UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2003 COMMISSION FILE NO. 0-22810
MACE SECURITY INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 03-0311630
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Crawford Place, Suite 400, Mt. Laurel, NJ 08054
(Address of Principal Executive Offices)
Registrant's Telephone No., including area code: (856) 778-2300
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 ("the
Exchange Act") during the preceding 12 months (or for such shorter period that
the registrant was required to file such report), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---
Indicate by checkmark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
------
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock:
As of November 6, 2003, there were 12,415,192 Shares of Registrant's Common
Stock, par value $.01 per share, outstanding.
Mace Security International, Inc.
Form 10-Q
Quarter Ended September 30, 2003
Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets - September 30, 2003 (Unaudited) 2
and December 31, 2002
Consolidated Statements of Operations (Unaudited) for the three 4
months ended September 30, 2003 and 2002
Consolidated Statement of Operations (Unaudited) for the nine 5
months ended September 30, 2003 and 2002
Consolidated Statement of Stockholders' Equity 6
for the nine months ended September 30, 2003 (Unaudited)
Consolidated Statements of Cash Flows (Unaudited) for 7
the nine months ended September 30, 2003 and
2002
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2 - Management's Discussion and Analysis of 15
Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 29
Item 4 - Controls and Procedures 29
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 29
Item 2 - Not applicable -
Item 3 - Not applicable -
Item 4 - Not applicable -
Item 5 - Other Information 29
Item 6 - Exhibits and Reports on Form 8-K 29
Signatures 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 2003 2002
------------- -------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 3,940 $ 6,189
Accounts receivable, less allowance for doubtful
accounts of $288 and $198 in 2003 and 2002, respectively 1,391 772
Inventories 3,776 2,675
Deferred income taxes 230 230
Prepaid expenses and other current assets 2,144 1,968
------------------ ----------------
Total current assets 11,481 11,834
Property and equipment:
Land 31,804 31,804
Buildings and leasehold improvements 35,274 35,470
Machinery and equipment 9,893 9,485
Furniture and fixtures 447 444
------------------ ----------------
Total property and equipment 77,418 77,203
Accumulated depreciation and amortization (10,373) (9,082)
------------------ ----------------
Total property and equipment, net of accumulated depreciation
and amortization 67,045 68,121
Goodwill 13,390 13,430
Other intangible assets, net of accumulated amortization
of $1,454 and $1,415 in 2003 and 2002, respectively 974 959
Deferred income taxes 1,669 1,700
Other assets 179 244
------------------ ----------------
Total assets $ 94,738 $ 96,288
================== ================
See accompanying notes.
2
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
------------- ------------
(Unaudited)
Current liabilities:
Current portion of longterm debt and capital lease obligations $ 10,660 $ 8,812
Accounts payable 2,173 2,598
Income taxes payable 89 210
Deferred revenue 266 380
Accrued expenses and other current liabilities 2,931 2,044
-------------- -----------
Total current liabilities 16,119 14,044
Longterm debt, net of current portion 20,599 24,168
Capital lease obligations, net of current portion 217 332
Other liabilities 38 75
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 12,415,192 and
12,407,655 in 2003 and 2002, respectively 124 124
Additional paidin capital 69,734 69,710
Accumulated deficit (12,093) (12,165)
---------------- ----------------
Total stockholders' equity 57,765 57,669
---------------- ----------------
Total liabilities and stockholders' equity $ 94,738 $ 96,288
================ ================
See accompanying notes.
3
Mace Security International, Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands except share information)
Three Months Ended
September 30,
2003 2002
-------------- --------------
Revenues:
Car wash and detailing services $ 8,276 $ 8,707
Lube and other automotive services 1,089 1,125
Fuel and merchandise sales 925 839
Security products sales 1,586 1,169
-------------- -----------
11,876 11,840
Cost of revenues:
Car wash and detailing services 6,396 6,433
Lube and other automotive services 815 887
Fuel and merchandise sales 823 731
Security products sales 914 643
-------------- -----------
8,948 8,694
Selling, general and administrative expenses 2,325 2,325
Depreciation and amortization 487 474
Costs of terminated acquisitions - 57
-------------- -----------
Operating income 116 290
Interest expense, net (443) (553)
Other income 43 82
-------------- -----------
Loss before income taxes (284) (181)
Income tax benefit (102) (65)
-------------- -----------
Net loss $ (182) $ (116)
============== ================
Per share of common stock (basic and diluted):
Net loss $ (0.01) $ (0.01)
============== ================
Weighted average shares outstanding:
Basic 12,412,189 12,676,568
Diluted 12,412,189 12,676,568
See accompanying notes.
4
Mace Security International, Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands except share information)
Nine Months Ended
September 30,
2003 2002
-------------- --------------
Revenues:
Car wash and detailing services $ 27,080 $ 28,229
Lube and other automotive services 3,133 3,168
Fuel and merchandise sales 2,723 2,407
Security products sales 3,843 1,566
Operating agreement - 80
--------------- -------------
36,779 35,450
Cost of revenues:
Car wash and detailing services 19,806 19,419
Lube and other automotive services 2,402 2,509
Fuel and merchandise sales 2,387 2,086
Security products sales 2,214 868
--------------- -------------
26,809 24,882
Selling, general and administrative expenses 6,777 6,160
Depreciation and amortization 1,462 1,456
Asset impairment charge 351
Costs of terminated acquisitions - 57
--------------- -------------
Operating income 1,380 2,895
Interest expense, net (1,476) (1,669)
Other income 210 230
--------------- -------------
Income before income taxes 114 1,456
Income tax expense 42 524
--------------- -------------
Income before cumulative effect of a change in accounting principle 72 932
Cumulative effect of a change in accounting principle,
net of tax benefit of $2,188 - (5,733)
--------------- -------------
Net income (loss) $ 72 $ (4,801)
=============== =============
Per share of common stock (basic and diluted):
Income before cumulative effect of a change in accounting principle $ 0.01 $ 0.07
Cumulative effect of a change in accounting principle, net of tax - (0.45)
--------------- -------------
Net income (loss) $ 0.01 $ (0.38)
=============== =============
Weighted average shares outstanding:
Basic 12,409,747 12,681,424
Diluted 12,422,952 12,708,475
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, 2002..... 12,407,655 $ 124 $ 69,710 $ (12,165) $ 57,669
Shares purchased and retired..... (12,200) - (14) - (14)
Common stock issued in purchase
acquisition.................. 19,737 - 38 - 38
Net income....................... 72 72
-------------- -------------- ---------------- ---------------- ---------------
Balance at September 30, 2003.... 12,415,192 $ 124 $ 69,734 $ (12,093) $ 57,765
============== ============== ================= =============== ===============
See accompanying notes.
6
Mace Security International, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
2003 2002
---------------- -----------------
Operating activities
Income before cumulative effect of a change in accounting principle $ 72 $ 932
Cumulative effect of a change in accounting principle,
net of tax benefit - (5,733)
--------------- ---------------
Net income (loss) 72 (4,801)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 1,462 1,456
Provision for losses on receivables 53 71
Cumulative effect of change in accounting principle 7,920
Asset impairment charge 351
Deferred income taxes 32 (1,768)
Loss on disposal of fixed assets 3
Changes in operating assets and liabilities:
Accounts receivable (673) (139)
Inventories (1,101) 112
Accounts payable (425) (357)
Deferred revenue (113) (29)
Accrued expenses 887 535
Income taxes (121) (86)
Prepaid expenses and other assets (101) 144
--------------- ---------------
Net cash provided by operating activities 326 3,058
Investing activities
Purchase of property and equipment (712) (531)
Acquisition of business, net of cash acquired (217)
Payments for intangibles (14) (5)
--------------- ---------------
Net cash used in investing activities (726) (753)
Financing activities
Payments on long term debt and capital lease obligations (1,835) (1,615)
Payments to purchase stock (14) (88)
--------------- ---------------
Net cash used in financing activities (1,849) (1,703)
--------------- ---------------
Net (decrease) increase in cash and cash equivalents (2,249) 602
Cash and cash equivalents at beginning of period 6,189 6,612
--------------- ---------------
Cash and cash equivalents at end of period $ 3,940 $ 7,214
=============== ===============
See accompanying notes.
7
Mace Security International, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Mace Security International, Inc. and its wholly owned subsidiaries
(collectively "the Company" or "Mace"). All significant intercompany
transactions have been eliminated in consolidation. These consolidated interim
financial statements reflect all adjustments (including normal recurring
accruals), which in the opinion of management, are necessary for a fair
presentation of results of operations for the interim periods presented. The
results of operations for the nine month period ended September 30, 2003 are not
necessarily indicative of the operating results for the full year. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted. These consolidated interim
financial statements should be read in conjunction with the audited consolidated
financial statements and notes contained in the Company's Annual Report on Form
10-K for the year ended December 31, 2002.
On December 17, 2002, we effected a one-for-two reverse stock split. All stock
prices, share amounts, per share information, stock options and warrants have
been retroactively restated to reflect the reverse split, unless otherwise
noted.
2. New Accounting Standards
In June 2002, the Financial Accounting Standards Board ("FASB") approved the
issuance of Statement of Financial Accounting Standards ("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 were
previously accounted for pursuant to the guidance that the Emerging Issues Task
Force "EITF" had set forth in EITF Issue 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 is effective for exit or
disposal activities that are initiated after December 31, 2002. The adoption of
SFAS 146 did not have a material effect on the Company's financial position or
results of operations.
In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS 148 amends SFAS 123 Accounting
for Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS 148 is
effective for fiscal years beginning after December 15, 2002. The expanded
annual disclosure requirements and the transition provisions are effective for
fiscal years ending after December 15, 2002. The interim disclosure provisions
are effective for financial reports containing financial statements for interim
periods beginning after December 15, 2002. The adoption of SFAS 148 did not have
a material effect on the Company's financial position or results of operations.
In November 2002, FASB Interpretation 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45), was issued. FIN 45 requires a guarantor entity, at the
inception of a guarantee covered by the measurement provisions of the
interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 applies prospectively to guarantees
the Company issues or modifies subsequent to December 31, 2002, but has certain
disclosure requirements effective for interim and annual periods ending after
December 15, 2002. The Company has not historically issued guarantees and does
not anticipate FIN 45 will have a material effect on its 2003 consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), Consolidation
of Variable Interest Entities. FIN 46 clarifies the application of Accounting
Research Bulletin 51, Consolidated Financial Statements, for certain entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties
or in which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities"). Variable interest entities
within the scope of FIN 46 will be required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is determined
to be the party that absorbs a majority of the entity's expected losses,
receives a majority of its expected returns, or both. FIN 46 applies immediately
to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The adoption of FIN 46 did
not have a material effect on the Company's consolidated financial position,
results of operations, or cash flows.
8
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS 150
established standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that issuers classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). SFAS 150 is effective
for all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of this statement did not have a material
impact on the Company's consolidated financial position or results of
operations.
3. Change in Accounting Principle
Effective January 1, 2002, we adopted SFAS 142, Goodwill and Other Intangible
Assets. SFAS 142 requires companies to test intangibles for impairment on an
annual basis. During 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 were impairment issues with goodwill and
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.
Under the provisions of SFAS 142, the Company was also required to complete a
goodwill impairment test. 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 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. In
the third quarter of 2002, as a result of the goodwill impairment testing for
our Car and Truck Wash Segmant, 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 fair value was based on 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 results for the six months ended June 30, 2002 were restated
to reflect the cumulative effect of a change in accounting principle in
accordance with SFAS 142.
We will perform our annual testing of goodwill and intangible assets determined
to have indefinite lives in accordance with SFAS 142 as of November 30, each
year, or whenever there is an impairment indicator. The Company cannot guarantee
that there will not be impairments in this or subsequent years.
9
4. Other Intangible Assets
The following table reflects the components of intangible assets, excluding
goodwill (in thousands):
September 30, 2003 December 31, 2002
-------------------------------- ------------------------------
Gross
Gross Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------------- --------------- --------------- ---------------
Amortized intangible assets:
Non compete agreement $ 28 $ 6 $ 25 $ 2
Customer list 69 17 25 2
Deferred financing costs 380 151 373 131
---------------- --------------- -------------- ---------------
Total amortized intangible assets 477 174 423 135
Non amortized intangible assets:
Trademarks Security Products Segment 1,835 1,270 1,835 1,270
Service mark Car and Truck Wash Segment 116 10 116 10
---------------- --------------- -------------- ---------------
Total non amortized intangible assets 1,951 1,280 1,951 1,280
---------------- --------------- -------------- ---------------
Total intangible assets $ 2,428 $ 1,454 $ 2,374 $ 1,415
================ =============== ============== ===============
The following sets forth the estimated amortization expense on intangible assets
for the fiscal years ending December 31 (in thousands):
2003 $53
2004 47
2005 43
2006 26
2007 23
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; 11 facilities were subsequently divested
or closed. The five full service truck wash facilities are located in Arizona,
Indiana, Ohio and Texas.
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 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 (pre-reverse split) registered shares
of common stock of the Company representing the first of eight quarterly
payments of shares totaling 105,263 (pre-reverse split) shares. This transaction
was accounted for using the purchase method of accounting in accordance with
SFAS 141, Business Combinations.
On September 26, 2003, a wholly owned subsidiary within the Company's Security
Products Segment acquired the inventory, certain other assets and the operations
of Vernex, Inc., a manufacturer and retailer of electronic security monitors.
Total consideration under the agreement was $213,000 cash for inventory. The
agreement also provides for additional cash consideration based on sales
performance for a twelve month period subsequent to closing. This transaction
was accounted for using the purchase method of accounting in accordance with
SFAS 141, Business Combinations.
6. Stock Based Compensation
The Company accounts for stock options under SFAS 123, Accounting for
Stock-Based Compensation, as amended by SFAS 148, which contains a fair
value-based method for valuing stock-based compensation that entities may use,
which measures compensation cost at the grant date based on the fair value of
the award. Compensation is then recognized over the service period, which is
usually the vesting period. Alternatively, SFAS 123 permits entities to continue
accounting for employee stock options and similar equity instruments under
Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to
Employees. Entities that continue to account for stock options using APB Opinion
25 are required to make pro forma disclosures of net income and earnings per
share, as if the fair value-based method of accounting defined in SFAS 123 had
been applied.
10
At September 30, 2003, the Company had two stock based employee compensation
plans. The Company accounts for the plans under the recognition and measurement
principles of APB 25, Accounting for Stock Issued to Employees, and related
interpretations. Stock-based employee compensation costs are not reflected in
net (loss) income, as all options granted under the plan had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net (loss) income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
123, to stock-based employee compensation (in thousands, except per share
amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------------------------------- ---------------------------------
Net (loss) income, as reported $ (182) $ (116) $ 72 $ (4,801)
Less: Stock based compensation costs under fair
value based method for all awards (151) (171) (307) (514)
---------------- --------------- ----------------- ----------------
Pro forma net (loss) income $ (333) $ (287) $ (235) $ (5,315)
================ ================ ================= ================
Earnings per share basic
As reported $ (0.01) $ (0.01) $ 0.01 $ (0.38)
Pro forma $ (0.03) $ (0.02) $ (0.02) $ (0.42)
Earnings per share diluted
As reported $ (0.01) $ (0.01) $ 0.01 $ (0.38)
Pro forma $ (0.03) $ (0.02) $ (0.02) $ (0.42)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions for grants in 2002: expected volatility of 61%; risk-free interest
rates ranging from 3.72% to 5.39%; and expected lives of 10 years. In the
quarter ended September 30, 2003, 616,000 options were granted with an expected
volatility of 22%, risk-free interest rates ranging from 3.74% to 4.45%; and
expected life of 10 years. For the nine months ended September 30, 2003, a total
of 676,000 options were granted with a weighted-average risk-free interest rate
of 3.77%.
7. Operating Agreement
The Company has been directly operating its Security Products Segment since May
1, 2002. Previous to May 1, 2002, the Security Products Segment 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 segment and received all profits and
losses therefrom. In exchange, Mark Sport paid the Company a monthly fee of
$20,000 and, upon termination of the agreement, an amount equal to the
amortization and depreciation of the assets of the division.
8. Commitments and Contingencies
In December 1999, the Company was named as a defendant in a suit filed in the
Supreme Court of 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., ("LTV") 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 Company has filed a summary
judgement motion which requests a judgement on the promissory note and a
dismissal of the defendant's counterclaims. On August 29, 2003, LTV filed a
Voluntary Petition for Chapter 11 Reorganization in the United States Bankruptcy
Court, Southern District of New York (the "Petition"). The Petition has the
effect of operating as a stay on the State Court proceedings. Though the outcome
of litigation is always uncertain, the Company currently believes that the
counterclaims are without merit and intends to assert its claims in the
Bankruptcy proceedings.
11
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
Consumer Products Division. The lawsuit requests $15 million in damages. Though
the outcome of litigation is always uncertain, the Company believes that all of
the claims are without merit.
The Company has received a subpoena in connection with an investigation being
conducted by the Securities and Exchange Commission of possible securities law
violations. The subpoena was issued on October 27, 2003. The subpoena generally
requests documents and information which would identify persons who knew of two
transactions involving the Company prior to Mace's public announcement of the
transactions. The transactions were announced by Mace on March 29, 1999 and were
consummated in July of 1999. The subpoena also requests documents relating to
Mace's dealings with two investment banking firms and certain of their
employees. Mace intends to fully cooperate with the Securities and Exchange
Commission's investigation.
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.
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 employee stock
option agreements whereby options issued to them shall be entitled to immediate
vesting should the officer be terminated upon a change in control of the
Company. Additionally, the employment agreement of the Company's Chief Executive
Officer, Louis D. Paolino, Jr., entitles Mr. Paolino to receive a fee of $2.5
million upon termination of employment under certain conditions. The employment
agreement also provides for a bonus of $2.5 million upon a change in control.
12
9. Business Segments Information
The Company currently operates in two segments: the Car and Truck Wash Segment,
supplying complete car care services (including wash, detailing, lube, and minor
repairs), fuel, and merchandise sales; and the Security 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 Segment. Effective May 1, 2002, the Management Agreement expired and
the Company recommenced operation of the Security Products Segment.
Financial information regarding the Company's segments is as follows (in
thousands):
Car and Security Corporate
Truck Wash Products Functions *
--------------- --------------- -------------
Three months ended September 30, 2003
Revenues from external customers $ 10,290 $ 1,586 $ -
Intersegment revenues $ - $ - $ -
Segment operating income (loss) $ 728 $ 29 $ (641)
Segment assets $ 87,918 $ 6,820 $ -
Nine months ended September 30, 2003
Revenues from external customers $ 32,936 $ 3,843 $ -
Intersegment revenues $ - $ 22 $ -
Segment operating income (loss) $ 3,380 $ (14) $ (1,986)
Three months ended September 30, 2002
Revenues from external customers $ 10,671 $ 1,169 $ -
Intersegment revenues $ - $ - $ -
Segment operating income (loss) $ 1,009 $ 146 $ (865)
Nine months ended September 30, 2002
Revenues from external customers $ 33,804 $ 1,646 $ -
Intersegment revenues $ - $ - $ -
Segment operating income (loss) $ 5,005 $ 167 $ (2,277)
* 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.
10. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, as well as the disclosure of contingent
assets and liabilities at the date of its financial statements. The Company
bases its estimates on historical experience, actuarial valuations and various
other factors that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgements about the carrying value
of assets and liabilities that are not readily apparent from other sources. Some
of those judgements can be subjective and complex, and consequently, actual
results may differ from these estimates under different assumptions or
conditions. Such estimates include the Company's estimates of reserves such as
the allowance for doubtful accounts, inventory valuation allowances, insurance
losses and loss reserves, valuation of long-lived assets, estimates of
realization of income tax net operating loss carryforwards, as well as valuation
calculations such as the Company's goodwill impairment calculations under the
provisions of SFAS 142, Goodwill and Other Intangible Assets.
11. Income Taxes
The Company recorded tax expense of $42,000 and $524,000 for the nine months
ended September 30, 2003 and 2002, respectively. Tax expense reflects the
recording of income taxes on income before the cumulative effect of a change in
accounting principle at an effective rate of 36% in both 2003 and 2002. We
recorded an income tax benefit of approximately $2.2 million related to the
cumulative effect of a change in accounting principle in 2002. The income tax
benefit reflects an effective rate of 36% for the impairments in the Arizona and
truck wash reporting units. No income tax benefit was recorded for the Northeast
Region reporting unit impairment due to the non-deductibility of the goodwill.
The effective rate differs from the federal statutory rate for each year
primarily due to state and local income taxes, non-deductible costs related to
intangibles, fixed asset adjustments and changes to the valuation allowance.
13
12. Asset Impairment Charges
In accordance with SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we periodically review the carrying value of our long-lived
assets held and used and assets to be disposed of for possible impairment when
events and circumstances warrant such a review. During the quarter ended June
30, 2003, we fully wrote down assets determined to be impaired by approximately
$351,000. The asset write-down related to a full service car wash site in
Arizona which we partially wrote down at December 31, 2002. The additional
write-down was the result of the impending loss of a significant customer at
this site resulting in the future expected cash flows not being sufficient to
recover the site's respective carrying values. The Company closed the facility
effective September 30, 2003.
13. Related Party Transactions
Effective August 1, 2000, Mace entered into a five-year lease 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. The lease terms were subject to a survey of local real estate market
pricing and approval by the Company's Audit Committee and provide for an initial
monthly rental payment of $15,962, which increases by 5% per year in the third
through fifth years of the lease. Mace believes that the terms of this lease
(based on an annual rate of $19.00 per square foot ) 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 incurred
approximately $5,000 in 2003 and $29,000 in 2002 for such services. 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 Segment and receive all profits or
losses for a seven-month term beginning January 1, 2000 in exchange for certain
payments to the Company. The Management Agreement was extended several times
through amendments. A February 21, 2002 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, 2003, Mark Sport
owed the Company $127,000.
The Company's Consumer Products Division leases manufacturing and office space
under a five-year lease with Vermont Mill, Inc. ("Vermont Mill"), which provides
for monthly lease payments of $9,167 through November 2004. Vermont Mill is
controlled by Jon E. Goodrich, a director of the Company. The Company believes
that the lease rate is lower than lease rates charged for similar properties in
the Bennington, Vermont area. On July 22, 2002, the lease was 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, 2003, the balance owed on this
promissory note was $121,000.
14
From January 1, 2003 through September 30, 2003, the Company's Electronic
Surveillance Products Division sold approximately $60,000 of electronic security
equipment to DSS, Inc. Louis Paolino, III, the son of the Company's CEO, Louis
D. Paolino, Jr., is a one-third owner of DSS, Inc. The pricing extended to DSS,
Inc. is no more favorable than the pricing given to third party customers who
purchase in similar volume. Additionally, DSS, Inc. was hired by the Company to
install security cameras in several of the Company's car washes at an
installation fee of $6,800. At September 30, 2003, DSS, Inc. owed the Company
approximately $50,000.
14. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Three Months Ended Nine Months Ended
----------------------------------- ---------------- ----------------
9/30/03 9/30/02 9/30/03 9/30/02
----------------------------------- ---------------- ----------------
Numerator:
(Loss) income before cumulative
effect of $ (182) $ (116) $ 72 $ 932
a change in accounting principle
Cumulative effect of a change in
accounting principle, net of tax - - - (5,733)
--------------- ---------------- ---------------- ----------------
Net (loss) income $ (182) $ (116) $ 72 $ (4,801)
================ ================ ================ ================
Denominator:
Denominator for basic (loss) income
per share - weighted average 12,412,189 12,676,568 12,409,747 12,681,424
shares...........................
Dilutive effect of options and
warrants......................... - - 13,205 27,051
--------------- ---------------- ----------------- ---------------
Denominator for diluted
(loss) income per share -
weighted average shares.......... 12,412,189 12,676,568 12,422,952 12,708,475
================ ================ ================ ================
Basic and diluted (loss) income per share:
(Loss) income before cumulative
effect of a change in accounting $ (0.01) $ (0.01) $ 0.01 $ 0.07
principle.................
Cumulative effect of a change in
accounting principle, net of tax. -- - -- (0.45)
--------------- ---------------- ----------------- ---------------
Net (loss) income.................... $ (0.01) $ (0.01) $ 0.01 $ (0.38)
================ ================ ================ ================
The effect of options and warrants for the three months ended September 30, 2003
and 2002 have not be included as they would be anti-dilutive.
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. 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. We believe that
our critical accounting policies include those described below.
Revenue Recognition
Revenue from the Company's Car and Truck Wash 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 Segment is recognized when
shipments are made, or for export sales when title has passed. The Company was
paid $20,000 per month, from January through April of 2002, under an agreement
which allowed Mark Sport, an entity controlled by Jon E. Goodrich, a director of
the Company, to operate the Company's Security Products Segment. These amounts
are included under revenues from operating agreements.
Goodwill
On January 1, 2002, we adopted SFAS 142, and as required, discontinued
amortization of goodwill acquired prior to July 1, 2001. Additionally, SFAS 142
required 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. 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. (See Note 3,
Change in Accounting Principle.)
In accordance with SFAS 142, we also completed a 2002 annual impairment test as
of November 30, 2002, and will be subject to an impairment test each year
thereafter. Significant estimates and assumptions are used in assessing the fair
value of the reporting units and determining impairment to goodwill (See Note 3,
Change in Accounting Principle). We cannot guarantee that there will not be
impairments in this or subsequent years.
Other Intangible Assets
Other intangible assets consist primarily of deferred financing costs,
trademarks, and establishing a registered national brand name. Prior to 2002,
our trademarks and brand name were amortized on a straight-line basis over 15
years. In accordance with SFAS 142, Goodwill and Other Intangible Assets, our
trademarks and brand name are considered to have indefinite lives, and as such,
are no longer subject to amortization. These assets 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. We, however, routinely evaluate such capitalized costs and charge
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.
Impairment of Long-Lived Assets
In accordance with SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we periodically review the carrying value of our long-lived
assets held and used and assets to be disposed of when events and circumstances
warrant such a review. We evaluate the carrying value of long-lived assets for
potential impairment on a reporting unit basis using undiscounted after-tax
estimated cash flows or on an individual asset basis if the asset is to be held
and used or held for sale.
16
Costs of Terminated Acquisitions
Our policy is to charge as an expense any previously capitalized expenditures
relating to proposed acquisitions that in management's current opinion will not
be consummated.
Income Taxes
Deferred income taxes are determined based on the difference between the
financial accounting and tax bases of assets and liabilities. Deferred income
tax expense (benefit) represents the change during the period in the deferred
income tax assets and deferred income tax liabilities. Deferred tax assets
include tax loss and credit carryforwards and are reduced by a valuation
allowance if, based on available evidence and management's judgment, 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 and ticket books and
seasonal and annual passes sold at its car care locations but not yet redeemed.
The Company estimates these unredeemed amounts based on gift certificates and
ticket book sales and redemptions throughout the year as well as utilizing
historical sales and redemption rates. Seasonal and annual passes are amortized
on a straight-line basis over the time during which the passes are valid.
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 and Truck Wash Services
We own full service, exterior only and self-service car wash locations in New
Jersey, Pennsylvania, Delaware, Texas, Florida and Arizona, as well as truck
washes in Arizona, Indiana, Ohio and Texas. We earn revenues from washing and
detailing automobiles; performing oil and lubrication services, minor auto
repairs, and state inspections; selling fuel; and selling merchandise through
convenience stores within the car wash facilities. Revenues generated for the
nine months ended September 30, 2003 for the car care segment were comprised of
approximately 82% car wash and detailing, 10% lube and other automotive
services, and 8% 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 and has had a significant impact on volume at the individual
locations. We believe that the geographic diversity of our operating locations
helps spread the risk of adverse weather-related influence on our volume.
Security Products
During 2000, 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, 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.
Prior to the acquisition of Micro-Tech, the Company operated its Security
Products Segment solely as the Consumer Products Division. The Company's
Consumer Products operations manufacture and market personal 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.
With the acquisition on August 12, 2002 of certain of the assets and operations
of Micro-Tech, a manufacturer and retailer of electronic security and
surveillance devices, the Company added an additional division to its Security
Products Segment. The Company has added security cameras, closed-circuit
monitors, digital video recording devices and related electronic security
components to its line of well-known personal security products. The Company is
purchasing these items for resale from Original Equipment Manufactures ("OEMs").
17
Cost of Revenues
Car and Truck Wash Services
Cost of revenues consists primarily of direct labor and related taxes and
benefits, certain insurance costs, chemicals, wash and detailing supplies, rent,
real estate taxes, utilities, car damages, maintenance and repairs of equipment
and facilities, as well as the cost of the fuel and merchandise sold.
Security Products
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. Cost of revenues within the Security
Products Segment consists primarily of costs to purchase or manufacture the
security products including direct labor and related taxes and benefits, and raw
material costs. Product return and warranty costs related to the new electronic
security surveillance product business have been minimal in that the majority of
customer product warranty claims are reimbursed by the manufacturer.
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 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.
Depreciation and Amortization
Depreciation and amortization consists primarily of depreciation of buildings
and equipment, and amortization of certain intangible assets. Buildings and
equipment are depreciated over the estimated useful lives of the assets using
the straight-line method. Intangible assets, other than goodwill or intangible
assets with indefinite useful lives, are amortized over their useful lives
ranging from three to 15 years, using the straight-line method. With the
adoption of SFAS 142 on January 1, 2002, we no longer amortize goodwill and
certain intangible assets, namely trademarks and service marks, determined to
have indefinite useful lives.
Other Income
Other income consists primarily of rental income received on renting out excess
space at our car wash facilities and includes gains and losses on the sale of
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, fixed asset
adjustments and changes to the valuation allowance.
Liquidity and Capital Resources
Liquidity
Cash and cash equivalents were $3.9 million at September 30, 2003. The ratio of
our total debt to total capitalization, which consists of total debt plus
stockholders' equity, was 35% at September 30, 2003, and 37% at December 31,
2002.
Our business requires a substantial amount of capital, most notably to pursue
our expansion strategies, including our current expansion in the electronic
surveillance products business, and for equipment purchases and upgrades for our
car 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, 2003, we had negative working capital of approximately $4.6
million. At December 31, 2002, working capital was a negative $2.2 million. The
negative working capital position at September 30, 2003 is primarily
attributable to the classification of five 15-year amortizing loans with the
Company's principal lender, Bank One, N.A. ("Bank One"), totaling approximately
$9.1 million classified as current liabilities at September 30, 2003 as a result
of these loans being due beginning from November 2003 through August 2004. The
Company intends to renew these loans with the current lender. Although the
Company has been successful in renewing similar loans with the current lender in
the past, including the renewal of two loans in February 2003 totaling $4.7
million for a five-year period, and a loan for $730,000 in July 2003, there can
be no assurance that our lender will continue to provide us with renewals, with
renewals at favorable terms, or that we may be able to obtain favorable terms
from an alternative funding source. If we were unable to obtain renewals of or
refinancings on favorable terms, our ability to operate would be materially and
adversely affected.
We estimate aggregate capital expenditures for our Car and Truck Wash Segment,
exclusive of acquisitions of businesses, of approximately $200,000 for the
remainder of the year ending December 31, 2003. In October 2002, we purchased a
building as a warehouse, production and administrative facility for our new
electronic surveillance products operations. We financed a portion of the
$505,000 purchase price of this building with a long-term mortgage of
approximately $400,000. In October 2003, we increased this mortgage to
$729,000,utilizing the funds to purchase additional warehouse space and improve
office space. In addition to the purchase of the electronic surveillance
products business and facility, we will also expend significant cash to purchase
inventory as we continue to introduce new electronic surveillance products and
for improvements to the facility purchased in 2002. We spent approximately $2.2
million for inventory of newly developed electronic surveillance products and
approximately $100,000 for capital improvements, furnishing and equipment for
the facility through the nine months ending September 30, 2003.
Debt Capitalization and Other Financing Arrangements
At September 30, 2003, we had borrowings of approximately $31.5 million. We had
three letters of credit outstanding at September 30, 2003, totaling $825,000 as
collateral relating to workers' compensation insurance policies. We maintain a
$500,000 revolving credit facility to provide financing for additional
electronic surveillance product inventory purchases. There were no borrowings
outstanding under the revolving credit facility at September 30, 2003.
19
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.
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. At September 30, 2003, we were not in
compliance with our consolidated debt coverage ratio related to our GMAC notes
payable and a subsidiary level cash flow covenant with Bank One related to
Colonial Full Service Car Wash, Inc. ("Colonial"). With respect to the GMAC
notes payable and the Bank One notes payable, the Company has received waivers
of acceleration of the notes through October 1, 2004. Additionally, the Company
has entered into amendments to the Bank One term loan agreements and a
modification agreement to a loan agreement with Wachovia Bank, N.A.("Wachovia")
as of December 31, 2002. The Company is currently in compliance with the
Wachovia covenants as amended. The Company initiated certain temporary and
permanent cost savings measures in March of 2003 including reductions in payroll
expense and certain operating costs to enable it to maintain compliance with the
Bank One consolidated debt coverage ratio. These savings through September 30,
2003, totaled approximately $375,000. The amended debt coverage ratio with Bank
One requires the Company to maintain a consolidated earnings before interest,
taxes, depreciation and amortization ("EBITDA") to debt service ("the debt
coverage ratio") of 1.2 to 1 at December 31, 2003 and thereafter, and a 1.1 to 1
ratio for the twelve month period ending September 30, 2003. If we default on
any of the Bank One covenants or the GMAC covenant in the future, the Company
will need to obtain further amendments or waivers from these lenders. If the
Company is unable to obtain waivers or amendments in the future, Bank One debt
totaling $5.6 million and GMAC debt totaling $11.0 million recorded as long-term
debt at September 30, 2003 would become due on demand.
The Company's ongoing ability to comply with its debt covenants under its credit
arrangements and refinance its debt depends largely on the achievement of
adequate levels of cash flow. Our cash flow has been and could continue to be
adversely affected by weather patterns and economic conditions. In the event
that non-compliance with the debt covenants should reoccur, the Company would
pursue various alternatives to attempt to successfully resolve the
non-compliance, which might include, among other things, seeking additional debt
covenant waivers or amendments, or refinancing debt with other financial
institutions. Although the Company believes that it would be successful in
resolving potential non-compliance with its debt covenants, or refinancing its
current debt, there can be no assurance that further debt covenant waivers or
amendments would be obtained or that the debt would be refinanced with other
financial institutions at favorable terms. If we are unable to obtain renewals
of or refinancings on favorable terms, our ability to operate would be
materially and adversely affected.
The Company is obligated under various operating leases, primarily for certain
equipment and real estate within the car care segment. Certain of these leases
contain purchase options, renewal provisions, and contingent rentals for our
proportionate share of taxes, utilities, insurance, and annual cost of living
increases. Future minimum lease payments under operating leases with initial or
remaining noncancellable lease terms in excess of one year as of September 30,
2003 are as follows: Year 1 - $1.3 million; Year 2 - $1.1 million; Year 3 -
$688,000; Year 4 - $529,000; Year 5 - $412,000; and thereafter - $1.3 million.
The following are summaries of our contractual obligations and other commercial
commitments at September 30, 2003 (in thousands):
- ------------------------------------------------------------------------------------------------------------------
Payments Due By Period
- ------------------------------------------------------------------------------------------------------------------
Contractual Obligations
- ----------------------- Less than Two to Four to Five More Than
Total One Year Three Years Years Five Years
-----------------------------------------------------------------------------
Long-term debt $ 31,085 $ 10,486 $ 4,238 $ 6,442 $ 9,919
Capital leases 391 174 175 42 -
Minimum operating lease payments 5,287 1,305 1,740 941 1,301
------------ ------------- ------------- -------------- --------------
$ 36,763 $ 11,965 $ 6,153 $ 7,425 $ 11,220
============= ============== ============= =============== ==============
- ------------------------------------------------------------------------------------------------------------------
Amounts Expiring Per Period
- ------------------------------------------------------------------------------------------------------------------
Other Commercial Commitments
- ---------------------------- Less Than Two to Four to More Than
Total One Year Three Years Five Years Five Years
-----------------------------------------------------------------------------
Line of Credit $ 500 (1)$ 500 $ - $ - $ -
Standby Letters of Credit 825 825 - - -
------------ ------------- ------------- -------------- --------------
$ 1,325 $ 1,325 $ - $ - $ -
============= ============= ============= =============== ==============
(1) There were no borrowings outstanding under the Company's line of credit at
September 30, 2003
20
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 to purchase directly from us shares of our
unrestricted common stock. Each equity purchase agreement is to be in an
aggregate principal amount of $12.0 million. The first equity purchase agreement
was entered into on April 17, 2000. Fusion had the right to terminate the first
equity purchase agreement on or after February 20, 2003. In the Company's Form
10-K for the fiscal year ended December 31, 2002, the Company described the
first equity purchase agreement as having expired on February 20, 2003. On April
11, 2003 Fusion notified the Company that Fusion did not terminate the first
equity agreement and further agreed not to terminate it until on or after
February 20, 2005; accordingly, the first equity purchase agreement is still in
effect. The equity purchase agreement allows us to suspend the purchasing of our
common stock by Fusion if the price of our common stock is less than $7.00
(pre-reverse split) 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 (pre-reverse split), whichever is
greater or (2) a price based upon the lower of (a) the lowest sale price of the
common stock during the 12 consecutive trading days immediately preceding
Fusion's purchase and (b) the lowest closing bid price for the common stock
during the 12 consecutive trading days ending on the day prior to Fusion's
purchase. 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.
Proceeds from purchased shares through December 31, 2001 totaled approximately
$1.3 million. 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. The
description of the equity purchase agreement and master facility agreement is
summarized above. The equity purchase agreement and the master facility
agreement have been filed as exhibits 10.128 and 10.129 as noted in our December
31, 2002 Form 10-K.
Cash Flows
Operating Activities. Net cash provided by operating activities totaled $326,000
for the nine months ended September 30, 2003. Cash provided by operating
activities in 2003 was impacted primarily by reduced volume within the Car and
Truck Wash Segment due to above average inclement weather in the Company's Texas
and East operating regions and the purchasing of our initial inventory of
electronic surveillance products.
Investing Activities. Cash used in investing activities totaled $726,000 for the
nine months ended September 30, 2003 which reflects $606,000 for capital
expenditures relating to ongoing car care operations, and $106,000 for the
Security Products Segment.
Financing Activities. Cash used in financing activities was $1.8 million for the
nine months ended September 30, 2003 which reflects routine principal payments
on debt of $1.8 million and $14,000 for the purchase and retirement of shares of
our common stock.
Seasonality and Inflation
The Company believes that its car washing and detailing operations are adversely
affected by periods of inclement weather. In particular, long periods of rain
and cloudy weather 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, usually
encountered during the Company's third quarter, may encourage customers to wash
their cars themselves which also can adversely affect our car wash business. The
Company has attempted to mitigate the risk of unfavorable weather patterns by
having operations in diverse geographic regions. The Company also experiences a
seasonal reduction in volume during the third quarter within the Company's
Arizona and Florida regions as a result of a migration of a significant portion
of the area's population to cooler climates.
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.
21
Results of Operations for the Nine Months Ended September 30, 2003
Compared to the Nine Months Ended September 30, 2002
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues:
Nine Months Ended
September 30,
2003 2002
------------------------------------------------------------------- ------------- ------------
Revenues 100.0% 100.0%
Cost of revenues 72.9 70.2
Selling, general and administrative expenses 18.4 17.4
Depreciation and amortization 4.0 4.1
Costs of terminated acquisitions - 0.1
Asset impairment charge 1.0 -
------------- ------------
Operating income 3.7 8.2
Interest expense, net (4.0) (4.7)
Other income 0.6 0.6
------------- ------------
Income before income taxes 0.3 4.1
Income tax expense 0.1 1.5
------------- ------------
Income before cumulative effect of a change in accounting 0.2 2.6
principle
Cumulative effect of a change in accounting principle, net of tax - (16.1)
------------- ------------
Net income (loss) 0.2% (13.5)%
============= ============
Revenues
Car and Truck Wash Services
Revenues for the nine months ended September 30, 2003 were $32.9 million as
compared to $33.8 million for the nine months ended September 30, 2002, a
decrease of $0.9 million or 3%. This decrease was primarily attributable to a
decrease in wash and detail services. Of the $32.9 million of revenues for the
nine months ended September 30, 2003, $27.1 million or 82% was generated from
car wash and detailing, $3.1 million or 10% from lube and other automotive
services, and $2.7 million or 8% from fuel and merchandise sales. 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. The decrease in wash and detailing revenues was principally due to an
approximate 8% decrease in wash volume in 2003 as compared to 2002 as a result
of more rainy and cloudy days in substantially all of the Company's markets in
2003. The volume decrease was partially offset by an increase in the average
total wash and detailing revenue per car of approximately 4%.
Security Products
During the first four months of 2002, pursuant to a Management Agreement, the
Company was paid $20,000 per month. These amounts are included under revenues
from operating agreements. Effective May 1, 2002, the Company recommenced
operation of the Security Products Segment and payments under the Management
Agreement were terminated. Revenues for the nine months ended September 30, 2003
were $3.8 million comprised of approximately $2.1 million from the Consumer
Products Division and approximately $1.7 million from the Electronic
Surveillance Products Division. Revenues for the five months in which the
Company operated this segment during the first nine months of 2002, May through
September, were approximately $1.6 million.
Cost of Revenues
Car and Truck Wash Services
22
Cost of revenues for the nine months ended September 30, 2003 were $24.6
million, or 75% of revenues, with car washing and detailing costs at 73% of
respective revenues, lube and other automotive services costs at 77% of
respective revenues, and fuel and merchandise costs at 88% of respective
revenues. Cost of revenues 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. The Company has experienced a deterioration in wash and detailing
operating margins largely due to a decrease in wash volume of 8% as compared to
the same period in the prior year, combined with increased insurance premiums
and related claim costs, lease termination costs related to an underperforming
car wash property closed in 2003, and an increase in labor costs as a percent of
revenues of approximately two percentage points. This deterioration in wash and
detailing operating margins was partially offset by certain temporary and
permanent cost savings measures instituted in March of 2003, including
reductions in payroll and related benefit costs and certain other operating
expenses.
Security Products
For the nine months ended September 30, 2003, cost of revenues were $2.2 million
or 58% of revenues. Through April of 2002, pursuant to a Management Agreement,
no costs were incurred by us. From May through September of 2002, cost of
revenues were $868,000 or 55% of revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September
30, 2003 were $6.8 million compared to $6.2 million for the same period in 2002,
an increase of approximately $0.6 million or 10%. SG&A expenses as a percent of
revenues were 18.4% for the nine months ended September 30, 2003 as compared to
17.4% in the first nine months of 2002. The increase in SG&A expenses is
primarily the result of recommencing operation of the Security Products Segment
in May 2002, which added $1.0 million of SG&A expenses in the first nine months
of 2003. This increase in SG&A expenses was partially offset by certain
temporary and permanent cost savings measures instituted in March of 2003,
including reductions in payroll and related benefit costs and certain other
operating expenses.
Depreciation and Amortization
Depreciation and amortization totaled $1.5 million for the nine months ended
September 30, 2003 as compared to $1.5 million for the same period in 2002.
Asset Impairment Charges
In accordance with SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we periodically review the carrying value of our long-lived
assets held and used and assets to be disposed of for possible impairment when
events and circumstances warrant such a review. During the quarter ended June
30, 2003, we wrote down assets determined to be impaired by approximately
$351,000. The asset write-down related to a full service car wash site in
Arizona which we partially wrote down at December 31, 2002. The additional
write-down was the result of the impending loss of a significant customer of
this site resulting in the future expected cash flows not being sufficient to
recover the site's carrying value. The Company closed the facility effective
September 30, 2003.
Interest Expense, Net
Interest expense, net of interest income, for the nine months ended September
30, 2003 was $1.5 million compared to $1.7 million for the nine months ended
September 30, 2002. 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, 2003 was $210,000 compared
to $230,000 for the nine months ended September 30, 2002.
Income Taxes
The Company recorded tax expense of $42,000 and $524,000 for the nine months
ended September 30, 2003 and 2002, respectively. Tax expense reflects the
recording of income taxes on income before cumulative effect of a change in
accounting principle at an effective rate of approximately 36% in both 2003 and
2002. We recorded an income tax benefit of approximately $2.2 million related to
the cumulative effect of a change in accounting principle in 2002. The income
tax benefit reflects an effective rate of 36% for the impairments in the Arizona
and truck wash reporting units. No income tax benefit was recorded for the
Northeast Region reporting unit impairment due to the non-deductibility of the
goodwill. The effective rate differs from the federal statutory rate for each
year primarily due to state and local income taxes, non-deductible costs related
to intangibles, fixed asset adjustments and changes to the valuation allowance.
23
Results of Operations for the Three Months Ended September 30, 2003
Compared to the Three Months Ended September 30, 2002
Revenues
Car and Truck Wash Services
Revenues for the three months ended September 30, 2003 were $10.3 million as
compared to $10.7 million for the three months ended September 30, 2002, a
decrease of $0.4 million or 4%. This decrease was primarily attributable to a
decrease in wash and detail services. Of the $10.3 million of revenues for the
three months ended September 30, 2003, $8.3 million or 80% was generated from
car wash and detailing, $1.1 million or 11% from lube and other automotive
services, and $0.9 million or 9% from fuel and merchandise sales. 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 million or 8% from fuel and merchandise
sales. The decrease in wash and detailing revenues was principally due to a 10%
decrease in wash volume in the three months ending September 30, 2003 as
compared to the same period in 2002 as a result of more rainy and cloudy days in
the Company's Texas and Northeast regions in 2003. The volume decrease was
partially offset by an increase in the average total wash and detailing revenue
per car of approximately 5%.
Security Products
During the first four months of 2002, pursuant to a Management Agreement, the
Company was paid $20,000 per month. These amounts are included under revenues
from operating agreements. Effective May 1, 2002, the Company recommenced
operation of the Security Products Segment and payments under the Management
Agreement were terminated. Revenues for the three months ended September 30,
2003 were $1.6 million comprised of approximately $770,000 from the Consumer
Products Division and approximately $820,000 from the Electronic Surveillance
Products Division. Revenues for the three months ended September 30, 2002 were
approximately $1.2 million.
Cost of Revenues
Car and Truck Wash Services
Cost of revenues for the three months ended September 30, 2003 were $8.0
million, or 78% of revenues, with car washing and detailing costs at 77% of
respective revenues, lube and other automotive services costs at 75% of
respective revenues, and fuel and merchandise costs at 89% of respective
revenues. Cost of revenues 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. The Company has experienced a deterioration in wash and detailing
operating margins largely due to a decrease in wash volume of 10% as compared to
the same quarter in the prior year, combined with lease termination costs
related to an underperforming car wash property in Arizona closed in 2003, and
an increase in labor costs as a percent of revenues of approximately two
percentage points. This deterioration in wash and detailing operating margins
was partially offset by certain temporary and permanent cost savings measures
instituted in March of 2003, including reductions in payroll and related benefit
costs.
Security Products
During the three months ended September 30, 2003, cost of revenues were $914,000
or 58% of revenues as compared to $643,000 or 55% of revenues for the three
months ended September 30, 2002.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
September 30, 2003 were $2.3 million compared to $2.3 million for the same
period in 2002. SG&A expenses as a percent of revenues were 19.6% for the three
months ended September 30, 2003 as compared to 19.6% in the third quarter of
2002. SG&A expenses increased as a result of entering the electronic security
surveillance business in August 2002, which added $277,000 of SG&A expenses in
the third quarter of 2003. This increase in SG&A expenses was offset by certain
temporary and permanent cost savings measures instituted in March of 2003,
including reductions in payroll and related benefit costs.
Depreciation and Amortization
Depreciation and amortization totaled $487,000 for the three months ended
September 30, 2003 as compared to $474,000 for the same period in 2002.
24
Interest Expense, Net
Interest expense, net of interest income, for the three months ended September
30, 2003 was $443,000 compared to $553,000 for the three months ended September
30, 2002. This decrease in interest expense was 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, a retroactive interest rate adjustment on a note
payable, and a reduction in our outstanding debt as a result of normal principal
payments.
Other Income (Expense)
Other income (expense) for the three months ended September 30, 2003 was $43,000
compared to $82,000 for the three months ended September 30, 2002, primarily as
a result of a reserve for $100,000 against a note receivable (see Note 8,
Commitments and Contingencies) partially offset by an insurance reimbursement in
the third quarter of 2003 for lost profit due to a fire at one of our car wash
facilities.
Income Taxes
The Company recorded tax benefit of $102,000 and $65,000 for the three months
ended September 30, 2003 and 2002, respectively. Tax benefit reflects the
recording of income taxes on loss before income taxes at an effective rate of
approximately 36% in both 2003 and 2002. The effective rate differs from the
federal statutory rate for each year primarily due to state and local income
taxes, non-deductible costs related to intangibles, fixed asset adjustments and
changes to the valuation allowance.
Risk Factors
This report includes forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended ("Forward Looking Statements"). All statements
other than statements of historical fact included in this report are Forward
Looking Statements. Although we believe that the expectations reflected in such
Forward Looking Statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. These risks and uncertainties are
set forth herein and in the Company's 2002 Form 10-K and as may be set forth in
the Company's subsequent press releases and/or Forms 10-Q, 8-K, and other
filings with the Securities and Exchange Commission. All phases of our
operations are subject to a number of uncertainties, risks and other influences,
many of which are outside our control and any one of which, or a combination of
which, could materially affect the results of our operations and whether Forward
Looking Statements made by us ultimately prove to be accurate. Such important
factors that could cause actual results to differ materially from our
expectations are disclosed in this section and elsewhere in this report. All
subsequent written and oral Forward Looking Statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the important factors described below that could cause actual
results to differ from our expectations.
Our business plan poses risks for us. Our business objectives include
internally developing our Electronic Surveillance Products Division and
acquiring additional car washes, if we can do so under advantageous terms. To
date, we have spent or committed to spend approximately $3.0 million in
developing our Electronic Surveillance Products Division including the
acquisition cost of Micro-Tech, the purchase of our warehouse in Hollywood,
Florida, and the cost of developing and purchasing our expanded inventory
product line. As part of our business plan we may also develop or acquire
additional car wash facilities. Our strategy involves a number of risks,
including:
i. risks associated with growth;
ii. risks associated with acquisitions; and their integration into our
Company.
iii. risks associated with the recruitment and development of
management and operating personnel; and
iv. risks of not being able to sell the electronic surveillance
products in the quantities we have ordered from OEM manufacturers.
If we are unable to manage one or more of these associated risks effectively, we
may not fully realize our business plan.
25
Risk related to borrowings. Our borrowings as of September 30, 2003
were $31.5 million. Of the borrowings, $10.7 million is classified as current as
it is due in less than twelve months. Our business plan is dependent on
refinancing the debt as it becomes due. 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.
At September 30, 2003, we were not in compliance with our consolidated debt
coverage ratio related to our GMAC notes payable and a subsidiary level covenant
with Bank One related to Colonial Full Service Car Wash, Inc. ("Colonial"). With
respect to the GMAC notes payable and the Bank One notes payable related to
Colonial, the Company has received waivers of acceleration of the notes through
October 1, 2004. Additionally, the Company has entered into amendments to the
Bank One term loan agreements and a modification agreement to a loan agreement
with Wachovia Bank N.A. as of December 31, 2002. The Company is currently in
compliance with these covenants as amended. The Company initiated certain
temporary and permanent cost savings measures in March of 2003 including
reductions in payroll expense and certain operating costs to enable it to
maintain compliance with the Bank One consolidated debt coverage ratio. These
savings through September 30, 2003, totaled approximately $375,000. The amended
debt coverage ratio with Bank One requires the Company to maintain a
consolidated earnings before interest, taxes, depreciation and amortization
("EBITDA") to debt service ("the debt coverage ratio") of 1.2 to 1 at December
31, 2003 and thereafter, and a 1.1 to 1 ratio for the twelve month period ending
September 30, 2003. If we default on any of the Bank One covenants or the GMAC
convenant in the future, the Company will need to obtain further amendments or
waivers from these lenders. If the Company is unable to obtain waivers or
amendments in the future, Bank One debt totaling $5.6 million and GMAC debt
totaling $11.0 million currently recorded as long-term debt at September 30,
2003 would become due on demand.
The Company's ongoing ability to comply with its debt covenants under its credit
arrangements and refinance its debt depends largely on the achievement of
adequate levels of cash flow. Our cash flow has been and can continue to be
adversely affected by weather patterns and the economic climate. In the event
that non-compliance with the debt covenants should reoccur, the Company would
pursue various alternatives to successfully resolve the non-compliance, which
might include, among other things, seeking additional debt covenant waivers or
amendments, or refinancing debt with other financial institutions. Although the
Company believes that it would be successful in resolving potential
non-compliance with its debt covenants, or refinancing its current debt, there
can be no assurance that further debt covenant waivers or amendments would be
obtained or that the debt would be refinanced with other financial institutions
at favorable terms. If we are unable to obtain renewals of or refinancings on
favorable terms, our ability to operate would be materially and adversely
affected.
Our operations are dependent substantially on the services of our
executive officers. If we lose one or more of our executive officers and do not
replace them with experienced personnel, 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. The primary terms of the
employment agreements of Robert M. Kramer, Gregory M. Krzemien and Ronald R.
Pirollo expired on March 26, 2003. Mr. Paolino and the Company have executed an
employment agreement which has a term through August 12, 2006. Messrs. Kramer
and Krzemien are working on a month-to-month at-will basis. Mr. Pirollo or the
Company may terminate Mr. Pirollo's employment at any time. Mr. Paolino is the
Company's Chief Executive Officer; Mr. Kramer is the Company's Chief Operating
Officer, General Counsel and Secretary; Mr. Krzemien is the Company's Chief
Financial Officer and Treasurer; and Mr. Pirollo is the Company's Chief
Accounting Officer and Corporate Controller. The Company and the officers named
above, except Mr. Paolino, are in the process of negotiating their continued
employment arrangements.
We have reported net losses. We have reported net losses and working
capital deficits, and we have expended substantial funds for acquisitions,
equipment, and new business development. 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 subsequent reporting periods that will have a
material impact on earnings and equity of the Company. (See also Note 3, Change
in Accounting Principle.)
We have a limited operating history regarding our Electronic
Surveillance Products Division. We recently expanded our line of security
products by adding the Electronic Surveillance Products Division. We are
incurring expenses to develop the new line of products without having
extensively tested the size or possible profitability of the market for such
products. There are numerous risks associated with the new Electronic
Surveillance Products that may prevent the Company from making them profitably,
including, among others: risks associated with unanticipated problems in the
acquired company; risks inherent with our management having limited experience
in electronic security device marketing; 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 surveillance industry. We also expect that
there will be costs related to product returns and warranties and customer
support, that we cannot quantify or accurately estimate until we have more
experience in operating the new business.
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.
26
We face significant competition. The extent and kind of competition
that we face varies. The car care industry is highly competitive. Competition is
based primarily on location, facilities, customer service, available services
and rates. Because barriers to entry into the car care industry are relatively
low, competition may be expected to continually arise from new sources not
currently competing with us. We also face competition from outside the car care
industry, such as gas stations and convenience stores, that offer automated car
wash services. In some cases, these competitors may have greater financial and
operating resources than we have. In our car wash businesses, we face
competition from a number of sources, including regional and national chains,
gasoline stations, gasoline companies, automotive companies and specialty
stores, both regional and national.
Consumer demand for our car wash services is unpredictable. Our
financial condition and results of operations will depend substantially on
continued consumer demand for car wash services. Our car wash business depends
on consumers choosing to employ professional services to wash their cars rather
than washing their cars themselves or not washing their cars at all. 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 in car washes results in frequent mechanical problems. If we fail to
properly maintain the equipment, any car wash could become inoperable resulting
in a loss of its revenue. Many of our car washes have older equipment which
requires frequent repair or replacement.
We must operate our locations safely. Our Consumer Products Division
and Car and Truck Wash Segment utilize harsh chemicals in their operations. Our
Car and Truck Wash Segment employs approximately 1,400 people. Though we train
our personnel in safety, there is a risk of injury to our employees.
We face risks associated with significant insurance claims. We maintain
workers' compensation insurance in every state in which we operate. Commencing
July 2002, as a result of increasing costs of the Company's insurance program,
including auto, general liability, and workers' compensation coverage, we are
insured through participation in a captive insurance program with other
unrelated parties. With respect to our auto, general liability and workers'
compensation policies, we are required to set aside a certain amount of cash in
a restricted "loss fund" account for the payment of our deductible obligations
under the policies up to the first $300,000 per claim. As a member of the
captive, we are obligated to pay assessments to the captive insurance program.
The assessments are secured by a letter of credit in the amount of $525,000 at
September 30, 2003. If our loss experience is worse than expected, our
assessments to the captive may be increased in the future year. The Company
maintains excess coverage through occurrence-based policies. There can be no
assurance that our insurance program will provide sufficient coverage in the
event that a claim exceeds our insurance coverage or the captive insurer fails
to pay its claims, or that we will be able to maintain in place such insurance
at reasonable prices. An uninsured or under insured claim against us of
sufficient magnitude could have a material adverse effect on our business and
results of operations.
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. Other car care services, such as
gasoline and lubrication, use a number of oil derivatives and other regulated
hazardous substances. As a result, we are governed by environmental laws and
regulations dealing with, among other things:
i. transportation, storage, presence, use, disposal and handling of
hazardous materials and wastes;
ii. discharge of storm water; and
iii.underground storage tanks.
If uncontrolled hazardous substances were found on our property, including
leased property, or if we were 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 risks associated with our consumer safety products. We face
claims of injury allegedly resulting from our defense sprays. For example, we
are aware of allegations that defense sprays used by law enforcement personnel
resulted in deaths of prisoners and of suspects in custody. In the event a
lawsuit is brought against us, we cannot give assurance that our insurance
coverage will be sufficient to cover any judgments won. If our insurance
coverage is exceeded, we will have to pay the excess liability directly.
27
Listing on the Nasdaq National Market. Our common stock is listed on
the Nasdaq National Market and a bid price of $1.61 at the close of the market
on November 6, 2003. If the price of our common stock falls below $1.00 and for
30 consecutive days remains below $1.00, we are subject to being delisted from
the Nasdaq National Market. Upon delisting from the Nasdaq National Market, our
stock would be traded on the Nasdaq SmallCap Market until we maintain a minimum
bid price of $1.00 for 30 consecutive days at which time we can regain listing
on the Nasdaq National Market. If our stock fails to 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 could receive a delisting notice
from the Nasdaq SmallCap Market. Upon delisting from the Nasdaq SmallCap Market,
our stock would be traded over-the-counter, more commonly known as OTC. OTC
transactions involve risks in addition to those associated with transactions in
securities traded on the Nasdaq National Market or the Nasdaq SmallCap Market
(together "Nasdaq-Listed Stocks"). OTC companies may have limited product lines,
markets or financial resources. Many OTC stocks trade less frequently and in
smaller volumes than Nasdaq-Listed Stocks. The values of these stocks may be
more volatile than Nasdaq-Listed Stocks. If our stock is traded in the OTC
market and a market maker sponsors us, we may have the price of our stock
electronically displayed on the OTC Bulletin Board, or OTCBB. However, if we
lack sufficient market maker support for display on the OTCBB, we must have our
price published by the National Quotations Bureau LLP in a paper publication
known as the "Pink Sheets." The marketability of our stock will be even more
limited if our price must be published on the "Pink Sheets."
On October 2, 2002, Nasdaq advised the Company that its common stock failed to
maintain a minimum bid price of $1.00 over the prior 30 consecutive trading days
as required by the Nasdaq National Market under its Marketplace Rules. Nasdaq
advised us that we had 90 days to maintain a bid price of at least $1.00 for 10
consecutive business days or we would be delisted. The Company maintained a
minimum bid price of at least $1.00 for 10 consecutive business days ending
December 24, 2002, in part by completing a one-for-two reverse stock split on
December 17, 2002. On December 30, 2002, Nasdaq advised the Company that it was
in compliance with Market Place Rule 4450(a)(5) and was not subject to being
delisted.
Our stock price is volatile. Our common stock's market price has been
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.
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 million shares
of preferred stock. No shares of preferred stock are currently outstanding. It
is not possible to state the precise effect of preferred stock upon the rights
of the holders of our common stock until the Board of Directors determines the
respective preferences, limitations and relative rights of the holders of one or
more series or classes of the preferred stock. However, such effect might
include: (i) reduction of the amount otherwise available for payment of
dividends on common stock, to the extent dividends are payable on any issued
shares of preferred stock, and restrictions on dividends on common stock if
dividends on the preferred stock are in arrears, (ii) dilution of the voting
power of the common stock to the extent that the preferred stock has voting
rights, and (iii) the holders of common stock not being entitled to share in our
assets upon liquidation until satisfaction of any liquidation preference granted
to the preferred stock.
The preferred stock may be viewed as having the effect of discouraging an
unsolicited attempt by another entity to acquire control of us and may therefore
have an anti-takeover effect. Issuances of authorized preferred stock can be
implemented, and have been implemented by some companies in recent years with
voting or conversion privileges intended to make an acquisition of the company
more difficult or costly. Such an issuance could discourage or limit the
stockholders' participation in certain types of transactions that might be
proposed (such as a tender offer), whether or not such transactions were favored
by the majority of the stockholders, and could enhance the ability of officers
and directors to retain their positions.
Some provisions of Delaware law may prevent us from being acquired. We
are governed by Section 203 of the Delaware General Corporation Law, which
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an entity who is an "interested stockholder" for a period of
three 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.
28
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, 2002 as reported on our Form 10-K
for the year ended December 31, 2002.
Item 4. Controls and Procedures
The Company's management conducted an evaluation, under the supervision and with
the participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of October 9, 2003. Based on this
evaluation and as of the date of the evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in alerting them in a timely manner to material
information required to be included in the Company's SEC reports. In addition,
management, including the Chief Executive Officer and Chief Financial Officer,
reviewed the Company's internal controls, and there have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding our legal proceedings can be found in Note 8, Commitments
and Contingencies.
Item 5. Other Information
The Company's 2004 Annual Meeting of the Stockholders is currently expected to
be held on September 15, 2004. June 15, 2004 is the deadline for the
stockholders to submit proposals pursuant to Rule 14a-8 of the Exchange Act for
inclusion in Mace's Proxy Statement for Mace's 2004 Annual Meeting of
Stockholders. If a stockholder gives notice of a proposal after this deadline,
the proxies will be allowed to use their discretionary authority to vote against
such matter when and if raised at the 2004 meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.153 Consolidated Promissory Note and Amended and Restated Loan
Agreement dated October 20, 2003 between the Company, its
wholly owned subsidiary, Mace Security Products, Inc. and
Wachovia Bank, N.A. in the amount of $728,800.
10.154 Amendment dated October 25, 2003 to Employment Contract dated
August 12, 2003 by and between Mace Security International,
Inc. and Louis D. Paolino, Jr.
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Current Reports on Form 8-K or 8-K/A:
On August 12, 2003, the Company filed a report on Form 8-K dated
August 12, 2003, under Item 7 and Item 12, to report the issuance of a
press release announcing the Company's financial results for the
fiscal quarter and six month period ended June 30, 2003.
On October 29, 2003, The Company filed a report on Form 8-K dated
October 29, 2003 under Item 5 and Item 7 to (i) report the resignation
of one of its directors, Richard B. Muir, due to business commitments
and (ii) the election of Burton Segal to fill the vacancy created by
Mr. Muir's resignation.
29
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, 2003
30
EXHIBIT INDEX
Exhibit No. Description
- ---------- ------------
10.153 Consolidated Promissory Note and Amended and Restated Loan
Agreement dated October 20, 2003 between the Company, its wholly
owned subsidiary, Mace Security Products, Inc. and Wachovia Bank,
N.A. in the amount of $728,800.
10.154 Amendment dated October 25,2003 to Employment Contract dated
August 12,2003 by and between Mace Security International, Inc.
and Louis D. Paolino, Jr.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
31