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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2004 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)
REGISTRANT'S TELEPHONE NO., INCLUDING AREA CODE: (856) 778-2300
Indicate by checkmark 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 ("the
Exchange Act") during the preceding 12 months (or for such shorter period that
the registrant was required to file such report), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock:
As of November 10, 2004 there were 14,253,632 Shares of Registrant's Common
Stock, par value $.01 per share, outstanding.
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MACE SECURITY INTERNATIONAL, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2004
CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets - September 30, 2004 (Unaudited) 2
and December 31, 2003
Consolidated Statements of Operations (Unaudited) for the three
months ended September 30, 2004 and 2003 4
Consolidated Statements of Operations (Unaudited) for the nine
months ended September 30, 2004 and 2003. 5
Consolidated Statement of Stockholders' Equity
for the nine months ended September 30, 2004 (Unaudited) 6
Consolidated Statements of Cash Flows (Unaudited) for
the nine months ended September 30, 2004 and 2003 7
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 32
Item 4 - Controls and Procedures 32
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 33
Item 2 - Changes in Securities, Use of Proceeds and Issuer, Purchase
of Equity Securities 33
Item 6 - Exhibits and Reports on Form 8-K 34
Signatures 35
1
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MACE SECURITY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share information)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 12,000 $ 3,414
Accounts receivable, less allowance for doubtful
accounts of $514 and $263 in 2004 and 2003, respectively 3,321 1,531
Inventories 6,661 3,780
Deferred income taxes 265 266
Prepaid expenses and other current assets 2,424 1,878
--------- ---------
Total current assets 24,671 10,869
Property and equipment:
Land 31,604 31,391
Buildings and leasehold improvements 37,134 34,871
Machinery and equipment 10,882 10,172
Furniture and fixtures 495 447
--------- ---------
Total property and equipment 80,115 76,881
Accumulated depreciation (12,096) (10,738)
--------- ---------
Total property and equipment, net of accumulated depreciation 68,019 66,143
Goodwill 11,302 10,623
Other intangible assets, net of accumulated amortization
of $1,449 and $1,373 in 2004 and 2003, respectively 2,958 991
Deferred income taxes - 1,820
Other assets 166 156
--------- ---------
TOTAL ASSETS $ 107,116 $ 90,602
========= =========
See accompanying notes.
2
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- -------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 2,792 $ 5,520
Accounts payable 3,174 2,658
Income taxes payable 261 172
Deferred revenue 337 402
Accrued expenses and other current liabilities 3,824 1,847
------------- -------------
Total current liabilities 10,388 10,599
Long-term debt, net of current portion 27,039 25,591
Capital lease obligations, net of current portion 97 175
Other liabilities - 25
Deferred income taxes 1,070 -
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 and outstanding shares of 14,253,632 and
12,451,771 in 2004 and 2003, respectively 143 125
Additional paid-in capital 84,103 69,785
Accumulated deficit (15,724) (15,698)
------------- -------------
Total stockholders' equity 68,522 54,212
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 107,116 $ 90,602
============= =============
See accompanying notes.
3
MACE SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except share information)
THREE MONTHS ENDED
------------------------------
SEPTEMBER 30,
2004 2003
------------ ------------
Revenues:
Car wash and detailing services $ 7,898 $ 8,276
Lube and other automotive services 894 1,089
Fuel and merchandise sales 997 925
Security products sales 6,858 1,607
------------ ------------
16,647 11,897
Cost of revenues:
Car wash and detailing services 5,786 6,396
Lube and other automotive services 677 815
Fuel and merchandise sales 875 823
Security products sales 5,152 914
------------ ------------
12,490 8,948
Selling, general and administrative expenses 3,620 2,346
Depreciation and amortization 539 487
------------ ------------
Operating (loss) income (2) 116
Interest expense, net (447) (443)
Other income 91 43
------------ ------------
Loss before income taxes (358) (284)
Income tax benefit (129) (102)
------------ ------------
Net loss $ (229) $ (182)
============ ============
Per share of common stock (basic and diluted):
Net loss $ (0.02) $ (0.01)
============ ============
Weighted average shares outstanding:
Basic 14,213,656 12,412,189
Diluted 14,213,656 12,412,189
See accompanying notes.
4
MACE SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except share information)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2004 2003
------------ ------------
Revenues:
Car wash and detailing services $ 25,374 $ 27,080
Lube and other automotive services 2,719 3,133
Fuel and merchandise sales 3,098 2,723
Security products sales 10,737 3,889
------------ ------------
41,928 36,825
Cost of revenues:
Car wash and detailing services 18,199 19,806
Lube and other automotive services 2,084 2,402
Fuel and merchandise sales 2,701 2,387
Security products sales 7,650 2,214
------------ ------------
30,634 26,809
Selling, general and administrative expenses 8,628 6,823
Depreciation and amortization 1,533 1,462
Asset impairment charge - 351
------------ ------------
Operating income 1,133 1,380
Interest expense, net (1,376) (1,476)
Other income 202 210
------------ ------------
(Loss) income before income taxes (41) 114
Income tax (benefit) expense (15) 42
------------ ------------
Net (loss) income $ (26) $ 72
============ ============
Per share of common stock (basic and diluted):
Net (loss) income $ - $ 0.01
============ ============
Weighted average shares outstanding:
Basic 13,386,621 12,409,747
Diluted 13,386,621 12,422,952
See accompanying notes.
5
MACE SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2004
(In thousands except share information)
NUMBER OF PAR VALUE ADDITIONAL
COMMON OF COMMON PAID-IN ACCUMULATED
SHARES STOCK CAPITAL DEFICIT TOTAL
---------- --------- ---------- ----------- --------
Balance at December 31, 2003........ 12,451,771 $ 125 $ 69,785 $ (15,698) $ 54,212
Exercise of common stock options.... 430,956 4 1,844 1,848
Common stock issued in purchase
acquisition..................... 55,905 - 193 193
Common stock issued for land
and building........................ 250,000 3 1,561 1,564
Sales of common stock, net
of issuance costs of $348.......... 1,065,000 11 4,995 5,006
Proceeds from removal of
restriction on shares, net
of income tax of $3,227............ - - 5,725 5,725
Net loss............................ (26) (26)
---------- ------ ------------ ---------- --------
Balance at September 30, 2004....... 14,253,632 $ 143 $ 84,103 $ (15,724) $ 68,522
========== ====== ============ ========== ========
See accompanying notes.
6
MACE SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2004 2003
-------- --------
OPERATING ACTIVITIES
Net (loss) income $ (26) $ 72
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation and amortization 1,533 1,462
Provision for losses on receivables 143 53
Asset impairment charge - 351
Deferred income taxes (336) 32
Loss on disposal of fixed assets 12 3
Changes in operating assets and liabilities:
Accounts receivable (563) (673)
Inventories (1,022) (1,101)
Accounts payable 516 (425)
Deferred revenue (65) (113)
Accrued expenses 1,775 887
Income taxes 90 (121)
Prepaid expenses and other assets (468) (101)
-------- --------
Net cash provided by operating activities 1,589 326
INVESTING ACTIVITIES
Acquisition of business (5,621) -
Purchase of property and equipment (2,035) (712)
Payments for intangibles (64) (14)
Proceeds from sale of property and equipment 795 -
Prepaid costs for future acquisitions (25) -
-------- --------
Net cash used in investing activities (6,950) (726)
FINANCING ACTIVITIES
Payments on long-term debt and capital lease obligations (1,859) (1,835)
Proceeds from issuance of common stock 6,854 -
Gross proceeds from removal of restriction on shares 8,952 -
Payments to purchase stock - (14)
-------- --------
Net cash provided by (used in) financing activities 13,947 (1,849)
-------- --------
Net increase (decrease) in cash and cash equivalents 8,586 (2,249)
Cash and cash equivalents at beginning of period 3,414 6,189
-------- --------
Cash and cash equivalents at end of period $ 12,000 $ 3,940
======== ========
See accompanying notes.
7
MACE SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements include the
accounts of Mace Security International, Inc. and its wholly owned subsidiaries
(collectively "the Company" or "Mace"). All significant intercompany
transactions have been eliminated in consolidation. These consolidated interim
financial statements reflect all adjustments (including normal recurring
accruals), which in the opinion of management, are necessary for a fair
presentation of results of operations for the interim periods presented. The
results of operations for the nine and three month periods ended September 30,
2004 are not necessarily indicative of the operating results for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted. Certain amounts in
the 2003 financial statements have been reclassified to conform to the 2004
presentation. These consolidated interim financial statements should be read in
conjunction with the audited consolidated financial statements and notes
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003.
2. NEW ACCOUNTING STANDARDS
On March 31, 2004, the Financial Accounting Standards Board ("FASB") issued a
proposed Statement, Share-Based Payment an Amendment of FASB Statements No. 123
and APB No. 95, that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. Under the FASB's proposal, all forms of
share-based payments to employees, including employee stock options, would be
treated the same as other forms of compensation by recognizing the related cost
in the income statement. The expense of the award would generally be measured at
fair value at the grant date. Current accounting guidance requires that the
expense relating to so-called fixed plan employee stock options only be
disclosed in the footnotes to the financial statements. The proposed Statement
would eliminate the ability to account for share-based compensation transactions
using Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees. On October 13, 2004, the FASB voted to delay the adoption
of this proposed standard by public companies until their first fiscal quarter
beginning after June 15, 2005. The Company is currently evaluating this proposed
statement and the effects on its results of operations.
In January 2003, the FASB released Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46") which requires that all primary
beneficiaries of Variable Interest Entities ("VIE") consolidate those entities.
FIN 46 is effective immediately for VIEs created after January 31, 2003 and to
VIEs in which an enterprise obtains an interest after that date. It applies in
the first fiscal year or interim period beginning after June 15, 2003 to VIEs in
which an enterprise holds a variable interest it acquired before February 1,
2003. In December 2003, the FASB published a revision to FIN 46 ("FIN 46R") to
clarify some of the provisions of the interpretation and to defer the effective
date of implementation for certain entities. Under the guidance of FIN 46R,
entities that do not have interests in structures that are commonly referred to
as special purpose entities are required to apply the provisions of the
interpretation in financial statements for periods ending after March 14, 2004.
The Company does not have interests in special purpose entities and the adoption
of FIN 46R did not have an impact on the Company's consolidated financial
position, results of operations, or cash flows.
8
3. OTHER INTANGIBLE ASSETS
The following table reflects the components of intangible assets, excluding
goodwill (in thousands):
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------------ ------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- ------------ -------- ------------
Amortized intangible assets:
Non-compete agreement $ 28 $ 12 $ 65 $ 7
Customer lists 699 57 62 23
Product lists 590 15 - -
Deferred financing costs 412 180 390 158
------ ------ ------ ------
Total amortized intangible assets 1,729 264 517 188
Non-amortized intangible assets:
Trademarks - Security Products Segment 2,562 1,175 1,731 1,175
Service mark - Car and Truck Wash Segment 116 10 116 10
------ ------ ------ ------
Total non-amortized intangible assets 2,678 1,185 1,847 1,185
------ ------ ------ ------
Total intangible assets $4,407 $1,449 $2,364 $1,373
====== ====== ====== ======
The following sets forth the estimated amortization expense on intangible assets
for the fiscal years ending December 31 (in thousands):
2004 $123
2005 166
2006 151
2007 148
2008 141
4. BUSINESS COMBINATIONS
On July 1, 2004, the Company, through its wholly owned subsidiary, Mace Security
Products, Inc., acquired substantially all of the operating assets of Industrial
Vision Source(R)("IVS") and SecurityandMore(R)("S&M") from American Building
Control, Inc. The results of operations of IVS and S&M have been included in the
consolidated financial statements of the Company since July 1, 2004. S&M
supplies video surveillance and security equipment and IVS is a distributor of
technologically advanced imaging components and video equipment. The acquisition
of IVS and S&M furthers the Company's expansion of our Security Products
Segment, and specifically the Electronic Surveillance Products Division. The
acquisition also expands our presence in the southwestern part of the United
States and provides us with new mass merchant opportunities, an active
e-commerce web site, a catalog sales channel and a high-end digital and fiber
optics camera product line. The purchase price for IVS and S&M consisted of
approximately $5.6 million of cash and the assumption of $280,000 of current
liabilities. The purchase was allocated as follows: approximately $1.86 million
for inventory; $1.37 million for accounts receivable; $100,000 for equipment;
and the remainder of $2.57 million allocated to goodwill and other intangible
assets. Of the $2.57 million of acquired intangible assets, $830,000 was
assigned to registered trademarks and $521,000 was assigned to goodwill, neither
of which is subject to amortization expense. The remaining intangible assets
were assigned to customer lists for $630,000 and product lists for $590,000.
Customer and product lists were assigned a useful life of 10 years. The
acquisition was accounted for as a business combination in accordance with SFAS
No. 141, Business Combinations.
The proforma financial information presented below gives effect to the IVS and
S&M acquisition as if it had occurred as of the beginning of our fiscal year
2003. The information presented below is for illustrative purposes only and is
not necessarily indicative of results that would have been achieved if the
acquisition actually had occurred as of the beginning of 2003 or results which
may be achieved in the future. Unaudited proforma financial information is as
follows (in thousands, except per shares amounts):
9
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenues $ 16,647 $ 17,027 $ 52,361 $ 53,679
Net (loss) income $ (229) $ 115 $ 115 $ 807
Earnings per share-basic and
dilutive $ (0.02) $ 0.01 $ 0.01 $ 0.07
On August 3, 2004, the Company sold an exterior-only car wash facility in New
Jersey. Proceeds from the sale of this facility, which was producing marginal
cash flow, were approximately $645,000; slightly more than the site's net book
value.
On September 26, 2003, a wholly owned subsidiary within the Company's Security
Products Segment acquired the inventory, certain other assets and the operations
of Vernex, Inc., a manufacturer and retailer of electronic security monitors.
Total consideration under the agreement was $213,000 cash for inventory and the
issuance of 42,747 registered shares of the Company's common stock. This
transaction was accounted for using the purchase method of accounting in
accordance with SFAS 141, Business Combinations.
5. STOCK BASED COMPENSATION
The Company accounts for stock options under Statement of Financial Accounting
Standards ("SFAS") 123, Accounting for Stock-Based Compensation, as amended by
SFAS 148, which contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures compensation cost at the
grant date based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period. Alternatively,
SFAS 123 permits entities to continue accounting for employee stock options and
similar equity instruments under Accounting Principles Board ("APB") Opinion 25,
Accounting for Stock Issued to Employees. Entities that continue to account for
stock options using APB Opinion 25 are required to make pro forma disclosures of
net income and earnings per share as if the fair value-based method of
accounting defined in SFAS 123 had been applied.
At September 30, 2004, the Company had two stock based employee compensation
plans. The Company accounts for the plans under the recognition and measurement
principles of APB 25, Accounting for Stock Issued to Employees, and related
interpretations. Stock-based employee compensation costs are not reflected in
net income, as all options granted under the plan had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share as
if the Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
------- ------- ----- -------
Net (loss) income, as reported $ (229) $ (182) $ (26) $ 72
Less: Stock-based compensation costs under
fair value based method for all awards (92) (151) (255) (307)
------- ------- ------ -------
Pro forma net loss $ (321) $ (333) $ (281) $ (235)
======= ======= ====== =======
Earnings per share - basic
As reported $ (0.02) $ (0.01) $ - $ 0.01
Pro forma $ (0.02) $ (0.03) $(0.02) $ (0.02)
Earnings per share - diluted
As reported $ (0.02) $ (0.01) $ - $ 0.01
Pro forma $ (0.02) $ (0.03) $(0.02) $ (0.02)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions for grants in the quarter ended September 30, 2003: expected
volatility of 22%; risk-free interest rates ranging from 3.74% to 4.45%; and
expected life of 10 years. During the third quarter of 2004, 252,500 options
were
10
granted with expected volatility of 64%, risk-free interest rates ranging from
4.19% to 4.56%, and expected life of 10 years.
6. COMMITMENTS AND CONTINGENCIES
In July 2002, the Company and its former president, Jon Goodrich, were named as
defendants in a lawsuit in the Supreme Court of New York County of the State of
New York filed by Armor Holdings, et al. The suit alleged that the Company and
Mr. Goodrich had violated the non-compete terms of various agreements entered
into in April 1998, which transferred certain of the Company's then lines of
business to the plaintiff. This suit was dismissed by the plaintiff without
payment.
In December 2003, one of the Company's car wash subsidiaries was named as a
defendant in a suit filed by Kristen Sellers in the Circuit Court of the Twelfth
Judicial Circuit in and for Sarasota County, Florida. The suit alleges that the
plaintiff is entitled to damages in excess of $15,000 due to psychological
injury and emotional distress sustained when an employee of the car wash
allegedly assaulted Ms. Sellers with sexually explicit acts and words. The
Company's subsidiary is alleged to have been negligent in hiring, retaining and
supervising the employee. The Company forwarded the suit to its insurance
carrier for defense. The plaintiff has communicated that the case could be
settled for $95,000.
The Company has produced documents requested in a subpoena issued in connection
with an investigation that was conducted by the United States Securities and
Exchange Commission of possible securities law violations. The subpoena was
issued on October 27, 2003. The Company has produced all documents that were
requested and has not been contacted by the United States Securities and
Exchange Commission regarding the investigation since February, 2004. The
Company intends to fully cooperate with the United States Securities and
Exchange Commission's investigation.
On July 20, 2004, the Company received a letter from the United States
Securities and Exchange Commission. This letter requested that the Company
voluntarily provide information and documents relating to Price Legacy
Corporation's sale of 1,875,000 shares of the Company's common stock on the open
market in April, 2004 and Price Legacy Corporation's payment of $8.95 million to
the Company in exchange for the Company removing a sales restriction from
1,750,000 of the shares that were sold. The Company supplied the information in
August of 2004. The Company has not been contacted by the Securities and
Exchange Commission since supplying the information. The Company intends to
fully cooperate with the United States Securities and Exchange Commission in
this matter.
The Company is a party to various other legal proceedings related to its normal
business activities. In the opinion of the Company's management, none of these
proceedings is material in relation to the Company's results of operations,
liquidity, cash flows or financial condition.
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.
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, in all
material respects, with all applicable laws relating to its business.
The employment agreement of the Company's Chief Executive Officer, Louis D.
Paolino, Jr., entitles Mr. Paolino to receive a fee of $2.5 million upon
termination of employment under certain conditions. The employment agreement
also provides for a bonus of $2.5 million upon a change in control.
7. BUSINESS SEGMENTS INFORMATION
The Company currently operates in two segments: the Car and Truck Wash Segment,
supplying complete car care services (including wash, detailing, and lube
services), fuel, and merchandise sales; and the Security Products Segment. The
Security Products Segment is comprised of two operating divisions; the
Electronic Surveillance Products Division and Consumer Products Division. The
Consumer Products Division designs, markets and sells personal protection
consumer products for use in home and automobile. The Electronic Surveillance
Products Division designs, markets and sells cameras, digital video recorders
(DVR's), and monitors.
11
Financial information regarding the Company's segments is as follows (in
thousands):
CAR AND SECURITY CORPORATE
TRUCK WASH PRODUCTS FUNCTIONS *
------------- ------------- ------------
THREE MONTHS ENDED SEPTEMBER 30, 2004
Revenues from external customers $ 9,789 $ 6,858 $ -
Intersegment revenues $ - $ 30 $ -
Segment operating income (loss) $ 912 $ (85) $ (829)
Segment assets $ 88,568 $ 18,548 $ -
Goodwill $ 10,381 $ 921 $ -
Capital Expenditures $ 389 $ 2,087 $ -
NINE MONTHS ENDED SEPTEMBER 30, 2004
Revenues from external customers $ 31,191 $ 10,737 $ -
Intersegment revenues $ - $ 35 $ -
Segment operating income (loss) $ 3,621 $ (150) $ (2,338)
Capital Expenditures $ 739 $ 3,635 $ 3
THREE MONTHS ENDED SEPTEMBER 30, 2003
Revenues from external customers $ 10,290 $ 1,607 $ -
Intersegment revenues $ - $ - $ -
Segment operating income (loss) $ 728 $ 29 $ (641)
Capital Expenditures $ 215 $ 31 $ 2
NINE MONTHS ENDED SEPTEMBER 30, 2003
Revenues from external customers $ 32,936 $ 3,889 $ -
Intersegment revenues $ - $ 22 $ -
Segment operating income (loss) $ 3,380 $ (14) $ (1,986)
Capital Expenditures $ 604 $ 106 $ 2
* Corporate functions include the corporate treasury, legal, financial
reporting, information technology, corporate tax, corporate insurance,
human resources, investor relations, and other typical centralized
administrative functions.
8. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, as well as the disclosure of contingent
assets and liabilities at the date of its financial statements. The Company
bases its estimates on historical experience, actuarial valuations and various
other factors that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Some of
those judgments can be subjective and complex, and consequently, actual results
may differ from these estimates under different assumptions or conditions. We
must make these estimates and assumptions because certain information that we
use is dependent on future events and cannot be calculated with a high degree of
precision from the data currently available. Such estimates include the
Company's estimates of reserves such as the allowance for doubtful accounts,
inventory valuation allowances, insurance losses and loss reserves, valuation of
long-lived assets, estimates of realization of income tax net operating loss
carryforwards, as well as valuation calculations such as the Company's goodwill
impairment calculations under the provisions of SFAS 142, Goodwill and Other
Intangible Assets.
9. INCOME TAXES
The Company recorded income tax (benefit) expense of $(15,000) and $42,000 for
the nine months ended September 30, 2004 and 2003, respectively. Income tax
(benefit) expense reflects the recording of income taxes on (loss) income at an
effective rate of approximately 36% in both 2004 and 2003. 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, fixed asset
adjustments and changes to the valuation allowance. During the quarter ended
June 30, 2004, the Company received a payment of $8.95 million for the removal
of a restriction on certain outstanding shares of the Company's stock (see Note
11, Equity). Although the transaction is taxable for Federal and State income
tax purposes, no current or deferred income tax expense is reflected on the
accompanying income
12
statement due to the recording of the transaction as a contribution to capital,
net of income tax of $3.2 million. Although the Company has sufficient Federal
net operating losses available to fully offset the taxable income generated from
this event, a tax liability of $179,000 has been recorded for Federal
Alternative Minimum Tax purposes. Additionally, a $150,000 liability has been
recorded for New Jersey Corporate income tax due to that state's 50% net
operating loss limitation.
10. RELATED PARTY TRANSACTIONS
Effective August 1, 2000, Mace entered into a five-year lease with Bluepointe,
Inc., a corporation fifty percent owned by Louis D. Paolino, Jr., Mace's
Chairman, Chief Executive Officer and President and fifty percent owned by Mr.
Paolino's father Louis D. Paolino, Sr. The lease was for Mace's executive
offices in Mt. Laurel, New Jersey. Bluepointe, Inc. sold the building to an
unrelated party in May, 2004. The lease terms, which were assumed by the new
owner, were subject to a survey of local real estate market pricing and approval
by the Company's Audit Committee and provide for an initial monthly rental
payment of $15,962, which increases by 5% per year in the third through fifth
years of the lease. Mace believes that the terms of this lease (based on an
annual rate of $19.00 per square foot) were competitive when the lease was
executed.
From November, 2001 through July 2002, the Company prepaid LP Learjets, LLC
$5,109 per month for the right to use a Learjet 31A for 100 hours per year. LP
Learjects, LLC is a company owned by Louis D. Paolino, Jr., the Company's
Chairman, Chief Executive Officer and President. When the Learjet 31A is used,
the prepaid amount is reduced by the hourly usage charge as approved by the
Audit Committee, and the Company pays to third parties unaffiliated with Louis
D. Paolino, Jr., the direct costs of the Learjet's per-hour use, which include
fuel, pilot fees, engine insurance and landing fees. The balance of unused
prepaid flight fees total $31,659 at September 30, 2004.
From February 2000 through April 2002, the Company and Mark Sport, Inc. ("Mark
Sport") were parties to a Management Agreement. Mark Sport is a Vermont
corporation controlled by Jon E. Goodrich, a former director and current
employee of the Company. Mr. Goodrich was a director from December 1987 through
December 2003. Under the Management Agreement, as amended, Mark Sport operated
the Company's Security Products Segment and received all profits or losses from
January 1, 2000 to April 30, 2002 in exchange for certain payments to the
Company. At March 31, 2004, Mark Sport owed the Company $127,000 in payments
under the Management Agreement. In April 2004, the outstanding balance owed by
Mark Sport to the Company was paid in full.
The Company's Consumer Products Division leases manufacturing and office space
under a five-year lease with Vermont Mill, Inc. ("Vermont Mill"), which provides
for monthly lease payments of $9,167 through November 2004. Vermont Mill is
controlled by Jon E. Goodrich, a former director and current employee of the
Company. The Company has exercised an option to continue the lease through
November 2009. The rent will increase by a CPI factor in November 2004. The
Company believes that the lease rate is lower than lease rates charged for
similar properties in the Bennington, Vermont area. On July 22, 2002, the lease
was amended to provide Mace the option and right to cancel the lease with proper
notice and a payment equal to six months of the then current rent for the leased
space occupied by Mace. Additionally, 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%. At March 31, 2004, the balance owed on this
promissory note was $82,100. In April 2004, the balance on the promissary note
was paid in full.
From January 1, 2003 through September 30, 2004, the Company's Electronic
Surveillance Products Division sold approximately $155,000 of electronic
security equipment to two companies, each of which Louis Paolino, III, the son
of the Company's CEO, Louis D. Paolino, Jr., is a partial owner. The pricing
extended to these companies is no more favorable than the pricing given to third
party customers who purchase in similar volume. At September 30, 2004, the
balance owed from these companies to Mace was approximately $11,000.
11. EQUITY
On April 16, 2004, the Company received approximately $8.95 million in cash from
Price Legacy Corporation (formerly Excel Legacy Holdings, Inc.) in exchange for
the Company removing a contractual restriction that prohibited Price Legacy
Corporation from selling 1,750,000 shares of the Company's common stock without
the Company's approval. The Company recorded this transaction as a contribution
to capital, net of related income taxes, in accordance with APB Opinion No. 9.
The proceeds will be used as part of working capital. Price Legacy Corporation
purchased 125,000 restricted shares in July of 1999 and received 1,750,000
shares in October of 1999 in a transaction in which the Company purchased the
car wash assets of Millennia Car Wash, LLC. Additionally, as part of the
agreement, the Company agreed to indemnify Price Legacy Corporation against
certain potential circumstances as a result of lifting the restriction.
Management believes the fair value of this provision is negligible.
13
On April 20, 2004, the Company purchased a 20,000 square foot facility in Fort
Lauderdale, Florida, to serve as its regional headquarters for the Electronic
Surveillance Products Division. Consideration for the facility consisted of
250,000 registered shares of the Company's common stock.
The Master Facility Agreement between the Company and Fusion Capital Fund II,
LLC ("Fusion") and the Equity Purchase Agreement between the Company and Fusion
is terminated. Under the Master Facility Agreement, the Company had entered in
to an Equity Purchase Agreement on April 17, 2000. Under the Equity Purchase
Agreement, Fusion had the right and obligation to purchase up to $10 million of
the Company's common stock under certain conditions. On April 21, 2004, the
Company and Fusion entered into a termination and release agreement under which
the Company sold Fusion 150,000 registered shares of the Company's common stock
at $2.32 per share and terminated the Equity Purchase Agreement.
On May 26, 2004, the Company completed a stock sale of 915,000 shares of the
Company's common stock at a price of $5.47 per share to a private institution
for a total capital investment of $5,005,050. Under the terms of the sale
agreement, Mace also granted to the private institution a warrant dated May 26,
2004 to purchase 183,000 shares of the Company's common stock at a strike price
of $7.50 per share exercisable immediately through its expiration date of May
26, 2009. The shares were sold in a private transaction under Regulation D of
the Securities Act of 1933. Mace was obligated to register the shares for resale
within 125 days. The shares were registered on September 28, 2004. The proceeds
of this transaction strengthened the Company's capital structure and provide
additional cash for the development of new electronic surveillance products,
future growth strategies and general working capital.
On July 29, 2004, the Company's Board of Directors authorized a Stock Buy Back
Plan to purchase shares of the Company's common stock up to a maximum value of
$3.0 million. Purchases will be made in the open market if and when management
decides to effect purchases. Management may elect not to make purchases or to
make purchases less than $3.0 million in amount. As of November 10, 2004, the
Company did not purchase any shares on the open market.
12. LONG-TERM DEBT, NOTE PAYABLE, AND CAPITAL LEASE OBLIGATIONS
At September 30, 2004, we had borrowings, including capital lease obligations,
of approximately $29.9 million. We had letters of credit outstanding at
September 30, 2004, totaling $908,000 as collateral relating to workers'
compensation insurance policies. We maintain a $500,000 revolving credit
facility, subject to an availability calculation based on inventory and accounts
receivable, to provide financing for additional electronic surveillance product
inventory purchases. There were no borrowings outstanding under the revolving
credit facility at September 30, 2004.
Several of our debt agreements, as amended, contain certain affirmative and
negative covenants and require the maintenance of certain levels of tangible net
worth, maintenance of certain unencumbered cash and marketable securities
balances, and the maintenance of certain debt service coverage ratios on a
consolidated level. At September 30, 2004, we were not in compliance with our
consolidated debt service coverage ratios related to our General Motors
Acceptance Corp. ("GMAC") notes payable and Bank One notes payable. With respect
to the GMAC notes payable, the Company has received a waiver of acceleration
related to the non-compliance with the debt service coverage ratio covenant at
September 30, 2004 and for measurement periods through October 1, 2005 and,
accordingly, a portion of the GMAC notes payable were reflected as non-current
in our financial statements at September 30, 2004. Additionally, the Company has
entered into amendments to the Bank One term loan agreements effective March 31,
2004. The amended debt coverage ratio with Bank One requires the Company to
maintain a consolidated earnings before interest, income taxes, depreciation and
amortization ("EBITDA") to debt service (collectively " the debt service
coverage ratio") of 1.05 to 1 at September 30, 2004 and December 31, 2004. The
Company's debt service coverage ratio was .96 to 1 at September 30, 2004 and
accordingly was not in compliance with this Bank One covenant at September 30,
2004 as amended. The Company received a waiver of acceleration with respect to
this debt service coverage ratio from Bank One through October 1, 2005 and,
accordingly, a portion of the Bank One notes payable were reflected as
non-current in our financial statements at September 30, 2004. The Bank One
amendment also requires the maintenance of a minimum total unencumbered cash and
marketable securities balance of $5 million. This cash balance requirement will
be lowered to $1 million upon the Company returning to a debt service coverage
ratio of at least 1.10 to 1. Additionally, the Bank One Agreement contains a
prohibition on incurring additional debt for borrowed money without the approval
of Bank One. The Company must demonstrate that the cash flow benefit from the
use of new loan proceeds exceeds the resulting future debt service requirements.
The Company sold or closed five unprofitable or marginally profitable car wash
facilities and a lube facility in 2003 and the first nine months of 2004 and
increased its prices in March 2004 within the Car and Truck Wash Segment to help
improve cash flows for fiscal 2004. If our future cash flows are less than
expected or debt service including interest expense increases more than expected
causing us to further default on any of the Bank One covenants or the GMAC
covenant in the future, the Company will need to obtain further amendments or
waivers from these lenders. If the Company is unable to obtain waivers or
amendments
14
in the future, Bank One debt currently totaling $14.7 million and/or GMAC debt
currently totaling $11.0 million, including debt recorded as long-term debt at
September 30, 2004 would become payable on demand upon expiration of the current
waivers.
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Numerator:
Net (loss) income ........................ $ (229) $ (182) $ (26) $ 72
============ ============ ============ ============
Denominator:
Denominator for basic (loss) income
per share - weighted average
shares ............................ 14,213,656 12,412,189 13,386,621 12,409,747
Dilutive effect of options and
warrants .......................... - - - 13,205
------------ ------------ ------------ ------------
Denominator for diluted
(loss) income per share -
weighted average shares ........... 14,213,656 12,412,189 13,386,621 12,422,952
============ ============ ============ ============
Basic and diluted (loss) income per share:
Net (loss) income ........................ $ (0.02) $ (0.01) $ - $ 0.01
============ ============ ============ ============
The effect of options and warrants for periods in which we incurred a net loss
have not been included as they would be anti-dilutive. The dilutive effect of
options and warrants excluded were 1,266,281, 33,330, and 696,258 for the three
months ended September 30, 2004 and 2003 and the nine months ended September 30,
2004, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE NOTES
THERETO INCLUDED IN THIS FORM 10-Q.
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 report 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.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based upon the Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States
15
of America. The preparation of these financial statements requires the Company
to make estimates and judgments that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities at the date of the Company's financial statements. Management
bases its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The Company's
critical accounting policies are described below.
REVENUE RECOGNITION
Revenues from the Company's Car and Truck Wash Segment are recognized, net of
customer coupon discounts, when services are rendered or fuel or merchandise is
sold. The Company records a liability for gift certificates, ticket books, and
seasonal and annual passes sold at its car care locations but not yet redeemed.
The Company estimates these unredeemed amounts based on gift certificate and
ticket book sales and redemptions throughout the year as well as utilizing
historical sales and tracking of redemption rates per the car washes'
point-of-sale systems. Seasonal and annual passes are amortized on a
straight-line basis over the time during which the passes are valid.
Revenues from the Company's Security Products Segment are recognized when
shipments are made, or for export sales when title has passed. Shipping and
handling charges billed are included in revenues; the cost of which is included
in cost of revenues.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we periodically review the carrying value of our long-lived
assets held and used, and assets to be disposed of, when events and
circumstances warrant such a review. If significant events or changes in
circumstances indicate that the carrying value of an asset or asset group may
not be recoverable, we perform a test of recoverability by comparing the
carrying value of the asset or asset group to its undiscounted expected future
cash flows. Cash flow projections are sometimes based on a group of assets,
rather than a single asset. If cash flows cannot be separately and independently
identified for a single asset, we will determine whether an impairment has
occurred for the group of assets for which we can identify the projected cash
flows. If the carrying values are in excess of undiscounted expected future cash
flows, we measure any impairment by comparing the fair value of the asset group
to its carrying value. If the fair value of an asset or asset group is
determined to be less than the carrying amount of the asset or asset group, an
impairment in the amount of the difference is recorded.
GOODWILL
In accordance with SFAS 142, the Company completed annual impairment tests as of
November 30, 2003, and 2002, and will be subject to an impairment test each year
thereafter and whenever there is an impairment indicator. The Company's annual
impairment testing corresponds with the Company's determination of its annual
operating budgets for the upcoming year. The Company's valuation of goodwill is
based on a discounted cash flow model applying an appropriate discount rate to
future expected cash flows and management's annual review of historical data and
future assessment of certain critical operating factors, including, car wash
volumes, average car wash and detailing revenue rates per car, wash and
detailing labor cost percentages, weather trends and recent and expected
operating cost levels. Estimating cash flows requires significant judgment
including factors beyond our control and our projections may vary from cash
flows eventually realized. Adverse business conditions could impair
recoverability of goodwill in the future and accordingly, the Company may record
impairments in this or subsequent years. Weather, particularly in our Northeast
and Texas Regions, continues to negatively influence our year to date operating
results. This negative influence may affect our future cash flow assumptions
during our annual goodwill impairment testing at November 30, 2004, potentially
resulting in further goodwill impairment charges.
OTHER INTANGIBLE ASSETS
Other intangible assets consist primarily of deferred financing costs, customer
lists, product lists, trademarks, and a registered national brand name. Prior to
2002, our trademarks and brand name were amortized on a straight line basis over
15 years. In accordance with SFAS 142, Goodwill and Other Intangible Assets, our
trademarks and brand name are considered to have indefinite lives, and as such,
are no longer subject to amortization. These assets are tested for impairment
using discounted cash flow methodology annually and whenever there is an
impairment indicator. Estimating future cash flows requires significant
16
judgment and projections may vary from cash flows eventually realized. Several
impairment indicators are beyond our control, and cannot be predicted with any
certainty whether or not they will occur. Deferred financing costs are amortized
on a straight-line basis over the terms of the respective debt instruments.
Customer lists, product lists, and non-compete agreements are amortized on a
straight-line basis over their respective estimated useful lives.
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 income 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 income tax assets will not be realized.
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid on all indebtedness was approximately $1.4 million and $1.5
million for the nine months ended September 30, 2004 and 2003, respectively.
Income taxes paid were approximately $231,000 and $132,000 for the nine months
ended September 30, 2004 and 2003, respectively. Noncash investing and financing
activities of the Company excluded from the statement of cash flows include a
property addition financed by common stock of $1.6 million, real estate
partially funded by a mortgage of approximately $825,000, and the sale of
property and simultaneous pay down of a related mortgage of $325,000, all in
2004.
INTRODUCTION
REVENUES
CAR AND TRUCK WASH 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
nine months ended September 30, 2004 for the Car and Truck Wash Segment were
comprised of approximately 81% car wash and detailing 9% lube and other
automotive services, and 10% fuel and merchandise.
The majority of revenues from our Car and Truck Wash Segment are collected in
the form of cash or credit card receipts, thus minimizing customer accounts
receivable.
Weather has had and continues to have a significant impact on volume, and
therefore revenue, at the individual locations. We believe that the geographic
diversity of our operating locations helps mitigate the risk and impact of
adverse weather-related influence on our volume.
SECURITY PRODUCTS
Prior to the acquisition of Micro-Tech, the Company operated its Security
Products Segment solely as the Consumer Products Division. The Company's
Consumer Products operations manufacture and market personal security, and home
and auto security products which are sold through retail stores, major discount
stores, domestic and international distributors, and at the Company's car care
facilities.
With the acquisition on August 12, 2002 of certain of the assets and operations
of Micro-Tech, a manufacturer and retailer of electronic security and
surveillance devices, the Company added an additional division to its Security
Products Segment. The Company has added security cameras, closed-circuit
monitors, digital video recording devices and related electronic security
components (the Company's "Electronic Surveillance Products Division") to its
line of well-known personal security products. The Company's Electronic
Surveillance Products Division was further expanded in July of 2004 with the
acquisition of Industrial Vision Source ("IVS") and SecurityandMore ("S&M").
IVS is a distributor of technologically advanced imaging components and video
equipment and S&M supplies video surveillance and security equipment. The
Company's electronic security products are manufactured to our specifications
principally in Korea, China, and other foreign countries, and are labeled,
packaged, and shipped ready for sale, to our warehouses in Ft. Lauderdale,
Florida and Farmers Branch, Texas.
17
COST OF REVENUES
CAR AND TRUCK WASH SERVICES
Cost of revenues consists primarily of direct labor and related taxes and
benefits, certain insurance costs, chemicals, wash and detailing supplies, rent,
real estate taxes, utilities, car damages resulting from our services,
maintenance and repairs of equipment and facilities, as well as the cost of the
fuel and merchandise sold.
SECURITY PRODUCTS
Cost of revenues within the Security Products Segment consists primarily of
costs to purchase or manufacture the security products including direct labor
and related taxes and benefits, and raw material costs. Product warranty costs
related to the electronic security surveillance products business have been
minimal in that the majority of customer product warranty claims are reimbursed
by the supplier.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses consist primarily of
management, clerical and administrative salaries, professional services,
insurance premiums, sales commissions, and other costs relating to marketing and
sales.
We capitalize direct incremental costs associated with acquisitions. Indirect
acquisition costs, such as executive salaries, corporate overhead, public
relations, and other corporate services and overhead are expensed as incurred.
The Company also charges as an expense any expenditures relating to proposed
acquisitions that will not be consummated. At September 30, 2004, the Company
had approximately $25,000 of capitalized costs related directly to proposed
acquisitions that were not yet consummated.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization consists primarily of depreciation of buildings
and equipment, and amortization of certain intangible assets. Buildings and
equipment are depreciated over the estimated useful lives of the assets using
the straight-line method. Intangible assets, other than goodwill or intangible
assets with indefinite useful lives, are amortized over their useful lives
ranging from three to 15 years, using the straight-line method. With the
adoption of SFAS 142 on January 1, 2002, we no longer amortize goodwill and
certain intangible assets, namely trademarks and service marks, determined to
have indefinite useful lives.
OTHER INCOME
Other income consists primarily of rental income received on renting out excess
space at our car wash facilities and includes gains and losses on the sale of
property and equipment.
INCOME TAXES
Income tax (benefit) expense is derived from tax provisions for interim periods
that are based on the Company's estimated annual effective rate. Currently, the
effective rate differs from the federal statutory rate primarily due to state
and local income taxes, non-deductible costs related to acquired intangibles,
fixed asset adjustments and changes to the valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Cash and cash equivalents were $12.0 million at September 30, 2004. The ratio of
our total debt to total capitalization, which consists of total debt plus
stockholders' equity, was 30% at September 30, 2004, and 37% at December 31,
2003. The improvements in the Company's cash position and total debt to total
capitalization ratio are directly related to equity infusions as noted below.
18
Our business requires a substantial amount of capital, most notably to pursue
our expansion strategies, including our current expansion in the electronic
surveillance products business, and for equipment purchases and upgrades for our
Car and Truck Wash Segment. We plan to meet these capital needs from various
financing sources, including borrowings, internally generated funds, and the
issuance of common stock if the market price of the Company's stock is at a
desirable level.
As of September 30, 2004, we had working capital of approximately $14.3 million.
At December 31, 2003, working capital was approximately $270,000 including cash
and cash equivalents of $3.4 million. The significant improvement in working
capital at September 30, 2004 is primarily attributable to: 1) $8.95 million of
proceeds received from the removal of a restriction on outstanding shares of the
Company's common stock; 2) $5.0 million of proceeds, net of issuance costs, from
the sale of 915,000 shares of the Company's common stock to a private
institution and the sale of 150,000 shares of the Company's stock to Fusion
under a Master Facility Agreement; 3) $1.8 million of proceeds from the exercise
of common stock options; and 4) $795,000 of proceeds from the sale of an
exterior-only car wash in New Jersey and a full-service car wash in Arizona.
Working capital was also positively affected by the renewal and reclassification
to non-current liabilities of approximately $3.2 million of 15-year amortizing
loans with Bank One. The above was partially offset by the use of $5.6 million
of cash for the acquisition of IVS and S&M on July 1, 2004; capital expenditure
investments to further growth within the Car and Truck Wash Segment and the
Security Products Segment, as more fully detailed below; and the
reclassification to current liabilities of an additional loan for $290,000 which
is up for renewal in April, 2005. The Company intends to renew this loan with
the current lender. Although the Company has been successful in renewing similar
loans with the current lender in the past, including the renewal of loans in
2003 totaling $6.4 million and renewal of $3.2 million of loans in the first
nine months of 2004, there can be no assurance that our lender will continue to
provide us with renewals or with renewals at favorable terms.
During the nine month periods ending September 30, 2004 and 2003, we made
capital expenditures of $739,000 and $604,000, respectively, within our Car and
Truck Wash Segment. We estimate aggregate capital expenditures for our Car and
Truck Wash Segment, exclusive of acquisitions of businesses, of approximately
$900,000 for the year ending December 31, 2004. The Company believes its current
cash balance at September 30, 2004 of $12.0 million and cash flow from operating
activities in the remainder of 2004 will be sufficient to meet its car wash
capital expenditure funding needs through at least the next twelve months. In
years subsequent to 2004, we estimate that our Car and Truck Wash Segment will
require annual capital expenditures of $500,000 to $1 million. Capital
expenditures within our Car and Truck Wash Segment are necessary to maintain the
efficiency and competitiveness of our sites. If the cash provided from operating
activities does not improve in 2005 and future years and if current cash
balances are depleted, we will need to raise additional capital to meet these
ongoing capital requirements.
We have spent approximately $4.9 million through June 30, 2004 in developing our
Electronic Surveillance Products Division, including the acquisition costs of
Micro-Tech and Vernex and the cost of developing and purchasing inventory for
our expanded product line. Additionally, on July 1, 2004 the Company paid
approximately $5.6 million of cash for the acquisition of the S&M and IVS
security operations. We also made capital expenditures of approximately $1.9
million for the purchase and furnishing of a new facility in the Dallas, Texas
area for our newly acquired S&M and IVS security operations. Approximately
$825,000 of the Dallas, Texas area facility purchase price was financed. We
estimate capital expenditures for the Security Products Segment at approximately
$100,000 for the remainder of 2004, principally related to improvements for the
new facilities in Dallas, Texas and Ft. Lauderdale, Florida. We intend to
continue to expend significant cash for the purchasing of inventory as we grow
and introduce new electronic surveillance products in 2004 and for years
subsequent to 2004. The amount of capital that we will spend in 2004 and in
years subsequent to 2004 is largely dependent on the marketing success we
achieve in our Electronic Surveillance Products Division. We anticipate that
inventory purchases will be funded from cash collected from sales and working
capital. At September 30, 2004, we maintained an unused $500,000 revolving
credit facility with Bank One to provide financing for additional electronic
surveillance product inventory purchases. This revolving credit facility is
subject to an availability calculation based on inventory and accounts
receivable (as defined in our bank agreement). Based upon availability
calculations at September 30, 2004, the full amount of the revolving credit
facility is currently available. We believe our cash balance of $12.0 million at
September 30, 2004 and the revolving credit facility will provide for growth in
2004 and 2005. Unless our operating cash flow improves, our growth will be
limited if we deplete our cash balance.
In the past, we have been successful in obtaining financing by selling common
stock and obtaining mortgage loans. Our ability to obtain new financing can be
adversely impacted by our stock price. Our failure to maintain the required
current debt service coverage ratios on existing loans also adversely impacts
our ability to obtain additional financing. We are reluctant to sell common
stock at market prices below our per share book value. For the twelve month
period ended September 30, 2004 we would have been in default on certain of our
debt covenants had we not obtained waivers. Our ability to obtain new financing
will be limited if our stock price is not above our per share book value and our
cash from operating activities does not improve. Currently, the Company cannot
incur additional long term debt without the approval of its commercial lenders.
The Company must demonstrate
19
that the cash flow benefit from the use of new loan proceeds exceeds the
resulting future debt service requirements.
DEBT CAPITALIZATION AND OTHER FINANCING ARRANGEMENTS
At September 30, 2004, we had borrowings, including capital lease obligations,
of approximately $29.9 million. We had three letters of credit outstanding at
September 30, 2004, totaling $908,000 as collateral relating to workers'
compensation insurance policies. We maintain a $500,000 revolving credit
facility, subject to an availability calculation based on inventory and accounts
receivable, to provide financing for additional electronic surveillance product
inventory purchases. There were no borrowings outstanding under the revolving
credit facility at September 30, 2004.
Several of our debt agreements, as amended, contain certain affirmative and
negative covenants and require the maintenance of certain levels of tangible net
worth, maintenance of certain unencumbered cash and marketable securities
balances, and the maintenance of certain debt service coverage ratios on a
consolidated level. At September 30, 2004, we were not in compliance with our
consolidated debt service coverage ratios related to our GMAC notes payable and
Bank One notes payable.
With respect to the GMAC notes payable, the Company has received a waiver of
acceleration related to the non-compliance with the debt service coverage ratio
covenant at September 30, 2004 and for measurement periods through October 1,
2005. Additionally, the Company has entered into amendments to the Bank One term
loan agreements effective March 31, 2004. The amended debt coverage ratio with
Bank One requires the Company to maintain a consolidated earnings before
interest, income taxes, depreciation and amortization ("EBITDA") to debt service
(collectively " the debt service coverage ratio") of 1.05 to 1 at September 30,
2004 and December 31, 2004. The Company's debt service coverage ratio was .96 to
1 at September 30, 2004 and accordingly was not in compliance with this Bank One
covenant at September 30, 2004 as amended. The Company received a waiver of
acceleration with respect to this debt service coverage ratio from Bank One
through October 1, 2005. The Bank One amendment also requires the maintenance of
a minimum total unencumbered cash and marketable securities balance of $5
million. This cash balance requirement will be lowered to $1 million upon the
Company returning to a debt coverage ratio of at least 1.10 to 1.
The Company sold or closed five unprofitable or marginally profitable car wash
facilities and a lube facility in 2003 and the first nine months of 2004 and
increased its prices in March 2004 within the Car and Truck Wash Segment to help
improve cash flows for fiscal 2004. If our future cash flows are less than
expected or debt service including interest expense increases more than expected
causing us to further default on any of the Bank One covenants or the GMAC
covenant in the future, the Company will need to obtain further amendments or
waivers from these lenders. If the Company is unable to obtain waivers or
amendments in the future, Bank One debt currently totaling $14.7 million and
GMAC debt currently totaling $11.0 million, including debt recorded as long-term
debt at September 30, 2004, would become payable on demand upon expiration of
the current waivers.
The Company's ongoing ability to comply with its debt covenants under its credit
arrangements and refinance its debt depends largely on the achievement of
adequate levels of cash flow. Our cash flow has been and could continue to be
adversely affected by weather patterns, economic conditions, and the
requirements to fund our security business that we are attempting to grow. In
the event that non-compliance with the debt covenants should reoccur, the
Company would pursue various alternatives to attempt to successfully resolve the
non-compliance, which might include, among other things, seeking additional debt
covenant waivers or amendments, or refinancing debt with other financial
institutions. There can be no assurance that further debt covenant waivers or
amendments would be obtained or that the debt would be refinanced with other
financial institutions at favorable terms. If we are unable to obtain renewals
on maturing loans or refinancing of loans on favorable terms, our ability to
operate would be materially and adversely affected.
The Company is obligated under various operating leases, primarily for certain
equipment and real estate within the Car and Truck Wash Segment. Certain of
these leases contain purchase options, renewal provisions, and contingent
rentals for our proportionate share of taxes, utilities, insurance, and annual
cost of living increases.
20
The following are summaries of our contractual obligations and other commercial
commitments at September 30, 2004 (in thousands):
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------------
LESS THAN TWO TO THREE FOUR TO FIVE MORE THAN
CONTRACTUAL OBLIGATIONS (1) TOTAL ONE YEAR YEARS YEARS FIVE YEARS
-------------------------------- ------------ ------------- ------------- -------------- -------------
Long-term debt (2) $ 29,715 $ 2,675 $ 5,630 $ 12,275 $ 9,135
Capital leases (2) 213 117 96 - -
Minimum operating lease payments 3,915 1,047 1,235 648 985
------------ ------------- ------------- -------------- -------------
$ 33,843 $ 3,839 $ 6,961 $ 12,923 $ 10,120
============ ============= ============= ============== =============
AMOUNTS EXPIRING PER PERIOD
----------------------------------------------------------------------------
LESS THAN TWO TO THREE FOUR TO FIVE MORE THAN
OTHER COMMERCIAL COMMITMENTS TOTAL ONE YEAR YEARS YEARS FIVE YEARS
---------------------------- ------------ ------------- ------------- -------------- -------------
Line of credit (3) $ 500 $ 500 $ - $ - $ -
Standby letters of credit 908 908 - - -
------------ ------------- ------------- -------------- -------------
$ 1,408 $ 1,408 $ - $ - $ -
============ ============= ============= ============== =============
(1) Potential amounts for inventory ordered under purchase orders are
not reflected in the amounts above as they are typically cancelable
prior to delivery and, if purchased, would be sold within the normal
business cycle.
(2) Related interest obligations have been excluded from this maturity
schedule. Our interest payments for the next twelve month period,
based on current market rates, are expected to be approximately $1.9
million.
(3) There were no borrowings outstanding under the Company's line of
credit at September 30, 2004.
Mace currently employs Louis D. Paolino, Jr. as its President and Chief
Executive Officer under a three-year employment agreement dated August 12, 2003.
The principal terms of the employment agreement include: an annual salary of
$400,000; a car at a lease cost of $1,500 per month: provision for certain
medical and other employee benefits; prohibition against competing with Mace
during employment and for a three-month period following a termination of
employment; and a $2.5 million payment in the event that Mr. Paolino's
employment is terminated for certain reasons set forth in the employment
agreement. The termination payment is not due in the event of termination due to
death or disability or certain prohibited conduct, as more fully set forth in
the employment agreement. The termination payment is due if Mr. Paolino is
terminated for unsatisfactory job performance. The employment agreement also
entitles Mr. Paolino to a $2.5 million change-of-control bonus.
The Master Facility Agreement between the Company and Fusion Capital Fund II,
LLC ("Fusion") and the Equity Purchase Agreement between the Company and Fusion
has been terminated. Under the Master Facility Agreement, the Company had
entered into an Equity Purchase Agreement on April 17, 2000. Under the Equity
Purchase Agreement, Fusion had the right and obligation to purchase up to $10
million of the Company's common stock under certain conditions. On April 21,
2004, the Company and Fusion entered into a termination and release agreement
under which the Company sold Fusion 150,000 registered shares of the Company's
common stock at $2.32 per share and terminated the Equity Purchase Agreement.
CASH FLOWS
Operating Activities. Net cash provided by operating activities totaled $1.6
million for the nine months ended September 30, 2004 and $326,000 in the same
period in 2003. The Company generated approximately $263,000 in cash from
working capital accounts. The cash provided by working capital was mainly due to
an increase in accrued liabilities and accounts payable, offset by a growth in
the Company's inventory and accounts receivable balances. Accounts receivable
and inventory increased approximately $1.8 million and $2.9 million,
respectively from December 31, 2003 to September 30, 2004. The increase in
accounts receivable and inventory was due primarily to the acquisition of IVS
and S&M on July 1, 2004 and internal growth within our existing Ft. Lauderdale,
Florida based Electronic Security Products operation. The Company also incurred
$1.5 million of non-cash depreciation and amortization expense. Net cash
provided by operating activities totaled $326,000 for the nine months ended
September 30, 2003. Cash provided by operating activities in 2003 was impacted
primarily by reduced volume within the Car
21
and Truck Wash Segment due to above average inclement weather in the Company's
Texas and East operating regions and the purchasing of our initial inventory of
electronic surveillance products.
Investing Activities. Cash used in investing activities totaled $7.0 million for
the nine months ended September 30, 2004 which includes $5.6 million for the
acquisition of IVS and S&M, $739,000 for capital expenditures relating to
ongoing car care operations, and $1.3 million for the Security Products Segment.
These expenditures were partially offset by proceeds of approximately $795,000
received from the sale of an exterior-only car wash in New Jersey and a
full-service car wash in Arizona. Cash used in investing activities totaled
$726,000 for the nine months ended September 30, 2003 which includes $606,000
for capital expenditures relating to ongoing car care operations, and $106,000
for the Security Products Segment.
Financing Activities. Cash provided by financing activities was $13.9 million
for the nine months ended September 30, 2004 which includes $6.9 million of
proceeds from the issuance of common stock and the exercise of stock options and
$8.95 million of proceeds from the removal of restrictions on shares; partially
offset by routine principal payments on debt of $1.9 million. Cash used in
financing activities was $1.8 million for the nine months ended September 30,
2003 which reflects routine principal payments on debt of $1.8 million and
$14,000 for the purchase and retirement of shares of our common stock.
SEASONALITY AND INFLATION
The Company believes that its car washing and detailing operations are adversely
affected by periods of inclement weather. In particular, long periods of rain
and cloudy weather adversely affects our car wash volumes and related lube and
other automotive services as people typically do not wash their cars during such
periods. Additionally, extended periods of warm, dry weather, usually
encountered during the Company's third quarter, may encourage customers to wash
their cars themselves which also can adversely affect our car wash business. The
Company has attempted to mitigate the risk of unfavorable weather patterns by
having operations in diverse geographic regions. The Company also experiences a
seasonal reduction in volume during the third quarter within the Company's
Arizona and Florida regions as a result of a migration of a significant portion
of those areas' populations to cooler climates.
The Company believes that inflation and changing prices have not had, and are
not expected to have, a material adverse effect on its results of operations in
the near future.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2003
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2004 2003
----- -----
Revenues 100.0% 100.0%
Cost of revenues 73.0 72.8
Selling, general and administrative expenses 20.6 18.5
Depreciation and amortization 3.7 4.0
Asset impairment charge - 1.0
---- ---
Operating income 2.7 3.7
Interest expense, net (3.3) (4.0)
Other income 0.5 0.6
---- ---
(Loss) income before income taxes (0.1) 0.3
Income tax (benefit) expense - 0.1
---- ---
Net (loss) income (0.1)% 0.2%
==== ===
22
REVENUES
CAR AND TRUCK WASH SERVICES
Revenues for the nine months ended September 30, 2004 were $31.2 million as
compared to $32.9 million for the nine months ended September 30, 2003, a
decrease of $1.7 million or 5.2%. This decrease was primarily attributable to a
decrease in wash and detail services. Of the $31.2 million of revenues for the
nine months ended September 30, 2004, $25.4 million or 81% was generated from
car wash and detailing, $2.7 million or 9% from lube and other automotive
services, and $3.1 million or 10% from fuel and merchandise sales. Of the $32.9
million of revenues for the nine months ended September 30, 2003, $27.1 million
or 82% was generated from car wash and detailing, $3.1 million or 10% from lube
and other automotive services, and $2.7 million or 8% from fuel and merchandise
sales. The decrease in wash and detailing revenues was principally due to
closing or divesting of five of our car wash locations and a lube facility
during 2003 and the first nine months of 2004 and the accompanying reduction in
car volume; and continued unfavorable weather trends within the Northeast,
Florida, and Texas regions. Overall car wash volumes declined 10.5% in the first
nine months of 2004 as compared to the first nine months of 2003, including a
4.6% volume decline from the closing or divesting of car wash locations noted
above. Partially offsetting this decline in volume, the Company experienced an
increase in average wash and detailing revenue per car to $15.07 in 2004, from
$14.45 in 2003. This increase in average wash and detailing revenue per car was
the result of management's continued focus on aggressively selling detailing and
additional on-line car wash services combined with the effect of a price
increase in certain markets effective in March, 2004. The increase in fuel and
merchandise revenues is primarily the result of higher fuel prices and the
addition of higher quality merchandise in our car wash lobbies. Management
expects car wash volumes to increase as weather trends return to more historic
levels of inclement weather resulting in an improvement in car wash and
detailing revenue levels.
SECURITY PRODUCTS
Revenues for the nine months ended September 30, 2004 were $10.7 million
comprised of approximately $8.6 million from the Electronic Surveillance
Products Division and approximately $2.1 million from the Consumer Products
Division. Revenues for the nine months ended September 30, 2003 were
approximately $3.9 million, comprised of $1.8 million from the Electronic
Surveillance Products Division and $2.1 million from the Consumer Products
Division. The increase in revenues within the Electronic Surveillance Products
Division is due principally to growth in sales to security systems installers
and $4.5 million of sales generated by IVS and S&M, which were acquired in July
of 2004, and by Vernex, which was acquired in September 2003. Management expects
revenues to continue to increase in the Electronic Surveillance Products
Division as the Company expands its sales staff and marketing efforts. Included
in revenues from the Electronic Surveillance Products Division is approximately
$725,000 of revenue from a major discount retailer that is not expected to
reoccur in the fourth quarter of 2004.
COST OF REVENUES
CAR AND TRUCK WASH SERVICES
Cost of revenues for the nine months ended September 30, 2004 were $23.0
million, or 74% of revenues, with car washing and detailing costs at 72% of
respective revenues, lube and other automotive services costs at 77% of
respective revenues, and fuel and merchandise costs at 87% of respective
revenues. Cost of revenues for the nine months ended September 30, 2003 were
$24.6 million, or 75% of revenues, with car washing and detailing costs at 73%
of respective revenues, lube and other automotive services costs at 77% of
respective revenues, and fuel and merchandise costs at 88% of respective
revenues. Cost of revenues as a percent of revenues declined in 2004 as compared
to 2003, despite the reduction in wash and detail revenues, principally as a
result of a reduction in wash and detailing direct labor costs of approximately
$735,000, improved workers' compensation claims experience, and the cost saving
related to closing five unprofitable or marginally profitable car wash sites in
2003 and the first nine months of 2004. We expect cost of revenues as a percent
of revenues to decrease if car wash volumes improve.
SECURITY PRODUCTS
During the nine months ended September 30, 2004 cost of revenues were $7.65
million or 71% of revenues as compared to $2.2 million or 57% of revenues for
the nine months ended September 30, 2003. The increase in cost of revenues in
2004 is principally due to 1) the growth in the Electronic Surveillance Products
Division which has gross profit margins typically lower than the Consumer
Products Division; 2) an increase in sales of monitors, which are typically sold
at lower profit margins than other electronic surveillance equipment, 3) an
increase in sales to larger distributors and system installers at lower profit
margins to gain market share and; 4) the effect of an unfavorable physical
inventory adjustment at September 30, 2004 which was identified and
23
corrected by management subsequent to September 30, 2004. Management does not
expect the cost of revenues as a percent of revenues to increase substantially
from current levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the nine months ended September
30, 2004 were $8.6 million compared to $6.8 million for the same period in 2003.
SG&A expenses as a percent of revenues were 20.6% for the nine months ended
September 30, 2004 as compared to 18.5% in the same period in 2003. The increase
in SG&A costs is primarily the result of the growth in the Electronic
Surveillance Products Division which added $1.6 million of SG&A costs in 2004.
The SG&A cost increase in the Electronic Security Products Division was
comprised of $857,000 related to the S&M and IVS business, including $105,000 of
transition and integration costs, and increases in costs at the Company's
existing Electronic Security Products Division. These increases were in the
areas of marketing and selling costs, and administration personnel costs, as
additional staff was added to handle planned growth. These increases in costs
were partially offset by certain temporary cost saving measures initiated in
March 2004, including reductions in payroll and other administrative costs.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization totaled $1.5 million for the nine months ended
September 30, 2004 as compared to $1.5 million for the same period in 2003.
ASSET IMPAIRMENT CHARGE
In accordance with SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we periodically review the carrying value of our long-lived
assets held and used and assets to be disposed of for possible impairment when
events and circumstances warrant such a review. During the quarter ended June
30, 2003, we fully wrote down assets determined to be impaired by approximately
$351,000. The asset write-down related to a full service car wash site in
Arizona which we partially wrote down at December 31, 2002. The additional
write-down was the result of the impending loss of a significant customer to
this site resulting in the future expected cash flows not being sufficient to
recover the site's respective carrying values. The Company closed the facility
effective September 30, 2003.
INTEREST EXPENSE, NET
Interest expense, net of interest income, for the nine months ended September
30, 2004 was $1.4 million compared to $1.5 million for the nine months ended
September 30, 2003. This decrease in interest expense was the result of a slight
decrease in interest rates on approximately 50% of our long term debt which has
interest rates tied to the prime rate, and a reduction in our outstanding debt
as a result of routine monthly principal payments. Management expects interest
expense to begin to increase with the anticipated increase in the prime interest
rate.
OTHER INCOME
Other income for the nine months ended September 30, 2004 was $202,000 compared
to $210,000 for the nine months ended September 30, 2003.
INCOME TAXES
The Company recorded tax (benefit) expense of $(15,000) and $42,000 for the nine
months ended September 30, 2004 and 2003, respectively. Tax (benefit) expense
reflects the recording of income taxes at an effective rate of approximately 36%
in both 2004 and 2003. 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, fixed asset adjustments and changes to the
valuation allowance. During the quarter ended June 30, 2004, the Company
received a payment of $8.95 million for removal of a restriction on certain
outstanding shares of the Company's stock (see Note 11, Equity). Although the
transaction is taxable for Federal and State income tax purposes, no current or
deferred income tax expense is reflected on the income statement due to the
recording of the transaction as a contribution of capital, net of income tax of
$3.2 million. Although the Company has sufficient Federal net operating losses
available to fully offset the taxable income generated from this event, a tax
liability of $179,000 has been recorded for Federal Alternative Minimum Tax
purposes. Additionally, a $150,000 liability has been recorded for New Jersey
Corporate income tax
24
due to that state's 50% net operating loss limitation.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER, 2004
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2003
REVENUES
CAR AND TRUCK WASH SERVICES
Revenues for the three months ended September 30, 2004 were $9.8
million as compared to $10.3 million for the three months ended September 30,
2003, a decrease of $.5 million or 5%. This decrease was primarily attributable
to a decrease in wash and detail services. Of the $9.8 million of revenues for
the three months ended September 30, 2004, $7.9 million or 81% was generated
from car wash and detailing, $.9 million or 9% from lube and other automotive
services, and $1.0 million or 10% from fuel and merchandise sales. Of the $10.3
million of revenues for the three months ended September 30, 2003, $8.3 million
or 80% was generated from car wash and detailing, $1.1 million or 11% from lube
and other automotive services, and $0.9 million or 9% from fuel and merchandise
sales. The decrease in wash and detailing revenues was principally due to
closing or divesting of four of our car wash locations and a lube facility
during 2003 and the first nine months of 2004 and the accompanying reduction in
car volume; and continued unfavorable weather trends within the Northeast,
Florida, and Texas regions. Overall car wash volumes declined 10.6% in the
third quarter of 2004 as compared to the same period of 2003, including a 3.7%
decline in volume from the closing or divesting of car wash locations as noted
above. Partially offsetting this decline in volume, the Company experienced an
increase in average wash and detailing revenue per car to $15.59 in 2004, from
$14.59 in 2003. This increase in average wash and detailing revenue per car was
the result of management's continued focus on aggressively selling detailing
and additional on-line car wash services. Management expects volumes to
increase as weather trends return to more normal levels of inclement weather.
SECURITY PRODUCTS
Revenues for the three months ended September 30, 2004 were $6.9 million
comprised of approximately $6.1 million from the Electronic Surveillance
Products Division and approximately $778,000 from the Consumer Products
Division. Revenues for the three months ended September 30, 2003 were
approximately $1.6 million, comprised of $840,000 from the Electronic
Surveillance Products Division and $770,000 from the Consumer Products Division.
The increase in revenues within the Electronic Surveillance Products Division is
due principally to growth in sales to security systems installers and $4.5
million of sales generated by IVS and S&M which was acquired on July 1, 2004,
and by Vernex, which was acquired in September 2003. Included in revenues from
the Electronic Surveillance Division is approximately $725,000 of revenue from a
major discount retailer that is not expected to reoccur in the fourth quarter of
2004. Management expects revenues to continue to increase in this area as the
Company expands its sales staff and marketing efforts.
COST OF REVENUES
CAR AND TRUCK WASH SERVICES
Cost of revenues for the three months ended September 30, 2004 were $7.3
million, or 75% of revenues, with car washing and detailing costs at 73% of
respective revenues, lube and other automotive services costs at 76% of
respective revenues, and fuel and merchandise costs at 88% of respective
revenues. Cost of revenues for the three months ended September 30, 2003 were
$8.0 million, or 78% of revenues, with car washing and detailing costs at 77% of
respective revenues, lube and other automotive services costs at 75% of
respective revenues, and fuel and merchandise costs at 89% of respective
revenues. Cost of revenues as a percent of revenues declined in 2004 as compared
to 2003 despite the reduction in wash and detail revenues principally as a
result of a reduction in direct wash and detailing labor costs of approximately
$263,000, improved workers' compensation claims experience and the cost savings
of closing five unprofitable or marginally profitable car wash sites in 2003 and
the first nine months of 2004. We expect cost of revenues as a percent of
revenues to decrease if car wash volumes improve.
SECURITY PRODUCTS
During the three months ended September 30, 2004 cost of revenues were $5.15
million or 75% of revenues as compared to $914,000 or 57% of revenues for the
three months ended September 30, 2003. The increase in cost of revenues in 2004
is principally due to 1) the growth in the Electronic Surveillance Products
Division which has gross profit margins typically lower than the Consumer
Products Division; 2) an increase in sales of monitors which are typically sold
at lower profit margins than other electronic surveillance equipment 3) an
increase in sales to larger distributors and installers at lower profit margins
to gain
25
market share and; 4) the affect of an unfavorable physical inventory adjustment
at September 30, 2004. Management does not expect the cost of revenues to
increase substantially from current levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
September 30, 2004 were $3.6 million compared to $2.3 million for the same
period in 2003. SG&A expenses as a percent of revenues were 21.7% for the three
months ended September 30, 2004 as compared to 19.7% in the third quarter of
2003. The increase in SG&A costs is primarily the result of the growth in the
Electronic Surveillance Products Division which added an additional $1.1 million
of SG&A costs in 2004.The SG&A cost increase in the Electronic Security Products
Division was comprised of $857,000 related to the S&M and IVS business,
including $105,000 of transition and integration costs and increases in costs of
the Company's existing Electronic Security Products Division. These increases
were in the areas of marketing and selling costs and administration personnel
costs as additional staff were added to handle planned growth. Management does
not expect SG&A costs as a percent of revenues to substantially increase in the
future.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization totaled $539,000 for the three months ended
September 30, 2004 as compared to $487,000 for the same period in 2003. The
increase was primarily related to IVS and S&M which was acquired on July 1,
2004.
INTEREST EXPENSE, NET
Interest expense, net of interest income, for the three months ended September
30, 2004 was $447,000 compared to $443,000 for the three months ended September
30, 2003.
OTHER INCOME
Other income for the three months ended September 30, 2004 was $91,000 compared
to income of $43,000 for the three months ended September 30, 2003.
INCOME TAXES
The Company recorded tax benefits of $129,000 and $102,000 for the three months
ended September 30, 2004 and 2003, respectively. Tax benefit reflects the
recording of income taxes at an effective rate of approximately 36% in both 2004
and 2003. 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, fixed asset adjustments and changes to the valuation allowance.
RISK FACTORS
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 report 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. These risks and uncertainties
are set forth herein and in the Company's 2003 Form 10-K and as may be set forth
in the Company's subsequent press releases and/or Forms 10-Q, 8-K, and other
filings with the United States Securities and Exchange Commission. 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.
GENERAL RISKS
IF WE DO NOT RAISE ADDITIONAL CAPITAL, WE MAY NEED TO SUBSTANTIALLY REDUCE THE
SCALE OF OUR OPERATIONS AND CURTAIL OUR BUSINESS PLAN.
Our business plan involves growing through acquisitions and internal
development, each of which requires significant capital. Our capital
requirements also include working capital for daily operations and significant
capital for inventory and equipment
26
purchases. Although we had positive working capital as of September 30, 2004, we
have a history of net losses and in some years we have ended our fiscal year
with a negative working capital balance. To the extent that we lack cash to meet
our further capital needs, we will be required to raise additional funds through
bank borrowings and significant additional equity and/or debt financing, which
may result in significant increases in leverage and interest expense and/or
substantial dilution of our outstanding equity. If we are unable to raise
additional capital, we will need to substantially reduce the scale of our
operations and curtail our business plan.
IF WE ARE NOT ABLE TO MANAGE GROWTH, OUR BUSINESS PLAN MAY NOT BE REALIZED.
Our business objectives include developing our Electronic Surveillance Products
Division, both internally and through acquisitions. As such, our business plan
is predicated on growth. If we succeed in growing, it will place significant
burdens on our management and on our operational and other resources. For
example, it may be difficult to assimilate the operations and personnel of an
acquired business into our existing business; we must integrate management
information and accounting systems of an acquired business into our current
systems; our management must devote its attention to assimilating the acquired
business, which diverts attention from other business concerns; we may enter
markets in which we have limited prior experience; and we may lose key employees
of an acquired business. We will also need to attract, train, motivate, retain,
and supervise senior managers and other employees. If we fail to manage these
burdens successfully, one or more of the acquisitions could be unprofitable, the
shift of our management's focus could harm our other businesses, and we may be
forced to abandon our business plan, which relies on growth.
IF WE VIOLATE THE FINANCIAL COVENANTS WITH OUR LENDERS, OUR BORROWINGS MAY BE
ACCELERATED AND IF OUR LENDERS FORECLOSE ON OUR ASSETS WE COULD GO OUT OF
BUSINESS.
Our bank debt borrowings as of September 30, 2004 were $29.9 million
substantially all of which is secured with mortgages against certain of our real
property. Of such borrowings, $2.8 million is classified as current as it is due
in less than 12 months from September 30, 2004. Our business plan is dependent
on refinancing this debt as it becomes due. Our two most significant borrowings
are secured notes payable to General Motors Acceptance Corp. ("GMAC") in the
amount of $11.0 million, $13.1 million of which was classified as non-current
debt at September 30, 2004, and secured notes payable to Bank One, Texas, N.A.
("Bank One") in the amount of $14.7 million, $10.2 million of which was
classified as non-current debt at September 30, 2004. The GMAC and Bank One
agreements contain affirmative and negative covenants, including the maintenance
of certain levels of tangible net worth, maintenance of certain levels of
unencumbered cash and marketable securities, and the maintenance of certain debt
service coverage ratios on a consolidated level. The Bank One agreement contains
a prohibition on incurring additional debt for borrowed money without the
approval of Bank One. None of our other agreements contain such a prohibition.
As security for our bank debt, we have encumbered 26 car washes, one truck wash
and our facility in Hollywood, Florida with mortgages.
At September 30, 2004, we were not in compliance with our consolidated debt
service coverage ratio related to our GMAC notes payable. GMAC granted us a
waiver of acceleration related to the non-compliance with the debt service
coverage ratio covenant at September 30, 2004 and for measurement periods
through October 1, 2005 and, accordingly, a portion of the GMAC notes payable
were reflected as non-current in our financial statements at September 30, 2004.
If we are not able to increase our debt coverage ratio to at least 1.25:1, or we
cannot obtain further waivers, the GMAC notes may be reflected as current and
our stock price may decline.
As of March 31, 2004, we entered into amendments to our Bank One financial
covenants and, as a result, we were in compliance at March 31, 2004. At
September 30, 2004, we again were in violation of the debt service coverage
ratio contained in our term loan agreements with Bank One. We have obtained a
waiver of acceleration from Bank One with respect to this debt service coverage
ratio through October 1, 2005 and, accordingly, a portion of the Bank One notes
payable were reflected as non-current in our financial statements at September
30, 2004. If we are unable to satisfy the Bank One Covenants in the future or
obtain further waivers, the Bank One notes may be reflected as current and our
stock price may decline.
Our ongoing ability to comply with the debt service coverage covenants under our
credit arrangements and refinance our debt depends largely on our achievement of
adequate levels of cash flow. Our cash flow has been and could continue to be
adversely affected by weather patterns and economic conditions. If our cash
flows are less than expected or debt service, including interest expense,
increases more than expected, we may continue to be out of compliance with the
Bank One covenant, as amended, and need to seek additional waivers or
amendments. If we default on any of the Bank One or GMAC covenants and are not
able to obtain further amendments or waivers of acceleration, Bank One debt
totaling $14.7 million and GMAC debt totaling $11.0 million, including debt
recorded as long-term debt at September 30, 2004, could become due and payable
on demand, and Bank One and/or GMAC could foreclose on the assets pledged in
support of the relevant indebtedness. If our assets (including up to
27
26 of our car wash facilities and one truck wash) are foreclosed upon, revenues
from our Car and Truck Wash Segment, which comprised 74.4% of our total revenues
in the first nine months of 2004, would be severely impacted and we could be
unable to continue to operate our business. Even if the debt were accelerated
without foreclosure, it would be very difficult for us to continue to operate
our business and the price of our common stock may decline, or we may go out of
business.
WE HAVE REPORTED NET LOSSES IN THE PAST. IF WE CONTINUE TO REPORT NET LOSSES,
THE PRICE OF OUR COMMON STOCK MAY DECLINE, OR WE COULD GO OUT OF BUSINESS.
For the year ended December 31, 2003 and for the three and nine months ended
September 30, 2004, we reported net losses, although our business as a whole was
cash flow positive. The majority of the reported losses in 2003 related to
impairment charges of intangible assets, particularly goodwill, in accordance
with SFAS 142, Goodwill and Other Intangible Assets. Under SFAS 142, which
became effective on January 1, 2002, we no longer amortize goodwill and certain
intangible assets determined to have indefinite useful lives. Additionally, SFAS
142 requires annual fair value based impairment tests of goodwill and other
intangible assets identified with indefinite useful lives. As a result, we may
be forced to record additional impairments in the future, which would materially
reduce our earnings and equity.
IF WE LOSE THE SERVICES OF OUR EXECUTIVE OFFICERS, OUR BUSINESS MAY SUFFER.
If we lose the services of one or more of our executive officers and do not
replace them with experienced personnel, that loss of talent and experience will
make our business plan, which is dependent on active growth and management, more
difficult to implement. Mr. Kramer is the chief operating officer of our car and
truck wash segment, and our general counsel and secretary; Mr. Krzemien is our
chief financial officer and treasurer; and Mr. Pirollo is our chief accounting
officer and corporate controller. Messrs. Kramer and Krzemien are working on a
month-to-month at-will basis, and Mr. Pirollo is working on an at-will basis.
Without employment contracts, we may lose the services of any one or more of
Messrs. Kramer, Krzemien or Pirollo, each of whom has been involved in our
management for several years and would be difficult to replace. In addition, we
do not maintain key-man life insurance policies on our executive officers.
IF OUR INSURANCE IS INADEQUATE, WE COULD FACE SIGNIFICANT LOSSES.
We maintain various insurance coverages for our assets and operations. These
coverages include property coverages including business interruption protection
for each location. We maintain commercial general liability coverage in the
amount of $1 million per occurrence and $2 million in the aggregate with an
umbrella policy which provides coverage up to $25 million. We also maintain
workers' compensation policies in every state in which we operate. Commencing
July 2002, as a result of increasing costs of our insurance program, including
automobile, general liability, and workers' compensation coverage, we are
insured through participation in a captive insurance program with other
unrelated businesses. We maintain excess coverage through occurrence-based
policies. Although our automobile, general liability, and workers' compensation
policies are secured in a number of ways, and we believe such policies to be
adequate, 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. Furthermore, our business
involves potentially dangerous chemicals and operations, and, accordingly, we
face exposure to significant liabilities for injury. If our insurance coverage
is exceeded by (or does not cover) a claim, we will have to pay the uncovered
liability directly. In the event that we were required to directly pay a claim,
our income would be significantly reduced, and in the event of a large claim, we
could go out of business.
RISKS RELATED TO OUR SECURITY PRODUCTS SEGMENT
IF WE ARE NOT ABLE TO OPERATE OUR ELECTRONIC SURVEILLANCE PRODUCTS DIVISION
EFFECTIVELY, OUR BUSINESS WILL SUFFER.
We expanded our line of security products in 2002 by adding the Electronic
Surveillance Products Division. We are incurring expenses to develop this new
line of products without having extensively tested the size or possible
profitability of the market for such products. There are numerous risks
associated with the Electronic Surveillance Products Division that may prevent
us from operating such division profitably, including, among others: risks
associated with unanticipated liabilities of the acquired companies; risks
inherent with our management having limited experience in the electronic
security product market; risks relating to the size and number of competitors in
the electronic security product market, many of whom may be more experienced or
better financed; risks associated with the costs of entering into new markets
and expansion of product lines in existing markets; risks associated with
rapidly evolving technology and having inventory become obsolete; risks
associated with purchasing inventory before having orders for that inventory;
risks attendant to locating and maintaining reliable sources of OEM products and
component supplies in the electronic surveillance industry; risks related to
retaining key employees involved in future technology development and
communications with OEM suppliers; and risks associated with developing and
introducing new products in
28
order to maintain competitiveness in a rapidly changing marketplace. We also
expect that there will be costs related to product returns and warranties and
customer support that we cannot quantify or accurately estimate until we have
more experience in operating the division.
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD SERIOUSLY HARM OUR BUSINESS.
Although we have not been the subject of any such actions, third parties may in
the future assert against us infringement claims or claims that we have violated
a patent or infringed upon a copyright, trademark or other proprietary right
belonging to them. We design most of our security products and contract with
independent suppliers to manufacture those products and deliver them to us.
Certain of these products contain proprietary intellectual property of these
independent suppliers. Third parties may in the future assert claims against our
suppliers that such suppliers have violated a patent or infringed upon a
copyright, trademark or other proprietary right belonging to them. If such
infringement by our suppliers or us were found to exist, a party could seek an
injunction preventing the use of their intellectual property. In addition, if an
infringement by us were found to exist, we may attempt to acquire a license or
right to use such technology or intellectual property. Most of our suppliers
have agreed to indemnify us against any such infringement claim, but any
infringement claim, even if not meritorious and/or covered by an indemnification
obligation, could result in the expenditure of a significant amount of our
financial and managerial resources.
IF OUR ORIGINAL EQUIPMENT MANUFACTURERS FAIL TO ADEQUATELY SUPPLY OUR PRODUCTS,
OUR SECURITY PRODUCTS SALES MAY SUFFER.
Our products are manufactured on an OEM basis. Reliance upon OEMs, as well as
industry supply conditions, generally involves several risks, including the
possibility of defective products (which can adversely affect our reputation for
reliability), a shortage of components and reduced control over delivery
schedules (which can adversely affect our distribution schedules), and increases
in component costs (which can adversely affect our profitability).
We have some single-sourced manufacturer relationships, either because
alternative sources are not readily or economically available or because the
relationship is advantageous due to performance, quality, support, delivery,
capacity, or price considerations. If these sources are unable or unwilling to
manufacture our products in a timely and reliable manner, we could experience
temporary distribution interruptions, delays, or inefficiencies, adversely
affecting our results of operations. Even where alternative OEMs are available,
qualification of the alternative manufacturers and establishment of reliable
supplies could result in delays and a possible loss of sales, which could affect
operating results adversely.
IF PEOPLE ARE INJURED BY OUR CONSUMER SAFETY PRODUCTS, WE COULD BE HELD
LIABLE AND FACE DAMAGE AWARDS.
We face claims of injury allegedly resulting from our defense sprays, which we
market as "non-lethal." For example, we are aware of allegations that defense
sprays used by law enforcement personnel resulted in deaths of prisoners and of
suspects in custody. In addition to use or misuse by law enforcement agencies,
the general public may pursue legal action against us based on injuries alleged
to have been caused by our products. As the use of defense sprays by the public
increases, we could be subject to additional product liability claims. We have a
$25,000 deductible on our insurance policy, meaning that all such lawsuits, even
unsuccessful ones, and ones covered by insurance, cost the company money.
Furthermore, if our insurance coverage is exceeded, we will have to pay the
excess liability directly. Our product liability insurance provides coverage of
up to $26 million per occurrence. Based on the amount demanded in the case
currently against us and our current insurance coverage, we do not believe that
this potential liability is significant. However, if we are required to directly
pay a claim in excess of our coverage, our income will be significantly reduced,
and in the event of a large claim, we could go out of business.
IF GOVERNMENTAL REGULATIONS CHANGE OR ARE APPLIED DIFFERENTLY, OUR BUSINESS
COULD SUFFER.
The distribution, sale, ownership and use of consumer defense sprays are legal
in some form in all 50 states and the District of Columbia. Restrictions on the
manufacture or use of consumer defense sprays may be enacted that would severely
restrict the market for our products or increase our costs of doing business.
Some of our consumer defense spray manufacturing operations currently
incorporate hazardous materials, the use and emission of which are regulated by
various state and federal environmental protection agencies, including the
United States Environmental Protection Agency. We believe that we are in
compliance with all current state and local statutes governing our handling and
disposal of these hazardous materials, but if there are any changes in
environmental permit or regulatory requirements, or if we fail to comply with
any environmental requirements, these changes or failures may expose us to
significant liabilities that would have a material adverse effect on our
business and financial condition.
Through our Car and Truck Wash Segment, we face a variety of potential
environmental liabilities, including those arising out of improperly disposing
waste oil or lubricants at our lube centers, improper maintenance of oil
discharge ponds, which exist at
29
two of our truck washes, and leaks from our underground oil storage tanks. If we
improperly dispose of oil or other hazardous substances, or if our oil discharge
ponds or underground tanks leak we could be assessed fines by federal or state
regulatory authorities and/or be required to remediate the property. Although
each case is different, and there can be no assurance as to the cost to
remediate an environmental problem, if any, at one of our properties, the cost
for remediation and removal of a leaking discharge pond typically ranges from
$200,000 to $150,000, and the costs for remediation of a leaking underground
storage tank typically ranges from $75,000 to $30,000.
RISKS RELATED TO OUR CAR AND TRUCK WASH SEGMENT
IF CONSUMER DEMAND FOR OUR CAR WASH SERVICE DROPS, OUR BUSINESS WILL SUFFER.
A large portion of our revenues are derived from our Car and Truck Wash Segment.
As such, our financial condition and results of operations will depend
substantially on continued consumer demand for car wash services. Our car wash
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. Also, seasonal trends in some areas 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. It is also possible that general consumer demand for car wash services
will decrease in the future.
WE FACE SIGNIFICANT COMPETITION AND IF WE CANNOT COMPETE EFFECTIVELY WE MAY LOSE
MONEY AND THE VALUE OF OUR SECURITIES COULD DECLINE.
The car care industry is highly competitive. Competition is based primarily on
location, customer service, available services, and price. We face competition
from both inside and outside the car care industry, including gas stations,
gasoline companies, automotive companies, specialty stores and convenience
stores that offer automated car wash services. 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. In some
cases, our competitors may have greater financial and operating resources than
do we and we may lose customers and revenue to those competitors.
OUR CAR AND TRUCK WASH OPERATIONS FACE GOVERNMENTAL REGULATIONS AND IF WE ARE
UNABLE TO COMPLY WITH THOSE REGULATIONS, OUR BUSINESS MAY SUFFER.
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. Other car care services, such as
gasoline and lubrication, use 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 wastes;
ii. discharge of storm water; and
iii. underground storage tanks.
If uncontrolled hazardous substances were found on our property, including
leased property, or if we were otherwise found to be in violation of applicable
laws and regulations, we could be responsible for clean-up costs, property
damage, fines, or other penalties, any one of which could have a material
adverse effect on our financial condition and results of operations.
IF OUR CAR WASH EQUIPMENT AND BUILDINGS ARE NOT MAINTAINED, OUR CAR WASHES WILL
NOT BE OPERABLE.
Many of our car washes have older equipment which requires frequent repair or
replacement. Although we undertake to keep our car washing equipment in proper
operating condition, the operating environment in car washes results in frequent
mechanical problems. If we fail to properly maintain the equipment in a car
wash, that car wash could become inoperable resulting in a loss of revenue. Many
of our car wash locations have older buildings that also require functional
repairs and modernizationn. If we fail to make the improvements our volume could
decrease.
RISKS RELATED TO OUR STOCK
On May 26, 2004, we completed a private placement financing in which we sold to
a private investor 915,000 shares of our common stock and warrants to purchase
an aggregate of 183,000 shares of our common stock. We agreed to register for
resale
30
the shares of common stock and the shares issuable upon exercise of the
warrants. By further increasing the number of shares of our common stock that
may be sold into the market, this sale could cause the market price of our
common stock to drop significantly, even if our business is doing well.
Our stock price has been, and likely will continue to be, volatile.
The market prices for securities of companies quoted on The NASDAQ Stock Market,
including our market price, have in the past been, and are likely to continue in
the future to be, very volatile. That volatility depends upon many factors, some
of which are beyond our control, including:
- announcements regarding the results of expansion or development efforts by
us or our competitors;
- announcements regarding the acquisition of businesses or companies by us
or our competitors;
- technological innovations or new commercial products developed by us or
our competitors;
- changes in our, or our Suppliers', intellectual property portfolio;
- issuance of new or changed securities analysts' reports and/or
recommendations applicable to us;
- additions or departures of our key personnel;
- operating losses by us;
- actual or anticipated fluctuations in our quarterly financial and
operating results and degree of trading liquidity in our common stock; and
- our ability to maintain our common stock listing on the Nasdaq National
Market.
One or more of these factors could cause a decline in our revenue and income or
in the price of our common stock.
IF WE LOSE OUR LISTING ON THE NASDAQ NATIONAL MARKET, OUR STOCK WILL BECOME
SIGNIFICANTLY LESS LIQUID AND ITS VALUE MAY BE AFFECTED.
Our common stock is listed on the NASDAQ National Market with a bid price of
$5.07 at the close of the market on November 10, 2004. Although the recent
closing prices of our stock have been well in excess of $1.00, earlier in 2004
our stock traded at a price as low as $1.78. If the price of our common stock
falls below $1.00 and for 30 consecutive days remains below $1.00, we are
subject to being delisted from the NASDAQ National Market. 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 $1.00 for 30 consecutive days at
which time we can regain our listing on the NASDAQ National Market. If our stock
fails to maintain a minimum bid price of $1.00 for 30 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 could
receive a delisting notice from the NASDAQ SmallCap Market. Upon delisting from
the NASDAQ SmallCap Market, our stock would 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 "NASDAQ-Listed Stocks"). Many OTC stocks
trade less frequently and in smaller volumes than NASDAQ-Listed Stocks.
Accordingly, our stock would be less liquid than it would otherwise be. Also,
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."
BECAUSE WE ARE A DELAWARE CORPORATION, IT MAY BE DIFFICULT FOR A THIRD PARTY TO
ACQUIRE US, WHICH COULD AFFECT OUR STOCK PRICE.
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 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
premium for our common stock above its market price.
If we issue our authorized preferred stock, the rights of the holders of our
common stock may be affected and other entities may be discouraged from seeking
to acquire control of our Company.
Our certificate of incorporation authorizes the issuance of up to 10 million
shares of "blank check" preferred stock that could be designated and issued by
our board of directors to increase the number of outstanding shares and thwart a
takeover attempt. No
31
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 holders of our
preferred stock.
The "blank check" 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 a company more difficult or costly. Such an issuance, or the
perceived threat of 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.
OUR POLICY OF NOT PAYING CASH DIVIDENDS ON OUR COMMON STOCK COULD NEGATIVELY
AFFECT THE PRICE OF OUR COMMON STOCK.
We have not paid in the past, and do not expect to pay in the foreseeable
future, cash dividends on our common stock. We expect to reinvest in our
business any cash otherwise available for dividends. Our decision not to pay
cash dividends may negatively affect the price of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 with
respect to our fixed rate debt unless and until such debt would need to be
refinanced at maturity. Substantially all of our variable rate debt obligations
are tied to the prime rate, as is our incremental borrowing rate. A one percent
increase in the prime and Libor rates would not have a material effect on the
fair value of our variable rate debt at September 30, 2004 and would have had
the impact of increasing interest expense by approximately $177,000 for the
twelve months ended September 30, 2004. In October 2004, the Company purchased a
fixed interest rate swap on $7 million of floating rate debt for a three year
period at a cost of $124,000. The fixed interest rate swap provides for a cap
rate of 6.50% on the $7 million of floating rate debt covered by the instrument.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management conducted an evaluation, under the supervision and with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of September 30, 2004. Based on this
evaluation and as of the date of the evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in alerting them in a timely manner to material
information required to be included in the Company's SEC reports. In connection
with the preparation of our consolidated financial statements included in our
third quarter report on Form 10-Q, we became aware of a material weakness in our
internal controls over inventory, billing procedures, and recording of costs of
revenues while performing a routine physical inventory observation at one of our
Security Products locations. We believe that this weakness did not affect the
accuracy of our financial statements included in this report. However, it
represented a material control weakness in our internal controls as of September
30, 2004. In order to correct this weakness, we took the following actions: (i)
reinforced compliance with existing processes and procedures relating to the
inventory and billing control process and implemented additional processes and
procedures relating thereto and (ii) expanded and enhanced the periodic review
process by our Company's financial and accounting personnel. We believe that the
foregoing actions corrected the weakness. There have been no significant changes
in the Company's internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
Company's most recent fiscal quarter that have materially affected, or are
32
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding our legal proceedings can be found in Note 6 Commitments
and Contingencies.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER, PURCHASE OF EQUITY
SECURITIES
The following table summarizes our equity security repurchases during the three
months ended September 30, 2004:
APPROXIMATE DOLLAR
TOTAL NUMBER OF SHARE VALUE OF SHARES THAT
PURCHASED AS PART OF MAY YET BE PURCHASED
TOTAL NUMBER OF AVERAGE PRICE PAID PUBLICLY ANNOUNCED UNDER THE PLANS OR
PERIOD SHARES PURCHASED PER SHARE PLANS OR PROGRAMS PROGRAMS (1)
--------------------------- ---------------- ------------------ --------------------- --------------------
July 1 to July 31, 2004 - - - $ 3,000,000
August 1 to August 31, 2004 - - - $ 3,000,000
September 1 to
September 30, 2004 - - - $ 3,000,000
---------------- ------------------ ---------------------
Total - - -
================ ================== =====================
(1) On July 29, 2004, the Company's Board of Directors approved a share
repurchase program to allow the Company to repurchase up to an aggregate
$3,000,000 of its common shares in the future if market conditions so
dictate. As of September 30, 2004, no shares had been repurchased under
the program.
33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.167 Modification Agreement between the Company , its subsidiary -
Colonial Full Service Car Wash, Inc., and Bank One, Texas,
N.A. in the original amount of $984,000 (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 $2,216,000 (extended to August 20, 2009) and
$380,000 (extended to October 6, 2009)).
10.168 Promissory Note dated September 15, 2004, between the
Company, its subsidiary, Mace Security Products, Inc., and
Bank One, Texas, N.A. in the amount of $825,000.
10.169 First Amendment to Asset Purchase Agreement dated August 27,
2004, between Vernex, Inc. and Mace Security Products, Inc.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
*Incorporated by reference
(b) Current Reports on Form 8-K or 8-K/A:
On July 13, 2004, the Company filed a report on Form 8-K dated July
1, 2004, under Item 2 and Item 7 to report the acquisition of assets
of Industrial Vision Source ("IVS") and SecurityandMore ("S&M").
Historic financial statements of IVS and S&M and pro forma financial
information of the Company required under "Item 7,: "Financial
Statements and Exhibits" were filed on Form 8-K/A on August 2, 2004.
On August 12, 2004, the Company filed a report on Form 8-K dated
August 12, 2004, under Item 7 and Item 12, to report the issuance of
a press release announcing the Company's financial results for the
fiscal quarter ended June 30, 2004.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant 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, Chief Executive Officer
and President
BY: /s/ Gregory M. Krzemien
-----------------------
Gregory M. Krzemien, Chief Financial Officer
BY: /s/ Ronald R. Pirollo
---------------------
Ronald R. Pirollo, Controller (Principal Accounting Officer)
DATE: November 12, 2004
35
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
10.167 Modification Agreement between the Company , its subsidiary -
Colonial Full Service Car Wash, Inc., and Bank One, Texas, N.A. in
the original amount of $984,000 (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 $2,216,000 (extended to August 20,
2009) and $380,000 (extended to October 6, 2009)).
10.168 Promissory Note dated September 15, 2004, between the Company, its
subsidiary, Mace Security Products, Inc., and Bank One, Texas, N.A.
in the amount of $825,000.
10.169 First Amendment to Asset Purchase Agreement dated August 27, 2004,
between Vernex, Inc. and Mace Security Products, Inc.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.