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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 MARCH 31, 2005 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 May 6, 2005 there were 15,271,132 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 MARCH 31, 2005
CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets - March 31, 2005 (Unaudited)
and December 31, 2004 2
Consolidated Statements of Income (Unaudited) for the three
months ended March 31, 2005 and 2004 4
Consolidated Statement of Stockholders' Equity
for the three months ended March 31, 2005 (Unaudited) 5
Consolidated Statements of Cash Flows (Unaudited) for
the three months ended March 31, 2005 and 2004 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 29
Item 4 - Controls and Procedures 30
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 30
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 6 - Exhibits 31
Signatures 32
1
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MACE SECURITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
MARCH 31, DECEMBER 31,
ASSETS 2005 2004
----------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 12,962 $ 14,499
Accounts receivable, less allowance for doubtful
accounts of $520 and $449 in 2005 and 2004, respectively 2,472 2,556
Inventories 7,904 7,067
Deferred income taxes 321 321
Prepaid expenses and other current assets 1,907 2,102
Asset held for sale 243 600
----------- ------------
Total current assets 25,809 27,145
Property and equipment:
Land 31,639 31,629
Buildings and leasehold improvements 36,537 36,263
Machinery and equipment 11,707 11,456
Furniture and fixtures 536 527
----------- ------------
Total property and equipment 80,419 79,875
Accumulated depreciation and amortization (13,550) (13,003)
----------- ------------
Total property and equipment, net 66,869 66,872
Goodwill 3,587 3,587
Other intangible assets, net of accumulated amortization
of $346 and $309 in 2005 and 2004, respectively 2,893 2,935
Deferred income taxes 1,992 2,008
Other assets 256 210
----------- ------------
TOTAL ASSETS $ 101,406 $ 102,757
=========== ============
See accompanying notes.
2
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004
----------- ------------
(Unaudited)
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 2,555 $ 2,634
Accounts payable 3,231 4,077
Income taxes payable 283 278
Deferred revenue 439 469
Accrued expenses and other current liabilities 2,662 2,216
----------- ------------
Total current liabilities 9,170 9,674
Long-term debt, net of current portion 25,658 26,480
Capital lease obligations, net of current portion 69 81
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
15,271,132 in both 2005 and 2004 153 153
Additional paid-in capital 88,456 88,507
Accumulated other comprehensive loss (3) (30)
Accumulated deficit (22,097) (22,108)
----------- ------------
Total stockholders' equity 66,509 66,522
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 101,406 $ 102,757
=========== ============
See accompanying notes.
3
MACE SECURITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except share information)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2005 2004
------------ -------------
Revenues:
Car wash and detailing services $ 8,712 $ 8,910
Lube and other automotive services 791 930
Fuel and merchandise sales 983 959
Security sales 6,365 1,876
------------ -------------
16,851 12,675
Cost of revenues:
Car wash and detailing services 6,189 6,287
Lube and other automotive services 654 705
Fuel and merchandise sales 852 826
Security sales 4,579 1,180
------------ -------------
12,274 8,998
Selling, general and administrative expenses 3,608 2,471
Depreciation and amortization 590 500
------------ -------------
Operating income 379 706
Interest expense, net (451) (479)
Other income 89 112
------------ -------------
Income before income taxes 17 339
Income tax expense 6 122
------------ -------------
Net income $ 11 $ 217
============ =============
Per share of common stock (basic and diluted):
Net income $ 0.00 $ 0.02
============ =============
Weighted average shares outstanding:
Basic 15,271,132 12,461,029
Diluted 15,655,863 12,618,837
See accompanying notes.
4
MACE SECURITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands, except share information)
ACCUMULATED
ADDITIONAL OTHER
COMMON COMMON PAID-IN COMPREHENSIVE ACCUMULATED
SHARES STOCK CAPITAL LOSS DEFICIT TOTAL
----------- ------ ---------- ------------- ----------- --------
BALANCE AT DECEMBER 31, 2004 15,271,132 $ 153 $ 88,507 $ (30) $ (22,108) $ 66,522
Costs associated with private placement....... (51) (51)
Change in fair value of cash flow hedge....... 27 27
Net income.................................... 11 11
--------
Total comprehensive income.................... 38
---------- ------ ---------- ------------- ----------- --------
BALANCE AT MARCH 31, 2005..................... 15,271,132 $ 153 $ 88,456 $ (3) $ (22,097) $ 66,509
========== ====== ========== ============= =========== ========
See accompanying notes.
5
MACE SECURITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
THREE MONTHS ENDED
MARCH 31,
---------------------
2005 2004
-------- --------
OPERATING ACTIVITIES
Net income $ 11 $ 217
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Depreciation and amortization 590 500
Provision for losses on receivables 71 32
Gain on sale of property and equipment (33) -
Deferred income taxes 16 112
Changes in operating assets and liabilities:
Accounts receivable 14 (56)
Inventories (837) 484
Accounts payable (846) (603)
Deferred revenue (30) (56)
Accrued expenses 295 529
Income taxes 5 77
Prepaid expenses and other assets 178 (195)
-------- --------
Net cash (used in) provided by operating activities (566) 1,041
INVESTING ACTIVITIES
Purchase of property and equipment (396) (141)
Proceeds form sale of property and equipment 390 -
Payments for intangibles (1) (29)
-------- --------
Net cash used in investing activities (7) (170)
FINANCING ACTIVITIES
Payments on long-term debt and capital lease obligations (913) (660)
(Costs) proceeds from issuance of common stock (51) 26
-------- --------
Net cash used in financing activities (964) (634)
-------- --------
Net (decrease) increase in cash and cash equivalents (1,537) 237
Cash and cash equivalents at beginning of period 14,499 3,414
-------- --------
Cash and cash equivalents at end of period $ 12,962 $ 3,651
======== ========
See accompanying notes.
6
MACE SECURITY INTERNATIONAL, INC. AND SUBSIDIARIES
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", "we" 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 three month period ended March 31, 2005 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. 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, 2004.
2. NEW ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 151, Inventory Costs- An
Amendment of ARB No. 43, Chapter 4. SFAS 151 amends the guidance in ARB 43,
Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material (spoilage).
SFAS 151 is effective for fiscal years beginning after June 15, 2005 and is
required to be adopted by the Company in the first quarter of fiscal 2006. The
Company does not expect SFAS 151 to have a material impact on the Company.
In December 2004, the FASB issued SFAS 153, Exchange of Nonmonetary Assets - An
Amendment of APB Opinion No. 18. Accounting for Nonmonetary Transactions. SFAS
153 eliminates the exception from fair value measurement for nonmonetary
exchanges of similar productive assets in paragraph 21(b) of Accounting
Principles Board ("APB") Opinion 29, and replaces it with an exception for
exchanges that do not have commercial substance. SFAS 153 is effective for
fiscal periods beginning after June 15, 2005. The Company does not expect SFAS
153 to have a material impact on the Company.
In December 2004, the FASB issued SFAS 123(R), Share-Based Payment. SFAS 123(R)
requires that the compensation cost relating to share-based payment transactions
be recognized in financial statements. The cost will be measured based on the
fair value of the equity or liability instruments issued. SFAS 123(R) is
effective as of the first interim or annual reporting period of the first fiscal
year beginning on or after June 15, 2005. SFAS 123(R) covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. In addition to the accounting standard that sets forth the
financial reporting objectives and related accounting principles, SFAS 123(R)
includes an appendix of implementation guidance that provides expanded guidance
on measuring the fair value of share-based payment awards. SFAS 123(R) replaces
SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion
25, Accounting for Stock Issued to Employees. SFAS 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in APB Opinion
25, as long as the footnotes to financial statements disclosed what net income
would have been had the preferable fair-value-based method been used.
Additionally, in March 2005, the SEC issued Staff Accounting Bulletin ("SAB")
107, Share-Based Payments, which provides further guidance for the adopation of
SFAS 123(R), discussed above. The Company will implement this new standard in
the first quarter of our fiscal year 2006. The Company is currently evaluating
this statement and the effects on our results of operations. The Company
believes that implementation of SFAS 123 (R) will have a material impact on the
Company.
7
3. OTHER INTANGIBLE ASSETS
The following table reflects the components of intangible assets, excluding
goodwill (in thousands):
MARCH 31, 2005 DECEMBER 31, 2004
------------------------- -----------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- ------------ -------- ------------
Amortized intangible assets:
Non-compete agreement $ 28 $ 15 $ 28 $ 13
Customer lists 699 101 699 79
Product lists 590 44 590 29
Deferred financing costs 415 186 421 188
-------- ------------ -------- ------------
Total amortized intangible assets 1,732 346 1,738 309
Non-amortized intangible assets:
Trademarks - Security Segment 1,401 - 1,400 -
Service mark - Car and Truck Wash Segment 106 - 106 -
-------- ------------ -------- ------------
Total non-amortized intangible assets 1,507 - 1,506 -
-------- ------------ -------- ------------
Total intangible assets $ 3,239 $ 346 $ 3,244 $ 309
======== ============ ======== ============
The following sets forth the estimated amortization expense on intangible assets
for the fiscal years ending December 31 (in thousands):
2005 $ 168
2006 $ 153
2007 $ 149
2008 $ 143
2009 $ 143
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 Segment. 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 $5.62 million of cash and the assumption of $290,000 of current
liabilities. The purchase price was allocated as follows: approximately $1.86
million for inventory; $1.37 million for accounts receivable; $100,000 for
equipment; and the remainder of $2.58 million allocated to goodwill and other
intangible assets. Of the $2.58 million of acquired intangible assets, $830,000
was assigned to registered trademarks and $531,000 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 141, Business Combinations.
The pro forma 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
2004. 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 2004 or results which
may be achieved in the future. Unaudited pro forma financial information is as
follows (in thousands, except per shares amounts):
8
THREE MONTHS ENDED
MARCH 31,
--------------------
2005 2004
-------- --------
Revenues $ 16,851 $ 17,766
Net income $ 11 $ 247
Income per share-basic and
dilutive $ 0.00 $ 0.02
5. STOCK-BASED COMPENSATION
The Company has two stock-based employee compensation plans. The Company
accounts for those plans under the recognition and measurement principles of
Accounting Principles Board Opinion ("APB") No. 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
exercise prices equal to the market value of the underlying common stock on the
date of grant. The table below illustrates the effect on net (loss) income and
(loss) income per share if the Company had applied the fair value recognition
provisions of FASB 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
The Company has elected to follow APB 25, and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123, requires use of
option valuation models that are not developed for use in valuing employee stock
options. Under APB 25, if the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. In December 2004, the FASB issued Statement
123(R) Share-Based Payment. SFAS 123(R) requires that the compensation cost
relating to share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. This statement will be effective as of the first
quarter of 2006.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Pro forma results are
not likely to be representative of the effects on reported or pro forma results
of operations for future years. The Company's pro forma information is as
follows (in thousands, except per share data):
THREE MONTHS ENDED
MARCH 31,
--------------------
2005 2004
-------- ---------
Net income, as reported $ 11 $ 217
Less: Stock-based compensation costs under fair
value based method for all awards (219) (88)
-------- ---------
Pro forma net (loss) income $ (208) $ 129
======== =========
Earnings per share - basic and diluted
As reported $ 0.00 $ 0.02
Pro forma $ (0.01) $ 0.01
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 March 31, 2004: 170,000 options
granted; expected volatility of 20%; risk-free interest rates ranging from 3.80%
to 4.05%; and expected life of 10 years. In the quarter ended March 31, 2005,
90,000 options were granted with an expected volatility of 56%, risk-free
interest rate of 4.06% and expected life of 10 years.
9
6. COMMITMENTS AND CONTINGENCIES
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 conducted by the United States Securities and Exchange
Commission of possible securities law violations. The subpoena was issued on
October 27, 2003. The Company 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.
Certain of the Company's executive officers have entered into employee stock
option agreements whereby options issued to them shall be entitled to immediate
vesting should the officer be terminated upon a change in control of the
Company. Additionally, the employment agreement of the Company's Chief Executive
Officer, Louis D. Paolino, Jr., entitles Mr. Paolino to receive a fee of $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.
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.
10
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, lube, and minor
repairs), fuel, and merchandise sales; and the Security Segment.
Financial information regarding the Company's segments is as follows (in
thousands):
CAR AND CORPORATE
TRUCK WASH SECURITY FUNCTIONS *
---------- -------- -----------
THREE MONTHS ENDED MARCH 31, 2005
Revenues from external customers $ 10,486 $ 6,365 $ -
Intersegment revenues $ - $ 140 $ -
Segment operating income (loss) $ 1,247 $ (1) $ (867)
Segment assets $ 82,165 $ 19,241 $ -
Goodwill $ 2,655 $ 932 $ -
Capital expenditures $ 276 $ 118 $ 2
THREE MONTHS ENDED MARCH 31, 2004
Revenues from external customers $ 10,799 $ 1,876 $ -
Intersegment revenues $ - $ 3 $ -
Segment operating income (loss) $ 1,456 $ (1) $ (749)
Segment assets $ 82,841 $ 7,290 $ -
Goodwill $ 10,381 $ 242 $ -
Capital expenditures $ 136 $ 5 $ -
* 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 expense of $6,000 and $122,000 for the three
months ended March 31, 2005 and 2004, respectively. Income tax expense reflects
the recording of income taxes on income at an effective rate of approximately
36% in both 2005 and 2004. 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.
10. RELATED PARTY TRANSACTIONS
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
Learjets, 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 totaled $31,659 at March 31, 2005 and December 31, 2004.
11
From January 1, 2004 through March 31, 2005, Louis D. Paolino, Jr. purchased
approximately $26,000 of the Company's products at a discount from the prices
charged to distributors. The total of the discount given to Mr. Paolino was
approximately $8,500.
The Company's Security Segment leases manufacturing and office space under a
five-year lease with Vermont Mill, Inc. ("Vermont Mill"), which provided 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 at a rate of $10,576 per month. 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.
From January 1, 2004 through March 31, 2005, the Company's Security Segment sold
approximately $124,000 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 March 31, 2005, $6,828 was owed from one of these companies
to Mace.
Louis Paolino III, the son of the Company's Chief Executive Officer, Louis
Paolino, Jr., has offered to purchase from the Company a warehouse bay in
Hollywood, Florida that is no longer used in the Company's operations for
$306,000 in cash. The Company paid $256,688 for the property in 2003. The
warehouse property was appraised by a third party independent appraiser on
January 18, 2005 at an estimated market value of $306,000. On February 14, 2005,
the Company's Audit Committee authorized the Company to proceed with a sale of
the warehouse property to Louis Paolino III for $306,000. A sale has not been
consumated and the related assets remain classified as held for sale at March
31, 2005.
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.
On April 20, 2004, the Company purchased a 20,000 square foot facility in Fort
Lauderdale, Florida, to serve as its regional headquarters for its electronic
surveillance products operation. Consideration for the facility consisted of
250,000 registered shares of the Company's common stock valued at approximately
$1.6 million.
The Master Facility Agreement between the Company and Fusion Capital Fund II,
LLC ("Fusion") and the Equity Purchase Agreement between the Company and Fusion
was 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 sold 915,000 shares of the Company's common stock
and issued a warrant for 183,000 shares of the Company's common stock in
exchange for $5,005,050 in cash. The purchaser was Langley Partners, L.P., an
accredited investor. The warrant is exercisable by Langley Partners, L.P. at any
time up to May 26, 2009 at a price of $7.50 per share. The securities sold were
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933
and Regulation D promulgated under the Securities Exchange Act of 1934. The
securities were registered for resale by Langley Partners, L.P. effective
September 28, 2004 on a Form S-3 Registration Statement.
On December 14, 2004, the Company sold 750,000 shares of the Company's common
stock and issued a warrant for 150,000 shares of the Company's common stock in
exchange for $3,307,500 in cash. The purchaser was Langley Partners, L.P., an
accredited investor. The warrant is exercisable by Langley Partners, L.P. at any
time up to December 14, 2009 at a price of $5.88 per share. The securities sold
were exempt from registration pursuant to Section 4(2) of the Securities Act of
1933 and Regulation D promulgated under the Securities Act of 1934.The
securities were registered for resale by Langley Partners, L.P. effective
February 3, 2005 on a Form S-3 Registration Statement.
12
On December 14, 2004, the Company sold 400,000 shares of the Company's common
stock and issued a warrant for 50,000 shares of the Company's common stock in
exchange for $1,872,000 in cash. The purchaser was JMB Capital Partners, L.P.,
an accredited investor. The warrant is exercisable by JMB Capital Partners, L.P.
at any time up to December 14, 2009, at a price of $5.88 per share. The
securities sold were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 and Regulation D promulgated under the Securities Act of
1934. The securities were registered for resale by JMB Capital Partners, L.P.
effective February 3, 2005 on a Form S-3 Registration Statement.
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 May 6, 2005, the Company
did not purchase any shares on the open market.
12. LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
At March 31, 2005, we had borrowings, including capital lease obligations, of
approximately $28.3 million, substantially all of which is secured by mortgages
against certain of our real property. Of such borrowings, approximately $2.6
million is classified as current as it is due in less than 12 months from March
31, 2005. We had letters of credit outstanding at March 31, 2005, totaling $1.1
million 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 March 31, 2005.
Our two most significant borrowings are secured notes payable to General Motors
Acceptance Corp. ("GMAC") in the amount of $10.4 million, $9.5 million of which
was classified as non-current debt at March 31, 2005, and secured notes payable
to Bank One, Texas, N.A. ("Bank One") in the amount of $14.2 million, $12.8
million of which was classified as non-current debt at March 31, 2005. 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, limitations on capital
spending and the maintenance of certain debt coverage ratios on a consolidated
level. The Bank One agreement is our only debt agreement that contains an
express prohibition on incurring additional debt for borrowed money without the
approval of the lender. None of our other agreements contain such a prohibition.
Twenty five car washes, one truck wash and our warehouse and office facility in
Farmers Branch, Texas are encumbered by mortgages.
At March 31, 2005, we were not in compliance with our semi-annual consolidated
debt coverage ratio of at least 1.25:1 related to our GMAC notes payable. The
Company's debt coverage ratio related to the GMAC notes payable was .89:1 at
March 31, 2005. GMAC granted us a waiver of acceleration related to the
non-compliance with the debt coverage ratio covenant at March 31, 2005, and for
measurement periods through April 1, 2006 and, accordingly, a portion of the
GMAC notes payable was reflected as non-current on our financial statements at
March 31, 2005. If we are not able to achieve a debt coverage ratio of at least
1.25:1, or we cannot obtain further waivers of acceleration, the GMAC notes may
be reflected as current in future balance sheets and as a result our stock price
may decline.
The Company 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 ratio of consolidated earnings before interest, income
taxes, depreciation and amortization to debt service of 1.05:1 at December 31,
2004 and thereafter. The Company's debt coverage ratio was .86:1 at March 31,
2005, which was not in compliance with this Bank One covenant as amended. The
Company received a waiver of acceleration with respect to this debt coverage
ratio from Bank One through April 1, 2006 and, accordingly, a portion of the
Bank One notes payable was reflected as non-current on our financial statements
at March 31, 2005. The Bank One amendment also requires the maintenance of a
minimum total unencumbered cash and marketable securities balance of $5.0
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 :1. If we are unable
to satisfy these covenants or obtain further waivers, the Bank One notes may be
reflected as current in future balance sheets and as a result our stock price
may decline.
Our ongoing ability to comply with the debt 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. In the future,
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 and GMAC covenants and may need to seek additional waivers or
amendments.
13
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
$14.2 million and GMAC debt totaling $10.4 million, including debt recorded as
long-term debt at March 31, 2005, 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 25 of our car wash
facilities and one truck wash facility) are foreclosed upon, revenues from our
Car and Truck Wash Segment, which comprised 71% of our total revenues for fiscal
year 2004 and 62% of our total revenues in the first quarter of 2005, 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 we may go out of
business.
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
MARCH 31,
---------------------------
2005 2004
----------- ------------
Numerator:
Net income $ 11 $ 217
=========== ============
Denominator:
Denominator for basic income
per share - weighted average shares...... 15,271,132 12,461,029
Dilutive effect of options and
warrants................................. 384,731 157,808
----------- ------------
Denominator for diluted
income per share - weighted average
shares................................... 15,655,863 12,618,837
=========== ============
Basic and diluted income per share:
Net income.................................... $ 0.00 $ 0.02
=========== ============
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.
14
SUMMARY OF CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
is based upon the Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States 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. 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 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 SG&A expenses.
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 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, Goodwill and Other Intangible Assets, the Company
completed annual impairment tests as of November 30, 2004, 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 affect recoverability of goodwill in the
future and accordingly, the Company may record additional impairments in
subsequent years.
OTHER INTANGIBLE ASSETS
Other intangible assets consist primarily of deferred financing costs, customer
lists, product lists, trademarks, and a registered national brand name. 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 not
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
15
significant 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 $504,000 and $486,000 for
the quarter ended March 31, 2005 and 2004, respectively. Income taxes paid were
$0 in the first quarter of 2005 and a refund of $67,000 was received in the
first quarter of 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
three months ended March 31, 2005 for the Car and Truck Wash Segment were
comprised of approximately 83% car wash and detailing, 8% lube and other
automotive services, and 9% fuel and merchandise.
The majority of revenues are collected in the form of cash or credit card
receipts, thus minimizing customer accounts receivable.
Weather has had a significant impact on volume, and therefore revenue at the
individual locations. We believe that the geographic diversity of our operating
locations in different regions of the country helps mitigate the risk of adverse
weather-related influence on our volume.
SECURITY
Our Security Segment designs, manufactures, markets and sells a wide range of
products. The Company's primary focus in the Security Segment is the design of
electronic video surveillance systems and components that it produces and sells,
primarily to installing dealers, system integrators and end users. Other
products in our Security Segment include, but are not limited to,
less-than-lethal defense sprays, personal alarms, biometric locks and plasma
monitors. The main marketing channels for our products are industry shows,
outside sales representatives, catalogs, internet, sales through a call center
and sales through mass merchants and trade publications.
COST OF REVENUES
CAR AND TRUCK WASH SERVICES
Cost of revenues consists primarily of direct labor and related taxes and fringe
benefits, certain insurance costs, chemicals, wash and detailing supplies, rent,
real estate taxes, utilities, car damages, maintenance and repairs of equipment
and facilities, as well as the cost of the fuel and merchandise sold.
16
SECURITY
Cost of revenues within the Security Segment consists primarily of costs to
purchase or manufacture the security products including direct labor and related
taxes and fringe benefits, and raw material costs. Product warranty costs
related to the Security Segment 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 business acquisitions.
Indirect acquisition costs, such as executive salaries, corporate overhead,
public relations, and other corporate services and overhead are expensed as
incurred.
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 fifteen years, using the straight-line method.
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 expense is derived from tax provisions for interim periods that are
based on the Company's estimated annual effective rate. Currently, the effective
rate of 36% 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 $13.0 million at March 31, 2005. The ratio of our
total debt to total capitalization, which consists of total debt plus
stockholders' equity, was 29.8% at March 31, 2005, and 30.5% at December 31,
2004.
Our business requires a substantial amount of capital, most notably to pursue
our expansion strategies, including our current expansion in the Security
Segment, 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 March 31, 2005, we had working capital of approximately $16.6 million. At
December 31, 2004, working capital was approximately $17.5 million.
During the three month periods ending March 31, 2005 and 2004, we made capital
expenditures of $276,000 and $136,000, 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 $1.0
million for the remainder of the year ending December 31, 2005. The Company
believes its current cash balance at March 31, 2005 of $13.0 million and cash
flow from operating activities in the remainder of 2005 will be sufficient to
meet its car wash capital expenditure funding needs through at least the next
twelve months. In years subsequent to 2005, we estimate that our Car and Truck
Wash Segment will require annual capital expenditures of $750,000 to $1.25
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
17
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
video surveillance systems operations in Ft. Lauderdale, Florida 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
Farmers Branch, Texas for our newly acquired S&M and IVS security operations.
Approximately $825,000 of the Farmers Branch, Texas facility purchase price was
financed with debt. We estimate capital expenditures for the Security Segment at
approximately $100,000 for the remainder of 2005, principally related to
improvements and equipment for the new facilities in Farmers Branch, Texas and
Ft. Lauderdale, Florida.
We intend to continue to expend significant cash for the purchase of inventory
as we grow and introduce new video surveillance products in 2005 and in years
subsequent to 2005. We anticipate that inventory purchases will be funded from
cash collected from sales and working capital. At March 31, 2005, we maintained
an unused $500,000 revolving credit facility with Bank One to provide financing
for additional video 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 March 31, 2005, the full amount of the revolving credit facility
is currently available. The amount of capital that we will spend in 2005 and in
years subsequent to 2005 is largely dependent on the marketing success we
achieve with our video surveillance systems and components. We believe our cash
balance of $13.0 million at March 31, 2005 and the revolving credit facility
will provide for growth in 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 March 31, 2005 we were in default on certain of our debt covenants.
We obtained waivers through April 1, 2006 from the lenders. 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, we cannot incur additional long term debt without the approval of one
of our commercial lenders. The Company must demonstrate 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 March 31, 2005, we had borrowings, including capital lease obligations, of
approximately $28.3 million. We had three letters of credit outstanding at March
31, 2005, totaling $1.1 million 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 video surveillance product inventory purchases.
There were no borrowings outstanding under the revolving credit facility at
March 31, 2005. The Company also maintains a $600,000 line of credit for
commerical letters of credit for the importation of inventory. There were no
outstanding commerical letters of credit under this commitment at March 31,
2005.
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, limitations on capital spending and the maintenance of certain debt
service coverage ratios on a consolidated level.
At March 31, 2005, we were not in compliance with our semi-annual consolidated
debt coverage ratio of at least 1.25:1 related to our GMAC notes payable. The
Company's debt coverage ratio related to the GMAC notes payable was .89:1 at
March 31, 2005. GMAC granted us a waiver of acceleration related to the
non-compliance with the debt coverage ratio covenant at March 31, 2005, and for
measurement periods through April 1, 2006 and, accordingly, a portion of the
GMAC notes payable was reflected as non-current on our financial statements at
March 31, 2005. If we are not able to achieve a debt coverage ratio of at least
1.25:1, or we cannot obtain further waivers of acceleration, the GMAC notes may
be reflected as current in future balance sheets and as a result our stock price
may decline.
18
The Company 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 ratio of consolidated earnings before interest, income
taxes, depreciation and amortization to debt service of 1.05:1 at March 31, 2004
and thereafter. The Company's debt coverage ratio was .86:1 at March 31, 2005,
which was not in compliance with this Bank One covenant as amended. The Company
received a waiver of acceleration with respect to this debt coverage ratio from
Bank One through April 1, 2006 and, accordingly, a portion of the Bank One notes
payable was reflected as non-current on our financial statements at March 31,
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. If we are unable to satisfy these
covenants or obtain further waivers, the Bank One notes may be reflected as
current in future balance sheets and as a result our stock price may decline.
The Company sold two unprofitable or marginally profitable car wash facilities
in 2004 and increased its prices in March 2004 within the Car and Truck Wash
Segment to help improve cash flows. 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. 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. Our cash flow has been
and could continue to be adversely affected by weather patterns, economic
conditions, and the requirements to fund the growth of our security business. 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. If the Company is unable to obtain waivers or amendments in the
future, Bank One debt currently totaling $14.2 million and GMAC debt currently
totaling $10.4 million, including debt recorded as long-term debt at March 31,
2005, would become payable on demand by the financial institution upon
expiration of the current waivers. 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.
19
The following are summaries of our contractual obligations and other commercial
commitments at March 31, 2005 (in thousands):
Payments Due By Period
--------------------------------------------------------------
Two to
Less than Three Four to More Than
Contractual Obligations (1) Total One Year Years Five Years Five Years
- ------------------------------ --------- --------- -------- ---------- ----------
Long-term debt (2) $ 28,145 $ 2,487 $ 5,095 $ 12,700 $ 7,863
Capital leases (2) 137 69 68 - -
Minimum operating lease payments 3,914 1,034 1,274 717 889
--------- --------- -------- ---------- ----------
$ 32,196 $ 3,590 $ 6,437 $ 13,417 $ 8,752
========= ========= ======== ========== ==========
Amounts Expiring Per Period
--------------------------------------------------------------
Two to
Less Than Three Four to More Than
Other Commercial Commitments Total One Year Years Five Years Five Years
- ---------------------------- --------- --------- -------- ---------- ----------
Line of credit (3) $ 500 $ 500 $ - $ - $ -
Standby letters of credit (4) 1,078 1,078 - - -
--------- --------- -------- ---------- ----------
$ 1,578 $ 1,578 $ - $ - $ -
========= ========= ======== ========== ==========
(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 $1.95 million.
(3) There were no borrowings outstanding under the Company's line of credit at
March 31, 2005.
(4) The Company also maintains a $600,000 line of credit for commerical
letters of credit for the importation of inventory. There were no
outstanding commercial letters of credit under this commitment at March
31, 2005. Outstanding letters of credit of $1,078,000 represent collateral
for workers' compensation insurance policies
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 used in operating activities totaled $566,000 for
the three months ended March 31, 2005. Cash used in operating activities in 2005
was primarily due to an increase in our inventories of our Security Segment of
$770,000 and a decrease in accounts payable of $846,000 primarily due to the
payment of real estate taxes in the first quarter of 2005. Net cash provided by
operating activities totaled $1.0 million for the three months ended March 31,
2004. Cash provided by operating
20
activities in 2004 was primarily due to positive operating results and a
reduction of inventory within the Company's Security Segment.
Investing Activities. Cash used in investing activities totaled $7,000 for the
three months ended March 31, 2005, which includes capital expenditures of
$396,000 and proceeds of $390,000 from the sale of an unused warehouse bay in
one of our Florida facilities. Cash used in investing activities totaled
$170,000 for the three months ended March 31, 2004 which includes $135,000 for
capital expenditures relating to ongoing car care operations, and $6,000 for the
Security Segment.
Financing Activities. Cash used in financing activities was $964,000 for the
three months ended March 31, 2005, which includes routine principal payments on
debt of $575,000 and payoff of $338,000 of debt utilizing proceeds from the
previously mentioned sale of a warehouse bay. Cash used in financing activities
was $634,000 for the three months ended March 31, 2004, which includes routine
principal payments on debt of $660,000 partially offset by $26,000 of proceeds
from the issuance of common stock.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005
COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2004
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues:
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
------- -------
Revenues 100.0% 100.0%
Cost of revenues 72.8 71.0
Selling, general and administrative expenses 21.4 19.5
Depreciation and amortization 3.5 3.9
----- -----
Operating income 2.3 5.6
Interest expense, net (2.7) (3.8)
Other income 0.5 0.9
----- -----
Income before income taxes 0.1 2.7
Income tax expense - 1.0
----- -----
Net income 0.1% 1.7%
===== =====
REVENUES
CAR AND TRUCK WASH SERVICES
Revenues for the three months ended March 31, 2005 were $10.5 million as
compared to $10.8 million for the three months ended March 31, 2004, a decrease
of $0.3 million or 3%. This decrease was primarily attributable to a decrease in
wash and detail services. Of the $10.5 million of revenues for the three months
ended March 31, 2005, $8.7 million or 83% was generated from car wash and
detailing, $791,000 or 8% from lube and other automotive services, and $983,000
or 9% from fuel and merchandise sales. Of the $10.8 million of revenues for the
three months ended March 31, 2004, $8.9 million or 82% was generated from car
wash and detailing, $0.9 million or 9% from lube and other automotive services,
and $1.0 million or 9% from fuel and merchandise sales. The decrease in wash and
detail revenues was principally due to closing or divesting of two of our car
wash locations in 2004; and unfavorable weather trends within our Arizona and
Texas regions. Overall car wash volumes declined 3.4% in the first quarter of
2005 as compared to the first quarter of 2004, including 2.3% from the closing
or divesting of the two 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 $14.73 in the first quarter of 2005, from $14.42 in
the same period in 2004. 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. The increase in fuel and
merchandise revenues is primarily the result of the addition of higher quality
merchandise in our car wash lobbies. Management expects car wash volumes to
increase as weather trends return to more
21
historic levels of inclement weather resulting in an improvement in car wash and
detailing revenue levels.
SECURITY
Revenues within the Security Segment were approximately $6.4 million and $1.9
million for the three months ended March 31, 2005 and 2004, respectively, The
increase in revenues within the Security Segment was due principally to internal
growth in sales to security system installers, and $3.5 million of sales
generated by IVS and S&M which we acquired in July of 2004. Management expects
revenues to continue to increase in the electronic surveillance systems 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 March 31, 2005 were $7.7 million, or
73% of revenues, with car washing and detailing costs at 71% of respective
revenues, lube and other automotive services costs at 83% of respective
revenues, and fuel and merchandise costs at 87% of respective revenues. Cost of
revenues for the three months ended March 31, 2004 were $7.8 million, or 72% of
revenues, with car washing and detailing costs at 71% of respective revenues,
lube and other automotive services costs at 76% of respective revenues, and fuel
and merchandise costs at 86% of respective revenues.
SECURITY
During the three months ended March 31, 2005 cost of revenues were $4.6 million
or 72% of revenues as compared to $1.2 million or 63% of revenues for the three
months ended March 31, 2004. The increase in cost of revenues in 2005 is
principally due to the growth in the sale of video surveillance systems and
components which have gross profit margins typically lower than less-than-lethal
defense sprays; an increase in sales to larger distributors and system
installers at lower profit margins to gain market share; and the acquisition of
IVS and S&M with sales margins lower than the Company's previously existing
security operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended March
31, 2005 were $3.6 million compared to $2.5 million for the same period in 2004.
SG&A expenses as a percent of revenues were 21.4% for the three months ended
March 31, 2005 as compared to 19.5% in the first quarter of 2004. The increase
in SG&A costs is primarily the result of the growth in the Security Segment
which added an additional $1.0 million of SG&A costs in 2005. 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 $590,000 for the three months ended March
31, 2005 as compared to $500,000 for the same period in 2004.
INTEREST EXPENSE, NET
Interest expense, net of interest income, for the three months ended March 31,
2005 was $451,000 compared to $479,000 for the three months ended March 31,
2004. This decrease in interest expense was the result of a reduction in our
outstanding debt as a result of normal principal payments, partially offset by
an increase in interest rates on approximately 50% of our long term debt which
has interest rates tied to the prime rate and an increase in interest income.
OTHER INCOME
Other income for the three months ended March 31, 2005 was $89,000 compared to
$112,000 for the three months ended March 31, 2004.
22
INCOME TAXES
The Company recorded tax expense of $6,000 and $122,000 for the three months
ended March 31, 2005 and 2004, respectively. Tax expense reflects the recording
of income taxes at an effective rate of approximately 36% in both 2005 and 2004.
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
FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING STATEMENTS
This report includes forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended ("Forward-Looking Statements"). All statements
other than statements of historical fact included in this 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 be 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.
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 equipment purchases. Although we had positive working capital of
$16.6 million as of March 31, 2005, 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 future capital needs, we will need to
raise additional funds through bank borrowings and significant additional equity
and/or debt financings, 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 may 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 Security Segment, both internally
and through acquisitions, if we can do so under advantageous terms. 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.
23
IF WE VIOLATE THE FINANCIAL COVENANTS WITH OUR LENDERS, OUR BORROWINGS MAY BE
ACCELERATED.
Our bank debt borrowings as of March 31, 2005 were $28.3 million substantially
all of which is secured by mortgages against certain of our real property. Of
such borrowings, $2.6 million is classified as current as it is due in less than
12 months from March 31, 2005. Our two most significant borrowings are secured
notes payable to General Motors Acceptance Corp. ("GMAC") in the amount of $10.4
million, $9.5 million of which was classified as non-current debt at March 31,
2005, and secured notes payable to Bank One, Texas, N.A. ("Bank One") in the
amount of $14.2 million, $12.8 million of which was classified as non-current
debt at March 31, 2005. 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, limitations on capital spending and the maintenance of certain debt
coverage ratios on a consolidated level. The Bank One agreement is our only debt
agreement that contains an express prohibition on incurring additional debt for
borrowed money without the approval of the lender. None of our other agreements
contain such a prohibition. Twenty five car wash facilities, one truck wash
facility and our warehouse and office in Farmers Branch, Texas are encumbered by
mortgages.
At March 31, 2005, we were not in compliance with our semi-annual consolidated
debt coverage ratio of at least 1.25:1 related to our GMAC notes payable. The
Company's debt coverage ratio related to the GMAC notes payable was .89:1 at
March 31, 2005. GMAC granted us a waiver of acceleration related to the
non-compliance with the debt coverage ratio covenant at March 31, 2005, and for
measurement periods through April 1, 2006 and, accordingly, a portion of the
GMAC notes payable was reflected as non-current on our financial statements at
March 31, 2005. If we are not able to achieve a debt coverage ratio of at least
1.25:1, or we cannot obtain further waivers of acceleration, the GMAC notes may
be reflected as current in future balance sheets and as a result our stock price
may decline.
The Company 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 ratio of consolidated earnings before interest, income
taxes, depreciation and amortization to debt service of 1.05:1 at March 31, 2004
and thereafter. The Company's debt coverage ratio related to the Bank One term
loan agreement was .86:1 at March 31, 2005, which was not in compliance with
this Bank One covenant as amended. The Company received a waiver of acceleration
with respect to this debt coverage ratio from Bank One through April 1, 2006
and, accordingly, a portion of the Bank One notes payable was reflected as
non-current on our financial statements at March 31, 2005. The Bank One
amendment also requires the maintenance of a minimum total unencumbered cash and
marketable securities balance of $5.0 million. This cash balance requirement
will be lowered to $1 million upon the Company returning to a debt coverage
ratio of at least 1.10:1. If we are unable to satisfy these covenants or obtain
further waivers, the Bank One notes may be reflected as current in future
balance sheets and as a result our stock price may decline.
Our ongoing ability to comply with the debt 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. In the future,
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 and GMAC coven ants 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
$14.2 million and GMAC debt totaling $10.4 million, including debt recorded as
long-term debt at March 31, 2005, 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 25 of our car wash
facilities and one truck wash) are foreclosed upon, revenues from our Car and
Truck Wash Segment, which comprised 62% of our total revenues for the quarter
ended March 31, 2005, 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 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, 2004, we reported a net loss although our
business as a whole generated positive cash flow from operations. The majority
of the reported losses in 2004 related to non-cash 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 required to record
additional impairments in the future, which could materially reduce our earnings
and equity.
24
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. The employment agreements of Robert M. Kramer, Gregory
M. Krzemien, and Ronald R. Pirollo expired on March 26, 2003. 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 and 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 the Company's insurance program,
including auto, general liability, and workers' compensation coverage, we are
insured through participation in a captive insurance program with other
unrelated businesses. The Company maintains excess coverage through
occurrence-based policies. With respect to our auto, general liability, and
workers' compensation policies, we are required to set aside an actuarial
determined amount of cash in a restricted "loss fund" account for the payment of
claims under the policies. We expect to fund these accounts annually as required
by the insurance company. Should funds deposited exceed claims incurred and
paid, unused deposited funds are returned to us with interest on the third
anniversary of the policy year-end. The captive insurance program is further
secured by a letter of credit in the amount of $973,000 at March 31, 2005. The
Company records a monthly expense for losses up to the reinsurance limit per
claim based on the Company's tracking of claims and the insurance company's
reporting of amounts paid on claims plus their estimate of reserves for possible
future payments. There can be no assurance that our insurance will provide
sufficient coverage in the event a claim is made against us, or that we will be
able to maintain in place such insurance at reasonable prices. An uninsured or
under insured claim against us of sufficient magnitude could have a material
adverse effect on our business and results of operations.
RISKS RELATED TO OUR SECURITY SEGMENT
IF WE ARE NOT ABLE TO OPERATE OUR ELECTRONIC SURVEILLANCE PRODUCTS DIVISION
EFFECTIVELY, OUR BUSINESS WILL SUFFER.
In 2001, we expanded our Security Segment by adding video systems and
components. We are incurring expenses to develop and further expand these
products. There are numerous risks associated with expanding our video
surveillance systems and components that may prevent us from operating the
Security Segment profitably, including, among others: risks associated with
products which do not function properly; risks associated with unanticipated
liabilities of the acquired companies; risks inherent with our management having
limited experience in the electronic surveillance product market; risks relating
to the size and number of competitors in the video system and component 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 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 electronic surveillance product division. If we are
not able to operate our electronic surveillance products division effectively,
our operating and financial results could be adversely impacted.
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
25
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
suppliers 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 less-than-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. We may also face claims by
purchasers of our electronic surveillance systems, if they fail to operate
properly during the commission of a crime. As the use of defense sprays and
electronic surveillance systems by the public increase, 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. 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, which 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.
26
RISKS RELATED TO OUR CAR AND TRUCK WASH SEGMENT
IF CONSUMER DEMAND FOR OUR CAR WASH SERVICE DROPS, OUR BUSINESS WILL SUFFER.
Our revenues are primarily 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. If there is a
drop in consumer demand, our financial condition and results of operations will
be adversely impacted.
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
we do. If we cannot effectively compete, our operating results are likely to be
negatively effected.
OUR CAR AND TRUCK WASH OPERATIONS FACE GOVERNMENTAL REGULATIONS, INCLUDING
ENVIRONMENTAL REGULATIONS, AND IF WE FAIL TO OR 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 any of our properties,
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.
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 two of our truck washes, and leaks from our
underground gasoline storage tanks. If we improperly dispose of oil or other
hazardous substances, or if our oil discharge ponds or underground gasoline
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 costs for
remediation and removal of a leaking discharge pond typically range from
$150,000 to $200,000, and the costs for remediation of a leaking underground
storage tank typically range from $30,000 to $75,000.
IF OUR CAR WASH EQUIPMENT IS NOT MAINTAINED, OUR CAR WASHES WILL NOT BE
OPERABLE.
Many of our car washes have older equipment that 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.
27
RISK RELATED TO THE SALE OF OUR CAR AND TRUCK WASH SEGMENT
IF WE SELL OUR CAR AND TRUCK WASH SEGMENT, OUR REVENUES WILL DECREASE AND OUR
BUSINESS MAY SUFFER.
On December 9, 2004, we engaged Legg Mason Wood Walker, Incorporated for the
purpose of identifying strategic business alternatives, including the possible
sale of all of our car and truck washes. We can offer no assurances that we will
be able to locate potential buyers for our Car and Truck Wash Segment or that we
will be able to consummate any sales to potential buyers we do locate. If we are
able to sell our Car and Truck Wash Segment, our total revenues will decrease
and our business will become reliant on the success of our Security Segment. Our
Security Segment faces significant risks as set forth herein and may impact our
ability to generate positive operating income or cash flows from operations, may
cause our financial results to become more volatile, or may otherwise materially
adversely affect us.
RISKS RELATED TO OUR STOCK
OUR STOCK PRICE HAS BEEN, AND LIKELY WILL CONTINUE TO BE, VOLATILE AND YOUR
INVESTMENT MAY SUFFER A DECLINE IN VALUE.
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 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;
- - announcements regarding the disposition of all or a significant portion of
the assets that comprise our Car and Truck Wash Segment, which may or may
not be on favorable terms;
- - 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 or our competitors;
- - 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 revenues and income or
in the price of our common stock, thereby reducing the value of an investment in
our Company.
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
$2.33 at the close of the market on May 6, 2005. Although the recent closing
prices of our stock have been well in excess of $1.00, 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.
28
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 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.
THERE ARE ADDITIONAL RISKS SET FORTH IN THE INCORPORATED DOCUMENTS. In
addition to the risk factors set forth above, you should review the financial
statements and exhibits incorporated into this report. Such documents may
contain, in certain instances and from time to time, additional and supplemental
information relating to the risks set forth above and/or additional risks to be
considered by you, including, without limitation, information relating to losses
experienced by us in certain historical periods, working capital deficits at
particular dates, information relating to pending and recently completed
acquisitions by us, and estimates at various times of our potential liabilities
for compliance with environmental laws or in connection with pending litigation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in our exposure to market risks arising from
fluctuations in foreign currency exchange rates, commodity prices, equity prices
or market interest rates since December 31, 2004 as reported on our Form 10-K
for the year ended December 31, 2004.
29
A significant portion of our debt is at fixed rates, and as such, changes in
market interest rates would not significantly impact operating results unless
and until such debt would need to be refinanced at maturity. 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
March 31, 2005 and would have had the impact of increasing interest expense by
approximately $163,000 for the twelve months ended March 31, 2005.
On October 14, 2004, we entered into an interest rate cap that effectively
changes our interest rate exposure on approximately $7 million of variable rate
debt. The variable rate debt floats at prime plus .25% (6.0% at March 31, 2005).
The hedge contract has a 36-month term and caps the interest rate on the $7
million of variable rate debt at 6.5%. The derivative is designated as a cash
flow hedge and, accordingly, is marked to market with gains and losses on the
contract reported as a component of other comprehensive income (loss) and is
classified into earnings in the earlier of (i) the period the hedged transaction
affects earnings, or (ii) the termination of the hedge contract. At March 31,
2005 the contract, which was originally purchased for $124,000, is included in
other assets at its fair market value of approximately $120,000.
ITEM 4. CONTROLS AND PROCEDURES
Under the direction of our Chief Executive Officer and Chief Financial Officer,
we evaluated our disclosure controls and procedures and internal control over
financial reporting and concluded that (i) our disclosure controls and
procedures were effective March 31, 2005, and (ii) no change in internal control
over financial reporting occurred during the quarter ended March 31, 2005, that
has materially affected, or is reasonably likely to materially affect, such
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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes our equity security repurchases during the three
months ended March 31, 2005:
APPROXIMATE
TOTAL NUMBER OF DOLLAR VALUE OF
SHARE PURCHASED AS SHARES THAT MAY
PART OF PUBLICLY YET BE PURCHASED
TOTAL NUMBER OF AVERAGE PRICE ANNOUNCED PLANS UNDER THE PLANS OR
PERIOD SHARES PURCHASED PAID PER SHARE OR PROGRAMS PROGRAMS (1)
- -------------------- ---------------- -------------- ------------------ ------------------
January 1 to January
31, 2005 - - - $ 3,000,000
February 1 to
February 28, 2005 - - - $ 3,000,000
March 1 to March
31, 2005 - - - $ 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 March 31, 2005, no shares had been repurchased under the
program.
30
ITEM 6. EXHIBITS
(a) Exhibits:
10.1 Note Modification Agreement dated December 22, 2004 between
the Company, its subsidiary, Mace Security Products Inc. and
Bank One, Texas, N.A. in the amount of $500,000.
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.
31
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: May 10, 2005
32
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------------
10.1 Note Modification Agreement dated December 22, 2004 between the Company, its subsidiary, Mace Security Products Inc.
and Bank One, Texas, N.A. in the amount of $500,000.
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.