-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TzK57rK5KmUi03EdypX//smPOQrot2I0RFrRLUh+tgSMuKxi5URxC4ZOOrcR2VWQ rfrwIdim+wb+2f6QyKRV3g== 0000893220-04-002012.txt : 20040924 0000893220-04-002012.hdr.sgml : 20040924 20040924131622 ACCESSION NUMBER: 0000893220-04-002012 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040924 DATE AS OF CHANGE: 20040924 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MACE SECURITY INTERNATIONAL INC CENTRAL INDEX KEY: 0000912607 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 030311630 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-22810 FILM NUMBER: 041044438 BUSINESS ADDRESS: STREET 1: 1000 CROWFORD PLACE STREET 2: SUITE 400 CITY: MOUNT LAUREL STATE: NJ ZIP: 08054 BUSINESS PHONE: 8567782300 MAIL ADDRESS: STREET 1: 160 BENMONT AVE CITY: BENNINGTON STATE: VT ZIP: 05201 10-K/A 1 w02537e10vkza.txt FORM 10-K/A FOR MACE SECURITY INTERNATIONAL, INC. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 --------------- FORM 10-K/A AMENDMENT NO. 2 --------------- FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______ COMMISSION FILE NUMBER 0-22810 _____________ MACE SECURITY INTERNATIONAL, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 03-0311630 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 1000 CRAWFORD PLACE, SUITE 400 08054 MT. LAUREL, N.J. (Zip Code) (Address of Principal Executive Offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (856) 778-2300 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) of THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: TITLE OF EACH CLASS ------------------- Common Stock, par value $.01 per share (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant on June 30, 2004 was approximately $63,196,000. Such aggregate market value was computed by reference to the closing price of the common stock as reported on the Nasdaq National Market on June 30, 2004. For purposes of determining this amount only, Registrant has defined affiliates as including (a) the executive officers and directors of Registrant on June 30, 2004, and (b) each stockholder that had informed Registrant that it was the beneficial owner of 10% or more of the outstanding common stock of Registrant on June 30, 2004. The number of shares of Common Stock, par value $.01 per share, of the Registrant outstanding as of September 20, 2004 was 14,210,885. ================================================================================ INDEX TO FORM 10-K/A - PART II PART II - Item 7 Management's Discussion and Analysis of Financial Conditions and Results of Operations. PART II - Item 8 Financial Statements and Supplementary Data. PART III - Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K. EXPLANATORY NOTE This Annual Report on Form 10-K/A constitutes Amendment No. 2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2003. This Annual Report on Form 10-K/A is being filed solely to (i) amend and restate Part II - Item 7 Management's Discussion and Analysis of Financial Conditions and Results of Operations and (ii) amend the Financial Statements called for in Item 8, specifically Footnotes 5, 10 and 21 to the Consolidated Financial Statements, which were previously filed with the Commission as part of the Annual Report on Form 10-K for the year ended December 31, 2003 filed on March 15, 2004. Except for the additional information included in Item 7, Item 8 and Item 15, this Amendment does not update information that was presented in the Company's original Annual Report on Form 10-K to reflect recent developments that have occurred since that date. Additional information about the Company can be found in other filings it has made with the Commission. This Form 10-K/A has been filed by the Company in response to a review by the Securities and Exchange Commission of the Company's 1934 Securities Exchange Act filings. PART II - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion reviews our operations for each of the three years in the period ended December 31, 2003, and should be read in conjunction with our Consolidated Financial Statements and related notes thereto included elsewhere herein. The following discussion includes Forward-Looking Statements. The accuracy of such statements depends upon a variety of factors that may affect our business and operations. Certain of these factors are discussed under Description of Business - Factors Influencing Future Results and Accuracy of Forward-Looking Statements included in Item 1 of this report. SUMMARY OF CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the Company's financial statements. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, -1- and potentially result in materially different results under different assumptions and conditions. The Company's critical accounting policies are described below. REVENUE RECOGNITION Revenues from the Company's Car and Truck Wash Segment are recognized, net of customer coupon discounts, when services are rendered or fuel or merchandise is sold. The Company records a liability for gift certificates, ticket books, and seasonal and annual passes sold at its car care locations but not yet redeemed. The Company estimates these unredeemed amounts based on gift certificate and ticket book sales and redemptions throughout the year as well as utilizing historical sales and redemption rates per the car washes' point-of-sale systems. Seasonal and annual passes are amortized on a straight-line basis over the time during which the passes are valid. Revenues from the Company's Security Products Segment are recognized when shipments are made, or for export sales when title has passed. Shipping and handling charges are included in revenues and cost of goods sold. COSTS OF TERMINATED ACQUISITIONS Our policy is to charge as an expense any previously capitalized expenditures relating to proposed acquisitions that in management's current opinion will not be consummated. DEFERRED REVENUE The Company records a liability for gift certificates, ticket books, and seasonal and annual passes sold at its car care locations but not yet redeemed. The Company estimates these unredeemed amounts based on gift certificates and ticket book sales and redemptions throughout the year as well as utilizing historical sales and tracking of redemption rates per the car washes' point- of- sale systems. Seasonal and annual passes are amortized on a straight-line basis over the time during which the passes are valid. IMPAIRMENT OF LONG-LIVED ASSETS In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we periodically review the carrying value of our long-lived assets held and used, and assets to be disposed of, when events and circumstances warrant such a review. We evaluate the carrying value of long-lived assets for potential impairment on a reporting unit basis using undiscounted after-tax estimated cash flows or on an individual asset basis if the asset is held for sale. See Note 17 of the Notes to Consolidated Financial Statements for information regarding impairment charges incurred with respect to one full service car wash site in our Texas region and two car wash sites in our Arizona region. GOODWILL Prior to 2002, goodwill was amortized on a straight-line basis over 25 years. On January 1, 2002, the Company adopted SFAS 142, Goodwill and Other Intangible Assets, and as required, discontinued amortization of goodwill acquired prior to July 1, 2001. Additionally, SFAS 142 required that, -2- within six months of adoption, the first phase of the goodwill transitional impairment testing be completed at the reporting unit level as of the date of adoption. SFAS 142 requires that any goodwill impairment loss recognized as a result of initial application be reported in the first interim period of adoption as a change in accounting principle and that the income per share effects of the accounting change be separately disclosed. The transitional impairment testing was completed during the third quarter of 2002 and as of January 1, 2002 (See Note 3 of the Notes to Consolidated Financial Statements). In accordance with SFAS 142, the Company also completed annual impairment tests as of November 30, 2003, and 2002, and will be subject to an impairment test each year thereafter and whenever there is an impairment indicator. Significant estimates and assumptions are used in assessing the fair value of the reporting units and determining impairment to goodwill (See Note 3 of the Notes to Consolidated Financial Statements). Adverse business conditions could impair recoverability of goodwill in the future and accordingly, the Company cannot guarantee that there will not be impairments in subsequent years. OTHER INTANGIBLE ASSETS Other intangible assets consist primarily of deferred financing costs, trademarks, and establishing a registered national brand name. Prior to 2002, our trademarks and brand name were amortized on a straight line basis over 15 years. In accordance with SFAS 142, Goodwill and Other Intangible Assets, our trademarks and brand name are considered to have indefinite lives, and as such, are no longer subject to amortization. These assets will be tested for impairment annually and whenever there is an impairment indicator. Deferred financing costs are amortized on a straight-line basis over the terms of the respective debt instruments. Customer lists and non-compete agreements are amortized on a straight-line basis over their respective estimated useful lives. INCOME TAXES Deferred income taxes are determined based on the difference between the financial accounting and tax bases of assets and liabilities. Deferred income tax expense (benefit) represents the change during the period in the deferred income tax assets and deferred income tax liabilities. Deferred tax assets include tax loss and credit carry forwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. INTRODUCTION REVENUES CAR AND TRUCK WASH SERVICES We own full service, exterior only and self-service car wash operations in New Jersey, Pennsylvania, Delaware, Texas, Florida and Arizona, as well as truck washes in Arizona, Indiana, Ohio and Texas. We earn revenues from washing and detailing automobiles; performing oil and lubrication services, minor auto repairs, and state inspections; selling fuel; and selling merchandise through convenience stores within the car wash facilities. Revenues generated for 2003 for the Car and Truck Wash Segment were comprised of approximately 82% car wash and detailing, 10% lube and other automotive services, and 8% fuel and merchandise. The majority of revenues are collected in the form of cash or credit card receipts, thus minimizing customer accounts receivable. -3- Weather can have and has had a significant impact on volume at the individual locations. The strength of the economy also has a significant impact on the volume at the car wash locations. We believe that the geographic diversity of our operating locations mitigates but does not remove the risks of adverse weather-related influence on our volume. SECURITY PRODUCTS During 2001, and for the first four months of 2002, the Company was paid $20,000 per month under a Management Agreement pursuant to which Mark Sport, an entity controlled by Jon E. Goodrich, a director of the Company through December, 2003, operated the Security Products Segment. Effective May 1, 2002, the Management Agreement expired and the Company recommenced operation of the Security Products Segment. Prior to the acquisition of the assets and operations of Micro-Tech, the Company operated its Security Products Segment solely as the Consumer Products Division. The Company's Consumer Products operations manufacture and market personal safety, and home and auto security products which are sold through retail stores, major discount stores, domestic and international distributors, and at the Company's car care facilities. With the acquisition on August 12, 2002 of certain of the assets and operations of Micro-Tech, a manufacturer and retailer of electronic security and surveillance devices, the Company added an additional division, the Electronic Surveillance Products Division, to its Security Products Segment. The Company has added security cameras, closed-circuit monitors, digital video recording devices and related electronic security components to its line of well-known personal security products. The Company is purchasing these items for resale from OEM manufacturers. COST OF REVENUES CAR AND TRUCK WASH SERVICES Cost of revenues consists primarily of direct labor and related taxes and benefits, certain insurance costs, chemicals, wash and detailing supplies, rent, real estate taxes, utilities, car damages, maintenance and repairs of equipment and facilities, as well as the cost of the fuel and merchandise sold. SECURITY PRODUCTS During 2001, and for the first four months of 2002, the Security Products Segment was operated under a Management Agreement by Mark Sport. Accordingly, during that time, no costs were incurred by the Company. Cost of revenues within the Security Products Segment consists primarily of costs to purchase or manufacture the security products including direct labor and related taxes and benefits, and raw material costs. Product return and warranty costs related to the electronic security surveillance product business have been minimal in that the majority of customer product warranty claims are reimbursed by the manufacturer. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses consist primarily of management, clerical and administrative salaries, professional services, insurance premiums, sales commissions, and costs relating to marketing and sales. -4- We capitalize direct incremental costs associated with acquisitions. Indirect acquisition costs, such as executive salaries, corporate overhead, public relations, and other corporate services and overhead are expensed as incurred. The Company also charges as an expense any capitalized expenditures relating to proposed acquisitions that will not be consummated. DEPRECIATION AND AMORTIZATION Depreciation and amortization consists primarily of depreciation of buildings and equipment, and amortization of certain intangible assets. Buildings and equipment are depreciated over the estimated useful lives of the assets using the straight-line method. Intangible assets, other than goodwill or intangible assets with indefinite useful lives, are amortized over their useful lives ranging from three to 15 years, using the straight-line method. In 2001, goodwill was amortized using the straight-line method over 25 years. With the adoption of SFAS 142 on January 1, 2002, we no longer amortize goodwill and certain intangible assets, namely trademarks and service marks, determined to have indefinite useful lives, thereby eliminating approximately $900,000 in annual amortization expense. COSTS OF TERMINATED ACQUISITIONS Our policy is to charge as an expense any previously capitalized expenditures relating to proposed acquisitions that in our current opinion will not be consummated. At December 31, 2003, there were no costs related directly to proposed acquisitions that were not yet consummated. We periodically review the future likelihood of these acquisitions and record appropriate provisions against capitalized costs associated with projects that are not likely to be completed. GOODWILL AND ASSET IMPAIRMENT CHARGES In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we periodically review the carrying value of our long-lived assets held and used, and assets to be disposed of, for possible impairment when events and circumstances warrant such a review. During the year ended December 31, 2002, we wrote down impaired assets by approximately $1.2 million. The asset write-down related to one of our full service car wash sites in Texas and two full service car wash sites in Arizona. We have determined that due to poor demographics and increased competition in the geographic areas of these sites, their future expected cash flows would not be sufficient to recover their respective carrying values. During the quarter ended June 30, 2003, we further wrote down the assets related to one of the full service car wash sites in Arizona which we partially wrote down at December 31, 2002, by an additional $351,000. The additional write-down was the result of the impending loss of a significant customer of this site resulting in an additional reduction of the future expected cash flows of this site and the ability to recover the site's carrying value. The Company closed the facility effective September 30, 2003. We continue to market the remaining two sites for sale and have written down these two assets to their estimated fair market values. The Company performs its annual impairment testing of Goodwill and Other Intangibles as of November 30 each year which 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. In the fourth quarter of 2003, as a result of this annual impairment test of -5- Goodwill and Other Intangibles in accordance with SFAS 142, we recorded an impairment of approximately $3.4 million related to our Northeast region-reporting unit of our Car and Truck Wash Segment. This was principally due to a reduction in future projected cash flow as determined during our 2004 budgeting process, which we undertook in November, 2003. The projection of cash flow from the Northeast region-reporting unit was reduced because fewer cars were washed in 2003 than the Company had projected in November 2002 for 2003. We projected our car wash volume for 2003 based on the number of cars washed in the Northeast region-reporting unit in the previous four years. The Company believes that fewer cars were actually washed during 2003 as a result of more inclement weather than in 2002 and a slower economy. The Company anticipates that the volume of cars washed in the Northeast region will increase, if weather patterns return to the patterns existing in prior years. OTHER INCOME Other income consists largely of rental income received from renting out excess space at our car wash facilities, along with gains and losses on the sale of property and equipment. INCOME TAXES Income tax (benefit) expense reflects the recording of income taxes on (loss) income before cumulative effect of a change in accounting principle at effective rates of approximately 1%, 36%, and 37% for the years ended December 31, 2003, 2002, and 2001, respectively. In 2003, no income tax benefit was recorded for the Northeast region reporting unit impairment of approximately $3.4 million due to the non-deductibility of the related goodwill. In 2002, the income tax benefit related to the cumulative effect of change in accounting principle was recorded at an effective tax rate of 36% for the impairments in the Arizona and Truck Wash reporting units. No income tax benefit was recorded for the Northeast region reporting unit's impairment due to the non-deductibility of the goodwill. The effective rate differs from the federal statutory rate for each year primarily due to state and local income taxes, non-deductible costs related to intangibles, fixed asset adjustments, and changes to the valuation allowance. RESULTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2003 The following table presents the percentage each item in the consolidated statements of operations bears to total revenues:
YEAR ENDED DECEMBER 31, 2003 2002 2001 ---- ---- ---- Revenues 100.0% 100.0% 100.0% Cost of revenues 73.1 71.3 70.7 ----- ----- ----- Selling, general and administrative expenses 19.4 18.0 15.3 Depreciation and amortization 4.0 4.2 5.8 Costs of terminated acquisitions - 0.1 0.3
-6-
YEAR ENDED DECEMBER 31, 2003 2002 2001 ---- ---- ---- Goodwill and asset impairment charges 7.7 2.5 - ---- ----- --- Operating (loss) income (4.2) 3.9 7.9 Interest expense, net (4.0) (4.8) (6.0) Other income 0.9 0.7 1.1 ---- ----- --- (Loss) income from continuing operations before income taxes (7.3) (0.2) 3.0 Income tax (benefit) expense (0.1) (0.1) 1.1 ---- ----- --- (Loss) income before cumulative effect of change in accounting principle (7.2) (0.1) 1.9 Cumulative effect of change in accounting principle, net of tax benefit - (12.3) - Net (loss) income (7.2)% (12.4)% 1.9% ==== ===== ===
REVENUES CAR AND TRUCK WASH SERVICES Revenues for the year ended December 31, 2003 were $43.4 million as compared to $44.1 million for the year ended December 31, 2002, a decrease of $0.7 million or 1.6%. Of the $43.4 million of revenues for the year ended December 31, 2003, $35.7 million or 82% was generated from car wash and detailing, $4.1 million or 10% from lube and other automotive services, and $3.6 million or 8% from fuel and merchandise sales. Of the $44.1 million of revenues for the year ended December 31, 2002, $36.7 million or 83% was generated from car wash and detailing, $4.2 million or 10% from lube and other automotive services, and $3.2 million or 7% from fuel and merchandise sales. The decrease in wash and detailing revenues was principally due to closing or divesting of three of our car wash locations and a lube facility during 2003; the temporary closure of a car wash location in Arizona due to fire damage; a departure from historic revenue levels within the Northeast region due to several significant snow storms in the first quarter of 2003, an increase in inclement weather, particularly on weekends, within the Texas region and the impact of a slower economy. Overall car wash volumes declined 6.9% in 2003 from 2002, including 1.8% from the closing or divesting of the three car wash locations noted above. Partially offsetting this decline in volume, the Company experienced an increase in average wash and detailing revenue per car to $14.52 in 2003, from $13.89 in 2002. This increase in average wash and detailing revenue per car was the result of management's continued focus on aggressively selling detailing and additional on-line car wash services. The increase in fuel and merchandise revenues is the result of more aggressive pricing on fuel to attract traffic into our car wash facilities and the addition of higher quality merchandise in our car wash lobbies. Revenues for the year ended December 31, 2002 were $44.1 million as compared to $48.0 million for the year ended December 31, 2001, a decrease of $3.9 million or 8.1%. Of the $44.1 million of revenues for the year ended December 31, 2002, $36.7 million or 83% was generated from car wash and detailing, $4.2 million or 10% from lube and other automotive services, and $3.2 million or 7% from fuel and merchandise sales. Of the $48.0 million of revenues for the year ended December 31, 2001, $39.9 million or 83% was generated from car wash and detailing, $4.5 million or 9% from lube and other automotive services, and $3.6 million or 8% from fuel and merchandise sales. The decrease in wash and detailing revenues was principally due to the divesting of two of our car wash locations during 2001 combined with a departure from our historic revenue levels -7- within our Northeast region due to the unusual lack of snow and pollen in the first six months of 2002 and increased rainfall in the quarter ending December 31, 2002. The Company also experienced more challenging weather within its Texas region for the quarters ended September 30 and December 31, 2002. Car wash volume declined 8.4% in 2002 from 2001. In addition to these declines in volume, the Company experienced a slight reduction in average wash and detailing revenues per car to $13.89 in 2002, from $13.90 per car in 2001. Despite management's continued focus on aggressively selling detailing and additional on-line car wash services, more aggressive coupon and discount promotions to encourage volume reduced the average revenue per car. As to the decline in revenues from lube and other automotive services, we discontinued the practice of providing a free wash to lube customers, resulting in decreased lube revenues but benefiting our overall site gross margin performance. The decline in fuel and merchandise revenues was the result of instituting certain minimum gross margin criteria which reduced fuel sales and the sale of certain low margin merchandise. SECURITY PRODUCTS Pursuant to a Management Agreement, we earned $80,000 in 2002 and $240,000 in 2001. These amounts are included under revenues from operating agreements. Effective May 1, 2002, the Company recommenced operation of the Security Products Segment. Revenues for the Consumer Products Division were approximately $2.8 million and $2.1 million in 2003 and 2002, respectively. Additionally, in August 2002, the Company purchased the inventory and certain assets and operations of Micro-Tech, an electronic surveillance and security device business. Revenues for this business unit were approximately $2.8 million and $380,000 in 2003 and 2002, respectively. COST OF REVENUES CAR AND TRUCK WASH SERVICES Cost of revenues for the year ended December 31, 2003 were $32.3 million or 74% of revenues with car washing and detailing costs at 73% of respective revenues, lube and other automotive services costs at 77% of respective revenues, and fuel and merchandise costs at 87% of respective revenues. Cost of revenues for the year ended December 31, 2002 were $31.8 million, or 72% of revenues with car wash and detailing costs at 70% of respective revenues, lube and other automotive services costs at 78% of respective revenues, and fuel and merchandise costs at 87% of respective revenues. In 2003, the Company experienced a deterioration in wash and detailing operating margins largely due to the decrease in wash volume of 6.9% as compared to the prior year, combined with increased insurance premiums and related claim costs, lease termination costs related to an underperforming car wash property closed in 2003, and an increase in labor costs as a percent of revenues of approximately two percentage points. This deterioration in wash and detailing operating margins was partially offset by certain temporary and permanent cost savings measures instituted in March of 2003, including reductions in payroll and related benefit costs, repairs and maintenance costs and certain other operating expenses. Cost of revenues for the year ended December 31, 2002 were $31.8 million or 72% of revenues with car washing and detailing costs at 70% of respective revenues, lube and other automotive services costs at 78% of respective revenues, and fuel and merchandise costs at 87% of respective revenues. Cost of revenues for the year ended December 31, 2001 were $34.1 million, or 71% of revenues with car wash and detailing costs at 69% of respective revenues, lube and other automotive services costs at 77% of respective revenues, and fuel -8- and merchandise costs at 89% of respective revenues. With only a slight decrease in average wash and detailing revenues per car in 2002 and our continued emphasis on controlling direct labor and other operating costs such as wash and detailing chemicals and supplies, car damages, uniform expense, and repairs and maintenance costs, we experienced only a one percentage point reduction in wash and detailing gross margins in 2002 despite the 8.4% volume decline previously noted. We also experienced a slight increase in our direct wash and detailing labor costs as a percent of car wash and detail revenues to 48% in 2002 as compared to 47% in 2001 as a result of the volume decline. SECURITY PRODUCTS During 2001 and for the first four months of 2002, pursuant to a Management Agreement, no costs were incurred by us. Cost of revenues were $3.5 million or 62% of revenues and $1.5 million or 61% of revenues for 2003 and 2002, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the year ended December 31, 2003 were $9.5 million compared to $8.4 million for the same period in 2002, an increase of approximately $1.1 million or 13%. SG&A costs as a percent of revenues were 19.4% for 2003 as compared to 18.1% in 2002. The increase in SG&A costs is primarily the result of recommencing operation of the Security Products Segment in May 2002, which along with the growth in the Electronic Surveillance Products Division added a combined $1.2 million of SG&A costs in 2003. The Company also incurred approximately $168,000 of legal fees through December 31, 2003 related to the investigation being conducted by the United States Securities and Exchange Commission. These increases in costs were partially offset by certain temporary and permanent cost saving measures initiated in March of 2003, including reductions in payroll and related benefit costs. Selling, general and administrative expenses for the year ended December 31, 2002 were $8.4 million compared to $7.4 million for the same period in 2001, an increase of approximately $1.0 million or 14%. SG&A costs as a percent of revenues were 18.0% for 2002 as compared to 15.3% in 2001. The increase in SG&A costs was primarily the result of recommencing operation of the Security Products Segment in May 2002, which, along with the acquisition of the assets and operations of Micro-Tech, added a combined $0.9 million of SG&A costs in 2002. We also experienced an increase in certain credit card and bank charges and a significant increase in insurance costs. These increases were partially offset by a decrease in administrative salaries and certain office costs. DEPRECIATION AND AMORTIZATION Depreciation and amortization totaled $2.0 million for the year ended December 31, 2003 and December 31, 2002. Depreciation and amortization totaled $2.0 million for the year ended December 31, 2002 as compared to $2.8 million for 2001. This decrease was primarily attributable to the adoption of SFAS 142 on January 1, 2002, under which the Company no longer amortizes goodwill and other intangible assets determined to have indefinite useful lives. This decrease of approximately $900,000 in amortization costs was partially offset by increased depreciation expense as a result of recent property and equipment purchases and recommencing operation of the Security Products Segment in May 2002. -9- COSTS OF TERMINATED ACQUISITIONS Our policy is to charge as an expense any previously capitalized expenditures relating to proposed acquisitions that in our current opinion will not be consummated. During 2002 and 2001, the costs of previously capitalized expenditures related to proposed acquisitions totaled approximately $57,000 and $135,000, respectively. These costs, which principally related to several possible acquisitions we pursued outside the car wash industry, are primarily related to due diligence costs. ASSET IMPAIRMENT CHARGES In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we periodically review the carrying value of our long-lived assets held, and used and assets to be disposed of, for possible impairment when events and circumstances warrant such a review. During the year ended December 31, 2002, we wrote down assets determined to be impaired by approximately $1.2 million. The asset write-down related to one of our full service car wash sites in Texas and two full service car wash sites in Arizona. We have determined that due to poor demographics and increased competition in the geographic areas of these sites, their future expected cash flows will not be sufficient to recover their respective carrying values. During the quarter ended June 30, 2003, we further wrote down the assets related to one of the full service car wash sites in Arizona which we partially wrote down at December 31, 2002, by an additional $351,000. The additional write-down was the result of the impending loss of a significant customer of this site resulting in an additional reduction of the future expected cash flows of this site and the ability to recover the site's carrying value. The Company closed the facility effective September 30, 2003. We continue to market the remaining two sites for sale and have written down these two assets to their estimated fair market values. In the fourth quarter of 2003, as a result of the annual impairment test of Goodwill and Other Intangibles in accordance with SFAS 142, we recorded an impairment of approximately $3.4 million related to our Northeast region reporting unit of our Car and Truck Wash Segment. This was principally due to a reduction in future projected cash flows resulting from extended departures from our historic revenue levels as a result of inclement weather and a slower economy. INTEREST EXPENSE, NET Interest expense, net of interest income, for the year ended December 31, 2003, was $2.0 million compared to $2.2 million for 2002. This decrease in our interest expense was the result of a decrease in interest rates on approximately 50% of our long-term debt which has interest rates tied to the prime rate and a reduction in our outstanding debt as a result of normal principal payments. Interest expense, net of interest income, for the year ended December 31, 2002, was $2.2 million compared to $2.9 million for 2001. This decrease in our interest expense was the result of a decrease in interest rates on approximately 50% of our long-term debt which has interest rates tied to the prime rate and a reduction in our outstanding debt as a result of normal principal payments. OTHER INCOME Other income for 2003 was $438,000 compared to $327,000 for 2002. Included in 2003 is a $107,000 gain on the sale of a car wash facility in our Northeast region. -10- Other income for 2002 was $327,000 compared to $514,000 for 2001. The primary reason for the decrease was that the 2001 figure included a $216,000 gain on the sale of a car wash facility in August of 2001. INCOME TAXES We recorded income tax (benefit) expense of $(50,000), $(32,000), and $534,000 for the years ended December 31, 2003, 2002, and 2001, respectively. Income tax (benefit) expense reflects the recording of income taxes on (loss) income before cumulative effect of change in accounting principle at effective rates of approximately 1%, 36%, and 37% for the years ended December 31, 2003, 2002, and 2001, respectively. In 2003, no income tax benefit was recorded on the Northeast region reporting unit goodwill impairment of approximately $3.4 million due to the non-deductibility of the goodwill. The effective rate differs from the federal statutory rate for each year primarily due to state and local income taxes, non-deductible costs related to intangibles, fixed asset adjustments and changes to the valuation allowance. In 2002, we recorded an income tax benefit related to the cumulative effect of a change in accounting principle of approximately $2.2 million which reflects an effective rate of 36% for the impairment in the Arizona and truck wash reporting units. No income tax benefit was recorded for the Northeast region reporting unit goodwill impairment due to the non-deductibility of the goodwill. At December 31, 2003, we had approximately $21.0 million of net operating loss carryforwards for federal income tax purposes. Components of the net operating loss carryforwards include $19.8 million from continuing operations and $1.2 million from acquired net operating losses attributable to the acquisition of Colonial Full Service Car Wash, Inc. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY Cash and cash equivalents were $3.4 million at December 31, 2003. The ratio of our total debt to total capitalization, which consists of total debt plus stockholders' equity, was 37% at December 31, 2003, 37% at December 31, 2002, and 35% at December 31, 2001. Our business requires a substantial amount of capital, most notably to pursue our expansion strategies, including our current expansion in the electronic surveillance products business, and for equipment purchases and upgrades for our Car and Truck Wash Segment. We plan to meet these capital needs from various financing sources, including borrowings, internally generated funds, and the issuance of common stock if the market price of the Company's stock improves. As of December 31, 2003, we had working capital of approximately $270,000. At December 31, 2002, working capital was a negative $2.2 million, including cash and cash equivalents of $6.2 million. The change in working capital at December 31, 2003 is primarily attributable to renewal and reclassification to non-current liabilities of approximately $6.4 million of 15-year amortizing loans with our current lender. This was partially offset by reclassification to current liabilities of approximately $3.2 million of additional loans due and up for renewal in June through October 2004. The Company intends to renew these loans with the current lender. Although the Company has been successful in renewing similar loans with the current lender in the past, including the renewal of the above mentioned loans in 2003 totaling $6.4 million for a five year renewal -11- period, there can be no assurance that our lender will continue to provide us with renewals or with renewals at favorable terms. During 2003 and 2002 we made capital expenditures of $872,000 and $1.4 million, 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 $500,000 for the year ending December 31, 2004. The Company believes its current cash balance at December 31, 2003 of $3.4 million and cash flow from operating activities in 2004 will be sufficient to meet its car wash capital expenditure funding needs through at least the next twelve months. In years subsequent to 2004, we estimate that our Car and Truck Wash Segment will require annual capital expenditures of $500,000 to $1,000,000. Capital expenditures within our Car and Truck Wash Segment are necessary to maintain the efficiency and competitiveness of our sites. If the cash provided from operating activities does not improve in 2004 and future years and if current cash balances are depleted, we will need to raise additional capital to meet these ongoing capital requirements. In October 2002, we purchased a building as a warehouse, production and administrative facility for our new electronic surveillance products operations. In October 2003, we purchased additional warehouse and office space adjacent to the original facility. We financed a portion of the $885,000 total purchase price of our facility with a long-term mortgage of approximately $728,000. Additionally, we have spent approximately $4.2 million to date in developing our Electronic Surveillance Products Division, including the acquisition costs of Micro-Tech and Vernex and the cost of developing and purchasing inventory for our expanded product line. As of December 31, 2003, we maintain an unused $500,000 revolving credit facility with Bank One to provide financing for additional electronic surveillance product inventory purchases. This revolving credit facility, subject to an availability calculation based on inventory and accounts receivable (as defined in our bank agreement). We expect to fund working capital needs for the Security Products Segment, including inventory purchases, with cash collected on current sales and the line of credit. The Company anticipates aggregate capital expenditures for the Security Products Segment in 2004 of approximately $1.5 million, exclusive of acquisitions of businesses and, if any, their related capital requirements. The principal component of the $1.5 million is necessary to meet the requirements for additional warehouse and office space for our Security Products business located in Hollywood, FL. The Company intends to fund this expenditure through a mortgage or, if a mortgage is not an alternative or the price of our common stock rises to a level which we deem to be advantageous, though the issuance of our Common Stock. In the past, we have been successful in obtaining financing by selling common stock and obtaining mortgage loans. Our ability to obtain new financing is currently adversely impacted by our stock price and our current debt coverage ratios on existing loans. We are reluctant to sell common stock at current prices as our market price is below our per share book value. For the year ended 2003 we would have been in default of our debt covenants had we not obtained waivers and amendments of certain of our debt coverage ratios. Our ability to obtain new financing will be limited, if our stock price does not increase or our cash from operating activities does not improve. Currently, the Company cannot incur additional long term debt without the approval of its commercial lenders. The Company must demonstrate that the cash flow benefit from the use of new loan proceeds exceeds the resulting future debt service requirements. DEBT CAPITALIZATION AND OTHER FINANCING ARRANGEMENTS At December 31, 2003, we had borrowings of approximately $31.3 million. We had three letters of credit -12- outstanding at December 31, 2003, totaling $825,000 as collateral relating to workers' compensation insurance policies. We maintain a revolving credit facility to provide financing for additional electronic surveillance product inventory purchases. During 2000 and 2001, we refinanced on a long term basis under favorable terms the majority of our short term debt related to our 1999 and 2000 acquisitions. Several of our debt agreements, as amended, contain certain affirmative and negative covenants and require the maintenance of certain levels of tangible net worth and the maintenance of certain debt coverage ratios on a consolidated level. At December 31, 2003, we were not in compliance with our consolidated debt coverage ratio related to our GMAC notes payable. With respect to the GMAC notes payable, the Company has received a waiver of acceleration of the notes through January 1, 2005. Additionally, the Company has entered into amendments to the Bank One term loan agreements as of December 31, 2003. The Company is currently in compliance with these covenants as amended. The Company initiated certain temporary and permanent cost savings measures in March of 2003, including reductions in payroll expense and certain operating costs to enable it to maintain compliance with the Bank One consolidated debt coverage ratio. These savings through December 31, 2003 totaled approximately $425,000. Additional temporary and permanent cost saving measures were initiated in March of 2004, including further reductions in payroll expenses and certain operating costs, along with an increase in prices within the Car and Truck Wash Segment to enable the Company to maintain compliance with the Bank One consolidated debt coverage ratio. The amended debt coverage ratio with Bank One requires the Company to maintain a consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") to debt service (collectively, the "debt coverage ratio") of 1.1 to 1 at December 31, 2003 and in the future. As of March 11, 2004, the preliminary operating results for the quarter ended March 31, 2004 indicate that we should meet the Bank One required debt coverage ratio as of March 31, 2004; however, we cannot provide assurance that favorable operating trends will continue through March 31, 2004. If we default on any of the Bank One covenants or the GMAC covenant in the future, the Company will need to obtain further amendments or waivers from these lenders. If the Company is unable to obtain waivers or amendments in the future, Bank One debt totaling $14.9 million and GMAC debt totaling $11.6 million recorded as long-term debt at December 31, 2003 would become due on demand. The Company's ongoing ability to comply with its debt covenants under its credit arrangements and refinance its debt depends largely on the achievement of adequate levels of cash flow. Our cash flow has been and could continue to be adversely affected by weather patterns and economic conditions. In the event that non-compliance with the debt covenants should reoccur, the Company would pursue various alternatives to successfully resolve the non-compliance, which might include, among other things, seeking additional debt covenant waivers or amendments, or refinancing debt with other financial institutions. Although the Company believes that it would be successful in resolving potential non-compliance with its debt covenants, or refinancing its current debt, there can be no assurance that further debt covenant waivers or amendments would be obtained or that the debt would be refinanced with other financial institutions on favorable terms. If we are unable to obtain renewals of our loans or refinancings on favorable terms, our ability to operate would be materially and adversely affected. 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 a proportionate share of taxes, utilities, insurance, and annual cost of living increases. Future minimum lease payments under operating leases with initial or remaining noncancellable lease terms in excess of one year as of December 31, 2003 are as follows: 2004 - $1.3 million; 2005 - $1.0 million; 2006 - - $616,000; 2007 - $501,000; 2008 - $369,000; and thereafter - $1.1 million. -13- The following are summaries of our contractual obligations and other commercial commitments at December 31, 2003 (in thousands):
PAYMENTS DUE BY PERIOD TOTAL 2004 2005 - 2006 2007 - 2008 THEREAFTER ----- ---- ----------- ----------- ---------- CONTRACTUAL OBLIGATIONS Long-term debt, including capital leases (1) $31,286 $5,520 $ 4,935 $11,273 $ 9,558 Minimum operating lease payments 4,853 1,280 1,582 870 1,121 Product Purchase Commitments 107 107 - - - ------- ------ ------- ------- ------- $36,246 $6,907 $ 6,517 $12,143 $10,679 ======= ====== ======= ======= =======
AMOUNTS EXPIRING PER PERIOD TOTAL 2004 2005 - 2006 2007 - 2008 THEREAFTER ----- ---- ----------- ----------- ---------- OTHER COMMERCIAL COMMITMENTS Line of Credit (2) $ 500 $ 500 $ - $ - $ - Standby Letters of Credit 825 825 - - - ------ ------ ----- ------ ----- $1,325 $1,325 $ - $ - $ - ====== ====== ===== ====== =====
(1) Related interest obligations have been excluded from this maturity schedule. Our 2004 interest payments are expected to be approximately $1.8 million. (2) There were no borrowings outstanding under the Company's line of credit at December 31, 2002 or 2003. Mace currently employs Louis D. Paolino, Jr. as its President and Chief Executive Officer under a three-year employment agreement dated August 12, 2003. The principle terms of the employment agreement include: an annual salary of $400,000; a car allowance not to exceed $1,500 per month: provision of 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. On April 5, 2000, we executed a master facility agreement with Fusion Capital Fund II, LLC ("Fusion") pursuant to which Fusion agreed to enter into up to two equity purchase agreements, each with an aggregate principal amount of $12 million. The master facility agreement expired on February 20, 2003. The first equity purchase agreement was executed by Fusion on April 17, 2000. Proceeds from purchased shares through December 31, 2001 totaled approximately $1.3 million. There were no purchased shares in 2002 or 2003. CASH FLOWS Operating Activities. Net cash provided by operating activities totaled $137,000 for the year ended December -14- 31, 2003 as compared to net cash provided by operating activities of $3.3 million for the year ended December 31, 2002. The reduction in net cash provided by operating activities in 2003 was principally due to increased net losses from operations in 2003 and a decrease in cash generated from the changes in working capital accounts of $2.3 million. The decrease in cash generated from working capital is mainly attributed to an increase in the Company's inventory and accounts receivable totaling $1.95 million, due primarily to the increase in inventory and accounts receivable related to the growth and expansion of the Company's new Electronic Surveillance Products Division. The increase in the loss from operations is mainly due to the expansion of the new Electronic Surveillance Products Division and the effect of increased inclement weather, especially in the Northeast and Texas regions, together with a slower economy, which negatively affected the Company's car count. Investing Activities. Cash used in investing activities totaled $569,000 for the year ended December 31, 2003. The use of cash in 2003 reflects $1.1 million for capital expenditures, including $873,000 relating to ongoing car care operations and $234,000 for the expansion of the new Electronic Surveillance Products Division. These expenditures were offset partially by $598,000 of cash proceeds from the sale of a car wash facility in our Northeast region. Financing Activities. Cash used in financing activities was $2.3 million for the year ended December 31, 2003. This reflects routine principal payments on debt of $2.4 million, proceeds from the issuance of stock under the Company's stock option plans of $40,000, and $14,000 for the purchase and retirement of shares of our common stock. SEASONALITY AND INFLATION The Company believes that its car washing and detailing operations are adversely affected by extended periods of inclement weather. In particular, long periods of rain and cloudy weather adversely affect our car wash volumes and related lube and other automotive services as people typically do not wash their cars during such periods. Additionally, extended periods of warm, dry weather may encourage customers to wash their cars themselves which also can adversely affect our car wash business. The Company has mitigated the risk of unfavorable weather patterns by having operations in diverse regions. The Company believes that inflation and changing prices have not had, and are not expected to have, any material adverse effect on its results of operations in the near future. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS We are not materially exposed to market risks arising from fluctuations in foreign currency exchange rates, commodity prices, or equity prices. INTEREST RATE EXPOSURE A significant portion of our debt is at fixed rates, and as such, changes in market interest rates would not significantly impact operating results 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 December 31, 2003 and would have had the impact of increasing interest expense by approximately $180,000 in 2003. -15- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The reports of independent certified public accountants and Consolidated Financial Statements are included in Part IV, ITEM 15 of this Report beginning on page F-1. PART IV - ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed or incorporated by reference as part of this Form 10-K/A. 1. FINANCIAL STATEMENTS Report of the Independent Certified Accountants. Consolidated Financial Statements of Mace Security International, Inc. for the years ended December 31, 2003, 2002, and 2001 including: Consolidated Balance Sheets for the years ended December 31, 2003, 2002, and 2001; Consolidated Statements of Operations for the years ended December 31, 2003, 2002, and 2001; Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003, 2002, and 2001; Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001; and Notes to Consolidated Financial Statements. 2. FINANCIAL STATEMENT SCHEDULE The requirements of Schedule II have been included in the Notes to Consolidated Financial Statements. All other schedules for which provision is made in the applicable accounting regulations of the United States Securities and Exchange Commission ("the Commission") are not required under the related instructions or are inapplicable, and therefore, have been omitted. 3. EXHIBITS The following Exhibits are filed as part of this report (exhibits marked with an asterisk have been previously filed with the Commission and are incorporated herein by this reference): 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. 99.1 Financial Statements and Notes to Financial Statements. -16- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the United States Securities Exchange Act of 1934, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. MACE SECURITY INTERNATIONAL, INC. By: /s/ Gregory M. Krzemien ________________________ Gregory M. Krzemien Chief Financial Officer and Treasurer DATED the 24th day of September, 2004. -17- Exhibit Index
Exhibit Description - ------- ------------- 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1 Financial Statements and Notes to Financial Statements
- 2 - EX-31.1 2 w02537exv31w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 302 EXHIBIT 31.1 CERTIFICATION I, Louis D. Paolino, Jr., certify that: 1. I have reviewed this annual report on Form 10-K/A of Mace Security International, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 24, 2004 /s/ Louis D. Paolino, Jr. _________________________________ Name: Louis D. Paolino, Jr. Title: Chief Executive Officer EX-31.2 3 w02537exv31w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 302 EXHIBIT 31.2 CERTIFICATION I, Gregory M. Krzemien, certify that: 1. I have reviewed this annual report on Form 10-K/A of Mace Security International, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 24, 2004 /s/ Gregory M. Krzemien _______________________________ Name: Gregory M. Krzemien Title: Chief Financial Officer EX-32.1 4 w02537exv32w1.txt CERTIFICATION OF CEO PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002 I, Louis D. Paolino, Jr., the Chief Executive Officer of Mace Security International, Inc., hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Form 10-K, as amended, of Mace Security International, Inc. for the year ended December 31, 2003 (the "December 31, 2003 Form 10-K"), which this certification accompanies, fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and information contained in the December 31, 2003 Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Mace Security International, Inc. Dated: September 24, 2004 /s/ Louis D. Paolino, Jr. _________________________ Louis D. Paolino, Jr. * A signed original of this written statement as required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the United States Securities and Exchange Commission or its staff upon request. EX-32.2 5 w02537exv32w2.txt CERTIFICATION OF CFO PURSUANT TO 18 U.S.C. SECTION 1350 EXHIBIT 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF SARBANES-OXLEY ACT OF 2002 I, Gregory M. Krzemien, the Chief Financial Officer of Mace Security International, Inc., hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Form 10-K, as amended, of Mace Security International, Inc. for the year ended December 31, 2003 (the "December 31, 2003 Form 10-K"), which this certification accompanies, fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and information contained in the December 31, 2003 Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Mace Security International, Inc. Dated: September 24, 2004 /s/ Gregory M. Krzemien _______________________ Gregory M. Krzemien * A signed original of this written statement as required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the United States Securities and Exchange Commission or its staff upon request EX-99.1 6 w02537exv99w1.txt FINANCIAL STATEMENTS AND NOTES TO FINANCIAL STATEMENTS EXHIBIT 99.1 MACE SECURITY INTERNATIONAL, INC. CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
CONTENTS Report of Independent Certified Public Accountants.............................. F-2 Audited Consolidated Financial Statements Consolidated Balance Sheets..................................................... F-3 Consolidated Statements of Operations........................................... F-5 Consolidated Statements of Stockholders' Equity................................. F-6 Consolidated Statements of Cash Flows........................................... F-7 Notes to Consolidated Financial Statements...................................... F-8
F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Shareholders and Board of Directors Mace Security International, Inc. We have audited the accompanying consolidated balance sheets of Mace Security International, Inc. and subsidiaries as of December 31, 2003 and 2002 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mace Security International, Inc. and subsidiaries as of December 31, 2003 and 2002, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 3 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, on January 1, 2002. /s/ Grant Thornton LLP Philadelphia, Pennsylvania March 2, 2004 (except for Note 8, as to which the date is March 11, 2004) F-2 MACE SECURITY INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except share information)
DECEMBER 31, ------------ 2003 2002 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 3,414 $ 6,189 Accounts receivable, less allowance for doubtful accounts of $263 and $198 in 2003 and 2002, respectively 1,531 772 Inventories 3,780 2,675 Deferred income taxes 266 230 Prepaid expenses and other current assets 1,878 1,968 -------- -------- Total current assets 10,869 11,834 Property and equipment: Land 31,391 31,804 Buildings and leasehold improvements 34,871 35,470 Machinery and equipment 10,172 9,485 Furniture and fixtures 447 444 -------- -------- Total property and equipment 76,881 77,203 Accumulated depreciation (10,738) (9,082) -------- -------- Total property and equipment, net of accumulated depreciation 66,143 68,121 Goodwill 10,623 13,430 Other intangible assets, net of accumulated amortization of $1,373 and $1,415 in 2003 and 2002, respectively 991 959 Deferred income taxes 1,820 1,700 Other assets 156 244 -------- -------- TOTAL ASSETS $ 90,602 $ 96,288 ======== ========
See accompanying notes. F-3
DECEMBER 31, 2003 2002 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt and capital lease obligations $ 5,520 $ 8,812 Accounts payable 2,658 2,598 Income taxes payable 172 210 Deferred revenue 402 380 Accrued expenses and other current liabilities 1,847 2,044 -------- -------- Total current liabilities 10,599 14,044 Long-term debt, net of current portion 25,591 24,168 Capital lease obligations, net of current portion 175 332 Other liabilities 25 75 Stockholders' equity: Preferred stock, $.01 par value: Authorized shares - 10,000,000 Issued and outstanding shares - none - - Common stock, $.01 par value: Authorized shares - 100,000,000 Issued and outstanding shares of 12,451,771 and 12,407,655 in 2003 and 2002, respectively 125 124 Additional paid-in capital 69,785 69,710 Accumulated deficit (15,698) (12,165) -------- -------- TOTAL STOCKHOLDERS' EQUITY 54,212 57,669 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 90,602 $ 96,288 ======== ========
See accompanying notes. F-4 MACE SECURITY INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share information)
YEAR ENDED DECEMBER 31, ----------------------- 2003 2002 2001 ---- ---- ---- Revenues: Car wash and detailing services $ 35,655 $ 36,696 $ 39,859 Lube and other automotive services 4,147 4,219 4,487 Fuel and merchandise sales 3,613 3,217 3,638 Security products sales 5,581 2,498 - Operating agreements - 80 240 ------------ ------------ ------------ 48,996 46,710 48,224 Cost of revenues: Car wash and detailing services 25,983 25,674 27,417 Lube and other automotive services 3,188 3,301 3,446 Fuel and merchandise sales 3,156 2,802 3,234 Security products sales 3,485 1,523 - ------------ ------------ ------------ 35,812 33,300 34,097 Selling, general and administrative expenses 9,486 8,432 7,366 Depreciation and amortization 1,958 1,953 2,813 Costs of terminated acquisitions - 57 135 Goodwill and asset impairment charges 3,798 1,165 - ------------ ------------ ------------ Operating (loss) income (2,058) 1,803 3,813 Interest expense, net (1,963) (2,219) (2,885) Other income 438 327 514 ------------ ------------ ------------ (Loss) income before income taxes (3,583) (89) 1,442 Income tax (benefit) expense (50) (32) 534 ------------ ------------ ------------ (Loss) income before cumulative effect of change in accounting principle (3,533) (57) 908 Cumulative effect of change in accounting principle, net of tax benefit of $ 2,188 - (5,733) - ------------ ------------ ------------ Net (loss) income $ (3,533) $ (5,790) $ 908 ============ ============ ============ Basic (loss) income per share (Loss) income before cumulative effect of change in accounting principle $ (0.28) $ - $ 0.07 Cumulative effect of change in accounting principle - (0.46) - Total $ (0.28) $ (0.46) $ 0.07 ------------ ------------ ------------ Weighted average number of shares outstanding 12,414,816 12,630,964 12,724,282 ============ ============ ============ Diluted (loss) income per share (Loss) income before cumulative effect of change in accounting principle $ (0.28) $ - $ 0.07 Cumulative effect of change in accounting principle - (0.46) - ------------ ------------ ------------ Total $ (0.28) $ (0.46) $ 0.07 ------------ ------------ ------------ Weighted average number of shares outstanding 12,414,816 12,630,964 12,742,122 ============ ============ ============
See accompanying notes. F-5 MACE SECURITY INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands except share information)
ADDITIONAL COMMON COMMON PAID-IN ACCUMULATED SHARES STOCK CAPITAL DEFICIT TOTAL ------ ----- ------- ------- ----- BALANCE AT DECEMBER 31, 2000 ........ 25,480,590 $ 255 $ 69,905 $ (7,283) $62,877 Common stock issued in purchase acquisitions ...................... 26,137 158 158 Shares purchased and retired ........ (78,300) (1) (86) (87) Net income .......................... 908 908 ---------- ------- ------- -------- ------- BALANCE AT DECEMBER 31, 2001 ........ 25,428,427 254 69,977 (6,375) 63,856 Common stock issued in purchase acquisitions ...................... 26,316 25 25 Shares purchased and retired ........ (624,900) (6) (416) (422) One-for-two reverse stock split ..... (12,422,188) (124) 124 - Net loss ............................ (5,790) (5,790) ---------- ------- ------- -------- ------- BALANCE AT DECEMBER 31, 2002 ........ 12,407,655 124 69,710 (12,165) 57,669 Common stock issued in purchase acquisitions ...................... 26,316 50 50 Exercise of Common Stock Options .... 30,000 1 39 40 Shares purchased and retired ........ (12,200) (14) (14) Net loss ............................ (3,533) (3,533) ---------- ------- ------- -------- ------- BALANCE AT DECEMBER 31, 2003 ........ 12,451,771 $ 125 $ 69,785 $(15,698) $54,212 ========== ======= ======== ======== =======
See accompanying notes. F-6 MACE SECURITY INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
YEAR ENDED DECEMBER 31, 2003 2002 2001 ---- ---- ---- OPERATING ACTIVITIES (Loss) income before cumulative effect of change in accounting principle $ (3,533) $ (57) $ 908 Cumulative effect of change in accounting principle, net of income tax benefit - (5,733) - --------- ------- ------- Net (loss) income (3,533) (5,790) 908 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 1,958 1,953 2,813 Provision for losses on receivables 86 98 40 Cumulative effect of change in accounting principle - 7,920 - Goodwill and asset impairment charges 3,798 1,165 - (Gain) loss on disposal of property and equipment (104) - (216) Deferred income taxes (155) (2,423) 339 Changes in operating assets and liabilities: Accounts receivable (845) (16) 30 Inventory (1,105) (195) 81 Accounts payable 60 198 (376) Deferred revenue 22 127 (63) Accrued expenses (197) (140) 105 Income taxes (39) 37 (17) Prepaid expenses and other assets 191 401 (3) Other - - (4) --------- ------- ------- Net cash provided by operating activities 137 3,335 3,637 INVESTING ACTIVITIES Acquisition of businesses, net of cash acquired - (217) - Purchase of property and equipment (1,112) (865) (876) Proceeds from sale of property and equipment 598 - 1,327 Payments for intangibles (55) (14) (21) --------- ------- ------- Net cash (used in) provided by investing activities (569) (1,096) 430 FINANCING ACTIVITIES Proceeds from long term debt 11 - 3 Payments on long-term debt and capital lease obligations (2,380) (2,240) (2,209) Proceeds from issuance of common stock 40 - - Payments to purchase stock (14) (422) (87) --------- ------- ------- Net cash used in financing activities (2,343) (2,662) (2,293) --------- ------- ------- Net (decrease) increase in cash and cash equivalents (2,775) (423) 1,774 Cash and cash equivalents at beginning of year 6,189 6,612 4,838 --------- ------- ------- Cash and cash equivalents at end of year $ 3,414 $ 6,189 $ 6,612 ========= ======= =======
See accompanying notes. F-7 MACE SECURITY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Mace Security International, Inc. and its wholly owned subsidiaries (collectively, "the Company"). All significant intercompany transactions have been eliminated in consolidation. On December 17, 2002, we effected a one-for-two reverse stock split. All stock prices, share amounts, per share information, stock options and stock warrants reflect the reverse split, unless otherwise noted. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS The Company currently operates in two business segments: the Car and Truck Wash Segment, supplying complete car care and truck wash services (including wash, detailing, lube, and minor repairs) and the Security Products Segment, producing for sale consumer safety and personal defense products, as well as electronic surveillance and monitoring products. The Company's car care and truck wash operations are principally located in Texas, Arizona, Florida, Pennsylvania, New Jersey, Delaware, Indiana, and Ohio. REVENUE RECOGNITION AND DEFERRED REVENUE Revenue from the Company's Car and Truck Wash Segment is recognized, net of customer coupon discounts, when services are rendered or fuel or merchandise is sold. The Company records a liability for gift certificates, ticket books, and seasonal and annual passes sold at its car care locations but not yet redeemed. The Company estimates these unredeemed amounts based on gift certificates and ticket book sales and redemptions throughout the year as well as utilizing historical sales and 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. Revenue from the Company's Security Products Segment is recognized when shipments are made, or for export sales when title has passed. Shipping and handling charges are included in revenues and cost of goods sold. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and highly liquid short-term investments with original maturities of three months or less, and credit card deposits which are converted into cash within two to three business days. ACCOUNTS RECEIVABLE The Company's accounts receivable are due from trade customers. Credit is extended based on evaluation of customers' financial condition and, generally, collateral is not required. Accounts receivable payment terms vary and amounts due from customers are stated in the financial statements net of an allowance for doubtful accounts. Accounts outstanding longer than the payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they are deemed uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Risk of losses from international sales within the Security Products Segment are reduced by requiring substantially all international customers to provide irrevocable confirmed letters of credit and/or cash advances. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in first-out (FIFO) method for F-8 security and car care products. Inventories at the Company's car and truck wash locations consist of various chemicals and cleaning supplies used in operations and merchandise and fuel for resale to consumers. Inventories within the Company's Security Products Segment consist of defense sprays, child safety products, electronic security monitors, cameras and digital recorders, and various other consumer security and safety products. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets, which are generally as follows: buildings and leasehold improvements - 15 to 40 years; machinery and equipment - 2 to 20 years; and furniture and fixtures - 5 to 10 years. Significant additions or improvements extending assets' useful lives are capitalized; normal maintenance and repair costs are expensed as incurred. Depreciation expense was approximately $1.9 million, $1.9 million, and $1.8 million for the years ended December 31, 2003, 2002, and 2001, respectively. Maintenance and repairs are charged to expense as incurred and amounted to approximately $900,000 in 2003, $1.1 million in 2002, and $1.1 million in 2001. ASSET IMPAIRMENT CHARGES In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we periodically review the carrying value of our long-lived assets held and used, and assets to be disposed of, for possible impairment when events and circumstances warrant such a review. During the year ended December 31, 2002, we wrote down assets determined to be impaired by approximately $1.2 million. The asset write-down related to one of our full service car wash sites in Texas and two full service car wash sites in Arizona. We have determined that due to poor demographics and increased competition in the geographic areas of these sites, their future expected cash flows will not be sufficient to recover their respective carrying values. During the quarter ended June 30, 2003, we further wrote down the assets related to one of the full service car wash site in Arizona which we partially wrote down at December 31, 2002, by an additional $351,000. The additional write-down was the result of the impending loss of a significant customer of this site resulting in an additional reduction of the future expected cash flows of this site and the ability to recover the site's carrying value. The Company closed the facility effective September 30, 2003. We continue to market the remaining two sites for sale and have written down these two assets to their estimated fair market values. GOODWILL Prior to 2002, goodwill was amortized on a straight-line basis over 25 years. On January 1, 2002, the Company adopted SFAS 142, and as required, discontinued amortization of goodwill acquired prior to July 1, 2001. Additionally, SFAS 142 required that, within six months of adoption, the first phase of the goodwill transitional impairment testing be completed at the reporting unit level as of the date of adoption. SFAS 142 requires that any goodwill impairment loss recognized as a result of initial application be reported in the first interim period of adoption as a change in accounting principle and that the income per share effects of the accounting change be separately disclosed. The transitional impairment testing was completed during the third quarter of 2002 and as of January 1, 2002 (See Note 3, Change in Accounting Principle). In accordance with SFAS 142, the Company also completed our annual impairment tests as of November 30, 2003, and 2002, and will be subject to impairment test each year thereafter. In the fourth quarter of 2003, as a result of the annual impairment test of Goodwill and Other Intangibles, we recorded an impairment of approximately $3.4 million related to our Northeast region reporting unit of our Car and Truck Wash Segment. This was principally due to a reduction in future projected cash flows resulting from an extended departure from our historic revenue levels due to inclement weather and a slower economy. Significant estimates and assumptions are used in assessing the fair value of the reporting units and determining impairment to goodwill (See Note 3, Change in Accounting Principle). The Company cannot guarantee that there will not be impairments in subsequent years. F-9 OTHER INTANGIBLE ASSETS Other intangible assets consist primarily of deferred financing costs, trademarks, and establishing a registered national brand name. Prior to 2002, our trademarks and brand name were amortized on a straight-line basis over 15 years. In accordance with SFAS 142, our trademarks and brandname are considered to have indefinite lives, and as such, are no longer subject to amortization. These assets will be tested for impairment annually and whenever there is an impairment indicator. In 2003, approximately $9,000 related to our security product trademarks was written off in accordance with SFAS 142. Deferred financing costs are amortized on a straight-line basis over the terms of the respective debt instruments. Customer lists and non-compete agreements are amortized on a straight-line basis over their respective estimated useful lives. Amortization of other intangible assets was approximately $53,000, $31,000, and $79,000 for the years ended December 31, 2003, 2002, and 2001, respectively. (See "New Accounting Standards" below.) COSTS OF TERMINATED ACQUISITIONS The Company's policy is to charge as an expense any previously capitalized expenditures relating to proposed acquisitions that in management's current opinion will not be consummated. INCOME TAXES Deferred income taxes are determined based on the difference between the financial accounting and tax bases of assets and liabilities. Deferred income tax expense (benefit) represents the change during the period in the deferred income tax assets and deferred income tax liabilities. Deferred tax assets include tax loss and credit carryforwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. SUPPLEMENTARY CASH FLOW INFORMATION Interest paid on all indebtedness was approximately $2.0 million, $2.3 million, and $3.1 million for the years ended December 31, 2003, 2002, and 2001, respectively. Income taxes paid were approximately $144,000, $169,000, and $211,000 in 2003, 2002, and 2001, respectively. Noncash investing and financing activities of the Company excluded from the statement of cash flows include property additions financed by debt of $343,000, $1.0 million, and $181,000 in 2003, 2002, and 2001, respectively. ADVERTISING The Company expenses advertising costs, including advertising production costs, as they are incurred or the first time advertising takes place. The Company's costs of coupon advertising are recorded as a prepaid asset and amortized to advertising expense during the period of distribution and customer response, typically two to three months. Prepaid advertising costs were $134,000 and $70,000 at December 31, 2003 and 2002, respectively. Advertising expense was approximately $1.1 million in 2003, $1.1 million in 2002, and $1.1 million in 2001. STOCK BASED COMPENSATION At December 31, 2003, the Company has two stock-based employee compensation plans, which are more fully described in Note 10. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion ("APB") No. 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 (loss) income and (loss) income per share if the Company had applied the fair value recognition provisions of F-10 FASB 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. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair values for these options were estimated at the dates of grant using a Black-Scholes option pricing model with the following weighted average assumptions for grants in 2003, 2002 and 2001; risk-free interest rate ranges of 3.29% to 4.45% in 2003, 3.72% to 5.39% in 2002, and 4.62% to 5.22% in 2001; dividend yield of 0%; expected volatility of the market price of the Company's common stock of 21% in 2003, 61% in 2002, and 97% in 2001; and a weighted-average expected life of the option of ten years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 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):
YEAR ENDED DECEMBER 31, 2003 2002 2001 ---- ---- ---- Net (loss) income, as reported $ (3,533) $ (5,790) $ 908 Less: Stock-based compensation costs under fair value based method for all awards (401) (685) (1,354) ----------- ------------ ----------- Pro forma net loss $ (3,934) $ (6,475) $ (446) =========== ============ =========== Earnings per share - basic As reported $ (0.28) $ (0.46) $ 0.07 Pro forma $ (0.32) $ (0.51) $ (0.04) Earnings per share - diluted As reported $ (0.28) $ (0.46) $ 0.07 Pro forma $ (0.32) $ (0.51) $ (0.04)
USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates. RECLASSIFICATIONS F-11 Certain amounts in the 2002 financial statements have been reclassified to conform to the 2003 presentation. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables and debt instruments. The carrying values of cash and cash equivalents, trade receivables, and trade payables are considered to be representative of their respective fair values. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the carrying values and fair values of the Company's fixed and variable rate debt instruments at December 31, 2003 were as follows:
CARRYING FAIR VALUE VALUE ----- ----- (In Thousands) Fixed rate debt $ 13,730 $ 16,575 Variable rate debt 17,556 17,812 --------- --------- Total $ 31,286 $ 34,387 ========= =========
The majority of the fixed rate debt provides for a pre-payment penalty based on an interest rate yield maintenance formula. The yield maintenance formula results in a significant pre-payment penalty as market interest rates decrease. The pre-payment penalty precludes refinancing of this long-term debt. BUSINESS COMBINATIONS Prior to July 1, 2001, the Company assessed each business combination to determine whether the pooling of interests or the purchase method of accounting was appropriate. For those business combinations prior to July 1, 2001, accounted for under the pooling of interests method, the financial statements were combined with those of the Company at their historical amounts, and if material, all periods presented were restated as if the combination occurred on the first day of the earliest year presented. For those acquisitions accounted for using the purchase method of accounting, the Company allocates the cost of the acquired business to the assets acquired and the liabilities assumed based on estimates of fair values thereof. These estimates are revised during the allocation period as necessary when, and if, information regarding contingencies becomes available to define and quantify assets acquired and liabilities assumed. The allocation period varies but does not exceed one year. To the extent contingencies such as pre-acquisition environmental matters, pre-acquisition liabilities including deferred revenues, litigation and related legal fees are resolved or settled during the allocation period, such items are included in the revised allocation of the purchase price. After the allocation period, the effect of changes in such contingencies is included in results of operations in the period in which the adjustment is determined. NEW ACCOUNTING STANDARDS In June 2002, the Financial Accounting Standards Board ("FASB") approved the issuance of SFAS 146, Accounting for Exit or Disposal Activities. SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that were previously accounted for pursuant to the guidance that the Emerging Issues Task Force "EITF" had set forth in EITF Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain F-12 Costs Incurred in a Restructuring). SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 did not have a material effect on the Company's financial position or results of operations. In November 2002, the FASB issued FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. The adoption of FIN 45 did not have a material impact on the Company's consolidated balance sheets, results of operations or cash flows. In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS 148 amends SFAS 123 Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for fiscal years beginning after December 15, 2002. The expanded annual disclosure requirements and the transition provisions are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The adoption of SFAS 148 did not have a material effect on the Company's financial position or results of operations. In January 2003, the FASB released Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46") which requires that all primary beneficiaries of Variable Interest Entities (VIE) consolidate that entity. FIN 46 is effective immediately for VIEs created after January 31, 2003 and to VIEs in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003 to VIEs in which an enterprise holds a variable interest it acquired before February 1, 2003. In December 2003, the FASB published a revision to FIN 46 ("FIN 46R") to clarify some of the provisions of the interpretation and to defer the effective date of implementation for certain entities. Under the guidance of FIN 46R, entities that do not have interests in structures that are commonly referred to as special purpose entities are required to apply the provisions of the interpretation in financial statements for periods ending after March 14, 2004. The Company does not have interests in special purpose entities and does not anticipate that the adoption of FIN 46R will have a material impact on the Company's consolidated financial position, results of operations, or cash flows. In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that issuers classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material impact on the Company's consolidated financial position or results of operations. 3. CHANGE IN ACCOUNTING PRINCIPLE Effective January 1, 2002, we adopted SFAS 142, Goodwill and Other Intangible Assets. In connection with the adoption, we discontinued approximately $900,000 in annual amortization of goodwill. SFAS 142 also requires companies to test intangibles for impairment on an annual basis. During the first quarter of 2002, the Company performed its testing under SFAS 142 pertaining to its evaluation of intangible assets determined to have indefinite useful lives, and determined that there was an impairment issue with certain trademarks used in our security products segment. The fair values of the trademarks were determined using a royalty savings approach, discounted at appropriate risk-adjusted rates, which yielded results consistent with available market-approach data. The impairment of $43,000, net of tax, was recorded as a cumulative effect of a change in accounting principle as of December 31, 2001 in our March 31, F-13 2002 financial statements. The following table reflects unaudited adjusted results of operations of the Company, giving effect to the provisions of SFAS 142 as if they were adopted on January 1, 2000 (in thousands except earnings per share):
YEAR ENDED DECEMBER 31, ---------------------------------------- 2003 2002 2001 ----------- ------------ ----------- (Loss) income before cumulative effect of change in accounting principle, as reported $ (3,533) $ (57) $ 908 Add back: amortization expense, net of tax - - 580 ----------- ------------ ----------- Pro forma (loss) income before cumulative effect of change in accounting principle $ (3,533) $ (57) $ 1,488 =========== ============ =========== Basic (loss) income before cumulative effect of change in accounting principle per common share: As reported $ (0.28) $ - $ 0.07 Pro forma $ (0.28) $ - $ 0.12 Diluted (loss) income before cumulative effect of change in accounting principle per common share: As reported $ (0.28) $ - $ 0.07 Pro forma $ (0.28) $ - $ 0.12
Under the provisions of SFAS 142, the Company was required to complete the first phase of the goodwill transitional impairment test within six months of adopting the new standard or by June 30, 2002 and the final phase of the transitional test before the end of the year of adoption, or December 31, 2002. The first step of the transitional testing was the determination of our reporting units and the estimation of the fair values of the reporting units. A discounted cash flow model was used to estimate the fair value of our reporting units. Discount rates were derived by using the weighted average cost of capital technique. The discount rates were then used by the Company in the discounted cash flow calculations. Significant estimates and assumptions were used in assessing the fair value of the reporting units. These estimates and assumptions involved future cash flows, growth rates, discount rates, weighted average cost of capital, and estimates of market valuations of each of the reporting units. During the third quarter of 2002, we completed the transitional requirements for goodwill impairment testing. As a result of the transitional goodwill impairment testing, we determined that the book value of our Northeast reporting unit exceeded its current fair value by $1.84 million. The Northeast reporting unit's current fair value was based on present expectations for the business in light of the current economic environment and the uncertainty associated with recent volume due to unfavorable weather patterns. Additionally, there was an impairment of $5.34 million in our Arizona reporting unit due to unfavorable economic conditions combined with a significant increase in local competition. This charge represented a complete write-off of the goodwill associated with this reporting unit. Finally, there was an impairment loss of $670,000 in our truck wash reporting unit, primarily because we did not acquire additional truck washes necessary to achieve the scale needed to attract national accounts. This charge represented a complete write-off of the goodwill associated with this reporting unit. We completed our annual testing of goodwill and intangible assets determined to have indefinite lives in accordance with SFAS 142 as of November 30, 2003. The methodology applied was consistent with that of our transitional impairment testing and our 2002 annual test. The growth rate applied to future cash flows beyond detailed projections was 3%. The discount rates used varied from 7.25% for our security products business to approximately 11.2% for our car and truck wash operations. In the fourth quarter of 2003, as a result of the annual impairment test of Goodwill and Other Intangibles, we recorded an impairment of approximately $3.4 million related to our Northeast region reporting unit of our Car and Truck Wash Segment. This was principally due to a reduction in future projected cash flows resulting from extended departures from our historic revenue levels due to inclement weather and a slower economy. Impairment of F-14 goodwill and intangible assets with indefinite lives must be tested on at least an annual basis and whenever there is an impairment indicator. The Company cannot guarantee that there will not be impairments in subsequent years. The changes in the carrying amount of goodwill for the years ended December 31, 2002 and 2003 are as follows (in thousands):
TRUCK SECURITY NORTHEAST TEXAS ARIZONA WASHES PRODUCTS TOTAL ------------ --------- ---------- ---------- --------- ----------- Balance at December 31, 2001 $ 6,508 $ 7,620 $ 5,341 $ 670 $ - $ 20,139 Reallocation of purchase price 862 - - - - 862 Acquisition of Micro-Tech Manufacturing, Inc. - - - - 282 282 Transitional impairment loss upon adoption of SFAS 142 (1,842) - (5,341) (670) - (7,853) ------------ --------- ---------- ---------- --------- ----------- Balance at December 31, 2002 5,528 7,620 - - 282 13,430 Reallocation of purchase price - 671 - - (40) 631 Impairment loss (3,438) - - - - (3,438) ------------ --------- ---------- ---------- --------- ----------- Balance at December 31, 2003 $ 2,090 $ 8,291 $ - $ - $ 242 $ 10,623 ============ ========= ========== ========== ========= ===========
4. BUSINESS COMBINATIONS From April 1, 1999 through July 26, 2000, the Company acquired 62 car care facilities and five truck wash facilities through the acquisition of 17 separate businesses including: 42 full service facilities, one self service facility, 11 exterior only facilities and one lube center in Pennsylvania, New Jersey, Delaware, Texas, Florida, and Arizona; 11 facilities were subsequently divested or closed. The five full service truck wash facilities are located in Arizona, Indiana, Ohio, and Texas. On August 28, 2001, the Company sold, through a wholly-owned subsidiary, substantially all of the assets of Gabe's Plaza Car Wash in Morrisville, Pennsylvania. The Company received an aggregate cash sales price of $1.2 million, $315,000 of which was utilized to pay off a promissory note secured by the Gabe's Plaza Car Wash assets. On August 12, 2002, the Company acquired the inventory, certain other assets and the operations of Micro-Tech Manufacturing, Inc. ("Micro-Tech"), a manufacturer and retailer of electronic security devices. Total consideration under the agreement was approximately $505,000. At closing, the Company paid $217,000 cash for inventory, $15,625 cash representing the first of twelve equal monthly installments totaling $187,500, and 13,158 (pre-reverse split) registered shares of common stock of the Company representing the first of eight quarterly payments of shares totaling 105,263 (pre-reverse split) shares. This transaction was accounted for using the purchase method of accounting in accordance with SFAS 141, Business Combinations. On September 26, 2003, a wholly owned subsidiary within the Company's Security Products Segment acquired the inventory, certain other assets and the operations of Vernex, Inc., a manufacturer and retailer of electronic security monitors. Total consideration under the agreement was $213,000 cash. The agreement also provides for additional cash consideration based on sales performance for a twelve-month period subsequent to closing. This transaction was accounted for using the purchase method of accounting in accordance with SFAS 141, Business Combinations. On November 12, 2003, the Company sold, through a wholly owned subsidiary, the assets of our car wash facility located F-15 in Voorhees, New Jersey, for approximately $600,000. 5. ALLOWANCE FOR DOUBTFUL ACCOUNTS The changes in the allowance for doubtful accounts are summarized as follows:
YEAR ENDED DECEMBER 31, 2003 2002 2001 ------ ------ ------ (In Thousands) Balance at beginning of year $ 198 $ 178 $ 261 Additions (charged to expense) 86 98 40 Adjustments - 239 (123) Deductions (21) (317) - ------ ------ ------ Balance at end of year $ 263 $ 198 $ 178 ====== ====== ======
6. INVENTORIES Inventories consist of the following:
AS OF DECEMBER 31, 2003 2002 -------- -------- (In Thousands) Finished goods $ 2,115 $ 963 Work in process 94 128 Raw materials and supplies 602 634 Fuel, merchandise inventory and car wash supplies 969 950 -------- -------- $ 3,780 $ 2,675 ======== ========
7. OTHER INTANGIBLE ASSETS The following table reflects the components of intangible assets, excluding goodwill (in thousands):
DECEMBER 31, 2003 DECEMBER 31, 2002 GROSS GROSS CARRYING ACCUM. CARRYING ACCUM. AMOUNT AMORT. AMOUNT AMORT. Amortized intangible assets: Non-compete agreement $ 65 $ 7 $ 25 $ 2 Customer list 62 23 25 2 Deferred financing costs 390 158 373 131 -------------- ------ --------- --------- Total amortized intangible assets 517 188 423 135 Non-amortized intangible assets: Trademarks - security products segment 1,731 1,175 1,185 1,270 -------------- ------ --------- --------- Service mark - car care segment 116 10 116 10 -------------- ------ --------- --------- Total non-amortized intangible assets 1,847 1,185 1,951 1,280
F-16
DECEMBER 31, 2003 DECEMBER 31, 2002 GROSS GROSS CARRYING ACCUM. CARRYING ACCUM. AMOUNT AMORT. AMOUNT AMORT. Total intangible assets $ 2,364 $1,373 $ 2,374 $ 1,415 ============== ====== ========= =========
The following sets forth the estimated amortization expense on intangible assets for the fiscal years ending December 31 (in thousands): 2004 $63 2005 $49 2006 $35 2007 $32 2008 $24
Amortization expense of other intangible assets was approximately $53,000, $31,000, and $79,000, for the years ended December 31, 2003, 2002, and 2001, respectively. 8. LONG-TERM DEBT, NOTES PAYABLE, AND CAPITAL LEASE OBLIGATIONS Long-term debt, notes payable, and capital lease obligations consist of the following:
AS OF DECEMBER 31, 2003 2002 --------- --------- (In Thousands) Notespayable to GMAC Commercial Mortgage ("GMAC"), interest rate of 8.52%, due in monthly installments totaling $145,936 including interest, through September 2013, collateralized by real property, equipment and inventory of certain of the Millennia Car Wash locations $ 11,618 $ 12,346 Note payable to Bank One, Texas, NA, interest rate of prime plus 0.25% (4.25% at December 31, 2003), is due in monthly installments of $51,466 including interest (adjusted annually), through November 2008, collateralized by real property and equipment of Eager Beaver Car Wash, Inc. 5,723 6,019 Notespayable to Bank One, Texas, NA, interest prime plus 0.25% (4.25% at December 31, 2003) due in monthly installments totaling $50,179 per month including interest (adjusted annually), through various dates ranging from January 2004 to February 2008, collateralized by real property and equipment of certain of the Colonial Car Wash locations 3,531 4,013 Note payable to Bank One, Texas, NA which refinanced a note payable to Cornett Ltd. Partnership on February 17, 2000. The Bank One note, which provides for an interest rate of prime plus 0.25% (4.25% at December 31, 2003), is due in monthly installments of $37,367 including interest (adjusted annually), renewed through February 2008, collateralized by real property and equipment of the Genie Car Wash locations 4,062 4,301 Note payable to Western National Bank, interest rate of 8.75%, due in monthly installments of $20,988 including interest, through October 2014, collateralized by real property and equipment in Lubbock, Texas 1,769 1,859
F-17 Note payable to Business Loan Express, interest rate of prime plus 2.5% (6.5% at December 31, 2003), is due in monthly installments of $10,753 including interest (adjusted annually), through December 2022, collateralized by real property and equipment of the Blue Planet Car Wash 1,409 1,444 Note payable to Merriman Park J.V., interest rate of 4.0% (adjusted annually), due in monthly installments of $9,270 including interest, through November 2011, collateralized by real property and equipment of certain of the Colonial Car Wash locations 754 828 Note payable to Bank One Texas, NA, interest rate of prime plus 0.25% (4.25% at December 31, 2003), is due in monthly installments of $6,516 including interest (adjusted annually), through July 2006, collateralized by real property and equipment of the Superstar Kyrene Car Wash 712 755 Note payable to Bank One, Texas, NA, interest rate of prime plus 0.25% (4.25% at December 31, 2003), is due in monthly installments of $2,705 including interest (adjusted annually) through April 2005, collateralized by real property and equipment of the Red Baron Amarillo Truck Wash 313 331 Note payable to Bank One, Texas, NA, which refinanced the mortgage note payable to Southwest Bank in October 2001. The Bank One note which provides for an interest rate of prime plus 0.25% (4.25% at December 31, 2003), is due in monthly installments of $2,869 including interest (adjusted annually), through October 2004, collateralized by real property and equipment of certain of the Colonial Car Wash locations 339 359 Note payable to Wachovia, interest rate of one month LIBOR plus 2.50% (3.65% at December 31, 2003), is due in monthly principal payments of $4,049 plus accrued interest, collateralized by real property of Mace Security Products, Inc. 714 399 Capital lease payable to Columbia Credit Company, interest rate of 14.5%, due in monthly installments of $8,314 including interest, through May 2005, collateralized by certain equipment of the Shammy Man Car Wash location 123 201 Capital leases payable to various creditors, interest rates ranging from 7.75% to 9.97%, due in monthly installments of $6,310 including interest, through various dates ranging from November 2004 to June 2007, collateralized by certain equipment of the Company 204 317 Note payable to Pennzoil Products Company, interest rate of 5% due in monthly installments of $2,496, including interest, through June 2003, collateralized by equipment of the Company - 15 Notes payable to individuals for deferred purchase payment of Micro- Tech, Inc. due in monthly installments of $15,625. 15 125 --------- --------- 31,286 33,312 Less: current portion 5,520 8,812 --------- --------- $ 25,766 $ 24,500 ========= =========
In January 2004, the Company obtained renewals from Bank One, Texas, N.A. ("Bank One") on a 15-year amortization loan totaling $48,725 which was up for periodic renewal. The loan, classified as current at September 30, 2003, was renewed by Bank One for a five year period at favorable terms. Accordingly, the loan was reclassified to long-term debt at December 31, 2003. The Company has available a short-term line of credit with Bank One, Texas, N.A. which provides borrowing for F-18 inventory and accounts receivable financing up to $500,000 for the Company's electronic surveillance operations. The availability under this line of credit is subject to an inventory and accounts receivable borrowing formula. There were no borrowings outstanding under this line of credit at December 31, 2003. At December 31, 2003, the Company had three letters of credit outstanding totaling $825,000 as collateral relating to workers' compensation insurance policies. Several of our debt agreements, as amended, contain certain affirmative and negative covenants and require the maintenance of certain levels of tangible net worth and the maintenance of certain debt coverage ratios on a consolidated level. At December 31, 2003, we were not in compliance with our consolidated debt coverage ratio related to our GMAC notes payable. With respect to the GMAC notes payable, the Company has received a waiver of acceleration of the notes through January 1, 2005. Additionally, the Company has entered into amendments to the Bank One term loan agreements as of December 31, 2003. The Company is currently in compliance with these covenants as amended. The Company initiated certain temporary and permanent cost savings measures in March of 2003, including reductions in payroll expense and certain operating costs to enable it to maintain compliance with the Bank One consolidated debt coverage ratio. These savings through December 31, 2003 totaled approximately $425,000. Additional temporary and permanent cost saving measures were initiated in March of 2004, including further reductions in payroll expenses and certain operating costs, along with an increase in prices within the Car and Truck Wash Segment to enable the Company to maintain compliance with the Bank One consolidated debt coverage ratio. The amended debt coverage ratio with Bank One requires the Company to maintain a consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") to debt service (collectively " the debt coverage ratio") of 1.1 to 1 at December 31, 2003 and in the future. As of March 11, 2004, the preliminary operating results for the quarter ended March 31, 2004 indicate that we should meet the Bank One required debt coverage ratio as of March 31, 2004; however, we cannot provide assurance that favorable operating trends will continue through March 31, 2004. If we default on any of the Bank One covenants or the GMAC covenant in the future, the Company will need to obtain further amendments or waivers from these lenders. If the Company is unable to obtain waivers or amendments in the future, Bank One debt totaling $14.9 million and GMAC debt totaling $11.6 million recorded as long-term debt at December 31, 2003 would become due on demand. The Company's ongoing ability to comply with its debt covenants under its credit arrangements and refinance its debt depends largely on the achievement of adequate levels of cash flow. Our cash flow has been and can continue to be adversely affected by weather patterns and the economic climate. In the event that non-compliance with the debt covenants should reoccur, the Company would pursue various alternatives to successfully resolve the non-compliance, which might include, among other things, seeking additional debt covenant waivers or amendments, or refinancing of debt with other financial institutions. Although the Company believes that it will be successful in resolving potential non-compliance with its debt covenants, or refinancing its current debt, there can be no assurance that further debt covenant waivers or amendments will be attained or that the debt will be refinanced with other financial institutions at favorable terms. Certain machinery and equipment notes payable discussed above have been classified as capital lease obligations in the balance sheet. Maturities of long-term debt are as follows: 2004 - $5.5 million, 2005 - $2.3 million, 2006 - $2.6 million, 2007 - $2.7 million, 2008 - $8.6 million, and 2009 and thereafter - $9.6 million. 9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities consists of the following: F-19
AS OF DECEMBER 31, 2003 2002 -------- -------- (In Thousands) Accrued compensation $ 495 $ 844 Property and other non-income taxes 267 132 Other 1,085 1,068 -------- -------- $ 1,847 $ 2,044 ======== ========
10. STOCK OPTION PLANS During September 1993, the Company adopted the 1993 Stock Option Plan ("the 1993 Plan"). The 1993 Plan provides for the issuance of up to 630,000 shares of common stock upon exercise of the options. The Company has reserved 630,000 shares of common stock to satisfy the requirements of the 1993 Plan. The options are non-qualified stock options and are not transferable by the recipient. The 1993 Plan is administered by the Compensation Committee ("the Committee") of the Board of Directors, which may grant options to employees, directors and consultants to the Company. The term of each option may not exceed fifteen years from the date of grant. Options are exercisable over either a 10 or 15 year period and exercise prices are not less than the market value of the shares on the date of grant. In December 1999, the Company's stockholders approved the 1999 Stock Option Plan ("the 1999 Plan") providing for the granting of incentive stock options or nonqualified stock options to directors, officers, or employees of the Company. Under the 1999 Plan, 15,000,000 shares of common stock are reserved for issuance. Incentive stock options and nonqualified options have terms which are determined by the Committee with exercise prices not less than the market value of the shares on the date of grant. The options generally expire ten years from the date of grant and are exercisable based upon graduated vesting schedules as determined by the Committee. As of December 31, 2003, 2,338,012 options have been granted under the 1993 and 1999 Plans including 1,879,828 nonqualified stock options. Activity with respect to these plans is as follows:
2003 2002 2001 WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE NUMBER PRICE NUMBER PRICE NUMBER PRICE Options outstanding beginning of period 1,305,283 $ 5.72 1,101,875 $ 7.14 1,002,862 $ 8.58 Options granted 791,000 $ 1.42 279,500 $ 2.32 174,250 $ 1.52 Options exercised (30,000) $ 1.32 - - - - Options canceled (109,250) $ 1.81 (76,092) $ 13.48 (75,237) $ 13.18 --------- --------- --------- Options outstanding end of period 1,957,033 $ 4.27 1,305,283 $ 5.72 1,101,875 $ 7.14 ========= ========= ========= Options exercisable 1,417,895 $ 5.28 1,037,988 $ 6.40 763,574 $ 7.82 ========= ========= ========= Shares available for granting of options 5,586,237 6,267,987 6,471,395 ========= ========= =========
Stock options outstanding at December 31, 2003 under both plans are summarized as follows:
WEIGHTED WEIGHTED AVG. AVG. RANGE OF NUMBER REMAINING EXERCISE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE $1.28-$1.80 757,334 9.2 $ 1.39 $1.94-$2.88 454,917 7.8 $ 2.31 $3.00-$3.26 54,959 8.2 $ 3.01 $5.38-$8.00 439,186 5.3 $ 5.91 $8.63-$11.75 70,108 3.1 $ 10.04 $13.25-$19.50 170,529 5.4 $ 14.89 $22.00 10,000 5.6 $ 22.00 --------- 1,957,033 =========
F-20 In August 1994, the Company issued warrants to purchase 28,800 shares of Mace Security International, Inc. common stock at $8.50 per share (shares and exercise price are adjusted for one-for-two reverse stock split) in connection with the purchase of certain assets of a business. The warrants are exercisable over a ten-year period, expiring on August 24, 2004. In 1999, the Company issued warrants to purchase a total of 1,328,250 shares of the Company's common stock at a weighted average exercise price of $4.22 per share (shares and exercise price are adjusted for one-for-two reverse stock split) in connection with the purchase of certain businesses and to a director. The terms of the warrants have been established by the Board of Directors. The warrants are exercisable at various dates through August 2, 2009 and have exercise prices ranging from $2.75 to $18.50 per share. Through December 31, 2003, 281,818 warrants to purchase common stock have been exercised and 170,000 warrants to purchase common stock have expired. Including both the 1994 and 1999 warrants, the Company has a remaining total of 905,232 warrants to purchase common stock outstanding at December 31, 2003, all of which are exercisable. During the exercise period, the Company will reserve a sufficient number of shares of its common stock to provide for the exercise of the rights represented by option and warrant holders. 11. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at December 31, 2003 and 2002 are as follows:
AS OF DECEMBER 31, --------------------- (IN THOUSANDS) --------------------- 2003 2002 --------- --------- Deferred tax assets: Allowance for doubtful accounts $ 104 $ 94 Inventories 39 39 Net operating loss carryforwards 7,822 5,820 Deferred revenue 159 150 Compensation 155 202 Car damage reserve 25 33 Accrued workers compensation costs (11) 140 Other, net 17 176 --------- --------- Total deferred tax assets 8,310 6,654 Valuation allowance for deferred tax assets (872) (1,100) --------- --------- Deferred tax assets after valuation allowance 7,438 5,554 Deferred tax liabilities: Property, equipment and intangibles (5,352) (3,624) --------- --------- Net deferred tax assets $ 2,086 $ 1,930 ========= =========
At December 31, 2003, the Company has a net deferred tax asset of $2.1 million, primarily representing the tax effect of the $21.0 million of net operating loss carryforwards that will begin to expire during the year ending December 31, 2008, if unused. Realization of the future tax benefits related to the deferred tax assets is dependent upon many factors, including the Company's ability to generate taxable income in future years. Based on the relevant factors considered, the Company believes it is more likely than not it will realize the benefits of the net deferred tax assets. During 2003 the valuation allowance was reduced by $228,000. This reduction was the result of several fully reserved deferred tax assets that were written off in 2003 along with their corresponding valuation allowance established in prior years. F-21 The components of income tax (benefit) expense are:
YEAR ENDED DECEMBER 31, (IN THOUSANDS) 2003 2002 2001 Current (principally state taxes) $ 106 $ 203 $ 195 Deferred (156) (2,423) 339 ----- ------- ----- Total income tax (benefit) expense $ (50) $(2,220) $ 534 ===== ======= =====
The significant components of deferred income tax (benefit) expense attributed to (loss) income for the years ended December 31, 2003, 2002, and 2001 are as follows:
YEAR ENDED DECEMBER 31, ( IN THOUSANDS) 2003 2002 2001 Deferred tax expense $ 2,074 $(1,465) $ 1,531 Loss carryforward (2,002) (1,108) (1,297) Valuation allowance for deferred tax assets (228) 150 105 ------- ------- ------- $ (156) $(2,423) $ 339 ======= ======= =======
A reconciliation of income tax (benefit) expense computed at the U.S. federal statutory tax rates to total income tax (benefit) expense is as follows:
YEAR ENDED DECEMBER 31, 2003 2002 2001 ------- ------- ----- (In Thousands) Tax at U.S. federal statutory rate $(1,255) $(2,803) $ 505 State taxes, net of federal benefit 233 (184) 128 Goodwill impairment 1,203 - - Nondeductible costs and other acquisition accounting adjustments 7 654 171 Valuation allowance for deferred tax assets (228) 150 105 ------- ------- ----- Fixed asset adjustments - - (358) Other adjustments (10) (37) (17) ------- ------- ----- Total income tax (benefit) expense $ (50) $(2,220) $ 534 ======= ======= =====
12. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: (in thousands except earnings per share) F-22
YEAR ENDED DECEMBER 31, 2003 2002 2001 Numerator (In Thousands): (Loss) income before cumulative effect of change in accounting principle $ (3,533) $ (57) $ 908 Cumulative effect of change in accounting principle - (5,733) - ------------ ----------- ------------ Net (loss) income $ (3,533) $ (5,790) $ 908 ============ =========== ============ Denominator: Denominator for basic (loss) income per share - weighted average shares 12,414,816 12,630,964 12,724,282 Dilutive effect of options and warrants - - 17,840 ------------ ----------- ------------ Denominator for diluted (loss) income per share - weighted average shares 12,414,816 12,630,964 12,742,122 ============ =========== ============ Basic (loss) income per share: (Loss) income before cumulative effect of change in accounting principle $ (0.28) $ - $ 0.07 Cumulative effect of change in accounting principle - (0.46) - ------------ ----------- ------------ Total $ (0.28) $ (0.46) $ 0.07 ============ =========== ============ Diluted (loss) income per share: (Loss) income before cumulative effect of change in accounting principle $ (0.28) $ - $ 0.07 Cumulative effect of change in accounting principle - (0.46) - ------------ ----------- ------------ Total $ (0.28) $ (0.46) $ 0.07 ============ =========== ============
The dilutive effect of options and warrants of 40,399 and 25,344 at December 31, 2003 and 2002, respectively, have not been included in the calculation of diluted earnings per share because they are anti-dilutive. 13. CONCENTRATION OF CREDIT RISK The Company maintains its cash accounts in high quality financial institutions. At times, these balances may exceed insured amounts. 14. COMMITMENTS AND CONTINGENCIES The Company is obligated under various operating leases, primarily for certain equipment, vehicles, and real estate. Certain of these leases contain purchase options, renewal provisions, and contingent rentals for the proportionate share of taxes, utilities, insurance, and annual cost of living increases. Future minimum lease payments under operating leases with initial or remaining noncancelable lease terms in excess of one year as of December 31, 2003 are as follows: 2004 - $1.3 million; 2005 - $1.0 million; 2006 - $616,000; 2007 - $501,000; 2008 - $369,000; and thereafter - $1.1 million. Rental expense under these leases was $1.7 million, $1.6 million, and $1.5 million, for the years ended December 31, 2003, 2002, and 2001, respectively. The Company subleases a portion of the building space at several of its car wash facilities either on a month-to-month basis or under cancelable leases. During fiscal 2003, 2002, and 2001 revenues under these leases were approximately $214,000, $192,000, and $141,000 respectively. These amounts are classified as other income in the accompanying statements of operations. 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 respect, with all applicable laws relating to its business. Certain of the Company's executive officers have entered into employee stock option agreements whereby options issued to them shall be entitled to immediate vesting should the officer be terminated upon a change in control of the Company. Additionally, the employment agreement of the Company's Chief Executive Officer, Louis D. Paolino, Jr., entitles Mr. F-23 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. The Company is a party to various legal proceedings related to its normal business activities. In the opinion of the Company's management, none of these proceedings are material in relation to the Company's results of operations, liquidity, cash flows, or financial condition. 15. EMPLOYEE BENEFIT PLANS Two subsidiaries of the Company maintained voluntary 401(k) plans which covered substantially all of their respective employees. Under one of the plans, employees were allowed to contribute from 1% to 20% of their regular wages, up to the limit permitted by the Internal Revenue Service. The Company matched 25% of each dollar contributed by employees up to 4% of their wages. Under the second plan, employees could contribute from 1% to 25%. Although the plan allowed for discretionary company matches, the Company did not make any matching contributions in the three years ended December 31, 2003. Both plans were terminated in 2002. 16. OPERATING AGREEMENTS The Company has been directly operating its Security Products Segment since May 1, 2002. Previous to May 1, 2002, the Security Products Segment was operated by Mark Sport under a management agreement which expired on April 30, 2002. Mark Sport is controlled by Jon E. Goodrich, a director of the Company through December, 2003. Under the Management Agreement, beginning on January 1, 2000, Mark Sport operated the segment and received all profits and losses therefrom. In exchange, Mark Sport paid the Company a monthly fee and, upon termination of the agreement, an amount equal to the amortization and depreciation of the assets of the division. (See Note 19, Related Party Transactions.) 17. GOODWILL AND ASSET IMPAIRMENT CHARGES In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we periodically review the carrying value of our long-lived assets held and used, and assets to be disposed of, for possible impairment when events and circumstances warrant such a review. During the year ended December 31, 2002, we wrote down assets determined to be impaired by approximately $1.2 million. The asset write-down related to one of our full service car wash sites in Texas and two full service car wash sites in Arizona. We have determined that due to poor demographics and increased competition in the geographic areas of these sites, their future expected cash flows will not be sufficient to recover their respective carrying values. During the quarter ended June 30, 2003, we further wrote down the assets related to one of the full service car wash site in Arizona which we partially wrote down at December 31, 2002 by an additional $351,000. The additional write-down was the result of the impending loss of a significant customer of this site resulting in an additional reduction of the future expected cash flows of this site and the ability to recover the site's carrying value. The Company closed the facility effective September 30, 2003. We continue to market the remaining two sites for sale and have written down these two assets to their estimated fair market values. F-24 In the fourth quarter of 2003, as a result of the annual impairment test of Goodwill and Other Intangibles, we recorded an impairment of approximately $3.4 million related to our Northeast region reporting unit of our Car and Truck Wash Segment. This was principally due to a reduction in future projected cash flows resulting from extended departures from our historic revenue levels due to inclement weather and a slower economy. 18. COSTS OF TERMINATED ACQUISITIONS The Company's policy is to charge as an expense any previously capitalized expenditures relating to proposed acquisitions that in management's current opinion will not be consummated. The costs of previously capitalized expenditures related to proposed acquisitions totaled approximately $57,000 and $135,000 in 2002 and 2001, respectively. These costs, which principally related to several possible acquisitions the Company pursued outside the car wash industry, are primarily related to due diligence costs. 19. RELATED PARTY TRANSACTIONS Effective August 1, 2000, Mace entered into a five-year lease with Bluepointe, Inc., a corporation controlled by Louis D. Paolino, Jr., Mace's Chairman, Chief Executive Officer and President, for Mace's executive offices in Mt. Laurel, New Jersey. The lease terms were subject to a survey of local real estate market pricing and approval by the Company's Audit Committee and provide for an initial monthly rental payment of $15,962, which increases by 5% per year in the third through fifth years of the lease. Mace believes that the terms of this lease (based on an annual rate of $19.00 per square foot) are competitive when compared to similar facilities in the Mt. Laurel, New Jersey area. Mace has also entered into a three-year furniture lease/purchase agreement with Bluepointe, Inc., dated January 1, 2001, which provided for an initial payment of $20,000 and monthly rental payments thereafter of $4,513, for the use of the furnishings in Mace's executive offices. The rental rates were based upon a third-party valuation of the furnishings. The furniture lease has expired and Mace has purchased the furniture. The Company purchased charter airline services from Air Eastern, Inc., and LP Learjets, LLC, charter airline companies owned by Louis D. Paolino, Jr., the Company's Chairman, Chief Executive Officer and President. The Company incurred approximately $5,000 in 2003 and $29,000 in 2002 for such services. On November 6, 2001, the Audit Committee approved an arrangement subject to quarterly review under which the Company prepays LP Learjets, LLC $5,109 per month for the right to use a Learjet 31A for 100 hours per year. Additionally, when the Learjet 31A is used, the Company pays to third parties unaffiliated with Louis D. Paolino, Jr., the direct costs of the Learjet's per-hour use, which include fuel, pilot fees, engine insurance and landing fees. As of July 2002, the Company is no longer prepaying LP Learjets, LLC for the future right to use the Learjet 31A. In February 2000, the Company entered into a Management Agreement with Mark Sport, Inc. ("Mark Sport"), a Vermont corporation controlled by Jon E. Goodrich, a director of the Company through December, 2003. The Management Agreement entitled Mark Sport to operate the Company's Security Products Segment and receive all profits or losses for a seven-month term beginning January 1, 2000 in exchange for certain payments to the Company. The Management Agreement was extended several times through amendments. A February 21, 2002 amendment extended the term of the Management Agreement through April 30, 2002, and reconciled the amount owed by Mark Sport to the Company under the Management Agreement from February 2000 through December 31, 2001. Mark Sport and the Company agreed in the amendment that Mark Sport, as of December 31, 2001, owed the Company $127,000, resulting in a resolution of certain disputes and a reduction of the amounts owed by Mark Sport of approximately $92,000. The Management Agreement expired on April 30, 2002 and was further amended on July 22, 2002 to reconcile the amount owed by Mark Sport to Mace under the Management Agreement for the period January 1, 2002 through April 30, 2002. Mark Sport and Mace agreed in their final amendment that Mark Sport owed the Company $100,000 for this period, resulting F-25 in a resolution of certain disputes and a reduction of the amounts recorded by the Company as owed by Mark Sport of approximately $39,000. At December 31, 2003, Mark Sport owed the Company $127,000. The Company's Consumer Products Division leases manufacturing and office space under a five-year lease with Vermont Mill, Inc. ("Vermont Mill"), which provides for monthly lease payments of $9,167 through November 2004. The Company has exercised an option to continue the lease through November 2009. The rent will increase by a CPI factor on November 2004. Vermont Mill is controlled by Jon E. Goodrich, a director of the Company through December 2003. 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. On March 1, 2004, Vermont Mill agreed to pay the $127,000 that Mark Sport owes the Company by giving the Company a monthly rent reduction of $1,700. The rent credit commences in July 2004 and continues for 72 months. Vermont Mill borrowed a total of $228,671 from the Company through December 31, 2001. On February 22, 2002, Vermont Mill executed a three year promissory note with monthly installments of $7,061 including interest at a rate of 7%. The Company's Lease Agreement with Vermont Mill provides for a right of offset of lease payments against this promissory note in the event monthly payments are not made by Vermont Mill. At December 31, 2003, the balance owed on this promissory note was $102,000. From January 1, 2003 through December 31, 2003, the Company's Electronic Surveillance Products Division sold approximately $51,000 of electronic security equipment to DSS, Inc. and approximately $22,000 to Security Systems and Installations, Inc. Louis Paolino, III, the son of the Company's CEO, Louis D. Paolino, Jr., is a one-third owner of DSS, Inc. and a fifty percent owner of Security Systems and Installations Inc. The pricing extended to DSS, Inc. and Security Systems and Installations, Inc. is no more favorable than the pricing given to third party customers who purchase in similar volume. Additionally, DSS, Inc. was hired by the Company to install security cameras in several of the Company's car washes at an installation fee of $6,800. At December 31, 2003, DSS, Inc. and Security Systems and Installations, Inc. owed the Company approximately $37,000 and $20,000, respectively. 20. SEGMENT REPORTING The Company currently operates in two segments: the Car and Truck Wash Segment, supplying complete car care services (including wash, detailing, lube, and minor repairs), fuel, and merchandise sales; and the Security Products Segment. From January 1, 2000 through April 30, 2002, the Company was paid $20,000 per month under a Management Agreement pursuant to which Mark Sport, an entity controlled by Jon E. Goodrich, a director of the Company through December, 2003, operated the Company's Security Products Segment. Effective May 1, 2002, the Management Agreement expired and the Company recommenced operation of the Security Products Segment. The Company evaluates performances and allocates resources based on operating income of each reportable segment rather than at the operating unit level. The Company defines operating income as revenues less cost of revenues, selling, general and administrative expense, and depreciation and amortization expense. The accounting policies of the reportable segments are the same as those described in the Summary of Significant Accounting Policies (see Note 2). There is no intercompany profit or loss recognized on intersegment sales. The Company's reportable segments are business units that offer different services and products. The reportable segments are each managed separately because they provide distinct services or produce and distribute distinct products through different processes. F-26 \ Selected financial information for each reportable segment is as follows:
YEAR ENDED DECEMBER 31, 2003 2002 2001 -------- --------- --------- (In Thousands) Revenues: Car and truck wash - external customers $ 43,415 $ 44,132 $ 47,984 Security products - external customers 5,581 2,498 - Security products - operating agreement - 80 240 -------- --------- --------- $ 48,996 $ 46,710 $ 48,224 ======== ========= ========= Operating (loss) income: Corporate (1) $ (2,987) $ (3,044) $ (2,845) Car and truck wash 4,917 6,004 6,645 Security products (190) (15) - Security products - operating agreement - 80 148 -------- --------- --------- $ 1,740 $ 3,025 $ 3,948 ======== ========= ========= Assets: Car and truck wash $ 83,262 $ 91,294 $ 100,529 Security products 7,340 4,994 4,141 -------- --------- --------- $ 90,602 $ 96,288 $ 104,670 ======== ========= ========= Capital expenditures: Corporate $ 5 $ 11 $ 171 Car and truck wash 872 1,357 1,715 Security products 578 625 - -------- --------- --------- $ 1,455 $ 1,993 $ 1,886 ======== ========= ========= Depreciation and amortization: Corporate $ 62 $ 66 $ 95 Car and truck wash 1,795 1,839 2,626 Security products 101 48 92 -------- --------- --------- $ 1,958 $ 1,953 $ 2,813 ======== ========= =========
(1) 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. A reconciliation of operating income for reportable segments to total reported operating (loss) income is as follows:
YEAR ENDED DECEMBER 31, 2003 2002 2001 ------- ------ ------ (In Thousands) Total operating income for reportable segments $ 1,740 $3,025 $3,948 Costs of terminated acquisitions - 57 135 Goodwill and asset impairment charges 3,798 1,165 - ------- ------ ------ Total reported operating (loss) income $(2,058) $1,803 $3,813 ======= ====== ======
F-27 21. SELECTED QUARTERLY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) (UNAUDITED) YEAR ENDED DECEMBER 31, 2003
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL Revenues $ 12,601 $ 12,302 $ 11,876 $ 12,217 $ 48,996 Gross profit $ 3,670 $ 3,372 $ 2,928 $ 3,214 $ 13,184 Net income (loss) $ 342 $ (88) $ (182) $ (3,605) $ (3,533) Diluted net income (loss) per share $ 0.03 $ (0.01) $ (0.01) $ (0.29) $ (0.28)
YEAR ENDED DECEMBER 31, 2002
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL Revenues $ 11,756 $ 11,853 $ 11,840 $ 11,261 $ 46,710 Gross Profit $ 3,840 $ 3,581 $ 3,146 $ 2,843 $ 13,410 Income (loss) before Cumulative effect of change in accounting principle $ 691 $ 357 $ (116) $ (989) $ (57) Net (loss) income $ (5,042) $ 357 $ (116) $ (989) $ (5,790) Diluted income (loss) before cumulative effect of change in accounting principle per share $ 0.06 $ 0.03 $ (0.01) $ (0.08) $ - Diluted net (loss) income per share $ (0.40) $ 0.03 $ (0.01) $ (0.08) $ (0.46)
YEAR ENDED DECEMBER 31, 2001
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL Revenues $ 12,829 $ 13,041 $ 10,965 $ 11,389 $ 48,224 Gross Profit $ 3,749 $ 3,894 $ 2,827 $ 3,657 $ 14,127 Net Income (loss) $ 302 $ 358 $ (19) $ 267 $ 908 Diluted Net Income (loss) Per Share $ 0.02 $ 0.03 $ - $ 0.02 $ 0.07
F-28 -----END PRIVACY-ENHANCED MESSAGE-----