UFOC
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Sample UFOC
FRANCHISE OFFERING CIRCULAR
ACE DURAFLO SYSTEMS, LLC
A Nevada Limited Liability Company
711 West Kimberly Avenue, Suite 100
Placentia, California 92870-6356
(714) 256-0220 or (888) 775-0220
The franchise offered is for the operation of a pipe restoration business using specific technology licensed by ADF.
The Initial License Fee for an ACE DuraFlo® franchise is $24,900 for a territory of up to 1 Million population, plus $5,000 for each increment of up to 250,000 population in the territory that you purchase. In addition to the Initial License Fee, before you begin operating, you will pay us initial fees for equipment and an initial supply of epoxy. The initial fees that you pay to us, including the Initial License Fee for a territory of up to 1 Million ($24,900) will range between approximately $123,400 to $133,400.
These are not the total costs necessary to begin operating an ACE DuraFlo® pipe restoration business. For a territory of up to 1 Million, the total initial investment to begin operating, including initial fees, is estimated at between $139,700 and $236,100 if you are an existing plumbing business, and between $184,700 and $390,100 if you are a new business. See Items 5 and 7 of the Offering Circular.
Risk Factors:
1. THE LICENSE AGREEMENT PERMITS YOU TO ARBITRATE WITH ADF ONLY IN ORANGE COUNTY, CALIFORNIA. ARBITRATION OUT OF YOUR HOME STATE MAY FORCE YOU TO ACCEPT A LESS FAVORABLE SETTLEMENT. IT MAY ALSO COST MORE TO ARBITRATE WITH US IN ORANGE COUNTY, CALIFORNIA THAN IN YOUR HOME STATE.
2. THE LICENSE AGREEMENT STATES THAT NEVADA LAW GENERALLY GOVERNS THE AGREEMENT, AND THIS LAW MAY NOT PROVIDE THE SAME PROTECTIONS AND BENEFITS AS LOCAL LAW. YOU MAY WANT TO COMPARE THESE LAWS.
3. THERE MAY BE OTHER RISKS CONCERNING THIS FRANCHISE.
Information comparing franchisors is available. Call the state administrators listed in Exhibit F or your public library for sources of information. Registration of this franchise by a state does not mean that the state recommends it or has verified the information in this Offering Circular. If you learn that anything in this Offering Circular is untrue, contact the Federal Trade Commission.
State Effective Dates: See Exhibit K - State Addendum
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I
/ICE DUR/IFLO*
THE REPIP1N-G ALTERNATIVE
DISCLOSURES REQUIRED BY MICHIGAN LAW
THE STATE OF MICHIGAN PROHIBITS CERTAIN UNFAIR PROVISIONS THAT ARE SOMETIMES IN FRANCHISE DOCUMENTS. IF ANY OF THE FOLLOWING PROVISIONS ARE IN THESE FRANCHISE DOCUMENTS, THE PROVISIONS ARE VOID AND CANNOT BE ENFORCED AGAINST YOU.
1. A prohibition on the right of a franchisee to join an association of franchisees.
2. A requirement that a franchisee assent to a release, assignment, novation, waiver or estoppel which deprives a franchisee of rights and protections provided in this act. This shall not preclude a franchisee, after entering into a franchise agreement, from settling any and all claims.
3. A provision that permits a franchisor to terminate a franchise prior to the expiration of its term except for good cause. Good cause shall include the failure of the franchisee to comply with any lawful provision of the franchise agreement and to cure such failure after being given written notice thereof and a reasonable opportunity, which in no event need be more than 30 days, to cure such failure.
4. A provision that permits a franchisor to refuse to renew a franchise without fairly compensating the franchisee by repurchase or other means for the fair market value at the time of expiration of the franchisee's inventory, supplies, equipment, fixtures, and furnishings. Personalized materials which have no value to the franchisor and inventory, supplies, equipment, fixtures, and furnishings not reasonably required in the conduct of the franchise business are not subject to compensation. This subsection applies only if: (i) The term of the franchise is less than 5 years and (ii) the franchisee is prohibited by the franchise or other agreement from continuing to conduct substantially the same business under another trademark, service mark, trade name, logotype, advertising, or other commercial symbol in the same area subsequent to the expiration of the franchise or the franchisee does not receive at least 6 months advance notice of the franchisor's intent not to renew the franchise.
5. A provision that permits the franchisor to refuse to renew a franchise on terms generally available to other franchisees of the same class or type under similar circumstances. This section does not require a renewal provision.
6. A provision requiring that arbitration or litigation be conducted outside this state. This shall not preclude the franchisee from entering into an agreement, at the time of arbitration, to conduct arbitration at a location outside this state.
7. A provision which permits a franchisor to refuse to permit a transfer of ownership of a franchise, except for good cause. This subdivision does not prevent a franchisor from exercising a right of first refusal to purchase the franchise. Good cause shall include, but is not limited to:
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(a) The failure of the proposed transferee to meet the franchisor's then current reasonable qualifications or standards.
(b) The fact that the proposed transferee is a competitor of the franchisor or subfranchisor.
(c) The unwillingness of the proposed transferee to agree in writing to comply with all lawful obligations.
(d) The failure of the franchisee or proposed transferee to pay any sums owing to the franchisor or to cure any default in the franchise agreement existing at the time of the proposed transfer.
8. A provision that requires the franchisee to resell to the franchisor items that are not uniquely identified with the franchisor. This subdivision does not prohibit a provision that grants to a franchisor a right of first refusal to purchase the assets of a franchise on the same terms and conditions as a bona fide third party willing and able to purchase those assets, nor does this subdivision prohibit a provision that grants the franchisor the right to acquire the assets of a franchise for the market or appraised value of such assets if the franchisee has breached the lawful provisions of the franchise agreement and has failed to cure the breach in the manner provided in subdivision (c).
9. A provision which permits the franchisor to directly or indirectly convey, assign, or otherwise transfer its obligations to fulfill contractual obligations to the franchisee unless provision has been made for providing the required contractual services.
THE FACT THAT THERE IS A NOTICE OF THIS OFFERING ON FILE WITH THE ATTORNEY GENERAL DOES NOT CONSTITUTE APPROVAL, RECOMMENDATION, OR ENDORSEMENT BY THE ATTORNEY GENERAL.
Michigan law provides that a franchisor whose most recent statements are unaudited and which show a net worth of less than $100,000 shall, at the request of a franchisee, arrange for the escrow of initial investment and other funds paid by the franchisee or subfranchisor until the obligations to provide real estate, improvements, equipment, inventory, training, or other items included in the franchise offering are fulfilled. At the option of the franchisor, a surety bond may be provided in place of escrow. In the event that an escrow is so established, the escrow agent shall be a financial institution authorized to do business in the State of Michigan. The escrow agent may release to the franchisor those amounts of the escrowed funds applicable to a specific franchisee or subfranchisor upon presentation of an affidavit executed by the franchisee and an affidavit executed by the franchisor stating that the franchisor has fulfilled its obligation to provide real estate, improvements, equipment, inventory, training, or other items. This portion of the Michigan law does not prohibit a partial release of escrowed funds upon receipt of affidavits of partial fulfillment of the franchisor's obligation.
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SHOULD THE PROSPECTIVE FRANCHISEE HAVE ANY QUESTIONS REGARDING THE NOTICE OF THIS FILING WITH THE ATTORNEY GENERAL, SUCH QUESTIONS SHOULD BE ADDRESSED TO:
Department of the Attorney General Consumer Protection Division Antitrust and Franchise Section PO Box 30213 Lansing, Ml 48909 (517)373-7117
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ACE DURAFLO SYSTEMS, LLC
FRANCHISE OFFERING CIRCULAR
TABLE OF CONTENTS
Item No. Name Page
ITEM 1: THE FRANCHISOR, ITS PREDECESSORS AND AFFILIATES............................3
ITEM 2: BUSINESS EXPERIENCE..........................................................................................5
ITEM 3: LITIGATION................................................................................................................6
ITEM 4: BANKRUPTCY...........................................................................................................6
ITEM 5: INITIAL LICENSE FEE..............................................................................................7
ITEM 6: OTHER FEES...............................................................................................................7
ITEM 7: INITIAL INVESTMENT...........................................................................................10
ITEM 8: RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES.....................12
ITEM 9: FRANCHISEE'S OBLIGATIONS............................................................................13
ITEM 10: FINANCING...............................................................................................................13
ITEM 11: FRANCHISOR'S OBLIGATIONS............................................................................14
ITEM 12: TERRITORY...............................................................................................................18
ITEM 13: TRADEMARKS..........................................................................................................20
ITEM 14: PATENTS, COPYRIGHTS AND PROPRIETARY INFORMATION......................21
ITEM 15: OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE
FRANCHISE BUSINESS..........................................................................................22
ITEM 16: RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL..............................23
ITEM 17: RENEWAL, TERMINATION, TRANSFER AND DISPUTE RESOLUTION.........23
ITEM 18: PUBLIC FIGURES......................................................................................................26
ITEM 19: EARNINGS CLAIMS.................................................................................................26
ITEM 20: LIST OF FRANCHISE OUTLETS.............................................................................26
ITEM 21: FINANCIAL STATEMENTS.....................................................................................28
ITEM 22: CONTRACTS..............................................................................................................28
ITEM 23: RECEIPT.....................................................................................................................28
Exhibits
"A" License Agreement
"B" Financial Statements
"C" List of Existing Franchises
"D" List of Terminated Franchises
"E" Confidential Technical Manual and Equipment Manual:
Table of Contents
"F" List of State Franchise Administrators
"G" Personal Guaranty
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Table of Contents Continued.....
Exhibits
"H" Personal Covenant Agreement
"I" Representations, Warranties and Acknowledgments
"J" Agents for Service of Process
"K" State Addendum
"L" Automatic Clearinghouse Agreement for Electronic Payments
"M" Acknowledgment of Receipt
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ITEM 1: THE FRANCHISOR, ITS PREDECESSORS AND AFFILIATES
In this Offering Circular, "ADF", "we", "us" or "our" means ACE DuraFlo Systems, LLC or ACE DuraFlo®, the franchisor. "You" or "your" means or refers to the person who buys the ACE DuraFlo franchise. If you are a corporation, a limited liability company, or a partnership, certain provisions of the agreement will also apply to the stockholders, members, or partners of that entity, and will be noted. For purposes of this Offering Circular, ADF refers to our franchisees as either licensees or franchisees, and we use those terms interchangeably.
Our principal business address is 711 West Kimberly Avenue, Suite 100, Placentia, California 92870-6356. Our telephone number is (714) 256-0220. We disclose our agents for service of process on Exhibit J.
ADF does business under the name ACE DuraFlo Systems, LLC and ACE DuraFlo. ADF is a Nevada limited liability company that was organized on August 24, 1999. The franchise we offer will allow you to use the ACE DuraFlo proprietary process to clean and recondition pipelines of various compositions. The procedure involves a drying process, and then cleaning the pipes with an abrasive material, and blowing the pipe clean with compressed air and lining the pipe with specialized, proprietary epoxies by applying controlled pressure and air. This proprietary process allows the building owner to have its pipe systems restored in lieu of replacement. This process minimizes the disruption to the building owner, and may be more cost effective than replacing worn out, damaged or corroded pipes and avoids most of the demolition and repair to the building associated with replacing the pipes.
The application of epoxy lining to small diameter piping systems is a relatively new process in North America. ADF believes its process qualifies for patent protection and we have applied for U.S. patents on systems and methodologies relating to the process (see Item 14). We believe that your principal competition will come from plumbers and others who seek to repair damaged or worn pipes or piping systems without replacing the piping, and from plumbing contractors who would re-pipe some or all of the piping in a building. There are other companies that install epoxy lining in existing pipes. As we disclose in Item 13, in the future, we may enter into arrangements with one or more national or regional plumbing chains allowing them and their licensees to use of our proprietary process under our ePIPE brand.
The market for our pipe restoration services includes any building with pipe systems having pipe diameters of 3/8 inch to 2 inches of varying lengths. Houses and other buildings that were built more than 30 years ago with galvanized steel piping, and newer structures that were built with copper piping in areas that present environmental challenges, aggressive water, or particular water treatment challenges, or pipes with faulty installation, are particular targets for our process.
The "Licensed Business" that we offer will allow you to use the ACE DuraFlo proprietary process to clean and recondition plumbing pipes of various types (with the exception of fire sprinkler systems) having diameters of up to 2 inches in two types of applications: "residential" and "limited commercial" applications. "Residential" applications involve
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single family homes and multi-family (up to 4 units) residential structures. "Limited commercial" applications involve small commercial structures, like apartment buildings, strip centers, and schools, that have no more than 3 stories. In this Offering Circular, we sometimes refer to these services as the "Authorized Services." The Authorized Services expressly exclude the reconditioning of fire sprinkler systems in all types of dwellings and applications.
Depending on your qualifications, you may request that we expand the scope of Authorized Services so that you can apply the ACE DuraFlo proprietary process (i) to pipes in "Commercial" applications, including mid-rise and high-rise office buildings (4 stories and greater), larger school facilities, apartment buildings, condominiums and hotels and (ii) in small pipe remediation applications using portable single line equipment ("Single Line Remediation applications"). We have discretion in considering your request taking into account the factors we believe are most relevant to the scope of work and your qualifications. We may grant or deny your request in our sole discretion.
Under the license that we grant to you, you may not (i) use or sell our proprietary epoxy except incidental to performing Authorized Services; (ii) market or solicit customers by, among other activities, placing local advertising in media that circulates or broadcasts outside of your territory; (iii) market, solicit or advertise for restoration jobs that are outside the scope of the Authorized Services; or (iv) perform Authorized Services outside of your territory.
ADF has been offering franchises for this business since November, 2001. Although our franchise company has never operated a business restoring pipes, we have affiliates that operate businesses restoring piping in residential and commercial buildings using the ACE DuraFlo technology (patent pending). The first one began operating in March, 2000. ADF has never offered franchises for any other type of business.
Our parent company Pipe Restoration Technologies, LLC ("PRT") owns the ACE DuraFlo proprietary technology, and has granted ADF an exclusive license to exploit this technology in North America. PRT is a Nevada limited liability company that was organized on August 11, 1998. Its principal offices are at 7469 West Lake Mead, Suite 200, Las Vegas, Nevada 89128. It has never sold any franchises in any line of business, and it does not itself operate a pipe restoration business. However PRT's affiliated company, ACE EnviroTech, Inc. ("ETI"), 711 West Kimberly Avenue, Suite 100, Placentia, California 92870-6356, was granted a license to operate a pipe restoration business in the United States. Although ADF has an affiliate that operates a pipe restoration business, ADF does not have any affiliates that offer franchises in any line of business or that provide products or services to our licensees.
Most states have plumbing regulations that regulate this business. The regulations will follow either the Uniform Plumbing Code or regulations of the International Plumbing Code, or other state or local specific codes influenced by these Codes. On a local basis, these regulations are generally contained in housing and building codes. You should check with the cities in which you will operate to determine how these regulations will apply to your business in each city. Numerous local, state and federal laws also will regulate the operation of businesses in general and will apply to your business. ADF urges you to become familiar with these laws and regulations.
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ITEM 2: BUSINESS EXPERIENCE
Larry Gillanders - Chief Executive Officer, Chief Technology Officer and Managing Member: Mr. Gillanders is a co-founder of our company and co-inventor of the ACE DuraFlo System of PRT. He has been a managing member of ADF (serving in the capacity equivalent to a director of a business corporation) since August 1999 and has served us in several additional capacities since that time. Through August 2002, Mr. Gillanders was our Chief Operating Officer-Canada. From September 2001 to August 2002 he also served as an Executive Vice President. From August 2002 to February 2003, he was our President and Chief Financial Officer. He was promoted in February 2003 to Chief Executive Officer and Chief Technology Officer. From June 1999 to the present, Mr. Gillanders has also been a managing member, Co-Chief Executive Officer, and Chief Operating Officer-Canada for PRT. Since June 1986, he has also been the president of Coastline Appraisal/Consulting, a Vancouver, Canada firm that conducts real estate appraisals.
W. Stuart Tucker - President:
Mr. Tucker has been President of ADF since July 2005. He joined ADF as Chief Operating Officer in October 2003 and held that position until his promotion to President in 2005. From January 2003 to September 2003 Mr. Tucker was a financial consultant to prospective and existing franchisors based in Irvine, California. From June 2000 to December 2002 he was Chief Financial Officer of Touch Screen Marketing International, LLC, based in Irvine, California. Mr. Tucker received an MBA degree from the University of California, Irvine in 2005.
Lawrence Soskin - Executive Vice President:
Mr. Soskin joined ADF as Executive Vice President in February 2002. From February 1975 to January 2002, Mr. Soskin was Chief Plumbing Inspector for the City of Los Angeles Department of Building and Safety, Los Angeles, California.
Ronald W. Davies - Managing Member:
Mr. Davies was appointed a managing member of ADF in January 2003 (serving in the capacity equivalent to a director of a business corporation). From 1991 until his retirement in 2005, Mr. Davies was Chief Technology Officer of MBNA America Bank N.A., in Wilmington, Delaware. In May 2002, he was appointed Executive Vice Chairman of that company. He also served as Senior Vice Chairman of MBNA America Bank N.A. from December 1997 to May 2002. In addition, Mr. Davies has been Chairman and Chief Executive Officer of MBNA Technology, Inc., since October 1996. From April 1997 to August 2002, Mr. Davies was also Executive Vice President of MBNA Corporation. Mr. Davies is now a management consultant and an owner and director of a number of different privately held organizations.
FRANCHISE BROKER: Jerry Cole Franchise Consultants. Inc.: Jerry Cole, President In March, 2006, we retained the services of Jerry Cole Franchise Consultants, Inc., located in Newport Beach, California, as our franchise broker. Mr. Jerry Cole has been the President of Jerry Cole Franchise Consultants, Inc. since January 1, 2003. From January 1, 2001 to January 1, 2003, Mr. Cole was a self-employed/sole proprietor franchise consultant doing business as Jerry Cole Franchising and Consulting. Neither
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Jerry Cole Franchise Consultants, Inc., nor Mr. Cole, have authority to make any representations, promises, assurances or commitments on our behalf that are contrary to the content of this Offering Circular, and only we are authorized to offer and sell franchises.
ITEM 3: LITIGATION
Ace DuraFlo Systems, LLC and Pipe Restoration Technologies, LLC v. Bill Howe Plumbing, Pipe Renovations Systems, Inc., Nu Flow Technologies, American Pipe Lining, Inc., et al. United States District Court, Central District California, Case No. SA CV 05-01039 DDP (MCx). We and our affiliate, PRT, filed this action on October 21, 2005 against our former franchisee, Bill Howe Plumbing, Inc. ("Howe Plumbing"), which did business as Ace DuraFlo San Diego and Pipe Renovations Systems, Inc., American Pipe Lining, Inc. ("APL"), Nu Flow Technologies 2000, Inc. and Nu Flow America Inc. (together, "Nu Flow"), and various individuals associated with Howe Plumbing. APL licenses from the United States another type of pipe restoration epoxy, which is the subject of a patent issued to the United States, and APL sublicenses the other epoxy material to Nu Flow, a competitor of ours, which we believe is controlled by Howe Plumbing and other related individual defendants. Our complaint seeks specific performance and damages for breach of contract, breach of the implied covenant of good faith and fair dealing, trade secret misappropriation, trademark infringement, intentional interference with economic advantage, common law unfair competition, violation of California Business & Professions Code Section 17200, civil conspiracy, and defamation. We also seek declaratory relief that our pipe restoration epoxy material does not infringe the United States' patent. Defendant Howe Plumbing purported to terminate its franchise agreement with us based on its statement that we failed to disclose our alleged infringement of the United States' patent. Our claims in this lawsuit assert that our pipe restoration epoxy material does not infringe the United States' patent and, therefore, Howe Plumbing's purported termination of the franchise agreement was invalid and a breach of contract. As of the effective date of this Offering Circular, Defendants have not yet answered the complaint. Management denies all allegations of patent infringement and misrepresentation and intends to vigorously prosecute its claims.
Except for the 1 case disclosed in this Item 3, no litigation is required to be disclosed in this Offering Circular.
ITEM 4: BANKRUPTCY
No person identified in Items 1 or 2 of this Offering Circular has been involved as a debtor in proceedings under the U.S. Bankruptcy Code required to be disclosed in this Item.
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ITEM 5: INITIAL LICENSE FEE
The Initial License Fee for an ACE DuraFlo® franchise is $24,900 for a territory of up to 1 Million population, plus $5,000 for each increment of up to 250,000 population in the territory that you purchase. The Initial License Fee is due in full when you sign the License Agreement. It is not refundable. We identify your territory before you sign the License Agreement. In determining the population in the territory, we rely on the most recent U.S. census data compiled by the federal Office of Management and Budget or comparable statistical information.
In addition to the Initial License Fee, you will buy an equipment package from us that includes a compressor and epoxy mixer, air distribution header, sander, filters and air dryers. A residential equipment package will cost approximately $95,000, plus tax and shipping charges. You must order the equipment package by no later than the date that you (or your principal owner) complete the one-week initial training program (see Item 11) and before you may begin performing Authorized Services. When you place your order, you must remit payment of 20% of the cost of the equipment, and the balance is due before ADF ships the equipment. You also must buy your epoxy from us. ADF expects your initial purchase of epoxy will cost between $3,000 and $4,200. You must pay for the epoxy when you place the order. These payments are not refundable. (For additional information as to these additional items, see Item 7, and in particular footnotes 4 and 5 to Item 7.)
ITEM 6: OTHER FEES
|
Name of Fee (Notel) |
Amount |
Due Date |
Remarks |
|
Royalty |
8% of Gross Receipts up to $1 million, and 6% on additional Gross Receipts (Notes 2 and 4) |
Weekly, on or before Wednesday of each week for the 7 day Monday-Sunday period before payment |
Gross Receipts include revenues from the sale of products or services in connection with the performance of Authorized Services, including (without limitation) revenues from the replacement of tub and shower valves, angle stops and supply lines, and any other revenues as a result of the application of Epoxy, use of equipment purchased or leased from Licensor to operate the Licensed Business or use of the Names and Marks. We may require payment by electronic funds transfer. See Item 11 and Exhibit L. |
|
Advertising Contribution |
1.5% of Gross Receipts (Note 3) |
At the same time, and for the same period, as Royalty Fees |
You must also spend a minimum amount on local advertising (see Note 3). You do not pay us for local advertising activities. |
|
Additional Training (Note 5) |
Up to $500/person to attend our one-week initial training program, and up to $500/day for us to |
Upon receipt of an invoice |
We do not charge any training fee to provide our one-week initial training course to up to 6 persons whom you enroll during the term by mutual arrangement, or to provide field training in connection with your first 2 |
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|
Name of Fee (Note 1) |
Amount |
Due Date |
Remarks |
|
provide field training |
residential jobs if you complete field training within 60 days after you complete the initial training program, (see Item 11). |
||
|
Late Charges |
$25, plus interest on unpaid balances at the lesser of 1.5% per month or the maximum rate permitted by applicable law |
Immediately after notice from us |
This fee is only due when you do not timely pay fees that you owe us. |
|
Transfer Fee (Note 6) |
40% of our then current initial license fee at the time you ask for our consent to the transfer, or if we are not selling new licenses at the time, $10,000 |
Before completing a transfer of the license |
This fee is only due when you transfer control of the License Agreement, the license, or your ACE DuraFlo® business. |
|
Renewal Fee |
$1,000 |
Within 30 days after we deliver the agreements to you to renew your license |
This fee is only due if you decide to renew your license. |
|
Audit Expenses |
Cost of audit |
Immediately after notice from us |
Payable only if you understate your Gross Receipts by 2% or more. |
|
Costs and Attorneys' Fees |
Will vary under circumstances |
Immediately after notice from us |
If ADF is successful in any judicial or arbitration action that we bring against you or you bring against us. |
|
Indemnification |
Will vary under circumstances |
As incurred |
You have to reimburse us if we are sued or held liable for claims arising out of your operations. |
(1) Unless otherwise stated, all fees are paid to ADF and are nonrefundable.
(2) We do not suggest or represent that your business will reach any particular level of Gross Receipts. However, if the cumulative Gross Receipts of your ACE DuraFlo business over the term of the License Agreement exceed $1 million, we reduce the percentage rate of Royalty Fees for the balance of the term to 6% of your Gross Receipts over $1 Million.
(3) In addition to Advertising Contributions, you must spend a minimum amount each month on local advertising in your territory starting with the first calendar month that is at least 30 days after you sign the License Agreement. See Item 11. Expenditures for local advertising are paid to third parties, not to us. We currently have a local advertising rebate program in place whereby we will rebate to you up to 50% of your Advertising Contributions for qualified advertising that you place in your local market. Qualified advertising includes any print media that clearly
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displays our trademarks (e.g., magazine and newspaper advertising, vehicle graphic wraps and mailers), but excludes telephone directory advertising and web site advertising or development. You must obtain our prior written approval of the local advertising before you use or place the advertising. To request a rebate, you must present the local advertising to us, together with the applicable invoice showing your expenditure using our rebate request form. You must submit written rebate requests on a timely basis in accordance with the procedures in our operations manuals. We do not allow you to carry-forward any unused local advertising credits. We reimburse you out of the Advertising Fund. We review the local advertising rebate program every 6 months to evaluate if we will continue it for the next 6 months, and may discontinue the rebate program at the end of any 6 month period upon 30 days written notice.
(4) If your state, or any governmental body in your state, charges a tax on the Royalty Fees that ADF receives from you, then you must pay us, as an additional Royalty Fee, the amount of this tax. This does not apply to any federal or state income taxes that we must pay on the Royalty Fees that we receive from you.
(5) As we explain in Item 11, we may also conduct an annual meeting or require you or designated personnel to complete additional training. (See License Agreement - sections 7.03, 7.04). We will not require that more than 2 persons complete mandatory additional training exceeding 2 days in any 12 month period. Nor will we require that more than 2 persons attend an annual meeting in any 12 month period exceeding 3 days in duration. We may charge additional training fees for additional mandatory training not to exceed $500/person in any 12 month period. We may charge a registration fee for the annual meeting not to exceed $500/person. You are responsible for all travel, living and salary expenses for your personnel in connection with attending additional training or the annual meeting. We intend to conduct additional training and the annual meeting (if we hold one) at locations in the United States.
(6) The fee is 40% of our then current Initial License Fee. Today, this percentage would equal $9,960 for a territory of up to 1 Million population. If we are not selling new franchises at the time you transfer your license, the fee will be $10,000.
For additional information as to your initial investment, see Item 7.
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ITEM 7: INITIAL INVESTMENT
|
Expenditures (Notel) |
Estimated Low-High Range for an Existing Plumbing Business Performing Authorized Services (Note 2) |
Estimated Low-High Range for New Business Performing Authorized Services (Note 2) |
Method of Payment |
When Due |
To Whom Payment is to Be Made |
|
Initial License Fee |
$24,900 |
$24,900 |
Lump Sum |
Upon signing License Agreement |
ADF |
|
Real Property and Fixtures (Note 3) |
$0 |
$2,500-$15,000 |
Landlord |
||
|
Equipment (Note 4) |
$95,000 -$105,000 |
$95,000-$105,000 |
20% down, balance on delivery |
Before Opening |
ADF |
|
Plumbing Tools, Supplies and Epoxy (Note 5) |
$3,000-$10,000 |
$13,000-$16,000 |
As Ordered |
Before Opening |
ADF |
|
Vehicle (Note 6) |
0 - $50,000 |
0 - $50,000 |
As Ordered |
Before Opening |
Suppliers |
|
Signage (Note 7) |
$2,300 - $4,200 |
$2,300 - $4,200 |
As Ordered |
Before Opening |
Suppliers |
|
Misc. Opening Costs, including Travel and Living Expenses While Training (Note 8) |
$12,000-$17,000 |
$12,000-$25,000 |
As Incurred |
Before and After Opening |
Suppliers and ADF |
|
Additional Funds - Three Months (Note 9) |
$2,500 - $25,000 |
$35,000-$150,000 |
As Incurred |
As Incurred |
Various Parties, Including Employee s |
|
Total (Note 10) |
$139,700-$236,100 |
$184,700-$390,100 |
(1) None of these payments are refundable.
(2) We define "Authorized Services" in Item 1.
(3) In most cases, we expect our licensees will own and be operating an existing plumbing business and will operate the Ace DureFlo® licensed business out of their existing offices. If you do that, we do not expect you to incur any additional costs for real property and fixtures. We have no minimum requirements for your office space. Within 90 days after you sign the License Agreement, you must obtain our approval of the street address of your business office and be ready to receive and conduct business there. Our estimate for a new business assumes you lease office space at a cost of $1,200 to $2,000 per month and pay security
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deposits equal to two months' rent. We also assume you will spend up to $10,000 for fixtures and leasehold improvements for a new business.
(4) For applications within the scope of Authorized Services, the cost of the equipment will generally be about $95,000, plus tax and shipping.
(5) If you are already in the plumbing business, you may not have to buy any plumbing tools. Otherwise, ADF estimate tools for residential applications will cost approximately $8,000. ADF anticipates the supplies you will need to operate your business will be $2,000 to $3,000 for hoses, clamps, etc. You will also need epoxy kits to operate your business. The epoxy kits for your main epoxy mixer presently cost $300 per kit, with a 10-kit minimum. When you purchase your initial epoxy dispenser, ADF will give you a smaller, backup epoxy mixer. If you want to use this mixer, you will need to purchase epoxy for this mixer. This epoxy is sold in kits that presently cost $100 each, with a 6-kit minimum. Therefore, the high estimate assumes you also purchase epoxy for this backup mixer.
(6) You will need at least one vehicle to operate your business. Our low estimate assumes you either use an existing vehicle, or lease one with no down payment. Our high estimate assumes you purchase a new plumbing truck, and a trailer to tow your equipment.
(7) These figures include exterior signage, and signage for one vehicle. If you have additional vehicles, ADF estimates that the additional signage costs for each vehicle will range between $500 and $2,200.
(8) Miscellaneous opening costs Include security deposits (excluding lease deposit, which we include under the Real Property category), business licenses, attorneys' fees, initial insurance, and prepaid expenses. This category also includes an estimate for travel and living expenses (i) for you and your personnel to attend the initial training program in Placentia, California before you begin performing Authorized Services, and (ii) that you must reimburse us to send a technician to your territory to provide field training in connection with your first two residential jobs. Our estimates assume that you complete field training within the first 60 days after you complete the initial training program and, therefore, do not pay any training fees to us for field training. See Item 11.
(9) We include in the category of additional funds allocations for grand opening advertising ($2,500), local advertising, costs for local telephone directory listings, and other marketing expenses that you will incur during the first 3 months. See Item 11 regarding minimum advertising obligations. The amount for an existing plumbing business is primarily for marketing expenses; since you will already have an existing business, ADF is assuming you will not need to hire additional employees, or incur additional office expenses for your ACE DuraFlo® business. For a new business, you will have significantly greater expenses during the first 3 months to hire employees, establish an office and market your business. These figures are estimates and ADF cannot guarantee you will not have additional
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expenses either in starting the business or during the first 3 months. Your costs will depend on factors like: how closely you follow our promotional methods; your management skill, experience and business acumen; local economic conditions, and the local market for your services; the prevailing wage rate; competition; and the sales level reached during the initial period.
(10) In putting together these estimates, ADF relies on the experience of our affiliate, ETI and our existing licensees. Your actual investment could be different. ADF does not offer financing for any part of the initial investment. The availability and terms of financing will depend on factors like the availability of financing generally, your credit worthiness, your relationship with local banks, and any additional collateral you may offer to a lender to secure the loan. Our estimates do not include any finance charges, interest or debt service obligations.
ITEM 8: RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES
The equipment you need to operate your business must meet our specifications, and you must purchase the equipment from us or from suppliers ADF designates. As of the date of this Offering Circular, ADF is the only approved supplier for this equipment. The equipment includes your compressor, epoxy mixer, air distribution header, air dryers, sander, pre-filters and filter/dust collectors.
You must also purchase your epoxy from us or from suppliers ADF designates. The epoxy that you buy from us is manufactured by an affiliated company. As of the date of this Offering Circular, ADF is the only approved supplier for the epoxy.
ADF earns a profit on items we sell to our licensees. For the 12 months ending
December 31, 2006, ADF's total sales of goods and services to ACE DuraFlo
franchisees were $1,245,898, or approximately 56% of our total revenues of $2,225,664.
You will also need a vehicle to operate your business, but ADF does not have specifications for that vehicle, and ADF does not require you to buy the vehicle from us or from any supplier ADF approves or designates.
ADF may issue specifications for the other items you need to use in your business. If ADF does, these specifications will be issued either in one of our operations manuals, or in a separate memorandum. ADF may also provide lists to you of recommended suppliers for forms, signs, supplies, marketing materials and other items necessary to operate your business. The recommended source of supply may be us, an affiliate of ours, or an independent supplier.
ADF does not have any purchasing or distribution cooperatives. ADF does not currently receive any payments from third party suppliers from whom you make purchases.
The equipment and initial epoxy that you must purchase from us or from suppliers we designate will likely represent between 55% and 90% of the total purchases you make to begin operations if you are a new business. If you already own a plumbing business and a service vehicle, then the cost of the equipment, initial epoxy and the initial
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franchise fee that you pay to us will represent closer to 90% of your total initial investment (see Item 7). Once you begin operating your business, the primary item you must purchase from us or from suppliers we designate is epoxy. ADF estimates your epoxy purchases will represent less than 5% of your total annual expenses.
ITEM 9: FRANCHISEE'S OBLIGATIONS
THIS TABLE LISTS YOUR PRINCIPAL OBLIGATIONS UNDER THE LICENSE AGREEMENT AND OTHER AGREEMENTS. IT WILL HELP YOU FIND MORE DETAILED INFORMATION ABOUT YOUR OBLIGATIONS IN THESE AGREEMENTS AND IN OTHER ITEMS OF THIS OFFERING CIRCULAR.
|
Obligation |
Section or Article in License Agreement |
Item in Offering Circular |
|
|
a. |
Site selection and acquisition/lease |
6.01 |
7,11 |
|
b. |
Pre-opening purchases/leases |
6.02,7.05, 13.02 |
5-8 |
|
c. |
Site development and other pre-opening requirements |
3.02,6.01,6.02, 13.02 |
7,8,11 |
|
d. |
Initial and ongoing training |
7.01-7.04,7.10 |
11 |
|
e. |
Opening |
VI, IX |
7,11 |
|
f. |
Fees |
III, IV, V, XIII, XIV, 18.04 |
5-7,17 |
|
g- |
Compliance with standards and policies/Operating Manual |
7.06, 9.04 |
8, 11 |
|
h. |
Trademarks and proprietary information |
1.02, 5.03-5.06, XII |
13, 14 |
|
i. |
Restrictions on products/services offered |
2.02, VIII, X |
16 |
|
j- |
Warranty and customer service requirements |
XI |
11 |
|
k. |
Territorial development and sales quotas |
2.03 |
12 |
|
1. |
Ongoing product/service purchases |
3.02, VIM, XIII |
8, 11 |
|
m. |
Maintenance, appearance and remodeling requirements |
6.02 |
7,17 |
|
n. |
Insurance |
XV |
7 |
|
0. |
Advertising |
V |
6, 11 |
|
P- |
Indemnification |
23.02-23.04 |
6 |
|
q- |
Owner's participation/management/staffing |
7.02, IX |
11,15 |
|
r. |
Records/reports |
14.01, 14.02, 14.04 |
11 |
|
s. |
Inspections/audits |
14.05 |
6 |
|
t. |
Transfer |
XVIII |
17 |
|
u. |
Renewal |
2.04 |
17 |
|
V. |
Post-termination obligations |
XXI |
17 |
|
w. |
Non-competition covenants |
XVII |
17 |
|
X. |
Dispute resolution |
XXII |
17 |
ITEM 10: FINANCING
ADF does not offer direct or indirect financing. ADF does not guaranty any note, lease, or obligation you might incur.
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ITEM 11: FRANCHISOR'S OBLIGATIONS
Except as listed below, we need not provide any assistance to you. Before you begin operating your business, ADF will:
(a) Designate a nonexclusive territory in which you can operate, (see Item 12) (License Agreement- Exhibit 1).
(b) Provide the one-week initial training program. (License Agreement -section 7.01).
(c) Sell to you an initial equipment package, including compressor, epoxy mixer, air dryer, air distribution header, sander, and pre-filter/dust collector (License Agreement - sections 3.02 and 13.02).
(d) Loan to you one or more sets of our confidential manuals and other guides which we may develop to describe our system of operation and the application of the ACE DuraFlo process (License Agreement -section 9.07). At present, these manuals consist of a Technical Manual and an Equipment Manual (which we sometimes collectively refer to this Offering Circular as our "operations manuals"). The Tables of Contents of these manuals are attached to this Offering Circular as Exhibit E.
During the operation of your business, ADF will:
(a) Sell to you the supply of epoxy that you need for your use in performing Authorized Services (License Agreement - section 11.01).
(b) Provide additional field training and other onsite support to you as you may request, subject to the availability of our personnel, for the fees that we describe in Item 6, and at your sole cost and expense (License Agreement - section 7.04).
(c) Maintain and administer the ACE DuraFlo Advertising Fund (License Agreement - section 5.02).
ADF requires you to contribute 1.5% of your Gross Receipts to our Advertising Fund on a weekly basis, (see Item 6). ADF accounts for these Advertising Contributions separately from our other funds. The purpose of this fund is to promote the ACE DuraFlo name and system through national trade shows, national trade organizations that benefit business development, to underwrite marketing materials and media promotional development for the business of our licensees, and to generally promote our names and marks and the ACE DuraFlo process. ADF may use print, radio or television media on a local, regional or national basis. ADF may also use some of the monies in the Advertising Fund to defray the cost of establishing and maintaining a website, National Accounts Program (if we choose to implement one), and other tools
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for generating leads for our licensees. ADF will not use these contributions to pay any of our general operating expenses, except for the reasonable salaries, administrative costs, direct expenses, and overhead ADF incurs in activities related to the administration of the Advertising Fund (up to 15% of the aggregate Advertising Contributions that we collect during any calendar year). ADF does not use the Advertising Fund to pay for expenses that we may incur in selling franchises. ADF is not required to ensure that ADF expends monies from this fund in proportion to contributions made by businesses in any particular geographic area. ADF will periodically prepare an unaudited accounting of these expenditures, and this accounting will be available to you upon written request. If all amounts in the Fund are not spent in any given year, these amounts will be carried over to the next year.
In our most recent fiscal year ending December 31, 2005, the percentage breakdown of our Advertising Fund expenditures was as follows:
|
Production expenses for creating and development advertising materials for use by our licensees |
8.02 |
|
Media placement costs |
39.84 |
|
Administrative expenses |
0.21 |
|
Other (trade shows to promote Authorized Services and to benefit licensees; payments under our local advertising rebate program (see Item 6); ADF website development and maintenance; expenses for public relations services to develop brand awareness of the Ace Dureflo® name and the Authorized Services) |
51.93 |
|
100% |
You must also spend a minimum of $2,500 on grand opening promotional activities that publicize the opening of the Licensed Business and the availability of Authorized Services in the territory. We count towards this minimum obligation the sums that you document that you spend on promotional activities that take place before, and within the first 30 days after, you begin performing the Authorized Services. Within 60 days after you begin performing the Authorized Services, you must submit a report substantiating expenditures on grand opening advertising. You must obtain our prior written consent to the use of any materials that you create and to any promotional activities that you conduct as part of your grand opening advertising program.
During each calendar month of the License Agreement beginning with the first calendar month after Licensee (or one of Licensee's principal owners) completes the initial training program, you must spend at least the greater of (i) $1,000, or (ii) 2% of the prior calendar month's Gross Receipts on local advertising. For example, if you complete the initial training program on August 10, 2008, then in September, 2008, you must spend the greater of (i) $1,000 on Local Advertising, or (ii) 2% of the Licensed Business'
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August gross receipts. Within 30 days after the end of each calendar quarter, you must submit a quarterly report substantiating expenditures on local advertising during the most recent calendar quarter. We do not credit your payments for Advertising Contributions, telephone directory advertising or grand opening promotion to your obligation for local advertising expenditures.
In conducting local advertising in your territory, you may use advertising materials that we prepare from the proceeds of the Advertising Fund, which we will make available to you upon request. Alternatively, you may create your own materials. If you do create your own materials, you must obtain our approval before using those materials.
As we disclose in Item 6, we currently have a local advertising rebate program in place whereby we will rebate to you from the Advertising Fund up to 50% of your Advertising Contributions for qualified local advertising that you place in your local market. We may discontinue the rebate program at the end of any 6 month period upon 30 days written notice.
We do not require you to buy or use any type of electronic cash register or POS system for your business. We do require you to use a computer in your business, but do not prescribe any specific hardware that you must purchase. Our only requirement with regard to your computer system is that it have high speed Internet access. We may require you to use a specific accounting system that we designate or approve. If we designate this system, your initial cost to purchase or lease the computer software will not exceed $2,500 per licensed business location). (License Agreement - section 14.05).
We may change the method by which you pay us Royalty Fees, Advertising Contributions and other payments upon 14 days written notice, including directing that you use a payment system that we designate involving using pre-authorized transfers from your bank account and electronic fund transfers to our bank account. When you sign the License Agreement, you will sign an agreement in the form of Exhibit L agreeing to pay us all fees and other charges for goods or services by our electronic fund transfer system upon our request. You bear the cost of adopting any new payment systems that we require.
You must maintain a business office in your territory where you conduct and receive business and maintain all records of your business activities. Your business office must be open before you perform your first job. You must obtain ADF's prior written approval of the street address of the proposed business office. We do not assist you in selecting a site for your business office. ADF assumes that in most cases our licensees will operate their ACE DuraFlo business from the office of an existing business and, therefore, will obtain our consent to that location before we sign the License Agreement. ADF does not assist you in hiring your employees. (License Agreement - section 6.01).
The typical length of time between the signing of the License Agreement and the opening of your business is generally between 90 and 120 days, assuming you order your equipment in the first 30 days after you sign the License Agreement. This time period can be affected by the time it takes to select a site and negotiate a lease if you
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The original documents were scanned as an image. The original file can be downloaded at the link above.