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)
ASSETS December 31,
--------------------------
2003 2002
------------- ------------
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
LIABILITIES AND STOCKHOLDERS' EQUITY December 31,
--------------------------
2003 2002
------------ -------------
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 sustanitally 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 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.
F-8
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.
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.)
F-9
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 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.
F-10
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
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:
F-11
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 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.
F-12
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, 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
---------- ------------- ---------
F-13
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. The
Company engaged an independent appraisal firm to determine appropriate discount
rates for each reporting unit. 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
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
=========== ======== ========== ========= ========== =========
F-14
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 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
(In Thousands)
--------------------------
Balance at beginning of year $ 198 $ 178
Additions (charged to expense) 86 98
Adjustments - 239
Deductions (21) (317)
--------------------------
Balance at end of year $ 263 $ 198
=========================
F-15
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
--------------- ------------ ------------ ------------
Total intangible assets $ 2,364 $ 1,373 $ 2,374 $ 1,415
=============== ============ ============ ============
F-16
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)
Notes payable 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
Notes payable 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
F-17
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
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. 16 125
31,287 33,312
-------- --------
F-18
Less: current portion 5,520 8,812
-------- --------
$ 25,767 $ 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 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 intiated in March of 2004,
including further reductions in payroll expenses and certain operating costs,
along with an increase in prices within the Car and Truck Wash Segment to enable
the Company to maintain compliance with the Bank One consolidated debt coverage
ratio. The amended debt coverage ratio with Bank One requires the Company to
maintain a consolidated earnings before interest, taxes, depreciation and
amortization ("EBITDA") to debt service (collectively " the debt coverage
ratio") of 1.1 to 1 at December 31, 2003 and in the future. As of March 11,
2004, the preliminary operating results for the quarter ended March 31, 2004
indicate that we should meet the Bank One required debt coverage ratio as of
March 31, 2004; however, we cannot provide assurance that favorable operating
trends will continue through March 31, 2004. If we default on any of the Bank
One covenants or the GMAC covenant in the future, the Company will need to
obtain further amendments or waivers from these lenders. If the Company is
unable to obtain waivers or amendments in the future, Bank One debt totaling
$14.9 million and GMAC debt totaling $11.6 million recorded as long-term debt at
December 31, 2003 would become due on demand.
The Company's ongoing ability to comply with its debt covenants under its credit
arrangements and refinance its debt 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.
F-19
9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consists of the following:
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
========== =========== ==========
F-20
Stock options outstanding at December 31, 2003 under both plans are summarized
as follows:
Weighted Avg. Weighted
Range of Number Remaining Avg.
Exercise Prices Outstanding Contractual Exercise
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
=============
In August 1994, the Company issued warrants to purchase 30,000 shares of Mace
Security International, Inc. common stock at $8.50 per share 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.
The Company has a remaining total of 905,232 warrants to purchase common stock
outstanding at December 31, 2003, all of which are exercisable. 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 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 any time through August 2, 2009 and have an exercise price
ranging from $2.75 to $18.50 per share.
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:
F-21
As of December 31,
----------------------
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.
The components of income tax (benefit) expense are:
Year ended December 31,
-------------------------------
2003 2002 2001
(In Thousands)
-------------------------------
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,
-------------------------------------
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:
F-22
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:
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 dilutine 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.
F-23
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
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. 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 cancellable 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. 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 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.
F-25
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
----------- ------------- ------------
Revenues: (In Thousands)
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
---------------------------------------------------
Diluted Net
Net Income (Loss)
Revenues Gross Profit Income Per Share
(Loss)
---------------------------------------------------
1st Quarter $12,601 $3,670 $342 $0.03
2nd Quarter 12,302 3,372 (88) $(0.01)
3rd Quarter 11,876 2,928 (182) $(0.01)
4th Quarter 12,217 3,214 (3,605) $(0.29)
---------- --------------- ------------- ------------
Total $48,996 $13,184 $(3,533) $(0.28)
========== =============== ============= ============
Year ended December 31, 2002
-----------------------------------------------------
Diluted Net
Net (Loss) (Loss) Income
Revenues Gross Profit Income Per Share
---------- --------------- ------------- ------------
1st Quarter $11,756 $3,840 $(5,042) $(0.40)
2nd Quarter 11,853 3,581 357 $0.03
3rd Quarter 11,840 3,146 (116) $(0.01)
4th Quarter 11,261 2,843 (989) $(0.08)
---------- --------------- ------------- ------------
Total $46,710 $13,410 $(5,790) $(0.46)
========== =============== ============= ============
Year ended December 31, 2001
-----------------------------------------------------
Diluted Net
Net Income Income (Loss)
Revenues Gross Profit (Loss) Per Share
---------- --------------- ------------- ------------
1st Quarter $12,829 $3,749 $302 $0.02
2nd Quarter 13,041 3,894 358 $0.03
3rd Quarter 10,965 2,827 (19) $-
4th Quarter 11,389 3,657 267 $0.02
---------- --------------- ------------- ------------
Total $48,224 $14,127 $908 $0.07
========== =============== ============= ============
F-28
EXHIBIT INDEX
Exhibit
No. Description
10.155 Modification and Extension of Note and Ratification of Mortgage
Liens dated November 28, 2003, between the Company, its
subsidiary, Eager Beaver Car Wash, Inc. and Bank One, Texas, N.A.
in the amount of $5,723,079.
10.156 Note Modification Agreement and Amendment to credit agreement
dated December 15, 2003, between the Company, its subsidiary,
Mace Security Products, Inc. and Bank One, Texas, N.A. in the
amount of $500,000.
10.157 Note Modification Agreement and Amendment to credit agreement
dated January 21, 2004, between the Company, its subsidiary,
Colonial Full Service Car Wash, Inc. and Bank One, Texas, N.A. in
the amount of $48,725.50.
10.158 Credit Agreement dated as of December 31, 2003, between the
Company, its subsidiary, Eager Beaver Car Wash, Inc., and Bank
One Texas, N.A. (pursuant to instruction 2 to Item 601of
Regulation S-K, four additional credit agreements which are
substantially identical in all material respects, except as to
the borrower being Mace Car Wash - Arizona, Inc., Colonial Full
Service Car Wash, Inc., Mace Security Products, Inc., and Mace
Security International, Inc., are not being filed.)
11 Statement Re: Computation of Per Share Earnings
14 Code of Ethics and Business Conduct
21 Subsidiaries of the Company
23.1 Consent of Grant Thornton LLP
24 Power of Attorney (included on signature page)
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.