Attached files
| file | filename |
|---|---|
| EX-11 - MACE SECURITY INTERNATIONAL INC | v178316_ex11.htm |
| EX-21 - MACE SECURITY INTERNATIONAL INC | v178316_ex21.htm |
| EX-3.3 - MACE SECURITY INTERNATIONAL INC | v178316_ex3-3.htm |
| EX-23.1 - MACE SECURITY INTERNATIONAL INC | v178316_ex23-1.htm |
| EX-31.1 - MACE SECURITY INTERNATIONAL INC | v178316_ex31-1.htm |
| EX-32.1 - MACE SECURITY INTERNATIONAL INC | v178316_ex32-1.htm |
| EX-32.2 - MACE SECURITY INTERNATIONAL INC | v178316_ex32-2.htm |
| EX-31.2 - MACE SECURITY INTERNATIONAL INC | v178316_ex31-2.htm |
| EX-10.27 - MACE SECURITY INTERNATIONAL INC | v178316_ex10-27.htm |
| EX-10.29 - MACE SECURITY INTERNATIONAL INC | v178316_ex10-29.htm |
| EX-10.28 - MACE SECURITY INTERNATIONAL INC | v178316_ex10-28.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2009
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the transaction period from __ to __
Commission
File No. 0-22810
MACE
SECURITY INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
(State or other Jurisdiction of
Incorporation or Organization)
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03-0311630
(I.R.S. Employer
Identification No.)
|
|
240
Gibraltar Rd., Suite 220, Horsham, PA 19044
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|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant's
Telephone Number, Including Area Code: (267) 317-4009
Securities
Registered Pursuant to Section 12(b) of the Act:
Common
Stock, par value $0.01 per share
Name
of each exchange on which registered: The NASDAQ Global Market
Securities
Registered Pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No
x
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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes ¨ No
¨
Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, 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 a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one)
|
Large
accelerated filer ¨
|
Accelerated filer ¨
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Non-accelerated filer
¨
|
Smaller reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (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 registrant
on June 30, 2009 was approximately $18,560,000. Such aggregate market value was
computed by reference to the closing price of the common stock as reported on
the Nasdaq Global Market on June 30, 2009. For purposes of determining this
amount only, the registrant has defined affiliates as including (a) the
executive officers and directors of the Registrant on June 30, 2009 and (b) each
stockholder that had informed registrant that it was the beneficial owner of 10%
or more of the outstanding common stock of Registrant on June 30,
2009.
The
number of shares of Common Stock, par value $0.01 per share, of registrant
outstanding as of March 19, 2010 was 15,913,775.
Mace
Security International, Inc. and Subsidiaries
Form
10-K
Year
Ended December 31, 2009
Contents
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Page
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PART
I
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Item
1.
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Business
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3
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Item
1A.
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Risk
Factors
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10
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Item
1B.
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Unresolved
Staff Comments
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19
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Item
2.
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Properties
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19
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Item
3.
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Legal
Proceedings
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20
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Item
4.
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(Removed
and Reserved)
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21
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PART
II
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|||
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Item
5.
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Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
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22
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Item
6.
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Selected
Financial Data
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25
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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26
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risks
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41
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Item
8.
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Financial
Statements and Supplementary Data
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42
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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42
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Item
9A(T).
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Controls
and Procedures
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42
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Item
9B.
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Other
Information
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42
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PART
III
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|||
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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43
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Item
11.
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Executive
Compensation
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46
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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59
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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62
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Item
14.
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Principal
Accounting Fees and Services
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63
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PART
IV
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|||
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Item
15.
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Exhibits,
Financial Statement Schedules
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63
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2
PART
I
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ITEM
1.
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BUSINESS
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GENERAL
Mace
Security International, Inc. (the “Company” or “Mace”) was incorporated in
Delaware on September 1, 1993. Our operations are currently conducted
through two segments: Security and Digital Media Marketing.
Our
Security Segment designs, manufactures, assembles, markets and sells a wide
range of security products. The products include intrusion fencing,
access control, security cameras and security digital recorders. The Security
Segment also owns and operates an Underwriters Laboratories (“UL”) listed
monitoring center that monitors video and security alarms for 300 security
dealer clients with over 30,000 end-user accounts. The Security Segment’s
electronic surveillance products and components are purchased from Asian,
European and Israeli manufacturers. Many of our products are designed
to our specifications. We sell the electronic surveillance products and
components primarily to installing dealers, distributors, system integrators and
end users. Other products in our Security Segment are the original
less-than-lethal Mace® defense sprays and other security devices such as
monitors, high-end digital and machine vision cameras and professional imaging
components. The main marketing channels for our products are industry
shows, trade publications, catalogs, the internet, telephone orders,
distributors and mass merchants.
Our
Digital Media Marketing Segment focuses on selling products on third party
internet promotional sites. We also have our own internet promotional
sites that offers our products, as well as third party products. The
products we sell are developed internally. Our promotional site markets and
acquires customers for third parties using a proprietary marketing platform. The
products we sell on the third party internet promotional sites also utilize our
proprietary marketing platform.
We
formerly had a Car Wash Segment. At its largest, the Car Wash Segment
consisted of fifty seven car washes and five truck washes. As of
December 31, 2009, the assets of our former Car Wash Segment consisted of eight
car washes, one of which is currently under contract for sale under an Agreement
of Sale and one which was sold in March 2010. The sale of our car
wash under Agreement of Sale is anticipated to close in the second quarter of
2010. All eight remaining car washes, which made up the Car Wash
Segment, have been classified as discontinued operations in the statements of
operations and the statements of cash flows with the related assets and
liabilities classified as assets and related liabilities held for sale in the
December 31, 2009 balance sheet. The car wash operations are no longer reported
as a Segment of the Company.
The
Company’s periodic reports on Forms 10-K and 10-Q and current reports on Form
8-K, as filed with the United States Securities and Exchange Commission (the
“SEC”), can be accessed through the Company’s website at www.mace.com.
LINES
OF BUSINESS
Security
Segment. The Security Segment offers for sale a wide variety
of security products. The Security Segment also owns and
operates a UL listed monitoring center that monitors video and security alarms
for over 300 security dealer clients having over 30,000 end-user
accounts. Among the products we offer are electronic surveillance
products, including intrusion fencing, access control, analog, digital and IP
cameras, digital video recorders, security monitors, matrix switching equipment
for video distribution, robotic camera dome systems, system controls, and
consoles for system assembly markets. Other products offered are
Mace® defense sprays, personal alarms, home security alarms, whistles, door
jammers, and window and door lock alarms. We also offer the KinderGard® product
line of childproof security locks, security literature for the domestic and
foreign financial community, state-of-the-art training videos, crisis response
materials and TG Guard®, an electronically controlled tear gas system used in
prisons, embassies, and safe rooms.
Our
electronic surveillance products and system component requirements are
established by our operating and marketing staff in Fort Lauderdale, Florida and
manufactured by overseas original equipment manufacturers (“OEM”). Our
electronic surveillance products and system components are warehoused and
shipped from our facility in Farmers Branch, Texas. Our defense sprays are
manufactured by the Company in our Bennington, Vermont facility. The
KinderGard® product line is manufactured by a third party utilizing molds
primarily owned by the Company. Our defense sprays and the
KinderGard® product line are packaged, warehoused, and shipped from our Vermont
facility. Our TG Guard® products are also assembled in our Bennington, Vermont
facility.
Our
electronic surveillance products and components are marketed through several
sales channels, such as dealers, system integrators, catalogs, the internet,
mass merchants, exhibitions at national trade shows and by telephone
orders. We also sell our products by the use of distributors,
exhibitions at national trade shows and advertisements in trade
publications.
3
The
Security Segment provided 65.8%, 54.6%, and 74.5% of our revenues in
fiscal years 2009, 2008, and 2007, respectively.
Digital Media Marketing
Segment. The Digital Media Marketing Segment is an e-commerce and online
marketing business which has two business divisions: (1) e-commerce, the sale of
products on internet promotional sites and (2) online marketing, which publishes
internet promotional sites that offer our products and third party products for
sale. The segment uses proprietary technologies and software to sell products on
the internet. The Company resumed operations of the online marketing division in
the first quarter of 2010 and accordingly, these operations are currently a
small part of the Digital Media Marketing Segment's business.
Linkstar
operates our e-commerce division. The e-commerce division is a
direct-response product business that develops, markets and sells products
directly to consumers through the internet promotional sites. We reach the
customers predominately through online advertising on third-party promotional
websites. The products include: Vioderm, an anti-wrinkle skin care product
(www.vioderm.com);
Purity by Mineral Science, a mineral cosmetic (www.mineralscience.com);
TrimDay™, a weight-loss supplement (www.trimday.com);
Eternal Minerals, a dead sea spa product line (www.eternalminerals.com);
ExtremeBriteWhite, a teeth whitening product (www.extremebritewhite.com);
Knockout, an acne product (www.knockoutmyacne.com); Biocol, a natural colon
cleanser (www.biocolcleanse.com); Goji Berry Now, a concentrated antioxidant
dietary supplement (www.gojiberrynow.com); and PetVitamins, a pet care product
line of patented FDA-approved supplements to improve heart and joint health in
dogs and cats (www.petvitamins.com). We continuously develop and test product
offerings to determine customer acquisition costs and revenue potential, as well
as to identify the most efficient marketing programs.
From July
20, 2007 through June 2008, our online marketing division, Promopath, conducted
an online affiliate marketing business. Promopath was acquired on
July 20, 2007. Promopath located customers or leads for third party
clients who hired Promopath. The advertising clients who hired
Promopath paid us based on a set fee per customer, prospect or lead
acquired. The online media marketing industry refers to the
arrangement of acquiring customers, prospects or leads for advertisers on a fee
basis per customer as the cost-per-acquisition (“CPA”) model. Promopath helped
its advertising clients acquire customers by publishing internet promotional
offers for its advertising clients. Promopath also worked with other
internet publishers to reach many areas of interactive
media. Promopath’s advertising clients were typically established
direct-response advertisers with well recognized brands and broad consumer
appeal such as NetFlix, Discover credit cards and Bertelsmann Group. Promopath
generated CPA revenue, both brokered and through co-partnered
sites.
During
the third quarter of 2009, management made a decision to reactivate the
operations of the Promopath online marketing services to both third party
customers as well as to generate customer acquisitions for Linkstar, the
Company’s e-commerce division. The Company resumed generating online marketing
revenue through Promopath in the first quarter of 2010. The Company is
controlling the cost of operating Promopath by limiting the amount Promopath
spends on internet addresses which it uses to generate marketing
revenues.
In
addition to CPA revenue, Promopath generated two other types of revenue streams,
list management and lead generation revenue. List management revenue is based on
a relationship between a data owner and a list management company. The data
owner, Promopath, compiles, collects, owns and maintains a proprietary
computerized database composed of consumer information. Promopath, as
the data owner, granted a list manager a non-exclusive, non-transferable,
revocable worldwide license to manage, make use and have access to the data
pursuant to defined terms and conditions for which Promopath is paid revenue.
Another type of revenue stream Promopath had was lead generation or
cost-per-lead (“CPL”). Advertisers who purchase potential customers,
on a CPL basis are interested in collecting data from consumers expressing
interest in a product or service. CPL varies from CPA in that no
credit card information for the potential customer needs to be provided to the
advertiser for the fee to be paid for the lead.
The
Digital Media Marketing Segment provided 34.2%, 45.4% and 25.5% of our revenues
in fiscal years 2009, 2008 and 2007, respectively.
Discontinued
Operations. The Company, through its subsidiaries, owned eight
car washes as of December 31, 2009. As of March 19, 2010, the
Company owns seven car washes in Texas. The seven locations consist
of six full service car washes and one self service car wash
location. 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. One of the
remaining car washes is subject to an Agreement of Sale and is anticipated to
close in the second quarter of 2010.
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, Management’s
Discussion and Analysis of Financial Condition and Results of
Operations-Seasonality and Inflation.
4
BUSINESS
STRATEGIES
Security Segment.
Internal
Growth. The
Security Segment designs, manufacturers, markets and sells a wide range of
security products. For the year ended December 31, 2009, revenues
from the Security Segment were $18.6 million. The Company began
selling electronic surveillance products and system components in August 2002.
Revenues from electronic surveillance products and system components have grown
from $373,000 of revenue in 2002 to $7.2 million in 2009. Growth has been
principally achieved through acquiring businesses and internal growth through
development of new product offerings, as well as expanded advertising and
marketing efforts. During 2009, the Security Segment added intrusion fencing and
access control to its products. In the second quarter of 2009, the Security
Segment acquired a UL listed monitoring center. The monitoring center monitors
video and security alarms for over 300 security dealer clients which have over
30,000 end-user accounts. The wholesale alarm monitoring company offers our
dealers an easy alternative for the monitoring of the video output of our
products that the dealers install. By offering video monitoring we hope to be
able to increase the loyalty and number of our dealers.
The
Company sells its defense sprays in the consumer market under its Mace®
brand. Defense sprays are sold in the law enforcement market under
the brand name of TakeDown®. The Mace Trademark Corporation, a
subsidiary of Mace Security International, Inc., manages the correct use of the
Mace® trademark by Mace Security International, Inc. and Armor Holdings, Inc.
(See also Trademarks and Patents, page 8). Armor Holdings, Inc has
the exclusive right to use the Mace® brand when selling aerosol defense sprays
to the law enforcement market, pursuant to an agreement dated July 1998. We
believe that the total domestic consumer defense spray market is approximately
$18 million to $20 million in annual revenues and that the domestic law
enforcement market is approximately $5 million in annual
revenues. Our newly developed Pepper Gel® has increased sales in Law
Enforcement and Consumer markets. Pepper Gel® has a patent pending in the U.S.
Patent and Trademark Office and in the European Union under the Patent
Co-operation Treaty (PCT).
During
the six months ended December 31, 2008 and throughout 2009, we implemented cost
savings measures, including a reduction in employees throughout the Company, and
completed a consolidation of our Security Segment’s electronic surveillance
equipment operations in Fort Lauderdale, Florida and Farmers Branch,
Texas. As part of this reorganization, we consolidated our security
division’s surveillance equipment warehouse operations into our Farmers Branch,
Texas facility and sold our Fort Lauderdale, Florida warehouse. Our professional
security sales and administrative team has remained in Fort Lauderdale, Florida
in a rented facility. Our security catalog sales team was relocated to Florida
in the rented facility. The goals of the reorganization were to align
our electronic surveillance equipment sales teams to achieve sales growth, gain
efficiencies by sharing redundant functions within our security operations such
as warehousing, customer service, and accounting services, and to streamline our
organization structure and management team for improved long-term
growth.
Operating
Agreements and Acquisitions. On
April 30, 2009, the Company completed the purchase of all the outstanding common
stock of Central Station Security Systems, Inc. (“CSSS”) from CSSS’s
shareholders. Total consideration was approximately $3.7 million
which consisted of $1.7 million in cash at closing, $224,000 paid subsequent to
closing, potential additional payments of up to $1.2 million upon the settlement
of certain contingencies as set forth in the Stock Purchase Agreement, $766,000
of which is recorded in accrued expenses and other current liabilities, and
$461,000 which is recorded as other non-current liabilities at December 31,
2009, and the assumption of approximately $590,000 of
liabilities. CSSS, which is reported within the Company’s Security
Segment, is a national wholesale monitoring company located in Anaheim,
California, with approximately 300 security dealer clients. CSSS owns and
operates a UL-listed monitoring center that services over 30,000 end-user
accounts. CSSS’s primary assets are accounts receivable, equipment, customer
contracts, and its business methods. The acquisition of CSSS enables
the Company to expand the marketing of its security products through
cross-marketing of the Company’s surveillance equipment products to CSSS’s
dealer base as well as offering monitoring services to the Company’s current
customers. The purchase price was allocated as follows: approximately (i)
$19,000 for cash; (ii) $112,000 for accounts receivable; (iii) $63,000 for
prepaid expenses and other assets; (iv) $443,000 for fixed assets and capital
leased assets; (v) the assumption of $590,000 of liabilities, and (vi) the
remainder, or $3.04 million, allocated to goodwill and other intangible assets.
Within the $3.04 million of acquired intangible assets, $1.98 million was
assigned to goodwill, which is not subject to amortization
expense. The amount assigned to goodwill was deemed appropriate based
on several factors, including: (i) multiples paid by market participants for
businesses in the security monitoring business; (ii) levels of CSSS’s current
and future projected cash flows; (iii) the Company’s strategic business plan,
which included cross-marketing the Company’s surveillance equipment products to
CSSS’s dealer base as well as offering the Company’s current customers
monitoring services, thus potentially increasing the value of its existing
business segment; and (iv) the Company’s plan to substitute the cash flows of
the Car Wash Segment, which the Company is exiting. The remaining
intangible assets were assigned to customer contracts and relationships for
$940,000, tradename for $70,000, and a non-compete agreement for $50,000.
Customer relationships, tradename and the non-compete agreement, were assigned a
life of fifteen, three, and five years, respectively.
5
On
November 23, 2005 we acquired the inventory and customer accounts of Securetek,
Inc. which specializes in the sale of electronic surveillance products to
security alarm dealers and installers. The acquired businesses were relocated
and integrated into our existing security operations.
We
regularly evaluate potential acquisitions for the Security Segment to determine
if they provide an advantageous opportunity. In evaluating potential
acquisitions, we 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® brand name; (iv)
market penetration of existing products; and (v) other relevant
factors.
As
consideration for acquisitions, we may use combinations of common stock,
warrants, 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 our cash reserves, funds provided by operations,
loans, and the proceeds of possible future equity sales.
Digital Media Marketing
Segment.
Sales. We have been
increasing sales and customer acquisition efforts and expenses in our e-commerce
division. The Purity cosmetics product line is, to date, our most successful
product line and is anticipated to remain stable. We also anticipate
additional growth from our 2008 launch of products such as ExtremeBriteWhite,
our teeth whitening product; and Knockout, our acne product; our recent launch
of new products such as Biocol, a colon cleanser; Goji Berry Now, our
antioxidant dietary supplement, and PetVitamins, our pet care supplements, as
well as from future planned product lines.
Operating
Efficiency. In
an effort to streamline and strengthen internal operations, we have consolidated
all internal operations of our Digital Media Marketing Segment in our Wexford,
Pennsylvania office, a suburb of Pittsburgh, Pennsylvania. We
maintain a sales presence throughout the country. In September 2009,
we began to lease warehouse space in the York, Pennsylvania area for the Digital
Media Marketing Segment’s e-commerce division’s shipping and fulfillment
functions which were previously located in Farmers Branch, Texas. The relocation
provided savings in operating, overhead, and personnel costs.
Acquisition. On
July 20, 2007, the Digital Media Marketing Segment was added to our operations
when all of the outstanding common stock of Linkstar was purchased from
Linkstar’s shareholders. The acquisition of Linkstar provides us with a presence
in the online and digital media services industry. We paid approximately $10.5
million to the Linkstar shareholders, which consisted of $7.0 million in cash at
closing, $500,000 of promissory notes bearing a 5% interest rate paid on January
3, 2008 and 1,176,471 unregistered shares of the Company’s common stock. The
Company’s stock was issued based on a closing price of $2.55 per share or a
total value of $2.9 million.
Discontinued
Operations
We
acquired our car and truck washes between May 1999 and December 2000 and had
reported their results as the Company’s Car Wash Segment. We have
made the decision to sell the remaining eight car washes. From
December 2005 to March 12, 2010, we have sold 42 car washes including all of our
car washes in the Northeast region; Arizona; Florida; Austin, Texas; and San
Antonio, Texas. The five truck washes we had owned were sold in
2007.
We
currently own seven car washes as of March 19, 2010, all located in Texas. One
of the remaining car washes is subject to an Agreement of Sale. We
are marketing our car washes individually and in groups. We are considering
offers for our car washes and evaluating offers based on whether the
purchase price would be sufficient to retire all debt related to the car washes
and provide sufficient capital for the growth of our Security and Digital Media
Marketing Segments. We seek to grow the Security and Digital Media
Marketing Segments through acquisitions, new product development and new market
penetration.
MARKETING
Security Segment. Our
electronic surveillance products and components are marketed through several
sales channels, such as catalogs, the internet, mass merchants, exhibitions at
national trade shows and telephone orders. Our other products are sold through
direct marketing, the use of distributors as well as exhibitions at national
trade shows and advertisements in trade publications.
Our self
defense sprays are available for purchase at mass merchant/department stores,
gun shops, sporting goods stores, hardware, auto, convenience and drug
stores. In the law enforcement market, our defense sprays, including
Pepper Gel®, are sold through direct marketing, the use of independent sales
representatives and distributors as well as exhibitions at national trade shows
and advertisements in trade publications.
6
We have a
diverse customer base within the Security Segment with no single customer
accounting for 5% or more of our consolidated revenues for the fiscal year ended
December 31, 2009. We do not believe that the loss of any single Security
Segment customer would have a material adverse effect on our business or results
of operations.
Digital Media Marketing Segment.
E-commerce products and services are marketed on third party promotional
internet sites. We are continuing to increase the products offered by our
Linkstar e-commerce division, with the successful launch of our mineral cosmetic
line, Purity, in late 2007, the launch of Eternal Minerals, a Dead Sea spa
product line in the Spring of 2008 and ExtremeBriteWhite, a teeth whitening
product in late 2008; and the launch of four new products in 2009, including
Knockout, an acne product; Biocol, a natural colon cleanser; Goji Berry Now, a
concentrated antioxidant dietary supplement; and PetVitamins, a pet care product
line of supplements to improve heart and joint health in dogs and cats. We
intend to concentrate on expanding our existing product lines, building brand
awareness, and launching three to four new product lines in 2010.
PRODUCTION
AND SUPPLIES
Security Segment. Our
electronic surveillance products and system component requirements are
established at our Fort Lauderdale, Florida facility and are manufactured
principally in Korea, China, Israel and England by original equipment
manufacturers (“OEM”). The electronic surveillance products and components
meeting our requirements are labeled, packaged, and shipped ready for sale to
our warehouse in Farmers Branch, Texas.
Substantially
all of the manufacturing processes for our defense sprays 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." KinderGard ®, a product line of
childproof locks, and TG Guard®, an electronic tear gas security system, are
primarily manufactured by unrelated companies and are assembled 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.
Digital Media Marketing
Segment. Linkstar, our e-commerce division, and Promopath, our
digital marketing division, are located in Wexford, Pennsylvania, a suburb of
Pittsburgh. Shipping and fulfillment for the e-commerce division is performed in
a third party fulfillment center located in York, Pennsylvania. The
products sold by the e-commerce division are manufactured within the United
States as well as China and other foreign countries. The packaging of
products is also currently obtained through suppliers in the United States and
China.
COMPETITION
Security Segment. Our video
systems and security products components face competition from many larger
companies such as Sony, Panasonic, Security Equipment Corp. and others. A number
of these competitors have significantly greater financial, marketing, and other
resources than us. Our high-end digital and machine vision camera operation,
IVS, is a large distributor of Sony® products. Customers of IVS who
achieve a high Sony® product purchasing level, qualify for purchasing directly
from Sony®. IVS occasionally loses high volume customers to Sony. Additionally,
our foreign manufacturers of electronic surveillance products also sell directly
to our customer base. 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
sales.
Our
security monitoring company is in a highly competitive
industry. Monitoring accounts are difficult to obtain, as there is a
natural resistance by dealers to move their end user accounts. There
are many national and local monitoring companies that compete aggressively on
price.
There
continues to be a number of companies marketing personal defense sprays to
civilian consumers such as Armor Holdings, Inc. We continue to offer defense
spray products that we believe distinguish themselves through brand name
recognition and superior product features and formulations. This
segment experienced increased sales in aerosols in each of the three years
ending December 31, 2009, 2008 and 2007 and increased sales in TG Guard systems
in 2007. We attribute the increased sales to improved marketing,
including improvements in our website, and development of new products such as
our Mace Pepper Gun®, our Mace Pepper Gel®, our Hot Pink Mace Defense Spray™ and
our Night Defender Pepper Gel Defense Spray™.
7
Digital Media Marketing
Segment. Linkstar, our e-commerce division, competes with product
development and marketing companies, both on and offline. Our success
relies on creating innovative products attractive to consumers and being able to
gain and protect market share for successful product lines. We compete with
numerous well-established national and regional companies such as ValueClick,
Think Partnership, Syndero, Intelligent Beauty, Guthy-Renker, and Bare
Escentuals. Promopath, our online marketing division, has recently
restarted its third party business in addition
to placing Linkstar’s e-commerce products on third-party
promotional websites.
TRADEMARKS
AND PATENTS
Security
Segment. We began marketing products in 1993 under the Mace®
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. We
subsequently purchased outright the Mace® brand name and related trademarks
(Pepper Mace®, Chemical Mace®, Mace . . . Just in Case®, CS MaceÔ and Magnum MaceÔ). 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 have
patents pending for our new less-than-lethal gel products in the United States
and also in several foreign jurisdictions. We have recently obtained trademarks
for Mace Pepper Gel® and have filed trademark applications for Hot Pink Mace
Defense Spray™, Night Defender Pepper Gel Defense Spray™ and the Sportsman Scent
System®. Additionally, we have been issued a patent on the locking mechanism for
our Mark VI defense spray unit. Additionally, we have recently received a patent
internationally for a non-irritant gel formulation.
In July
1998, in connection with the sale of our Law Enforcement Division, we
transferred our Mace® 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® brand, certain other such trademarks and the patents in the law
enforcement market only.
We also
have various other patents and trademarks for the devices we sell, including
trademarks and/or patents for the Big Jammer® door brace, Screecher®,
Peppergard®, Mace (Mexico)®, Viper® defense spray, KinderGard®, TG Guard®, Take
Down®, Muzzle®, Pepper Mace®, MSI and Design®, Mace® Community (European Union)
Trademark, Pepper Gel®, and Take Down Extreme®. We also license the
pending patent for our new Pepper Gun product.
Additional trademarks
used in our Security Segment are: SecurityandMore.com®, Industrial Vision
Source®, Easy Watch®, Focus Vision 4 Observation System (Stylized)®,
SmartChoice®, MaceLockÔ, MaceTrac™ and
MaceVision™.
The
Company has expanded the Mace® trademark to cover new electronic surveillance
products.
We
believe these Mace-related trademarks provide us with a competitive
advantage.
Digital Media Marketing
Segment. We are applying for trademarks and service marks for
the brands we sell on the internet.
GOVERNMENT
REGULATION/ENVIRONMENTAL COMPLIANCE
Security
Segment. The distribution, sale, ownership, and use of
consumer defense sprays are legal in some form in all fifty states and the
District of Columbia. However, in some states, sales to minors are prohibited
and in several states (MA, MI, NY and WI, for example) sales are highly
regulated. Among the typical regulations are the following, which list is not
all inclusive: Massachusetts requires both the seller and possessor to be
licensed; Michigan does not allow the sale of combinations of tear gas and
pepper sprays; and New York requires sellers to be licensed firearms dealers or
pharmacists. There are often restrictions on sizes, labeling and packaging that
may vary from state to state. We have been able to sell our defense sprays
consistent with the requirements of state laws. We believe we are in material
compliance with all federal, state, and local laws that affect the sale and
marketing of our defense spray business. There can be no assurance, however,
that broader or more severe restrictions will not be enacted that would have an
adverse impact on the sale of defense sprays. Additionally, certain states
require licenses for the sale of our security equipment. We have obtained all
required licenses.
During
January 2008, the Environmental Protection Agency (the “EPA”) conducted a site
investigation at the Company’s Bennington, Vermont location and the building
within which the facility is located. The Company leases 33,476
square feet of the building from Vermont Mill Properties, Inc. (“Vermont
Mill”). The site investigation was focused on whether hazardous
substances were being improperly stored. After the site
investigation, the EPA notified the Company and the building owner that
remediation of certain hazardous wastes were required. The EPA, the
Company and the building owner entered into an Administrative Consent Order
under which the hazardous materials and waste were remediated. All remediation
required by the Administrative Consent Order was completed within the time
allowed by the EPA and a final report regarding the remediation was submitted to
the EPA in October 2008, as required by the Administrative Consent
Order. On September 29, 2009 the EPA accepted the final report. On
February 23, 2010 the EPA issued the Company an invoice for $240,096
representing the total of the EPA's oversight costs that the Company and Vermont
Mill is obligated to pay under the Administrative Consent Order. The
Company and Vermont Mill are in discussions to determine what portion of the
invoice each will pay. The Company is estimating that it will pay
approximately $190,000 of this invoice. A total estimated cost of approximately
$786,000 relating to the remediation, which includes disposal of the waste
materials, as well as expenses incurred to engage environmental engineers and
legal counsel and reimbursement of the EPA’s costs, has been recorded through
December 31, 2009. This amount represents management’s best estimate of probable
loss. Approximately $596,000 has been paid to date, leaving an accrual balance
of $190,000 at December 31, 2009 for the estimated share of the Company's EPA
costs.
8
The
United States Attorney for the District of Vermont (“U.S. Attorney”) is
conducting an investigation of the Company relating to possible violations of
the Resource Conservation and Recovery Act (“RCRA”) at the Vermont
location. The Company believes the investigation is focused on the
Company allegedly not disposing of hazardous materials and waste at the Vermont
location, as required by various environmental laws. In connection with the
investigation, a search of the Company’s Bennington, Vermont location and the
building in which the facility is located occurred in February
2008. On May 2, 2008, the U.S. Attorney issued a grand jury subpoena
to the Company. The subpoena required the Company to provide the U.S.
Attorney documents related to the storage, disposal and transportation of
materials at the Bennington, Vermont location. The
Company supplied the documents and is fully cooperating with the U.S.
Attorney’s investigation. During the fourth quarter of 2009, the U.S. Attorney
interviewed a Company employee before a grand jury. The Company
believes that the U.S. Attorney is actively pursuing an investigation
of possible criminal violations. The Company has made no provision for any
future costs associated with the investigation.
Digital Media Marketing
Segment. We believe that we currently comply with all state
and federal laws within our online marketing practices. However, the
online marketing segment has come under increased scrutiny by the Federal Trade
Commission (“FTC”) and several state Attorney Generals with regard to online
lead generation practices. Because our online marketing and
e-commerce sites could be impacted, we are closely monitoring any changes to
state or federal laws and FTC guidelines. In addition, any changes to
laws impacting the import or sale of any products within our e-commerce division
could adversely impact revenues, although we believe this to be of minimal risk
in the near future.
Car Washes Held for
Sale. 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. 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
washes. We use approved waste-oil haulers to remove our oil and
lubricant waste. Our 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.
RESEARCH
AND DEVELOPMENT
Security
Segment. The staff in our Fort Lauderdale,
Florida facility determines the requirements of various electronic
surveillance products and components in conjunction with OEM manufacturers. We
also 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. Our research and
development expense was not material in 2009, 2008 or 2007.
Digital Media Marketing
Segment. We spend funds to internally develop software used
in our business. We also have employees whose duties are to perform
market research and testing of new product ideas and improve existing products
within the e-commerce division. Our research and development expense was not
material in 2009, 2008 or 2007.
INSURANCE
We
maintain various insurance policies for our assets and
operations. These policies provide property insurance 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
of 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 companies.
Workers’ compensation coverage for non-car wash employees was transferred to an
occurrence-based policy in March 2009. The Company maintains excess coverage
through occurrence-based policies. With respect to our auto, general liability,
and certain workers’ compensation policies, we are required to set aside an
actuarially 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 captive insurance company. Should funds
deposited exceed claims incurred and paid, unused deposited funds are returned
to us with interest upon the captive insurance company deciding a distribution
is appropriate, but no earlier than the fifth anniversary of the policy
year-end. The captive insurance program is further secured by a
letter of credit in the amount of $566,684 at December 31, 2009. 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 an estimate of reserves for possible
future losses on reported claims and claims incurred but not
reported. 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.
9
U.S.
BASED BUSINESS
Our
electronic surveillance products are manufactured in Korea, China, England and
Israel. All of our property and equipment is located in the United States. We do
not believe we are currently subject to any material risks associated with any
foreign operations. Our Digital Media Market Segment products are
manufactured within the U.S. as well as China and other foreign countries. All
of our car wash business is conducted in the United
States. Approximately 3.6%, (or $676,000), 4.5%, (or $936,000) and
3.8% (or $841,000) of the 2009, 2008 and 2007 revenues, respectively, from our
Security Segment were derived from customers outside of the United States.
Additionally, revenues of approximately 0.3%, or $31,000, 1.0%, or $145,000, and
0.2%, or $18,000, of our Digital Media Marketing Segment revenues in 2009, 2008
and 2007, respectively, were derived from customers outside of the United
States.
EMPLOYEES
As of
March 19, 2010, we had approximately 310 employees, of which approximately 179
were employed in the car wash business, 91 employed in the Security Segment, 23
employed in the Digital Media Marketing Segment, 15 in corporate clerical and
administrative positions in our corporate and finance departments, and two in
executive management. None of our employees are covered by a
collective bargaining agreement.
AVAILABLE
INFORMATION
For more
information about Mace Security International, Inc., please visit our website at
www.mace.com.
Our electronic filings with the SEC (including all annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, and any
amendments to these reports), including the exhibits, are available free of
charge through our website as soon as reasonably practicable after we
electronically file them with or furnish them to the SEC.
ITEM
1A. RISK
FACTORS
Risks
Related to Our Business
Many of our
customers’ activity levels and spending for our products and services may be
impacted by the current deterioration in the economy and credit markets.
As a result of the recession, the credit market crisis, declining
consumer and business confidence, increased unemployment, and other challenges
currently affecting the domestic economy, our customers have reduced their
spending on our products and services. Many of our customers in our
electronic surveillance equipment business finance their purchase activities
through cash flow from operations or the incurrence of
debt. Additionally, many of our customers in our personal defense
products division, our e-commerce division and our car wash operations depend on
disposable personal income. The combination of a reduction of disposable
personal income, a reduction in cash flow of businesses and a possible lack of
availability of financing to businesses and individuals has resulted in a
significant reduction in our customers’ spending for our products and
services. During 2009, our revenues from continuing operations
declined $9.8 million, or 25.8%, from our revenues from continuing operations in
2008. To the extent our customers continue to reduce their spending
in 2010, this reduction in spending could have a material adverse effect on our
operations. If the economic slowdown continues for a significant period or there
is significant further deterioration in the economy, our results of operations,
financial position and cash flows will be materially adversely
affected.
We have reported
net losses in the past. If we continue to report net losses, the price of our
common stock may decline, or we could go out of business. We
reported net losses and negative cash flow from operating activity from
continuing operations in each of the five years ended December 31, 2009.
Although a portion of the reported losses in past years related to non-cash
impairment charges of intangible assets and non-cash stock-based compensation
expense, we may continue to report net losses and negative cash flow in the
future. Our net loss for the year ended December 31, 2009 was $10.95
million. Additionally, accounting pronouncements require annual fair value based
impairment tests of goodwill and other intangible assets identified with
indefinite useful lives. As a result, we may be required to record
additional impairments in the future, which could materially reduce our earnings
and equity. If we continue to report net losses and negative cash flows, our
stock price could be adversely impacted.
10
Our liquidity
could be adversely affected if we do not prevail in the litigation initiated by
Louis D. Paolino, Jr. The Board of Directors of the
Company terminated Louis D. Paolino, Jr. as the Chief Executive Officer of the
Company on May 20, 2008. On June 9, 2008, the Company received a
Demand for Arbitration from Mr. Paolino (the “Arbitration Demand”) filed with
the American Arbitration Association in Philadelphia, Pennsylvania (the
“Arbitration Proceeding”). The primary allegations of the Arbitration
Demand are: (i) Mr. Paolino alleges that he was terminated by the Company
wrongfully and is owed a severance payment of $3,918,120 due to the termination;
(ii) Mr. Paolino is claiming that the Company owes him $322,606 because the
Company did not issue him a sufficient number of stock options in August 2007,
under provisions of the Employment Contract between Mr. Paolino and the Company
dated August 21, 2006; (iii) Mr. Paolino is claiming damages against the Company
in excess of $6,000,000, allegedly caused by the Company having defamed Mr.
Paolino’s professional reputation and character in the Current Report on Form
8-K dated May 20, 2008 filed by the Company and in the press release the Company
issued on May 21, 2008, relating to Mr. Paolino’s termination; and
(iv) Mr. Paolino is also seeking punitive damages, attorney’s fees
and costs in an unspecified amount. The Company filed a counterclaim in the
Arbitration Proceeding demanding damages from Mr. Paolino of
$1,000,000. On June 25, 2008, Mr. Paolino also filed a claim with the
United States Department of Labor claiming that his termination as Chief
Executive Officer of the Company was an “unlawful discharge” in violation of 18
U.S.C. Sec. 1514A, a provision of the Sarbanes-Oxley Act of 2002 (the “DOL
Complaint”). In the DOL Complaint, Mr. Paolino demands the same
damages he requested in the Arbitration Demand and additionally requests
reinstatement as Chief Executive Officer with back pay from the date of
termination. Upon the motion of Mr. Paolino, the proceedings relating
to the DOL Complaint have been stayed pending the conclusion of the Arbitration
Proceeding. The Company is disputing the allegations made by Mr.
Paolino and is defending itself in the Arbitration Proceeding and against the
DOL Complaint. A ruling in the Arbitration Proceeding is expected on
or about May 31, 2010. It is not possible to predict the outcome of
litigation with any certainty. If the Company does not prevail and significant
damages are awarded to Mr. Paolino, such award will severely diminish the
Company’s liquidity.
If we are unable
to finance our business, our stock price could decline and we could go out of
business. We have been funding
operating losses by divesting of our car washes through third party sales. Our
capital requirements include working capital for daily operations, including
purchasing inventory and equipment. Although we had cash and cash equivalents
of $9.4 million as of December 31, 2009, we have a history of net
losses and in some years we have ended our fiscal year with a negative working
capital balance. Our operating losses for 2008 and 2009 were $10.9 million and
$9.0 million, respectively. The current economic climate has made it
more difficult to sell our remaining car washes as it is more difficult for
buyers to finance the purchase price. Additionally, as of December 31, 2009 we
only have eight remaining car washes which we estimate will generate proceeds,
net of related mortgages, in the range of approximately $4.0 million to $4.5
million. To the extent that we lack cash to meet our future capital needs, we
will need to raise additional funds through bank borrowings and additional
equity and/or debt financings, which may result in significant increases in
leverage and interest expense and/or substantial dilution of our outstanding
equity. If we are unable to raise additional capital, we may need to
substantially reduce the scale of our operations and curtail our business
plan.
We compete with
many companies, some of whom are more established and better capitalized than
us. We compete with a variety of companies on a worldwide
basis. Some of these companies are larger and better capitalized than
us. There are also few barriers to entry in our markets and thus above
average profit margins will likely attract additional competitors. Our
competitors may develop products and services that are superior to, or have
greater market acceptance than, our products and services. For example, many of
our current and potential competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources and
larger customer bases than ours. These factors may allow our competitors
to respond more quickly than we can to new or emerging technologies and changes
in customer requirements. Our competitors may engage in more extensive
research and development efforts, undertake more far-reaching marketing
campaigns and adopt more aggressive pricing policies which may allow them to
offer superior products and services.
Failure or
circumvention of our controls or procedures could seriously harm our business.
An internal control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the control system’s
objectives will be met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no system of controls can provide absolute assurance that all
control issues, mistakes and instances of fraud, if any, within the Company have
been or will be detected. The design of any system of controls is based in part
upon certain assumptions about the likelihood of future events, and we cannot
assure you that any design will succeed in achieving its stated goals under all
potential future conditions. Any failure of our controls and procedures to
detect error or fraud could seriously harm our business and results of
operations.
If we lose the
services of our executive officers, our business may
suffer. If we lose the services of one or more of our
executive officers and do not replace them with experienced personnel, that loss
of talent and experience will make our business plan, which is dependent on
active growth and management, more difficult to implement and could adversely
impact our operations.
11
If our insurance
is inadequate, we could face significant losses. We maintain
various insurance coverages for our assets and operations. These
coverages include property coverage 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. Since July 2002, as a result of increasing costs of the
Company’s insurance program, including auto, general liability, and certain of
our workers’ compensation coverage, we have been insured as a participant in a
captive insurance program with other unrelated businesses. Workers’ compensation
coverage for non-car wash employees was transferred to an occurrence-based
policy in March 2009. The Company maintains excess coverage through
occurrence-based policies. With respect to our auto, general
liability, and certain workers’ compensation policies, we are required to set
aside an actuarially 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 after the fifth anniversary of the policy
year-end. The captive insurance program is further secured by a
letter of credit from Mace in the amount of $566,684 at December 31,
2009. 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 an estimate of
reserves for possible future losses on reported claims and claims incurred but
not reported. There can be no assurance that our insurance will
provide sufficient coverage in the event a claim is made against us, or that we
will be able to maintain in place such insurance at reasonable
prices. An uninsured or under insured claim against us of sufficient
magnitude could have a material adverse effect on our business and results of
operations.
Risks
Related to our Security Segment
We could become
subject to litigation regarding intellectual property rights, which could
seriously harm our business. Although we have not been the
subject of any such actions, third parties may in the future assert against us
infringement claims or claims that we have violated a patent or infringed upon a
copyright, trademark or other proprietary right belonging to them. We
provide the specifications for most of our security products and contract with
independent suppliers to engineer and manufacture those products and deliver
them to us. Certain of these products contain proprietary
intellectual property of these independent suppliers. Third parties
may in the future assert claims against our suppliers that such suppliers have
violated a patent or infringed upon a copyright, trademark or other proprietary
right belonging to them. If such infringement by our suppliers or us were found
to exist, a party could seek an injunction preventing the use of their
intellectual property. In addition, if an infringement by us were
found to exist, we may attempt to acquire a license or right to use such
technology or intellectual property. Some of our suppliers have
agreed to indemnify us against any such infringement claim, but any infringement
claim, even if not meritorious and/or covered by an indemnification obligation,
could result in the expenditure of a significant amount of our financial and
managerial resources, which would adversely effect our operations and financial
results.
If our Mace brand
name falls into common usage, we could lose the exclusive right to the brand
name. The Mace registered name and trademark is important to
our security business and defense spray business. If we do not defend the Mace
name or allow it to fall into common usage, our security segment business could
be adversely affected.
If our original
equipment manufacturers (“OEMs”) fail to adequately supply our products, our
security products sales may suffer. Reliance upon OEMs, as
well as industry supply conditions generally involves several additional risks,
including the possibility of defective products (which can adversely affect our
reputation for reliability), a shortage of components and reduced control over
delivery schedules (which can adversely affect our distribution schedules), and
increases in component costs (which can adversely affect our profitability). We
have some single-sourced manufacturer relationships, either because alternative
sources are not readily or economically available or because the relationship is
advantageous due to performance, quality, support, delivery, capacity, or price
considerations. If these sources are unable or unwilling to
manufacture our products in a timely and reliable manner, we could experience
temporary distribution interruptions, delays, or inefficiencies adversely
affecting our results of operations. Even where alternative OEMs are
available, qualification of the alternative manufacturers and establishment of
reliable suppliers could result in delays and a possible loss of sales, which
could affect operating results adversely.
Many states have
and other states have stated an intention to enact laws requiring manufacturers
of certain electronic products to pay annual registration fees and have
recycling plans in place for electronic products sold at retail such as
televisions, computers, and monitors (“electronic recycling
laws”). If the electronic recycling laws are applied to us, the sale
of monitors by us may become prohibitively expensive. Our
Security Segment sells monitors as part of the video security surveillance
packages we market. The video security surveillance packages consist of cameras,
digital video recorders and video monitors. We have taken the
position with many states that our monitors are security monitors and are not
subject to the laws they have enacted which generally refer to computer
monitors. If we have to pay registration fees and have recycling plans for the
monitors we sell, it may be prohibitively expensive to offer monitors as part of
our security surveillance packages. The inability to offer monitors
at a competitive price will place us at a competitive
disadvantage.
12
The businesses
that manufacture our electronic surveillance products are located in foreign
countries, making it difficult to recover damages if the manufacturers fail to
meet their obligations. Our electronic surveillance
products and many non-aerosol personal protection products are manufactured on
an OEM basis. Most of the OEM suppliers we deal with are located in Asian
countries and are paid a significant portion of an order in advance of the
shipment of the product. If any of the OEM suppliers defaulted on their
agreements with the Company, it would be difficult for the Company to obtain
legal recourse because of the suppliers’ assets being located in foreign
countries.
If people are
injured by our consumer safety products, we could be held liable and face damage
awards. We face claims of injury allegedly resulting from our
defense sprays, which we market as less-than-lethal. For example, we
are aware of allegations that defense sprays used by law enforcement personnel
resulted in deaths of prisoners and of suspects in custody. In
addition to use or misuse by law enforcement agencies, the general public may
pursue legal action against us based on injuries alleged to have been caused by
our products. We may also face claims by purchasers of our electronic
surveillance systems if they fail to operate properly during the commission of a
crime. As the use of defense sprays and electronic surveillance systems by the
public increases, we could be subject to additional product liability
claims. We currently have a $25,000 deductible on our consumer safety
products insurance policy, meaning that all such lawsuits, even unsuccessful
ones and ones covered by insurance, cost the Company
money. Furthermore, if our insurance coverage is exceeded, we will
have to pay the excess liability directly. Our product liability
insurance provides coverage of $1 million per occurrence and $2 million in the
aggregate with an umbrella policy which provides coverage of up to $25 million.
However, if we are required to directly pay a claim in excess of our coverage,
our income will be significantly reduced, and in the event of a large claim, we
could go out of business.
If governmental
regulations regarding defense sprays change or are applied differently, our
business could suffer. The distribution, sale, ownership and use of
consumer defense sprays are legal in some form in all 50 states and the District
of Columbia. Restrictions on the manufacture or use of consumer
defense sprays may be enacted, which would severely restrict the market for our
products or increase our costs of doing business.
Our defense
sprays use hazardous materials which if not properly handled would result in our
being liable for damages under environmental laws. Our
consumer defense spray manufacturing operation currently incorporates hazardous
materials, the use and emission of which are regulated by various state and
federal environmental protection agencies, including the United States
Environmental Protection Agency. If we fail to comply with any environmental
requirements, these changes or failures may expose us to significant liabilities
that would have a material adverse effect on our business and financial
condition. The Environmental Protection Agency conducted a site investigation at
our Bennington, Vermont facility in January, 2008 and found the facility in need
of remediation. See Note 17. Commitments and
Contingencies.
Our monitoring
business relies on third party providers for the software systems and
communication connections we use to monitor alarms and video signals; any
failure or interruption in products or services provided by these third parties
could harm our ability to operate our business. Our central station
utilizes third party software and third party phone and internet connections to
monitor alarm and video signals. Any financial or other difficulties our
providers face may have negative effects on our business.
Our monitoring
business can lose customers due to customers' cancelling land
line telecommunications services. Certain elements of
our operating model rely on our customers' selection and continued use of
traditional, land-line telecommunications services, which we use to communicate
with our monitoring operations. In order to continue to service existing
customers who cancel their land-line telecommunications services and to service
new customers who do not subscribe to land-line telecommunications services,
some customers must upgrade to alternative and often more expensive wireless or
internet based technologies. Higher costs may reduce the market for new
customers of alarm monitoring services, and the trend away from traditional
land-lines to alternatives may mean more existing customers will cancel service
with us. Continued shifts in customers' preferences regarding telecommunications
services could continue to have an adverse impact on our earnings, cash flow and
customer attrition.
Our monitoring
business faces continued competition and pricing pressure from other
companies in the industry and, if we are unable to compete
effectively with these companies, our sales and profitability could be adversely
affected. We compete with a number of major domestic security
monitoring companies, as well as a large number of smaller, regional
competitors. We believe that this competition is a factor in our customer
attrition, limits our ability to raise prices, and, in some cases, requires that
we lower prices. Some of our monitoring competitors, either alone or in
conjunction with their respective parent corporate groups, are larger than we
are and have greater financial resources, sales, marketing or operational
capabilities than we do. In addition, opportunities to take market share using
innovative products, services and sales approaches may attract new entrants to
the field. We may not be able to compete successfully with the offerings and
sales tactics of other companies, which could result in the loss of customers
and, as a result, decreased revenue and operating results.
13
Loss of customer
accounts by our monitoring business could materially adversely affect our
operations. Our contracts can be terminated on 60 day notice by our
customers. We could experience the loss of accounts as a result of,
among other factors:
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relocation of
customers;
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customers' inability or
unwillingness to pay our
charges;
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adverse financial and economic
conditions, the impact of which may be particularly acute among our small
business customers;
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the customers' perceptions of
value;
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competition from other alarm
service companies; and
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the purchase of our dealers by
third parties who choose to monitor
elsewhere.
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Loss of a
large dealer customer could result in a significant reduction in recurring
monthly revenue. Net losses of customer accounts could materially and adversely
affect our business, financial condition and results of operations.
Increased
adoption of "false alarm" ordinances by local governments may adversely affect
our monitoring business. An increasing number of local governmental
authorities have adopted, or are considering the adoption of, laws, regulations
or policies aimed at reducing the perceived costs to municipalities of
responding to false alarm signals. Such measures could include:
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requiring permits for the
installation and operation of individual alarm systems and the revocation
of such permits following a specified number of false
alarms;
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imposing limitations on the
number of times the police will respond to alarms at a particular location
after a specified number of false
alarms;
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requiring further verification of
an alarm signal before the police will respond;
and
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subjecting alarm monitoring
companies to fines or penalties for transmitting false
alarms.
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Enactment
of these measures could adversely affect our future business and operations. For
example, concern over false alarms in communities adopting these ordinances
could cause a decrease in the timeliness of police response to alarm activations
and thereby decrease the propensity of consumers to purchase or maintain alarm
monitoring services. Our costs to service affected accounts could
increase.
Due to a
concentration of monitoring customers in California, we are susceptible to
environmental incidents that may negatively impact our results of operations.
Approximately 95% of the monitoring businesses recurring monthly revenue
(“RMR”) at December 31, 2009 was derived from customers located in California.
Additionally, our facilities are located in California. A major
earthquake, or other environmental disaster in California, could disrupt our
ability to serve customers or render customers uninterested in continuing to
retain us to provide alarm monitoring services.
We could face
liability for our failure to respond adequately to alarm activations. The
nature of the monitoring services we provide potentially exposes us to greater
risks of liability for employee acts or omissions or system failures than may be
inherent in other businesses. In an attempt to reduce this risk, our alarm
monitoring agreements and other agreements pursuant to which we sell our
products and services contain provisions limiting our liability to customers and
third parties. In the event of litigation with respect to such matters, however,
these limitations may not be enforced. In addition, the costs of such litigation
could have an adverse effect on us.
Future government
regulations or other standards could have an adverse effect on our operations.
Our monitoring operations are subject to a variety of laws, regulations
and licensing requirements of federal, state and local authorities. In certain
jurisdictions, we are required to obtain licenses or permits to comply with
standards governing employee selection and training and to meet certain
standards in the conduct of our business. The loss of such licenses, or the
imposition of conditions to the granting or retention of such licenses, could
have an adverse effect on us. In the event that these laws, regulations and/or
licensing requirements change, we may be required to modify our operations or to
utilize resources to maintain compliance with such rules and regulations. In
addition, new regulations may be enacted that could have an adverse effect on
us.
The loss of our
Underwriter Laboratories listing could negatively impact our competitive
position. Our alarm monitoring center is UL listed. To obtain and
maintain a UL listing, an alarm monitoring center must be located in a building
meeting UL's structural requirements, have back-up and uninterruptible power
supplies, have secure telephone lines and maintain redundant computer systems.
UL conducts periodic reviews of alarm monitoring centers to ensure compliance
with its regulations. Non-compliance could result in a suspension of our UL
listing. The loss of our UL listing could negatively impact our competitive
position.
14
Risks
Related to our Digital Media Marketing Segment
Our e-commerce
brands are not well known. Our e-commerce brands of Vioderm
(anti-wrinkle products), TrimDay (diet supplement), Purity by Mineral Science
(mineral based facial makeup), Eternal Minerals (Dead Sea spa products),
Extreme- BriteWhite (a teeth whitening product), Knockout (an acne product),
Biocol (a natural colon cleanser), Goji Berry Now (a concentrated antioxidant
dietary supplement), and PetVitamins (a line of FDA-approved supplements for
pets) are relatively new. We have not yet been able to develop
widespread awareness of our e-commerce brands. Lack of brand awareness
could harm the success of our marketing campaigns, which could have a material
adverse effect on our business, results of operations, financial condition and
the trading price of our common stock.
We have a
concentration of our e-commerce business in limited
products. E-Commerce revenues are currently generated from six
product lines. The concentration of our business in limited products creates the
risk of adverse financial impact if we are unable to continue to sell these
products or unable to develop additional products. We believe that we can
mitigate the financial impact of any decrease in sales by the development of new
products, however we cannot predict the timing of or success of new
products.
We compete with
many established e-commerce companies that have been in business longer than
us. Current and potential e-commerce competitors are making,
and are expected to continue to make, strategic acquisitions or establish
cooperative, and, in some cases, exclusive relationships with significant
companies or competitors to expand their businesses or to offer more
comprehensive products and services. To the extent these competitors or
potential competitors establish exclusive relationships with major portals,
search engines and ISPs, our ability to reach potential members through online
advertising may be restricted. Any of these competitors could cause us
difficulty in attracting and retaining online registrants and converting
registrants into customers and could jeopardize our existing affiliate program
and relationships with portals, search engines, ISPs and other Internet
properties. Failure to compete effectively including by developing and
enhancing our services offerings would have a material adverse effect on our
business, results of operations, financial condition and the trading price of
our common stock.
We need to
attract and retain a large number of e-commerce customers who purchase our
products on a recurring basis. Our e-commerce model is driven by
the need to attract a large number of customers to our continuity program and to
maintain customers for an extended period of time. We have fixed
costs in obtaining an initial customer which can be defrayed only by a customer
making further purchases. For our business to be profitable, we must
convert a certain percentage of our initial customers to customers that purchase
our products on a recurring monthly basis for a period of time. To do
so, we must continue to invest significant resources in order to enhance our
existing products and to introduce new high-quality products and services.
There is no assurance we will have the resources, financial or otherwise,
required to enhance or develop products and services. Further, if we are
unable to predict user preferences or industry changes, or if we are unable to
improve our products and services on a timely basis, we may lose existing
members and may fail to attract new customers. Failure to enhance or
develop products and services or to respond to the needs of our customers in an
effective or timely manner could have a material adverse effect on our business,
results of operations, financial condition and the trading price of our common
stock.
Our customer
acquisition costs may increase significantly. The customer
acquisition cost of our business depends in part upon our ability to obtain
placement on promotional Internet sites at a reasonable cost. We
currently pay for the placement of our products on third party promotional
Internet sites by paying the site operators a fixed fee for each customer we
obtain from the site (“CPA fee”). The CPA fee varies over time, depending
upon a number of factors, some of which are beyond our control. One of the
factors that determine the amount of the CPA fee is the attractiveness of our
products and how many consumers our products draw to a promotional
website. Historically, we have used online advertising on promotional
websites as the sole means of marketing our products. In general, the
costs of online advertising have increased substantially and are expected to
continue to increase as long as the demand for online advertising remains
robust. We may not be able to pass these costs on in the form of higher
product prices. Continuing increases in advertising costs could have a
material adverse effect on our business, results of operations, financial
condition and the trading price of our common stock.
15
Our online
marketing business must keep pace with rapid technological change to remain
competitive. Our online marketing business operates in a market
characterized by rapidly changing technology, evolving industry standards,
frequent new product and service announcements, enhancements, and changing
customer demands. We must adapt to rapidly changing technologies and
industry standards and continually improve the speed, performance, features,
ease of use and reliability of our services and products. Introducing new
technology into our systems involves numerous technical challenges, requires
substantial amounts of capital and personnel resources, and often takes many
months to complete. We may not successfully integrate new technology into
our websites on a timely basis, which may degrade the responsiveness and speed
of our websites. Technology, once integrated, may not function as
expected. Failure to generally keep pace with the rapid technological
change could have a material adverse effect on our business, results of
operations, financial condition and the trading price of our common
stock.
We depend on our
merchant and banking relationships, as well as strategic relationships with
third parties, who provide us with payment processing solutions.
Our e-commerce products are sold by us on the Internet and are paid for by
customers through credit cards. From time to time, VISA and
MasterCard increase the fees that they charge processors. We may attempt to pass
these increases along to our customers, but this might result in the loss of
those customers to our competitors who do not pass along the increases. Our
revenues from merchant account processing are dependent upon our continued
merchant relationships which are highly sensitive and can be canceled if
customer charge-backs escalate and generate concern that the company has not
held back sufficient funds in reserve accounts to cover these charge-backs as
well as result in significant charge-back fines. Cancellation by our merchant
providers would most likely result in the loss of new customers and lead to a
reduction in our revenues.
We depend on
credit card processing for a majority of our e-commerce business, including but
not limited to Visa, MasterCard, American Express, and Discover.
Significant changes to the merchant operating regulations, merchant rules and
guidelines, card acceptance methods and/or card authorization methods could
significantly impact our revenues. Additionally, our e-commerce membership
programs are accepted under a negative option billing term (customers are
charged monthly until they cancel), and change in regulation of negative option
billing could significantly impact our revenue.
We are exposed to
risks associated with credit card fraud and credit payment. Our
customers use credit cards to pay for our e-commerce products and for the
products we market for third parties. We have suffered losses, and may
continue to suffer losses, as a result of orders placed with fraudulent credit
card data, even though the associated financial institution approved
payment. Under current credit card practices, a merchant is liable for
fraudulent credit card transactions when the merchant does not obtain a
cardholder’s signature. A failure to adequately control fraudulent credit
card transactions would result in significantly higher credit card-related costs
and could have a material adverse effect on our business, results of operations,
financial condition and the trading price of our common stock.
Security breaches and
inappropriate Internet use could
damage our Digital Media Marketing business. Failure to successfully
prevent security breaches could significantly harm our business and expose us to
lawsuits. Anyone who is able to circumvent our security measures could
misappropriate proprietary information, including customer credit card and
personal data, cause interruptions in our operations, or damage our brand and
reputation. Breach of our security measures could result in the disclosure
of personally identifiable information and could expose us to legal
liability. We cannot assure you that our financial systems and other
technology resources are completely secure from security breaches or
sabotage. We have experienced security breaches and attempts at
“hacking.” We may be required to incur significant costs to protect
against security breaches or to alleviate problems caused by breaches. All of
these factors could have a material adverse effect on our business, results of
operations, financial condition and the trading price of our common
stock.
Changes in
government regulation and industry standards could decrease demand for our
products and services and increase our costs of doing business. Laws and regulations
that apply to Internet communications, commerce and advertising are becoming
more prevalent. These regulations could affect the costs of communicating on the
web and could adversely affect the demand for our advertising solutions or
otherwise harm our business, results of operations and financial condition. The
United States Congress has enacted Internet legislation regarding children’s
privacy, copyrights, sending of commercial email (e.g., the Federal CAN-SPAM Act
of 2003), and taxation. Other laws and regulations have been adopted and
may be adopted in the future, and may address issues such as user
privacy, spyware, “do not email” lists, pricing, intellectual property ownership
and infringement, copyright, trademark, trade secret, export of encryption
technology, click-fraud, acceptable content, search terms, lead generation,
behavioral targeting, taxation, and quality of products and services. This
legislation could hinder growth in the use of the web generally and adversely
affect our business. Moreover, it could decrease the acceptance of the web as a
communications, commercial and advertising medium. The Company does not use any
form of spam or spyware.
16
Government
enforcement actions could result in decreased demand for our products and
services. The Federal Trade
Commission and other governmental or regulatory bodies have increasingly focused
on issues impacting online marketing practices and consumer protection. The
Federal Trade Commission has conducted investigations of competitors and filed
law suits against competitors. Some of the investigations and law
suits have been settled by consent orders which have imposed fines and required
changes with regard to how competitors conduct business. The New York
Attorney General’s office has sued a major Internet marketer for alleged
violations of legal restrictions against false advertising and deceptive
business practices related to spyware. In our judgment, the marketing
claims we make in advertisements we place to obtain new e-commerce customers are
legally permissible. Governmental or regulatory authorities may
challenge the legality of the advertising we place and the marketing claims we
make. We could be subject to regulatory proceedings for past marketing
campaigns, or could be required to make changes in our future marketing claims,
either of which could adversely affect our revenues.
Our business
could be subject to regulation by foreign countries, new unforeseen laws and
unexpected interpretations of existing laws, resulting in an increased cost of
doing business. Due to the global nature of the web, it is
possible that, although our transmissions originate in California and
Pennsylvania, the governments of other states or foreign countries might attempt
to regulate our transmissions or levy sales or other taxes relating to our
activities. In addition, the growth and development of the market for Internet
commerce may prompt calls for more stringent consumer protection laws, both
in the United States and abroad, that may impose additional burdens on
companies conducting business over the Internet. The laws governing the internet
remain largely unsettled, even in areas where there has been some legislative
action. It may take years to determine how existing laws, including those
governing intellectual property, privacy, libel and taxation, apply to the
Internet and Internet advertising. Our business, results of operations and
financial condition could be materially and adversely affected by the adoption
or modification of industry standards, laws or regulations relating to the
Internet, or the application of existing laws to the Internet or Internet-based
advertising.
We depend on
third parties to manufacture all of the products we sell within our e-commerce
division, and if we are unable to maintain these manufacturing and product
supply relationships or enter into additional or different arrangements, we may
fail to meet customer demand and our net sales and profitability may suffer as
a result. In addition, shortages of raw ingredients, especially
for our Purity mineral cosmetics line, could affect our supply chain and impede
current and future sales and net revenues. All of our products
are contract manufactured or supplied by third parties. The fact that we do not
have long-term contracts with our other third-party manufacturers means that
they could cease manufacturing these products for us at any time and for any
reason. In addition, our third-party manufacturers are not restricted from
manufacturing our competitors’ products, including mineral-based products. If we
are unable to obtain adequate supplies of suitable products because of the loss
of one or more key vendors or manufacturers, our business and results of
operations would suffer until we could make alternative supply arrangements. In
addition, identifying and selecting alternative vendors would be time-consuming
and expensive, and we might experience significant delays in production during
this selection process. Our inability to secure adequate and timely supplies of
merchandise would harm inventory levels, net sales and gross profit, and
ultimately our results of operations.
The quality of
our e-commerce products depend on quality control of third party
manufacturers. For our e-commerce products, third-party
manufacturers may not continue to produce products that are consistent with our
standards or current or future regulatory requirements, which would require us
to find alternative suppliers of our products. Our third-party
manufacturers may not maintain adequate controls with respect to product
specifications and quality and may not continue to produce products that are
consistent with our standards or applicable regulatory requirements. If we are
forced to rely on products of inferior quality, then our customer satisfaction
and brand reputation would likely suffer, which would lead to reduced net
sales.
Within our
e-commerce division, we manufacture and market health and beauty consumer
products that are ingestible or applied topically. These products may
cause unexpected and undesirable side effects that could limit their use,
require their removal from the market or prevent further development. In
addition, we are vulnerable to claims that our products are not as effective as
we claim them to be. We also may be vulnerable to product liability
claims from their use. Unexpected and undesirable side effects caused by
our products for which we have not provided sufficient label warnings could
result in our recall or discontinuance of sales of our products. Unexpected and
undesirable side effects could prevent us from achieving or maintaining market
acceptance of the affected products or could substantially increase the costs
and expenses of commercializing new products. In addition, consumers or industry
analysts may assert claims that our products are not as effective as we claim
them to be. Unexpected and undesirable side effects associated with our products
or assertions that our products are not as effective as we claim them to be also
could cause negative publicity regarding our company, brand or products, which
could in turn harm our reputation and net sales. Our business exposes
us to potential liability risks that arise from the testing, manufacture and
sale of our beauty products. Plaintiffs in the past have received substantial
damage awards from other cosmetics companies based upon claims for injuries
allegedly caused by the use of their products. We currently maintain general
liability insurance in the amount of $1 million per occurrence and
$2 million in the aggregate with an umbrella policy which provides coverage
of up to $25 million. Any claims brought against us may exceed our existing or
future insurance policy coverage or limits. Any judgment against us that is in
excess of our policy limits would have to be paid from our cash reserves, which
would reduce our capital resources. Any product liability claim or
series of claims brought against us could harm our business significantly,
particularly if a claim were to result in adverse publicity or damage awards
outside or in excess of our insurance policy limits.
17
Risks
Related to our Common Stock
Our
stock price has been, and likely will continue to be, volatile and an investment
in our common stock may suffer a decline in value.
The
market price of our common stock has in the past been, and is likely to continue
in the future to be, volatile. That volatility depends upon many factors,
some of which are beyond our control, including:
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announcements
regarding the results of expansion or development efforts by us or our
competitors;
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announcements
regarding the acquisition of businesses or companies by us or our
competitors;
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announcements
regarding the disposition of all or a significant portion of the assets
that comprise our Car Wash Segment, which may or may not be on favorable
terms;
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technological
innovations or new commercial products developed by us or our
competitors;
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changes
in our or our suppliers’ intellectual property
portfolio;
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issuance
of new or changed securities analysts’ reports and/or recommendations
applicable to us or our
competitors;
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additions
or departures of our key personnel;
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operating
losses by us;
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actual
or anticipated fluctuations in our quarterly financial and operating
results and degree of trading liquidity in our common stock;
and
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our
ability to maintain our common stock listing on the NASDAQ Global
Market.
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One or
more of these factors could cause a decline in our revenues and income or in the
price of our common stock, thereby reducing the value of an investment in our
Company.
We could lose our
listing on the NASDAQ Global Market if the closing bid price of our stock does
not return to above $1.00 for ten consecutive days during the 180 day period
ending September 20, 2010. The loss of the listing would make our
stock significantly less liquid and would affect its
value. Our common stock is listed on NASDAQ Global Market with
a closing bid price of $0.92 at the close of the market March 18, 2010. On March
22, 2010, the Company received a letter from the NASDAQ Listing Qualifications
Department that the Company was not in compliance with NASDAQ Listing Rule
5450(a)(1) because, for the period February 4, 2010 through March 19, 2010, the
closing bid price of our common stock was less than $1.00 per share. The
non-compliance with NASDAQ Listing Rule 5450a)(1) makes the Company’s common
stock subject to being delisted from the NASDAQ Stock Market. In accordance with
NASDAQ Listing Rule 5810(c)(3)(A), the Company has a grace period of 180
calendar days expiring on September 20, 2010 to regain compliance by having a
closing bid price for a minimum of ten consecutive business days at $1.00 per
share or higher. Under NASDAQ Listing Rule 5810(c)(3)(F), the NASDAQ Listing
Qualification Department may, in its discretion, require the Company to maintain
a closing bid price of at least $1.00 per share for a period in excess of ten
consecutive business days, but generally not more than 20 consecutive business
days. Upon delisting from the NASDAQ Capital 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 Global Market or the NASDAQ Capital Market (together
“NASDAQ-listed Stocks”). Many OTC stocks trade less frequently and in smaller
volumes than NASDAQ-listed Stocks. Accordingly, our stock would be
less liquid than it would be otherwise. Also, the values of these
stocks may be more volatile than NASDAQ-listed Stocks. If our stock
is traded in the OTC market and a market maker sponsors us, we may have the
price of our stock electronically displayed on the OTC Bulletin Board, or
OTCBB. However, if we lack sufficient market maker support for
display on the OTCBB, we must have our price published by the National
Quotations Bureau LLP in a paper publication known as the Pink Sheets. The
marketability of our stock would be even more limited if our price must be
published on the Pink Sheets.
Because we are a
Delaware corporation, it may be difficult for a third party to acquire us, which
could affect our stock price. We are governed by Section 203
of the Delaware General Corporation Law, which prohibits a publicly held
Delaware corporation from engaging in a “business combination” with an entity
who is an “interested stockholder” (as defined in Section 203, an owner of 15%
or more of the outstanding stock of the corporation) for a period of three years
following the stockholder becoming an “interested stockholder,” unless approved
in a prescribed manner. This provision of Delaware law may affect our
ability to merge with, or to engage in other similar activities with, some other
companies. This means that we may be a less attractive target to a
potential acquirer who otherwise may be willing to pay a premium for our common
stock above its market price.
18
If we issue our
authorized preferred stock, the rights of the holders of our common stock may be
affected and other entities may be discouraged from seeking to acquire control
of our Company. Our certificate of incorporation authorizes
the issuance of up to 10 million shares of “blank check” preferred stock that
could be designated and issued by our board of directors to increase the number
of outstanding shares and thwart a takeover attempt. No shares of
preferred stock are currently outstanding. It is not possible to
state the precise effect of preferred stock upon the rights of the holders of
our common stock until the board of directors determines the respective
preferences, limitations, and relative rights of the holders of one or more
series or classes of the preferred stock. However, such effect might
include: (i) reduction of the amount otherwise available for payment of
dividends on common stock, to the extent dividends are payable on any issued
shares of preferred stock, and restrictions on dividends on common stock if
dividends on the preferred stock are in arrears, (ii) dilution of the voting
power of the common stock to the extent that the preferred stock has voting
rights, and (iii) the holders of common stock not being entitled to share in our
assets upon liquidation until satisfaction of any liquidation preference granted
to the holders of our preferred stock. The “blank check” preferred
stock may be viewed as having the effect of discouraging an unsolicited attempt
by another entity to acquire control of us and may therefore have an
anti-takeover effect. Issuances of authorized preferred stock can be
implemented, and have been implemented by some companies in recent years, with
voting or conversion privileges intended to make an acquisition of a company
more difficult or costly. Such an issuance, or the perceived threat
of such an issuance, could discourage or limit the stockholders’ participation
in certain types of transactions that might be proposed (such as a tender
offer), whether or not such transactions were favored by the majority of the
stockholders, and could enhance the ability of officers and directors to retain
their positions.
Our policy of not
paying cash dividends on our common stock could negatively affect the price of
our common stock. We have not paid in the past, and do not
expect to pay in the foreseeable future, cash dividends on our common
stock. We expect to reinvest in our business any cash otherwise
available for dividends. Our decision not to pay cash dividends may
negatively affect the price of our common stock.
ITEM
1B. UNRESOLVED STAFF COMMENTS
At March
19, 2010, there were no unresolved comments from the SEC staff regarding our
periodic or current reports.
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ITEM
2.
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PROPERTIES
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Our
corporate headquarter is located in Horsham, Pennsylvania and the office of our
Chief Executive Officer is in Walnut Creek, California. We rent approximately
5,000 square feet of space at a current annual cost of approximately $116,000 in
Horsham, Pennsylvania and approximately 800 square feet of space plus use of
common areas at a current annual cost of approximately $51,000 in Walnut Creek,
California.
Security Segment
Properties. The operations of our electronic surveillance
product operations are located in Fort Lauderdale, Florida and Farmers Branch,
Texas. The operations of our personal defense and law enforcement aerosol
business, 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
approximately $127,000. This lease, which expired on November 15, 2009, was
amended during 2008 to approximately 44,300 square feet of space with a total
annual cost of approximately $129,000. We also leased from November 2008 to May
2009, on a month-to-month basis, approximately 3,000 square feet of temporary
inventory storage space at a monthly cost of $1,200. In September 2009, the
Company and Vermont Mill extended the term of the lease to November 14, 2010 at
a monthly rental rate of $10,777 per month and modified the square footage
rented to 33,476 square feet. The Company believes that the lease rate is lower
than lease rates charged for similar properties in the Bennington, Vermont area.
Vermont Mill is controlled by Jon E. Goodrich, a director of the Company through
December 2003 and a current employee of the Company.
We
purchased a 20,000 square foot facility in June 2004 in Fort Lauderdale, Florida
which also housed the administrative and sales staff of the Security Segment’s
electronic surveillance products division. On December 4, 2009, we sold the Fort
Lauderdale, Florida building pursuant to an agreement of sale entered into on
October 5, 2009 for cash consideration of $1.6 million. With the sale of this
property, we entered into a lease for 7,358 square feet of office space in Fort
Lauderdale, Florida for the administrative and sales staff located in the Fort
Lauderdale, Florida area. This lease is for a three year term expiring on
December 31, 2012 at a current lease rate of $7,143 per month. The lease also
provides for a two year renewal option through December 31, 2014.
In August
2004, we purchased a 45,000 square foot facility in Farmers Branch, Texas where
our electronic surveillance products and our high end camera products are
warehoused and sold. Additionally, in the fourth quarter of 2008, we
consolidated the inventory of our Fort Lauderdale, Florida based electronic
surveillance equipment operation into our Farmers Branch, Texas facility. We
also warehoused certain of our Digital Media Marketing Segment e-commerce
division product at our Farmers Branch, Texas facility until September of 2009.
The Farmers Branch, Texas facility is secured by a first mortgage loan in the
amount of $610,678 at December 31, 2009.
19
Digital Media Marketing
Properties. The operations of our Digital Media Marketing Segment were
consolidated in November 2007 into a 5,000 square foot leased office space in
Wexford, PA, a suburb of Pittsburgh, PA, with an additional 2,000 square feet of
space leased in March 2008. The lease, which expires in November 2012, is at a
total current lease rate of $11,162 per month. This additional space allowed for
expansion. We previously leased 3,872 square feet of space in San Francisco,
California under an 18 month sublease agreement at an annual cost of
approximately $81,000. We in turn entered into a sublease agreement for this
space with a third party effective March 1, 2008 through May 15,
2009.
Car Wash
Properties. As of December 31, 2009, we owned seven and
leased one car wash facilities. As of March 19, 2010, we own six and lease one
car wash facilities. Our remaining car wash facilities are reported
under Discontinued Operations and are being held for sale. We have
sold 42 car wash facilities since December 31, 2005. The locations of our car
washes and the services offered at the locations are in the chart
below.
|
Locations (1)
|
Type of
Car Wash
|
Number of
Facilities as of
December 31, 2009 (2)
|
Number of
Facilities as of
March 19, 2010 (3)
|
|||
|
Dallas,
Texas Area
|
Full
Service
Self
Serve /Lube
|
5
|
5
|
|||
|
Lubbock,
Texas
|
Full
Service
|
3
|
2
|
| (1) |
All
of our locations are owned, except for one locations in Dallas, Texas
which is leased.
|
|
|
|
(2)
|
Several
locations also offer other consumer products and related car care
services, such as professional detailing services (currently offered at
six locations), oil and lubrication services (currently offered at five
locations), gasoline dispensing services (currently offered at five
locations), state inspection services (currently offered at five
locations), convenience store sales (currently offered at one location)
and merchandise store sales (currently offered at seven
locations).
|
|
|
(3)
|
One
Dallas, Texas location is subject to an Agreement of Sale. It is
anticipated that the sale of this location will be consummated in the
second quarter of 2010.
|
We own
real estate, buildings, equipment, and other properties that we employ in
substantially all of our car washes.
Many of
our car washes are encumbered by first mortgage loans. Of the eight
car washes owned or leased by us at December 31, 2009, five properties and
related equipment with a net book value totaling $4.9 million secured first
mortgage loans totaling $2.1 million and three properties with a net book value
totaling $1.9 million were not encumbered.
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
The Board
of Directors of the Company terminated Mr. Paolino as the Chief Executive
Officer of the Company on May 20, 2008. On June 9, 2008, the Company
received a Demand for Arbitration from Mr. Paolino (“Arbitration
Demand”). The Arbitration Demand has been filed with the American
Arbitration Association in Philadelphia, Pennsylvania (“Arbitration
Proceeding”). The primary allegations of the Arbitration Demand are:
(i) Mr. Paolino alleges that he was terminated by the Company wrongfully and is
owed a severance payment of $3,918,120 due to the termination; (ii) Mr. Paolino
is claiming that the Company owes him $322,606 because the Company did not issue
him a sufficient number of stock options in August 2007, under provisions of the
Employment Contract between Mr. Paolino and the Company dated August 21, 2006;
(iii) Mr. Paolino is claiming damages against the Company in excess of
$6,000,000, allegedly caused by the Company defaming Mr. Paolino’s professional
reputation and character in the Current Report on Form 8-K dated May 20, 2008
filed by the Company and in the press release the Company issued on May 21,
2008 relating to Mr. Paolino’s termination; and (iv) Mr.
Paolino is also seeking punitive damages, attorney’s fees and costs in an
unspecified amount. The Company has disputed the allegations made by Mr. Paolino
and is defending itself in the Arbitration Proceeding. The Company has also
filed a counterclaim in the Arbitration Proceeding demanding damages from Mr.
Paolino of $1,000,000. Testimony in the arbitration has been
completed, the parties prepared and filed briefs of their positions and a ruling
is expected on or about May 31, 2010, based on the current scheduling order. It
is not possible to predict the outcome of the Arbitration Proceeding. No
accruals have been made with respect to Mr. Paolino’s claims.
On March
30, 2009, Mr. Paolino filed a Complaint (“Indemnity Complaint”) in the Court of
Chancery for the State of Delaware seeking to compel the Company to indemnify
and advance to Mr. Paolino his costs of defending the Company’s $1,000,000
counterclaim filed in the Arbitration Proceeding (“Counterclaim”). In an Opinion
issued December 8, 2009, the Court in the Indemnity Action, ordered the Company
to advance the costs Mr. Paolino incurred in defending the
Counterclaim. The Company paid Mr. Paolino $250,000 to settle the
Company’s advancement obligation. Mr. Paolino’s initial demand was in
the amount of $688,758. As part of the settlement, Mr. Paolino has
agreed to repay any amount of the advancement that exceeds the amount Mr.
Paolino is awarded as indemnification for expenses in the Indemnity
Action. The Court in the Indemnification Action has stayed
proceedings on the indemnification portion of the Indemnity Action until after
the Arbitration Proceeding.
20
On June
25, 2008, Mr. Paolino filed a claim with the United States Department of Labor
claiming that his termination as Chief Executive Officer of the Company was an
“unlawful discharge” in violation of 18 U.S.C. Sec. 1514A, a provision of the
Sarbanes-Oxley Act of 2002 (the “DOL Complaint”). Mr. Paolino has alleged that
he was terminated in retaliation for demanding that certain risk factors be set
forth in the Company’s Form 10-Q for the quarter ended March 31, 2008, filed by
the Company on May 15, 2008. Even though the risk factors demanded by Mr.
Paolino were set forth in the Company’s Form 10-Q for the quarter ended March
31, 2008, Mr. Paolino in the DOL Complaint asserts that the demand was a
“protected activity” under 18 U.S.C. Sec. 1514A, which protects Mr. Paolino
against a “retaliatory termination.” In the DOL Complaint, Mr.
Paolino demands the same damages he requested in the Arbitration Demand and
additionally requests reinstatement as Chief Executive Officer with back pay
from the date of termination. On September 23, 2008 the Secretary of
Labor, acting through the Regional Administrator for the Occupational Safety and
Health Administration, Region III dismissed the DOL Complaint and issued
findings (the “Findings”) that there was no reasonable cause to believe that the
Company violated 18 U.S.C. Sec. 1514A of the Sarbanes-Oxley Act of
2002. The Findings further stated that: (i) the investigation
revealed that Mr. Paolino was discharged for non-retaliatory reasons that were
unrelated to his alleged protected activity; (ii) Mr. Paolino was discharged
because of his failure to comply with a Board directive to reduce costs; (iii)
the Board terminated Mr. Paolino’s employment because of his failure to follow
its directions and for his failure to reduce corporate overhead and expenses;
and (iv) a preponderance of the evidence indicates that the alleged protected
activity was not a contributing factor in the adverse action taken against Mr.
Paolino. Mr. Paolino has filed objections to the
Findings. As a result of the objections, an Administrative Law Judge
set a date for a “de novo” hearing on Mr. Paolino’s claims. A “de
novo” hearing is a proceeding where evidence is presented to the Administrative
Law Judge and the Administrative Law Judge rules on the claims based on the
evidence presented at the hearing. Upon the motion of Mr. Paolino,
the de novo hearing and the claims made in the DOL Complaint have been stayed
pending the conclusion of the Arbitration Proceeding. The Company
will defend itself against the allegations made in the DOL Complaint, which the
Company believes are without merit. Although the Company is confident that it
will prevail, it is not possible to predict the outcome of the DOL Complaint or
when the matter will reach a conclusion.
The
United States Attorney for the District of Vermont (“U.S. Attorney”) is
conducting an investigation of the Company relating to possible violations of
the Resource Conservation and Recovery Act (“RCRA”) at the Company’s Bennington,
Vermont location. The Company believes the investigation is focused
on the Company allegedly not disposing of hazardous materials and waste at the
Vermont location, as required by various environmental laws. In
connection with the investigation, a search of the Company’s Bennington, Vermont
location and the building in which the facility is located occurred
during February 2008. On May 2, 2008, the U.S. Attorney issued a
grand jury subpoena to the Company. The subpoena required the Company
to provide the U.S. Attorney documents related to the storage, disposal and
transportation of materials at the Bennington, Vermont location. The Company has
supplied the documents and fully cooperated with the U.S. Attorney’s
investigation and will continue to do so. During the fourth quarter of 2009, the
U.S. Attorney interviewed a Company employee before a grand jury. The
Company believes that the U.S. Attorney is actively pursuing an investigation of
possible criminal violations. The Company has made no provision for any future
costs associated with the investigation.
The
Company is a party to various other legal proceedings related to its normal
business activities. In the opinion of the Company’s management, none
of these proceedings are material in relation to the Company’s results of
operations, liquidity, cash flows, or financial condition.
Additional
information regarding our legal proceedings can be found in Note 17 of the Notes
to Consolidated Financial Statements included in this Annual Report on Form
10-K.
|
ITEM
4.
|
(REMOVED
AND RESERVED)
|
21
PART
II
|
ITEM 5.
|
MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
|
(a)
Market Price and Dividends of the Registrant’s Common Equity
Our
common stock is traded and quoted on the Nasdaq Global 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.
|
HIGH
|
LOW
|
|||||||
|
Year
Ending December 31, 2008
|
||||||||
|
First
Quarter
|
$ | 2.05 | $ | 1.40 | ||||
|
Second
Quarter
|
$ | 1.99 | $ | 1.40 | ||||
|
Third
Quarter
|
$ | 1.65 | $ | 1.04 | ||||
|
Fourth
Quarter
|
$ | 1.26 | $ | 0.61 | ||||
|
Year
Ending December 31, 2009
|
||||||||
|
First
Quarter
|
$ | 0.91 | $ | 0.61 | ||||
|
Second
Quarter
|
$ | 1.29 | $ | 0.65 | ||||
|
Third
Quarter
|
$ | 1.19 | $ | 0.89 | ||||
|
Fourth
Quarter
|
$ | 1.24 | $ | 0.68 | ||||
|
Year
Ending December 31, 2010
|
||||||||
|
First
Quarter, through March 19, 2010
|
$ | 1.24 | $ | 0.85 | ||||
The
closing price for our common stock on June 30, 2009 was $1.18. 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 of 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,
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 and Related
Stockholder Matters.
As of
March 19, 2010 we had 92 stockholders of record and approximately 2,700
beneficial owners of our common stock. We did not pay dividends in the preceding
two years and do not anticipate paying any cash dividends in the foreseeable
future. We 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.
For
information regarding our equity compensation plans, See Item 12, Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters.
22
|
(b)
|
Stock
Performance Graph
|
The
following line graph and table compare, for the five most recently concluded
fiscal years, the yearly percentage change in the cumulative total stockholder
return, assuming reinvestment of dividends, on the Company’s common stock with
the cumulative total return of companies on the Nasdaq Stock Market and an index
comprised of certain companies in similar service industries (the “Selected Peer
Group Index”).
(1)
|
(1)
|
The
Selected Peer Group Index is comprised of securities of Command Security
Corp, Innodata Isogen, Inc., Lasercard Corp, Looksmart Ltd., Napco
Security Systems, Inc., RAE Systems, Inc., Taser International, Inc.,
Inuvo, Inc., Track Data Corp., and Versar, Inc. The current peer
group includes security product, e-commerce and digital media marketing
companies which appropriately reflect Mace’s business. There can be no
assurance that the Company’s stock performance will continue into the
future with the same or similar trends depicted by the graph
above. The Company neither makes nor endorses any predictions
as to future stock performance.
|
23
COMPARISON
OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG MACE SECURITY
INTERNATIONAL,
INC., THE NASDAQ MARKET INDEX, AND SELECTED PEER GROUP
|
December 31,
|
||||||||||||||||||||||||
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
|||||||||||||||||||
|
Mace
Security International
|
100.00 | 51.46 | 53.33 | 42.29 | 16.66 | 23.75 | ||||||||||||||||||
|
NASDAQ
Composite
|
100.00 | 101.41 | 114.05 | 123.94 | 73.43 | 105.89 | ||||||||||||||||||
|
PEER
GROUP INDEX
|
100.00 | 38.12 | 37.68 | 48.10 | 16.97 | 19.19 | ||||||||||||||||||
The
Performance Graph set forth above shall not be deemed incorporated by reference
into any filing under the Securities Act or the Exchange Act by virtue of any
general statement in such filing incorporating this Annual Report on Form 10-K
by reference, except to the extent that the Company specifically incorporates
the information contained in this section by reference, and shall not otherwise
be deemed filed under either the Securities Act of 1933, as amended (the
“Securities Act”) or the Exchange Act.
(c)
Recent Sales of Unregistered Securities
On July
20, 2007, the Company completed the purchase of all of the outstanding common
stock of Linkstar Interactive, Inc. (“Linkstar”) from Linkstar’s shareholders by
paying approximately $10.5 million to the Linkstar shareholders consisting of
$7.0 million in cash at closing and $500,000 of promissory notes bearing a 5%
interest rate paid in January 2008. As part of the consideration paid for
Linkstar, the Company issued 1,176,471 unregistered shares of the Company’s
common stock with a total value of $2.9 million to the six prior shareholders of
Linkstar Interactive, Inc.
In
undertaking this issuance, the Company relied on an exemption from registration
under Section 4(2) of the Securities Act.
(d)
Issuer Purchases of Securities
The
following table summarizes our equity security repurchase during the three
months ended December 31, 2009:
|
Period
|
Total Number
of Shares
Purchased
|
Average Price
Paid per Share
|
Total Number of
Shares Purchased
as part of
Publicly
Announced Plans
or Programs
|
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under
the Plans or
Programs (1)
|
||||||||||||
|
October
1 to October 31, 2009
|
16,700 | $ | 0.97 | 16,700 | $ | 1,507,000 | ||||||||||
|
November
1 to November 30, 2009
|
35,400 | $ | 0.84 | 35,400 | $ | 1,477,000 | ||||||||||
|
December
1 to December 31, 2009
|
82,700 | $ | 0.88 | 82,700 | $ | 1,404,000 | ||||||||||
|
Total
|
134,800 | $ | 0.88 | 134,800 | ||||||||||||
(1)
On August 13, 2007, the Company’s Board of Directors approved a
share repurchase program to allow the Company to repurchase up to an aggregate
$2,000,000 of its common shares in the future if the market conditions so
dictate. As of December 31, 2009, 575,210 shares had been repurchased under this
program at a cost of approximately $596,000.
24
|
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 “Item 7. 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,
|
|||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(In
thousands, except share information)
|
||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
Security
|
$ | 18,591 | $ | 20,788 | $ | 22,278 | $ | 23,366 | $ | 24,909 | ||||||||||
|
Digital
media marketing
|
9,655 | 17,290 | 7,625 | - | - | |||||||||||||||
| 28,246 | 38,078 | 29,903 | 23,366 | 24,909 | ||||||||||||||||
|
Cost
of revenues:
|
||||||||||||||||||||
|
Security
|
12,998 | 15,740 | 16,936 | 18,172 | 18,136 | |||||||||||||||
|
Digital
media marketing
|
6,943 | 12,126 | 6,505 | - | - | |||||||||||||||
| 19,941 | 27,866 | 23,441 | 18,172 | 18,136 | ||||||||||||||||
|
Selling,
general and administrative expenses
|
15,067 | 17,086 | 15,088 | 13,403 | 9,810 | |||||||||||||||
|
Depreciation
and amortization
|
790 | 786 | 691 | 549 | 442 | |||||||||||||||
|
Goodwill
and asset impairment charges
|
1,462 | 3,249 | 447 | 71 | - | |||||||||||||||
|
Operating
loss
|
(9,014 | ) | (10,909 | ) | (9,764 | ) | (8,829 | ) | (3,479 | ) | ||||||||||
|
Interest
(expense) income, net
|
(7 | ) | 260 | 247 | 2 | 92 | ||||||||||||||
|
Other
(loss) income
|
(108 | ) | (2,217 | ) | 944 | 324 | 235 | |||||||||||||
|
Loss
from continuing operations before income taxes
|
(9,129 | ) | (12,866 | ) | (8,573 | ) | (8,503 | ) | (3,152 | ) | ||||||||||
|
Income
tax expense
|
- | 100 | 98 | 156 | 2,182 | |||||||||||||||
|
Loss
from continuing operations
|
(9,129 | ) | (12,966 | ) | (8,671 | ) | (8,659 | ) | (5,334 | ) | ||||||||||
|
(Loss)
income from discontinued operations, net of tax
|
(1,822 | ) | 2,314 | 2,086 | 1,877 | 314 | ||||||||||||||
|
Net
loss
|
$ | (10,951 | ) | $ | (10,652 | ) | $ | (6,585 | ) | $ | (6,782 | ) | $ | (5,020 | ) | |||||
|
Basic
and Diluted loss per share
|
||||||||||||||||||||
|
Loss
from continuing operations
|
$ | (0.57 | ) | $ | (0.79 | ) | $ | (0.55 | ) | $ | (0.56 | ) | $ | (0.35 | ) | |||||
|
(Loss)
income from discontinued
|
$ | (0.11 | ) | $ | 0.14 | $ | 0.13 | $ | 0.12 | $ | 0.02 | |||||||||
|
Net
loss
|
$ | (0.68 | ) | $ | (0.65 | ) | $ | (0.42 | ) | $ | (0.44 | ) | $ | (0.33 | ) | |||||
|
Weighted
average number of shares outstanding
|
16,202,254 | 16,464,760 | 15,810,705 | 15,274,498 | 15,271,637 | |||||||||||||||
|
Year ended December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||
|
Balance
Sheet Data (at end of period):
|
||||||||||||||||||||
|
Working
capital
|
$ | 16,583 | $ | 16,025 | $ | 17,764 | $ | 26,556 | $ | 14,615 | ||||||||||
|
Intangible
assets, net
|
$ | 11,649 | $ | 10,336 | $ | 13,796 | $ | 4,546 | $ | 6,148 | ||||||||||
|
Total
assets
|
$ | 42,358 | $ | 55,036 | $ | 75,436 | $ | 87,598 | $ | 96,111 | ||||||||||
|
Long-term
debt, including capital leases and current maturities (1)
|
$ | 2,920 | $ | 6,452 | $ | 13,558 | $ | 23,966 | $ | 26,674 | ||||||||||
|
Stockholders’
equity
|
$ | 31,988 | $ | 43,167 | $ | 53,566 | $ | 56,506 | $ | 61,650 | ||||||||||
(1) Includes
Long-term debt included in Liabilities related to assets held for
sale.
25
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, 2009 and should be read in conjunction with our
Consolidated Financial Statements and related notes thereto included elsewhere
herein.
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 and Section 21E of the Exchange Act (“Forward-Looking
Statements”). All statements other than statements of historical fact
included in this report are Forward-Looking
Statements. Forward-Looking Statements are statements related to
future, not past, events. In this context, Forward-Looking Statements often
address our expected future business and financial performance and financial
condition, and often contain words such as "expect," "anticipate," "intend,"
"plan," believe," "seek," or ''will." Forward-Looking Statements by their nature
address matters that are, to different degrees, uncertain. For us, particular
uncertainties that could cause our actual results to be materially different
than those expressed in our Forward-Looking Statements include: the severity and
duration of current economic and financial conditions; our success in selling
our remaining car washes; the level of demand of the customers we serve for our
goods and services, and numerous other matters of national, regional and global
scale, including those of a political, economic, business and competitive
nature. These uncertainties are described in more detail in Part I, Item 1A.
Risk Factors of this
Form 10-K Report. 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.
Introduction
Revenues
Security
Our
Security Segment designs, manufactures, assembles, markets and sells a wide
range of security products. The products include intrusion fencing,
access control, security cameras and security digital recorders. The Security
Segment also owns and operates a UL listed monitoring center that monitors video
and security alarms for 300 security dealer clients with over 30,000 end-user
accounts. The Security Segment’s electronic surveillance products and components
are purchased from Asian, European and Israeli manufacturers. Many of
our products are designed to our specifications. We sell the electronic
surveillance products and components primarily to installing dealers,
distributors, system integrators and end users. Other products in our
Security Segment are less-than-lethal Mace® defense sprays and other security
devices such as monitors, high-end digital and machine vision cameras and
professional imaging components. The main marketing channels for our
products are industry shows, trade publications, catalogs, the internet,
telephone orders, distributors, and mass merchants. Revenues
generated for the year ended December 31, 2009 for the Security Segment were
comprised of approximately 25% from our professional electronic surveillance
operation, 36% from our consumer direct electronic surveillance and machine
vision camera and video conferencing equipment operation, 27% from our personal
defense and law enforcement aerosol operation in Vermont, and 12% from our
wholesale security monitoring operation in California.
Digital Media Marketing
Prior to
June 2008, our Digital Media Marketing Segment consisted of two business
divisions: (1) e-commerce and (2) online marketing. After June 2008 we
discontinued the online marketing services to outside customers and our Digital
Media Marketing Segment was essentially an online e-commerce
business. During the first quarter of 2010, we resumed generating
online marketing revenue.
Linkstar,
our e-commerce division, is a direct-response product business that develops,
markets and sells products directly to consumers through the internet. We reach
our customers predominately through online advertising on third party
promotional websites. Linkstar also markets products on promotional websites
operated by Promopath, our online marketing division. Our products include:
Vioderm, an anti-wrinkle skin care product (www.vioderm.com);
Purity by Mineral Science, a mineral cosmetic (www.mineralscience.com);
TrimDay™, a weight-loss supplement (www.trimday.com);
Eternal Minerals, a Dead Sea spa product line (www.eternalminerals.com);
ExtremeBriteWhite, a teeth whitening product (www.extremebritewhite.com);
Knockout, an acne product (www.knockoutmyacne.com);
Biocol, a natural colon cleanser (www.biocolcleanser.com);
Goji Berry Now, a concentrated antioxidant dietary supplement (www.gojiberrynow.com);
and PetVitamins, a pet care product line of patented FDA-approved supplements to
improve heart and joint health in dogs and cats (www.petvitamins.com).
We continuously develop and test product offerings to determine customer
acquisition costs and revenue potential, as well as to identify the most
efficient marketing programs.
26
Promopath,
our online affiliate marketing company, secured customer acquisitions or leads
for advertising clients principally using promotional internet sites offering
free gifts. Promopath was paid by its clients based on the cost-per-acquisition
(“CPA”) model. Promopath’s advertising clients were typically established
direct-response advertisers with well recognized brands and broad consumer
appeal such as NetFlix®, Discover® credit cards and Bertelsmann Group. Promopath
generated CPA revenue, both brokered and through co-partnered sites, as well as
list management and lead generation revenues. CPA revenue in the digital media
marketplace refers to paying a fee for the acquisition of a new customer,
prospect or lead. List management revenue is based on a relationship between a
data owner and a list management company. The data owner compiles, collects,
owns and maintains a proprietary computerized database composed of consumer
information. The data owner grants a list manager a non-exclusive,
non-transferable, revocable worldwide license to manage, use and have access to
the data pursuant to defined terms and conditions for which the data owner is
paid revenue. Lead generation is referred to as cost per lead (“CPL”) in the
digital media marketplace. Advertisers purchasing media on a CPL basis are
interested in collecting data from consumers expressing interest in a product or
service. CPL varies from CPA in that no credit card information needs to be
provided to the advertiser for the publishing source to be paid for the lead.
Promopath’s largest expense item was purchasing lists of internet addresses to
which it sent its promotional pages.
In June
of 2008, the Company discontinued marketing Promopath’s online marketing
services to third party customers. Between June of 2008 and December 31, 2009,
Promopath’s primary mission was focused on increasing the distribution of the
products of the Company’s e-commerce division, Linkstar. During the third
quarter of 2009, management made a decision to reactivate the operations of the
Promopath online marketing services as described above to both third party
customers as well as to generate customer acquisitions for Linkstar, the
Company’s e-commerce division. The reactivation is being conducted on a
controlled basis by having a more limited budget for the purchasing of lists of
internet addresses. The Company resumed generating online marketing revenue
through Promopath in the first quarter of 2010.
Revenues
within our Digital Media Marketing Segment for the year ended December 31, 2009,
were approximately $9.7 million; consisting of $9.64 million, or 99.8%, from our
e-commerce division and $21,000, or 0.2%, from our online marketing
division.
Cost
of Revenues
Security
Cost of
revenues within the Security Segment consists primarily of costs to purchase or
manufacture the security products including direct labor and related taxes and
fringe benefits, and raw material costs, and telecommunication costs related to
our wholesale monitoring operation. Product warranty costs related to the
Security Segment are mitigated in that a portion of customer product warranty
claims are covered by the supplier through repair or replacement of the product
associated with the warranty claim.
Digital Media Marketing
Cost of
revenues within the Digital Media Marketing Segment consist primarily of amounts
we pay to website publishers that are directly related to revenue-generating
events, including the cost to enroll new members, fulfillment and warehousing
costs, including direct labor and related taxes and fringe benefits and
e-commerce product costs. Promopath’s largest expense is the purchasing of
internet addresses to which it sends its promotional pages.
Selling,
General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses consist primarily of
management, clerical and administrative salaries, professional services,
insurance premiums, sales commissions, and other costs relating to marketing and
sales.
We
expense direct incremental costs associated with business acquisitions as well
as indirect acquisition costs, such as executive salaries, corporate overhead,
public relations, and other corporate services and overhead.
Depreciation
and Amortization
Depreciation
and amortization consists primarily of depreciation of buildings and equipment,
and amortization of leasehold improvements and certain intangible
assets. Buildings and equipment are depreciated over the estimated
useful lives of the assets using the straight-line method. Leasehold
improvements are amortized over the shorter of their useful lives or the lease
term with renewal options. Intangible assets, other than goodwill or intangible
assets with indefinite useful lives, are amortized over their useful lives
ranging from three to fifteen years, using the straight-line or an accelerated
method.
27
Other
Income
Other
income consists primarily of gains and losses on short-term
investments.
Income
Taxes
Income
tax expense is derived from tax provisions for interim periods that are based on
the Company’s estimated annual effective rate. Currently, the
effective rate differs from the federal statutory rate primarily due to state
and local income taxes, non-deductible costs related to acquired intangibles,
and changes to the valuation allowance.
Discontinued
Operations
At
December 31, 2009, we owned or leased eight full service and self-service car
wash locations in Texas which are reported as discontinued operations (see Note
4 of the Notes to Consolidated Financial Statements); and accordingly, have been
segregated from the following revenue and expense discussion. 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. The majority of revenues from our car wash operations are
collected in the form of cash or credit card receipts, thus minimizing customer
accounts receivable. Cost of revenues within the car wash operations consists
primarily of direct labor and related taxes and fringe benefits, certain
insurance costs, chemicals, wash and detailing supplies, rent, real estate
taxes, utilities, car damages, maintenance and repairs of equipment and
facilities, as well as the cost of the fuel and merchandise sold.
On
December 31, 2007, Eagle completed the purchase of the Company’s five truck
washes for $1.2 million in consideration, consisting of $280,000 cash and a
$920,000 note payable to the Company secured by mortgages on the truck washes.
The $920,000 note, which has a balance of $881,000 at December 31, 2009, has a
five-year term, with principal and interest paid on a 15-year amortization
schedule.
Results
of Operations for the Three Years Ended December 31, 2009, 2008 and
2007
The
following table presents the percentage each item in the consolidated statements
of operations bears to total revenues:
|
Year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues
|
100 | % | 100 | % | 100 | % | ||||||
|
Cost
of revenues
|
70.6 | 73.2 | 78.4 | |||||||||
|
Selling,
general and administrative expenses
|
53.3 | 44.9 | 50.5 | |||||||||
|
Depreciation
and amortization
|
2.8 | 2.1 | 2.3 | |||||||||
|
Goodwill
and asset impairment charges
|
5.2 | 8.5 | 1.5 | |||||||||
|
Operating
loss
|
(31.9 | ) | (28.7 | ) | (32.7 | ) | ||||||
|
Interest
(expense) income, net
|
(0.0 | ) | 0.7 | 0.8 | ||||||||
|
Other
(expense) income
|
(0.4 | ) | (5.8 | ) | 3.2 | |||||||
|
Loss
from continuing operations before income taxes
|
(32.3 | ) | (33.8 | ) | (28.7 | ) | ||||||
|
Income
tax expense
|
- | 0.3 | 0.3 | |||||||||
|
Loss
from continuing operations
|
(32.3 | ) | (34.1 | ) | (29.0 | ) | ||||||
|
(Loss)
income from discontinued operations, net of tax
|
(6.5 | ) | 6.1 | 7.0 | ||||||||
|
Net
loss
|
(38.8 | )% | (28.0 | )% | (22.0 | )% | ||||||
28
Revenues
Security
Revenues
were approximately $18.6 million, $20.8 million and $22.3 million for the years
ended December 31, 2009, 2008 and 2007, respectively. Of the $18.6 million of
revenues for the year ended December 31, 2009, $4.7 million, or 25%, was
generated from our professional electronic surveillance operations, $6.6
million, or 36%, from our consumer direct electronic surveillance and high end
digital and machine vision cameras and professional imaging components
operation, $5.0 million or 27%, from our personal defense and law enforcement
aerosol operations in Vermont, and $2.3 million or 12% from our wholesale
security monitoring operation in California acquired on April 30, 2009. Of the
$20.8 million of revenues for the year ended December 31, 2008, $7.2 million, or
35%, was generated from our professional electronic surveillance operation, $9.0
million, or 43%, from our consumer direct electronic surveillance and high end
digital and machine vision cameras and professional imaging components
operation, and $4.6 million, or 22%, from our personal defense and law
enforcement aerosol operation in Vermont. Of the $22.3 million of revenues for
year ended December 31, 2007, $7.8 million, or 35% was generated from our
professional electronic surveillance operation, $9.9 million, or 44%, from our
consumer direct electronic surveillance and high end digital and machine vision
cameras and professional imaging components operation, and $4.6 million, or 21%
from personal defense and law enforcement aerosol operations in
Vermont.
Overall
revenues within the Security Segment decreased in 2009. The majority of the
decrease in sales was from decreases in sales of our consumer direct
electronic surveillance division, our professional electronic surveillance
operation and our machine vision camera and video conferencing operation. Our
Vermont personal defense operations sales in 2009 increased approximately
$465,000 or 10% over 2008. The decrease in sales of our consumer direct
electronic surveillance, machine vision camera and video conference equipment
operations, and our professional electronic surveillance operation was due to
several factors, including the impact on sales of increased competition and a
reduction in spending by many of our customers impacted by the deteriorating
economy. Additionally, the Company’s machine vision camera and video
conferencing equipment operations continue to be impacted by reductions in sales
to certain customers with ties to the big three automotive manufacturers. With
respect to our personal defense operation, we experienced growth in aerosol and
non-aerosol sales largely from the introduction of new products such as a new
home security system, our Mace Pepper Gun®, our new Mace Hot Pink Defense Spray™
and our Mace Pepper Gel® partially offset by a decrease in sales of TG Guard,
law enforcement and OEM supplied products.
The
decrease in revenues within the Security Segment in 2008 as compared to 2007 was
due principally to a decrease in sales of our consumer direct electronic
surveillance and machine vision camera and video conferencing equipment and our
professional electronic surveillance operation. The decrease in sales in our
professional electronic surveillance operation was partially a result of sales
of discontinued and refurbished products at lower selling prices, the inability
of some of Mace’s vendors to supply high volume products in a timely manner, and
competitive pressures. The decrease in sales of our consumer direct electronic
surveillance operations in Texas was largely a result of increased competition
and inventory shortages of certain components. The Company’s machine vision
camera and video conferencing equipment operation was impacted by competition
and certain large customers purchasing direct from its main supplier. This
decrease in revenue was partially offset by an increase in revenue in our
personal defense and law enforcement aerosol operations with a noted increase in
sales in our Mace aerosol defense sprays and TG Guard® products.
Digital Media Marketing
Revenues
within our Digital Media Marketing Segment for the year ended December 31, 2009
were approximately $9.7 million, consisting of $9.64 million from our e-commerce
division and $21,000 from our online marketing division. Revenues within our
Digital Media Marketing Segment for the year ended December 31, 2008 were
approximately $17.3 million, consisting of $15.1 million from our e-commerce
division and $2.2 million from our online marketing division. The reduction in
revenues within our e-commerce division of $5.46 million is related to a
reduction in sales in our Purity by Mineral Science cosmetic product line
introduced in late 2007 partially offset by sales from the introduction of new
products, including the Eternal Minerals spa products, ExtremeBriteWhite teeth
whitening, Knockout acne product, Biocol colon cleanser, and Goji Berry Now
antioxidant dietary supplement products. Revenues within our e-commerce division
were also negatively impacted by an increase in credit card decline rates as the
recession continues and as credit card companies continue to tighten their
credit to customers. The reduction in revenues within our online marketing
divisions was a result of management’s decision to discontinue marketing
Promopath’s online marketing services to external customers in June
2008.
Revenues
within our Digital Media Marketing Segment from the acquisition date, July 20,
2007, through December 31, 2007, were approximately $7.6 million, consisting of
$4.2 million from our e-commerce division and $3.4 million from our online
marketing division.
29
Cost
of Revenues
Security
Costs of
revenues were $13.0 million, or 70% of revenues, $15.7 million or 76% of
revenues and $16.9 million or 76% of revenues for 2009, 2008 and 2007,
respectively. The reduction in cost of revenues as a percent of revenues in 2009
is the result of the implementation of corporate wide cost savings measures,
including a reduction in employees, in the last six months of 2008 and through
the end of 2009 and a reduction in discounts and product returns within our
professional and our consumer direct electronic surveillance operations. The
decrease in cost of revenues as a percentage of revenues in 2008 as compared to
2007 is due to a change in customer and product mix and a conscious effort to
reduce discounting of list prices and sell products at higher profit margins and
partially due to reduced overhead costs from the consolidation of the Fort
Lauderdale, Florida warehouse operations into the Farmers Branch, Texas
warehouse in the fourth quarter of 2008. Additionally, the margins within our
professional electronic surveillance operation in Florida were negatively
impacted in 2007 by an increase in sales of discontinued products, refurbished
items and substitute items as a result of the inability of some of Mace’s
vendors to supply high volume products in a timely manner.
Digital Media Marketing
Cost of
revenues within our Digital Media Marketing Segment was approximately $6.9
million, or 72% of revenues, for the year ended December 31, 2009, the majority
of which related to our e-commerce divisions.
Cost of
revenues within our Digital Media Marketing Segment was approximately $12.1
million, or 70% of revenues, for the year ended December 31, 2008. Of this
amount, $10.1 million related to our e-commerce division and $1.98 million
related to our online marketing division. Cost of revenues within our Digital
Media Marketing Segment from July 20, 2007, the date we acquired the segment,
through December 31, 2007 were approximately $6.5 million; $3.3 million related
to our e-commerce division and $3.2 million related to our online marketing
division.
Selling,
General and Administrative Expenses
SG&A
expenses for the year ended December 31, 2009 were $15.1 million compared to
$17.1 million for the same period in 2008, a net decrease of approximately $2.0
million, or 12% inclusive of approximately $858,000 of SG&A expenses in 2009
related to CSSS. CSSS was acquired in April 2009. SG&A expenses as a percent
of revenues increased to 53% in 2009 as compared to 45% in 2008 as a result of
the above mentioned reductions in revenues. The decrease in SG&A costs is
primarily the result of implementation of corporate wide cost savings measures
in the last six months of 2008 and throughout 2009, including a significant
reduction in employees throughout the entire Company. The cost savings were
partially realized from a reduction in costs with the consolidation of our
security division’s surveillance equipment warehouse operations into our Farmers
Branch, Texas facility as well as the consolidation of customer service,
accounting services, and other administrative functions within these
operations. SG&A costs decreased within our Florida and Texas
electronic surveillance equipment operations by approximately $663,000, or 13%,
partially as a result of our consolidation efforts to reduce SG&A costs as
noted above and partially as a result of our reduced sales levels. Additionally,
cost savings were realized through overhead reductions within our Digital Media
Marketing Segment, Linkstar, including cost savings from our decision in June
2008 to discontinue marketing Promopath’s online marketing services to external
customers. SG&A expenses of our Digital Media Marketing Segment
decreased from $4.6 million in 2008 to $2.5 million in 2009. In
addition to these cost savings measures, we also noted a reduction in stock
option non-cash compensation expense from continuing operations from
approximately $626,000 in 2008 to $116,000 in 2009. SG&A expenses also
includes costs related to the Arbitration Proceedings with Mr. Paolino of
approximately $874,000 and $132,000 in 2009 and 2008, respectively, and $222,000
of severance cost related to employee reductions in 2009.
SG&A
expenses for the year ended December 31, 2008 were $17.1 million compared to
$15.1 million for the same period in 2007, an increase of approximately $2.0
million or 13%. SG&A expenses as a percent of revenues were 45% for the year
ended December 31, 2008 as compared to 50% for the year ended December 31, 2007.
The increase in SG&A costs is primarily the result of the acquisition of
Linkstar in July 2007, which represents an increase in SG&A costs of $2.9
million in 2008 as compared to 2007 and an additional charge of approximately
$425,000 for the waste remediation at our personal defense operation in Vermont
(See Note 17. Commitments and Contingencies). These increases were partially
offset by a decrease in costs related to the Northeast car wash region
immigration investigation, non-cash compensation expense, reduction in costs
within our Florida and Texas operations, and costs of the previously reported
Florida security based controller embezzlement. SG&A expenses include
$244,000 of legal fees in 2008 relating to the immigration investigation as
compared to $674,000 in 2007. SG&A costs also include non-cash compensation
expense from continuing operations of approximately $626,000 and $896,000 in
2008 and 2007, respectively. SG&A costs decreased within our Florida and
Texas electronic surveillance equipment operations by approximately $378,000,
partially as a result of our reduced sales levels and partially as a result of
our consolidation efforts to reduce SG&A costs in all areas. In April 2007,
we determined that our former Florida security based divisional controller
embezzled funds from the Company. The Company conducted an internal
investigation, and our Audit Committee engaged an independent consulting firm to
conduct an independent forensic investigation. As a result of these
investigations, we estimated that the amount embezzled by the employee was
approximately $240,000 during fiscal 2006 and $99,000 in the first quarter of
fiscal 2007. SG&A expenses for 2007 also include approximately $300,000 of
legal, consulting and accounting fees related to the Florida embezzlement
investigation. In January 2009, we recovered $42,000 of funds from an investment
account of the former divisional controller where certain of the embezzled funds
were deposited. The recovered funds were reported as a component of operating
income in the first quarter of 2009.
30
Depreciation
and Amortization
Depreciation
and amortization totaled $790,000, $786,000 and $691,000 for 2009, 2008 and
2007, respectively. The increase in depreciation and amortization expense,
principally in 2009 and 2008 as compared to 2007, was related to amortization
expense on Linkstar and CSSS acquired intangible assets.
Asset
Impairment Charges
In
accordance with ASC 360,
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.
Assets classified as held for sale are measured at the lower of carrying value
or fair value, net of costs to sell.
Continuing Operations
In
assessing goodwill for impairment, we first compare the fair value of our
reporting units with their net book value. We estimate the fair value of the
reporting units using discounted expected future cash flows, supported by the
results of various market approach valuation models. If the fair value of the
reporting units exceeds their net book value, goodwill is not impaired, and no
further testing is necessary. If the net book value of our reporting units
exceeds their fair value, we perform a second test to measure the amount of
impairment loss, if any. To measure the amount of any impairment loss, we
determine the implied fair value of goodwill in the same manner as if our
reporting units were being acquired in a business combination. Specifically, we
allocate the fair value of the reporting units to all of the assets and
liabilities of that unit, including any unrecognized intangible assets, in a
hypothetical calculation that would yield the implied fair value of goodwill. If
the implied fair value of goodwill is less than the goodwill recorded on our
balance sheet, we record an impairment charge for the difference.
We
performed extensive valuation analyses, utilizing both income and market
approaches, in our goodwill assessment process. The following describes the
valuation methodologies used to derive the fair value of the reporting
units.
|
|
·
|
Income Approach: To
determine fair value, we discounted the expected cash flows of the
reporting units. The discount rate used represents the estimated weighted
average cost of capital, which reflects the overall level of inherent risk
involved in our reporting units and the rate of return an outside investor
would expect to earn. To estimate cash flows beyond the final year of our
model, we used a terminal value approach. Under this approach, we used
estimated operating income before interest, taxes, depreciation and
amortization in the final year of our model, adjusted to estimate a
normalized cash flow, applied a perpetuity growth assumption and
discounted by a perpetuity discount factor to determine the terminal
value. We incorporated the present value of the resulting terminal value
into our estimate of fair value.
|
|
|
·
|
Market-Based Approach:
To corroborate the results of the income approach described above,
we estimated the fair value of our reporting units using several
market-based approaches, including the value that we derive based on our
consolidated stock price as described above. We also used the guideline
company method which focuses on comparing our risk profile and growth
prospects to select reasonably similar/guideline publicly traded
companies.
|
The
determination of the fair value of the reporting units requires us to make
significant estimates and assumptions that affect the reporting unit’s expected
future cash flows. These estimates and assumptions primarily include, but are
not limited to, the discount rate, terminal growth rates, operating income
before depreciation and amortization and capital expenditures forecasts. Due to
the inherent uncertainty involved in making these estimates, actual results
could differ from those estimates. In addition, changes in underlying
assumptions would have a significant impact on either the fair value of the
reporting units or the goodwill impairment charge.
The
allocation of the fair value of the reporting units to individual assets and
liabilities within reporting units also requires us to make significant
estimates and assumptions. The allocation requires several analyses to determine
fair value of assets and liabilities including, among others, customer
relationships, non-competition agreements and current replacement costs for
certain property, plant and equipment.
31
As of
November 30, we conducted our annual assessment of goodwill for impairment for
our Security Segment and as of June 30 for our Digital Media Marketing Segment.
We conduct assessments more frequently if indicators of impairment
exists. In the fourth quarter of 2007, as a result of our annual
impairment test of goodwill and other intangibles, we recorded a goodwill
impairment charge of approximately $280,000 within our Security Segment and an
impairment of trademarks of approximately $66,000 related to our consumer direct
electronic surveillance operations and an impairment of trademarks of
approximately $101,000 related to our high end digital and machine vision
cameras and professional imaging components operations, both located in Texas.
As of November 30, 2008, we experienced a sustained, significant decline in our
stock price. The Company believes the reduced market capitalization reflects the
financial market’s reduced expectations of the Company’s performance, due in
large part to overall deteriorating economic conditions that may have a
materially negative impact on the Company’s future performance. We updated our
forecasted cash flows of the Security Segment reporting units during the fourth
quarter of 2008. This update considered current economic conditions and trends,
estimated future operating results, our views of growth rates, anticipated
future economic and regulatory conditions. Based on the results of our
assessment of goodwill for impairment, the net book value of our Mace Security
Products, Inc. (Florida and Texas operations) reporting unit exceeded its fair
value. With the noted potential impairment in Mace Security Products, Inc., we
performed the second step of the impairment test to determine the implied fair
value of goodwill. Specifically, we hypothetically allocated the fair value of
the impaired reporting units as determined in the first step to our recognized
and unrecognized net assets, including allocations to intangible assets such as
trademarks, customer relationships and non-competition
agreements. The resulting implied goodwill was $(5.9) million;
accordingly, we recorded an impairment charge to write off the goodwill of this
reporting unit totaling $1.34 million. We also performed impairment testing of
certain other intangible assets relating to Mace Security Products, Inc.,
specifically, the value assigned to trademarks. We recorded an additional
impairment charge to trademarks of approximately $223,000 related to our
consumer direct electronic surveillance operations and our high end digital and
machine vision cameras and professional imaging component operations.
Additionally, due to continuing deterioration in our Mace Security Products,
Inc. reporting unit, we performed certain impairment testing of our remaining
intangible assets, specifically, the value assigned to customer lists, product
lists, and trademarks as of June 30, 2009 and December 31, 2009. We recorded an
additional impairment charge to trademarks of approximately $80,000 and an
impairment charge of $142,000 to customer lists, both principally related to our
consumer direct electronic surveillance operations at June 30, 2009 and an
impairment charge of $30,000 to trademarks related to our high end digital and
machine vision cameras and professional imaging component operations at December
31, 2009.
As noted
above, we conducted our annual assessment of goodwill for impairment for our
Digital Media Marketing Segment as of June 30. Additionally, based
upon our procedures, we determined impairment indicators existed at December 31,
2008 relative to our Digital Media Marketing Segment and accordingly, we
performed an updated assessment of goodwill for impairment. Our Digital Media
Marketing Segment reporting unit fair value as determined exceeded its net book
value as of December 31, 2008. We updated our forecasted cash flows
of this reporting unit during the second quarter early June 30, 2009. This
update considered current economic conditions and trends, estimated future
operating results for the launch of new products as well as non-product revenue
growth, and anticipated future economic and regulatory conditions. Based on the
results of our assessment of goodwill impairment, the net book value of our
Digital Media Marketing Segment reporting unit exceeded its fair value. With the
noted potential impairment, we performed the second step of the impairment test
to determine the implied fair value of goodwill. The resulting implied goodwill
was $5.9 million which was less than the recorded value of goodwill of $6.9
million; accordingly, we recorded an impairment to write down goodwill of this
reporting unit by $1.0 million. Additionally, during our December 31, 2009
review of intangible assets, we determined impairment indicators existed
relative to our Digital Media Marketing Segment and accordingly, we performed an
updated assessment of goodwill within this reporting unit for impairment. The
budgets and long-term business plans of this reporting unit include the
resumption of generating online marketing revenues through our online marketing
division, Promopath, in 2010 and an increase in projected e-commerce revenues
and growth rates as a result of introduction of new products and a reduction in
credit card decline rates that negatively impacted revenues in 2009. Based upon
the Company’s December 31, 2009 assessment, a hypothetical 15% reduction in the
estimated fair value of the Digital Media Marketing reporting unit would not
result in an impairment charge. In order to evaluate the sensitivity of the
estimated fair value calculations of the reporting unit, the Company
hypothetical reduced the 2010 projected revenues by 13% and limited future
annual growth rates to 5%. These hypothetical assumptions would have no impact
on the goodwill impairment analysis for the reporting unit.
As
previously noted, in June 2008 management made a decision to discontinue
marketing efforts by its subsidiary, Promopath, the on-line marketing division
of Linkstar, to third-party customers on a non-exclusive CPA basis, both
brokered and through promotional sites. Management’s decision was the result of
business environment changes in which the ability to maintain non-exclusive
third-party relationships at an adequate profit margin became increasingly
difficult. Promopath continued to market and acquire customers for the Company’s
e-commerce operation, Linkstar. As a result of this decision, the value assigned
to customer relationships at the time of the acquisition of Promopath was
determined to be impaired as of June 30, 2008 in that future undiscounted cash
flows relating to this asset were insufficient to recover its carrying value.
Accordingly, in the second quarter of 2008, we recorded an impairment charge of
approximately $1.4 million representing the net book value of the Promopath
customer relationship intangible asset at June 30, 2008.
32
In the
fourth quarter of 2008, we consolidated the inventory in our Fort Lauderdale,
Florida warehouse into our Farmers Branch, Texas facility. Certain of our
administrative and sales staff of our Security Segment’s electronic surveillance
products division remain in the Fort Lauderdale, Florida building which we
listed for sale with a real estate broker. We performed an updated market
evaluation of this property, listing the facility for sale at a price of
$1,950,000. We recorded an impairment charge of $275,000 related to this
property at December 31, 2008, and an additional impairment charge of $60,000 at
June 30, 2009 to write-down the property to our estimate of net realizable value
based on updated market valuations of the property. On October 5, 2009, the
Company entered into an agreement of sale to sell the Fort Lauderdale, Florida
building for cash consideration of $1.6 million, recording an additional
impairment charge of $150,000 at September 30, 2009 to write-down the property
to the sale price.
On December 4, 2009, we sold the Fort Lauderdale, Florida building
recording a loss of $108,000 in the fourth quarter of 2009 after closing costs
and broker commissions.
Interest
Expense, Net
Interest
expense, net of interest income, for the year ended December 31, 2009 was $7,000
compared to interest income, net of interest expense of $260,000 for the year
ended December 31, 2008. The decrease in net interest income is due to a slight
increase in interest expense of approximately $4,000 and a reduction in interest
income of approximately $264,000 with the Company’s decrease in average cash and
cash equivalent balances on hand during 2009.
Interest
income, net of interest expense, for year ended December 31, 2008 was $260,000,
compared to $247,000 for the year ended December 31, 2007. The increase in net
interest income is due to a decrease in interest expense of approximately
$160,000 as a result of decreasing interest rates and a reduction in outstanding
debt due to routine principal payments and repayment of debt related to car wash
site sales, and a decrease in interest income of approximately $146,000 related
to the Company’s decrease in interest rates and in our cash and cash
equivalents.
Other
(Expense) Income
Other
(expense) income was $(108,000), $(2.2) million and $944,000 for 2009, 2008 and
2007, respectively. The 2008 amount includes $250,000 of earnings on short term
investments offset by a $2.2 million investment loss related to the Victory
Fund, Ltd. hedge fund and a loss of $380,000 on the redemption of a mutual fund
investment in the fourth quarter of 2008. See Liquidity section below. Other
income during 2007 included $752,000 of earnings on short-term investments and
the recovery of a previously written-off acquisition deposit of
$150,000.
Income
Taxes
We
recorded income tax expense of $0, $100,000 and $98,000 for the years ended
December 31, 2009, 2008 and 2007, respectively. Income tax expense (benefit)
reflects the recording of income taxes on loss before income taxes at effective
rates of approximately (0)% (0.78)%, and (1.14)% for the years ended December
31, 2009, 2008, and 2007, respectively. 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, and changes to the
valuation allowance.
Realization
of the future tax benefits related to the deferred tax assets is dependent upon
many factors, including the Company’s ability to generate taxable income in
future years. The Company performed a detailed review of the considerations
influencing our ability to realize the future benefit of the NOLs, including the
extent of recently used NOLs, the turnaround of future deductible temporary
differences, the duration of the NOL carryforward period, and the Company’s
future projection of taxable income. The Company increased its valuation
allowance against deferred tax assets by $3.9 million in 2007, $4.3 million in
2008, and $3.4 million in 2009 with a total valuation allowance of $18.4 million
at December 31, 2009 representing the amount of its deferred income tax assets
in excess of the Company’s deferred income tax liabilities. The valuation
allowance was recorded because management was unable to conclude that
realization of the net deferred income tax asset was more likely than not. This
determination was a result of the Company’s continued losses, the uncertainty of
the timing of the Company’s sale of its remaining Car Wash operations, and the
ultimate extent of growth in the Company’s Security and Digital Media Marketing
Segments.
Discontinued
Operations
Revenues
within the car wash operations for the year ended December 31, 2009 were $10.6
million as compared to $16.1 million for the year ended December 31, 2008, a
decrease of $5.5 million or 34%. This decrease was primarily attributable to a
decrease in wash and detail services principally due to the sale of car washes
and reduced car wash volumes in the Texas market. Overall car wash volumes
declined by 154,000 cars, or 27% in 2009 as compared to 2008, 12%, excluding the
impact of a car wash volume reduction of approximately 128,000 cars from the
closure and divestiture of 14 car wash locations in Texas and Florida since
January 2008. Additionally, the Company experienced a decrease in average car
wash and detailing revenue per car, from $18.29 in 2008 to $17.89 in
2009. Revenues for the year ended December 31, 2008 were $16.1
million as compared to $27.2 million for the year ended December 31, 2007, a
decrease of $11.1 million or 41%. The decrease in car wash and detail revenues
in 2008 was principally due to the sale of car washes and reduced car wash
volumes in the Texas market due to economic pressures, increased competition and
unfavorable weather. Overall car wash volumes declined by 665,000 cars, or 53%
in 2008 as compared to 2007, with car wash volumes increasing slightly excluding
the impact of a car wash volume reduction of approximately 664,000 cars from the
closure and divestiture of 35 car wash locations from January 2007 to December
2008. Partially offsetting the reduction in car wash volume, average wash and
detailing revenue per car increased from $17.11 in 2007 to $18.29 in
2008.
33
Cost of
revenues within the car wash operations were $9.3 million, or 88% of revenues,
$13.8 million or 86%, and $21.8 million of revenues, and 81% for the years ended
December 31, 2009, 2008, and 2007, respectively. The increase in cost of
revenues as a percent of revenues in 2008 and 2009 was the result of the
reduction in car wash volumes and an increase in cost of labor as a percentage
of car wash and detailing revenues.
During
the quarter ended December 31, 2007, we wrote down assets related to a full
service car wash in San Antonio, Texas by approximately
$180,000. During the quarter ended June 30, 2008, we wrote down
assets related to two full service car washes in Arlington, Texas by
approximately $1.2 million. We also closed the two remaining car wash locations
in San Antonio, Texas in the quarter ended September 30, 2008. In connection
with the closing of these two facilities, we wrote down the assets of these
sites by approximately $310,000 to our estimate of net realizable value based on
our plan to sell the two facilities for real estate value. During the
quarter ended December 31, 2008, we wrote down the assets of two of our
Arlington, Texas area car wash sites by approximately $1.0 million and we closed
a full service car wash location in Lubbock, Texas and wrote down the assets of
this site by approximately $670,000 to an updated appraisal value based on our
plan to sell this facility for real estate value. We also wrote down an
additional Lubbock, Texas location by approximately $250,000. Additionally, as
noted in Note 3. Business
Acquisitions and Divestitures, in the accompanying financial statements,
the agreements of sale related to the three car washes the Company owned in
Austin, Texas were amended to modify the sales price to $8.0 million. This
amended sale price, less costs to sell, was estimated to result in a loss upon
disposal of approximately $175,000. Accordingly, an impairment loss of $175,000
was recorded as of September 30, 2009 and included in the results from
discounted operations in the accompanying consolidated statement of operations.
The sale of the Austin, Texas car washes was completed on November 30, 2009.
Lastly, during the quarter ended December 31, 2009, we wrote down three
Arlington, Texas car wash sites for a total of $1.2 million including a $200,000
write down of a car wash site that the Company entered into an agreement of sale
on January 27, 2010 for a sale price below its net book value; and a
$37,000 write down related to a Lubbock, Texas car wash sold on March
10, 2010. We have determined that due to further reductions in car wash volumes
at these sites resulting from increased competition and a deterioration in
demographics in the immediate geographic areas of these sites, current economic
pressures, along with current data utilized to estimate the fair value of these
car wash facilities, future expected cash flows would not be sufficient to
recover their carrying values.
Liquidity
and Capital Resources
Liquidity
Cash,
cash equivalents and short-term investments were $9.4 million at December 31,
2009. The ratio of our total debt to total capitalization, which
consists of total debt plus stockholders’ equity, was 8.4% at December 31, 2009,
and 13.0% at December 31, 2008.
One of
our short-term investments in 2008 was in a hedge fund, the Victory Fund, Ltd.
We requested redemption of this hedge fund investment on June 18, 2008. Under
the Limited Partnership Agreement with the hedge fund, the redemption request
was timely for a return of the investment account balance as of September 30,
2008, payable ten business days after the end of the September 30, 2008 quarter.
The hedge fund acknowledged that the redemption amount owed was $3,207,000;
however, on October 15, 2008, the hedge fund asserted the right to withhold the
redemption amount due to extraordinary market circumstances. After negotiations,
the hedge fund agreed to pay the redemption amount in two installments, $1.0
million on November 3, 2008 and $2,207,000 on January 15, 2009. The Company
received the first installment of $1.0 million on November 5,
2008. The Company has not received the second
installment. On January 21, 2009, the principal of the Victory Fund,
Ltd, Arthur Nadel, was criminally charged with operating a “Ponzi”
scheme. Additionally, the SEC has initiated a civil case against Mr.
Nadel and others alleging that Arthur Nadel defrauded investors in the Victory
Fund, LLC and five other hedge funds by massively overstating the value of
investments in these funds and issuing false and misleading account statements
to investors. The SEC also alleges that Mr. Nadel transferred large sums of
investor funds to secret accounts which only he controlled. A
receiver has been appointed in the civil case and has been directed to
administer and manage the business affairs, funds, assets, and any other
property of Mr. Nadel, the Victory Fund, LLC and the five other hedge funds and
conduct and institute such legal proceedings that benefit the hedge fund
investors. Accordingly, we recorded a charge of $2,207,000 as an
investment loss at December 31, 2008. If we recover any of the investment loss,
such amounts will be recorded as recoveries in future periods when received. The
original amount invested in the hedge fund was $2.0 million. One of the actions
the Receiver may take on behalf of all investors is to attempt to “claw back”
redemptions and distributions made by the hedge funds to their investors and use
the returned funds to pay the expenses of the Receiver and for a pro-rata
distribution to all investors. No “claw back” action has been filed
to date. We have received a letter from the Receiver stating that the Receiver
does not intend to claw back the $1.0 million we were paid based on the fact
that our original investment was $2.0 million. If we are required by the Court
to pay back the $1.0 million redemption we received, our liquidity would be
adversely affected.
34
Our
business requires a substantial amount of capital, most notably to pursue our
expansion strategies, including our current expansion in the Security and
Digital Media Marketing Segment. We plan to meet these capital needs from
various financing sources, including borrowings, cash generated from the sale of
car washes, and the issuance of common stock if the market price of the
Company’s stock is at a desirable level.
As of
December 31, 2009, we had working capital of approximately $16.6 million.
Working capital was approximately $16.0 million and $17.8 million at December
31, 2008 and 2007, respectively. Our positive working capital increased by
approximately $558,000 from December 31, 2008 to December 31, 2009, principally
due to the sale of our three Austin, Texas car washes and payoff of their
related mortgage debt recorded as current at December 31, 2008 in the fourth
quarter of 2009 and the reclass of our
Dallas, Texas area car washes to assets held for sale and liabilities related to
assets held for sale.
During
the years ended December 31, 2009, 2008 and 2007, we made capital expenditures
of $63,000, $230,000 and $536,000, respectively, within our Car Wash operations
which are reported as discontinued operations. We believe our current cash and
short-term investment balance at December 31, 2009 of $9.4 million, and cash
generated from the sale of our Car Wash operations will be sufficient to meet
our Security, Digital Media Marketing and Car Wash operations’ capital
expenditure and operating funding needs through at least the next twelve months,
and continue to satisfy our debt covenant requirement with Chase to maintain a
total unencumbered cash and marketable securities balance of $1.5 million. In
2010, we estimate that our Car Wash operations will require limited capital
expenditures of $25,000 to $50,000 depending upon the timing of the sale of our
remaining car wash sites. Capital expenditures within our Car Wash operations
are necessary to maintain the efficiency and competitiveness of our
sites. If the cash provided from operating activities does not
improve in 2010 and future years and if current cash balances are depleted, we
will need to raise additional capital to meet these ongoing capital
requirements.
Capital
expenditures for our Security Segment were $352,000, $438,000, and $205,000 for
the fiscal years ending December 31, 2009, 2008 and 2007, respectively. We
estimate capital expenditures for the Security Segment at approximately $100,000
to $150,000 for 2010, principally related to technology and facility
improvements for warehouse production equipment.
We expect
to invest resources in additional products within our e-commerce division. Our
online marketing division will also require the infusion of additional capital
as we grow our new members because our e-commerce customers are charged after a
14 to 21 day trial period while we typically pay our website publishers for new
member acquisitions in approximately 15 days. Additionally, as we introduce new
e-commerce products, upfront capital spending is required to purchase inventory
as well as pay for upfront media costs to enroll new e-commerce
members.
We intend
to continue to expend cash for the purchasing of inventory as we grow and
introduce new video surveillance and access control products in 2010 and in
years subsequent to 2010. We anticipate that inventory purchases will be funded
from cash collected from sales and working capital. At December 31,
2009, we maintained an unused and fully available $500,000 revolving credit
facility with Chase to provide financing for additional video surveillance and
access control product inventory purchases.
The
amount of capital that we will spend in 2010 and in years subsequent to 2010 on
all of our businesses is largely dependent on the profitability of our
businesses. Until our businesses start generating positive cash flow, we are
dependent on car wash sales for liquidity. We believe our cash and short-term
investments balance of $9.4 million at December 31, 2009, the revolving credit
facility, and cash generated from the sale of our remaining car wash operations
will be sufficient to meet capital expenditure and fund operating needs through
at least the next twelve months while continuing to satisfy our debt covenant
requirement with Chase. Our debt covenant requires us to maintain a total
unencumbered cash and marketable securities balance of $1.5 million. Unless our
operating cash flow improves, our growth will be limited if we deplete our cash
balance. If the cash provided from operating activities does not improve in 2010
and future years and if current cash balances are depleted, we will need to
raise additional capital to meet these ongoing capital
requirements.
During
the six months ended December 31, 2008 and throughout 2009, we implemented
Company wide cost savings measures, including a reduction in employees
throughout the entire Company, and completed a consolidation of our Security
Segment’s electronic surveillance equipment operations in Fort Lauderdale,
Florida and Farmers Branch, Texas at December 31, 2008. As part of this
reorganization, we consolidated our security division’s surveillance equipment
warehouse operations into our Farmers Branch, Texas facility. Our professional
security sales and administrative team remained in Florida with the security
catalog sales team being relocated from Texas to Florida during the third
quarter of 2009. Our goals of the reorganization were to better align our
electronic surveillance equipment sales teams to achieve sales growth, gain
efficiencies by sharing redundant functions within our security operations such
as warehousing, customer service, and administrative services, and to streamline
our organization structure and management team for improved long-term growth. We
estimate that our reorganization within our Security Segment, our Company wide
employee reductions, and other cost saving measures result in excess of $3.0
million in annualized savings. Through December 31, 2009, we incurred
approximately $285,000 in cumulative severance costs from employee
reductions.
35
As
previously disclosed, on June 27, 2008, Car Care, Inc., a subsidiary of the
Company, paid a criminal fine of $100,000 and forfeited $500,000 in proceeds
from the sale of four car washes to settle a criminal indictment. A charge of
$600,000 was recorded as a component of income from discontinued operations for
the three months ended March 31, 2008.
Shortly
after the Company’s Audit Committee became aware of the now resolved criminal
investigation into the hiring of illegal aliens at four of the Company’s car
washes on March 6, 2006, the Company’s Audit Committee retained independent
outside counsel (“Special Counsel”) to conduct an independent investigation of
the Company’s hiring practices at the Company’s car washes and other related
matters. Special Counsel’s findings included, among other things, a finding that
the Company’s internal controls for financial reporting at the corporate level
were adequate and appropriate, and that there was no financial statement impact
implicated by the Company’s hiring practices, except for a potential contingent
liability. The Company incurred $704,000 in legal, consulting and accounting
expenses associated with the Audit Committee investigations in fiscal 2006 and a
total of $1.9 million ($185,000, $244,000, $674,000 and $796,000, in fiscal
2009, 2008, 2007 and 2006, respectively), in legal fees associated with the
governmental investigation and Company’s defense and negotiations with the
government. As a result of this matter, the Company has incorporated additional
internal control procedures at the corporate, regional and site level to further
enhance the existing internal controls with respect to the Company’s hiring
procedures at the car wash locations to prevent the hiring of undocumented
workers.
As
previously discussed, during January 2008, the Environmental Protection Agency
(“EPA”) conducted a site investigation at the Company’s Bennington, Vermont
location and the building in which the facility is located. The
Company does not own the building or land and leases 33,476 square feet of the
building from Vermont Mill Properties, Inc (“Vermont
Mill”). The site investigation was focused on whether hazardous
substances were being improperly stored. After the site investigation
and search, the EPA notified the Company and the building owner that remediation
of certain hazardous wastes were required. All remediation required
by the Administrative Consent Order was completed within the time allowed by the
EPA and a final report regarding the remediation was submitted to the EPA in
October 2008, as required by the Administrative Consent Order. On
September 29, 2009, the EPA accepted the final report. On February 23, 2010 the
EPA issued the Company an invoice for $240,096 representing the total of the
EPA's oversight costs that the Company and Vermont Mill is obligated to pay
under the Administrative Consent Order. The Company and Vermont Mill
are in discussions to determine what portion of the invoice each will
pay. The Company is estimating that it will pay approximately
$190,000 of this invoice. A total estimated cost of approximately $786,000
relating to the remediation, which includes disposal of the waste materials, as
well as expenses incurred to engage environmental engineers and legal counsel
and reimbursement of the EPA’s costs, has been recorded through December 31,
2009. This amount represents management’s best estimate of probable loss.
Approximately $596,000 has been paid to date, leaving an accrual balance of
$190,000 at December 31, 2009 for the estimated share of the Company's EPA
costs.
In
addition to the EPA site investigation, the U.S. Attorney is conducting an
investigation of the Company relating to possible violations of the RCRA at the
Vermont location. The Company believes the investigation is focused
on the Company allegedly not disposing of hazardous materials and waste at the
Vermont location, as required by various environmental laws. In connection with
the investigation, a search of the Company’s Bennington, Vermont location and
the building in which the facility is located occurred in February
2008. On May 2, 2008, the U.S. Attorney issued a grand jury
subpoena to the Company. The subpoena required the Company to provide
the U.S. Attorney documents related to the storage, disposal and transportation
of materials at the Bennington, Vermont location. The
Company supplied the documents and is fully cooperating with the U.S.
Attorney’s investigation. During the fourth quarter of 2009, the U.S.
Attorney interviewed a Company employee before a grand jury. The
Company believes that the U.S. Attorney is actively pursuing an
investigation of possible criminal violations. The Company has made no provision
for any future costs associated with the investigation.
The
Company is a party to various other legal proceedings related to its normal
business activities. In the opinion of the Company’s management, none
of these proceedings are material in relation to the Company’s results of
operations, liquidity, cash flows, or financial condition.
Despite
our recent operating losses, we believe our cash and short-term investment
balance of approximately $9.4 million at December 31, 2009, cash provided from
the sale of assets, and the revolving credit facility will be sufficient to meet
its car wash and security operations capital expenditure and operating funding
needs through at least the next twelve months and continue to satisfy our debt
covenant requirement with Chase to maintain a total unencumbered cash and
marketable securities balance of $1.5 million.
36
In
December 2004, the Company announced that it was exploring the sale of its car
washes. From December 2005 through March 12, 2010, we sold 42 car washes and
five truck washes with total cash proceeds generated of approximately $41.7
million, net of pay-off of related mortgage debt. While, we believe
we will be successful in selling additional car washes and generating cash for
funding of current operating needs and expansion of our Security Segment, the
current economy has caused the Company to reduce selling prices and has caused
the timing of sales to be uncertain. If the cash provided from operating
activities does not improve in 2010 and in future years and if current cash
balances are depleted, we will need to raise additional capital to meet these
ongoing capital requirements.
In the
past, we have been successful in obtaining financing by selling common stock and
obtaining mortgage loans. Our ability to obtain new financing can be
adversely impacted by our stock price. Our failure to maintain the required debt
covenants on existing loans also adversely impacts our ability to obtain
additional financing. We are reluctant to sell common stock at market prices
below our per share book value. Our ability to obtain new financing
will be limited if our stock price is not above our per share book value and our
cash from operating activities does not improve. Currently, we cannot incur
additional long term debt without the approval of one of our commercial lenders.
The Company must demonstrate that the cash flow benefit from the use of new loan
proceeds exceeds the resulting future debt service requirements.
Debt
Capitalization and Other Financing Arrangements
At
December 31, 2009, we had borrowings, including capital lease obligations, of
approximately $2.9 million. We had two letters of credit outstanding at December
31, 2009, totaling $570,364 as collateral relating to workers’ compensation
insurance policies. We maintain a $500,000 revolving credit facility to provide
financing for additional video surveillance product inventory purchases. There
were no borrowings outstanding under the revolving credit facility at December
31, 2009.
Several
of our debt agreements, as amended, contain certain affirmative and negative
covenants and require the maintenance of certain levels of tangible net worth,
maintenance of certain unencumbered cash and marketable securities balances,
limitations on capital spending and the maintenance of certain debt service
coverage ratios on a consolidated level.
The
Company entered into amendments to the Chase term loan agreements effective
September 30, 2006. The amended loan agreements with Chase eliminated
the Company’s requirement to maintain a ratio of consolidated earnings before
interest, income taxes, depreciation and amortization to debt service. The Chase
term loan agreements also limit capital expenditures annually to $1.0 million,
requires the Company to provide Chase with an Annual Report on Form 10-K and
audited financial statements within 120 days of the Company’s fiscal year end
and a Quarterly Report on Form 10-Q within 60 days after the end of each fiscal
quarter, and requires the maintenance of a minimum total unencumbered cash and
marketable securities balance of $3 million. The maintenance of a minimum total
unencumbered cash and marketable securities balance requirements was reduced to
$3 million from $5 million on May 8, 2009 as part of the Amendments to the Chase
loan agreements noted above and from $3.0 million to $1.5 million as part of an
additional amendment to our loan agreements on December 21, 2009. If we are
unable to satisfy these covenants and we cannot obtain waivers, the Chase notes
may be reflected as current in future balance sheets and as a result our stock
price may decline. We were in compliance with these covenants as of December 31,
2009.
The
Company’s ongoing ability to comply with its debt covenants under its credit
arrangements and refinance its debt depends largely on the achievement of
adequate levels of cash flow. If our future cash flows are less than
expected or our debt service, including interest expense, increases more than
expected, causing us to default on any of the Chase covenants in the future, the
Company will need to obtain further amendments or waivers from Chase. Our cash
flow has been and could continue to be adversely affected by continued
deterioration in economic conditions, and the requirements to fund the growth of
our security and digital media marketing businesses. In the event that
non-compliance with the debt covenants should occur, the Company would pursue
various alternatives to attempt to successfully resolve the non-compliance,
which might include, among other things, seeking additional debt covenant
waivers or amendments, or refinancing debt with other financial
institutions. If the Company is unable to obtain waivers or
amendments in the future, Chase debt currently totaling $1.9 million, including
debt recorded as long-term debt at December 31, 2009, would become payable on
demand by the financial institution upon expiration of its current waiver. There
can be no assurance that debt covenant waivers or amendments would be
obtained or that the debt would be refinanced with other financial institutions
at favorable terms. If we are unable to obtain renewals on maturing loans or
refinancing of loans on favorable terms, our ability to operate would be
materially and adversely affected.
The
Company is obligated under various operating leases, primarily for certain
equipment and real estate within the Car Wash operations. Certain of
these leases contain purchase options, renewal provisions, and contingent
rentals for our proportionate share of taxes, utilities, insurance, and annual
cost of living increases.
The
following are summaries of our contractual obligations and other commercial
commitments at December 31, 2009, including capital lease obligations, debt
related to discontinued operations and liabilities related to assets held for
sale and reflects the renewal on May 8, 2009 of loans maturing in 2009 (in
thousands):
37
|
Payments Due By Period
|
||||||||||||||||||||
|
Contractual Obligations (1)
|
Total
|
Less than
One Year
|
One to Three
Years
|
Three to Five
Years
|
More Than
Five Years
|
|||||||||||||||
|
Long-term
debt (2)
|
$ | 2,753 | $ | 522 | $ | 1,799 | $ | 432 | $ | - | ||||||||||
|
Capital
lease obligations
|
167 | 46 | 107 | 14 | - | |||||||||||||||
|
Minimum
operating lease payments
|
3,821 | 1,037 | 1,715 | 705 | 364 | |||||||||||||||
| $ | 6,741 | $ | 1,605 | $ | 3,621 | $ | 1,151 | $ | 364 | |||||||||||
|
Amounts Expiring Per Period
|
||||||||||||||||||||
|
Other Commercial
Commitments
|
Total
|
Less Than
One Year
|
One to Three
Years
|
Three to Five
Years
|
More Than
Five Years
|
|||||||||||||||
|
Line
of credit (3)
|
$ | – | $ | – | $ | – | $ | – | $ | – | ||||||||||
|
Standby
letters of credit (4)
|
570 | 570 | – | – | – | |||||||||||||||
| $ | 570 | $ | 570 | $ | – | $ | – | $ | – | |||||||||||
|
|
(1)
|
Potential
amounts for inventory ordered under purchase orders are not reflected in
the amounts above as they are typically cancelable prior to delivery and,
if purchased, would be sold within the normal business
cycle.
|
|
|
(2)
|
Related
interest obligations have been excluded from this maturity schedule. Our
interest payments for the next twelve month period, based on current
market rates, are expected to be approximately
$115,000.
|
|
|
(3)
|
The
Company maintains a $500,000 line of credit with Chase. There were no
borrowings outstanding under this line of credit at December 31,
2009.
|
|
|
(4)
|
Outstanding
letters of credit of $570,364 represent collateral for workers’
compensation insurance policies.
|
Cash
Flows
Operating Activities. Net
cash used in operating activities totaled $3.7 million for the year ended
December 31, 2009. Cash used in operating activities in 2009 was primarily due
to a net loss from continuing operations of $9.1 million, which included
$116,000 in non-cash stock-based compensation charges from continuing
operations, $790,000 of depreciation and amortization expense and asset
impairment charges of $1.5 million. Cash was also impacted by a increase in
accounts payable of $1.0 million and a decrease in inventory of $1.8
million.
Net cash
used in operating activities totaled $6.5 million for the year ended December
31, 2008. Cash used in operating activities in 2008 was primarily due to a net
loss from continuing operations of $13.0 million, which included $626,000 in
non-cash stock-based compensation charges, $786,000 of depreciation and
amortization expense and asset impairment charges of $3.2 million. Cash was also
impacted by a decrease in accounts payable and accrued expenses of $1.6 million
and a decrease in inventory of $1.3 million. Net cash used in operating
activities totaled $9.3 million for the year ended December 31, 2007. Cash used
in operating activities in 2007 was primarily due to a net loss from continuing
operations of $8.7 million offset partially by $896,000 in non-cash stock based
compensation charges and $691,000 in depreciation and amortization expense. Cash
was also impacted by a $2.2 million increase in inventory.
Investing
Activities. Cash provided by investing activities totaled
approximately $5.2 million for the year ended December 31, 2009, which includes
cash provided by investing activities from discontinued operations of $6.1
million related to the sale of six car wash sites in the year ended
December 31, 2009. Investing activity also included a use of $1.9 million for
the acquisition of CSSS and capital expenditures of $431,000 related to ongoing
operations, as well as proceeds of $1.5 million from the sale of the Company’s
Fort Lauderdale, Florida warehouse.
Cash
provided by investing activities totaled approximately $8.3 million for the year
ended December 31, 2008, which includes cash provided by investing activities
from discontinued operations of $8.7 million related to the sale of seven car
wash sites in the year ended December 31, 2008. Investing activity in 2008 also
included capital expenditures of $486,000. Cash provided by investing
activities totaled approximately $15.1 million for the year ended December 31,
2007, which includes capital expenditures of $253,000 related to ongoing
operations and proceeds of approximately $22.3 million from the sale of 25 car
wash sites and five truck washes in the year ended December 31, 2007 offset by
the acquisition of Linkstar Interactive, Inc. of $6.9 million.
Financing
Activities. Cash used in financing activities was
approximately $1.5 million for the year ended December 31, 2009, which includes
$93,000 of routine principal payments on debt from continuing operations, and
$350,000 related to the repurchase of stock. Financing activities also include
$1.0 million of routine principal payments on debt related to discontinued
operations.
38
Cash used
in financing activities was approximately $1.6 million for the year ended
December 31, 2008, which included $556,000 of routine principal payments related
to continuing operations and $1.1 million of routine principal payments on debt
related to discontinued operations. Cash used in financing activities was
approximately $1.8 million for the year ended December 31, 2007, which includes
$67,000 of routine principal payments on debt from continuing operations and
$1.8 million from routine principal payments on debt related to discontinued
operations.
Seasonality
and Inflation
The
Company believes that its car washing and detailing operations, all of which are
recorded in discontinued operations, are adversely affected by periods of
inclement weather. In particular, long periods of rain and cloudy
weather adversely affect our car wash volumes and related lube and other
automotive services, as people typically do not wash their cars during such
periods. Additionally, extended periods of warm, dry weather, usually
encountered during the Company’s third quarter, may encourage customers to wash
their cars themselves, which also can adversely affect our car wash business.
The Company does not believe its security or digital media marketing operations
are subject to seasonality.
The
Company believes that inflation and changing prices have not had, and are not
expected to have, a material adverse effect on its results of operations in the
near future.
Summary
of Critical Accounting Policies
The
discussion and analysis of our financial condition and results of operations is
based upon the Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. 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 and Deferred
Revenue
The
Company recognizes revenue when the following criteria have been met: persuasive
evidence of an arrangement exists, the fees are fixed and determinable, no
significant obligations remain and collection of the related receivable is
reasonably assured. Allowances for sales returns, discounts and allowances are
estimated and recorded concurrent with the recognition of the sale and are
primarily based on historical return rates.
Revenues
from the Company’s Security Segment are recognized when shipments are
made and title has passed, and are recorded net of sales returns and
discounts.
Revenues
from the Company’s Digital Media Marketing Segment’s e-commerce division
recognizes revenue and the related product costs for trial product shipments
after the expiration of the trial period. Marketing costs incurred by the
e-commerce division are recognized as incurred. The online marketing division
recognizes revenue and cost of sales based on the gross amount received from
advertisers and the amount paid to the publishers placing the advertisements as
cost of sales.
Revenues
from the Company’s Car Wash operations are recognized, net of customer coupon
discounts, when services are rendered or fuel or merchandise is
sold. The Company records a liability for gift certificates, ticket
books, and seasonal and annual passes sold at its car care locations but not yet
redeemed. The Company estimates these unredeemed amounts based on
gift certificate and ticket book sales and redemptions throughout the year, as
well as utilizing historical sales and tracking of redemption rates per the car
washes’ point-of-sale systems. Seasonal and annual passes are amortized on a
straight-line basis over the time during which the passes are
valid.
Shipping
and handling costs related to the Company’s Security Segment of $535,000,
$669,000 and $713,000 in the years ending December 31, 2009, 2008 and 2007,
respectively are included in cost of revenues. Shipping and handling costs
related to the Digital Media Marketing Segment of $588,000, $1.4 million and
$384,000 are included in cost of revenues for the years ended December 31, 2009,
2008 and 2007, respectively. Prior year amounts, which were originally recorded
in selling, general and administrative (SG&A) expenses, were reclassed to
cost of revenues to conform to current presentation.
39
Accounts Receivable
The
Company’s accounts receivable are due from trade customers. Credit is extended
based on evaluation of customers’ financial condition and, generally, collateral
is not required. Accounts receivable payment terms vary and amounts due from
customers are stated in the financial statements net of an allowance for
doubtful accounts. Accounts outstanding longer than the payment terms
are considered past due. The Company determines its allowance by
considering a number of factors, including the length of time trade accounts
receivable are past due, the Company’s previous loss history, the customer’s
current ability to pay its obligation to the Company, and the condition of the
general economy and the industry as a whole. The Company writes off
accounts receivable when they are deemed uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts. Risk of losses from international sales within the Security
Segment are reduced by requiring substantially all international customers to
provide either irrevocable confirmed letters of credit or cash
advances.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using
the first-in first-out (FIFO) method for security and e-commerce
products. Inventories at the Company’s car wash locations consist of
various chemicals and cleaning supplies used in operations and merchandise and
fuel for resale to consumers. Inventories within the Company’s
Security Segment consist of defense sprays, child safety products, electronic
security monitors, cameras and digital recorders, and various other consumer
security and safety products. Inventories within the e-commerce division of the
Digital Media Marketing segment consist of several health and beauty products.
The Company continually and at least on a quarterly basis reviews the book value
of slow moving inventory items, as well as discontinued product lines, to
determine if inventory is properly valued. The Company identifies slow moving or
discontinued product lines by a detail review of recent sales volumes of
inventory items as well as a review of recent selling prices versus cost and
assesses the ability to dispose of inventory items at a price greater than cost.
If it is determined that cost is less than market value, then cost is used for
inventory valuation. If market value is less than cost, than an adjustment is
made to the Company’s obsolescence reserve to adjust the inventory to market
value. When slow moving items are sold at a price less than cost, the difference
between cost and selling price is charged against the established obsolescence
reserve.
Advertising and Marketing
Costs
The
Company expenses advertising costs in its Security Segment and in its Car Wash
operations, including advertising production cost, as the costs are incurred or
the first time the advertisement appears. Marketing costs in the Company’s
Digital Media Marketing Segment, which consist of the costs to acquire new
members for its e-commerce business, are expensed as incurred rather than
deferred and amortized over the expected life of a customer.
Impairment of Long-Lived
Assets
We
periodically review the carrying value of our long-lived assets held and used,
and assets to be disposed of, when events and circumstances warrant such a
review. If significant events or changes in circumstances indicate that the
carrying value of an asset or asset group may not be recoverable, we perform a
test of recoverability by comparing the carrying value of the asset or asset
group to its undiscounted expected future cash flows. Cash flow projections are
sometimes based on a group of assets, rather than a single asset. If cash flows
cannot be separately and independently identified for a single asset, we
determine whether an impairment has occurred for the group of assets for which
we can identify the projected cash flows. If the carrying values are in excess
of undiscounted expected future cash flows, we measure any impairment by
comparing the fair value of the asset group to its carrying value. If the fair
value of an asset or asset group is determined to be less than the carrying
amount of the asset or asset group, an impairment in the amount of the
difference is recorded.
40
Goodwill
Goodwill
represents the premium paid over the fair value of the net tangible and
intangible assets we have acquired in business combinations. We
perform a goodwill impairment test on at least an annual basis. Application of
the goodwill impairment test requires significant judgments including estimation
of future cash flows, which is dependent on internal forecasts, estimation of
the long-term rate of growth for the businesses, the useful life over which cash
flows will occur and determination of our weighted average cost of
capital. Changes in these estimates and assumptions could materially
affect the determination of fair value and/or conclusions on goodwill impairment
for each reporting unit. The Company conducts its annual goodwill
impairment test as of April 30 for its wholesale security monitoring operation
business unit and as of June 30 for its Digital Media Marketing Segment, or more
frequently if indicators of impairment exist. We periodically analyze
whether any such indicators of impairment exist. A significant amount
of judgment is involved in determining if an indicator of impairment has
occurred. Such indicators may include a sustained, significant decline in our
share price and market capitalization, a decline in our expected future cash
flows, a significant adverse change in legal factors or in the business climate,
unanticipated competition and/or slower expected growth rates, among
others. The Company compares the fair value of each of its reporting
units to their respective carrying values, including related
goodwill. Future changes in the industry could impact the results of
future annual impairment tests. Goodwill at December 31, 2009 and 2008 was $7.9
million and $6.9 million, respectively. There can be no assurance
that future tests of goodwill impairment will not result in impairment charges.
See Note 5
Goodwill.
Other Intangible Assets
Other
intangible assets consist primarily of deferred financing costs, non-compete
agreements, customer lists, software costs, product lists, patent costs, and
trademarks. Our trademarks are considered to have indefinite lives, and as such,
are not subject to amortization. These assets are tested for impairment using
discounted cash flow methodology annually and whenever there is an impairment
indicator. Estimating future cash flows requires significant judgment and
projections may vary from cash flows eventually realized. Several impairment
indicators are beyond our control, and determining whether or not they will
occur cannot be predicted with any certainty. Customer lists, product lists,
software costs, patents and non-compete agreements are amortized on a
straight-line or accelerated basis over their respective assigned 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. In establishing the provision for
income taxes and deferred income tax assets and liabilities, and valuation
allowances against deferred tax assets, the Company makes judgments and
interpretations based on enacted laws, published tax guidance and estimates of
future earnings. Deferred income tax assets include tax loss and credit
carryforwards and are reduced by a valuation allowance if, based on available
evidence, it is more likely than not that some portion or all of the deferred
income tax assets will not be realized.
Stock-Based Compensation
The
Company has two stock-based employee compensation plans. The compensation cost
relating to share-based payment transactions is recognized as compensation
expense on a straight-line basis over the vesting period of the instruments,
based upon the grant date fair value of the equity or liability instruments
issued. Total stock compensation expense is approximately $116,000 for the year
ended December 31, 2009, all included in SG&A expense, $629,000 for the year
ended December 31, 2008, ($626,000 in SG&A expense and $3,000 in
discontinued operations), and $924,000 for the year ended December 31, 2007,
($896,000 in SG&A expense and $28,000 in discontinued
operations).
The
Company expects stock compensation expense in 2010 of approximately $90,000 to
$120,000. The Company’s actual stock compensation expense in 2010 could differ
materially from this estimate depending on the timing, magnitude and vesting of
new awards, the number of new awards and changes in the market price or the
volatility of the Company’s common stock.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISKS
We are
not materially exposed to market risks arising from fluctuations in foreign
currency exchange rates, commodity prices, or equity prices.
41
Interest
Rate Exposure
With the
payoff of the Arizona fixed rate mortgages in the second quarter of 2007, nearly
100% of the Company’s debt at December 31, 2009, including debt related to
discontinued operations, is at variable rates. Substantially all of our variable
rate debt obligations are tied to the prime rate, as is our incremental
borrowing rate. A one percent increase in the prime rates would not have a
material effect on the fair value of our variable rate debt at December 31,
2009. The impact of increasing interest rates by one percent would be an
increase in interest expense of approximately $46,000 in 2009.
On
October 14, 2004, we entered into an interest rate cap that effectively changes
our interest rate exposure on approximately $7 million of variable rate debt.
The variable rate debt floats at prime plus .25. The interest rate cap contract
had a 36-month term and capped the interest rate on the $7 million of variable
rate debt at 6.5%. The contract expired at September 30, 2007.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
The
report of independent registered public accounting firm and Consolidated
Financial Statements are included in Part IV, Item 15 of this
Report.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM
9A(T). CONTROLS AND
PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures
The
Company’s disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act, is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules, and include
controls and procedures designed to ensure that such information is accumulated
and communicated to the Company’s management, including its
principal executive and financial officers, to allow timely decisions
regarding required disclosure. Based on the evaluation of the effectiveness of
the Company’s disclosure controls and procedures as of December 31, 2009
required by Rule 13a-15(b) or Rule 15d-15(b) under the Exchange Act and
conducted by the Company’s Chief Executive Officer and Chief Financial Officer,
such officers concluded that the Company’s disclosures controls and procedures
were effective as of December 31, 2009.
(b)
Management’s Annual Report on Internal Control over Financial
Reporting
The
management of Mace Security International, Inc. and its subsidiaries is
responsible for establishing and maintaining adequate internal control over
financial reporting. With the participation of the Principal Executive Officer
and the Principal Financial Officer, management has evaluated the effectiveness
of its internal control over financial reporting as of December 31, 2009. Based
on such evaluation, management has concluded that Mace Security International,
Inc.’s internal control over financial reporting is effective as of December 31,
2009. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in
Internal Control-Integrated
Framework. This annual report does not include an attestation report of
the Company’s registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
Changes
in Internal Control Over Financial Reporting
The
Company’s management, including its Chief Executive Officer and Chief Financial
Officer, have concluded that during the quarter ended December 31, 2009, there
were no changes in the Company’s internal control over financial reporting that
have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
ITEM
9B. OTHER INFORMATION
On
December 30, 2009, the Annual Meeting of the stockholders of Mace Security
International, Inc. was completed. The meeting was originally noticed for
December 15, 2009, and was adjourned to December 30, 2009. The
adjournment took place at the date and place of the originally noticed meeting.
Proposals for the election of five directors to the Board of Directors for
one-year terms and the ratification of the Audit Committee’s appointment of
Grant Thornton LLP as Mace’s registered public accounting firm for fiscal year
2009 were submitted to a vote.
42
The proposals were adopted by the
shareholders. The voting was as follows:
|
Votes
Witheld
|
||||||||||||
|
Directors:
|
Votes
For
|
or
Against
|
Abstentions
|
|||||||||
|
Dennis
R. Raefield
|
8,502,311 | 60,195 | - | |||||||||
|
John
C. Mallon
|
8,502,012 | 60,494 | - | |||||||||
|
Richard
A. Barone
|
8,502,811 | 59,695 | - | |||||||||
|
Mark
S. Alsentzer
|
4,058,646 | 4,503,860 | - | |||||||||
|
Gerald
T. LaFlamme
|
8,501,586 | 60,920 | - | |||||||||
|
Ratify
appointment of
|
||||||||||||
|
Grant
Thornton LLP
|
8,529,548 | 24,173 | 8,785 | |||||||||
On March
22, 2010, The Company received a letter from the NASDAQ Listing Qualifications
Department that the Company was not in compliance with NASDAQ Listing Rule
5450(a)(1) because, for the period February 4, 2010 through March 19, 2010, the
Company’s closing bid price was less than $1.00 per share. The
non-compliance with NASDAQ Listing Rule 5450(a)(1) makes the Company’s common
stock subject to being delisted from The NASDAQ Stock Market. In
accordance with NASDAQ Listing Rule 5810(c)(3)(A) the Company has a grace period
of 180 calendar days expiring on September 20, 2010 to regain compliance by
having a closing bid price for a minimum of ten consecutive business days at
$1.00 per share or higher. Under NASDAQ Listing Rule 5810(c)(3)(F),
The NASDAQ Listing Qualifications Department may, in its discretion, require the
Company to maintain a closing bid price of at least $1.00 per share for a period
in excess of ten consecutive business days, but generally not more than 20
consecutive business days. Until the Company is in compliance with the closing
bid price rule, an indicator will be displayed with the quotation information
related to the Company’s securities on NASDAQ.com and
NASDAQTrader.com.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
DIRECTORS
|
Name
|
Age
|
Position
|
||
|
John
C. Mallon
|
74
|
Director,
Chairman of the Board
|
||
|
Dennis
R. Raefield
|
62
|
Director,
President and Chief Executive Officer
|
||
|
Mark
S. Alsentzer
|
54
|
Director
|
||
|
Gerald
T. LaFlamme
|
70
|
Director
|
||
|
Richard
A. Barone
|
|
67
|
|
Director
|
All of
Mace’s directors serve for terms of one year each until their successors are
elected and qualified. All of the above directors were elected on
December 30, 2009.
Dennis R. Raefield has served
as a director since October 16, 2007 and as President and Chief Executive
Officer since August 18, 2008. From April 2007 to the August 17, 2008, Mr.
Raefield was the President of Reach Systems, Inc. (formerly Edge Integration
Systems, Inc.) (a manufacturer of security access control systems). From
February 2005 to February 2006, Mr. Raefield was President of Rosslare Security
Products, Inc. (a manufacturer of diverse security products). From
February 2004 to February 2005, Mr. Raefield was President of NexVision
Consulting (security business consultant). From January 2003 to
February 2004, Mr. Raefield was President of Ortega InfoSystems (a software
developer). From October 1998 to November 2002, Mr. Raefield was
President of Ademco and Honeywell Access Systems (a division of Honeywell, Inc.
that manufactured access control systems).
Mark S. Alsentzer has served
as a director since December 15, 1999. From January 2006 to the
present, Mr. Alsentzer has been the Chief Executive Officer and Director of Pure
Earth, Inc. From December 1996 to October 2005, Mr. Alsentzer was a
director of U.S. Plastic Lumber Corporation (a plastic lumber and recycling
company). From December 1996 to July 2004, Mr. Alsentzer was the
President and Chief Executive Officer of U.S. Plastic Lumber Corporation (a
plastic lumber and recycling company). From 1992 to December 1996,
Mr. Alsentzer was Vice President of Republic Environmental System, Inc. (an
environmental services company). On July 23, 2004, U.S. Plastic
Lumber Corporation filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code. At the time of the Chapter 11 filing, Mark S. Alsentzer
was Chairman, President and Chief Executive Officer of U.S. Plastic Lumber
Corporation. Mr. Alsentzer is no longer Chairman, a director, President or Chief
Executive Officer of U.S. Plastic Lumber Corporation.
43
Gerald T. LaFlamme has served
as a director since December 14, 2007. From May 20, 2008 to August 18, 2008, Mr.
LaFlamme served as interim Chief Executive Officer of the Company. From 2004 to
the present, Mr. LaFlamme has been President of JL Development Company, Inc. (a
real estate development and consulting company). From 2001 to 2004,
Mr. LaFlamme was Senior Vice President and CFO of Davidson Communities, LLC (a
regional home builder). From 1978 to 1997, Mr. LaFlamme was Area
Managing Partner for Ernst & Young, LLP, and a predecessor accounting firm
in San Diego, CA. Mr. LaFlamme is a director and Chairman of the
Audit Committee of Arlington Hospitality Inc. On August 31, 2005,
Arlington Hospitality Inc. filed a voluntary petition under Chapter 11 of the
United States Bankruptcy Code. At the time of the Chapter 11 filing, Mr.
LaFlamme was a director.
John C. Mallon has served as a
director since December 14, 2007 and as Chairman of the Board since May 20,
2008. From 1994 to the present, Mr. Mallon has been the Managing Director of
Mallon Associates (an investment bank and broker specializing in the security
industry). From 1994 to 2006, Mr. Mallon was the Editor and Publisher
of Mallon’s Security Investing and Mallon’s Security Report (financial
newsletters tracking more than 250 public security companies). Mr.
Mallon is a director of and Chairman of the Audit Committee of Good Harbor
Partners Acquisition Corporation (a public special purpose acquisition
corporation focusing on acquisitions in the global security
market). Mr. Mallon is a director of and Chairman of the Board of IBI
Armored Services, Inc. (a privately held national armored trucking, and money
processing company). Mr. Mallon is also an attorney admitted to practice in the
states of New York and Connecticut and before the Federal Court.
Richard A. Barone has served
as a director since March 31, 2009. From 2001 to present, Mr. Barone has been
Chairman of the Executive Committee for the Ancora Group of
Companies. (The Ancora Group of Companies includes Ancora Advisors
LLC, Ancora Capital Inc., Ancora Securities Inc, the Ancora Mutual Funds, and
the Ancora Foundation). Mr. Barone also oversees or manages a variety of
investment strategies for the Ancora Group, selected clients and the Ancora
Group’s Hedge Fund, Merlin Partners. Ancora Securities, Inc. is
registered as a broker/dealer with the SEC and the Financial Industry Regulatory
Authority (“FINRA”), formerly known as the NASD. Mr. Barone is Chairman of
Cleveland State University Foundation, Trustee of Cleveland State University,
Director of Hospice of the Western Reserve, Director of Brentwood Hospital,
Director of Stephan Company and Chairman of Evergreen Expedition
Group.
EXECUTIVE
OFFICERS
The
individuals below are the current Executive Officers and were the Executive
Officers during 2009, except for Robert M. Kramer whose last day as an employee
of the Company was February 12, 2010.
|
Name
|
Age
|
Position
|
||
|
Dennis
R. Raefield
|
62
|
President
and Chief Executive Officer
|
||
|
Robert
M. Kramer
|
57
|
Executive
Vice President, General Counsel and Secretary
|
||
|
Gregory
M. Krzemien
|
|
50
|
|
Chief
Financial Officer and
Treasurer
|
Dennis R. Raefield has served
as President and Chief Executive Officer since August 18, 2008. From
April 2007 to August 17, 2008, Mr. Raefield was the President of Reach Systems,
Inc. (formerly Edge Integration Systems, Inc.) (a manufacturer of security
access control systems). From February 2005 to February 2006, Mr. Raefield was
President of Rosslare Security Products, Inc. (a manufacturer of diverse
security products). From February 2004 to February 2005, Mr. Raefield
was President of NexVision Consulting (security business
consultant). From January 2003 to February 2004, Mr. Raefield was
President of Ortega InfoSystems (a software developer). From October
1998 to November 2002, Mr. Raefield was President of Ademco and Honeywell Access
Systems (a division of Honeywell, Inc. that manufactured access control
systems).
Robert M. Kramer served as
Executive Vice President, General Counsel, and Secretary of the Company from May
1999, to February 12, 2010 and as Chief Operating Officer of the Car Wash
Segment from July 2000 to July 2006. Mr. Kramer was terminated upon the
expiration of his employment contract, effective on February 12, 2010. 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. 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.
44
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.
CORPORATE
GOVERNANCE
Audit
Committee and Audit Committee Financial Expert
The Board
of Directors has determined that Gerald T. LaFlamme, the Chairman of the
Company’s Audit Committee, is an audit committee financial expert as defined by
Item 407(d)(5)(ii) of Regulation S-K of the Exchange Act. The Company
has a separately designated standing Audit Committee established in accordance
with Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee
are Gerald T. LaFlamme, Chairman, Mark S. Alsentzer, and Richard A. Barone. The
Board of Directors has determined that each member of the Audit Committee is
independent within the meaning of Rule 4200(a)(15) of the National Association
of Securities Dealers’ Nasdaq Global Market listing standards and Rule 10A-3
promulgated under the Securities Exchange Act of 1934. The Charter of
the Audit Committee is posted on our website at www.mace.com.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires Mace’s directors and executive officers, as
well as persons beneficially owning more than 10% of Mace’s outstanding shares
of common stock and certain other holders of such shares (collectively, “Covered
Persons”), to file with the SEC and the NASDAQ Stock Market, within specified
time periods, initial reports of ownership, and subsequent reports of changes in
ownership, of common stock and other equity securities of Mace. Based upon
Mace’s review of copies of such reports furnished to it and upon representations
of Covered Persons that no other reports were required, to Mace’s knowledge, all
of the Section 16(a) filings required to be made by the Covered Persons with
respect to 2009 were made on a timely basis.
Code
of Ethics and Corporate Governance
The
Company has adopted a Code of Ethics and Business Conduct for directors,
officers (including the chief executive officer, chief financial officer, and
chief accounting officer), and employees. The Code of Ethics and Business
Conduct is posted on our website at www.mace.com.
The Board
of Directors has adopted Corporate Governance Guidelines. Stockholders are
encouraged to review the Corporate Governance Guidelines at our website at www.mace.com for
information concerning the Company’s governance practices. Copies of the
charters of the committees of the Board are also available on the Company’s
website.
Nominating
Committee
The
Nominating Committee is composed of all independent directors. The
Nominating Committee is currently composed of Mark S. Alsentzer, Chairman,
Gerald T. LaFlamme and John C. Mallon. The charter of the Nominating
Committee is available for inspection on the Company’s web site, www.mace.com, under
the heading of Investors Relations. The Nominating Committee considers
candidates for Board membership suggested by its members, other Board members
and management. The Nominating Committee has authority to retain a search firm
to assist in the identification of director candidates. In selecting nominees
for director, the Nominating Committee considers a number of factors, including,
but not limited to:
|
|
·
|
whether
a candidate has demonstrated business and industry experience that is
relevant to the Company, including recent experience at the senior
management level (preferably as chief executive officer or in a similar
position) of a company as large or larger than the
Company;
|
|
|
·
|
the
candidate’s ability to meet the suitability requirements of all relevant
regulatory agencies;
|
|
|
·
|
the
candidate’s ability to represent interests of the
stockholders;
|
|
|
·
|
the
candidate’s independence from management and freedom from potential
conflicts of interest with the
Company;
|
|
|
·
|
the
candidate’s financial literacy, including whether the candidate will meet
the audit committee membership standards set forth in the rules of the
NASDAQ Global Market;
|
|
|
·
|
whether
a candidate is widely recognized for his or her reputation, integrity,
judgment, skill, leadership ability, honesty and moral
values;
|
|
|
·
|
the
candidate’s ability to work constructively with the Company’s management
and other directors; and
|
|
|
·
|
the
candidate’s availability, including the number of other boards on which
the candidate serves, and his or her ability to dedicate sufficient time
and energy to his or her board
duties.
|
During
the process of considering a potential nominee, the Committee may request
additional information concerning, or an interview with, the potential
nominee.
45
The
Nominating Committee will also consider recommendations by stockholders of
nominees for directors to be elected at the Company’s Annual Meeting of
Stockholders, if they are received on or before September 1 of the year of the
meeting or at an earlier date as may be determined and disclosed by the Company.
In evaluating nominations received from stockholders, the Committee will apply
the same criteria and follow the same process used to evaluate candidates
recommended by members of the Nominating Committee. Stockholders wishing to
recommend a nominee for director are to submit such nomination in writing, along
with any other supporting materials the stockholder deems appropriate, to the
Secretary of the Company at the Company’s offices at 240 Gibraltar Road, Suite
220, Horsham, Pennsylvania 19044.
ITEM
11. EXECUTIVE
COMPENSATION
COMPENSATION
DISCUSSION AND ANALYSIS
Introduction. The
Compensation Committee is responsible for developing the Company’s philosophy
and structure for executive compensation. Consistent with this
philosophy, on an annual basis, the Compensation Committee reviews and sets the
compensation for the Chief Executive Officer (“CEO”), Chief Financial Officer
(“CFO”), and the Executive Vice President, General Counsel
(“EVP”). Mr. Raefield and Mr. Krzemien have been the Executive
Officers of the Company during calendar year 2009 to present. Mr.
Kramer was an executive officer of the Company during calendar year 2009 to
February 12, 2010 and is no longer a Company employee. The roles of Mr.
Raefield, Mr. Krzemien and Mr. Kramer, who are referred to as Named Executive
Officers herein, are as follows:
(a)
Dennis R. Raefield, President and CEO;
(b)
Gregory M. Krzemien, CFO and Treasurer; and
(c)
Robert M. Kramer, EVP, General Counsel and Secretary.
The
Company’s executive compensation program is based on principles designed to
align executive compensation with the Company’s business strategy of creating
wealth for its stockholders and creating long-term value for the
business. The Compensation Committee believes in establishing base
executive compensation which is comparable to the median base compensation paid
by comparable companies with bonuses tied to the execution of business
strategies approved by the Board. It is the Company’s philosophy to
evaluate its executive compensation structure with other companies of
comparative size, type and geographic scope. The Company’s
compensation policy for executives is intended to further the interests of the
Company and its stockholders by encouraging growth of its business through
securing, retaining, and motivating management employees of high caliber who
possess the skills necessary for the development and growth of the Company. The
Company selected Dennis R. Raefield as its CEO, effective August 18,
2008. The Compensation Committee believes that the Company’s current
management team is experienced and capable.
Compensation and
Benefits Philosophy. The compensation and
benefits programs for the Named Executive Officers are designed with the goal of
providing compensation and benefits that are fair, reasonable and
competitive. The programs are intended to help the Company recruit
and retain qualified executives, motivate executive performance to achieve
specific strategic objectives of the Company, and align the interests of
executive management with the long-term interests of the Company’s
stockholders.
The
design of specific programs is based on the following guiding
principles:
Competitiveness:
Compensation and benefit programs are designed to be competitive with those
provided by companies with whom we compete for talent. In general,
programs are considered competitive when all factors of a job are considered
with compensation levels at the 50th percentile as measured against these
competitor companies.
Performance:
The Company believes that the best way to accomplish the alignment of
compensation plans with the interest of its executives and stockholders is to
link pay directly to individual and Company performance.
Cost:
Compensation and benefit programs are designed to be cost-effective and
affordable, ensuring that the interests of the Company’s stockholders are
considered. This is especially critical during this time of
transition, as we cannot afford to add executives to strengthen our
“bench.”
Comparator
Group: The relevant comparator group for compensation and benefit programs
consists primarily of companies of comparative size, similar businesses and
geographic scope. These are the firms with which the Company competes
for talent. The comparator group was chosen to include companies with
similar market capitalization, similar revenue size, direct competitors, and
also included some companies in areas where the Company intended to do business
in the future.
46
The
Compensation Committee did not commission a compensation study for 2008 or
2009. The most recent compensation study commissioned by the
Compensation Committee was the December 2007 study conducted by the Hay
Group.
Roles,
Responsibilities and Charter of the Committee. The primary
purpose of the Compensation Committee is to conduct reviews of the Company’s
general executive compensation policies and strategies, oversee and evaluate the
Company’s overall compensation structure and programs and establish the
compensation for the Named Executive Officers. The Compensation
Committee’s direct responsibilities include, but are not limited
to:
|
·
|
Determining
and approving the compensation level of the
CEO;
|
|
·
|
Evaluating
and approving compensation levels of the other Named Executive
Officers;
|
|
·
|
Evaluating
and approving all grants of equity-based compensation to Named Executive
Officers;
|
|
·
|
Recommending
to the Board compensation policies for non-employee directors;
and
|
|
·
|
Designing
performance-based and equity-based incentive plans for the CEO and other
Named Executive Officers and reviewing other benefit programs presented to
the Compensation Committee by the
CEO.
|
Overall Program
Components. The key components of the Company’s executive
compensation package are direct compensation and company-sponsored benefit
plans. These components are administered with the goal of providing
total compensation that recognizes meaningful differences in individual
performance, is competitive, varies the opportunity based on individual and
corporate performance, and is valued by the Company’s executives. The
Company seeks to achieve its compensation objectives through five key
compensation elements:
|
·
|
A
base salary;
|
|
·
|
Structured
performance bonuses (with respect to Mr. Raefield), Periodic (generally
annual) grants of long-term, equity-based compensation (i.e., longer-term
incentives), such as stock options, which may be subject to
performance-based and/or time-based vesting
requirements;
|
|
·
|
Change
of control arrangements that are designed to retain executives and provide
continuity of management in the event of an actual or threatened change of
control;
|
|
·
|
Special
awards and/or bonuses for duties that are above and beyond the normal
scope of duties for a given executive;
and
|
|
·
|
Perquisites
and benefits.
|
Competitive
Consideration. In making compensation decisions with respect
to each element of compensation, the Compensation Committee considers the
competitive market for executives and compensation levels provided by comparable
companies. The Compensation Committee regularly reviews the compensation
practices at companies with which it competes for talent, including businesses
engaged in activities similar to those of the Company, as noted in the list
above.
The
Compensation Committee does not attempt to set each compensation element for
each executive within a particular range related to levels provided by industry
peers or the comparator group. The Compensation Committee does use
market comparisons as one factor in making compensation
decisions. Some of the other factors considered when making
individual executive compensation decisions include individual contribution and
performance, reporting structure, internal pay relationship, complexity and
importance of role and responsibilities, leadership and growth
potential.
Executive
Compensation Practices. The Company’s practices with respect
to each of the five key compensation elements identified above, as well as other
elements of compensation, are set forth below, followed by a discussion of the
specific factors considered in determining key elements of fiscal year 2009
compensation for the Named Executive Officers.
Base
Salary. Base salary is designed to attract and retain
experienced executives who can drive the achievement of the Company’s business
goals. Mr. Raefield became the Company’s CEO on August 18, 2008. Mr.
Raefield’s base salary was arrived at by negotiation. Mr. Raefield
did not receive an increase in base salary during
2009. Mr. Raefield’s base salary is $375,000.
The Compensation Committee felt that Mr. Raefield’s security industry experience
and success in reducing the Company’s cost structured warranted his
base salary of $375,000 during 2009. Mr. Krzemien and Mr. Kramer who
received a base salary of $230,000 in the employment agreements they entered
into with the Company in February 2007 did not receive any increase in base
salary during 2008 or 2009. While an executive’s initial base salary is
determined through an assessment of comparative market levels for the position,
the major factors in determining base salary increases are individual
performance, pertinent experience, an increase in responsibility and the
profitability of the Company.
Mr.
Krzemien and the Company recently executed a Letter Agreement dated March 23,
2010 (“Krzemien Agreement”) under which Mr. Krzemien is an employee at
will. Under the Krzemien Agreement, Mr. Krzemien's annual base salary
remains $230,000 with a $700 per month car allowance and standard Company
medical benefits. The Krzemien Agreement also provides that the Company will
recommend that Mr. Krzemien be awarded an option for 50,000 shares of the
Company’s common stock at the next Compensation Committee
meeting. The options, if awarded will be exercisable at the closing
market price on the date of the award and will vest in three equal annual
installments on the annual anniversary date of the Krzemien
Agreement.
47
The
minimum salary for the CEO, CFO, and General Counsel were established by
employment agreement. The amount of any increase over this minimum
for the CEO, CFO and General Counsel are determined by the Compensation
Committee based on a variety of factors, including:
|
·
|
The
nature and responsibility of the position and, to the extent available,
salary norms for persons in comparable positions at comparable
companies;
|
|
|
·
|
The
expertise of the individual
executive;
|
|
|
·
|
The
competitiveness of the market for the executive’s
services;
|
|
|
·
|
The
recommendations of the CEO (except in the case of his own
compensation);
|
|
·
|
The
amount of structured bonuses paid under the executive’s Employment
Contract ; and
|
|
|
·
|
The
success of the Company in achieving the goals established by the Board of
Directors.
|
Where not
specified by contract, salaries are generally reviewed
annually.
Annual Incentives
for Named Executive Officers. There was a formal incentive
plan in place for 2009 with respect to Mr. Raefield. The benchmarks in the bonus
plan were not achieved and Mr. Raefield did not receive a bonus in
2009. The formal 2009 Incentive Plan for the CEO was based on
benchmarks of earnings before interest, taxes, depreciation and
amortization (“EBITDA”) for the year ended 2009. The 2009 Incentive Plan was
designed to focus on key financial, operational, and individual
goals.
The
Compensation Committee has discretion to provide bonuses to the Named Executive
Officers for exceptional results, special circumstances, and other
non-quantitative measures. In 2009, no annual bonuses, special awards
or recognition were granted by the Compensation Committee, and none of the Named
Executive Officers received any annual incentive payments.
Long-term
Incentive Compensation. The long-term equity-based award is
designed to attract and retain executives and certain other key employees, and
to strengthen the link between compensation and increased returns for
stockholders through share price appreciation. The Company uses stock
options as its long-term incentive compensation. Awards granted to
individual executives are discretionary and may be made annually under the
Company’s 1999 Stock Option Plan (the “Option Plan”). The number of
shares granted is at the discretion of the Compensation Committee and are
generally awarded each year for the previous year’s performance, or when the
Company conducts a market-based review to ensure compensation is in line with
the outside world. The options are typically subject to a ten-year
life and vest per the terms of each option agreement. Options are
issued at the market closing price for the Company’s common stock on the date
the option is authorized. The value of each option is not adjusted
during the option’s lifetime.
The
Company has adopted a policy on stock option grants that includes the following
provisions relating to the timing of option grants:
|
·
|
All
awards of stock options to Named Executive Officers are awarded by the
Compensation Committee or when each Named Executive Officer’s compensation
and performance is reviewed by the Compensation
Committee.
|
|
·
|
All
awards of stock options to employees who are not Named Executive Officers
are awarded by the Compensation Committee based on the Named Executive
Officer’s recommendations after review by the Compensation
Committee.
|
|
·
|
Option
grants are not timed with the release of material non-public
information.
|
|
·
|
Except
for inducement grants for new employees, Named Executive Officers
recommend an award of stock options based on a review of the employee’s
performance and compensation.
|
|
·
|
The
grant date of the stock options is always the date the Compensation
Committee authorizes the grant or a date in the
future.
|
|
·
|
The
exercise price is the closing price of the underlying common stock on the
grant date authorized by the Compensation
Committee.
|
|
·
|
Stock
option awards for Named Executive Officers are promptly announced on a
Form 4 filing.
|
The
long-term incentive program calls for stock options to be granted with exercise
prices of not less than fair market value of the Company’s stock on the date of
authorization and to vest over time, based on continued employment, with rare
exceptions made by the Compensation Committee. The Compensation
Committee will not grant stock options with exercise prices below the market
price of the Company’s stock on the date of authorization. New option
grants to Named Executive Officers normally have a term of ten
years.
48
Long-term
equity grants are positioned at or below the median of the competitive market
when performance is at target levels. When performance falls below
target levels, funding will be below the market median or
eliminated. When performance exceeds target levels, funding may be
above the market median.
Overall
grant levels are at the discretion of the Compensation Committee. The
size of individual long-term equity based awards is determined using
compensation guidelines developed based on individual performance.
Fiscal Year 2009
Stock Option Decisions. In fiscal 2008, as part of hiring Mr.
Raefield, the Compensation Committee agreed to award Mr. Raefield
an option for 250,000 shares of the Company’s Common Stock on the
anniversary date of Mr. Raefield’s date of hire. The option was
issued on August 11, 2009 at an exercise price of $.97 per share. The
option vests one-half on July 28, 2010 and one-half on July 28,
2011.
At the
time Mr. Raefield was hired, the Compensation Committee believed that the 2009
option award was warranted due to the award being below the median of long term
incentive compensation granted to chief executive officers, as stated in the Hay
2007 Report. Mr. Raefield’s total direct compensation under his employment
agreement was below the median total direct compensation market consensus for
chief executive officers, as set forth in the Hay Group’s 2007
Report.
Mr.
Kramer and Mr. Krzemien did not receive any options or other incentive
compensation for 2009.
Change of Control
Arrangements. The Employment Agreement between the Company and
Mr. Raefield entered into on July 29, 2008 did not contain a provision for
payments triggered by a change of control, but does require certain payments if
Mr. Raefield is terminated without cause. The Company entered into a change of
control arrangement with Mr. Kramer and Mr. Krzemien in 2007. The
Company entered into the arrangements in order to encourage the executives to
remain employed with the Company during a period when the Company was changing
its business from the car wash industry to the security business and e-commerce
business. The Compensation Committee was concerned that the uncertain atmosphere
could result in Mr. Kramer, and Mr. Krzemien seeking employment at
another company. The 2007 Compensation Committee believed that it was important
to retain its key executives as the Company transitioned its
business.
Mr.
Kramer’s and Mr. Krzemien’s payments under the employments agreement that
expired February 12, 2010 were linked to three separate events. Mr. Kramer and
Mr. Krzemien would have received a one-time payment of their base annual salary
($230,000) in the event that both a change of control occurred and Mr. Paolino
no longer is Chief Executive Officer of the Company (“Double
Trigger”). Mr. Paolino was terminated as Chief Executive
Officer of the Company on May 20, 2008. After the Double Trigger occurred, if
during the term of their employment agreements, the Company terminated Mr.
Kramer or Mr. Krzemien, respectively, or the Company breached their respective
employment agreement, the affected Executive Officer would have received an
additional one-time payment of his base annual salary (“Triple Trigger”). The
Compensation Committee, after consultation with Compensation Resources, Inc.,
believed the lesser payment and the Double Trigger and Triple Trigger was
sufficient to encourage the retention of Mr. Kramer and Mr.
Krzemien. The change of control arrangement expired on February 12,
2010, the date that the Employment Agreements of Mr. Krzemien and Mr. Kramer
expired.
Termination
Payment Provisions for Mr. Raefield. The Employment Agreement
between the Company and Mr. Raefield entered into on July 29, 2008 provides that
Mr. Raefield can be terminated by the Board of Directors for cause, as set forth
in the Raefield Employment Agreement without any severance or other
payment. The Board of Directors can also terminate Mr. Raefield
without cause, upon a payment of two times Mr. Raefield’s current annual base
salary. Mr. Raefield is prohibited from competing with the Company
during his period of employment and for a one year period following a
termination of employment. The Company is obligated to pay Mr.
Raefield $375,000 in exchange for the one year obligation not to compete, if Mr.
Raefield is employed through August 18, 2011 and the Company and Mr. Raefield do
not enter into a new employment agreement within sixty days after August 18,
2011.
Change of Control
Provision for Mr. Krzemien. Mace currently employs Gregory M.
Krzemien, its CFO and Treasurer. From February 12, 2007 to February
12, 2010, Mr. Krzemien was employed under an Employment Contract dated February
12, 2007. Mr. Krzemien is currently an employee at will under the
Krzemien Agreement dated March 23, 2010. Under the Krzemien
Agreement, Mr. Krzemien is not entitled to any change of control payment, but is
entitled to a severance payment equal to six months of his base salary, if he is
terminated without “Good Cause”, as defined in the Krzemien
Agreement. Mr. Krzemien is also entitled to the six month severance
payment, if he resigns due to the Company materially changing his duties as
Chief Financial Officer, relocates his office more than 25 miles from its
present location or reduces his annual base salary. “Good Cause” to
terminate Mr. Krzemien without a severance payment generally exists if Mr.
Krzemien fails to perform his duties and does not cure the failure within thirty
days of being notified of the failure, or commits certain other enumerated
actions which harm the Company. The definition of "Good Cause" is in
footnote 5 to the Change of Control Chart below. Generally, the
Krzemien Agreement provides for two weeks advance notice of a termination;
however, in the case of the Company being merged or acquired by another party,
the notice of termination is increased to three months. Mr. Krzemien
is required to continue to perform his duties during the notice period. Under
the expired employment contract, Mr. Krzemien was entitled to receive a one time
retention payment equal to his then annual base compensation upon the occurrence
of both: (a) a change of control of the Company and (b) Louis D. Paolino, Jr.
ceasing to be the CEO of the Company. Additionally Mr. Krzemien would have been
entitled to receive a termination payment equal to his then annual base
compensation if his employment contract was terminated without cause or if the
Company breached his employment contract. As of December 31, 2009, the annual
base compensation of Mr. Krzemien was $230,000. If a change of control occurred
on December 31, 2009, Mr. Krzemien would have received a retention payment of
$230,000. If on December 31, 2009, a change of control occurred, and
the Company decided to either terminate Mr. Krzemien without cause or the
Company breached Mr. Krzemien’s employment contract, Mr. Krzemien would have
been paid a total of $460,000.
49
Change of Control
Provision for Mr. Kramer. Mace no longer employs Robert Kramer as its EVP
and General Counsel. During 2009 through February 12, 2010, Mr.
Kramer was employed under an employment contract entered on February 12, 2007.
Under his employment contract, Mr. Kramer was entitled to receive a one-time
retention payment equal to his then annual base compensation upon the occurrence
of both: (a) a change of control of the Company and (b) Louis D. Paolino, Jr.
ceasing to be the CEO of the Company. Additionally, after Mr. Kramer is paid the
retention payment, he is entitled to receive a termination payment equal to his
then annual base compensation, if his employment contract is terminated without
cause, or if the Company breaches his employment contract. As of December 31,
2008, the annual base compensation of Mr. Kramer was $230,000. If a change of
control had occurred on the date of this Proxy Statement, Mr. Kramer would have
received a retention payment of $230,000. Additionally, if on the date of this
Annual Report, a change of control had occurred and the Company decided to
either terminate Mr. Kramer without cause or the Company breached Mr. Kramer’s
employment contract, Mr. Kramer would have been paid a total of
$460,000.
Benefits and
Perquisites. With limited exceptions, the Committee supports
providing benefits and perquisites to the Named Executive Officers that are
substantially the same as those offered to other officers of the Company. As of
February 12, 2007, Mr. Kramer and Mr. Krzemien became entitled to a $700 per
month car allowance. Pursuant to his employment agreement, Mr. Raefield is
entitled to receive a company vehicle for his personal use, having a lease cost
of no more than $800 per month starting August 18, 2008 and payment of certain
life and disability insurance premiums and funding of certain health
reimbursement plans.
Total
Compensation. In making decisions with respect to elements of Named
Executive Officers’ compensation, the Compensation Committee considers the total
compensation of the executive, including salary, special awards/bonuses and
long-term incentive compensation. In addition, in reviewing and approving
employment agreements for Named Executive Officers, the Compensation Committee
considers all benefits to which the officer is entitled by the agreement,
including compensation payable upon termination of the agreement. The
Compensation Committee’s goal is to award compensation that is reasonable when
all elements of potential compensation are considered.
Policy with
respect to the $1 million deduction limit. Section 162(m) of
the Internal Revenue Code generally disallows a tax deduction to public
corporations for compensation over $1,000,000 paid for any fiscal year to the
corporation’s Principal Executive Officer and the four other most highly
compensated executive officers as of the end of the fiscal year. However, the
statute exempts qualifying performance-based compensation from the deduction
limit if certain requirements are met.
The
Compensation Committee designs certain components of Executive Officer
compensation to permit full deductibility. The Compensation Committee believes,
however, that stockholder interests are best served by not restricting the
Compensation Committee’s discretion and flexibility in crafting compensation
programs, even though such programs may result in certain non-deductible
compensation expenses. Accordingly, the Compensation Committee has from time to
time approved elements of compensation for certain officers that are not fully
deductible, and reserves the right to do so in the future in appropriate
circumstances.
50
Compensation
Committee Report
The
Compensation Committee of the Company’s Board of Directors consists of directors
John C. Mallon, Richard A. Barone and Mark S. Alsentzer, all of whom the Board
has determined to be independent pursuant to the NASDAQ Stock Market, Inc.’s
Marketplace Rules. This report shall not be deemed incorporated by
reference into any filing under the Securities Act or the Exchange Act by virtue
of any general statement in such filing incorporating the Form 10-K by
reference, except to the extent that the Company specifically incorporates the
information contained in this section by reference and shall not otherwise be
deemed filed under either the Securities Act or the Exchange Act.
The
Compensation Committee has reviewed and discussed with management the
Compensation Discussion and Analysis contained in this Form 10-K Annual Report
for the year ended December 31, 2009. Based on the review and
discussions, the Compensation Committee recommended to the Board of Directors
that the Compensation Discussion and Analysis be included in this Annual Report
on Form 10-K.
|
The
Compensation Committee of the Board of Directors
|
|
John
C. Mallon
|
|
Richard
A. Barone
|
|
Mark
S. Alsentzer
|
EXECUTIVE
COMPENSATION TABLES AND NARRATIVES
The
following table provides summary information concerning cash and certain other
compensation paid or accrued by Mace to, or on behalf of the Named Executive
Officers for the years ended December 31, 2009 and 2008.
51
|
SUMMARY
COMPENSATION TABLE (1)
|
||||||||||||||||||||||
|
Option
|
All
Other
|
|||||||||||||||||||||
|
Name
and Principal
|
Bonus
|
Awards
|
Compensation
|
|||||||||||||||||||
|
Position
|
Year
|
Salary
$
|
($)(4)
|
(S)(5)
|
($)(6)
|
Total
|
||||||||||||||||
|
Dennis
R. Raefield (2)
|
2009
|
$ | 375,000 | $ | - | $ | 26,520 | $ | 32,059 | $ | 433,579 | |||||||||||
|
President
and Chief
|
2008
|
$ | 129,808 | $ | 50,000 | $ | 225,975 | $ | 11,167 | $ | 416,950 | |||||||||||
|
Executive
Officer
|
||||||||||||||||||||||
|
Gerald
T. LaFlamme (3)
|
2009
|
$ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||
|
Interim
Chief
|
2008
|
$ | 64,000 | $ | - | $ | - | $ | - | $ | 64,000 | |||||||||||
|
Executive
Officer
|
||||||||||||||||||||||
|
Louis
D. Paolino, Jr.
|
2009
|
$ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||
|
Chairman
of the Board,
|
2008
|
$ | 190,385 | $ | 124,969 | $ | 27,526 | $ | 7,615 | $ | 350,495 | |||||||||||
|
President
and Chief
|
||||||||||||||||||||||
|
Executive
Officer
|
||||||||||||||||||||||
|
Robert
M. Kramer
|
2009
|
$ | 230,000 | $ | - | $ | 8,587 | $ | 8,400 | $ | 246,987 | |||||||||||
|
Executive
Vice
|
2008
|
$ | 230,000 | $ | - | $ | 27,526 | $ | 8,400 | $ | 265,926 | |||||||||||
|
President,
General
|
||||||||||||||||||||||
|
Counsel
and Secretary
|
||||||||||||||||||||||
|
Gregory
M. Krzemien
|
2009
|
$ | 230,000 | $ | - | $ | 8,587 | $ | 8,400 | $ | 246,987 | |||||||||||
|
Chief
Financial Officer
|
2008
|
$ | 230,000 | $ | - | $ | 27,526 | $ | 8,400 | $ | 265,926 | |||||||||||
|
and
Treasurer
|
||||||||||||||||||||||
|
(1)
|
The
Company (i) granted no restricted stock awards and (ii) maintained no
other long-term incentive plan for any of the Named Executive
Officers, in each case during the fiscal years ended December 31, 2009 and
2008. Additionally, the Company has never issued any stock appreciation
rights (SARs).
|
|
(2)
|
Dennis
R. Raefield became President and Chief Executive Officer on August 18,
2008.
|
|
(3)
|
Gerald
T. LaFlamme served as interim Chief Executive Officer from May 20, 2008 to
August 18, 2008.
|
|
(4)
|
Mr.
Raefield’s employee agreement provided for a $50,000 signing fee.
Additionally, transaction bonuses were paid to Mr. Paolino during 2007 and
2008 under the terms of his Employment
Contract.
|
|
(5)
|
The
amounts in this column reflect the dollar amount recognized for financial
statement reporting purposes, including the impact of estimated for
forfeitures, for the fiscal years ended December 31, 2009 and 2008, for
all existing stock option awards and thus include amounts from awards
granted in and prior to 2008. Assumptions used in the calculation of this
amount are included in Note 2 to the Company’s Audited Financial
Statements for the fiscal year ended December 31,
2009.
|
|
(6)
|
Mr.
Raefield received a car at a lease cost of $791 per month beginning in
August 2008 and received a reimbursement of legal expenses of $2,812
related to review of his employment contract in 2008. Mr. Raefield is
entitled under his employment agreement to receive payment of certain life
and disability insurance premiums and funding of certain health
reimbursement plans which totaled $22,500 and $4,400 in 2009 and 2008,
respectively. Mr. Paolino received a car allowance upon expiration of his
then current car lease of $1,500 per month through May 2008. Mr. Paolino
also received a discount of $439 on the purchase of security products from
the Company during the fiscal years ended December 31, 2008. Mr. Krzemien
and Mr. Kramer received car allowances of $700 per month in 2008 and
2009.
|
Dennis
R. Raefield Employment Agreement
Dennis R.
Raefield serves as the Company’s President and Chief Executive Officer under an
Employment Contract dated July 29, 2008 and expiring on August 18, 2011 (the
“Raefield Employment Agreement”). Mr. Raefield’s base salary is
$375,000 annually. As a one time incentive to execute the Raefield
Employment Agreement, Mr. Raefield was paid $50,000 and received a reimbursement
of legal expenses of $2,812 related to review of his employment
contract.
52
In
accordance with the Raefield Employment Agreement, Mr. Raefield received an
option grant on July 30, 2008 exercisable into 250,000 shares of common stock at
an exercise price of $1.50 per share (the “First Option”). The First
Option was issued fully vested. On July 26, 2009, Mr. Raefield also
received a second option grant exercisable for 250,000 shares (the “Second
Option”). The Second Option vests over two years, with the first
125,000 option shares vesting 12 months from the date of grant and the second
125,000 option shares vesting 24 months from the date of grant. The
Second Option fully vests upon a change of control of the Company.
The
Raefield Employment Agreement provides that Mr. Raefield and the Company are
required to develop a mutually acceptable annual bonus plan for Mr. Raefield
within forty-five (45) days from the date of the Employment
Agreement. No annual bonus plan was agreed upon for
2008. The bonus plan is to be designed to provide profitability
targets for the Company that, if achieved, will allow Mr. Raefield to earn
annual bonuses of between thirty percent (30%) to fifty percent (50%) of his
base salary; if any bonus is paid under the annual bonus plan, and the Company
thereafter restates its financial statements such that the bonus or a portion
thereof would not have been earned based on the restated financial statements,
Mr. Raefield shall be obligated to repay to the Company the bonus he received or
a portion thereof. The Raefield Employment Agreement further provides that Mr.
Raefield can be terminated by the Board of Directors for cause without any
severance or other payment. The Board of Directors can also terminate
Mr. Raefield without cause, upon a payment of two times Mr. Raefield’s current
annual base salary.
The
Compensation Committee implemented a formal 2009 Incentive Plan for the CEO
based on benchmarks of achieved earnings before interest, taxes, depreciation
and amortization (“EBITDA”) for the year ended 2009. Based on the
Company’s results for 2009, Mr. Raefield will not receive any payments under the
2009 Incentive Plan.
Mr.
Raefield has also been provided a Company vehicle at a lease cost of
approximately $791 per month, plus all maintenance costs, and Company standard
medical and other employee benefits. Mr. Raefield is prohibited from competing
with the Company during his period of employment and for a one year period
following a termination of employment. The Company is obligated to
pay Mr. Raefield $375,000 in exchange for the one year non-compete obligation if
Mr. Raefield is employed through August 18, 2011 and the Company and Mr.
Raefield do not enter into a new employment agreement within sixty days after
August 18, 2011.
Louis
D. Paolino, Jr. Employment Agreement
Mace
employed Louis D. Paolino, Jr. as its President and Chief Executive Officer
under a three-year Employment Contract dated August 21, 2006 and expiring on
August 21, 2009 (the “Paolino Employment Agreement”). The Company terminated Mr.
Paolino’s employment on May 20, 2008. Before entering into the
Paolino Employment Agreement, the Company obtained a Compensation Study from
Compensation Resources, Inc., an independent third party consulting
firm.
The
initial base salary under the Paolino Employment Agreement was $450,000. The
Paolino Employment Agreement provided for three separate option grants to Mr.
Paolino for common stock under Mace’s 1999 Stock Option Plan at an exercise
price equal to the close of market on the date of grant. The first grant was
issued on August 21, 2006, and was an option exercisable into 450,000 shares of
common stock at an exercise price of $2.30. The second options grant (the
“Second Grant”) was to have been awarded within five days of August 21, 2007
(this award in the amount of 300,000 was made on February 22,
2008). Mr. Paolino objected to the size of the Second Grant, taking
the position that an option for more shares should have been
granted. To satisfy the objection of Mr. Paolino, the Company issued
Mr. Paolino an additional option for 35,000 shares on March 25,
2008. Both options were fully vested on the date of the
grant. The option agreements relating to the three option grants
described above provided that the options may only be exercised within ninety
days after a termination for cause, as defined in the option
agreements. The Company has taken the position that Mr. Paolino was
terminated for cause, as defined in the option agreements and that the three
described options are no longer exercisable.
The
Paolino Employment Agreement provided for a third option grant (the “Third
Grant”) that was to have been awarded within five days of August 21, 2008. The
Third Grant was never awarded as the Paolino Employment Agreement was
terminated.
The
annual options issued to Mr. Paolino under the Paolino Employment Agreement were
required to be in an amount based on a formula administered by the Company’s
Compensation Committee. The formula was based on a current
compensation study of the Principal Executive Officer position. The amount of
the annual option shares, at time of grant, plus the $450,000 annual
compensation paid to Mr. Paolino, was to equal no less than the “market
consensus total direct compensation” amount paid by the comparable companies to
their chief executive officers, as set forth in a compensation study to be
obtained by the Compensation Committee. The options with respect to each of the
grants were to be fully vested on the date of the grant.
53
Under the
Paolino Employment Agreement, Mr. Paolino received a bonus of (a) one percent
(1%) of the sales price of any car washes sold (excepting one car wash under
contract on the date of the Paolino Employment Agreement and which has been
sold) and (b) three percent (3%) of the purchase or sale price of any other
business sold or purchased. The three percent (3%) amount was reduced by the
amount of any fee paid to an investment banker hired by the Company where the
investment banker located the transaction and conducted all negotiations. The
three percent (3%) amount was not reduced for fees paid to any investment banker
for a fairness opinion or other valuation. In 2008 and 2007, the
bonus paid to Mr. Paolino was $124,969 and $637,000, respectively.
Upon
termination of employment by the Company without cause or upon a change of
control, Mr. Paolino was entitled to a payment of 2.99 times Mr. Paolino’s
average total compensation (base salary plus any bonuses plus the value of any
option award, valued using the Black-Scholes method) over the past five years.
If Mr. Paolino received the change of control bonus, his employment could then
be terminated by the Company without cause and without the payment of a second
2.99 times payment. The Company computed the 2.99 payment as of December 31,
2007 as $3,851,000. The Company terminated Mr. Paolino on May 20,
2008, asserting that it had cause for the termination. Mr. Paolino,
in an arbitration claim he has filed against the Company, is asserting that the
Company did not have cause for his termination and he is seeking to enforce the
termination payment under the 2.99 formula.
Under the
Paolino Employment Agreement, Mr. Paolino received a car at a lease cost of
$1,500 per month and Company standard medical and other employee benefits. Mr.
Paolino was prohibited from competing with the Company during his period of
employment and for a three-month period following a termination of
employment.
Gregory
M. Krzemien Employment Agreement
Mace
currently employs Gregory M. Krzemien as its CFO and Treasurer as an employee at
will under the Krzemien Agreement dated March 23, 2010. Mr.
Krzemien's current annual base salary is $230,000, plus a $700 per month car
allowance. The Krzemien Agreement also provides that Mr. Krzemien is
to receive a grant of 50,000 options at an exercise price of the closing market
price of the Company's common stock on the day of the option
grant. The option is to vest in three equal annual installments on
the anniversary dates of the Krzemien Agreement. Under the Krzemien
Agreement, Mr. Krzemien is not entitled to any change of control payment, but is
entitled to a severance payment equal to six months of his base salary if he is
terminated without “Good Cause”, as defined in the Krzemien
Agreement. Mr. Krzemien is also entitled to the six month severance
payment, if he resigns due to the Company materially changing his duties as
Chief Financial Officer, relocating his office more than 25 miles from its
present location or reducing his annual base salary. As defined “Good
Cause” to terminate Mr. Krzemien without a severance payment generally exists,
if Mr. Krzemien fails to perform his duties and does not cure the failure within
thirty days of being notified of the failure, or commits certain other
enumerated actions which harm the Company.
From
February 12, 2007 through February 12, 2010, Mr. Krzemien was employed under an
Employment Contract (the “Krzemien Employment
Agreement”). In accordance with the Krzemien Employment Agreement,
Mr. Krzemien received an option grant for 60,000 shares of common stock under
the Company’s Stock Option Plan at an exercise price of $2.73, the market price
at the close of market on the date of grant. The options were granted on
February 12, 2007. The options vested one-third on the date of the grant,
one-third on February 12, 2008, and one-third on February 12,
2009.
Under the
Krzemien Employment Agreement, Mr. Krzemien would have received a one-time
retention payment equal to Mr. Krzemien’s then annual base compensation
(currently $230,000) upon the occurrence of both: (a) a change of control of the
Company and (b) Louis D. Paolino, Jr. ceasing to be CEO of the Company (this
event occurred on May 20, 2008). If Mr. Krzemien’s employment was
terminated during the term of the Krzemien Employment Agreement without cause or
if the Company breached the Krzemien Employment Agreement, Mr. Krzemien would
have been entitled to an additional one-time payment equal to Mr. Krzemien’s
then annual base compensation. The total amount of both the retention
payment and termination payment was $460,000.
Mr.
Krzemien receives a monthly car allowance of $700, which began in February 2007,
and the Company’s standard medical and other employee benefits.
Robert
M. Kramer Employment Agreement
Mace employed
Robert M. Kramer as its EVP, General Counsel and Secretary during 2009 through
February 12, 2010 under an Employment Contract dated February 12, 2007 and
expiring on end of business February 12, 2010 (the “Kramer Employment
Agreement”). The Company’s Compensation Committee obtained a Compensation Study
from Compensation Resources, Inc. prior to entering into the Kramer Employment
Agreement. The initial base salary under the Kramer Employment Agreement was
$230,000. In accordance with the Kramer Employment Agreement, Mr. Kramer
received an option grant for 60,000 shares of common stock under the Company’s
Stock Option Plan at an exercise price of $2.73, the market price at the close
of market on the date of grant. The options were granted on February 12, 2007.
The options vested one-third on the date of the grant, one-third on February 12,
2008 and one-third on February 12, 2009.
54
Under the
Kramer Employment Agreement, Mr. Kramer would have received a one-time retention
payment equal to Mr. Kramer’s then annual base compensation ($230,000) upon the
occurrence of both: (a) a change of control of the Company and (b) Louis D.
Paolino, Jr. ceasing to be CEO of the Company. Mr. Paolino ceased to be CEO of
the Company on May 20, 2008. If during the term of the Kramer Employment
Agreement, Mr. Kramer’s employment was terminated without cause or if the
Company breached the Kramer Employment Agreement, Mr. Kramer would have been
entitled to an additional one-time payment equal to Mr. Kramer’s then annual
base compensation. The total amount of both the retention payment and
termination payment was $460,000.
Mr.
Kramer received a monthly car allowance of $700, and the Company’s standard
medical and other employee benefits. Mr. Kramer is prohibited against competing
with the Company during his period of employment and for a three-month period
following termination of employment.
Potential
Payments upon Termination or Change of Control
For a
description of compensation that would become payable under existing
arrangements in the event of a change of control or termination of each Named
Executive Officer’s employment under several different circumstances, see the
discussion under “Change of Control Arrangements” in the “Compensation
Discussion and Analysis” Section which is part of the Executive Compensation
Section of this report.
The
following tables quantify the amounts payable upon a change of control or the
termination of each of the Named Executive Officers.
Change of
Control Payment and Termination Payments – Dennis R. Raefield, Chief Executive
Officer
|
Event Triggering Payment
|
Severance Payment
|
Acceleration of Option
Awards(4)
|
||||||
|
Termination
by Company For Cause (1)
|
$ | - |
None
|
|||||
|
Termination
by Company without Cause (1)
|
$ | 750,000 |
None
|
|||||
|
Non-Compete
Payment (2)
|
$ | 375,000 |
None
|
|||||
|
Change
of Control (3)
|
$ | - | $ | 42,500 | ||||
Change of Control Payment and
Termination Payments – Gregory Krzemien, Chief Financial
Officer
|
Event Triggering Payment
|
Severance Payment
|
Acceleration of Option
Awards(4)
|
||||||
|
Change
of Control
|
$ | - | $ | - | ||||
| $ | - | |||||||
|
Termination
of Mr. Krzemien(5)
|
$ | 115,000 | $ | - | ||||
(1) Cause
is defined in the Raefield Employment Agreement as “(a) Employee committing
against the Company fraud, gross misrepresentation, theft or embezzlement, (b)
Employee’s conviction of any felony (excluding felonies involving driving a
vehicle), (c) Employee’s material intentional violations of Company policies, or
(d) a material breach of the provisions of the Raefield Employment Agreement,
including specifically the failure of Employee to perform his duties after
written notice of such failure from the Company.” The Raefield
Employment Agreement provides that Mr. Raefield can be terminated by the Board
of Directors for Cause, without any severance or other payment. The
Board of Directors can also terminate Mr. Raefield without Cause, upon a payment
of two times Mr. Raefield’s then current annual base salary. The
termination payment is calculated based on Mr. Raefield’s base salary of
$375,000 as of December 31, 2009.
(2) Mr.
Raefield is prohibited from competing with the Company during his period of
employment and for a one year period following a termination of employment. The
Company is obligated to pay Mr. Raefield $375,000 in exchange for his one year
agreement not to compete, if Mr. Raefield is employed through August 18, 2011
and the Company and Mr. Raefield do not enter into a new employment agreement
within sixty days after August 18, 2011.
55
(3) A
Change of Control Event is defined in the Named Executive Officer’s Employment
Agreement as any of the events set forth in items (i) through and including
(iii) below: (i) the acquisition in one or more transactions by any “Person,”
excepting the employee, as the term “Person” is used for purposes of Sections
13(d) or 14(d) of the Exchange Act, of “Beneficial Ownership” (as the
term beneficial ownership is used for purposes or Rule 13d-3 promulgated under
the Exchange Act) of the fifty percent (50%) or more of the combined voting
power of the Company’s then outstanding voting securities (the “Voting
Securities”), for purposes of this item (i), Voting Securities acquired directly
from the Company and from third parties by any Person shall be included in the
determination of such Person’s Beneficial Ownership of Voting
Securities; (ii) the approval by the stockholders of the Company of:
(A) a merger, reorganization or consolidation involving the Company, if the
shareholders of the Company immediately before such merger, reorganization or
consolidation do not or will not own directly or indirectly immediately
following such merger, reorganization or consolidation, more than fifty percent
(50%) of the combined voting power of the outstanding Voting Securities of the
corporation resulting from or surviving such merger, reorganization or
consolidation in substantially the same proportion as their ownership of the
Voting Securities immediately before such merger, reorganization or
consolidation, (B) a complete liquidation or dissolution of the Company, or (C)
an agreement for the sale or other disposition of 50% or more of the assets of
the Company and a distribution of the proceeds of the sale to the stockholders;
or (iii) the acceptance by stockholders of the Company of shares in a share
exchange, if the stockholders of the Company immediately before such share
exchange do not or will not own directly or indirectly following such share
exchange own more than fifty percent (50%) of the combined
voting power of the outstanding Voting Securities of the
corporation resulting from or surviving such share exchange in
substantially the same proportion as the ownership of the Voting Securities
outstanding immediately before such share exchange.
(4) Assumes
exercise of all in-the-money stock options for which vesting accelerated at
$1.14 per share (the closing price of the Company’s common stock on December 31,
2009).
(5) The payment is due Mr.
Krzemien, if he is terminated without “Good Cause”. “Good Cause” in
the Krzemien Agreement exists, if any of the following occur:
(i) Employee’s refusal to perform his duties or other obligations
under this Agreement, or Employee’s intentional or grossly negligent conduct
causing material harm to the Company as determined by the Company, on fifteen
(15) days notice after the Company has provided Employee written notice of such
failure to perform and Employee has failed to cure the unsatisfactory
performance, if capable of cure, within thirty (30) business days; or
(ii) Employee’s conviction of a felony, or a misdemeanor
involving moral turpitude, or Employee’s engaging in conduct involving
dishonesty toward the Company or its customers, or engaging in conduct that
could damage the reputation or good will of the Company, whether or not
occurring in the workplace; or (iii) Employee’s death, or inability
with reasonable accommodation to perform his duties under this Agreement because
of illness or physical or mental disability or other incapacity which continues
for a period of 120 consecutive days, as determined by a medical doctor; or
(iv) If Employee engages in any type of discrimination, harassment,
violence or threat thereof, or other behavior toward other employees of MSI, the
Company, or any of their subsidiaries or toward third parties or employees of a
third party; (v) alcohol abuse and/or use of controlled substances
during employment hours, or a positive test for use of controlled substances
that are not prescribed by a medical doctor; or (vi) gross negligence
or willful misconduct with respect to the Company, or any of its affiliates or
subsidiaries; or (vii) on fifteen (15) days notice for any other
material intentional breach of this Agreement or the Company’s Employee Manual
by Employee not cured within 30 days after Employee’s receipt of written notice
of the same from the Company.
56
Grants
of Stock Options
The
following table sets forth certain information concerning individual grants of
stock options to the Named Executive Officers during the fiscal year ended
December 31, 2009.
GRANTS
OF PLAN-BASED AWARDS
|
Name
|
Grant
Date
|
All
other Option
Awards:
Number
of
Securities
Underlying
Options
|
Exercise
Price
of
Option
Awards
per
Share
|
Grant
Date
Fair
Value of
Stock
and
Option
Awards
|
||||||||||
|
Dennis
R. Raefield
|
7/28/2009
|
250,000 | $ | 0.97 | $ | 151,542 | ||||||||
On July
28, 2009, as part of Mr. Raefield’s Employment Agreement, the Compensation
Committee awarded Mr. Raefield options for 250,000 shares of the Company’s
Common Stock vesting one-half on July 28, 2010 and one-half on July 28,
2011. The options are exercisable at $0.97 per share. The
Black Scholes value of the awarded option grant is $151,542. The
median long term incentive compensation of chief executive officers, as set
forth in the Hay 2007 Report was $243,257. The Compensation Committee believed
that the option award was warranted due to the award being below the median of
long term incentive compensation granted to chief executive officers, as stated
in the Hay 2007 Report, a compensation study for the Chief Executive Officer
position from the Hay Group dated December 12, 2007. Mr. Raefield’s
total direct compensation under his employment agreement was below the median
total direct compensation market consensus for chief executive officers, as set
forth in the Hay 2007 Report.
Mr.
Kramer and Mr. Krzemien were each awarded an option for 40,000 shares on March
25, 2008 at a per share exercise price of $1.44 per share, vesting one half
immediately and the balance one year from the date of grant. The Black-Scholes
value of the option for 40,000 shares was $31,459. According to a
report of the Hay Group finalized on March 31, 2008, the value of the option was
below the median of long term incentive compensation received by Chief Financial
Officers and Executive Vice Presidents/General Counsels. The
Compensation Committee, in an effort to conserve cash, decided not to increase
the base salaries of Mr. Krzemien or Mr. Kramer for 2008 or 2009. The
Compensation Committee decided that an award of options would be appropriate to
provide incentive for Mr. Krzemien and Mr. Kramer for 2008. Mr. Krzemien and Mr.
Kramer were not awarded stock options in 2009.
Mr.
Paolino’s Employment Contract provided that he was to receive an option grant
within five days of August 21, 2007, based on a market
assessment. The amount of option shares which were required to be
granted are determined by the Company’s Compensation Committee, based on a
current compensation study of the Chief Executive Officer position. The amount
of option shares, at time of grant, plus the $450,000 annual compensation paid
to Mr. Paolino, is to equal no less than the “market consensus total direct
compensation” amount paid by comparable companies to their chief executive
officers, as set forth in a compensation study to be obtained by the
Compensation Committee. The Compensation Committee obtained the Hay 2007 Report
on December 12, 2007. The Hay 2007 Report indicated that the median
market consensus for Total Direct Compensation was $722,834 and the 75th
percentile market consensus for total direct compensation was $970,238. The
Compensation Committee decided to award Mr. Paolino with an amount of options
that would equal $335,800 in Black-Scholes value. On February 22,
2008, Mr. Paolino was issued 300,000 options in satisfaction of the employment
contract obligation. Mr. Paolino objected to the size of the option
grant, taking the position that an option for more shares should have been
granted. To satisfy the objection of Mr. Paolino, the Company issued
Mr. Paolino an additional option for 35,000 shares on March 25,
2008. Both options were fully vested on the date of the
grant. The option agreements relating to the two option grants,
provided that the options may only be exercised within ninety days after a
termination for cause, as defined under the option agreements. The
Company has taken the position that Mr. Paolino was terminated for cause, as
defined in the option agreements and that the two described options are no
longer exercisable.
57
Aggregated
Option and Warrant Exercises in Last Fiscal Year
The
following table sets forth certain information regarding stock options held by
the Named Executive Officers during the fiscal year ended December 31, 2009,
including the number of exercisable and un-exercisable stock options as of
December 31, 2009 by grant. No options were exercised by any of the
Named Executive Officers during the fiscal year ended December 31,
2009.
|
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
||||||||||||
|
Name
|
Number
of Securities
Underlying
Unexercised Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Option
Exercise
Price
($)
|
Option
Grant
Date
|
Option
Expiration
Date
|
|||||||
|
Dennis
R. Raefield
|
(3)
|
15,000
|
-
|
1.94
|
1/8/2008
|
1/8/2018
|
||||||
|
(4)
|
250,000
|
-
|
1.50
|
7/30/2008
|
7/30/2018
|
|||||||
|
-
|
(5)
|
250,000
|
0.97
|
7/28/2009
|
7/28/2019
|
|||||||
|
Louis
D. Paolino, Jr.
|
(1)
|
5,000
|
-
|
2.56
|
10/18/2000
|
10/18/2010
|
||||||
|
-
|
(2)
|
87,500
|
2.36
|
4/4/2002
|
4/4/2012
|
|||||||
|
(1)
|
150,000
|
-
|
1.32
|
7/14/2003
|
7/14/2013
|
|||||||
|
-
|
(2)
|
568,182
|
4.21
|
11/2/2004
|
11/2/2014
|
|||||||
|
-
|
(2)
|
14,000
|
5.35
|
11/19/2004
|
11/19/2014
|
|||||||
|
-
|
(2)
|
150,000
|
5.35
|
11/19/2004
|
11/19/2014
|
|||||||
|
-
|
(2)
|
15,000
|
2.64
|
10/31/2005
|
10/31/2015
|
|||||||
|
-
|
(2)
|
150,000
|
2.40
|
3/23/2006
|
3/23/2016
|
|||||||
|
-
|
(2)
|
450,000
|
2.30
|
8/21/2006
|
8/21/2016
|
|||||||
|
-
|
(2)
|
300,000
|
1.69
|
2/22/2008
|
2/22/2018
|
|||||||
|
-
|
(2)
|
35,000
|
1.44
|
3/25/2008
|
3/25/2018
|
|||||||
|
Gregory
M. Krzemien (1)
|
50,000
|
-
|
1.38
|
3/30/2001
|
3/30/2011
|
|||||||
|
37,500
|
-
|
2.36
|
4/4/2002
|
4/4/2012
|
||||||||
|
150,000
|
-
|
1.32
|
7/14/2003
|
7/14/2013
|
||||||||
|
50,000
|
-
|
5.35
|
11/19/2004
|
11/19/2014
|
||||||||
|
60,000
|
-
|
2.40
|
3/23/2006
|
3/23/2016
|
||||||||
|
60,000
|
-
|
2.73
|
2/12/2007
|
2/12/2017
|
||||||||
|
40,000
|
-
|
1.44
|
3/25/2008
|
3/25/2018
|
||||||||
|
Robert
M. Kramer (1)
|
5,000
|
-
|
2.56
|
10/18/2000
|
10/18/2010
|
|||||||
|
50,000
|
-
|
1.38
|
3/30/2001
|
3/30/2011
|
||||||||
|
37,500
|
-
|
2.36
|
4/4/2002
|
4/4/2012
|
||||||||
|
150,000
|
-
|
1.32
|
7/14/2003
|
7/14/2013
|
||||||||
|
37,500
|
-
|
4.21
|
11/2/2004
|
11/2/2014
|
||||||||
|
75,000
|
-
|
5.35
|
11/19/2004
|
11/19/2014
|
||||||||
|
75,000
|
-
|
2.40
|
3/23/2006
|
3/23/2016
|
||||||||
|
60,000
|
-
|
2.73
|
2/12/2007
|
2/12/2017
|
||||||||
|
40,000
|
-
|
1.44
|
3/25/2008
|
3/25/2018
|
||||||||
|
(1)
|
Fully
vested option.
|
|
(2)
|
The
option agreement relating to the option grant provided that the option
grant may only be exercised within ninety days after a termination for
cause. The Company has taken the position that Mr. Paolino was
terminated for cause, as defined in the option agreement, and that the
described option is no longer
exercisable.
|
|
(3)
|
Fully
vested options granted to Mr. Raefield during the period Mr. Raefield
served as a Director.
|
58
|
(4)
|
Fully
vested options granted to Mr. Raefield as part of Mr. Raefield being hired
as the Company’s President and Chief Executive
Officer.
|
|
(5)
|
Options
granted on July 28, 2009 vest 125,000 shares on July 28, 2010 and 125,000
shares on July 28, 2011.
|
DIRECTOR
COMPENSATION
The
following table provides summary information concerning cash and certain other
compensation paid or accrued by Mace to or on behalf of Mace’s Directors, other
than Mr. Raefield, for the year ended December 31, 2009.
|
Name
|
Fees
Earned or
Paid in
Cash
($) (1)
|
Option
Awards
($) (2)
|
All
Other
Compensation
($)
|
Total
|
||||||||||||
|
John
C. Mallon
|
$ | 49,500 | $ | 4,264 | $ | - | $ | 53,764 | ||||||||
|
Mark
S. Alsentzer
|
$ | 25,500 | $ | 4,264 | $ | - | $ | 29,764 | ||||||||
|
Gerald
T. LaFlamme
|
$ | 25,500 | $ | 4,264 | $ | - | $ | 29,764 | ||||||||
|
Richard
A. Barone
|
$ | 17,750 | $ | 4,264 | $ | - | $ | 22,014 | ||||||||
|
Constantine
N. Papadakis, Ph.D
|
$ | 16,000 | $ | - | $ | - | $ | 16,000 | ||||||||
|
(1)
|
Constantine
N. Papadakis, PhD served on the Board of Directors until his death on
April 5, 2009.
|
|
(2)
|
The
aggregate options outstanding at December 31, 2009 were as follows: Mark
Alsentzer, 152,500 options; Constantine Papadakis, PhD, 112,500 options;
John C. Mallon, 45,000 options; Gerald T. LaFlamme, 45,000 options; and
Richard A. Barone, 30,000 options. Assumptions used in the calculation of
these amounts are included in Note 2 to the Company’s Audited Financial
Statements for the fiscal year ended December 31, 2009. The
amounts in this column reflect the dollar amount recognized, in accordance
with Generally Accepted Accounting Principles for Share-Based Payments,
for financial reporting purposes for the fiscal year ended December 31,
2009. There were no options granted to non-employee directors in 2007.
Options granted to non-employee directors in 2008 were for services on the
Board for 2008 and 2009. Options granted to non-employee directors in 2009
were for services on the Board for
2010.
|
For the
year 2009, the Board of Directors approved of the following fees to be paid to
directors who are not employees of the Company with respect to their calendar
year 2009 service: a $15,000 annual cash retainer fee to be paid in a lump sum;
a $1,000 fee to each non-employee director for each Board or Committee meeting
attended in person; a $500 fee to each non-employee director for each Board or
Committee meeting exceeding thirty minutes in length attended by telephone; a
grant of 15,000 options at the close of market on December 11, 2008 for services
on the Board for 2009 to each non-employee director. The grants vested
immediately. The fees earned or paid in cash also include a special fee of
$25,000 to Mr. Mallon for the significant amount of time Mr. Mallon spent
working on the Paolino Arbitration matter in 2009.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities
Authorized for Issuance Under Equity Compensation Plans
The
Company has two Stock Option Plans that have been approved by the
stockholders. The plans are the 1999 Stock Option Plan and the 1993
Stock Option Plan. Stock options are issued under the 1999 Stock
Option Plan and 1993 Stock Option Plan at the discretion of the Compensation
Committee to employees at an exercise price of no less than the then current
market price of the common stock and generally expire ten years from the date of
grant. Allocation of available options and vesting schedules are at
the discretion of the Compensation Committee and are determined by potential
contribution to, or impact upon, the overall performance of the Company by the
executives and employees. Stock options are also issued to members of the Board
of Directors at the discretion of the Compensation Committee. These options may
have similar terms as those issued to officers or may vest
immediately. The purpose of both Stock Option Plans is to provide a
means of performance-based compensation in order to provide incentive for the
Company’s employees. Warrants have been issued in connection with the sale of
the shares of the Company’s stock, the purchase and sale of certain businesses
and to a director. The terms of the warrants have been established by the Board
of Directors of the Company. Certain of the warrants have been
approved by stockholders.
59
The
following table sets forth certain information regarding the Company’s Stock
Option Plan and warrants as of December 31, 2009.
|
Plan Category
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
|
Weighted average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column)
|
|||||||||
|
1993
Stock Option Plan
|
18,959 | $ | 3.11 | 56,999 | ||||||||
|
1999
Stock Option Plan
|
3,186,249 | $ | 2.20 | 3,814,955 | ||||||||
|
Total
of both Equity Compensation Plans approved by stockholders
|
3,205,208 | $ | 2.21 | 3,871,954 | ||||||||
|
Equity
compensation plans not approved by stockholders
|
- | $ | - | N/A | ||||||||
|
Total
|
3,205,208 | $ | 2.21 | 3,871,954 | ||||||||
Beneficial
Ownership
The
following beneficial ownership table sets forth information as of February 28,
2010 regarding ownership of shares of Mace common stock by the following
persons:
|
·
|
each
person who is known to Mace to own beneficially more than 5% of the
outstanding shares of Mace common stock, based upon Mace’s records or the
records of the SEC;
|
|
·
|
each
director of Mace;
|
|
·
|
each
Named Executive Officer; and
|
|
·
|
all
directors and executive officers of Mace, as a
group.
|
Unless
otherwise indicated, to Mace’s knowledge, all persons listed on the beneficial
ownership table below have sole voting and investment power with respect to
their shares of Mace common stock. Shares of Mace common stock subject to
options or warrants exercisable within 60 days of February 28, 2010 are
considered outstanding for the purpose of computing the percentage ownership of
the person holding such options or warrants, but are not deemed outstanding for
computing the percentage ownership of any other person.
60
|
Name
and Address of
Beneficial Owner
|
Amount
and Nature of Beneficial
Ownership
|
Percentage
of
Common
Stock
Owned (1)
|
||||||
|
Lawndale
Capital Management, LLC
591
Redwood Highway, Suite 2345
Mill
Valley, CA 94941
|
1,638,382 | (2) | 10.3 | % | ||||
|
Ancora
Group (3)
One
Chagrin Highlands
2000
Auburn Drive, Suite 300
Cleveland,
Ohio 44122
|
1,344,700 | (4) | 8.4 | % | ||||
|
Louis
D. Paolino, Jr.
2626
Del Mar Place
Fort
Lauderdale, Florida 33301
|
1,045,958 | (5) | 6.5 | % | ||||
|
Gregory
M. Krzemien
|
472,750 | (6) | 2.9 | % | ||||
|
Mark
S. Alsentzer
|
452,500 | (7) | 2.8 | % | ||||
|
Dennis
R. Raefield
|
275,000 | (8) | 1.7 | % | ||||
|
Richard
A. Barone
|
197,000 | (9) | 1.2 | % | ||||
|
John
C. Mallon
|
55,000 | (10) | * | |||||
|
Gerald
T. LaFlamme
|
45,000 | (11) | * | |||||
|
All
current directors and executive officers as a group (6
persons)
|
1,497,250 | (12) | 8.9 | % | ||||
* Less
than 1% of the outstanding shares of Mace common stock.
(1) Percentage
calculation is based on 15,913,775 shares outstanding on February 28,
2010.
(2) According
to their Schedule 13D Amendment 8 filed with the SEC on November 30, 2009,
consists of 1,638,382 shares to which Lawndale Capital Management, LLC
(“Lawndale”) has shared voting and dispositive power. The Schedule 13D was filed
jointly by Lawndale, Andrew Shapiro and Diamond A. Partners, L.P.
(“Diamond”). Lawndale is the investment advisor to and the general
partner of Diamond, which is an investment limited partnership. Mr.
Shapiro is the sole manager of Lawndale. Mr. Shapiro is also deemed
to have shared voting and dispositive power with respect to the shares reported
as beneficially owned by Lawndale. Diamond has shared voting and
dispositive power with respect to 1,415,110 shares of the Company.
(3) According
to its Schedule 13D Amendment 5 filed with the SEC on August 31, 2009, Ancora
Group, which includes Ancora Capital, Inc.; Ancora Securities, Inc., the main
subsidiary of Ancora Capital, Inc.; Ancora Advisors, LLC, Ancora Trust, the
master trust for the Ancora Mutual Funds; Ancora Foundation, a private
foundation; Merlin Partners, an investment limited partnership; and various
owners and employees of the aforementioned entities have aggregate beneficial
ownership of 1,344,700 shares. Ancora Securities, Inc. is registered
as a broker/dealer with the SEC and FINRA, formerly known as NASD. Ancora
Advisors, LLC is registered as an investment advisor with the SEC under the
Investment Advisors Act of 1940, as amended. The Ancora Trust, which
includes Ancora Income Fund, Ancora Equity Fund, Ancora Special Opportunity
Fund, and Ancora MicroCap Fund, are registered with the SEC as investment
companies under the Investment Company Act of 1940, as amended. Mr. Richard
Barone is the controlling shareholder of Ancora Capital, controls 31% of Ancora
Advisors, LLC, owns approximately 5% of Merlin Partners, and is Chairman of and
has an ownership interest in the various Ancora Funds. Ancora
Advisors, LLC has the power to dispose of the shares owned by the investment
clients for which it acts as advisor, including Merlin Partners, for which it is
also the General Partner, and the Ancora Mutual Funds. Ancora
Advisors, LLC, disclaims beneficial ownership of such shares, except to the
extent of its pecuniary interest therein. Ancora Securities, Inc. acts as the
agent for its various clients and has neither the power to vote nor the power to
dispose of the shares. Ancora Securities, Inc. disclaims beneficial
ownership of such shares. All entities named in the Schedule 13D
Amendment 5 each disclaim membership in a Group within the meaning of Section
13(d)(3) of the Exchange Act and the Rules and Regulations promulgated
thereunder.
(4) The
1,344,700 aggregate shares listed for the Ancora Group are owned beneficially,
according to Schedule 13D Amendment 5 filed with the SEC on August 31, 2009, as
follows: (a) 320,000 by the Ancora Mutual Funds for which Mr. Barone is a
portfolio manager; (b) 1,018,500 by investment clients of Ancora Advisors, LLC,
over which shares Ancora Advisors LLC has the power of disposition by virtue of
an Investment Management Agreement (Ancora Advisors, LLC has disclaimed
beneficial ownership of such shares); and (c) 6,200 by owners/employees of
Ancora Group, including Richard A. Barone.
61
(5) Includes
options to purchase 155,000 shares.
(6) Includes
options to purchase 447,500 shares.
(7) Includes
options to purchase 152,500 shares. Does not include 200,000 shares
that Mr. Alsentzer delivered to Argyll Equities, LLC (“Argyll”), as collateral
for a $600,000 loan obtained by Mr. Alsentzer on April 27, 2004 (the “Pledged
Shares”). Mr. Alsentzer has advised the Company that the shares were delivered
in street name. By letter dated May 4, 2005, Mr. Alsentzer requested
that Argyll confirm in writing that the Pledged Shares were in Argyll's
possession and being held as collateral, under the terms of Mr. Alsentzer’s
agreement with Argyll. To date, Mr. Alsentzer has not received the requested
confirmation or any notice of default from Argyll. Based on the information the
Company has received, the Company has decided not to allow Mr. Alsentzer to vote
the 200,000 shares.
(8) Includes
options to purchase 265,000 shares.
(9) Includes
135,000 shares owned by Mr. Barone, 32,000 shares owned by entities Mr. Barone
directly controls and options to purchase 30,000 shares.
(10) Includes
options to purchase 45,000 shares.
(11) Represents
options to purchase 45,000 shares.
(12) See
Notes 1 and 6 through 11 above.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Certain
Relationships and Related Party Transactions
The
Company’s Security Segment leases manufacturing and office space under a
five-year lease with Vermont Mill. Vermont Mill is controlled by Jon E.
Goodrich, a former director and current employee of the Company. In November
2004, the Company exercised an option to continue the lease through November
2009 at a rate of $10,576 per month. The Company amended the lease in 2008 to
occupy additional space for an additional $200 per month. The Company also
leased from November 2008 to May 2009, on a month-to-month basis, approximately
3,000 square feet of temporary inventory storage space at a monthly cost of
$1,200. In September 2009, the Company and Vermont Mill extended the term of the
lease to November 14, 2010 at a monthly rental rate of $10,776 per month and
modified the square footage rented to 33,476 square feet. The Company believes
that the lease rate is lower than lease rates charged for similar properties in
the Bennington, Vermont area. Rent expense under this lease was $135,000,
$130,000 and $127,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
The
Company’s Audit Committee Charter, Section IV.E (vi), provides that the Audit
Committee annually reviews all existing related party transactions or other
conflicts of interest that exist between employees and directors and the
Company. The Audit Committee Charter also requires that the Audit Committee
review all proposed related party transactions. As provided in Section IV.E (iv)
of the Audit Committee Charter, the Company may not enter into a related party
transaction, unless the transaction is first approved by the Audit Committee.
The Audit Committee Charter is in writing and is available for review on the
Company’s website at www.mace.com, under
the Investor Relations heading. The current members of the Audit Committee are
Gerald T. LaFlamme, Richard A. Barone, and Mark S. Alsentzer. When reviewing
related party transactions, the Audit Committee considers the benefit to the
Company of the transaction and whether the transaction furthers the Company’s
interest. The decisions of the Audit Committee are set forth in writing in the
minutes of the meetings of the Audit Committee.
Director
Independence
Mace has
Corporate Governance Guidelines. The Corporate Governance Guidelines
provide that a majority of the Company’s directors should be independent, as
defined by the rules of the NASDAQ Global Market and Section 3.14 of the
Company’s ByLaws. Section 3.14 of the
Company’s ByLaws is available for review on the Company’s website at www.mace.com, under
the Investor Relations heading. The Board has determined that
Messrs. Alsentzer, LaFlamme, Mallon, and Barone are independent under these
rules. In addition, all of the Audit Committee members are independent under the
Audit Committee independence standards established by the NASDAQ Global Market
and the rules promulgated by the SEC. The Board has an Audit Committee,
a Compensation Committee, a Nominating Committee and an Ethics and Corporate
Governance Committee. The independent directors are the sole members of all of
the named committees.
62
ITEM
14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
Audit
Fees. The
Company was billed $330,663 by Grant Thornton LLP for the audit of Mace’s annual
financial statements for the fiscal year ended December 31, 2009, and for the
review of the financial statements included in Mace’s Quarterly Reports on Forms
10-Q filed for each calendar quarter of 2009. The Company was billed $361,164 by
Grant Thornton LLP for the audit of Mace’s annual financial statements for the
fiscal year ended December 31, 2008, and for the review of the financial
statements included in Mace’s Quarterly Reports on Forms 10-Q for each calendar
quarter of 2008.
Tax Fees.
The Company was billed $65,576 and $187,336 for tax compliance services
rendered by Grant Thornton LLP during 2009 and 2008,
respectively. The services aided the Company in the preparation of
federal, state and local tax returns.
All Other
Fees. The Company did
not incur any other fees from Grant Thornton LLP during 2009 or
2008.
Other
Matters. The Audit
Committee of the Board of Directors has considered whether the provision of
financial information systems design and implementation services and other
non-audit services is compatible with maintaining the independence of Mace’s
registered public accountants, Grant Thornton LLP. The Audit Committee
pre-approves all auditing services and permitted non-audit services (including
the fees and terms thereof) to be performed for the Company by its independent
auditors. All auditing services and permitted non-audit services in 2008 and
2009 were pre-approved. The Audit Committee may delegate authority to the
chairman, or in his or her absence, a member designated by the chairman to grant
pre-approvals of audit and permitted non-audit services, provided that decisions
of such person or subcommittee to grant pre-approvals shall be presented to the
full Audit Committee at its next scheduled meeting.
PART
IV
ITEM
15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a)
(1)
|
Consolidated
Financial Statements:
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2009, 2008, and
2007
|
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2009,
2008 and 2007
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008, and
2007
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
(a)
(2)
|
The
requirements of Schedule II have been included in the Notes to
Consolidated Financial Statements. All other schedules for
which provision is made in the applicable accounting regulations of the
SEC are not required under the related instructions or are inapplicable
and therefore have been omitted.
|
|
(a)
(3) Exhibits:
|
|
|
The
following Exhibits are filed as part of this report (exhibits marked with
an asterisk have been previously filed with the SEC and are incorporated
herein by this reference):
|
|
|
3.3
|
Amended
and Restated Bylaws of Mace Security International,
Inc.
|
|
*3.4
|
Amended
and Restated Certificate of Incorporation of Mace Security International,
Inc. (Exhibit 3.4 to the 1999 Form 10-KSB)
|
|
*3.5
|
Certificate
of Amendment of Amended and Restated Certificate of Incorporation of Mace
Security International, Inc. (Exhibit 3.5 to the 2000 Form
10-KSB)
|
|
*3.6
|
Certificate
of Amendment of Amended and Restated Certificate of Incorporation of Mace
Security International, Inc. (Exhibit 3.6 to the 2002 Form
10-K)
|
|
*3.7
|
The
Company’s Amended and Restated Certificate of Incorporation (Exhibit 4.1
to the June 16, 2004 Form S-3)
|
|
*10.1
|
1993
Non-Qualified Stock Option Plan (1)
|
|
*10.2
|
Trademarks(1)
|
|
*10.3
|
Mace
Security International, Inc. 1999 Stock Option Plan. (Exhibit 10.98 to the
June 30, 1999 Form 10-QSB dated August 13, 1999)
(3)
|
63
|
*10.4
|
Business
Loan Agreement dated January 31, 2000, between the Company, its subsidiary
- Colonial Full Service Car Wash, Inc., and Bank One, Texas, N.A.;
Promissory Note dated February 2, 2000 between the same parties as above
in the amount of $400,000 (pursuant to instruction 2 to Item 601 of
Regulation S-K, two additional Promissory Notes, which are substantially
identical in all material respects except as to the amount of the
Promissory Notes) are not being filed in the amount of: $19,643.97 and
$6,482; and a Modification Agreement dated as of January 31, 2000 between
the same parties as above in the amount of $110,801.55 (pursuant to
instruction 2 to Item 601 of Regulation S-K, Modification Agreements,
which are substantially identical in all material respects except to the
amount of the Modification Agreement) are not being filed in the amounts
of: $39,617.29, $1,947,884.87, $853,745.73, and $1,696,103.31. (Exhibit
10.124 to the December 31, 1999 Form 10-KSB dated March 29,
2000)
|
|
*10.5
|
Amendment
dated March 13, 2001, to Business Loan Agreement between the Company, its
subsidiary Colonial Full Service Car Wash, Inc., and Bank One, Texas, N.A.
(pursuant to instruction 2 to Item 601 of Regulation S-K, one additional
amendment which is substantially identical in all material respects,
except as to the borrower being Eager Beaver Car Wash, Inc., is not being
filed). (Exhibit 10.132 to the December 31, 2000 Form 10-KSB dated March
20, 2001)
|
|
*10.6
|
Modification
Agreement between the Company, its subsidiary - Colonial Full Service Car
Wash, Inc., and Bank One, Texas, N.A. in the amount of $2,216,000
(pursuant to Instruction 2 to Item 601 of Regulation S-K, Modification
Agreements, which are substantially identical in all material respects
except to amount and extension date of the Modification Agreement are not
being filed in the original amounts of $984,000 (extended to August 20,
2004) and $1,970,000 (extended to June 21, 2004). (Exhibit 10.133 to the
June 30, 2001 Form 10-Q dated August 9, 2001)
|
|
*10.7
|
Term
Note dated November 6, 2001, between the Company, its subsidiary, Colonial
Full Service Car Wash, Inc., and Bank One, Texas, N.A. in the amount of
$380,000. (Exhibit 10.134 to the September 30, 2001 Form 10-Q dated
November 9, 2001)
|
|
*10.8
|
Master
Lease Agreement dated June 10, 2002, between the Company, its subsidiary,
Colonial Full Service Car Wash, Inc., and Banc One Leasing Corporation in
the amount of $193,055. (Exhibit 10.140 to the June 30, 2002 Form 10-Q
dated August 14, 2002)
|
|
*10.9
|
Lease
Schedule and Addendum dated August 28, 2002 in the amount of $39,434 to
Master Lease Agreement dated June 10, 2002, between the Company, its
subsidiary, Colonial Full Service Car Wash, Inc., and Banc One Leasing
Corporation. (Exhibit 10.144 to the September 30, 2002 Form 10-Q dated
November 12, 2002)
|
|
*10.10
|
Note
Modification Agreement dated February 21, 2003, between the Company, its
subsidiary, Colonial Full Service Car Wash, Inc. and Bank One, Texas, N.A.
in the amount of $348,100. (Exhibit 10.148 to the December 31, 2002 Form
10-K dated March 19, 2003)
|
|
*10.11
|
Note
Modification Agreement and Amendment to Credit Agreement dated January 21,
2004, between the Company, its subsidiary, Colonial Full Service Car Wash,
Inc. and Bank One, Texas, N.A. in the amount of $48,725.50. (Exhibit
10.157 to the December 31, 2004 Form 10-K dated March 12,
2004)
|
|
*10.12
|
Credit
Agreement dated as of December 31, 2003 between the Company, its
subsidiary, Eager Beaver Car Wash, Inc., and Bank One Texas, N.A.
(pursuant to instruction 2 to Item 601of Regulation S-K, four additional
credit agreements which are substantially identical in all material
respects, except as to the borrower being Mace Car Wash - Arizona, Inc.,
Colonial Full Service Car Wash, Inc., Mace Security Products, Inc. and
Mace Security International, Inc., are not being filed.) (Exhibit 10.158
to the December 31, 2004 Form 10-K dated March 12,
2004.)
|
|
*10.13
|
Amendment
to Credit Agreement dated April 27, 2004, effectiveness of March 31, 2004
between Mace Security International, Inc., and Bank One Texas, N.A.
(Pursuant to instruction 2 to Item 601 of Regulation S-K, four Additional
credit agreements which are substantially identical in all material
respects, except as to borrower being the Company’s subsidiaries, Mace Car
Wash-Arizona, Inc., Colonial Full Service Car Wash, Inc. Mace Security
Products Inc. and Eager Beaver Car Wash, Inc., are not being filed)
(Exhibit 10.159 to the March 31, 2004 Form 10-Q dated May 5,
2004)
|
|
*10.14
|
Modification
Agreement between the Company , its subsidiary - Colonial Full Service Car
Wash, Inc., and Bank One, Texas, N.A. in the original amount of
$984,000 (pursuant to Instruction 2 to Item 601 of Regulation S-K,
Modification Agreements, which are substantially identical in all material
respects except to amount and extension date of the Modification
Agreement, are not being filed in the original amounts of $2,216,000
(extended to August 20, 2009) and $380,000 (extended to October 6, 2009)).
(Exhibit 10.167 to the September 30, 2004 Form 10-Q dated November 12,
2004)
|
|
*10.15
|
Promissory
Note dated September 15, 2004, between the Company, its subsidiary, Mace
Security Products, Inc., and Bank One, Texas, N.A. in the
amount of $825,000. (Exhibit 10.168 to the September 30, 2004 Form 10-Q
dated November 12, 2004)
|
|
*10.16
|
Note
Modification Agreement dated December 1, 2005 between the Company, its
subsidiary Mace Security Products, Inc. and JPMorgan Bank One Bank, N.A.
in the amount of $500,000. (Exhibit 10.179 to the December 31, 2005 Form
10-K dated July 14, 2006)
|
|
Form
8-K dated March 6, 2006) +
|
|
|
*10.17
|
Amendment
to Credit Agreement dated October 31, 2006, effective September 30, 2006
between Mace Security International, Inc., and JP Morgan Chase Bank, N.A.
(Pursuant to instruction 2 to Item 601 of Regulation S-K, five additional
credit agreements which are substantially identical in all material
respects, except as to borrower being the Company’s subsidiaries, Mace
Truck Wash, Inc., Mace Car Wash-Arizona, Inc., Colonial Full Service Car
Wash, Inc., Mace Security Products Inc., and Eager Beaver Car Wash, Inc.,
are not being filed). (Exhibit 10.1 to the September 30, 2006 Form 10-Q
dated November 13, 2006)
|
64
|
*10.18
|
Employment
Agreement dated August 21, 2006 between Mace Security International, Inc.
and Louis D. Paolino, Jr. (Exhibit 10.1 to the August 21, 2006 Form 8-K
dated August 22, 2006) (3)
|
|
*10.19
|
Employment
Agreement dated February 12, 2007 between Mace Security International,
Inc. and Gregory M. Krzemien (Exhibit 10.1 to the February 8, 2007 Form
8-K dated February 14, 2007) (3)
|
|
*10.20
|
Employment
Agreement dated February 12, 2007 between Mace Security International,
Inc., and Robert M. Kramer. (Exhibit 10.2 to the February 8,
2007 Form 8-K dated February 14, 2007) (3)
|
|
*10.21
|
Employment
Agreement dated July 29, 2008 between Mace Security International, Inc.
and Dennis R. Raefield (Incorporated by reference as Exhibit 10.1 to the
July 29, 2008 Form 8-K dated July 31, 2008) (3)
|
|
*10.22
|
Amendment
to Credit Agreement dated May 1, 2009, between Mace Security
International, Inc., and JP Morgan Chase Bank N.A. (“Chase”). (Pursuant to
Instruction 2 to Item 601 of Regulation S-K, two additional credit
agreements which are substantially identical in all material respects,
except as to borrower being the Company’s subsidiaries, Mace Car
Wash-Arizona, Inc. and Colonial Full Service Car Wash, Inc. are not being
filed). (Incorporated by reference as Exhibit 10.37 to the March 31, 2009
Form 10Q dated May 13, 2009).
|
|
*10.23
|
Note
Modification Agreement between the Company, its subsidiary-Colonial Full
Service Car Wash, Inc. and Chase, in the original amount of $2,216,000
extended to April 20, 2011. (Pursuant to Instruction 2 to Item 601 of
Regulation S-K, Modification Agreements which are substantially identified
in all material respects except to amounts and extension dates of the
Modification Agreements, are not being filed in the original amounts of
$1,970,000 (extended to April 21, 2011) $984,000 (extended to April 20,
2011 and $380,000 extended to May 6, 2011)). (Incorporated by reference as
Exhibit 10.38 to the March 31, 2009 Form 10Q dated May 13,
2009).
|
|
*10.24
|
Modification,
Renewal, and Extension of Note, Liens and Credit Agreement dated May 8,
2009 between the Company, its subsidiary, Mace Security Products Inc. and
Chase. (Incorporated by reference as Exhibit 10.39 to the March 31, 2009
Form 10Q dated May 13, 2009).
|
|
*10.25
|
Stock
Purchase Agreement dated April 7, 2009, by and among Mace Security
International, Inc., CSSS, In Keays, and Bradley Keays and related
Amendment 1 to Stock Purchase Agreement dated April (Incorporated by
reference as Exhibit 10.40 to the March 31, 2009 Form 10Q dated May 13,
2009).
|
|
*10.26
|
Agreements
consisting of: (i) Commercial Earnest Money Contract, dated as of January
15, 2009; (ii) Amendment to Commercial Earnest Money Contract dated
effective March 16, 2009; (iii) Commercial Earnest Contract, executed as
of April 16, 2009; (iv) Amendment to Commercial Earnest Monet Contracts,
dated as of May 27, 2009, (v) Third Amendment to Commercial Earnest Money
Contracts, dated September 1, 2009; (vii) Fifth Amendment to Contracts
dated October 9, 2009; and (viii) Assignment of Commercial Earnest money
Contract dated October 12, 2009. (Incorporated by reference as Exhibit
10.1 to the November 30, 2009 Form 8-K dated December 4,
2009).
|
|
10.27
|
Amendment
to Credit Agreement dated December 21, 2009, between Mace Security
International, Inc., and JP Morgan Chase Bank N.A. (“Chase”). (Pursuant to
Instruction 2 to Item 601 of Regulation S-K, two additional credit
agreements which are substantially identical in all material respects,
except as to borrower being the Company’s subsidiaries, Mace Security
Products, Inc. and Colonial Full Service Car Wash, Inc. are not being
filed).
|
|
10.28
|
Line
of Credit Note dated December 12, 2009 between the Company, its
subsidiary, Mace Security Products, Inc. and JP Morgan Chase Bank N.A. in
the amount of $500,000.
|
|
10.29
|
Letter
Agreement of Employment dated March 23, 2010 between Mace Security
International, Inc. and Gregory M. Krzemien.
(3)
|
|
11
|
Statement
Regarding Computation of Per Share Earnings.
|
|
*14
|
Code
of Ethics and Business Conduct (Exhibit 14 to the December 31, 2003 Form
10-K dated March 12, 2004)
|
|
21
|
Subsidiaries
of the Company
|
|
23.1
|
Consent
of Grant Thornton LLP
|
|
24
|
Power
of Attorney (included on signature page)
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
*99.1
|
Corporate
Governance Guidelines dated October 16, 2007 (Exhibit 99.1 to the October
16, 2007 8-K dated October 16,
2007)
|
*Incorporated by reference
65
|
+
|
Schedules
and other attachments to the indicated exhibit have been
omitted. The Company agrees to furnish supplementally to the
SEC upon request a copy of any omitted schedules or
attachments.
|
|
(1)
|
Incorporated
by reference to the exhibit of the same number filed with the Company's
registration statement on Form SB-2 (33-69270) that was declared effective
on November 12, 1993.
|
|
(2)
|
Incorporated
by reference to the Company's Form 10-QSB report for the quarter ended
September 30, 1994 filed on November 14, 1994. It should be noted that
Exhibits 10.25 through 10.34 were previously numbered 10.1 through 10.10
in that report.
|
|
(3)
|
Indicates
a management contract or compensation plan or
arrangement.
|
66
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MACE
SECURITY INTERNATIONAL, INC.
|
By:
|
/s/ Dennis R.
Raefield.
|
Dennis R.
Raefield
President
and Chief Executive Officer
DATED the
24 day of March, 2010
KNOW ALL
MEN BY THESE PRESENTS that the undersigned does hereby constitute and appoint
Dennis R. Raefield and Gregory M. Krzemien, or either of them acting alone, his
true and lawful attorney-in-fact and agent, with full power of substitution and
revocation for him and in his name, place and stead, in any and all capacities,
to sign this Annual Report on Form 10-K of Mace Security International, Inc. and
any and all amendments to the Report and to file the same with all exhibits
thereto, and other documents in connection therewith, with the United States
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
|
Name
|
Title
|
Date
|
||
|
/s/ Dennis R. Raefield
|
President,
Chief Executive Officer
|
March
24, 2010
|
||
|
Dennis
R. Raefield.
|
and
Director
|
|||
|
(Principal
Executive Officer)
|
||||
|
/s/ Gregory M. Krzemien
|
Chief
Financial Officer
|
March
24, 2010
|
||
|
Gregory
M. Krzemien
|
and
Treasurer
|
|||
|
(Principal
Financial Officer and
|
||||
|
Principle
Accounting Officer)
|
||||
|
/s/John C. Mallon
|
Chairman
of the Board
|
March
24 2010
|
||
|
John
C. Mallon
|
||||
|
/s/ Mark S. Alsentzer
|
Director
|
March
24, 2010
|
||
|
Mark
S. Alsentzer
|
||||
|
/s/Richard A. Barone
|
Director
|
March
24, 2010
|
||
|
Richard
A. Barone
|
||||
|
/s/Gerald T. LaFlamme
|
Director
|
March
24, 2010
|
||
|
Gerald
T. LaFlamme
|
|
|
67
Mace
Security International, Inc.
Audited
Consolidated Financial Statements
Years
ended December 31, 2009, 2008, and 2007
Contents
|
Report
of Independent Registered Public Accountants
|
F-2
|
|
Audited Consolidated Financial
Statements
|
|
|
Consolidated
Balance Sheets
|
F-3
|
|
Consolidated
Statements of Operations
|
F-5
|
|
Consolidated
Statements of Stockholders’ Equity
|
F-6
|
|
Consolidated
Statements of Cash Flows
|
F-7
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
Report
of Independent Registered Public Accountants
Board of
Directors
Mace
Security International, Inc. and Subsidiaries
We have audited the accompanying
consolidated balance sheets of Mace Security International, Inc. (a Delaware
corporation) and Subsidiaries (the Company) as of December 31, 2009 and 2008 and
the related consolidated statements of operations, changes in stockholders’
equity and cash flows for each of the three years in the period ended December
31, 2009. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Mace Security International, Inc. and
Subsidiaries as of December 31, 2009 and 2008, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2009, in conformity with accounting principles generally
accepted in the United States of America.
|
/s/ Grant Thornton
LLP
|
Philadelphia,
Pennsylvania
March 24,
2010
F-2
Mace Security International,
Inc. and
Subsidiaries
Consolidated
Balance Sheets
(In
thousands, except share and par value information)
|
ASSETS
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 8,289 | $ | 8,314 | ||||
|
Short-term
investments
|
1,086 | 1,005 | ||||||
|
Accounts
receivable, less allowance for doubtful accounts of $785 and $760 in
2009 and 2008, respectively
|
1,939 | 1,852 | ||||||
|
Inventories,
less reserve for obsolescence of $1,379 and $1,463 in 2009 and 2008,
respectively
|
5,232 | 7,743 | ||||||
|
Prepaid
expenses and other current assets
|
2,078 | 1,994 | ||||||
|
Assets
held for sale
|
7,180 | 4,680 | ||||||
|
Total
current assets
|
25,804 | 25,588 | ||||||
|
Property
and equipment:
|
||||||||
|
Land
|
250 | 6,874 | ||||||
|
Buildings
and leasehold improvements
|
2,213 | 12,642 | ||||||
|
Machinery
and equipment
|
3,177 | 5,332 | ||||||
|
Furniture
and fixtures
|
491 | 511 | ||||||
|
Total
property and equipment
|
6,131 | 25,359 | ||||||
|
Accumulated
depreciation and amortization
|
(2,856 | ) | (7,164 | ) | ||||
|
Total
property and equipment, net
|
3,275 | 18,195 | ||||||
|
Goodwill
|
7,869 | 6,887 | ||||||
|
Other
intangible assets, net of accumulated amortization of $1,881 and $1,472 in
2009 and 2008, respectively
|
3,780 | 3,449 | ||||||
|
Other
assets
|
1,630 | 917 | ||||||
|
Total
assets
|
$ | 42,358 | $ | 55,036 | ||||
The
accompanying notes are an integral
part
of these consolidated financial statements.
F-3
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Current
liabilities:
|
||||||||
|
Current
portion of long-term debt and capital lease obligations
|
$ | 109 | $ | 2,502 | ||||
|
Accounts
payable
|
3,436 | 2,287 | ||||||
|
Income
taxes payable
|
206 | 350 | ||||||
|
Deferred
revenue
|
319 | 131 | ||||||
|
Accrued
expenses and other current liabilities
|
3,028 | 2,649 | ||||||
|
Liabilities
related to assets held for sale
|
2,123 | 1,644 | ||||||
|
Total
current liabilities
|
9,221 | 9,563 | ||||||
|
Long-term
debt, net of current portion
|
568 | 2,306 | ||||||
|
Capital
lease obligations, net of current portion
|
120 | - | ||||||
|
Other
liabilities
|
461 | - | ||||||
|
Commitments
and contingencies – See Note 17
|
||||||||
|
Stockholders’
equity:
|
||||||||
|
Preferred
stock, $.01 par value: authorized shares-10,000,000, issued and
outstanding shares-none
|
- | - | ||||||
|
Common
stock, $.01 par value: authorized shares-100,000,000, issued and
outstanding shares of 15,913,775 and 16,285,377 in 2009 and 2008,
respectively
|
159 | 163 | ||||||
|
Additional
paid-in capital
|
93,948 | 94,161 | ||||||
|
Accumulated
other comprehensive loss
|
- | (5 | ) | |||||
|
Accumulated
deficit
|
(62,098 | ) | (51,147 | ) | ||||
| 32,009 | 43,172 | |||||||
|
Less
treasury stock at cost – 18,200 and 5,532 shares in 2009 and 2008,
respectively
|
(21 | ) | (5 | ) | ||||
|
Total
stockholders’ equity
|
31,988 | 43,167 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 42,358 | $ | 55,036 | ||||
The
accompanying notes are an integral
part
of these consolidated financial statements.
F-4
Mace
Security International, Inc. and Subsidiaries
Consolidated
Statements of Operations
(In
thousands, except share and per share information)
|
Year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues:
|
||||||||||||
|
Security
|
$ | 18,591 | $ | 20,788 | $ | 22,278 | ||||||
|
Digital
media marketing
|
9,655 | 17,290 | 7,625 | |||||||||
| 28,246 | 38,078 | 29,903 | ||||||||||
|
Cost
of revenues:
|
||||||||||||
|
Security
|
12,998 | 15,740 | 16,936 | |||||||||
|
Digital
media marketing
|
6,943 | 12,126 | 6,505 | |||||||||
| 19,941 | 27,866 | 23,441 | ||||||||||
|
Selling,
general and administrative expenses
|
15,067 | 17,086 | 15,088 | |||||||||
|
Depreciation
and amortization
|
790 | 786 | 691 | |||||||||
|
Goodwill
and asset impairment charges
|
1,462 | 3,249 | 447 | |||||||||
|
Operating
loss
|
(9,014 | ) | (10,909 | ) | (9,764 | ) | ||||||
|
Interest
(expense), net
|
(7 | ) | 260 | 247 | ||||||||
|
Other
(loss) income
|
(108 | ) | (2,217 | ) | 944 | |||||||
|
Loss
from continuing operations before income tax expense
|
(9,129 | ) | (12,866 | ) | (8,573 | ) | ||||||
|
Income
tax expense
|
- | 100 | 98 | |||||||||
|
Loss
from continuing operations
|
(9,129 | ) | (12,966 | ) | (8,671 | ) | ||||||
|
(Loss)
income from discontinued operations, net of tax expense of $0 in 2009,
2008 and 2007
|
(1,822 | ) | 2,314 | 2,086 | ||||||||
|
Net
loss
|
$ | (10,951 | ) | $ | (10,652 | ) | $ | (6,585 | ) | |||
|
Per
share of common stock (basic and diluted):
|
||||||||||||
|
Loss
from continuing operations
|
$ | (0.57 | ) | $ | (0.79 | ) | $ | (0.55 | ) | |||
|
(Loss)
income from discontinued operations, net of tax
|
(0.11 | ) | 0.14 | 0.13 | ||||||||
|
Net
loss
|
$ | (0.68 | ) | $ | (0.65 | ) | $ | (0.42 | ) | |||
|
Weighted
average shares outstanding:
|
||||||||||||
|
Basic
|
16,202,254 | 16,464,760 | 15,810,705 | |||||||||
|
Diluted
|
16,202,254 | 16,464,760 | 15,810,705 | |||||||||
The
accompanying notes are an integral
part
of these consolidated financial statements.
F-5
Mace
Security International, Inc. and Subsidiaries
Consolidated
Statements of Stockholders' Equity
(In
thousands, except share information)
|
Common
Stock
|
Additional
Paid-in
|
Accumulated
Other
Comprehensive
|
Accumulated
|
Treasury
|
||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Income
(Loss)
|
Deficit
|
Stock
|
Total
|
||||||||||||||||||||||
|
Balance
at December 31, 2006
|
15,275,382 | $ | 153 | $ | 89,850 | $ | 413 | $ | (33,910 | ) | $ | - | $ | 56,506 | ||||||||||||||
|
Common
stock issued in purchase acquisition
|
1,176,471 | 12 | 2,883 | - | - | - | 2,895 | |||||||||||||||||||||
|
Exercise
of common stock options
|
13,400 | - | 28 | - | - | - | 28 | |||||||||||||||||||||
|
Purchase
of treasury stock
|
- | - | - | - | - | (111 | ) | (111 | ) | |||||||||||||||||||
|
Stock-based
compensation expense
|
- | - | 924 | - | - | - | 924 | |||||||||||||||||||||
|
Change
in fair value of cash flow hedge
|
- | - | - | (17 | ) | - | - | (17 | ) | |||||||||||||||||||
|
Unrealized
gain (loss) on short-term investments, net of tax
|
- | - | - | (74 | ) | - | - | (74 | ) | |||||||||||||||||||
|
Net
loss
|
- | - | - | - | (6,585 | ) | - | (6,585 | ) | |||||||||||||||||||
|
Total
comprehensive loss
|
- | - | - | - | - | - | (6,676 | ) | ||||||||||||||||||||
|
Balance
at December 31, 2007
|
16,465,253 | 165 | 93,685 | 322 | (40,495 | ) | (111 | ) | 53,566 | |||||||||||||||||||
|
Purchase
and retirement of treasury stock.
|
(179,876 | ) | (2 | ) | (246 | ) | - | - | 106 | (142 | ) | |||||||||||||||||
|
Stock-based
compensation expense (see note 6)
|
- | - | 629 | - | - | - | 629 | |||||||||||||||||||||
|
Adjustment
to common stock value issued in purchase acquisition
|
- | - | 93 | - | - | - | 93 | |||||||||||||||||||||
|
Unrealized
loss on short-term investments
|
- | - | - | (327 | ) | - | - | (327 | ) | |||||||||||||||||||
|
Net
loss
|
- | - | - | - | (10,652 | ) | - | (10,652 | ) | |||||||||||||||||||
|
Total
comprehensive loss
|
- | - | - | - | - | - | (10,979 | ) | ||||||||||||||||||||
|
Balance
at December 31, 2008
|
16,285,377 | 163 | 94,161 | (5 | ) | (51,147 | ) | (5 | ) | 43,167 | ||||||||||||||||||
|
Purchase
and retirement of treasury stock
|
(371,602 | ) | (4 | ) | (329 | ) | - | - | (16 | ) | (349 | ) | ||||||||||||||||
|
Stock-based
compensation expense (see note 6)
|
- | - | 116 | - | - | - | 116 | |||||||||||||||||||||
|
Unrealized
gain on short-term investments
|
- | - | - | 5 | - | - | 5 | |||||||||||||||||||||
|
Net
loss
|
- | - | - | - | (10,951 | ) | - | (10,951 | ) | |||||||||||||||||||
|
Total
comprehensive loss
|
- | - | - | - | - | - | (10,946 | ) | ||||||||||||||||||||
|
Balance
at December 31, 2009
|
15,913,775 | $ | 159 | $ | 93,948 | $ | - | $ | (62,098 | ) | $ | (21 | ) | $ | 31,988 | |||||||||||||
The accompanying
notes are an integral
part of these consolidated
financial statements.
F-6
Mace
Security International, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
|
Year ended December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Operating
activities
|
||||||||||||
|
Net
loss
|
$ | (10,951 | ) | $ | (10,652 | ) | $ | (6,585 | ) | |||
|
(Loss)
income from discontinued operations, net of tax
|
(1,822 | ) | 2,314 | 2,086 | ||||||||
|
Loss
from continuing operations
|
(9,129 | ) | (12,966 | ) | (8,671 | ) | ||||||
|
Adjustments
to reconcile loss from continuing operations to net cash used in operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
790 | 786 | 691 | |||||||||
|
Stock-based
compensation
|
116 | 626 | 896 | |||||||||
|
Provision
for losses on receivables
|
236 | (31 | ) | 381 | ||||||||
|
Loss
(gain) on sale of property and equipment
|
99 | - | (3 | ) | ||||||||
|
Loss
(gain) on short-term investments
|
5 | 2,338 | (752 | ) | ||||||||
|
Goodwill
and asset impairment charges
|
1,462 | 3,249 | 447 | |||||||||
|
Changes
in operating assets and liabilities, net of acquisition:
|
||||||||||||
|
Accounts
receivable
|
(329 | ) | 1,086 | (52 | ) | |||||||
|
Inventories
|
1,839 | 1,311 | (2,213 | ) | ||||||||
|
Prepaid
expenses and other assets
|
(40 | ) | 280 | (508 | ) | |||||||
|
Accounts
payable
|
1,026 | (1,879 | ) | 669 | ||||||||
|
Deferred
revenue
|
206 | 118 | 63 | |||||||||
|
Accrued
expenses
|
704 | 304 | 797 | |||||||||
|
Income
taxes payable
|
(135 | ) | (421 | ) | 66 | |||||||
|
Net
cash used in operating activities-continuing operations
|
(3,150 | ) | (5,199 | ) | (8,189 | ) | ||||||
|
Net
cash used in operating activities-discontinued operations
|
(589 | ) | (1,263 | ) | (1,067 | ) | ||||||
|
Net
cash used in operating activities
|
(3,739 | ) | (6,462 | ) | (9,256 | ) | ||||||
|
Investing
Activities
|
||||||||||||
|
Acquisition
of business, net of cash acquired
|
(1,863 | ) | - | (6,947 | ) | |||||||
|
Purchase
of property and equipment
|
(431 | ) | (486 | ) | (253 | ) | ||||||
|
Purchase
of short-term investments
|
(82 | ) | - | - | ||||||||
|
Proceeds
from sale of property and equipment
|
1,524 | 75 | 15 | |||||||||
|
Payments
for intangibles
|
(41 | ) | (22 | ) | (15 | ) | ||||||
|
Net
cash used in investing activities-continuing operations
|
(893 | ) | (433 | ) | (7,200 | ) | ||||||
|
Net
cash provided by investing activities-discontinued
operations
|
6,075 | 8,690 | 22,303 | |||||||||
|
Net
cash provided by investing activities
|
5,182 | 8,257 | 15,103 | |||||||||
|
Financing
activities
|
||||||||||||
|
Payments
on long-term debt and capital lease obligations
|
(93 | ) | (556 | ) | (67 | ) | ||||||
|
Proceeds
from issuance of common stock
|
- | - | 28 | |||||||||
|
Purchase
and retirement of treasury stock
|
(349 | ) | 106 | (111 | ) | |||||||
|
Net
cash used in financing activities-continuing operations
|
(442 | ) | (450 | ) | (150 | ) | ||||||
|
Net
cash used in financing activities-discontinued operations
|
(1,026 | ) | (1,134 | ) | (1,649 | ) | ||||||
|
Net
cash used in financing activities
|
(1,468 | ) | (1,584 | ) | (1,799 | ) | ||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(25 | ) | 211 | 4,048 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
8,314 | 8,103 | 4,055 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 8,289 | $ | 8,314 | $ | 8,103 | ||||||
The
accompanying notes are an integral
part of these consolidated financial
statements.
F-7
Mace
Security International, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
1. Description
of Business and Basis of Presentation
The
accompanying consolidated financial
statements include the accounts of Mace Security International, Inc. and its
wholly owned subsidiaries (collectively, the “Company” or “Mace”). All
significant intercompany transactions have been eliminated in consolidation. The
Company currently operates in two business segments: the Security Segment,
selling consumer safety and personal defense products, and electronic
surveillance products as well as providing security monitoring services and the
Digital Media Marketing Segment, selling consumer products on the internet and
providing online marketing services. The Company entered the digital media
marketing business with its acquisition of Linkstar Interactive, Inc.
(“Linkstar”) on July 20, 2007 and the wholesale security monitoring business
with its acquisition of Central Station Security Systems, Inc. (“CSSS”) on April
30, 2009. See Note 3. Business
Acquisitions and Divestitures. We formerly had a Car Wash
Segment in which we provided complete car care services (including wash,
detailing, lube, and minor repairs). The Company’s remaining car wash operations
as of December 31, 2009 are located in Texas. As of December 31, 2009, the
results for all of our car wash operations and the Company’s truck washes have
been classified as assets held for sale in the balance sheet and as discontinued
operations in the statement of operations and the statement of cash flows. The
statements of operations and the statements of cash flows for the prior years
have been restated to reflect the discontinued operations in accordance with
accounting principles generally accepted in the United States (“GAAP”). See
Note 4. Discontinued
Operations and Assets Held for Sale.
2. Summary
of Significant Accounting Policies
Revenue Recognition and Deferred
Revenue
The
Company recognizes revenue when the following criteria have been met: persuasive
evidence of an arrangement exists, the fees are fixed and determinable, no
significant obligations remain and collection of the related receivable is
reasonably assured. Allowances for sales returns, discounts and allowances, are
estimated and recorded concurrent with the recognition of the sale and are
primarily based on historical return rates.
Revenue
from the Company’s Security Segment is recognized when shipments are made, or
for export sales when title has passed. Shipping and handling charges and costs
of $535,000, $669,000 and $713,000 in 2009, 2008 and 2007 respectively, are
included in cost of revenues. Prior year
amounts, which were originally recorded as selling, general, and administrative
(SG&A) expenses, were reclassed to conform to current year
presentation.
The
e-commerce division recognizes revenue and the related product costs for trial
product shipments after the expiration of the trial period. Marketing costs
incurred by the e-commerce division are recognized as incurred. The online
marketing division recognizes revenue and cost of sales based on the gross
amount received from advertisers and the amount paid to the publishers placing
the advertisements as cost of sales. Shipping and handling charges related to
the e-commerce division of the Company’s Digital Media Marketing
Segment of $588,000, $1.4 million and $384,000 are included in cost of revenues
for the years ended December 31, 2009, 2008 and 2007, respectively. Prior year
amounts, which were originally recorded as SG&A expenses, were reclassed to
cost of revenues to conform to current year presentation.
Revenue
from the Company’s Car Wash operations is recognized, net of customer coupon
discounts, when services are rendered or fuel or merchandise is sold. Sales tax
collected from customers and remitted to the applicable taxing authorities is
accounted for on a net basis, with no impact to revenues. The Company records a
liability for gift certificates, ticket books, and seasonal and annual passes
sold at its car wash locations but not yet redeemed. The Company estimates these
unredeemed amounts based on gift certificates and ticket book sales and
redemptions throughout the year as well as utilizing historical sales and
redemption rates 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.
F-8
Cash
and Cash Equivalents
Cash and
cash equivalents consist of cash and highly liquid short-term investments with
original maturities of three months or less, and credit card deposits which are
converted into cash within two to three business days.
Short-Term
Investments
At
December 31, 2009 and 2008, the Company had approximately $1.1 million and $1.0
million, respectively, of short-term investments classified as available for
sale in one broker account consisting of certificates of deposit.
On June
18, 2008, we requested redemption of a short-term investment in a hedge fund,
the Victory Fund, Ltd. Under the Limited Partnership Agreement with the hedge
fund, the redemption request was timely for a return of the investment account
balance as of September 30, 2008, payable ten business days after the end of the
September 30, 2008 quarter. The hedge fund acknowledged that the redemption
amount owed was $3,207,000. On October 15, 2008 the hedge fund asserted the
right to withhold the redemption amount due to extraordinary market
circumstances. After negotiations, the hedge fund agreed to pay the redemption
amount in two installments, $1.0 million on November 3, 2008 and $2,207,000 on
January 15, 2009. The Company received the first installment of $1.0 million on
November 5, 2008. The Company has not received the second
installment. On January 21, 2009, the principal of the Victory Fund,
Ltd, Arthur Nadel, was criminally charged with operating a “Ponzi”
scheme. Additionally, the SEC has initiated a civil case against Mr.
Nadel and others alleging that Arthur Nadel defrauded investors in the Victory
Fund, LLC and five other hedge funds by massively overstating the value of
investments in these funds and issuing false and misleading account statements
to investors. The SEC also alleges that Mr. Nadel transferred large sums of
investor funds to secret accounts which only he controlled. A
receiver has been appointed in the civil case and has been directed to
administer and manage the business affairs, funds, assets, and any other
property of Mr. Nadel, the Victory Fund, LLC and the five other hedge funds and
conduct and institute such legal proceedings that benefit the hedge fund
investors. Accordingly, we recorded a charge of $2,207,000 as an
investment loss at December 31, 2008. If we recover any of the investment loss,
such amounts will be recorded as recoveries in future periods when received. The
original amount invested in the hedge fund was $2.0 million.
Fair
Value Measurements
The
Company’s nonfinancial assets and liabilities that are measured at fair value on
a nonrecurring basis include goodwill, intangible assets and long-lived tangible
assets including property, plant and equipment. Although the adoption
of the new accounting pronouncement did not materially impact our
financial condition, results of operations or cash flows, additional disclosures
about fair value measurements are required.
The
following table shows the assets included in the accompanying balance sheet
which are measured at fair value on a recurring basis and the source of the fair
value measurement:
|
(In thousands)
|
Fair Value Measurement Using
|
|||||||||||||||
|
Description
|
Fair Value at
December 31,
2009
|
Quoted Market
Prices(1)
|
Observable
Inputs(2)
|
Unobservable
Inputs(3)
|
||||||||||||
|
Short-term investments
|
$ | 1,086 | $ | 1,086 | $ | - | $ | - | ||||||||
(1) This
is the highest level of fair value input and represents inputs to fair value
from quoted prices in active markets for identical assets and liabilities to
those being valued.
(2) Directly
or indirectly observable inputs, other than quoted prices in active markets, for
the assets or liabilities being valued including but not limited to, interest
rates, yield curves, principal- to principal markets, etc.
(3) Lowest
level of fair value input because it is unobservable and reflects the Company’s
own assumptions about what market participants would use in pricing assets and
liabilities at fair value.
F-9
Accounts
Receivable
The
Company’s accounts receivable are due from trade customers. Credit is extended
based on evaluation of customers’ financial condition and, generally, collateral
is not required. Accounts receivable payment terms vary and amounts
due from customers are stated in the financial statements net of an allowance
for doubtful accounts. Accounts outstanding longer than the payment
terms are considered past due. The Company determines its allowance
by considering a number of factors, including the length of time trade accounts
receivable are past due, the Company’s previous loss history, the customer’s
current ability to pay its obligation to the Company, and the condition of the
general economy and the industry as a whole. The Company writes off
accounts receivable when they are deemed uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts. Risk of losses from international sales within the Security
Segment are reduced by requiring substantially all international customers to
provide either irrevocable confirmed letters of credit or cash
advances.
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined using
the first-in first-out (FIFO) method for our security and e-commerce
inventories. Inventories at the Company’s car wash locations consist of various
chemicals and cleaning supplies used in operations and merchandise and fuel for
resale to consumers. Inventories within the Company’s Security
Segment consist of defense sprays, child safety products, electronic security
monitors, cameras and digital recorders, and various other consumer security and
safety products. Inventories within the e-commerce division of the Digital Media
Marketing segment consist of several health and beauty products. The Company
continually and at least on a quarterly basis reviews the book value of slow
moving inventory items, as well as, discontinued product lines to determine if
inventory is properly valued. The Company identifies slow moving or discontinued
product lines by a detail review of recent sales volumes of inventory items as
well as a review of recent selling prices versus cost and assesses the ability
to dispose of inventory items at a price greater than cost. If it is determined
that cost is less than market value, then cost is used for inventory valuation.
If market value is less than cost, then an adjustment is made to the Company’s
obsolescence reserve to adjust the inventory to market value. When slow moving
items are sold at a price less than cost, the difference between cost and
selling price is charged against the established obsolescence
reserve.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation is recorded using the
straight-line method over the estimated useful lives of the assets, which are
generally as follows: buildings and leasehold improvements - 15 to 40 years;
machinery and equipment - 3 to 20 years; and furniture and fixtures - 5 to 10
years. Significant additions or improvements extending assets' useful
lives are capitalized; normal maintenance and repair costs are expensed as
incurred. Depreciation expense is approximately $329,000, $285,000 and $291,000
for the years ended December 31, 2009, 2008 and 2007,
respectively. Maintenance and repairs are charged to expense as
incurred and amounted to approximately $33,000, $53,000 and $30,000 in the years
ended December 31, 2009, 2008 and 2007, respectively.
Asset
Impairment Charges
The
Company periodically reviews the carrying value of its long-lived assets held
and used, and assets to be disposed of, for possible impairment when events and
circumstances warrant such a review. Also see Note 18. Asset Impairment
Charges.
Goodwill
Goodwill
represents the premium paid over the fair value of the net tangible and
intangible assets we have acquired in business
combinations. Accounting standards require that the Company perform a
goodwill impairment test on at least an annual basis. Application of the
goodwill impairment test requires significant judgments including estimation of
future cash flows, which is dependent on internal forecasts, estimation of the
long-term rate of growth for the businesses, the useful life over which cash
flows will occur and determination of our weighted average cost of
capital. Changes in these estimates and assumptions could materially
affect the determination of fair value and/or conclusions on goodwill impairment
for each reporting unit. The Company conducts its annual goodwill
impairment test as of April 30 for its wholesale security monitoring business
unit and as of June 30 for its Digital Media Marketing Segment, or more
frequently if indicators of impairment exist. We periodically analyze
whether any such indicators of impairment exist. A significant amount
of judgment is involved in determining if an indicator of impairment has
occurred. Such indicators may include a sustained, significant decline in our
share price and market capitalization, a decline in our expected future cash
flows, a significant adverse change in legal factors or in the business climate,
unanticipated competition and/or slower expected growth rates, among
others. The Company compares the fair value of each of its reporting
units to their respective carrying values, including related
goodwill. Future changes in the industry could impact the results of
future annual impairment tests. Goodwill at December 31, 2009 and
2008 was $7.9 million and $6.9 million, respectively. There can be no
assurance that future tests of goodwill impairment will not result in impairment
charges. Also see Note 5.
Goodwill.
F-10
Other
Intangible Assets
Other
intangible assets consist of deferred financing costs, trademarks, customer
lists, non-compete agreements, product lists, and patent costs. Our trademarks
are considered to have indefinite lives and, as such, are not subject to
amortization. These assets will be tested for impairment annually and whenever
there is an impairment indicator. Estimating future cash requires significant
judgment and projections may vary from cash flows eventually realized. Several
impairment indicators are beyond our control, and determining whether or not
they will occur cannot be predicted with any certainty. Customer
lists, product lists, software costs, patents and non-compete agreements are
amortized on a straight-line or accelerated basis over their respective
estimated useful lives. Amortization of other intangible assets was
approximately $461,000, $501,000 and $400,000 for the years ended December 31,
2009, 2008, and 2007, respectively. Also see Note 8. Other Intangible
Assets and Note 18. Asset Impairment Charges.
Insurance
The
Company insures for auto, general liability, and workers’ compensation claims
through participation in a captive insurance program with other unrelated
businesses. The Company maintains excess coverage through occurrence-based
policies. With respect to participating in the captive insurance
program, the Company sets aside an actuarially determined amount of cash in a
restricted “loss fund” account for the payment of claims under the policies. The
Company funds these accounts annually as required by the captive insurance
company. Should funds deposited exceed claims ultimately incurred and paid,
unused deposited funds are returned to the Company with interest on or about the
fifth anniversary of the policy year-end. The Company’s participation
in the captive insurance program is secured by a letter of credit in the amount
of $566,684 at December 31, 2009. 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 an estimate of reserves for possible future losses on reported
claims as well as claims incurred but not reported.
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. The Company also follows
the appropriate accounting pronouncements which prescribes a model for the
recognition and measurement of a tax position taken or expected to be taken, and
provides guidance on recognition, classification, interest and penalties,
disclosure and transition. At December 31, 2009, the Company did not have any
significant unrecognized tax benefits. The total amount of interest and
penalties recognized in the statements of operations for the years ended
December 31, 2009, 2008 and 2007 is insignificant and when incurred is reported
as interest expense.
Supplementary
Cash Flow Information
Interest
paid on all indebtedness was approximately $252,000, $517,000 and $1.5 million
for the years ended December 31, 2009, 2008 and 2007, respectively.
Income
taxes paid, net of refunds, were approximately $134,000, $447,000 and $81,000
for the years ended December 31, 2009, 2008, and 2007,
respectively.
F-11
Noncash
investing and financing activity of the Company includes the recording of a
$500,000 note payable to Company stockholders issued as part of the
consideration paid for the acquisition of Linkstar, a $920,000 note receivable
recorded as part of the consideration received from the sale of the Company’s
truck washes, and the sale of property and simultaneous pay down of related
mortgages of $9.2 million, all in 2007. In 2008, the Company sold a Dallas,
Texas car wash property and simultaneously paid down a related mortgage of $1.2
million as well as its Florida car washes in the three months ended March 31,
2008, simultaneously paying down related mortgages of approximately $4.2
million. Additionally, in January 2009, the Company sold two San Antonio, Texas
car wash properties and received, as part of the consideration, a note
receivable for $750,000 and in September 2009, the Company sold a car wash
facility in Dallas, Texas and simultaneously paid down a related mortgage of
approximately $461,000. Finally, in November 2009, the Company sold its three
car wash properties in Austin, Texas and simultaneously paid down related
mortgages of approximately $2.1 million.
Advertising
The
Company expenses advertising costs, including advertising production costs, as
they are incurred or when the first time advertising takes place. The
Company’s costs of coupon advertising are recorded as a prepaid asset and
amortized to advertising expense during the period of distribution and customer
response, which is typically two to four months. Prepaid advertising
costs were $41,400 and $30,000 at December 31, 2009 and 2008,
respectively. Advertising expense was approximately $862,000, $1.2
million and $1.3 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
Stock
Based Compensation
The
Company has two stock-based employee compensation plans. The Company recognizes
compensation expense for all share-based awards on a straight-line basis over
the life of the instruments, based upon the grant date fair value of the equity
or liability instruments issued. Total stock compensation expense is
approximately $116,000 for the year ended December 31, 2009, all in SG&A
expense, $629,000 for the year ended December 31, 2008, ($626,000 in SG&A
expense and $3,000 in discontinued operations), and $924,000 for the year ended
December 31, 2007, ($896,000 in SG&A expense, and $28,000 in discontinued
operations).
The fair
values of the Company’s options were estimated at the dates of grant using a
Black Scholes option pricing model with the following weighted average
assumptions:
|
Year ended December,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Expected
term (years)
|
6.5
to 10
|
10
|
10
|
|||||||||
|
Risk-free
interest rate
|
2.75%
to 3.40%
|
3.50%
to 4.25%
|
4.24%
to 5.16%
|
|||||||||
|
Volatility
|
47%
to 49%
|
46%
to 49%
|
52%
|
|||||||||
|
Dividend
yield
|
0%
|
0%
|
0%
|
|||||||||
|
Forfeiture
Rate
|
30%
|
11%
to 31%
|
33%
|
|||||||||
Expected
term: The Company’s expected life is based on the period the options are
expected to remain outstanding. The Company estimated this amount based on
historical experience of similar awards, giving consideration to the contractual
terms of the awards, vesting requirements and expectations of future
behavior.
Risk-free
interest rate: The Company uses the risk-free interest rate of a U.S. Treasury
Note with a similar term on the date of the grant.
Volatility:
The Company calculates the volatility of the stock price based on historical
value and corresponding volatility of the Company’s stock price over the prior
five years, to correspond with the Company’s focus on the Security
Segment.
Dividend
yield: The Company uses a 0% expected dividend yield as the Company has not paid
and does not anticipate declaring dividends in the near future.
Forfeitures:
The Company estimates forfeitures based on historical experience and factors of
known historical or future projected work force reduction actions to anticipate
the projected forfeiture rates.
F-12
The
weighted-averages of the fair value of stock option grants are $0.55, $1.50 and
$1.67 per share in 2009, 2008 and 2007, respectively. As of December 31, 2009,
total unrecognized stock-based compensation expense is $160,000 which has a
weighted average period to be recognized of approximately 1.3
years.
The Black
Scholes option valuation model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company’s employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management’s
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those
estimates.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist primarily of cash and cash equivalents,
short-term investments, trade receivables, trade payables and debt
instruments. The carrying values of cash and cash equivalents, trade
receivables, and trade payables are considered to be representative of their
respective fair values.
Based on the borrowing rates currently
available to the Company for bank loans with similar terms and average
maturities, the carrying values and fair values of the Company’s fixed and
variable rate debt instruments at December 31, 2009 and 2008, including debt
recorded as liabilities related to assets held for sale, were as follows (in
thousands):
|
2009
|
2008
|
|||||||||||||||
|
Carrying
Value
|
Fair
Value
|
Carrying
Value
|
Fair
Value
|
|||||||||||||
|
Fixed
rate debt
|
$ | 186 | $ | 186 | $ | 24 | $ | 24 | ||||||||
|
Variable
rate debt
|
2,734 | 2,763 | 6,428 | 6,564 | ||||||||||||
|
Total
|
$ | 2,920 | $ | 2,949 | $ | 6,452 | $ | 6,588 | ||||||||
Derivative
Instruments
On
October 14, 2004, we entered into an interest rate cap arrangement that
effectively changed our interest rate exposure on approximately $7 million of
variable rate debt. The variable rate debt floated at prime plus .25%. The hedge
contract had a 36-month term and capped the interest rate on the $7 million of
variable rate debt at 6.5%. The contract expired on September 30,
2007.
The
interest rate cap arrangement was effective in hedging changes in cash flows
related to certain debt obligations during 2007.
F-13
New
Accounting Standards
In June
2009, the Financial Accounting Standards Board (“FASB”) issued the FASB
Accounting Standards Codification (the “ASC”). The ASC has become the single
source of non-governmental accounting principles generally accepted in the
United States (“GAAP”) recognized by the FASB in the preparation of financial
statements. The ASC does not supersede the rules or regulations of the U.S.
Securities and Exchange Commission (the “SEC”), therefore, the rules and
interpretive releases of the SEC continue to be additional sources of GAAP for
the Company. The Company adopted the ASC as of July 1, 2009. The ASC does not
change GAAP and did not have an effect on the Company’s financial position,
results of operations or cash flows.
In
December 2007, the FASB issued new guidance on business combinations. This
guidance establishes principles and requirements for how the Company: (1)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree; (2) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and (3) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The business
combinations guidance also requires acquisition-related transaction and
restructuring costs to be expensed rather than treated as part of the cost of
the acquisition. This guidance applies prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Company adopted
the business combination guidance on January 1, 2009. See Note 3. Business Acquisitions and
Divestitures.
In April
2009, the FASB issued guidance relating to accounting for assets acquired and
liabilities assumed in a business combination that arise from contingencies.
This pronouncement amends the guidance on business combinations to clarify the
initial and subsequent recognition, subsequent accounting, and disclosure of
assets and liabilities arising from contingencies in a business combination.
This pronouncement requires that assets acquired and liabilities assumed in a
business combination that arise from contingencies be recognized at fair value,
as determined in accordance with the fair value measurements guidance, if the
acquisition-date fair value can be reasonably estimated. If the acquisition-date
fair value of an asset or liability cannot be reasonably estimated, the asset or
liability would be measured at the amount that would be recognized in accordance
with the accounting guidance for contingencies. This pronouncement became
effective for the Company as of January 1, 2009, and the provisions of the
pronouncement are applied prospectively to business combinations with an
acquisition date on or after the date the guidance became effective. The
adoption of the pronouncement did not have a material impact on the Company’s
financial position or results of operations.
In April
2009, the FASB issued additional guidance on fair value measurements and
disclosures. Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants under current market conditions. The new guidance requires
an evaluation of whether there has been a significant decrease in the volume and
level of activity for the asset or liability in relation to normal market
activity for the asset or liability. If there has been a significant decrease in
activity, transactions or quoted prices may not be indicative of fair value and
a significant adjustment may need to be made to those prices to estimate fair
value. Additionally, an entity must consider whether the observed transaction
was orderly (that is, not distressed or forced). If the transaction was orderly,
the obtained price can be considered a relevant, observable input for
determining fair value. If the transaction is not orderly, other valuation
techniques must be used when estimating fair value. This guidance, which was
applied by the Company prospectively as of June 30, 2009, did not impact the
Company’s results of operations, cash flows or financial position year ended
December 31, 2009.
In May
2009, the FASB issued guidance on subsequent events which establishes general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued. This guidance is based on the same principles as currently exist
in auditing standards and was issued by the FASB to include accounting guidance
that originated as auditing standards into the body of authoritative literature
issued by the FASB. The standard addresses the period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements and disclosure that an entity should make about events or
transactions that occurred after the balance sheet date. The Company adopted
this guidance during the quarter ended June 30, 2009. At December 31, 2009, we
had recognizable subsequent events by entering into an agreement of sale on
January 26, 2010 to sell two car wash sites in Lubbock, Texas and an agreement
of sale on January 27, 2010 to sell a car wash site in Arlington,
Texas. See Note 21,
Subsequent
Events.
F-14
3. Business Acquisitions and Divestitures
Acquisitions
On July
20, 2007, the Company completed the purchase of all of the outstanding common
stock of Linkstar from Linkstar’s stockholders. Linkstar is an online internet
advertising and e-commerce direct marketing company. Linkstar’s primary assets
at the time of purchase were inventory, accounts receivable, proprietary
software, customer contracts, and its business methods. The acquisition of
Linkstar enabled the Company to expand the marketing of its security products
through online channels and provides the Company with a presence in the online
and digital media services industry. The Company paid approximately $10.5
million to the Linkstar shareholders consisting of $7.0 million in cash at
closing, $500,000 of promissory notes with interest at 5% paid on
January 18, 2008 and 1,176,471 unregistered shares of the Company’s common
stock. The Company’s stock was issued based on a closing price of $2.55 per
share or a total value of $2.9 million. In addition to the $10.5 million of
consideration at closing, the Company incurred approximately $261,000 in related
acquisition costs and recorded an additional estimated receivable of $132,000
for working capital acquired below the minimum working capital requirement of
$500,000, as per the purchase agreement. The purchase price was
allocated as follows: approximately (i) $248,000 for cash; (ii) $183,000 for
inventory; (iii) $1.12 million for accounts receivable; (iv) $41,000 for prepaid
expenses; (v) $80,000 for equipment; (vi) the assumption of $1.26 million of
liabilities, and (vii) the remainder, or $10.18 million, allocated to goodwill
and other intangible assets. Of the $10.18 million of acquired intangible
assets, $478,000 was assigned to trademarks and $6.89 million was assigned to
goodwill, neither of which is subject to amortization expense. The amount
assigned to goodwill was deemed appropriate based on several factors, including:
(i) multiples paid by market participants for business in the digital media
marketing and e-commerce business; (ii) levels of Linkstar’s current and future
projected cash flows; (iii) the Company’s strategic business plan, which
included utilizing the professional expertise of Linkstar’s staff and the
propriety software acquired in the Linkstar transaction to expand the marketing
of the Company’s Security Segment products using internet media marketing
channels, thus potentially increasing the value of its existing business
segment; and (iv) the Company’s plan to substitute the cash flows of the Car and
Truck Wash Segment, which the Company is exiting, with cash flow from the
digital media and e-commerce business. The remaining intangible
assets were assigned to customer relationships for $1.57 million, non-compete
agreements for $367,000 and software for $883,000. The allocation of the
purchase price of the Linkstar acquisition reflects certain reclassifications
from the allocation reported as of September 30, 2007 as a result of refinements
to certain data utilized for the acquisition valuation. Customer relationships,
non-compete agreements, and software costs were assigned a life of nine, seven,
and six years, respectively. The acquisition was accounted for as a business
combination in accordance with SFAS 141, Business
Combinations.
On April
30, 2009, the Company completed the purchase of all the outstanding common stock
of CSSS from CSSS’s shareholders. Total consideration was approximately $3.7
million consisting of $1.7 million in cash at closing, $224,000 paid subsequent
to closing, potential additional payments of up to $1.2 million upon the
settlement of certain contingencies as set forth in the Stock Purchase
Agreement, $766,000 which is recorded in accrued expenses and other current
liabilities and $461,000 of which is recorded as other non-current liabilities
at December 31, 2009, and the assumption of approximately $590,000 of
liabilities. CSSS, which is reported within the Company’s Security Segment, is a
national wholesale monitoring company located in Anaheim, California, with
approximately 300 security dealer clients. CSSS owns and operates a UL-listed
monitoring center that services over 30,000 end-user accounts. CSSS’s primary
assets are accounts receivable, equipment, customer contracts, and its business
methods. The acquisition of CSSS enables the Company to expand the marketing of
its security products through cross-marketing of the Company’s surveillance
equipment products to CSSS’s dealer base as well as offering the Company’s
current customers monitoring services. The purchase price was allocated as
follows: approximately (i) $19,000 for cash; (ii) $112,000 for accounts
receivable; (iii) $63,000 for prepaid expenses and other assets; (iv) $443,000
for fixed assets and capital leased assets; (v) the assumption of $590,000 of
liabilities, and (vi) the remainder, or $3.04 million, allocated to goodwill and
other intangible assets. Within the $3.04 million of acquired intangible assets,
$1.98 million was assigned to goodwill, which is not subject to amortization
expense. The amount assigned to goodwill was deemed appropriate based on several
factors, including: (i) multiples paid by market participants for businesses in
the security monitoring business; (ii) levels of CSSS’s current and future
projected cash flows; (iii) the Company’s strategic business plan, which
included cross-marketing the Company’s surveillance equipment products to CSSS’s
dealer base as well as offering the Company’s current customers monitoring
services, thus potentially increasing the value of its existing business
segment; and (iv) the Company’s plan to substitute the cash flows of the Car
Wash Segment, which the Company is exiting. The remaining intangible
assets were assigned to customer contracts and relationships for $940,000,
tradename for $70,000, and a non-compete agreement for $50,000. Customer
relationships, tradename and the non-compete agreement were assigned a life of
fifteen, three, and five years, respectively. The acquisition was accounted for
as a business combination in accordance with the new business combination
pronouncement as disclosed in Note 2.
F-15
Unaudited
proforma financial information, assuming the Linkstar acquisition and the CSSS
acquisition occurred on January 1, 2007, is as follows (in thousands, except per
shares amounts):
|
Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues
|
$ | 29,422 | $ | 41,985 | $ | 44,993 | ||||||
|
Net
Loss
|
$ | (11,032 | ) | $ | (10,295 | ) | $ | (7,934 | ) | |||
|
Loss
per share-basic and dilutive
|
$ | (0.69 | ) | $ | (0.63 | ) | $ | (0.50 | ) | |||
Divestitures
In the
first quarter ended March 31, 2007, the Company sold seven car washes
consisting of: (i) three full service car washes in the Philadelphia area on
January 29, 2007 and a full service car wash in Cherry Hill, New Jersey on
February 1, 2007 for a total of $7.8 million in cash at a gain of approximately
$1.0 million; (ii) an exterior car wash in Moorestown, New Jersey on January 5,
2007 for $350,000 cash, which approximates book value; (iii) an exterior car
wash in Philadelphia, Pennsylvania on March 1, 2007 for $475,000 in cash at a
gain of approximately $141,000; and (iv) a full service car wash in Fort Worth,
Texas on March 7, 2007 for $285,000 in cash at a gain of approximately
$9,000.
In the
second quarter ended June 30, 2007, the Company sold 14 car washes consisting
of: (i) an exterior car wash in Yeadon, Pennsylvania on May 14, 2007 for
$100,000 in cash at a gain of approximately $90,000; (ii) twelve full service
car washes in the Phoenix, Arizona area representing our entire Arizona region
on May 17, 2007 for $19,380,000 in cash at a gain of approximately $413,000; and
(iii) an exterior car wash in Smyrna, Delaware on May 31, 2007 for $220,000 in
cash at a gain of approximately $202,000. In the third quarter ended September
30, 2007, the Company sold its two remaining exterior car wash sites in Camden
and Sicklerville, New Jersey on August 3, 2007 for total cash consideration of
$1.38 million at a gain of approximately $179,000. In the fourth quarter ending
December 31, 2007, the Company sold two of its San Antonio, Texas car wash sites
in two separate transactions on November 8, 2007 and November 13, 2007 for total
cash consideration of $2.96 million at a total gain of approximately
$38,000.
On
December 31, 2007, the Company completed its sale of its five truck washes under
its lease-to-sell agreement with Eagle United Truck Wash, LLC (“Eagle”). Eagle
purchased the five truck washes for total consideration of $1.2 million,
consisting of $280,000 cash and a $920,000 five year note payable to Mace, which
has a balance of $892,000 at December 31, 2008, is secured by mortgages on the
truck washes. The current portion of the note payable, approximately $31,000, is
included in prepaid expenses and other current assets and the non-current
portion, approximately $861,000, is included in other assets. The Company
recorded a gain of approximately $279,000 on the sale of the truck
washes.
In the
first quarter ending March 31, 2008, the Company sold its six full service car
washes in Florida in three separate transactions for total cash consideration of
approximately $12.5 million at a gain of approximately $6.9 million.
Simultaneously with the sale, $4.2 million of cash was used to pay down related
mortgage debt. On July 18, 2008, the Company entered into an agreement to sell
one of its full service car washes in Dallas, Texas for a total cash
consideration of $1.8 million. The Company completed this sale on October 14,
2008 and simultaneously paid down $1.24 million of mortgage debt.
On
January 14, 2009, the Company sold its two remaining San Antonio, Texas car
washes for $1.0 million, resulting in a loss of approximately $7,000. The sale
price was paid by the buyer issuing the Company a secured promissory note in the
amount of $750,000 bearing interest at 6% per annum plus cash of $250,000, less
closing costs.
F-16
On
January 15, 2009, the Company, through its subsidiary, Mace Car Wash-Arizona,
Inc., entered into an agreement of sale for two of the three car washes owned in
Austin, Texas for a sale price of $6.0 million. Additionally, on April 6, 2009,
the Company entered into an agreement of sale for the third of the three car
washes it owned in Austin, Texas for a sale price of $3.2 million. The two sale
agreements were amended several times and were ultimately assigned to Seamless
GCW, Ltd. (“Purchaser”). Under the terms of the assigned Agreements, the
Purchaser paid an amended purchase price of $8.0 million for the inventory,
property and equipment, and certain intangible assets of all three Austin, Texas
car washes. Costs at closing were approximately $328,000, consisting of $240,000
of broker commissions, approximately $17,000 of non-reimbursed environmental
costs, and approximately $71,000 of other closing costs. Cash proceeds received
were $5,585,000, consisting of $5,145,000 of cash received at closing on
November 30, 2009 and $440,000 received through previously released escrow
deposits. Approximately $2,149,000 of the $8.0 million sale proceeds was used to
pay-off existing bank debt in addition to payment of certain closing
costs.
On May
18, 2009, the Company entered into an agreement of sale for an Arlington, Texas
car wash for a sale price of $979,000. The net book value of this car wash was
approximately $925,000. The Company completed the sale of the Arlington, Texas
car wash on September 16, 2009. Simultaneously with the sale, $461,000 of cash
was used to pay down related mortgage debt. The sale resulted in a net gain of
$15,000. On July 31, 2009, the Company sold a cell tower easement located at one
of the Company’s Arlington, Texas car wash properties for a sales price of
$292,000. The sale resulted in a net gain of $9,600.
On
November 18, 2009, the Company entered into an agreement of sale for one of its
Lubbock, Texas car washes for cash consideration of $750,000. The Company
completed the sale of this car wash on March 10, 2010 with cash proceeds of
$733,000 received, net of closing costs.
4. Discontinued Operations
and Assets Held for
Sale
The
Company reviews the carrying value of its long-lived assets held and used, and
its assets to be disposed of, for possible impairment when events and
circumstances warrant such a review. We also follow the criteria within GAAP in
determining when to reclass assets to be disposed of to assets and related
liabilities held for sale as well as when an operation disposed of or to be
disposed of is classified as a discontinued operation in the statements of
operations and the statements of cash flows.
As of
December 31, 2009, the results for all car wash operations and the Company’s
truck washes have been classified as discontinued operations in the statement of
operations and the statement of cash flows. This classification is based on the
remaining car washes being currently marketed and ready for sale and the
Company’s Board of Directors’ commitment to a plan to dispose of the remaining
car washes in 2010. The statements of operations and the statements of cash
flows for the prior years have been restated to reflect the discontinued
operations in accordance with accounting principles generally accepted in the
United States (“GAAP”).
Revenues
from discontinued operations were $10.6 million, $16.1 million, and $27.2
million for the years ended December 31, 2009, 2008 and 2007,
respectively. Operating (loss) income from discontinued operations,
including asset impairment charges, was $(1.8) million, $(4.4) million, and
$614,000 for the years ended December 31, 2009, 2008 and 2007,
respectively.
F-17
Assets
and liabilities held for sale are comprised of the following at December 31,
2009 (in thousands):
|
As of December 31, 2009
|
||||||||||||
|
|
Dallas and
Fort Worth,
Texas
|
Lubbock,
Texas
|
Total
|
|||||||||
|
Assets held for sale:
|
||||||||||||
|
Inventory
|
$ | 245 | $ | 136 | $ | 381 | ||||||
|
Property,
plant and equipment, net
|
3,796 | 2,997 | 6,793 | |||||||||
|
Intangible
assets
|
6 | - | 6 | |||||||||
|
Total
assets
|
$ | 4,047 | $ | 3,133 | $ | 7,180 | ||||||
|
Liabilities
related to assets held for sale: sale:
|
||||||||||||
|
Current
portion of long-term debt
|
$ | 293 | $ | 166 | $ | 459 | ||||||
|
Long-term
debt, net of current portion
|
967 | 697 | 1,664 | |||||||||
|
Total
liabilities
|
$ | 1,260 | $ | 863 | $ | 2,123 | ||||||
|
As of December 31, 2008
|
||||||||||||||||
|
|
Dallas and
Fort Worth,
Texas
|
Lubbock,
Texas
|
San
Antonio,
Texas
|
Total
|
||||||||||||
|
Assets held for sale:
|
||||||||||||||||
|
Inventory
|
$ | 51 | $ | 126 | $ | - | $ | 177 | ||||||||
|
Property,
plant and equipment, net
|
927 | 2,599 | 977 | 4,503 | ||||||||||||
|
Total
assets
|
$ | 978 | $ | 2,725 | $ | 977 | $ | 4,680 | ||||||||
|
Liabilities
related to assets held for sale:
|
||||||||||||||||
|
Current
portion of long-term debt
|
$ | 589 | $ | 201 | $ | - | $ | 790 | ||||||||
|
Long-term
debt, net of current portion
|
- | 854 | - | 854 | ||||||||||||
|
Total
liabilities
|
$ | 589 | $ | 1,055 | $ | - | $ | 1,644 | ||||||||
5. Goodwill
In
assessing goodwill for impairment, we first compare the fair value of our
reporting units with their net book value. We estimate the fair value of the
reporting units using discounted expected future cash flows, supported by the
results of various market approach valuation models. If the fair value of the
reporting units exceeds their net book value, goodwill is not impaired, and no
further testing is necessary. If the net book value of our reporting units
exceeds their fair value, we perform a second test to measure the amount of
impairment loss, if any. To measure the amount of any impairment loss, we
determine the implied fair value of goodwill in the same manner as if our
reporting units were being acquired in a business combination. Specifically, we
allocate the fair value of the reporting units to all of the assets and
liabilities of that unit, including any unrecognized intangible assets, in a
hypothetical calculation that would yield the implied fair value of goodwill. If
the implied fair value of goodwill is less than the goodwill recorded on our
balance sheet, we record an impairment charge for the difference.
We
performed extensive valuation analyses, utilizing both income and market
approaches, in our goodwill assessment process. The following describes the
valuation methodologies used to derive the fair value of the reporting
units.
|
|
·
|
Income Approach: To
determine fair value, we discounted the expected cash flows of the
reporting units. The discount rate used represents the estimated weighted
average cost of capital, which reflects the overall level of inherent risk
involved in our reporting units and the rate of return an outside investor
would expect to earn. To estimate cash flows beyond the final year of our
model, we used a terminal value approach. Under this approach, we used
estimated operating income before interest, taxes, depreciation and
amortization in the final year of our model, adjusted to estimate a
normalized cash flow, applied a perpetuity growth assumption and
discounted by a perpetuity discount factor to determine the terminal
value. We incorporated the present value of the resulting terminal value
into our estimate of fair
value.
|
F-18
|
|
·
|
Market-Based Approach:
To corroborate the results of the income approach described above,
we estimated the fair value of our reporting units using several
market-based approaches, including the value that we derive based on our
consolidated stock price as described above. We also used the guideline
company method which focuses on comparing our risk profile and growth
prospects to select reasonably similar/guideline publicly traded
companies.
|
The
determination of the fair value of the reporting units requires us to make
significant estimates and assumptions that affect the reporting unit’s expected
future cash flows. These estimates and assumptions primarily include, but are
not limited to, the discount rate, terminal growth rates, operating income
before depreciation and amortization and capital expenditures forecasts. Due to
the inherent uncertainty involved in making these estimates, actual results
could differ from those estimates. In addition, changes in underlying
assumptions would have a significant impact on either the fair value of the
reporting units or the goodwill impairment charge.
The
allocation of the fair value of the reporting units to individual assets and
liabilities within reporting units also requires us to make significant
estimates and assumptions. The allocation requires several analyses to determine
fair value of assets and liabilities including, among others, customer
relationships, non-competition agreements and current replacement costs for
certain property, plant and equipment.
As of
November 30, we conducted our annual assessment of goodwill for impairment for
our Security Segment and as of June 30 for our Digital Media Marketing Segment.
We conduct assessments more frequently if indicators of impairment
exists. In the fourth quarter of 2007, as a result of our annual
impairment test of goodwill and other intangibles, we recorded a goodwill
impairment charge of approximately $280,000 within our Security Segment and an
impairment of trademarks of approximately $66,000 related to our consumer direct
electronic surveillance operations and an impairment of trademarks of
approximately $101,000 related to our high end digital and machine vision
cameras and professional imaging components operations, both located in Texas.
As of November 30, 2008, we experienced a sustained, significant decline in our
stock price. The Company believes the reduced market capitalization reflects the
financial market’s reduced expectations of the Company’s performance, due in
large part to overall deteriorating economic conditions that may have a
materially negative impact on the Company’s future performance. We updated our
forecasted cash flows of the Security Segment reporting units during the fourth
quarter of 2008. This update considered current economic conditions and trends,
estimated future operating results, our views of growth rates, anticipated
future economic and regulatory conditions. Based on the results of our
assessment of goodwill for impairment, the net book value of our Mace Security
Products, Inc. (Florida and Texas operations) reporting unit exceeded its fair
value. With the noted potential impairment in Mace Security Products, Inc., we
performed the second step of the impairment test to determine the implied fair
value of goodwill. Specifically, we hypothetically allocated the fair value of
the impaired reporting units as determined in the first step to our recognized
and unrecognized net assets, including allocations to intangible assets such as
trademarks, customer relationships and non-competition
agreements. The resulting implied goodwill was $(5.9) million;
accordingly, we recorded an impairment charge to write off the goodwill of this
reporting unit totaling $1.34 million. We also performed impairment testing of
certain other intangible assets relating to Mace Security Products, Inc.,
specifically, the value assigned to trademarks. We recorded an additional
impairment charge to trademarks of approximately $223,000 related to our
consumer direct electronic surveillance operations and our high end digital and
machine vision cameras and professional imaging component operations.
Additionally, due to continuing deterioration in our Mace Security Products,
Inc. reporting unit, we performed certain impairment testing of our remaining
intangible assets, specifically, the value assigned to customer lists, product
lists, and trademarks as of June 30, 2009 and December 31, 2009. We recorded an
additional impairment charge to trademarks of approximately $80,000 and an
impairment charge of $142,000 to customer lists, both principally related to our
consumer direct electronic surveillance operations at June 30, 2009 and an
impairment charge of $30,000 to trademarks related to our high end digital and
machine vision cameras and professional imaging component operations at December
31, 2009.
F-19
As noted
above, we conducted our annual assessment of goodwill for impairment for our
Digital Media Marketing Segment as of June 30. Additionally, based
upon our procedures, we determined impairment indicators existed at December 31,
2008 relative to our Digital Media Marketing Segment and accordingly, we
performed an updated assessment of goodwill for impairment. Our Digital Media
Marketing Segment reporting unit fair value as determined exceeded its net book
value as of December 31, 2008. We updated our forecasted cash flows
of this reporting unit during the second quarter early June 30, 2009. This
update considered current economic conditions and trends, estimated future
operating results for the launch of new products as well as non-product revenue
growth, and anticipated future economic and regulatory conditions. Based on the
results of our assessment of goodwill impairment, the net book value of our
Digital Media Marketing Segment reporting unit exceeded its fair value. With the
noted potential impairment, we performed the second step of the impairment test
to determine the implied fair value of goodwill. The resulting implied goodwill
was $5.9 million which was less than the recorded value of goodwill of $6.9
million; accordingly, we recorded an impairment to write down goodwill of this
reporting unit by $1.0 million. Additionally, during our December 31, 2009
review of intangible assets, we determined impairment indicators existed
relative to our Digital Media Marketing Segment and accordingly, we performed an
updated assessment of goodwill within this reporting unit for impairment. The
budgets and long-term business plans of this reporting unit include the
resumption of generating online marketing revenues through our online marketing
division, Promopath, in 2010 and an increase in projected e-commerce revenues
and growth rates as a result of introduction of new products and a reduction in
credit card decline rates that negatively impacted revenues in 2009. Based upon
the Company’s December 31, 2009 assessment, a hypothetical 15% reduction in the
estimated fair value of the Digital Media Marketing reporting unit would not
result in an impairment charge.
As
previously noted, in June 2008 management made a decision to discontinue
marketing efforts by its subsidiary, Promopath, the on-line marketing division
of Linkstar, to third-party customers on a non-exclusive CPA basis, both
brokered and through promotional sites. Management’s decision was the result of
business environment changes in which the ability to maintain non-exclusive
third-party relationships at an adequate profit margin became increasingly
difficult. Promopath continued to market and acquire customers for the Company’s
e-commerce operation, Linkstar. As a result of this decision, the value assigned
to customer relationships at the time of the acquisition of Promopath was
determined to be impaired as of June 30, 2008 in that future undiscounted cash
flows relating to this asset were insufficient to recover its carrying value.
Accordingly, in the second quarter of 2008, we recorded an impairment charge of
approximately $1.4 million representing the net book value of the Promopath
customer relationship intangible asset at June 30, 2008.
In the
fourth quarter of 2008, we consolidated the inventory in our Fort Lauderdale,
Florida warehouse into our Farmers Branch, Texas facility. Certain of our
administrative and sales staff of our Security Segment’s electronic surveillance
products division remain in the Fort Lauderdale, Florida building which we
listed for sale with a real estate broker. We performed an updated market
evaluation of this property, listing the facility for sale at a price of
$1,950,000. We recorded an impairment charge of $275,000 related to this
property at December 31, 2008, and an additional impairment charge of $60,000 at
June 30, 2009 to write-down the property to our estimate of net realizable value
based on updated market valuations of the property. On October 5, 2009, the
Company entered into an agreement of sale to sell the Fort Lauderdale, Florida
building for cash consideration of $1.6 million, recording an additional
impairment charge of $150,000 at September 30, 2009 to write-down the property
to the sale price.
On December 4, 2009, we sold the Fort Lauderdale, Florida building
recording a loss of $108,000 in the fourth quarter of 2009 after closing costs
and broker commissions.
F-20
The changes in the carrying amount of
goodwill for the years ended December 31, 2009, 2008 and 2007 are as follows (in
thousands):
|
Security
Products
Reporting
Unit
|
Digital Media
Marketing
Segment
|
Security
Monitoring
Services
Reporting
Unit
|
Total
|
|||||||||||||
|
Balance
at December 31, 2006
|
$ | 1,623 | $ | - | $ | - | $ | 1,623 | ||||||||
|
Acquisition
of Linkstar
|
- | 6,887 | - | 6,887 | ||||||||||||
|
Impairment
loss
|
(280 | ) | - | - | (280 | ) | ||||||||||
|
Balance
at December 31, 2007
|
1,343 | 6,887 | - |
8,230
|
||||||||||||
|
Impairment
loss
|
(1,343 | ) | - | - | (1,343 | ) | ||||||||||
|
Balance
at December 31, 2008
|
- | 6,887 | - | 6,887 | ||||||||||||
|
Acquisition
of CSSS, Inc.
|
- | - | 1,982 | 1,982 | ||||||||||||
|
Impairment
loss
|
- | (1,000 | ) | - | (1,000 | ) | ||||||||||
|
Balance
at December 31, 2009
|
$ | - | $ | 5,887 | $ | 1,982 | $ | 7,869 | ||||||||
6. Allowance
for Doubtful Accounts
The
changes in the allowance for doubtful accounts are summarized as
follows:
|
Year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Balance
at beginning of year
|
$ | 760 | $ | 791 | $ | 690 | ||||||
|
Additions
(charged to expense)
|
571 | 295 | 354 | |||||||||
|
Adjustments
|
(3 | ) | (3 | ) | (4 | ) | ||||||
|
Deductions
|
(543 | ) | (323 | ) | (249 | ) | ||||||
|
Balance
at end of year
|
$ | 785 | $ | 760 | $ | 791 | ||||||
7. Inventories
Inventories,
net of reserves for obsolete inventory, consist of the following:
|
As of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Finished
goods
|
$ | 4,269 | $ | 6,295 | ||||
|
Work
in process
|
77 | 89 | ||||||
|
Raw
materials and supplies
|
886 | 890 | ||||||
|
Fuel,
merchandise inventory and car wash supplies
|
- | 469 | ||||||
| $ | 5,232 | $ | 7,743 | |||||
F-21
The
changes in the reserve for obsolete inventory are summarized as
follows:
|
Year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Balance
at beginning of year
|
$ | 1,463 | $ | 1,027 | $ | 833 | ||||||
|
Additions
(charged to expense)
|
163 | 801 | 338 | |||||||||
|
Deductions
|
(247 | ) | (365 | ) | (144 | ) | ||||||
|
Balance
at end of year
|
$ | 1,379 | $ | 1,463 | $ | 1,027 | ||||||
8. Other
Intangible Assets
|
December 31, 2009
|
December 31, 2008
|
|||||||||||||||
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
|||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Amortized
intangible assets:
|
||||||||||||||||
|
Non-compete
agreements
|
$ | 515 | $ | 231 | $ | 465 | $ | 164 | ||||||||
|
Customer
and Product lists
|
2,572 | 1,156 | 1,774 | 920 | ||||||||||||
|
Software
|
883 | 356 | 883 | 208 | ||||||||||||
|
Patent
Costs and Trademarks
|
106 | 16 | 16 | - | ||||||||||||
|
Deferred
financing costs
|
123 | 122 | 231 | 180 | ||||||||||||
|
Total
amortized intangible assets
|
4,199 | 1,881 | 3,369 | 1,472 | ||||||||||||
|
Non-Amortized
intangible assets:
|
||||||||||||||||
|
Trademarks
- Security Segment
|
984 | - | 1,074 | - | ||||||||||||
|
Trademarks
- Digital Media Marketing Segment
|
478 | - | 478 | - | ||||||||||||
|
Total
Non-Amortized intangible assets
|
1,462 | - | 1,552 | - | ||||||||||||
|
Total
other intangible assets
|
$ | 5,661 | $ | 1,881 | $ | 4,921 | $ | 1,472 | ||||||||
The
following sets forth the estimated amortization expense on intangible assets for
the fiscal years ending December 31 (in thousands):
|
2010
|
$ | 528 | ||
|
2011
|
$ | 441 | ||
|
2012
|
$ | 339 | ||
|
2013
|
$ | 270 | ||
|
2014
|
$ | 119 |
Amortization expense of other
intangible assets was approximately $461,000, $501,000 and $400,000 for the
years ended December 31, 2009, 2008 and 2007, respectively. The weighted average
useful life of amortizing intangible assets was 4.82 years at December
31, 2009.
F-22
9. Long-Term
Debt, Notes Payable, and Capital Lease Obligations
Long-term
debt notes and capital lease obligations, including debt related to discontinued
operations totaling $2,123,000 consist of the following:
|
As of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Notes
payable to Chase, interest rate of prime plus 0.75% (4.0%
at December 31, 2009) payable in monthly principle
payments totaling $21,811 plus interest maturing from April
2011 to May 2011, collateralized by real property and equipment
of certain of the Colonial Car Wash locations.
|
$ | 1,080 | $ | 1,906 | ||||
|
Note
payable to Chase, interest rate of prime plus 0.25% (3.50% at December 31,
2008), was due in monthly installments of $46,811 including interest
collateralized by real property and equipment of the Genie Car Wash
locations. Paid in full on November 30, 2009 upon sale of the three Genie
Car Wash locations.
|
- | 2,586 | ||||||
|
Note
payable to Western National Bank, interest rate of 3.75%, (the interest
rate is established every 5 years, based on prime rate plus
0.5%), due in monthly installments of $16,921 including
interest, through October 2014, collateralized by real property
and equipment in Lubbock, Texas.
|
862 | 1,056 | ||||||
|
Note
payable to Chase, interest rate of prime plus 0.95% (4.20% at December 31,
2009) due in monthly fixed principle payments of $4,847 plus interest
through May 2012, collateralized by real property and equipment of Mace
Security Products, Inc. in Farmers Branch, Texas.
|
611 | 669 | ||||||
|
Note
Payable to Chase, interest rate of prime plus 0.25% (3.5% at December 31,
2009) due in monthly installment of $3,132, including interest (adjusted
annually) through February, 2013, collateralized by real property and
equipment of certain of the Colonial Car Wash locations.
|
181 | 211 | ||||||
|
Various
capital lease obligations related to equipment at CSSS, Inc. at various
interest rates from 9.06% to 13.27%, due in monthly installments totaling
$5,527 maturing from April, 2010 through February, 2014, collateralized by
equipment.
|
166 | - | ||||||
|
Note
payable to Lyon Financial Services, interest rate of 7.99% due in monthly
installments of $510 including interest, through September 2013,
collateralized by a vehicle.
|
20 | 24 | ||||||
| 2,920 | 6,452 | |||||||
|
Less:
current portion
|
2,232 | 4,146 | ||||||
| $ | 688 | $ | 2,306 | |||||
Of the
eight car washes owned or leased by us at December 31, 2009, five properties and
related equipment with a net book value totaling $4.9 million are secured by
first mortgage loans totaling $2.1 million.
At
December 31, 2009, we had borrowings, including borrowings related to
discontinued operations, of approximately $2.9 million, substantially all of
which are secured by mortgages against certain of our real
property. Of such borrowings, approximately $2.2 million, including
$2.1 million of long-term debt included in liabilities related to assets held
for sale, is reported as current as it is due or expected to be repaid in less
than twelve months from December 31, 2009.
F-23
We have
two letters of credit outstanding at December 31, 2009, totaling $570,364 as
collateral relating to workers’ compensation insurance policies. We maintain a
$500,000 revolving credit facility to provide financing for additional
electronic surveillance product inventory purchases. There were no borrowings
outstanding under the revolving credit facility at December 31,
2009.
Maturities
of long-term debt and capital lease obligations including debt related to
discontinued operations, are as follows: 2010 - $568,000, 2011 - $1.1 million,
2012 - $712,000, 2013 - $271,000, and 2014 - $161,000.
10. Accrued
Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities consist of the following:
|
As of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Accrued
compensation
|
$ | 302 | $ | 534 | ||||
|
Accrued
acquisition consideration
|
766 | - | ||||||
|
Other
|
1,960 | 2,115 | ||||||
| $ | 3,028 | $ | 2,649 | |||||
11. Interest
Expense, net
Interest
expense, net of interest income consists of the following (in
thousands):
|
Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Interest
expense
|
$ | (51 | ) | $ | (48 | ) | $ | (207 | ) | |||
|
Interest
income
|
44 | 308 | 454 | |||||||||
| $ | (7 | ) | $ | 260 | $ | 247 | ||||||
F-24
12. Other
(Loss) Income
Other
(loss) income consists of the following (in thousands):
|
Year Ended December 31
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Investment
(loss) income
|
$ | - | $ | (2,338 | ) | $ | 752 | |||||
|
Deposit
recovery
|
- | - | 150 | |||||||||
|
Rental
income
|
- | 76 | - | |||||||||
|
Other
|
(108 | ) | 45 | 42 | ||||||||
| $ | (108 | ) | $ | (2,217 | ) | $ | 944 | |||||
13. Stock
Option Plans
During
September 1993, the Company adopted the 1993 Stock Option Plan (the “1993
Plan”). The 1993 Plan provides for the issuance of up to 630,000 shares of
common stock upon exercise of the options. The Company has reserved 630,000
shares of common stock to satisfy the requirements of the 1993 Plan. The options
are non-qualified stock options and are not transferable by the
recipient. The 1993 Plan is administered by the Compensation
Committee (the “Committee”) of the Board of Directors, which may grant options
to employees, directors and consultants to the Company. The term of each option
may not exceed fifteen years from the date of grant. Options are exercisable
over either a 10 or 15 year period and exercise prices are not less than the
market value of the shares on the date of grant.
In
December 1999, the Company’s stockholders approved the 1999 Stock Option Plan
(the “1999 Plan”) providing for the granting of incentive stock options or
nonqualified stock options to directors, officers, or employees of the
Company. Under the 1999 Plan, 15,000,000 shares of common stock are
reserved for issuance. Incentive stock options and nonqualified
options have terms which are determined by the Committee with exercise prices
not less than the market value of the shares on the date of
grant. The options generally expire ten years from the date of grant
and are exercisable based upon graduated vesting schedules as determined by the
Committee.
As of
December 31, 2009, 3,205,208 options have been granted under the 1993 and 1999
Plans including 3,194,708 nonqualified stock options.
F-25
Activity
with respect to these plans is as follows:
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Number
|
Weighted
Average
Exercise
Price
|
Number
|
Weighted
Average
Exercise
Price
|
Number
|
Weighted
Average
Exercise
Price
|
|||||||||||||||||||
|
Options
outstanding beginning of period
|
3,362,999 | $ | 3.22 | 4,440,015 | $ | 3.51 | 3,995,015 | $ | 3.63 | |||||||||||||||
|
Options
granted
|
433,000 | $ | 0.84 | 1,055,500 | $ | 1.50 | 555,000 | $ | 2.45 | |||||||||||||||
|
Options
exercised
|
- | $ | - | - | $ | - | (13,400 | ) | $ | 2.10 | ||||||||||||||
|
Options
forfeited
|
(183,835 | ) | $ | 1.71 | (2,132,516 | ) | $ | 2.37 | (96,600 | ) | $ | 2.63 | ||||||||||||
|
Options
expired
|
(406,956 | ) | $ | 9.52 | - | $ | - | - | $ | - | ||||||||||||||
|
Options
outstanding end of period
|
3,205,208 | $ | 2.18 | 3,362,999 | $ | 3.18 | 4,440,015 | $ | 3.51 | |||||||||||||||
|
Options
exercisable
|
2,795,209 | 2,962,829 | 3,767,013 | |||||||||||||||||||||
|
Shares
available for granting of options
|
3,814,954 | 3,657,163 | 2,637,149 | |||||||||||||||||||||
Stock
options outstanding at December 31, 2009 under both plans are summarized as
follows:
|
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||||||
|
Range of
Exercise Prices
|
Number
Outstanding
|
Weighted Avg.
Remaining
Contractual Life
|
Weighted
Avg. Exercise
Price
|
Number
Exercisable
|
Weighted Avg.
Remaining
Contractual Life
|
Weighted
Avg. Exercise
Price
|
||||||||||||||||||
|
$0.68-$0.97
|
511,000 | 2.9 | $ | 0.91 | 161,000 | 9.3 | $ | 0.83 | ||||||||||||||||
|
$1.05-$1.54
|
984,292 | 4.8 | $ | 1.39 | 930,959 | 5.1 | $ | 1.39 | ||||||||||||||||
|
$1.62-$2.42
|
719,230 | 5.3 | $ | 2.16 | 717,564 | 5.3 | $ | 2.16 | ||||||||||||||||
|
$2.45-$3.26
|
638,790 | 5.2 | $ | 2.76 | 633,790 | 5.2 | $ | 2.76 | ||||||||||||||||
|
$4.21-$5.59
|
317,834 | 4.8 | $ | 5.07 | 317,834 | 4.8 | $ | 5.07 | ||||||||||||||||
|
$7.63-$11.00
|
33,950 | 0.1 | $ | 8.63 | 33,950 | 0.1 | $ | 8.63 | ||||||||||||||||
|
$17.75-$22.00
|
112 | 0.1 | $ | 17.75 | 112 | 0.1 | $ | 17.75 | ||||||||||||||||
The
Company received cash from options exercised during the fiscal year 2007 of
$28,100. The impact of these cash receipts is included in financing activities
in the accompanying consolidated statements of cash flows.
During
2009, the Company granted a total of 433,000 stock options at a weighted average
fair value of $0.84. Also, during the year ended December 31, 2009, a total of
239,300 shares vested at a weighted average fair value of $1.53. As of December
31, 2009, there are a total of 410,000 options that remain non-vested at a
weighted average fair value of $1.03.
In 1999,
the Company issued warrants to purchase a total of 1,328,250 shares of the
Company’s common stock at a weighted average exercise price of $4.22 per share
(shares and exercise price are adjusted for one-for-two reverse stock split) in
connection with the purchase of certain businesses and to a director. Through
December 31, 2009, 281,818 warrants to purchase common stock have been exercised
and the remainder, or 1,046,432 warrants to purchase common stock have
expired.
In 2004,
the Company issued warrants to purchase a total of 383,000 shares of the
Company’s common stock at a weighted average price of $6.65 per share which
expired in 2009.
F-26
During
the exercise period, the Company will reserve a sufficient number of shares of
its common stock to provide for the exercise of the rights represented by option
holders.
14. Income
Taxes
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities at December 31, 2009 and 2008 are
as follows:
|
As of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
(In
thousands)
|
||||||||
|
Deferred
tax assets:
|
||||||||
|
Allowance
for doubtful accounts
|
$ | 447 | $ | 285 | ||||
|
Inventories
|
436 | 450 | ||||||
|
Net
operating loss carryforwards
|
14,249 | 11,853 | ||||||
|
Deferred
revenue
|
7 | 12 | ||||||
|
Car
damage reserve
|
7 | 109 | ||||||
|
Accrued
workers compensation costs
|
- | 40 | ||||||
|
Federal
tax credit
|
53 | 152 | ||||||
|
Vesting
stock options
|
1,324 | 1,262 | ||||||
|
Other,
net
|
111 | 225 | ||||||
|
Total
deferred tax assets
|
16,634 | 14,388 | ||||||
|
Valuation
allowance for deferred tax assets
|
(18,421 | ) | (15,032 | ) | ||||
|
Deferred
tax (liability) assets after valuation allowance
|
(1,787 | ) | (644 | ) | ||||
|
Deferred
tax liabilities:
|
||||||||
|
Property,
equipment and intangibles
|
1,787 | 644 | ||||||
|
Net
deferred tax assets
|
$ | - | $ | - | ||||
At
December 31, 2009, the Company had U.S. federal net operating loss carryforwards
(“NOLs”) of approximately $35.6 million. The U.S. federal net operating loss
carryforwards expire as follows:
|
Year of Expiration
|
Amount
|
|||
|
(In
thousands)
|
||||
|
2018
|
$ | 951 | ||
|
2019
|
4,507 | |||
|
2020
|
3,241 | |||
|
2021
|
1,583 | |||
|
2022
|
2,822 | |||
|
2023
|
4,411 | |||
|
2024
|
5 | |||
|
2025
|
1,250 | |||
|
2026
|
6,897 | |||
|
2028
|
2,400 | |||
|
2029
|
7,545 | |||
| $ | 35,612 | |||
F-27
Realization
of the future tax benefits related to the deferred tax assets is dependent upon
many factors, including the Company’s ability to generate taxable income in
future years. The Company performed a detailed review of the considerations
influencing our ability to realize the future benefit of the NOLs, including the
extent of recently used NOLs, the turnaround of future deductible temporary
differences, the duration of the NOL carryforward period, and the Company’s
future projection of taxable income. Utilization of our net operating loss and
tax credit carryforwards may be subject to annual limitations due to the
ownership change limitations provided by the Internal Revenue Code and similar
state provisions. Such an annual limitation could result in the expiration of
the net operating loss or tax credits before utilization. The Company increased
its valuation allowance against deferred tax assets by $3.4 million in 2009,
$4.3 million in 2008 and $3.9 million in 2007 with a total valuation allowance
of $18.4 million at December 31, 2009 representing the amount of its deferred
income tax assets in excess of the Company’s deferred income tax liabilities.
The valuation allowance was recorded because management was unable to conclude
that realization of the net deferred income tax asset was more likely than not.
This determination was a result of the Company’s continued losses in its fiscal
year ended December 31, 2009, the uncertainty of the timing of the Company’s
transition from the Car Wash business, and the ultimate extent of growth in the
Company’s Digital Media Marketing and Security Segments.
The
Company follows the appropriate accounting pronouncements which prescribe a
model for the recognition and measurement of a tax position taken or expected to
be taken in a tax return, and provides guidance on recognition, classification,
interest and penalties, disclosure and transition. At December 31, 2009, the
Company did not have any significant unrecognized tax benefits. The total amount
of interest and penalties recognized in the statements of operations for each of
the years in the three-year period ended December 31, 2009 was insignificant and
when incurred is reported as interest expense.
The
components of income tax expense (benefit) are:
|
Year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Current
(principally state taxes)
|
$ | - | $ | 100 | $ | 98 | ||||||
|
Deferred
|
- | - | - | |||||||||
|
Total
income tax expense (benefit)
|
$ | - | $ | 100 | $ | 98 | ||||||
The
significant components of deferred income tax expense (benefit) attributed to
the loss for the years ended December 31, 2009, 2008, and 2007 are as
follows:
|
Year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Deferred
tax (benefit) expense
|
$ | (993 | ) | $ | (3,948 | ) | $ | (1,710 | ) | |||
|
Loss
carryforward
|
(2,396 | ) | (401 | ) | (2,223 | ) | ||||||
|
Valuation
allowance for deferred tax assets
|
3,389 | 4,349 | 3,933 | |||||||||
| $ | - | $ | - | $ | - | |||||||
F-28
A
reconciliation of income tax benefit computed at the U.S. federal statutory tax
rates to total income tax expense is as follows:
|
Year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Tax
at U.S. federal statutory rate
|
$ | (3,833 | ) | $ | (3,693 | ) | $ | (3,728 | ) | |||
|
State
taxes, net of federal benefit
|
26 | (192 | ) | (107 | ) | |||||||
|
Nondeductible
costs and other acquisition accounting
adjustments
|
418 | (364 | ) | - | ||||||||
|
Valuation
allowance for deferred tax assets
|
3,389 | 4,349 | 3,933 | |||||||||
|
Total
income tax expense (benefit)
|
$ | - | $ | 100 | $ | 98 | ||||||
15. Loss
Per Share
The
following table sets forth the computation of basic and diluted loss per share
(in thousands except loss per share):
|
Year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Numerator
(In Thousands):
|
||||||||||||
|
Net
loss
|
$ | (10,951 | ) | $ | (10,652 | ) | $ | (6,585 | ) | |||
|
Denominator:
|
||||||||||||
|
Denominator
for basic loss per share - weighted average shares
|
16,202,254 | 16,464,760 | 15,810,705 | |||||||||
|
Dilutive
effect of options and warrants
|
- | - | - | |||||||||
|
Denominator
for diluted loss per share - weighted average shares
|
16,202,254 | 16,464,760 | 15,810,705 | |||||||||
|
Basic
loss per share:
|
||||||||||||
|
Net
loss
|
$ | (0.68 | ) | $ | (0.65 | ) | $ | (0.42 | ) | |||
|
Diluted
loss per share:
|
||||||||||||
|
Net
loss
|
$ | (0.68 | ) | $ | (0.65 | ) | $ | (0.42 | ) | |||
The
dilutive effect of options and warrants of 9,811, 127,397, and 375,292 at
December 31, 2009, 2008, and 2007, respectively, have not been included in the
calculation of diluted earnings per share because they are
anti-dilutive.
16. Concentration
of Credit Risk
The
Company maintains its cash accounts in high quality financial
institutions. At times, these balances may exceed insured
amounts.
F-29
17. Commitments
and Contingencies
The
Company is obligated under various operating leases, primarily for certain
equipment, vehicles, and real estate. Certain of these leases contain
purchase options, renewal provisions, and contingent rentals for the
proportionate share of taxes, utilities, insurance, and annual cost of living
increases. Future minimum lease payments under operating leases with
initial or remaining non-cancellable lease terms in excess of one year as of
December 31, 2009 are as follows: 2010 - $1.0 million; 2011 - $898,000; 2012 -
$817,000; 2013 - $414,000; 2014 - $291,000 and thereafter -
$364,000. Rental expense under these leases, including leases
reported in discontinued operations was $1.1 million, $1.0 million, and $1.0
million for the year ended December 31, 2009, 2008 and 2007,
respectively.
The
Company subleased a portion of the building space at its previous California
leased office space related to its Digital Media Marketing Segment under a
cancelable lease. During the year ending December 31, 2009 and 2008,
revenues under this lease were approximately $34,000 and $76,000,
respectively. These amounts are recorded in SG&A expense as a
reduction of rental expense in the accompanying consolidated statements of
operations.
As a
result of its continued cost saving efforts, the Company decided to terminate a
leased office in Fort Lauderdale, Florida during the second quarter
2008. The lease termination resulted in a one time fee of $39,000,
which was paid and included in SG&A expense in 2008.
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. See
also the discussion below concerning the environmental remediation which
occurred at the Bennington, Vermont location in 2008.
Certain
of the Company’s executive officers have entered into employee stock option
agreements pursuant to which options issued to them shall immediately vest upon
a change in control of the Company.
The Board
of Directors of the Company terminated Mr. Paolino as the Chief Executive
Officer of the Company on May 20, 2008. On June 9, 2008, the Company
received a Demand for Arbitration from Mr. Paolino (“Arbitration
Demand”). The Arbitration Demand has been filed with the American
Arbitration Association in Philadelphia, Pennsylvania (“Arbitration
Proceeding”). The primary allegations of the Arbitration Demand are:
(i) Mr. Paolino alleges that he was terminated by the Company wrongfully and is
owed a severance payment of $3,918,120 due to the termination; (ii) Mr. Paolino
is claiming that the Company owes him $322,606 because the Company did not issue
him a sufficient number of stock options in August 2007, under provisions of the
Employment Contract between Mr. Paolino and the Company dated August 21, 2006;
(iii) Mr. Paolino is claiming damages against the Company in excess of
$6,000,000, allegedly caused by the Company defaming Mr. Paolino’s professional
reputation and character in the Current Report on Form 8-K dated May 20, 2008
filed by the Company and in the press release the Company issued on May 21,
2008 relating to Mr. Paolino’s termination; and (iv) Mr.
Paolino is also seeking punitive damages, attorney’s fees and costs in an
unspecified amount. The Company has disputed the allegations made by Mr. Paolino
and is defending itself in the Arbitration Proceeding. The Company has also
filed a counterclaim in the Arbitration Proceeding demanding damages from Mr.
Paolino of $1,000,000. Testimony in the arbitration has been
completed, the parties have prepared and filed briefs of their positions and a
ruling is expected on or about May 31, 2010, based on the current scheduling
order. It is not possible to predict the outcome of the Arbitration Proceeding.
No accruals have been made with respect to Mr. Paolino’s claims.
On
March 30, 2009, Mr. Paolino filed a Complaint (“Indemnity Complaint”) in the
Court of Chancery for the State of Delaware seeking to compel the Company to
indemnify and advance to Mr. Paolino his costs of defending the Company’s
$1,000,000 counterclaim filed in the Arbitration Proceeding (“Counterclaim”). In
an Opinion issued December 8, 2009, the Court in the Indemnity Action ordered
the Company to advance the costs Mr. Paolino incurred in defending the
Counterclaim. The Company paid Mr. Paolino $250,000 to settle the
Company’s advancement obligation. Mr. Paolino’s initial demand was in
the amount of $688,758. As part of the settlement, Mr. Paolino has
agreed to repay any amount of the advancement that exceeds the amount Mr.
Paolino is awarded as indemnification for expenses in the Indemnity
Action. The Court in the Indemnification Action has stayed
proceedings on the indemnification portion of the Indemnity Action until after
the Arbitration Proceeding.
F-30
On June
25, 2008, Mr. Paolino filed a claim with the United States Department of Labor
claiming that his termination as Chief Executive Officer of the Company was an
“unlawful discharge” in violation of 18 U.S.C. Sec. 1514A, a provision of the
Sarbanes-Oxley Act of 2002 (the “DOL Complaint”). Mr. Paolino has alleged that
he was terminated in retaliation for demanding that certain risk factors be set
forth in the Company’s Form 10-Q for the quarter ended March 31, 2008, filed by
the Company on May 15, 2008. Even though the risk factors demanded by Mr.
Paolino were set forth in the Company’s Form 10-Q for the quarter ended March
31, 2008, Mr. Paolino in the DOL Complaint asserts that the demand was a
“protected activity” under 18 U.S.C. Sec. 1514A, which protects Mr. Paolino
against a “retaliatory termination.” In the DOL Complaint, Mr.
Paolino demands the same damages he requested in the Arbitration Demand and
additionally requests reinstatement as Chief Executive Officer with back pay
from the date of termination. On September 23, 2008 the Secretary of
Labor, acting through the Regional Administrator for the Occupational Safety and
Health Administration, Region III dismissed the DOL Complaint and issued
findings (the “Findings”) that there was no reasonable cause to believe that the
Company violated 18 U.S.C. Sec. 1514A of the Sarbanes-Oxley Act of
2002. The Findings further stated that: (i) the investigation
revealed that Mr. Paolino was discharged for non-retaliatory reasons that were
unrelated to his alleged protected activity; (ii) Mr. Paolino was discharged
because of his failure to comply with a Board directive to reduce costs; (iii)
the Board terminated Mr. Paolino’s employment because of his failure to follow
its directions and for his failure to reduce corporate overhead and expenses;
and (iv) a preponderance of the evidence indicates that the alleged protected
activity was not a contributing factor in the adverse action taken against Mr.
Paolino. Mr. Paolino has filed objections to the
Findings. As a result of the objections, an Administrative Law Judge
set a date for a “de novo” hearing on Mr. Paolino’s claims. A “de
novo” hearing is a proceeding where evidence is presented to the Administrative
Law Judge and the Administrative Law Judge rules on the claims based on the
evidence presented at the hearing. Upon the motion of Mr. Paolino,
the de novo hearing and the claims made in the DOL Complaint have been stayed
pending the conclusion of the Arbitration Proceeding. The Company
will defend itself against the allegations made in the DOL Complaint, which the
Company believes are without merit. Although the Company is confident that it
will prevail, it is not possible to predict the outcome of the DOL Complaint or
when the matter will reach a conclusion.
As
previously disclosed, on May 8, 2008, Car Care, Inc. (“Car Care”), a
defunct subsidiary of the Company that owned four of the Company’s Northeast
region car washes, the Company’s former Northeast region car wash
manager and four former general managers of four Northeast region car washes,
were each indicted with and pled guilty to one felony count of conspiracy to
defraud the government, harboring illegal aliens and identity
theft. To resolve the indictment, Car Care entered into a written
Guilty Plea Agreement on June 23, 2008 with the government, to plead guilty to
the one count of conspiracy charged in the indictment. Under this
agreement, on June 27, 2008, Car Care paid a criminal fine of $100,000 and
forfeited $500,000 in proceeds from the sale of the four car washes. A charge of
$600,000 was recorded as a component of income from discontinued operations as
of March 31, 2008. The Company was not named in the indictment and, according to
the plea agreement, will not be charged. The Company fully cooperated
with the government in its investigation of this matter.
During
January 2008, the Environmental Protection Agency (the “EPA”) conducted a site
investigation at the Company’s Bennington, Vermont location and the building
within which the facility is located. The Company leases 33,476
square feet of the building from Vermont Mill Properties, Inc. (“Vermont
Mill”). The site investigation was focused on whether hazardous
substances were being improperly stored. After the site
investigation, the EPA notified the Company and the building owner that
remediation of certain hazardous wastes were required. The EPA, the
Company and the building owner entered into an Administrative Consent Order
under which the hazardous materials and waste were remediated. All remediation
required by the Administrative Consent Order was completed within the time
allowed by the EPA and a final report regarding the remediation was submitted to
the EPA in October 2008, as required by the Administrative Consent
Order. On September 29, 2009 the EPA accepted the final report. On
February 23, 2010 the EPA issued the Company an invoice for $240,096
representing the total of the EPA's oversight costs that the Company and Vermont
Mill is obligated to pay under the Administrative Consent Order. The
Company and Vermont Mill are in discussions to determine what portion of the
invoice each will pay. The Company is estimating that it will pay
approximately $190,000. A total estimated cost of approximately $786,000
relating to the remediation, which includes disposal of the waste materials, as
well as expenses incurred to engage environmental engineers and legal counsel
and reimbursement of the EPA’s costs, has been recorded through December 31,
2009. This amount represents management’s best estimate of probable loss.
Approximately $596,000 has been paid to date, leaving an accrual balance of
$190,000 at December 31, 2009 for the estimated share of the Company's EPA
costs.
F-31
The
United States Attorney for the District of Vermont (“U.S. Attorney”) is
conducting an investigation of the Company relating to possible violations of
the Resource Conservation and Recovery Act (“RCRA”) at the Company’s Bennington,
Vermont location. The Company believes the investigation is focused
on the Company allegedly not disposing of hazardous materials and waste at the
Vermont location, as required by various environmental laws. In connection with
the investigation, a search of the Company’s Bennington, Vermont
location and the building in which the facility is located occurred
during February 2008, and on May 2, 2008, the U.S. Attorney issued a
grand jury subpoena to the Company. The subpoena required the Company
to provide the U.S. Attorney documents related to the storage, disposal and
transportation of materials at the Bennington, Vermont location. The
Company has supplied the documents and fully cooperated with the U.S. Attorney’s
investigation and will continue to do so. During the fourth quarter
of 2009, the U.S. Attorney interviewed a Company employee before a grand
jury. The Company believes that the U.S. Attorney is actively
pursuing an investigation of possible criminal violations. The Company has made
no provision for any future costs associated with the
investigation.
On
September 19, 2008, the Company received a proposed assessment from a sales tax
audit in the State of Florida for the audit period of August 2004 through July
2007. In the proposed assessment, audit deficiency, including interest, totaled
$600,307. Based on documentation provided to the State, the Company settled this
matter with a payment of $45,000 in March 2009.
The
Company is a party to various other legal proceedings related to its normal
business activities. In the opinion of the Company’s management, none
of these proceedings are material in relation to the Company’s results of
operations, liquidity, cash flows, or financial condition.
18. Asset
Impairment Charges
Management
periodically reviews 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. Assets classified as held for sale are
measured at the lower of carrying value or fair value, net of costs to
sell.
Continuing
Operations
In June
2008, management made a decision to discontinue marketing efforts by its
subsidiary, Promopath, the on-line marketing division of Linkstar, to
third-party customers on a non-exclusive CPA basis, both brokered and through
promotional sites. Management’s decision was the result of business environment
changes in which the ability to maintain non-exclusive third-party relationships
at an adequate profit margin became increasingly difficult. Promopath continued
to market and acquire customers for the Company’s e-commerce operation,
Linkstar. As a result of this decision, the value assigned to customer
relationships at the time of the acquisition of Promopath was determined to be
impaired as of June 30, 2008 in that future undiscounted cash flows relating to
this asset were insufficient to recover its carrying value. Accordingly, in the
second quarter of 2008, we recorded an impairment charge of approximately $1.4
million representing the net book value of the Promopath customer relationship
intangible asset at June 30, 2008.
We
conducted our annual assessment of goodwill for impairment for our Digital Media
Marketing Segment as of June 30, 2009. We updated our forecasted cash flows of
this reporting unit during the second quarter. This update considered current
economic conditions and trends, estimated future operating results for the
launch of new products as well as non-product revenue growth, and anticipated
future economic and regulatory conditions. Based on the results of our
assessment of goodwill impairment, the net book value of our Digital Media
Marketing Segment reporting unit exceeded its fair value. With the noted
potential impairment, we performed the second step of the impairment test to
determine the implied fair value of goodwill. The resulting implied goodwill was
$5.9 million which was less than the recorded value of goodwill of $6.9 million;
accordingly, we recorded an impairment to write down goodwill of this reporting
unit by $1.0 million. Additionally, due to continuing deterioration in our Mace
Security Products, Inc. reporting unit, we performed certain impairment testing
of our remaining intangible assets, specifically, the value assigned to customer
lists, product lists, and trademarks as of June 30, 2009 and December 31, 2009.
We recorded an additional impairment charge to trademarks of approximately
$80,000 and an impairment charge of $142,000 to customer lists, both principally
related to our consumer direct electronic surveillance operations as of June 30,
2009 and an impairment charge of $30,000 for trademarks related to our high end
digital and machine vision cameras and professional imaging component operations
at December 31, 2009.
In the
fourth quarter of 2008, we consolidated the inventory in our Fort Lauderdale,
Florida warehouse into our Farmers Branch, Texas facility. Certain of our
administrative and sales staff of our Security Segment’s electronic surveillance
products division remain in the Fort Lauderdale, Florida building which we
listed for sale with a real estate broker. We performed an updated market
evaluation of this property, listing the facility for sale at a price of
$1,950,000. We recorded an impairment charge of $275,000 related to this
property at December 31, 2008, and an additional impairment charge of $60,000 at
June 30, 2009 to write-down the property to our estimate of net realizable value
based on updated market valuations of the property. On October 5, 2009, the
Company entered into an agreement of sale to sell the Fort Lauderdale, Florida
building for cash consideration of $1.6 million, recording an additional
impairment charge of $150,000 at September 30, 2009 to write-down the property
to the sale price.
On December 4, 2009, we sold the Fort Lauderdale, Florida building,
recording a loss of $108,000 in the fourth quarter of 2009 after closing costs
and broker commissions.
F-32
Discontinued
Operations
During
the quarter ended December 31, 2007, we wrote down assets related to a full
service car wash in San Antonio, Texas by approximately
$180,000. During the quarter ended June 30, 2008, we wrote down
assets related to two full service car washes in Arlington, Texas by
approximately $1.2 million. We also closed the two remaining car wash locations
in San Antonio, Texas in the quarter ended September 30, 2008. In connection
with the closing of these two facilities, we wrote down the assets of these
sites by approximately $310,000 to our estimate of net realizable value based on
our plan to sell the two facilities for real estate value. During the
quarter ended December 31, 2008, we wrote down the assets of two of our
Arlington, Texas area car wash sites by approximately $1.0 million and we closed
a full service car wash location in Lubbock, Texas and wrote down the assets of
this site by approximately $670,000 to an updated appraisal value based on our
plan to sell this facility for real estate value. We also wrote down an
additional Lubbock, Texas location by approximately $250,000. Additionally, as
noted in Note 3. Business
Acquisitions and Divestitures, in the accompanying financial statements,
the agreements of sale related to the three car washes the Company owned in
Austin, Texas were amended to modify the sales price to $8.0 million. This
amended sale price, less costs to sell, was estimated to result in a loss upon
disposal of approximately $175,000. Accordingly, an impairment loss of $175,000
was recorded as of September 30, 2009 and included in the results from
discounted operations in the accompanying consolidated statement of operations.
The sale of the Austin, Texas car washes was completed on November 30, 2009.
Lastly, during the quarter ended December 31, 2009, we wrote down three
Arlington, Texas car wash sites for a total of $1.2 million including a $200,000
write down of a car wash site that the Company entered into an agreement of sale
on January 27, 2010 for a sale price below its net book value; and a
$37,000 write down related to a Lubbock, Texas car wash sold on March
10, 2010. We have determined that due to further reductions in car wash volumes
at these sites resulting from increased competition and a deterioration in
demographics in the immediate geographic areas of these sites, current economic
pressures, along with current data utilized to estimate the fair value of these
car wash facilities, future expected cash flows would not be sufficient to
recover their carrying values.
19. Related
Party Transactions
The
Company’s Security Segment leases manufacturing and office space under a
five-year lease with Vermont Mill. Vermont Mill is controlled by Jon E.
Goodrich, a former director and current employee of the Company. In November
2004, the Company exercised an option to continue the lease through November
2009 at a rate of $10,576 per month. The Company amended the lease in 2008 to
occupy additional space for an additional $200 per month. The Company also
leased from November 2008 to May 2009, on a month-to-month basis, approximately
3,000 square feet of temporary inventory storage space at a monthly cost of
$1,200. In September 2009, the Company and Vermont Mill extended the term of the
lease to November 14, 2010 at a monthly rate of $10,776 per month and modified
the square footage rented to 33,476 square feet. Rent expense under this lease
was $135,000, $130,000 and $127,000 for the years ending December 31, 2009, 2008
and 2007, respectively. Mace has the option to cancel the lease with proper
notice and a payment equal to six months of the then current rent.
20. Segment
Reporting
The
Company currently operates in two segments: the Security Segment and the Digital
Media Marketing Segment.
The
Company evaluates performance and allocates resources based on operating income
of each reportable segment rather than at the operating unit
level. The Company defines operating income as revenues less cost of
revenues, selling, general and administrative expense, and depreciation and
amortization expense. The accounting policies of the reportable
segments are the same as those described in the Summary of Significant Accounting
Policies (see Note 2). There is no intercompany profit or loss
recognized on intersegment sales.
F-33
The
Company’s reportable segments are business units that offer different services
and products. The reportable segments are each managed separately
because they provide distinct services or produce and distribute distinct
products through different processes.
Selected
financial information for each reportable segment from continuing operations is
as follows:
|
Year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
|
(In
thousands)
|
|||||||||||
|
Revenues:
|
||||||||||||
|
Security
- external customers
|
$ | 18,591 | $ | 20,788 | $ | 22,278 | ||||||
|
Digital
media marketing - external customers
|
9,655 | 17,290 | 7,625 | |||||||||
| $ | 28,246 | $ | 38,078 | $ | 29,903 | |||||||
|
Segment Operating
(loss) income:
|
||||||||||||
|
Corporate
(1)
|
$ | (5,460 | ) | $ | (5,323 | ) | $ | (6,186 | ) | |||
|
Security
|
(2,098 | ) | (2,612 | ) | (2,445 | ) | ||||||
|
Digital
media marketing
|
6 | 275 | (686 | ) | ||||||||
| $ | (7,552 | ) | $ | (7,660 | ) | $ | (9,317 | ) | ||||
|
Assets:
(2)
|
||||||||||||
|
Corporate
and Car Washes
|
$ | 12,223 | $ | 26,305 | $ | 37,962 | ||||||
|
Security
|
14,344 | 14,303 | 18,748 | |||||||||
|
Digital
media marketing
|
8,611 | 9,748 | 13,061 | |||||||||
| $ | 35,178 | $ | 50,356 | $ | 69,771 | |||||||
|
Capital
expenditures:
|
||||||||||||
|
Corporate
|
$ | 77 | $ | 25 | $ | 36 | ||||||
|
Security
|
352 | 438 | 205 | |||||||||
|
Digital
media marketing
|
2 | 23 | 12 | |||||||||
| $ | 431 | $ | 486 | $ | 253 | |||||||
|
Depreciation
and amortization:
|
||||||||||||
|
Corporate
|
$ | 17 | $ | 9 | $ | 30 | ||||||
|
Security
|
550 | 468 | 497 | |||||||||
|
Digital
media marketing
|
223 | 309 | 164 | |||||||||
| $ | 790 | $ | 786 | $ | 691 | |||||||
|
|
1)
|
Corporate
functions include the corporate treasury, legal, public company financial
reporting, information technology, corporate tax, corporate insurance,
human resources, investor relations, and other typical centralized
corporate administrative functions.
|
|
|
2)
|
Total
reportable segment assets excludes Assets held for sale of $7,180,000,
$4,680,000 and $5,665,000 at December 31, 2009, 2008 and 2007,
respectively.
|
F-34
A
reconciliation of operating income for reportable segments to total reported
operating loss is as follows:
|
Year ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(In
thousands)
|
||||||||||||
|
Total
operating loss for reportable segments
|
$ | (7,552 | ) | $ | (7,660 | ) | $ | (9,317 | ) | |||
|
Goodwill
and asset impairment charges
|
(1,462 | ) | (3,249 | ) | (447 | ) | ||||||
|
Total
reported operating loss
|
$ | (9,014 | ) | $ | (10,909 | ) | $ | (9,764 | ) | |||
21. Subsequent
Events
On
January 26, 2010, the Company entered into an agreement of sale for two car
washes we own in Lubbock, Texas for a total sale price of $2.6 million. The net
book value of these car wash sites is approximately $2.3 million. The
transaction was conditioned upon the buyer being satisfied with environmental
due diligence and a feasibility study of the assets being purchased for the
buyer’s intended use. The agreement of sale was terminated by the buyer on March
10, 2010.
On
January 27, 2010, the Company entered into an agreement of sale for an
Arlington, Texas car wash for a sale price of $625,000. The net book value of
this car wash was approximately $800,000, and accordingly, a $200,000 impairment
write-down of this property was recorded at December 31, 2009. The transaction
is subject to customary closing conditions, including a ninety day environmental
due diligence period. No assurance can be given that this transaction will be
consummated.
22. Florida
Security Division
In April
2007, we determined that the former divisional controller of the Florida
Security division embezzled funds from the Company. We initially
conducted an internal investigation and our Audit Committee subsequently engaged
a consulting firm to conduct an independent forensic investigation. As a result
of the investigation, we identified that the amount embezzled by the employee
during fiscal 2006 was approximately $240,000, with an additional $99,000 in the
first quarter of fiscal 2007. The embezzlement occurred from a local
petty cash checking account and from diversion of customer cash payments at the
Florida Security division. Additionally, the investigation uncovered an
unexplained inventory shortage in 2006 in the Florida Security division of
approximately $350,000 which may be due to theft. We filed a civil
complaint against the former employee in June 2007 and intend to pursue all
legal measures to recover our losses. SG&A expenses include
charges of $240,000 and $99,000 in fiscal year 2006 and 2007, respectively,
representing embezzled funds at our Florida Security division. As
embezzled funds are recovered, such amounts will be recorded as recoveries in
the periods they are received. In January 2009, we recovered $42,000
of funds from an investment account of the former divisional controller where
certain of the embezzled funds were deposited. The recovered funds were reported
as a component of operating income in the first quarter of
2009.
F-35
23. Selected
Quarterly Financial Information (In thousands, except per share information)
(Unaudited)
|
Year Ended December 31, 2009
|
||||||||||||||||||||
|
1st Quarter
|
2nd Quarter
|
3rd Quarter
|
4th Quarter
|
Total
|
||||||||||||||||
|
Revenues
|
$ | 7,224 | $ | 7,216 | $ | 7,053 | $ | 6,753 | $ | 28,246 | ||||||||||
|
Gross
profit
|
$ | 2,139 | $ | 2,147 | $ | 1,932 | $ | 2,087 | $ | 8,305 | ||||||||||
|
Loss
from continuing operations
|
$ | (1,539 | ) | $ | (3,363 | ) | $ | (2,064 | ) | $ | (2,163 | ) | $ | (9,129 | ) | |||||
|
Income
(loss) from discontinued operations
|
$ | (59 | ) | $ | 31 | $ | (294 | ) | $ | (1,500 | ) | $ | (1,822 | ) | ||||||
|
Net
loss
|
$ | (1,598 | ) | $ | (3,332 | ) | $ | (2,358 | ) | $ | (3,663 | ) | $ | (10,951 | ) | |||||
|
Diluted
(loss) income per share:
|
||||||||||||||||||||
|
Continuing
operations
|
$ | (0.10 | ) | $ | (0.21 | ) | $ | (0.13 | ) | $ | (0.13 | ) | $ | (0.57 | ) | |||||
|
Discontinued
operations
|
$ | - | $ | 0.01 | $ | (0.02 | ) | $ | (0.10 | ) | $ | (0.11 | ) | |||||||
|
Net
loss
|
$ | (0.10 | ) | $ | (0.20 | ) | $ | (0.15 | ) | $ | (0.23 | ) | $ | (0.68 | ) | |||||
|
Year
Ended December 31, 2008
|
||||||||||||||||||||
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
Total
|
||||||||||||||||
|
Revenues
|
$ | 10,732 | $ | 11,027 | $ | 8,664 | $ | 7,655 | $ | 38,078 | ||||||||||
|
Gross
profit
|
$ | 2,794 | $ | 3,204 | $ | 2,522 | $ | 1,692 | $ | 10,212 | ||||||||||
|
Loss
from continuing operations
|
$ | (1,991 | ) | $ | (2,775 | ) | $ | (1,703 | ) | $ | (6,497 | ) | $ | (12,966 | ) | |||||
|
Income
(loss) from discontinued operations
|
$ | 5,964 | $ | (1,154 | ) | $ | (358 | ) | $ | (2,138 | ) | $ | 2,314 | |||||||
|
Net
loss
|
$ | 3,973 | $ | (3,929 | ) | $ | (2,061 | ) | $ | (8,635 | ) | $ | (10,652 | ) | ||||||
|
Diluted
(loss) income per share:
|
||||||||||||||||||||
|
Continuing
operations
|
$ | (0.12 | ) | $ | (0.17 | ) | $ | (0.10 | ) | $ | (0.40 | ) | $ | (0.79 | ) | |||||
|
Discontinued
operations
|
$ | 0.36 | $ | (0.07 | ) | $ | (0.02 | ) | $ | (0.12 | ) | $ | 0.14 | |||||||
|
Net
loss
|
$ | 0.24 | $ | (0.24 | ) | $ | (0.12 | ) | $ | (0.52 | ) | $ | (0.65 | ) | ||||||
|
Year
Ended December 31, 2007
|
||||||||||||||||||||
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
Total
|
||||||||||||||||
|
Revenues
|
$ | 5,434 | $ | 5,625 | $ | 8,499 | $ | 10,345 | $ | 29,903 | ||||||||||
|
Gross
profit
|
$ | 1,194 | $ | 1,179 | $ | 1,756 | $ | 2,333 | $ | 6,462 | ||||||||||
|
Loss
from continuing operations
|
$ | (2,150 | ) | $ | (1,703 | ) | $ | (3,089 | ) | $ | (1,729 | ) | $ | (8,671 | ) | |||||
|
Income
(loss) from discontinued operations
|
$ | 1,492 | $ | 439 | $ | (140 | ) | $ | 295 | $ | 2,086 | |||||||||
|
Net
loss
|
$ | (658 | ) | $ | (1,264 | ) | $ | (3,229 | ) | $ | (1,434 | ) | $ | (6,585 | ) | |||||
|
Diluted
(loss) income per share:
|
||||||||||||||||||||
|
Continuing
operations
|
$ | (0.14 | ) | $ | (0.11 | ) | $ | (0.19 | ) | $ | (0.11 | ) | $ | (0.55 | ) | |||||
|
Discontinued
operations
|
$ | 0.10 | $ | 0.03 | $ | (0.01 | ) | $ | 0.02 | $ | 0.13 | |||||||||
|
Net
loss
|
$ | (0.04 | ) | $ | (0.08 | ) | $ | (0.20 | ) | $ | (0.09 | ) | $ | (0.42 | ) | |||||
All
quarters have been restated to reflect our car wash segment as discontinued
operations, consistent with our presentation at December 31, 2009.
In the fourth quarter of 2007, the
Company recorded an adjustment to reclass an unrealized gain on short-term
investments of $167,000 from Other Comprehensive Income to a realized gain on
short-term investments in other income. The realized gains related to prior
years.
F-36
EXHIBIT
INDEX
|
Exhibit
No.
|
Description
|
|
|
3.3
|
Amended
and Restated Bylaws of Mace Security International,
Inc.
|
|
|
10.27
|
Amendment
to Credit Agreement dated December 21, 2009, between Mace Security
International, Inc., and JP Morgan Chase Bank N.A. (“Chase”). (Pursuant to
Instruction 2 to Item 601 of Regulation S-K, two additional credit
agreements which are substantially identical in all material respects,
except as to borrower being the Company’s subsidiaries, Mace Security
Products, Inc. and Colonial Full Service Car Wash, Inc. are not being
filed).
|
|
|
10.28
|
Line
of Credit Note dated December 12, 2009 between the Company, its
subsidiary, Mace Security Products, Inc. and JP Morgan Chase Bank N.A. in
the amount of $500,000.
|
|
|
10.29
|
Letter
Agreement of Employment dated March 23, 2010 between Mace Security
International, Inc. and Gregory M. Krzemien (3)
|
|
|
11
|
Statement
Regarding Computation of Per Share Earnings.
|
|
|
21
|
Subsidiaries
of the Company.
|
|
|
23.1
|
Consent
of Grant Thornton LLP.
|
|
|
24
|
Power
of Attorney (included on signature page).
|
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
F-37