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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2001 Commission File No. 0-22810
MACE SECURITY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 03-0311630
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1000 Crawford Place, Suite 400, Mt. Laurel, NJ 08054
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (856) 778-2300
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
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Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this form, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the last sale price of the Registrant's Common Stock at
the close of business on March 6, 2002, was approximately $13,651,095.
(Reference is made to page 14 herein for a statement of assumptions upon which
this calculation is based.) The Company does not have any non-voting stock.
The number of shares of Common Stock, par value $.01 per share, of the
Registrant outstanding as of March 6, 2002 was 25,384,027.
Documents Incorporated by Reference
Portions of the Registrant's definitive Proxy Statement to be filed with
the Commission in connection with the 2002 Annual Meeting of Stockholders (which
proxy statement is expected to be filed with the Commission not later than 120
days after the end of the Registrant's last fiscal year) are incorporated by
reference into Part III of this Form 10-K.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Mace Security International, Inc. ("the Company" or "Mace") was incorporated in
Delaware on September 1, 1993. Before July 1999, its main business was the
production and sale of less-than-lethal defense sprays and other consumer safety
and personal security products. On July 1, 1999, we merged American Wash
Services, Inc., a company that was engaged in the business of acquiring and
operating car wash facilities, into a wholly-owned subsidiary of Mace Security
International, Inc. On July 9, 1999, we acquired all the outstanding common
stock of Innovative Control Systems, Inc. ("ICS"), a developer of point-of-sale
systems for the car wash and oil and lubrication industries. On June 2, 2000,
we sold our computer products subsidiary, ICS, and accordingly, all results of
ICS's operations have been classified as "discontinued operations."
Our operations are currently conducted through two primary divisions. Since
July 1999, our main business has been the ownership and operation of full
service car and truck wash facilities. Through a separate security products
division, we produce retail sale consumer safety and personal security products.
In the first quarter of 2000, we entered into a Management Agreement with Mark
Sport, Inc. ("Mark Sport"). Mark Sport is controlled by Jon E. Goodrich, a
director of the Company. The Management Agreement entitles Mark Sport to
operate the Security Products Division and receive all profits or losses
realized through operation of this division. We have retained ownership of all
of the business assets. Under the Management Agreement, Mark Sport pays us
$20,000 per month. Additionally, Mark Sport must pay us an amount equal to the
amortization and depreciation on the assets of the division. During the term of
the Agreement, Mark Sport must operate the division in substantially the same
manner as it has been operated prior to the Management Agreement. The
Management Agreement currently expires on April 30, 2002.
LINES OF BUSINESS
Car and Truck Wash Business. The Company, through its subsidiaries, owns
and operates 55 car washes and five truck washes. We operate 15 car wash
locations in the region surrounding Philadelphia, Pennsylvania, some of which
are located in New Jersey, Pennsylvania and Delaware. We also operate six car
wash locations in the Sarasota, Florida area, 14 car wash locations in Arizona,
and 20 car wash locations in Texas. We also own five truck washes located in
Arizona, Indiana, Ohio and Texas. Except for 11 of the Philadelphia-region car
washes, which provide only exterior washing, and two of the Texas-region
locations, which represent a self serve wash facility and a lube facility, the
rest of our locations are full service car washes. These full service car
washes provide exterior washing and drying, vacuuming and dusting of dashboards
and door panels, and cleaning of all windows and glass.
Our typical car or truck wash facility consists of a free standing building of
approximately 4,000 square feet, containing a sales area for impulse items and a
car wash tunnel of approximately 75 feet in length. Cars are moved through the
car wash tunnel by a conveyor system where automatic equipment cleans the
vehicle as it moves underneath the equipment. Additional extra services,
including wheel cleaning, fragrance and rust protection treatment, interior and
wheel treatments, waxing and shampooing, are also offered at the locations.
Many of our locations also offer other consumer products and related car care
services, such as professional detailing services (offered at 42 locations), oil
and lubrication services (offered at 10 locations), gasoline dispensing services
(offered at 19 locations), state inspection services (offered at six locations),
convenience store sales (offered at one location), and merchandise store sales
(offered at 42 locations). Our truck wash facilities provide washing and waxing
services for tractor-trailer and fleet transport vehicles. These services are
provided by hand. While certain acquisitions were pending in 1999 and 2000, we
managed several car wash locations under operating agreements pursuant to which
we were entitled to all profits generated by that location. Car wash and
ancillary services provided 99.5%, 99.5%, and 86.7% of our revenues in fiscal
years 2001, 2000 and 1999, respectively. (See also, the Consolidated Statements
of Operations in the financial statements accompanying this report.)
Our car wash operations are not dependent on any one or small number of
customers. The nature of our car wash operations does not result in a backlog
of orders at any time, and all of our car wash revenues are derived from sales
in the United States. For a discussion of seasonal effects on our car wash
operations, see Item 7, Seasonality and Inflation in Management's Discussion and
Analysis of Financial Condition and Results of Operations.
Security Products Division. The Security Products Division designs,
markets and sells consumer products for use in protection of the home and
automobile, and for personal and child protection. These products include a line
of defense sprays,
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personal alarms, whistles, and window and door lock alarms. The defense sprays
include tear gas sprays, pepper sprays and sprays with both tear gas and pepper
solution. The Security Products Division markets its products through mass
merchants/department stores, consumer catalogues and guns/sporting goods,
hardware, auto, convenience, and drug stores as well as on the Internet. Mace
Anti Crime Bureau(R) ("MACB") develops and markets security products and
literature primarily for the foreign financial community, including a "dye-pack"
used by financial institutions for robbery protection, state-of-the-art training
videos and crisis response materials. MACB markets to foreign financial
institutions and related businesses throughout the world through direct
marketing and the use of independent sales representatives and distributors as
well as exhibitions at national trade shows and advertisement in trade
publications. Substantially all of the manufacturing processes are performed at
the Bennington, Vermont facility under the Management Agreement through Mark
Sport. Defense spray products are manufactured on an aerosol filling machine.
Most products are packaged in sealed, tamper-resistant "clamshells." The
KinderGard(R) product line is primarily manufactured by an unrelated company and
packaged on-site at the Vermont facility. Operating results of the KinderGard(R)
product line are immaterial at this time.
In the first quarter of 2000, we entered into a Management Agreement with Mark
Sport, a Vermont corporation controlled by Jon E. Goodrich, a director of the
Company. The Management Agreement entitles Mark Sport to operate the Security
Products Division and receive all profits or losses during the term of the
Management Agreement. We have retained the ownership of all of the business
assets. The Management Agreement was extended under several amendments, most
recently through April 30, 2002. Under the Management Agreement, Mark Sport
pays us $20,000 per month. Additionally, Mark Sport must pay us an amount equal
to the amortization and depreciation on the assets of the division. During the
term of the Management Agreement, Mark Sport must operate the division in
substantially the same manner as it has been operated prior to the Management
Agreement. Revenue from the Security Products Division provided 0.5%, 0.5%, and
13.3% of our revenues in fiscal years 2001, 2000 and 1999, respectively. (See
also, the Consolidated Statements of Operations in the financial statements
accompanying this report.)
Point-of-Sale Systems and Software Sales and Development. On July 9, 1999,
we acquired ICS in exchange for 604,000 shares of company common stock and the
assumption of $750,000 of debt. From July 1999 to June 2000, ICS was involved
in the development, marketing and sale of automated point-of-sale control
systems that are used to monitor, manage and analyze car wash systems and
lubrication centers. On June 2, 2000, we sold ICS. Accordingly, all results of
ICS operations have been classified as "discontinued operations."
BUSINESS STRATEGIES
Growth Of Car and Truck Wash Business.
. Internal Growth. We believe that we can achieve internal growth,
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principally from additional sales into our current markets, by providing
superior and improved service and through our existing marketing efforts. To
improve market share in a given operating region, we spend approximately 2% to
3% of regional revenue on strong regional advertising campaigns emphasizing
brand awareness. Advertising includes, but is not limited to, direct mail
discount coupon campaigns, media promotional events, and radio and television
spots. We believe that only about 30% of the general population routinely use
car wash services. We believe that this relatively low level of participation
is the result of (i) lack of effective advertising; (ii) inconsistent wash
quality and service levels across fragmented locations; and (iii) concerns about
scratches and other adverse effects from the automated wash process. We believe
that through consumer education and by developing a strong brand reputation,
known for consistent quality and safe, dependable service across locations, we
can increase consumer participation rates and generate significant internal
growth from existing locations. We also intend to selectively implement price
increases when competitive advantages and appropriate market conditions exist.
. Increasing Productivity and Operating Efficiency. We have reduced
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the total operating expenses of our owned businesses by implementing centralized
financial controls. In addition, we are continually implementing programs to
take advantage of certain economies of scale in such areas as the purchase of
equipment, chemicals and supplies, parts, equipment maintenance, data
processing, financing arrangements, employee benefits, insurance, and
communications. We train our operating personnel to emphasize customer service,
labor savings, safe operation and improved sales of add-on and ancillary
services. Location managers are trained to implement our standardized service
menu option list and high-margin service add-ons at each of our locations.
Acquisitions. From May 1999 through December 2001, and including our
merger with American Wash Services, Inc., we acquired 62 car wash facilities and
five truck wash facilities through the acquisition of 17 separate businesses.
Seven car wash
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facilities have been divested or closed. The majority of the locations were
acquired by acquiring a company, or the assets of a company, that owned several
locations in a given geographic area.
We will continue to acquire car washes when we can do so on advantageous terms.
In evaluating potential acquisitions, we will consider: (i) the potential for
operating cost reductions, revenue growth through advertising, and managerial
efficiencies; (ii) the commercial viability and underlying real estate value of
each location; (iii) the potential for geographic diversification throughout the
United States; and (iv) other relevant factors.
We are also exploring potential acquisitions, mergers and strategic alliances
with companies not in the car wash business.
As consideration for future acquisitions, we intend to continue to use
combinations of common stock, cash, and assumption of indebtedness. The
consideration for each future acquisition will vary on a case-by-case basis
depending on our financial interests, the historic operating results of the
acquisition target, and the growth potential of the business to be acquired. We
expect to finance future acquisitions through funds provided by operations,
mortgage loans and the proceeds of possible future equity sales.
. Completed Acquisitions. We did not complete any acquisitions in 2001.
-----------------------
During 2000, we acquired three car care companies and a truck wash company.
Completed Acquisitions
January 1, 2000 -- December 31, 2000
Date Acquired
Company (Accounting Method) Location Principal Business
------- ------------------- -------- ------------------
Red Baron Truck Washes, Inc. March 24, 2000 Arizona, Five Truck Washes
(Purchase) Indiana,
Texas and Ohio
Sparsupco, Inc. (the "Beneva Car Wash") June 5, 2000 Sarasota, Florida Full Service Car Wash
(Purchase)
Superstar Kyrene July 10, 2000 Phoenix, Arizona Full Service Car Wash
(Purchase)
Blue Planet Car Wash July 26, 2000 Dallas, Texas Full Service Car Wash
(Purchase)
MARKETING
Car and Truck Wash Business. The car care industry services customers on a
local and regional basis. We employ operational and customer service people at
our operating locations. The operational and customer service people are
supervised by the management of the operating locations. We emphasize providing
quality services as well as customer satisfaction and retention, and believe
that we will attract customers in the future because of our reputation for
quality service. We market our services through coupon advertising and direct-
mail marketing programs. We have a diverse customer base, with no single
customer accounting for five percent or more of our consolidated revenues for
the fiscal year ended December 31, 2001. We do not believe that the loss of any
single customer would have a material adverse effect on our business or results
of operations.
Security Products Division. During 2000 and 2001, we did not directly
market its line of personal safety and security devices. All marketing and
sales are done by Mark Sport under the Management Agreement which expires on
April 30, 2002. Each market category is reached through dedicated in-house sales
managers, and/or through a nationwide network of manufacturers' representatives.
Market categories are also reached through catalogue, magazine and trade
publication advertising, Internet website and promotion at industry trade shows.
Mark Sport also sells directly to wholesale distributors and to certain large
department stores. Mail order and specialty accounts are handled directly by
Mark Sport.
Point-of-Sale and Software Business. Having sold ICS, we no longer market
the point-of-sale systems manufactured by ICS.
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PRODUCTION AND SUPPLIES
Car and Truck Wash Business. We do not manufacture any of the car or truck
wash equipment and supplies which we use. There are numerous suppliers of the
equipment and supplies required by our car and truck wash operations.
Security Products Division. Substantially all of the manufacturing
processes for the Security Products Division are performed under the Management
Agreement by Mark Sport at our leased Bennington, Vermont facility. Defense
spray products are manufactured on an aerosol filling machine. Most products are
packaged in sealed, tamper-resistant "clamshells." The KinderGard(R) product
line and its MaceCash dye pack bag are primarily manufactured by unrelated
companies and packaged on-site at the Vermont facility. There are numerous
potential suppliers of the components and parts required in the production
process. We have developed strong beneficial long-term relationships with many
of our suppliers including the following: Allplax, Inc., Moldamatic, Inc., Piper
Impact, Inc., Amber International, Inc. and Springfield Printing, Inc. In
addition, Mark Sport purchases for resale a variety of products produced by
others including whistles, alarms, and window and door locks, among others.
Point-of-Sale and Software Business. Prior to the sale of ICS in June
2000, all of our manufacturing processes for the Point-of-Sale and Software
Business were performed at our Nazareth, Pennsylvania facility. The component
parts of ICS's Point-of-Sale systems were manufactured by unrelated companies
and assembled at the Nazareth, Pennsylvania facility.
COMPETITION
Car and Truck Wash Business. The car care industry is a highly fragmented
industry comprised of many "mom and pop" private businesses. At any wash
location the main competitors are privately owned car washes which may, in many
instances, be located near our car washes. The car care industry is highly
competitive. Competition is based primarily on location, facilities, customer
service, available services and rates. We also face competition from sources
outside the car wash industry, such as gas stations that offer automated car
wash services. Because barriers to entry in the general car care industry are
relatively low, competition may arise from new sources not currently competing
with us. We compete with other companies intending to become a national car
wash chain including, Wash Depot Holdings, Inc., Car Wash Partners, Car Wash of
America, Car Spa and Oasis Car Wash.
Security Products Division. The Security Products Division faces intense
competition in the security products consumer market. Domestically, there
continues to be a number of companies marketing defense sprays to civilian
consumers. While Mark Sport continues to offer defense spray products that we
believe distinguish themselves through brand name recognition, superior product
features and formulations, and research and development, this division has
experienced a sales decline for these products. We attribute this decline not
only to the strong competition, but also to lower demand in general.
TRADEMARKS AND PATENTS
Car and Truck Wash Business. We previously announced that we selected
Super Bright(R) as our national car wash chain's new brand name. We own a
registered service mark for Super Bright(R) effective October 30, 2001. This new
brand name marks the beginning of an expanded marketing and advertising
initiative, which will include upgrading the signage and appearance of many of
our car wash facilities.
Security Products Division. Mace Security International, Inc. began
marketing products in 1988 under the Mace(R) brand name and related trademarks
pursuant to an exclusive license for sales of defense sprays to the consumer
market in the continental United States, and a non-exclusive license for sales
to the consumer market worldwide. The license agreement was renegotiated in 1992
to include a purchase option. We exercised this option and purchased outright
the Mace(R) brand name and related trademarks (Pepper Mace(R), Chemical Mace(R),
Mace . . . Just in Case(R), CS Mace(TM) and Magnum Mace(TM)). In conjunction
with this purchase, we acquired a non-exclusive worldwide license to promote a
patented pepper spray formula in both markets. We also have various other
patents and trademarks for the devices we sell including, trademarks and patents
for the Big Jammer(R) door brace, Window Jammer(TM), Sonic Alert(TM), Safety
Flasher(TM), Sport Strobe(TM), Child Safe Alarm(TM), Window Alert(TM), Motion
Alert(TM), Emergency Whistle(TM), Auto Alert(TM), Screecher(R), Peppergard(R),
Slam(R), Mace (Mexico)(R), Viper(R) defense spray, KinderGard(R), Zip-a-Babe(R),
Hand n-Hand(R) and Safe-T-Zip(R). We have been issued a patent on the locking
mechanism for the Mark VI defense spray unit.
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In July 1998, in connection with the sale of our Law Enforcement division, we
transferred our Mace (R) brand trademark and all related trademarks and a patent
(No. 5,348,193) to our wholly owned subsidiary, Mace Trademark Corp. The
purchaser of our Law Enforcement division received a 99 year license to use the
Mace (R) brand, certain other such trademarks and the patent in the Law
Enforcement Market only.
GOVERNMENT REGULATION/ENVIRONMENTAL COMPLIANCE
Car and Truck Wash Business. We are subject to various local, state and
federal laws regulating the discharge of pollutants into the environment. We
believe that our operations are in compliance in all material respects with
applicable environmental laws and regulations. Compliance with these laws and
regulations is not expected to materially affect our competitive position. Three
major areas of regulation facing us are disposal of lubrication oil at our oil
change centers, the compliance with all underground storage tank laws in
connection with our gasoline sales and the proper recycling and disposal of
water used in our car washes. We use approved waste-oil haulers to remove our
oil and lubricant waste. Before acquiring a gasoline dispensing site, we
investigate it to verify that any underground storage tanks are in compliance
with all legal requirements. We recycle our waste water and where we have proper
permits it is disposed of into sewage drains; 70% of the detergent and wax
products used in the car wash are recycled within a built-in reclaim system.
Security Products Division. The distribution, sale, ownership and use of
consumer defense sprays are legal in some form in all 50 states and the District
of Columbia. However, in most states, sales to minors are prohibited and in
several states (MA, MI, NE, NY, WI), sales of defense sprays are highly
regulated. On January 1, 1996, California eased restrictions on defense sprays.
On November 1, 1996, New York lifted an overall ban on defense sprays allowing
for the sale of oleoresin capsicum (OC) pepper sprays in licensed pharmacies and
licensed gun stores only. Massachusetts requires both users and sellers to be
licensed. Wisconsin allows the sale of OC pepper sprays only and they must be
sold from behind a counter or under glass. Michigan does not permit sales of
chloroacetophenone (CN) sprays. Nevada permits sales of
orthochlorobenzalmalononitrile (CS) sprays only. We have been able to sell our
defensive sprays within the guidelines set by state regulations. There can be no
assurance, however, that broader, more severe restrictions will not be enacted
that would have an adverse impact on our financial condition. We believe we are
in compliance with all federal, state, and local environmental laws.
RESEARCH AND DEVELOPMENT
Car and Truck Wash Business. We have a car wash school established at one
of our Austin, Texas car washes. The school is used to train managers and
assistant managers for our car washes.
Security Products Division. We have an on-site laboratory. Research and
development is conducted to maintain our reputation in the defense spray
industry. We are continually reviewing ideas and potential licensing
arrangements to expand our product lines. We spent approximately $13,000 on
research and development in 1999.
INSURANCE
We maintain various insurance coverages for our assets and operations. These
coverages include Property coverages including Business Interruption protection
for each location. We maintain garage keepers and commercial general liability
coverages in the amount of $1,000,000 per occurrence and $3,000,000 in the
aggregate with an umbrella policy which provides coverage up to $25,000,000. We
also maintain workers compensation policies in every state in which we operate.
Nevertheless, there can be no assurance that our insurance will provide
sufficient coverage in the event a claim is made against us, or that we will be
able to maintain in place such insurance at reasonable prices. An uninsured or
under insured claim against us of sufficient magnitude could have a material
adverse effect on our business and results of operations.
U.S. BASED BUSINESS
We currently conduct, and for each of the past three years have conducted,
substantially all of our business in the United States. We do not derive any
material revenue from countries other than the United States and do not have
long-term assets or customer relationships outside of the United States.
Accordingly, we are not currently subject to any material risks associated with
any foreign operations.
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EMPLOYEES
As of March 6, 2002, we had approximately 1,825 employees, of which
approximately 1,801 were employed in the car care services, 19 in clerical,
administrative and sales positions, and five in management. None of our
employees is covered by collective bargaining agreements.
FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING STATEMENTS
This report includes forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended ("Forward Looking Statements"). All statements
other than statements of historical fact included in this section are Forward
Looking Statements. Although we believe that the expectations reflected in such
Forward Looking Statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Generally, these statements relate
to business plans or strategies, projected or anticipated benefits or other
consequences of such plans or strategies, number of acquisitions and projected
or anticipated benefits from acquisitions made by or to be made by us, or
projections involving anticipated revenues, earnings, levels of capital
expenditures or other aspects of operating results. All phases of our operations
are subject to a number of uncertainties, risks and other influences, many of
which are outside our control and any one of which, or a combination of which,
could materially affect the results of our operations and whether Forward
Looking Statements made by us ultimately prove to be accurate. Such important
factors that could cause actual results to differ materially from our
expectations are disclosed in this section and elsewhere in this report. All
subsequent written and oral Forward Looking Statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Important Factors described below that could cause actual
results to differ from our expectations. The Forward Looking Statements made
herein are only made as of the date of this filing, and we undertake no
obligation to publicly update such Forward Looking Statements to reflect
subsequent events or circumstances.
We need to raise additional capital. Additional capital will be needed if
acquisitions of car washes or other businesses are made. Our capital
requirements also include working capital for daily operations and capital for
equipment purchases. To the extent that we lack cash to meet our future capital
needs, we will be required to raise additional funds through bank borrowings and
additional equity and/or debt financing, which may result in significant
increases in leverage and interest expense and/or substantial dilution. If we
are unable to raise additional capital, we will need to curtail future
acquisitions.
Risks of Acquisitions and New Business Segments. One of our strategies has
been to grow through acquisitions. We are currently examining acquisition
candidates outside the car care industry. To the extent we make acquisitions
inside or outside the car care industry, our ability to identify suitable
acquisition candidates, understand new businesses, and consummate acquisitions
on financially favorable terms is a risk. Acquisitions involve risks inherent in
assessing acquisition candidates' values, strengths, weaknesses, risks and
profitability and risks related to the financing, integration and operation of
acquired businesses, including:
i. adverse short-term effects on our reported operating results;
ii. diversion of management's attention;
iii. dependence on hiring, training and retaining key personnel;
iv. risks associated with unanticipated problems or latent liabilities;
and
v. risks inherent with management not having experience in new business
segments acquired.
We cannot give assurance that acquisition opportunities will be available, that
we will have access to the capital required to finance potential acquisitions,
that we will continue to acquire businesses, or that any acquired business will
be profitable.
Listing on the Nasdaq National Market. If our common stock does not
maintain a minimum bid price of one dollar for thirty consecutive days, we are
subject to being delisted from the Nasdaq National Market. If our stock is under
$1.00 for thirty consecutive business days, we will be able to maintain our
listing if during the next 90 day period, our stock maintains at least a minimum
bid price of $1.00 for a ten consecutive day period. The ten day period required
can be extended at the discretion of Nasdaq. Upon delisting from the Nasdaq
National Market, our stock would be traded on the Nasdaq SmallCap Market until
we maintain a minimum bid price of one dollar for thirty consecutive days at
which time we can regain listing on the Nasdaq National Market. If our stock
does not maintain a minimum bid price of one dollar for thirty consecutive days
during a 180 day grace period on the Nasdaq SmallCap Market or a 360 day grace
period if compliance with certain core listing standards are demonstrated, we
will receive a delisting notice from the Nasdaq SmallCap Market. Upon delisting
from the Nasdaq SmallCap Market, our stock may be traded over-the-counter, more
commonly known as OTC. OTC transactions involve risks in addition to those
associated with transactions in securities traded on the Nasdaq National Market
or the Nasdaq SmallCap Market (together
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"Nasdaq-Listed Stocks"). OTC companies may have limited product lines, markets
or financial resources. Many OTC stocks trade less frequently and in smaller
volumes than Nasdaq-Listed Stocks. The values of these stocks may be more
volatile than Nasdaq-Listed Stocks. If our stock is traded in the OTC market and
a market maker sponsors us, we may have the price of our stock electronically
displayed on the OTC Bulletin Board, or OTCBB. However, if we lack sufficient
market maker support for display on the OTCBB, we must have our price published
by the National Quotations Bureau LLP in a paper publication known as the "Pink
Sheets." The marketability of our stock will be even more limited if our price
must be published on the "Pink Sheets."
On April 19, 2001, we were advised by Nasdaq that our common stock had failed to
trade above one dollar for thirty consecutive business days, and therefore, we
were not in compliance with Marketplace Rule 4450(a)(5) of the Nasdaq National
Market. Nasdaq advised us that we had 90 days to maintain a bid price of at
least one dollar for ten consecutive business days or we would be delisted. We
maintained a minimum bid price of at least one dollar for ten consecutive
business days ending May 4, 2001. On May 11, 2001, we were advised by Nasdaq
that we were in compliance with Marketplace Rule 4450(a)(5) and were not subject
to being delisted.
Our bid price has been below one dollar since February 8, 2002. Should the bid
price of our common stock fail to close above one dollar for one day before
March 22, 2002, we may be subject to delisting as described above.
We have a history of losses, and we may incur continuing charges. We have
reported net losses and working capital deficits in the past, and we have
expended substantial funds for acquisitions and equipment. In connection with
financing acquisitions and business growth, we anticipate that we will continue
to incur significant debt and interest charges. Several of our debt agreements,
as amended, contain certain affirmative and negative covenants and require the
maintenance of certain levels of tangible net worth and the maintenance of
certain debt coverage ratios on an individual subsidiary and consolidated level.
If our results are not sufficient to maintain the required ratios, we would be
in default of our loan agreements. In addition, we have recognized goodwill
amortization charges in connection with our acquisitions that are accounted for
under the "purchase" method of accounting. The amount of goodwill recognized is
the amount by which the purchase price of a business exceeds the fair market
value of the assets acquired. Until December 31, 2001, goodwill was amortized
over a period not to exceed 25 years depending on the business acquired,
resulting in an annual non-cash charge to our earnings during that period. With
the adoption of Statement of Financial Accounting Standards 142, Goodwill and
Intangible Assets ("SFAS 142" ) on January 1, 2002, we will no longer amortize
goodwill. Additionally, SFAS 142 requires annual fair value based impairment
tests of goodwill and other intangible assets identified with indefinite lives.
Although we have not yet determined the effect of these new impairment test,
future charges to our consolidated statement of operations could result should
impairment losses be identified.
Our business plan poses risks for us. One of our business objectives is to
develop as a full service, integrated car care business through acquisitions and
through the internal development of our car wash facilities. We have
repositioned our company from one involved primarily in the production of
consumer defense products to a company that provides car wash and car care
services. This strategy involves a number of risks, including:
i. risks associated with growth;
ii. risks associated with acquisitions; and
iii. risks associated with the recruitment and development of management
and operating personnel.
If we are unable to manage one or more of these associated risks effectively, we
may not fully realize our business plan.
We have a limited operating history regarding our car and truck wash
businesses. Since July 1999, our main business has been the acquisition and
operation of car wash facilities, which now accounts for substantially all of
our revenues. Because of our relatively limited operating history with respect
to this business, we cannot assure you that we will be able to operate it
successfully.
We may not be able to manage growth. If we succeed in growing, growth will
place significant burdens on our management and on our operational and other
resources. We will need to attract, train, motivate, retain and supervise our
senior managers and other employees. If we are unable to do this, we will not be
able to realize our business objectives.
Our car wash business may suffer under certain weather conditions. Seasonal
trends in some periods may affect our car wash business. In particular, long
periods of rain and cloudy weather can adversely affect our car wash business as
people typically do not wash their cars during such periods. Additionally,
extended periods of warm, dry weather may encourage customers to wash their cars
themselves which also can adversely affect our car wash business.
8
Our stock price is volatile. Our common stock's market price has been and
is likely to continue to be highly volatile. Factors like fluctuations in our
quarterly revenues and operating results, our ongoing acquisition program,
market conditions and economic conditions generally may impact significantly our
common stock's market price. In addition, if we make an acquisition, we may
agree to issue common stock that will become available generally for resale and
may have an impact on our common stock's market price.
We may not be able to integrate businesses we acquire and achieve operating
efficiencies. If we acquire new businesses, we may not be able to successfully
operate and integrate the acquired businesses. Our strategy is to achieve
economies of scale and brand name recognition in part through acquisitions that
increase our size. We cannot give assurance that we will be able to acquire
businesses or that our efforts to integrate acquired operations will be
effective or that we will realize expected results. Our failure to achieve any
of these results could have a material adverse effect on our business and
results of operations.
We face potential liabilities associated with acquisitions of businesses.
The businesses we acquire may have liabilities that we do not discover or may be
unable to discover during our preacquisition investigations, including
liabilities arising from environmental contamination or prior owners' non-
compliance with environmental laws or other regulatory requirements, and for
which we, as a successor owner or operator, may be responsible.
We face risks associated with our consumer safety products. We face claims
of injury allegedly resulting from our defense sprays. We cannot give assurance
that our insurance coverage will be sufficient to cover any judgments won
against us in these lawsuits. If our insurance coverage is exceeded, we will
have to pay the excess liability directly. We are also aware of several claims
that defense sprays used by law enforcement personnel resulted in deaths of
prisoners and of suspects in custody. While we no longer sell defense sprays to
law enforcement agencies, it is possible that the increasing use of defense
sprays by the public could, in the future, lead to additional product liability
claims.
Consumer demand for our car wash services is unpredictable. Our financial
condition and results of operations will depend substantially on consumer demand
for car wash services. Our business depends on consumers choosing to employ
professional services to wash their cars rather than washing their cars
themselves or not washing their cars at all. We cannot give assurance that
consumer demand for car wash services will increase as our business expands. Nor
can we give assurance that consumer demand will maintain its current level.
We must maintain our car wash equipment. Although we undertake to keep our
car washing equipment in proper operating condition, the operating environment
found in car washes results in frequent mechanical problems. If we fail to
properly maintain the equipment, the car wash could become inoperable resulting
in a loss of revenue.
Our car wash and car care services operations face governmental
regulations. We are governed by federal, state and local laws and regulations,
including environmental regulations, that regulate the operation of our car wash
centers and other car care services businesses. Car wash centers utilize
cleaning agents and waxes in the washing process that are then discharged in
waste water along with oils and fluids washed off of vehicles. Other car care
services, such as gasoline and lubrication, use of a number of oil derivatives
and other regulated hazardous substances. As a result, we are governed by
environmental laws and regulations dealing with, among other things:
i. transportation, storage, presence, use, disposal and handling of
hazardous materials and hazardous wastes;
ii. discharge of stormwater; and
iii. underground storage tanks.
If any of the previously mentioned substances were found on our property,
including leased property, or if we were found to be in violation of applicable
laws and regulations, we could be responsible for clean-up costs, property
damage and fines or other penalties, any one of which could have a material
adverse effect on our financial condition and results of operations.
We face significant competition. The extent and kind of competition that we
face varies. The car care industry is highly competitive. Competition is based
primarily on location, facilities, customer service, available services and
rates. Because barriers to entry into the car care industry are relatively low,
competition may be expected to continually arise from new sources not currently
competing with us. We also face competition from outside the car care industry,
such as gas stations and convenience stores, that offer automated car wash
services. In some cases, these competitors may have greater financial and
operating resources than we have. In our car wash businesses, we face
competition from a number of sources, including regional and national chains,
gasoline stations, gasoline companies, automotive companies and specialty
stores, both regional and national.
9
Our operations are dependent substantially on the services of our executive
officers. If we lose one or more of our executive officers, the loss could have
a material adverse effect on our business and results of operations. We do not
maintain key-man life insurance policies on our executive officers.
Our preferred stock may affect the rights of the holders of our common
stock; it may also discourage another entity from acquiring control of Mace. Our
Certificate of Incorporation authorizes the issuance of up to 10,000,000 shares
of preferred stock. No shares of preferred stock are currently outstanding. It
is not possible to state the precise effect of preferred stock upon the rights
of the holders of our common stock until the Board of Directors determines the
respective preferences, limitations and relative rights of the holders of one or
more series or classes of the preferred stock. However, such effect might
include: (i) reduction of the amount otherwise available for payment of
dividends on common stock, to the extent dividends are payable on any issued
shares of preferred stock, and restrictions on dividends on common stock if
dividends on the preferred stock are in arrears, (ii) dilution of the voting
power of the common stock to the extent that the preferred stock has voting
rights, and (iii) the holders of common stock not being entitled to share in our
assets upon liquidation until satisfaction of any liquidation preference granted
to the preferred stock.
The preferred stock may be viewed as having the effect of discouraging an
unsolicited attempt by another entity to acquire control of us and may therefore
have an anti-takeover effect. Issuances of authorized preferred stock can be
implemented, and have been implemented by some companies in recent years with
voting or conversion privileges intended to make an acquisition of the company
more difficult or costly. Such an issuance could discourage or limit the
stockholders' participation in certain types of transactions that might be
proposed (such as a tender offer), whether or not such transactions were favored
by the majority of the stockholders, and could enhance the ability of officers
and directors to retain their positions.
Some provisions of Delaware law may prevent us from being acquired. We are
governed by Section 203 of the Delaware General Corporation Law, which prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an entity who is an "interested stockholder" for a period of three (3)
years, unless approved in a prescribed manner. This provision of Delaware law
may affect our ability to merge with, or to engage in other similar activities
with, some other companies. This means that we may be a less attractive target
to a potential acquirer who otherwise may be willing to pay a price for our
common stock above its market price.
We do not expect to pay cash dividends on our common stock. We do not
expect to pay any cash dividends on our common stock in the foreseeable future.
We will reinvest in our business any cash otherwise available for dividends.
There are additional risks set forth in the incorporated documents. In
addition to the risk factors set forth above, you should review the financial
statements and exhibits incorporated into this report. Such documents may
contain, in certain instances and from time to time, additional and supplemental
information relating to the risks set forth above and/or additional risks to be
considered by you, including, without limitation, information relating to losses
experienced by us in certain historical periods, working capital deficits at
particular dates, information relating to pending and recently completed
acquisitions, descriptions of new or changed federal or state regulations
applicable to Mace, data relating to remediation and the actions taken by Mace,
and estimates at various times of Mace's potential liabilities for compliance
with environmental laws or in connection with pending litigation.
10
ITEM 2. DESCRIPTION OF PROPERTIES
Our corporate headquarters is located in Mount Laurel, New Jersey. We rent
approximately 10,000 square feet of space at a current annual cost of
approximately $192,000.
Car and Truck Wash Properties. Our principal fixed assets are our car
wash facilities used for performing car care services which are described under
Item 1. Lines of Business. The 55 car wash facilities operated by us as of
December 31, 2001 are situated on sites we own or lease. We own 42 and lease 13
of our car wash facilities. The locations of our car washes and the services
offered at the locations are set forth in summary fashion in the chart below.
Type of Number of
Locations /(1)/ Car Wash /(2)/ Facilities
--------------- -------------- ----------
Philadelphia, Pennsylvania Area Full Service 3
Exterior Washes 3
Southern New Jersey Area Full Service 1
Exterior Washes 7
Smyrna, Delaware Exterior Wash 1
Phoenix, Arizona Area Full Service 14
Dallas, Texas Area Full Service 8
Lube Only 1
Self Serve/Lube 1
Austin, Texas Full Service 3
Lubbock, Texas Full Service 3
Sarasota, Florida Area Full Service 6
San Antonio, Texas Full Service 4
(1) The majority of our locations are owned except for the following
number of locations which are leased:
(i) Philadelphia, Pennsylvania (3)
(ii) Southern New Jersey Area (1)
(iii) Smyrna, Delaware (1)
(iv) Phoenix, Arizona Area (5)
(v) Dallas, Texas Area (3)
(2) Several locations also offer other consumer products and related car
care services, such as professional detailing services (offered at 42
locations), oil and lubrication services (offered at 10 locations),
gasoline dispensing services (offered at 19 locations), state
inspection services (offered at six locations), convenience store
sales (offered at one location) and merchandise store sales (offered
at 42 locations).
We own real estate, buildings, equipment and other properties that we employ in
substantially all of our car washes. We expect to make substantial investments
in additional equipment and property for expansion, replacement of assets, and
in connection with future acquisitions.
Many of our car washes are encumbered by first mortgage loans. Of the 55 car
washes owned and leased by us as of December 31, 2001, 26 properties secured
first mortgage loans totaling $33,906,997 and 29 were not encumbered.
We also own and operate five truck wash facilities. We own all of the buildings
and equipment, except for the building in Amarillo, Texas, and lease the land
for all five of our truck wash facilities. None of our five truck wash
properties was encumbered by debt as of December 31, 2001.
11
Security Products Division Property. The operations of our Security
Products Division, including administration and sales, and all of its production
facilities are located in Bennington, Vermont. During 1999 we leased
approximately 44,000 square feet of space in a building from Vermont Mill
Properties, Inc. ("Vermont Mill") at a cost of $80,000. Vermont Mill is
controlled by Jon E. Goodrich, a director of the Company and President of Mark
Sport.
ITEM 3. LEGAL PROCEEDINGS
The following discloses all pending litigation against Mace, other than routine
litigation that is incidental to the business, involving claims for damages in
excess of $1.2 million, which constitutes approximately ten (10%) percent of our
current assets at December 31, 2001, and also discloses the disposition of
claims previously disclosed.
In January 1994, a suit was filed by Carmeta Gentles on her own behalf and as
personal representative of the estate of Robert Gentles in Ontario Court
(General Division), Ontario, Canada, claiming intentional or negligent
manufacture and distribution of the Mark V Mace(R) brand defense spray unit and
that its contents contributed to the suffering and death of Robert Gentles while
in the Kingston Penitentiary in October 1993. The Company was added as a party
defendant on February 8, 1995. The Company was recently dismissed from this
suit by Summary Judgement and no longer has any exposure to damages arising from
this suit.
In December 1999, the Company was named as a defendant in a suit filed in the
Supreme Court of New York by Janeen Johnson et. al. The litigation concerns a
claim that a self-defense spray manufactured by us and used by a law enforcement
officer contributed to the suffering and death of Christopher Johnson. We
forwarded the suit to our insurance carrier for defense. We do not anticipate
that this claim will result in the payment of damages in excess of our insurance
coverage.
In October 2001, the Company was named as an additional party defendant in a
suit filed by Alan Berndt and Martha Berndt in the United States District Court
for the Northern District of California. The litigation alleges the Company was
responsible for personal injuries arising out of Mr. Berndt's use of a Gas
Launcher, which may have been manufactured or sold by the Company. We have
forwarded the suit to our insurance carrier for defense. We do not anticipate
that this claim will result in the payment of damages in excess of our insurance
coverage.
Although the Company is not aware of any substantiated claim of permanent
personal injury from its products, the Company is aware of reports of incidents
in which, among other things, defense sprays: have been mischievously or
improperly used, in some cases by minors; have not been instantly effective; or
have been ineffective against enraged or intoxicated individuals. Incidents of
this type, or others, could give rise to product liability or other claims, or
to claims that past or future advertising, packaging or other practices should
be, or should have been, modified, or that regulation of products of this nature
should be extended or changed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Stockholders of Mace Security International, Inc. was
held on December 12, 2001. The following proposals were submitted to a vote:
(i) to approve for a one-year term for the Election of Directors, expiring at
the next Annual Meeting, (ii) to ratify the appointment of Grant Thornton LLP as
Mace's independent auditors for fiscal year 2001. Both proposals were adopted
by the shareholders. The voting was as follows:
Votes With- Broker
Votes For held or Against Abstentions Non-Votes
---------- --------------- ----------- ---------
Directors:
----------
Louis D. Paolino, Jr. 21,524,790 149,984 -- --
Mark S. Alsentzer 21,416,102 258,672 -- --
Jon E. Goodrich 21,558,446 116,328 -- --
Robert M. Kramer 21,524,890 149,884 -- --
Richard B. Muir 21,574,790 99,884 -- --
Matthew J. Paolino 21,524,790 149,984 -- --
Constantine N. Papadakis, Ph.D. 21,574,790 99,984 -- --
Ratify appointment of Grant 21,584,740 83,774 6,260 --
Thornton LLP
12
Executive Officers of the Company
The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K:
There are no family relationships between any of the executive officers of the
Company except that Matthew J. Paolino is a brother to Louis D. Paolino, Jr.
The following table sets forth information regarding certain of our executive
officers.
Name Age Position
---- --- --------
Louis D. Paolino, Jr... 45 Chairman of the Board, President, and Chief
Executive Officer
Robert M. Kramer....... 49 Executive Vice President, Chief Operating
Officer, General Counsel, and Secretary
Gregory M. Krzemien.... 42 Chief Financial Officer and Treasurer
Ronald R. Pirollo...... 43 Chief Accounting Officer and Corporate
Controller
Matthew J. Paolino..... 37 Vice President
Louis D. Paolino, Jr. has served as the Chairman of the Board, President and
Chief Executive Officer of the Company since May 1999. From June 1996 through
December 1998, Mr. Paolino served as Chairman of the Board, President and Chief
Executive Officer of Eastern Environmental Services, Inc. Prior thereto, he was
President of Soil Remediation of Philadelphia, Inc., a company engaged in the
business of treating contaminated soil which was sold to USA Waste Services,
Inc., a waste management corporation, in September 1993. From September 1993 to
June 1996, Mr. Paolino served as a Vice President of USA Waste Services, Inc.
From November 1995 to January 1996, Mr. Paolino served on the Board of Directors
of Metal Management, Inc., formerly known as General Parametrics Corp., a
publicly traded company. Mr. Paolino received a B.S. in Civil Engineering from
Drexel University. Mr. Paolino is 45 years old.
Robert M. Kramer has served as a director of the Company, and as Executive
Vice President, General Counsel, and Secretary of the Company since May 1999,
and as Chief Operating Officer since July 2000. From June 1996 through December
1998, he served as General Counsel, Executive Vice President and Secretary of
Eastern Environmental Services, Inc. Mr. Kramer is an attorney and has
practiced law since 1979 with various firms, including Blank Rome Comisky &
McCauley, Philadelphia, Pennsylvania and Arent Fox Kitner Poltkin & Kahn,
Washington, D.C. From 1989 to December 2000, Mr. Kramer had been the sole
partner of Robert M. Kramer & Associates, P.C., a law firm which consisted of
three lawyers. From December 1989 to December 1997, Mr. Kramer served on the
Board of Directors of American Capital Corporation, a registered securities
broker dealer. Mr. Kramer received B.S. and J.D. degrees from Temple University
Law School. Mr. Kramer is 49 years old.
Gregory M. Krzemien has served as the Chief Financial Officer and Treasurer of
the Company since May 1999. From August 1992 through December 1998, he served
as Chief Financial Officer and Treasurer of Eastern Environmental Services, Inc.
From October 1988 to August 1992, Mr. Krzemien was a senior audit manager with
Ernst & Young LLP, and he held other positions with that firm since 1981. Mr.
Krzemien received a B.S. degree in Accounting from the Pennsylvania State
University and is a certified public accountant. Mr. Krzemien is 42 years old.
Ronald R. Pirollo has served as Chief Accounting Officer and Corporate
Controller of the Company since May 1999. Mr. Pirollo served as Vice President
and Corporate Controller of Eastern Environmental Services, Inc. from July 1997
to June 1999. Prior thereto, Mr. Pirollo was with Envirite Corporation for ten
years, where he served in various financial management positions including Vice
President - Finance. Mr. Pirollo received a B.S. degree in Accounting from
Villanova University in 1981. Mr. Pirollo is 43 years old.
Matthew J. Paolino has served as a director and as a Vice President of the
Company since May 1999. From 1996 to December 1998, Mr. Paolino served as a
director of Eastern Environmental Services, Inc. as well as Vice President of
Risk Management, Asset Management and Special Waste Divisions of Eastern
Environmental Services, Inc. From 1993 to 1996, Mr. Paolino served as Vice
President and General Manager - Soil Remediation Division of USA Waste Services,
Inc., which was acquired by Eastern in August 1997. Mr. Paolino received a B.S.
degree in Civil Engineering from Villanova University in 1986 and a J.D. degree
from the Widener School of Law in 1994. Mr. Paolino is the brother of Louis D.
Paolino, Jr., the Chairman, President and Chief Executive Officer of the
Company. Mr. Paolino is 37 years old.
13
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Price and Dividends of the Registrant's Common Equity
Our common stock is traded in the over-the-counter market and quoted on the
Nasdaq National Market under the trading symbol "MACE". Common stock price
reflects inter-dealer quotations, does not include retail markups, markdowns or
commissions and does not necessarily represent actual transactions.
The following table sets forth, for the quarters indicated, the high and low
sale prices per share for our common stock, as reported by Nasdaq.
HIGH LOW
------- -------
Year Ended December 31, 2000
First Quarter............... $ 6.50 $ 3.00
Second Quarter.............. 5.0625 1.1875
Third Quarter............... 1.9375 1.00
Fourth Quarter.............. 1.5312 0.875
Year Ended December 31, 2001
First Quarter............... $ 1.344 $ 0.594
Second Quarter.............. 1.40 0.531
Third Quarter............... 1.21 0.80
Fourth Quarter.............. 1.00 0.62
2002
First Quarter............... $ 1.06 $ 0.63
(through March 6, 2002)
The closing price for our common stock on March 6, 2002 was $0.91. For purposes
of calculating the aggregate market value of our shares of common stock held by
non-affiliates, as shown on the cover page of this report, it has been assumed
that all the outstanding shares were held by non-affiliates except for the
shares held by our directors and executive officers and stockholders owning 10%
or more of our outstanding shares. However, this should not be deemed to
constitute an admission that all such persons are, in fact, non-affiliates of
the Company, or that there are not other persons who may be deemed to be
affiliates of the Company. Further information concerning ownership of our
securities by executive officers, directors and principal stockholders will be
included in our definitive proxy statement to be filed with the Securities and
Exchange Commission.
As of March 6, 2002, we had 204 holders of record and approximately 1,835
beneficial owners of our common stock. We do not anticipate paying any cash
dividends in the foreseeable future and intend to retain all working capital and
earnings, if any, for use in our operations and in the expansion of our
business. Any future determination with respect to the payment of dividends
will be at the discretion of our Board of Directors and will depend upon, among
other things, our results of operations, financial condition and capital
requirements, the terms of any then existing indebtedness, general business
conditions, and such other factors as our Board of Directors deems relevant.
Certain of our credit facilities prohibit or limit the payment of cash dividends
without prior bank approval.
(b) Recent Sales of Unregistered Securities
None.
14
ITEM 6. SELECTED FINANCIAL DATA
The information below was derived from our Consolidated Financial Statements
included in this report and in reports we have previously filed with the SEC.
This information should be read together with those financial statements and the
Notes to the Consolidated Financial Statements. For more information regarding
this financial data, see the Management's Discussion and Analysis of Financial
Condition and Results of Operations section also included in this report.
Statement of Operations Data: Year ended December 31,
-----------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ------------ ---------- ----------
(In thousands, except per share amounts)
Revenues:
Car wash and detailing services $ 39,859 $ 37,812 $ 17,073 $ 4,420 $ 4,211
Lube and other automotive services 4,487 4,869 2,693 - -
Fuel and merchandise sales 3,638 5,061 2,092 346 381
Security product sales - - 3,435 2,404 2,657
Operating agreements 240 261 463 - -
----------- ----------- ------------ ---------- ----------
48,224 48,003 25,756 7,170 7,249
Cost of revenues:
Car wash and detailing services 27,417 26,856 11,137 2,599 2,605
Lube and other automotive services 3,446 3,789 1,992 - -
Fuel and merchandise sales 3,234 4,472 1,708 238 271
Security product sales - - 1,818 1,230 1,645
----------- ----------- ------------ ---------- ----------
34,097 35,117 16,655 4,067 4,521
Selling, general and administrative expenses 7,366 7,303 5,753 1,873 1,421
Depreciation and amortization 2,813 2,467 1,096 715 931
Costs of terminated acquisitions 135 580 - - -
Merger costs - - 1,875 - -
Restructuring, asset write-downs and change in control charges - 138 1,519 - -
----------- ----------- ------------ ---------- ----------
Operating income (loss) 3,813 2,398 (1,142) 515 376
Interest expense, net (2,885) (3,013) (1,033) (285) (445)
Other income 514 408 205 284 173
----------- ----------- ------------ ---------- ----------
Income (loss) from continuing operations before income taxes 1,442 (207) (1,970) 514 104
Income tax expense (benefit) 534 (66) (619) 4 8
----------- ----------- ------------ ---------- ----------
Income (loss) from continuing operations 908 (141) (1,351) 510 96
Discontinued Operations:
(Loss) gain from discontinued operations, net of
applicable income taxes - (265) 91 (737) (1,542)
Gain on disposal of ICS, net of applicable
income tax expense - 724 - - -
----------- ----------- ------------ ---------- ----------
Net income (loss) $ 908 $ 318 $ (1,260) $ (227) $ (1,446)
=========== =========== ============ ========== ==========
Basic income (loss) per share
From continuing operations $ 0.04 $ (0.01) $ (0.10) $ 0.06 $ 0.01
From discontinued operations - 0.02 - (0.09) (0.18)
----------- ----------- ------------ ---------- ----------
Total $ 0.04 $ 0.01 $ (0.10) $ (0.03) $ (0.17)
=========== =========== ============ ========== ==========
Weighted average number of shares outstanding 25,448,564 24,476,842 13,159,154 8,341,747 8,274,643
=========== =========== ============ ========== ==========
Diluted income (loss) per share
From continuing operations $ 0.04 $ (0.01) $ (0.10) $ 0.06 $ 0.01
From discontinued operations - 0.02 - (0.09) (0.18)
----------- ----------- ------------ ---------- ----------
Total $ 0.04 $ 0.01 $ (0.10) $ (0.03) $ (0.17)
=========== =========== ============ ========== ==========
Weighted average number of shares outstanding 25,484,245 24,476,842 13,159,154 8,364,106 8,274,643
=========== =========== ============ ========== ==========
Balance Sheet Data (at end of period):
Working capital (deficit) $ 4,809 $ (1,003) $ (1,403) $ 5,761 $ 2,949
Intangible assets, net $ 21,132 $ 22,024 $ 21,752 $ 1,021 $ 1,879
Total assets $ 104,670 $ 106,131 $ 98,115 $ 15,926 $ 18,714
Long-term debt, including current maturities $ 34,349 $ 36,685 $ 32,784 $ 5,158 $ 6,649
Stockholders' equity $ 63,856 $ 62,877 $ 56,568 $ 9,316 $ 10,097
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion reviews our operations for each of the three years in
the period ended December 31, 2001, and should be read in conjunction with our
Consolidated Financial Statements and related notes thereto included elsewhere
herein.
The following discussion includes Forward Looking Statements. The accuracy of
such statements depends upon a variety of factors that may affect our business
and operations. Certain of these factors are discussed under Description of
Business -- Factors Influencing Future Results and Accuracy of Forward-Looking
Statements included in Item 1 of this report.
Introduction
Revenues
Car Care Services
We own full service, exterior only and self-service car wash locations in New
Jersey, Pennsylvania, Delaware, Texas, Florida and Arizona as well as truck
washes in Arizona, Indiana, Ohio and Texas. We earn revenues from washing and
detailing automobiles; performing oil and lubrication services, minor auto
repairs, and state inspections; selling fuel; and selling merchandise through
convenience stores within the car wash facilities. Revenues generated for the
year ended December 31, 2001 for the car care segment were comprised of
approximately 83% car wash and detailing, 9% lube and other automotive services,
8% fuel and merchandise.
The majority of our revenues are collected in the form of cash or credit card
receipts, thus minimizing customer accounts receivable.
Weather can have a significant impact on volume at the individual locations.
However, we believe that the geographic diversity of our operating locations
minimizes overall weather-related influence on our volume.
Security Products
The Security Products Division manufactures and markets personal safety, and
home and auto security products. These products are sold through retail stores,
major discount stores, and at our car care facilities.
Effective January 1, 2000, we entered into a Management Agreement, under which
we earn $20,000 per month, which allows Mark Sport, an entity controlled by Jon
E. Goodrich, a director of the Company, to operate the Security Products
Division.
Computer Products and Services
Our computer products and services subsidiary, ICS, was sold in June of 2000 and
has accordingly been reflected as discontinued operations.
Cost of Revenues
Car Care Services
Cost of revenues consists primarily of direct labor and related taxes and
benefits, chemicals, wash and detailing supplies, rent, real estate taxes,
utilities, maintenance and repairs of equipment and facilities, as well as the
cost of the fuel and merchandise sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of management,
clerical and administrative salaries, professional services, insurance premiums,
and costs relating to marketing and sales.
We capitalize direct incremental costs associated with purchase acquisitions.
Indirect acquisition costs, such as executive salaries, corporate overhead,
public relations, and other corporate services and overhead are expensed as
incurred.
16
Depreciation and Amortization
Depreciation and amortization consists primarily of depreciation of buildings
and equipment, and amortization of goodwill and other intangible assets.
Buildings and equipment are depreciated over the estimated useful lives of the
assets using the straight-line method. Goodwill was amortized on a straight-
line basis over 25 years through December 31, 2001. Other intangibles are
amortized over their useful lives ranging from three to twenty years, using the
straight line method. With the adoption of SFAS 142 on January 1, 2002, we will
no longer amortize goodwill.
Costs of Terminated Acquisitions
Our policy is to charge as an expense any previously capitalized expenditures
relating to proposed acquisitions that in our current opinion will not be
consummated. At December 31, 2001, there were no capitalized costs related
directly to proposed acquisitions that were not yet consummated. We
periodically review the future likelihood of these acquisitions and record
appropriate provisions against capitalized costs associated with projects that
are not likely to be completed.
Merger Costs
In connection with acquisitions accounted for under the pooling of interests
method, we recorded various merger costs. Merger costs consisted of transaction-
related expenses including deal costs, legal, accounting and other professional
and consulting fees, filing fees, external due diligence costs, contractual
costs, and finder fees as well as employee severance and termination costs.
Restructuring, Asset Write-Downs and Change in Control Charges
In conjunction with our 1999 change in control, we recorded costs relating to
restructuring of certain of our security products operations, abandoning certain
operations and assets, and incurring certain other change in control related
costs. Additionally, in 2000, we wrote down the value of our Berlin, New Jersey
facility by $137,904 to reflect the sales price of those assets in January 2001.
Other Income and Expense
Other income and expense includes gains and losses on the sale of equipment and
rental income received on renting out excess space at our car wash facilities.
Income Taxes
Income tax expense (benefit) reflects the recording of income taxes at an
effective rate of 37%, 32% and 32% for the years ended December 31, 2001, 2000
and 1999 , respectively. The effective rate differs from the federal statutory
rate for each year primarily due to state and local income taxes, non-deductible
costs related to intangibles, the use of net operating loss carryforwards, fixed
asset adjustments and changes to the valuation allowance.
17
Results of Operations for Each of the Three Years in the Period Ended December
31, 2001
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues:
Year ended December 31,
--------------------------
2001 2000 1999
-------- -------- --------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 70.7 73.2 64.6
Selling, general and administrative expenses 15.3 15.2 22.3
Depreciation and amortization 5.8 5.1 4.3
Costs of terminated acquisitions 0.3 1.2 -
Merger costs - - 7.3
Restructuring, asset write-downs and change
in control charges - 0.3 5.9
------- ------- -------
Operating income (loss) 7.9 5.0 (4.4)
Interest expense, net (6.0) (6.3) (4.0)
Other income 1.1 0.9 0.8
------- ------- -------
Income (loss) from continuing operations before income 3.0 (0.4) (7.6)
Income tax expense (benefit) 1.1 (0.1) (2.4)
------- ------- -------
Income (loss) from continuing operations 1.9 (0.3) (5.2)
Discontinued operations - 1.0 0.3
------- ------- -------
Net income (loss) 1.9% 0.7% (4.9)%
======= ======= =======
Revenues
Car Care Services
Revenues for the year ended December 31, 2001 were $48.0 million as compared to
$47.8 million for the year ended December 31, 2000, an increase of $0.2 million
or 0.4%. Of the $48.0 million of revenues for the year ended December 31, 2001,
$39.9 million or 83% was generated from car wash and detailing, $4.5 million or
9% from lube and other automotive services, and $3.6 million or 8% from fuel and
merchandise sales. Of the $47.8 million of revenues for the year ended December
31, 2000, $37.8 million or 79% was generated from car wash and detailing, $4.9
million or 10% from lube and other automotive services, and $5.1 million or 11%
from fuel and merchandise sales. The net increase in total revenue in 2001 is
attributable to a full year of revenue earned at two car washes and five truck
washes we acquired during 2000; internal growth through a continued aggressive
focus on selling detailing and additional on-line car wash services which
increased the average wash and detailing revenue per car by 8.1% or $1.04 to
$13.90 in 2001, from $12.86 per car in 2000. This increase was offset partially
by a reduction in wash volumes due to the divestiture of two car wash sites
during 2001, a temporary decrease in car wash volume in all of our regions due
to the terrorist attacks against the United States on September 11, 2001, and
slightly more rain and cloud days in certain of our operating regions in 2001.
In 2001, approximately 43.6% of our operating days within our markets were rainy
or cloudy as compared to 42.9% in 2000. Additionally, we experienced an
approximate $1.8 million or 18% decline in lube services, fuel and merchandise
sales. We discontinued the practice of providing a free wash to lube customers
resulting in decreased lube revenues but improved overall site gross margin
performance. The decline in fuel and merchandise gross revenues is the result
of instituting certain minimum sale margin criteria which reduced gross fuel
sales and the sale of certain low margin merchandise.
During a portion of 2000 and 1999, we managed several car wash locations under
operating agreements, under which we were entitled to all profits generated from
the operation of those locations. The income earned under the agreements is
shown as revenue net of related operating expenses. Gross revenue generated by
the locations under operating agreements for 2000 and 1999 was $857,000 and
$10.1 million, respectively. No locations were operated under operating
agreements during 2001.
18
Revenues for 2000 of $47.8 million were $25.5 million or 114% greater than
revenues for the year ended December 31, 1999 of $22.3 million. Of the $22.3
million of revenues for the year ended December 31, 1999, $17.1 million or 77%
was generated from car wash and detailing, $2.7 million or 12% from lube and
other automotive services, $2.1 million or 9% from fuel and merchandise sales
and $462,000 or 2% from operating agreements. Revenues for 1999, including
gross revenue generated by locations under operating agreements were $32.0
million consisting of $25.6 million, or 80%, from car wash and detailing, $3.3
million, or 10%, from lube and other automotive services, and $3.1 million, or
10%, from fuel and merchandise sales. This increase in total revenues was
primarily attributable to the 15 purchase acquisitions completed from May 1999
to December 31, 2000. Revenue increases were also realized through internal
growth from selling detailing and additional on-line car wash services.
Security Products
Pursuant to a Management Agreement, we earned $240,000 and $220,000 in 2001 and
2000, respectively. These amounts are included under revenues from operating
agreements. Revenues for the year ended December 31, 1999, prior to the
Management Agreement, were $3.4 million.
Cost of Revenues
Car Care Services
Cost of revenues for the year ended December 31, 2001 were $34.1 million or 71%
of revenues with car washing and detailing costs at 69% of respective revenues,
lube and other automotive services costs at 77% of respective revenues, and fuel
and merchandise costs at 89% of respective revenues. Cost of revenues for the
year ended December 31, 2000 were $35.1 million, or 73% of revenues with car
wash and detailing costs at 71% of respective revenues, lube and other
automotive services costs at 78% of respective revenues, and fuel and
merchandise costs at 88% of respective revenues.
With our increase in average wash and detailing revenues per car of $1.04 or
8.1% in 2001 and our continued emphasis on controlling direct labor and other
operating costs, we achieved improved wash and detailing gross margins in 2001.
Additionally, the overall gross profit margin improved in 2001 as compared to
2000 as a result of less fuel, merchandise and lube sales, which carry higher
costs as a percentage of revenues compared to wash and detail sales.
Cost of revenues for the year ended December 31, 1999 were $14.8 million, or 64%
of revenues. However, because income earned under operating agreements is shown
as a net figure in revenue, already reduced by cost of revenues, the cost of
revenue percentage for this segment is better analyzed on a gross method. With
revenues and cost of revenues for locations under operating agreement shown on a
gross basis, total cost of revenues for 1999 was $22.2 million or 69% of
revenues for this segment, with car wash and detailing costs at 66% of
respective revenues, lube and other automotive services costs at 78% of
respective revenues, and fuel and merchandise costs at 84% of respective
revenues.
The increase in cost of revenues as a percent of revenues in 2000 compared to
1999 is largely a result of certain direct labor inefficiencies present with
significant inclement weather combined with an increase in detailing services
which require more labor than wash services. In 2000, approximately 42.9% of
our operating days within our markets were rainy or cloudy as compared to 33.9%
in 1999. Additionally, significant time invested by us in 2000 on the
terminated Wash Depot acquisition, combined with certain turnover in our
regional management resulted in this increase in our labor expense and in labor
as a percent of revenues.
Security Products
During 2001 and 2000, pursuant to a Management Agreement, no costs were incurred
by us. Cost of revenues for the year ended December 31, 1999, prior to the
Management Agreement, were $1.8 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December 31,
2001 were $7,366,000 compared to $7,303,000 for the year ended December 31,
2000, an increase of $63,000, or 0.9%. Most of this increase is a result of
SG&A costs incurred at the six additional locations acquired during 2000 and
three sites transitioned from operating agreements to being owned. The
19
remainder of the increase is primarily the result of increases in advertising,
insurance costs and business taxes. This increase was partially offset by a
reduction of administrative costs as a result of efficiencies gained through
consolidating all of our regional back office activity into the Mt. Laurel, New
Jersey corporate office.
Selling, general and administrative expenses for the year ended December 31,
1999 were $5.8 million as compared to the $7.3 million for the year ended
December 31, 2000, an increase of $1.5 million, or 26%. The primary reason for
this increase is the infrastructure established during the 21 months ended
December 31, 2000 in order to effectively enter the car care industry and
execute our growth strategy. These increased costs included accounting,
finance, legal and administrative costs necessary to integrate the acquisitions
consummated. This increase is partially offset by cost controls placed on
previously private companies and favorable pricing for supplies, insurance,
other indirect costs due to economies of scale, and the elimination of costs at
our security products facility.
Depreciation and Amortization
Depreciation and amortization totaled $2.8 million for the year ended December
31, 2001 as compared to $2.5 million for the same period in 2000, an increase of
14%. This increase is primarily the result of a full year of depreciation and
amortization in 2001 on assets acquired through acquisitions during 2000. With
the adoption of SFAS 142 on January 1, 2002, we will no longer amortize
goodwill. Goodwill amortization expense was approximately $889,000 in 2001.
Depreciation and amortization increased $1.4 million or 125% to $2.5 million for
the year ended December 31, 2000 as compared to $1.1 million for the same period
in 1999. This increase is the result of entering the car care industry, which
required a substantial investment in property and equipment. Additionally,
certain acquisitions resulted in the recording of goodwill, which increased
amortization expense. This increase was partially offset by the elimination of
expenses at our security products facility.
Costs of Terminated Acquisitions
Our policy is to charge as an expense any previously capitalized expenditures
relating to proposed acquisitions that in our current opinion will not be
consummated. During the year ended December 31, 2001, the costs of previously
capitalized expenditures related to proposed acquisitions totaled approximately
$135,000. These costs, which principally related to several possible
acquisitions we pursued outside the car wash industry, are primarily related to
due diligence costs. In 2000, costs of previously capitalized expenditures
principally related to the termination of the Planet Truck Wash acquisition and
acquisition related expenses associated with the proposed Wash Depot Holdings,
Inc. ("Wash Depot") merger. We terminated the Wash Depot Merger Agreement on
September 30, 2000, as a result of certain conditions precedent to closing not
being satisfied by Wash Depot. Of the $580,000 in costs of terminated
acquisitions in 2000, approximately $209,000 represented unrecoverable cash and
stock deposits and approximately $371,000 represented external incremental
transaction costs including legal, accounting, consulting and due diligence
costs.
Merger Costs
In 1999, we incurred approximately $225,000, $120,000, and $1,530,000 in merger-
related costs associated with the ICS, Classic, and Eager Beaver mergers,
respectively. Merger costs consisted of transaction-related expenses of
$680,000 which includes deal costs, legal, accounting and other professional and
consulting fees, filing fees, external due diligence costs, contractual costs,
and finder fees as well as employee severance and termination costs which
totaled $1,195,000. Additionally, tax provisions of $96,000, and $50,000 were
recorded at the date of the mergers relating to net deferred tax liabilities
with respect to the termination of the previous S Corporation elections of
Classic and Eager Beaver, respectively. This total of $146,000 was included
within the income tax benefit for 1999.
Restructuring, Asset Write-Downs and Change in Control Charges
In conjunction with the Company's 1999 change in control, we restructured
certain of our security products operations, abandoned certain operations and
assets, and incurred certain other change in control related costs. A
restructuring, asset write-down and change in control charge totaling $1,519,000
was recorded in the second quarter ending June 30, 1999. Of this charge,
$1,178,000 was non-cash in nature consisting of a $218,000 write-off of certain
assets as a result of abandoning certain product lines within our security
products segment; a $373,000 write-off of leasehold improvements related to our
plan to abandon a portion of our currently leased facilities in Vermont; and a
$587,000 non-cash compensation charge relating to the vesting of variable
options to certain previous directors of the Company upon the Company's change
in control. The remaining charge of approximately
20
$341,000 included certain severance costs accrued as well as legal, accounting
and other transaction costs related to the Company's change in control.
Additionally, in 2000, we wrote down the value of our Berlin, New Jersey
facility by $137,904 to reflect the sales price of those assets in January 2001.
Interest Expense, Net
Interest expense, net of interest income, for the year ended December 31, 2001,
was $2.9 million compared to $3.0 million for the year ended December 31, 2000.
This is the result of additional interest expense on borrowings relating to
several acquisitions in the year ended December 31, 2000, and additional working
capital borrowings through a refinancing in the last quarter of 2000. This
increase was offset by a decrease in interest rates on approximately 50% of our
long term debt which has interest rates tied to the prime rate.
Interest expense, net of interest income, for the year ended December 31, 1999
was $1.0 million, compared to $3.0 million for the year ended December 31, 2000.
This increase is principally the result of borrowings for acquisitions during
1999 and 2000.
Other Income and Expense
Other income for the year ended December 31, 2001 was $514,000 compared to
$408,000 for the year ended December 31, 2000, an increase of $106,000. This
increase was primarily due to a pre-tax gain of approximately $216,000 on the
sale of our facility in Morrisville, Pennsylvania in 2001, offset partially by a
reduction in certain rental income in 2001. Other income for the year ended
December 31, 1999 was $205,000 as compared to other income of $408,000 in 2000.
This increase in other income was due primarily to additional rental income
received from renting out excess space at wash facilities acquired during 1999
and 2000.
Income Taxes
We recorded income tax expense (benefit) from continuing operations of $534,000,
$(66,000) and $(618,519) for the years ended December 31, 2001, 2000 and 1999,
respectively. Income tax expense (benefit) reflects the recording of income
taxes at an effective rate of 37%, 32% and 32% for the years ended December 31,
2001, 2000 and 1999 , respectively. The effective rate differs from the federal
statutory rate for each year primarily due to state and local income taxes, non-
deductible costs related to intangibles, the use of net operating loss
carryforwards, fixed asset adjustments and changes to the valuation allowance.
At December 31, 2001, we had approximately $12.7 million of net operating loss
carryforwards for federal income tax purposes. Components of the net operating
loss carryforwards include $11.5 million from continuing operations and $1.2
million from acquired net operating losses attributable to the Colonial Full
Service Car Wash, Inc. acquisition.
Liquidity and Capital Resources
Our business requires substantial amounts of capital, most notably to pursue our
acquisition strategy and for equipment purchases and upgrades. We plan to meet
these capital needs from various financing sources, including borrowings,
internally generated funds, and the issuance of common stock as the market price
of our stock improves. We estimate aggregate capital expenditures, exclusive of
acquisitions of businesses, of approximately $750,000 for the year ending
December 31, 2002.
As of December 31, 2001, we had working capital of approximately $4.8 million,
including cash and cash equivalents of $6.6 million. For the year ended
December 31, 2001, net cash provided by operations was approximately $3.6
million, net cash used in financing activities was approximately $2.3 million
and net cash provided by investing activities was approximately $430,000
resulting in an increase in cash and cash equivalents for the year of
approximately $1.8 million. Capital expended during the period included
$876,000 for the purchase of operating equipment and real estate.
At December 31, 2001, we had borrowings of approximately $34.3 million. We had
two letters of credit outstanding at December 31, 2001, totaling $625,000 as
collateral relating to worker compensation insurance policies. We do not have a
revolving credit facility.
During 2001, we refinanced on a long term basis under favorable terms the
majority of our short term debt related to our 1999 and 2000 acquisitions. In
February 2000, we entered into a $4.8 million term loan with Bank One, Texas, NA
("Bank One") to refinance the remaining balance of a short term promissory note
related to the Genie acquisition and entered into several new loan agreements
with Bank One to finalize the assumption of notes held by Bank One relating to
the Colonial acquisition.
21
Additionally, in November 2000, we entered into a $6.7 million three year term
note (15 year amortization basis) with Bank One to refinance a $1.3 million
convertible promissory note to Bullseye Properties assumed in connection with
the acquisition of Eager Beaver, a $2.1 million SouthTrust Bank note scheduled
to mature in May 2001, and a $1.0 million promissory note related to the Red
Baron Truck Wash acquisition. The Bank One term note also provided approximately
$800,000 for the purchase of the leased Beneva Car Wash property and
approximately $1.6 million of additional funding, net of loan closing costs, for
capital improvements and working capital.
We also had various other long term mortgage notes up for periodic review during
2001 which we have been successful in renewing. Several of our debt agreements,
as amended, contain certain affirmative and negative covenants and require the
maintenance of certain levels of tangible net worth and the maintenance of
certain debt coverage ratios on an individual subsidiary and consolidated level.
On April 5, 2000, we executed a master facility agreement with Fusion Capital
Fund II, LLC ("Fusion") pursuant to which Fusion agreed to enter into up to two
equity purchase agreements, each with an aggregate principal amount of $12.0
million. The equity purchase agreements allow us to suspend the purchasing of
our common stock by Fusion if the price of our common stock is less than $7.00
per share. We are currently not permitting the purchase of our common stock
under the equity purchase agreement due to the current low trading value of our
common stock and the potentially dilutive effect of such stock purchases. If
and when we agree to the purchase of our stock, Fusion has the right to purchase
from us shares of common stock up to $12.0 million at a price equal to the
lesser of (1) 140% of the average of the closing bid prices for our common stock
during the 10 trading days prior to the date of the applicable equity purchase
agreement or $7.00, whichever is greater or (2) a price based upon the future
performance of the common stock, in each case without any fixed discount to the
market price. As long as we have not suspended Fusion from purchasing our
stock, the equity purchase agreement requires that at the beginning of each
month, Fusion will pay us $1.0 million as partial prepayment for the common
stock. Once the $1.0 million has been applied to purchase shares of our common
stock, Fusion will pay the remaining principal amount upon receipt of our common
stock. The first equity purchase agreement was executed by Fusion on April 17,
2000. Proceeds from purchased shares through December 31, 2001 totaled
approximately $1.3 million. The first equity purchase agreement was extended to
February 20, 2003. The second equity purchase agreement will be executed after
delivery of an irrevocable written notice by us to Fusion stating that we elect
to enter into such purchase agreement with Fusion. The second equity purchase
agreement may be entered into only after the principal amount under the first
equity purchase agreement is fully converted into our common stock.
Seasonality and Inflation
We believe that our car washing and detailing operations are adversely affected
by periods of inclement weather. We have mitigated and intend to continue to
mitigate the impact of inclement weather through geographic diversification of
our operations.
We believe that inflation and changing prices have not had, and are not expected
to have any material adverse effect on our results of operations in the near
future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are not materially exposed to market risks arising from fluctuations in
foreign currency exchange rates, commodity prices or equity prices.
Interest Rate Exposure
A significant portion of our debt is at fixed rates, and as such, changes in
market interest rates would not significantly impact operating results unless
and until such debt would need to be refinanced at maturity. All of our
variable rate debt obligations are tied to the prime rate, as is our incremental
borrowing rate. Therefore, a one percent increase in the prime rate would not
have a material effect on the fair value of our variable rate debt at December
31, 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The reports of independent certified public accountants and Consolidated
Financial Statements are included in Part III, ITEM 14. of this Report beginning
on page F-1.
22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
In May 1999, we selected the international accounting firm of Ernst & Young LLP
to serve as our new independent accountants. The appointment of Ernst & Young
LLP as our independent auditors for the fiscal year 1999 was approved by our
Board of Directors and ratified at our Annual Meeting of the Stockholders held
on December 15, 1999. Ernst & Young LLP issued an opinion with respect to the
audit of the consolidated balance sheet of the Company as of December 31, 1998
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the two years in the period ended December 31, 1998, as
restated for three pooling of interest acquisitions completed in 1999. In
January 2000, we were advised that Ernst & Young LLP resigned as our independent
accountants due to a business conflict as a result of pending litigation between
two clients and the focus of part of that litigation on financial statements of
another client that Ernst & Young LLP audited. The reports of Ernst & Young LLP
on the Company's consolidated financial statements as restated for the two years
ended December 31, 1998 did not contain any adverse opinion or disclaimer of
opinion, or modification or qualification as to uncertainty, audit scope or
accounting principles. In connection with their audits, there have been no
disagreements between us and Ernst & Young LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Ernst &
Young LLP, would have caused them to make reference thereto in their report on
the Company's Consolidated Financial Statements for such years.
In January 2000, we selected the international accounting firm of Grant Thornton
LLP to serve as our new independent accountants for the audit of the Company's
Consolidated Financial Statements for the year ended December 31, 1999. On
December 12, 2001, the appointment of Grant Thornton LLP as continuing auditors
for the year ended December 31, 2001 was approved by our Board of Directors and
ratified by our Stockholders at the Annual Meeting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors appearing in the sections entitled
"Election of Directors" in our definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with our 2002 Annual Meeting of
Stockholders ("Proxy Statement") is incorporated herein by this reference. The
information concerning executive officers is set forth in Part I herein.
ITEM 11. EXECUTIVE COMPENSATION
The information contained in the section of the Proxy Statement entitled
"Compensation of Certain Executive Officers" is incorporated herein by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the section of the Proxy Statement entitled
"Beneficial Ownership" is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the section of the Proxy Statement entitled
"Certain Relationships and Related Party Transactions" is incorporated herein by
this reference.
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Consolidated Financial Statements:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Operations for the years ended December 31,
2001, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999
Notes to Consolidated Financial Statements
23
(a)(2) The requirements of Schedule II have been included in the notes to the
financial statements. All other schedules for which provision is made in
the applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable, and therefore, have been omitted.
(a)(3) Exhibits:
The following Exhibits are filed as part of this report (exhibits marked
with an asterisk have been previously filed with the Commission and are
incorporated herein by this reference):
(a) Exhibits:
*3.1 Certificate of Incorporation of Mace Security International, Inc.
(Exhibit 3.1 to the Company's Report on Form 10-QSB for the quarter
ended June 30, 1999 (the "June 30, 1999 Form 10-QSB"))
*3.2 Certificate of Amendment of Certificate of Incorporation of Mace
Security International, Inc. (Exhibit 3.2 to the June 30, 1999 Form
10-QSB)
*3.3 Amended and Restated Bylaws of Mace Security International, Inc.
(Exhibit 3.3 to the Company's Report on Form 10-KSB for the year ended
December 31, 1999 (the "1999 Form 10-KSB"))
*3.4 Amended and Restated Certificate of Incorporation of Mace Security
International, Inc. (Exhibit 3.4 to the 1999 Form 10-KSB)
*3.5 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Mace Security International, Inc.
*10.3 1993 Non-Qualified Stock Option Plan (1)
*10.22 Trademarks(1)
*10.28 Warrants in connection with the acquisition of the assets of the
KinderGard Corporation(2)
*10.34 Real Estate Purchase Agreement between Vermont Economic Development
Authority and Mace Security International, Inc.(2)
*10.66 Employment Agreement between the Company and Jon E. Goodrich effective
as of September 1, 1998 (3)
*10.67 Employment Agreement between the Company and Mark A. Capone effective
as of September 17, 1998 (3)
*10.68 Settlement Agreement between the Company and MSP Retail, Inc. dated
December 2, 1998
*10.69 Merger Agreement between Louis D. Paolino, Red Mountain Holding, Ltd.
and Mace Security International, Inc. dated as of March 26, 1999 +
*10.70 Stock purchase Agreement, between Louis Paolino, Jr. and Mace Security
International, Inc. dated as of March 26, 1999
*10.71 Employment Contract between Mace Security International, Inc. and
Robert M. Kramer dated March 26, 1999 (3)
*10.72 Employment Contract between Mace Security International, Inc. and
Gregory M. Krzemien dated March 26, 1999 (3)
*10.73 Amendment No. 1 to Merger Agreement between Louis D. Paolino, Red
Mountain Holding, Ltd. and Mace Security International, Inc. dated
April 13, 1999
*10.74 Amendment No. 1 to Stock purchase Agreement, between Louis Paolino,
Jr. and Mace Security International, Inc. dated April 13, 1999
*10.75 Stock Purchase Agreement dated as of February 4, 1999, by and between
Gary Higgins, Rosario Higgins, Rosa Maria Dietrich, Rainer Dietrich,
Amy Schmadeke, Elisa Rauch and Gunter Rauch and American Wash
Services, Inc. (Exhibit 2.1 to the Company's Current Report on Form 8-
K dated May 17, 1999 (the "May 17, 1999 Form 8-K"))+
*10.76 Amendment Number One to Stock Purchase Agreement dated April 1, 1999,
between Gary Higgins, Rosario Higgins, Rosa Maria Dietrich, Rainer
Dietrich, Amy Schmadeke, Elisa Rauch, Gunter Rauch and Steven Sims and
American Wash Services, Inc. (Exhibit 2.2 to the May 17, 1999 Form 8-
K)
*10.77 Assignment dated May 17, 1999 between Mace Security International,
Inc., Mace Anti Crime Bureau, Inc., and American Wash Services, Inc.
(Exhibit 2.3 to the May 17, 1999 Form 8-K)
*10.78 Car Wash Asset Purchase/Sale Agreement dated July 8, 1998 between
Genie Car Wash Inc. of Austin, Genie Car Care Center, Inc., Genie Car
Service Center, Inc., and Cornett Limited Partnership and Millennia
Car Wash Group LLC. (Exhibit 2.1 to the Company's Current Report on
Form 8-K dated May 18, 1999 (the "May 18, 1999 Form 8-K")) +
24
*10.79 First Amendment to Car Wash Asset Purchase/Sale Agreement effective
July 8, 1998 between Genie Car Wash Inc. of Austin, Genie Car Care
Center, Inc., Genie Car Service Center, Inc., and Cornett Limited
Partnership and Millennia Car Wash Group LLC (Exhibit 2.2 to the May
18, 1999 Form 8-K)
*10.80 Second Amendment to Car Wash Asset Purchase/Sale Agreement effective
April 29, 1999 between Genie Car Wash Inc. of Austin, Genie Car Care
Center, Inc., Genie Car Service Center, Inc., and Cornett Limited
Partnership and Millennia Car Wash Group LLC. (Exhibit 2.3 to the May
18, 1999 Form 8-K)
*10.81 Third Amendment to Car Wash Asset Purchase/Sale Agreement effective
May 17, 1999 between Genie Car Wash Inc. of Austin, Genie Car Care
Center, Inc., Genie Car Service Center, Inc., and Cornett Limited
Partnership and Millennia Car Wash Group LLC. (Exhibit 2.4 to the May
18, 1999 Form 8-K)
*10.82 Fourth Amendment to Car Wash Asset Purchase/Sale Agreement effective
May 18, 1999 between Genie Car Wash Inc. of Austin, Genie Car Care
Center, Inc., Genie Car Service Center, Inc., and Cornett Limited
Partnership and Millennia Car Wash Group LLC. (Exhibit 2.5 to the May
18, 1999 Form 8-K)
*10.83 Promissory Note in the amount of $4,750,000 by Mace Car Wash-Arizona,
Inc., dated May 18, 1999, payable to Mike W. Cornett as collecting
agent for Genie Car Wash Inc. of Austin, Genie Car Care Center, Inc.,
Genie Car Service Center, Inc. and Cornett Limited Partnership.
(Exhibit 2.6 to the May 18, 1999 Form 8-K)
*10.84 Security Agreement dated May 18, 1999 between Mace Car Wash-Arizona,
Inc. and Genie Car Wash Inc. of Austin, Genie Car Care Center, Inc.,
Genie Car Service Center, Inc. and Cornet Limited Partnership.
(Exhibit 2.7 to the May 18, 1999 Form 8-K)
*10.85 Agreement of Sale dated as of April 22, 1999 by and among Gabe
Kirikian and Alice Kirikian, Gabe's Plaza Car Wash, Inc. and Red
Mountain Holdings, Ltd. (Exhibit 2.1 to the Company's Current Report
on Form 8-K dated June 1, 1999 (the "June 1, 1999 Form 8-K")) +
*10.86 First Amendment to Agreement of Sale dated as of May 10, 1999 by and
among Gabe Kirikian and Alice Kirikian, Gabe's Plaza Car Wash, Inc.
and Red Mountain Holdings, Ltd. (Exhibit 2.2 to the June 1, 1999 Form
8-K)
*10.87 Assignment dated May 17, 1999 between Mace Security International,
Inc. and Red Mountain Holdings, Inc. (Exhibit 2.3 to the June 1, 1999
Form 8-K)
*10.88 Agreement of Sale dated as of April 23, 1999 by and among American
Wash Services, Inc. and Mario DeBerardinis and Jennifer DeBerardinis.
(Exhibit 2.1 to the Company's Current Report on Form 8-K dated June
22, 1999 (the "June 22, 1999 Form 8-K")) +
*10.89 Assignment dated June 15, 1999 between Mace Security International,
Inc. and American Wash Services, Inc. (Exhibit 2.2 to the June 22,
1999 Form 8-K)
*10.90 Merger Agreement dated as of March 26, 1999 between Louis D. Paolino,
Jr. and Red Mountain Holding, Ltd. on the one hand, and Mace Security
International, Inc. on the other hand. (Exhibit 2.1 to the Company's
Current Report on Form 8-K dated July 1, 1999 (the "July 1, 1999 AWS
Form 8-K")) +
*10.91 Amendment No. 1 to the Merger Agreement dated as of April 13, 1999.
(Exhibit 2.2 to the July 1, 1999 AWS Form 8-K)
*10.92 Amendment No. 2 to the Merger Agreement dated as of May 24, 1999.
(Exhibit 2.3 to the July 1, 1999 AWS Form 8-K)
*10.93 The Stock Purchase Agreement dated as of March 26, 1999 between Louis
D. Paolino, Jr. and Mace Security International, Inc. (Exhibit 2.4 to
the July 1, 1999 AWS Form 8-K) +
*10.94 Amendment No. 1 to the Stock Purchase Agreement dated as of April 13,
1999. (Exhibit 2.5 to the July 1, 1999 AWS Form 8-K)
*10.95 Amendment No. 2 to the Stock Purchase Agreement dated as of May 24,
1999 (Exhibit 2.6 to the July 1, 1999 AWS Form 8-K)
*10.96 The Real Estate and Asset Purchase Agreement dated as of March 8,
1999, among Stephen B. Properties, Inc., Stephen Bulboff, and American
Wash Services, Inc. (Exhibit 2.1 to the Company's Current Report on
Form 8-K dated July 1, 1999 (the "July 1, 1999 Form 8-K")) +
*10.97 Lease Assignment and Assumption Agreement dated July 1, 1999 among
Mace Wash, Inc., a wholly-owned subsidiary of Mace Security
International, Inc., Stephen B. Properties, Inc., Stephen Bulboff and
American Wash Services, Inc. (Exhibit 2.2 to the July 1, 1999)
*10.98 Mace Security International, Inc. 1999 Stock Option Plan (3)
*10.99 Operating Agreement between Millennia Car Wash, LLC, Excel Legacy
Corporation and G II Ventures, LLC and Mace Car Wash, Inc.
*10.100 Employment Contract between Mace Security International, Inc. and
Louis D. Paolino, Jr.(3)
*10.101 Employment Contract between Mace Security International, Inc. and
Michael Fazio(3)
*10.102 Stock Purchase Agreement and Sale Agreement dated June 23, 1999 among
Mace Security International, Inc. and the Environmental Opportunities
Fund II, L.P. and Environmental Opportunities Fund II (Institutional),
L.P.
25
*10.103 Stock Purchase Agreement and Plan of Reorganization dated as of June 1,
1999, by and between Kevin Detrick, Brian Bath, Michael Ruiz, and
Francis Janoski on the one hand, and Mace Security International, Inc.
on the other hand. (Exhibit 2.1 to the Company's Current Report on Form
8-K dated July 9, 1999) +
*10.104 Stock Exchange Agreement dated as of August 13, 1999, by and between
Joe Crawford, Ron Clark, Robert Duggan, Jr., and First National Bank of
Abilene, as Trustee of the Wayne V. Ramsey, Jr., and Mira Marie Ramsey
Family Trust No. 2 on the one hand, and Mace Security International,
Inc. on the other hand. (Exhibit 2.1 to the Company's Current Report on
Form 8-K dated August 25, 1999) +
*10.105 Car Wash Asset Purchase/Sale Agreement dated as of May 11, 1999,
between The Manus Group, Inc. and Mace Car Wash, Inc. (Exhibit 2.1 to
the Company's Current Report on Form 8-K dated August 24, 1999) +
*10.106 Car Wash Asset Purchase/Sale Agreement dated as of August 26, 1998,
between Quaker Car Wash, Inc. and Millennia Car Wash, LLC. (Exhibit 2.1
to the Company's Current Report on Form 8-K dated September 9, 1999
(the "September 9, 1999 Form 8-K")) +
*10.107 Amendment one of the Car Wash Asset Purchase/Sale Agreement dated as
of November 23, 1998. (Exhibit 2.2 to the September 9, 1999 Form 8-K)
*10.108 Amendment two of the Car Wash Asset Purchase/Sale Agreement dated as
of January 6, 1999. (Exhibit 2.3 to the September 9, 1999 Form 8-K)
*10.109 Amendment three of the Car Wash Asset Purchase/Sale Agreement dated as
of February 26, 1999. (Exhibit 2.4 to the September 9, 1999 Form 8-K)
*10.110 Amendment four of the Car Wash Asset Purchase/Sale Agreement dated as
of April 7, 1999. (Exhibit 2.5 to the September 9, 1999 Form 8-K)
*10.111 Amendment five of the Car Wash Asset Purchase/Sale Agreement dated as
of May 10, 1999. (Exhibit 2.6 to the September 9, 1999 Form 8-K)
*10.112 Amendment six of the Car Wash Asset Purchase/Sale Agreement dated as
of June 25, 1999. (Exhibit 2.7 to the September 9, 1999 Form 8-K)
*10.113 Amendment seven of the Car Wash Asset Purchase/Sale Agreement dated as
of August 13, 1999. (Exhibit 2.8 to the September 9, 1999 Form 8-K)
*10.114 Amendment eight of the Car Wash Asset Purchase/Sale Agreement dated as
of August 27, 1999. (Exhibit 2.9 to the September 9, 1999 Form 8-K)
*10.115 Stock Purchase Agreement dated as of June 21, 1999, by and between Ken
H. Bachman, as Trustee under the Kenneth H. Bachman Revocable Trust
under agreement dated September 12, 1994, Claudia Bachman, as Trustee
under the Claudia Bachman Revocable Trust under agreement dated
September 12, 1994, Carolyn Schmidt, Daniel Warmbier, and Diane
Warmbier on the one hand, and Mace Security International, Inc. on the
other hand. (Exhibit 2.1 to the Company's Current Report on Form 8-K
dated September 9, 1999) +
*10.116 Stock Purchase Agreement and Sale Agreement dated September 8, 1999
among Mace Security International, Inc. and Park Equity Partners
*10.117 Car Wash Asset Purchase/Sale Agreement dated as of April 20, 1999,
between White Glove Partnership and Mace Wash, Inc., a wholly owned
subsidiary of Mace Security International, Inc. (Exhibit 2.1 to the
Company's Current Report on Form 8-K dated October 18, 1999) +
*10.118 Amendment one of the Car Wash Asset Purchase/Sale Agreement dated as of
April 20, 1999 (Exhibit 2.2 to the Company's Current Report on Form 8-K
dated October 18, 1999)
*10.119 Real Estate and Asset Purchase Agreement dated March 30, 1999, by and
among Millennia Car Wash, LLC, Excel Legacy Corporation and G II
Ventures, LLC, and Mace Security International, Inc. (Exhibit 2.1 to
the Company's Current Report on Form 8-K dated October 29, 1999) +
*10.120 Amendment No. 1 dated as of March 30, 1999 by and among Millennia Car
Wash, LLC, Excel Legacy Corporation and G II Ventures, LLC, and Mace
Security International, Inc. (Exhibit 2.2 to the Company's Current
Report on Form 8-K dated October 29, 1999) +
*10.121 Closing letter to Real Estate and Asset Purchase Agreement dated March
30, 1999 as amended. (Exhibit 2.3 to the Company's Form 8-K dated
October 29, 1999)
*10.122 Agreement of Sale dated as of August 31, 1999, by and among Cherry Hill
Car Wash, Inc., 1505 Associates General Partnership, Henry Gorenstein
and Joan Rambler, and Mace Car Wash, Inc., a wholly owned subsidiary of
Mace Security International, Inc. (Exhibit 2.1 to the Company's Form 8-
K dated December 29, 1999) +
*10.123 Loan Agreement and Promissory Note dated February 17, 2000, between the
Company, its subsidiary Mace Car Wash - Arizona, Inc. and Bank One,
Texas, NA
*10.124 Business Loan Agreement dated January 31, 2000, between the Company,
its subsidiary - Colonial Full Service Car Wash, Inc., and Bank One,
Texas, N.A.; Promissory Note dated February 2, 2000 between the same
parties as above in the amount of $400,000 (pursuant to instruction 2
to Item 601 of Regulation S-B, two additional Promissory Notes, which
are substantially identical in all material respects except as to the
amount of the
26
Promissory Notes) are not being filed in the amount of: $19,643.97 and
$6,482; and a Modification Agreement dated as of January 31, 2000
between the same parties as above in the amount of $110,801.55
(pursuant to instruction 2 to Item 601 of Regulation S-B, Modification
Agreements, which are substantially identical in all material respects
except to the amount of the Modification Agreement) are not being filed
in the amounts of: $39,617.29, $1,947,884.87, $853,745.73, and
$1,696,103.31.
*10.125 Asset Purchase Agreement dated as of January 24, 2000, by and among
James Grandlich, Raymond Grandlich, and Arthur Grandlich, residents of
the state of Arizona, Red Baron Truck Washes, Inc. and Mace Truck Wash,
Inc., a wholly owned subsidiary of Mace Security International, Inc.
(Exhibit 2.1 to the Company's Current Report on Form 8-K dated March
24, 2000).+
*10.126 Merger Agreement and Plan of Reorganization dated March 8, 2000, by and
among Wash Depot Holdings, Inc., Mace Security International, Inc., and
Mace Holdings, Inc., a wholly owned subsidiary of Mace Security
International, Inc. (Exhibit 2.1 to the Company's Current Report on
Form 8-K dated April 27, 2000).+
*10.127 Acknowledgment of Schedules and Clarification of Certain Provisions of
Merger Agreement dated April 27, 2000 (Exhibit 2.2 to the Company's
Current Form on 8-K dated April 27, 2000).
*10.128 Form of Equity Purchase Agreement to be issued by Mace to Fusion
Capital (included as Exhibit A to Master Facility Agreement in Exhibit
10.1 of S-3) (Exhibit 4.1 to the Company's Current Form on S-3 dated
April 11, 2000).
*10.129 Master Facility Agreement, dated as of April 5, 2000, between Mace and
Fusion Capital (Exhibit 10.1 to the Company's Current Form on S-3 dated
April 11, 2000).
*10.130 Loan Agreement and Promissory Note dated November 28, 2000, between the
Company, its subsidiary Eager Beaver Car Wash, Inc. and Bank One,
Texas, N.A. in the amount of $6,754,400.
*10.131 Lease Agreement dated August 1, 2000 among Mace Security International,
Inc. and Bluepointe, Inc.
*10.132 Amendment dated March 13, 2001, to Business Loan Agreement between the
Company, its subsidiary Colonial Full Service Car Wash, Inc., and Bank
One, Texas, N.A. (pursuant to instruction 2 to Item 601 of Regulation
S-B, two additional amendments which are substantially identical in all
material respects, except as to the borrower being Eager Beaver Car
Wash, Inc. and Mace Car Wash - Arizona, Inc., are not being filed).
*10.133 Modification Agreement between the Company, its subsidiary - Colonial
Full Service Car Wash, Inc., and Bank One, Texas, N.A. in the amount of
$2,216,000 (pursuant to Instruction 2 to Item 601 of Regulation S-K,
Modification Agreements, which are substantially identical in all
material respects except to amount and extension date of the
Modification Agreement are not being filed in the original amounts of
$984,000 (extended to August 20, 2004) and $1,970,000 (extended to June
21, 2004)).
*10.134 Term Note dated November 6, 2001, between the Company, its subsidiary,
Colonial Full Service Car Wash, Inc., and Bank One, Texas, N.A. in the
amount of $380,000.
10.135 Amendment dated February 21, 2002 to Management Agreement between the
Company and Mark Sport, Inc. and original Management Agreement dated
February 1, 2000 to which the amendment relates.
10.136 Amendment dated February 25, 2002 to Lease Agreement between the
Company and Vermont Mill Properties, Inc. and original Lease Agreement
dated November 15, 1999 to which the amendment relates.
10.137 Promissory Note between the Company and Vermont Mill Properties,
Inc. dated February 22, 2002 in the amount of $228,671.
10.138 Extension dated February 6, 2002 of Equity Purchase Agreement
between the Company and Fusion Capital Fund II, LLC.
11 Statement Re: Computation of Per Share Earnings
21 Subsidiaries of the Company
23.1 Consent of Grant Thornton LLP
24 Power of Attorney (included on signature page)
___________________
* Incorporated by reference
+ Schedules and other attachments to the indicated exhibit have been omitted.
The Company agrees to furnish supplementally to the Commission upon request
a copy of any omitted schedules or attachments.
(1) Incorporated by reference to the exhibit of the same number filed with
the Company's registration statement on Form SB-2 (33-69270) that was
declared effective on November 12, 1993.
(2) Incorporated by reference to the Company's Form 10-QSB report for the
quarter ended 9/30/94 filed on November 14, 1994. It should be noted
that Exhibits 10.25 through 10.34 were previously numbered 10.1 through
10.10 in that report.
(3) Indicates a management contract or compensation plan or arrangement.
27
(b) Current Reports on Form 8-K or 8-K/A:
None.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
MACE SECURITY INTERNATIONAL, INC.
By: /s/ Louis D. Paolino, Jr.
------------------------------
Louis D. Paolino, Jr.
Chairman of the Board,
Chief Executive Officer,
and President
DATED the 11/th/ day of March, 2002.
KNOW ALL MEN BY THESE PRESENTS that the undersigned does hereby constitute
and appoint Louis D. Paolino, Jr. and Gregory M. Krzemien, or either of them
acting alone, his true and lawful attorney-in-fact and agent, with full power of
substitution and revocation for him and in his name, place and stead, in any and
all capacities, to sign this Report on Form 10-K of Mace Security International,
Inc. and any and all amendments to the Report 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 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 his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated:
Name Title Date
---- ----- ----
/s/ Louis D. Paolino, Jr. Chairman of the Board, 3/11/02
------------------------------------- Chief Executive Officer,
Louis D. Paolino, Jr. President and Director
(Principal Executive Officer)
/s/ Robert M. Kramer Executive Vice President, 3/11/02
------------------------------------- Chief Operating Officer,
Robert M. Kramer General Counsel, Secretary
and Director
/s/ Gregory M. Krzemien Chief Financial Officer 3/11/02
------------------------------------- and Treasurer (Principal
Gregory M. Krzemien Financial Officer)
/s/ Ronald R. Pirollo Chief Accounting Officer and 3/11/02
------------------------------------- Corporate Controller (Principal
Ronald R. Pirollo Accounting Officer)
/s/ Matthew J. Paolino Vice President and Director 3/11/02
-------------------------------------
Matthew J. Paolino
/s/ Jon E. Goodrich Director 3/11/02
-------------------------------------
Jon E. Goodrich
/s/ Constantine N. Papadakis, Ph.D. Director 3/11/02
-------------------------------------
Constantine N. Papadakis, Ph.D.
/s/ Mark S. Alsentzer Director 3/11/02
-------------------------------------
Mark S. Alsentzer
/s/ Richard B. Muir Director 3/11/02
-------------------------------------
Richard B. Muir
29
Mace Security International, Inc.
Consolidated Financial Statements
Years ended December 31, 2001, 2000, and 1999
Contents
Report of Independent Certified Public Accountants.............. F-2
Audited Consolidated Financial Statements
-----------------------------------------
Consolidated Balance Sheets..................................... F-3
Consolidated Statements of Operations........................... F-5
Consolidated Statements of Stockholders' Equity................. F-6
Consolidated Statements of Cash Flows........................... F-7
Notes to Consolidated Financial Statements...................... F-8
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Mace Security International, Inc.
We have audited the accompanying consolidated balance sheets of Mace Security
International, Inc. and subsidiaries as of December 31, 2001 and 2000 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mace Security
International, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
February 22, 2002
F-2
Mace Security International, Inc. and Subsidiaries
Consolidated Balance Sheets
ASSETS December 31
-----------------------------------
2001 2000
------------ --------------
Current assets:
Cash and cash equivalents $ 6,611,566 $ 4,838,023
Accounts receivable, less allowance for doubtful
accounts of $178,086 and $260,825 in 2001 and 2000,
respectively 1,075,443 737,547
Inventories 2,275,075 2,256,477
Deferred income taxes 144,614 118,575
Prepaid expenses and other current assets 2,218,514 2,699,996
------------ -------------
Total current assets 12,325,212 10,650,618
Property and equipment:
Land 32,592,390 32,597,872
Buildings and leasehold improvements 36,314,889 36,739,752
Machinery and equipment 8,775,639 8,223,801
Furniture and fixtures 431,143 257,549
------------ -------------
Total property and equipment 78,114,061 77,818,974
Accumulated depreciation and amortization (7,204,187) (5,423,330)
------------ -------------
70,909,874 72,395,644
Excess of cost over net assets of acquired businesses, net of
accumulated amortization of $2,031,413 and $1,143,239 in
2001 and 2000, respectively 20,138,793 20,881,085
Other intangible assets, net of accumulated amortization
of $1,384,362 and $1,223,702 in 2001 and 2000, respectively 993,537 1,142,485
Other assets 302,590 1,061,596
------------ -------------
Total assets $104,670,006 $ 106,131,428
============ =============
See accompanying notes.
F-3
LIABILITIES AND STOCKHOLDERS' EQUITY December 31,
------------------------------------
2001 2000
------------ ------------
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 2,514,067 $ 6,322,263
Accounts payable 2,445,998 2,821,752
Income taxes payable 173,444 190,127
Deferred revenue 257,415 315,743
Accrued expenses and other current liabilities 2,125,221 2,003,370
------------ ------------
Total current liabilities 7,516,145 11,653,255
Deferred income taxes 638,011 272,473
Long-term debt, net of current portion 31,569,556 30,094,300
Capital lease obligations, net of current portion 265,234 268,455
Other liabilities 825,000 965,625
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 10,000,000
Issued and outstanding shares - none - -
Common stock, $.01 par value:
Authorized shares - 100,000,000
Issued shares of 25,428,427 and
25,480,590 in 2001 and 2000, respectively 254,284 254,806
Additional paid-in capital 69,976,698 69,905,062
Accumulated deficit (6,374,922) (7,282,548)
------------ ------------
Total stockholders' equity 63,856,060 62,877,320
------------ ------------
Total liabilities and stockholders' equity $104,670,006 $106,131,428
============ ============
See accompanying notes.
F-4
Mace Security International, Inc. and Subsidiaries
Consolidated Statements of Operations
Year ended December 31,
------------------------------------------
2001 2000 1999
------------ ------------ ------------
Revenues:
Car wash and detailing services $ 39,859,473 $ 37,811,611 $ 17,073,284
Lube and other automotive services 4,487,028 4,869,506 2,692,532
Fuel and merchandise sales 3,637,954 5,061,351 2,092,082
Security product sales - - 3,435,312
Operating agreements 240,000 260,756 462,582
------------ ------------ ------------
48,224,455 48,003,224 25,755,792
Cost of revenues:
Car wash and detailing services 27,417,041 26,855,854 11,136,729
Lube and other automotive services 3,446,181 3,789,164 1,992,025
Fuel and merchandise sales 3,234,258 4,472,026 1,707,925
Security product sales - - 1,818,316
------------ ------------ ------------
34,097,480 35,117,044 16,654,995
Selling, general and administrative expenses 7,366,409 7,302,912 5,753,194
Depreciation and amortization 2,812,887 2,467,217 1,095,517
Costs of terminated acquisitions 134,759 580,000 -
Merger costs - - 1,875,000
Restructuring, asset write-downs and change in control charges - 137,904 1,519,000
------------ ------------ ------------
Operating income (loss) 3,812,920 2,398,147 (1,141,914)
Interest expense, net (2,885,455) (3,012,686) (1,033,564)
Other income 514,161 407,618 205,465
------------ ------------ ------------
Income (loss) from continuing operations before income taxes 1,441,626 (206,921) (1,970,013)
Income tax expense (benefit) 534,000 (66,000) (618,519)
------------ ------------ ------------
Income (loss) from continuing operations 907,626 (140,921) (1,351,494)
Discontinued Operations:
(Loss) gain from discontinued operations, net of applicable
income tax benefit of $130,000 in 2000 and income tax expense of
$30,000 in 1999 - (264,601) 91,379
Gain on disposal of ICS, net of $107,000 of applicable income tax
expense - 723,581 -
------------ ------------ ------------
Net income (loss) $ 907,626 $ 318,059 $ (1,260,115)
============ ============ ============
Basic income (loss) per share
From continuing operations $ 0.04 $ (0.01) $ (0.10)
From discontinued operations - 0.02 -
------------ ------------ ------------
Total $ 0.04 $ 0.01 $ (0.10)
============ ============ ============
Weighted average number of shares outstanding 25,448,564 24,476,842 13,159,154
============ ============ ============
Diluted income (loss) per share
From continuing operations $ 0.04 $ (0.01) $ (0.10)
From discontinued operations - 0.02 -
------------ ------------ ------------
Total $ 0.04 $ 0.01 $ (0.10)
============ ============ ============
Weighted average number of shares outstanding 25,484,245 24,476,842 13,159,154
============ ============ ============
See accompanying notes.
F-5
Mace Security International, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Additional
Common Common Paid-in Accumulated Treasury
Shares Stock Capital Deficit Stock Total
----------- -------- ----------- ----------- -------- -----------
Balance at December 31, 1998................ 8,179,620 $ 81,796 $14,272,243 $(4,985,528) $(52,388) $ 9,316,123
Exercise of common stock options
and warrants............................... 1,305,746 13,057 2,135,704 - - 2,148,761
Proceeds from sale of common stock,
less commissions and issuance.............. -
expenses of $457,201...................... 6,295,558 62,956 14,191,468 - 14,254,424
Common stock issued in purchase
acquisitions............................... 7,010,500 70,105 26,650,515 - - 26,720,620
Warrants issued in purchase
acquisitions............................... - - 5,176,400 - - 5,176,400
Effect of variable options vesting on
change of control.......................... - - 587,000 - - 587,000
Options issued for consulting
services................................... - - 26,875 - - 26,875
Common stock issued for consulting
services................................... 4,444 44 26,620 - - 26,664
Stock issued to satisfy debt obligation..... 25,807 258 251,358 - - 251,616
Income tax benefit from exercise of
non-qualified stock options................ - - 674,424 - - 674,424
Transactions of pooled companies............ - - - (76,732) - (76,732)
Dividends paid to former stockholders
of pooled companies........................ - - - (1,278,232) - (1,278,232)
Net loss.................................... - - - (1,260,115) - (1,260,115)
----------- -------- ----------- ----------- -------- -----------
Balance at December 31, 1999................ 22,821,675 228,216 63,992,607 (7,600,607) (52,388) 56,567,828
Sale of common stock less
commissions and issuance expenses
of $158,220............................... 1,626,159 16,262 1,531,053 - - 1,547,315
Exercise of common stock options
and warrants............................... 43,750 438 80,779 - - 81,217
Common stock issued in purchase
acquisitions............................... 1,277,300 12,773 4,667,775 - - 4,680,548
Common stock issued for services............ 40,000 400 199,600 - - 200,000
Common stock issued to satisfy debt
obligation................................. 106,985 1,070 385,787 - - 386,857
Common stock issued for debt
guarantee.................................. 19,521 195 68,129 - - 68,324
Cancellation of shares received from
sale of ICS................................ (450,000) (4,500) (1,008,000) - - (1,012,500)
Shares purchased and retired................ (4,800) (48) (5,445) - - (5,493)
Treasury shares retired..................... - - (52,388) - 52,388 -
Income tax benefit from exercise of
non-qualified stock options................ - - 45,165 - - 45,165
Net income.................................. - - - 318,059 - 318,059
----------- -------- ----------- ----------- -------- -----------
Balance at December 31, 2000................ 25,480,590 254,806 69,905,062 (7,282,548) - 62,877,320
Common stock issued in purchase
acquisitions............................... 26,137 261 157,720 - - 157,981
Shares purchased and retired................ (78,300) (783) (86,084) - - (86,867)
Net income.................................. - - - 907,626 - 907,626
----------- -------- ----------- ----------- -------- -----------
Balance at December 31, 2001................ 25,428,427 $254,284 $69,976,698 $(6,374,922) $ - $63,856,060
=========== ======== =========== =========== ======== ===========
See accompanying notes.
F-6
Mace Security International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31,
----------------------------------------
2001 2000 1999
---------- ---------- ----------
Operating activities
Income (loss) from continuing operations $ 907,626 $ (140,921) $ (1,351,494)
Discontinued operations, net of income tax - 458,980 91,379
----------- ----------- ------------
Net income (loss) 907,626 318,059 (1,260,115)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 2,812,887 2,467,217 1,095,517
Provision for losses on receivables 39,918 24,772 154,465
Write-down of assets - 137,904 -
(Gain) loss on disposal of property and equipment (215,891) 16,241 (5,655)
Deferred income taxes 339,499 (248,857) (716,172)
Non-cash portion of restructuring and change in control charges - - 1,178,000
Net gain on sale of ICS, including cash surrendered - (975,199) -
Non-cash expenses of discontinued operations - 24,206 48,122
Changes in operating assets and liabilities:
Accounts receivable 29,908 957,768 (425,706)
Inventory 80,775 89,667 (407,962)
Accounts payable (376,411) (278,566) 1,020,923
Deferred revenue (63,113) (104,313) 5,571
Accrued expenses 105,610 (609,832) (900,799)
Income taxes (16,683) (69,598) 118,837
Prepaid expenses and other assets (3,146) (409,399) (1,235,058)
Discontinued operations - - 326,835
Other (4,019) - (76,732)
----------- ----------- ------------
Net cash provided by (used in) operating activities 3,636,960 1,340,070 (1,079,929)
Investing activities
Acquisition of businesses, net of cash acquired - (25,000) (11,239,410)
Purchase of property and equipment (876,420) (1,344,060) (2,301,204)
Proceeds from sale of property and equipment 1,326,825 15,468 14,850
Payments for intangibles (20,464) (567,215) (143,789)
Payments received on notes receivable from shareholder - - 903,547
Deposits and other prepaid costs on future acquisitions - 233,073 (1,098,560)
----------- ----------- ------------
Net cash provided by (used in) investing activities 429,941 (1,687,734) (13,864,566)
Financing activities
Proceeds from long term debt and capital lease obligations 3,191 9,947,119 112,681
Payments on long-term debt and capital lease obligations (2,209,682) (8,705,275) (1,979,894)
Proceeds from issuance of common stock, net of offering costs - 1,628,532 15,743,185
Payments to purchase stock (86,867) (5,493) -
Net payments on note payable to shareholder - - (5,136)
Dividends paid to former stockholders of pooled companies - - (1,278,232)
----------- ----------- ------------
Net cash (used in) provided by financing activities (2,293,358) 2,864,883 12,592,604
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents 1,773,543 2,517,219 (2,351,891)
Cash and cash equivalents at beginning of year 4,838,023 2,320,804 4,672,695
----------- ----------- ------------
Cash and cash equivalents at end of year $ 6,611,566 $ 4,838,023 $ 2,320,804
=========== =========== ============
See accompanying notes.
F-7
Mace Security International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Mace
Security International, Inc. and its wholly owned subsidiaries (collectively,
"the Company"). All significant intercompany transactions have been eliminated
in consolidation.
The accompanying consolidated financial statements include the financial
position and results of operations of: (i) Mace Security International, Inc.
(prior to combination), (ii) 50's Classic Car Wash and CRCD, Inc. (collectively,
"Classic") which was acquired on August 25, 1999, and (iii) Eager Beaver Car
Wash, Inc. ("Eager Beaver") which was acquired on September 9, 1999. These
transactions were accounted for as poolings of interests.
Year Ended December 31, 1999
----------------------------
Revenue Percentage
------------- --------------
Mace (prior to combination for
pooling of interest acquisitions) $20,558,041 80%
Classic 892,158 3%
Eager Beaver 4,305,593 17%
------------ ---------
$25,755,792 100%
============ =========
2. Summary of Significant Accounting Policies
Description of Business
The Company currently operates in one business segment: the Car Care segment,
supplying complete car care and truck wash services (including wash, detailing,
lube, and minor repairs). The Company's car care operations are principally
located in Texas, Arizona, Florida, Pennsylvania, New Jersey, Delaware, Indiana
and Ohio. During 1999 the Company also operated in two additional business
segments: security product sales and computer products and services. The
Company's security products and computer products and services provided products
and services to various locations throughout the United States.
Revenue Recognition
Revenue from the Company's Car Care segment is recognized, net of customer
coupon discounts, when services are rendered or fuel or merchandise is sold.
During 1999, revenue from the Company's Security Products sales segment was
recognized when shipments were made, or for export sales when title had passed.
The Company was paid $20,000 per month, beginning in February 2000, under an
agreement which allowed Mark Sport, an entity controlled by Jon E. Goodrich, a
director of the Company, to operate the Company's Security Products Division.
This amount is included under revenues from operating agreements.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid short-term
investments with original maturities of three months or less, and credit card
deposits which are converted into cash within two to three business weeks.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in first-out (FIFO) method for security and car care products.
Inventories at the Company's Car Care locations consist of various chemicals and
cleaning supplies used in operations and merchandise and fuel for resale to
consumers.
F-8
Property and Equipment
Property and equipment are stated at cost. Depreciation is recorded using the
straight-line method over the estimated useful lives of the assets, which are
generally as follows: buildings and leasehold improvements - 15 to 40 years;
machinery and equipment -2 to 20 years; and furniture and fixtures - 5 to 10
years. Significant additions or improvements extending assets' useful lives are
capitalized; normal maintenance and repair costs are expensed as incurred.
Depreciation expense was approximately $1.8 million, $1.5 million, and $715,000
for the years ended December 31, 2001, 2000, and 1999, respectively.
Maintenance and repairs are charged to expense as incurred and amounted to
approximately $1.1 million, $1.4 million, and $505,000 in 2001, 2000, and 1999,
respectively.
Excess Cost over Fair Market Value of Net Assets Acquired
Through December 31, 2001, the excess cost over fair market value of net assets
acquired was amortized on a straight-line basis over 25 years commencing on the
dates of the respective acquisitions. Amortization expense of excess cost over
fair value of net assets acquired was approximately $889,000, $867,000, and
$277,000 in 2001, 2000, and 1999, respectively.
The Company periodically evaluates the value and future benefits of its
intangibles. The Company assesses recoverability from future operations using
expected future cash flows from operations of the related acquired business as a
measure. Under this approach, the carrying value would be reduced if it becomes
probable that the Company's best estimate for expected future cash flows of the
related business would be less than the carrying amount of the intangible over
the remaining amortization period. For the three year period ended December 31,
2001, there were no adjustments to the carrying amounts of intangibles resulting
from these evaluations. (See "New Accounting Standards" below.)
Other Intangible Assets
Other intangible assets consist primarily of deferred financing costs,
trademarks, and establishing a registered national brand name. Trademarks are
stated at cost and amortized on a straight-line basis over 15 years. Deferred
financing costs are amortized on a straight-line basis over the terms of the
respective debt instruments. The registered brand name is being amortized on a
straight-line basis over 15 years. Amortization of other intangible assets was
approximately $79,000, $60,000 and $103,000 for the years ended December 31,
2001, 2000 and 1999, respectively. (See "New Accounting Standards" below.)
Deferred Acquisition Costs
The Company capitalizes legal, accounting, engineering and other direct costs
paid to outside parties that are incurred in connection with potential
acquisitions. The Company, however, routinely evaluates such capitalized costs
and charges to expense those relating to abandoned acquisition candidates.
Indirect acquisition costs, such as executive salaries, general corporate
overhead, and other corporate services are expensed as incurred. Deferred
acquisition costs, included in other assets, were approximately $47,000, and
$183,000 at December 31, 2000, and 1999, respectively. There were no deferred
acquisition costs at December 31, 2001.
Costs of Terminated Acquisitions
The Company's policy is to charge as an expense any previously capitalized
expenditures relating to proposed acquisitions that in management's current
opinion will not be consummated.
Merger Costs
In 1999, the Company incurred approximately $225,000, $120,000, and $1,530,000
in merger-related costs associated with the ICS, Classic, and Eager Beaver
mergers, respectively. Merger costs consisted of transaction-related expenses
of $680,000 which includes deal costs, legal, accounting and other professional
and consulting fees, filing fees, external due diligence costs, contractual
costs, and finder fees as well as employee severance and termination costs which
totaled $1,195,000. Additionally, tax provisions of $96,000, and $50,000 were
recorded at the date of the mergers relating to net deferred tax liabilities
with respect to the termination of the previous S Corporation elections of
Classic and Eager Beaver, respectively. This total of $146,000 was included
within the income tax benefit for 1999.
F-9
Income Taxes
Deferred income taxes are determined based on the difference between the
financial accounting and tax bases of assets and liabilities. Deferred income
tax expense (benefit) represents the change during the period in the deferred
income tax assets and deferred income tax liabilities. Deferred tax assets
include tax loss and credit carryforwards and are reduced by a valuation
allowance if, based on available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Supplementary Cash Flow Information
Interest paid on all indebtedness was approximately $3.1 million, $3.1 million,
and $927,000 for the years ended December 31, 2001, 2000, and 1999,
respectively.
Income taxes paid were approximately $211,000, $79,000 and $13,000 in 2001, 2000
and 1999, respectively.
Noncash investing and financing activities of the Company excluded from the
statement of cash flows include debt paid with common stock of the Company of
$387,000 and $252,000 in 2000 and 1999, respectively, and property additions
financed by debt of $181,000 in 2001 and $3.1 million in 1999.
Deferred Revenue
The Company records a liability for gift certificates and ticket books sold at
its car care locations but not yet redeemed. The Company estimates these
unredeemed amounts based on gift certificates and ticket book sales and
redemptions throughout the year as well as utilizing historical sales and
redemption rates.
Advertising
The Company expenses advertising costs, including advertising production costs,
as they are incurred or the first time advertising takes place. The Company's
costs of coupon advertising are capitalized as a prepaid asset and amortized to
advertising expense during the period of distribution and customer response,
typically two to three months. Prepaid advertising costs were $67,000 at
December 31, 2001. Advertising expense was approximately $1,140,000, $863,000,
and $538,000 in 2001, 2000, and 1999, respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables and debt instruments. The
carrying value of cash and cash equivalents, trade receivables, and trade
payables are considered to be representative of their respective fair values.
Based on the borrowing rates currently available to the Company for bank loans
with similar terms and average maturities, the carrying values and fair values
of the Company's fixed and variable rate debt instruments at December 31, 2001
were as follows:
CARRYING VALUE FAIR VALUE
---------------- --------------
Fixed rate debt $ 15,397,368 $ 18,470,967
Variable rate debt 18,951,489 19,360,019
--------------- --------------
Total $ 34,348,857 $ 37,830,986
=============== ==============
F-10
The majority of the fixed rate debt provides for a pre-payment penalty based on
an interest rate yield maintenance formula. The yield maintenance formula
results in a significant pre-payment penalty as market interest rates decrease.
The Company obtained a calculation of the pre-payment penalty in August 2001 of
$3.2 million. The pre-payment penalty precludes refinancing of this long term
debt.
At December 31, 2000, the difference between the carrying values and the fair
values of the Company's debt instruments was not significant.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, the Company evaluates the recoverability of its long-lived
assets which include trademarks, other intangibles, and other assets whenever
changes in circumstances indicate that the carrying amount may not be
recoverable. If indications are that the carrying amount of the asset is not
recoverable, the Company will estimate the future cash flows expected to result
from use of the asset and its eventual disposition. If the sum of the expected
future cash flows is less than the carrying amount of the asset, the Company
recognizes an impairment loss. The impairment loss recognized is measured as the
amount by which the carrying amount of the asset exceeds its fair value. There
were no impairment losses recognized on long-lived assets in the year ending
December 31, 2001.
Business Combinations
The Company assesses each business combination to determine whether the pooling
of interests or the purchase method of accounting is appropriate. For those
business combinations prior to July 1, 2001, accounted for under the pooling of
interests method, the financial statements are combined with those of the
Company at their historical amounts, and if material, all periods presented are
restated as if the combination occurred on the first day of the earliest year
presented. For those acquisitions accounted for using the purchase method of
accounting, the Company allocates the cost of the acquired business to the
assets acquired and the liabilities assumed based on estimates of fair values
thereof. These estimates are revised during the allocation period as necessary
when, and if, information regarding contingencies becomes available to define
and quantify assets acquired and liabilities assumed. The allocation period
varies but does not exceed one year. To the extent contingencies such as pre-
acquisition environmental matters, pre-acquisition liabilities including
deferred revenues, litigation and related legal fees are resolved or settled
during the allocation period, such items are included in the revised allocation
of the purchase price. After the allocation period, the effect of changes in
such contingencies is included in results of operations in the period in which
the adjustment is determined.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 141,
Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141
is effective for all business combinations completed after June 30, 2001. SFAS
142 is effective for fiscal years beginning after December 15, 2001; however,
certain provisions of this Statement apply to goodwill and other intangible
assets acquired between July 1, 2001 and the effective date of SFAS 142. Major
provisions of these Statements and their effective dates for the Company are as
follows:
. All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interests method of
accounting is prohibited except for transactions initiated before July
1, 2001.
. Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as
part of a related contract, asset or liability.
. Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized.
. Effective January 1, 2002, all previously recognized goodwill and
intangible assets with indefinite lives will no longer be subject to
amortization.
. Effective January 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator.
. All acquired goodwill must be assigned to reporting units for purposes
of impairment testing and segment reporting.
The Company continued to amortize goodwill and intangible assets acquired prior
to July 1, 2001, under its current method through December 31, 2001. In
accordance with SFAS 142, by December 31, 2002, the Company is required to have
completed a
F-11
transitional fair value based impairment test of goodwill as of January 1, 2002.
Additionally, by March 31, 2002, the Company will have completed a transitional
impairment test of any other intangible assets identified with indefinite lives.
These required transitional impairment tests of goodwill and other intangible
assets may result in asset write-downs which would be recognized as a change in
accounting principle in the consolidated statement of operations. The Company
has not yet determined the effect of these new impairment tests on its
consolidated financial position or results of operations. The Company is also
currently evaluating the provisions of SFAS 142 on the Company's amortization
expense. The Company's preliminary assessment is that these Statements will have
a material impact on the Company's amortization expense and results of
operations. Upon adoption of SFAS 142, on January 1, 2002, the Company will no
longer amortize goodwill, thereby eliminating annual amortization expense up to
approximately $900,000.
In August 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 applies to all entities, including rate-regulated
entities, that have legal obligations associated with the retirement of a
tangible long-lived asset that result from acquisition, constructions or
development and (or) normal operations of the long-lived asset. The application
of this Statement is not limited to certain specialized industries, such as the
extractive or nuclear industries. This Statement also applies, for example, to
a company that operates a manufacturing facility and has a legal obligation to
dismantle the manufacturing plant and restore the underlying land when it ceases
operation of that plant. A liability for an asset retirement obligation should
be recognized if the obligation meets the definition of a liability and can be
reasonable estimated. The initial recording should be at fair value. SFAS 143
is effective for financial statements issued for fiscal years beginning after
June 15, 2002, with earlier application encouraged. The provisions of the
Statement are not expected to have a material impact on the financial condition
or results of operations of the Company.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 retains the existing requirements to
recognize and measure the impairment of long-lived assets to be held and used or
to be disposed of by sale. However, SFAS 144 makes changes to the scope and
certain measurement requirements of existing accounting guidance. SFAS 144 also
changes the requirements relating to reporting the effects of a disposal or
discontinuation of a segment of a business. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The adoption of this Statement is not
expected to have a significant impact on the financial condition or results of
operations of the Company.
3. Acquisitions
Acquisitions Accounted for Under the Pooling of Interests Method
On August 25, 1999, the Company completed its merger with 50's Classic Car Wash
and CRCD, Inc. (collectively "Classic") and issued 91,677 unregistered shares of
the Company's common stock, par value $.01, in exchange for all outstanding
shares of Classic. Classic owns and operates a car wash in Lubbock, Texas. The
car wash provides a range of services which include full service car wash,
gasoline sales and a custom detail shop. The transaction was accounted for using
the pooling of interests method; and accordingly, the accompanying consolidated
financial statements include accounts of Classic for all periods presented.
On September 9, 1999, the Company completed its merger with Eager Beaver Car
Wash, Inc. ("Eager Beaver") and issued 659,222 unregistered shares of the
Company's common stock, par value $.01, in exchange for all of the outstanding
shares of Eager Beaver. Eager Beaver operates car wash facilities and a
lubrication center from locations throughout west central and south central
Florida. Eager Beaver operations provide a full line of car cleaning services
including washing, waxing and detailing services . The transaction was
accounted for using the pooling of interests method; and accordingly, the
accompanying consolidated financial statements include the accounts of Eager
Beaver for all periods presented.
Additionally, on July 9, 1999, the Company acquired all of the outstanding
shares of Innovative Control Systems, Inc. ("ICS"). Approximately 604,000
unregistered shares of common stock of the Company were issued in exchange for
all of the outstanding shares of ICS. Additionally, the Company assumed
approximately $750,000 of ICS's debt. On June 2, 2000, the Company sold ICS in
exchange for the return of 450,000 shares of common stock of the Company and
$295,500 of future goods and services from ICS. Accordingly, ICS's results of
operations, as well as the gain on the ICS sale, were accounted for as
discontinued operations.
Classic and Eager Beaver were Subchapter S Corporations prior to the mergers,
whereby, the taxable income or loss flowed through to the individual
shareholders. The effects of pro forma taxes as a C Corporation would result in
additional income tax expense of approximately $214,000 for the year ended
December 31, 1999.
F-12
In 1999, the Company incurred approximately $225,000, $120,000, and $1,530,000
in merger-related costs associated with the ICS, Classic, and Eager Beaver
mergers, respectively. Merger costs consisted of transaction-related expenses
of $680,000 which includes deal costs, legal, accounting and other professional
and consulting fees, filing fees, external due diligence costs, contractual
costs, and finder fees as well as employee severance and termination costs
which totaled $1,195,000. Additionally, tax provisions of $96,000 and $50,000
were recorded at the date of the mergers relating to net deferred tax
liabilities with respect to the termination of the previous S Corporation
elections of Classic and Eager Beaver, respectively. This total of $146,000 was
included within the income tax benefit for 1999.
Acquisitions Accounted for Under the Purchase Method
On May 17, 1999, the Company acquired all of the outstanding stock of Colonial
Full Service Car Wash, Inc. ("Colonial") in exchange for 1,250,991 unregistered
shares of the Company's common stock and the assumption of debt and negative
working capital of approximately $6,579,000. This transaction was accounted for
using the purchase method of accounting.
On May 18, 1999, the Company acquired certain assets of Genie Car Wash of
Austin, Inc., Genie Car Care Center, Inc., and Genie Car Service Center, Inc.
(collectively, "Genie"). Consideration under the Agreement consisted of 533,333
unregistered shares of common stock of the Company, $1,000,000 of cash, and the
issuance of promissory notes in the amount of $4,750,000 and $180,000. The
assets acquired consist of substantially all of the real estate, equipment, and
inventories utilized in the car wash businesses. This transaction was accounted
for using the purchase method of accounting.
On June 1, 1999, the Company acquired substantially all of the assets of Gabe's
Plaza Car Wash, Inc. ("Gabe's") in exchange for $210,000 in cash and delivery of
a promissory note for $717,000. The transaction was accounted for using the
purchase method of accounting. On August 28, 2001, the Company sold Gabe's for
an aggregate cash sales price of $1.2 million. The Company utilized
approximately $315,000 of the sales proceeds to pay off a promissory note which
was secured by a first mortgage on the real estate sold. A pre-tax gain of
approximately $216,000 was realized and included in other income.
On June 22, 1999, the Company acquired substantially all of the assets of the
Moorestown Car Wash in exchange for $225,000 and the issuance of 20,930
unregistered shares of common stock of the Company. This transaction was
accounted for using the purchase method of accounting.
On July 1, 1999, the Company completed, pursuant to a Merger Agreement dated
March 26, 1999, its merger with American Wash Services, Inc. ("AWS"), a car wash
company controlled by Mr. Paolino, pursuant to which AWS was merged with and
into a wholly owned subsidiary of the Company. Mr. Paolino and Red Mountain
Holdings, Ltd., AWS's other shareholder, received in exchange for all of the
shares of AWS, $4.8 million in cash, and 628,362 unregistered shares of common
stock, of which Mr. Paolino received 470,000 shares and Red Mountain received
158,362 shares. Mr. Paolino and Mr. Robert M. Kramer, the current Executive
Vice President and General Counsel of the Company, received additional
consideration in connection with this merger in the form of warrants to purchase
shares of common stock of the Company having a total fair market value at the
time of the grant of approximately $2.1 million, as follows:
. Mr. Paolino received a warrant to purchase 1,500,000 shares of common
stock at a purchase price of $1.375 per share;
. Mr. Paolino received a warrant to purchase 250,000 shares of common
stock at a purchase price of $2.50 per share; and
. Mr. Kramer received a warrant to purchase 75,000 shares of common
stock at a purchase price of $1.375 per share.
The transaction was accounted for as a purchase.
On July 1, 1999, the Company acquired substantially all the assets of Stephen
Bulboff and Stephen B. Properties, Inc. (collectively, "Shammy Shine" or
"Stephen Bulboff") in exchange for 860,000 unregistered shares of common stock
of the Company and cash consideration of $1,900,000. Stephen Bulboff owns and
operates a total of ten exterior only car washes in Pennsylvania, New Jersey and
Delaware. This transaction was accounted for as a purchase.
On August 24, 1999, the Company acquired, through a wholly owned subsidiary,
substantially all of the assets of Shammy Man Car Wash ("Shammy Man") in
exchange for 62,649 unregistered shares of common stock cash consideration of
$475,000 and the assumption of approximately $400,000 of debt. This transaction
was accounted for using the purchase method of accounting.
On September 9, 1999, the Company acquired all of the assets of Quaker Car Wash,
Inc. ("Quaker") in exchange for 224,072 unregistered shares of common stock and
approximately $1,055,000 of cash consideration. This transaction was accounted
for using the purchase method of accounting.
F-13
On October 18, 1999, the Company, through a wholly owned subsidiary, acquired
all of the car wash related assets of White Glove Car Wash ("White Glove")
located in Tempe, Arizona. Consideration consisted of 38,095 unregistered
shares of common stock of the Company, $130,000 of cash, and the issuance of a
$345,000 promissory note. The transaction was accounted for using the purchase
method of accounting.
On October 29, 1999, the Company consummated the acquisition of Millennia Car
Wash, LLC ("Millennia") which the Company had operated under an operating
agreement since March 31, 1999. Millennia consists of 11 full service car
washes in the Phoenix, Arizona market and six full service car washes in the San
Antonio, Texas market as well as a total of five lube and repair centers, eight
fuel sales operations, and 17 convenience stores. Consideration under the
agreement, as amended, consisted of 3,500,000 unregistered shares of common
stock of the Company and the assumption of approximately $15.0 million of long-
term debt. The transaction was accounted for using the purchase method of
accounting.
On December 29, 1999, the Company, through a wholly owned subsidiary, acquired
all of the assets of Cherry Hill Car Wash, Inc. and 1505 Associates General
Partnership ("Cherry Hill Car Wash") located in Cherry Hill, New Jersey.
Consideration consisted of 63,309 unregistered shares of common stock of the
Company and $1.9 million of cash. The transaction was accounted for using the
purchase method of accounting.
On March 24, 2000, the Company, through a wholly owned subsidiary, acquired all
of the truck wash related assets of Red Baron Truck Washes, Inc. ("Red Baron")
with a total of five operating locations in Arizona, Indiana, Ohio and Texas.
Consideration consisted of 568,421 registered shares of common stock of the
Company and the issuance of a secured $1.0 million promissory note to the
seller. The transaction was accounted for using the purchase method of
accounting.
On June 5, 2000, the Company, through a wholly owned subsidiary, acquired
certain assets of Sparsupco, Inc. (the "Beneva Car Wash"). Consideration
consisted of 130,712 shares of common stock of the Company and $20,000 of cash.
The Beneva Car Wash is located in Sarasota, Florida. The transaction was
accounted for using the purchase method of accounting.
On July 10, 2000, the Company, through a wholly owned subsidiary, completed the
acquisition of substantially all the assets of Superstar Kyrene, a full service
car wash in the Phoenix, Arizona area, in exchange for 56,521 unregistered
shares of common stock of the Company, cash consideration of approximately
$824,000 and the assumption of approximately $926,000 of debt. The transaction
was accounted for using the purchase method of accounting.
Additionally, on July 26, 2000, the Company acquired, through a wholly owned
subsidiary, substantially all of the assets of Blue Planet Car Wash ("Blue
Planet"), a full service car wash in the Dallas, Texas area, in exchange for
250,008 unregistered shares of common stock, and the assumption of approximately
$1,554,000 of debt. This transaction was accounted for using the purchase
method of accounting.
4. Discontinued Operations
On July 14, 1998, the Company sold substantially all of the assets of its Law
Enforcement division within its security products segment. Accordingly, the
operating results of its Law Enforcement division have been segregated from
continuing operations and reported, on a comprehensive basis, as a separate line
item on the consolidated statement of operations entitled "Discontinued
Operations." In conjunction with the sale of assets, the Company licensed to
the purchaser the use of Mace(R) and related trademarks and a patent for use by
the purchaser in the Law Enforcement market and received a one-time license fee
of $650,000. A portion of the sales price, $600,000, was retained by the
purchaser in escrow to secure, among other things, the Company's obligations
under the representations and warranties in the purchase agreement. During
1999, this amount was returned to the Company. Notwithstanding the sale of the
Law Enforcement division, the Company fulfilled its obligation under a
nonassignable Department of Defense contract which was completed in September of
1999. Accordingly, this contract is included in discontinued operations in the
accompanying consolidated statement of operations for the year ended December
31, 1999.
On May 4, 2000, the Board of Directors of the Company approved a plan to sell
its computer products and services subsidiary, ICS. Accordingly, the operating
results of ICS have been segregated from continuing operations and reported on a
comprehensive basis as a separate line item on the consolidated statement of
operations entitled "Discontinued Operations". On June 2, 2000, the Company
sold ICS in exchange for the return of 450,000 shares of common stock of the
Company and $295,500 of future goods and services from ICS.
F-14
LAW
ENFORCEMENT
ICS DIVISION
------------- --------------
Year ended December 31, 2000
Revenues $ 518,753 $ -
Loss from discontinued operations $ (264,601) $ -
Gain on disposal $ 723,581 (1) $ -
Year ended December 31, 1999
Revenues $2,925,217 $1,135,051
Income from discontinued operations $ 67,347 $ 24,032
(1) Includes a net loss of $77,308 from operations of ICS from the
measurement date to the disposal date.
5. Accounts Receivable
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. Risk of losses from international sales within the
security products segment are minimized by requiring the majority of customers
to provide irrevocable confirmed letters of credit and/or cash advances. The
Company maintains an allowance for doubtful accounts at a level that management
believes is sufficient to cover potential credit losses.
The changes in the allowance for doubtful accounts are summarized as follows:
YEAR ENDED DECEMBER 31,
----------------------------
2001 2000
------------ ------------
Balance at beginning of year $ 260,825 $ 102,393
Additions (charged to expense) 39,918 24,772
Adjustments (122,657) 133,660
Deductions - -
----------- ----------
Balance at end of year $ 178,086 $ 260,825
=========== ==========
6. Inventories
Inventories consist of the following:
AS OF DECEMBER 31,
------------------------
2001 2000
----------- ----------
Finished goods $ 320,822 $ 370,676
Work in process 176,104 114,501
Raw materials and supplies 852,325 763,202
Fuel, merchandise inventory and car wash supplies 925,824 1,008,098
----------- ----------
$2,275,075 $2,256,477
=========== ==========
F-15
7. Other Intangibles
The components of other intangibles are summarized below:
As of December 31,
--------------------------------
2001 2000
-------------- ---------------
Trademarks $ 1,748,578 $ 1,748,578
Trademark protection costs 154,208 154,208
Deferred financing fees 359,023 349,758
Registered brand name 116,090 113,643
-------------- ---------------
Total intangibles 2,377,899 2,366,187
Less: Accumulated amortization 1,384,362 1,223,702
-------------- ---------------
Other intangibles, net $ 993,537 $ 1,142,485
============== ===============
Amortization expense of other intangible assets was approximately $79,000,
$60,000 and $103,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
8. Long-Term Debt, Notes Payable, and Capital Lease Obligations
Long-term debt, notes payable, and capital lease obligations consist of the
following:
As of December 31,
----------------------------
2001 2000
----------- -------------
Notes payable to Franchise Mortgage Acceptance Corporation
("FMAC"), interest rate of 8.52%, due in monthly installments
totaling $145,936 including interest, through September 2013,
collateralized by real property, equipment and inventory of
certain of the Millennia Car Wash locations $ 13,013,278 $ 13,626,777
Note payable to Bank One, Texas, NA, interest rate of prime plus
0.25% (5.00% at December 31, 2001), is due in monthly
installments of $71,554 including interest (adjusted annually),
through November 2003, collateralized by real property and
equipment of Eager Beaver Car Wash, Inc. 6,358,805 6,734,067
Note payable to Bank One, Texas, NA, interest rates ranging from
prime plus 0.25% (5.00% at December 31, 2001) to 9.75%, due
in monthly installments totaling $63,449 per month including
interest (adjusted annually), through various dates ranging from
July 2002 to August 2004, collateralized by real property and
equipment of certain of the Colonial Car Wash locations 4,499,043 4,837,222
Note payable to Bank One, Texas, NA which refinanced a note
payable to Cornett Ltd. Partnership on February 17, 2000. The
Bank One note, which provides for an interest rate of prime plus
0.25% (5.00% at December 31, 2001), is due in monthly
installments of $49,682 including interest (adjusted annually),
through February 2003, collateralized by real property and
equipment of the Genie Car Wash locations 4,549,092 4,793,714
Note payable to Western National Bank, interest rate of 8.75%, due
in monthly installments of $20,988 including interest, through
October 2014, collateralized by real property and equipment in
Lubbock, Texas 1,942,230 2,018,103
F-16
Note payable to Transamerica Small Business Capital, Inc., interest
rate of prime plus 2.5% (7.25% at December 31, 2001), is due in
monthly installments of $12,581 including interest (adjusted
annually), through December 2022, collateralized by real
property and equipment of the Blue Planet Car Wash 1,475,780 1,497,640
Note payable to Merriman Park J.V., interest rate of 7.5% (adjusted
annually), due in monthly installments of $10,644 including
interest, through November 2011, collateralized by real property
and equipment of certain of the Colonial Car Wash locations 891,684 943,732
Note payable to Bank One Texas, NA, interest rate of prime plus
0.25% (5.00% at December 31, 2001), is due in monthly
installments of $7,727 including interest (adjusted annually),
through July 2003, collateralized by real property and equipment
of the Superstar Kyrene Car Wash 803,910 843,810
Note payable to Southwest Bank, interest rate of 11.25%, due in
monthly principal payments of $5,565 including interest, through
October 2001, collateralized by real property and equipment of
certain of the Colonial Car Wash locations - 391,754
Note payable to Bank One, Texas, NA, which refinanced the
mortgage note payable to Southwest Bank in October 2001. The
Bank One note which provides for an interest rate of prime plus
0.25% (5.00% at December 31, 2001), is due in monthly
installments of $3,156 including interest (adjusted annually),
through October 2004, collateralized by real property and
equipment of certain of the Colonial Car Wash locations 378,452 -
Note payable to Gabe and Alice Kirikian, interest rate of 7% due
in quarterly payments of $25,850 plus interest, collateralized by
real property of Gabe's Plaza Car Wash - 387,750
Capital lease payable to Columbia Credit Company, interest
rate of 14.5%, due in monthly installments of $8,314 including
interest, through May 2005, collateralized by certain equipment
of the Shammy Man Car Wash location 270,021 326,089
Capital leases payable to various creditors, interest rates ranging
from 9.00% to 9.97%, due in monthly installments of $5,079
including interest, through various dates ranging from December
2003 to November 2004, collateralized by certain equipment of
the Company 123,370 -
Note payable to Mitra II, interest payable at 8%, principal balance due
April 2001, collateralized by certain real property in Arizona - 164,122
Note payable to Pennzoil Products Company, interest rate of 5%
due in monthly installments of $2,496, including interest,
through June 2003, collateralized by equipment of the Company 43,192 70,238
Notes payable to individuals for consulting services, interest rates
from 8% to 12%, due on demand - 50,000
------------- -----------
34,348,857 36,685,018
Less: current portion 2,514,067 6,322,263
------------- -----------
$ 31,834,790 $30,362,755
============= ===========
On November 28, 2000, the Company entered into a $6.7 million three year term
note (15 year amortization basis) with Bank One, Texas N.A. ("Bank One") to
refinance certain maturing debt including the $1.3 million convertible
promissory note to Bullseye Properties, the $2.1 million SouthTrust Bank note
maturing in May 2001, and the $1.0 million promissory note related to the Red
Baron Truck Wash acquisition. The term note also provided approximately
$800,000 for the purchase of the leased Beneva Car Wash property and provided
approximately $1.4 million of additional funding, net of loan closing costs, for
capital improvements and working capital.
F-17
In August 1999, the Company assumed a 7% Convertible Promissory Note in the
amount of $1,348,379 in connection with an acquisition accounted for as a
pooling of interests. The note was payable in monthly installments of $12,276,
including interest, commencing in March 2000. The principal amount of the note,
including unpaid interest, was convertible into the Company's common stock at
the rate of $3.62 per share until August 2000 and at $3.875 per share
thereafter. The note contained a call provision which provided the holder the
right to call the note with a 90 day notice any time after April 15, 2000. The
promissory note was called by the holder and was due on November 28, 2000. The
promissory note was satisfied on March 7, 2001 with proceeds from the $6.7
million Bank One term note which were escrowed at December 31, 2000.
Additionally, in February 2000, the Company financed the remaining $4.35 million
balance of the promissory note related to the acquisition of Genie through a
$4.8 million three year term note (15 year amortization basis) with Bank One.
The term note also provided approximately $400,000 of additional funding, net of
loan closing costs, for capital improvements and working capital.
Several of the Company's debt agreements contain certain affirmative and
negative covenants and require the maintenance of certain levels of tangible net
worth and the maintenance of certain debt coverage ratios on an individual
subsidiary and consolidated level.
Certain machinery and equipment notes payable discussed above have been
classified as capital lease obligations in the balance sheet.
Maturities of long-term debt are as follows: 2002 - $2,514,067; 2003 -
$12,674,024; 2004 - $4,567,208; 2005 - $1,119,521; 2006 -$1,182,391; and 2007
and thereafter - $12,291,646.
9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consists of the following:
As of December 31,
-----------------------------
2001 2000
------------- ------------
Accrued compensation $ 795,928 $ 540,642
Accrued acquisition and merger
transaction costs - 125,262
Property and other non-income taxes 112,731 643,972
Other 1,216,562 693,494
------------- ------------
$ 2,125,221 $ 2,003,370
============= ============
10. Liabilities
In connection with an acquisition made by the Company during 1999, the Company
has an accrued liability as of December 31, 2001, totaling $825,000 payable to
sellers upon satisfactory resolution of certain contingencies. This amount has
been included in the purchase price allocation of the respective acquisition.
Management believes it is probable all contingencies will be met.
11. Stock Option Plans
During September 1993, the Company adopted the 1993 Stock Option Plan ("the 1993
Plan"). The 1993 Plan provides for the issuance of up to 630,000 shares of
common stock upon exercise of the options. The Company has reserved 630,000
shares of common stock to satisfy the requirements of the 1993 Plan. The options
are non-qualified stock options and are not transferable by the recipient. The
1993 Plan is administered by the Compensation Committee ("the Committee") of the
Board of Directors, which may grant options to employees, directors and
consultants to the Company. The term of each option may not exceed fifteen years
from the date of grant. Options are exercisable over either a 10 or 15 year
period and exercise prices are not less than the market value of the shares on
the date of grant.
In December 1999, the Company's stockholders approved the 1999 Stock Option Plan
("the 1999 Plan") providing for the granting of incentive stock options or
nonqualified stock options to directors, officers, or employees of the Company.
Under the 1999 Plan, 15,000,000 shares of common stock are reserved for
issuance. Incentive stock options and nonqualified options have terms which are
determined by the Committee with exercise prices not less than the market value
of the shares on the date of grant. The options
F-18
generally expire ten years from the date of grant and are exercisable based upon
graduated vesting schedules as determined by the Committee. As of December 31,
2001, 2,687,209 options have been granted under the 1993 and 1999 Plan including
1,763,338 nonqualified stock options.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that are not
developed for use in valuing employee stock options. Under APB 25, if the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for grants
in 2001, 2000 and 1999; risk-free interest rate ranges of 4.62% to 5.22% in
2001, 5.11% to 6.64% in 2000 and from 5.03% to 6.32% in 1999; dividend yield of
0%; expected volatility of the market price of the Company's common stock of 97%
in 2001, 91% in 2000 and 86% in 1999; and a weighted-average expected life of
the option of ten years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Pro forma results are
not likely to be representative of the effects on reported or pro forma results
of operations for future years. The Company's pro forma information is as
follows:
Year ended December 31,
------------------------------------------
2001 2000 1999
----------- ------------- --------------
Pro forma net loss $ (445,458) $(2,342,579) $(3,089,856)
Pro forma diluted loss per share $ (0.02) $ (0.09) $ (0.23)
Activity with respect to these plans is as follows:
2001 2000 1999
------------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
------------ ------------ --------- ------------ --------- -----------
Options outstanding beginning of
period 2,005,724 $ 4.29 2,721,708 $ 5.26 501,000 $ 1.37
Options granted 348,500 $ 0.76 330,325 $ 2.45 2,840,918 $ 5.37
Options exercised - - (43,750) $ 1.86 (439,710) $ 1.73
Options canceled (150,475) $ 6.59 (1,002,559) $ 7.73 (180,500) $ 4.69
------------ ---------- ----------
Options outstanding end of period 2,203,749 $ 3.57 2,005,724 $ 4.29 2,721,708 $ 5.26
============ ========== ==========
Options exercisable 1,527,147 $ 3.91 970,915 $ 4.42 398,876 $ 4.33
============ ========== ==========
Shares available for granting of options 12,942,791 13,140,816 12,468,582
============ ========== ==========
F-19
Stock options outstanding at December 31, 2001 under both plans are
summarized as follows:
Weighted Avg. Weighted
Range of Number Remaining Avg. Exercise
Exercise Prices Outstanding Contractual Life Price
------------------- ------------- ----------------- -------------
$ 0.69 - $ 1.03 379,000 8.6 years $ 0.78
$ 1.19 - $ 1.63 314,167 7.0 years $ 1.35
$ 2.69 - $ 4.00 878,373 7.2 years $ 2.96
$ 4.31 - $ 6.25 149,818 8.1 years $ 5.06
$ 6.63 - $ 9.75 412,391 7.4 years $ 7.37
$ 10.00 - $11.00 70,000 7.4 years $ 10.89
------------
2,203,749
============
In August 1994, the Company issued warrants to purchase 60,000 shares of Mace
Security International, Inc. common stock at $4.25 per share in connection with
the purchase of certain assets of a business. The warrants are exercisable over
a ten year period, expiring on August 24, 2004. On July 14, 1998, in connection
with the sale of the Law Enforcement division (Note 4), the Company issued to
the purchaser 300,000 warrants to purchase common stock of the Company at $1.25
per share. These warrants were fully exercised in March 1999.
The Company has a remaining total of 2,150,464 warrants to purchase common stock
outstanding at December 31, 2001, all of which are exercisable. In 1999, the
Company issued warrants to purchase a total of 2,656,500 shares of the Company's
common stock at a weighted average exercise price of $2.11 per share in
connection with the purchase of certain businesses and to a director. Warrants
exercised in 1999 totaled 866,036 at a weighted average exercise price of $1.64
per share. The terms of the warrants have been established by the Board of
Directors. The warrants are exercisable at any time through August 2, 2009 and
have an exercise price ranging from $1.375 to $9.25 per share.
During the exercise period, the Company will reserve a sufficient number of
shares of its common stock to provide for the exercise of the rights represented
by option and warrant holders.
12. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets at December 31, 2001 and 2000
are as follows:
As of December 31,
----------------------------------
2001 2000
----------------- ---------------
Deferred tax liabilities:
Property, equipment and intangibles $ (4,781,828) $ (3,232,125)
Other, net (29,502) (60,322)
-------------- ------------
Total deferred tax liabilities (4,811,330) (3,292,447)
Deferred tax assets:
Allowance for doubtful accounts 41,779 36,665
Inventories 39,116 50,981
Net operating loss carryforwards 4,711,900 3,414,955
Deferred revenue 99,606 125,371
Compensation and related transition costs 202,453 202,453
Other, net 173,430 153,475
-------------- ------------
Total deferred tax assets 5,268,284 3,983,900
Valuation allowance for deferred tax assets (950,351) (845,351)
-------------- ------------
Deferred tax assets after valuation allowance 4,317,933 3,138,549
-------------- ------------
Net deferred tax liabilities $ (493,397) $ (153,898)
============== ============
At December 31, 2001, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $12.7 million that begin to expire
during the year ended December 31, 2008, if unused. A valuation allowance has
been provided to reduce the deferred tax assets to a level which, more likely
than not, will be realized.
F-20
The components of income tax expense (benefit) are:
Year ended December 31,
------------------------------------
2001 2000 1999
-------- --------- --------
Current (principally state taxes) $ 194,501 $ 159,857 $ 97,653
Deferred 339,499 (225,857) (716,172)
--------- --------- ---------
Total income tax expense (benefit) $ 534,000 $ (66,000) $(618,519)
========= ========= =========
The significant components of deferred income tax expense (benefit) attributed
to income (loss) from continuing operations for the years ended December 31,
2001, 2000, and 1999 are as follows:
Year ended December 31,
------------------------------------
2001 2000 1999
-------- --------- --------
Deferred tax expense $ 1,531,444 $ 875,651 $ 439,842
Loss carry forward (1,296,945) (871,508) (903,805)
Valuation allowance for deferred tax assets 105,000 (230,000) (252,209)
----------- --------- ---------
$ 339,499 $(225,857) $(716,172)
=========== ========= =========
A reconciliation of income tax computed at the U.S. federal statutory tax
rates to total income tax expense (benefit) is as follows:
Year ended December 31,
------------------------------------
2001 2000 1999
--------- ----------- --------
Tax at U.S. federal statutory rate $ 504,569 $ (72,422) $(677,022)
S Corporation income prior to pooling date - - (225,290)
State taxes, net of federal benefit 128,190 93,039 30,509
Nondeductible costs and other acquisition
accounting adjustments 170,881 151,657 285,220
S Corporation status termination - - 121,648
Valuation allowance for deferred tax assets 105,000 (230,000) (192,259)
Fixed asset adjustments (358,280) - -
Other adjustments (16,360) (8,274) 38,675
--------- --------- ---------
Total income tax expense (benefit) $ 534,000 $ (66,000) $(618,519)
========= ========= =========
F-21
13. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Year ended December 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
Numerator:
Income (loss) from continuing operations $ 907,626 $ (140,921) $(1,351,494)
Income from discontinued operations - 458,980 91,379
----------- ----------- -----------
Net income (loss) $ 907,626 $ 318,059 $(1,260,115)
=========== =========== ===========
Denominator:
Denominator for basic income (loss)
per share - weighted average shares 25,448,564 24,476,842 13,159,154
Dilutive effect of options and warrants 35,681 - -
----------- ----------- -----------
Denominator for diluted income (loss)
per share - weighted average shares 25,484,245 24,476,842 13,159,154
=========== =========== ===========
Basic and diluted income (loss) per share:
From continuing operations $ 0.04 $ (0.01) $ (0.10)
From discontinued operations - 0.02 -
----------- ----------- -----------
Total $ 0.04 $ 0.01 $ (0.10)
=========== =========== ===========
The Company's options and warrants outstanding at December 31, 2000 and 1999
have not been included in the calculation of diluted earnings per share because
they are anti-dilutive.
14. Concentration of Credit Risk
The Company maintains its cash accounts in high quality financial institutions.
At times, these balances may exceed insured amounts.
15. Commitments and Contingencies
The Company is obligated under various operating leases, primarily for certain
equipment, vehicles, and real estate. Certain of these leases contain purchase
options, renewal provisions, and contingent rentals for proportionate share of
taxes, utilities, insurance, and annual cost of living increases. Future minimum
lease payments under operating leases with initial or remaining noncancellable
lease terms in excess of one year as of December 31, 2001 are as follows: 2002 -
$1,408,483; 2003 - $1,311,477; 2004 -$1,281,728; 2005 -$1,067,305; 2006 -
$702,083; and 2007 and thereafter - $3,038,389. Rental expense under these
leases was $1,513,268, $1,599,601 and $768,629 for the years ended December 31,
2001, 2000, and 1999, respectively.
In 1999, the Company entered into month to month and long-term sublease
agreements with tenants of their operating facility in Bennington, Vermont,
including a related party. These agreements were assigned to another party in
1999. Total sublease rental income was $133,842 in 1999.
The Company was a party to a real estate purchase agreement with the Vermont
Economic Development Authority ("VEDA") for the purchase of the Center and North
Wings of its security products office and manufacturing operation, after the
satisfaction or waiver of certain contingencies by VEDA. The Company previously
deposited $75,000 of the total cash portion into an escrow account as required
by the agreement. The Company elected not to purchase the building and leased
the premises from VEDA through November 15, 1999 for $4,000 per month, together
with taxes, insurance and utilities. The Company assigned to Vermont Mill, an
entity controlled by Jon Goodrich, all of its rights and obligations under the
VEDA Agreement including certain leasehold improvements abandoned by the
Company. Effective November 15, 1999, the Company entered into a lease with
Vermont Mill to continue to utilize space for its security products office and
manufacturing operation for $6,667 per month. The lease is for a term of five
years and provides for renewal options. Rent expense under this lease was
$10,000 in 1999.
The Company leases a portion of the building space at several of its car wash
facilities either on a month-to-month basis or under cancellable leases. During
fiscal 2001, 2000, and 1999 revenues of approximately $141,000, $92,000, and
$61,000, respectively, were recognized under these leasing arrangements. These
amounts are classified as other income in the accompanying statements of income.
F-22
The Company is subject to federal and state environmental regulations, including
rules relating to air and water pollution and the storage and disposal of oil,
other chemicals, and waste. The Company believes that it complies with all
applicable laws relating to its business.
Certain of the Company's executive officers have entered into employment
agreements whereby they will be entitled to immediate vesting provisions of
issued options should the officer be terminated upon a change in control of the
Company. Additionally, the employment agreement of the Company's Chief Executive
Officer, Louis D. Paolino, Jr., entitles Mr. Paolino to receive a fee of
$7,000,000 upon termination of employment under certain conditions including
upon termination as a result of a change in control.
The Company is a party to various legal proceedings related to its normal
business activities. In the opinion of the Company's management, none of these
proceedings are material in relation to the Company's results of operations,
liquidity, cash flows or financial condition.
16. Employee Benefit Plans
Two subsidiaries of the Company maintain voluntary 401(k) plans covering
substantially all of their respective employees. Under one of the plans,
employees may contribute from 1% to 20% of their regular wages, up to the limit
permitted by the Internal Revenue Service. The Company matches 25% of each
dollar contributed by employees up to 4% of their wages. The cost of the plan
amounted to $15,000 in 1999. Under the second plan, employees may contribute
from 1% to 25%. Although the plan allows for discretionary company matches, the
Company has not made any matching contributions in the three years ended
December 31, 2001. Both plans were terminated subsequent to December 31, 2001.
17. Operating Agreements
During the years ended December 31, 2000 and 1999, the Company managed several
car wash locations under operating agreements, under which the Company was
entitled to all profits generated from the operation of those locations.
Operating agreements generally arise from pending acquisitions that will be
closed pending completion of certain conditions. The pretax income earned under
these operating agreements is presented in the accompanying statements of
operations as revenue from operating agreements net of all operating expenses.
Additionally, the Company currently earns $20,000 per month under an agreement
which allows Mark Sport, an entity controlled by Jon E. Goodrich, a director of
the Company, to operate the Company's Security Products Division. The
Management Agreement also provides that at the end of its term, Mark Sport will
pay the Company an amount equal to the depreciation and amortization on the
assets of the Company's Security Products Division during the term of the
Management Agreement.
The results of operations subject to operating agreements were as follows:
Year ended December 31,
--------------------------------------
2001 2000 1999
---------- ---------- -----------
Revenues
Car wash and detailing services $ - $ 803,900 $ 8,421,825
Lube and other automotive services - - 641,296
Fuel and merchandise sales - 53,091 1,038,746
Security products operating lease payments 240,000 220,000 -
-------- ---------- -----------
240,000 1,076,991 10,101,867
Cost of Revenues
Car wash and detailing services - 727,125 5,816,466
Lube and other automotive services - - 595,356
Fuel and merchandise sales - 37,520 911,139
-------- ---------- -----------
- 764,645 7,322,961
Selling, general, and administrative expenses - 52,435 901,883
Depreciation and amortization - 102 722,064
-------- ---------- -----------
Operating income 240,000 259,809 1,154,959
Interest expense, net - - (790,331)
Other income - 947 97,954
-------- ---------- -----------
Income earned under operating agreements $240,000 $ 260,756 $ 462,582
======== ========== ===========
F-23
18. Restructuring, Asset Write-Downs and Change in Control Charges
In conjunction with the Company's 1999 change in control, the Company
restructured certain of its security products operations, abandoned certain
operations and assets, and incurred certain other change in control related
costs. A restructuring, asset write-down and change in control charge totaling
$1,519,000 was recorded in the second quarter ending June 30, 1999. Of this
charge, $1,178,000 was non-cash in nature consisting of a $218,000 write-off of
certain assets as a result of abandoning certain product lines within the
Company's security products segment; a $373,000 write-off of leasehold
improvements related to the Company's plan to abandon a portion of its currently
leased facilities in Vermont; and a $587,000 non-cash compensation charge
relating to the vesting of variable options to certain previous directors of the
Company upon the Company's change in control. The remaining charge of
approximately $341,000 included certain severance costs accrued as well as
legal, accounting and other transaction costs related to the Company's change in
control. Additionally, in 2000, the Company wrote down the value of its Berlin,
New Jersey facility by $137,904 to reflect the sales price of those assets in
January 2001.
19. Costs of Terminated Acquisitions
The Company's policy is to charge as an expense any previously capitalized
expenditures relating to proposed acquisitions that in management's current
opinion will not be consummated. During the year ended December 31, 2001, the
costs of previously capitalized expenditures related to proposed acquisitions
totaled approximately $135,000. These costs, which principally related to
several possible acquisitions the Company pursued outside the car wash industry,
are primarily related to due diligence costs. In 2000, costs of previously
capitalized expenditures principally related to the termination of the Planet
Truck Wash acquisition and acquisition related expenses associated with the
proposed Wash Depot Holdings, Inc. ("Wash Depot") merger. The Company terminated
the Wash Depot Merger Agreement on September 30, 2000, as a result of certain
conditions precedent to closing not being satisfied by Wash Depot. Of the
$580,000 in costs of terminated acquisitions in 2000, approximately $209,000
represented unrecoverable cash and stock deposits and approximately $371,000
represented external incremental transaction costs including legal, accounting,
consulting and due diligence costs.
20. Related Party Transactions
In August 1999, the Company entered into a month-to-month lease arrangement with
Bluepointe, Inc., a corporation controlled by Louis D. Paolino, Jr., the
Company's Chairman of the Board, Chief Executive Officer and President, for the
Company's executive offices in Mt. Laurel, New Jersey. The lease arrangement
provided for monthly rental payments of $10,000. This monthly lease payment was
considered to be more favorable than could be obtained on the open market for
similar facilities. Effective August 1, 2000, after a survey of local real
estate market pricing and upon the approval of the Audit Committee, the Company
entered into a five year lease with Bluepointe, Inc. which provides for an
initial monthly rental payment of $15,962, which increases by 5% per year in the
third through fifth years of the lease. The Company believes that the terms of
this lease (based on an annual rate of $19.00 per square foot ) are competitive
when compared to similar facilities in the Mt. Laurel, New Jersey area. The
Company has also entered into a three-year furniture lease/purchase agreement
with Bluepointe, Inc., dated January 1, 2001, which provided for an initial
payment of $20,000 and monthly rental payments thereafter of $4,513, for the use
of the furnishings in the Company's executive offices. The rental rates were
based upon a third-party valuation of the furnishings, and the Company believes
that the terms of the furniture lease are competitive with similar leasing
arrangements available in the local area.
The Company purchased charter airline services from Air Eastern, Inc., and LP
Learjets, LLC, charter airline companies owned by Louis D. Paolino, Jr., the
Company's Chairman of the Board, Chief Executive Officer and President. The
Company paid $60,000, $84,000, and $50,000 in fiscal 2001, 2000 and 1999,
respectively, for such services. An additional $15,000 was paid in 2001 to
Aeroways, Inc., a chartered air service company not affiliated with Louis D.
Paolino, Jr., for the direct costs of flying the Learjet 31A owned by LP
Learjets, LLC. The Company believes that the rates charged are competitive when
compared with similar services provided by independent airline charter
companies. The Company's Audit Committee approved an arrangement between the
Company and LP Learjets, LLC, whereby the Company would pay $5,109 per month to
LP Learjets, LLC for the right to use a Learjet 31A for 100 hours per year.
Additionally, when the Learjet 31A is used, the Company pays to Aeroways, Inc.,
the direct costs of the Learjet's per-hour use, which include fuel, pilot fees,
engine insurance and landing fees.
Until September 2000, Robert M. Kramer, the Company's Chief Operating Officer,
Executive Vice President, General Counsel, Secretary and a director, was engaged
in the part-time practice of law through Robert M. Kramer & Associates, P.C., a
professional corporation owned by Mr. Kramer. Robert M. Kramer & Associates,
P.C., had rendered legal services to the Company from April 1999 to August of
2000. The Company paid such corporation approximately $15,000, $163,000, and
$145,000 in 2001, 2000, and 1999, respectively. The Company has not paid such
corporation for legal services since January 2001 and does not anticipate any
future payments.
F-24
In 2001, the Company hired Premier Concrete, Inc., a company controlled by
Matthew J. Paolino, the Company's Vice President and a director, to assist with
underground tank removal and complete pavement re-surfacing at one of the
Company's car wash locations. Premier Concrete, Inc., the lowest responsible
bidder for the contract, has been paid $34,450 for its services in 2001. The
Company believes that the rates charged are competitive when compared with
similar service provided by independent contractors.
The Company purchased car wash parts, equipment and related services from
Sonny's Enterprises, Inc., a car wash parts and equipment company owned by Paul
G. Fazio, the brother of Michael Fazio, the Company's Vice President of
Operations until June 2000. Payments for such purchases totaled $391,000 in
fiscal year 1999 and approximately $558,000 in fiscal year 2000. The Company
contracted with Sonny's Enterprises, Inc. based on the competitive prices and
quality of such parts, equipment and services offered by Sonny's Enterprises,
Inc.
In February 2000, the Company entered into a Management Agreement with Mark
Sport, a Vermont corporation controlled by Jon E. Goodrich, a director of the
Company. The Management Agreement entitled Mark Sport to operate the Company's
Security Products Division and receive all profits or losses for a seven-month
term beginning January 1, 2000. The Agreement was extended several times through
amendments with the most recent through April 30, 2002.The Agreement requires
Mark Sport to pay the Company $20,000 per month beginning February 2000 and
continuing through the term of the Management Agreement as extended.
Additionally, Mark Sport must pay the Company an amount equal to the
amortization and depreciation on the assets of the division at the end of the
term of the Agreement. During the term of the Agreement, Mark Sport must operate
the division in substantially the same manner as it was operated prior to the
Management Agreement. On February 21, 2002, Mark Sport and the Company amended
the Management Agreement. The Amendment extended the term of the Management
Agreement through April 30, 2002, and reconciled the amount owed by Mark Sport
to the Company under the Management Agreement from February 2000 through
December 31, 2001. Mark Sport and the Company agreed in the Amendment that Mark
Sport, as of December 31, 2001, owes the Company $126,847, resulting in a
resolution of certain disputes and a reduction of the amounts owed by Mark Sport
of approximately $92,000.
The Company's Security Products Division leases manufacturing and office space
under a five-year lease with Vermont Mill , which provides for monthly lease
payments of $6,667 beginning November 15, 1999. Vermont Mill is also controlled
by Jon E. Goodrich. On February 25, 2002, the Company and Vermont Mill amended
the lease. The original lease provided that Vermont Mill could increase the
lease payment $0.50 per square foot upon demonstration that Vermont Mill had a
higher paying third party tenant for the space occupied by the Company. The
lease amendment clarifies that the Company occupies 44,000 square feet in
Vermont Mill at a rental rate of $2.50 per square foot per year. The Company
believes that the revised lease rate is lower than lease rates charged for
similar properties in the Bennington, Vermont area.
Vermont Mill borrowed a total of $228,671 from the Company through December 31,
2001. On February 22, 2002, Vermont Mill executed a three year promissory note
with monthly installments of $7,061 including interest at a rate of 7%. The
Company's Lease Agreement with Vermont Mill provides for a right of offset of
lease payments against this promissory note in the event monthly payments are
not made by Vermont Mill.
21. Segment Reporting
The Company currently operates in one business segment: the Car Care segment,
supplying complete car and truck care services (including wash, detailing, lube,
and minor repairs, fuel and merchandise sales). During 1999 the Company also
operated in two additional business segments: the Security Products sales
segment, producing and marketing retail consumer safety and security products,
and the Computer Products and Services segment, developing software and
manufacturing products and hardware for management and control of the car care
industry.
On June 2, 2000 the Company sold its computer products and services subsidiary.
Accordingly, the operating results for this segment have been segregated from
continuing operations and are being reported as discontinued operations.
The Company evaluates performances and allocates resources based on operating
income of each reportable segment rather than at the operating unit level. The
Company defines operating income as revenues less cost of revenues, selling,
general and administrative expense, and depreciation and amortization expense.
The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies (see Note 2). There
is no intercompany profit or loss on intersegment sales.
The Company's reportable segments are business units that offer different
services and products. The reportable segments are each managed separately
because they provide distinct services or produce and distribute distinct
products through different processes.
F-25
Selected financial information for each reportable segment is as follows:
Year ended December 31,
-----------------------------------------
2001 2000 1999
------------ ------------ -----------
Revenues:
Car care - external customers $ 47,984,455 $ 47,783,224 $22,320,480
Security products - external customers - - 3,435,312
Security products - operating agreement 240,000 220,000 -
Security products - intersegment revenues - - 11,620
Elimination of intersegment revenues - - (11,620)
------------ ------------ -----------
$ 48,224,455 $ 48,003,224 $25,755,792
============ ============ ===========
Operating income (loss):
Car care $ 3,799,874 $ 2,896,051 $ 3,194,088
Security products - operating agreement 147,805 220,000 (942,002)
------------ ------------ -----------
$ 3,947,679 $ 3,116,051 $ 2,252,086
============ ============ ===========
Assets:
Car care $100,528,855 $102,615,891 $93,283,956
Security products 4,141,151 3,515,537 4,353,734
Computer products and services - - 477,666
------------ ------------ -----------
$104,670,006 $106,131,428 $98,115,356
============ ============ ===========
Capital expenditures:
Car care $ 1,886,080 $ 2,154,247 $ 5,266,537
Security products - 14,813 88,463
------------ ------------ -----------
$ 1,886,080 $ 2,169,060 $ 5,355,000
============ ============ ===========
Depreciation and amortization:
Car care $ 2,720,692 $ 2,467,217 $ 834,298
Security products 92,195 - 261,219
------------ ------------ -----------
$ 2,812,887 $ 2,467,217 $ 1,095,517
============ ============ ===========
A reconciliation of operating income for reportable segments to total reported
operating income (loss) is as follows:
Year ended December 31,
-------------------------------------
2001 2000 1999
---------- ---------- -----------
Total operating income for
reportable segments $3,947,679 $3,116,051 $ 2,252,086
Costs of terminated acquisitions 134,759 580,000 -
Merger costs - - 1,875,000
Restructuring, asset write-downs
and change in control charges - 137,904 1,519,000
---------- ---------- -----------
Total operating income (loss) $3,812,920 $2,398,147 $(1,141,914)
========== ========== ===========
22. Selected Quarterly Financial Information (Unaudited)
Year ended December 31, 2001
---------------------------------------------------------
Net Diluted Net
Income Income
Revenues Gross Profit (Loss) Per Share
------------ ------------ ---------- -----------
1/st/ Quarter $12,828,926 $ 3,748,640 $301,878 $ 0.01
2/nd/ Quarter 13,041,613 3,894,378 358,350 $ 0.01
3/rd/ Quarter 10,965,189 2,826,506 (19,719) -
4/th/ Quarter 11,388,727 3,657,451 267,117 $ 0.01
------------ ------------ ----------
Total $48,224,455 $14,126,975 $907,626 $ 0.04
============ ============ ==========
Year ended December 31, 2000
----------------------------------------------------------
Net Diluted Net
Income Income (Loss)
Revenues Gross Profit (Loss) Per Share
------------ ------------ ---------- -------------
1/st/ Quarter $11,760,234 $ 3,534,957 $ 280,467 $ 0.01
2/nd/ Quarter 12,171,438 3,355,605 393,842 $ 0.02
3/rd/ Quarter 12,683,915 3,023,921 (83,577) -
4/th/ Quarter 11,387,637 2,971,697 (272,673) $ (0.01)
------------ ------------ ----------
Total $48,003,224 $12,886,180 $ 318,059 $ 0.01
============ ============ ==========
F-26
EXHIBIT INDEX
Exhibit
No. Description
--- -----------
10.135 Amendment dated February 21, 2002 to Management Agreement between
the Company and Mark Sport, Inc. and original Management
Agreement dated February 1, 2000 to which the amendment relates.
10.136 Amendment dated February 25, 2002 to Lease Agreement between the
Company and Vermont Mill Properties, Inc. and original Lease
Agreement dated November 15, 1999 to which the amendment relates.
10.137 Promissory Note between the Company and Vermont Mill Properties,
Inc. dated February 22, 2002 in the amount of $228,671.
10.138 Extension dated February 6, 2002 of Equity Purchase Agreement
between the Company and Fusion Capital Fund II, LLC.
11 Statement Re: Computation of Per Share Earnings
21 Subsidiaries of the Company
23.1 Consent of Grant Thornton LLP
F-27