 2010, and the results of their
operations and cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United
States of America.
Charlotte, North Carolina
June 27, 2011
F-145
|
|
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
730,649
|
|
Accounts receivable, net of allowance Note 2
|
|
|
250,730
|
|
Prepaid expenses and other current assets
|
|
|
58,424
|
|
|
|
|
|
|
Total current assets
|
|
$
|
1,039,803
|
|
|
|
|
|
|
Property and equipment, net Note 3
|
|
|
1,880,020
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
Intangible assets Note 4
|
|
|
111,595
|
|
|
|
|
|
|
|
|
$
|
3,031,418
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
145,431
|
|
Deferred revenue Note 2
|
|
|
350,487
|
|
Long-term debt, current portion Note 5
|
|
|
370,808
|
|
|
|
|
|
|
Total current liabilities
|
|
$
|
866,726
|
|
|
|
|
|
|
Long-term debt, less current portion Note 5
|
|
|
350,136
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
Common stock of Central Carting Disposal, Inc., $1 par
value, authorized 10,000 shares, 10,000 shares issued
and outstanding at December 31, 2010
|
|
|
10,000
|
|
Common stock of CCI Hauling, Inc., $.10 par value,
authorized 1,000 shares, 1,000 shares issued and
outstanding at December 31, 2010
|
|
|
100
|
|
Additional paid-in capital
|
|
|
191,200
|
|
Retained earnings
|
|
|
1,613,256
|
|
|
|
|
|
|
|
|
|
1,814,556
|
|
|
|
|
|
|
|
|
$
|
3,031,418
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-146
|
|
|
|
|
Revenue
|
|
|
|
|
Services
|
|
$
|
6,150,479
|
|
|
|
|
|
|
Costs and Expenses
|
|
|
|
|
Cost of sales
|
|
$
|
1,433,762
|
|
Selling, general and administrative
|
|
|
2,450,480
|
|
Depreciation and amortization
|
|
|
523,440
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
4,407,682
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
|
|
1,742,797
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
Interest expense
|
|
|
(81,256
|
)
|
|
|
|
|
|
Total other income (expense)
|
|
|
(81,256
|
)
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,661,541
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Total
|
|
|
Balance as of December 31, 2009
|
|
|
11,000
|
|
|
$
|
10,100
|
|
|
$
|
191,200
|
|
|
$
|
1,405,829
|
|
|
$
|
1,607,129
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,454,114
|
)
|
|
|
(1,454,114
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,661,541
|
|
|
|
1,661,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
|
11,000
|
|
|
$
|
10,100
|
|
|
$
|
191,200
|
|
|
$
|
1,613,256
|
|
|
$
|
1,814,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-148
|
|
|
|
|
Cash provided by operating activities
|
|
|
|
|
Net income
|
|
$
|
1,661,541
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
|
523,490
|
|
Provision for doubtful accounts
|
|
|
80,000
|
|
Changes in working capital components:
|
|
|
|
|
Accounts receivable
|
|
|
(79,822
|
)
|
Prepaid expenses and other assets
|
|
|
5,264
|
|
Accounts payable and accrued expenses
|
|
|
328,239
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
2,518,712
|
|
Cash used in investing activities
|
|
|
|
|
Purchases of property and equipment
|
|
|
(363,540
|
)
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(363,540
|
)
|
Cash used in financing activities
|
|
|
|
|
Distributions to stockholders
|
|
|
(1,454,114
|
)
|
Proceeds from long-term debt
|
|
|
94,879
|
|
Payments on long-term debt
|
|
|
(427,094
|
)
|
|
|
|
|
|
Cash used in financing activities
|
|
|
(1,786,329
|
)
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
368,843
|
|
Cash and cash equivalents at beginning of year
|
|
|
361,806
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
730,649
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-149
CENTRAL
CARTING DISPOSAL, INC. AND
CCI HAULING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
|
|
NOTE 1
|
BUSINESS
DESCRIPTION
|
Nature of
Business
Central Carting Disposal, Inc. (CCD), founded in 1996 and
headquartered in Dade City, Florida, provides refuse collection
and disposal services to its commercial and residential
customers located in the Florida counties of Pasco, Citrus,
Sumter, Hillsborough and Hernando.
CCI Hauling, Inc. (CCI), founded in 2002 and headquartered in
Dade City, Florida, provides roll-off refuse collection and
disposal services to commercial customers located in the Florida
counties of Pasco, Citrus, Sumter, Hillsborough and Hernando.
Principles
of Combination and Consolidation
CCD and CCI (collectively the Company) have common
ownership and management. The financial statements of these two
companies have been combined in accordance with Financial
Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) Topic 810
Consolidation. All inter-company transactions are
eliminated in these combined financial statements.
|
|
NOTE 2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue
and expenses and disclosure of contingent assets and liabilities
at the date of the financial statements. Actual results could
differ from those estimates and such differences could affect
the results of operations reported in future periods.
Cash and
Cash Equivalents
The Company considers all cash accounts and all highly liquid
short-term investments purchased with an original maturity of
three months or less to be cash or cash equivalents. As of
December 31, 2010, the Company did not have any investments
with maturities greater than three months.
Accounts
Receivable
Accounts receivable consist of amounts due from customers for
services. Accounts receivable are reported net of an allowance
for doubtful accounts. The allowance is managements best
estimate of uncollectible amounts and is based on a number of
factors, including overall credit quality, age of outstanding
balances, historical write-off experience and specific account
analysis that projects the ultimate collectability of the
outstanding balances. As of December 31, 2010, the
allowance was $80,000.
Property
and Equipment
Property and equipment is stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization is
provided using the straight-line method over the estimated
useful lives of individual assets or classes of assets as
follows:
|
|
|
|
|
Office Equipment and Furniture
|
|
|
5 - 7 years
|
|
Containers
|
|
|
10 years
|
|
Leasehold Improvements
|
|
|
10 years
|
|
Vehicles
|
|
|
5 - 7 years
|
|
F-150
CENTRAL
CARTING DISPOSAL, INC. AND
CCI HAULING, INC.
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
When an asset is sold or otherwise disposed, the related cost
and accumulated depreciation or amortization are removed from
the respective accounts and the gain or loss is recognized.
Maintenance and repairs are charged to expense when incurred.
Intangible
Assets
The Company accounts for intangible assets under FASB ASC Topic
350, Intangibles-Goodwill and Other under which
intangible assets are recorded at cost. Those assets with a
determinable estimated useful life are amortized on a
straight-line basis over their estimated lives. Intangible
assets with an indefinite life are not subject to amortization.
These assets are evaluated at least annually for impairment in
accordance with FASB ASC
350-30-35-1,
Subsequent Measurement.
Long-lived
Assets
In accordance with FASB ASC
360-10-35
Impairment of Disposal of Long-lived Assets, losses
related to the impairment of long-lived assets are recognized
when the carrying amount is not recoverable and exceeds its fair
value. When facts and circumstances indicate that the carrying
values of long-lived assets may be impaired, management of the
Company evaluates recoverability by comparing the carrying value
of the assets to projected future cash flows, in addition to
other qualitative and quantitative analyses.
Revenue
Recognition
Revenue is recognized when the collection and disposal services
are performed. Deferred revenue consists of amounts collected
from customers as of December 31, 2010 for services to be
performed in the future.
Income
Taxes
Effective January 1, 1997, CCDs stockholders and on
October 23, 2002, CCIs stockholders elected that the
corporations be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under this provision, the
stockholders are taxed on their proportionate share of the
Companys taxable income. As a Subchapter
S corporation, the Company bears no liability or expense
for income taxes.
FASB ASC
740-10,
Income Taxes, clarifies the accounting for income
taxes, by prescribing a minimum recognition threshold a tax
position is required to meet before being recognized in the
balance sheet. It also provides guidance on derecognition,
measurement and classification of amounts related to uncertain
tax positions, accounting for and disclosure of interest and
penalties, accounting in interim period disclosures and
transition relating to the adoption of new accounting standards.
Under FASB ASC
740-10, the
recognition for uncertain tax positions should be based on a
more likely than not threshold that the tax position will be
sustained upon audit. The tax position is measured as the
largest amount of benefit that has a greater than fifty percent
probability of being realized upon settlement. Management has
determined that adoption of this topic has had no effect on the
Companys balance sheet.
Fair
Value of Financial Instruments
At December 31, 2010, the Company did not have any
outstanding financial derivative instruments. The carrying
amounts of cash and the current portion of accounts receivable
approximate fair value due to the short maturity of these
instruments. The non-current notes receivable are presented at
fair value due to rates generally being at current market rates.
The fair value of the Companys 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.
F-151
CENTRAL
CARTING DISPOSAL, INC. AND
CCI HAULING, INC.
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
Segment
Information
FASB ASC 280, Segment Reporting, establishes
standards for reporting information regarding operating segments
in annual financial statements. Operating segments are
identified as components of an enterprise for which separate
discrete financial information is available for evaluation by
the chief operating decision-maker, or decision-making group in
making decisions on how to allocate resources and assess
performance.
The Company manages, allocates resources and reports in one
business segment. The Companys chief operating
decision-maker, as defined under FASB ASC 280, is the
Companys chief executive officer. Based on the information
reviewed by its chief executive officer, the Company operates in
one business segment.
|
|
NOTE 3
|
PROPERTY
AND EQUIPMENT
|
Property and equipment as of December 31, 2010 consist of
the following:
|
|
|
|
|
Office equipment and furniture
|
|
$
|
58,121
|
|
Containers
|
|
|
1,043,898
|
|
Leasehold improvements
|
|
|
88,290
|
|
Vehicles
|
|
|
3,427,134
|
|
|
|
|
|
|
|
|
|
4,617,443
|
|
Less: accumulated depreciation
|
|
|
(2,737,423
|
)
|
|
|
|
|
|
|
|
$
|
1,880,020
|
|
|
|
|
|
|
Depreciation expense for the year ended December 31, 2010
is $490,340.
|
|
NOTE 4
|
INTANGIBLE
ASSETS
|
Intangible assets as of December 31, 2010 consist of the
following:
|
|
|
|
|
Customer lists
|
|
$
|
98,050
|
|
Non-compete agreements
|
|
|
67,450
|
|
|
|
|
|
|
|
|
|
165,500
|
|
Less: accumulated amortization
|
|
|
(53,905
|
)
|
|
|
|
|
|
|
|
$
|
111,595
|
|
|
|
|
|
|
Amortization expense for the year ended December 31, 2010
is $33,100.
At December 31, 2010, projected aggregate annual
amortization expense is as follows:
|
|
|
|
|
2011
|
|
$
|
33,100
|
|
2012
|
|
|
33,100
|
|
2013
|
|
|
30,350
|
|
2014
|
|
|
15,045
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
111,595
|
|
|
|
|
|
|
F-152
CENTRAL
CARTING DISPOSAL, INC. AND
CCI HAULING, INC.
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
Long-term debt as of December 31, 2010 consists of the
following:
|
|
|
|
|
Note payable on a company vehicle dated October 2006, due in
monthly installments of $4,186, including interest of 10.24%,
maturing September 2011, collateralized by vehicle costing
$197,502
|
|
$
|
32,238
|
|
Note payable on company vehicles dated December 2009, due in
monthly installments of $6,762 including interest of 9.55%,
maturing October 2011, collateralized by vehicles costing
$326,680
|
|
|
64,752
|
|
Note payable on a company vehicle dated June 2007, due in
monthly installments of $3,699 including interest of 8.46%,
maturing April 2012, collateralized by vehicle costing $184,131
|
|
|
52,477
|
|
Note payable on company vehicles dated March 2008, due in
monthly installments of $4,070 including interest of 8.50%,
maturing December 2013, collateralized by vehicles costing
$203,764
|
|
|
89,541
|
|
Note payable on company vehicles dated September 2008, due in
monthly installments of $4,030 including interest of 5.18%,
maturing September 2013, collateralized by vehicles costing
$212,629
|
|
|
123,706
|
|
Note payable on a company vehicle dated April 2009, due in
monthly installments of $4,979, including interest of 9.73%,
maturing February 2014, collateralized by vehicle costing
$240,506
|
|
|
166,379
|
|
Note payable on a company vehicle dated July 2009, due in
monthly installments of $3,146, including interest of 10.34%,
maturing May 2014, collateralized by vehicle costing $150,000
|
|
|
106,396
|
|
Note payable to a former shareholder dated October 2002, due in
monthly installments of $2,125 including interest of 5.00%,
maturing October 2012, unsecured
|
|
|
42,643
|
|
Note payable for insurance financing agreement dated July 2010,
due in monthly installments of $10,868, including interest of
7.35%, maturing April 2011, unsecured
|
|
|
42,812
|
|
|
|
|
|
|
|
|
|
720,944
|
|
Current portion
|
|
|
(370,808
|
)
|
|
|
|
|
|
Long-term portion
|
|
$
|
350,136
|
|
|
|
|
|
|
As of December 31, 2010, principal payments due on
long-term debt are as follows:
|
|
|
|
|
2011
|
|
$
|
370,808
|
|
2012
|
|
|
199,295
|
|
2013
|
|
|
125,664
|
|
2014
|
|
|
25,177
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
720,944
|
|
|
|
|
|
|
The Company was making monthly payments of $2,125 to a former
shareholder of the Company. This note is payable as a result of
the purchase of Company stock from this shareholder in 2002. The
balance on this note was paid off subsequent to year end.
F-153
CENTRAL
CARTING DISPOSAL, INC. AND
CCI HAULING, INC.
NOTES TO COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 6
|
RELATED
PARTY TRANSACTIONS
|
The Company leases its headquarters from the stockholder on a
month-to-month basis. During the year ended December 31,
2010, the Company paid this related party $53,028 as rent for
the use of this facility.
|
|
NOTE 7
|
SUPPLEMENTAL
FINANCIAL INFORMATION
|
Supplemental
Disclosure of Cash Flow Information
Supplemental cash flow information with respect to the year
ended December 31, 2010 is as follows:
|
|
|
|
|
Cash paid for:
|
|
|
|
|
Interest
|
|
$
|
81,256
|
|
|
|
|
|
|
Advertising
The company expenses advertising costs as incurred. Advertising
expenses for the year ended December 31, 2010 was
approximately $11,800.
Environmental
Liability
The Company is subject to liability for any environmental
damage, including personal injury and property damage arising
from off-site environmental contamination caused by pollutants
or hazardous substances if the Company arranges to transport,
treat or dispose of those materials. Any substantial liability
incurred by the Company arising from environmental damage could
have a material adverse effect on the Companys business,
financial condition and results of operations. The Company is
not presently aware of any situations that it expects would have
a material adverse impact on its results of operations or
financial condition.
|
|
NOTE 8
|
SUBSEQUENT
EVENTS
|
The Company evaluated all events and transactions through
June 27, 2011, the date these financial statements were
issued. During this period, there were no material recognizable
or non-recognizable subsequent events except for the following:
On June 6, 2011, the Company entered into an agreement
under which it sold certain assets and liabilities of the
Company to Choice Environmental Services, Inc., a wholly-owned
subsidiary of Swisher Hygiene, Inc. Assets sold included
substantially all supplies, accounts receivable, property and
equipment, rights under contracts, customer lists, and other
intangible assets.
F-154
SWISHER
HYGIENE INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS
On February 13, 2011, Swisher Hygiene Inc.
(Swisher or the Company) entered into an
agreement and plan of merger (the Agreement) by and
among Swisher, Swsh Merger Sub, Inc., Choice Environmental
Services, Inc., a Florida corporation (Choice), and
other parties set forth in the Agreement. The Agreement provided
for the acquisition of Choice by Swisher by way of merger. On
March 1, 2011, the parties completed the transaction and
Choice became a wholly-owned subsidiary of Swisher.
In connection with this transaction, Swisher issued
8,281,923 shares of its common stock to the former
shareholders of Choice and assumed approximately
$40.9 million in debt, and paid down $39.2 million of
this debt with proceeds from the February 11, 2011
Subscription Receipts Offering (the Offering).
Under the terms of the Offering, on February 11, 2011
Swisher issued 12,262,500 subscription receipts at a price of
$4.80 per subscription receipt, for aggregate gross proceeds of
$58,859,594. Each subscription receipt entitled the holder to
acquire one share of the common stock of Swisher, without
payment of any additional consideration, upon completion of the
Companys acquisition of Choice. On March 1, 2011 and
after the completion of the merger, the Company issued
12,262,500 shares of its common stock in exchange for the
outstanding subscription receipts.
The following unaudited pro forma condensed combined financial
statements are based on the historical consolidated financial
statements of Swisher and Choice after giving effect to
(i) the Companys acquisition of Choice on
March 1, 2011 as well as (ii) the issuance of common
stock under the terms of the Offering and the assumptions,
reclassifications, and adjustments described in the notes to
unaudited pro forma condensed combined financial statements.
These unaudited pro forma condensed combined financial
statements have been compiled from and include:
(a) An unaudited pro forma condensed combined balance sheet
combining the audited consolidated balance sheet of Swisher and
the unaudited consolidated balance sheet of Choice as of
December 31, 2010, included in the supplemental schedules
in the unaudited consolidated financial statements of Choice in
Exhibit 99.2, giving effect to the Choice acquisition as if
it occurred on December 31, 2010.
(b) An unaudited pro forma condensed combined statement of
operations combining the audited consolidated statement of
operations of Swisher for the year ended December 31, 2010
with the audited statement of operations of Choice for the year
ended September 30, 2010 (which is the fiscal year end of
Choice), included in the supplemental schedules in the audited
consolidated financial statements of Choice in Exhibit 99.1,
giving effect to the Choice acquisition as if it had occurred on
January 1, 2010. We believe any difference resulting from
the differing period end dates is immaterial to the pro forma
condensed combined financial statements.
The historical consolidated financial statements of Choice
included in Exhibit 99.1 and Exhibit 99.2, include
Choice Realty Holdings, LLC (Choice Realty), a
related party through common ownership, which is required to be
consolidated since Choice supports Choice Realty, who does not
have sufficient financial resources to support its own
activities. The Company did not purchase the assets of Choice
Realty in the acquisition of Choice; and, therefore, we have not
included Choice Realty in the historical amounts of Choice for
the following unaudited pro forma condensed combined financial
statements.
The unaudited pro forma condensed combined financial statements
are based on preliminary valuations of assets and liabilities
acquired and consideration paid in the acquisition of Choice.
These preliminary amounts could change as additional information
becomes available. These changes could result in material
variances between the Companys future financial results
and the amounts presented in these unaudited pro forma condensed
combined financial statements, including fair values recorded,
as well as expenses and cash flows associated with these items.
The unaudited pro forma condensed combined financial statements
are presented for illustrative purposes only and is not
necessarily indicative of the operating results that would have
occurred if the Company had
PF-2
operated Choice, or if the acquisition had occurred as of the
date or during the period presented, nor is it necessarily
indicative of future operating results or financial position.
The unaudited pro forma condensed combined financial statements
do not reflect any operating efficiencies
and/or cost
savings that the Company may achieve with respect to the
combined companies.
The unaudited pro forma condensed combined financial statements
should be read in conjunction with the historical audited
consolidated financial statements and notes to consolidated
financial statements of the Company, the historical audited
consolidated financial statements and notes to consolidated
financial statements of Choice, and the historical unaudited
consolidated financial statements and notes to consolidated
financial statements of Choice, which financial statements are
included in this report.
PF-3
SWISHER
HYGIENE INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 2010
(expressed
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swisher
|
|
|
Choice
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
|
|
|
|
Hygiene
|
|
|
Environmental
|
|
|
Pro Forma
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
Combined
|
|
|
|
Inc.
|
|
|
Services, Inc.
|
|
|
Adjustments
|
|
|
Notes
|
|
|
Adjustments
|
|
|
Notes
|
|
|
Pro Forma
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash
|
|
$
|
44,125
|
|
|
$
|
424
|
|
|
$
|
58,860
|
|
|
|
a
|
|
|
$
|
(47,832
|
)
|
|
|
b
|
|
|
$
|
55,577
|
|
Accounts receivable, net
|
|
|
7,068
|
|
|
|
6,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,209
|
|
Inventory
|
|
|
2,968
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,216
|
|
Deferred income taxes and other assets
|
|
|
895
|
|
|
|
1,108
|
|
|
|
|
|
|
|
|
|
|
|
(181
|
)
|
|
|
c
|
|
|
|
1,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
55,056
|
|
|
|
7,921
|
|
|
|
58,860
|
|
|
|
|
|
|
|
(48,013
|
)
|
|
|
|
|
|
|
73,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
11,324
|
|
|
|
25,787
|
|
|
|
|
|
|
|
|
|
|
|
3,956
|
|
|
|
d
|
|
|
|
41,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
29,660
|
|
|
|
13,958
|
|
|
|
|
|
|
|
|
|
|
|
35,902
|
|
|
|
e
|
|
|
|
79,520
|
|
Other intangible assets, net
|
|
|
7,669
|
|
|
|
3,251
|
|
|
|
|
|
|
|
|
|
|
|
27,469
|
|
|
|
e
|
|
|
|
38,389
|
|
Other noncurrent assets
|
|
|
2,525
|
|
|
|
2,217
|
|
|
|
|
|
|
|
|
|
|
|
(1,491
|
)
|
|
|
f
|
|
|
|
3,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
39,854
|
|
|
|
19,426
|
|
|
|
|
|
|
|
|
|
|
|
61,880
|
|
|
|
|
|
|
|
121,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
106,234
|
|
|
$
|
53,134
|
|
|
$
|
58,860
|
|
|
|
|
|
|
$
|
17,823
|
|
|
|
|
|
|
$
|
236,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
$
|
9,335
|
|
|
$
|
4,955
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
14,290
|
|
Short term obligations
|
|
|
15,379
|
|
|
|
9,682
|
|
|
|
|
|
|
|
|
|
|
|
(8,660
|
)
|
|
|
b, f
|
|
|
|
16,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
24,714
|
|
|
|
14,637
|
|
|
|
|
|
|
|
|
|
|
|
(8,660
|
)
|
|
|
|
|
|
|
30,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term obligations
|
|
|
31,029
|
|
|
|
32,398
|
|
|
|
|
|
|
|
|
|
|
|
(27,804
|
)
|
|
|
b, f
|
|
|
|
35,623
|
|
Deferred income tax liabilities
|
|
|
1,700
|
|
|
|
1,066
|
|
|
|
|
|
|
|
|
|
|
|
10,539
|
|
|
|
c
|
|
|
|
13,305
|
|
Other long term liabilities
|
|
|
2,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent liabilities
|
|
|
35,492
|
|
|
|
33,464
|
|
|
|
|
|
|
|
|
|
|
|
(17,265
|
)
|
|
|
|
|
|
|
51,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
46,028
|
|
|
|
5,033
|
|
|
|
58,860
|
|
|
|
a
|
|
|
|
43,748
|
|
|
|
h
|
|
|
|
153,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
106,234
|
|
|
$
|
53,134
|
|
|
$
|
58,860
|
|
|
|
|
|
|
$
|
17,823
|
|
|
|
|
|
|
$
|
236,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited pro forma condensed combined financial
statements
PF-4
SWISHER
HYGIENE INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF
OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2010
(expressed
in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Swisher
|
|
|
Choice
|
|
|
|
|
|
|
|
|
|
|
|
|
Hygiene
|
|
|
Environmental
|
|
|
Pro Forma
|
|
|
|
|
|
Pro Forma
|
|
|
|
Inc.
|
|
|
Services, Inc.
|
|
|
Adjustments
|
|
|
Notes
|
|
|
Combined
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
37,690
|
|
|
$
|
4,998
|
|
|
$
|
|
|
|
|
|
|
|
$
|
42,688
|
|
Services
|
|
|
17,737
|
|
|
|
39,896
|
|
|
|
|
|
|
|
|
|
|
|
57,633
|
|
Franchise and other
|
|
|
8,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
63,652
|
|
|
|
44,894
|
|
|
|
|
|
|
|
|
|
|
|
108,546
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
23,597
|
|
|
|
14,576
|
|
|
|
|
|
|
|
|
|
|
|
38,173
|
|
Route expenses
|
|
|
13,931
|
|
|
|
14,429
|
|
|
|
|
|
|
|
|
|
|
|
28,360
|
|
Selling, general and administrative
|
|
|
31,258
|
|
|
|
8,112
|
|
|
|
(534
|
)
|
|
|
d
|
|
|
|
38,836
|
|
Merger expenses
|
|
|
5,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,122
|
|
Depreciation and amortization
|
|
|
4,857
|
|
|
|
3,671
|
|
|
|
4,634
|
|
|
|
h
|
|
|
|
13,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
78,765
|
|
|
|
40,788
|
|
|
|
4,100
|
|
|
|
|
|
|
|
123,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from Operations
|
|
|
(15,113
|
)
|
|
|
4,106
|
|
|
|
(4,100
|
)
|
|
|
|
|
|
|
(15,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense), net
|
|
|
(757
|
)
|
|
|
(3,164
|
)
|
|
|
1,466
|
|
|
|
i
|
|
|
|
(2,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income Before Income Tax
|
|
|
(15,870
|
)
|
|
|
942
|
|
|
|
(2,634
|
)
|
|
|
|
|
|
|
(17,562
|
)
|
Income Tax Expense (Benefit)
|
|
|
1,700
|
|
|
|
577
|
|
|
|
(577
|
)
|
|
|
c
|
|
|
|
1,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
$
|
(17,570
|
)
|
|
$
|
365
|
|
|
$
|
(2,057
|
)
|
|
|
|
|
|
$
|
(19,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per Share Basic and diluted
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Common Shares Used in the Computation of
Loss per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
66,956,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,500,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited pro forma condensed combined financial
statements
PF-5
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
(expressed
in thousands, except share and per share amounts)
|
|
1.
|
Basis of
Pro Forma Presentation
|
The following unaudited pro forma condensed combined financial
statements are based on the historical consolidated financial
statements of Swisher and Choice after giving effect to
(i) the Companys acquisition of Choice on
March 1, 2011 as well as (ii) the issuance of common
stock under the terms of the Offering and the assumptions,
reclassifications, and adjustments described in the notes to
unaudited pro forma condensed combined financial statements.
These unaudited pro forma condensed combined financial
statements have been compiled from and include:
(a) An unaudited pro forma condensed combined balance sheet
combining the audited consolidated balance sheet of Swisher and
the unaudited consolidated balance sheet of Choice as of
December 31, 2010, included in the supplemental schedules
in the unaudited consolidated financial statements of Choice in
Exhibit 99.2, giving effect to the Choice acquisition as if
it occurred on December 31, 2010.
(b) An unaudited pro forma condensed combined statement of
operations combining the audited consolidated statement of
operations of Swisher for the year ended December 31, 2010
with the audited statement of operations of Choice for the year
ended September 30, 2010 (which is the fiscal year end of
Choice), included in the supplemental schedules in the audited
consolidated financial statements of Choice in Exhibit 99.1,
giving effect to the Choice acquisition as if it had occurred on
January 1, 2010. We believe any difference resulting from
the differing period end dates is immaterial to the pro forma
condensed combined financial statements.
The historical consolidated financial statements of Choice
include Choice Realty Holdings, LLC (Choice Realty), a related
party through common ownership, which is required to be
consolidated since Choice supports Choice Realty, who does not
have sufficient financial resources to support its own
activities. The Company did not purchase the assets of Choice
Realty in the acquisition of Choice; and, therefore, we have not
included Choice Realty in the historical amounts of Choice for
the following unaudited pro forma condensed combined financial
statements.
The unaudited pro forma condensed combined financial statements
are based on preliminary valuations of assets and liabilities
acquired and consideration paid in the acquisition of Choice.
These preliminary amounts could change as additional information
becomes available. These changes could result in material
variances between the Companys future financial results
and the amounts presented in these unaudited pro forma condensed
combined financial statements, including fair values recorded,
as well as expenses and cash flows associated with these items.
The unaudited pro forma condensed combined financial statements
are presented for illustrative purposes only and is not
necessarily indicative of the operating results that would have
occurred if the Company had operated Choice, or if the
acquisition had occurred as of the date or during the period
presented, nor is it necessarily indicative of future operating
results or financial position. The unaudited pro forma condensed
combined financial statements do not reflect any operating
efficiencies
and/or cost
savings that the Company may achieve with respect to the
combined companies.
The unaudited pro forma condensed combined financial statements
should be read in conjunction with the historical audited
consolidated financial statements and notes to consolidated
financial statements of the Company contained in its 2010 Annual
Report on
Form 10-K
for the year ended December 31, 2010, filed with Securities
and Exchange Commission on March 31, 2011; the historical
audited consolidated financial statements and notes to
consolidated financial statements of Choice, which are included
as Exhibit 99.1 to this Current Report on
Form 8-K/A;
and the historical unaudited consolidated financial statements
and notes to
PF-6
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
(expressed
in thousands, except share and per share amounts)
consolidated financial statements of Choice, which are included
as Exhibit 99.2 to this Current Report on
Form 8-K/A.
|
|
2.
|
Preliminary
Estimated Purchase Price Allocation
|
The following table represents the preliminary estimated
purchase price allocation as of March 1, 2011 (in
thousands):
|
|
|
|
|
Consideration:
|
|
|
|
|
Issuance of shares at stock price of $5.89
|
|
$
|
48,781
|
|
Debt assumed
|
|
|
42,798
|
|
Cash paid
|
|
|
5,700
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
97,279
|
|
|
|
|
|
|
The debt assumed includes a prepayment penalty of $1,854 as a
result of the Company paying down $39,216 of the assumed debt as
part of the acquisition of Choice as of March 1, 2011.
The preliminary allocation of the purchase price is based on the
best information available to management at the time that these
unaudited pro forma condensed combined financial statements were
filed. This allocation is provisional, as the Company is
required to recognize additional assets or liabilities if new
information is obtained about facts and circumstances that
existed as of March 1, 2011 that, if known, would have
resulted in the recognition of those assets or liabilities as of
that date. The Company may adjust the preliminary purchase price
allocation after obtaining addition information regarding asset
valuation, liabilities assumed and revisions of previous
estimates. The following table summarizes the preliminary
allocation of the purchase price based on the estimated fair
value of the acquired assets and assumed liabilities of Choice
as of March 1, 2011 as follows (in thousands):
|
|
|
|
|
Net tangible assets acquired:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
341
|
|
Receivables, net
|
|
|
6,096
|
|
Inventory
|
|
|
151
|
|
Property and equipment
|
|
|
29,743
|
|
Franchise agreements
|
|
|
27,840
|
|
Non compete agreements
|
|
|
2,880
|
|
Other assets
|
|
|
1,536
|
|
Accounts payable and expenses
|
|
|
(6,221
|
)
|
Capital leases
|
|
|
(3,995
|
)
|
Deferred income tax liabilities
|
|
|
(11,605
|
)
|
|
|
|
|
|
|
|
|
46,766
|
|
Goodwill
|
|
|
50,513
|
|
|
|
|
|
|
Total purchase price
|
|
|
97,279
|
|
Less: Debt assumed
|
|
|
40,944
|
|
Less: Issuance of shares
|
|
|
48,781
|
|
|
|
|
|
|
Cash paid (including prepayment penalty)
|
|
$
|
7,554
|
|
|
|
|
|
|
PF-7
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
(expressed
in thousands, except share and per share amounts)
Employment agreements were entered into with four individuals as
part of the acquisition of Choice. These employment agreements
provided a salary, bonus, stock option and restricted stock
awards, and included a covenant to not compete for a
2.5 year period. The bonus available is equal to 50% of the
employees salary and is contingent on the performance of
Choice for the calendar year 2010. The salary, stock awards, and
bonus will all be recorded as compensation over the periods in
which it is earned and we have not made any adjustments for
these items in the unaudited pro forma condensed combined
financial statements.
|
|
3.
|
Pro forma
adjustments (a, b, c, d, e, f, g, h, and i as referenced in the
unaudited pro forma condensed combined financial
statements)
|
The adjustments included in the unaudited pro forma condensed
combined financial statements are those that are considered to
be directly attributable to the acquisition of Choice and the
issuance of common stock under the terms of the Offering and
that provide information as to how the condensed combined
historical financial statements may have been affected had those
events occurred as of December 31, 2010, and at the
beginning of the year ended December 31, 2010,
respectively. These adjustments are as follows:
|
|
(a)
|
Proceeds
from the Offering and issuance of Swisher common stock (in
thousands, except per share data)
|
In connection with the announced acquisition of Choice, on
February 11, 2011, we issued 12,262,500 subscription
receipts at a price of $4.80 for aggregate gross proceeds of
$58,860. Each subscription receipt entitled the holder to
acquire one share of the Companys common stock upon
completion of the Companys acquisition of Choice. After
completion of the acquisition of Choice on March 1, 2011,
the Company issued 12,262,500 shares of its common stock in
exchange for the outstanding subscription receipts. The
adjustment does not include a reduction in the actual cash
received by the Company for fees of approximately $3,178.
In connection with the consummation of the acquisition of
Choice, on March 1, 2011 we paid $5,700 of cash to certain
shareholders of Choice who received warrants to purchase 918,076
additional shares of the Companys common stock at an
exercise price of $6.21. Additionally, the pro forma adjustments
reflect the pay off of $40,278 of the Choice debt present at
December 31, 2010 and an additional $1,854 prepayment
penalty. See pro forma adjustment (f).
We made the following adjustments to deferred taxes as a result
of the acquisition of Choice (in thousands):
|
|
|
|
|
|
|
Net
|
|
|
|
increase
|
|
|
|
(decrease)
|
|
|
Deferred tax assets
|
|
$
|
(181
|
)
|
Deferred tax liabilities
|
|
|
10,539
|
|
|
|
|
|
|
|
|
$
|
10,358
|
|
|
|
|
|
|
Deferred taxes are primary due to temporary differences related
to intangibles and property and equipment and have been
calculated based on a statutory rate. In addition, we made an
adjustment for $577 for income tax expense as the Choice 2010
taxable income would have been able to be offset against the
combined companies net operating losses if Swisher had operated
Choice during 2010.
PF-8
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
(expressed
in thousands, except share and per share amounts)
|
|
(d)
|
Property
and equipment
|
Upon completion of the acquisition of Choice, the Company
estimated the fair value of property and equipment acquired and
property leased under capital leases. We made the following
adjustments between the historical net value and the estimated
fair value of the property and equipment, including capital
leased property, acquired at December 31, 2010 as well as
changes to depreciation expense for the year ended
December 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
|
Estimated
|
|
|
|
cost, net
|
|
|
fair value
|
|
|
Machinery and equipment
|
|
$
|
6,368
|
|
|
$
|
6,224
|
|
Vehicles
|
|
|
18,690
|
|
|
|
19,748
|
|
Capital leases
|
|
|
|
|
|
|
3,049
|
|
Leasehold improvements
|
|
|
659
|
|
|
|
659
|
|
Office equipment
|
|
|
70
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,787
|
|
|
$
|
29,743
|
|
|
|
|
|
|
|
|
|
|
Increase in depreciation expense. See pro forma adjustment(h)
|
|
|
|
|
|
$
|
384
|
|
|
|
|
|
|
|
|
|
|
See pro forma adjustment (f) for capital lease obligations
related to the leased property that were executed in connection
with the Choice acquisition with shareholders of Choice. We also
made an adjustment of $534 for rent expense related to the
capital leases.
|
|
(e)
|
Goodwill
and other intangibles(in thousands)
|
Goodwill
We recorded a pro forma adjustment related to goodwill of
$35,902 as a result of the purchase price allocation of the
acquired assets and liabilities of Choice assuming the
transaction occurred on December 31, 2010. This adjustment
also includes the removal of the historical Choice goodwill as
of December 31, 2010 of $13,958.
Other
intangibles
We recorded a pro forma adjustment related to other intangibles
of $27,469 to record the fair value of the following
identifiable other intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Weighted
|
|
|
Amortization
|
|
|
|
fair value
|
|
|
average life
|
|
|
expense
|
|
|
Franchise agreements
|
|
$
|
27,840
|
|
|
|
7
|
|
|
$
|
3,977
|
|
Non compete agreements
|
|
|
2,880
|
|
|
|
2.5
|
|
|
|
1,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,720
|
|
|
|
6.6
|
|
|
$
|
5,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pro forma adjustment includes the removal of other
intangibles of $3,251 on the historical Choice balance sheet at
December 31, 2010.
We adjusted amortization expense to remove the $879 of
amortization expense from the historical Choice statement of
operations for the year ended September 30, 2010 and
recorded the amount of $5,129 for amortization expense for the
year ended December 31, 2010, related to the acquired
intangibles as if the acquisition of Choice occurred on
January 1, 2010. See pro forma adjustment (h).
PF-9
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
(expressed
in thousands, except share and per share amounts)
|
|
(f)
|
Debt,
including capital leases(in thousands)
|
Pro forma adjustments include (i) the payoff of $40,278 of
the assumed Choice debt present at December 31, 2010,
(ii) the capital leases entered into in connection with the
acquisition of Choice, (iii) the revaluation of the
remaining assumed debt to fair value, and (iv) the removal
of unamortized debt financing costs of $1,491 included in other
noncurrent assets on the unaudited condensed balance sheet of
Choice at December 31, 2010.
|
|
|
|
|
Debt paid down
|
|
$
|
(40,278
|
)
|
Capital leases entered into in connection with the acquisition
of Choice
|
|
|
3,995
|
|
Fair value adjustment for the remaining Choice debt
|
|
|
(181
|
)
|
|
|
|
|
|
Total pro forma adjustments to debt, including capital leases
|
|
$
|
(36,464
|
)
|
|
|
|
|
|
In connection with the payoff of $40,278 of the assumed Choice
debt present at December 31, 2010, the Company would have
paid a prepayment penalty of $1,854. Total cash paid in
connection with the retirement of the debt is:
|
|
|
|
|
Debt paid down in the acquisition of Choice
|
|
$
|
40,278
|
|
Prepayment penalty
|
|
|
1,854
|
|
|
|
|
|
|
|
|
$
|
42,132
|
|
|
|
|
|
|
See pro forma adjustment (h) below for interest expense and
amortization related to debt discounts and debt financing costs.
We recorded the following adjustments to the equity accounts
(in thousands):
|
|
|
|
|
Equity
|
|
|
|
|
Shares issued in connection with the private placement
|
|
$
|
58,860
|
|
|
|
|
|
|
Elimination of historical equity accounts of Choice
|
|
|
(5,033
|
)
|
Shares issued in connection with the acquisition of Choice
|
|
|
48,781
|
|
|
|
|
|
|
|
|
$
|
43,748
|
|
|
|
|
|
|
|
|
(h)
|
Depreciation
and amortization
|
We recorded the following adjustments to depreciation and
amortization (in thousands):
|
|
|
|
|
Adjustment for difference in amortization of acquired other
intangibles acquired in the Choice acquisition ($5,129-$879).
See pro forma adjustment(e)
|
|
$
|
4,250
|
|
Adjustment for depreciation of property leased under capital
leases. See pro forma adjustment(d)
|
|
|
313
|
|
Adjustment for difference in depreciation of fixed assets, other
than capital leases, based on fair value. See pro forma
adjustment(d)
|
|
|
71
|
|
|
|
|
|
|
|
|
$
|
4,634
|
|
|
|
|
|
|
PF-10
SWISHER
HYGIENE INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL
STATEMENTS (Continued)
(expressed
in thousands, except share and per share amounts)
We recorded the following adjustments to interest expense (in
thousands):
|
|
|
|
|
Elimination of interest expense for debt paid down. See pro
forma adjustment(f)
|
|
$
|
(1,630
|
)
|
Interest expense related to capital lease obligations. See pro
forma adjustment(f)
|
|
|
230
|
|
Elimination of interest expense for amortization of debt
discounts and debt financing costs related to debt paid down.
See pro forma adjustment(f)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
$
|
(1,466
|
)
|
|
|
|
|
|
|
|
4.
|
Pro forma
Earnings Per Share
|
The pro forma basic and diluted earnings per share amounts
presented in the unaudited pro forma condensed combined
statements of operations are based on the weighted average
number of the Companys common shares outstanding at
December 31, 2010 as adjusted for the following:
|
|
|
|
|
Basic and Diluted
|
|
|
|
|
Weighted-average common shares outstanding, as reported
|
|
|
66,956,371
|
|
Shares issued in connection with the acquisition of Choice
|
|
|
8,281,923
|
|
Shares issued in connection with the private placement
|
|
|
12,262,500
|
|
|
|
|
|
|
Weighted-average common shares outstanding, pro forma
|
|
|
87,500,794
|
|
|
|
|
|
|
PF-11
Part II
Information
Not Required In Prospectus
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution
|
|
|
|
|
|
|
|
Amount
|
|
|
Securities and Exchange Commission Registration Fee
|
|
$
|
5,373
|
|
Legal Fees and Expenses
|
|
|
25,000
|
|
Accounting Fees and Expenses
|
|
|
5,000
|
|
Miscellaneous Expenses
|
|
|
12,000
|
|
|
|
|
|
|
Total
|
|
$
|
47,373
|
|
|
|
|
|
|
All amounts are estimates, other than the SECs
registration fee.
We are paying all expenses of the offering listed above. No
portion of these expenses will be borne by the selling
stockholders. The selling stockholders, however, will pay all
underwriting discounts and selling commissions, if any.
|
|
Item 14.
|
Indemnification
of Directors and Officers
|
We are a corporation organized under the laws of the State of
Delaware. Section 102(b)(7) of the General Corporation Law
of the State of Delaware permits a corporation to provide in its
certificate of incorporation that a director of the corporation
shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty
as a director, except for liability (i) for any breach of
the directors duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation
of law, (iii) for unlawful payments of dividends or
unlawful stock repurchases, redemptions or other distributions
or (iv) for any transaction from which the director derived
an improper personal benefit. Our certificate of incorporation
provides that a director shall not be liable to us or our
stockholders, except to the extent such exemption from liability
or limitation thereof is not permitted under the General
Corporation Law of the State of Delaware.
Section 145 of the General Corporation Law of the State of
Delaware provides that a corporation has the power to indemnify
a director, officer, employee or agent of the corporation and
certain other persons serving at the request of the corporation
in related capacities against amounts paid and expenses
(including attorneys fees) incurred in connection with an
action or proceeding (other than an action or proceeding brought
by or in the right of the corporation) to which such person is
or is threatened to be made a party by reason of such position,
if such person shall have acted in good faith and in a manner
such person reasonably believed to be in or not opposed to the
best interest of the corporation, and, in any criminal
proceeding, if such person had no reasonable cause to believe
his conduct was unlawful. Section 145 of the General
Corporation Law of the State of Delaware further provides that,
in the case of actions brought by or in the right of the
corporation, such corporation has the power to indemnify such
person only against expenses (including attorneys fees)
incurred in connection with the defense or settlement of an
action or proceeding to which such person is or is threatened to
be made a party by reason of such position, if such person shall
have acted in good faith and in a manner the person reasonably
believes to be in or not opposed to the best interests of the
corporation, and no indemnification shall be made with respect
to any matter as to which such person shall have been adjudged
to be liable to the corporation unless and only to the extent
that the adjudicating court determines that such indemnification
is proper under the circumstances. Section 145 further
provides that, to the extent a present or former director of the
corporation has been successful on the merits or otherwise in
any such action, suit or proceeding, or in defense of any claim,
issue or matter therein, such person shall be indemnified
against expenses (including attorneys fees) actually and
reasonably incurred by such person in connection therewith. It
also provides that the expenses (including attorneys fees)
incurred by an officer or director of the corporation in
defending any civil, criminal, administrative or investigative
action, suit or proceeding may be
II-1
paid by the corporation in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking
by or on behalf of such director or officer to repay such amount
if it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as provided by
Section 145 of the General Corporation Law of the State of
Delaware. Such expenses (including attorneys fees)
incurred by former directors and officers or other employees and
agents of the corporation or by persons serving at the request
of the corporation as directors, officers, employees or agents
of another corporation, partnership, joint venture, trust or
other enterprise may be so paid upon such terms and conditions,
if any, as the corporation deems appropriate.
Our bylaws provide that we will indemnify our current and former
directors and officers and persons who, while serving as a
director or officer of Swisher Hygiene, act or acted at our
request as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust,
enterprise or nonprofit entity, including service with respect
to employee benefit plans, against all liability and loss
suffered and expenses (including attorneys fees)
reasonably incurred, to the fullest extent permitted by the
General Corporation Law of the State of Delaware. In addition,
our bylaws provide that we will pay the expenses (including
attorneys fees) incurred by any such person in defending
any proceeding in advance of its final disposition, provided
that such payment will be made only upon the receipt of an
undertaking by such person to repay all amounts if it is
ultimately determined that such person is not entitled to
indemnification.
At present, there is no pending litigation or proceeding
involving any of our directors or officers in which
indemnification or advancement is sought. We are not aware of
any threatened litigation that may result in claims for
advancement or indemnification.
We have been advised that in the opinion of the SEC, insofar as
indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and other persons
pursuant to the foregoing provisions, or otherwise, such
indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. In the event a
claim for indemnification against such liabilities (other than
payment of expenses incurred or paid by a director or officer in
the successful defense of any action, suit or proceeding) is
asserted by such director, officer or other person in connection
with the securities being registered, we will, unless in the
opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities
|
On November 1, 2010, Swisher Hygiene completed its
Redomestication to Delaware from Canada, where it had been a
publicly-traded corporation, listed on the TSX under the name
CoolBrands International Inc. and trading under the symbol
COB. On November 2, 2010, Swisher International
completed the Merger with Swisher Hygiene. In the Merger, the
former stockholders of Swisher International received
57,789,630 shares of Swisher Hygiene common stock,
representing, on a fully diluted basis, a 48% ownership interest
in Swisher Hygiene, in exchange for all of the issued and
outstanding shares of Swisher International. The stockholders of
CoolBrands retained 52% of the company. As a result of the
Merger, Swisher International is a wholly-owned subsidiary of
Swisher Hygiene, which continues to trade on the TSX under the
symbol SWI.
On November 1, 2010, in connection with the
Redomestication, Swisher Hygiene issued the following securities:
(a) 56,225,433 shares of Swisher Hygiene common stock
to approximately 338 holders of CoolBrands common stock in
exchange for 56,225,433 shares of CoolBrands common stock;
(b) options to purchase up to 880,000 shares of
Swisher Hygiene common stock to six persons, in exchange for
options to purchase 880,000 shares of CoolBrands common
stock; and
(c) warrants to purchase 5,500,000 shares of common
stock of Swisher Hygiene to one person, in exchange for warrants
to purchase 5,500,000 shares of common stock of CoolBrands.
II-2
On November 2, 2010, in connection with the Merger, Swisher
Hygiene also issued the following securities:
(d) 57,789,630 shares of Swisher Hygiene common stock
to 11 former stockholders of Swisher International in exchange
for 1,212,890 shares of Swisher International common
stock; and
In connection with acquisitions and private placements, Swisher
Hygiene also issued the following securities:
(e) On November 8, 2010, in connection with the
acquisition of certain assets of Gateway ProClean, Inc., Swisher
Hygiene issued a promissory note to Gateway ProClean, Inc.,
which note is convertible for up to 1,312,864 shares of our
common stock;
(f) On December 7, 2010, in connection with the
acquisition certain assets of Lasfam Investments Inc., Swisher
Hygiene issued a promissory note to Lasfam Investments Inc.,
which note is convertible for up to 1,027,122 shares of our
common stock;
(g) On December 31, 2010, in connection with our entry
into a distribution agreement with Cheney Bros. and related
acquisition of certain assets of Cheney Bros. warewashing and
laundry business, Swisher Hygiene issued two promissory notes to
Cheney Bros., which notes are convertible for up to
291,928 shares of our common stock;
(h) On January 10, 2011, in connection with the
acquisition of certain assets of En-Viro Solutions, Inc.,
Swisher Hygiene issued a promissory note to En-Viro Solutions,
Inc., which note is convertible for up to 374,263 shares of
common stock;
(i) On January 12, 2011, in connection with the
acquisition of certain assets of ASC Hygiene, Inc., Swisher
Hygiene issued a promissory note to ASC Hygiene, Inc., which
note is convertible for up to 553,304 shares of common
stock;
(j) On January 24, 2011, in connection with the
acquisition of the outstanding equity interest in Express
Restaurant Equipment Service, Inc., Swisher Hygiene issued a
promissory note to Robert and Tamara Boyd, which note is
convertible for up to 412,444 shares of common stock;
(k) On February 8, 2011, in connection with the
acquisition of the outstanding shares of IPABE, Inc., Swisher
Hygiene issued a promissory note to Gerardo Jimenez, which note
is convertible for up to 107,143 shares of our common stock;
(l) On March 1, 2011, Swisher Hygiene issued
12,262,500 shares of our common stock in exchange for
12,262,500 subscription receipts;
(m) On March 1, 2011, in connection with the
acquisition of Choice, Swisher Hygiene issued
8,281,924 shares of our common stock to the former
shareholders of Choice and two of Choices officers
received warrants to purchase an additional 688,557 shares
and an additional 229,519 shares of common stock,
respectively, at an exercise price of $6.21 (the
Warrants). The Warrants expired unexercised on
March 31, 2011;
(n) On March 7, 2011, in connection with the
acquisition of certain assets of ADCO Services, Inc., Swisher
Hygiene issued 25,594 shares of our common stock to ADCO
Services, Inc.;
(o) On March 8, 2011, in connection with the
acquisition of the healthcare and hospitality division of
Solvents and Petroleum Service, Inc., Swisher Hygiene issued
67,712 shares of our common stock to Solvents and Petroleum
Service, Inc.;
(p) On March 9, 2011, in connection with the
acquisition of certain assets of Logico Associates, Inc.,
Swisher Hygiene issued 149,502 shares of our common stock
to Logico Associates, Inc.;
(q) On March 14, 2011, in connection with the
acquisition of certain assets of Nebraska Hygiene, Inc., Swisher
Hygiene issued 38,136 shares of our common stock to
Nebraska Hygiene, Inc.;
II-3
(r) On March 28, 2011, in connection with the
acquisition of certain assets of Goldman Management Associates,
Swisher Hygiene issued a promissory note to Goldman Management
Associates, which note is convertible for up to
900,000 shares of our common stock;
(s) On March 28, 2011, in connection with the
acquisition of certain assets of En-Viro Solutions HI, Inc.,
Swisher Hygiene issued 17,138 shares of our common stock;
(t) On March 22, 2011, Swisher Hygiene entered into a
series of arms length securities purchase agreements to
sell 12,000,000 shares of our common stock at a price of
$5.00 per share, for aggregate proceeds of $60,000,000 to
certain funds of a global financial institution. On
March 23, 2011, Swisher Hygiene closed the private
placement and issued 12,000,000 shares of Swisher
Hygienes common stock;
(u) On April 11, 2011, in connection with the
acquisition of Lawson Sanitation LLC, Swisher Hygiene issued
909,090 shares of our common stock to John Lawson, Jr.;
(v) On March 30, 2011, in connection with the
satisfaction of additional consideration involved in the
acquisition of certain assets of Total Cost Systems, Inc.,
Swisher Hygiene issued 218,760 shares of our common stock
to Total Cost Systems, Inc.;
(w) On March 30, 2011 in connection with the
acquisition of certain assets of Chicagoland Hygiene, Inc.,
Swisher Hygiene issued 23,552 shares of our common stock to
Chicagoland Hygiene, Inc. and 60,425 shares of common stock
to Robert F. Riley;
(x) On March 30, 2011, in connection with the
acquisition of
A-1
Solutions, LLC, Swisher Hygiene issued 27,304 shares of our
common stock to Peter Tooley;
(y) On March 31, 2011, in connection with the
acquisition of certain assets of Intercon Chemical Company,
Swisher Hygiene issued 20,379 shares of our common stock to
Intercon Chemical Company;
(z) On April 8, 2011, in connection with the
acquisition of certain assets of Q Linen Service Inc., Swisher
Hygiene issued 37,479 shares of our common stock to Q Linen
Service Inc.;
(aa) On April 12, 2011, in connection with the
acquisition of Hallmark Sales and Service, Inc., Swisher Hygiene
issued 24,437 shares of our common stock to Harry F.
Noyes, Jr.;
(bb) On April 11, 2011, in satisfaction of a
promissory note issued in connection with the acquisition of
certain assets of Budgetchem.com, Swisher Hygiene issued
50,027 shares of our common stock to Jay Felen;
(cc) On March 28, 2011, in connection with the
acquisition of certain assets of J.F. Daley International Ltd.,
Swisher Hygiene issued 32,751 shares of our common stock to
J.F. Daley International Ltd.;
(dd) On April 14, 2011, in connection with the
acquisition of the minority equity interests of Service
Tallahassee, LLC, Swisher Hygiene issued 25,000 shares of
our common stock to Todd Bierling;
(ee) On April 15, 2011, Swisher Hygiene entered into a
series of arms length securities purchase agreements to
sell 9,857,143 shares of our common stock at a price of
$7.70 per share, for aggregate proceeds of $75.9 million to
certain funds of a global financial institution. Swisher Hygiene
completed this private placement on April 19, 2011; and
(ff) On July 22, 2011, in connection with the
acquisition of certain assets of GLC Linen, LLC, Swisher Hygiene
issued a promissory note to Donald Gravette, which note is
convertible for up to 201,925 shares of our common stock.
No underwriters were involved in any of the issuances of
securities described in paragraphs (a) through (ff) above,
all of which were exempt from the registration requirements of
the Securities Act. The securities described in paragraphs
(a) through (c) were issued in accordance with
Section 3(a)(10) of the Securities Act following a hearing
at which the Ontario Superior Court of Justice (Commercial
List), upon notice duly provided to the security holders of
CoolBrands and upon approval of the plan of arrangement by such
security
II-4
holders at a meeting held for that purpose, determined that the
transactions described in the plan of arrangement were fair to
the security holders of CoolBrands, including all of the persons
to whom the securities were issued. Before the hearing, which
was open to all CoolBrands security holders, the Ontario
Superior Court of Justice (Commercial List) was informed that
Swisher Hygiene intended to rely on the Courts fairness
determination to conduct the exchange transaction without
registration under the Federal securities laws of the
U.S. Except in the case of securities issued to affiliates
of Swisher Hygiene or former affiliates of CoolBrands, the
securities may be resold without restriction.
The issuance of the securities described in subparagraphs
(d) through (ff) above were exempt from the registration
requirements of the Securities Act afforded by Section 4(2)
thereof and Regulation D promulgated thereunder, which
exception Swisher Hygiene believes is available because the
securities were not offered pursuant to a general solicitation
and such issuances were otherwise made in compliance with the
requirements of Regulation D and Rule 506. The
securities issued in these transactions are restricted and may
not be resold except pursuant to an effective registration
statement filed under the Securities Act or pursuant to a valid
exemption from the registration requirements of the Securities
Act.
A total of 55,789,632 of the 57,789,630 shares of Swisher
Hygiene common stock issued in the Merger to former stockholders
of Swisher International, Inc. are subject to
lock-up
agreements whereby such shares cannot be sold or transferred for
the period ending upon the earlier of (i) the public
release of the companys consolidated earnings for fiscal
year 2011 or (ii) March 31, 2012.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger, among CoolBrands International
Inc., CoolBrands International (Nevada), Inc., Swisher
International, Inc. and Steven R. Berrard, dated as of
August 17, 2010.(1)
|
|
2
|
.2
|
|
Plan of Arrangement, dated November 1, 2010.(1)
|
|
3
|
.1
|
|
Certificate of Corporate Domestication of CoolBrands
International Inc., dated November 1, 2010.(1)
|
|
3
|
.2
|
|
Amended and Restated Certificate of Incorporation(2)
|
|
3
|
.3
|
|
Bylaws of Swisher Hygiene Inc.(1)
|
|
5
|
.1
|
|
Opinion of Akerman Senterfitt.
|
|
10
|
.1
|
|
Credit Agreement by and between Swisher International, Inc. and
Wachovia Bank, National Association, dated November 14,
2005.(3)
|
|
10
|
.2
|
|
Security Agreement by and among Swisher International, Inc. and
certain subsidiaries of Swisher International, Inc., dated as of
November 14, 2005.(1)
|
|
10
|
.3
|
|
First Amendment to Credit Agreement by and between Swisher
International, Inc. and Wachovia Bank, National Association,
dated as of April 26, 2006.(1)
|
|
10
|
.4
|
|
Second Amendment and Waiver to Credit Agreement by and between
Swisher International, Inc. and Wachovia Bank, National
Association, dated as of September 8, 2006.(1)
|
|
10
|
.5
|
|
Third Amendment and Waiver to Credit Agreement by and between
Swisher International, Inc. and Wachovia Bank, National
Association, dated as of March 21, 2008.(1)
|
|
10
|
.6
|
|
Fourth Amendment and Waiver to Credit Agreement by and between
Swisher International, Inc. and Wachovia Bank, National
Association, dated June 25, 2008.(1)
|
|
10
|
.7
|
|
Fifth Amendment and Waiver to Credit Agreement by and between
Swisher International, Inc., Wachovia Bank, National
Association, and other persons party thereto, dated
June 30, 2009.(1)
|
|
10
|
.8
|
|
Sixth Amendment to Credit Agreement by and between Swisher
International, Inc., Wachovia Bank, National Association and
other persons party thereto, dated November 18, 2009.(1)
|
|
10
|
.9
|
|
Credit Agreement by and between HB Service, LLC and Wachovia
Bank, National Association, dated as of June 25, 2008.(1)
|
|
10
|
.10
|
|
First Amendment and Waiver to Credit Agreement by and between HB
Service, LLC, Wachovia Bank, National Association and other
persons party thereto, dated as of June 30, 2009.(1)
|
II-5
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.11
|
|
Second Amendment to Credit Agreement by and between HB Service,
LLC, Wachovia Bank, National Association, and other persons
party thereto, dated November 18, 2009.(1)
|
|
10
|
.12
|
|
Omnibus Amendment Agreement, Limited Consent and Waiver by and
between Swisher International, Inc., HB Service, LLC, Wells
Fargo Bank, National Association and other persons party
thereto, dated August 13, 2010.(1)
|
|
10
|
.13
|
|
Omnibus Amendment Agreement, Limited Consent and Waiver by and
between Swisher International, Inc., HB Service, LLC, Wells
Fargo Bank, National Association and other persons party
thereto, dated October 28, 2010.(1)
|
|
10
|
.14
|
|
Unconditional Guaranty by and among Swisher International, Inc.,
H. Wayne Huizenga and Wachovia Bank, National Association, dated
June 25, 2008.(1)
|
|
10
|
.15
|
|
Unconditional Guaranty by and among HB Service, LLC, H. Wayne
Huizenga and Wachovia Bank, National Association, dated
June 25, 2008.(1)
|
|
10
|
.16
|
|
Promissory Note, dated May 26, 2010, as amended, in the
principal amount of $21,445,000 to Royal Palm Mortgage Group,
LLC.(1)
|
|
10
|
.17
|
|
Amended and Restated Security Agreement by and between H. Wayne
Huizenga and Wachovia Bank, National Association, dated January
2010.(1)
|
|
10
|
.18
|
|
Capital Contribution Agreement by and among H. Wayne Huizenga,
Steven R. Berrard and Swisher International, Inc., dated
July 13, 2010.(1)
|
|
10
|
.19
|
|
Form of
Lock-Up
Agreement.(1)
|
|
10
|
.20
|
|
Promissory Note, dated August 9, 2010, in the principal
amount of $2,000,000 to Royal Palm Mortgage Group, LLC.(1)
|
|
10
|
.21
|
|
Promissory Note, dated August 9, 2010, in the principal
amount of $1,500,000 to Royal Palm Mortgage Group, LLC.(1)
|
|
10
|
.22
|
|
Omnibus Amendment Agreement, Limited Consent and Waiver by and
between Swisher International, Inc., HB Service, LLC, Wells
Fargo Bank, National Association and other persons party
thereto, dated November 5, 2010.(1)
|
|
10
|
.23
|
|
Vendor Agreement, dated July 25, 2008, between Swisher
Hygiene Franchise Corp. and Intercon Chemical Company (Portions
of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for
confidential treatment.)(3)
|
|
10
|
.24
|
|
Credit Agreement among Swisher Hygiene, Inc., the lenders named
therein and Wells Fargo Bank, National Association, dated
March 30, 2011.(4)
|
|
10
|
.25
|
|
Pledge and Security Agreement by Swisher Hygiene Inc., certain
subsidiaries of Swisher Hygiene, Inc. named therein, and Wells
Fargo Bank, National Association, dated March 30, 2011
(portions of this exhibit have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a
request for confidential treatment).(4)
|
|
10
|
.26
|
|
Guaranty Agreement by certain subsidiaries of Swisher Hygiene
Inc. and Guaranteed Parties named therein, dated March 30,
2011.(4)
|
|
10
|
.27
|
|
Securities Purchase Agreement, dated March 22, 2011. (On
March 22, 2011, Swisher Hygiene Inc. entered into an
additional 11 securities purchase agreements which are
substantially identical in all material respects to this exhibit
expect as to the parties thereto and the number of shares of
common stock of Swisher Hygiene purchased. Attached to this
exhibit is a schedule identifying the parties to the additional
11 securities purchase agreements and the number of shares of
common stock of Swisher Hygiene purchased by such parties.)(5)
|
|
10
|
.28
|
|
Securities Purchase Agreement, dated April 15, 2011. (On
April 15, 2011, Swisher Hygiene Inc. entered into an
additional 16 securities purchase agreements which are
substantially identical in all material respects to this exhibit
expect as to the parties thereto and the number of shares of
common stock of Swisher Hygiene purchased. Attached to this
exhibit is a schedule identifying the parties to the additional
16 securities purchase agreements and the number of shares of
common stock Swisher Hygiene purchased by such parties.)(5)
|
|
10
|
.29
|
|
Amended and Restated Swisher Hygiene Inc. 2010 Stock Incentive
Plan(2)
|
II-6
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.30
|
|
Swisher Hygiene Inc. Senior Executive Officers Performance
Incentive Bonus Plan(6)
|
|
10
|
.31
|
|
Employment Agreement of Michael Kipp(6)
|
|
16
|
.1
|
|
Letter of Scharf Pera & Co., PLLC, dated
November 16, 2010.(3)
|
|
21
|
.1
|
|
Subsidiaries of Swisher Hygiene Inc.(7)
|
|
23
|
.1
|
|
Consent of BDO USA, LLP.
|
|
23
|
.2
|
|
Consent of Scharf Pera & Co., PLLC.
|
|
23
|
.3
|
|
Consent of Kreischer Miller.
|
|
23
|
.4
|
|
Consent of Scharf Pera & Co., PLLC.
|
|
23
|
.5
|
|
Consent of Scharf Pera & Co., PLLC.
|
|
23
|
.6
|
|
Consent of Scharf Pera & Co., PLLC.
|
|
23
|
.7
|
|
Consent of Akerman Senterfitt (included in Exhibit 5.1).
|
|
24
|
.1
|
|
Power of Attorney (included on signature page II-9).
|
Exhibits are incorporated by reference to the exhibit indicated
in the following filings by the Company under the Securities Act
of 1933, as amended, or the Securities Exchange Act of 1934, as
amended.
|
|
|
(1) |
|
Registration Statement on Form 10, filed with the
Securities and Exchange Commission on November 9, 2010. |
|
(2) |
|
Registration Statement on
Form S-8,
filed with the Securities and Exchange Commission on May 9,
2011. |
|
(3) |
|
Amendment No. 1 to Registration Statement on Form 10,
filed with the Securities and Exchange Commission on
December 15, 2010. |
|
(4) |
|
Current Report on
Form 8-K
dated March 30, 2011 and filed with the Securities and
Exchange Commission on April 5, 2011, as amended on
Amendment No. 1 and Amendment No. 2 to
Form 8-K/A,
filed with the Securities and Exchange Commission on
April 20, 2011. |
|
(5) |
|
Pre-Effective Amendment No. 3 to Registration Statement on
Form S-4,
filed with the Securities and Exchange Commission on
April 21, 2011. |
|
(6) |
|
Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
May 10, 2011. |
|
(7) |
|
Annual Report on
Form 10-K
for the year ended December 31, 2010, filed with the
Securities and Exchange Commission on March 31, 2011. |
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the
maximum aggregate
II-7
offering price set forth in the Calculation of
Registration Fee table in the effective registration
statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(4) For determining liability under the Securities Act to
any purchaser, each prospectus filed pursuant to
Rule 424(b) as part of a registration statement relating to
an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in
the registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the
registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the
registration statement or made in any such document immediately
prior to such date of first use.
(5) That, for the purpose of determining liability of the
registrant under the Securities Act of 1933 to any purchaser in
the initial distribution of the securities:
The undersigned registrant undertakes that in a primary offering
of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities
are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell
such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
II-8
Signatures
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Charlotte, State of North Carolina on
August 5, 2011.
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Steven R. Berrard and
Thomas Aucamp, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution
and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration
statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or any of them, or his
substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
SWISHER HYGIENE INC.
|
|
|
|
By:
|
/s/ Steven
R. Berrard
|
Name: Steven R. Berrard
|
|
|
|
Title:
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Steven
R. Berrard
Steven
R. Berrard
|
|
President, Chief Executive Officer,
and Director
(Principal Executive Officer)
|
|
August 5, 2011
|
|
|
|
|
|
/s/ Michael
Kipp
Michael
Kipp
|
|
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
August 5, 2011
|
|
|
|
|
|
/s/ H.
Wayne Huizenga
H.
Wayne Huizenga
|
|
Chairman of the Board
|
|
August 5, 2011
|
|
|
|
|
|
/s/ David
Braley
David
Braley
|
|
Director
|
|
August 5, 2011
|
|
|
|
|
|
/s/ John
Ellis Bush
John
Ellis Bush
|
|
Director
|
|
August 5, 2011
|
|
|
|
|
|
/s/ Harris
W. Hudson
Harris
W. Hudson
|
|
Director
|
|
August 5, 2011
|
|
|
|
|
|
/s/ William
D. Pruitt
William
D. Pruitt
|
|
Director
|
|
August 5, 2011
|
|
|
|
|
|
/s/ David
Prussky
David
Prussky
|
|
Director
|
|
August 5, 2011
|
|
|
|
|
|
Michael
Serruya
|
|
Director
|
|
|
II-9
SWISHER
HYGIENE INC. AND SUBSIDIARIES
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
5
|
.1
|
|
Opinion of Akerman Senterfitt
|
|
23
|
.1
|
|
Consent of BDO USA, LLP.
|
|
23
|
.2
|
|
Consent of Scharf Pera & Co., PLLC.
|
|
23
|
.3
|
|
Consent of Kreischer Miller
|
|
23
|
.4
|
|
Consent of Scharf Pera & Co., PLLC.
|
|
23
|
.5
|
|
Consent of Scharf Pera & Co., PLLC.
|
|
23
|
.6
|
|
Consent of Scharf Pera & Co., PLLC.
|
|
23
|
.7
|
|
Consent of Akerman Senterfitt (included in Exhibit 5.1)
|
|
24
|
.1
|
|
Power of Attorney (included on signature page II-9).
|