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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED September 30, 2005 COMMISSION FILE NO. 0-22810
MACE SECURITY INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 03-0311630
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 CRAWFORD PLACE, SUITE 400, MT. LAUREL, NJ 08054
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NO., INCLUDING AREA CODE: (856) 778-2300
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 ("the
Exchange Act") during the preceding 12 months (or for such shorter period that
the registrant was required to file such report), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock:
As of November 7, 2005, there were 15,272,882 Shares of Registrant's Common
Stock, par value $.01 per share, outstanding.
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MACE SECURITY INTERNATIONAL, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2005
CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets - September 30, 2005 (Unaudited)
and December 31, 2004 2
Consolidated Statements of Operations (Unaudited) for the three
months ended September 30, 2005 and 2004 4
Consolidated Statements of Operations (Unaudited) for the nine
months ended September 30, 2005 and 2004 5
Consolidated Statement of Stockholders' Equity
for the nine months ended September 30, 2005 (Unaudited) 6
Consolidated Statements of Cash Flows (Unaudited) for
the nine months ended September 30, 2005 and 2004 7
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 33
Item 4 - Controls and Procedures 33
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 34
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 34
Item 6 - Exhibits 35
Signatures 36
1
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MACE SECURITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value information)
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,978 $ 14,499
Short-term investments 2,879 -
Accounts receivable, less allowance for doubtful
accounts of $599 and $449 in 2005 and 2004, respectively 2,516 2,556
Inventories 7,708 7,067
Deferred income taxes 318 321
Prepaid expenses and other current assets 2,282 2,102
Asset held for sale - 600
--------- ----------
Total current assets 25,681 27,145
Property and equipment:
Land 31,639 31,629
Buildings and leasehold improvements 35,785 36,263
Machinery and equipment 11,875 11,456
Furniture and fixtures 609 527
--------- ----------
Total property and equipment 79,908 79,875
Accumulated depreciation and amortization (14,639) (13,003)
--------- ----------
Total property and equipment, net 65,269 66,872
Goodwill 3,575 3,587
Other intangible assets, net of accumulated amortization
of $444 and $309 in 2005 and 2004, respectively 2,796 2,935
Deferred income taxes 2,140 2,008
Other assets 259 210
--------- ----------
TOTAL ASSETS $ 99,720 $ 102,757
========= ==========
See accompanying notes
2
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 2,140 $ 2,634
Accounts payable 2,967 4,077
Income taxes payable 283 278
Deferred revenue 401 469
Accrued expenses and other current liabilities 2,959 2,216
--------- ---------
Total current liabilities 8,750 9,674
Long-term debt, net of current portion 25,021 26,480
Capital lease obligations, net of current portion 44 81
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 15,271,882 and
15,271,132 in 2005 and 2004, respectively 153 153
Additional paid-in capital 88,455 88,507
Accumulated other comprehensive income (loss) 83 (30)
Accumulated deficit (22,786) (22,108)
--------- ---------
Total stockholders' equity 65,905 66,522
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 99,720 $ 102,757
========= =========
See accompanying notes.
3
MACE SECURITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share and per share information)
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2005 2004
------------ ------------
Revenues:
Car and truck wash and detailing services $ 8,138 $ 7,898
Lube and other automotive services 853 894
Fuel and merchandise sales 1,358 997
Security sales 5,737 6,858
------------ ------------
16,086 16,647
Cost of revenues:
Car and truck wash and detailing services 6,231 5,786
Lube and other automotive services 652 677
Fuel and merchandise sales 1,189 875
Security sales 4,010 5,152
------------ ------------
12,082 12,490
Selling, general and administrative expenses 3,589 3,620
Depreciation and amortization 590 539
Asset impairment charge 966 -
------------ ------------
Operating loss (1,141) (2)
Interest expense, net (441) (447)
Other income 104 91
------------ ------------
Loss before income taxes (1,478) (358)
Income tax benefit (350) (129)
------------ ------------
Net loss $ (1,128) $ (229)
============ ============
Per share of common stock (basic and diluted):
Net loss $ (0.07) $ (0.02)
============ ============
Weighted average shares outstanding:
Basic 15,271,450 14,213,656
Diluted 15,271,450 14,213,656
See accompanying notes.
4
MACE SECURITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share and per share information)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2005 2004
------------ ------------
Revenues:
Car and truck wash and detailing services $ 26,238 $ 25,374
Lube and other automotive services 2,517 2,719
Fuel and merchandise sales 3,606 3,098
Security sales 19,348 10,737
------------ ------------
51,709 41,928
Cost of revenues:
Car and truck wash and detailing services 19,000 18,199
Lube and other automotive services 1,943 2,084
Fuel and merchandise sales 3,137 2,701
Security sales 13,667 7,650
------------ ------------
37,747 30,634
Selling, general and administrative expenses 10,971 8,628
Depreciation and amortization 1,779 1,533
Asset impairment charge 966 -
------------ ------------
Operating income 246 1,133
Interest expense, net (1,335) (1,376)
Other income 315 202
------------ ------------
Loss before income taxes (774) (41)
Income tax benefit (96) (15)
------------ ------------
Net loss $ (678) $ (26)
============ ============
Per share of common stock (basic and diluted):
Net loss $ (0.04) $ -
============ ============
Weighted average shares outstanding:
Basic 15,271,239 13,386,621
Diluted 15,271,239 13,386,621
See accompanying notes.
5
MACE SECURITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands, except share information)
COMMON STOCK ACCUMULATED
------------------- ADDITIONAL OTHER
PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL (LOSS) INCOME DEFICIT TOTAL
---------- ------ ---------- ------------- ----------- --------
BALANCE AT DECEMBER 31, 2004 15,271,132 $ 153 $ 88,507 $ (30) $ (22,108) $ 66,522
Net costs from issuance of
common stock..................... (53) (53)
Exercise of common stock
options ......................... 750 - 1 1
Change in fair value of cash
flow hedge, net of tax........... 27 27
Unrealized gain on short-term
investments, net of tax.......... 86 86
Net loss......................... (678) (678)
--------
Total comprehensive loss......... (565)
---------- ------ ---------- ------- --------- --------
BALANCE AT SEPTEMBER 30, 2005 15,271,882 $ 153 $ 88,455 $ 83 $ (22,786) $ 65,905
========== ====== ========== ======= ========= ========
See accompanying notes.
6
MACE SECURITY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2005 2004
-------- --------
OPERATING ACTIVITIES
Net loss $ (678) $ (26)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 1,779 1,533
Provision for losses on receivables 117 143
(Gain) loss on sale of property and equipment (92) 12
Gain on short-term investments (147) -
Asset impairment charge-hurricane damage 100 -
Asset impairment charge 966 -
Deferred income taxes (128) (336)
Changes in operating assets and liabilities:
Accounts receivable (77) (563)
Inventories (686) (1,022)
Accounts payable (1,109) 516
Deferred revenue (68) (65)
Accrued expenses 606 1,775
Income taxes payable (58) 90
Prepaid expenses and other assets (131) (468)
-------- --------
Net cash provided by operating activities 394 1,589
INVESTING ACTIVITIES
Acquisition of business - (5,621)
Purchase of property and equipment (950) (2,035)
Proceeds from sale of property and equipment 687 795
Purchase of short-term investments (2,600) -
Payments for intangibles (5) (64)
Prepaid costs for future acquisitions - (25)
-------- --------
Net cash used in investing activities (2,868) (6,950)
FINANCING ACTIVITIES
Payments on long-term debt and capital lease obligations (1,995) (1,859)
(Costs) proceeds from issuance of common stock (52) 6,854
Proceeds from removal of restrictions on shares - 8,952
-------- --------
Net cash (used in) provided by financing activities (2,047) 13,947
-------- --------
Net (decrease) increase in cash and cash equivalents (4,521) 8,586
Cash and cash equivalents at beginning of period 14,499 3,414
-------- --------
Cash and cash equivalents at end of period $ 9,978 $ 12,000
======== ========
See accompanying notes
7
MACE SECURITY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Mace Security International, Inc. and its wholly owned subsidiaries
(collectively "the Company", "we" or "Mace"). All significant intercompany
transactions have been eliminated in consolidation. These consolidated interim
financial statements reflect all adjustments (including normal recurring
accruals) which, in the opinion of management, are necessary for a fair
presentation of results of operations for the interim periods presented. The
results of operations for the nine month period ended September 30, 2005 are not
necessarily indicative of the operating results for the full year. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted. These consolidated interim
financial statements should be read in conjunction with the audited consolidated
financial statements and notes contained in the Company's Annual Report on Form
10-K for the year ended December 31, 2004.
2. NEW ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 151, Inventory Costs - An
Amendment of ARB No. 43, Chapter 4. SFAS 151 amends the guidance in ARB 43,
Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material (spoilage).
SFAS 151 is effective for fiscal years beginning after June 15, 2005 and is
required to be adopted by the Company in the first quarter of fiscal 2006. The
Company does not expect SFAS 151 to have a material impact on the Company.
In December 2004, the FASB issued SFAS 153, Exchange of Nonmonetary Assets - An
Amendment of APB Opinion No. 18, Accounting for Nonmonetary Transactions. SFAS
153 eliminates the exception from fair value measurement for nonmonetary
exchanges of similar productive assets in paragraph 21(b) of Accounting
Principles Board ("APB") Opinion 29, and replaces it with an exception for
exchanges that do not have commercial substance. SFAS 153 is effective for
fiscal periods beginning after June 15, 2005. The Company does not expect SFAS
153 to have a material impact on the Company.
In December 2004, the FASB issued SFAS 123(R), Share-Based Payment. SFAS 123(R)
requires that the compensation cost relating to share-based payment transactions
be recognized in financial statements. The cost will be measured based on the
fair value of the equity or liability instruments issued. SFAS 123(R) is
effective as of the first interim or annual reporting period of the first fiscal
year beginning on or after June 15, 2005. SFAS 123(R) covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. In addition to the accounting standard that sets forth the
financial reporting objectives and related accounting principles, SFAS 123(R)
includes an appendix of implementation guidance that provides expanded guidance
on measuring the fair value of share-based payment awards. SFAS 123(R) replaces
SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion
25, Accounting for Stock Issued to Employees. SFAS 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in APB Opinion
25, as long as the footnotes to financial statements disclosed what net income
would have been had the preferable fair-value-based method been used.
Additionally, in March 2005, the SEC issued Staff Accounting Bulletin ("SAB")
107, Share-Based Payments, which provides further guidance for the adopation of
SFAS 123(R), discussed above. The Company will implement this new standard in
the first quarter of our fiscal year 2006. The Company is currently evaluating
this statement and the effects on our results of operations. The Company
believes that implementation of SFAS 123(R) will have a material impact on the
Company.
In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections
("SFAS 154") which replaces APB Opinion 20, Accounting Changes and SFAS 3,
Reporting Accounting Changes in Interim Financial Statements - An Amendment of
APB Opinion 28. SFAS 154 provides guidance on the accounting for and reporting
of accounting changes and error corrections. It establishes retrospective
application, or the latest practicable date, as the required method for
reporting a change in accounting principle and the reporting of a correction of
an error. SFAS 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005 and, accordingly, is
required to be adopted by the Company on January 1, 2006. The Company does not
expect that the adoption of SFAS 154 will have a material impact on its
consolidated results of operations and financial position.
8
3. OTHER INTANGIBLE ASSETS
The following table reflects the components of intangible assets, excluding
goodwill (in thousands):
SEPTEMBER 30, 2005 DECEMBER 31, 2004
---------------------- ----------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------- ------------ -------- ------------
Amortized intangible assets:
Non-compete agreement $ 28 $ 18 $ 28 $ 13
Customer lists 699 142 699 79
Product lists 590 74 590 29
Deferred financing costs 416 210 421 188
------ ------ ------ ------
Total amortized intangible assets 1,733 444 1,738 309
Non-amortized intangible assets:
Trademarks - Security Segment 1,401 - 1,400 -
Service mark - Car and Truck Wash Segment 106 - 106 -
------ ------ ------ ------
Total non-amortized intangible assets 1,507 - 1,506 -
------ ------ ------ ------
Total intangible assets $3,240 $ 444 $3,244 $ 309
====== ====== ====== ======
The following sets forth the estimated amortization expense on intangible assets
for the fiscal years ending December 31 (in thousands):
2005 $175
2006 $149
2007 $146
2008 $143
2009 $143
4. BUSINESS COMBINATIONS
On July 1, 2004, the Company, through its wholly owned subsidiary, Mace Security
Products, Inc., acquired substantially all of the operating assets of Industrial
Vision Source(R) ("IVS") and SecurityandMore(R) ("S&M") from American Building
Control, Inc. The results of operations of IVS and S&M have been included in the
consolidated financial statements of the Company since July 1, 2004. S&M
supplies video surveillance and security equipment, and IVS is a distributor of
technologically advanced imaging components and video equipment. The acquisition
of IVS and S&M furthered the Company's expansion of our Security Segment. The
acquisition also expanded our presence in the southwestern part of the United
States and provided us with new mass merchant opportunities, an active
e-commerce web site, a catalog sales channel and a high-end digital and fiber
optics camera product line. The purchase price for IVS and S&M consisted of
approximately $5.62 million of cash and the assumption of $290,000 of current
liabilities. The purchase price was allocated as follows: approximately $1.86
million for inventory; $1.37 million for accounts receivable; $100,000 for
equipment; and the remainder of $2.58 million allocated to goodwill and other
intangible assets. Of the $2.58 million of acquired intangible assets, $830,000
was assigned to registered trademarks and $531,000 was assigned to goodwill,
neither of which is subject to amortization. The remaining intangible assets
were assigned to customer lists for $630,000 and product lists for $590,000.
Customer and product lists were assigned a useful life of 10 years. The
acquisition was accounted for as a business combination in accordance with SFAS
141, Business Combinations.
The pro forma financial information presented below gives effect to the IVS and
S&M acquisition as if it had occurred as of the beginning of our fiscal year
2004. The information presented below is for illustrative purposes only and is
not necessarily indicative of results that would have been achieved if the
acquisition actually had occurred as of the beginning of 2004 or results which
may be achieved in the future. Unaudited pro forma financial information is as
follows (in thousands, except per share amounts):
9
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2005 2004
-------- --------
Revenues $ 51,709 $ 52,361
Net (loss) income $ (678) $ 115
Earnings per share-basic and
dilutive $ (0.04) $ 0.01
5. STOCK-BASED COMPENSATION
The Company has two stock-based employee compensation plans. The Company
accounts for those plans under the recognition and measurement principles of APB
25, Accounting for Stock Issued to Employees, and related interpretations.
Stock-based employee compensation costs are not reflected in net income, as all
options granted under the plan had exercise prices equal to the market value of
the underlying common stock on the date of grant. The table below illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
The Company has elected to follow APB 25, and related Interpretations, in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123, requires use of
option valuation models that are not developed for use in valuing employee stock
options. Under APB 25, if the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. In December 2004, the FASB issued Statement
123(R) Share-Based Payment. SFAS 123(R) requires that the compensation cost
relating to share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. This statement will be effective as of the first
quarter of 2006.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. Pro forma results are
not likely to be representative of the effects on reported or pro forma results
of operations for future years. The Company's pro forma information is as
follows (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2005 2004 2005 2004
------- ------- ------- -------
Net loss, as reported $(1,128) $ (229) $ (678) $ (26)
Less: Stock-based compensation costs under fair
value based method for all awards (86) (92) (521) (255)
------- ------- ------- -------
Pro forma net loss $(1,214) $ (321) $(1,199) $ (281)
======= ======= ======= =======
Earnings per share - basic and diluted
As reported $ (0.07) $ (0.02) $ (0.04) $ -
Pro forma $ (0.08) $ (0.02) $ (0.08) $ (0.02)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with weighted average assumptions for
grants. In the quarter ended September 30, 2004, 252,500 options were granted
with expected volatility of 64%, risk-free interest rates ranging from 4.19% to
4.56%, and expected life of 10 years. In the quarter ended September 30, 2005,
20,000 options were granted with an expected volatility of 54%, risk-free
interest rate of 4.42%, and expected life of 10 years.
10
6. COMMITMENTS AND CONTINGENCIES
In December 2003, one of the Company's car wash subsidiaries was named as a
defendant in a suit filed by Kristen Sellers in the Circuit Court of the Twelfth
Judicial Circuit in and for Sarasota County, Florida. The suit alleges that the
plaintiff is entitled to damages in excess of $15,000 due to psychological
injury and emotional distress sustained when an employee of the car wash
allegedly assaulted Ms. Sellers with sexually explicit acts and words. The
Company's subsidiary is alleged to have been negligent in hiring, retaining and
supervising the employee. The Company forwarded the suit to its insurance
carrier for defense. The plaintiff has communicated that the case could be
settled for $1.0 million.
The Company has produced documents requested in a subpoena issued in connection
with an investigation conducted by the United States Securities and Exchange
Commission of possible securities law violations. The subpoena was issued on
October 27, 2003. The Company produced all documents that were requested and has
not been contacted by the United States Securities and Exchange Commission
regarding the investigation since February, 2004. The Company intends to fully
cooperate with the United States Securities and Exchange Commission's
investigation.
On July 20, 2004, the Company received a letter from the United States
Securities and Exchange Commission. This letter requested that the Company
voluntarily provide information and documents relating to Price Legacy
Corporation's sale of 1,875,000 shares of the Company's common stock on the open
market in April, 2004 and Price Legacy Corporation's payment of $8.95 million to
the Company in exchange for the Company removing a sales restriction from
1,750,000 of the shares that were sold. The Company supplied the information in
August of 2004. The Company has not been contacted by the Securities and
Exchange Commission since supplying the information. The Company intends to
fully cooperate with the United States Securities and Exchange Commission in
this matter.
The Company is a party to various other legal proceedings related to its normal
business activities. In the opinion of the Company's management, none of these
proceedings is material in relation to the Company's results of operations,
liquidity, cash flows or financial condition.
Although the Company is not aware of any substantiated claim of permanent
personal injury from its products, the Company is aware of reports of incidents
in which, among other things, defense sprays have been mischievously or
improperly used, in some cases by minors; have not been instantly effective; or
have been ineffective against enraged or intoxicated individuals.
The Company is subject to federal and state environmental regulations, including
rules relating to air and water pollution and the storage and disposal of oil,
other chemicals and waste. The Company believes that it complies, in all
material respects, with all applicable laws relating to its business.
The employment agreement of the Company's Chief Executive Officer, Louis D.
Paolino, Jr., entitles Mr. Paolino to receive a fee of $2.5 million upon
termination of employment under certain conditions. The employment agreement
also provides for a bonus of $2.5 million upon a change in control.
11
7. BUSINESS SEGMENTS INFORMATION
The Company currently operates in two segments: the Car and Truck Wash Segment
and the Security Segment.
Financial information regarding the Company's segments is as follows (in
thousands):
CAR AND CORPORATE
TRUCK WASH SECURITY FUNCTIONS *
---------- -------- -----------
THREE MONTHS ENDED SEPTEMBER 30, 2005
Revenues from external customers $ 10,349 $ 5,737 $ -
Intersegment revenues $ - $ 123 $ -
Segment operating loss $ (347) $ (2) $ (792)
Segment assets $ 81,632 $ 18,088 $ -
Goodwill $ 2,655 $ 920 $ -
Capital expenditures $ 253 $ 38 $ 3
NINE MONTHS ENDED SEPTEMBER 30, 2005
Revenues from external customers $ 32,361 $ 19,348 $ -
Intersegment revenues $ - $ 348 $ -
Segment operating income (loss) $ 2,500 $ 298 $ (2,552)
Capital expenditures $ 867 $ 230 $ 8
THREE MONTHS ENDED SEPTEMBER 30, 2004
Revenues from external customers $ 9,789 $ 6,858 $ -
Intersegment revenues $ - $ 30 $ -
Segment operating income (loss) $ 912 $ (85) $ (829)
Segment assets $ 88,568 $ 18,548 $ -
Goodwill $ 10,381 $ 921 $ -
Capital expenditures $ 389 $ 2,087 $ -
NINE MONTHS ENDED SEPTEMBER 30, 2004
Revenues from external customers $ 31,191 $ 10,737 $ -
Intersegment revenues $ - $ 35 $ -
Segment operating income (loss) $ 3,621 $ (150) $ (2,338)
Capital expenditures $ 739 $ 3,635 $ 3
* Corporate functions include the corporate treasury, legal, financial
reporting, information technology, corporate tax, corporate insurance, human
resources, investor relations, and other typical centralized administrative
functions.
8. USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, as well as the disclosure
of contingent assets and liabilities at the date of its consolidated financial
statements. The Company bases its estimates on historical experience, actuarial
valuations and various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Some of those judgments can be subjective and complex, and
consequently, actual results may differ from these estimates under different
assumptions or conditions. We must make these estimates and assumptions because
certain information that we use is dependent on future events and cannot be
calculated with a high degree of precision from the data currently available.
Such estimates include the Company's estimates of reserves such as the allowance
for doubtful accounts, inventory valuation allowances, insurance losses and loss
reserves, valuation of long-lived assets, estimates of realization of income tax
net operating loss carryforwards, as well as valuation calculations such as the
Company's goodwill impairment calculations under the provisions of SFAS 142,
Goodwill and Other Intangible Assets.
12
9. INCOME TAXES
The Company recorded income tax benefits of $96,000 and $15,000 for the nine
months ended September 30, 2005 and 2004, respectively. Income tax expense
(benefit) reflects the recording of income taxes on income at an effective rate
of approximately 36% in both 2005 and 2004. The effective rate differs from the
federal statutory rate for each year primarily due to state and local income
taxes, non-deductible costs related to intangibles, fixed asset adjustments and
changes to the valuation allowance. Additionally, the income tax benefit for the
nine months ended September 30, 2005 was reduced by a $182,000 write-off of
deferred tax assets of one of the Company's subsidiaries generated from net
operating loss carryforwards in certain states in which the subsidiary operates.
It is management's belief that it is unlikely that the benefit from these net
operating loss carryforwards will be realized.
10. RELATED PARTY TRANSACTIONS
From November, 2001 through July 2002, the Company prepaid LP Learjets, LLC
$5,109 per month for the right to use a Learjet 31A for 100 hours per year. LP
Learjets, LLC is a company owned by Louis D. Paolino, Jr., the Company's
Chairman, Chief Executive Officer and President. When the Learjet 31A is used,
the prepaid amount is reduced by the hourly usage charge as approved by the
Audit Committee, and the Company pays to third parties unaffiliated with Louis
D. Paolino, Jr., the direct costs of the Learjet's per-hour use, which include
fuel, pilot fees, engine insurance and landing fees. The balance of unused
prepaid flight fees totaled $31,659 at September 30, 2005.
From January 1, 2004 through September 30, 2005, Louis D. Paolino, Jr. purchased
approximately $59,200 of the Company's products at a discount from the prices
charged to distributors. The total of the discount given to Mr. Paolino was
approximately $22,300.
The Company's Security Segment leases manufacturing and office space under a
five-year lease with Vermont Mill, Inc. ("Vermont Mill"), which provided for
monthly lease payments of $9,167 through November 2004. Vermont Mill is
controlled by Jon E. Goodrich, a former director and current employee of the
Company. The Company has exercised an option to continue the lease through
November 2009 at a rate of $10,576 per month. The Company believes that the
lease rate is lower than lease rates charged for similar properties in the
Bennington, Vermont area. On July 22, 2002, the lease was amended to provide
Mace the option and right to cancel the lease with proper notice and a payment
equal to six months of the then current rent for the leased space occupied by
Mace.
From January 1, 2004 through September 30, 2005, the Company's Security Segment
sold approximately $146,500 of electronic security equipment to two companies,
each of which Louis Paolino, III, the son of the Company's CEO, Louis D.
Paolino, Jr., is a partial owner. The pricing extended to these companies is no
more favorable than the pricing given to third party customers who purchase in
similar volume. At September 30, 2005 and December 31, 2004, $15,250 or $0,
respectively, was owed from these companies to Mace.
On September 29, 2005, Louis Paolino III, the son of the Company's Chief
Executive Officer, Louis D. Paolino, Jr., purchased from the Company a warehouse
bay in Hollywood, Florida that is no longer used in the Company's operations for
$306,000 in cash. The Company's Audit Committee authorized the Company on
February 14, 2005 to proceed with a sale of the warehouse property to Louis
Paolino III for $306,000. The Company paid $256,688 for the property in 2003.
The warehouse property was appraised by a third party independent appraiser on
January 18, 2005 at an estimated market value of $306,000.
11. EQUITY
On April 16, 2004, the Company received approximately $8.95 million in cash from
Price Legacy Corporation (formerly Excel Legacy Holdings, Inc.) in exchange for
the Company removing a contractual restriction that prohibited Price Legacy
Corporation from selling 1,750,000 shares of the Company's common stock without
the Company's approval. The Company recorded this transaction as a contribution
to capital, net of related income taxes, in accordance with APB Opinion 9. The
remaining proceeds are being used as part of working capital. Price Legacy
Corporation purchased 125,000 restricted shares in July of 1999 and received
1,750,000 shares in October of 1999 in a transaction in which the Company
purchased the car wash assets of Millennia Car Wash, LLC. Additionally, as part
of the agreement, the Company agreed to indemnify Price Legacy Corporation
against certain potential circumstances as a result of lifting the restriction.
Management believes the fair value of this provision is negligible.
13
On April 20, 2004, the Company purchased a 20,000 square foot facility in Fort
Lauderdale, Florida, to serve as its regional headquarters for its electronic
surveillance products operation. Consideration for the facility consisted of
250,000 registered shares of the Company's common stock valued at approximately
$1.6 million.
The Master Facility Agreement between the Company and Fusion Capital Fund II,
LLC ("Fusion") and the Equity Purchase Agreement between the Company and Fusion
was terminated. Under the Master Facility Agreement, the Company had entered
into an Equity Purchase Agreement on April 17, 2000. Under the Equity Purchase
Agreement, Fusion had the right and obligation to purchase up to $10 million of
the Company's common stock under certain conditions. On April 21, 2004, the
Company and Fusion entered into a termination and release agreement under which
the Company sold Fusion 150,000 registered shares of the Company's common stock
at $2.32 per share and terminated the Equity Purchase Agreement.
On May 26, 2004, the Company sold 915,000 shares of the Company's common stock
and issued a warrant for 183,000 shares of the Company's common stock in
exchange for $5,005,050 in cash. The purchaser was Langley Partners, L.P., an
accredited investor. The warrant is exercisable by Langley Partners, L.P. at any
time up to May 26, 2009 at a price of $7.50 per share. The securities sold were
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933,
as amended (the "1933 Act") and Regulation D promulgated under the 1933 Act. The
securities were registered for resale by Langley Partners, L.P. effective
September 28, 2004 on a Registration Statement on Form S-3.
On December 14, 2004, the Company sold 750,000 shares of the Company's common
stock and issued a warrant for 150,000 shares of the Company's common stock in
exchange for $3,307,500 in cash. The purchaser was Langley Partners, L.P., an
accredited investor. The warrant is exercisable by Langley Partners, L.P. at any
time up to December 14, 2009 at a price of $5.88 per share. The securities sold
were exempt from registration pursuant to Section 4(2) of the 1933 Act and
Regulation D promulgated under the 1933 Act. The securities were registered for
resale by Langley Partners, L.P. effective February 3, 2005 on a Registration
Statement on Form S-3.
On December 14, 2004, the Company sold 400,000 shares of the Company's common
stock and issued a warrant for 50,000 shares of the Company's common stock in
exchange for $1,872,000 in cash. The purchaser was JMB Capital Partners, L.P.,
an accredited investor. The warrant is exercisable by JMB Capital Partners, L.P.
at any time up to December 14, 2009, at a price of $5.88 per share. The
securities sold were exempt from registration pursuant to Section 4(2) of the
1933 Act and Regulation D promulgated under the 1933 Act. The securities were
registered for resale by JMB Capital Partners, L.P. effective February 3, 2005
on a Registration Statement Form S-3.
On July 29, 2004, the Company's Board of Directors authorized a Stock Buy Back
Plan to purchase shares of the Company's common stock up to a maximum value of
$3.0 million. Purchases will be made in the open market if and when management
decides to effect purchases. Management may elect not to make purchases or to
make purchases less than $3.0 million in amount. As of November 7, 2005, the
Company did not purchase any shares on the open market.
12. LONG-TERM DEBT, NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
At September 30, 2005, we had borrowings, including capital lease obligations,
of approximately $27.2 million, substantially all of which is secured by
mortgages against certain of our real property. Of such borrowings,
approximately $2.1 million is classified as current as it is due in less than 12
months from September 30, 2005. We had three letters of credit outstanding at
September 30, 2005, totaling $1.1 million as collateral relating to workers'
compensation insurance policies. We maintain a $500,000 revolving credit
facility, subject to an availability calculation based on inventory and accounts
receivable, to provide financing for additional electronic surveillance product
inventory purchases. There were no borrowings outstanding under the revolving
credit facility at September 30, 2005. The Company also maintains a $600,000
line of credit for commercial letters of credit for the importation of
inventory. There were no outstanding commercial letters of credit under this
commitment at September 30, 2005.
Our two most significant borrowings are secured notes payable to General Motors
Acceptance Corp. ("GMAC") in the amount of $9.98 million, $9.04 million of which
was classified as non-current debt at September 30, 2005, and secured notes
payable to Bank One, Texas, N.A. ("Bank One") in the amount of $13.68 million,
$12.72 million of which was classified as non-current debt at September 30,
2005. The GMAC and Bank One agreements contain affirmative and negative
covenants, including the maintenance of certain levels of tangible net worth,
maintenance of certain levels of unencumbered cash and marketable securities,
limitations on capital spending and the maintenance of certain debt coverage
ratios on a consolidated level. The Bank One agreement is our only debt
agreement that contains an express prohibition on incurring additional debt for
borrowed money
14
without the approval of the lender. None of our other agreements contain such a
prohibition. Our warehouse and office facility in Farmers Branch, Texas, twenty
five car washes and one truck wash are encumbered by mortgages.
At September 30, 2005, we were not in compliance with our semi-annual
consolidated debt coverage ratio of at least 1.25:1 related to our GMAC notes
payable. The Company's debt coverage ratio related to the GMAC notes payable was
1.01:1 at September 30, 2005. GMAC granted us a waiver of acceleration related
to the non-compliance with the debt coverage ratio covenant at September 30,
2005, and for measurement periods through October 1, 2006 and, accordingly, a
portion of the GMAC notes payable was reflected as non-current on our financial
statements at September 30, 2005. If we are not able to achieve a debt coverage
ratio of at least 1.25:1, and we cannot obtain further waivers of acceleration,
the GMAC notes may be reflected as current in future balance sheets and as a
result our stock price may decline.
The Company entered into amendments to the Bank One term loan agreements
effective March 31, 2004. The amended debt coverage ratio with Bank One requires
the Company to maintain a ratio of consolidated earnings before interest, income
taxes, depreciation and amortization to debt service of 1.05:1 at September 30,
2004 and thereafter. The Company's debt coverage ratio was 1.02:1 at September
30, 2005, which was not in compliance with this Bank One covenant, as amended.
The Company received a waiver of acceleration with respect to this debt coverage
ratio from Bank One through October 1, 2006 and, accordingly, a portion of the
Bank One notes payable was reflected as non-current on our consolidated
financial statements at September 30, 2005. The Bank One amendment also requires
the maintenance of a minimum total unencumbered cash and marketable securities
balance of $5.0 million. This cash balance requirement will be lowered to $1
million upon the Company returning to a debt coverage ratio of at least 1.10:1.
If we are unable to satisfy these covenants and we cannot obtain further
waivers, the Bank One notes may be reflected as current in future balance sheets
and as a result our stock price may decline.
Our ongoing ability to comply with the debt covenants under our credit
arrangements and refinance our debt depends largely on our achievement of
adequate levels of cash flow. Our cash flow has been and could continue to be
adversely affected by weather patterns and economic conditions. In the future,
if our cash flows are less than expected or debt service, including interest
expense, increases more than expected, we may continue to be out of compliance
with the Bank One and GMAC covenants and may need to seek additional waivers or
amendments.
If we default on any of the Bank One or GMAC covenants and are not able to
obtain further amendments or waivers of acceleration, Bank One debt totaling
$13.68 million and GMAC debt totaling $9.98 million, including debt recorded as
long-term debt at September 30, 2005, could become due and payable on demand,
and Bank One and/or GMAC could foreclose on the assets pledged in support of the
relevant indebtedness. If our assets (including up to 25 of our car wash
facilities and one truck wash) are foreclosed upon, revenues from our Car and
Truck Wash Segment, which comprised 71% of our total revenues for fiscal year
2004 and 63% of our total revenues in the nine months ended September 30, 2005,
would be severely impacted and we may be unable to continue to operate our
business. Even if the debt were accelerated without foreclosure, it would be
very difficult for us to continue to operate our business and we may go out of
business.
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Numerator:
Net loss $ (1,128) $ (229) $ (678) $ (26)
============ ============ ============ ============
Denominator:
Denominator for basic earnings
per share - weighted average
shares........................ 15,271,450 14,213,656 15,271,239 13,386,621
Dilutive effect of options and
warrants...................... - - - -
------------ ------------ ------------ ------------
Denominator for diluted
earnings per share - weighted
average shares................ 15,271,450 14,213,656 15,271,239 13,386,621
============ ============ ============ ============
Basic and diluted earnings per share: $ (0.07) $ (0.02) $ (0.04) $ -
============ ============ ============ ============
15
The effect of options and warrants for periods in which we incurred a net loss
have been excluded as they would be anti-dilutive. The dilutive effect of
options and warrants excluded were 1,266,281 and 696,258 for the three months
ended September 30, 2004 and the nine months ended September 30, 2004,
respectively, and 254,628 and 292,825 for the three months and nine months ended
September 30, 2005, respectively.
14. SUBSEQUENT EVENT
During October of 2005, certain of our Florida Security Segment and Car and
Truck Wash Segment operations suffered property damages and business
interruption losses from hurricane Wilma. We are still assessing the extent of
damage to property which could be in the range of $60,000 to $80,000 which is
below the Company's property insurance deductible of $100,000. Additionally,
hurricane Wilma disrupted our Florida based security operation for approximately
a week. It is too early to determine the impact of the hurricane disruption on
Florida based security sales.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE NOTES
THERETO INCLUDED IN THIS FORM 10-Q.
FORWARD-LOOKING STATEMENTS
This report includes forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended ("Forward-Looking Statements"). All statements
other than statements of historical fact included in this report are
Forward-Looking Statements. Although we believe that the expectations reflected
in such Forward-Looking Statements are reasonable, we can give no assurance that
such expectations will prove to have been correct. Generally, these statements
relate to business plans or strategies, projected or anticipated benefits or
other consequences of such plans or strategies, number of acquisitions, and
projected or anticipated benefits from acquisitions made by or to be made by us,
or projections involving anticipated revenues, earnings, levels of capital
expenditures or other aspects of operating results. All phases of our operations
are subject to a number of uncertainties, risks, and other influences, many of
which are outside our control and any one of which, or a combination of which,
could materially affect the results of our operations and whether
Forward-Looking Statements made by us ultimately prove to be accurate. Such
important factors that could cause actual results to differ materially from our
expectations are disclosed in this section and elsewhere in this report. All
subsequent written and oral Forward-Looking Statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the important factors described below that could cause actual
results to differ from our expectations. The Forward-Looking Statements made
herein are only made as of the date of this filing, and we undertake no
obligation to publicly update such Forward-Looking Statements to reflect
subsequent events or circumstances.
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 of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities at the date of the Company's financial
statements. Actual results may differ from these estimates under different
assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The Company's
critical accounting policies are described below.
REVENUE RECOGNITION AND DEFERRED REVENUE
Revenues from the Company's Car and Truck Wash Segment are recognized, net of
customer coupon discounts, when services are rendered or fuel or merchandise is
sold. The Company records a liability for gift certificates, ticket books, and
seasonal and annual passes sold at its car care locations but not yet redeemed.
The Company estimates these unredeemed amounts based on
16
gift certificate and ticket book sales and redemptions throughout the year as
well as utilizing historical sales and tracking of redemption rates per the car
washes' point-of-sale systems. Seasonal and annual passes are amortized on a
straight-line basis over the time during which the passes are valid.
Revenues from the Company's Security Segment are recognized when shipments are
made. Shipping and handling charges billed are included in revenues; the cost of
which is included in SG&A expenses.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash, 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 September 30, 2005, the Company had approximately $2.9 million invested in
three funds. The Company may exit one of the fund at the end of any calendar
quarter with 30 days advanced written notice and the other funds may be exited
with one business days notice. In the quarter ended September 30, 2005, the
Company realized a total gain of $92,000. Additionally, an unrealized gain, net
of tax, of approximately $86,000 is included in Accumulated Other Comprehensive
Income (Loss) at September 30, 2005.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, we periodically review the carrying value of our long-lived
assets held and used, and assets to be disposed of, when events and
circumstances warrant such a review. If significant events or changes in
circumstances indicate that the carrying value of an asset or asset group may
not be recoverable, we perform a test of recoverability by comparing the
carrying value of the asset or asset group to its undiscounted expected future
cash flows. Cash flow projections are sometimes based on a group of assets,
rather than a single asset. If cash flows cannot be separately and independently
identified for a single asset, we 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.
ASSET IMPAIRMENT CHARGE
During the quarter ended September 30, 2005, we wrote down assets related to our
truck wash operations determined to be impaired by approximately $966,000. We
have determined that due to further reductions in truck wash volumes resulting
from inclement weather, competition, increased fuel costs which had the effect
of reducing spending on truck washing, along with current data utilized in
estimating the fair market value of the truck wash facilities, their future
expected cash flows would not be sufficient to recover their respective carrying
values.
GOODWILL
In accordance with SFAS 142, Goodwill and Other Intangible Assets, the Company
completed annual impairment tests as of November 30, 2004, 2003, and 2002, and
will be subject to an impairment test each year thereafter and whenever there is
an impairment indicator. The Company's annual impairment testing corresponds
with the Company's determination of its annual operating budgets for the
upcoming year. The Company's valuation of goodwill is based on a discounted cash
flow model applying an appropriate discount rate to future expected cash flows
and management's annual review of historical data and future assessment of
certain critical operating factors, including, car wash volumes, average car
wash and detailing revenue rates per car, wash and detailing labor cost
percentages, weather trends and recent and expected operating cost levels.
Estimating cash flows requires significant judgment including factors beyond our
control and our projections may vary from cash flows eventually realized.
Adverse business conditions could affect recoverability of goodwill in the
future and, accordingly, the Company may record additional impairments in
subsequent years.
OTHER INTANGIBLE ASSETS
Other intangible assets consist primarily of deferred financing costs, customer
lists, product lists, trademarks, and a registered
17
national brand name. In accordance with SFAS 142, Goodwill and Other Intangible
Assets, our trademarks and brand name are considered to have indefinite lives,
and as such, are 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 cannot be predicted with any
certainty whether or not they will occur. Deferred financing costs are amortized
on a straight-line basis over the terms of the respective debt instruments.
Customer lists, product lists, and non-compete agreements are amortized on a
straight-line basis over their respective estimated useful lives.
INCOME TAXES
Deferred income taxes are determined based on the difference between the
financial accounting and tax bases of assets and liabilities. Deferred income
tax expense (benefit) represents the change during the period in the deferred
income tax assets and deferred income tax liabilities. Deferred income tax
assets include tax loss and credit carryforwards and are reduced by a valuation
allowance if, based on available evidence, it is more likely than not that some
portion or all of the deferred income tax assets will not be realized.
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid on all indebtedness was approximately $1.5 million and $1.4
million for the nine months ended September 30, 2005 and 2004, respectively.
Income taxes paid were $91,000 in the nine months ended September 30, 2005 and
$231,000 in the nine months ended September 30, 2004. Noncash investing and
financing activities of the Company excluded from the statement of cash flows
include a property addition financed by common stock of $1.6 million, real
estate partially funded by a mortgage of approximately $825,000, and the sale of
property and simultaneous pay down of a related mortgage of $325,000, all in
2004.
INTRODUCTION
REVENUES
CAR AND TRUCK WASH SERVICES
We own full service, exterior only and self-service car wash locations in New
Jersey, Pennsylvania, Delaware, Texas, Florida and Arizona, as well as truck
washes in Arizona, Indiana, Ohio and Texas. We earn revenues from washing and
detailing automobiles; performing oil and lubrication services, minor auto
repairs, and state inspections; selling fuel; and selling merchandise through
convenience stores within the car wash facilities. Revenues generated for the
nine months ended September 30, 2005 for the Car and Truck Wash Segment were
comprised of approximately 81% car wash and detailing, 8% lube and other
automotive services, and 11% fuel and merchandise.
The majority of revenues are collected in the form of cash or credit card
receipts, thus minimizing customer accounts receivable.
Weather has had a significant impact on volume and revenue at the individual
locations. We believe that the geographic diversity of our operating locations
in different regions of the country helps mitigate the risk of adverse
weather-related influence on our volume.
SECURITY
Our Security Segment designs, manufactures, markets and sells a wide range of
products. The Company's primary focus in the Security Segment is the design of
electronic video surveillance systems and components that it produces and sells,
primarily to installing dealers, system integrators and end users. Other
products in our Security Segment include, but are not limited to,
less-than-lethal defense sprays, personal alarms, biometric locks and plasma
monitors. The main marketing channels for our products are industry shows,
outside sales representatives, catalogs, internet, sales through a call center
and sales through mass merchants and trade publications.
18
COST OF REVENUES
CAR AND TRUCK WASH SERVICES
Cost of revenues within the Car and Truck Wash Segment 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.
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. Product warranty costs
related to the Security Segment have been minimal in that the majority of
customer product warranty claims are reimbursed by the supplier.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses consist primarily of
management, clerical and administrative salaries, professional services,
insurance premiums, sales commissions, and other costs relating to marketing and
sales.
We capitalize direct incremental costs associated with business acquisitions.
Indirect acquisition costs, such as executive salaries, corporate overhead,
public relations, and other corporate services and overhead are expensed as
incurred.
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 method.
OTHER INCOME
Other income consists primarily of rental income received on renting out excess
space at our car wash facilities and includes gains and losses on the sale of
property and equipment and 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, fixed asset
adjustments and changes to the valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
Cash and cash equivalents were approximately $10.0 million at September 30,
2005. The ratio of our total debt to total capitalization, which consists of
total debt plus stockholders' equity, was 29.2% at September 30, 2005, and 30.5%
at December 31, 2004.
Our business requires a substantial amount of capital, most notably to pursue
our expansion strategies, including our current expansion in the Security
Segment, and for equipment purchases and upgrades for our Car and Truck Wash
Segment. We plan to meet these capital needs from various financing sources,
including borrowings, internally generated funds, and the issuance of common
stock if the market price of the Company's stock is at a desirable level.
As of September 30, 2005, we had working capital of approximately $16.9 million.
At December 31, 2004, working capital was approximately $17.5 million.
19
During the nine month periods ending September 30, 2005 and 2004, we made
capital expenditures of $867,000 and $739,000, respectively, within our Car and
Truck Wash Segment. We estimate aggregate capital expenditures for our Car and
Truck Wash Segment, exclusive of acquisitions of businesses, of approximately
$300,000 for the remainder of the year ending December 31, 2005. The Company
believes its current cash balance at September 30, 2005 of approximately $10.0
million and cash flow from operating activities will be sufficient to meet its
car wash capital expenditure funding needs through at least the next twelve
months. In years subsequent to 2005, we estimate that our Car and Truck Wash
Segment will require annual capital expenditures of $750,000 to $1.25 million.
Capital expenditures within our Car and Truck Wash Segment are necessary to
maintain the efficiency and competitiveness of our sites. If the cash provided
from operating activities does not improve in 2006 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 $230,000 and $3.6 million for
the nine month period ending September 30, 2005 and 2004, respectively. We spent
approximately $4.9 million through June 30, 2004 in the initial development of
our video surveillance systems operations in Ft. Lauderdale, Florida including
the acquisition costs of Micro-Tech and Vernex and the cost of developing and
purchasing inventory for our expanded product line. Additionally, on July 1,
2004 the Company paid approximately $5.6 million of cash for the acquisition of
the S&M and IVS security operations. We also made capital expenditures in 2004
of approximately $1.9 million for the purchase and furnishing of a new facility
in Farmers Branch, Texas for our S&M and IVS security operations. Approximately
$825,000 of the Farmers Branch, Texas facility purchase price was financed with
debt. We estimate capital expenditures for the Security Segment at approximately
$150,000 for the remainder of 2005, principally related to hurricane damage work
at a Florida property and facility improvements and equipment for our Farmers
Branch, Texas and Ft. Lauderdale, Florida operations.
We intend to continue to expend significant cash for the purchase of inventory
as we grow and introduce new video surveillance products in 2005 and in years
subsequent to 2005. We anticipate that inventory purchases will be funded from
cash collected from sales and working capital. At September 30, 2005, we
maintained an unused $500,000 revolving credit facility with Bank One to provide
financing for additional video surveillance product inventory purchases. This
revolving credit facility is subject to an availability calculation based on
inventory and accounts receivable (as defined in our bank agreement). Based upon
availability calculations at September 30, 2005, the full amount of the
revolving credit facility is currently available. The amount of capital that we
will spend in 2005 and in years subsequent to 2005 is largely dependent on the
marketing success we achieve with our video surveillance systems and components.
We believe our cash balance of approximately $10.0 million at September 30, 2005
and the revolving credit facility will provide for growth in 2006. Unless our
operating cash flow improves, our growth will be limited if we deplete our cash
balance.
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
current debt service coverage ratios 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. For the twelve month
period ended September 30, 2005 we were in default on certain of our debt
covenants. We obtained waivers through October 1, 2006 from the lenders. 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 September 30, 2005, we had borrowings, including capital lease obligations,
of approximately $27.2 million. We had three letters of credit outstanding at
September 30, 2005, totaling $1.1 million as collateral relating to workers'
compensation insurance policies. We maintain a $500,000 revolving credit
facility, subject to an availability calculation based on inventory and accounts
receivable, to provide financing for additional video surveillance product
inventory purchases. There were no borrowings outstanding under the revolving
credit facility at September 30, 2005. The Company also maintains a $600,000
line of credit for commerical letters of credit for the importation of
inventory. There were no outstanding commerical letters of credit under this
commitment at September 30, 2005.
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.
20
At September 30, 2005, we were not in compliance with our semi-annual
consolidated debt coverage ratio of at least 1.25:1 related to our GMAC notes
payable. The Company's debt coverage ratio related to the GMAC notes payable was
1.01:1 at September 30, 2005. GMAC granted us a waiver of acceleration related
to the non-compliance with the debt coverage ratio covenant at September 30,
2005, and for measurement periods through October 1, 2006 and, accordingly, a
portion of the GMAC notes payable was reflected as non-current on our financial
statements at September 30, 2005. If we are not able to achieve a debt coverage
ratio of at least 1.25:1, and we cannot obtain further waivers of acceleration,
the GMAC notes may be reflected as current in future balance sheets and as a
result our stock price may decline.
The Company entered into amendments to the Bank One term loan agreements
effective March 31, 2004. The amended debt coverage ratio with Bank One requires
the Company to maintain a ratio of consolidated earnings before interest, income
taxes, depreciation and amortization to debt service of 1.05:1 at September 30,
2004 and thereafter. The Company's debt coverage ratio was 1.02:1 at September
30, 2005, which was not in compliance with this Bank One covenant, as amended.
The Company received a waiver of acceleration with respect to this debt coverage
ratio from Bank One through October 1, 2006 and, accordingly, a portion of the
Bank One notes payable was reflected as non-current on our consolidated
financial statements at September 30, 2005. The Bank One amendment also requires
the maintenance of a minimum total unencumbered cash and marketable securities
balance of $5 million. This cash balance requirement will be lowered to $1
million upon the Company returning to a debt coverage ratio of at least 1.10 to
1. If we are unable to satisfy these covenants and we cannot obtain further
waivers, the Bank One notes may be reflected as current in future balance sheets
and as a result our stock price may decline.
The Company sold two unprofitable or marginally profitable car wash facilities
in 2004 and increased its prices in March 2004 within the Car and Truck Wash
Segment to help improve cash flows. 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 debt service including interest expense
increases more than expected causing us to further default on any of the Bank
One covenants or the GMAC covenant in the future, the Company will need to
obtain further amendments or waivers from these lenders. Our cash flow has been
and could continue to be adversely affected by weather patterns, economic
conditions, and the requirements to fund the growth of our security business. In
the event that non-compliance with the debt covenants should reoccur, the
Company would pursue various alternatives to attempt to successfully resolve the
non-compliance, which might include, among other things, seeking additional debt
covenant waivers or amendments, or refinancing debt with other financial
institutions. If the Company is unable to obtain waivers or amendments in the
future, Bank One debt currently totaling $13.68 million and GMAC debt currently
totaling $9.98 million, including debt recorded as long-term debt at September
30, 2005, would become payable on demand by the financial institution upon
expiration of the current waivers. There can be no assurance that further debt
covenant waivers or amendments would be obtained or that the debt would be
refinanced with other financial institutions at favorable terms. If we are
unable to obtain renewals on maturing loans or refinancing of loans on favorable
terms, our ability to operate would be materially and adversely affected.
The Company is obligated under various operating leases, primarily for certain
equipment and real estate within the Car and Truck Wash Segment. Certain of
these leases contain purchase options, renewal provisions, and contingent
rentals for our proportionate share of taxes, utilities, insurance, and annual
cost of living increases.
The following are summaries of our contractual obligations and other commercial
commitments at September 30, 2005 (in thousands):
Payments Due By Period
--------------------------------------------------
Two to Four to
Less than Three Five More Than
Contractual Obligations (1) Total One Year Years Years Five Years
----------------------- ------- --------- ------- ------- ----------
Long-term debt (2) $27,103 $ 2,082 $ 8,150 $10,299 $ 6,572
Capital leases (2) 102 58 44 - -
Minimum operating lease payments 3,448 863 1,231 543 811
------- ------- ------- ------- -------
$30,653 $ 3,003 $ 9,425 $10,842 $ 7,383
======= ======= ======= ======= =======
21
Amounts Expiring Per Period
--------------------------------------------------
Two to Four to
Less than Three Five More Than
Other Commercial Commitments Total One Year Years Years Five Years
---------------------------- ------- --------- ------- ------- ----------
Line of credit (3) $ - $ - $ - $ - $-
Standby letters of credit (4) 1,078 1,078 - - -
------ ------- --- --- --
$1,078 $ 1,078 $ - $ - $-
====== ======= === === ==
(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 $2.0 million.
(3) The Company maintains a $500,000 revolving credit facility, subject to an
availability calculation based on inventory and accounts receivable, to
provide financing for additional electronic surveillance product inventory
purchases. There were no borrowings outstanding under the Company's line
of credit at September 30, 2005.
(4) Outstanding letters of credit of $1,078,000 represent collateral for
workers' compensation policies. The Company also maintains a $600,000 line
of credit for commercial letters of credit for the importation of
inventory. There were no outstanding commercial letters of credit under
this commitment at September 30, 2005.
Mace currently employs Louis D. Paolino, Jr. as its President and Chief
Executive Officer under a three-year employment agreement dated August 12, 2003.
The principal terms of the employment agreement include: an annual salary of
$400,000; a car at a lease cost of $1,500 per month; provision for certain
medical and other employee benefits; prohibition against competing with Mace
during employment and for a three-month period following a termination of
employment; and a $2.5 million payment in the event that Mr. Paolino's
employment is terminated for certain reasons set forth in the employment
agreement. The termination payment is not due in the event of termination due to
death or disability or certain prohibited conduct, as more fully set forth in
the employment agreement. The termination payment is due if Mr. Paolino is
terminated for unsatisfactory job performance. The employment agreement also
entitles Mr. Paolino to a $2.5 million change-of-control bonus.
The Master Facility Agreement between the Company and Fusion Capital Fund II,
LLC ("Fusion") and the Equity Purchase Agreement between the Company and Fusion
has been terminated. Under the Master Facility Agreement, the Company had
entered into an Equity Purchase Agreement on April 17, 2000. Under the Equity
Purchase Agreement, Fusion had the right and obligation to purchase up to $10
million of the Company's common stock under certain conditions. On April 21,
2004, the Company and Fusion entered into a termination and release agreement
under which the Company sold Fusion 150,000 registered shares of the Company's
common stock at $2.32 per share and terminated the Equity Purchase Agreement.
CASH FLOWS
Operating Activities. Net cash provided by operating activities totaled $394,000
for the nine months ended September 30, 2005. Cash provided by operating
activities in 2005 was primarily due to positive operating results, exclusive of
two non-cash asset impairment charges, and an increase in accrued expenses,
partially offset by a reduction in accounts payable and growth in inventory as
the Company experiences growth in the Security Segment. Net cash provided by
operating activities totaled approximately $1.6 million for the nine months
ended September 30, 2004. Cash provided by operating activities in 2004 was
primarily due to an increase in accrued expenses and accounts payable offset by
growth in inventory and accounts receivable as a result of acquiring IVS and S&M
of July 1, 2004.
Investing Activities. Cash used in investing activities totaled approximately
$2.9 million for the nine months ended September 30, 2005, which includes the
purchase of short-term investments of $2.6 million, capital expenditures of
$717,000 related to ongoing car care operations and $225,000 for the Security
Segment partially offset by proceeds of $687,000 from the sale of two unused
warehouse bays in Florida. Cash used in investing activities totaled
approximately $7.0 million for the nine months ended September 30, 2004, which
includes $5.6 million for the acquisition of IVS and S&M, $739,000 for capital
expenditures relating to ongoing car care operations and $1.3 million for the
Security Segment.
Financing Activities. Cash used in financing activities was approximately $2.0
million for the nine months ended September 30, 2005, which includes routine
principal payments on debt of $1.7 million and payoff of $338,000 of debt
utilizing proceeds from
22
the previously mentioned sale of a warehouse bay. Cash provided by financing
activities was $13.9 million for the nine months ended September 30, 2004, which
includes $6.9 million of proceeds from the issuance of common stock and the
exercise of stock options and $8.95 million of proceeds from the removal of
restrictions on shares, partially offset by routine principal payments on debt
of $1.9 million.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2004
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues:
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2005 2004
----- ------
Revenues 100.0% 100.0%
Cost of revenues 73.0 73.0
Selling, general and administrative expenses 21.2 20.6
Depreciation and amortization 3.4 3.7
Asset impairment charge 1.9 -
----- -----
Operating income 0.5 2.7
Interest expense, net (2.6) (3.3)
Other income 0.6 0.5
----- -----
Loss before income taxes (1.5) (0.1)
Income tax benefit (0.2) -
----- -----
Net loss (1.3)% (0.1)%
===== =====
REVENUES
CAR AND TRUCK WASH SERVICES
Revenues for the nine months ended September 30, 2005 were $32.4 million as
compared to $31.2 million for the nine months ended September 30, 2004, an
increase of $1.2 million or 3.8%. This increase was primarily attributable to an
increase in car wash and detail services. Of the $32.4 million of revenues for
the nine months ended September 30, 2005, $26.2 million or 81% was generated
from car and truck wash and detailing, $2.5 million or 8% from lube and other
automotive services, and $3.6 million or 11% from fuel and merchandise sales. Of
the $31.2 million of revenues for the nine months ended September 30, 2004,
$25.4 million or 81% was generated from car and truck wash and detailing, $2.7
million or 9% from lube and other automotive services, and $3.1 million or 10%
from fuel and merchandise sales. The increase in car and truck wash and detail
revenues was principally due to an increase in consumer spending and an
improvement in weather trends in the second quarter in most of the Company's
markets, partially offset by the divesting of two of our car wash locations in
the first half of 2004. Overall car wash volumes increased 4.3% in the first
nine months of 2005 as compared to the same period 2004, net of a 1.4% reduction
from the closing or divesting of the two car wash locations noted above. In
addition to this increase in volume, the Company experienced an increase in
average car wash and detailing revenue per car to $15.20 in the first nine
months of 2005, from $15.07 in the same period in 2004. This increase in average
car wash and detailing revenue per car was the result of management's continued
focus on aggressively selling detailing and additional on-line car wash
services. This increase was partially offset by a $350,000 decrease in truck
wash revenue. The increase in fuel and merchandise revenues is primarily the
result of an increase in the price of fuel and the addition of higher quality
merchandise in our car wash lobbies. Management expects car wash volumes and
revenues to continue at historic levels consistent with weather patterns.
SECURITY
Revenues within the Security Segment were approximately $19.3 million and $10.7
million for the nine months ended September 30, 2005 and 2004, respectively. The
increase in revenues within the Security Segment was due principally to internal
growth in sales to security system installers, approximately $0.6 million of
sales growth within the Company's personal defense products
23
operations, and $5.7 million increase in sales by IVS and S&M, which we acquired
in July of 2004 and, therefore, only contributed revenues for three months of
the nine months ended September 30, 2004. Management expects revenues to
increase in the electronic surveillance systems areas where the Company is
expanding its sales staff and marketing efforts.
COST OF REVENUES
CAR AND TRUCK WASH SERVICES
Cost of revenues for the nine months ended September 30, 2005 were $24.1
million, or 74% of revenues, with car and truck washing and detailing costs at
72% of respective revenues, lube and other automotive services costs at 77% of
respective revenues, and fuel and merchandise costs at 87% of respective
revenues. Cost of revenues for the nine months ended September 30, 2004 were
$23.0 million, or 74% of revenues, with car and truck washing and detailing
costs at 72% of respective revenues, lube and other automotive services costs at
77% of respective revenues, and fuel and merchandise costs at 87% of respective
revenues.
SECURITY
During the nine months ended September 30, 2005 cost of revenues were $13.7
million or 71% of revenues as compared to $7.7 million or 71% of revenues for
the nine months ended September 30, 2004. The increase in cost of revenue in
2005 is principally due to growth in sales of advanced imaging components and
video equipment sold by IVS, increased sales of monitors, and a increase in
sales to distributors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the nine months ended September
30, 2005 were $11.0 million compared to $8.6 million for the same period in
2004. SG&A expenses as a percent of revenues were 21.2% for the nine months
ended September 30, 2005 as compared to 20.6% in the same period in 2004. The
increase in SG&A costs is primarily the result of the growth in the Security
Segment which added an additional $2.0 million of SG&A costs in 2005. These
increases were in the areas of marketing and selling costs and administration
personnel costs as additional staff was added to handle planned growth.
Corporate SG&A costs also increased approximately $234,000 principally related
to increased insurance costs, increased auditing and consulting fees related to
preparation for the audit of internal controls over financial reporting as
required by Section 404 of the Sarbanes-Oxley Act of 2002 and increased
corporate salaries. Management expects SG&A costs to increase in the future as
the Company expands its Security operations.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization totaled $1.8 million for the nine months ended
September 30, 2005 as compared to $1.5 million for the same period in 2004.
ASSET IMPAIRMENT CHARGE
During the quarter ended September 30, 2005, we wrote down assets related to our
truck wash operations determined to be impaired by approximately $966,000. We
have determined that due to further reductions in truck wash volumes resulting
from inclement weather, competition, increased fuel costs which had the effect
of reducing spending on truck washing, along with current data utilized in
estimating the fair market value of the truck wash facilities, their future
expected cash flows would not be sufficient to recover their respective carrying
values.
INTEREST EXPENSE, NET
Interest expense, net of interest income, for the nine months ended September
30, 2005 was $1.3 million compared to $1.4 million for the nine months ended
September 30, 2004.
OTHER INCOME
Other income for the nine months ended September 30, 2005 was $316,000 compared
to $202,000 for the nine months ended September 30, 2004. The increase in other
income for 2005 is principally due to a gain on short term investments of
$147,000.
24
INCOME TAXES
The Company recorded tax benefits of $96,000 and $15,000 for the nine months
ended September 30, 2005 and 2004, respectively. Tax benefit reflects the
recording of income taxes at an effective rate of approximately 36% in both 2005
and 2004. The effective rate differs from the federal statutory rate for each
year primarily due to state and local income taxes, non-deductible costs related
to intangibles, fixed asset adjustments and changes to the valuation allowance.
Additionally, the income tax benefit for the nine months ended September 30,
2005 was reduced by a $182,000 write-off of deferred tax assets of one of the
Company's subsidiaries generated from net operating loss carryforwards in
certain states in which the subsidiary operates. It is management's belief that
it is unlikely that the benefit from these net operating loss carryforwards will
be realized
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2004
REVENUES
CAR AND TRUCK WASH SERVICES
Revenues for the three months ended September 30, 2005 were $10.4 million as
compared to $9.8 million for the three months ended September 30, 2004, an
increase of $0.6 million or 5.7%. This increase was primarily attributable to an
increase in car wash and detail services. Of the $10.4 million of revenues for
the three months ended September 30, 2005, $8.1 million or 79% was generated
from car and truck wash and detailing, $0.9 million or 8% from lube and other
automotive services, and $1.4 million or 13% from fuel and merchandise sales. Of
the $9.8 million of revenues for the three months ended September 30, 2004, $7.9
million or 81% was generated from car and truck wash and detailing, $0.9 million
or 9% from lube and other automotive services, and $1.0 million or 10% from fuel
and merchandise sales. The increase in car wash and detail revenues was
principally due to an increase in consumer spending and an improvement in
weather trends in most of the Company's markets. Overall, car wash volumes
increased 4.4% in the third quarter of 2005 as compared to the third quarter of
2004. The Company also experienced a slight increase in average car wash and
detailing revenue per car to $15.69 in the third quarter of 2005, from $15.59 in
the same period in 2004. This increase was partially offset by a $128,000
decrease in truck wash revenue. The increase in fuel and merchandise revenues is
primarily the result of an increase in the price of fuel and the addition of
higher quality merchandise in our car wash lobbies. Management expects car wash
volumes and revenues to continue at historic levels consistent with weather
pattern.
SECURITY
Revenues within the Security Segment were approximately $5.7 million and $6.9
million for the three months ended September 30, 2005 and 2004, respectively.
The decrease in revenues within the Security Segment was due principally to a
decrease in electronic surveillance equipment sales to retail distributors and
sales within our consumer based call center. This decrease in sales was
partially offset by growth in sales of our professional line of electronic
surveillance equipment to dealers and installers and growth in sales of our
less-than-lethal defense spray products. Management expects revenues to increase
in the electronic surveillance systems areas where the Company is expanding its
sales staff and marketing efforts.
COST OF REVENUES
CAR AND TRUCK WASH SERVICES
Cost of revenues for the three months ended September 30, 2005 were $8.1
million, or 78% of revenues, with car and truck washing and detailing costs at
77% of respective revenues, lube and other automotive services costs at 76% of
respective revenues, and fuel and merchandise costs at 88% of respective
revenues. Cost of revenues for the three months ended September 30, 2004 were
$7.3 million, or 75% of revenues, with car and truck washing and detailing costs
at 73% of respective revenues, lube and other automotive services costs at 76%
of respective revenues, and fuel and merchandise costs at 88% of respective
revenues. The Company experienced a decrease in car and truck wash and detailing
operating margins in the September 2005 quarter, as compared to the same period
in 2004, largely due to an increase in certain direct operating expenses,
including an increase in car wash labor costs as a percent of revenues from
50.6% in 2004 to 52.5% in 2005.
25
SECURITY
During the three months ended September 30, 2005 cost of revenues were $4.0
million or 70% of revenues as compared to $5.2 million or 75% of revenues for
the three months ended September 30, 2004. The decrease in costs as a percent of
revenues in 2005 is principally due a decrease in sales of advanced imaging
components and video equipment sold by Industrial Vision Source and a decrease
in sales to retail distributors, both of which have gross profit margins
typically lower than other security products, combined with an improvement in
gross profits margins related to sales of electronic surveillance security
products to installers and dealers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
September 30, 2005 and 2004 were $3.6 million. SG&A expenses as a percent of
revenues were 22.3% for the three months ended September 30, 2005 as compared to
21.7% in the third quarter of 2004. The increase in SG&A costs as a percent of
sales is primarily the result of the reduction in Security Segment sales in
2005. Management expects SG&A costs to increase in the future as the Company
expands its Security operations.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization totaled $590,000 for the three months ended
September 30, 2005 as compared to $539,000 for the same period in 2004.
ASSET IMPAIRMENT CHARGE
During the quarter ended September 30, 2005, we wrote down assets related to our
truck wash operations determined to be impaired by approximately $966,000. We
have determined that due to further reductions in truck wash volumes resulting
from inclement weather, competition, increased fuel costs which had the effect
of reducing spending on truck washing, along with current data utilized in
estimating the fair market value of the truck wash facilities, their future
expected cash flows would not be sufficient to recover their respective carrying
values.
INTEREST EXPENSE, NET
Interest expense, net of interest income, for the three months ended September
30, 2005 was $441,000 compared to $447,000 for the three months ended September
30, 2004.
OTHER INCOME
Other income for the three months ended September 30, 2005 was $104,000 compared
to $91,000 for the three months ended September 30, 2004. The increase in other
income for 2005 is principally due to a gain on short-term investments of
$92,000, and a $59,000 gain on the sale of a warehouse bay in Florida, partially
offset by a $100,000 write down of certain property, equipment, and inventory as
a result of damage from hurricane Katrina at one of our Florida properties.
INCOME TAXES
The Company recorded tax benefits of $350,000 and $129,000 for the three months
ended September 30, 2005 and 2004, respectively. Tax benefit reflects the
recording of income taxes at an effective rate of approximately 36% in both 2005
and 2004. The effective rate differs from the federal statutory rate for each
year primarily due to state and local income taxes, non-deductible costs related
to intangibles, fixed asset adjustments and changes to the valuation allowance.
Additionally, the income tax benefit for the three months ended September 30,
2005 was reduced by a $182,000 write-off of deferred tax assets of one of the
Company's subsidiaries generated from net operating loss carryforwards in
certain states in which the subsidiary operates. It is management's belief that
it is unlikely that the benefit from these net operating loss carryforwards will
be realized
26
RISK FACTORS
FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING STATEMENTS
This report includes forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended ("Forward-Looking Statements"). All statements
other than statements of historical fact included in this report are
Forward-Looking Statements. Although we believe that the expectations reflected
in such Forward-Looking Statements are reasonable, we can give no assurance that
such expectations will prove to be correct. Generally, these statements relate
to business plans or strategies, projected or anticipated benefits or other
consequences of such plans or strategies, number of acquisitions, and projected
or anticipated benefits from acquisitions made by or to be made by us, or
projections involving anticipated revenues, earnings, levels of capital
expenditures or other aspects of operating results. All phases of our operations
are subject to a number of uncertainties, risks, and other influences, many of
which are outside our control and any one of which, or a combination of which,
could materially affect the results of our operations and whether
Forward-Looking Statements made by us ultimately prove to be accurate. Such
important factors that could cause actual results to differ materially from our
expectations are disclosed in this section and elsewhere in this report. All
subsequent written and oral Forward-Looking Statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the important factors described below that could cause actual
results to differ from our expectations. The Forward- Looking Statements made
herein are only made as of the date of this filing, and we undertake no
obligation to publicly update such Forward-Looking Statements to reflect
subsequent events or circumstances.
IF WE DO NOT RAISE ADDITIONAL CAPITAL, WE MAY NEED TO SUBSTANTIALLY REDUCE THE
SCALE OF OUR OPERATIONS AND CURTAIL OUR BUSINESS PLAN.
Our business plan involves growing through acquisitions and internal
development, each of which requires significant capital. Our capital
requirements also include working capital for daily operations and significant
capital for equipment purchases. Although we had positive working capital of
$16.9 million as of September 30, 2005, we have a history of net losses and in
some years we have ended our fiscal year with a negative working capital
balance. To the extent that we lack cash to meet our future capital needs, we
will need to raise additional funds through bank borrowings and significant
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.
IF WE ARE NOT ABLE TO MANAGE GROWTH, OUR BUSINESS PLAN MAY NOT BE REALIZED.
Our business objectives include developing our Security Segment, both internally
and through acquisitions, if we can do so under advantageous terms. As such, our
business plan is predicated on growth. If we succeed in growing, it will place
significant burdens on our management and on our operational and other
resources. For example, it may be difficult to assimilate the operations and
personnel of an acquired business into our existing business; we must integrate
management information and accounting systems of an acquired business into our
current systems; our management must devote its attention to assimilating the
acquired business, which diverts attention from other business concerns; we may
enter markets in which we have limited prior experience; and we may lose key
employees of an acquired business. We will also need to attract, train,
motivate, retain, and supervise senior managers and other employees. If we fail
to manage these burdens successfully, one or more of the acquisitions could be
unprofitable, the shift of our management's focus could harm our other
businesses, and we may be forced to abandon our business plan, which relies on
growth.
IF WE VIOLATE THE FINANCIAL COVENANTS WITH OUR LENDERS, OUR BORROWINGS MAY BE
ACCELERATED.
Our bank debt borrowings as of September 30, 2005 were $27.2 million
substantially all of which is secured by mortgages against certain of our real
property. Of such borrowings, $2.1 million is classified as current as it is due
in less than 12 months from September 30, 2005. Our two most significant
borrowings are secured notes payable to General Motors Acceptance Corp. ("GMAC")
in the amount of $9.98 million, $9.04 million of which was classified as
non-current debt at September 30, 2005, and secured notes payable to Bank One,
Texas, N.A. ("Bank One") in the amount of $13.68 million, $12.72 million of
which was classified as non-current debt at September 30, 2005. The GMAC and
Bank One agreements contain affirmative and negative covenants, including the
maintenance of certain levels of tangible net worth, maintenance of certain
levels of unencumbered cash and marketable securities, limitations on capital
spending and the maintenance of certain debt coverage ratios on a consolidated
level. The Bank One agreement is our only debt agreement that contains an
express prohibition on incurring additional debt for borrowed money without the
approval of the lender. None of our other agreements contain such a prohibition.
Our warehouse
27
and office facility in Farmers Branch, Texas, twenty five car washes and one
truck wash are encumbered by mortgages. At September 30, 2005, we were not in
compliance with our semi-annual consolidated debt coverage ratio of at least
1.25:1 related to our GMAC notes payable. The Company's debt coverage ratio
related to the GMAC notes payable was 1.01:1 at September 30, 2005. GMAC granted
us a waiver of acceleration related to the non-compliance with the debt coverage
ratio covenant at September 30, 2005, and for measurement periods through
October 1, 2006 and, accordingly, a portion of the GMAC notes payable was
reflected as non-current on our consolidated financial statements at September
30, 2005. If we are not able to achieve a debt coverage ratio of at least
1.25:1, and we cannot obtain further waivers of acceleration, the GMAC notes may
be reflected as current in future balance sheets and as a result our stock price
may decline.
The Company entered into amendments to the Bank One term loan agreements
effective March 31, 2004. The amended debt coverage ratio with Bank One requires
the Company to maintain a ratio of consolidated earnings before interest, income
taxes, depreciation and amortization to debt service of 1.05:1 at September 30,
2004 and thereafter. The Company's debt coverage ratio related to the Bank One
term loan agreement was 1.02:1 at September 30, 2005, which was not in
compliance with this Bank One covenant, as amended. The Company received a
waiver of acceleration with respect to this debt coverage ratio from Bank One
through October 1, 2006 and, accordingly, a portion of the Bank One notes
payable was reflected as non-current on our consolidated financial statements at
September 30, 2005. The Bank One amendment also requires the maintenance of a
minimum total unencumbered cash and marketable securities balance of $5.0
million. This cash balance requirement will be lowered to $1 million upon the
Company returning to a debt coverage ratio of at least 1.10:1. If we are unable
to satisfy these covenants and we cannot obtain further waivers, the Bank One
notes may be reflected as current in future balance sheets and as a result our
stock price may decline.
Our ongoing ability to comply with the debt covenants under our credit
arrangements and refinance our debt depends largely on our achievement of
adequate levels of cash flow. Our cash flow has been and could continue to be
adversely affected by weather patterns and economic conditions. In the future,
if our cash flows are less than expected or debt service, including interest
expense, increases more than expected, we may continue to be out of compliance
with the Bank One and GMAC covenants and need to seek additional waivers or
amendments.
If we default on any of the Bank One or GMAC covenants and are not able to
obtain further amendments or waivers of acceleration, Bank One debt totaling
$13.68 million and GMAC debt totaling $9.98 million, including debt recorded as
long-term debt at September 30, 2005, could become due and payable on demand,
and Bank One and/or GMAC could foreclose on the assets pledged in support of the
relevant indebtedness. If our assets (including up to 25 of our car wash
facilities and one truck wash) are foreclosed upon, revenues from our Car and
Truck Wash Segment, which comprised 71% of our total revenues for fiscal year
2004 and 63% of our total revenues in the nine months ended September 30, 2005,
would be severely impacted and we may be unable to continue to operate our
business. Even if the debt were accelerated without foreclosure, it would be
very difficult for us to continue to operate our business and we may go out of
business.
WE HAVE REPORTED NET LOSSES IN THE PAST. IF WE CONTINUE TO REPORT NET LOSSES,
THE PRICE OF OUR COMMON STOCK MAY DECLINE, OR WE COULD GO OUT OF BUSINESS.
For the year ended December 31, 2004, we reported a net loss although our
business as a whole generated positive cash flow from operations. The majority
of the reported losses in 2004 related to non-cash impairment charges of
intangible assets, particularly goodwill, in accordance with SFAS 142, Goodwill
and Other Intangible Assets. Under SFAS 142, which became effective on January
1, 2002, we no longer amortize goodwill and certain intangible assets determined
to have indefinite useful lives. Additionally, SFAS 142 requires annual fair
value based impairment tests of goodwill and other intangible assets identified
with indefinite useful lives. As a result, we may be required to record
additional impairments in the future, which could materially reduce our earnings
and equity.
IF WE LOSE THE SERVICES OF OUR EXECUTIVE OFFICERS, OUR BUSINESS MAY SUFFER.
If we lose the services of one or more of our executive officers and do not
replace them with experienced personnel, that loss of talent and experience will
make our business plan, which is dependent on active growth and management, more
difficult to implement. The employment agreements of Robert M. Kramer, Gregory
M. Krzemien, and Ronald R. Pirollo expired on March 26, 2003. Mr. Kramer is the
chief operating officer of our Car and Truck Wash Segment, and our general
counsel and secretary; Mr. Krzemien is our chief financial officer and
treasurer; and Mr. Pirollo is our chief accounting officer and corporate
controller. Messrs. Kramer and Krzemien are working on a month-to-month at-will
basis, and Mr. Pirollo is working on an at-will basis. Without employment
contracts, we may lose the services of any one or more of Messrs. Kramer,
Krzemien and Pirollo, each of whom has been involved in our management for
several years and would be difficult to replace. In addition, we do not maintain
key-man life insurance policies on our executive officers.
28
IF OUR INSURANCE IS INADEQUATE, WE COULD FACE SIGNIFICANT LOSSES.
We maintain various insurance coverages for our assets and operations. These
coverages include property coverages including business interruption protection
for each location. We maintain commercial general liability coverage in the
amount of $1 million per occurrence and $2 million in the aggregate with an
umbrella policy which provides coverage up to $25 million. We also maintain
workers' compensation policies in every state in which we operate. Commencing
July 2002, as a result of increasing costs of 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 businesses. The Company maintains excess coverage through
occurrence-based policies. With respect to our auto, general liability, and
workers' compensation policies, we are required to set aside an actuarial
determined amount of cash in a restricted "loss fund" account for the payment of
claims under the policies. We expect to fund these accounts annually as required
by the insurance company. Should funds deposited exceed claims incurred and
paid, unused deposited funds are returned to us with interest after the third
anniversary of the policy year-end. The captive insurance program is further
secured by a letter of credit from Mace in the amount of $973,000 at September
30, 2005. The Company records a monthly expense for losses up to the reinsurance
limit per claim based on the Company's tracking of claims and the insurance
company's reporting of amounts paid on claims plus their estimate of reserves
for possible future payments. There can be no assurance that our insurance will
provide sufficient coverage in the event a claim is made against us, or that we
will be able to maintain in place such insurance at reasonable prices. An
uninsured or under insured claim against us of sufficient magnitude could have a
material adverse effect on our business and results of operations.
RISKS RELATED TO OUR SECURITY SEGMENT
IF WE ARE NOT ABLE TO OPERATE OUR ELECTRONIC SURVEILLANCE PRODUCTS DIVISION
EFFECTIVELY, OUR BUSINESS WILL SUFFER.
In 2001, we expanded our Security Segment by adding video systems and
components. We are incurring expenses to develop and further expand these
products. There are numerous risks associated with expanding our video
surveillance systems and components that may prevent us from operating the
Security Segment profitably, including, among others: risks associated with
products which do not function properly; risks associated with unanticipated
liabilities of the acquired companies; risks inherent with our management having
limited experience in the electronic surveillance product market; risks relating
to the size and number of competitors in the video system and component product
market, many of whom may be more experienced or better financed; risks
associated with the costs of entering into new markets and expansion of product
lines in existing markets; risks associated with rapidly evolving technology and
having inventory become obsolete; risks associated with purchasing inventory
before having orders for that inventory; risks attendant to locating and
maintaining reliable sources of OEM products and component supplies in the
electronic surveillance industry; risks related to retaining key employees
involved in future technology development and communications with OEM suppliers;
and risks associated with developing and introducing new products in order to
maintain competitiveness in a rapidly changing marketplace. We also expect that
there will be costs related to product returns and warranties and customer
support that we cannot quantify or accurately estimate until we have more
experience in operating the electronic surveillance products division. If we are
not able to operate our electronic surveillance products division effectively,
our operating and financial results could be adversely impacted.
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD SERIOUSLY HARM OUR BUSINESS.
Although we have not been the subject of any such actions, third parties may in
the future assert against us infringement claims or claims that we have violated
a patent or infringed upon a copyright, trademark or other proprietary right
belonging to them. We design most of our security products and contract with
independent suppliers to manufacture those products and deliver them to us.
Certain of these products contain proprietary intellectual property of these
independent suppliers. Third parties may in the future assert claims against our
suppliers that such suppliers have violated a patent or infringed upon a
copyright, trademark or other proprietary right belonging to them. If such
infringement by our suppliers or us were found to exist, a party could seek an
injunction preventing the use of their intellectual property. In addition, if an
infringement by us were found to exist, we may attempt to acquire a license or
right to use such technology or intellectual property. Most of our suppliers
have agreed to indemnify us against any such infringement claim, but any
infringement claim, even if not meritorious and/or covered by an indemnification
obligation, could result in the expenditure of a significant amount of our
financial and managerial resources.
IF OUR ORIGINAL EQUIPMENT MANUFACTURERS FAIL TO ADEQUATELY SUPPLY OUR PRODUCTS,
OUR SECURITY PRODUCTS SALES MAY SUFFER.
Our products are manufactured on an OEM basis. Reliance upon OEMs, as well as
industry supply conditions, generally involves several risks, including the
possibility of defective products (which can adversely affect our reputation for
reliability), a shortage of components and reduced control over delivery
schedules (which can adversely affect our distribution schedules), and increases
in component costs (which can adversely affect our profitability). We have some
single-sourced manufacturer relationships, either
29
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.
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 increase, we could be subject to
additional product liability claims. We have a $25,000 deductible on our
insurance policy, meaning that all such lawsuits, even unsuccessful ones, and
ones covered by insurance, cost the Company money. Furthermore, if our insurance
coverage is exceeded, we will have to pay the excess liability directly. Our
product liability insurance provides coverage of $1 million per occurrence and
$2 million in the aggregate with an umbrella policy which provides coverage 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 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.
Some of our consumer defense spray manufacturing operations currently
incorporate hazardous materials, the use and emission of which are regulated by
various state and federal environmental protection agencies, including the
United States Environmental Protection Agency. We believe that we are in
compliance with all current state and local statutes governing our handling and
disposal of these hazardous materials, but if there are any changes in
environmental permit or regulatory requirements, or if we fail to comply with
any environmental requirements, these changes or failures may expose us to
significant liabilities that would have a material adverse effect on our
business and financial condition.
RISKS RELATED TO OUR CAR AND TRUCK WASH SEGMENT
IF CONSUMER DEMAND FOR OUR CAR WASH SERVICE DROPS, OUR BUSINESS WILL SUFFER.
Our revenues are primarily derived from our Car and Truck Wash Segment. As such,
our financial condition and results of operations will depend substantially on
continued consumer demand for car wash services. Our car wash business depends
on consumers choosing to employ professional services to wash their cars rather
than washing their cars themselves or not washing their cars at all. Also,
seasonal trends in some areas affect our car wash business. In particular, long
periods of rain and cloudy weather can adversely affect our car wash business as
people typically do not wash their cars during such periods. Additionally,
extended periods of warm, dry weather may encourage customers to wash their cars
themselves which also can adversely affect our car wash business. If there is a
drop in consumer demand, our financial condition and results of operations will
be adversely impacted.
WE FACE SIGNIFICANT COMPETITION AND IF WE CANNOT COMPETE EFFECTIVELY WE MAY LOSE
MONEY AND THE VALUE OF OUR SECURITIES COULD DECLINE.
The car care industry is highly competitive. Competition is based primarily on
location, customer service, available services, and price. We face competition
from both inside and outside the car care industry, including gas stations,
gasoline companies, automotive companies, specialty stores and convenience
stores that offer automated car wash services. Because barriers to entry into
the car care industry are relatively low, competition may be expected to
continually arise from new sources not currently competing with us. In some
cases, our competitors may have greater financial and operating resources than
we do. If we cannot effectively compete, our operating results are likely to be
negatively effected.
30
OUR CAR AND TRUCK WASH OPERATIONS FACE GOVERNMENTAL REGULATIONS, INCLUDING
ENVIRONMENTAL REGULATIONS, AND IF WE FAIL TO OR ARE UNABLE TO COMPLY WITH THOSE
REGULATIONS, OUR BUSINESS MAY SUFFER.
We are governed by federal, state and local laws and regulations, including
environmental regulations, that regulate the operation of our car wash centers
and other car care services businesses. Other car care services, such as
gasoline and lubrication, use a number of oil derivatives and other regulated
hazardous substances. As a result, we are governed by environmental laws and
regulations dealing with, among other things:
i. transportation, storage, presence, use, disposal, and handling of
hazardous materials and wastes;
ii. discharge of storm water; and
iii. underground storage tanks.
If uncontrolled hazardous substances were found on any of our properties,
including leased property, or if we were otherwise found to be in violation of
applicable laws and regulations, we could be responsible for clean-up costs,
property damage, fines, or other penalties, any one of which could have a
material adverse effect on our financial condition and results of operations.
Through our Car and Truck Wash Segment, we face a variety of potential
environmental liabilities, including those arising out of improperly disposing
waste oil or lubricants at our lube centers, improper maintenance of oil
discharge ponds, which exist at two of our truck washes, and leaks from our
underground gasoline storage tanks. If we improperly dispose of oil or other
hazardous substances, or if our oil discharge ponds or underground gasoline
tanks leak, we could be assessed fines by federal or state regulatory
authorities and/or be required to remediate the property. Although each case is
different, and there can be no assurance as to the cost to remediate an
environmental problem, if any, at one of our properties, the costs for
remediation and removal of a leaking discharge pond typically range from
$150,000 to $200,000, and the costs for remediation of a leaking underground
storage tank typically range from $30,000 to $75,000.
IF OUR CAR WASH EQUIPMENT IS NOT MAINTAINED, OUR CAR WASHES WILL NOT BE
OPERABLE.
Many of our car washes have older equipment that requires frequent repair or
replacement. Although we undertake to keep our car washing equipment in proper
operating condition, the operating environment in car washes results in frequent
mechanical problems. If we fail to properly maintain the equipment in a car
wash, that car wash could become inoperable resulting in a loss of revenue.
RISK RELATED TO THE SALE OF OUR CAR AND TRUCK WASH SEGMENT
IF WE SELL OUR CAR AND TRUCK WASH SEGMENT, OUR REVENUES WILL DECREASE AND OUR
BUSINESS MAY SUFFER.
On December 9, 2004, we engaged Legg Mason Wood Walker, Incorporated for the
purpose of identifying strategic business alternatives, including the possible
sale of all of our car and truck washes. We can offer no assurances that we will
be able to locate potential buyers for our Car and Truck Wash Segment or that we
will be able to consummate any sales to potential buyers we do locate. If we are
able to sell our Car and Truck Wash Segment, our total revenues will decrease
and our business will become reliant on the success of our Security Segment. Our
Security Segment faces significant risks as set forth herein and may impact our
ability to generate positive operating income or cash flows from operations, may
cause our financial results to become more volatile, or may otherwise materially
adversely affect us.
RISKS RELATED TO OUR STOCK
OUR STOCK PRICE HAS BEEN, AND LIKELY WILL CONTINUE TO BE, VOLATILE AND YOUR
INVESTMENT MAY SUFFER A DECLINE IN VALUE.
The market prices for securities of companies quoted on The NASDAQ Stock Market,
including our market price, have in the past been, and are likely to continue in
the future to be volatile. That volatility depends upon many factors, some of
which are beyond our control, including:
- announcements regarding the results of expansion or development efforts by
us or our competitors;
- announcements regarding the acquisition of businesses or companies by us
or our competitors;
- announcements regarding the disposition of all or a significant portion of
the assets that comprise our Car and Truck Wash Segment, which may or may
not be on favorable terms;
31
- technological innovations or new commercial products developed by us or
our competitors;
- changes in our, or our suppliers', intellectual property portfolio;
- issuance of new or changed securities analysts' reports and/or
recommendations applicable to us or our competitors;
- additions or departures of our key personnel;
- operating losses by us;
- actual or anticipated fluctuations in our quarterly financial and
operating results and degree of trading liquidity in our common stock; and
- our ability to maintain our common stock listing on the NASDAQ National
Market.
One or more of these factors could cause a decline in our revenues and income or
in the price of our common stock, thereby reducing the value of an investment in
our Company.
IF WE LOSE OUR LISTING ON THE NASDAQ NATIONAL MARKET, OUR STOCK WILL BECOME
SIGNIFICANTLY LESS LIQUID AND ITS VALUE MAY BE AFFECTED.
Our common stock is listed on the NASDAQ National Market with a bid price of
$2.65 at the close of the market on November 7, 2005. Although the recent
closing prices of our stock have been well in excess of $1.00, in 2004 our stock
traded at a price as low as $1.78. If the price of our common stock falls below
$1.00 and for 30 consecutive days remains below $1.00, we are subject to being
delisted from the NASDAQ National Market. Upon delisting from the NASDAQ
National Market, our stock would be traded on the NASDAQ SmallCap Market until
we maintain a minimum bid price of $1.00 for 30 consecutive days at which time
we can regain our listing on the NASDAQ National Market. If our stock fails to
maintain a minimum bid price of $1.00 for 30 consecutive days during a 180-day
grace period on the NASDAQ SmallCap Market or a 360-day grace period if
compliance with certain core listing standards are demonstrated, we could
receive a delisting notice from the NASDAQ SmallCap Market. Upon delisting from
the NASDAQ SmallCap Market, our stock would be traded over-the-counter, more
commonly known as OTC. OTC transactions involve risks in addition to those
associated with transactions in securities traded on the NASDAQ National Market
or the NASDAQ SmallCap Market (together "NASDAQ-Listed Stocks"). Many OTC stocks
trade less frequently and in smaller volumes than NASDAQ-Listed Stocks.
Accordingly, our stock would be less liquid than it would otherwise be. Also,
the values of these stocks may be more volatile than NASDAQ-Listed Stocks. If
our stock is traded in the OTC market and a market maker sponsors us, we may
have the price of our stock electronically displayed on the OTC Bulletin Board,
or OTCBB. However, if we lack sufficient market maker support for display on the
OTCBB, we must have our price published by the National Quotations Bureau LLP in
a paper publication known as the "Pink Sheets." The marketability of our stock
will be even more limited if our price must be published on the "Pink Sheets."
BECAUSE WE ARE A DELAWARE CORPORATION, IT MAY BE DIFFICULT FOR A THIRD PARTY TO
ACQUIRE US, WHICH COULD AFFECT OUR STOCK PRICE.
We are governed by Section 203 of the Delaware General Corporation Law, which
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an entity who is an "interested stockholder" for a period of
three years, unless approved in a prescribed manner. This provision of Delaware
law may affect our ability to merge with, or to engage in other similar
activities with, some other companies. This means that we may be a less
attractive target to a potential acquirer who otherwise may be willing to pay a
premium for our common stock above its market price.
IF WE ISSUE OUR AUTHORIZED PREFERRED STOCK, THE RIGHTS OF THE HOLDERS OF OUR
COMMON STOCK MAY BE AFFECTED AND OTHER ENTITIES MAY BE DISCOURAGED FROM SEEKING
TO ACQUIRE CONTROL OF OUR COMPANY.
Our certificate of incorporation authorizes the issuance of up to 10 million
shares of "blank check" preferred stock that could be designated and issued by
our board of directors to increase the number of outstanding shares and thwart a
takeover attempt. No shares of preferred stock are currently outstanding. It is
not possible to state the precise effect of preferred stock upon the rights of
the holders of our common stock until the board of directors determines the
respective preferences, limitations, and relative rights of the holders of one
or more series or classes of the preferred stock. However, such effect might
include: (i) reduction of the amount otherwise available for payment of
dividends on common stock, to the extent dividends are payable on any issued
shares of preferred stock, and restrictions on dividends on common stock if
dividends on the preferred stock are in arrears, (ii)
32
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.
THERE ARE ADDITIONAL RISKS SET FORTH IN OUR OTHER FILINGS WITH THE SECURITIES
AND EXCHANGE COMMISSION. In addition to the risk factors set forth above, you
should review the financial statements and exhibits included in our other
filings with the Securities and Exchange Commission. Such documents may contain,
in certain instances and from time to time, additional and supplemental
information relating to the risks set forth above and/or additional risks to be
considered by you, including, without limitation, information relating to losses
experienced by us in certain historical periods, working capital deficits at
particular dates, information relating to pending and recently completed
acquisitions by us, and estimates at various times of our potential liabilities
for compliance with environmental laws or in connection with pending litigation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in our exposure to market risks arising from
fluctuations in foreign currency exchange rates, commodity prices, equity prices
or market interest rates since December 31, 2004 as reported on our Form 10-K
for the year ended December 31, 2004.
A significant portion of our debt is at fixed rates, and as such, changes in
market interest rates would not significantly impact operating results unless
and until such debt would need to be refinanced at maturity. Substantially all
of our variable rate debt obligations are tied to the prime rate, as is our
incremental borrowing rate. A one percent increase in the prime and Libor rates
would not have a material effect on the fair value of our variable rate debt at
September 30, 2005 and would have had the impact of increasing interest expense
by approximately $163,000 for the twelve months ended September 30, 2005.
On October 14, 2004, we entered into an interest rate cap that effectively
changes our interest rate exposure on approximately $7 million of our variable
rate debt. The variable rate debt floats at prime plus .25% (7% at September 30,
2005). The hedge contract has a 36-month term and caps the interest rate on the
$7 million of variable rate debt at a cap rate of 6.5%. The derivative is
designated as a cash flow hedge and, accordingly, is marked to market with gains
and losses on the contract reported as a component of Accumulated Other
Comprehensive Income (Loss) and is classified into earnings in the earlier of
(i) the period the hedged transaction affects earnings, or (ii) the termination
of the hedge contract. At September 30, 2005 the contract, which was originally
purchased for $124,000, is included in other assets at its fair market value of
approximately $119,000.
ITEM 4. CONTROLS AND PROCEDURES
Under the direction of our Chief Executive Officer and Chief Financial Officer,
we evaluated our disclosure controls and procedures and internal control over
financial reporting and concluded that (i) our disclosure controls and
procedures were effective September 30, 2005, and (ii) no change in internal
control over financial reporting occurred during the quarter ended September 30,
2005, that has materially affected, or is reasonably likely to materially
affect, such internal control over financial reporting.
33
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information regarding our legal proceedings can be found in Note 6 Commitments
and Contingencies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes our equity security repurchases during the three
months ended September 30, 2005:
APPROXIMATE
TOTAL NUMBER OF DOLLAR VALUE OF
SHARES PURCHASED SHARES THAT MAY
AS PART OF PUBLICLY YET BE PURCHASED
TOTAL NUMBER OF AVERAGE PRICE ANNOUNCED PLANS UNDER THE PLANS OR
PERIOD SHARES PURCHASED PAID PER SHARE OR PROGRAMS PROGRAMS (1)
---------------------------- ---------------- -------------- ------------------- ------------------
July 1 to July 31, 2005 - - - $ 3,000,000
August 1 to August 31, 2005 - - - $ 3,000,000
September 1 to September 30,
2005 - - - $ 3,000,000
------ ------ ------
Total - - -
====== ====== ======
(1) On July 29, 2004, the Company's Board of Directors approved a share
repurchase program to allow the Company to repurchase up to an aggregate
$3,000,000 of its common shares in the future if market conditions so
dictate. As of September 30, 2005, no shares had been repurchased under
the program.
34
ITEM 6. EXHIBITS
(a) Exhibits:
10.1 Amended Audit Committee Charter dated November 3, 2005.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MACE SECURITY INTERNATIONAL, INC.
BY: /s/ Louis D. Paolino, Jr.
------------------------------
Louis D. Paolino, Jr., Chairman, Chief Executive Officer and President
BY: /s/ Gregory M. Krzemien
------------------------------
Gregory M. Krzemien, Chief Financial Officer
BY: /s/ Ronald R. Pirollo
------------------------------
Ronald R. Pirollo, Controller (Principal Accounting Officer)
DATE: November 9, 2005
36
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
10.1 AMENDED Audit Committee Charter dated November 3, 2005.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.