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 JUNE 30, 2004 COMMISSION FILE NO. 0-22810
MACE SECURITY INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 03-0311630
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 CRAWFORD PLACE, SUITE 400, MT. LAUREL, NJ 08054
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NO., INCLUDING AREA CODE: (856) 778-2300
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 ("the
Exchange Act") during the preceding 12 months (or for such shorter period that
the registrant was required to file such report), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---- ----
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes No X
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock:
As of August 10, 2004 there were 14,208,385 Shares of Registrant's Common Stock,
par value $.01 per share, outstanding.
MACE SECURITY INTERNATIONAL, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2004
CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 2
Consolidated Balance Sheets - June 30, 2004 (Unaudited)
and December 31, 2003 2
Consolidated Statements of Operations (Unaudited) for the three
months ended June 30, 2004 and 2003 4
Consolidated Statements of Operations (Unaudited) for the six
months ended June 30, 2004 and 2003. 5
Consolidated Statement of Stockholders' Equity
for the six months ended June 30, 2004 (Unaudited) 6
Consolidated Statements of Cash Flows (Unaudited) for
the six months ended June 30, 2004 and 2003 7
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 33
Item 4 - Controls and Procedures 33
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 33
Item 2 - Changes in Securities, Use of Proceeds and Issuer, Purchase
of Equity Securities 33
Item 6 - Exhibits and Reports on Form 8-K 34
Signatures 35
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MACE SECURITY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share information)
JUNE 30, DECEMBER 31,
2004 2003
ASSETS --------- ---------
(Unaudited)
Current assets:
Cash and cash equivalents $ 18,842 $ 3,414
Accounts receivable, less allowance for doubtful
accounts of $322 and $263 in 2004 and 2003, respectively 1,669 1,531
Inventories 4,115 3,780
Deferred income taxes 264 266
Prepaid expenses and other current assets 1,466 1,878
------ ------
Total current assets 26,356 10,869
Property and equipment:
Land 31,891 31,391
Buildings and leasehold improvements 35,801 34,871
Machinery and equipment 10,386 10,172
Furniture and fixtures 450 447
------ ------
Total property and equipment 78,528 76,881
Accumulated depreciation (11,653) (10,738)
------ ------
Total property and equipment, net of accumulated depreciation 66,875 66,143
Goodwill 10,623 10,623
Other intangible assets, net of accumulated amortization
of $1,403 and $1,373 in 2004 and 2003, respectively 1,029 991
Deferred income taxes -- 1,820
Other assets 235 156
------ ------
TOTAL ASSETS $ 105,118 $ 90,602
========= =========
SEE ACCOMPANYING NOTES.
1
LIABILITIES AND STOCKHOLDERS' EQUITY JUNE 30, DECEMBER 31,
2004 2003
----------- ------------
(UNAUDITED)
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 5,245 $ 5,520
Accounts payable 1,765 2,658
Income taxes payable 340 172
Deferred revenue 364 402
Accrued expenses and other current liabilities 2,600 1,847
------ ------
Total current liabilities 10,314 10,599
Long-term debt, net of current portion 24,681 25,591
Capital lease obligations, net of current portion 112 175
Other liabilities -- 25
Deferred income taxes 1,325 --
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 10,000,000
Issued and outstanding shares - none -- --
Common stock, $.01 par value:
Authorized shares - 100,000,000
Issued and outstanding shares of 14,208,385 and 142 125
12,451,771 in 2004 and 2003, respectively
Additional paid-in capital 84,039 69,785
Accumulated deficit (15,495) (15,698)
------ ------
Total stockholders' equity 68,686 54,212
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 105,118 $ 90,602
========= =========
SEE ACCOMPANYING NOTES.
2
MACE SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except share information)
THREE MONTHS ENDED
JUNE 30,
2004 2003
------------- -------------
Revenues:
Car wash and detailing services $ 8,565 $ 9,259
Lube and other automotive services 895 1,024
Fuel and merchandise sales 1,142 877
Security products sales 2,003 1,157
------ ------
12,605 12,317
Cost of revenues:
Car wash and detailing services 6,126 6,706
Lube and other automotive services 703 810
Fuel and merchandise sales 1,000 768
Security products sales 1,317 646
------ ------
9,146 8,930
Selling, general and administrative expenses 2,537 2,258
Depreciation and amortization 493 489
Asset impairment charge -- 351
------ ------
Operating income 429 289
Interest expense, net (450) (511)
Other (expense) income (1) 85
------ ------
Loss before income taxes (22) (137)
Income tax benefit (8) (49)
------ ------
Net loss $ (14) $ (88)
============ ============
Per share of common stock (basic and diluted):
Net loss $ -- $ (0.01)
============ ============
Weighted average shares outstanding:
Basic 13,495,889 12,406,805
Diluted 13,495,889 12,406,805
SEE ACCOMPANYING NOTES.
3
MACE SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except share information)
Six Months Ended
June 30,
2004 2003
------------ -------------
Revenues:
Car wash and detailing services $ 17,476 $ 18,804
Lube and other automotive services 1,825 2,045
Fuel and merchandise sales 2,101 1,797
Security products sales 3,879 2,282
------ ------
25,281 24,928
Cost of revenues:
Car wash and detailing services 12,413 13,411
Lube and other automotive services 1,407 1,587
Fuel and merchandise sales 1,826 1,563
Security products sales 2,498 1,300
------ ------
18,144 17,861
Selling, general and administrative expenses 5,008 4,477
Depreciation and amortization 994 975
Asset impairment charge -- 351
------ ------
Operating income 1,135 1,264
Interest expense, net (929) (1,033)
Other income 111 167
------ ------
Income before income taxes 317 398
Income tax expense 114 144
------ ------
Net income $ 203 $ 254
============ ============
Per share of common stock (basic and diluted):
Net income $ 0.02 $ 0.02
============ =============
Weighted average shares outstanding:
Basic 12,978,459 12,408,513
Diluted 13,389,706 12,411,656
SEE ACCOMPANYING NOTES.
4
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, 2003 ..... 12,451,771 $ 125 $ 69,785 $ (15,698) $ 54,212
Exercise of common stock options . 428,456 4 1,840 1,844
Common stock issued in purchase
acquisition .................... 13,158 -- 25 25
Common stock issued for land
and building .................... 250,000 2 1,561 1,563
Sales of common stock, net
of issuance costs of $241 ....... 1,065,000 11 5,101 5,112
Proceeds from removal of
restriction on shares, net
of income tax of $3,227 -- -- 5,727 5,727
Net income ....................... -- -- -- 203 203
Balance at June 30, 2004 ......... 14,208,385 $ 142 $ 84,039 $ (15,495) $ 68,686
============== =========== =========== =========== ============
SEE ACCOMPANYING NOTES.
5
MACE SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
June 30,
---------------------
2004 2003
---------------------
OPERATING ACTIVITIES
Net income $ 203 $ 254
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 994 975
Provision for losses on receivables 67 29
Asset impairment charge -- 351
Deferred income taxes 98 123
Loss on disposal of fixed assets 51 3
Changes in operating assets and liabilities:
Accounts receivable (204) (388)
Inventories (336) (688)
Accounts payable (893) (525)
Deferred revenue (38) (43)
Accrued expenses 747 308
Income taxes (10) (92)
Prepaid expenses and other assets 433 480
------ ------
Net cash provided by operating activities 1,112 787
INVESTING ACTIVITIES
Purchase of property and equipment (384) (463)
Payments for intangibles (68) (7)
Proceeds from sale of property and equipment 149 --
Prepaid costs for future acquisitions (43) --
------ ------
Net cash used in investing activities (346) (470)
FINANCING ACTIVITIES
Payments on long-term debt and capital lease obligations (1,248) (1,227)
Proceeds from issuance of common stock 6,956 --
Proceeds from removal of restriction on shares 8,954 --
Payments to purchase stock -- (14)
------ ------
Net cash provided by (used in) financing activities 14,662 (1,241)
------ ------
Net increase (decrease) in cash and cash equivalents 15,428 (924)
Cash and cash equivalents at beginning of period 3,414 6,189
------ ------
Cash and cash equivalents at end of period $ 18,842 $ 5,265
======== =========
SEE ACCOMPANYING NOTES.
6
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 six month period ended June 30, 2004 are not
necessarily indicative of the operating results for the full year. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted. Certain amounts in the 2003
financial statements have been reclassified to conform to the 2004 presentation.
These consolidated interim financial statements should be read in conjunction
with the audited consolidated financial statements and notes contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003.
2. NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB") released
Interpretation No. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES ("FIN 46")
which requires that all primary beneficiaries of Variable Interest Entities
("VIE") consolidate those entities. FIN 46 is effective immediately for VIEs
created after January 31, 2003 and to VIEs in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003 to VIEs in which an enterprise holds a variable
interest it acquired before February 1, 2003. In December 2003, the FASB
published a revision to FIN 46 ("FIN 46R") to clarify some of the provisions of
the interpretation and to defer the effective date of implementation for
certain entities. Under the guidance of FIN 46R, entities that do not have
interests in structures that are commonly referred to as special purpose
entities are required to apply the provisions of the interpretation in
financial statements for periods ending after March 14, 2004. The Company does
not have interests in special purpose entities and the adoption of FIN 46R did
not have an impact on the Company's consolidated financial position, results of
operations, or cash flows.
3. OTHER INTANGIBLE ASSETS
The following table reflects the components of intangible assets, excluding
goodwill (in thousands):
JUNE 30, 2004 DECEMBER 31, 2003
GROSS CARRYING GROSS
AMOUNT ACCUMULATED CARRYING ACCUMULATED
AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------- ----------- -------------
Amortized intangible assets:
Non-compete agreement $ 119 $ 10 $ 65 $ 7
Customer list 62 36 62 23
Deferred financing costs 404 172 390 158
-------------- ------------- ----------- -------------
Total amortized intangible assets 585 218 517 188
Non-amortized intangible assets:
Trademarks - Security Products Segment 1,731 1,175 1,731 1,175
Service mark - Car and Truck Wash Segment 116 10 116 10
-------------- ------------- ----------- -------------
Total non-amortized intangible assets 1,847 1,185 1,847 1,185
-------------- ------------- ----------- -------------
Total intangible assets $ 2,432 $ 1,403 $ 2,364 $ 1,373
============== ============= =========== =============
8
The following sets forth the estimated amortization expense on intangible assets
for the fiscal years ending December 31 (in thousands):
2004 $73
2005 53
2006 39
2007 36
2008 26
4. 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, and
further 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. (also
see Note 7, Subsequent Events)
5. STOCK BASED COMPENSATION
The Company accounts for stock options under Statement of Financial Accounting
Standards ("SFAS") 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, as amended by
SFAS 148, which contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures compensation cost at the
grant date based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period. Alternatively,
SFAS 123 permits entities to continue accounting for employee stock options and
similar equity instruments under Accounting Principles Board ("APB") Opinion 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Entities that continue to account for
stock options using APB Opinion 25 are required to make pro forma disclosures of
net income and earnings per share as if the fair value-based method of
accounting defined in SFAS 123 had been applied.
At June 30, 2004, the Company had two stock based employee compensation plans.
The Company accounts for the plans under the recognition and measurement
principles of APB 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations. Stock-based employee compensation costs are not reflected in
net income, as all options granted under the plan had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share as
if the Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
---------------- ---------------- -------------- ------------
Net (loss) income, as reported $ (14) $ (88) $ 203 $ 254
Less: Stock-based compensation costs under
fair value based method for all awards (75) (80) (163) (155)
---------------- ---------------- -------------- ------------
Pro forma net (loss) income $ (89) $ (168) $ 40 $ 99
================ ================ ============== ============
Earnings per share - basic and diluted
As reported $ - $ (0.01) $ 0.02 $ 0.02
Pro forma $ (0.01) $ (0.01) $ - $ 0.01
9
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted average
assumptions for grants in the quarter ended June 30, 2003: expected volatility
of 24%; risk-free interest rate of 3.3%; and expected life of 10 years. In the
quarter ended June 30, 2004, no options were granted.
6. COMMITMENTS AND CONTINGENCIES
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 Company filed a summary judgment motion that was
granted in May of 2004. The Company received a judgment on the promissory note
and the defendant's counterclaims were dismissed.
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 was dismissed without the Company paying
any money.
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.("Mark Sport") to operate the
Company's Security Products Segment. 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.
In December 2003, one of the Company's car wash subsidiaries was named as a
defendant in a suit filed by Kristen Sellers in the Circuit Court of the Twelfth
Judicial Circuit in and for Sarasota County, Florida. The suit alleges that the
plaintiff is entitled to damages in excess of $15,000 due to psychological
injury and emotional distress sustained when an employee of the car wash
allegedly assaulted Ms. Sellers with sexually explicit acts and words. The
Company's subsidiary is alleged to have been negligent in hiring, retaining and
supervising the employee. The Company forwarded the suit to its insurance
carrier for defense. The plaintiff has communicated that the case could be
settled for $500,000. We do not anticipate that this claim will result in the
payment of damages in excess of the Company's insurance coverage.
The Company has produced documents requested in a subpoena issued in connection
with an investigation being conducted by the United States Securities and
Exchange Commission of possible securities law violations. The subpoena was
issued on October 27, 2003. The subpoena requested documents and information
which would identify persons who knew of two transactions involving the Company
prior to the Company's public announcement of the transactions. The transactions
were announced by the Company on March 29, 1999 and were consummated in July of
1999. The subpoena also requested documents relating to the Company's dealings
with two investment banking firms and certain of their employees. The Company
intends to fully cooperate with the United States Securities and Exchange
Commission's investigation. The Company has produced all documents that were
requested and has not been contacted by the United States Securities and
Exchange Commission regarding the investigation since February, 2004.
10
On July 20, 2004, the Company received a letter from the United States
Securities and Exchange Commission. This letter requested that the Company
voluntarily provide information and documents relating to Price Legacy
Corporation's sale of 1,875,000 shares of the Company's common stock on the open
market in April, 2004 and Price Legacy Corporation's payment of $8.95 million to
the Company in exchange for the Company removing a sales restriction from
1,750,000 of the shares that were sold. The Company has voluntarily produced the
information and documents requested. The Company intends to cooperate with the
United States Securities and Exchange Commission in this matter.
The Company is a party to various other legal proceedings related to its normal
business activities. In the opinion of the Company's management, none of these
proceedings is material in relation to the Company's results of operations,
liquidity, cash flows or financial condition.
Although the Company is not aware of any substantiated claim of permanent
personal injury from its products, the Company is aware of reports of incidents
in which, among other things; defense sprays have been mischievously or
improperly used, in some cases by minors; have not been instantly effective; or
have been ineffective against enraged or intoxicated individuals.
The Company is subject to federal and state environmental regulations, including
rules relating to air and water pollution and the storage and disposal of oil,
other chemicals and waste. The Company believes that it complies, in all
material respects, with all applicable laws relating to its business.
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 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.
7. SUBSEQUENT EVENTS
On July 1, 2004, the Company, through its wholly owned subsidiary, Mace Security
Products, Inc., acquired substantially all of the operating assets of Industrial
Vision Source(R)("IVS") and SecurityandMore(R)("S&M") from American Building
Control, Inc. The Company paid approximately $5.6 million of cash comprised of
approximately $1.86 million for inventory; $1.37 million for accounts
recievable; $100,000 for equipment; $250,000 for current liabilities; and the
remainder of $2.54 million allocated to goodwill and other intangible assets.
S&M supplies video surveillance and security equipment and IVS is a distributor
of technologically advanced imaging components and video equipment. The
acquisition will be accounted for as a business combination in accordance with
SFAS No. 141, BUSINESS COMBINATIONS.
On July 29, 2004, the Company's Board of Directors authorized a Stock Buy Back
Plan to purchase shares of the Company's common stock up to a maximum value of
$3.0 million. Purchases will be made in the open market, if and when management
determines to effect purchases. Management may elect not to make purchases or
make purchases less than $3.0 million in amount. As of August 11, 2004, the
Company did not purchase any shares on the open market.
On August 3, 2004, the Company sold an exterior-only car wash facility in New
Jersey. Proceeds from the sale of this facility, which was producing marginal
cash flow, were approximately $645,000; slightly more than the site's net book
value.
8. 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. The
Security Products Segment is comprised of two operating divisions; the
Electronic Surveillance Products Division and Consumer Products Division. The
Consumer Products Division designs, markets and sells consumer products for use
in home and automobile and for personal protection. The Electronic Surveillance
Products Division designs, markets and sells cameras, digital video recorders
(DVR's), and monitors.
11
Financial information regarding the Company's segments is as follows (in
thousands):
CAR AND SECURITY CORPORATE
TRUCK WASH PRODUCTS FUNCTIONS*
--------------- --------------- ----------
THREE MONTHS ENDED JUNE 30, 2004
Revenues from external customers $ 10,602 $ 2,003 $ -
Intersegment revenues $ - $ 2 $ -
Segment operating income (loss) $ 1,253 $ (64) $ (760)
Segment assets $ 95,743 $ 9,375 $ -
Goodwill $ 10,381 $ 242 $ -
Capital Expenditures $ 215 $ 1,542 $ 3
SIX MONTHS ENDED JUNE 30, 2004
Revenues from external customers $ 21,402 $ 3,879 $ -
Intersegment revenues $ - $ 5 $ -
Segment operating income (loss) $ 2,709 $ (65) $ (1,509)
Capital Expenditures $ 350 $ 1,548 $ 3
THREE MONTHS ENDED JUNE 30, 2003
Revenues from external customers $ 11,160 $ 1,157 $ -
Intersegment revenues $ - $ 22 $ -
Segment operating income (loss) $ 983 $ (16) $ (678)
Capital Expenditures $ 249 $ 64 $ -
SIX MONTHS ENDED JUNE 30, 2003
Revenues from external customers $ 22,646 $ 2,282 $ -
Intersegment revenues $ - $ 22 $ -
Segment operating income (loss) $ 2,663 $ (43) $ (1,356)
Capital Expenditures $ 389 $ 75 $ -
* Corporate functions include the corporate treasury, legal, financial
reporting, information technology, corporate tax, corporate insurance, human
resources, investor relations, and other typical centralized administrative
functions.
9. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, as well as the disclosure of contingent
assets and liabilities at the date of its financial statements. The Company
bases its estimates on historical experience, actuarial valuations and various
other factors that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Some of
those judgments can be subjective and complex, and consequently, actual results
may differ from these estimates under different assumptions or conditions. We
must make these estimates and assumptions because certain information that we
use is dependent on future events and cannot be calculated with a high degree of
precision from the data currently available. Such estimates include the
Company's estimates of reserves such as the allowance for doubtful accounts,
inventory valuation allowances, insurance losses and loss reserves, valuation of
long-lived assets, estimates of realization of income tax net operating loss
carryforwards, as well as valuation calculations such as the Company's goodwill
impairment calculations under the provisions of SFAS 142, GOODWILL AND OTHER
INTANGIBLE ASSETS.
10. INCOME TAXES
The Company recorded income tax expense of $114,000 and $144,000 for the six
months ended June 30, 2004 and 2003, respectively. Income tax expense reflects
the recording of income taxes on income at an effective rate of approximately
36% in both 2004 and 2003. The effective rate differs from the federal statutory
rate for each year primarily due to state and local income taxes, non-deductible
costs related to intangibles, fixed asset adjustments and changes to the
valuation allowance. During the quarter ended June 30, 2004, the Company
received a payment of $8.95 million for the removal of a restriction on certain
outstanding shares of the Company's stock (see Note 12, Equity). Although the
transaction is taxable for Federal and State income tax purposes, no current or
deferred income tax expense is reflected on the accompanying income statement
due to the recording of the transaction as a contribution to capital, net of
income tax of $3.2 million. The Company has sufficient net operating losses
available to fully offset the taxable income generated from this event. A tax
liability of $179,000 has been recorded for Federal Alternative Minimum Tax
purposes.
12
11. RELATED PARTY TRANSACTIONS
Effective August 1, 2000, Mace entered into a five-year lease with Bluepointe,
Inc., a corporation fifty percent owned by Louis D. Paolino, Jr., Mace's
Chairman, Chief Executive Officer and President and fifty percent owned by Mr.
Paolino's father Louis D. Paolino, Sr., for Mace's executive offices in Mt.
Laurel, New Jersey. Bluepointe, Inc. sold the building to an unrelated party in
May, 2004. The lease terms, which were assumed by the new owner, were subject to
a survey of local real estate market pricing and approval by the Company's Audit
Committee and provide for an initial monthly rental payment of $15,962, which
increases by 5% per year in the third through fifth years of the lease. Mace
believes that the terms of this lease (based on an annual rate of $19.00 per
square foot) were competitive when the lease was executed.
From November, 2001 through July 2002, the Company prepaid LP Learjets, LLC
$5,109 per month for the right to use a Learjet 31A for 100 hours per year. LP
Learjects, LLC is a company owned by Louis D. Paolino, Jr., the Company's
Chairman, Chief Executive Officer and President. When the Learjet 31A is used,
the prepaid amount is reduced by the hourly usage charge as approved by the
Audit Committee, and the Company pays to third parties unaffiliated with Louis
D. Paolino, Jr., the direct costs of the Learjet's per-hour use, which include
fuel, pilot fees, engine insurance and landing fees. The balance of unused
prepaid flight fees total $31,659 at June 30, 2004.
From February 2000 through April 2002, the Company and Mark Sport, Inc. ("Mark
Sport") were parties to a Management Agreement. Mark Sport is a Vermont
corporation controlled by Jon E. Goodrich, a former director and current
employee of the Company. Mr. Goodrich was a director from December 1987 through
December 2003. Under the Management Agreement, as amended, Mark Sport operated
the Company's Security Products Segment and received all profits or losses from
January 1, 2000 to April 30, 2002 in exchange for certain payments to the
Company. At March 31, 2004, Mark Sport owed the Company $127,000 in payments
under the Management Agreement. In April 2004, the outstanding balance owed by
Mark Sport to the Company was paid in full.
The Company's Consumer Products Division leases manufacturing and office space
under a five-year lease with Vermont Mill, Inc. ("Vermont Mill"), which provides
for monthly lease payments of $9,167 through November 2004. The Company has
exercised an option to continue the lease through November 2009. The rent will
increase by a CPI factor in November 2004. Vermont Mill is controlled by Jon E.
Goodrich, a former director and current employee 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
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%. At March
31, 2004, the balance owed on this promissory note was $82,100. In April 2004,
the balance on the promissary note was paid in full.
From January 1, 2003 through June 30, 2004, the Company's Electronic
Surveillance Products Division sold approximately $148,000 of electronic
security equipment to two companies of which Louis Paolino, III, the son of the
Company's CEO, Louis D. Paolino, Jr., is a partial owner of each company. The
pricing extended to these companies is no more favorable than the pricing given
to third party customers who purchase in similar volume. Additionally, one of
these companies was hired by the Company to install security cameras in four of
the Company's car washes at an installation fee of $6,800. At June 30, 2004, the
balance owed from these companies was approximately $21,000.
12. EQUITY
On April 16, 2004, the Company received approximately $8.95 million in cash from
Price Legacy Corporation (formerly Excel Legacy Holdings, Inc.) in exchange for
the Company removing a contractual restriction that prohibited Price Legacy
Corporation from selling 1,750,000 shares of the Company's common stock without
the Company's approval. The Company recorded this transaction as a contribution
to capital, net of related income taxes, in accordance with Accounting Principle
Board Opinion No. 9. The proceeds will be used as part of working capital. Price
Legacy Corporation purchased 125,000 restricted shares in July of 1999 and
received 1,750,000 shares in October of 1999 in a transaction in which the
Company purchased the car wash assets of Millennia Car Wash, LLC. Additionally,
as part of the agreement, the Company agreed to indemnify Price Legacy
Corporation against certain potential circumstances as a result of lifting the
restriction. Management believes the fair value of this provision is negligible.
13
On April 20, 2004, the Company purchased a 20,000 square foot facility in Fort
Lauderdale, Florida, to serve as its regional headquarters for the Electronic
Surveillance Products Division. Consideration for the facility consisted of
250,000 registered shares of the Company's common stock.
The Master Facility Agreement between the Company and Fusion Capital Fund II,
LLC ("Fusion") and the Equity Purchase Agreement between the Company and Fusion
is terminated. Under the Master Facility Agreement, the Company had entered in
to an Equity Purchase Agreement on April 17, 2000. Under the Equity Purchase
Agreement, Fusion had the right and obligation to purchase up to $10 million of
the Company's common stock under certain conditions. On April 21, 2004, the
Company and Fusion entered into a termination and release agreement to resolve a
dispute that arose between the Company and Fusion. The dispute arose out of
Fusion's claim that it was entitled to purchase approximately 690,000 shares of
the Company's common stock at a price of $2.32 per share under the terms of the
Equity Purchase Agreement. The Company's position was that Fusion did not have
the right to purchase the 690,000 shares. On April 21, 2004, the dispute was
resolved by the Company and Fusion entering into an agreement that provided (i)
the Company sell to Fusion 150,000 registered shares of common stock at $2.32
per share, (ii) the Master Facility Agreement and Equity Purchase Agreement be
terminated, and (iii) the Company has the unilateral right exercisable through
May 31, 2004 to enter into a new common stock purchase agreement with Fusion for
$10 million of common stock. The Company did not exercise its option. On April
22, 2004, Fusion purchased 150,000 shares of the Company's common stock at $2.32
per share, in accordance with the termination and release agreement.
On May 26, 2004, the Company completed a stock sale of 915,000 shares of the
Company's common stock at a price of $5.47 per share with a private institution
for a total capital investment of $5,005,050. Under the terms of the sale
agreement, Mace also granted to the private institution a warrant dated May 26,
2004 to purchase 183,000 shares of the Company's common stock at a strike price
of $7.50 per share exercisable immediately through its expiration date of May
26, 2009. The shares were sold in a private transaction under Regulation D of
the Securities Act of 1933. Mace is obligated to register the shares for resale
on a registration statement within 125 days. Pursuant to the registration rights
agreement, the Company filed a registration statement on June 16, 2004 on Form
S-3 and a first amendment to the Form S-3 on August 2, 2004. If the Company does
not register the shares within the time required, it is obligated to pay a
monthly penalty of $50,000 in the first month and $75,000 per month in
subsequent months. The proceeds of this transaction strengthen the Company's
capital structure and will provide additional cash for the development of new
electronic surveillance products, future growth strategies and general working
capital.
13. LONG-TERM DEBT, NOTE PAYABLE, AND CAPITAL LEASE OBLIGATIONS
At June 30, 2004, we had borrowings, including capital lease obligations, of
approximately $30.0 million. We had letters of credit outstanding at June 30,
2004, totaling $1,051,000 as collateral relating to workers' compensation
insurance policies and for the purchase of inventory related to our Security
Products Segment. We maintain a $500,000 revolving credit facility, subject to
an availability calculation based on inventory and accounts receivable, to
provide financing for additional electronic surveillance product inventory
purchases. There were no borrowings outstanding under the revolving credit
facility at June 30, 2004.
Several of our debt agreements, as amended, contain certain affirmative and
negative covenants and require the maintenance of certain levels of tangible net
worth, maintenance of certain unencumbered cash and marketable securities
balances, and the maintenance of certain debt service coverage ratios on a
consolidated level. At June 30, 2004, we were not in compliance with our
consolidated debt service coverage ratios related to our General Motors
Acceptance Corp. ("GMAC") notes payable and Bank One notes payable. With respect
to the GMAC notes payable, the Company has received a waiver of acceleration
related to the non-compliance with the debt service coverage ratio covenant at
June 30, 2004 and for measurement periods through July 1, 2005. Additionally,
the Company has entered into amendments to the Bank One term loan agreements
effective March 31, 2004. The amended debt coverage ratio with Bank One requires
the Company to maintain a consolidated earnings before interest, income taxes,
depreciation and amortization ("EBITDA") to debt service (collectively " the
debt service coverage ratio") of 1.03 to 1 at June 30, 2004; and 1.05 to 1 at
September 30, 2004 and December 31, 2004. The Company was not in compliance with
this Bank One covenant at June 30, 2004 as amended. The Company received a
waiver of acceleration with respect to this debt service coverage ratio from
Bank One through July 1, 2005. The Bank One amendment also requires the
maintenance of a minimum total unencumbered cash and marketable securities
balance of $5 million. This cash balance requirement will be lowered to $1
million upon the Company returning to a debt coverage ratio of at least 1.10 to
1. Additionally, the Bank One Agreement contains a prohibition on incurring
additional debt for borrowed money without the approval of Bank One. The Company
must demonstrate that the cash flow benefit from the use of new loan proceeds
exceeds the resulting future debt service requirements.
14
The Company sold or closed four unprofitable or marginally profitable car
wash facilities and a lube facility in 2003 and the first half of 2004 and
increased its prices in March 2004 within the Car and Truck Wash Segment to help
improve cash flows for fiscal 2004. If our future cash flows are less than
expected or debt service including interest expense increases more than expected
causing us to further default on any of the Bank One covenants or the GMAC
covenant in the future, the Company will need to obtain further amendments or
waivers from these lenders. If the Company is unable to obtain waivers or
amendments in the future, Bank One debt totaling $14.2 million and GMAC debt
totaling $11.2 million, including debt recorded as long-term debt at June 30,
2004, would become payable on demand.
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 SIX MONTHS ENDED
---------------------------------- ----------------------------------
6/30/04 6/30/03 6/30/04 6/30/03
---------------- --------------- ---------------- ---------------
Numerator:
Net (loss) income $ (14) $ (88) $ 203 $ 254
================ =============== ================ ===============
Denominator:
Denominator for basic (loss) income
per share - weighted average 13,495,889 12,406,805 12,978,459 12,408,513
shares.........................
Dilutive effect of options and
warrants......................... - - 411,247 3,143
---------------- --------------- ---------------- ---------------
Denominator for diluted
(loss) income per share -
weighted average shares.......... 13,495,889 12,406,805 13,389,706 12,411,656
================ =============== ================ ===============
Basic and diluted (loss) income $ - $ (0.01) $ 0.02 $ 0.02
per share: ================ =============== ================ ===============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE NOTES
THERETO INCLUDED IN THIS FORM 10-Q.
FORWARD-LOOKING STATEMENTS
This report includes forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended ("Forward-Looking Statements"). All statements
other than statements of historical fact included in this report are
Forward-Looking Statements. Although we believe that the expectations reflected
in such Forward-Looking Statements are reasonable, we can give no assurance that
such expectations will prove to have been correct. Generally, these statements
relate to business plans or strategies, projected or anticipated benefits or
other consequences of such plans or strategies, number of acquisitions, and
projected or anticipated benefits from acquisitions made by or to be made by us,
or projections involving anticipated revenues, earnings, levels of capital
expenditures or other aspects of operating results. All phases of our operations
are subject to a number of uncertainties, risks, and other influences, many of
which are outside our control and any one of which, or a combination of which,
could materially affect the results of our operations and whether
Forward-Looking Statements made by us ultimately prove to be accurate. Such
important factors that could cause actual results to differ materially from our
expectations are disclosed in this section and elsewhere in this report. All
subsequent written and oral Forward-Looking Statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the important factors described below that could cause actual
results to differ from our expectations. The Forward-Looking Statements made
herein are only made as of the date of this filing, and we undertake no
obligation to publicly update such Forward-Looking Statements to reflect
subsequent events or circumstances.
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 amounts of
assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities at the date of the Company's financial
statements. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The Company's
critical accounting policies are described below.
REVENUE RECOGNITION
Revenues from the Company's Car and Truck Wash Segment are recognized, net of
customer coupon discounts, when services are rendered or fuel or merchandise is
sold. The Company records a liability for gift certificates, ticket books, and
seasonal and annual passes sold at its car care locations but not yet redeemed.
The Company estimates these unredeemed amounts based on gift certificate and
ticket book sales and redemptions throughout the year as well as utilizing
historical sales and tracking of redemption rates per the car washes'
point-of-sale systems. Seasonal and annual passes are amortized on a
straight-line basis over the time during which the passes are valid.
Revenues from the Company's Security Products Segment are recognized when
shipments are made, or for export sales when title has passed. Shipping and
handling charges billed are included in revenues; the cost of which is included
in cost of goods sold.
DEFERRED REVENUE
The Company records a liability for gift certificates, ticket books, and
seasonal and annual passes sold at its car care locations but not yet redeemed.
The Company estimates these unredeemed amounts based on gift certificate and
ticket book sales and redemptions throughout the year as well as utilizing
historical sales and tracking of redemption rates per the car washes' point- of-
sale systems. Seasonal and annual passes are amortized on a straight-line basis
over the time during which the passes are valid.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS, we periodically review the carrying value of our long-lived
assets held and used, and assets to be disposed of, when events and
circumstances warrant such a review. If significant events or changes in
circumstances indicate that the carrying value of an asset or asset group may
not be recoverable, we perform a test of recoverability by comparing the
carrying value of the asset or asset group to its undiscounted expected future
cash flows. Cash flow projections are sometimes based on a group of assets,
rather than a single asset. If cash flows cannot be separately and independently
identified for a single asset, we will determine whether an impairment has
occurred for the group of assets for which we can identify the projected cash
flows. If the carrying values are in excess of undiscounted expected future cash
flows, we measure any impairment by comparing the fair value of the asset group
to its carrying value. If the fair value of an asset or asset group is
determined to be less than the carrying amount of the asset or asset group, an
impairment in the amount of the difference is recorded in the period that the
impairment indicator occurs.
GOODWILL
In accordance with SFAS 142, the Company completed annual impairment tests as of
November 30, 2003, and 2002, and will be subject to an impairment test each year
thereafter and whenever there is an impairment indicator. The Company's annual
impairment testing corresponds with the Company's determination of its annual
operating budgets for the upcoming year. The Company's valuation of goodwill is
based on a discounted cash flow model applying an appropriate discount rate to
future expected cash flows and management's annual review of historical data and
future assessment of certain critical operating factors, including, car wash
volumes, average car wash and detailing revenue rates per car, wash and
detailing labor cost percentages, weather trends and recent and expected
operating cost levels. Estimating cash flows requires significant judgment
including factors beyond our control and our projections may vary from cash
flows eventually realized. Adverse business conditions could impair
recoverability of goodwill in the future and accordingly, the Company cannot
guarantee that there will not be impairments in this or subsequent years.
Weather, particularly in our Northeast and Texas Regions, continues to
negatively influence our year to date operating results. This negative influence
may effect our future cash flow assumptions during our annual goodwill
impairment testing at November 30, 2004, potentially resulting in further
goodwill impairment charges.
16
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 are tested for impairment
using discounted cash flow methodology annually and whenever there is an
impairment indicator. Estimating future cash flows requires significant judgment
and projections may vary from cash flows eventually realized. Several impairment
indicators are beyond our control, and cannot be predicted with any certainty
whether or not they will occur. Deferred financing costs are amortized on a
straight-line basis over the terms of the respective debt instruments. Customer
lists and non-compete agreements are amortized on a straight-line basis over
their respective estimated useful lives.
INCOME TAXES
Deferred income taxes are determined based on the difference between the
financial accounting and tax bases of assets and liabilities. Deferred income
tax expense (benefit) represents the change during the period in the deferred
income tax assets and deferred income tax liabilities. Deferred income tax
assets include tax loss and credit carryforwards and are reduced by a valuation
allowance if, based on available evidence, it is more likely than not that some
portion or all of the deferred income tax assets will not be realized.
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid on all indebtedness was approximately $1.0 million and $1.1
million for the six months ended June 30, 2004 and 2003, respectively. Income
taxes paid were approximately $26,000 and $113,000 for the six months ended June
30, 2004 and 2003, respectively. Noncash investing and financing activities of
the Company excluded from the statement of cash flows include a property
addition financed by common stock of $1.6 million in 2004.
INTRODUCTION
REVENUES
CAR AND TRUCK WASH SERVICES
We own full service, exterior only and self-service car wash locations in New
Jersey, Pennsylvania, Delaware, Texas, Florida and Arizona, as well as truck
washes in Arizona, Indiana, Ohio and Texas. We earn revenues from washing and
detailing automobiles; performing oil and lubrication services, minor auto
repairs, and state inspections; selling fuel; and selling merchandise through
convenience stores within the car wash facilities. Revenues generated for the
six months ended June 30, 2004 for the Car and Truck Wash Segment were comprised
of approximately 82% car wash and detailing, 8% lube and other automotive
services, and 10% 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, and therefore revenue,
at the individual locations. We believe that the geographic diversity of our
operating locations helps mitigate the risk of adverse weather-related influence
on our volume.
SECURITY PRODUCTS
Prior to the acquisition of Micro-Tech, the Company operated its Security
Products Segment solely as the Consumer Products Division. The Company's
Consumer Products operations manufacture and market personal 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.
17
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's
electronic security products are manufactured to our specifications principally
in Korea, China, and other foreign countries, and are labeled, packaged, and
shipped ready for sale, to our warehouse in Hollywood, Florida.
COST OF REVENUES
CAR AND TRUCK WASH SERVICES
Cost of revenues consists primarily of direct labor and related taxes and
benefits, certain insurance costs, chemicals, wash and detailing supplies, rent,
real estate taxes, utilities, car damages resulting from our services,
maintenance and repairs of equipment and facilities, as well as the cost of the
fuel and merchandise sold.
SECURITY PRODUCTS
Cost of revenues within the Security Products Segment consists primarily of
costs to purchase or manufacture the security products including direct labor
and related taxes and benefits, and raw material costs. Product 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 supplier.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses consist primarily of
management, clerical and administrative salaries, professional services,
insurance premiums, sales commissions, and other costs relating to marketing and
sales.
We capitalize direct incremental costs associated with acquisitions. Indirect
acquisition costs, such as executive salaries, corporate overhead, public
relations, and other corporate services and overhead are expensed as incurred.
The Company also charges as an expense any capitalized expenditures (ie, due
diligence and transaction costs) 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.
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.
18
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Cash and cash equivalents were $18.8 million at June 30, 2004. The ratio of our
total debt to total capitalization, which consists of total debt plus
stockholders' equity, was 30% at June 30, 2004, and 37% at December 31, 2003.
The improvement in the Company's Cash position and total debt to total
capitalization ratio is directly related to equity infusions as noted below.
Our business requires a substantial amount of capital, most notably to pursue
our expansion strategies, including our current expansion in the electronic
surveillance products business, and for equipment purchases and upgrades for our
Car and Truck Wash Segment. We plan to meet these capital needs from various
financing sources, including borrowings, internally generated funds, and the
issuance of common stock if the market price of the Company's stock improves.
As of June 30, 2004, we had working capital of approximately $16.0 million. At
December 31, 2003, working capital was approximately $270,000 including cash and
cash equivalents of $3.4 million. The significant improvement in working capital
at June 30, 2004 is primarily attributable to: 1) $8.95 million of proceeds
received from the removal of a restriction on outstanding shares of the
Company's common stock; 2) $5.1 million of proceeds, net of issuance costs, from
the sale of 915,000 shares of the Company's common stock to a private
institution and the sale of 150,000 shares of the Company's stock to Fusion
under a Master Facility Agreement; and 3) $1.8 million of proceeds from the
exercise of common stock options. Working capital was also positively affected
by the renewal and reclassification to non-current liabilities of approximately
$1.2 million of 15-year amortizing loans with Bank One. This was partially
offset by reclassification to current liabilities of an additional loan for
$290,000 which is up for renewal in April, 2005. The Company intends to renew
this loan with the current lender. Although the Company has been successful in
renewing similar loans with the current lender in the past, including the
renewal of loans in 2003 totaling $6.4 million and renewal of $1.2 million of
loans in the first six months of 2004, there can be no assurance that our lender
will continue to provide us with renewals or with renewals at favorable terms.
During the six month period ending June 30, 2004 and 2003, we made capital
expenditures of $350,000 and $389,000, respectively, within our Car and Truck
Wash Segment. We estimate aggregate capital expenditures for our Car and Truck
Wash Segment, exclusive of acquisitions of businesses, of approximately $750,000
for the year ending December 31, 2004. The Company believes its current cash
balance at June 30, 2004 of $18.8 million and cash flow from operating
activities in 2004 will be sufficient to meet its car wash capital expenditure
funding needs through at least the next twelve months. In years subsequent to
2004, we estimate that our Car and Truck Wash Segment will require annual
capital expenditures of $500,000 to $1million. Capital expenditures within our
Car and Truck Wash Segment are necessary to maintain the efficiency and
competitiveness of our sites. If the cash provided from operating activities
does not improve in 2004 and future years and if current cash balances are
depleted, we will need to raise additional capital to meet these ongoing capital
requirements.
In October 2002, we purchased a building as a warehouse, production and
administrative facility for our new electronic surveillance products operations.
In October 2003, we purchased additional warehouse and office space adjacent to
the original facility. We financed a portion of the $885,000 total purchase
price of our facility with a long-term mortgage of approximately $728,000.
Additionally, we have spent approximately $4.9 million through June 30, 2004 in
developing our Electronic Surveillance Products Division, including the
acquisition costs of Micro-Tech and Vernex and the cost of developing and
purchasing inventory for our expanded product line. On July 1, 2004 the Company
paid approximately $5.6 million of cash for the acquisition of the S&M and IVS
security operations. (See Note 7, Subsequent Events). We estimate capital
expenditures for the Security Products Segment at approximately $2 million for
the remainder of 2004, principally related to the purchase and furnishing of a
facility in the Dallas, Texas area for our newly acquired S&M and IVS security
operation. Approximately $1 million of the facility purchase price is expected
to be financed. We intend to continue to expend significant cash for the
purchasing of inventory as we introduce new electronic surveillance products in
2004 and for years subsequent to 2004. We expect inventory purchased to be
funded with cash collected on current sales. The amount of capital that we will
spend in 2004 and in years subsequent to 2004 is largely dependent on the
marketing success we achieve in our Electronic Surveillance Products Division
and our ability to raise additional capital. At June 30, 2004, we maintained an
unused $500,000 revolving credit facility with Bank One to provide financing for
additional electronic surveillance product inventory purchases. This revolving
credit facility, subject to an availability calculation based on inventory and
accounts receivable (as defined in our bank agreement), and our cash balance of
$18.8 million at June 30, 2004 will provide for growth in 2004. Unless our
operating cash flow improves, our growth will be limited if we deplete our cash
balance.
19
In the past, we have been successful in obtaining financing by selling common
stock and obtaining mortgage loans. Our ability to obtain new financing is
currently adversely impacted by our stock price and our current debt coverage
ratios on existing loans. We are reluctant to sell common stock at current
prices as our market price is below our per share book value. For the twelve
month period ended June 30, 2004 we would have been in default of certain of our
debt covenants had we not obtained waivers. Our ability to obtain new financing
will be limited if our stock price does not increase and our cash from operating
activities does not improve. Currently, the Company cannot incur additional long
term debt without the approval of its commercial lenders. The Company must
demonstrate that the cash flow benefit from the use of new loan proceeds exceeds
the resulting future debt service requirements.
DEBT CAPITALIZATION AND OTHER FINANCING ARRANGEMENTS
At June 30, 2004, we had borrowings, including capital lease obligations, of
approximately $30.0 million. We had three letters of credit outstanding at June
30, 2004, totaling $1,103,000 as collateral relating to workers' compensation
insurance policies. We maintain a $500,000 revolving credit facility, subject to
an availability calculation based on inventory and accounts receivable, to
provide financing for additional electronic surveillance product inventory
purchases. There were no borrowings outstanding under the revolving credit
facility at June 30, 2004.
Several of our debt agreements, as amended, contain certain affirmative and
negative covenants and require the maintenance of certain levels of tangible net
worth, maintenance of certain unencumbered cash and marketable securities
balances, and the maintenance of certain debt service coverage ratios on a
consolidated level. At June 30, 2004, we were not in compliance with our
consolidated debt service coverage ratios related to our GMAC notes payable and
Bank One notes payable. With respect to the GMAC notes payable, the Company has
received a waiver of acceleration related to the non-compliance with the debt
service coverage ratio covenant at June 30, 2004 and for measurement periods
through July 1, 2005. Additionally, the Company has entered into amendments to
the Bank One term loan agreements effective March 31, 2004. The amended debt
coverage ratio with Bank One requires the Company to maintain a consolidated
earnings before interest, income taxes, depreciation and amortization ("EBITDA")
to debt service (collectively " the debt service coverage ratio") of 1.03 to 1
at June 30, 2004; and 1.05 to 1 at September 30, 2004 and December 31, 2004. The
Company was not in compliance with this Bank One covenant at June 30, 2004 as
amended. The Company received a waiver of acceleration with respect to this debt
service ratio from Bank One through July 1, 2005. The Bank One amendment also
requires the maintenance of a minimum total unencumbered cash and marketable
securities balance of $5 million. This cash balance requirement will be lowered
to $1 million upon the Company returning to a debt coverage ratio of at least
1.10 to 1.
The Company sold or closed four unprofitable or marginally profitable car wash
facilities and a lube facility in 2003 and the first half of 2004 and increased
its prices in March 2004 within the Car and Truck Wash Segment to help improve
cash flows for fiscal 2004. If our future cash flows are less than expected or
debt service including interest expense increases more than expected causing us
to further default on any of the Bank One covenants or the GMAC covenant in the
future, the Company will need to obtain further amendments or waivers from these
lenders. If the Company is unable to obtain waivers or amendments in the future,
Bank One debt totaling $14.2 million and GMAC debt totaling $11.2 million,
including debt recorded as long-term debt at June 30, 2004, would become payable
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. There can be no assurance that further debt covenant waivers or
amendments would be obtained or that the debt would be refinanced with other
financial institutions at favorable terms. If we are unable to obtain renewals
on maturing loans or refinancing of loans on favorable terms, our ability to
operate would be materially and adversely affected.
The Company is obligated under various operating leases, primarily for certain
equipment and real estate within the Car and Truck Wash Segment. Certain of
these leases contain purchase options, renewal provisions, and contingent
rentals for our proportionate share of taxes, utilities, insurance, and annual
cost of living increases.
20
The following are summaries of our contractual obligations and other commercial
commitments at June 30, 2004 (in thousands):
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS LESS THAN TWO TO THREE FOUR TO FIVE MORE THAN
TOTAL ONE YEAR YEARS YEARS FIVE YEARS
-----------------------------------------------------------------------------
Long-term debt (1) $ 29,786 $ 5,105 $ 4,824 $ 11,465 $ 8,392
Capital leases 252 140 112 - -
Minimum operating lease payments 4,148 1,105 1,328 698 1,017
Product purchase commitments 249 249 - - -
-----------------------------------------------------------------------------
$ 34,435 $ 6,599 $ 6,264 $ 12,163 $ 9,409
============= ============= ============== =============== ==============
AMOUNTS EXPIRING PER PERIOD
-----------------------------------------------------------------------------
OTHER COMMERCIAL COMMITMENTS LESS THAN TWO TO THREE FOUR TO MORE THAN
TOTAL ONE YEAR YEARS FIVE YEARS FIVE YEARS
-----------------------------------------------------------------------------
Line of credit (2) $ 500 $ 500 $ - $ - $ -
Standby letters of credit 1,051 1,051 - - -
------------- ------------- -------------- --------------- --------------
$ 1,551 $ 1,551 $ - $ - $ -
============= ============= ============== =============== ==============
(1) Related interest obligations have been excluded from this maturity
schedule. Our interest payments for the next twelve month period are expected to
be approximately $1.76 million.
(2) There were no borrowings outstanding under the Company's line of credit
at June 30, 2004.
Mace currently employs Louis D. Paolino, Jr. as its President and Chief
Executive Officer under a three-year employment agreement dated August 12, 2003.
The principle terms of the employment agreement include: an annual salary of
$400,000; a car at a lease cost of $1,500 per month: provision for certain
medical and other employee benefits; prohibition against competing with Mace
during employment and for a three-month period following a termination of
employment; and a $2.5 million payment in the event that Mr. Paolino's
employment is terminated for certain reasons set forth in the employment
agreement. The termination payment is not due in the event of termination due to
death or disability or certain prohibited conduct, as more fully set forth in
the employment agreement. The termination payment is due if Mr. Paolino is
terminated for unsatisfactory job performance. The employment agreement also
entitles Mr. Paolino to a $2.5 million change-of-control bonus.
The Master Facility Agreement between the Company and Fusion Capital Fund II,
LLC ("Fusion") and the Equity Purchase Agreement between the Company and Fusion
has been terminated. Under the Master Facility Agreement, the Company had
entered into an Equity Purchase Agreement on April 17, 2000. Under the Equity
Purchase Agreement, Fusion had the right and obligation to purchase up to $10
million of the Company's common stock under certain conditions. On April 21,
2004, the Company and Fusion entered into a termination and release agreement to
resolve a dispute that arose between the Company and Fusion. The dispute arose
out of Fusion's claim that it was entitled to purchase approximately 690,000
shares of the Company's common stock at a price of $2.32 per share under the
terms of the Equity Purchase Agreement. The Company's position was that Fusion
did not have the right to purchase the 690,000 shares. On April 21, 2004, the
dispute was resolved by the Company and Fusion entering into an agreement that
provided (i) the Company sell Fusion 150,000 registered shares of common stock
at $2.32 per share, (ii) the Master Facility Agreement and Equity Purchase
Agreement are terminated, and (iii) the Company has the unilateral right
exercisable through May 31, 2004 to enter into a new common stock purchase
agreement with Fusion for $10 million of common stock. The Company did not
exercise its option. On April 22, 2004, Fusion purchased 150,000 shares of the
Company's common stock at $2.32 per share, in accordance with the termination
and release agreement.
21
CASH FLOWS
OPERATING ACTIVITIES. Net cash provided by operating activities totaled $1.1
million for the six months ended June 30, 2004 and was slightly greater than
cash provided by operating activities of $.8 million in the same period in 2003.
The Company realized an approximate $650,000 improvement in cash used in working
capital accounts. The improvement in cash used in working capital accounts is
mainly attributed to (i) a greater increase in 2003 in the Company's inventory
and accounts receivable growth, primarily related to the Company's Electronic
Surveillance Products Division, and (ii) a increase in accrued expenses. Growth
in inventory and receivables was greater in 2003 as the Electronic Surveillance
Products Division was in its initial growth phase.
INVESTING ACTIVITIES. Cash used in investing activities totaled $346,000 for the
six months ended June 30, 2004 which includes $350,000 for capital expenditures
relating to ongoing car care operations, and $31,000 for the Security Products
Segment.
FINANCING ACTIVITIES. Cash provided by financing activities was $14.7 million
for the six months ended June 30, 2004 which includes $7.0 million of proceeds
from the issuance of common stock and the exercise of stock options and $8.95
million of proceeds from removal of restrictions on shares; partially offset by
routine principal payments on debt of $1.2 million.
SEASONALITY AND INFLATION
The Company believes that its car washing and detailing operations are adversely
affected by periods of inclement weather. In particular, long periods of rain
and cloudy weather adversely affects our car wash volumes and related lube and
other automotive services as people typically do not wash their cars during such
periods. Additionally, extended periods of warm, dry weather, usually
encountered during the Company's third quarter, may encourage customers to wash
their cars themselves which also can adversely affect our car wash business. The
Company has attempted to mitigate the risk of unfavorable weather patterns by
having operations in diverse geographic regions. The Company also experiences a
seasonal reduction in volume during the third quarter within the Company's
Arizona and Florida regions as a result of a migration of a significant portion
of those areas' populations to cooler climates.
The Company believes that inflation and changing prices have not had, and are
not expected to have, a material adverse effect on its results of operations in
the near future.
22
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004
COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2003
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues:
SIX MONTHS ENDED
JUNE 30,
------------------------------
2004 2003
------------- ------------
Revenues 100.0 % 100.0 %
Cost of revenues 71.8 71.7
Selling, general and administrative expenses 19.8 17.9
Depreciation and amortization 3.9 3.9
Asset impairment charge - 1.4
------------- ------------
Operating income 4.5 5.1
Interest expense, net (3.7) (4.2)
Other income 0.4 0.7
------------- ------------
Income before income taxes 1.2 1.6
Income tax expense 0.4 0.6
------------- ------------
Net income 0.8 % 1.0 %
============= ============
REVENUES
CAR AND TRUCK WASH SERVICES
Revenues for the six months ended June 30, 2004 were $21.4 million as compared
to $22.6 million for the six months ended June 30, 2003, a decrease of $1.2
million or 5.5%. This decrease was primarily attributable to a decrease in wash
and detail services. Of the $21.4 million of revenues for the six months ended
June 30, 2004, $17.5 million or 82% was generated from car wash and detailing,
$1.8 million or 8% from lube and other automotive services, and $2.1 million or
10% from fuel and merchandise sales. Of the $22.6 million of revenues for the
six months ended June 30, 2003, $18.8 million or 83% was generated from car wash
and detailing, $2.0 million or 9% from lube and other automotive services, and
$1.8 million or 8% from fuel and merchandise sales. The decrease in wash and
detailing revenues was principally due to closing or divesting of three of our
car wash locations and a lube facility during 2003; the temporary closure of a
car wash location in Arizona due to fire damage; continued unfavorable weather
trends within the Northeast, Florida, and Texas regions; and the impact of a
slower economy. Overall car wash volumes declined 10.4% in the first half of
2004 as compared to the first half of 2003, including 5% from the closing or
divesting of car wash locations noted above. Partially offsetting this decline
in volume, the Company experienced an increase in average wash and detailing
revenue per car to $14.84 in 2004, from $14.37 in 2003. This increase in average
wash and detailing revenue per car was the result of management's continued
focus on aggressively selling detailing and additional on-line car wash services
combined with the effect of a price increase in certain markets effective in
March, 2004. The increase in fuel and merchandise revenues is primarily the
result of higher fuel prices and the addition of higher quality merchandise in
our car wash lobbies. Management expects car wash volumes to increase as weather
trends return to more historic levels of inclement weather resulting in an
improvement in car wash and detailing revenue levels.
SECURITY PRODUCTS
Revenues for the six months ended June 30, 2004 were $3.9 million comprised of
approximately $2.5 million from the Electronic Surveillance Products Division
and approximately $1.4 million from the Consumer Products Division. Revenues for
the six months ended June 30, 2003 were approximately $2.3 million, comprised of
$900,000 from the Electronic Surveillance Products Division and $1.4 million
from the Consumer Products Division. The increase in revenues within the
Electronic Surveillance Products Division is due principally to growth in sales
to security systems installers and sales generated by Vernex, which was acquired
in September 2003. Management expects revenues to continue to increase in this
area as the Company expands its sales staff and marketing efforts.
23
COST OF REVENUES
CAR AND TRUCK WASH SERVICES
Cost of revenues for the six months ended June 30, 2004 were $15.7 million, or
73% of revenues, with car washing and detailing costs at 71% of respective
revenues, lube and other automotive services costs at 77% of respective
revenues, and fuel and merchandise costs at 87% of respective revenues. Cost of
revenues for the six months ended June 30, 2003 were $16.6 million, or 73% of
revenues, with car washing and detailing costs at 71% of respective revenues,
lube and other automotive services costs at 78% of respective revenues, and fuel
and merchandise costs at 87% of respective revenues. Cost of revenues as a
percent of revenues remained consistent by area in 2004 and 2003 despite the
reduction in wash and detail revenues principally as a result of a reduction in
direct labor costs of approximately $470,000 and improved workers compensation
claims experience of approximately $400,000. We expect cost of revenues as a
percent of revenues to decrease if car wash volumes improve.
SECURITY PRODUCTS
During the six months ended June 30, 2004 cost of revenues were $2.5 million or
64% of revenues as compared to $1.3 million or 57% of revenues for the six
months ended June 30, 2003. The increase in cost of revenues in 2004 is
principally due to 1) the growth in the Electronic Surveillance Products
Division which has gross profit margins typically lower than the Consumer
Products Division; 2) an increase in sales of monitors, which are typically sold
at lower profit margins than other electronic surveillance equipment, as a
result the acquisition of Vernex, a manufacturer and retailer of electronic
security monitors, and 3) an increase in sales to larger distributors and system
installers at lower profit margins to gain market share. Management does not
expect the cost of revenues as a percent of revenues to increase substantially
from current levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the six months ended June 30,
2004 were $5.0 million compared to $4.4 million for the same period in 2003.
SG&A expenses as a percent of revenues were 19.8% for the six months ended June
30, 2004 as compared to 17.9% in the first half of 2003. The increase in SG&A
costs is primarily the result of the growth in the Electronic Surveillance
Products Division which added an additional $452,000 of SG&A costs in 2004 in
the areas of marketing costs and selling and administration personnel costs as
additional staff were added to handle planned growth. The Company also incurred
approximately $54,000 of legal fees through June 30, 2004 related to the
investigation being conducted by the United States Securities and Exchange
Commission (See Note 6 of the accompanying notes to consolidated financial
statements.) These increases in costs were partially offset by certain temporary
cost saving measures initiated in March , 2004, including reductions in payroll
and other administrative costs. Management does not expect SG&A costs as a
percent of revenues to substantially increase in the future.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization totaled $994,000 for the six months ended June 30,
2004 as compared to $975,000 for the same period in 2003.
ASSET IMPAIRMENT CHARGE
In accordance with SFAS 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS, we periodically review the carrying value of our long-lived
assets held and used and assets to be disposed of for possible impairment when
events and circumstances warrant such a review. During the quarter ended June
30, 2003, we fully wrote down assets determined to be impaired by approximately
$351,000. The asset write-down related to a full service car wash site in
Arizona which we partially wrote down at December 31, 2002. The additional
write-down was the result of the impending loss of a significant customer to
this site resulting in the future expected cash flows not being sufficient to
recover the site's respective carrying values. The Company closed the facility
effective September 30, 2003.
INTEREST EXPENSE, NET
Interest expense, net of interest income, for the six months ended June 30, 2004
was $929,000 compared to $1.0 million for the six months ended June 30, 2003.
This decrease in interest expense was the result of a slight decrease in
interest rates on approximately 50% of our long term debt which has interest
rates tied to the prime rate, and a reduction in our outstanding debt as a
result of routine monthly principal payments. Management expects interest
expense to continue to decline on existing debt as routine monthly principle
payments are made.
24
OTHER INCOME
Other income for the six months ended June 30, 2004 was $111,000 compared to
$167,000 for the six months ended June 30, 2003.The decrease in other income was
primarily attributable to a $51,000 loss on the sale of one of our Arizona car
wash locations in 2004.
INCOME TAXES
The Company recorded tax expense of $114,000 and $144,000 for the six months
ended June 30, 2004 and 2003, respectively. Tax expense reflects the recording
of income taxes at an effective rate of approximately 36% in both 2004 and 2003.
The effective rate differs from the federal statutory rate for each year
primarily due to state and local income taxes, non-deductible costs related to
intangibles, fixed asset adjustments and changes to the valuation allowance.
During the quarter ended June 30, 2004, the Company received a payment of $8.95
million for removal of a restriction on certain outstanding shares of the
Company's stock (see Note12, Equity). Although the transaction is taxable for
Federal and State income tax purposes, no current or deferred income tax expense
is reflected on the income statement due to the recording of the transaction as
a contribution of capital, net of income tax of $3.2 million. The Company has
sufficient net operating losses available to fully offset the taxable income
generated from this event. A tax liability of $179,000 has been recorded for
Federal Alternative Minimum Tax purposes.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2003
REVENUES
CAR AND TRUCK WASH SERVICES
Revenues for the three months ended June 30, 2004 were $10.6 million as compared
to $11.2 million for the three months ended June 30, 2003, a decrease of $.6
million or 5%. This decrease was primarily attributable to a decrease in wash
and detail services. Of the $10.6 million of revenues for the three months ended
June 30, 2004, $8.6 million or 81% was generated from car wash and detailing,
$.9 million or 8% from lube and other automotive services, and $1.1 million or
11% from fuel and merchandise sales. Of the $11.2 million of revenues for the
three months ended June 30, 2003, $9.3 million or 83% was generated from car
wash and detailing, $1.0 million or 9% 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 closing or divesting of three of our
car wash locations and a lube facility during 2003; the temporary closure of a
car wash location in Arizona due to fire damage; continued unfavorable weather
trends within the Northeast, Florida, and Texas regions; and the impact of a
slower economy. Overall car wash volumes declined 10% in the second quarter of
2004 as compared to the same period of 2003, including 5% from the closing or
divesting of car wash locations as noted above. Partially offsetting this
decline in volume, the Company experienced an increase in average wash and
detailing revenue per car to $15.31 in 2004, from $14.98 in 2003. This increase
in average wash and detailing revenue per car was the result of management's
continued focus on aggressively selling detailing and additional on-line car
wash services. The increase in fuel and merchandise revenues is primarily the
result of higher fuel prices and the addition of higher quality merchandise in
our car wash lobbies. Management expects volumes to increase as weather trends
return to more normal levels of inclement weather resulting in an improvement in
car wash and detailing revenue levels.
SECURITY PRODUCTS
Revenues for the three months ended June 30, 2004 were $2.0 million comprised of
approximately $1.3 million from the Electronic Surveillance Products Division
and approximately $700,000 from the Consumer Products Division. Revenues for the
three months ended June 30, 2003 were approximately $1.2 million, comprised of
$529,000 from the Electronic Surveillance Products Division and $628,000 from
the Consumer Products Division. The increase in revenues within the Electronic
Surveillance Products Division is due principally to growth in sales to security
systems installers and sales generated by Vernex, which was acquired in
September 2003. Management expects revenues to continue to increase in this area
as the Company expands its sales staff and marketing efforts.
25
COST OF REVENUES
CAR AND TRUCK WASH SERVICES
Cost of revenues for the three months ended June 30, 2004 were $7.8 million, or
74% of revenues, with car washing and detailing costs at 72% of respective
revenues, lube and other automotive services costs at 79% of respective
revenues, and fuel and merchandise costs at 88% of respective revenues. Cost of
revenues for the three months ended June 30, 2003 were $8.3 million, or 74% of
revenues, with car washing and detailing costs at 72% of respective revenues,
lube and other automotive services costs at 79% of respective revenues, and fuel
and merchandise costs at 88% of respective revenues. Cost of revenues as a
percent of revenues remained consistent by area in 2004 and 2003 despite the
reduction in wash and detail revenues principally as a result of a reduction in
direct labor costs of approximately $300,000 and improved workers compensation
claims experience of approximately $285,000. We expect cost of revenues as a
percent of revenues to decrease if car wash volumes improve.
SECURITY PRODUCTS
During the three months ended June 30, 2004 cost of revenues were $1.3 million
or 66% of revenues as compared to $646,000 or 56% of revenues for the three
months ended June 30, 2003. The increase in cost of revenues in 2004 is
principally due to 1) the growth in the Electronic Surveillance Products
Division which has gross profit margins typically lower than the Consumer
Products Division. 2) an increase in sales of monitors, which are typically
sold at lower profit margins than other electronic surveillance equipment
as a result of an acquisition of Vernex, a manufacturer and retailer of
electronic security monitors. 3) an increase in sales to larger distributors
and installers at lower profit margins to gain market share. Management does not
expect the cost of revenues to increase substantially from current levels.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended June 30,
2004 were $2.5 million compared to $2.3 million for the same period in 2003.
SG&A expenses as a percent of revenues were 20.1% for the three months ended
June 30, 2004 as compared to 18.3% in the second quarter of 2003. The increase
in SG&A costs is primarily the result of the growth in the Electronic
Surveillance Products Division which added an additional $253,000 of SG&A costs
in 2004 in the areas of marketing costs and selling and administration personnel
costs as additional staff were added to handle planned growth. Management does
not expect SG&A costs as a percent of revenues to substantially increase in the
future.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization totaled $493,000 for the three months ended June
30, 2004 as compared to $489,000 for the same period in 2003.
ASSET IMPAIRMENT CHARGE
In accordance with SFAS 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS, we periodically review the carrying value of our long-lived
assets held and used and assets to be disposed of for possible impairment when
events and circumstances warrant such a review. During the quarter ended June
30, 2003, we fully wrote down assets determined to be impaired by approximately
$351,000. The asset write-down related to a full service car wash site in
Arizona which we partially wrote down at December 31, 2002. The additional
write-down was the result of the impending loss of a significant customer to
this site resulting in the future expected cash flows not being sufficient to
recover the site's respective carrying values. The Company closed the facility
effective September 30, 2003.
INTEREST EXPENSE, NET
Interest expense, net of interest income, for the three months ended June 30,
2004 was $450,000 compared to $511,000 for the three months ended June 30, 2003.
This decrease in interest expense was the result of a slight decrease in
interest rates on approximately 50% of our long term debt which has interest
rates tied to the prime rate, and a reduction in our outstanding debt as a
result of routine monthly principal payments. Management expects interest
expense to continue to decline on existing debt as routine monthly principle
payments are made.
OTHER INCOME (EXPENSE)
Other income (expense) for the three months ended June 30, 2004 was expense of
$1,000 compared to income of $85,000 for the three months ended June 30, 2003.
The decrease was primarily attributable to a $51,000 loss on the sale of one of
our Arizona car wash locations in 2004.
26
INCOME TAXES
The Company recorded tax benefits of $8,000 and $49,000 for the three months
ended June 30, 2004 and 2003, respectively. Tax benefit reflects the recording
of income taxes at an effective rate of approximately 36% in both 2004 and 2003.
The effective rate differs from the federal statutory rate for each year
primarily due to state and local income taxes, non-deductible costs related to
intangibles, fixed asset adjustments and changes to the valuation allowance.
During the quarter ended June 30, 2004, the Company received a payment of $8.95
million for removal of a restriction on certain outstanding shares of the
Company's common stock (see Note 12, Equity). Although the transaction is
taxable for Federal and State income tax purposes, no current or deferred income
tax expense is reflected on the income statement due to the recording this
transaction as a contribution to capital, net of income tax. The Company has
sufficient net operating losses available to fully offset the taxable income
generated from this event. A tax liability of $179,000 has been recorded for
Federal Alternative Minimum Tax purposes.
RISK FACTORS
This report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended ("Forward-Looking Statements"). All statements
other than statements of historical fact included in this report are
Forward-Looking Statements. Although we believe that the expectations reflected
in such Forward-Looking Statements are reasonable, we can give no assurance that
such expectations will prove to have been correct. These risks and uncertainties
are set forth herein and in the Company's 2003 Form 10-K and as may be set forth
in the Company's subsequent press releases and/or Forms 10-Q, 8-K, and other
filings with the United States Securities and Exchange Commission. All phases of
our operations are subject to a number of uncertainties, risks and other
influences, many of which are outside our control and any one of which, or a
combination of which, could materially affect the results of our operations and
whether Forward- Looking Statements made by us ultimately prove to be accurate.
Such important factors that could cause actual results to differ materially from
our expectations are disclosed in this section and elsewhere in this report. All
subsequent written and oral Forward-Looking Statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the important factors described below that could cause actual
results to differ from our expectations.
GENERAL RISKS
IF WE DO NOT RAISE ADDITIONAL CAPITAL, WE MAY NEED TO SUBSTANTIALLY REDUCE THE
SCALE OF OUR OPERATIONS AND CURTAIL OUR BUSINESS PLAN.
Our business plan involves growing through acquisitions and internal
development, each of which requires significant capital. Our capital
requirements also include working capital for daily operations and significant
capital for inventory and equipment purchases. Although we had positive working
capital as of June 30, 2004, we have a history of net losses and in some years
we have ended our fiscal year with a negative working capital balance. To the
extent that we lack cash to meet our further capital needs, we will be required
to raise additional funds through bank borrowings and significant additional
equity and/or debt financing, which may result in significant increases in
leverage and interest expense and/or substantial dilution of our outstanding
equity. If we are unable to raise additional capital, we will need to
substantially reduce the scale of our operations and curtail our business plan.
IF WE ARE NOT ABLE TO MANAGE GROWTH, OUR BUSINESS PLAN MAY NOT BE REALIZED.
Our business objectives include developing our Electronic Surveillance Products
Division, both internally and through acquisitions. As such, our business plan
is predicated on growth. If we succeed in growing, it will place significant
burdens on our management and on our operational and other resources. For
example, it may be difficult to assimilate the operations and personnel of an
acquired business into our existing business; we must integrate management
information and accounting systems of an acquired business into our current
systems; our management must devote its attention to assimilating the acquired
business, which diverts attention from other business concerns; we may enter
markets in which we have limited prior experience; and we may lose key employees
of an acquired business. We will also need to attract, train, motivate, retain,
and supervise senior managers and other employees. If we fail to manage these
burdens successfully, one or more of the acquisitions could be unprofitable, the
shift of our management's focus could harm our other businesses, and we may be
forced to abandon our business plan, which relies on growth.
27
IF WE VIOLATE THE FINANCIAL COVENANTS WITH OUR LENDERS, OUR BORROWINGS MAY BE
ACCELERATED AND IF OUR LENDERS FORECLOSE ON OUR ASSETS WE COULD GO OUT OF
BUSINESS.
Our bank debt borrowings as of June 30, 2004 were $30 million substantially all
of which is secured with mortgages against certain of our real property. Of such
borrowings, $5.2 million is classified as current as it is due in less than 12
months from June 30, 2004. Our business plan is dependent on refinancing this
debt as it becomes due. Our two most significant borrowings are secured notes
payable to General Motors Acceptance Corp. ("GMAC") in the amount of $11.2
million, $9.7 million of which was classified as non-current debt at June 30,
2004, and secured notes payable to Bank One, Texas, N.A. ("Bank One") in the
amount of $14.2 million, $10.8 million of which was classified as non-current
debt at June 30, 2004. The GMAC and Bank One agreements contain affirmative and
negative covenants, including the maintenance of certain levels of tangible net
worth, maintenance of certain levels of unencumbered cash and marketable
securities, and the maintenance of certain debt service coverage ratios on a
consolidated level. The Bank One agreement contains a prohibition on incurring
additional debt for borrowed money without the approval of Bank One. As security
for our bank debt, we have encumbered 26 car washes, one truck wash and our
facility in Hollywood, Florida with mortgages.
At June 30, 2004, we were not in compliance with our consolidated debt service
coverage ratio related to our GMAC notes payable. GMAC granted us a waiver of
acceleration related to the non-compliance with the debt service coverage ratio
covenant at June 30, 2004 and for measurement periods through July 1, 2005 and,
accordingly, a portion of the GMAC notes payable were reflected as non-current
in our financial statements at June 30, 2004.
As of March 31, 2004, we entered into amendments to our Bank One financial
covenants and, as a result, we were in compliance at March 31, 2004. At June 30,
2004, we again were in violation of debt service coverage ratio contained in our
term loan agreements with Bank One. We have obtained a waiver of acceleration
from Bank One with respect to this debt service coverage ratio through July 1,
2005 and, accordingly, a portion of the Bank One notes payable were reflected as
non-current in our financial statements at June 30, 2004.
Our ongoing ability to comply with the debt service coverage covenants under our
credit arrangements and refinance our debt depends largely on our achievement of
adequate levels of cash flow. Our cash flow has been and could continue to be
adversely affected by weather patterns and economic conditions. If our cash
flows are less than expected or debt service, including interest expense,
increases more than expected, we may continue to be out of compliance with the
Bank One covenant, as amended, and need to seek additional waivers or
amendments. If we default on any of the Bank One or GMAC covenants and are not
able to obtain further amendments or waivers of acceleration, Bank One debt
totaling $14.2 million and GMAC debt totaling $11.2 million, including debt
recorded as long-term debt at June 30, 2004, could become due and payable on
demand, and Bank One and/or GMAC could foreclose on the assets pledged in
support of the relevant indebtedness. If our assets (including up to 26 of our
car wash facilities and one truck wash) are foreclosed upon, revenues from our
Car and Truck Wash Segment, which comprised 84.7% of our total revenues in the
first six months of 2004, would be severely impacted and we could be unable to
continue to operate our business. Even if the debt were accelerated without
foreclosure, it would be very difficult for us to continue to operate our
business and the price of our common stock may decline, or we may go out of
business.
WE HAVE REPORTED NET LOSSES IN THE PAST. IF WE CONTINUE TO REPORT NET LOSSES,
THE PRICE OF OUR COMMON STOCK MAY DECLINE, OR WE COULD GO OUT OF BUSINESS.
For the year ended December 31, 2003, we reported a net loss, although our
business as a whole was cash flow positive. The majority of the reported losses
in 2003 related to impairment charges of intangible assets, particularly
goodwill, in accordance with SFAS 142, Goodwill and Other Intangible Assets.
Under SFAS 142, which became effective on January 1, 2002, we no longer amortize
goodwill and certain intangible assets determined to have indefinite useful
lives. Additionally, SFAS 142 requires annual fair value based impairment tests
of goodwill and other intangible assets identified with indefinite useful lives.
As a result, we may be forced to record additional impairments in the future,
which would materially reduce our earnings and equity.
IF WE LOSE THE SERVICES OF OUR EXECUTIVE OFFICERS, OUR BUSINESS MAY SUFFER.
If we lose the services of one or more of our executive officers and do not
replace them with experienced personnel, that loss of talent and experience will
make our business plan, which is dependent on active growth and management, more
difficult to implement. Mr. Kramer is the chief operating officer of our car and
truck wash segment, and our general counsel and secretary; Mr. Krzemien is our
chief financial officer and treasurer; and Mr. Pirollo is our chief accounting
officer and corporate controller. Messrs. Kramer and Krzemien are working on a
month-to-month at-will basis, and Mr. Pirollo is working on an at-will basis.
28
Without employment contracts, we may lose the services of any one or more of
Messrs. Kramer, Krzemien or Pirollo, each of whom has been involved in our
management for several years and would be difficult to replace. In addition, we
do not maintain key-man life insurance policies on our executive officers.
IF OUR INSURANCE IS INADEQUATE, WE COULD FACE SIGNIFICANT LOSSES.
We maintain various insurance coverages for our assets and operations. These
coverages include property coverages including business interruption protection
for each location. We maintain commercial general liability coverage in the
amount of $1 million per occurrence and $2 million in the aggregate with an
umbrella policy which provides coverage up to $25 million. We also maintain
workers' compensation policies in every state in which we operate. Commencing
July 2002, as a result of increasing costs of our insurance program, including
automobile, general liability, and workers' compensation coverage, we are
insured through participation in a captive insurance program with other
unrelated businesses. We maintain excess coverage through occurrence-based
policies. Although our automobile, general liability, and workers' compensation
policies are secured in a number of ways, and we believe such policies to be
adequate, there can be no assurance that our insurance will provide sufficient
coverage in the event a claim is made against us, or that we will be able to
maintain in place such insurance at reasonable prices. Furthermore, our business
involves potentially dangerous chemicals and operations, and, accordingly, we
face exposure to significant liabilities for injury. If our insurance coverage
is exceeded by (or does not cover) a claim, we will have to pay the uncovered
liability directly. In the event that we were required to directly pay a claim,
our income would be significantly reduced, and in the event of a large claim, we
could go out of business.
RISKS RELATED TO OUR SECURITY PRODUCTS SEGMENT
IF WE ARE NOT ABLE TO OPERATE OUR ELECTRONIC SURVEILLANCE PRODUCTS DIVISION
EFFECTIVELY, OUR BUSINESS WILL SUFFER.
We expanded our line of security products in 2002 by adding the Electronic
Surveillance Products Division. We are incurring expenses to develop this new
line of products without having extensively tested the size or possible
profitability of the market for such products. There are numerous risks
associated with the new Electronic Surveillance Products Division that may
prevent us from operating such division profitably, including, among others:
risks associated with unanticipated liabilities of the acquired companies; risks
inherent with our management having limited experience in the electronic
security product market; risks relating to the size and number of competitors in
the electronic security product market, many of whom may be more experienced or
better financed; risks associated with the costs of entering into new markets
and expansion of product lines in existing markets; risks associated with
rapidly evolving technology and having inventory become obsolete; risks
associated with purchasing inventory before having orders for that inventory;
risks attendant to locating and maintaining reliable sources of OEM products and
component supplies in the electronic surveillance industry; risks related to
retaining key employees involved in future technology development and
communications with OEM suppliers; and risks associated with developing and
introducing new products in order to maintain competitiveness in a rapidly
changing marketplace. We also expect that there will be costs related to product
returns and warranties and customer support that we cannot quantify or
accurately estimate until we have more experience in operating the new division.
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD SERIOUSLY HARM OUR BUSINESS.
Although we have not been the subject of any such actions, third parties may in
the future assert against us infringement claims or claims that we have violated
a patent or infringed upon a copyright, trademark or other proprietary right
belonging to them. We design most of our security products and contract with
independent suppliers to manufacture those products and deliver them to us.
Certain of these products contain proprietary intellectual property of these
independent suppliers. Third parties may in the future assert claims against our
suppliers that such suppliers have violated a patent or infringed upon a
copyright, trademark or other proprietary right belonging to them. If such
infringement by our suppliers or us were found to exist, a party could seek an
injunction preventing the use of their intellectual property. In addition, if an
infringement by us were found to exist, we may attempt to acquire a license or
right to use such technology or intellectual property. Most of our suppliers
have agreed to indemnify us against any such infringement claim, but any
infringement claim, even if not meritorious and/or covered by an indemnification
obligation, could result in the expenditure of a significant amount of our
financial and managerial resources.
IF OUR ORIGINAL EQUIPMENT MANUFACTURERS FAIL TO ADEQUATELY SUPPLY OUR PRODUCTS,
OUR SECURITY PRODUCTS SALES MAY SUFFER.
Our products are manufactured on an OEM basis. Reliance upon OEMs, as well as
industry supply conditions, generally involves several risks, including the
possibility of defective products (which can adversely affect our reputation for
reliability), a shortage of components and reduced control over delivery
schedules (which can adversely affect our distribution schedules), and increases
in component costs (which can adversely affect our profitability).
29
We have some single-sourced manufacturer relationships, either because
alternative sources are not readily or economically available or because the
relationship is advantageous due to performance, quality, support, delivery,
capacity, or price considerations. If these sources are unable or unwilling to
manufacture our products in a timely and reliable manner, we could experience
temporary distribution interruptions, delays, or inefficiencies, adversely
affecting our results of operations. Even where alternative OEMs are available,
qualification of the alternative manufacturers and establishment of reliable
supplies could result in delays and a possible loss of sales, which could affect
operating results adversely.
IF PEOPLE ARE INJURED BY OUR CONSUMER SAFETY PRODUCTS, WE COULD BE HELD LIABLE
AND FACE DAMAGE AWARDS.
We face claims of injury allegedly resulting from our defense sprays, which we
market as "non-lethal." For example, we are aware of allegations that defense
sprays used by law enforcement personnel resulted in deaths of prisoners and of
suspects in custody. In addition to use or misuse by law enforcement agencies,
the general public may pursue legal action against us based on injuries alleged
to have been caused by our products. As the use of defense sprays by the public
increases, we could be subject to additional product liability claims. We have a
$25,000 deductible on our insurance policy, meaning that all such lawsuits, even
unsuccessful ones, and ones covered by insurance, cost the company money.
Furthermore, if our insurance coverage is exceeded, we will have to pay the
excess liability directly. Our product liability insurance provides coverage of
up to $26 million per occurrence. Based on the amount demanded in the case
currently against us and our current insurance coverage, we do not believe that
this potential liability is significant. However, if we are required to directly
pay a claim in excess of our coverage, our income will be significantly reduced,
and in the event of a large claim, we could go out of business.
IF GOVERNMENTAL REGULATIONS CHANGE OR ARE APPLIED DIFFERENTLY, OUR BUSINESS
COULD SUFFER.
The distribution, sale, ownership and use of consumer defense sprays are legal
in some form in all 50 states and the District of Columbia. Restrictions on the
manufacture or use of consumer defense sprays may be enacted that would severely
restrict the market for our products or increase our costs of doing business.
Some of our consumer defense spray manufacturing operations currently
incorporate hazardous materials, the use and emission of which are regulated by
various state and federal environmental protection agencies, including the
United States Environmental Protection Agency. We believe that we are in
compliance with all current state and local statutes governing our handling and
disposal of these hazardous materials, but if there are any changes in
environmental permit or regulatory requirements, or if we fail to comply with
any environmental requirements, these changes or failures may expose us to
significant liabilities that would have a material adverse effect on our
business and financial condition. We face a variety of potential environmental
liabilities, including those arising out of improperly disposing waste oil or
lubricants at our lube centers, improper maintenance of oil discharge ponds,
which exist at two of our truck washes, and leaks from our underground oil
storage tanks.
RISKS RELATED TO OUR CAR AND TRUCK WASH SEGMENT
IF CONSUMER DEMAND FOR OUR CAR WASH SERVICE DROPS, OUR BUSINESS WILL SUFFER.
Our revenues are primarily derived from our Car and Truck Wash Segment. As such,
our financial condition and results of operations will depend substantially on
continued consumer demand for car wash services. Our car wash business depends
on consumers choosing to employ professional services to wash their cars rather
than washing their cars themselves or not washing their cars at all. Also,
seasonal trends in some areas affect our car wash business. In particular, long
periods of rain and cloudy weather can adversely affect our car wash business as
people typically do not wash their cars during such periods. Additionally,
extended periods of warm, dry weather may encourage customers to wash their cars
themselves which also can adversely affect our car wash business. It is also
possible that general consumer demand for car wash services will decrease in the
future.
WE FACE SIGNIFICANT COMPETITION AND IF WE CANNOT COMPETE EFFECTIVELY WE MAY LOSE
MONEY AND THE VALUE OF OUR SECURITIES COULD DECLINE.
The car care industry is highly competitive. Competition is based primarily on
location, customer service, available services, and price. We face competition
from both inside and outside the car care industry, including gas stations,
gasoline companies, automotive companies, specialty stores and convenience
stores that offer automated car wash services. Because barriers to entry into
the car care industry are relatively low, competition may be expected to
continually arise from new sources not currently competing with us. In some
cases, our competitors may have greater financial and operating resources than
do we and we may lose customers and revenue to those competitors.
30
OUR CAR AND TRUCK WASH OPERATIONS FACE GOVERNMENTAL REGULATIONS AND IF WE ARE
UNABLE TO COMPLY WITH THOSE REGULATIONS, OUR BUSINESS MAY SUFFER.
We are governed by federal, state and local laws and regulations, including
environmental regulations, that regulate the operation of our car wash centers
and other car care services businesses. Other car care services, such as
gasoline and lubrication, use a number of oil derivatives and other regulated
hazardous substances. As a result, we are governed by environmental laws and
regulations dealing with, among other things:
i. transportation, storage, presence, use, disposal, and handling of
hazardous materials and wastes;
ii. discharge of storm water; and
iii. underground storage tanks.
If uncontrolled hazardous substances were found on our property, including
leased property, or if we were otherwise found to be in violation of applicable
laws and regulations, we could be responsible for clean-up costs, property
damage, fines, or other penalties, any one of which could have a material
adverse effect on our financial condition and results of operations.
IF OUR CAR WASH EQUIPMENT IS NOT MAINTAINED, OUR CAR WASHES WILL NOT BE
OPERABLE.
Many of our car washes have older equipment which requires frequent repair or
replacement. Although we undertake to keep our car washing equipment in proper
operating condition, the operating environment in car washes results in frequent
mechanical problems. If we fail to properly maintain the equipment in a car
wash, that car wash could become inoperable resulting in a loss of revenue.
RISKS RELATED TO OUR STOCK
On May 26, 2004, we completed a private placement financing in which we sold to
a private investor 915,000 shares of our common stock and warrants to purchase
an aggregate of 183,000 shares of our common stock. We agreed to register for
resale the shares of common stock and the shares issuable upon exercise of the
warrants. By further increasing the number of shares of our common stock that
may be sold into the market, this sale could cause the market price of our
common stock to drop significantly, even if our business is doing well.
Our stock price has been, and likely will continue to be, volatile.
The market prices for securities of companies quoted on The NASDAQ Stock Market,
including our market price, have in the past been, and are likely to continue in
the future to be, very volatile. That volatility depends upon many factors, some
of which are beyond our control, including:
o announcements regarding the results of expansion or development efforts by
us or our competitors;
o announcements regarding the acquisition of businesses or companies by us or
our competitors;
o technological innovations or new commercial products developed by us or our
competitors;
o changes in our, or our Suppliers', intellectual property portfolio;
o issuance of new or changed securities analysts' reports and/or
recommendations applicable to us;
o additions or departures of our key personnel;
o operating losses by us;
o actual or anticipated fluctuations in our quarterly financial and operating
results and degree of trading liquidity in our common stock; and
o our ability to maintain our common stock listing on the Nasdaq National
Market.
One or more of these factors could cause a decline in our revenue and income or
in the price of our common stock.
31
IF WE LOSE OUR LISTING ON THE NASDAQ NATIONAL MARKET, OUR STOCK WILL BECOME
SIGNIFICANTLY LESS LIQUID AND ITS VALUE MAY BE AFFECTED.
Our common stock is listed on the NASDAQ National Market with a bid price of
$3.04 at the close of the market on August 10, 2004. Although the recent closing
prices of our stock have been well in excess of $1.00, earlier in 2004 our stock
traded at a price as low as $1.78. If the price of our common stock falls below
$1.00 and for 30 consecutive days remains below $1.00, we are subject to being
delisted from the NASDAQ National Market. Upon delisting from the NASDAQ
National Market, our stock would be traded on the NASDAQ SmallCap Market until
we maintain a minimum bid price of $1.00 for 30 consecutive days at which time
we can regain our listing on the NASDAQ National Market. If our stock fails to
maintain a minimum bid price of $1.00 for 30 consecutive days during a 180 day
grace period on the NASDAQ SmallCap Market or a 360 day grace period if
compliance with certain core listing standards are demonstrated, we could
receive a delisting notice from the NASDAQ SmallCap Market. Upon delisting from
the NASDAQ SmallCap Market, our stock would be traded over-the-counter, more
commonly known as OTC. OTC transactions involve risks in addition to those
associated with transactions in securities traded on the NASDAQ National Market
or the NASDAQ SmallCap Market (together "NASDAQ-Listed Stocks"). Many OTC stocks
trade less frequently and in smaller volumes than NASDAQ-Listed Stocks.
Accordingly, our stock would be less liquid than it would otherwise be. Also,
the values of these stocks may be more volatile than NASDAQ-Listed Stocks. If
our stock is traded in the OTC market and a market maker sponsors us, we may
have the price of our stock electronically displayed on the OTC Bulletin Board,
or OTCBB. However, if we lack sufficient market maker support for display on the
OTCBB, we must have our price published by the National Quotations Bureau LLP in
a paper publication known as the "Pink Sheets." The marketability of our stock
will be even more limited if our price must be published on the "Pink Sheets."
BECAUSE WE ARE A DELAWARE CORPORATION, IT MAY BE DIFFICULT FOR A THIRD PARTY TO
ACQUIRE US, WHICH COULD AFFECT OUR STOCK PRICE.
We are governed by Section 203 of the Delaware General Corporation Law, which
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an entity who is an "interested stockholder" for a period of
three years, unless approved in a prescribed manner. This provision of Delaware
law may affect our ability to merge with, or to engage in other similar
activities with, some other companies. This means that we may be a less
attractive target to a potential acquirer who otherwise may be willing to pay a
premium for our common stock above its market price.
If we issue our authorized preferred stock, the rights of the holders of our
common stock may be affected and other entities may be discouraged from seeking
to acquire control of our Company.
Our certificate of incorporation authorizes the issuance of up to 10 million
shares of "blank check" preferred stock that could be designated and issued by
our board of directors to increase the number of outstanding shares and thwart a
takeover attempt. No shares of preferred stock are currently outstanding. It is
not possible to state the precise effect of preferred stock upon the rights of
the holders of our common stock until the board of directors determines the
respective preferences, limitations, and relative rights of the holders of one
or more series or classes of the preferred stock. However, such effect might
include: (i) reduction of the amount otherwise available for payment of
dividends on common stock, to the extent dividends are payable on any issued
shares of preferred stock, and restrictions on dividends on common stock if
dividends on the preferred stock are in arrears, (ii) dilution of the voting
power of the common stock to the extent that the preferred stock has voting
rights, and (iii) the holders of common stock not being entitled to share in our
assets upon liquidation until satisfaction of any liquidation preference granted
to the holders of our preferred stock.
The "blank check" preferred stock may be viewed as having the effect of
discouraging an unsolicited attempt by another entity to acquire control of us
and may therefore have an anti-takeover effect. Issuances of authorized
preferred stock can be implemented, and have been implemented by some companies
in recent years, with voting or conversion privileges intended to make an
acquisition of a company more difficult or costly. Such an issuance, or the
perceived threat of such an issuance, could discourage or limit the
stockholders' participation in certain types of transactions that might be
proposed (such as a tender offer), whether or not such transactions were favored
by the majority of the stockholders, and could enhance the ability of officers
and directors to retain their positions.
OUR POLICY OF NOT PAYING CASH DIVIDENDS ON OUR COMMON STOCK COULD NEGATIVELY
AFFECT THE PRICE OF OUR COMMON STOCK.
We have not paid in the past, and do not expect to pay in the foreseeable
future, cash dividends on our common stock. We expect to reinvest in our
business any cash otherwise available for dividends. Our decision not to pay
cash dividends may negatively affect the price of our common stock.
32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not materially exposed to market risks arising from fluctuations in
foreign currency exchange rates, commodity prices, or equity prices.
INTEREST RATE EXPOSURE
A significant portion of our debt is at fixed rates, and as such, changes in
market interest rates would not significantly impact operating results with
respect to our fixed rate debt unless and until such debt would need to be
refinanced at maturity. Substantially all of our variable rate debt obligations
are tied to the prime rate, as is our incremental borrowing rate. A one percent
increase in the prime and Libor rates would not have a material effect on the
fair value of our variable rate debt at June 30, 2004 and would have had the
impact of increasing interest expense by approximately $175,000 in for the
twelve months ending June 30, 2004.
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 June 30, 2004. Based on this evaluation
and as of the date of the evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in alerting them in a timely manner to material
information required to be included in the Company's SEC reports. There have
been no significant changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the Company's most recent fiscal quarter that have
materially affected, or are reasonablely likely to materially affect, the
Company's internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding our legal proceedings can be found in Note 6 COMMITMENTS
AND CONTINGENCIES.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER, PURCHASE OF EQUITY
SECURITIES
The following table summarizes our equity security repurchases during the three
months ended June 30, 2004:
APPROXIMATE DOLLAR
TOTAL NUMBER OF SHARE VALUE OF SHARES THAT
PURCHASED AS PART OF MAY YET BE PURCHASED
PERIOD TOTAL NUMBER OF AVERAGE PRICE PAID PUBLICLY ANNOUNCED UNDER THE PLANS OR
- --------------------------- SHARES PURCHASED PER SHARE PLANS OR PROGRAMS PROGRAMS (1)
---------------- ------------------ ------------------------ ---------------------
April 1 to April 30, 2004 - - - $ -
May 1 to May 31, 2004 - - - $ -
June 1 to June 30, 2004 - - - $ -
----------------------- --------------------- ------------------------ -----------------------
Total - - - $ -
======================= ====================== ======================== =======================
(1) On July 29, 2004, the Company's Board of Directors approved a share
repurchase program to allow the Company to repurchase up to an aggregate
$3,000,000 of its common shares in the future if market conditions so
dictate. As of June 30, 2004, no shares had been repurchased under the
program.
33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
* 3.7 The Company's Amended and Restated Certificate of
Incorporation (Exhibit 4.1 to the June 16, 2004 Form S-3)
*10.162 Warrant dated May 26, 2004 to purchase 183,000 shares of the
Company's common stock, issued to Selling Stockholder.
(Exhibit 4.3 to the June 16, 2004 Form S-3)
*10.163 Securities Purchase Agreement dated May 26, 2004 between the
Company and the Purchasers set forth on the signature pages
thereof (Exhibit 10.1 to the June 16, 2004 Form S-3)
*10.164 Registration Rights Agreement dated May 26, 2004 between the
Company and the Purchasers set forth on the signature pages
thereof (Exhibit 10.2 to the June 16, 2004 Form S-3)
*10.165 First Amendment to the Securities Purchase Agreement, dated
June 8, 2004 (Exhibit 10.3 to the June 16, 2004 Form S-3)
*10.166 Agreement for purchase and Sale of Assets by and among MDI
Operating, L.P., American B Building Control, Inc., and Mace
Security Products, Inc. (Exhibit 2.1 to the July 1, 2004
Form 8- K)
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
*Incorporated by reference
(b) Current Reports on Form 8-K or 8-K/A:
On May 5, 2004, the Company filed a report on Form 8-K dated
May 5, 2004, under Item 7 and Item 12, to report the issuance
of a press release announcing the Company's financial results
for the fiscal quarter ended March 31, 2004.
On May 28, 2004, the Company filed a report on Form 8-K dated
May 26, 2004, under Item 5 and Item 7, to report the
completion of a private placement of its common stock and
warrants to a private institution.
On July 13, 2004, the Company filed a report on Form 8-K dated
July 1, 2004, under Item 2 and Item 7 to report the
acquisition of assets of Industrial Vision Source ("IVS") and
SecurityandMore ("S&M"). Historic financial statements of IVS
and S&M and pro forma financial information of the Company
required under "Item 7,: "Financial Statements and Exhibits"
were filed on Form 8-K/A on August 2, 2004.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MACE SECURITY INTERNATIONAL, INC.
BY:/S/ LOUIS D. PAOLINO, JR.
-------------------------
Louis D. Paolino, Jr., Chairman, Chief Executive
Officer and President
BY:/S/ GREGORY M. KRZEMIEN
-----------------------
Gregory M. Krzemien, Chief Financial Officer
BY:/S/ RONALD R. PIROLLO
---------------------
Ronald R. Pirollo, Controller (Principal Accounting
Officer)
DATE: August 12, 2004
35
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
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.
36