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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2002 COMMISSION FILE NO. 0-22810
MACE SECURITY INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
03-0311630
(I.R.S. Employer 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 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 the number of shares outstanding of each of the issuer's classes of
Common Stock:
As of November 7, 2002, there were 24,921,685 Shares of Registrant's Common
Stock, par value $.01 per share, outstanding.
Mace Security International, Inc.
Form 10-Q
Quarter Ended September 30, 2002
Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 2
Consolidated Balance Sheets - September 30, 2002 (Unaudited)
and December 31, 2001 2
Consolidated Statements of Operations for the three
months ended September 30, 2002 and 2001 (Unaudited) 4
Consolidated Statements of Operations for the nine months
ended September 30, 2002 and 2001 (Unaudited) 5
Consolidated Statement of Stockholders' Equity
for the nine months ended September 30, 2002 (Unaudited) 6
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2002 and 2001 (Unaudited) 7
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 27
Item 4 - Controls and Procedures 27
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 27
Item 2 - Not applicable -
Item 3 - Not applicable -
Item 4 - Submission of Matters to a Vote of Security Holders 28
Item 5 - Other Information 28
Item 6 - Exhibits and Reports on Form 8-K 28
Signatures 29
Certifications 30
1
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Mace Security International, Inc.
Consolidated Balance Sheets
(In thousands except share information)
September 30, December 31,
ASSETS 2002 2001
------------------- -----------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 7,214 $ 6,612
Accounts receivable, less allowance for doubtful
accounts of $249 and $178 in 2002 and 2001, respectively 922 1,075
Inventories 2,368 2,275
Deferred income taxes 158 145
Prepaid expenses and other current assets 2,189 2,218
------------------- -----------------
Total current assets 12,851 12,325
Property and equipment:
Land 32,029 32,592
Buildings and leasehold improvements 35,828 36,315
Machinery and equipment 9,292 8,776
Furniture and fixtures 444 431
------------------- -----------------
Total property and equipment 77,593 78,114
Accumulated depreciation and amortization (8,593) (7,204)
------------------- -----------------
Total property and equipment, net of accumulated depreciation
and amortization 69,000 70,910
Goodwill 13,430 20,139
Other intangible assets, net of accumulated amortization
of $1,403 and $1,384 in 2002 and 2001, respectively 963 993
Deferred income taxes 1,118 -
Other assets 275 303
------------------- -----------------
Total assets $ 97,637 $ 104,670
=================== =================
See accompanying notes.
2
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
----------------- ----------------
(Unaudited)
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 7,594 $ 2,514
Accounts payable 2,043 2,446
Income taxes payable 88 174
Deferred revenue 223 257
Accrued expenses and other current liabilities 2,720 2,125
----------------- ----------------
Total current liabilities 12,668 7,516
Deferred income taxes - 638
Long-term debt, net of current portion 25,553 31,570
Capital lease obligations, net of current portion 348 265
Other liabilities 88 825
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 25,355,685 and 25,428,427 in
2002 and 2001, respectively 254 254
Additional paid-in capital 69,902 69,977
Accumulated deficit (11,176) (6,375)
----------------- ----------------
Total stockholders' equity 58,980 63,856
----------------- ----------------
Total liabilities and stockholders' equity $ 97,637 $ 104,670
================= ================
See accompanying notes.
3
Mace Security International, Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands except share information)
Three Months Ended
September 30,
----------------------------
2002 2001
------------ ------------
Revenues:
Car wash and detailing services $ 8,707 $ 8,933
Lube and other automotive services 1,125 1,084
Fuel and merchandise sales 839 888
Security products sales 1,169 -
Operating agreements - 60
------------ ------------
11,840 10,965
Cost of revenues:
Car wash and detailing services 6,433 6,504
Lube and other automotive services 887 840
Fuel and merchandise sales 731 795
Security products sales 643 -
------------ ------------
8,694 8,139
Selling, general and administrative expenses 2,325 1,717
Depreciation and amortization 474 684
Costs of terminated acquisitions 57 33
------------ ------------
Operating income 290 392
Interest expense, net (553) (712)
Other income 82 289
------------ ------------
Loss before income taxes (181) (31)
Income tax benefit (65) (11)
------------ ------------
Net loss $ (116) $ (20)
============ ============
Per share of common stock:
Basic $ - $ -
============ ============
Diluted $ - $ -
============ ============
Weighted average shares outstanding:
Basic 25,353,136 25,428,427
Diluted 25,353,136 25,428,427
See accompanying notes.
4
Mace Security International, Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands except share information)
Nine Months Ended
September 30,
------------------------------
2002 2001
------------ ------------
Revenues:
Car wash and detailing services $ 28,229 $ 30,308
Lube and other automotive services 3,168 3,446
Fuel and merchandise sales 2,407 2,902
Security products sales 1,566 -
Operating agreements 80 180
------------ ------------
35,450 36,836
Cost of revenues:
Car wash and detailing services 19,419 21,149
Lube and other automotive services 2,509 2,626
Fuel and merchandise sales 2,086 2,591
Security products sales 868 -
------------ ------------
24,882 26,366
Selling, general and administrative expenses 6,160 5,474
Depreciation and amortization 1,456 2,037
Cost of terminated acquisitions 57 107
------------ ------------
Operating income 2,895 2,852
Interest expense, net (1,669) (2,263)
Other income 230 429
------------ ------------
Income before income taxes and cumulative effect of a change
in accounting principle 1,456 1,018
Income tax expense 524 377
------------ ------------
Income before cumulative effect of a change in accounting principle 932 641
Cumulative effect of a change in accounting principle, net of tax of $2,188 (5,733) -
------------ ------------
Net (loss) income $ (4,801) $ 641
============ ============
Per share of common stock:
Basic income before cumulative effect of a change
in accounting principle $ 0.04 $ 0.03
Cumulative effect of a change in accounting principle, net of tax $ (0.23) -
------------ ------------
Basic net (loss) income $ (0.19) $ 0.03
============ ============
Diluted income before cumulative effect of a change
in accounting principle $ 0.04 $ 0.03
Cumulative effect of a change in accounting principle, net of tax $ (0.23) -
------------ ------------
Diluted net (loss) income $ (0.19) $ 0.03
============ ============
Weighted average shares outstanding:
Basic 25,362,849 25,455,350
Diluted 25,416,951 25,490,776
See accompanying notes.
5
Mace Security International, Inc.
Consolidated Statement of Stockholders' Equity
(Unaudited)
(In thousands except share information)
Number of Par Value Additional
Common of Common Paid-in Accumulated
Shares Stock Capital Deficit Total
----------- ---------- ---------- ----------- -----------
Balance at December 31, 2001 ........ 25,428,427 $ 254 $ 69,977 $ (6,375) $ 63,856
Shares issued in acquisition ........ 13,158 1 12 13
Shares purchased and retired ........ (85,900) (1) (87) (88)
Net loss ............................ (4,801) (4,801)
----------- ---------- ---------- ----------- -----------
Balance at September 30, 2002 ....... 25,355,685 $ 254 $ 69,902 $ (11,176) $ 58,980
=========== ========== ========== =========== ===========
See accompanying notes.
6
Mace Security International, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
---------------------------
2002 2001
---------- ----------
Operating activities
Net (loss) income $ (4,801) $ 641
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Depreciation and amortization 1,456 2,037
Provision for losses on receivables 71 20
Gain on disposal of property and equipment - (216)
Deferred income taxes 419 285
Non-cash charge due to change in accounting principle 5,733 -
Changes in operating assets and liabilities:
Accounts receivable (139) (20)
Inventories 112 42
Accounts payable (357) (562)
Deferred revenue (29) (193)
Accrued expenses 535 763
Income taxes (86) (108)
Prepaid expenses and other assets 144 (556)
---------- ----------
Net cash provided by operating activities 3,058 2,133
Investing activities
Purchase of property and equipment (531) (618)
Proceeds from sale of property and equipment - 1,327
Acquisition of business, net of cash acquired (217) -
Payments for intangibles (5) (16)
---------- ----------
Net cash (used in) provided by investing activities (753) 693
Financing activities
Payments on long-term debt and capital lease obligations (1,615) (1,539)
Payments to purchase stock (88) (87)
---------- ----------
Net cash used in financing activities (1,703) (1,626)
---------- ----------
Net increase in cash and cash equivalents 602 1,200
Cash and cash equivalents at beginning of period 6,612 4,838
---------- ----------
Cash and cash equivalents at end of period $ 7,214 $ 6,038
========== ==========
See accompanying notes.
7
Mace Security International, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Mace Security International, Inc. and its wholly owned subsidiaries
(collectively "the Company"). All significant intercompany transactions have
been eliminated in consolidation. These consolidated 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 and nine month periods ended September 30, 2002 are not necessarily
indicative of the operating results for the full year. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These interim financial statements should be read in conjunction with
the audited financial statements and notes contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
2. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") 141, Business Combinations, and SFAS
142, Goodwill and Other Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
fiscal years beginning after December 15, 2001; however, certain provisions of
this Statement apply to goodwill and other intangible assets acquired between
July 1, 2001 and the effective date of SFAS 142. Major provisions of these
Statements and their effective dates for the Company are as follows:
. All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interests method of
accounting is prohibited except for transactions initiated before July 1,
2001.
. Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as part
of a related contract, asset or liability.
. Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized.=
. Effective January 1, 2002, all previously recognized goodwill and
intangible assets with indefinite lives will no longer be subject to
amortization.
. Effective January 1, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually and whenever there is an
impairment indicator.
. All acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.
On January 1, 2002, the Company adopted SFAS 142, and as required, discontinued
amortization of goodwill and certain intangible assets determined to have
indefinite useful lives acquired prior to July 1, 2001. This statement also
requires that within the first interim period of adoption, the intangible assets
with indefinite lives should be tested for impairment as of the date of
adoption, and that if any impairment results, it should be recognized as a
change in accounting principle. Additionally, SFAS 142 requires that, within six
months of adoption, goodwill be tested for impairment at the reporting unit
level as of the date of adoption. If any impairment is indicated to have existed
upon adoption, it should be measured and recorded before the end of the year of
adoption. SFAS 142 requires that any goodwill impairment loss recognized as a
result of initial application be reported in the first interim period of
adoption as a change in accounting principle and that the income per share
effects of the accounting change be separately disclosed. The first phase of the
goodwill transitional impairment testing was completed during the second quarter
of 2002 and as of January 1, 2002. The transitional impairment testing was
completed with goodwill impairment recorded during the third quarter of 2002 and
as of January 1, 2002. (See Note 3, Change in Accounting Principle.)
In August 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 applies to all entities, including rate-regulated
entities, that have legal obligations associated with the retirement of a
tangible long-lived asset that result from acquisition, construction or
development and (or) normal operations of the long-lived asset. SFAS 143 is
effective for fiscal
years beginning after June 15, 2002. The provisions of the Statement are not
expected to have a material impact on the financial condition or results of
operations of the Company.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 retains the existing requirements to
recognize and measure the impairment of long-lived assets to be held and used or
to be disposed of by sale. However, SFAS 144 makes changes to the scope and
certain measurement requirements of existing accounting guidance. SFAS 144 also
changes the requirements relating to reporting the effects of a disposal or
discontinuation of a segment of a business. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
8
periods within those fiscal years. The adoption of this Statement did not have a
significant impact on the financial condition or results of operations of the
Company.
In April 2002, the FASB approved the issuance of SFAS 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS 145 primarily affects the reporting requirements and
classification of gains and losses from the extinguishment of debt and requires
that certain lease modifications with economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
SFAS 145 is effective for fiscal years beginning after May 15, 2002. The Company
believes this statement will not materially affect the Company's financial
position or results of operations.
In June 2002, the FASB approved the issuance of SFAS 146, "Accounting for Exit
or Disposal Activities." SFAS 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for pursuant to the guidance that the Emerging Issues Task Force
(EITF) has set forth in EITF Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS 146 will be effective for exit
or disposal activities that are initiated after December 31, 2002. The Company
believes this Statement will not materially affect the Company's financial
position or results of operations.
3. Change in Accounting Principle
Effective January 1, 2002, we adopted SFAS 142, "Goodwill and Other Intangible
Assets." In connection with the adoption, we discontinued approximately $886,000
in annual amortization of goodwill. SFAS 142 also requires companies to test
intangibles for impairment on an annual basis. During the first quarter of 2002,
the Company performed its testing under SFAS 142 pertaining to its evaluation of
intangible assets determined to have indefinite useful lives, and determined
that there was an impairment issue with certain trademarks used in our security
products segment. The fair values of the trademarks were determined using a
royalty savings approach, discounted at appropriate risk-adjusted rates, which
yielded results consistent with available market-approach data. The impairment
of $43,000, net of tax, was recorded as a cumulative effect of a change in
accounting principle at March 31, 2002.
The following table reflects unaudited adjusted results of operations of the
Company, giving effect to the amortization of goodwill provisions of SFAS 142 as
if they were adopted on January 1, 2001 (in thousands except earnings per
share):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Loss) income before cumulative effect of change
in accounting principle, as reported $ (116) $ (20) $ 932 $ 641
Add back: amortization expense, net of tax - 140 - 420
------------ ------------ ------------ ------------
Pro forma (loss) income before cumulative effect
of change in accounting principle $ (116) $ 120 $ 932 $ 1,061
============ ============ ============ ============
Basic (loss) income before cumulative effect of
change in accounting principle per common share:
As reported $ - $ - $ 0.04 $ 0.03
Pro forma $ - $ - $ 0.04 $ 0.04
Diluted (loss) income before cumulative effect of
change in accounting principle per common share:
As reported $ - $ - $ 0.04 $ 0.03
Pro forma $ - $ - $ 0.04 $ 0.04
Under the provisions of SFAS 142, the Company was required to complete the first
phase of the goodwill transitional impairment test within six months of adopting
the new standard or by June 30, 2002 and the final phase of the transitional
test before the end of the year of adoption, or December 31, 2002. The first
step of the transitional testing was the determination of our reporting units
and the estimation of the fair values of the reporting units. A discounted cash
flow model was used to estimate the fair value of our reporting units. The
Company engaged an independent appraisal firm to determine appropriate discount
rates for each reporting unit. Discount rates were derived by using the weighted
average cost of capital technique. The discount rates were then
9
used by the Company in the discounted cash flow calculations. Significant
estimates and assumptions were used in assessing the fair value of the reporting
units. These estimates and assumptions involved future cash flows, growth rates,
discount rates, weighted average cost of capital and estimates of market
valuations of each of the reporting units. During the third quarter of 2002, we
completed the transitional requirements for goodwill impairment testing. As a
result of the transitional goodwill impairment testing, we determined that the
book value of our Northeast reporting unit exceeded its current fair value by
$1.84 million. The Northeast reporting unit's current fair value was based on
present expectations for the business in light of the current economic
environment and the uncertainty associated with recent volume due to unfavorable
weather patterns. Additionally, there was an impairment of $5.34 million in our
Arizona reporting unit due to unfavorable economic conditions combined with a
significant increase in local competition. This charge represented a complete
write-off of the goodwill associated with this reporting unit. Finally, there
was an impairment loss of $670,000 in our truck wash reporting unit, primarily
because we did not acquire additional truck washes necessary to achieve the
scale needed to attract national accounts. This charge represented a complete
write-off of the goodwill associated with this reporting unit.
The total after-tax impairment charge of $5.7 million is considered a change in
accounting principle, and the cumulative effect of adopting SFAS 142 on our
first quarter's results is provided below (in thousands except per share
information):
Basic Diluted
Earnings (Loss) Earnings (Loss)
Per Share Per Share
--------------- ---------------
Net income as reported for the three months
ended March 31, 2002 $ 647 $ 0.03 $ 0.03
Less: cumulative effect of change in accounting
principle, net of tax $ (5,689) $ (0.23) $ (0.23)
------------ --------------- ---------------
Adjusted to include impairment charge $ (5,042) $ (0.20) $ (0.20)
============ =============== ===============
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002 are as follows (in thousands):
Truck Security
East Texas Arizona Washes Products Total
-------- --------- --------- ---------- ---------- ---------
Balance at December 31, 2001 $ 6,508 $ 7,620 $ 5,341 $ 670 $ - $ 20,139
Reallocation of purchase price 862 - - - - 862
Acquisition of Micro-Tech
Manufacturing, Inc. - - - - 282 282
Transitional impairment loss upon
adoption of SFAS 142 (1,842) - (5,341) (670) - (7,853)
-------- --------- --------- --------- ---------- ---------
Balance at September 30, 2002 $ 5,528 $ 7,620 $ - $ - $ 282 $ 13,430
======== ========= ========= ========= ========== =========
Additionally, impairment of goodwill and intangible assets with indefinite lives
must be tested on at least an annual basis. The Company cannot guarantee that
there will not be impairments in a subsequent quarter in 2002 or in subsequent
years.
10
4. Other Intangible Assets
The following table reflects the components of intangible assets, excluding
goodwill (in thousands):
September 30, 2002 January 1, 2002
---------------------------------- -------------------------------
Gross Gross
Carrying Accum. Carrying Accum.
Amount Amort. Amount Amort.
--------------- --------------- -------------- --------------
Amortized intangible assets:
Non-compete agreement $ 25 $ - $ - $ -
Customer list 25 - - -
Deferred financing costs 365 123 359 104
--------------- --------------- -------------- --------------
Total amortized intangible assets 415 123 359 104
Non-amortized intangible assets:
Trademarks - security products segment 1,835 1,270 1,902 1,270
Service mark - car care segment 116 10 116 10
--------------- --------------- -------------- --------------
Total non-amortized intangible assets 1,951 1,280 2,018 1,280
--------------- --------------- -------------- --------------
Total intangible assets $ 2,366 $ 1,403 $ 2,377 $ 1,384
=============== =============== ============== ==============
The following sets forth the estimated amortization expense on intangible assets
for the fiscal years ending December 31 (in thousands):
2002 $ 28
2003 29
2004 28
2005 28
2006 28
5. Business Combinations
From April 1, 1999 through July 26, 2000, the Company acquired 62 car care
facilities and five truck wash facilities through the acquisition of 17 separate
businesses including: 42 full service facilities, one self service facility, 11
exterior only facilities and one lube center in Pennsylvania, New Jersey,
Delaware, Texas, Florida and Arizona; seven facilities were subsequently
divested. The five full service truck wash facilities are located in Arizona,
Indiana, Ohio and Texas.
On August 28, 2001, the Company sold, through a wholly owned subsidiary,
substantially all of the assets of Gabe's Plaza Car Wash in Morrisville,
Pennsylvania. The Company received an aggregate cash sales price of $1.2
million, $315,000 of which was utilized to pay off a promissory note secured by
the Gabe's Plaza Car Wash assets.
On August 12, 2002, the Company acquired the inventory, certain other assets and
the operations of Micro-Tech Manufacturing, Inc. ("Micro-Tech"), a manufacturer
and retailer of small and miniature electronic security devices. Total
consideration under the agreement was approximately $505,000. At closing, the
Company paid $217,000 cash for inventory, $15,625 cash representing the first of
twelve equal monthly installments totaling $187,500, and 13,158 registered
shares of common stock of the Company representing the first of eight monthly
payments of shares totaling 105,263 shares. This transaction was accounted for
using the purchase method of accounting in accordance with SFAS 141, "Business
Combinations."
6. Operating Agreement
The Company has been directly operating its Security Products Division since May
1, 2002. The results of operations of the Security Products Division since then
are included in the consolidated statements of operations for the three and nine
months ended September 30, 2002. Previous to May 1, 2002, the Security Products
division was operated by Mark Sport, Inc. ("Mark Sport") under a management
agreement which expired on April 30, 2002 (the "Management Agreement"). Mark
Sport is controlled by Jon E. Goodrich, a Director of the Company. Under the
Management Agreement, beginning on January 1, 2000, Mark Sport operated the
division and received all profits and losses therefrom. In exchange, Mark Sport
paid the Company a monthly fee and, upon termination of the agreement, an amount
equal to the amortization and depreciation of the assets of the division. (See
Note 11, Related Party Transactions.)
11
7. Commitments and Contingencies
In December 1999, the Company was named as a defendant in a suit filed in the
state of New York by Janeen Johnson et. al. The litigation concerns a claim that
a self-defense spray manufactured by the Company and used by a law enforcement
officer contributed to the suffering and death of Christopher Johnson. The
Company forwarded the suit to its insurance carrier for defense. The Company
does not anticipate that this claim will result in the payment of damages in
excess of the Company's insurance coverage.
In 2000, the Company was named as a defendant in a suit filed in the United
States District Court for the District of Colorado by Robert Rifkin. The suit
alleges that the Company and its transfer agent delayed in the removal of a
restrictive legend from certain shares of Company common stock owned by the
plaintiff, and that the delay caused the plaintiff to incur a loss in excess of
$335,000. Though the outcome of litigation is always uncertain, the Company
believes that there was no delay in the removal of the legend from the shares.
In July 2001, the Company filed a lawsuit in the Supreme Court of New York
County of the state of New York against LTV Networks, Inc., to collect upon a
promissory note in the amount of $100,000. In January 2002, defendant LTV filed
an answer to the suit denying liability under the promissory note and making
counterclaims. The counterclaims allege that the Company had agreed to lend LTV
$500,000 and that LTV has been damaged in the amount of $10 million because the
Company only lent $100,000 to LTV. The parties are presently completing
discovery and depositions. Though the outcome of litigation is always uncertain,
the Company currently believes that the counterclaims are without merit.
In October 2001, the Company was named as an additional party defendant in a
suit filed by Alan Berndt and Martha Berndt in the United States District Court
for the Northern District of California. The litigation alleges the Company was
responsible for personal injuries arising out of Mr. Berndt's use of a Gas
Launcher. We have forwarded the suit to our insurance carrier for defense. We do
not anticipate that this claim will result in the payment of damages in excess
of our insurance coverage.
In May 2002, the Company was named as one of three defendants in a suit filed by
Timothy Gamradt and Carla Gamradt in the United States District Court for the
District of Minnesota. The litigation alleges that the plaintiffs are entitled
to damages against the Company due to injuries allegedly sustained by Mr.
Gamradt when a pyrotechnic smoke device known as the "Black Smoke Device" was
discharged by Mr. Gamradt's superior during a training exercise at a federal
prison facility at which Mr. Gamradt was employed as a guard. Mr. Gamradt
alleges that when the device was activated, he suffered injuries to his lungs.
We have forwarded the suit to our insurance carrier for defense. We do not
anticipate that this claim will result in the payment of damages in excess of
our insurance coverage.
In July 2002, the Company and its former president, Jon Goodrich, were named as
defendants in a lawsuit in the Supreme Court of New York County of the state of
New York filed by Armor Holdings, et al. The suit alleges that the Company and
Mr. Goodrich had violated the non-compete terms of various agreements entered
into in April 1998, which transferred certain of the Company's then lines of
business to the plaintiffs. The suit also alleges that the Company violated a
right of first refusal on sale granted to plaintiffs, when the Company entered
into a Management Agreement with Mark Sport, Inc., to operate the Company's
Security Products Division. Though the outcome of litigation is always
uncertain, the Company believes that all of the claims are without merit, and
will be defending the suit.
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 are 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. Incidents of
this type, or others, could give rise to product liability or other claims, or
to claims that past or future advertising, packaging or other practices should
be, or should have been, modified, or that regulation of products of this nature
should be extended or changed.
The Company is subject to federal and state environmental regulations, including
rules relating to air and water pollution and the storage and disposal of oil,
other chemicals and waste. The Company believes that it complies with all
applicable laws relating to its business.
Certain of the Company's executive officers have entered into employment
agreements whereby they will be entitled to immediate
12
vesting provisions of issued options should the officer be terminated upon a
change in control of the Company. Additionally, the employment agreement of the
Company's Chief Executive Officer, Louis D. Paolino, Jr., entitles Mr. Paolino
to receive a fee of $7,000,000 upon termination of employment under certain
conditions including upon termination as a result of a change in control.
8. Business Segments Information
The Company currently operates in two segments: the Car Care segment, supplying
complete car care services (including wash, detailing, lube, and minor repairs),
fuel, and merchandise sales; and the Security Products segment. From January 1,
2000 through April 30, 2002, the Company was paid $20,000 per month under a
Management Agreement pursuant to which Mark Sport, an entity controlled by Jon
E. Goodrich, a director of the Company, operated the Company's Security Products
Division. Effective May 1, 2002, the Management Agreement expired and the
Company recommenced operation of the Security Products Division.
Financial information regarding the Car Care and Security Products segments is
as follows:
Car Security Corporate
Care Products Functions *
--------------- --------------- -------------
(In Thousands)
Three months ended September 30, 2002
Revenues from external customers $ 10,671 $ 1,169 $ -
Intersegment revenues - - -
Segment income (loss) $ 359 $ 97 $ (572)
Segment assets $ 90,982 $ 4,516 $ 2,139
Nine months ended September 30, 2002
Revenues from external customers $ 33,804 $ 1,646 $ -
Intersegment revenues - - -
Segment (loss) income $ (3,416) $ 69 $ (1,454)
Three months ended September 30, 2001
Revenues from external customers $ 10,905 $ 60 $ -
Intersegment revenues - - -
Segment income (loss) $ 240 $ 38 $ (298)
Nine months ended September 30, 2001
Revenues from external customers $ 36,656 $ 180 $ -
Intersegment revenues - - -
Segment income (loss) $ 1,781 $ 113 $ (1,253)
* 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.
9. 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 amounts reported in the financial
statements. Actual results could differ from those estimates. 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.
10. Income Taxes
The Company recorded a tax benefit of $65,000 for the three months ended
September 30, 2002 and a tax expense of $524,000 for the nine months ended
September 30, 2002. Tax expense reflects the recording of income taxes on income
before cumulative effect of a change in accounting principle at an effective
rate of 36%. The effective rate differs from the federal statutory rate
primarily due to state and local income taxes, non-deductible costs related to
acquired intangibles, and the use of net operating loss carryforwards.
11. Related Party Transactions
In August 1999, Mace entered into a month-to-month lease arrangement with
Bluepointe, Inc., a corporation controlled by Louis D. Paolino, Jr., Mace's
Chairman, Chief Executive Officer and President, for Mace's executive offices in
Mt. Laurel, New Jersey.
13
The leased offices are in a 41,000 square foot class "B" office building. The
lease arrangement provided for monthly rental payments of $10,000. This monthly
lease payment was considered to be more favorable than could be obtained on the
open market for similar facilities. Effective August 1, 2000, after a survey of
local real estate market pricing and upon the approval of the Audit Committee,
Mace entered into a five year lease with Bluepointe, Inc. which provides for an
initial monthly rental payment of $15,962, which increases by 5% per year in the
third through fifth years of the lease. Mace believes that the terms of this
lease (based on an annual rate of $19.00 per square foot ) are competitive when
compared to similar facilities in the Mt. Laurel, New Jersey area. Mace has also
entered into a three-year furniture lease/purchase agreement with Bluepointe,
Inc., dated January 1, 2001, which provided for an initial payment of $20,000
and monthly rental payments thereafter of $4,513, for the use of the furnishings
in Mace's executive offices. The rental rates were based upon a third-party
valuation of the furnishings, and Mace believes that the terms of the furniture
lease are competitive with similar leasing arrangements available in the local
area.
The Company purchased charter airline services from Air Eastern, Inc., and LP
Learjets, LLC, charter airline companies owned by Louis D. Paolino, Jr., the
Company's Chairman, Chief Executive Officer and President. The Company paid
$60,000 in fiscal 2001 and $25,544 through July 2002. No payments for charter
services have been made by the Company after July 2002.
In 2001, $15,000 was paid to Aeroways, Inc., a chartered air service company not
affiliated with Louis D. Paolino, Jr., for the direct costs of flying the
Learjet 31A owned by LP Learjets, LLC. The Company believes that the rates
charged are competitive when compared with similar services provided by
independent airline charter companies.
On November 6, 2001, the Audit Committee approved an arrangement subject to
quarterly review under which the Company prepays LP Learjets, LLC $5,109 per
month for the right to use a Learjet 31A for 100 hours per year. Additionally,
when the Learjet 31A is used, 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. As of July
2002, the Company is no longer prepaying LP Learjets, LLC for the future right
to use the Learjet 31A.
In February 2000, the Company entered into a Management Agreement with Mark
Sport, Inc. ("Mark Sport"), a Vermont corporation controlled by Jon E. Goodrich,
a director of the Company. The Management Agreement entitled Mark Sport to
operate the Company's Security Products Division and receive all profits or
losses for a seven-month term beginning January 1, 2000. The Management
Agreement was extended several times through amendments. The Management
Agreement required Mark Sport to pay the Company $20,000 per month beginning
February 2000 and continuing through April 30, 2002, the extended term of the
Management Agreement. Additionally, Mark Sport paid the Company an amount equal
to the amortization and depreciation on the assets of the division. During the
term of the Management Agreement, Mark Sport operated the division in
substantially the same manner as it was operated prior to the Management
Agreement. On February 21, 2002, Mark Sport and the Company amended the
Management Agreement. The amendment extended the term of the Management
Agreement through April 30, 2002, and reconciled the amount owed by Mark Sport
to the Company under the Management Agreement from February 2000 through
December 31, 2001. Mark Sport and the Company agreed in the amendment that Mark
Sport, as of December 31, 2001, owed the Company $127,000, resulting in a
resolution of certain disputes and a reduction of the amounts owed by Mark Sport
of approximately $92,000. The Management Agreement expired on April 30, 2002 and
was further amended on July 22, 2002 to reconcile the amount owed by Mark Sport
to Mace under the Management Agreement for the period January 1, 2002 through
April 30, 2002. Mark Sport and Mace agreed in their final amendment that Mark
Sport owed the Company $100,000 for this period, resulting in a resolution of
certain disputes and a reduction of the amounts recorded by the Company as owed
by Mark Sport of approximately $39,000. At September 30, 2002, Mark Sport owed
the Company $127,000.
The Company's Security Products Division leases manufacturing and office space
under a five-year lease with Vermont Mill, Inc. ("Vermont Mill"), which provides
for monthly lease payments of $6,667 beginning November 15, 1999. Vermont Mill
is controlled by Jon E. Goodrich, a director of the Company. On February 25,
2002, the Company and Vermont Mill amended the lease. The original lease
provided that Vermont Mill could increase the lease payment $0.50 per square
foot upon demonstration that Vermont Mill had a higher paying third party tenant
for the space occupied by the Company. The lease amendment clarifies that the
Company occupies 44,000 square feet in the Vermont Mill building at a rental
rate of $2.50 per square foot per year. The Company believes that the revised
lease rate is lower than lease rates charged for similar properties in the
Bennington, Vermont area. On July 22, 2002, the lease was further 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.
Vermont Mill borrowed a total of $228,671 from the Company through December 31,
2001. On February 22, 2002, Vermont Mill executed a three year promissory note
with monthly installments of $7,061 including interest at a rate of 7%. The
Company's Lease Agreement with Vermont Mill provides for a right of offset of
lease payments against this promissory note in the event monthly payments are
not made by Vermont Mill. At September 30, 2002, the balance owed on this
promissory note was $194,935.
14
12. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
9/30/02 9/30/01 9/30/02 9/30/01
----------- ----------- ----------- -----------
Numerator:
Net (loss) income (in thousands) ..... $ (116) $ (20) $ (4,801) $ 641
=========== =========== =========== ===========
Denominator:
Denominator for basic (loss) income
per share - weighted
average shares ................... 25,353,136 25,428,427 25,362,849 25,455,350
Dilutive effect of options and
warrants ............................. - - 54,102 35,426
----------- ----------- ----------- -----------
Denominator for diluted (loss)
income per share - weighted
average shares ................... 25,353,136 25,428,427 25,416,951 25,490,776
=========== =========== =========== ===========
Basic (loss) income per share ........... $ - $ - $ (0.19) $ 0.03
=========== =========== =========== ===========
Diluted (loss) income per share ......... $ - $ - $ (0.19) $ 0.03
=========== =========== =========== ===========
13. Subsequent Events
In October 2002, the Company purchased a block of 429,000 common shares of the
Company's stock in the open market at a price of $.51 per share. The Company
retired these shares.
On October 2, 2002, the Company was advised by Nasdaq that its common stock has
failed to maintain a minimum bid price of $1.00 over the last 30 consecutive
trading days as required by the Nasdaq National Market under Marketplace Rules
(see Management's Discussion and Analysis - Risk Factors).
On November 6, 2002, the Company filed a preliminary proxy statement in
preparation for the holding of a special meeting of the Company's stockholders
on December 16, 2002. The purpose of the special meeting is to approve an
amendment to the Company's charter which will effect a one-for-two reverse stock
split of the Company's issued and outstanding common stock. The Board of
Directors is authorized not to file the Amended and Restated Certificate of
Incorporation and not implement the reverse stock split, if after the special
meeting the Board of Directors determines that it would not be in the best
interest of Mace to effect the reverse stock split.
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 section are Forward
Looking Statements. Although we believe that the expectations reflected in such
Forward Looking Statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Generally, these statements relate
to business plans or strategies, projected or anticipated benefits or other
consequences of such plans or strategies, number of acquisitions and projected
or anticipated benefits from acquisitions made by or to be made by us, or
projections involving anticipated revenues, earnings, levels of capital
expenditures or other aspects of operating results. All phases of our operations
are subject to a number of uncertainties, risks and other influences, many of
which are outside our control and any one of which, or a combination of which,
could materially affect the results of our operations and whether Forward
Looking Statements made by us ultimately prove to be accurate. Such Risk 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 Risk
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.
15
Summary of Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based upon the Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amount of
assets and liabilities, revenues and expenses, and related disclosure 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
believes that its critical accounting policies include those described below.
Revenue Recognition
Revenue from the Company's Car Care segment is recognized, net of customer
coupon discounts, when services are rendered or fuel or merchandise is sold.
Revenue from the Company's Security Products sales segment is recognized when
shipments are made, or for export sales when title has passed.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in first-out (FIFO) method for security and car care products.
Inventories at the Company's Car Care locations consist of various chemicals and
cleaning supplies used in operations and merchandise and fuel for resale to
consumers. Inventories within the Company's Security Products segment consist of
defense sprays, child safety products, electronic security monitors, cameras and
digital recorders, and various other consumer security and safety products.
Property and Equipment
Property and equipment are stated at cost. Depreciation is recorded using the
straight-line method over the estimated useful lives of the assets, which are
generally as follows: buildings and leasehold improvements - 15 to 40 years;
machinery and equipment - 2 to 20 years; and furniture and fixtures - 5 to 10
years. Significant additions or improvements extending assets' useful lives are
capitalized; normal maintenance and repair costs are expensed as incurred.
Goodwill
In 2001, goodwill was amortized on a straight line basis over 25 years.
On January 1, 2002, the Company adopted SFAS 142, and as required, discontinued
amortization of goodwill acquired prior to July 1, 2001. Additionally, SFAS 142
requires that, within six months of adoption, the first phase of the goodwill
transitional impairment testing be completed at the reporting unit level as of
the date of adoption. If any impairment is indicated to have existed upon
adoption, it should be measured and recorded before the end of the year of
adoption. SFAS 142 requires that any goodwill impairment loss recognized as a
result of initial application be reported in the first interim period of
adoption as a change in accounting principle and that the income per share
effects of the accounting change be separately disclosed. The transitional
impairment testing was completed during the third quarter of 2002 and as of
December 31, 2001 (See Note 3, Change in Accounting Principle).
In accordance with SFAS 142, the Company will be subject to a 2002 annual
impairment test as well as impairment tests each year thereafter. Significant
estimates and assumptions are used in assessing the fair value of the reporting
units and determining impairment to goodwill. The Company cannot guarantee that
there will not be impairments in a subsequent quarter in 2002 or in subsequent
years.
Other Intangible Assets
Other intangible assets consist primarily of deferred financing costs,
trademarks and a registered national brand name. Prior to 2002, our trademarks
and brand name were amortized on a straight line basis over 15 years. In
accordance with SFAS 142, our trademarks and brand name are considered to have
indefinite lives, and as such, are no longer subject to amortization. These
16
assets will be tested for impairment annually and whenever there is an
impairment indicator. Deferred financing costs are amortized on a straight line
basis over the terms of the respective debt instruments. Customer lists and
non-compete agreements are amortized on a straight-line basis over their
respective estimated useful lives.
Deferred Acquisition Costs
The Company capitalizes legal, accounting, engineering and other direct costs
paid to outside parties that are incurred in connection with potential
acquisitions. The Company, however, routinely evaluates such capitalized costs
and charges to expense those relating to abandoned acquisition candidates.
Indirect acquisition costs, such as executive salaries, general corporate
overhead, and other corporate services are expensed as incurred.
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 represents the change during the period in the deferred income tax
assets and deferred income tax liabilities. Deferred tax assets include tax loss
and credit carryforwards and are reduced by a valuation allowance if, based on
available evidence, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
Deferred Revenue
The Company records a liability for gift certificates, ticket books, and
periodic wash passes sold at its car care locations but not yet redeemed. The
Company estimates these unredeemed amounts based on gift certificate, ticket
book and periodic pass sales and redemptions throughout the year as well as
utilizing historical sales and redemption rates.
Advertising
The Company expenses advertising costs, including advertising production costs,
as they are incurred or the first time advertising takes place. The Company's
costs of coupon advertising are recorded as a prepaid asset and amortized to
advertising expense during the period of distribution and customer response,
typically two to three months.
Introduction
Revenues
Car Care Services
We own full service, exterior only and self-service car wash locations in New
Jersey, Pennsylvania, Delaware, Texas, Florida and Arizona, as well as truck
washes in Arizona, Indiana, Ohio and Texas. We earn revenues from washing and
detailing automobiles; performing oil and lubrication services, minor auto
repairs, and state inspections; selling fuel; and selling merchandise through
convenience stores within the car wash facilities. Revenues generated for the
nine months ended September 30, 2002 for the car care segment were comprised of
approximately 84% car wash and detailing, 9% lube and other automotive services,
7% fuel and merchandise.
The majority of revenues are collected in the form of cash or credit card
receipts, thus minimizing customer accounts receivable.
Weather can have a significant impact on volume at the individual locations. We
believe that the geographic diversity of our operating locations spreads the
risk of adverse weather-related influence on our volume.
Security Products
During 2001 and for the first four months of 2002, the Company was paid $20,000
per month under a Management Agreement pursuant to which Mark Sport, Inc., an
entity controlled by Jon E. Goodrich, a director of the Company, operated the
Security Products segment. Effective May 1, 2002, the Management Agreement
expired and the Company recommenced operation of the Security Products segment.
The Company operated its security products segment in two main business units,
the Consumer Products Division and the Mace Anti-Crime Bureau. The Company's
Consumer Products operations manufacture and market personal safety, and home
and auto security products which are sold through retail stores, major discount
stores, domestic and international distributors, and at the Company's car care
facilities. The Mace Anti-Crime Bureau operations provide expertise in
developing and producing criminal deterrent systems for financial institutions.
17
With the acquisition of certain of the assets of Micro-Tech, a manufacturer and
retailer of electronic security and surveillance devices on August 12, 2002, the
Company added an additional business unit to its Security Products segment. The
Company plans to add the security cameras, closed-circuit monitors, digital
recording devices and related electronic security components to its line of
well-known personal security products. The Company is purchasing these items for
resale from OEM manufacturers. As with all new business undertakings, there are
numerous risks associated with the new business unit that may prevent the
Company from operating it profitably, including, among others: risks associated
with unanticipated problems in the acquired company; risks inherent with
management not having experience in electronic security device design,
purchasing and marketing; risks associated with our efforts to integrate the
line of products with our existing product lines to capitalize on name
recognition and marketing efficiencies; risks relating to the size and number of
competitors in the electronic security device market, many of whom may be more
experienced or better financed; risks associated with the costs of planned entry
into new markets and expansion of product lines in old markets; and risks
attendant to locating and maintaining reliable sources of OEM products and
component supplies in the electronic industry.
Cost of Revenues
Car Care Services
Cost of revenues consists primarily of direct labor and related taxes and
benefits, chemicals, wash and detailing supplies, rent, real estate taxes,
utilities, car damages, maintenance and repairs of equipment and facilities, as
well as the cost of the fuel and merchandise sold.
Security Products
During 2001 and for the first four months of 2002, the Security Products segment
was operated under a Management Agreement by Mark Sport. Accordingly, during
that time, no costs were incurred by the Company. Beginning in May of 2002, cost
of revenues consists primarily of costs to manufacture the security products
including direct labor and related taxes and benefits, and raw material costs.
It is anticipated that the new electronic security device business unit acquired
during the current quarter will incur costs related to product returns and
warranties and customer support, but those were insignificant during the current
quarter.
Selling, General and Administrative Expenses
Selling, general and administrative 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 purchase acquisitions.
Indirect acquisition costs, such as executive salaries, corporate overhead,
public relations, and other corporate services and overhead are expensed as
incurred. The Company also charges as an expense any capitalized expenditures
relating to proposed acquisitions that will not be consummated.
At September 30, 2002, there were no capitalized costs related directly to
proposed acquisitions that were not yet consummated. We periodically review the
future likelihood of acquisitions and record appropriate provisions against
capitalized costs associated with projects that are not likely to be completed.
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. In 2001
goodwill was amortized on a straight-line basis over 25 years. With the adoption
of SFAS 142 on January 1, 2002, we no longer amortize goodwill and certain
intangible assets, namely trademarks and service marks, determined to have
indefinite useful lives.
Other Income
Other income consists primarily of rental income received on renting out excess
space at our car wash facilities and includes gains and losses on the sale of
equipment.
18
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 differs from the federal statutory rate primarily due to state and local
income taxes, non-deductible costs related to acquired intangibles, and the use
of net operating loss carryforwards.
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues:
Nine Months Ended
September 30,
------------------------
2002 2001
-------- --------
Revenues 100.0% 100.0%
Cost of revenues 70.2 71.6
Selling, general and administrative expenses 17.4 14.9
Depreciation and amortization 4.1 5.5
Costs of terminated acquisitions 0.1 0.3
-------- --------
Operating income 8.2 7.7
Interest expense, net (4.7) (6.1)
Other income 0.6 1.2
-------- --------
Income before income taxes and cumulative effect of change in
accounting principle 4.1 2.8
Income tax expense 1.5 1.1
-------- --------
Income before cumulative effect of a change in accounting principle 2.6 1.7
Cumulative effect of a change in accounting principle, net of tax (16.1) -
-------- --------
Net (loss) income (13.5)% 1.7%
======== ========
Liquidity and Capital Resources
Liquidity
Cash and cash equivalents was $7.2 million at September 30, 2002. The ratio of
our total debt to total capital, which consists of total debt plus stockholders'
equity, was 36% at September 30, 2002 and 35% at December 31, 2001.
Our business requires a substantial amount of capital, most notably to pursue
our expansion strategies, including our current expansion in the electronic
security products business, and for equipment purchases and upgrades for our car
care 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 improves.
As of September 30, 2002, we had working capital of approximately $183,000. At
December 31, 2001, working capital was $4.8 million and cash and cash
equivalents were $6.6 million. The decrease in working capital at September 30,
2002 is primarily attributable to the reclassification of approximately $5.4
million of 15 year amortizing loans from long term to current liabilities as a
result of these loans being due in either February 2003 or July 2003. The
Company intends to renew these loans with the current lender.
We estimate aggregate capital expenditures for our car care segment, exclusive
of acquisitions of businesses, of approximately $150,000 for the remainder of
the year ending December 31, 2002. In October 2002, we purchased a building as a
warehouse, production and administrative facility for our new electronic
security operations. We financed a portion of the $505,000 purchase price of
this building with a long term mortgage of approximately $400,000. In addition
to the purchase of the electronic security products business and facility, we
will also expend significant cash for the purchasing of inventory as we
introduce new electronic security products and for improvements to the new
building. We estimate we will spend approximately $1 million for electronic
security product inventory and approximately $100,000 for capital improvements
to the recently purchased building for the remainder of the year ending December
31, 2002.
19
Debt Capitalization and Other Financing Arrangements
At September 30, 2002, we had borrowings of approximately $33.5 million. We had
two letters of credit outstanding at September 30, 2002, totaling $304,000 as
collateral relating to worker compensation insurance policies. Additionally, we
had two commercial letters of credit outstanding at September 30, 2002 totaling
$116,000 for the purchase of inventory for our new electronic security products
business. Subsequent to September 30, 2002, several additional commercial
letters of credit totaling $293,000 were issued for inventory purchases. We
currently do not have a revolving credit facility, however, we are currently
pursuing a revolving credit facility to provide financing for additional
security product inventory purchases.
During 2000 and 2001, we refinanced on a long term basis under favorable terms
the majority of our short term debt related to our 1999 and 2000 acquisitions.
We also had various other long term mortgage notes up for periodic review during
2001 which we have been successful in renewing. Several of our debt agreements,
as amended, contain certain affirmative and negative covenants and require the
maintenance of certain levels of tangible net worth and the maintenance of
certain debt coverage ratios on an individual subsidiary and consolidated level.
We were in compliance with all such financial covenants at September 30, 2002.
The Company's ability to continue to comply with its debt covenants under its
credit arrangement will depend largely on the achievement of adequate levels of
cash flow, which could be adversely affected by weather patterns, the economic
climate, competitive uncertainties, and other factors. In the event that
non-compliance with such debt covenants should occur, the Company would pursue
various alternatives to successfully resolve the non-compliance, which might
include, among other things, seeking debt covenant waivers or amendments, or
refinancing of debt. Although the Company believes that it would be successful
in resolving any such potential non-compliance with its debt covenants, there
can be no assurance that such would be the case.
The Company is obligated under various operating leases, primarily for certain
equipment and real estate within the car care segment. Certain of these leases
contain purchase options, renewal provisions, and contingent rentals for
proportionate share of taxes, utilities, insurance, and annual cost of living
increases. Future minimum lease payments under operating leases with initial or
remaining noncancellable lease terms in excess of one year as of September 30,
2002 are as follows: 2003 - $1.5 million; 2004 - $1.5 million; 2005 - $1.2
million; 2006 - $831,000; 2007 - $689,000; and thereafter - $2.5 million.
On April 5, 2000, we executed a master facility agreement with Fusion Capital
Fund II, LLC ("Fusion") pursuant to which Fusion agreed to enter into up to two
equity purchase agreements, each with an aggregate principal amount of $12.0
million. The equity purchase agreements allow us to suspend the purchasing of
our common stock by Fusion if the price of our common stock is less than $7.00
per share. We are currently not permitting the purchase of our common stock
under the equity purchase agreement due to the current low trading value of our
common stock and the potentially dilutive effect of such stock purchases. If and
when we agree to the purchase of our stock, Fusion has the right to purchase
from us shares of common stock up to $12.0 million at a price equal to the
lesser of (1) 140% of the average of the closing bid prices for our common stock
during the 10 trading days prior to the date of the applicable equity purchase
agreement or $7.00, whichever is greater or (2) a price based upon the future
performance of the common stock, in each case without any fixed discount to the
market price. As long as we have not suspended Fusion from purchasing our stock,
the equity purchase agreement requires that at the beginning of each month,
Fusion will pay us $1.0 million as partial prepayment for the common stock. Once
the $1.0 million has been applied to purchase shares of our common stock, Fusion
will pay the remaining principal amount upon receipt of our common stock. The
first equity purchase agreement was executed by Fusion on April 17, 2000.
Proceeds from purchased shares through December 31, 2001 totaled approximately
$1.3 million. The first equity purchase agreement was extended to February 20,
2003. The second equity purchase agreement will be executed after delivery of an
irrevocable written notice by us to Fusion stating that we elect to enter into
such purchase agreement with Fusion. The second equity purchase agreement may be
entered into only after the principal amount under the first equity purchase
agreement is fully converted into our common stock.
Cash Flows
Operating Activities. Net cash provided by operating activities totaled $3.1
million for the nine months ended September 30, 2002. Cash provided by operating
activities in the first nine months of 2002 was impacted in our Northeast
operating region by a mild winter and a spring with low pollen, and unusually
high precipitation, especially in our Texas operating region.
Investing Activities. Cash used in investing activities totaled $753,000 for the
nine months ended September 30, 2002. The use of cash in the first nine months
of 2002 reflects $531,000 for capital expenditures relating to ongoing car care
operations and $217,000 expended for the acquisition of our new Micro-Tech
electronic security device business in August 2002.
20
Financing Activities. Cash used in financing activities was $1.7 million for the
nine months ended September 30, 2002. This reflects routine principle payments
on debt of $1.6 million and $88,000 for the purchase and retirement of shares of
our common stock.
Seasonality and Inflation
The Company believes that its car washing and detailing operations are adversely
affected by periods of inclement weather. In particular, long periods of rain
and cloudy weather can adversely affect our car wash volumes and related lube
and other automotive services as people typically do not wash their cars during
such periods. Additionally, extended periods of warm, dry weather may encourage
customers to wash their cars themselves which also can adversely affect our car
wash business. The Company has mitigated the risk of unfavorable weather
patterns by having operations in diverse regions.
The Company believes that inflation and changing prices have not had, and are
not expected to have any material adverse effect on its results of operations in
the near future.
Results of Operations for the Nine Months Ended September 30, 2002
Compared to the Nine Months Ended September 30, 2001
Revenues
Car Care Services
Revenues for the nine months ended September 30, 2002 were $33.8 million as
compared to $36.6 million for the nine months ended September 30, 2001, a
decrease of $2.8 million or 7.8%. Of the $2.8 million decrease, approximately
$2.1 million was from wash and detail services, $277,000 was from lube and other
automotive services, and $495,000 was from fuel and merchandise sales. Of the
$33.8 million of revenues for the nine months ended September 30, 2002, $28.2
million or 84% was generated from car wash and detailing, $3.2 million or 9%
from lube and other automotive services, and $2.4 million or 7% from fuel and
merchandise sales. Of the $36.6 million of revenues for the nine months ended
September 30, 2001, $30.3 million or 83% was generated from car wash and
detailing, $3.4 million or 9% from lube and other automotive services, and $2.9
million or 8% from fuel and merchandise sales. The decrease in wash and
detailing revenues was principally due to the divesting of two of our car wash
locations during 2001 combined with a departure from our historic revenue levels
within our Northeast region due to the unusual lack of snow and pollen in the
first six months of 2002. The Company also experienced more challenging weather
within its Texas region principally within the Dallas/Ft. Worth market for the
quarters ended June 30, and September 30, 2002. In addition to these declines in
volume, the Company experienced a slight reduction in average wash and detailing
revenues per car to $13.83 in 2002, from $13.90 per car in the first nine months
of 2001. Despite management's continued aggressive focus on selling detailing
and additional on-line car wash services, more aggressive coupon and discount
promotions to encourage volume reduced the average revenue per car. As to the
decline in revenues from lube and other automotive services, we discontinued the
practice of providing a free wash to lube customers, resulting in decreased lube
revenues but benefitting our overall site gross margin performance. The decline
in fuel and merchandise revenues is the result of instituting certain minimum
gross margin criteria which reduced fuel sales and the sale of certain low
margin merchandise.
Security Products
During 2001 and for the first four months of 2002, pursuant to a Management
Agreement, the Company was paid $20,000 per month. This amount is included under
revenues from operating agreements. Effective May 1, 2002, the Company
recommenced operation of the Security Products Division. Revenues for the five
months in which the Company operated this division, May through September of
2002, were approximately $1.4 million. Additionally, in August 2002 the Company
purchased the inventory and certain assets of Micro-Tech, an electronic security
device business. Revenues for this business unit were approximately $165,000
through September 30, 2002.
Cost of Revenues
Car Care Services
Cost of revenues for the nine months ended September 30, 2002 were $24.0 million
or 71% of revenues with car washing and detailing costs at 69% of respective
revenues, lube and other automotive services costs at 79% of respective
revenues, and fuel and merchandise costs at 87% of respective revenues. Cost of
revenues for the nine months ended September 30, 2001 were $26.4 million, or 72%
of revenues. With only a slight decrease in average wash and detailing revenues
per car in 2002 and our continued emphasis on controlling direct labor and other
operating costs such as wash and detailing chemicals and supplies, car
21
damages, uniform expense, and repairs and maintenance costs, we achieved
improved wash and detailing gross margins in 2002. We reduced our direct wash
and detailing labor costs as a percent of car wash and detail revenues to 46.9%
in 2002 as compared to 47.7% in 2001.
Security Products
During 2001 and for the first four months of 2002, pursuant to a Management
Agreement, no costs were incurred by us. Cost of revenues were $868,000 or 55%
of revenues for the five months in which the Company operated this division.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September
30, 2002 were $6.2 million compared to $5.5 million for the same period in 2001,
an increase of approximately $0.7 million or 12%. SG&A costs as a percent of
revenues were 17.4% for the nine months ended September 30, 2002 as compared to
14.9% in the same period of 2001. The increase in SG&A costs is primarily the
result of recommencing operation of the Security Products Division in May 2002,
which added $550,000 of SG&A costs in 2002, combined with an increase in certain
credit card and bank charges and a significant increase in insurance costs. This
increase was partially offset by a decrease in administrative salaries and
certain office costs.
Depreciation and Amortization
Depreciation and amortization totaled $1.5 million for the nine months ended
September 30, 2002 as compared to $2.0 million for the same period in 2001. This
decrease is primarily attributable to the adoption of SFAS 142 on January 1,
2002, under which the Company no longer amortizes goodwill and other intangible
assets determined to have indefinite useful lives. This decrease is partially
offset by increased depreciation expense as a result of recommencing operation
of the security products division in May 2002.
Interest Expense, Net
Interest expense, net of interest income, for the nine months ended September
30, 2002, was $1.7 million compared to $2.3 million for the nine months ended
September 30, 2001. This decrease in our interest expense is the result of a
decrease in interest rates on approximately 50% of our long term debt which has
interest rates tied to the prime rate and a reduction in our outstanding debt as
a result of normal principal payments.
Other Income
Other income for the nine months ended September 30, 2002 was $230,000 compared
to $429,000 for the nine months ended September 30, 2001. The primary reason for
the decrease is that the 2001 figure includes a $216,000 gain on the sale of a
car wash facility in August of 2001.
Income Taxes
We recorded a tax expense of $524,000 for the nine months ended September 30,
2002. Tax expense reflects the recording of income taxes on income before
cumulative effect of a change in accounting principle at an effective rate of
36%. The effective rate differs from the federal statutory rate primarily due to
state and local income taxes, non-deductible costs related to acquired
intangibles, and the use of net operating loss carryforwards.
Results of Operations for the Three Months Ended September 30, 2002
Compared to the Three Months Ended September 30, 2001
Revenues
Car Care Services
Revenues for the three months ended September 30, 2002 were $10.7 million as
compared to $10.9 million for the three months ended September 30, 2001, a
decrease of $.2 million or 2%. This decrease was primarily attributable to a
decrease in wash and detail services. Of the $10.7 million of revenues for the
three months ended September 30, 2002, $8.7 million or 82% was generated from
car wash and detailing, $1.1 million or 10% from lube and other automotive
services, and $0.9 or 8% from fuel and merchandise sales. Of the $10.9 million
of revenues for the three months ended September 30, 2001, $8.9 million or 82 %
was generated from car wash and detailing, $1.1 million or 10% from lube and
other automotive services, and $0.9 million or 8% from fuel and merchandise
sales. The decrease in wash and detailing revenues was principally due to a
reduction in average
22
wash and detailing revenues per car to $13.83 in the three months ended
September 30, 2002 as compared to $14.54 in the third quarter of 2001. This
decrease in average wash and detailing revenues per car was partially offset by
a slight increase in volume in the three months ending September 30, 2002, as
compared to the same period in 2001. The revenue reduction is largely the result
of more aggressive coupon and discount promotions to encourage volume increases
to the car wash facilities.
Security Products
During 2001 and for the first four months of 2002, pursuant to a Management
Agreement, the Company was paid $20,000 per month. This amount is included under
revenues from operating agreements. Effective May 1, 2002, the Company
recommenced operation of the Security Products Division. Revenues for the three
months ended September 30, 2002 were $1.0 million. Additionally, in August 2002
the Company purchased the inventory and certain assets of an electronic security
device business. Revenues for this division were approximately $165,000 through
September 30,2002.
Cost of Revenues
Car Care Services
Cost of revenues for the three months ended September 30, 2002 were $8.1 million
or 75% of revenues with car washing and detailing costs at 74% of respective
revenues, lube and other automotive services costs at 79% of respective
revenues, and fuel and merchandise costs at 87% of respective revenues. Cost of
revenues for the three months ended September 30, 2001 were $8.1 million, or 75%
of revenues.
Security Products
During 2001, pursuant to a Management Agreement, no costs were incurred by us.
During the three months ended September 30, 2002, cost of revenues were $643,000
or 55% of revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
September 30, 2002 were $2.3 million compared to $1.7 million for the same
period in 2001, an increase of approximately $0.6 or 35%. SG&A costs as a
percent of revenues were 19.6% for the three months ended September 30, 2002 as
compared to 15.7% in the third quarter of 2001. The increase in SG&A costs is
primarily the result of recommencing operation of the Security Products Division
in May 2002, which added $347,000 of SG&A costs in 2002, combined with an
increase in certain credit card and bank charges and a significant increase in
insurance costs. This increase was partially offset by a decrease in
administrative salaries and certain office costs.
Depreciation and Amortization
Depreciation and amortization totaled $474,000 for the three months ended
September 30, 2002 as compared to $684,000 for the same period in 2001. This
decrease is primarily attributable to the adoption of SFAS 142 on January 1,
2002, under which the Company no longer amortizes goodwill and other intangible
assets determined to have indefinite useful lives. This decrease is partially
offset by increased depreciation expense as a result of recommencing operation
of the security products division in May 2002.
Interest Expense, Net
Interest expense, net of interest income, for the three months ended September
30, 2002, was $553,000 compared to $712,000 for the three months ended September
30, 2001. This decrease in our interest expense is the result of a decrease in
interest rates on approximately 50% of our long term debt which has interest
rates tied to the prime rate and a reduction in our outstanding debt as a result
of normal principal payments.
Other Income
Other income for the three months ended September 30, 2002 was $82,000 compared
to $289,000 for the three months ended September 30, 2001. The primary reason
for the decrease is that the 2001 figure includes a $216,000 gain on the sale of
a car wash facility in August 2001.
23
Income Taxes
We recorded a tax benefit of $65,000 for the three months ended September 30,
2002. This tax benefit reflects the recording of income taxes or income before
cumulative effect of a change in accounting principle at an effective rate of
36%. The effective rate differs from the federal statutory rate primarily due to
state and local income taxes, non-deductible costs related to acquired
intangibles, and the use of net operating loss carryforwards.
Risk Factors
We need to raise additional capital. Additional capital will be needed if
acquisitions of car washes or other businesses are made. Our capital
requirements also include working capital for daily operations and capital for
equipment purchases. To the extent that we lack cash to meet our future capital
needs, we will be required to raise additional funds through bank borrowings and
additional equity and/or debt financing, which may result in significant
increases in leverage and interest expense and/or substantial dilution. If we
are unable to raise additional capital, we will need to curtail future
acquisitions.
Risks of Acquisitions and New Business Segments. One of our strategies has
been to grow through acquisitions. We are currently examining acquisition
candidates in the security products and the car care industry. To the extent we
make acquisitions, our ability to identify suitable acquisition candidates,
understand new businesses, and consummate acquisitions on financially favorable
terms is a risk. Acquisitions involve risks inherent in assessing acquisition
candidates' values, strengths, weaknesses, risks and profitability and risks
related to the financing, integration and operation of acquired businesses,
including:
i. adverse short-term effects on our reported operating results;
ii. diversion of management's attention;
iii. dependence on hiring, training and retaining key personnel;
iv. risks associated with unanticipated problems or latent
liabilities; and
v. risks inherent with management not having experience in new
business segments acquired.
We cannot give assurance that acquisition opportunities will be available, that
we will have access to the capital required to finance potential acquisitions,
that we will continue to acquire businesses, or that any acquired business will
be profitable.
Listing on the Nasdaq National Market. On October 2, 2002, the Company was
advised by Nasdaq that its common stock has failed to maintain a minimum bid
price of $1.00 over the last 30 consecutive trading days as required by the
Nasdaq National Market under Marketplace Rules. The Company has been provided 90
calendar days, or until December 31, 2002, to regain compliance with the
Marketplace Rules by maintaining a bid price of the Company's common stock of at
least $1.00 for a minimum of 10 consecutive trading days (or longer, at the
discretion of Nasdaq). If the Company is unable to demonstrate compliance with
the rule on or before December 31, 2002, Nasdaq will provide the Company with
written notification that its securities will be delisted. The Company may
appeal such a decision to a Nasdaq Listing Qualifications Panel, or it may apply
to transfer its securities to the Nasdaq SmallCap Market ("SmallCap Market"). To
transfer, the Company must satisfy the continued inclusion requirements for the
SmallCap Market, which makes available an extended grace period for the minimum
$1.00 bid price requirement. If the transfer application is submitted by
December 31, 2002 and if the application is approved, the Company will be
afforded the 180 calendar day SmallCap Market grace period or until March 31,
2003. The Company may also be eligible for an additional 180 calendar day grace
period provided that it meets the initial listing criteria for the SmallCap
Market under Marketplace Rules. Furthermore, the Company may be eligible to
transfer back to the Nasdaq National Market if, by September 29, 2003, its bid
price maintains the $1.00 per share requirement for 30 consecutive trading days
and it has maintained compliance with all other continued listing requirements
on that market.
In the event we are delisted from the Nasdaq SmallCap Market, our stock may
be traded over-the-counter, more commonly known as OTC. OTC transactions involve
risks in addition to those associated with transactions in securities traded on
the Nasdaq National Market or the Nasdaq SmallCap Market (together
"Nasdaq-Listed Stocks"). OTC companies may have limited product lines, markets
or financial resources. Many OTC stocks trade less frequently and in smaller
volumes than Nasdaq-Listed Stocks. The values of these stocks may be more
volatile than Nasdaq-Listed Stocks. If our stock is traded in the OTC market and
a market maker sponsors us, we may have the price of our stock electronically
displayed on the OTC Bulletin Board, or OTCBB. However, if we lack sufficient
market maker support for display on the OTCBB, we must have our price published
by the National Quotations Bureau LLP in a paper publication known as the "Pink
Sheets." The marketability of our stock will be even more limited if our price
must be published on the "Pink Sheets."
If our common stock regains compliance with the Marketplace Rules by December
31, 2002, it will still be subject to delisting if the stock does not maintain a
minimum bid price of one dollar for thirty consecutive days after coming into
compliance. If our stock is under $1.00 for thirty consecutive business days, we
will be able to maintain our listing if during the next 90 day period, our stock
maintains at least a minimum bid price of $1.00 for a ten consecutive day
period. The ten day period required can be
24
extended at the discretion of Nasdaq. In the event we are delisted from the
Nasdaq National Market, our stock would be traded on the Nasdaq SmallCap Market
until we maintain a minimum bid price of one dollar for thirty consecutive days
at which time we can regain listing on the Nasdaq National Market. If our stock
does not maintain a minimum bid price of one dollar for thirty consecutive days
during a 180 day grace period on the Nasdaq SmallCap Market or a 360 day grace
period if compliance with certain core listing standards are demonstrated, we
will receive a delisting notice from the Nasdaq SmallCap Market.
We have reported net losses in the past. We have reported net losses and
working capital deficits in the past, and we have expended substantial funds for
acquisitions and equipment. With the adoption of SFAS 142 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. The Company cannot guarantee that there will not be
impairments in a subsequent quarter in 2002 or in subsequent years that will
have a material impact on earnings and equity of the Company. (See also Note 3,
Change in Accounting Principle.)
Risk related to borrowings. In connection with our operations and business
growth, we anticipate that we will continue to have significant debt and
interest charges. Several of our debt agreements, as amended, contain certain
affirmative and negative covenants and require the maintenance of certain levels
of tangible net worth and the maintenance of certain debt coverage ratios on an
individual subsidiary and consolidated level. If our results are not sufficient
to maintain the required ratios, we would be in default of our loan agreements.
Our business plan poses risks for us. One of our business objectives is to
continue to develop as a full service, integrated car care business through
acquisitions and through the internal development of our car wash facilities.
Our business plan is to also grow our consumer security products division
through acquisitions and internal development of security products. This
strategy involves a number of risks, including:
i. risks associated with growth;
ii. risks associated with acquisitions; and
iii. risks associated with the recruitment and development of
management and operating personnel.
If we are unable to manage one or more of these associated risks effectively, we
may not fully realize our business plan.
We have a limited operating history regarding some of our business
segments. We recently expanded our security products by adding a digital camera
and recorder product line. We are incurring expenses to develop the new line
without having tested the size of the market of the new line.
We may not be able to manage growth. If we succeed in growing, growth will
place significant burdens on our management and on our operational and other
resources. We will need to attract, train, motivate, retain and supervise our
senior managers and other employees. If we are unable to do this, we will not be
able to realize our business objectives.
Our car wash business may suffer under certain weather conditions. Seasonal
trends in some periods may affect our car wash business. In particular, long
periods of rain and cloudy weather can adversely affect our car wash business as
people typically do not wash their cars during such periods. Additionally,
extended periods of warm, dry weather may encourage customers to wash their cars
themselves which also can adversely affect our car wash business.
Our stock price is volatile. Our common stock's market price has been and
is likely to continue to be highly volatile. Factors like fluctuations in our
quarterly revenues and operating results, our ongoing acquisition program,
market conditions and economic conditions generally may impact significantly our
common stock's market price. In addition, if we make an acquisition, we may
agree to issue common stock that will become available generally for resale and
may have an impact on our common stock's market price.
We may not be able to integrate businesses we acquire. Our strategy is to
achieve economies of scale and brand name recognition in part through
acquisitions that increase our size. We cannot give assurance that we will be
able to acquire businesses or that our efforts to integrate acquired operations
will be effective or that we will realize expected results. Our failure to
achieve any of these results could have a material adverse effect on our
business and results of operations.
We face potential liabilities associated with acquisitions of businesses.
The businesses we acquire may have liabilities that we do not discover or may be
unable to discover during our preacquisition investigations, including
liabilities arising from environmental contamination or prior owners'
non-compliance with environmental laws or other regulatory requirements, and for
which we, as a successor owner or operator, may be responsible.
25
We face risks associated with our consumer safety products. We face claims
of injury allegedly resulting from our defense sprays. We cannot give assurance
that our insurance coverage will be sufficient to cover any judgments won
against us in these lawsuits. If our insurance coverage is exceeded, we will
have to pay the excess liability directly. We are also aware of several claims
that defense sprays used by law enforcement personnel resulted in deaths of
prisoners and of suspects in custody. While we no longer sell defense sprays to
law enforcement agencies, it is possible that the increasing use of defense
sprays by the public could, in the future, lead to additional product liability
claims.
Consumer demand for our car wash services is unpredictable. Our financial
condition and results of operations will depend substantially on consumer demand
for car wash services. Our business depends on consumers choosing to employ
professional services to wash their cars rather than washing their cars
themselves or not washing their cars at all. We cannot give assurance that
consumer demand for car wash services will increase as our business expands. Nor
can we give assurance that consumer demand will maintain its current level.
We must maintain our car wash equipment. Although we undertake to keep our
car washing equipment in proper operating condition, the operating environment
found in car washes results in frequent mechanical problems. If we fail to
adequately maintain our sites, we would lose volume resulting in a loss of
revenue.
Our car wash and car care services operations face governmental
regulations. We are governed by federal, state and local laws and regulations,
including environmental regulations, that regulate the operation of our car wash
centers and other car care services businesses. Car wash centers utilize
cleaning agents and waxes in the washing process that are then discharged in
waste water along with oils and fluids washed off of vehicles. Other car care
services, such as gasoline and lubrication, use a number of oil derivatives and
other regulated hazardous substances. As a result, we are governed by
environmental laws and regulations dealing with, among other things:
i. transportation, storage, presence, use, disposal and handling of
hazardous materials and hazardous wastes;
ii. discharge of stormwater; and
iii. underground storage tanks.
If any of the previously mentioned substances were found on our property,
including leased property, or if we were found to be in violation of applicable
laws and regulations, we could be responsible for clean-up costs, property
damage and fines or other penalties, any one of which could have a material
adverse effect on our financial condition and results of operations.
We face significant competition in the car care segment. The extent and
kind of competition that we face varies. The car care industry is highly
competitive. Competition is based primarily on location, facilities, customer
service, available services and rates. Because barriers to entry into the car
care industry are relatively low, competition may be expected to continually
arise from new sources not currently competing with us. We also face competition
from outside the car care industry, such as gas stations and convenience stores,
that offer automated car wash services. In some cases, these competitors may
have greater financial and operating resources than we have. In our car wash
businesses, we face competition from a number of sources, including regional and
national chains, gasoline stations, gasoline companies, automotive companies and
specialty stores, both regional and national.
Our operations are dependent substantially on the services of our executive
officers. If we lose one or more of our executive officers, the loss could have
a material adverse effect on our business and results of operations. We do not
maintain key-man life insurance policies on our executive officers.
Our preferred stock may affect the rights of the holders of our common
stock; it may also discourage another entity from acquiring control of Mace. Our
Certificate of Incorporation authorizes the issuance of up to 10,000,000 shares
of preferred stock. No shares of preferred stock are currently outstanding. It
is not possible to state the precise effect of preferred stock upon the rights
of the holders of our common stock until the Board of Directors determines the
respective preferences, limitations and relative rights of the holders of one or
more series or classes of the preferred stock. However, such effect might
include: (i) reduction of the amount otherwise available for payment of
dividends on common stock, to the extent dividends are payable on any issued
shares of preferred stock, and restrictions on dividends on common stock if
dividends on the preferred stock are in arrears, (ii) dilution of the voting
power of the common stock to the extent that the preferred stock has voting
rights, and (iii) the holders of common stock not being entitled to share in our
assets upon liquidation until satisfaction of any liquidation preference granted
to the preferred stock.
The preferred stock may be viewed as having the effect of discouraging an
unsolicited attempt by another entity to acquire control of us and may therefore
have an anti-takeover effect. Issuances of authorized preferred stock can be
implemented, and have been implemented by some companies in recent years with
voting or conversion privileges intended to make an acquisition of the
26
company more difficult or costly. Such an issuance could discourage or limit the
stockholders' participation in certain types of transactions that might be
proposed (such as a tender offer), whether or not such transactions were favored
by the majority of the stockholders, and could enhance the ability of officers
and directors to retain their positions.
Some provisions of Delaware law may prevent us from being acquired. We are
governed by Section 203 of the Delaware General Corporation Law, which prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an entity who is an "interested stockholder" for a period of three (3)
years, unless approved in a prescribed manner. This provision of Delaware law
may affect our ability to merge with, or to engage in other similar activities
with, some other companies. This means that we may be a less attractive target
to a potential acquirer who otherwise may be willing to pay a price for our
common stock above its market price.
We do not expect to pay cash dividends on our common stock. We do not
expect to pay any cash dividends on our common stock in the foreseeable future.
We will reinvest in our business any cash otherwise available for dividends.
There are additional risks set forth in the incorporated documents. In
addition to the risk factors set forth above, you should review the financial
statements and exhibits incorporated into this report. Such documents may
contain, in certain instances and from time to time, additional and supplemental
information relating to the risks set forth above and/or additional risks to be
considered by you, including, without limitation, information relating to losses
experienced by us in certain historical periods, working capital deficits at
particular dates, information relating to pending and recently completed
acquisitions, descriptions of new or changed federal or state regulations
applicable to Mace, data relating to remediation and the actions taken by Mace,
and estimates at various times of Mace's potential liabilities for compliance
with environmental laws or in connection with pending litigation.
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, 2001 as reported on our Form 10-K
for the year ended December 31, 2001.
Item 4. Controls and Procedures
At the beginning of the third quarter of 2002, in response to recent legislation
and additional requirements, an evaluation of the effectiveness of the Company's
internal control structure and disclosure controls and procedures was conducted
under the supervision of, and reviewed by, the Company's Chief Executive Officer
and Chief Financial Officer. As a result of such review, we implemented changes,
primarily to formalize and document the procedures already in place. We have
designed our disclosure controls and procedures to ensure that material
information related to the Company, including our consolidated subsidiaries, is
made known to our disclosure committee, including our Chief Executive Officer
and Chief Financial Officer on a regular basis, in particular during the period
in which periodic reports under the Securities Exchange Act of 1934 are being
prepared. As required, we will evaluate the effectiveness of these disclosure
controls and procedures on a quarterly basis, and did so on October 9, 2002, a
date within 90 days prior to the filing of this quarterly report. We believe as
of that date, such controls and procedures were operating effectively and as
designed. Refer to the certifications by the Company's Chief Executive Officer
and Chief Financial Officer following the signature page of this report.
We presented the results of our most recent evaluation of our disclosure
controls and procedures to the Audit Committee of the Board of Directors. Based
on such evaluation, the Company's management, including our Chief Executive
Officer and Chief Financial Officer, concluded that the Company's disclosure
controls and procedures are adequate to insure the clarity and material
completeness of the Company's disclosure in its periodic reports required to be
filed with the SEC and there are no significant deficiencies in the design or
operation of internal controls which could significantly affect our ability to
record, process, summarize and report financial data.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding our legal proceedings can be found in Note 7, Commitments
and Contingencies, to the consolidated financial statements.
27
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Stockholders of Mace Security International, Inc. was
held on September 12, 2002. The following proposals were submitted to a vote:
(i) to approve for a one-year term the Election of Directors, expiring at the
next Annual Meeting, and (ii) to ratify the appointment of Grant Thornton LLP as
Mace's independent auditors for fiscal year 2002. Both proposals were adopted by
the shareholders. The voting was as follows:
Votes With- Broker
Votes For held or Against Abstentions Non-Votes
---------- --------------- ----------- ---------
Directors:
- ----------
Louis D. Paolino, Jr. 22,129,784 500,907 - -
Mark S. Alsentzer 22,010,996 619,695 - -
Jon E. Goodrich 22,169,784 460,907 - -
Robert M. Kramer 22,169,784 460,907 - -
Richard B. Muir 22,169,784 460,907 - -
Matthew J. Paolino 22,129,784 500,907 - -
Constantine N. Papadakis, Ph.D. 22,169,784 460,907 - -
Ratify appointment of Grant
Thornton LLP 22,553,511 58,520 18,660 -
Item 5. Other Information
In addition to the Chief Executive Officer and Chief Financial Officer
Certifications required by Section 302 of the Sarbanes-Oxley Act which are
attached to this report following the signature page, the Company has submitted
to the Securities and Exchange Commission as correspondence accompanying this
report the Chief Executive Officer and Chief Financial Officer Certifications
required by Section 906 of that Act.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
*10.143 Asset Purchase Agreement dated as of August 12, 2002, by
and among Micro-Tech Manufacturing, Inc. and Moshe Luski
on the one hand, and Mace Security Products, Inc., a
wholly owned subsidiary of Mace Security International,
Inc.
10.144 Lease Schedule and Addendum dated August 28, 2002 in the
amount of $39,434 to Master Lease Agreement dated June
10, 2002, between the Company, its subsidiary, Colonial
Full Service Car Wash, Inc., and Banc One Leasing
Corporation.
* Incorporated by reference as indicated in the Company's current
report on Form 8-K.
(b) Current Reports on Form 8-K or 8-K/A:
On August 14, 2002, the Company filed a report on Form 8-K dated
August 14, 2002, under Item 9, to report the submission in
conjunction with the filing of the Company's Form 10-Q for the
quarter ended June 30, 2002, unqualified certificates as required
under Section 906 of the Sarbanes-Oxley Act of 2002.
On August 22, 2002, the Company filed a report on Form 8-K dated
August 12, 2002, under Item 2 to report the acquisition of the
assets of Micro-Tech Manufacturing, Inc. by Mace Security
Products, Inc., a wholly owned subsidiary of the Company. In
accordance with the applicable regulations under the Securities
and Exchange Act of 1934, the Company has concluded that
Securities and Exchange Act rules do not require the filing of
financial statements with respect to the acquired company.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Mace Security International, Inc.
BY: /s/ Louis D. Paolino, Jr.
--------------------------------------------
Louis D. Paolino, Jr., Chairman, Chief Executive Officer and
President
BY: /s/ Gregory M. Krzemien
----------------------------------------
Gregory M. Krzemien, Chief Financial Officer
BY: /s/ Ronald R. Pirollo
----------------------------------------------
Ronald R. Pirollo, Controller (Principal Accounting Officer)
DATE: November 12, 2002
29
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Louis D. Paolino, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mace Security
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Louis D. Paolino, Jr.
---------------------
Louis D. Paolino, Jr.
Chief Executive Officer and President
30
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gregory M. Krzemien, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mace Security
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Gregory M. Krzemien
--------------------
Gregory M. Krzemien
Chief Financial Officer and Treasurer
31
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.144 Lease Schedule and Addendum dated August 28, 2002 in the
amount of $39,434 to Master Lease Agreement dated June 10,
2002, between the Company, its subsidiary, Colonial Full
Service Car Wash, Inc., and Banc One Leasing Corporation.
32