Swisher International Inc · 8-K · For 2/18/98 · EX-16.1

Filed On 2/27/98   ·   SEC File 0-21282   ·   Accession Number 1026777-98-7

Current Report   ·   Form 8-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 8-K         Current Report                                         6     26K 
 2: EX-16.1     Letter From Auditor                                    9     40K 

EX-16.1   ·   Letter From Auditor

EX-16.1
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This letter constitutes our written notification to the Board of Directors of   
Swisher International, Inc. regarding certain acts and matters enumerated       
below.  To that end this letter replaces our letter to you dated February 19,   
1998.                                                                           

We confirm our verbal discussion with George Moore on February 18, 1998 of our  
decision to resign as auditors of Swisher International, Inc. (Swisher or the   
Company) (Commission File Number 0-21282), effective immediately.               
Additionally, we hereby withdraw our report, dated January 30, 1997, on the     
Company's financial statements for the year ended October 31, 1996.  Our        
decision is the result of (i) our conclusion that we are no longer able to      
rely on management's representations, and (ii) the existence of significant     
unresolved accounting matters relating to the Company's financial statements    
as of and for the years ended October 31, 1997 and 1996.                        

We believe that certain of the matters discussed below have a materially        
adverse impact on the Company's 1996 and 1997 financial statements.  We         
strongly recommend that the Board of Directors assess the significance of       
these matters and, where necessary, take timely and appropriate remedial        
action.                                                                         

MANAGEMENT REPRESENTATIONS AND FINANCIAL STATEMENT MATTERS                      
----------------------------------------------------------                      

Summarized below are the principal matters that caused us to conclude that we   
are no longer able to rely on management's representations and that there may   
be illegal acts which could have a material effect on the Company's 1997 and    
1996 financial statements.  These matters have been previously communicated to  
various members of the Company's management and the Board of Directors.         

1.   The most significant issue was our discovery last weekend of a   
salesman's activity log which contains information that contradicts             
management's representations to us regarding the consummation of the sale of a  
franchise in Ireland.  The information contained in that log causes us to (i)   
conclude that a sale of the franchise had not occurred as of October 31, 1997,  
and (ii) to further reevaluate the truthfulness and completeness of             
management's representations to us relating to certain other matters that       
occurred in the past year.  A copy of the salesman's activity log is attached   
as Exhibit A and a copy of management's memo is attached as Exhibit B.          

2.    In March 1997 we were informed by Mike Bernard, the new CFO for 
Swisher, that there were certain option and warrant agreements that had been    
executed by management during 1996 that were not disclosed nor accounted for    
in the Company's financial statements.  As part of our audit procedures for     
1996 we inquired of management as to the existence of any such agreements.      
Management failed to inform us of the existence of these agreements.            
Furthermore, the fiscal 1996 representation letter signed by management         
asserts that no such agreements existed, other than those disclosed in the      
financial statements.  Upon further inquiry in April 1997, we discovered that   
these agreements had not been approved by the Swisher Board of Directors.       
subsequently, the Swisher Board of Directors (i) determined that these          
agreements were nonenforceable because they were unauthorized, and (ii) caused  
the Company and the other involved parties to agree that the agreements were    
not legally enforceable and, therefore, were never effected.                    

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  3.     During the performance of our 1997 audit fieldwork, we became aware
of two important facts relating to the sale of the Houston franchise by the     
Company in the third quarter of 1996 that were not previously disclosed to us.  
This transaction resulted in a gain of $284,017 being recorded by the Company   
in the third quarter of 1996.  The two additional facts are discussed below:    

  -     The first fact is that the transaction was with Lone Star Hygiene,
         L.L.C., an entity that  was 51 percent owned by Pat Swisher, CEO of
the Company.  This fact was not disclosed to us nor to the
  Company's legal counsel who was assisting the Company in the
         preparation of the Form 10-K for 1996.  The related party nature of
        this transaction was not disclosed in the Company's 1996 financial
        statements nor in the 1996 Form 10-K.  Furthermore, management did
    not inform us of Pat Swisher's involvement in this transaction
         when, as a part of our 1996 audit procedures, we inquired about the
         terms of the transaction and had questions regarding the receivable
       confirmation response.  We were directed by Swisher management to
 contact Alex Arriaga (the minority shareholder of Lone Star
        Hygiene, L.L.C. who was otherwise unrelated to the Company) rather
  than to Pat Swisher, the 51 percent owner of the franchisee.

-     During our 1997 audit procedures, we discovered that there was a
         management agreement in place relating to this franchise sale.  The
      management agreement covered the period from the date of sale to
       October 31, 1996.  The agreement required the Company to continue
  to operate the franchise and, as compensation, to retain the
         revenues and the net profits of such franchise during the period of
  the agreement.  We believe that this agreement indicates the
       Company retained the control of this franchise during the term of
       the management agreement and, therefore, the sale should not have
been recognized in the third quarter of 1996.             

   4.    Our 1997 audit procedures identified that there was a related party
transaction recorded in the third quarter of 1997, similar to the third         
quarter 1996 transaction discussed above.  In the third quarter of 1997, the    
Company recorded a $381,000 gain on the sale of the Charlotte Hygiene           
franchise to Charlotte Hygiene Assoc., a company that is 51 percent owned by    
Tom Reeder, the Company's Vice President.  This transaction was not disclosed   
in the Company's 1997 third quarter Form 10-Q as a related party transaction.   
Additionally, this transaction included a management agreement for the period   
from the sale date to October 31, 1997.  We believe this transaction should be  
disclosed as a related party transaction and that the sale should not have      
been recorded in the third quarter of 1997.  Because we did not complete the    
audit of the Company's 1997 financial statements, we have formed no conclusion  
as to when such sale should be recorded.                                        

  5.     Our audit procedures in 1996 discovered that the Company had paid
the personal expenses of certain management employees.  At October 31, 1996,    
the Company recorded receivables totaling $138,000 from the individuals         
involved.  The 1996 representation letter included management's                 
representations that these amounts would be repaid to the Company in 1997,      
without the use of any special management compensation or bonuses to cover the  

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amounts owed.  However, such amounts were not repaid in 1997 and certain        
Company payments have continued on behalf of these individuals.  During our     
1997 audit fieldwork, Pat Swisher and Tom Reeder stated that they will repay    
the amounts owed by surrendering shares of the Company's common stock.  A       
summary of the issues follows:                                                  

   -     In 1996, the Company was paying certain split dollar life insurance
premiums for Pat Swisher and Tom Reeder.  Upon further    
      investigation, we determined that these policies and the related
  premium payments were not approved by the Company's Board of
        directors and that such policies were owned by the individuals and
      not the Company.  As a result of this discovery, the individuals
    involved agreed to repay the Company in 1997 for the amount of
 premiums paid, which totaled $61,000.  No payments had been
      received by the Company as of the dates of our fiscal 1997 audit
      fieldwork.   When questioned about these unpaid amounts, we were
 informed by management that the cash surrender value is the
     property of the Company and that the repayment is not required.

  -     During the 1996 audit fieldwork, we were asked by George Moore, an
     independent Director of the Company, to test certain management
     expense reports.  Our procedures indicated that Pat Swisher had
       submitted multiple reimbursement requests using the same receipt.
As a result, Mr. Moore was informed of such payments and, 
      subsequently, the Company recorded a $77,000 receivable from Pat
Swisher at October 31, 1996 relating to certain of these  
         overpayments.  Similar to the above item, our understanding is that
        such amounts would be repaid by Mr. Swisher during 1997.  However,
     no payments had been received as of the dates of our 1997 audit
fieldwork.                                                

6.    At October 31, 1996, Swisher had a $105,000 receivable from     
Professional Carpet Systems, Inc. (PCS) that arose from transactions during a   
period of transition of the Surface Dr. operations from PCS to Swisher.         
During our 1996 audit fieldwork, we attempted to confirm this receivable with   
PCS.  However, PCS disagreed with the amount recorded by the Company and        
confirmed an amount that was approximately $75,000 less than the amount         
Swisher had recorded.  In February 1997, representatives of PCS met at          
Swisher's offices to resolve the difference.  Craig Radke, McGladrey's audit    
partner, obtained verbal representations from both Swisher management and the   
PCS representatives of the agreed upon amount, which resulted in no adjustment  
to the receivable amount recorded on Swisher's accounting records.  This        
amount was subsequently confirmed to us in writing by PCS in February 1997,     
prior to the issuance of our report.  Mr. Radke also obtained a verbal          
representation from both Swisher management and PCS representatives that the    
amount was agreed to in total resolution of the issue and that no other side    
agreements existed and no other cash was to be exchanged.  However, in August   
1997, PCS brought a lawsuit against Swisher with respect to several items in    
connection with the sale of Surface Dr. from PCS to Swisher.  This lawsuit      
includes a demand for payment of amounts due under a consulting agreement with  
Joe Lundsford, a principle in PCS.  This consulting agreement was entered into  
on February 10, 1997 and required Swisher to pay him $80,000 in consulting      

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fees.  These events raise a question as to whether Swisher management           
misrepresented the fact that no other side agreements existed.  If Swisher      
management failed to disclose an existing side agreement Swisher has            
potentially overstated its receivable from PCS at October 31, 1996.             

7.     During the course of our 1996 audit fieldwork, we received     
representations from Swisher management with respect to certain notes           
receivable and repurchased franchise assets that were being held for resale.    

-     Tom Reeder stated to us that the franchise in Mobile was        
       operational and that the note receivable from this franchisee was
   valid and should be recognized as revenue.  During 1997, this
$45,000 note receivable was written off as uncollectible. 
    Additionally, Mr. Reeder now states that the franchise was not
        really operational at October 31, 1996, but that some business was
   being done by the franchisee through other franchises that he
operates in adjacent territories.                         

-     We received written representation from management that the     
  Scottsdale franchise had operating revenue of $200,000 as of
       October 31, 1996.  This information was used in our assessment of
        whether an impairment of this $143,000 asset existed at that date.
        During our 1997 audit fieldwork, we discovered that this franchise
         only had revenues of approximately $80,000 for the year and that in
         1997 the Company had reduced the carrying value of the franchise by
$53,000 as a result of the impairment in value.           

WITHDRAWAL OF OUR OPINION ON THE SWISHER FISCAL 1996 FINANCIAL STATEMENTS       
-------------------------------------------------------------------------       

The significance of the information discussed above indicates the Company's     
October 31, 1996 financial statements may be materially misstated.  As a        
result, we hereby withdraw our auditor's report dated January 30, 1997 on the   
October 31, 1996 financial statements of Swisher International, Inc.  You       
should notify those parties who have been provided copies of those financial    
statements that we have withdrawn our report and that they may no longer rely   
on our report.  The parties to be notified include, but are not limited to,     
the SEC, any applicable securities exchange, the state franchise board,         
lenders and other creditors.  By February 27, 1998, please provide us with a    
copy of the correspondence you furnish to these parties notifying them of the   
withdrawal of our report.                                                       

UNRESOLVED ACCOUNTING ISSUES RELATING TO THE FISCAL 1997 FINANCIAL STATEMENTS   
-----------------------------------------------------------------------------   

In addition to the matters discussed above, at the date of this letter we were  
having discussions with Swisher management regarding the resolution of certain  
accounting issues.  In particular, we had raised certain concerns regarding     
the timing of revenue recognition and the need for additional accounting        
reserves to adequately address the realization of accounts receivable, notes    
receivable relating to previously recorded franchise sale revenues, and the     
value of assets held for resale (acquired as a result of the repossession or    

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repurchase of certain franchises).  Our audit work in these matters has not     
been completed.  However, it is likely we would have issued a modified opinion  
if such matters were not ultimately resolved to our satisfaction.               

If you have any questions regarding this communication, please contact Mr.      
William D. Travis, Executive Partner-Audit and Accounting at (612) 921-7780 or  
Mr. Craig Radke at 704-367-6250.  Mr. Travis address is McGladrey and Pullen,   
LLP, 3600 West 80th Street, Suite 500, Minneapolis, Minnesota 55431.            

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Notepad:                                                                        
09-02-97 - JBM - DQ.                                                            
09-04-97 - JDR - Sending FedEx 9/3/97.                                          

*******************************   

Shane Kennelly                                                                  
Snap-on Tools                                                                   
5 Balaly Avenue                                                                 
Dundrum                                                                         
Dublin 14,                                                                      
Ireland                                                                         

Home Phone:  353-129-40261 fax            Work Phone:  353-86-538079 cell       
Territory:  Ireland                        Source:  Local ad                    
First Call:  09-03-97 JBM                  Activity Tracking:                   
Type:  Surface Doctor                                                           

Notepad:                                                                        
02-10-98  17:10 - JBM - Shane has arrived for training and has paid another     
$25,000.  Still owes another $25,000 and that will be due 3/1.                  
01-23-98  17:03 - JBM - I met with Shane earlier in the week and interviewed    
franchise candidates.  All is going well but he needs training.                 
01-20-98  17:12 - VRM - Sent 20 SD packets and PAL videos via Fed. Exp.         
12-31-97  08:54 - JBM - Called to say Happy New Year.                           
12-09-97 - JBM - Lined up meeting for Hugh in Phoenix.                          
11-26-97 - JBM - I called Shane for an update:  He has received ops manual and  
related stuff I sent.  One of the guys we met when I was there last has agreed  
to come on board and his brother wants another territory.  Shane is trying to   
close down prior to the end of the year.  Mentioned Tom's visit in January and  
he may tie some ads around that.  I asked Shane about the training letter and   
that should not be a big deal.                                                  
11-21-97 - JBM - Sent Ops Manual, leads, Franchise agreements and computer      
books, etc.  NEED TO GET TRAINING LETTER.                                       
11-17-97 - JBM - Closed!  I met Shane in Dublin and he and his wife (Maura)     
had dinner with Pat and Pauline Lee.  Received docs and money and he is         
excited.  Met three potential buyers and gave him info on McDonagh and          
O'Brien.  Need to send additional information and Ops manual to him and get a   
training letter.                                                                
11-08-97 - JBM - Received fax from Shane saying he is mailing the docs and      
will wire the Money on Monday.  Also, he has set two appointments.  I sent fax  
saying I would pick up everything next Friday and that he should meet me at     
the hotel at 10:15 on Friday.                                                   
11-05-97 - JBM - Tried to call Shane but got fax.  Sent fax offering to come    
to Dublin to help sell subs if we can get paperwork and check back in time.     
11-03-97 - JBM - Got lawyer' comments and it was a bit more detailed than       
Shane let on.  Worked thru them and faxed the LOC and the wiring instructions.  
Holding out a visit next week in case there is a problem.                       
10-30-97 - JBM - Shane called today to say that he has pushed his lawyer and    
that he is in agreement with the fax I sent him last night.  All is well and    
moving forward.                                                                 

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10-29-97 - JBM - I called Shane again and got him.  He was in to see the        
lawyer today and should have any concerns by the end of the week.  Sending fax  
explaining how everything is to go down and sending the MLA's out today and     
will do a "LETTER" on Friday.                                                   
10-29-97 - JBM - I tried Shane last nite and again this morning and there is    
no answer at his home.  Left message on his cell phone today.  Running?         
10-25-97 - JBM - Shane visited for a walk thru and has agreed to buy the ML.    
He will visit with his lawyer on the 28th and fax to me any questions - we      
have gone thru the Agreement and there is not a major problem.  I will send     
out two copies of the docs on the 29th and he will sign and return one set      
with the $25K.  Need to send the training letter as well.                       
10-15-97 - JBM - Sent a fax saying I will pick up at the airport and gave       
general weather and itenerary information.                                      
10-12-97 - JBM - Sent fax saying I will make hotel reservation and send rough   
itenerary.                                                                      
10-08-97 - RPM - Spoke with Shane and told him a schedule and will make hotel.  
10-01-97 - JBM - Received fax saying he is coming to visit on the 22nd and I    
replied to him that is fine and we will pay for hotel costs.  He is to advise   
when flight is booked.                                                          
09-23-97 - JBM - Received a fax from Shane that says he wants to meet again     
and also wants to meet Pat Lee.  EXTREMELY interested in moving forward.  Sent  
reply.                                                                          
09-20-97 - JBM - Met with Shane and he is our number 1 guy considering          
everything.  Distributor for Snap-On and knows franchising.  Has the money and  
wouldn't be strapped.  Very interested and we should get him here.              
09-09-97 - JBM - Sent fax asking if received and if interested.                 
09-04-97 - JDR - Sending video/pkt. via Federal Express 9/3/97.                 

********************************************            

Michael Kilkelly                                                                
43 Westbrook                                                                    
Barna Road                                                                      
Galway,                                                                         
Ireland                                                                         

Home Phone:                  Work Phone:                                        
Territory:  Ireland                  Source:  Ad                                
First Call:  09-08-97 JBM            Activity Tracking:                         
Type:  Surface Doctor                                                           

Notepad:                                                                        
09-20-97 - JBM - DQ.                                                            
09-16-97 - RPM - Email did not go thru.  Gave Bruce a phone number to call.     
09-16-97 - RPM - Email out requesting call for appt.  Hotel in Ireland given.   
09-09-97 - VRM - Package sent.                                                  

******************************************              

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Richard Lewis                                                                   
Barrack Street                                                                  
Templemore                                                                      
County Tipperary,                                                               
Ireland                                                                         

Home Phone:                  Work Phone:  0504-31220                            
Territory:  Ireland                  Source:  Ad                                
First Call:  09-08-97 JBM                  Activity Tracking:                   

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February 13, 1998                                                               

TO:            Mr. Chuck Cendrowski                                             

FROM:          Bruce Mullan                                                     

SUBJECT:       Sale of "Ireland" for Surface Doctor                             
Shane Kennelly                                    
5 Balaly Avenue                                   
Dundrum                                           
Dublin 14 Ireland                                 
TEL:  353-129-40261                               

Dear Chuck:                                                                     

Per your request, I have listed below the time line concerning the sale of our  
Surface Doctor Master License to Mr. Shane Kennelly:                            

Aug. 31, 1997            -      Ran ad in the "Irish Independent"   
     newspaper
    Sept. 7, 1997            -      Ran second ad in the "Irish Independent"
  Sept. 15-20-1997         -     Interviewed Irish prospects in Ireland,
                   including Mr. Kennelly.
Oct. 22-25, 1997      -       Mr. Kennelly visits Charlotte, tours  
                         Charlotte Corporate operation and spends time
                            with department heads covering franchise support
                      structure.  I cover franchise sales -- Mr.
                         Kennelly agrees to purchase pending review by
his attorney.       
   Oct. 30, 1997            -   Deal closed after acceptance of "Letter of
     Clarification".
Nov. 3, 1997            -    I was scheduled to visit Ireland to    
                              interview prospective subfranchisees and
                                to pick up the Agreement -- this visit was
                             delayed a week due to problems in other
areas.    
  Nov. 10-15, 1997      - Visited the UK and then Ireland where I picked
                        up the Agreement and interviewed prospective
subfranchisees.     

Chuck, I trust that this will clarify the situation satisfactorily.  Please     
let me know if you have further questions.                                      

Bruce                                                                           

Dates Referenced Herein   and   Documents Incorporated By Reference

				Referenced-On Page
This 8-K Filing		Date		First		Last			Other Filings
		10/31/96		1		4			10-K, 10-K/A, NT 10-K, 10-K405/A
		1/30/97		1		4
		2/10/97		3
		8/31/97		9
		9/7/97		9
		10/30/97		9
		10/31/97		1		2			10KSB, NT 10-K, 10KSB/A
		11/3/97		9
		2/13/98		9
For The Period Ended		2/18/98		1
		2/19/98		1
Filed On / Filed As Of		2/27/98		4
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