UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2003 Commission File No. 0-22810
MACE SECURITY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 03-0311630
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1000 Crawford Place, Suite 400, Mt. Laurel, NJ 08054
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (856) 778-2300
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
Indicate by check mark 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 reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained in this form, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the last sale price of the Registrant's Common Stock
at the close of business on March 10, 2004, was approximately $16,257,094.
(Reference is made to page 18 herein for a statement of assumptions upon which
this calculation is based.) The Company does not have any non-voting stock.
The number of shares of Common Stock, par value $.01 per share, of the
Registrant outstanding as of March 10, 2004 was 12,462,670.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Mace Security International, Inc. ("the Company" or "Mace") was incorporated in
Delaware on September 1, 1993. On December 17, 2002, we effected a one-for-two
reverse stock split. All stock prices, share amounts, per share information,
stock options and stock warrants to reflect the reverse split, unless otherwise
noted.
Our operations are currently conducted through two segments: car and truck
washes, and security products. Since July 1999, our full service car and truck
wash segment has generated most of our revenue and profit. Our Security Products
Segment produces consumer safety and personal defense products, as well as
electronic surveillance and monitoring products. Before July 1999, this
segment's main business was the production and sale of less-than-lethal defense
sprays.
Beginning in May of 1999, we began developing our car wash operations through
acquisitions, including our merger on July 1, 1999 with American Wash Services,
Inc., a company that was engaged in the business of acquiring and operating car
wash facilities.
During 2000, 2001 and for the first four months of 2002, the Company did not
directly manage the Security Products Segment. During this period, the Company
was paid $20,000 per month under a Management Agreement pursuant to which Mark
Sport, Inc. ("Mark Sport"), an entity controlled by Jon E. Goodrich, a director
of the Company through December 2003, operated the Security Products Segment.
Effective May 1, 2002, the Management Agreement expired and the Company
recommenced operation of the Security Products Segment. On May 1, 2002, the
Security Products Segment consisted of consumer safety and personal defense
products. Electronic security and surveillance devices were added to the
Security Products Segment on August 12, 2002 when we acquired certain of the
assets and operations of Micro-Tech, Inc. ("Micro-Tech"), a manufacturer and
retailer of electronic security and surveillance devices. Additionally, an
expanded line of electronic security monitors was added to the Security Products
Segment on September 26, 2003, when we acquired the assets of Vernex, Inc.
("Vernex"), a manufacturer and retailer of electronic security monitors.
On July 9, 1999, we entered the business of manufacturing and selling
point-of-sale systems for the car wash and oil lubrication industries when we
acquired all the outstanding common stock of Innovative Control Systems, Inc.
("ICS"), a developer of point-of-sale systems for the car wash and oil
lubrication industries. On June 2, 2000, we exited the business of manufacturing
and selling point-of-sale systems when we sold ICS. All results of ICS's
operations have been classified as "discontinued operations."
The Company's periodic reports, as filed with the United States Securities and
Exchange Commission, can be accessed through the Company's website at
www.mace.com.
LINES OF BUSINESS
Car and Truck Wash Segment. The Company, through its subsidiaries, owns
and operates 51 car washes and five truck washes. We operate 13 car wash
locations in the region surrounding Philadelphia, Pennsylvania, which are
located in New Jersey, Pennsylvania and Delaware. We also operate six car wash
locations in and near the Sarasota, Florida area, 13 car wash locations in the
Phoenix, Arizona area, and 19 car wash locations in Texas. We also own five
truck washes located in Arizona, Indiana, Ohio and Texas. Except for nine of the
Philadelphia area car washes, which provide only exterior washing, and one Texas
location, which is a self-serve wash and lube facility, the rest of our
locations are full service car washes. The full service car washes provide
exterior washing and drying, vacuuming of the interior of the vehicle, dusting
of dashboards and door panels, and cleaning of all windows and glass.
Our typical car wash facility consists of a free standing building of
approximately 4,000 square feet, containing a sales area for impulse items and a
car wash tunnel. Cars are moved through the car wash tunnel by a conveyor
system. Inside the tunnel, automatic equipment cleans the vehicle as it moves
past the equipment. Additional extra services, including wheel cleaning,
fragrance, rust protection treatment, wheel treatments, and waxing are also
offered at the locations. Many of our locations also offer other consumer
products and related car care services, such as professional automotive
detailing services (offered at 41 locations), oil and lubrication services
(offered at 10 locations), gasoline dispensing services (offered at 19
locations), state inspection services (offered at seven locations), convenience
store sales (offered at one location), and merchandise store sales (offered at
41 locations). Our truck wash facilities provide washing and waxing services for
tractor-trailer and fleet transport vehicles. These services are provided by
hand. While certain acquisitions were pending in 2000, we managed several car
wash locations under operating agreements pursuant to which we were entitled to
all profits generated by those locations. Car wash and ancillary services
provided 88.6%, 94.5%, and 99.5%, of our revenues in fiscal years 2003, 2002,
and 2001, respectively. (See also, the Consolidated Statements of Operations in
the financial statements accompanying this report.)
2
Our car wash operations are not dependent on any one or a small number of
customers. The nature of our car wash operations does not result in a backlog of
orders at any time, and all of our car wash revenues are derived from sales in
the United States. For a discussion of seasonal effects on our car wash
operations, see Item 7, Seasonality and Inflation in Management's Discussion and
Analysis of Financial Condition and Results of Operations, page 29.
Security Products Segment. The Security Products Segment is comprised
of two operating divisions: the Consumer Products Division and the Electronic
Surveillance Products Division. The Consumer Products Division designs, markets
and sells consumer products for use in home and automobile and for personal
protection. The Consumer Products Division includes a line of defense sprays,
personal alarms, home security alarms, whistles, door jammers, and window and
door lock alarms. The defense sprays include tear gas sprays, pepper sprays, and
sprays with a combination of tear gas, pepper solution and UV dye. The
Electronic Surveillance Products include cameras, digital video recorders
(DVR's), and monitors. The cameras are offered in weatherproof, black and white,
and color models. Certain of the camera models also record audio. The DVR's are
offered in models which can simultaneously record with four cameras, eight
cameras or 16 cameras.
Substantially all of the manufacturing processes for the Consumer Products
Division are performed at our Bennington, Vermont facility. Defense spray
products are manufactured on an aerosol filling machine. Most products are
packaged in sealed, tamper-resistant "clamshells." The KinderGard(R) product
line is primarily manufactured by an unrelated company utilizing molds primarily
owned by Mace and packaged on-site at our Vermont facility. Mace Anti Crime
Bureau(R) ("MACB"), part of the Consumer Products Division, develops and markets
security products and literature for the domestic and foreign financial
community, including a "dye-pack" used by financial institutions for robbery
protection, state-of-the-art training videos and crisis response materials. MACB
markets to domestic and foreign financial institutions and related businesses
throughout the world through direct marketing and the use of independent sales
representatives and distributors as well as exhibitions at national trade shows
and advertisements in trade publications.
In the first quarter of 2000, we entered into a Management Agreement with Mark
Sport, a Vermont corporation controlled by Jon E. Goodrich, a director of the
Company through December, 2003. The Management Agreement entitled Mark Sport to
operate the Security Products Segment and receive all profits or losses during
the term of the Management Agreement. We retained the ownership of all of the
business assets. The Management Agreement was extended under several amendments,
and terminated on April 30, 2002. Under the Management Agreement, Mark Sport
paid us $20,000 per month. Additionally, Mark Sport paid us an amount equal to
the amortization and depreciation on the assets of the division. Effective May
1, 2002, the Management Agreement expired and the Company recommenced operation
of the Security Products Segment.
With the acquisition of certain of the assets and operations of Micro-Tech, a
manufacturer and retailer of electronic security and surveillance devices, on
August 12, 2002, the Company added the Electronic Surveillance Products Division
to its Security Products Segment. The Company has contracted with equipment
manufacturers, principally in Korea, China, and other foreign countries, to
manufacture system components in accordance with our specifications and in
branded packaging suitable for direct sale to consumers or distributors. As with
all new business undertakings, there are numerous risks associated with the new
business unit that may prevent the Company from operating it profitably. (See
Factors Influencing Future Results And Accuracy of Forward -Looking Statements,
page 8.) The Company began its sales efforts for the Electronic Surveillance
Products Division during the second quarter of 2003.
The Security Products Segment provided 11.4%, 5.5%, and 0.5% of our revenues in
fiscal years 2003, 2002, and 2001, respectively. (See also, the Consolidated
Statements of Operations in the financial statements accompanying this report.)
Point-of-Sale Systems and Software Sales and Development. On July 9,
1999, we acquired ICS in exchange for 604,000 (pre-reverse split) shares of
Company common stock and the assumption of $750,000 of debt. From July 1999 to
June 2000, ICS was involved in the development, marketing and sale of automated
point-of-sale control systems that are used to monitor, manage and analyze car
wash systems and lubrication centers. On June 2, 2000, we sold ICS. Accordingly,
all results of ICS' operations have been classified as "discontinued
operations."
3
BUSINESS STRATEGIES
Car and Truck Wash Segment.
Internal Growth. We believe that we can achieve internal growth
principally from additional sales into our current markets by providing superior
service and through our existing marketing efforts. To improve market share in a
given operating region, we spend approximately 2% to 3% of regional revenue on
regional advertising campaigns emphasizing coupons to attract volume with
discount offers and brand awareness. We believe that only about 30% of the
general population routinely use car wash services. We believe that this
relatively low level of participation is the result of (i) lack of effective
advertising; (ii) inconsistent wash quality and service levels across fragmented
locations; and (iii) concerns about scratches and other adverse effects from the
automated wash process. We believe that through consumer education and by
developing a strong brand reputation, known for consistent quality and safe,
dependable service across locations, we can increase consumer participation
rates and generate internal growth from existing locations. We also intend to
selectively implement price increases when competitive advantages and
appropriate market conditions exist.
Operating Efficiency. We have reduced the total operating expenses of
our businesses by implementing centralized financial controls. In addition, we
are continually implementing programs to take advantage of certain economies of
scale in such areas as the purchase of equipment, chemicals and supplies, parts,
equipment maintenance, data processing, financing arrangements, employee
benefits, insurance, and communications. We train our operating personnel to
emphasize customer service, labor efficiency, safe operations, and sales of
add-on and ancillary services. Location managers are trained to implement our
standardized service menu option list and high-margin service add-ons at each of
our locations.
Acquisitions. From May 1999 through December 2000, and including our
merger with American Wash Services, Inc., we acquired 62 car wash facilities and
five truck wash facilities through the acquisition of 17 separate businesses.
Eleven car wash facilities have been divested or closed. The majority of the
locations were acquired by acquiring a company, or the assets of a company, that
owned several locations in a given geographic area.
We will acquire car washes when we can do so on advantageous terms. In
evaluating potential acquisitions, we will consider: (i) our cash position and
the availability of financing at favorable terms; (ii) the potential for
operating cost reductions, revenue growth through advertising, and managerial
efficiencies; (iii) the commercial viability and underlying real estate value of
each location; (iv) the potential for geographic diversification throughout the
United States; and (v) other relevant factors. At the present time, we are not
in negotiations with any parties regarding potential acquisitions.
As consideration for acquisitions, we may use combinations of common stock,
cash, and indebtedness. The consideration for each future acquisition will vary
on a case-by-case basis depending on our financial interests, the historic
operating results of the acquisition target, and the growth potential of the
business to be acquired. Cash used for future acquisitions may be provided by
operations, loans and the proceeds of possible future equity sales.
We did not complete any car or truck wash acquisitions in 2001, 2002, or 2003.
4
Security Products Segment.
Internal Growth. The Security Products Segment designs, markets and
sells the Consumer Products and the Electronic Surveillance Products. For the
year ended December 31, 2003, revenues from the Consumer Products Division were
$2.8 million. For the five years prior to July 14, 2003, the Company was
prohibited from selling defense sprays to the law enforcement market, under a
non-competition agreement with Armor Holdings, Inc. We are now selling our
defense sprays in the law enforcement market under the brand name of Take
Down(R). We believe that the total consumer defense spray market is
approximately $10 million to $12 million in revenues a year and that the law
enforcement market is approximately $3 million in revenue per year. We do not
expect to be able to significantly increase our market share of the consumer
defense spray market. Though the Company has only recently begun its sales
efforts for the Electronic Surveillance Products Division, this division, which
commenced operations in August 2002, achieved growth in revenues from $380,000
in 2002 to $2.8 million of revenues in 2003. Growth has been principally
achieved through the development of an internal sales staff and increased
advertising and marketing efforts in 2003.
Operating Agreements and Acquisitions. During 2001, we did not directly
market or sell the Consumer Product Division's line of personal safety and
security devices. All marketing and sales were done by Mark Sport under a
Management Agreement. The Management agreement expired on April 30, 2002, at
which time the Company recommenced marketing efforts.
With the acquisition of certain of the assets of Micro-Tech, a manufacturer and
retailer of electronic security and surveillance devices on August 12, 2002, the
Company added the Electronic Surveillance Products Division to its Security
Products Segment. Additionally, we acquired the assets of Vernex, a manufacturer
and retailer of electronic security monitors, on September 26, 2003. At the
present time we are not evaluating or seeking to make any acquisitions for the
Security Products Segment. However, we would consider a Security Products
Segment acquisition if one became available on advantageous terms. In evaluating
potential acquisitions, we will consider: (i) our cash position and the
availability of financing at favorable terms; (ii) the potential for operating
cost reductions; (iii) marketing advantages by adding new products to the
Mace(R) brand name; (iv) market penetration of existing products; and (v) other
relevant factors.
As consideration for acquisitions, we may use combinations of common stock,
cash, and indebtedness. The consideration for each future acquisition will vary
on a case-by-case basis depending on our financial interests, the historic
operating results of the acquisition target, and the growth potential of the
business to be acquired. We expect to finance the cash portion of future
acquisitions through funds provided by operations, loans, and the proceeds of
possible future equity sales.
MARKETING
Car and Truck Wash Segment. The car care industry services customers on a local
and regional basis. We employ operational and customer service people at our
operating locations. The operational and customer service people are supervised
by the management of the operating locations. We emphasize providing quality
services as well as customer satisfaction and retention, and believe that we
will attract customers in the future because of our reputation for quality
service. We market our services through regional coupon advertising, direct-mail
marketing programs and radio and television advertisements. We spend 2% to 3% of
regional revenue on regional advertising campaigns. We have a diverse customer
base, with no single customer accounting for five percent or more of our
consolidated revenues for the fiscal year ended December 31, 2003. We do not
believe that the loss of any single customer would have a material adverse
effect on our business or results of operations.
Security Products Segment. During 2001, we did not directly market the
Consumer Products Division's line of personal safety and security devices. All
marketing and sales were done by Mark Sport under a Management Agreement until
it expired on April 30, 2002, at which time the Company recommenced marketing
efforts. The consumer products are available for purchase at mass
merchant/department stores, gun shops, sporting goods stores, hardware, auto,
convenience and drug stores. Each market category of the Consumer Products
Division is reached through dedicated in-house sales managers, and/or through a
nationwide network of manufacturers' representatives. Consumer products are also
available for purchase directly through a catalog, trade publication
advertising, an internet website, and promotions at industry trade shows. Mail
orders, internet orders, and specialty accounts are handled directly by the
Company.
Our marketing efforts for the Electronic Surveillance Products Division began in
2003. Our Electronic Surveillance Products Division contains two separate
product lines which are developed for two distinct markets: professional
installers who sell and install systems, and consumers who directly purchase the
equipment. The professional line is sold through dealer and distributor networks
which we are developing. Our consumer line is sold primarily through mass
merchants and spy shops. Our marketing efforts have increased sales from
$380,000 in 2002 (August through December) to $2.8 million in 2003; however, no
assurance can be given that our marketing will continue to increase sales at the
same rate.
5
PRODUCTION AND SUPPLIES
Car and Truck Wash Segment. We do not manufacture any of the car or
truck wash equipment and supplies which we use. There are numerous suppliers of
the equipment and supplies required by our car and truck wash operations.
Consumer Products Division. Substantially all of the manufacturing
processes for the Consumer Products Division are performed at our leased
Bennington, Vermont facility. Defense spray products are manufactured on an
aerosol filling machine. Most products are packaged in sealed, tamper-resistant
"clamshells." The KinderGard(R) product line and MaceCash dye pack system are
primarily manufactured by unrelated companies and packaged on-site at our
Vermont facility. There are numerous potential suppliers of the components and
parts required in the production process. We have developed strong long-term
relationships with many of our suppliers including the following: Moldamatic,
Inc., Amber International, Inc., and Springfield Printing, Inc. In addition, we
purchase for resale a variety of products produced by others including whistles
and window and door alarms, among others.
Electronic Surveillance Products Division. Our Electronic Surveillance
products are manufactured principally in Korea, China, and other foreign
countries, by original equipment manufacturers ("OEM"). The Electronic
Surveillance products are manufactured to our specifications, labeled, packaged,
and shipped ready for sale, to our warehouse in Hollywood, Florida.
COMPETITION
Car and Truck Wash Segment. The car care industry is a highly
fragmented industry comprised of many large and small businesses. At any of our
wash locations, our main competitors are privately-owned car washes which may,
in many instances, be located near our car washes. The car care industry is
highly competitive. Competition is based primarily on location, facilities,
customer service, available services and price. We also face competition from
sources outside the car wash industry, such as gas stations that offer automated
car wash services. Barriers to entry in the car care industry are relatively
low. Competition is always entering our existing markets from new sources not
currently competing with us. We compete principally with locally-owned car wash
facilities and other regional car wash chains including Wash Tub, Car Spa, and
Oasis Car Wash.
Security Products Segment. The Consumer Products Division faces
intense competition in the security products consumer market. Domestically,
there continues to be a number of companies marketing defense sprays to civilian
consumers. While we continue to offer defense spray products that we believe
distinguish themselves through brandname recognition and superior product
features and formulations, this division has experienced a sales decline for
these products. We attribute this decline not only to the strong competition,
but also to lower demand in general.
Our Electronic Surveillance Products Division faces competition from many larger
companies such as Sony, Panasonic, and others. A number of these competitors
have significantly greater financial, marketing, and other resources than do we.
We also compete with numerous well-established, smaller, local or regional
firms. Increased competition from these companies could have an adverse effect
on our Electronic Surveillance Products Division.
TRADEMARKS AND PATENTS
Car and Truck Wash Business. We own a registered service mark for Super
Bright(R). We have selected Super Bright(R) as our brandname for regions in
which we do not have a well recognized name. During 2002, we upgraded the
signage and appearance of many of our car wash facilities while branding our
Pennsylvania, San Antonio, and Lubbock locations as Super Bright(R).
Security Products Segment. Mace Security International, Inc. began
marketing products in 1993 under the Mace(R) brand name and related trademarks
pursuant to an exclusive license for sales of defense sprays to the consumer
market in the continental United States, and a non-exclusive license for sales
to the consumer market worldwide. The license agreement was renegotiated in 1992
to include a purchase option. We exercised this option and purchased outright
the Mace(R) brand name and related trademarks (Pepper Mace(R), Chemical Mace(R),
Mace . . . Just in Case(R), CS Mace(TM) and Magnum Mace(TM)). In conjunction
with this purchase, we acquired a non-exclusive worldwide license to promote a
patented pepper spray formula in both the consumer and law enforcement markets.
We also have various other patents and trademarks for the devices we sell,
including trademarks and/or patents for the Big Jammer(R) door brace, Window
Jammer(TM), Sonic Alert(TM), Safety Flasher(TM), Sport Strobe(TM), Child Safe
Alarm(TM), Window Alert(TM), Motion Alert(TM), Emergency Whistle(TM), Auto
Alert(TM), Screecher(R), Peppergard(R), Slam(R), Mace (Mexico)(R), Viper(R)
defense spray, KinderGard(R), Zip-a-Babe(R), Hand-n-Hand(R), Safe-T-Zip(R), TG
Guard(R), and Take Down(R). The TG Guard(R) Security Protection System is
designed to move disruptive inmates out of an affected area without sending in
correctional officers who could be harmed or taken hostage. TG Guard(R)
accomplishes this with a strategic arrangement of chemical agent dispensers
installed in ceiling or elevated fixtures. The system is capable of eliminating
internal or external disturbances at correctional facilities and other high
risk, high security facilities. Additionally, we have been issued a patent on
the locking mechanism for our Mark VI defense spray unit.
6
In July 1998, in connection with the sale of our Law Enforcement Division, we
transferred our Mace(R) brand trademark and all related trademarks, and a patent
(No. 5,348,193) to our wholly-owned subsidiary, Mace Trademark Corp. The
purchaser of our Law Enforcement division received a 99 year license to use the
Mace(R) brand, certain other such trademarks and the patent in the Law
Enforcement Market only.
The Company is in the process of completing appropriate filings to expand the
Mace(R) trademark to cover the new Electronic Surveillance products.
GOVERNMENT REGULATION/ENVIRONMENTAL COMPLIANCE
Car and Truck Wash Segment. We are subject to various local, state, and
federal laws regulating the discharge of pollutants into the environment. We
believe that our operations are in compliance, in all material respects, with
applicable environmental laws and regulations. Compliance with these laws and
regulations is not expected to materially affect our competitive position. Three
major areas of regulation facing us are disposal of lubrication oil at our oil
change centers, the compliance with all underground storage tank laws in
connection with our gasoline sales, and the proper recycling and disposal of
water used in our car and truck washes. We use approved waste-oil haulers to
remove our oil and lubricant waste. Before acquiring a gasoline dispensing site,
we investigate it to verify that any underground storage tanks are in compliance
with all legal requirements. We recycle our waste water and, where we have
proper permits, it is disposed of into sewage drains. Approximately 70% of the
water used in the car wash is recycled at sites where a built-in reclaim system
exists.
Security Products Segment. The distribution, sale, ownership, and use
of consumer defense sprays are legal in some form in all 50 states and the
District of Columbia. However, in most states, sales to minors are prohibited
and in several states (MA, MI, NY, WI), sales of defense sprays are highly
regulated. Massachusetts allows the sale of defense sprays by licensed firearm
dealers only. Michigan does not allow the sale of chloroacetophenone (CN) sprays
but does allow certain pepper and CS tear gas sprays which we sell to our
Michigan customers. New York allows the sale of defense sprays but only by
licensed firearm dealers or licensed pharmacists. Wisconsin allows the sale of
pepper sprays, but they must be sold behind the counter or under glass. We have
been able to sell our defense sprays within the guidelines set by state
regulations. There can be no assurance, however, that broader, more severe
restrictions will not be enacted that would have an adverse impact on the
results of our Consumer Products Division. We believe we are in material
compliance with all federal, state, and local environmental laws that affect our
business.
RESEARCH AND DEVELOPMENT
Car and Truck Wash Segment. There are no research and development
expenditures within the Car and Truck Wash Segment.
Security Products Segment. We have an on-site laboratory at our Vermont
facility where research and development is conducted to maintain our reputation
in the defense spray industry. We are continually reviewing ideas and potential
licensing arrangements to expand our product lines. We spent approximately
$5,000 and $4,000 on research and development in 2003 and 2002, respectively.
Our Electronic Surveillance products have been developed by our staff in
Hollywood, Florida, working in conjunction with certain OEM manufacturers. We
have spent approximately $6,000 in developing the Electronic Surveillance
products in each of 2003 and 2002.
7
INSURANCE
We maintain various insurance coverages for our assets and operations. These
coverages include Property coverages including business interruption protection
for each location. We maintain commercial general liability coverage in the
amount of $1 million per occurrence and $2 million in the aggregate with an
umbrella policy which provides coverage up to $25 million. We also maintain
workers' compensation policies in every state in which we operate. Commencing
July 2002, as a result of increasing costs of the Company's insurance program,
including auto, general liability, and workers' compensation coverage, we are
insured through participation in a captive insurance program with other
unrelated business. The Company maintains excess coverage through
occurrence-based policies. With respect to our auto, general liability, and
workers' compensation policies, we are required to set aside an actuarial
determined amount of cash in a restricted "loss fund" account for the payment of
claims under the policies. We expect to fund these accounts annually as required
by the insurance company. Should funds deposited exceed claims incurred and
paid, unused deposited funds are returned to us with interest on the third
anniversary of the policy year-end. The captive insurance program is further
secured by a letter of credit in the amount of $525,000 at December 31, 2003.
The Company records a monthly expense for losses up to the reinsurance limit per
claim based on the Company's tracking of claims and the insurance company's
reporting of amounts paid on claims plus their estimate of reserves for possible
future payments. There can be no assurance that our insurance will provide
sufficient coverage in the event a claim is made against us, or that we will be
able to maintain in place such insurance at reasonable prices. An uninsured or
under insured claim against us of sufficient magnitude could have a material
adverse effect on our business and results of operations.
U.S. BASED BUSINESS
All of our car and truck wash businesses are conducted in the United States.
Approximately 4% or $246,000 and 6% or $150,000 of the 2003 and 2002 revenues,
respectively, from our Security Products Segment were derived from customers
outside of the United States. Our Electronic Surveillance products are
manufactured in Korea, China, and other foreign countries. We do not believe we
are currently subject to any material risks associated with any foreign
operations.
EMPLOYEES
As of March 5, 2004, we had approximately 1,630 employees, of which
approximately 1,576 were employed in the Car and Truck Wash Segment, 32 employed
in the Security Products Segment, 18 in corporate clerical and administrative
positions, and four in executive management. None of our employees is covered by
a collective bargaining agreement.
FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING STATEMENTS
This report includes forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended ("Forward-Looking Statements"). All statements
other than statements of historical fact included in this report are
Forward-Looking Statements. Although we believe that the expectations reflected
in such Forward-Looking Statements are reasonable, we can give no assurance that
such expectations will prove to 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.
Our business plan poses risks for us. Our business objectives include internally
developing our Electronic Surveillance Products Division and acquiring
additional car washes, if we can do so under advantageous terms. To date, we
have spent approximately $5.1 million in developing our Electronic Surveillance
Products Division including the acquisition costs of Micro-Tech and Vernex, the
purchase of our warehouse in Hollywood, Florida, and the cost of developing and
purchasing inventory for our branded product line. As part of our business plan
we may also develop or acquire additional car wash facilities. Our strategy
involves a number of risks, including:
8
i. risks associated with growth;
ii. risks associated with acquisitions and their integration into
our Company;
iii. risks associated with the recruitment and development of
management and operating personnel; and
iv. risks of not being able to sell the electronic surveillance
products in the quantities we have ordered from OEM
manufacturers.
If we are unable to manage one or more of these associated risks effectively, we
may not fully realize our business plan.
Risk related to borrowings. Our borrowings as of December 31, 2003 were
$31.3 million. Of the borrowings, $5.5 million is classified as current as it is
due in less than twelve months. Our business plan is dependent on refinancing
the debt as it becomes due. Several of our debt agreements, as amended, contain
certain affirmative and negative covenants and require the maintenance of
certain levels of tangible net worth and the maintenance of certain debt
coverage ratios on a consolidated level. At December 31, 2003, we were not in
compliance with our consolidated debt coverage ratio related to our GMAC notes
payable. With respect to the GMAC notes payable, the Company has received a
waiver of acceleration of the notes through January 1, 2005. Additionally, the
Company has entered into amendments to the Bank One term loan agreements as of
December 31, 2003. The Company is currently in compliance with these covenants
as amended. The Company initiated certain temporary and permanent cost savings
measures in March of 2003, including reductions in payroll expense and certain
operating costs to enable it to maintain compliance with the Bank One
consolidated debt coverage ratio. These savings through December 31, 2003
totaled approximately $425,000. Additional temporary and permanent cost saving
measures were intiated in March of 2004, including further reductions in payroll
expenses and certain operating costs, along with an increase in prices within
the Car and Truck Wash Segment to enable the Company to maintain compliance with
the Bank One consolidated debt coverage ratio. The amended debt coverage ratio
with Bank One requires the Company to maintain a consolidated earnings before
interest, taxes, depreciation and amortization ("EBITDA") to debt service
(collectively " the debt coverage ratio") of 1.1 to 1 at December 31, 2003 and
in the future. As of March 11, 2004, the preliminary operating results for the
quarter ended March 31, 2004 indicate that we should meet the Bank One required
debt coverage ratio as of March 31, 2004; however, we cannot provide assurance
that favorable operating trends will continue through March 31, 2004. If we
default on any of the Bank One covenants or the GMAC covenant in the future, the
Company will need to obtain further amendments or waivers from these lenders. If
the Company is unable to obtain waivers or amendments in the future, Bank One
debt totaling $14.9 million and GMAC debt totaling $11.6 million recorded as
long-term debt at December 31, 2003 would become due on demand.
The Company's ongoing ability to comply with its debt covenants under its credit
arrangements and refinance its debt depend largely on the achievement of
adequate levels of cash flow. Our cash flow has been and can continue to be
adversely affected by weather patterns and the economic climate. In the event
that non-compliance with the debt covenants should reoccur, the Company would
pursue various alternatives to successfully resolve the non-compliance, which
might include, among other things, seeking additional debt covenant waivers or
amendments, or refinancing debt with other financial institutions. Although the
Company believes that it would be successful in resolving potential
non-compliance with its debt covenants, or refinancing its current debt, there
can be no assurance that further debt covenant waivers or amendments would be
obtained or that the debt would be refinanced with other financial institutions
on favorable terms. If we are unable to obtain renewals of our loans or
refinancings on favorable terms, our ability to operate would be materially and
adversely affected.
Our operations are dependent substantially on the services of our
executive officers. If we lose one or more of our executive officers and do not
replace them with experienced personnel, the loss could have a material adverse
effect on our business and results of operations. We do not maintain key-man
life insurance policies on our executive officers. The primary terms of the
employment agreements of Robert M. Kramer, Gregory M. Krzemien, and Ronald R.
Pirollo expired on March 26, 2003. Louis D. Paolino, Jr. and the Company have
executed an employment agreement which has a term through August 12, 2006.
Messrs. Kramer and Krzemien are working on a month-to-month at-will basis. Mr.
Pirollo or the Company may terminate Mr. Pirollo's employment at any time. Mr.
Paolino is the Company's Chief Executive Officer; Mr. Kramer is the Company's
Chief Operating Officer, General Counsel and Secretary; Mr. Krzemien is the
Company's Chief Financial Officer and Treasurer; and Mr. Pirollo is the
Company's Chief Accounting Officer and Corporate Controller.
We have reported net losses. We have reported net losses and working
capital deficits, and we have expended substantial funds for acquisitions,
equipment, and new business development. With the adoption of Statement of
Financial Accounting Standards ("SFAS") 142, Goodwill and Other Intangible
Assets on January 1, 2002, we no longer amortize goodwill and certain intangible
assets determined to have indefinite useful lives. Additionally, SFAS 142
requires annual fair value based impairment tests of goodwill and other
intangible assets identified with indefinite useful lives. The Company cannot
guarantee that there will not be impairments in subsequent reporting periods
that will have a material impact on earnings and equity of the Company. (See
also Note 3, Change in Accounting Principle in the Notes to Consolidated
Financial Statements.)
9
We have a limited operating history regarding our Electronic
Surveillance Products Division. We recently expanded our line of security
products by adding the Electronic Surveillance Products Division. We are
incurring expenses to develop the new line of products without having
extensively tested the size or possible profitability of the market for such
products. There are numerous risks associated with the new Electronic
Surveillance Products Division that may prevent the Company from selling them
profitable, including, among others: risks associated with unanticipated
problems in the acquired companies; risks inherent with our management having
limited experience in electronic security device product; 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 planned entry into new markets and expansion of product lines in old
markets; and risks attendant to locating and maintaining reliable sources of OEM
products and component supplies in the electronic surveillance industry. We also
expect that there will be costs related to product returns and warranties and
customer support that we cannot quantify or accurately estimate until we have
more experience in operating the new business.
We may not be able to manage growth. If we succeed in growing, it will
place significant burdens on our management and on our operational and other
resources. We will need to attract, train, motivate, retain, and supervise our
senior managers and other employees. If we are unable to do this, we will not be
able to realize our business objectives.
Our car wash business may suffer under certain weather conditions.
Seasonal trends in some periods may affect our car wash business. In particular,
long periods of rain and cloudy weather can adversely affect our car wash
business as people typically do not wash their cars during such periods.
Additionally, extended periods of warm, dry weather may encourage customers to
wash their cars themselves which also can adversely affect our car wash
business.
We face significant competition. The extent and kind of competition
that we face varies. The car care industry is highly competitive. Competition is
based primarily on location, facilities, customer service, available services
and price. Because barriers to entry into the car care industry are relatively
low, competition may be expected to continually arise from new sources not
currently competing with us. We also face competition from outside the car care
industry, such as gas stations and convenience stores that offer automated car
wash services. In some cases, these competitors may have greater financial and
operating resources than do we. In our car wash business, we face competition
from a number of sources, including regional and national chains, gasoline
stations, gasoline companies, automotive companies and specialty stores, both
regional and national.
Consumer demand for our car wash services is unpredictable. Our
financial condition and results of operations will depend substantially on
continued consumer demand for car wash services. Our car wash business depends
on consumers choosing to employ professional services to wash their cars rather
than washing their cars themselves or not washing their cars at all. We cannot
give assurance that consumer demand for car wash services will increase in the
future, nor can we give assurance that consumer demand will maintain its current
level.
We must maintain our car wash equipment. Although we undertake to keep
our car washing equipment in proper operating condition, the operating
environment in car washes results in frequent mechanical problems. If we fail to
properly maintain the equipment, any car wash could become inoperable resulting
in a loss of revenue. Many of our car washes have older equipment which requires
frequent repair or replacement.
We must operate our locations safely. Our Consumer Products Division
and Car and Truck Wash Segment utilize harsh chemicals in their operations.
Though we train our personnel in safety, there is a risk of injury to our
employees.
We face risks associated with significant insurance claims. We maintain
various insurance coverages for our assets and operations. These coverages
include Property coverages including business interruption protection for each
location. We maintain commercial general liability coverage in the amount of $1
million per occurrence and $2 million in the aggregate with an umbrella policy
which provides coverage up to $25 million. We also maintain workers'
compensation policies in every state in which we operate. Commencing July 2002,
as a result of increasing costs of the Company's insurance program, including
auto, general liability, and workers' compensation coverage, we are insured
through participation in a captive insurance program with other unrelated
business. The Company maintains excess coverage through occurrence-based
policies. With respect to our auto, general liability, and workers' compensation
policies, we are required to set aside an actuarial determined amount of cash in
a restricted "loss fund" account for the payment of claims under the policies.
We expect to fund these accounts annually as required by the insurance company.
Should funds deposited exceed claims incurred and paid, unused deposited funds
are returned to us with interest on the third anniversary of the policy
year-end. The captive insurance program is further secured by a letter of credit
in the amount of $525,000 at December 31, 2003. If our loss experience is worse
than expected, our cash assessments to the captive may be increased in the
future. The Company records a monthly expense for losses up to the reinsurance
limit per claim based on the Company's tracking of claims and the insurance
company's reporting of amounts paid on claims plus their estimate of reserves
for possible future payments. There can be no assurance that our insurance will
provide sufficient coverage in the event a claim is made against us, or that we
will be able to maintain in place such insurance at reasonable prices. An
uninsured or under insured claim against us of sufficient magnitude could have a
material adverse effect on our business and results of operations.
10
Our car and truck wash operations face governmental regulations. We are
governed by federal, state and local laws and regulations, including
environmental regulations, that regulate the operation of our car wash centers
and other car care services businesses. Other car care services, such as
gasoline and lubrication, use a number of oil derivatives and other regulated
hazardous substances. As a result, we are governed by environmental laws and
regulations dealing with, among other things:
i. transportation, storage, presence, use, disposal, and
handling of hazardous materials and wastes;
ii. discharge of storm water; and
iii. underground storage tanks.
If uncontrolled hazardous substances were found on our property, including
leased property, or if we were found to be in violation of applicable laws and
regulations, we could be responsible for clean-up costs, property damage, and
fines, or other penalties, any one of which could have a material adverse effect
on our financial condition and results of operations.
We face risks associated with our consumer safety products. We face
claims of injury allegedly resulting from our defense sprays. For example, we
are aware of allegations that defense sprays used by law enforcement personnel
resulted in deaths of prisoners and of suspects in custody. In the event a
lawsuit is brought against us, we cannot give assurance that our insurance
coverage will be sufficient to cover any judgments won. If our insurance
coverage is exceeded, we will have to pay the excess liability directly.
Listing on the Nasdaq National Market. Our common stock is listed on
the Nasdaq National Market with a bid price of $2.11 at the close of the market
on March 10, 2004. If the price of our common stock falls below $1.00 and for 30
consecutive days remains below $1.00, we are subject to being delisted from the
Nasdaq National Market. Upon delisting from the Nasdaq National Market, our
stock would be traded on the Nasdaq SmallCap Market until we maintain a minimum
bid price of $1.00 for 30 consecutive days at which time we can regain listing
on the Nasdaq National Market. If our stock fails to maintain a minimum bid
price of one dollar for 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"). OTC companies may have limited product lines,
markets or financial resources. Many OTC stocks trade less frequently and in
smaller volumes than Nasdaq-Listed Stocks. The values of these stocks may be
more volatile than Nasdaq-Listed Stocks. If our stock is traded in the OTC
market and a market maker sponsors us, we may have the price of our stock
electronically displayed on the OTC Bulletin Board, or OTCBB. However, if we
lack sufficient market maker support for display on the OTCBB, we must have our
price published by the National Quotations Bureau LLP in a paper publication
known as the "Pink Sheets." The marketability of our stock will be even more
limited if our price must be published on the "Pink Sheets."
On October 2, 2002, Nasdaq advised us that our common stock failed to maintain a
minimum bid price of $1.00 over the prior 30 consecutive trading days as
required by the Nasdaq National Market under its Marketplace Rules. Nasdaq
advised us that we had 90 days to maintain a bid price of at least $1.00 for 10
consecutive business days or we would be delisted. The Company maintained a
minimum bid price of at least $1.00 for 10 consecutive business days ending
December 24, 2002, in part by completing a one-for-two reverse stock split on
December 17, 2002. On December 30, 2002, Nasdaq advised us that we are in
compliance with Market Place Rule 4450(a)(5) and are not subject to being
delisted.
11
Our stock price is volatile. Our common stock's market price has been
volatile. Factors like fluctuations in our quarterly revenues and operating
results, our acquisition program, market conditions, and economic conditions
generally may impact significantly our common stock's market price. In addition,
if we make an acquisition, we may agree to issue common stock that will become
available for resale and may have an impact on our common stock's market price.
Our preferred stock may affect the rights of the holders of our common
stock; it may also discourage another entity from acquiring control of Mace. Our
Certificate of Incorporation authorizes the issuance of up to 10 million shares
of preferred stock. No shares of preferred stock are currently outstanding. It
is not possible to state the precise effect of preferred stock upon the rights
of the holders of our common stock until the Board of Directors determines the
respective preferences, limitations and relative rights of the holders of one or
more series or classes of the preferred stock. However, such effect might
include: (i) reduction of the amount otherwise available for payment of
dividends on common stock, to the extent dividends are payable on any issued
shares of preferred stock, and restrictions on dividends on common stock if
dividends on the preferred stock are in arrears, (ii) dilution of the voting
power of the common stock to the extent that the preferred stock has voting
rights, and (iii) the holders of common stock not being entitled to share in our
assets upon liquidation until satisfaction of any liquidation preference granted
to the preferred stock.
The preferred stock may be viewed as having the effect of discouraging an
unsolicited attempt by another entity to acquire control of us and may therefore
have an anti-takeover effect. Issuances of authorized preferred stock can be
implemented, and have been implemented by some companies in recent years with
voting or conversion privileges intended to make an acquisition of a company
more difficult or costly. Such an issuance could discourage or limit the
stockholders' participation in certain types of transactions that might be
proposed (such as a tender offer), whether or not such transactions were favored
by the majority of the stockholders, and could enhance the ability of officers
and directors to retain their positions.
Some provisions of Delaware law may prevent us from being acquired. We
are governed by Section 203 of the Delaware General Corporation Law, which
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an entity who is an "interested stockholder" for a period of
three years, unless approved in a prescribed manner. This provision of Delaware
law may affect our ability to merge with, or to engage in other similar
activities with, some other companies. This means that we may be a less
attractive target to a potential acquirer who otherwise may be willing to pay a
price for our common stock above its market price.
We do not expect to pay cash dividends on our common stock. We do not
expect to pay cash dividends on our common stock in the foreseeable future. We
will reinvest in our business any cash otherwise available for dividends.
There are additional risks set forth in the incorporated documents. In
addition to the risk factors set forth above, you should review the financial
statements and exhibits incorporated into this report. Such documents may
contain, in certain instances and from time to time, additional and supplemental
information relating to the risks set forth above and/or additional risks to be
considered by you, including, without limitation, information relating to losses
experienced by us in certain historical periods, working capital deficits at
particular dates, information relating to pending and recently completed
acquisitions, descriptions of new or changed federal or state regulations
applicable to Mace, data relating to remediation and the actions taken by Mace,
and estimates at various times of Mace's potential liabilities for compliance
with environmental laws or in connection with pending litigation.
ITEM 2. DESCRIPTION OF PROPERTIES
Our corporate headquarters is located in Mount Laurel, New Jersey. We rent
approximately 10,000 square feet of space at a current annual cost of
approximately $216,000.
Car and Truck Wash Properties. Our principal fixed assets are our car
wash facilities used for performing car care services which are described under
Item 1. Lines of Business. The 51 car wash facilities operated by us as of
December 31, 2003 are situated on sites we own or lease. We own 41 and lease 10
of our car wash facilities. The locations of our car washes and the services
offered at the locations are set forth in summary fashion in the chart below.
Type of Number of
Locations (1) Car Wash (2) Facilities
------------ ------------ ----------
Philadelphia, Pennsylvania Full Service 3
Area Exterior Washes 3
Southern New Jersey Area Full Service 1
12
Exterior Washes 5
Smyrna, Delaware Exterior Wash 1
Phoenix, Arizona Area Full Service 13
Dallas, Texas Area Full Service 8
Self Serve 1
/Lube
Austin, Texas Full Service 3
Lubbock, Texas Full Service 3
Sarasota, Florida Area Full Service 6
San Antonio, Texas Full Service 4
(1) The majority of our locations are owned except for the following number of
locations which are leased:
(1) Philadelphia, Pennsylvania (3)
(2) Smyrna, Delaware (1)
(3) Phoenix, Arizona Area (4)
(4) Dallas, Texas Area (2)
(2) Several locations also offer other consumer products and related car care
services, such as professional detailing services (offered at 41
locations), oil and lubrication services (offered at 10 locations),
gasoline dispensing services (offered at 19 locations), state inspection
services (offered at seven locations), convenience store sales (offered at
one location) and merchandise store sales (offered at 41 locations).
We own real estate, buildings, equipment, and other properties that we employ in
substantially all of our car washes. We expect to make substantial investments
in additional equipment and property for expansion, replacement of assets, and
in connection with future acquisitions.
Many of our car washes are encumbered by first mortgage loans. Of the 51 car
washes owned or leased by us at December 31, 2003, 26 properties secured first
mortgage loans totaling $29.9 million and 25 were not encumbered.
We also own and operate five truck wash facilities. We own the buildings and
equipment at each of our truck washes, and lease the land for all of our truck
wash facilities except for the Amarillo, Texas land which we own and which is
encumbered by debt of $313,000 at December 31, 2003.
Security Products Segment Properties. The operations of our Consumer
Products Division, including administration and sales, and all of its production
facilities are located in Bennington, Vermont. Commencing May 1, 2002, we leased
approximately 44,000 square feet of space in a building from Vermont Mill
Properties, Inc. ("Vermont Mill") at an annual cost of $110,000. Vermont Mill is
controlled by Jon E. Goodrich, a director of the Company through December, 2003
and President of Mark Sport. The operations of our recently acquired Electronic
Surveillance Products Division are located in Hollywood, Florida. In November
2002, we purchased a 6,700 square foot building consisting of inventory
warehouse space and future office space for administrative and sales functions.
In October 2003, we purchased an additional 3,750 square feet of warehouse and
office space adjacent to the 6,700 square foot facility. The Hollywood, Florida
facility is secured by a first mortgage loan in the amount of $714,000 at
December 31, 2003. Prior to purchasing the Hollywood, Florida facility, we
rented 1,000 square feet of space at a rate of approximately $1,400 per month.
ITEM 3. LEGAL PROCEEDINGS
In December 1999, the Company was named as a defendant in a suit filed in the
Supreme Court of the State of New York by Janeen Johnson et. al. The litigation
concerns a claim that a self-defense spray manufactured by the Company and used
by a law enforcement officer contributed to the suffering and death of
Christopher Johnson. The Company forwarded the suit to its insurance carrier for
defense. The Company does not anticipate that this claim will result in the
payment of damages in excess of the Company's insurance coverage.
13
In 2000, the Company was named as a defendant in a suit filed in the United
States District Court for the District of Colorado by Robert Rifkin. The suit
alleges that the Company and its transfer agent delayed in the removal of a
restrictive legend from certain shares of Company common stock owned by the
plaintiff, and that the delay caused the plaintiff to incur a loss in excess of
$335,000. Though the outcome of litigation is always uncertain, the Company
believes that there was no delay in the removal of the legend from the shares.
In July 2001, the Company filed a lawsuit in the Supreme Court of New York
County of the State of New York against LTV Networks, Inc. ("LTV") to collect
upon a promissory note in the amount of $100,000. In January 2002, defendant LTV
filed an answer to the suit denying liability under the promissory note and
making counterclaims. The counterclaims allege that the Company had agreed to
lend LTV $500,000 and that LTV has been damaged in the amount of $10 million
because the Company only lent $100,000 to LTV. The Company has filed a summary
judgment motion which requests a judgment on the promissory note and a dismissal
of the defendant's counterclaims. On August 29, 2003, LTV filed a Voluntary
Petition for Chapter 11 Reorganization in the United States Bankruptcy Court,
Southern District of New York (the "Petition"). The Petition had the effect of
operating as a stay on the State Court proceedings. The Bankruptcy Court lifted
the stay in the first quarter of 2004, enabling the Company to proceed with its
summary judgment motion. Though the outcome of litigation is always uncertain,
the Company currently believes that the counterclaims are without merit and
intends to assert its claims in the Bankruptcy proceedings.
In October 2001, the Company was named as an additional party defendant in a
suit filed by Alan Berndt and Martha Berndt in the United States District Court
for the Northern District of California. The litigation alleges the Company was
responsible for personal injuries arising out of Mr. Berndt's use of a Gas
Launcher. This suit has been settled within the limits of our insurance
coverage.
In May 2002, the Company was named as one of three defendants in a suit filed by
Timothy Gamradt and Carla Gamradt in the United States District Court for the
District of Minnesota. The litigation alleges that the plaintiffs are entitled
to damages against the Company due to injuries allegedly sustained by Mr.
Gamradt when a pyrotechnic smoke device known as the "Black Smoke Device" was
discharged by Mr. Gamradt's superior during a training exercise at a federal
prison facility at which Mr. Gamradt was employed as a guard. Mr. Gamradt
alleges that when the device was activated, he suffered injuries to his lungs.
We have forwarded the suit to our insurance carrier for defense. We do not
anticipate that this claim will result in the payment of damages in excess of
our insurance coverage.
In July 2002, the Company and its former president, Jon Goodrich, were named as
defendants in a lawsuit in the Supreme Court of New York County of the State of
New York filed by Armor Holdings, et al. The suit alleges that the Company and
Mr. Goodrich had violated the non-compete terms of various agreements entered
into in April 1998, which transferred certain of the Company's then lines of
business to the plaintiffs. The suit also alleges that the Company violated a
right of first refusal on sale granted to plaintiffs when the Company entered
into a Management Agreement with Mark Sport to operate the Company's Consumer
Products Division. The lawsuit requests $15 million in damages. Though the
outcome of litigation is always uncertain, the Company believes that all of the
claims are without merit.
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 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.
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 Mace's public announcement of the transactions. The transactions were
announced by Mace on March 29, 1999 and were consummated in July of 1999. The
subpoena also requested documents relating to Mace's dealings with two
investment banking firms and certain of their employees. Mace intends to fully
cooperate with the United States Securities and Exchange Commission's
investigation.
14
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Stockholders of Mace Security International, Inc. was
held on December 19, 2003. The following proposals were submitted to a vote:
(i) to approve an amendment of the Mace Amended and Restated Certificate of
Incorporation to implement staggered director terms;
(ii) to approve for election of two Directors; for (a) one year term, if
proposal (i) is not approved or (b) staggered terms by class of Directors;
(iii) to approve an amendment of the Mace Amended and Restated Certificate of
Incorporation to provide for the filling of any vacancies or new positions
on the Board of Directors by a majority of the remaining directors;
(iv) to approve an amendment of the Mace Amended and Restated Certificate of
Incorporation to provide procedures that stockholders must follow in order
to nominate directors;
(v) to approve an amendment of the Mace Amended and Restated Certificate of
Incorporation to provide that the amendment, repeal or adoption of any
provision inconsistent with Proposals (i),(iii),(iv) or (v) only occur on
the affirmative vote of at least two-thirds (2/3) of the outstanding shares
of the common stock;
(vi) to approve an amendment of the Mace Amended and Restated Certificate of
Incorporation to decrease authorized shares;
(vii) to approve an amendment of the Mace Amended and Restated Certificate of
Incorporation to provide notice of stockholder proposals; and
(viii) to ratify the Board's appointment of Grant Thornton LLP as Mace's
independent auditors for fiscal year 2003.
Proposals (ii) and (viii) were adopted by the shareholders. The voting was as
follows:
Directors: Votes For Votes Against Abstentions Broker Non-Votes
Louis D. Paolino, Jr. 7,716,277 3,709,522 - -
Mark S. Alsentzer 7,653,627 3,772,172 - -
Matthew J. Paolino 7,716,277 3,709,522 - -
Constantine N. Papadakis, Ph.D 7,716,327 3,709,472 - -
Burton Segal 7,688,477 3,737,322 - -
15
Approve and adopt the amendment
of the Mace Amended and Restated
Certificate of Incorporation to
implement staggered director terms 3,807,869 4,226,650 1,525 3,389,755
Approve and adopt the amendment of the
Mace Amended and Restated Certificate of
Incorporation to provide for the filling
of any vacancies or new positions on
the Board of Directors by a majority
of the remaining directors 3,719,006 4,314,913 2,125 3,389,755
Approve and adopt the amendment of the
Mace Amended and Restated Certificate of
Incorporation to provide procedures that
stockholders must follow in order to
nominate directors 3,774,670 4,220,025 41,349 3,389,755
Approve and adopt the amendment of the
Mace Amended and Restated Certificate of
Incorporation to provide that the
amendment, repeal or adoption of any
provision inconsistent with Proposal
(i),(iii),(iv) or (v) only occur on the
affirmative vote of at least two-thirds
(2/3) of the outstanding shares of the
common stock 3,775,895 4,258,174 1,975 3,389,755
Approve and adopt amendment of the
Mace Amended and Restated
Certificate of Incorporation
to decrease authorized shares 5,243,578 2,790,841 1,625 3,389,755
Approve and adopt amendment of the
Mace Amended and Restated
Certificate of Incorporation to provide
notice of the stockholder proposals 3,812,219 4,222,150 1,675 3,389,755
Ratify appointment of Grant
Thornton LLP 9,088,357 2,334,917 2,525 -
16
Executive Officers of the Registrant
The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K:
There are no family relationships between any of the executive officers of the
Company. The following table sets forth information regarding of our executive
officers.
Name Age Position
Louis D. Paolino, Jr............................. 47 Chairman of the Board, President, and Chief
Executive Officer
Robert M. Kramer................................. 51 Executive Vice President, Chief Operating Officer,
General Counsel, and Secretary
Gregory M. Krzemien.............................. 44 Chief Financial Officer and Treasurer
Ronald R. Pirollo................................ 45 Chief Accounting Officer and Corporate Controller
Louis D. Paolino, Jr. has served as the Chairman of the Board, President and
Chief Executive Officer of the Company since May 1999. From June 1996 through
December 1998, Mr. Paolino served as Chairman of the Board, President and Chief
Executive Officer of Eastern Environmental Services, Inc. Prior thereto, he was
President of Soil Remediation of Philadelphia, Inc., a company engaged in the
business of treating contaminated soil. From September 1993 to June 1996, Mr.
Paolino served as a Vice President of USA Waste Services, Inc. From November
1995 to January 1996, Mr. Paolino served on the Board of Directors of Metal
Management, Inc., formerly known as General Parametrics Corp., a publicly traded
company. Mr. Paolino received a B.S. in Civil Engineering from Drexel
University. Mr. Paolino is 47 years old.
Robert M. Kramer has served as Executive Vice President, General Counsel, and
Secretary of the Company since May 1999, and as Chief Operating Officer since
July 2000. Mr. Kramer also served as a director of the company from May 1999 to
December 2003. From June 1996 through December 1998, he served as General
Counsel, Executive Vice President and Secretary of Eastern Environmental
Services, Inc. Mr. Kramer is an attorney and has practiced law since 1979 with
various firms, including Blank Rome Comisky & McCauley, Philadelphia,
Pennsylvania, and Arent Fox Kitner Poltkin & Kahn, Washington, D.C. From 1989 to
December 2000, Mr. Kramer had been the sole partner of Robert M. Kramer &
Associates, P.C., a law firm which consisted of three lawyers. From December
1989 to December 1997, Mr. Kramer served on the Board of Directors of American
Capital Corporation, a registered securities broker dealer. Mr. Kramer received
B.S. and J.D. degrees from Temple University. Mr. Kramer is 51 years old.
Gregory M. Krzemien has served as the Chief Financial Officer and Treasurer of
the Company since May 1999. From August 1992 through December 1998, he served as
Chief Financial Officer and Treasurer of Eastern Environmental Services, Inc.
From October 1988 to August 1992, Mr. Krzemien was a senior audit manager with
Ernst & Young LLP. Mr. Krzemien received a B.S. degree in Accounting from the
Pennsylvania State University and is a certified public accountant. Mr. Krzemien
is 44 years old.
Ronald R. Pirollo has served as Chief Accounting Officer and Corporate
Controller of the Company since May 1999. Mr. Pirollo served as Vice President
and Corporate Controller of Eastern Environmental Services, Inc. from July 1997
to June 1999. Prior thereto, Mr. Pirollo was with Envirite Corporation for ten
years, where he served in various financial management positions including Vice
President - Finance. Mr. Pirollo received a B.S. degree in Accounting and an MBA
from Villanova University. Mr. Pirollo is 45 years old.
17
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Price and Dividends of the Registrant's Common Equity
Our common stock is traded in the over-the-counter market and quoted on the
Nasdaq National Market under the trading symbol "MACE". Common stock price
reflects inter-dealer quotations, does not include retail markups, markdowns or
commissions and does not necessarily represent actual transactions.
The following table sets forth, for the quarters indicated, the high and low
sale prices per share for our common stock, as reported by Nasdaq.
On December 17, 2002, we effected a one-for-two reverse stock split. All
information in the table below preceding the reverse split has been restated for
the reverse split.
HIGH LOW
Year Ended December 31, 2002
First Quarter........... $2.88 $1.26
Second Quarter.......... 2.58 1.82
Third Quarter........... 2.18 1.50
Fourth Quarter.......... 3.00 1.00
Year Ended December 31, 2003
First Quarter........... $2.04 $0.88
Second Quarter.......... 1.73 1.02
Third Quarter........... 2.06 1.25
Fourth Quarter.......... 2.62 1.55
Year Ended December 31, 2004
First Quarter........... $2.29 $1.81
(through March 10, 2004)
The closing price for our common stock on March 10, 2004 was $2.11. For purposes
of calculating the aggregate market value of our shares of common stock held by
non-affiliates, as shown on the cover page of this report, it has been assumed
that all the outstanding shares were held by non-affiliates except for the
shares held by our directors and executive officers and stockholders owning 10%
or more of our outstanding shares. However, this should not be deemed to
constitute an admission that all such persons are, in fact, non-affiliates of
the Company, or that there are not other persons who may be deemed to be
affiliates of the Company. For further information concerning ownership of our
securities by executive officers, directors and principal stockholders, see Item
12, Security Ownership of Certain
Beneficial Owners and Management.
As of March 10, 2004, we had 192 stockholders of record and approximately 1,342
beneficial owners of our common stock. We do not anticipate paying any cash
dividends in the foreseeable future and intend to retain all working capital and
earnings, if any, for use in our operations and in the expansion of our
business. Any future determination with respect to the payment of dividends will
be at the discretion of our Board of Directors and will depend upon, among other
things, our results of operations, financial condition and capital requirements,
the terms of any then existing indebtedness, general business conditions, and
such other factors as our Board of Directors deems relevant. Certain of our
credit facilities prohibit or limit the payment of cash dividends without prior
bank approval.
Equity Compensation Plan Information
See the information contained under the heading "Equity Compensation Plan
Information" within Item 11 of this Form 10-K regarding shares authorized for
issuance under equity compensation plans approved by stockholders and not
approved by stockholders.
(b) Recent Sales of Unregistered Securities
None.
18
ITEM 6. SELECTED FINANCIAL DATA
The information below was derived from our Consolidated Financial Statements
included in this report and in reports we have previously filed with the SEC.
This information should be read together with those financial statements and the
Notes to the Consolidated Financial Statements. For more information regarding
this financial data, see the Management's Discussion and Analysis of Financial
Condition and Results of Operations section also included in this report.
Statement of Operations Data: Year ended December 31,
-------------------------------------------------------------------
2003 2002 2001 2000 1999
==== ==== ==== ==== ====
(In thousands, except share information)
Revenues:
Car wash and detailing services $ 35,655 $ 36,696 $ 39,859 $ 37,812 $ 17,073
Lube and other automotive services 4,147 4,219 4,487 4,869 2,693
Fuel and merchandise sales 3,613 3,217 3,638 5,061 2,092
Security products sales 5,581 2,498 - - 3,435
Operating agreements - 80 240 261 463
------ ------ ------ ------ ------
48,996 46,710 48,224 48,003 25,756
Cost of revenues:
Car wash and detailing services 25,983 25,674 27,417 26,856 11,137
Lube and other automotive services 3,188 3,301 3,446 3,789 1,992
Fuel and merchandise sales 3,156 2,802 3,234 4,472 1,708
Security products sales 3,485 1,523 - - 1,818
------ ------ ------ ------ ------
35,812 33,300 34,097 35,117 16,655
Selling, general and administrative expenses 9,486 8,432 7,366 7,303 5,753
Depreciation and amortization 1,958 1,953 2,813 2,467 1,096
Costs of terminated acquisitions - 57 135 580 -
Merger costs - - - - 1,875
Restructuring, asset impairment and change in control
charges 3,798 1,165 - 138 1,519
------ ------ ------ ------ ------
Operating (loss) income (2,058) 1,803 3,813 2,398 (1,142)
Interest expense, net (1,963) (2,219) (2,885) (3,013) (1,033)
Other income 438 327 514 408 205
(Loss) income from continuing operations before income ------ ------ ------ ------ ------
taxes (3,583) (89) 1,442 (207) (1,970)
Income tax (benefit) expense (50) (32) 534 (66) (619)
------ ------ ------ ------ ------
(Loss) income from continuing operations (3,533) (57) 908 (141) (1,351)
Discontinued Operations:
(Loss) gain from discontinued operations, net of
applicable income taxes - - - (265) 91
Gain on disposal of ICS, net of applicable income tax - - - 724 -
expense ------ ------ ------ ------ ------
(Loss) income before cumulative effect of change in
accounting principle (3,533) (57) 908 318 (1,260)
Cumulative effect of change in accounting principle,
net of tax benefit of $2,188 - (5,733) - - -
------ ------ ------ ------ ------
Net (loss) income $ (3,533) $ (5,790) $ 908 $ 318 $ (1,260)
============ ============ ============ ============ ============
Basic (loss) income per share
From continuing operations $ (0.28) $ - $ 0.07 $ (0.01) $ (0.20)
From discontinued operations - - - 0.04 0.01
(Loss) income before cumulative effect of change in (0.28) - 0.07 0.03 (0.19)
accounting principle
Cumulative effect of change in accounting principle - (0.46) - - -
------ ------ ------ ------ ------
Net (loss) income $ (0.28) $ (0.46) $ 0.07 $ 0.03 $ (0.19)
============ ============ ============ ============ ============
Weighted average number of shares outstanding 12,414,816 12,630,964 12,724,282 12,238,421 6,579,577
============ ============ ============ ============ ============
Diluted (loss) income per share
From continuing operations $ (0.28) $ - $ 0.07 $ (0.01) $ (0.20)
From discontinued operations - - - 0.04 0.01
(Loss) income before cumulative effect of change in ------ ------ ------ ------ ------
accounting principle (0.28) - 0.07 0.03 (0.19)
Cumulative effect of change in accounting principle - (0.46) - - -
------ ------ ------ ------ ------
Net (loss) income $ (0.28) $ (0.46) $ 0.07 $ 0.03 $ (0.19)
============ ============ ============ ============ ============
------ ------ ------ ------ ------
Weighted average number of shares outstanding 12,414,816 12,630,964 12,742,122 12,238,421 6,579,577
============ ============ ============ ============ ============
20
Year ended December 31,
2003 2002 2001 2000 1999
(In thousands)
Balance Sheet Data (at end of period):
Working capital (deficit) $ 270 $ (2,210) $ 4,809 $ (1,003) $ (1,403)
Intangible assets, net $11,614 $ 14,389 $ 21,132 $ 22,024 $ 21,752
Total assets $90,602 $ 96,288 $ 104,670 $ 106,131 $ 98,115
Long-term debt, including current maturities $31,286 $ 33,312 $ 34,349 $ 36,685 $ 32,784
Stockholders' equity $54,212 $ 57,669 $ 63,856 $ 62,877 $ 56,568
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion reviews our operations for each of the three years in
the period ended December 31, 2003, and should be read in conjunction with our
Consolidated Financial Statements and related notes thereto included elsewhere
herein.
The following discussion includes Forward-Looking Statements. The accuracy of
such statements depends upon a variety of factors that may affect our business
and operations. Certain of these factors are discussed under Description of
Business -- Factors Influencing Future Results and Accuracy of Forward-Looking
Statements included in Item 1 of this report.
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. 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 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 are included in revenues and cost of goods sold.
21
Costs of Terminated Acquisitions
Our policy is to charge as an expense any previously capitalized expenditures
relating to proposed acquisitions that in management's current opinion will not
be consummated.
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 certificates 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. We evaluate the carrying value of
long-lived assets for potential impairment on a reporting unit basis using
undiscounted after-tax estimated cash flows or on an individual asset basis if
the asset is held for sale. See Note 17 of the Notes to Consolidated Financial
Statements for information regarding impairment charges incurred with respect to
one full service car wash site in our Texas region and two car wash sites in our
Arizona region.
Goodwill
Prior to 2002, goodwill was amortized on a straight-line basis over 25 years.
On January 1, 2002, the Company adopted SFAS 142, Goodwill and Other Intangible
Assets, and as required, discontinued amortization of goodwill acquired prior to
July 1, 2001. Additionally, SFAS 142 required that, within six months of
adoption, the first phase of the goodwill transitional impairment testing be
completed at the reporting unit level as of the date of adoption. SFAS 142
requires that any goodwill impairment loss recognized as a result of initial
application be reported in the first interim period of adoption as a change in
accounting principle and that the income per share effects of the accounting
change be separately disclosed. The transitional impairment testing was
completed during the third quarter of 2002 and as of January 1, 2002 (See Note 3
of the Notes to Consolidated Financial Statements).
In accordance with SFAS 142, the Company also 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. Significant
estimates and assumptions are used in assessing the fair value of the reporting
units and determining impairment to goodwill (See Note 3 of the Notes to
Consolidated Financial Statements). The Company cannot guarantee that there will
not be impairments in subsequent years.
Other Intangible Assets
Other intangible assets consist primarily of deferred financing costs,
trademarks, and establishing a registered national brand name. Prior to 2002,
our trademarks and brand name were amortized on a straight line basis over 15
years. In accordance with SFAS 142, Goodwill and Other Intangible Assets, our
trademarks and brand name are considered to have indefinite lives, and as such,
are no longer subject to amortization. These assets will be tested for
impairment annually and whenever there is an impairment indicator. Deferred
financing costs are amortized on a straight-line basis over the terms of the
respective debt instruments. Customer lists and non-compete agreements are
amortized on a straight-line basis over their respective estimated useful lives.
Income Taxes
Deferred income taxes are determined based on the difference between the
financial accounting and tax bases of assets and liabilities. Deferred income
tax expense (benefit) represents the change during the period in the deferred
income tax assets and deferred income tax liabilities. Deferred tax assets
include tax loss and credit carryforwards and are reduced by a valuation
allowance if, based on available evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
22
Introduction
Revenues
Car and Truck Wash Services
We own full service, exterior only and self-service car wash operations 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 2003
for the Car and Truck Wash Segment were comprised of approximately 82% car wash
and detailing, 10% lube and other automotive services, and 8% fuel and
merchandise.
The majority of revenues are collected in the form of cash or credit card
receipts, thus minimizing customer accounts receivable.
Weather can have and has had a significant impact on volume at the individual
locations. We believe that the geographic diversity of our operating locations
mitigates the risk of adverse weather-related influence on our volume.
Security Products
During 2001, and for the first four months of 2002, the Company was paid $20,000
per month under a Management Agreement pursuant to which Mark Sport, an entity
controlled by Jon E. Goodrich, a director of the Company through December, 2003,
operated the Security Products Segment. Effective May 1, 2002, the Management
Agreement expired and the Company recommenced operation of the Security Products
Segment. Prior to the acquisition of the assets and operations of Micro-Tech,
the Company operated its Security Products Segment solely as the Consumer
Products Division. The Company's Consumer Products operations manufacture and
market personal safety, and home and auto security products which are sold
through retail stores, major discount stores, domestic and international
distributors, and at the Company's car care facilities.
With the acquisition on August 12, 2002 of certain of the assets and operations
of Micro-Tech, a manufacturer and retailer of electronic security and
surveillance devices, the Company added an additional division, the Electronic
Surveillance Products Division, to its Security Products Segment. The Company
has added security cameras, closed-circuit monitors, digital video recording
devices and related electronic security components to its line of well-known
personal security products. The Company is purchasing these items for resale
from OEM manufacturers.
Cost of Revenues
Car and Truck Wash Services
Cost of revenues consists primarily of direct labor and related taxes and
benefits, certain insurance costs, chemicals, wash and detailing supplies, rent,
real estate taxes, utilities, car damages, maintenance and repairs of equipment
and facilities, as well as the cost of the fuel and merchandise sold.
Security Products
During 2001, and for the first four months of 2002, the Security Products
Segment was operated under a Management Agreement by Mark Sport. Accordingly,
during that time, no costs were incurred by the Company. 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 electronic security surveillance product business have been minimal in that
the majority of customer product warranty claims are reimbursed by the
manufacturer.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of management,
clerical and administrative salaries, professional services, insurance premiums,
sales commissions, and costs relating to marketing and sales.
We capitalize direct incremental costs associated with acquisitions. Indirect
acquisition costs, such as executive salaries, corporate overhead, public
relations, and other corporate services and overhead are expensed as incurred.
The Company also charges as an expense any capitalized expenditures relating to
proposed acquisitions that will not be consumated.
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. In 2001,
goodwill was amortized using the straight-line method over 25 years. With the
adoption of SFAS 142 on January 1, 2002, we no longer amortize goodwill and
certain intangible assets, namely trademarks and service marks, determined to
have indefinite useful lives, thereby eliminating approximately $900,000 in
annual amortization expense.
Costs of Terminated Acquisitions
Our policy is to charge as an expense any previously capitalized expenditures
relating to proposed acquisitions that in our current opinion will not be
consummated. At December 31, 2003, there were no costs related directly to
proposed acquisitions that were not yet consummated. We periodically review the
future likelihood of these acquisitions and record appropriate provisions
against capitalized costs associated with projects that are not likely to be
completed.
Goodwill and Asset Impairment Charges
In accordance with SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we periodically review the carrying value of our long-lived
assets held and used, and assets to be disposed of, for possible impairment when
events and circumstances warrant such a review. During the year ended December
31, 2002, we wrote down assets determined to be impaired by approximately $1.2
million. The asset write-down related to one of our full service car wash sites
in Texas and two full service car wash sites in Arizona. We have determined that
due to poor demographics and increased competition in the geographic areas of
these sites, their future expected cash flows will not be sufficient to recover
their respective carrying values. During the quarter ended June 30, 2003, we
further wrote down the assets related to one of the full service car wash sites
in Arizona which we partially wrote down at December 31, 2002, by an additional
$351,000. The additional write-down was the result of the impending loss of a
significant customer of this site resulting in an additional reduction of the
future expected cash flows of this site and the ability to recover the site's
carrying value. The Company closed the facility effective September 30, 2003. We
continue to market the remaining two sites for sale and have written down these
two assets to their estimated fair market values.
In the fourth quarter of 2003, as a result of the annual impairment test of
Goodwill and Other Intangibles in accordance with SFAS 142, we recorded an
impairment of approximately $3.4 million related to our Northeast region
reporting unit of our Car and Truck Wash Segment. This was principally due to a
reduction in future projected cash flows resulting from extended departures from
our historic revenue levels as a result of inclement weather and a slower
economy.
Other Income
Other income consists largely of rental income received from renting out excess
space at our car wash facilities, along with gains and losses on the sale of
property and equipment.
Income Taxes
Income tax (benefit) expense reflects the recording of income taxes on (loss)
income before cumulative effect of a change in accounting principle at effective
rates of approximately 1%, 36% and 37% for the years ended December 31, 2003,
2002, and 2001, respectively. In 2003, no income tax benefit was recorded for
the Northeast region reporting unit impairment of approximately $3.4 million due
to the non-deductibility of the related goodwill.
In 2002, the income tax benefit related to the cumulative effect of change in
accounting principle was recorded at an effective tax rate of 36% for the
impairments in the Arizona and Truck Wash reporting units. No income tax benefit
was recorded for the Northeast region reporting unit's impairment due to the
non-deductibility of the goodwill. The effective rate differs from the federal
statutory rate for each year primarily due to state and local income taxes,
non-deductible costs related to intangibles, fixed asset adjustments, and
changes to the valuation allowance.
24
Results of Operations for Each of the Three Years in the Period Ended December
31, 2003
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues:
Year ended December 31,
-----------------------
2003 2002 2001
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Cost of revenues 73.1 71.3 70.7
Selling, general and administrative expenses 19.4 18.0 15.3
Depreciation and amortization 4.0 4.2 5.8
Costs of terminated acquisitions - 0.1 0.3
Goodwill and asset impairment charges 7.7 2.5 -
------ ------ ------
Operating (loss) income (4.2) 3.9 7.9
Interest expense, net (4.0) (4.8) (6.0)
Other income 0.9 0.7 1.1
------ ------ ------
(Loss) income from continuing operations before income taxes (7.3) (0.2) 3.0
Income tax (benefit) expense (0.1) (0.1) 1.1
------ ------ ------
(Loss) income before cumulative effect of change in accounting principle (7.2) (0.1) 1.9
Cumulative effect of change in accounting principle, net of tax benefit - (12.3) -
------ ------ ------
Net (loss) income (7.2)% (12.4)% 1.9%
====== ======= ======
Revenues
Car and Truck Wash Services
Revenues for the year ended December 31, 2003 were $43.4 million as compared to
$44.1 million for the year ended December 31, 2002, a decrease of $0.7 million
or 1.6%. Of the $43.4 million of revenues for the year ended December 31, 2003,
$35.7 million or 82% was generated from car wash and detailing, $4.1 million or
10% from lube and other automotive services, and $3.6 million or 8% from fuel
and merchandise sales. Of the $44.1 million of revenues for the year ended
December 31, 2002, $36.7 million or 83% was generated from car wash and
detailing, $4.2 million or 10% from lube and other automotive services, and $3.2
million or 7% 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; a departure from historic
revenue levels within the Northeast region due to several significant snow
storms in the first quarter of 2003, an increase in inclement weather,
particularly on weekends, within the Texas region and the impact of a slower
economy. Overall car wash volumes declined 6.9% in 2003 from 2002, including
1.8% from the closing or divesting of the three 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 $14.52 in 2003, from $13.89 in
2002. 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 the
result of more aggressive pricing on fuel to attract traffic into our car wash
facilities and the addition of higher quality merchandise in our car wash
lobbies.
Revenues for the year ended December 31, 2002 were $44.1 million as compared to
$48.0 million for the year ended December 31, 2001, a decrease of $3.9 million
or 8.1%. Of the $44.1 million of revenues for the year ended December 31, 2002,
$36.7 million or 83% was generated from car wash and detailing, $4.2 million or
10% from lube and other automotive services, and $3.2 million or 7% from fuel
and merchandise sales. Of the $48.0 million of revenues for the year ended
December 31, 2001, $39.9 million or 83% was generated from car wash and
detailing, $4.5 million or 9% from lube and other automotive services, and $3.6
million or 8% from fuel and merchandise sales. The decrease in wash and
detailing revenues was principally due to the divesting of two of our car wash
locations during 2001 combined with a departure from our historic revenue levels
within our Northeast region due to the unusual lack of snow and pollen in the
first six months of 2002 and increased rainfall in the quarter ending December
31, 2002. The Company also experienced more challenging weather within its Texas
region for the quarters ended September 30 and December 31, 2002. Car wash
volume declined 8.4% in 2002 from 2001. In addition to these declines in volume,
the Company experienced a slight reduction in average wash and detailing
revenues per car to $13.89 in 2002, from $13.90 per car in 2001. Despite
management's continued focus on aggressively selling detailing and additional
on-line car wash services, more aggressive coupon and discount promotions to
encourage volume reduced the average revenue per car. As to the decline in
revenues from lube and other automotive services, we discontinued the practice
of providing a free wash to lube customers, resulting in decreased lube revenues
but benefitting our overall site gross margin performance. The decline in fuel
and merchandise revenues was the result of instituting certain minimum gross
margin criteria which reduced fuel sales and the sale of certain low margin
merchandise.
25
Security Products
Pursuant to a Management Agreement, we earned $80,000 in 2002 and $240,000 in
2001. These amounts are included under revenues from operating agreements.
Effective May 1, 2002, the Company recommenced operation of the Security
Products Segment. Revenues for the Consumer Products Division were approximately
$2.8 million and $2.1 million in 2003 and 2002, respectively. Additionally, in
August 2002, the Company purchased the inventory and certain assets and
operations of Micro-Tech, an electronic surveillance and security device
business. Revenues for this business unit were approximately $2.8 million and
$380,000 in 2003 and 2002, respectively.
Cost of Revenues
Car and Truck Wash Services
Cost of revenues for the year ended December 31, 2003 were $32.3 million or 74%
of revenues with car washing and detailing costs at 73% of respective revenues,
lube and other automotive services costs at 77% of respective revenues, and fuel
and merchandise costs at 87% of respective revenues. Cost of revenues for the
year ended December 31, 2002 were $31.8 million, or 72% of revenues with car
wash and detailing costs at 70% of respective revenues, lube and other
automotive services costs at 78% of respective revenues, and fuel and
merchandise costs at 87% of respective revenues.
In 2003, the Company experienced a deterioration in wash and detailing operating
margins largely due to the decrease in wash volume of 6.9% as compared to the
prior year, combined with increased insurance premiums and related claim costs,
lease termination costs related to an underperforming car wash property closed
in 2003, and an increase in labor costs as a percent of revenues of
approximately two percentage points. This deterioration in wash and detailing
operating margins was partially offset by certain temporary and permanent cost
savings measures instituted in March of 2003, including reductions in payroll
and related benefit costs, repairs and maintenance costs and certain other
operating expenses.
Cost of revenues for the year ended December 31, 2002 were $31.8 million or 72%
of revenues with car washing and detailing costs at 70% 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 for the
year ended December 31, 2001 were $34.1 million, or 71% of revenues with car
wash and detailing costs at 69% of respective revenues, lube and other
automotive services costs at 77% of respective revenues, and fuel and
merchandise costs at 89% of respective revenues.
With only a slight decrease in average wash and detailing revenues per car in
2002 and our continued emphasis on controlling direct labor and other operating
costs such as wash and detailing chemicals and supplies, car damages, uniform
expense, and repairs and maintenance costs, we experienced only a one percentage
point reduction in wash and detailing gross margins in 2002 despite the 8.4%
volume decline previously noted. We also experienced a slight increase in our
direct wash and detailing labor costs as a percent of car wash and detail
revenues to 48% in 2002 as compared to 47% in 2001 as a result of the volume
decline.
Security Products
During 2001 and for the first four months of 2002, pursuant to a Management
Agreement, no costs were incurred by us. Cost of revenues were $3.5 million or
62% of revenues and $1.5 million or 61% of revenues for 2003 and 2002,
respectively.
26
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December 31,
2003 were $9.5 million compared to $8.4 million for the same period in 2002, an
increase of approximately $1.1 million or 13%. SG&A costs as a percent of
revenues were 19.4% for 2003 as compared to 18.1% in 2002. The increase in SG&A
costs is primarily the result of recommencing operation of the Security Products
Segment in May 2002, which along with the growth in the Electronic Surveillance
Products Division added a combined $1.2 million of SG&A costs in 2003. The
Company also incurred approximately $168,000 of legal fees through December 31,
2003 related to the investigation being conducted by the United States
Securities and Exchange Commission. These increases in costs were partially
offset by certain temporary and permanent cost saving measures initiated in
March of 2003, including reductions in payroll and related benefit costs.
Selling, general and administrative expenses for the year ended December 31,
2002 were $8.4 million compared to $7.4 million for the same period in 2001, an
increase of approximately $1.0 million or 14%. SG&A costs as a percent of
revenues were 18.0% for 2002 as compared to 15.3% in 2001. The increase in SG&A
costs was primarily the result of recommencing operation of the Security
Products Segment in May 2002, which, along with the acquisition of the assets
and operations of Micro-Tech, added a combined $0.9 million of SG&A costs in
2002. We also experienced an increase in certain credit card and bank charges
and a significant increase in insurance costs. These increases were part