UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
|
For
the fiscal year ended December 31,
2007
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Commission
File No. 0-22810
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MACE
SECURITY INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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03-0311630
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|
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(State
or Other Jurisdiction
of
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(I.R.S.
Employer
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|
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Incorporation
or Organization)
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Identification
No.)
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401
East Las Olas Boulevard, Suite 1570, Fort Lauderdale, Florida 33301
(Address
of Principal Executive Offices) (Zip
Code)
Registrant's
Telephone Number, Including Area Code: (954) 449-1300
1000
Crawford Place, Suite 400, Mount Laurel, New Jersey 08054
(Former
Address)
Securities
Registered Pursuant to Section 12(b) of the Act: None
Securities
Registered Pursuant to Section 12(g) of the Act:
Common
Stock, par value $0.01 per share
Name
of each exchange on which registered: The NASDAQ Global
Market
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
“Exchange Act”) during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to
such filing requirements for the past 90 days.
Yes o
No
x
Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and will not be contained, to
the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer o Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company, as defined in Rule
12b-2 of the Act.
Yes o
No
x
The
aggregate market value of the voting stock held by non-affiliates of registrant
on June 30, 2007 was approximately $35,670,000. Such aggregate market value
was
computed by reference to the closing price of the common stock as reported
on
the Nasdaq Global Market on June 30, 2007. For purposes of determining this
amount only, the registrant has defined affiliates as including (a) the
executive officers and directors of the Registrant on June 30, 2007 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,
2007.
The
number of shares of Common Stock, par value $.01 per share, of registrant
outstanding as of March 25, 2008 was 16,465,253.
Mace
Security International, Inc. and Subsidiaries
Form
10-K
Year
Ended December 31, 2007
Contents
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Page
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PART
I
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Item
1.
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Business
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3
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Item
1A.
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Risk
Factors
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10
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Item
1B.
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Unresolved
Staff Comments
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19
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Item
2.
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Properties
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19
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Item
3.
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Legal
Proceedings
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20
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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22
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PART
II
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||||
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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22
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Item
6.
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Selected
Financial Data
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25
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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26
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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40
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Item
8.
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Financial
Statements and Supplementary data
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40
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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40
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Item
9A(T).
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Controls
and Procedures
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40
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Item
9B.
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Other
Information
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41
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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41
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Item
11.
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Executive
Compensation
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43
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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57
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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59
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Item
14.
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Principal
Accountant Fees and Services
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59
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PART
IV
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Item
15.
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Exhibits,
Financial Statement Schedules
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60
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2
PART
I
ITEM
1. BUSINESS
GENERAL
Mace
Security International, Inc. (the “Company” or “Mace”) was incorporated in
Delaware on September 1, 1993. Our operations are currently conducted through
three segments: Security, Digital Media Marketing, and Car and Truck Washes.
Our
Security Segment designs, manufactures, assembles, markets and sells a wide
range of security products. Our primary focus in the Security Segment is
electronic surveillance products and components that we purchase from Asian
manufacturers who design equipment to our requirements. We sell the electronic
surveillance products and components primarily to installing dealers,
distributors, system integrators and end users. Other products in our Security
Segment are less-than-lethal Mace® defense sprays and other security devices
such as monitors, high-end digital and machine vision cameras and professional
imaging components, as well as video conferencing equipment. The main marketing
channels for our products are industry shows, trade publications, catalogs,
the
internet, a call center and mass merchants.
Our
Digital Media Marketing Segment focuses on marketing and customer acquisition
on
the internet. We market and acquire customers for third party advertisers
through an on-line marketing platform. We also develop our own products that
are
offered to consumers for purchase. The products developed by us are offered
to
consumers on a proprietary e-commerce internet platform.
Our
Car
and Truck Wash Segment owns a total of 15 car washes. We currently operate
14
car washes and lease one car wash which is contracted to be sold to the tenant
of the car wash.
The
Company’s periodic reports on Forms 10-K and 10-Q and current reports on Form
8-K, as filed with the United States Securities and Exchange Commission (the
“SEC”), can be accessed through the Company’s website at
www.mace.com.
LINES
OF BUSINESS
Security
Segment.
The
Security Segment offers a wide variety of security related products. Among
the
items offered are electronic surveillance products, including analog, digital
and IP cameras, digital video recorders, monitors, matrix switching equipment
for video distribution, robotic camera dome systems, system controls, and
consoles for system assembly markets. Other products offered are Mace® defense
sprays, personal alarms, home security alarms, whistles, door jammers, and
window and door lock alarms. We also offer the KinderGard ® product line of
childproof security locks, security literature for the domestic and foreign
financial community, a "dye-pack" used by financial institutions for robbery
protection, state-of-the-art training videos, crisis response materials and
TG
Guard®, an electronically controlled tear gas system used in prisons, embassies,
and safe rooms.
Our
electronic surveillance products and system component requirements are
established by our operating and marketing staffs in Ft. Lauderdale, Florida
and
Farmers Branch, Texas and manufactured by overseas original equipment
manufacturers (“OEM”). Our electronic surveillance products and system
components are warehoused and shipped from our facilities in Farmers Branch,
Texas and Ft. Lauderdale, Florida. Our defense sprays are manufactured by us
in
our Bennington, Vermont facility. The KinderGard ® product line is manufactured
by a third party utilizing molds primarily owned by the Company. Our defense
sprays and the KinderGard ® product line are packaged, warehoused, and shipped
from our Vermont facility. Our TG Guard® products are also assembled in our
Vermont facility.
Our
electronic surveillance products and components are marketed through several
sales channels, such as dealers, system integrators, catalogs, the internet,
mass merchants, exhibitions at national trade shows and a call center. We also
sell our products by the use of independent sales representatives and
distributors, exhibitions at national trade shows and advertisements in trade
publications.
The
Security Segment provided 47.3%, 54.8% and 54.4% of our revenues in fiscal
years
2007, 2006, and 2005, respectively.
Digital
Media Marketing Segment.
The
Digital Media Marketing Segment is an online marketing and e-commerce business
which has two business divisions: (1) online marketing and (2) e-commerce.
The
segment uses proprietary technologies and software to provide marketing services
to third party advertisers and to sell products on the internet.
The
online marketing division, PromoPath, is an online affiliate marketing company
that locates customers or leads for the clients who hire PromoPath. The
advertising clients who hire PromoPath pay us based on a set fee per customer,
prospect or lead acquired. The online media marketing industry refers to the
arrangement of acquiring customers, prospects or leads for advertisers on a
fee
basis per customer as the cost-per-acquisition (“CPA”) model. PromoPath helps
companies create effective performance driven marketing campaigns and provides
design, brand and technical support services in order to acquire customers
for
its advertising clients. PromoPath works with many large publishers to reach
many areas of interactive media. PromoPath’s advertising clients are typically
established direct-response advertisers with well recognized brands and broad
consumer appeal such as NetFlix, Discover credit cards and Bertelsmann Group.
PromoPath generates CPA revenue, both brokered and through co-partnered sites.
3
In
addition to CPA revenue PromoPath, has two other types of revenue streams.
List
management revenue, a second type of revenue stream, is based on a relationship
between a data owner and a list management company. The data owner, PromoPath,
compiles, collects, owns and maintains a proprietary computerized database
composed of consumer information. The PromoPath, the data owner, grants a list
manager a non-exclusive, non-transferable, revocable worldwide license to
manage, make use and have access to the data pursuant to defined terms and
conditions for which PromoPath is paid revenue. A third type of revenue stream
is lead generation or Cost per Lead (“CPL”). Advertisers who purchase potential
customers, on a CPL basis are interested in collecting data from consumers
expressing interest in a product or service. CPL varies from CPA in that no
credit card information for the potential customer needs to be provided to
the
advertiser for the fee to be paid for the lead.
Linkstar,
which is our e-commerce division, is a direct-response product business that
develops markets and sells products directly to consumers through the internet.
We reach the customers predominately through online advertising on both the
PromoPath platform and third-party websites. The products include: Vioderm,
an
anti-wrinkle skin care product (www.vioderm.com); Purity by Mineral Science,
a
mineral cosmetic (www.mineralscience.com); TrimDay™, a weight-loss supplement
(www.trimday.com); and Eternal Minerals, a dead sea spa product line
(www.eternalminerals.com);
as well
as Mace’s pepper sprays and surveillance products. We continuously develop and
test product offerings to determine customer acquisition costs and revenue
potential, as well as to identify the most efficient marketing
programs.
Revenues
within the Digital Media Marketing Segment from the acquisition date of the
business, July 20, 2007, were approximately $7.6 million; consisting of $3.4
million, or 44.7%, from the online marketing division and $4.2 million, or
55.3%, from the e-commerce division. (See Note 20, Segment
Reporting,
to the
consolidated financial statements accompanying this report.)
Car
and Truck Wash Segment.
The
Company, through its subsidiaries, owned and operated 21 car washes as of
December 31, 2007. As of March 20, 2008, the Company owns 15 car washes in
Texas, having sold 6 car washes from January 1, 2008 through March 3, 2008.
Of
the 15 car washes, 14 are operated by the Company and one is leased by the
Company to a third party. The leased location has been contracted to be sold
to
the third party tenant. The 15 locations consist of 14 full service car washes
and one oil change location. The full service car washes provide exterior
washing and drying, vacuuming of the interior of the vehicle, dusting of
dashboards and door panels, and cleaning of all windows and glass. On December
31, 2007, we sold five truck washes located in Arizona, Indiana, Ohio and Texas.
Our
typical car wash facility consists of a free standing building of approximately
4,000 square feet, containing a sales area for impulse items and a car wash
tunnel. Cars are moved through the car wash tunnel by a conveyor system. Inside
the tunnel, automatic equipment cleans the vehicle as it moves past the
equipment. Additional services, including wheel cleaning, fragrance, rust
protection treatment, wheel treatments, and waxing are also offered at the
locations. Many of our locations also offer other consumer products and related
car care services, such as professional automotive detailing services (currently
offered at 14 locations), oil and lubrication services (currently offered at
7
locations), gasoline dispensing services (currently offered at 11 locations),
state inspection services (currently offered at 6 locations), convenience store
sales (currently offered at one location), and merchandise sales (currently
offered at 14 locations). The Car and Truck Wash Segment provided 36.5%, 45.2%
and 45.6% of our revenues in fiscal years 2007, 2006 and 2005, respectively.
(See Note 20, Segment
Reporting
to the
consolidated financial statements accompanying this report.)
Our
car
wash operations are not dependent on any one or a small number of customers.
The
nature of our car wash operations does not result in a backlog of orders at
any
time, and all of our car wash revenues are derived from sales in the United
States.
For
a
discussion of seasonal effects on our car wash operations, see
Item
7, Seasonality and Inflation
in
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
BUSINESS
STRATEGIES
Security
Segment.
Internal
Growth. The
Security Segment designs, manufacturers, markets and sells a wide range of
security products. For the year ended December 31, 2007, revenues from the
Security Segment were $22.3 million. The Company began selling electronic
surveillance products and system components in August 2002. Revenues from
electronic surveillance products and system components have grown from $373,000
of revenue in 2002 to $12.1 million in 2007. Growth has been principally
achieved through acquiring businesses and through internal growth through
development of advanced product offerings, as well as expanded advertising
and
marketing efforts.
4
The
Company sells its defense sprays in the law enforcement market under the brand
name of TakeDown®. The Mace® name when representing aerosol defense sprays is
used in the law enforcement market by Armor Holdings, Inc., pursuant to an
agreement dated July 1998. The Mace Trademark Corporation, a subsidiary of
Mace
Security International, Inc., manages the correct use of the Mace® trademark by
Mace Security International, Inc. and Armor Holdings, Inc. (See also Trademarks
and Patents, page 8). We believe that the total consumer defense spray market
is
approximately $18 million to $20 million in annual revenues and that the law
enforcement market is approximately $5 million in annual revenues. Our newly
developed Pepper GelÔ
has
increased sales in Law Enforcement and Consumer markets. Pepper GelÔ
has a
patent pending in the US Patent office and internationally through the patent
co-operation treaty (PCT).
Operating
Agreements and Acquisitions.
On
August 12, 2002, the video systems and system component products were added
to
the Security Segment when we acquired certain of the assets and operations
of
Micro-Tech, Inc., a manufacturer and retailer of video security and surveillance
devices. Plasma and video monitors were added to the Security Segment on
September 26, 2003 when we acquired certain assets and the operations of Vernex,
Inc., a manufacturer and retailer of plasma and CRT video monitors. We added
a
line of high-end digital and machine vision cameras and professional imaging
components, Industrial Vision Source (“IVS”), and a line of consumer “do it
yourself” video surveillance systems, SecurityandMore (“S&M”), on July 1,
2004, when we acquired the two businesses from American Building Control, Inc.
On November 23, 2005 we acquired the inventory and customer accounts of
Securetek, Inc. which specializes in the sale of electronic surveillance
products to security alarm dealers and installers. The acquired business was
relocated and integrated into our existing security operation in Ft. Lauderdale,
Florida.
We
regularly evaluate potential acquisitions for the Security Segment to determine
if they provide an advantageous opportunity. In evaluating potential
acquisitions, we consider: (i) our cash position and the availability of
financing at favorable terms; (ii) the potential for operating cost reductions;
(iii) marketing advantages by adding new products to the Mace® brand name; (iv)
market penetration of existing products; and (v) other relevant factors.
As
consideration for acquisitions, we may use combinations of common stock,
warrants, cash, and indebtedness. The consideration for each future acquisition
will vary on a case-by-case basis depending on our financial interests, the
historic operating results of the acquisition target, and the growth potential
of the business to be acquired. We expect to finance the cash portion of future
acquisitions through our cash reserves, funds provided by operations, loans,
and
the proceeds of possible future equity sales.
Digital
Media Marketing Segment.
Sales. We
plan
to increase sales for both the online advertising and e-commerce divisions
of
our Digital Media Marketing segment. Our plan to increase sales will require
us
to incur additional expenses for marketing and the addition of sales personnel
throughout the next several quarters. We operate in a variety of online
channels, including email, search, lead generation and traditional banner
marketing, and we plan to expand marketing for all of the channels throughout
2008. We have been increasing sales and customer acquisition efforts and
expenses in our e-commerce division, especially for our recently launched Purity
cosmetics product line. The Purity cosmetics product line increased
significantly during the fourth quarter of 2007 and is anticipated to continue
to be a more significant percentage of our e-commerce revenue. We also
anticipate additional growth from the launch of new products and continued
expansion of current product lines.
Operating
Efficiency. In
an
effort to streamline and strengthen internal operations, we have consolidated
all internal operations of our Digital Media Marketing segment in our Wexford,
PA office, a suburb of Pittsburgh, PA. We maintain a sales presence throughout
the country. We have also consolidated the Digital Media Marketing Segment’s
e-commerce divisions shipping and fulfillment functions within our security
warehouse and shipping facility in Farmers Branch, Texas. We believe that the
consolidation will lead to significant savings in operating costs, overhead,
and
personnel.
Acquisition.
On
July
20, 2007, the Digital Media Marketing segment was added to our operations when
all of the outstanding common stock of Linkstar was purchased from Linkstar’s
shareholders. The acquisition of Linkstar enables us to expand the marketing
of
our security products through online channels and provides us with a presence
in
the online and digital media services industry. We paid approximately $10.5
million to the Linkstar shareholders consisting of $7.0 million in cash at
closing, $500,000 of promissory notes bearing a 5% interest rate due on January
3, 2008 and 1,176,471 unregistered shares of the Company’s common stock. The
Company’s stock was issued based on a closing price of $2.55 per share or a
total value of $3.0 million.
Car
and Truck Wash Segment.
Sales.
We
intend to maintain our revenues of the car washes we own while we continue
to
sell the car washes. We intend to maintain the revenues by providing superior
service and through our existing marketing efforts. To maintain market share
in
a given operating region, we spend approximately 2% to 3% of regional revenue
on
regional advertising campaigns emphasizing coupons to attract volume with
discount offers and brand awareness. We believe that only about 30% of the
general population routinely uses car wash services. We believe that this
relatively low level of participation is the result of (i) lack of effective
advertising; (ii) inconsistent wash quality and service levels across fragmented
locations; and (iii) concerns about scratches and other adverse effects from
the
automated wash process.
5
Operating
Efficiency. We
have
implemented programs to take advantage of certain economies of scale in such
areas as the purchase of equipment, chemicals, supplies and parts, equipment
maintenance, data processing, financing arrangements, employee benefits,
insurance and communications. We train our operating personnel to emphasize
customer service, labor efficiency, safe operations, and sales of add-on and
ancillary services.
Acquisitions
and Divestitures. We
acquired our car and truck washes between May 1999 and December 2000. Our
current strategy is to sell the car washes we own. In addition to our truck
washes, from December 2005 to March 3, 2008, we have sold 34 car washes
including all of our car washes in the Northeast, Arizona and Florida
regions.
On
January 4, 2008 we completed the sale of our car wash located in Bradenton,
Florida for $1.3 million at a gain of approximately $548,000. Also on January
4,
2008, we sold four full service car wash facilities in the Sarasota, Florida
area for approximately $10.3 million, resulting in a gain of approximately
$6.3
million. Additionally, on March 3, 2008, we sold our North Sarasota, Florida
car
wash for approximately $875,000, resulting in gains of approximately
$177,000.
We
currently own 15 car washes all located in Texas. Of the 15 car washes, 14
are
operated by the Company and one is leased by the Company to a third party.
We
are marketing our car washes individually and in groups. We are considering
offers for our car washes and evaluate offers based on whether the purchase
price would be sufficient to retire all debt related to the car washes and
provide sufficient capital for the growth of our Security and Digital Media
Marketing Segments. We seek to grow the Security and Digital Media Marketing
Segments through acquisitions, new product development and new market
penetration.
MARKETING
Security
Segment.
Our
electronic surveillance products and components are marketed through several
sales channels, such as catalogs, the internet, mass merchants, exhibitions
at
national trade shows and a call center. Our other products are sold through
direct marketing, the use of independent sales representatives and distributors
as well as exhibitions at national trade shows and advertisements in trade
publications.
Our
self
defense sprays are available for purchase at mass merchant/department stores,
gun shops, sporting goods stores, hardware, auto, convenience and drug stores.
In the law enforcement market, our defense sprays, including Pepper
GelÔ,
are
sold through direct marketing, the use of independent sales representatives
and
distributors as well as exhibitions at national trade shows and advertisements
in trade publications.
We
have a
diverse customer base within the Security Segment with no single customer
accounting for 5% or more of our consolidated revenues for the fiscal year
ended
December 31, 2007. We do not believe that the loss of any single Security
Segment customer would have a material adverse effect on our business or results
of operations.
Digital
Media Marketing. All
online marketing and e-commerce products and services are created and marketed
with a broad audience base as the target audience. We are continuing to increase
the marketing of our Linkstar e-commerce division, especially with our launch
in
the third quarter of 2007 of a new product line of mineral cosmetics, Purity.
We
intend to concentrate on expanding our existing product lines, building brand
awareness, and launching one to two new product lines in 2008.
PromoPath’s
advertising clients are typically established direct-response advertisers with
well recognized brands and broad consumer appeal such as NetFlix, Discover
credit cards and Bertelsmann Group. We do not believe that the loss of any
single Digital Media Marketing Segment customer would have a material adverse
effect on our business or results of operations.
Car
and Truck Wash Segment.
The car
care industry services customers on a local and regional basis. We employ
operational and customer service people at our operating locations. The
operational and customer service people are supervised by the management of
the
operating locations. We emphasize providing quality services as well as customer
satisfaction and retention, and believe that we will attract customers in the
future because of our reputation for quality service. We market our services
through regional coupon advertising, direct mail marketing programs and radio
and television advertisements. We have a diverse customer base, with no single
customer accounting for 5% or more of our consolidated revenues for the fiscal
year ended December 31, 2007. We do not believe that the loss of any single
customer would have a material adverse effect on our business or results of
operations.
6
PRODUCTION
AND SUPPLIES
Security
Segment.
Our
electronic surveillance products and system component requirements are
established at our Ft. Lauderdale, Florida facility and are manufactured
principally in Korea, China, and other foreign countries, by original equipment
manufacturers (“OEM”). The electronic surveillance products and components
meeting our requirements are labeled, packaged, and shipped ready for sale,
to
our warehouses in Ft. Lauderdale, Florida and Farmers Branch,
Texas.
Substantially
all of the manufacturing processes for our defense sprays are performed at
our
leased Bennington, Vermont facility. Defense spray products are manufactured
on
an aerosol filling machine. Most products are packaged in sealed,
tamper-resistant "clamshells." The KinderGard ®, a product line of childproof
locks, MaceCashÔ,
a dye
pack system, and TG Guard®, an electronic tear gas security system, the
components are primarily manufactured by unrelated companies and are assembled
and packaged on-site at our Vermont facility. There are numerous potential
suppliers of the components and parts required in the production process. We
have developed strong long-term relationships with many of our suppliers,
including the following: Moldamatic, Inc., Amber International, Inc., and
Springfield Printing, Inc. In addition, we purchase for resale a variety of
products produced by others including whistles and window and door
alarms.
Digital
Media Marketing Segment. Our
Linkstar e-commerce division is located in Wexford, Pennsylvania (a suburb
of
Pittsburgh). Shipping and fulfillment for the e-commerce division is performed
in the Company’s Dallas, Texas warehouse location. The Products sold by the
e-commerce division are manufactured within the US as well as China and other
foreign countries. The packaging of products is also currently obtained through
suppliers in the US and China.
Car
and Truck Wash Segment. We
do not
manufacture any of the car or car wash equipment or supplies which we use.
There
are numerous suppliers of car wash equipment and supplies.
COMPETITION
Security
Segment.
Our
video systems and security products components face competition from many larger
companies such as Sony, Panasonic, Armor Holdings, Inc. and others. A number
of
these competitors have significantly greater financial, marketing, and other
resources than us. Our high-end digital and machine vision camera operation,
IVS, is a large distributor of Sony® products. Customers of IVS who achieve a
high Sony® product purchasing level, qualify for purchasing directly from Sony®.
IVS occasionally loses high volume customers to Sony. Additionally, our foreign
manufacturers of electronic surveillance products also sell directly to our
customer base. We also compete with numerous well-established, smaller, local
or
regional firms. Increased competition from these companies could have an adverse
effect on our electronic surveillance products sales.
There
continues to be a number of companies marketing personal defense sprays to
civilian consumers such as Armor Holdings, Inc. We continue to offer defense
spray products that we believe distinguish themselves through brand name
recognition and superior product features and formulations. This segment
experienced increased sales in aerosols and TG Guard systems in 2006 and 2007.
We attribute the increased sales to improved marketing as well as an increase
in
government spending on purchasing our TG Guard systems for embassy, prison
and
safe room installations.
Digital
Media Marketing Segment. PromoPath,
our
online
marketing division competes with interactive advertising agencies, traditional
advertising agencies that perform internet advertising and marketing as part
of
their services to clients, and other companies that provide online marketing
and
customer acquisition services. We also compete with third-party affiliate
marketing and online direct marketing companies. We believe that the competitive
factors affecting the internet advertising market are data analysis
capabilities, client service, strategy, ad serving technology, creative
innovation, functionality and price. Linkstar, our e-commerce division competes
with product development and marketing companies, both on and offline. Our
success relies on creating innovative products attractive to consumers, and
being able to gain and protect market share for successful product lines. We
compete with numerous well-established national and regional companies such
as
ValueClick, Think Partnership, Syndero, Intelligent Beauty, Guthy-Renker, and
Bare Escentuals.
Car
and Truck Wash Segment.
The car
care industry is a highly fragmented industry comprised of many large and small
businesses. We compete principally with locally-owned car wash facilities and
other regional car wash chains which may, in many instances, be located near
our
car washes. The car care industry is highly competitive. Competition is based
primarily on location, facilities, customer service, available services and
price. We also face competition from sources outside the car wash industry,
such
as gas stations that offer automated car wash services. Barriers to entry in
the
car care industry are relatively low. Competition is always entering our
existing markets from new sources not currently competing with us.
7
TRADEMARKS
AND PATENTS
Security
Segment. We
began
marketing products in 1993 under the Mace® brand name and related trademarks
pursuant to an exclusive license for sales of defense sprays to the consumer
market in the continental United States, and a non-exclusive license for sales
to the consumer market worldwide. We subsequently purchased outright the Mace®
brand name and related trademarks (Pepper Mace®, Chemical Mace®, Mace . . . Just
in Case®, CS MaceÔ
and
Magnum MaceÔ).
In
conjunction with this purchase, we acquired a non-exclusive worldwide license
to
promote a patented pepper spray formula in both the consumer and law enforcement
markets. We have a patent pending and filed two trademark applications for
a new
less-than-lethal product called Pepper GelÔ
in the
law enforcement market and Mace GelÔ
in the
civilian market. Additionally, we have been issued a patent on the locking
mechanism for our Mark VI defense spray unit.
In
July
1998, in connection with the sale of our Law Enforcement Division, we
transferred our Mace® brand trademark and all related trademarks, and a patent
(No. 5,348,193) to our wholly-owned subsidiary, Mace Trademark Corp. The
purchaser of our Law Enforcement division received a 99 year license to use
the
Mace® brand, certain other such trademarks and the patents in the law
enforcement market only.
We
also
have various other patents and trademarks for the devices we sell, including
trademarks and/or patents for the Big Jammer® door brace, Screecher®,
Peppergard®, Mace (Mexico)®, Viper® defense spray, Kindergard®, TG Guard®, Take
Down®, Muzzle®, Pepper Mace®, MSI and Design®, Mace® Community (European Union)
Trademark, Pepper Gel®, and Take Down ExtremeÔ.
We also
license the pending patent for our new Pepper Gun product.
With
the
2004 acquisition of S&M and IVS, we obtained the following trademarks used
in our Security Segment: SecurityandMore®, SecurityandMore.com®, Industrial
Vision Source®, Security Outsourcing SolutionsÔ,
Observision®, ProtectItNow!®, Easy Watch®, Focus Vision 4 Observation System
(Stylized)® and SmartChoice®.
The
Company has expanded the Mace® trademark to cover new electronic surveillance
products.
We
believe these Mace related trademarks provide us with a competitive
advantage.
Digital
Media Marketing. We
are
applying for trademarks and service marks for the brands we sell on the
internet.
Car
and Truck Wash Business.
We own
a registered service mark for Super
Bright®.
Super
Bright®
is
our
brand name in our San Antonio, Texas and Lubbock, Texas locations. We operate
our car washes in our Texas regions under locally recognizable names such as
Colonial Car Wash, Dallas, Texas and Genie Car Wash, Austin, Texas.
GOVERNMENT
REGULATION/ENVIRONMENTAL COMPLIANCE
Security
Segment.
The
distribution, sale, ownership, and use of consumer defense sprays are legal
in
some form in all fifty states and the District of Columbia. However, in some
states, sales to minors are prohibited and in several states (MA, MI, NY and
WI,
for example) sales are highly regulated. Among the typical regulations are
the
following, which list is not all inclusive: Massachusetts requires both the
seller and possessor to be licensed; Michigan does not allow the sale of
combinations of tear gas and pepper sprays; and New York requires sellers to
be
licensed firearms dealers or pharmacists. There are often restrictions on sizes,
labeling and packaging that may vary from state to state. We have been able
to
sell our defense sprays consistent with the requirements of state laws. We
believe we are in material compliance with all federal, state, and local laws
that affect the sale and marketing of our defense spray business. There can
be
no assurance, however, that broader or more severe restrictions will not be
enacted that would have an adverse impact on the sale of defense sprays.
Additionally, certain states require licenses for the sale of our security
equipment. We have obtained all required licenses.
During
January 2008, the Environmental Protection Agency (“EPA”) conducted a site
investigation at the Company’s Bennington, Vermont location and the building the
facility is located within. The Company does not own the building or land and
leases 44,000 square feet of the building from Vermont Mill Properties, Inc
(“Vermont Mill”). During February 2008, a search of the Company’s Bennington,
Vermont location and the building it is located within was conducted under
a
search warrant issued by the U.S. District Court for the District of Vermont.
Both the site investigation and search were focused on discovering whether
hazardous substances were being improperly stored. Subsequent to the
investigation and search, the EPA notified the Company and the building owner
that remediation of certain hazardous wastes are required. The hazardous
materials and waste identified by the EPA were (i) metal contaminated soils
on
the building grounds (waste from sand blasting paint from the building, the
Company believes that the building owner and not Mace is responsible for any
soil clean up); (ii) approximately 130 drums of hazardous waste (waste gases
generated from testing the defense spray units sold by the Company and defective
spray units); (iii) 55 thousand pounds of 2-chlorobenzalmalononitrile stored
in
eight pound plastic containers (a chemical used to make tear gas); and (iv)
three steal drums containing a chemical used to make pyrotechnic grenades (this
material is held for resale). The EPA is requiring the Company and the building
owner to remove and properly dispose of the hazardous waste and properly store
of all hazardous material. The EPA in findings of fact issued on February 20,
2008 estimated the cost for the removal and proper storage at $300,000,
including the cost for any soil clean up which is not the responsibility of
the
Company. We estimate the range of possible loss attributable to the Company
to
be from approximately $285,000 to $365,000 including the cost of disposal of
the
waste materials, as well as expenses incurred with environmental engineers
and
legal counsel. An accrual of approximately $285,000 has been recorded as of
December 31, 2007 for this matter representing management’s best estimate of
probable loss, as defined by SFAS No. 5, Accounting
for Contingencies.
The
EPA, the Company and the building owner have entered into an Administrative
Consent Order which will govern the removal of hazardous waste and storage
of
hazardous material. The Administrative Consent Order requires that the Company
provide a $500,000 bond to secure its obligations under the Administrative
Consent Order. The Company is unable at this time to determine whether further
action will be taken by the United States Attorney or if any charges, fines
or
penalties will be sought from the Company.
8
Digital
Media Marketing. We
believe that we currently comply with all state and federal laws within our
online marketing practices. However, the online marketing segment has come
under
increased scrutiny by the Federal Trade Commission (“FTC”) and several state
Attorney Generals in regards to online lead generation practices. Since our
online marketing and e-commerce sites could be impacted, we are closely
monitoring any changes to state or federal laws and FTC guidelines. In addition,
any changes to laws impacting the import or sale of any products within our
e-commerce division could adversely impact revenues, although we believe this
to
be of minimal risk in the near future.
Car
and Truck Wash Segment.
We are
subject to various local, state, and federal laws regulating the discharge
of
pollutants into the environment. We believe that our operations are in
compliance, in all material respects, with applicable environmental laws and
regulations. Compliance with these laws and regulations is not expected to
materially affect our competitive position. Three major areas of regulation
facing us are disposal of lubrication oil at our oil change centers, the
compliance with all underground storage tank laws in connection with our
gasoline sales, and the proper recycling and disposal of water used in our
car
and truck washes. We use approved waste-oil haulers to remove our oil and
lubricant waste. Before acquiring a gasoline dispensing site, we investigate
it
to verify that any underground storage tanks are in compliance with all legal
requirements. We recycle our waste water and, where we have proper permits,
it
is disposed of into sewage drains. Approximately 70% of the water used in the
car wash is recycled at sites where a built-in reclaim system
exists.
RESEARCH
AND DEVELOPMENT
Security
Segment.
Our
staffs in our Ft. Lauderdale, Florida and Farmers Branch, Texas facilities
determine the requirements of various electronic surveillance products and
components in conjunction with OEM manufacturers. We also have an on-site
laboratory at our Vermont facility where research and development is conducted
to maintain our reputation in the defense spray industry. We are continually
reviewing ideas and potential licensing arrangements to expand our product
lines. Our
research and development expense was not material in 2007, 2006 or
2005.
Digital
Media Marketing. We
spend
funds on internally developing software used in this business. We also have
employees whose duties are to perform market research and testing of new product
ideas and improve existing products within the e-commerce division.
Car
and Truck Wash Segment. There
are
no research and development expenditures within the Car and Truck Wash
Segment.
INSURANCE
We
maintain various insurance policies for our assets and operations. These
policies provide property insurance including business interruption protection
for each location. We maintain commercial general liability coverage in the
amount of $1 million per occurrence and $2 million in the aggregate with an
umbrella policy which provides coverage up to $25 million. We also maintain
workers’ compensation policies in every state in which we operate. Commencing
July 2002, as a result of increasing costs of the Company’s insurance program,
including auto, general liability, and workers’ compensation coverage, we are
insured through participation in a captive insurance program with other
unrelated companies. The Company maintains excess coverage through
occurrence-based policies. With respect to our auto, general liability, and
workers’ compensation policies, we are required to set aside an actuarially
determined amount of cash in a restricted “loss fund” account for the payment of
claims under the policies. We expect to fund these accounts annually as required
by the captive insurance company. Should funds deposited exceed claims incurred
and paid, unused deposited funds are returned to us with interest upon the
captive insurance company deciding a distribution is appropriate but no earlier
than the fifth anniversary of the policy year-end. The captive insurance program
is further secured by a letter of credit in the amount of $1,065,000 at December
31, 2007. The Company records a monthly expense for losses up to the reinsurance
limit per claim based on the Company’s tracking of claims and the insurance
company’s reporting of amounts paid on claims plus an estimate of reserves for
possible future losses on reported claims and claims incurred but not reported.
There can be no assurance that our insurance will provide sufficient coverage
in
the event a claim is made against us, or that we will be able to maintain in
place such insurance at reasonable prices. An uninsured or under insured claim
against us of sufficient magnitude could have a material adverse effect on
our
business and results of operations.
9
U.S.
BASED BUSINESS
Our
electronic surveillance products are manufactured in Korea, China, and other
foreign countries. All of our property and equipment is located in the United
States. We do not believe we are currently subject to any material risks
associated with any foreign operations. Our Digital Media Market Segment
products are manufactured within the US as well as China and other foreign
countries. All of our car and truck wash business is conducted in the United
States. Approximately 3.8%, (or $841,000), 4.1%, (or $956,000) and 6.0% (or
$1.5
million) of the 2007, 2006 and 2005 revenues, respectively, from our Security
Segment were derived from customers outside of the United States. Additionally,
revenues of approximately 0.2%, or $18,000, of our newly acquired Digital Media
Marketing Segment in 2007 were derived from customers outside of the United
States.
EMPLOYEES
As
of
March 25, 2008, we had approximately 593 employees, of which approximately
454
were employed in the Car and Truck Wash Segment, 87 employed in the Security
Segment, 35 employed in the Digital Media Marketing Segment, 14 in corporate
clerical and administrative positions in our corporate and finance departments,
and three in executive management. None of our employees are covered by a
collective bargaining agreement.
AVAILABLE
INFORMATION
For
more
information about Mace Security International, Inc., please visit our web site
at www.mace.com.
Our
electronic filings with the SEC (including all annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, and any
amendments to these reports), including the exhibits, are available free of
charge through our web site as soon as reasonably practicable after we
electronically file them with or furnish them to the SEC.
ITEM
1A. RISK FACTORS
Risks
Related to Our Business
If
we are unable to finance the growth of our business, our stock price could
decline. Our
business plan involves growing our Security Segment and Digital Media Marketing
Segments through acquisitions and internal development, and divesting of our
car
washes through third party sales. The growth of our Security Segment and Digital
Media Segment requires significant capital that we hope to partially fund
through the sale of our car washes. Our capital requirements also include
working capital for daily operations and capital for equipment purchases.
Although we had positive working capital of $17.8 million as of December 31,
2007, we have a history of net losses and in some years we have ended our fiscal
year with a negative working capital balance. Our positive working capital
decreased by approximately $8.8 million from December 31, 2006 to December
31,
2007 principally due to the purchase of Linkstar in the quarter ended September
30, 2007. To the extent that we lack cash to meet our future capital needs,
we
will need to raise additional funds through bank borrowings and additional
equity and/or debt financings, which may result in significant increases in
leverage and interest expense and/or substantial dilution of our outstanding
equity. If we are unable to raise additional capital, we may need to
substantially reduce the scale of our operations and curtail our business plan.
Although we have generated cash from the sale of our car washes, there is no
guarantee that we will be able to sell our remaining car washes.
If
we fail to manage the growth of our business, our stock price could
decline. Our
business plan is predicated on growth. If we succeed in growing, it will place
significant burdens on our management and on our operational and other
resources. For example, it may be difficult to assimilate the operations and
personnel of an acquired business into our existing business; we must integrate
management information and accounting systems of an acquired business into
our
current systems; our management must devote its attention to assimilating the
acquired business, which diverts attention from other business concerns; we
may
enter markets in which we have limited prior experience; and we may lose key
employees of an acquired business. We will also need to attract, train,
motivate, retain, and supervise senior managers and other employees. If we
fail
to manage these burdens successfully, one or more of the acquisitions could
be
unprofitable, the shift of our management’s focus could harm our other
businesses, and we may be forced to abandon our business plan, which relies
on
growth.
10
We
have debt secured by mortgages, which can be foreclosed upon if we default
on
the debt. Our
bank
debt borrowings as of December 31, 2007 were $13.6 million, including capital
lease obligations and borrowings related to discontinued operations,
substantially all of which is secured by mortgages against certain of our real
property (including up to 15 of our car wash facilities and one truck wash
at
December 31, 2007). Our most significant borrowings are secured notes payable
to
JP Morgan Chase Bank, N.A. (“Chase”) in the amount of $10.5 million. We have in
the past violated loan covenants in our Chase agreements. We have obtained
waivers for our violations of the Chase agreements. Our ongoing ability to
comply with the debt covenants under our credit arrangements and refinance
our
debt depends largely on our achievement of adequate levels of cash flow. Our
cash flow has been and could continue to be adversely affected by the expenses
of the ongoing criminal immigration investigation, weather patterns and economic
conditions. In the future, if our cash flows are less than expected or debt
service, including interest expense, increases more than expected, we may
continue to be out of compliance with the loan covenants and need to seek
waivers or amendments. If we are in default on loan covenants and are not able
to obtain amendments or waivers of acceleration, our debt could become due
and
payable on demand, and Chase could foreclose on the assets pledged in support
of
the relevant indebtedness. If our assets (including up to 15 of our car wash
facilities at December 31, 2007) are foreclosed upon, revenues from our Car
and
Truck Wash Segment, which comprised 36.5% of our total revenues for the fiscal
year 2007, would be severely impacted and we may go out of business.
Our
loans with Chase have financial covenants that restrict our operations, and
which can cause our loans to be accelerated. Our
secured notes payable to Chase total $10.5 million, $4.9 million of which was
classified as non-current debt at December 31, 2007. The Chase agreements
contain affirmative and negative covenants, including the maintenance of certain
levels of tangible net worth, maintenance of certain levels of unencumbered
cash
and marketable securities, limitations on capital spending, and certain
financial reporting requirements. Our Chase agreements are the only debt
agreements that contain an express prohibition on incurring additional debt
without the approval of the lender. None of our other agreements contain such
a
prohibition. The Chase term loan agreements also limit capital expenditures
annually to $1.0 million, requires the Company to provide Chase with a Form
10-K
and audited financial statements within 120 days of the Company’s fiscal year
end and a Form 10-Q within 60 days after the end of each fiscal quarter, and
requires the maintenance of a minimum total unencumbered cash and marketable
securities balance of $5 million. If we are unable to satisfy the Chase
covenants and we cannot obtain further waivers or amendments to our loan
agreements, the Chase notes may be reflected as current in future balance sheets
and as a result our stock price may decline.
We
have reported net losses in the past. If we continue to report net losses,
the
price of our common stock may decline, or we could go out of business.
We
reported net losses for the years ended December 31, 2007, 2006, 2005 and 2004
and we reported negative cash flow from operating activities from continuing
operations in 2007, 2006 and 2005. Although a portion of the reported losses
in
past years related to non-cash impairment charges of intangible assets under
Statement of Financial Accounting Standards (“SFAS”) 142 and non-cash
stock-based compensation expense under SFAS 123(R), we may continue to report
net losses and negative cash flow in the future. Additionally, SFAS 142 requires
annual fair value based impairment tests of goodwill and other intangible assets
identified with indefinite useful lives. As a result, we may be required to
record additional impairments in the future, which could materially reduce
our
earnings and equity. If we continue to report net losses and negative cash
flows, our stock price could be adversely impacted.
We
compete with many companies, some of whom are more established and better
capitalized than us.
We
compete with a variety of companies on a worldwide basis. Some of these
companies are larger and better capitalized than us. There are also few
barriers to entry in our markets and thus above average profit margins will
likely attract additional competitors. Our competitors may develop
products and services that are superior to, or have greater market acceptance
than our products and services. For example, many of our current and potential
competitors have longer operating histories, significantly greater financial,
technical, marketing and other resources and larger customer bases than
us. These factors may allow our competitors to respond more quickly than
we can to new or emerging technologies and changes in customer
requirements. Our competitors may engage in more extensive research and
development efforts, undertake more far-reaching marketing campaigns and adopt
more aggressive pricing policies which may allow them to offer superior products
and services.
Failure
or circumvention of our controls or procedures could seriously harm our
business. An
internal control system, no matter how well designed and operated, can provide
only reasonable, not absolute, assurance that the control system’s objectives
will be met. Further, the design of a control system must reflect the fact
that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no system of controls can provide absolute assurance that all control
issues, mistakes and instances of fraud, if any, within the Company have been
or
will be detected. The design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and we cannot assure
you that any design will succeed in achieving its stated goals under all
potential future conditions. Any failure of our controls and procedures to
detect error or fraud could seriously harm our business and results of
operations.
If
we lose the services of our executive officers, our business may suffer.
If
we
lose the services of one or more of our executive officers and do not replace
them with experienced personnel, that loss of talent and experience will make
our business plan, which is dependent on active growth and management, more
difficult to implement and could adversely impact our operations.
11
If
our insurance is inadequate, we could face significant losses.
We
maintain various insurance coverages for our assets and operations. These
coverages include property coverages including business interruption protection
for each location. We maintain commercial general liability coverage in the
amount of $1 million per occurrence and $2 million in the aggregate with an
umbrella policy which provides coverage up to $25 million. We also maintain
workers’ compensation policies in every state in which we operate. Commencing
July 2002, as a result of increasing costs of the Company’s insurance program,
including auto, general liability, and workers’ compensation coverage, we are
insured through participation in a captive insurance program with other
unrelated businesses. The Company maintains excess coverage through
occurrence-based policies. With respect to our auto, general liability, and
workers’ compensation policies, we are required to set aside an actuarial
determined amount of cash in a restricted “loss fund” account for the payment of
claims under the policies. We expect to fund these accounts annually as required
by the insurance company. Should funds deposited exceed claims incurred and
paid, unused deposited funds are returned to us with interest after the fifth
anniversary of the policy year-end. The captive insurance program is further
secured by a letter of credit from Mace in the amount of $1,065,000 at December
31, 2007. The Company records a monthly expense for losses up to the reinsurance
limit per claim based on the Company’s tracking of claims and the insurance
company’s reporting of amounts paid on claims plus an estimate of reserves for
possible future losses on reported claims and claims incurred but not reported.
There can be no assurance that our insurance will provide sufficient coverage
in
the event a claim is made against us, or that we will be able to maintain in
place such insurance at reasonable prices. An uninsured or under insured claim
against us of sufficient magnitude could have a material adverse effect on
our
business and results of operations.
Risks
Related to our Security Segment
We
could become subject to litigation regarding intellectual property rights,
which
could seriously harm our business. Although
we have not been the subject of any such actions, third parties may in the
future assert against us infringement claims or claims that we have violated
a
patent or infringed upon a copyright, trademark or other proprietary right
belonging to them. We provide the specifications for most of our security
products and contract with independent suppliers to engineer and manufacture
those products and deliver them to us. Certain of these products contain
proprietary intellectual property of these independent suppliers. Third parties
may in the future assert claims against our suppliers that such suppliers have
violated a patent or infringed upon a copyright, trademark or other proprietary
right belonging to them. If such infringement by our suppliers or us were found
to exist, a party could seek an injunction preventing the use of their
intellectual property. In addition, if an infringement by us were found to
exist, we may attempt to acquire a license or right to use such technology
or
intellectual property. Some of our suppliers have agreed to indemnify us against
any such infringement claim, but any infringement claim, even if not meritorious
and/or covered by an indemnification obligation, could result in the expenditure
of a significant amount of our financial and managerial resources, which would
adversely effect our operations and financial results.
If
our Mace brand name falls into common usage, we could lose the exclusive right
to the brand name. The
Mace
registered name and trademark is important to our security business and defense
spray business. If we do not defend the Mace name or allow it to fall into
common usage, our security segment business could be adversely
affected.
The
businesses that manufacturer our electronic surveillance products are located
in
foreign countries, making it difficult to recover damages, if the manufacturers
fail to meet their obligations. Our
electronic surveillance products are manufactured on an OEM basis. Most of
the
OEM suppliers we deal with are located in Asian countries and are paid a
significant portion of an order in advance of the shipment of the product.
We
also have limited information on the OEM suppliers from which we purchase,
including their financial strength, location and ownership of the actual
manufacturing facilities producing the goods. If any of the OEM suppliers
defaulted on their agreement with the Company, it would be difficult for the
Company to obtain legal recourse because of the suppliers’ assets being located
in foreign countries.
If
our original equipment manufacturers (“OEMs”) fail to adequately supply our
products, our security products sales may suffer. Reliance
upon OEMs, as well as industry supply conditions generally involves several
additional risks, including the possibility of defective products (which can
adversely affect our reputation for reliability), a shortage of components
and
reduced control over delivery schedules (which can adversely affect our
distribution schedules), and increases in component costs (which can adversely
affect our profitability). We have some single-sourced manufacturer
relationships, either because alternative sources are not readily or
economically available or because the relationship is advantageous due to
performance, quality, support, delivery, capacity, or price considerations.
If
these sources are unable or unwilling to manufacture our products in a timely
and reliable manner, we could experience temporary distribution interruptions,
delays, or inefficiencies, adversely affecting our results of operations. Even
where alternative OEMs are available, qualification of the alternative
manufacturers and establishment of reliable suppliers could result in delays
and
a possible loss of sales, which could affect operating results
adversely.
12
If
people are injured by our consumer safety products, we could be held liable
and
face damage awards. We
face
claims of injury allegedly resulting from our defense sprays, which we market
as
less-than-lethal. For example, we are aware of allegations that defense sprays
used by law enforcement personnel resulted in deaths of prisoners and of
suspects in custody. In addition to use or misuse by law enforcement agencies,
the general public may pursue legal action against us based on injuries alleged
to have been caused by our products. We may also face claims by purchasers
of
our electronic surveillance systems, if they fail to operate properly during
the
commission of a crime. As the use of defense sprays and electronic surveillance
systems by the public increase, we could be subject to additional product
liability claims. We have a $25,000 deductible on our consumer safety products
insurance policy, meaning that all such lawsuits, even unsuccessful ones and
ones covered by insurance, cost the Company money. Furthermore, if our insurance
coverage is exceeded, we will have to pay the excess liability directly. Our
product liability insurance provides coverage of $1 million per occurrence
and
$2 million in the aggregate with an umbrella policy which provides coverage
up
to $25 million. However, if we are required to directly pay a claim in excess
of
our coverage, our income will be significantly reduced, and in the event of
a
large claim, we could go out of business.
If
governmental regulations regarding defense sprays change or are applied
differently, our business could suffer. The
distribution, sale, ownership and use of consumer defense sprays are legal
in
some form in all 50 states and the District of Columbia. Restrictions on the
manufacture or use of consumer defense sprays may be enacted, which would
severely restrict the market for our products or increase our costs of doing
business.
Our
defense sprays use hazardous materials which if not properly handled would
result in our being liable for damages under environmental laws.
Our
consumer defense spray manufacturing operation currently incorporates hazardous
materials, the use and emission of which are regulated by various state and
federal environmental protection agencies, including the United States
Environmental Protection Agency. We also store a chemical component of tear
gas
in our Bennington, Vermont facility in such quantities that if all the chemical
was released into the air, could cause an evacuation of Bennington, Vermont
until the chemical broke down into its components. If we fail to comply with
any
environmental requirements, these changes or failures may expose us to
significant liabilities that would have a material adverse effect on our
business and financial condition. The Environmental Protection Agency conducted
a site investigation at our Bennington, Vermont facility in January, 2008 and
found the facility in need of remediation. See Item
3. Legal
Proceedings.
Risks
Related to our Digital Media Marketing Segment
Our
online marketing business lacks long-term contracts with
clients.
Our clients who retain us to perform online marketing of their products hire
us
under contracts of less than twelve months. As a result, our online
marketing revenues are difficult to predict and may vary significantly.
Because we sometimes incur costs based on expectations of future revenues,
our
failure to predict future revenues accurately could have a material adverse
effect on our business, results of operations, and financial
condition.
Our
e-commerce brands are not well known.
Our e-commerce brands of Vioderm (anti-wrinkle products), TrimDay (diet
supplement) and Purity by Mineral Science (mineral based facial makeup) are
relatively new. We have not yet been able to develop widespread awareness of
our
e-commerce brands. Lack of brand awareness could harm the success of our
marketing campaigns, which could have a material adverse effect on our business,
results of operations, financial condition and the trading price of our common
stock.
We
have a concentration of our e-commerce business in limited products.
E-Commerce
revenues are currently generated from three product lines. The concentration
of
our business in limited products creates the risk of adverse financial impact
if
we are unable to continue to sell these products or unable to develop new
additional products. We believe that we can mitigate the financial impact of
any
decrease in sales by the development of new products, however we cannot predict
the timing of or success of new products.
We
compete with many established e-commerce companies that have been in business
longer than us. Current
and potential e-commerce and online marketing competitors are making, and are
expected to continue to make, strategic acquisitions or establish cooperative,
and, in some cases, exclusive relationships with significant companies or
competitors to expand their businesses or to offer more comprehensive products
and services. To the extent these competitors or potential competitors
establish exclusive relationships with major portals, search engines and ISPs,
our ability to reach potential members through online advertising may be
restricted. Any of these competitors could cause us difficulty in
attracting and retaining online registrants and converting registrants into
customers and could jeopardize our existing affiliate program and relationships
with portals, search engines, ISPs and other internet properties. Failure
to compete effectively including by developing and enhancing our services
offerings would have a material adverse effect on our business, results of
operations, financial condition and the trading price of our common
stock.
We
need to attract and retain a large number of e-commerce customers who purchase
our products on a reoccurring basis.
Our e-commerce model is driven by the need to attract a large number of
customers to our continuity program and to maintain customers for an extended
period of time. We have fixed costs in obtaining an initial customer which
can
be defrayed only by a customer making further purchases. For our business to
be
profitable, we must convert a certain percentage of our initial customers to
customers that purchase our products on a reoccurring monthly basis for a period
of time. To do so, we must continue to invest significant resources in order
to
enhance our existing products and to introduce new high-quality products and
services. There is no assurance we will have the resources, financial or
otherwise, required to enhance or develop products and services. Further,
if we are unable to predict user preferences or industry changes, or if we
are
unable to improve our products and services on a timely basis, we may lose
existing members and may fail to attract new customers. Failure to enhance
or develop products and services or to respond to the needs of our customers
in
an effective or timely manner could have a material adverse effect on our
business, results of operations, financial condition and the trading price
of
our common stock.
13
Our
member acquisition costs may increase significantly.
The customer acquisition cost of our business depends in part upon our ability
to purchase advertising at a reasonable cost. Advertising costs vary over
time, depending upon a number of factors, some of which are beyond our
control. Historically, we have used online advertising as the sole means
of marketing our products. In general, the costs of online advertising
have increased substantially and are expected to continue to increase as long
as
the demand for online advertising remains robust. We may not be able to
pass these costs on in the form of higher product prices. Continuing
increases in advertising costs could thus have a material adverse effect on
our
business, results of operations, financial condition and the trading price
of
our common stock.
Our
online marketing business must keep pace with rapid technological change to
remain competitive.
Our online marketing business operates in a market characterized by rapidly
changing technology, evolving industry standards, frequent new product and
service announcements, enhancements, and changing customer demands. We
must adapt to rapidly changing technologies and industry standards and
continually improve the speed, performance, features, ease of use and
reliability of our services and products. Introducing new technology into
our systems involves numerous technical challenges, requires substantial amounts
of capital and personnel resources, and often takes many months to
complete. We may not successfully integrate new technology into our
websites on a timely basis, which may degrade the responsiveness and speed
of
our websites. Technology, once integrated, may not function as
expected. Failure to generally keep pace with the rapid technological
change could have a material adverse effect on our business, results of
operations, financial condition and the trading price of our common
stock.
We
depend on our merchant and banking relationships, as well as strategic
relationships with third parties, who provide us with payment processing
solutions.
Our e-commerce products are sold by us on the internet and are paid for by
customers through credit card. From time to time, VISA and MasterCard increase
the fees that they charge processors. We may attempt to pass these increases
along to our customers, but this might result in the loss of those customers
to
our competitors who do not pass along the increases. Our revenues from merchant
account processing are dependent upon our continued merchant relationships
which
are highly sensitive and can be canceled if customer charge-backs escalate
and
generate concern that the company has held back sufficient funds in reserve
accounts to cover these charge-backs. Cancellation by our merchant providers
would most likely result in the loss of new customers and lead to a reduction
in
our revenues.
We
depend on credit card processing for a majority of our e-commerce business,
to
include but not be limited to Visa, MasterCard, American Express, and
Discover.
Significant changes to the merchant operating regulations, merchant rules and
guidelines, card acceptance methods and or card authorization methods could
significantly impact our revenues. Additionally our e-commerce membership
programs are accepted under a negative option billing term (customers are
charged monthly until they cancel), and change in regulation of negative option
billing could significantly impact our revenue.
We
are exposed to risks associated with credit card fraud and credit
payment.
Our customers use credit cards to pay for our e-commerce products and for the
products we market for third parties. We have suffered losses, and may
continue to suffer losses, as a result of orders placed with fraudulent credit
card data, even though the associated financial institution approved
payment. Under current credit card practices, a merchant is liable for
fraudulent credit card transactions when the merchant does not obtain a
cardholder’s signature. A failure to adequately control fraudulent credit
card transactions would result in significantly higher credit card-related
costs
and could have a material adverse effect on our business, results of operations,
financial condition and the trading price of our common stock.
Security
breaches and inappropriate internet use could damage our Digital Media Marketing
business.
Failure
to successfully prevent security breaches could significantly harm our business
and expose us to lawsuits. Anyone who is able to circumvent our security
measures could misappropriate proprietary information, including customer credit
card and personal data, cause interruptions in our operations, or damage our
brand and reputation. Breach of our security measures could result in the
disclosure of personally identifiable information and could expose us to legal
liability. We cannot assure you that our financial systems and other
technology resources are completely secure from security breaches or sabotage.
We have experienced security breaches and attempts at “hacking.” We may be
required to incur significant costs to protect against security breaches or
to
alleviate problems caused by breaches. All of these factors could
have a material adverse effect on our business, results of operations, financial
condition and the trading price of our common stock.
14
Our
online marketing business depends on strategic relationships with our partners.
We
expect
to generate significant commerce and advertising revenues from strategic
relationships with certain outside companies. It is our business plan that
our
websites and the websites of strategic partners will be jointly promoted.
However, there can be no assurance that our existing relationships will be
maintained through their initial terms or that additional third-party alliances
will be available to the Company on acceptable commercial terms, or at all.
The
inability to enter into new strategic alliances or to maintain any one or more
of our existing strategic alliances could result in decreased third-party paid
advertising and product and service sales revenue. Even if we are able to
maintain our strategic alliances, there can be no assurance that these alliances
will be successful or that our infrastructure of hardware and software will
be
sufficient to handle any potential increased traffic or sales volume resulting
from these alliances.
Changes
in government regulation and industry standards, could decrease demand for
our
products and services and increase our costs of doing
business. Laws
and
regulations that apply to internet communications, commerce and advertising
are
becoming more prevalent. These regulations could affect the costs of
communicating on the web and could adversely affect the demand for our
advertising solutions or otherwise harm our business, results of operations
and
financial condition. The United States Congress has enacted internet legislation
regarding children’s privacy, copyrights, sending of commercial email (e.g., the
Federal CAN-SPAM Act of 2003), and taxation. The United States Congress has
pending legislation regarding spyware (e.g., H.R. 964, “the Spy Act of 2007”).
Other laws and regulations have been adopted and may be adopted in the
future, and may address issues such as user privacy, spyware, “do not
email” lists, pricing, intellectual property ownership and infringement,
copyright, trademark, trade secret, export of encryption technology,
click-fraud, acceptable content, search terms, lead generation, behavioral
targeting, taxation, and quality of products and services. This legislation
could hinder growth in the use of the web generally and adversely affect our
business. Moreover, it could decrease the acceptance of the web as a
communications, commercial and advertising medium. The Company does not use
any
form of spam or spyware and has policies to prohibit abusive internet
behavior, including prohibiting the use of spam and spyware by our web publisher
partners.
Government
enforcement actions could result in a decrease demand for our products and
services. The
Federal Trade Commission and other governmental or regulatory bodies have
increasingly focused on issues impacting online marketing practices and consumer
protection. The Federal Trade Commission has conducted investigations of
competitors and filed law suits against competitors. Some of the investigations
and law suits have been settled by consent orders which have imposed fines
and
changes with regard to how competitors conduct business. The New York Attorney
General’s office has sued a major Internet marketer for alleged violations of
legal restrictions against false advertising and deceptive business practices
related to spyware. In our judgment, the marketing claims we make in
advertisements we place to obtain new e-commerce customers are legally
permissible. Governmental or regulatory bodies may make a different judgment
about the legally permissibility of the advertising we place and the marketing
claims we make. We could be subject to regulatory proceedings for past marketing
campaigns, or could be required to make changes in our future marketing claims,
either of which could adversely affect our revenues.
Our
business could be subject to regulation by foreign countries, new unforeseen
laws and unexpected interpretations of existing laws, resulting in an increase
cost of doing business. Due
to
the global nature of the web, it is possible that, although our transmissions
originate in California and Pennsylvania, the governments of other states or
foreign countries might attempt to regulate our transmissions or levy sales
or
other taxes relating to our activities. In addition, the growth and development
of the market for internet commerce may prompt calls for more stringent
consumer protection laws, both in the United States and abroad, that
may impose additional burdens on companies conducting business over the
Internet. The laws governing the internet remain largely unsettled, even in
areas where there has been some legislative action. It may take years to
determine how existing laws, including those governing intellectual property,
privacy, libel and taxation, apply to the Internet and Internet advertising.
Our
business, results of operations and financial condition could be materially
and
adversely affected by the adoption or modification of industry standards, laws
or regulations relating to the Internet, or the application of existing laws
to
the Internet or Internet-based advertising.
If
the technology that we currently use to deliver online advertisements is
restricted, our expenses would increase. Websites
typically place small files of non-personalized (or “anonymous”) information,
commonly known as cookies, on an Internet user’s hard drive. Cookies generally
collect information about users on a non-personalized basis to enable websites
to provide users with a more customized experience. Cookie information is passed
to the website through an Internet user’s browser software. We currently use
cookies to track an Internet user’s movement through our advertiser customer’s
websites and to monitor and prevent fraudulent activity on our networks. Most
currently available Internet browsers allow Internet users to modify their
browser settings to prevent cookies from being stored on their hard drive,
and
some users currently do so. Internet users can also delete cookies from their
hard drives at any time. Some Internet commentators and privacy advocates have
suggested limiting or eliminating the use of cookies, and legislation has been
introduced in some jurisdictions to regulate the use of cookie technology.
The
effectiveness of our technology could be limited by any reduction or limitation
in the use of cookies. If the use or effectiveness of cookies were limited,
we
would have to switch to other technologies to gather demographic and behavioral
information. While such technologies currently exist, they are substantially
less effective than cookies. We would also have to develop or acquire other
technology to monitor and prevent fraudulent activity on our networks.
Replacement of cookies could require significant reengineering time and
resources, might not be completed in time to avoid losing customers or
advertising inventory, and might not be commercially feasible. Our use of cookie
technology or any other technologies designed to collect Internet usage
information may subject us to litigation or investigations in the future.
Any litigation or government action against us could be costly and time
consuming, could require us to change our business practices and could divert
management’s attention.
15
We
could lose customers or advertising inventory if we fail to measure impressions,
clicks and actions on advertisements in a manner that is acceptable to our
advertisers and web publishers. We
earn
revenue from advertisers and make payments to web publishers based on the number
of impressions, clicks and actions from advertisements delivered on our networks
of websites. Advertisers’ and web publishers’ willingness to use our products
and services and join our networks will depend on the extent to which they
perceive our measurements of impressions, clicks and actions to be accurate
and
reliable. Advertisers and web publishers often maintain their own technologies
and methodologies for counting impressions, clicks and actions, and from time
to
time we have had to resolve differences between our measurements and theirs.
Any
significant dispute over the proper measurement of user responses to
advertisements could cause us to lose customers or advertising
inventory.
Competition
from other internet advertising companies could result in less revenue and
smaller margins. Competition
for advertising placements among current and future suppliers of Internet
navigational and informational services, high-traffic websites and Internet
service providers (“ISPs”), as well as competition with other media for
advertising placements, could result in significant price competition, declining
margins and reductions in advertising revenue. Google has made available offline
public-domain works through its search engine, which creates additional
competition for advertisers. In addition, as we continue our efforts to expand
the scope of our web services, we may compete with a greater number of web
publishers and other media companies across an increasing range of different
web
services, including in vertical markets where competitors may have
advantages in expertise, brand recognition and other areas. If existing or
future competitors develop or offer products or services that provide
significant performance, price, creative or other advantages over those offered
by us, our business, results of operations and financial condition would be
negatively affected. We also compete with traditional advertising media, such
as
direct mail, television, radio, cable, and print, for a share of advertisers’
total advertising budgets. Many current and potential competitors enjoy
competitive advantages over us, such as longer operating histories, greater
name
recognition, larger customer bases, greater access to advertising space on
high-traffic websites, and significantly greater financial, technical, sales,
and marketing resources. As a result, we may not be able to compete
successfully. If we fail to compete successfully, we could lose customers or
advertising inventory and our revenue and results of operations could
decline.
We
depend on third parties to manufacture all of the products we sell within our
e-commerce division, and if we are unable to maintain these manufacturing and
product supply relationships or enter into additional or different arrangements,
we may fail to meet customer demand and our net sales and profitability may
suffer as a result. In addition, shortages of raw ingredients, especially
for our Purity mineral cosmetics line, could affect our supply chain and impede
current and future sales and net revenues. All
of
our products are contract manufactured or supplied by third parties. The fact
that we do not have long-term contracts with our other third-party manufacturers
means that they could cease manufacturing these products for us at any time
and
for any reason. In addition, our third-party manufacturers are not restricted
from manufacturing our competitors’ products, including mineral-based products.
If we are unable to obtain adequate supplies of suitable products because of
the
loss of one or more key vendors or manufacturers, our business and results
of
operations would suffer until we could make alternative supply arrangements.
In
addition, identifying and selecting alternative vendors would be time-consuming
and expensive, and we might experience significant delays in production during
this selection process. Our inability to secure adequate and timely supplies
of
merchandise would harm inventory levels, net sales and gross profit, and
ultimately our results of operations.
The
quality of our e-commerce products depend on quality control of third party
manufacturers. For
our
e-commerce products, third-party manufacturers may not continue to produce
products that are consistent with our standards or current or future regulatory
requirements, which would require us to find alternative suppliers of our
products. Our third-party manufacturers may not maintain adequate controls
with
respect to product specifications and quality and may not continue to produce
products that are consistent with our standards or applicable regulatory
requirements. If we are forced to rely on products of inferior quality, then
our
customer satisfaction and brand reputation would likely suffer, which would
lead
to reduced net sales.
Within
our e-commerce division, we manufacture and market health and beauty consumer
products that are ingestible or applied topically. These products may cause
unexpected and undesirable side effects that could limit their use, require
their removal from the market or prevent further development. In addition,
we
are vulnerable to claims that our products are not as effective as we claim
them
to be. We also may be vulnerable to product liability claims from their
use. Unexpected
and undesirable side effects caused by our products for which we have not
provided sufficient label warnings could result in our recall or discontinuance
of sales of our products. Unexpected and undesirable side effects could prevent
us from achieving or maintaining market acceptance of the affected products
or
could substantially increase the costs and expenses of commercializing new
products. In addition, consumers or industry analysts may assert claims that
our
products are not as effective as we claim them to be. Unexpected and undesirable
side effects associated with our products or assertions that our products are
not as effective as we claim them to be also could cause negative publicity
regarding our company, brand or products, which could in turn harm our
reputation and net sales. Our business exposes us to potential liability risks
that arise from the testing, manufacture and sale of our beauty products.
Plaintiffs in the past have received substantial damage awards from other
cosmetics companies based upon claims for injuries allegedly caused by the
use
of their products. We currently maintain general liability insurance in the
amount of $1 million per occurrence and $2 million in the aggregate with an
umbrella policy which provides coverage up to $25 million. Any claims brought
against us may exceed our existing or future insurance policy coverage or
limits. Any judgment against us that is in excess of our policy limits would
have to be paid from our cash reserves, which would reduce our capital
resources. Any product liability claim or series of claims brought against
us
could harm our business significantly, particularly if a claim were to result
in
adverse publicity or damage awards outside or in excess of our insurance policy
limits.
16
Risks
Related to our Car and Truck Wash Segment
We
face a criminal investigation regarding the hiring of undocumented workers
at
our car washes that could result in fines and penalties.
On
March
13, 2006, the Company learned that the United States Attorney for the Eastern
District of Pennsylvania is investigating the Company for the alleged hiring
of
undocumented workers at the Company’s car washes. The Company’s Audit Committee
retained independent outside counsel (“Special Counsel”) to conduct an
independent investigation of the Company’s hiring practices at the Company’s car
washes and other related matters. Special Counsel provided a written summary
of
findings on April 18, 2006. The investigative findings included, among other
things, a finding that the Company’s internal controls for financial reporting
at the corporate level are adequate and appropriate, and that there is no
financial statement impact implicated by the Company’s hiring practices, except
for a potential contingent liability. Beginning on April 21, 2006, Special
Counsel began to receive for review some additional and previously requested
but
unavailable documents and information. On May 18, 2006, Special Counsel issued
its Review of Information Supplemental to Internal Investigation which stated
that the review of the additional documents and information had not changed
the
conclusions contained in the April 18, 2006 summary of findings. There is a
possibility that the United States Attorney for the Eastern District of
Pennsylvania may prosecute the Company at the conclusion of its investigation.
Violations of law may result in civil, administrative or criminal fines or
penalties. Due to the ongoing nature of the criminal investigation, it is not
possible at this time to predict the outcome of the investigation or the impact
of costs of ultimately resolving this matter on our results of operations or
financial condition. However, any fees, expenses, fines or penalties which
might
be incurred by the Company in connection with the hiring of undocumented workers
may have a material impact on the Company’s results of operations and financial
condition. The Company has made no provision for any future costs associated
with the investigations or any future costs associated with the Company’s
defense or negotiations with governmental authorities to resolve these
outstanding issues.
Our
car wash work force may expose us to claims that might adversely affect our
business, financial condition and results of operations; our insurance coverage
may not cover all of our potential liability. We
employ
a large number of workers who perform manual labor at the car washes we operate.
Many of the workers are paid at or slightly above minimum wage. Also, a large
percentage of our car wash work force is composed of employees who have been
employed by us for relatively short periods of time. This work force is
constantly turning over. Our work force may subject us to financial claims
in a
variety of ways, such as:
| · |
claims
by customers that employees damaged automobiles in our
custody;
|
| · |
claims
related to theft by employees;
|
| · |
claims
by customers that our employees harassed or physically harmed
them;
|
| · |
claims
related to the inadvertent hiring of undocumented
workers;
|
| · |
claims
for payment of workers’ compensation claims and other similar claims;
and
|
| · |
claims
for violations of wage and hour
requirements.
|
We
may
incur fines and other losses or negative publicity with respect to these claims.
In addition, some or all of these claims may rise to litigation, which could
be
costly and time consuming to our management team, and could have a negative
impact on our business. We cannot assure you that we will not experience these
problems in the future, that our insurance will cover all claims or that our
insurance coverage will continue to be available at economically feasible
rates
Our
car wash operations face governmental regulations, including environmental
regulations, and if we fail to or are unable to comply with those regulations,
our business may suffer. We
are
governed by federal, state and local laws and regulations, including
environmental regulations, that regulate the operation of our car wash centers
and other car care services businesses. Other car care services, such as
gasoline and lubrication, use a number of oil derivatives and other regulated
hazardous substances. As a result, we are governed by environmental laws and
regulations dealing with, among other things:
| · |
transportation,
storage, presence, use, disposal, and handling of hazardous materials
and
wastes;
|
| · |
discharge
of storm water; and
|
| · |
underground
storage tanks.
|
17
If
uncontrolled hazardous substances are found on any of our properties, including
leased property, or if we are otherwise found to be in violation of applicable
laws and regulations, we could be responsible for clean-up costs, property
damage, fines, or other penalties, any one of which could have a material
adverse effect on our financial condition and results of
operations.
Through
our Car and Truck Wash Segment, we face a variety of potential environmental
liabilities, including those arising out of improperly disposing waste oil
or
lubricants at our lube centers, , and leaks from our underground gasoline
storage tanks. If we improperly dispose of oil or other hazardous substances,
or
if our underground gasoline tanks leak, we could be assessed fines by federal
or
state regulatory authorities and/or be required to remediate the property.
Although each case is different, and there can be no assurance as to the cost
to
remediate an environmental problem, if any, at one of our properties, the costs
for remediation of a leaking underground storage tank typically range from
$30,000 to $75,000.
If
our car wash equipment is not maintained, our car washes will not be operable.
Many
of
our car washes have older equipment that requires frequent repair or
replacement. Although we undertake to keep our car washing equipment in adequate
operating condition, the operating environment in car washes results in frequent
mechanical problems. If we fail to properly maintain the equipment in a car
wash, that car wash could become inoperable or malfunction resulting in a loss
of revenue, damage to vehicles and poorly washed vehicles.
If
we sell our Car and Truck Wash Segment, our revenues will decrease and our
business may suffer. We
can
offer no assurances that we will be able to locate additional potential buyers
for our remaining car washes or that we will be able to consummate any further
sales to potential buyers we do locate. In addition if we are able to sell
our
remaining car washes, our total revenues will decrease and our business will
become reliant on the success of our Security Segment and our Digital Marketing
Media Segment. Our business faces significant risks as set forth herein and
may
impact our ability to generate positive operating income or cash flows from
operations, may cause our financial results to become more volatile, or may
otherwise materially adversely affect us.
Risks
Related to our Stock
Our
stock price has been, and likely will continue to be, volatile and your
investment may suffer a decline in value.
The
market price of our common stock, has in the past been, and is likely to
continue to be volatile in the future. That volatility depends upon many
factors, some of which are beyond our control, including:
|
·
|
announcements
regarding the results of expansion or development efforts by us or
our
competitors;
|
|
·
|
announcements
regarding the acquisition of businesses or companies by us or our
competitors;
|
|
·
|
announcements
regarding the disposition of all or a significant portion of the
assets
that comprise our Car and Truck Wash Segment, which may or may not
be on
favorable terms;
|
|
·
|
technological
innovations or new commercial products developed by us or our
competitors;
|
|
·
|
changes
in our, or our suppliers’ intellectual property
portfolio;
|
|
·
|
issuance
of new or changed securities analysts’ reports and/or recommendations
applicable to us or our competitors;
|
|
·
|
additions
or departures of our key personnel;
|
|
·
|
operating
losses by us;
|
|
·
|
actual
or anticipated fluctuations in our quarterly financial and operating
results and degree of trading liquidity in our common stock;
and
|
| · |
our
ability to maintain our common stock listing on the Nasdaq Global
Market.
|
One
or
more of these factors could cause a decline in our revenues and income or in
the
price of our common stock, thereby reducing the value of an investment in our
Company.
We
could lose our listing on the Nasdaq Global Market if our stock price falls
below $1.00 for 30 consecutive days, and the loss of the listing would make
our
stock significantly less liquid and would affect its value.
Our
common stock is listed on Nasdaq Global Market with a closing price of $1.44
at
the close of the market on March 25, 2008. If the price of our common stock
falls below $1.00 and for 30 consecutive days remains below $1.00, we would
be
subject to being delisted from the Nasdaq Global Market. Upon delisting from
the
Nasdaq Global Market, our stock would be traded on the Nasdaq SmallCap Market
until we maintain a minimum bid price of $1.00 for 30 consecutive days at which
time we would be able to regain our listing on the Nasdaq Global Market. If
our
stock fails to maintain a minimum bid price of $1.00 for 30 consecutive days
during a 180-day grace period on the Nasdaq SmallCap Market or a 360-day grace
period if compliance with certain core listing standards are demonstrated,
we
could receive a delisting notice from the Nasdaq SmallCap Market. Upon delisting
from the Nasdaq SmallCap Market, our stock would be traded over-the-counter,
more commonly known as OTC. OTC transactions involve risks in addition to those
associated with transactions in securities traded on the Nasdaq Global Market
or
the Nasdaq SmallCap Market (together “Nasdaq-Listed Stocks”). Many OTC stocks
trade less frequently and in smaller volumes than Nasdaq-Listed Stocks.
Accordingly, our stock would be less liquid than it would otherwise be. Also,
the values of these stocks may be more volatile than Nasdaq-Listed Stocks.
If
our stock is traded in the OTC market and a market maker sponsors us, we may
have the price of our stock electronically displayed on the OTC Bulletin Board,
or OTCBB. However, if we lack sufficient market maker support for display on
the
OTCBB, we must have our price published by the National Quotations Bureau LLP
in
a paper publication known as the Pink Sheets. The marketability of our stock
would be even more limited if our price must be published on the Pink
Sheets.
18
Because
we are a Delaware corporation, it may be difficult for a third party to acquire
us, which could affect our stock price. We
are
governed by Section 203 of the Delaware General Corporation Law, which prohibits
a publicly held Delaware corporation from engaging in a “business combination”
with an entity who is an “interested stockholder” (as defined in Section 203 an
owner of 15% or more of the outstanding stock of the corporation) for a period
of three years following the shareholders becoming an “interested shareholder”,
unless approved in a prescribed manner. This provision of Delaware law may
affect our ability to merge with, or to engage in other similar activities
with,
some other companies. This means that we may be a less attractive target to
a
potential acquirer who otherwise may be willing to pay a premium for our common
stock above its market price.
If
we issue our authorized preferred stock, the rights of the holders of our common
stock may be affected and other entities may be discouraged from seeking to
acquire control of our Company. Our
certificate of incorporation authorizes the issuance of up to 10 million shares
of “blank check” preferred stock that could be designated and issued by our
board of directors to increase the number of outstanding shares and thwart
a
takeover attempt. No shares of preferred stock are currently outstanding. It
is
not possible to state the precise effect of preferred stock upon the rights
of
the holders of our common stock until the board of directors determines the
respective preferences, limitations, and relative rights of the holders of
one
or more series or classes of the preferred stock. However, such effect might
include: (i) reduction of the amount otherwise available for payment of
dividends on common stock, to the extent dividends are payable on any issued
shares of preferred stock, and restrictions on dividends on common stock if
dividends on the preferred stock are in arrears, (ii) dilution of the voting
power of the common stock to the extent that the preferred stock has voting
rights, and (iii) the holders of common stock not being entitled to share in
our
assets upon liquidation until satisfaction of any liquidation preference granted
to the holders of our preferred stock. The “blank check” preferred stock may be
viewed as having the effect of discouraging an unsolicited attempt by another
entity to acquire control of us and may therefore have an anti-takeover effect.
Issuances of authorized preferred stock can be implemented, and have been
implemented by some companies in recent years, with voting or conversion
privileges intended to make an acquisition of a company more difficult or
costly. Such an issuance, or the perceived threat of such an issuance, could
discourage or limit the stockholders’ participation in certain types of
transactions that might be proposed (such as a tender offer), whether or not
such transactions were favored by the majority of the stockholders, and could
enhance the ability of officers and directors to retain their
positions.
Our
policy of not paying cash dividends on our common stock could negatively affect
the price of our common stock. We
have
not paid in the past, and do not expect to pay in the foreseeable future, cash
dividends on our common stock. We expect to reinvest in our business any cash
otherwise available for dividends. Our decision not to pay cash dividends may
negatively affect the price of our common stock.
ITEM
1B. UNRESOLVED STAFF COMMENTS
At
March
25, 2008, there were no unresolved comments from the SEC staff regarding our
periodic or current reports.
ITEM
2. PROPERTIES
Our
corporate headquarter is located in Fort Lauderdale, Florida and our corporate
accounting and finance office is located in Horsham, Pennsylvania. We rent
approximately 3,800 square feet of space at a current annual cost of
approximately $159,000 in Fort Lauderdale, Florida and approximately 5,000
square feet of space at a current annual cost of approximately $114,000 in
Horsham, Pennsylvania.
Security
Segment Properties.
The
operations of our electronic surveillance product operations are located in
Ft.
Lauderdale, Florida and Farmers Branch, Texas. The operations of our personal
defense and law enforcement aerosol business, including administration and
sales, and all of its production facilities are located in Bennington, Vermont.
Commencing May 1, 2002, we leased approximately 44,000 square feet of space
in a
building from Vermont Mill Properties, Inc. (“Vermont Mill”) at an annual cost
of $127,000. Vermont Mill is controlled by Jon E. Goodrich, a director of the
Company through December 2003 and a current employee of the Company. We
purchased a 20,000 square foot facility in June 2004 in Ft. Lauderdale, Florida,
where our professional electronic surveillance products and components are
warehoused and sold. In August 2004, we purchased a 45,000 square foot facility
in Farmers Branch, Texas where our consumer “do it yourself” electronic
surveillance products and components and our high end camera products are
warehoused and sold. We also warehouse our Digital Media Marketing Segment
e-commerce division product at our Farmers Branch Facility. The Farmers Branch
facility is secured by a first mortgage loan in the amount of $724,000 at
December 31, 2007.
19
Digital
Media Marketing Properties.
The
operations of our Digital Media Marketing Segment were consolidated in November
of 2007 into a 5,000 square foot leased space in Wexford, PA, a suburb of
Pittsburgh, PA, at an annual cost of approximately $90,000. We leased additional
2,000 square foot of space in March 2008 at an additional $40,000 annual costs.
This additional space allows for expansion. We previously leased 3,872 square
feet of space in San Francisco, California under an 18 month sublease agreement
at an annual cost of approximately $81,000. We in turn entered into a sublease
agreement for this space with a third party effective March 1, 2008. As noted
above, we warehouse and ship our e-commerce division products from our Farmers
Branch, Texas facility.
Car
and Truck Wash Properties.
Our
principal fixed assets are our car wash facilities used for performing car
care
services which are described under Item
1. Business.
The 21
car wash facilities operated by us as of December 31, 2007 are situated on
sites
we own or lease. As of December 31, 2007, we owned 19 and leased 2 of our car
wash facilities. As of March 3, 2008, we own 13 and lease two car wash
facilities. We have sold six car wash facilities since December 31, 2007. The
locations of our car washes and the services offered at the locations are set
forth in summary fashion in the chart below.
|
Locations
(1)
|
Type
of
Car
Wash (2)
|
Number
of
Facilities
as of
December
31, 2007
|
Number
of Facilities as of
March
3, 2008
|
|||
|
Dallas,
Texas Area
|
Full
Service
Self
Serve /Lube
|
6
1
|
6
1
|
|||
|
Austin,
Texas
|
Full
Service
|
3
|
3
|
|||
|
Lubbock,
Texas
|
Full
Service
|
3
|
3
|
|||
|
San
Antonio, Texas (3)
|
Full
Service
|
2
|
2
|
|||
|
Sarasota,
FL Area (4)
|
Full
Service
|
6
|
0
|
| (1) |
The
majority of our locations are owned, except for 2 locations in Dallas,
Texas which are leased.
|
| (2) |
Several
locations also offer other consumer products and related car care
services, such as professional detailing services (currently offered
at 14
locations), oil and lubrication services (currently offered at 7
locations), gasoline dispensing services (currently offered at 11
locations), state inspection services (currently offered at 6 locations),
convenience store sales (currently offered at 1 location) and merchandise
store sales (currently offered at 14
locations).
|
| (3) |
We
entered into agreements on March 15, 2008 with a third party to lease
and
ultimately purchase one of our full service car washes in San Antonio,
Texas. Pursuant to the agreements, the lessee must pay us $3,325
per month
to lease the car wash, and is responsible for all underlying property
and
operating expenses. By May 1, 2009, the lessee is obligated under
a sale
agreement to purchase the car wash site for $500,000 cash. If the
purchase
obligation is not satisfied, we will regain possession of the car
wash and
the lessee will forfeit to us a $35,000 deposit made at the commencement
of the agreements.
|
| (4) |
As
of March 3, 2008, all of our Florida car wash sites have been
sold.
|
We
own
real estate, buildings, equipment, and other properties that we employ in
substantially all of our car washes. We expect to make investments in additional
equipment and property as deemed necessary to insure the car washes operate
adequately.
Many
of
our car washes are encumbered by first mortgage loans. Of the 21 car washes
owned or leased by us at December 31, 2007, 15 properties and related equipment
with a net book value totaling $24.1 million secured first mortgage loans
totaling $12.3 million and six properties were not encumbered.
ITEM
3. LEGAL
PROCEEDINGS
On
March
13, 2006, the Company was served with a search warrant issued by the United
States District Court for the District of New Jersey relating to a criminal
immigration investigation. A search of the Company’s headquarters and four of
the Company’s then 48 car washes was conducted by representatives of the United
States Department of Investigations and Customs Enforcement and certain other
agencies. Three of the car washes searched are located in Pennsylvania and
the
fourth is located in New Jersey. Documents were seized and a number of car
wash
employees of Car Care, Inc., a wholly-owned subsidiary of the Company, were
taken into custody by the United States immigration authorities. The Company
was
also served with a federal grand jury subpoena seeking similar documents. The
Company has completed its response to the subpoena. The Company has been
informed by the government that it is a subject of the government’s
investigation. The Company’s Audit Committee retained independent outside
counsel (“Special Counsel”) to conduct an independent investigation of the
Company’s hiring practices at the Company’s car washes and other related
matters. Special Counsel provided a written summary of findings on April 18,
2006 to the Company’s Audit Committee. The investigative findings included,
among other things, a finding that the Company’s internal controls for financial
reporting at the corporate level are adequate and appropriate, and that there
is
no financial statement impact implicated by the Company’s hiring practices,
except for a potential contingent liability. Beginning on April 21, 2006,
Special Counsel began to receive for review some additional and previously
requested but unavailable documents and information, including the documents
the
government seized on March 13, 2006. On May 18, 2006, Special Counsel issued
its
Review of Information Supplemental to Internal Investigation which stated that
the review of the additional documents and information had not changed the
conclusions contained in the April 18, 2006 summary of findings. The Company
has
incorporated additional internal control procedures at the corporate, regional
and site level to further enhance the existing internal controls with respect
to
the Company’s hiring procedures at the car wash locations to prevent the hiring
of undocumented workers. There is a possibility that the United States Attorney
for the Eastern District of Pennsylvania may prosecute the Company at the
conclusion of its investigation. Violations of law may result in civil,
administrative or criminal fines or penalties. Due to the ongoing nature of
the
criminal investigation, it is not possible at this time to predict the outcome
of the investigation or the impact of costs of ultimately resolving this matter
on our results of operations or financial condition. However, any fees,
expenses, fines or penalties which might be incurred by the Company in
connection with the hiring of undocumented workers may have a material impact
on
the Company’s results of operations and financial condition. The Company has
made no provision for any future costs associated with the investigations or
any
future costs associated with the Company’s defense or negotiations with
governmental authorities to resolve these outstanding issues.
20
The
Company is a party to various other legal proceedings related to its normal
business activities. In the opinion of the Company’s management, none of these
proceedings is material in relation to the Company’s results of operations,
liquidity, cash flows or financial condition.
Although
the Company is not aware of any substantiated claim of permanent personal injury
from its products, the Company is aware of reports of incidents in which, among
other things, defense sprays have been mischievously or improperly used, in
some
cases by minors; have not been instantly effective; or have been ineffective
against enraged or intoxicated individuals.
During
January 2008, the Environmental Protection Agency (“EPA”) conducted a site
investigation at the Company’s Bennington, Vermont location and the building the
facility is located within. The Company does not own the building or land and
leases 44,000 square feet of the building from Vermont Mill Properties, Inc
(“Vermont Mill”). During February 2008, a search of the Company’s Bennington,
Vermont location and the building it is located within was conducted under
a
search warrant issued by the U.S. District Court for the District of Vermont.
Both the site investigation and search were focused on discovering whether
hazardous substances were being improperly stored. Subsequent to the
investigation and search, the EPA notified the Company and the building owner
that remediation of certain hazardous wastes are required. The hazardous
materials and waste identified by the EPA were (i) metal contaminated soils
on
the building grounds (waste from sand blasting paint from the building, the
Company believes that the building owner and not Mace is responsible for any
soil clean up); (ii) approximately 130 drums of hazardous waste (waste gases
generated from testing the defense spray units sold by the Company and defective
spray units); (iii) 55 thousand pounds of 2-chlorobenzalmalononitrile stored
in
eight pound plastic containers (a chemical used to make tear gas); and (iv)
three steal drums containing a chemical used to make pyrotechnic grenades (this
material is held for resale). The EPA is requiring the Company and the building
owner to remove and properly dispose of the hazardous waste and properly store
of all hazardous material. The EPA in findings of fact issued on February 20,
2008 estimated the cost for the removal and proper storage at $300,000,
including the cost for any soil clean up which is not the responsibility of
the
Company. We estimate the range of possible loss attributable to the Company
to
be from approximately $285,000 to $365,000 including the cost of disposal of
the
waste materials, as well as expenses incurred with environmental engineers
and
legal counsel. An accrual of approximately $285,000 has been recorded as of
December 31, 2007 for this matter representing management’s best estimate of
probable loss, as defined by SFAS No. 5, Accounting
for Contingencies.
The
EPA, the Company and the building owner have entered into an Administrative
Consent Order which will govern the removal of hazardous waste and storage
of
hazardous material. The Administrative Consent Order requires that the Company
provide a $500,000 bond to secure its obligations under the Administrative
Consent Order. The Company is unable at this time to determine whether further
action will be taken by the United States Attorney or if any charges, fines
or
penalties will be sought from the Company.
21
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
The
Annual Meeting of the stockholders of Mace Security International, Inc. was
held
on December 14, 2007. Proposals for the election of six directors to the Board
of Directors for one-year terms and the ratification of the Audit Committee’s
appointment of Grant Thornton as Mace’s registered public accounting firm for
fiscal year 2007 were submitted to a vote.
The
proposals were adopted by the shareholders. The voting was as
follows:
|
Votes
Withheld
|
||||||||||
|
Directors:
|
Votes
For
|
or
Against
|
Abstentions
|
|||||||
|
Louis
D. Paolino, Jr.
|
12,079,551
|
1,120,607
|
-
|
|||||||
|
Mark
S. Alsentzer
|
12,093,451
|
1,106,707
|
-
|
|||||||
|
Gerald
T. LaFlamme
|
12,523,196
|
676,962
|
-
|
|||||||
|
John
C. Mallon
|
12,535,794
|
664,364
|
-
|
|||||||
|
Constantine
N. Papadakis, Ph.D
|
12,303,094
|
897,064
|
-
|
|||||||
|
Dennis
Raefield
|
12,536,489
|
663,669
|
-
|
|||||||
|
Ratify
appointment of
|
||||||||||
|
Grant
Thornton LLP
|
12,360,560
|
635,526
|
204,072
|
|||||||
PART
II
ITEM
5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
(a)
Market Price and Dividends of the Registrant’s Common
Equity
Our
common stock is traded and quoted on the Nasdaq Global Market under the trading
symbol "MACE." Common stock price reflects inter-dealer quotations, does not
include retail markups, markdowns or commissions and does not necessarily
represent actual transactions.
The
following table sets forth, for the quarters indicated, the high and low sale
prices per share for our common stock, as reported by Nasdaq.
|
HIGH
|
|
LOW
|
|||||
|
Year
Ending December 31, 2006
|
|||||||
|
First
Quarter
|
$
|
2.71
|
$
|
2.25
|
|||
|
Second
Quarter
|
2.87
|
2.28
|
|||||
|
Third
Quarter
|
2.59
|
2.13
|
|||||
|
Fourth
Quarter
|
2.68
|
2.24
|
|||||
|
Year
Ending December 31, 2007
|
|||||||
|
First
Quarter
|
$
|
2.99
|
$
|
2.50
|
|||
|
Second
Quarter
|
2.73
|
2.37
|
|||||
|
Third
Quarter
|
2.70
|
1.85
|
|||||
|
Fourth
Quarter
|
2.39
|
1.84
|
|||||
|
Year
Ending December 31, 2008
|
|||||||
|
First
Quarter, through March 25, 2008
|
$
|
2.05
|
$
|
1.40
|
|||
The
closing price for our common stock on March 25, 2008, was $1.44. For purposes
of
calculating the aggregate market value of our shares of common stock held by
non-affiliates, as shown on the cover page of this report, it has been assumed
that all of the outstanding shares were held by non-affiliates except for the
shares held by our directors and executive officers and stockholders owning
10%
or more of our outstanding shares. However, this should not be deemed to
constitute an admission that all such persons are, in fact, affiliates of the
Company, or that there are not other persons who may be deemed to be affiliates
of the Company. For further information concerning ownership of our securities
by executive officers, directors and principal stockholders, see Item
12, Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
As
of
March 25, 2008, we had 110 stockholders of record and approximately 2,400
beneficial owners of our common stock. We did not pay dividends in the preceding
two years and do not anticipate paying any cash dividends in the foreseeable
future. We intend to retain all working capital and earnings, if any, for use
in
our operations and in the expansion of our business. Any future determination
with respect to the payment of dividends will be at the discretion of our Board
of Directors and will depend upon, among other things, our results of
operations, financial condition and capital requirements, the terms of any
then
existing indebtedness, general business conditions, and such other factors
as
our Board of Directors deems relevant. Certain of our credit facilities prohibit
or limit the payment of cash dividends without prior bank approval.
22
For
information regarding our equity compensation plans, See Item
12, Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
(c) Stock
Performance Graph
The
following line graph and table compare, for the five most recently concluded
fiscal years, the yearly percentage change in the cumulative total stockholder
return, assuming reinvestment of dividends, on the Company’s common stock with
the cumulative total return of companies on the Nasdaq Stock Market and an
index
comprised of certain companies in similar service industries (the “Selected Peer
Group Index”).
(1)
|
(1)
|
The
Selected Peer Group Index for the current year is comprised of securities
of Command Security Corp, Goldleaf Financial Solutions, Innodata
Isogen,
Inc., Kintera, Inc., Lasercard Corp, Looksmart Ltd., Napco Security
Systems, Inc., RAE Systems, Inc., Taser International, Inc., Think
Partnership, Inc., Track data Corp., Tumbleweed Comm. Co., and Versar,
Inc. The current peer group includes security product, e-commerce
and
digital media marketing companies to more appropriately reflect Mace’s
business. The peer group used in the prior year was comprised of
IPIX
Corporation, Lo Jack Corp., Napco Security Systems Inc., Rockford
Corporation, Taser International Inc., and Vicon Industries Inc.
There can
be no assurance that the Company’s stock performance will continue into
the future with the same or similar trends depicted by the graph
above.
The Company neither makes nor endorses any predictions as to future
stock
performance.
|
23
COMPARISON
OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG MACE SECURITY
INTERNATIONAL,
INC., THE NASDAQ MARKET INDEX, AND SELECTED PEER GROUP
|
December
31,
|
|||||||||||||||||||
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
||||||||||||||
|
Mace
Security International, Inc.
|
100.00
|
100.00
|
229.67
|
118.18
|
122.49
|
97.13
|
|||||||||||||
|
Selected
New Peer Group
|
100.00
|
203.38
|
357.08
|
153.80
|
140.82
|
168.36
|
|||||||||||||
|
Selected
Old Peer Group
|
100.00
|
243.21
|
757.53
|
413.28
|
356.07
|
494.63
|
|||||||||||||
|
Nasdaq
Market Index
|
100.00
|
150.36
|
163.00
|
166.58
|
183.68
|
201.91
|
|||||||||||||
The
Performance Graph set forth above shall not be deemed incorporated by reference
into any filing under the Securities Act or the Exchange Act by virtue of any
general statement in such filing incorporating this Form 10-K by reference,
except to the extent that the Company specifically incorporates the information
contained in this section by reference, and shall not otherwise be deemed filed
under either the Securities Act of 1933, as amended (the “Securities Act”) or
the Exchange Act.
(d)
Recent Sales of Unregistered Securities
On
July
20, 2007, the Company completed the purchase of all of the outstanding common
stock of Linkstar Interactive, Inc. (“Linkstar”) from Linkstar’s shareholders by
paying approximately $10.5 million to the Linkstar shareholders consisting
of
$7.0 million in cash at closing and $500,000 of promissory notes bearing a
5%
interest rate due in January 2008. As part of the consideration paid for
Linkstar, the Company issued 1,176,471 unregistered shares of the Company’s
common stock with a total value of $3.0 million to the six prior shareholders
of
Linkstar Interactive, Inc.
In
undertaking this issuance, the Company relied on an exemption from registration
under Section 4(2) of the Securities Act.
(e)
Issuer Purchases of Securities
The
following table summarizes our equity security repurchase during the three
months ended December 31, 2007:
|
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Share Purchased as part of Publicly Announced Plans or
Programs
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans
or
Programs (1)
|
|||||||||
|
October
1 to October 31, 2007
|
-
|
-
|
-
|
$
|
1,964,000
|
||||||||
|
November
1 to November 30, 2007
|
-
|
-
|
-
|
$
|
1,964,000
|
||||||||
|
December
1 to December 31, 2007
|
36,538
|
2.01
|
36,538
|
$
|
1,888,000
|
||||||||
|
Total
|
36,538
|
2.01
|
36,538
|
||||||||||
(1)
On
August
13, 2007, the Company’s Board of Directors approved a share repurchase program
to allow the Company to repurchase up to an aggregate $2,000,000 of its common
shares in the future if the market conditions so dictate. As of December 31,
2007, 53,909 shares had been repurchased under this program at a cost of
approximately $112,000.
24
ITEM
6. SELECTED
FINANCIAL DATA
The
information below was derived from our Consolidated Financial Statements
included in this report and in reports we have previously filed with the SEC.
This information should be read together with those financial statements and
the
Notes to the Consolidated Financial Statements. For more information regarding
this financial data, see “Item
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”
section
also included in this report.
|
Statement
of Operations Data:
|
Year
ended December 31,
|
|||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||
|
(In
thousands, except share information)
|
||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Car
wash and detailing services
|
$
|
11,704
|
$
|
12,881
|
$
|
13,835
|
$
|
12,553
|
$
|
14,118
|
||||||
|
Lube
and other automotive services
|
3,091
|
3,445
|
3,232
|
3,317
|
3,977
|
|||||||||||
|
Fuel
and merchandise
|
2,391
|
2,928
|
3,771
|
3,251
|
2,815
|
|||||||||||
|
Security
|
22,278
|
23,366
|
24,909
|
16,632
|
5,581
|
|||||||||||
|
Digital
media marketing
|
7,625
|
-
|
-
|
-
|
-
|
|||||||||||
|
47,089
|
42,620
|
45,747
|
35,753
|
26,491
|
||||||||||||
|
Cost
of revenues:
|
||||||||||||||||
|
Car
wash and detailing services
|
9,494
|
10,187
|
10,289
|
9,359
|
10,684
|
|||||||||||
|
Lube
and other automotive services
|
2,464
|
2,727
|
2,441
|
2,553
|
3,041
|
|||||||||||
|
Fuel
and merchandise
|
2,250
|
2,769
|
3,504
|
3,032
|
2,603
|
|||||||||||
|
Security
|
16,223
|
17,427
|
17,658
|
11,989
|
3,485
|
|||||||||||
|
Digital
media marketing
|
6,120
|
-
|
-
|
-
|
-
|
|||||||||||
|
36,551
|
33,110
|
33,892
|
26,933
|
19,813
|
||||||||||||
|
|
||||||||||||||||
|
Selling,
general and administrative expenses
|
18,344
|
16,150
|
12,257
|
10,109
|
7,099
|
|||||||||||
|
Depreciation
and amortization
|
1,431
|
1,342
|
1,242
|
1,221
|
998
|
|||||||||||
|
Costs
of terminated acquisitions
|
-
|
-
|
-
|
53
|
-
|
|||||||||||
|
Goodwill
and asset impairment charges
|
627
|
151
|
1,563
|
6,726
|
9
|
|||||||||||
|
|
|
|||||||||||||||
|
Operating
loss
|
(9,864
|
)
|
(8,133
|
)
|
(3,207
|
)
|
(9,289
|
)
|
(1,428
|
)
|
||||||
|
|
||||||||||||||||
|
Interest
expense, net
|
(450
|
)
|
(709
|
)
|
(661
|
)
|
(731
|
)
|
(719
|
)
|
||||||
|
Other
income
|
1,045
|
851
|
346
|
115
|
43
|
|||||||||||
|
Loss
from continuing operations before income taxes
|
(9,269
|
)
|
(7,991
|
)
|
(3,522
|
)
|
(9,905
|
)
|
(2,104
|
)
|
||||||
|
Income
tax expense (benefit)
|
98
|
156
|
2,186
|
(3,206
|
)
|
482
|
||||||||||
|
Loss
from continuing operations
|
(9,367
|
)
|
(8,147
|
)
|
(5,708
|
)
|
(6,699
|
)
|
(2,586
|
)
|
||||||
|
Income
(loss) from discontinued operations, net of tax
|
2,782
|
1,365
|
688
|
289
|
(947
|
)
|
||||||||||
|
Net
loss
|
$
|
(6,585
|
)
|
$
|
(6,782
|
)
|
$
|
(5,020
|
)
|
$
|
(6,410
|
)
|
$
|
(3,533
|
)
|
|
|
Basic
and Diluted loss per share
|
||||||||||||||||
|
Loss
from continuing operations
|
$
|
(0.60
|
)
|
$
|
(0.53
|
)
|
$
|
(0.38
|
)
|
$
|
(0.49
|
)
|
$
|
(0.21
|
)
|
|
|
Income
(loss) from discontinued operations, net of tax
|
$
|
0.18
|
$
|
0.09
|
0.05
|
0.02
|
(0.07
|
)
|
||||||||
|
Net
loss
|
$
|
(0.42
|
)
|
$
|
(0.44
|
)
|
$
|
(0.33
|
)
|
$
|
(0.47
|
)
|
$
|
(0.28
|
)
|
|
|
Weighted
average number of shares outstanding
|
15,810,705
|
15,274,498
|
15,271,637
|
13,679,604
|
12,414,816
|
|||||||||||
25
|
Year
ended December 31,
|
||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||
|
(In
thousands)
|
||||||||||||||||
|
Balance
Sheet Data (at end of period):
|
||||||||||||||||
|
Working
capital
|
$
|
17,764
|
$
|
26,556
|
$
|
14,615
|
$
|
17,471
|
$
|
270
|
||||||
|
Intangible
assets, net
|
$
|
13,796
|
$
|
4,546
|
$
|
6,148
|
$
|
6,522
|
$
|
11,614
|
||||||
|
Total
assets
|
$
|
75,436
|
$
|
87,598
|
$
|
96,111
|
$
|
102,757
|
$
|
90,602
|
||||||
|
Long-term
debt, including current maturities
|
$
|
13,558
|
$
|
23,966
|
$
|
26,674
|
$
|
29,195
|
$
|
31,286
|
||||||
|
Stockholders’
equity
|
$
|
53,566
|
$
|
56,506
|
$
|
61,650
|
$
|
66,522
|
$
|
54,212
|
||||||
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, 2007, and should be read in conjunction with our
Consolidated Financial Statements and related notes thereto included elsewhere
herein.
FACTORS
INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING
STATEMENTS
This
report includes forward looking statements within the meaning of Section 27A
of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (“Forward-Looking-Statements”). All statements
other than statements of historical fact included in this report are
Forward-Looking-Statements. Although we believe that the expectations reflected
in such Forward-Looking Statements are reasonable, we can give no assurance
that
such expectations will prove to be correct. Generally, these statements relate
to business plans or strategies, projected or anticipated benefits or other
consequences of such plans or strategies, number of acquisitions, and projected
or anticipated benefits from acquisitions made by or to be made by us, or
projections involving anticipated revenues, earnings, levels of capital
expenditures or other aspects of operating results. All phases of our operations
are subject to a number of uncertainties, risks, and other influences, many
of
which are outside our control and any one of which, or a combination of which,
could materially affect the results of our operations and whether
Forward-Looking Statements made by us ultimately prove to be accurate. Such
important factors that could cause actual results to differ materially from
our
expectations are disclosed in Item
1A. Risk Factors of
this
report. All subsequent written and oral Forward-Looking Statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by the important factors described below that could cause actual
results to differ from our expectations. The Forward- Looking Statements made
herein are only made as of the date of this filing, and we undertake no
obligation to publicly update such Forward-Looking Statements to reflect
subsequent events or circumstances.
Introduction
Revenues
Security
Our
Security Segment designs, manufactures, markets and sells a wide range of
products. The Company’s primary focus in the Security Segment is the sourcing
and selection of electronic surveillance products and components that it
produces and sells, primarily to installing dealers, system integrators,
retailers and end users. Other products in our Security Segment include, but
are
not limited to, less-than-lethal Mace defense sprays, personal alarms, high-end
digital and machine vision cameras and imaging components, as well as video
conferencing equipment and monitors. The main marketing channels for our
products are industry shows and publications, outside sales representatives,
catalogs, internet and sales through a call center. Revenues
generated for the year ended December 31, 2007 for the Security Segment were
comprised of approximately 35.2% from our professional electronic surveillance
operation in Florida, 44.4% from our consumer direct electronic surveillance
and
machine vision camera and video conferencing equipment operation in Texas,
and
20.4% from our personal defense and law enforcement aerosol operation in
Vermont.
Digital
Media Marketing
Our
Digital Media Marketing Segment is an online marketing and e-commerce business
which has two business divisions: (1) online marketing and (2) e-commerce.
The
segment uses proprietary technologies and software to provide marketing services
to third party advertisers and to sell products on the internet.
26
Our
online marketing division, PromoPath, is an online affiliate marketing company
that drives customer acquisitions or leads for advertising clients principally
using the cost-per-acquisition (“CPA”) model. PromoPath helps companies create
effective performance driven marketing campaigns and provides design, brand
and
technical support services in order to achieve these goals. PromoPath works
with
many large publishers to reach many areas of interactive media. PromoPath’s
advertising clients are typically established direct-response advertisers with
well recognized brands and broad consumer appeal such as NetFlix, Discover
credit cards and Bertelsmann Group. PromoPath generates CPA revenue, both
brokered and through co-partnered sites, as well as list management and lead
generation revenues. CPA revenue or “Cost per Acquisition” in the digital
marketing marketplace refers to paying a fee for the acquisition of a new
customer, prospect or lead. List management revenue is based on a relationship
between a data owner and a list management company. The data owner compiles,
collects, owns and maintains a proprietary computerized database composed of
consumer information. The data owner grants a list manager a non-exclusive,
non-transferable, revocable worldwide license to manage, make use and have
access to the Data pursuant to defined terms and conditions for which the data
owner is paid revenue. Lead Generation is referred to as CPL “Cost per Lead” in
the digital media marketplace. Advertisers purchasing media on a Cost per Lead
basis are interested in collecting data from consumers expressing interest
in a
product or service. Cost per Lead varies from Cost per Acquisition in that
no
credit card information needs to be provided to the advertiser for the
publishing source to be paid for the lead.
Our
e-commerce division is a direct-response product business that develops, markets
and sells products directly to consumers through the internet. We reach our
customers predominately
through online advertising on both the PromoPath platform as well as third-party
websites. Our products include: Vioderm, an anti-wrinkle skin care product
(www.vioderm.com);
Purity
by Mineral Science, a mineral cosmetic (www.mineralscience.com);
TrimDay™, a weight-loss supplement (www.trimday.com);
and
Eternal Minerals, a dead sea spa product line (www.eternalminerals.com); as
well
as Mace’s pepper sprays and surveillance
products. We continuously develop and test product offerings to determine
customer acquisition costs and revenue potential, as well as to identify the
most efficient marketing programs.
Revenues
within our Digital Media Marketing Segment from the acquisition date, July
20,
2007, were approximately $7.6 million; consisting of $3.4 million, or 44.7%,
from our online marketing division and $4.2 million, or 55.3%, from our
e-commerce division.
Car
and Truck Wash Services
At
December 31, 2007, we owned full service and self-service car wash locations
in
Florida 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 2007 for the Car and
Truck Wash Segment were comprised of approximately 68% from car washing and
detailing, 18% from lube and other automotive services, and 14% from fuel and
merchandise. Additionally, our Arizona, Florida and our Northeast region car
washes and our truck washes are being reported as discontinued operations,
(see
Note 4 of the Notes to Consolidated Financial Statements), and accordingly,
have
been segregated from the following revenue and expense discussion. Revenues
from
discontinued operations were $10.0 million, $20.7 million and $22.5 million
for
the years ended December 31, 2007, 2006 and 2005, respectively. Operating income
from discontinued operations was $714,000, $1.75 million and $1.73 million
for
the years ended December 31, 2007, 2006 and 2005 respectively.
The
Company executed a lease-to-sell agreement on December 31, 2005 with Eagle
to
lease Mace’s five truck washes beginning January 1, 2006 for up to two years.
Pursuant to the terms of the agreement, Eagle paid Mace $9,000 per month to
lease the Company’s truck washes, and was responsible for all underlying
property expenses. On December 31, 2007 Eagle completed the purchase of the
truck washes for $1.2 million consideration, consisting of $280,000 cash and
a
$920,000 note payable to Mace secured by mortgages on the truck washes. The
$920,000 note has a five-year term, with principal and interest paid on a
15-year amortization schedule. As a result, we did not recognize revenue or
operating expenses during the term of the lease other than rental income and
interest expense.
The
majority of revenues from our Car and Truck Wash Segment are collected in the
form of cash or credit card receipts, thus minimizing customer accounts
receivable.
Cost
of Revenues
Security
Cost
of
revenues within the Security Segment consists primarily of costs to purchase
or
manufacture the security products including direct labor and related taxes
and
fringe benefits, and raw material costs. Product warranty costs related to
the
Security Segment are mitigated in that a significant portion of customer product
warranty claims are reimbursed by the supplier.
27
Digital
Media Marketing
Cost
of
revenues within the Digital Media Marketing Segment consist primarily of amounts
we pay to website publishers that are directly related to revenue-generating
events, including the cost to enroll new members, fulfillment and warehousing
costs, including direct labor and related taxes and fringe benefits and
e-commerce product costs.
Car
and Truck Wash Services
Cost
of
revenues within the Car and Truck Wash Segment consists primarily of direct
labor and related taxes and fringe benefits, certain insurance costs, chemicals,
wash and detailing supplies, rent, real estate taxes, utilities, car damages,
maintenance and repairs of equipment and facilities, as well as the cost of
the
fuel and merchandise sold.
Selling,
General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses consist primarily of
management, clerical and administrative salaries, professional services,
insurance premiums, sales commissions, and other costs relating to marketing
and
sales.
We
capitalize direct incremental costs associated with business acquisitions.
Indirect acquisition costs, such as executive salaries, corporate overhead,
public relations, and other corporate services and overhead are expensed as
incurred.
Depreciation
and Amortization
Depreciation
and amortization consists primarily of depreciation of buildings and equipment,
and amortization of leasehold improvements and certain intangible assets.
Buildings and equipment are depreciated over the estimated useful lives of
the
assets using the straight-line method. Leasehold improvements are amortized
over
the shorter of their useful lives or the lease term with renewal options.
Intangible assets, other than goodwill or intangible assets with indefinite
useful lives, are amortized over their useful lives ranging from three to
fifteen years, using the straight-line method.
Other
Income
Other
income consists primarily of rental income received on renting out excess space
at our car wash facilities and includes gains and losses on the sale of property
and equipment and gains and losses on short-term investments.
Income
Taxes
Income
tax expense is derived from tax provisions for interim periods that are based
on
the Company’s estimated annual effective rate. Currently, the effective rate
differs from the federal statutory rate primarily due to state and local income
taxes, non-deductible costs related to acquired intangibles, and changes to
the
valuation allowance.
28
Results
of Operations for the Three Years Ended December 31, 2007, 2006 and
2005
The
following table presents the percentage each item in the consolidated statements
of operations bears to total revenues:
|
Year
ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Revenues
|
100
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
|
Cost
of revenues
|
77.6
|
77.7
|
74.1
|
|||||||
|
Selling,
general and administrative expenses
|
39.0
|
37.9
|
26.8
|
|||||||
|
Depreciation
and amortization
|
3.0
|
3.1
|
2.7
|
|||||||
|
Goodwill
and asset impairment charges
|
1.3
|
0.4
|
3.4
|
|||||||
|
Operating
loss
|
(20.9
|
)
|
(19.1
|
)
|
(7.0
|
)
|
||||
|
Interest
expense, net
|
(1.0
|
)
|
(1.6
|
)
|
(1.4
|
)
|
||||
|
Other
income
|
2.2
|
2.0
|
0.8
|
|||||||
|
Loss
from continuing operations before income taxes
|
(19.7
|
)
|
(18.7
|
)
|
(7.6
|
)
|
||||
|
Income
tax expense
|
0.2
|
0.4
|
4.8
|
|||||||
|
Loss
from continuing operations
|
(19.9
|
)
|
(19.1
|
)
|
(12.4
|
)
|
||||
|
Income
from discontinued operations, net of tax
|
5.9
|
3.2
|
1.5
|
|||||||
|
Net
loss
|
(14.0
|
)%
|
(15.9
|
)%
|
(10.9
|
)%
|
||||
Revenues
Security
Revenues
were approximately $22.3 million, $23.4 million and $24.9 million for the years
ended December 31, 2007, 2006 and 2005, respectively. Of the $22.3 million
of
revenues for the year ended December 31, 2007, $7.8 million, or 35%, was
generated from our professional electronic surveillance operation in Florida,
$9.9 million, or 44%, from our consumer direct electronic surveillance and
high
end digital and machine vision cameras and professional imaging components
operation in Texas, and $4.6 million, or 21%, from our personal defense and
law
enforcement aerosol operation in Vermont. Of the $23.4 million of revenues
for
year ended December 31, 2006, $9.1 million, or 39%, was generated from our
professional electronic surveillance operation in Florida, $10.8 million, or
46%, from our consumer direct electronic surveillance and high end digital
and
machine vision cameras and professional imaging components operation in Texas,
and $3.5 million, or 15%, from personal defense and law enforcement aerosol
operations in Vermont. Of the $24.9 million of revenues for the year ended
December 31, 2005, $8.4 million, or 34%, was generated from our professional
electronic surveillance operations in Florida, $13.0 million, or 52%, from
our
consumer direct electronic surveillance and high end digital and machine vision
cameras and professional imaging components operation in Texas, and $3.5 million
or 14%, for our personal defense and law enforcement aerosol operations in
Vermont.
The
decrease in revenues within the Security Segment in 2007 as compared to 2006
was
due principally to a decrease in sales of our consumer direct electronic
surveillance and machine vision camera and video conferencing equipment in
Texas
and our professional electronic surveillance operation in Florida. The decrease
in sales in our professional electronic surveillance operation was partially
a
result of sales of discontinued and refurbished products at lower selling
prices, the inability of some of Mace’s vendors to supply high volume products
in a timely manner, competitive pressures and the impact on operations and
management of the Florida embezzlement investigation. The decrease in sales
of
our consumer direct electronic surveillance operations in Texas was largely
a
result of increased competition and inventory shortages of certain components.
The Company’s machine vision camera and video conferencing equipment operation
was impacted by competition and certain large customers purchasing direct from
its main supplier. This decrease in revenue was partially offset by a $1.05
million or 30% increase in revenue in our personal defense and law enforcement
aerosol operations with a noted increase in sales in our Mace aerosol defense
sprays and TG Guard® products. The decrease in revenues within the Security
Segment in 2006 as compared to 2005 was due principally to a decrease in our
high end digital and machine vision cameras and professional imaging components
sales and to a lesser extent in our consumer direct electronic surveillance
and
retail sales in our Texas operations. This decrease was partially offset by
Securetek operations, which we acquired in November of 2005 and integrated
into
our Ft. Lauderdale, Florida operations and provided approximately $1.5 million
of revenue in the year ended December 31, 2006 compared to $179,000 in 2005,
which we acquired in November of 2005. We also experienced an increase in our
sales of professional electronic surveillance equipment sales in our Ft.
Lauderdale, Florida operations, partially offset by a decrease in sales of
our
Vernex monitor through a decision to eliminate the sale of plasma monitors
and
sales of monitors to large distributors.
29
Digital
Media Marketing
Revenues
within our Digital Media Marketing Segment from the acquisition date, July
20,
2007, were approximately $7.6 million, consisting of $3.4 million from our
online marketing division and $4.2 million from our e-commerce division. Of
the
$3.4 million of revenues in the online marketing division, $2.2 million, or
66%,
was cost-per-action (“CPA”) revenue, $576,000, or 17%, was lead generation
revenue, and $559,000, or 17%, was list management revenue.
Car
and Truck Wash Services
Revenues
for the year ended December 31, 2007 were $17.2 million as compared to $19.2
million for the year ended December 31, 2006, a decrease of $2.0 million or
10.4%. Of the $17.2 million of revenues for the year ended December 31, 2007,
$11.7 million or 68% was generated from car wash and detailing, $3.1 million
or
18% from lube and other automotive services, and $2.4 million or 14% from fuel
and merchandise sales. Of the $19.2 million of revenues for the year ended
December 31, 2006, $12.9 million or 67% was generated from car wash and
detailing, $3.4 million or 18% from lube and other automotive services, and
$2.9
million or 15% from fuel and merchandise sales. The decrease in wash and detail
revenues in 2007 was principally due to the sale of car washes and reduced
car
wash volumes in the Texas market due to unfavorable weather. Overall car wash
volumes declined by 150,000 cars, or 19%, in 2007 as compared to 2006, 16%
excluding the impact of a car wash volume reduction of approximately 38,900
cars
from the closure and divestiture of four car wash locations in Texas since
September 2006 included in continuing operations. Partially offsetting this
decline in volume, the Company experienced an increase in average car wash
and
detailing revenues per car to $18.69 in 2007, from $16.60 in 2006. 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 decrease in fuel and merchandise revenues was primarily
the
result of selling less volume of fuel as a result of higher fuel prices. The
decrease in merchandise sales in our car wash lobbies corresponds with the
reduction in our car wash volumes and site traffic.
Revenues
for the year ended December 31, 2006 were $19.2 million as compared to $20.8
million for the year ended December 31, 2005, a decrease of $1.6 million or
8%.
This decrease was primarily attributable to a decrease in wash and detail
services. Of the $19.2 million of revenues for the year ended December 31,
2006,
$12.9 million or 67% was generated from car wash and detailing, $3.4 million
or
18% from lube and other automotive services, and $2.9 million or 15% from fuel
and merchandise sales. Of the $20.8 million of revenues for the year ended
December 31, 2005, $13.8 million or 66% was generated from car wash and
detailing, $3.2 million or 16% from lube and other automotive services, and
$3.8
million or 18% from fuel and merchandise sales. The decrease in wash and detail
revenues in 2006 was principally due to the sale of car wash sites and reduced
car wash volumes in all of our Texas markets. Car wash volumes declined 48,000
cars or 6% in 2006 as compared to 2005. The closure and divestiture of one
of
our Texas car wash locations since September 2006 resulted in a car wash
reduction of 5,700 cars of the overall car reduction of 48,000 in 2006. In
addition to this decline in volume, the Company experienced a slight decrease
in
average wash and detailing revenue per car to $16.60 in 2006, from $16.77 in
2005.
Cost
of Revenues
Security
Costs
of
revenues were $16.2 million, or 73% of revenues, $17.4 million or 74% of
revenues and $17.7 million or 71% of revenues for 2007, 2006 and 2005,
respectively. The slight decrease in cost of revenues as a percentage of
revenues in 2007 as compared to 2006 is due principally to a change in customer
and product mix and a conscious effort to reduce discounting of list prices,
offset partially by an increase in sale of discontinued products and refurbished
items at lower profit margins.
The
increase in cost of revenues as a percentage of revenues in 2006 as compared
to
2005 is due to a change in customer and product mix and increased costs of
adding additional technical and warehouse staff in 2006 to address customer
needs as we continue to grow in this segment.
Digital
Media Marketing
Cost
of
revenues within our Digital Media Marketing Segment from July 20, 2007, the
date
we acquired the segment, were approximately $6.1 million; $3.2 million related
to our online marketing division and $2.9 related to our e-commerce
division.
30
Car
and Truck Wash Services
Cost
of
revenues for the year ended December 31, 2007 were $14.2 million or 83% of
revenues with car washing and detailing costs at 81% of respective revenues,
lube and other automotive services costs at 80% of respective revenues, and
fuel
and merchandise costs at 94% of respective revenues. Cost of revenues for the
year ended December 31, 2006 was $15.7 million, or 81% of revenues with car
wash
and detailing costs at 79% of respective revenues, lube and other automotive
services costs at 79% of respective revenues, and fuel and merchandise costs
at
95% of respective revenues. Cost of revenues, as a percent of revenues, was
relatively consistent between 2007 and 2006. The Company experienced a slight
decline in wash and detailing operating margins in 2007 due to an increase
in
cost of labor as a percent of car wash and detailing revenues from 52.4% in
2006
to 53.6% in 2007 as a result of reduced volumes.
Cost
of
revenues for the year ended December 31, 2006 were $15.7 million, or 81% of
revenues, with car washing and detailing costs at 79% of respective revenues,
lube and other automotive services costs at 79% of respective revenues, and
fuel
and merchandise costs at 95% of respective revenues. Cost of revenues for the
year ended December 31, 2005 were $16.2 million, or 78% of revenues, with car
washing and detailing costs at 74% of respective revenues, lube and other
automotive services costs at 76% of respective revenues, and fuel and
merchandise costs at 93% of respective revenues. This increase in car washing
and detailing costs as a percent of revenues in 2006 was a result of an increase
in labor as a percent of car wash and detailing revenues from 50.4% in 2005
to
52.4% in 2006, combined with an increase in workers’ compensation and car damage
claims, utility costs, and wash and detail chemicals and supplies.
Selling,
General and Administrative Expenses
Selling,
general and administrative (“SG&A”) expenses for the year ended December 31,
2007 were $18.3 million compared to $16.1 million for the same period in 2006.
SG&A expenses as a percent of revenues was 39% and 38% for the years ended
December 31, 2007 and 2006, respectively. The increase in SG&A expenses is
primarily the result of the acquisition of Linkstar which added SG&A
expenses of $2.0 million in 2007 and a commission payment related to the
Linkstar acquisition which added SG&A expenses of $310,000 in 2007. In April
2007, we determined that our former Florida security based divisional controller
embezzled funds from the Company. The Company initially conducted an internal
investigation, and our Audit Committee subsequently engaged an independent
consulting firm to conduct an independent forensic investigation. As a result
of
our investigation, we estimated that the amount embezzled by the employee was
approximately $240,000 in fiscal 2006 and $99,000 in the first quarter of fiscal
2007. SG&A expenses for the year ending December 31, 2007 also include an
accrual for approximately $285,000 for the waste remediation at our personal
defense and law enforcement aerosol operation in Vermont and approximately
$310,000 of legal, consulting and accounting fees related to the Florida
embezzlement investigation. If we recover any of the embezzled funds, such
amounts will be recorded as recoveries in future periods when they are received.
The increase was partially offset by a decrease in costs related to the ongoing
immigration investigation. SG&A expenses include $674,000 of legal,
consulting and accounting fees in 2007 relating to the ongoing immigration
investigation as compared to $1.5 million in 2006. SG&A expenses also
include non-cash compensation expense of approximately $895,000 million and
$1.35 million in the fiscal years 2007 and 2006, respectively. Management
expects SG&A expenses to increase in the future as the Company continues to
expand its security and digital media marketing operations.
SG&A
expenses for the year ended December 31, 2006 were $16.1 million compared to
$12.3 million for the same period in 2005, an increase of approximately $3.8
million or 31%. SG&A expenses as a percent of revenues were 38% for the year
ended December 31, 2006 as compared to 27% for the year ended December 31,
2005.
The increase in SG&A expenses is primarily the result of growth in
infrastructure and an increase in marketing and advertising costs within the
Security Segment, which added an additional $732,000 of SG&A expenses in
2006; $1.35 million related to non-cash charges to compensation expense for
stock-based compensation under SFAS 123(R); and $1.5 million of legal,
consulting and accounting fees relating to the ongoing immigration
investigation. As noted above, the 2006 SG&A expenses include a charge of
$240,000 representing the embezzlement that occurred from a local petty cash
checking account and from diversion of customer cash payments at the Florida
Security division. Additionally, the investigation uncovered an unexplained
inventory shortage in 2006 in the Florida Security division of approximately
$350,000. The independent forensic consulting firm agreed with these
conclusions. We have filed a civil complaint against the former employee in
June
2007 and are pursuing all legal measures to recover our losses of the embezzled
funds at our Florida Security division.
Depreciation
and Amortization
Depreciation
and amortization totaled $1.4 million, $1.3 million and $1.2 million for 2007,
2006 and 2005, respectively. The increase in depreciation and amortization
expense, principally in 2007 as compared to 2006, was related to amortization
expense on Linkstar acquired intangible assets.
31
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. There were no such expenses in 2007, 2006 or 2005.
Asset
Impairment Charges
In
accordance with SFAS 144, Accounting
for the Impairment or Disposal of Long-Lived Assets (“SFAS
144”), we periodically review the carrying value of our long-lived assets held
and used, and assets to be disposed of, for possible impairment when events
and
circumstances warrant such a review. Assets classified as held for sale are
measured at the lower of carrying value or fair value, net of costs to sell.
Continuing
Operations
In
the
fourth quarter of 2005, as a result of the annual impairment test of Goodwill
and Other Intangibles in accordance with SFAS 144, we recorded an impairment
of
approximately $1.56 million related to our Texas region reporting unit of our
Car and Truck Wash Segment. This impairment was principally due to reductions
in
future projected cash flows resulting from extended departures from our historic
revenue levels as a result of inclement weather and increased competition near
several of our facilities in Texas. During the quarter ended September 30,
2006,
we wrote down assets related to a full service car wash in Fort Worth, Texas
by
approximately $40,000. Additionally, during the quarter ended December 31,
2007,
we wrote down assets related to a full service car wash in San Antonio, Texas
by
approximately $180,000.We determined that based on current data utilized to
estimate the fair value of these car wash facilities, the future expected cash
flows would not be sufficient to recover their carrying values. Further, in
the
fourth quarter of 2006, as a result of our annual impairment test of Goodwill
and Other Intangibles in accordance with SFAS 142, we recorded an impairment
of
goodwill of approximately $105,000 related to our high end digital and machine
vision cameras and professional imaging components operation in Texas. In the
fourth quarter of 2007, as a result of our annual impairment test of goodwill
and other intangibles, we recorded an impairment of goodwill of approximately
$280,000 and an impairment of trademarks of approximately $66,000 related to
our
consumer direct electronic surveillance operations and an impairment of
trademarks of approximately $101,000 related to our high end digital and machine
vision cameras and professional imaging components operations, both located
in
Texas. These goodwill and trademark impairment charges were due to reductions
in
our future projected cash flows as sales levels in these divisions continue
to
deviate from historic levels as a result of competitive pressures.
Discontinued
Operations
During
the quarter ended September 30, 2005, we wrote down assets related to our truck
wash operations determined to be impaired by approximately $500,000 as a result
of our SFAS 144 quarterly reviews. We have determined that due to a reduction
in
truck wash volumes resulting from an increase in inclement weather, increased
competition, the significant increase in fuel costs which had the effect of
reducing spending on truck washing, and demographic changes to certain of our
facilities, future expected cash flows of our truck wash operations would not
be
sufficient to recover their respective carrying values. The Company executed
a
lease-to-sell agreement on December 31, 2005 with Eagle to lease Mace’s five
truck washes beginning January 1, 2006 for up to two years. During the quarter
ended September 30, 2006, we wrote down assets related to a full service car
wash in Moorestown, New Jersey, by approximately $40,000. We determined that
based on current data utilized to estimate the fair value of this car wash
facility, the future expected cash flows would not be sufficient to recover
its
carrying value.
Interest
Expense, Net
Interest
expense, net of interest income, for the year ended December 31, 2007 was
$450,000 compared to $709,000 for the year ended December 31, 2006. The decrease
in net interest expense is due to a slight increase in interest expense of
approximately $17,000 as a result of increasing interest rates despite a
reduction in outstanding debt due to routine principal payments offset by an
increase in interest income of approximately $276,000 with the Company’s
increase in cash and cash equivalents.
Interest
expense, net of interest income, for the year ended December 31, 2006 was
$709,000 compared to $661,000 for the year ended December 31, 2005. This
increase in interest expense was the result of a decrease in interest income
in
2006 as compared to 2005.
Other
Income
Other
income was $1.05 million, $851,000 and $346,000 for 2007, 2006 and 2005,
respectively. Other income during 2007 included approximately $47,000 of gains
on the sale of three Texas car wash sites in 2007, $752,000 of earnings on
short-term investments and the recovery of a previously written-off acquisition
deposit of $150,000. Other income in 2006 included a $461,000 gain on the sale
of a Dallas, Texas car wash site and $323,000 of earnings on short term
investments. Included in other income in 2005 are gains on short-term
investments of $266,000.
32
Income
Taxes
We
recorded income tax expense of $98,000, $156,000 and $2.2 million for the years
ended December 31, 2007, 2006 and 2005, respectively. Income tax expense
(benefit) reflects the recording of income taxes on loss before income taxes
at
effective rates of approximately (1.1)%, (2.0)%, and (94.5)% for the years
ended
December 31, 2007, 2006, and 2005, respectively. The effective rate differs
from
the federal statutory rate for each year primarily due to state and local income
taxes, non-deductible costs related to intangibles, and changes to the valuation
allowance.
Realization
of the future tax benefits related to the deferred tax assets is dependent
upon
many factors, including the Company’s ability to generate taxable income in
future years. The Company performed a detailed review of the considerations
influencing our ability to realize the future benefit of the NOLs, including
the
extent of recently used NOLs, the turnaround of future deductible temporary
differences, the duration of the NOL carryforward period, and the Company’s
future projection of taxable income. The Company increased its valuation
allowance against deferred tax assets by $3.3 million in 2005, $2.6 million
in
2006, and $3.9 million in 2007 with a total valuation allowance of $10.7 million
at December 31, 2007 representing the amount of its deferred income tax assets
in excess of the Company’s deferred income tax liabilities. The valuation
allowance was recorded because management was unable to conclude that
realization of the net deferred income tax asset was more likely than not.
This
determination was a result of the Company’s continued losses, the uncertainty of
the timing of the Company’s transition from the Car Wash business, and the
ultimate extent of growth in the Company’s Security and Digital Media Marketing
Segments.
Liquidity
and Capital Resources
Liquidity
Cash,
cash equivalents and short-term investments were $12.4 million at December
31,
2007. The ratio of our total debt to total capitalization, which consists of
total debt plus stockholders’ equity, was 20.2% at December 31, 2007, and 29.8%
at December 31, 2006. The
improvements in the Company’s total debt to total capitalization ratio is
directly related to routine principal payments on debt and the payoff of debt
related to the sale of car and truck wash sites as noted below.
Our
business requires a substantial amount of capital, most notably to pursue our
expansion strategies, including our current expansion in the Security and
Digital Media Marketing Segment. We plan to meet these capital needs from
various financing sources, including borrowings, internally generated funds,
cash generated from the sale of car washes, and the issuance of common stock
if
the market price of the Company’s stock is at a desirable level.
As
of
December 31, 2007, we had working capital of approximately $17.8 million.
Working capital was approximately $26.6 million and $14.6 million at December
31, 2006 and 2005, respectively. Our positive working capital decreased by
approximately $8.8 million from December 31, 2006 to December 31, 2007,
principally due to the purchase of Linkstar in the quarter ended September
30,
2007. The increase in working capital at December 31, 2006 from 2005 was
principally due to the reclassification at December 31, 2006 of assets and
liabilities of our Arizona region, certain of our Northeast regions car washes
and our truck washes as assets and related liabilities, held of
sale.
During
the years ended December 31, 2007, 2006 and 2005, we made capital expenditures
of $536,000, $957,000 and $1.14 million, (including $171,000, $806,000, and
$942,000 related to discontinued operations) respectively, within our Car and
Truck Wash Segment. We believe our current cash and short-term investment
balance at December 31, 2007 of $12.4 million, cash flow from operating
activities in 2008, and cash generated from the sale of our car wash operations
will be sufficient to meet our car wash capital expenditure funding needs
through at least the next twelve months. In years subsequent to 2008, we
estimate that our Car and Truck Wash Segment will require annual capital
expenditures of $250,000 to $500,000 depending upon the timing of the sale
of
our remaining car wash sites. 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 2008
and future years and if current cash balances are depleted, we will need to
raise additional capital to meet these ongoing capital
requirements.
Capital
expenditures for our Security Segment were $205,000, $341,000, and $455,000
for
the fiscal years ending December 31, 2007, 2006, and 2005, respectively. We
used
$1.9 million of cash for the acquisition of Securetek in November 2005. We
estimate capital expenditures for the Security Segment at approximately $100,000
to $200,000 for 2008, principally related to facility improvements and equipment
for our Farmers Branch, Texas and Ft. Lauderdale, Florida
operations.
We
expect
to invest significant resources and capital to grow our new Digital Media
Marketing Segment. We expect to continue to invest in engineering staff and
in
the development of new services and technologies within our online marketing
division as well as additional products within our e-commerce division. Further,
we may need to expend additional capital resources in member acquisition costs
and in integrating new technologies to improve the speed, performance, features,
ease of use and reliability of our consumer services in order to adapt to
rapidly changing industry standards. As usage of our websites increases, we
will
need to increase networking equipment to maintain adequate data transmission
speeds, the availability of which may be limited or the cost of which may be
significant. Our online marketing division will also require the infusion of
additional capital as we grow because of our advertising customers, who are
billed at the end of the month with payment terms of approximately 45 days,
while we typically pay our website publishers in approximately 15 days.
Additionally, as we introduce new e-commerce products, upfront capital spending
is required to purchase inventory as well as pay for upfront media costs to
enroll new e-commerce members.
33
We
intend
to continue to expend significant cash for the purchasing of inventory as we
grow and introduce new video surveillance products in 2008 and in years
subsequent to 2008. We anticipate that inventory purchases will be funded from
cash collected from sales and working capital. At December 31, 2007, we
maintained an unused and fully available $500,000 revolving credit facility
with
Chase to provide financing for additional video surveillance product inventory
purchases. The amount of capital that we will spend in 2008 and in years
subsequent to 2008 is largely dependent on the marketing success we achieve
with
our video surveillance systems and components. We believe our cash and
short-term investments balance of $12.4 million at December 31, 2007, the
revolving credit facility, and cash generated from the sale of our car wash
operations, will provide for growth in 2008. Unless our operating cash flow
improves, our growth will be limited if we deplete our cash
balance.
Despite
our recent operating losses, we believe our cash and short-term investment
balance of approximately $12.4 million at December 31, 2007, cash flow from
operating activities, cash provided from the sale of assets, and the revolving
credit facility will be sufficient to meet its car wash and security operations
capital expenditure and operating funding needs through at least the next twelve
months and provide for growth in 2008.
In
December 2004, the Company announced that it was exploring the sale of its
car
and truck washes. From December 2005 through March 3, 2008, we sold 34 car
washes and five truck washes with total cash proceeds generated of approximately
$33.7 million, net of pay-off of related mortgage debt. We believe we will
be
successful in selling additional car washes and generating cash for funding
of
current operating needs and expansion of our Security Segment. If the cash
provided from operating activities does not improve in 2008 and in future years
and if current cash balances are depleted, we will need to raise additional
capital to meet these ongoing capital requirements.
In
the
past, we have been successful in obtaining financing by selling common stock
and
obtaining mortgage loans. Our ability to obtain new financing can be adversely
impacted by our stock price. Our failure to maintain the required debt covenants
on existing loans also adversely impacts our ability to obtain additional
financing. We are reluctant to sell common stock at market prices below our
per
share book value. Our ability to obtain new financing will be limited if our
stock price is not above our per share book value and our cash from operating
activities does not improve. Currently, we cannot incur additional long term
debt without the approval of one of our commercial lenders. The Company must
demonstrate that the cash flow benefit from the use of new loan proceeds exceeds
the resulting future debt service requirements.
Debt
Capitalization and Other Financing Arrangements
At
December 31, 2007, we had borrowings, including capital lease obligations,
of
approximately $13.6 million. We had three letters of credit outstanding at
December 31, 2007, totaling $1,149,000 as collateral relating to workers’
compensation insurance policies. We maintain a $500,000 revolving credit
facility to provide financing for additional video surveillance product
inventory purchases. There were no borrowings outstanding under the revolving
credit facility at December 31, 2007. The Company also maintains a $300,000
bank
commitment for commercial letters of credit for the importation of inventory.
There were outstanding commercial letters of credit of $153,000 under this
commitment at December 31, 2007.
Several
of our debt agreements, as amended, contain certain affirmative and negative
covenants and require the maintenance of certain levels of tangible net worth,
maintenance of certain unencumbered cash and marketable securities balances,
limitations on capital spending and the maintenance of certain debt service
coverage ratios on a consolidated level.
The
Company entered into amendments to the Chase term loan agreements effective
September 30, 2006. The amended loan agreements with Chase eliminated the
Company’s requirement to maintain a ratio of consolidated earnings before
interest, income taxes, depreciation and amortization to debt service. The
Chase
term loan agreements also limit capital expenditures annually to $1.0 million,
requires the Company to provide Chase with a Form 10-K and audited financial
statements within 120 days of the Company’s fiscal year end and a Form 10-Q
within 60 days after the end of each fiscal quarter, and requires the
maintenance of a minimum total unencumbered cash and marketable securities
balance of $5 million. If we are unable to satisfy these covenants and we cannot
obtain waivers, the Chase notes may be reflected as current in future balance
sheets and as a result our stock price may decline.
34
If
we
default on any of the Chase covenants and are not able to obtain amendments
or
waivers of acceleration, Chase debt totaling $10.5 million at December 31,
2007,
including debt recorded as long-term debt at December 31, 2007, could become
due
and payable on demand, and Chase could foreclose on the assets pledged in
support of the relevant indebtedness. If our assets (including up to 15 of
our
car wash facilities as of December 31, 2007) are foreclosed upon, revenues
from
our Car and Truck Wash Segment, which comprised 36.5% of our total revenues
for
fiscal year 2007 would be severely impacted and we may be unable to continue
to
operate our business. Even if the debt were accelerated without foreclosure,
it
would be very difficult for us to continue to and we may go out of
business.
The
Company’s ongoing ability to comply with its debt covenants under its credit
arrangements and refinance its debt depends largely on the achievement of
adequate levels of cash flow. If our future cash flows are less than expected
or
our debt service, including interest expense, increases more than expected
causing us to further default on any of the Chase covenants in the future,
the
Company will need to obtain further amendments or waivers from Chase. Our cash
flow has been and could continue to be adversely affected by weather patterns,
economic conditions, and the requirements to fund the growth of our security
business. In the event that non-compliance with the debt covenants should
continue to occur, the Company would pursue various alternatives to attempt
to
successfully resolve the non-compliance, which might include, among other
things, seeking additional debt covenant waivers or amendments, or refinancing
debt with other financial institutions. If the Company is unable to obtain
waivers or amendments in the future, Chase debt currently totaling $10.5
million, including debt recorded as long-term debt at December 31, 2007, would
become payable on demand by the financial institution upon expiration of its
current waiver. There can be no assurance that further debt covenant waivers
or
amendments would be obtained or that the debt would be refinanced with other
financial institutions at favorable terms. If we are unable to obtain renewals
on maturing loans or refinancing of loans on favorable terms, our ability to
operate would be materially and adversely affected.
On
March
13, 2006, the Company learned that the United States Attorney for the Eastern
District of Pennsylvania is conducting a criminal investigation regarding the
alleged hiring of undocumented workers at the Company’s car washes. See “Item 3.
Legal Proceedings.” From March 13, 2006 through December 31, 2007, the Company
incurred $704,000 in legal, consulting and accounting expenses associated with
the Audit Committee investigations in fiscal 2006 and $1.47 million ($674,000
and $796,000, in fiscal 2007 and 2006, respectively) associated with the
governmental investigation and the Company’s defense and negotiations with the
government. In accordance with the Company’s By-Laws, the Company is obligated
to indemnify and advance legal costs for its officers and directors when they
are made party to an action, suit or proceeding by reason of the fact that
such
officers or directors are officers or directors of the Company. Due to the
ongoing nature of the criminal investigation, it is not possible at this time
to
predict the outcome of the investigation or the impact of costs of ultimately
resolving this matter. However, we believe that additional legal and other
costs
and expenses through 2008 may be significant as we work to resolve the criminal
investigation. In addition, we may be required to make substantial payments for
fines, penalties or settlements in connection with the resolution of alleged
violations of laws. Any such expenses or payments could have a material adverse
effect on our liquidity and capital resources.
The
Company is obligated under various operating leases, primarily for certain
equipment and real estate within the Car and Truck Wash Segment. Certain of
these leases contain purchase options, renewal provisions, and contingent
rentals for our proportionate share of taxes, utilities, insurance, and annual
cost of living increases.
The
following are summaries of our contractual obligations and other commercial
commitments at December 31, 2007, including debt related to discontinued
operations and liabilities related to assets held for sale (in
thousands):
|
Payments
Due By Period
|
||||||||||||||||
|
Contractual
Obligations
(1)
|
Total
|
|
Less
than
One
Year
|
|
One
to Three Years
|
|
Three
to Five Years
|
|
More
Than Five Years
|
|||||||
|
Long-term
debt (2)
|
$
|
13,558
|
$
|
5,795
|
$
|
3,953
|
$
|
1,541
|
$
|
2,269
|
||||||
|
Minimum
operating lease payments
|
4,302
|
998
|
1,422
|
931
|
951
|
|||||||||||
|
$
|
17,860
|
$
|
6,793
|
$
|
5,375
|
$
|
2,472
|
$
|
3,220
|
|||||||
35
|
Amounts
Expiring Per Period
|
||||||||||||||||
|
Other
Commercial Commitments
|
Total
|
|
Less
Than One Year
|
|
One
to Three Years
|
|
Three
to Five Years
|
|
More
Than Five Years
|
|||||||
|
Line
of credit (3)
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Standby
letters of credit (4)
|
1,302
|
1,302
|
-
|
-
|
-
|
|||||||||||
|
$
|
1,302
|
$
|
1,302
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||||
(1)
Potential amounts for inventory ordered under purchase orders are not reflected
in the amounts above as they are typically cancelable prior to delivery and,
if
purchased, would be sold within the normal business cycle.
(2)
Related interest obligations have been excluded from this maturity schedule.
Our
interest payments for the next twelve month period, based on current market
rates, are expected to be approximately $960,000.
(3)
The
Company maintains a $500,000 line of credit with Chase. There were no borrowings
outstanding under this line of credit at December 31, 2007.
(4)
The
Company also maintains a $300,000 bank commitment for commercial letters of
credit with Chase for the importation of inventory. There were outstanding
commercial letters of credit under this commitment of approximately $153,000
at
December 31, 2007. Additionally, outstanding letters of credit of $1,149,000
represent collateral for workers’ compensation insurance policies.
Mace
currently employs Louis D. Paolino, Jr. as its President and Chief Executive
Officer under a three-year employment agreement dated August 21, 2006. The
principal terms of the employment agreement include: an annual salary of
$450,000; three annual stock option grants fully vested on the date of each
grant; certain bonus payments for the sale or purchase of businesses; a car
allowance at a cost of $1,500 per month; provision for certain medical and
other
employee benefits; and prohibition against competing with Mace during employment
and for a three-month period following a termination of employment. Mr.
Paolino’s employment agreement also provides for a payment of 2.99 times Mr.
Paolino’s average total compensation (base salary plus any bonuses plus the
value of any option award, valued using the Black-Scholes method) over the
past
five years, upon termination of employment under certain conditions or upon
a
change in control. Additionally, if Mr. Paolino receives such change of control
bonus, his employment agreement can then be terminated without an additional
payment. Of the three stock option grants provided for in Mr. Paolino’s
employment agreement, the first grant, exercisable into 450,000 shares of the
Company’s common stock, was made on August 21, 2006. The second grant,
exercisable into 300,000 shares of the Company’s common stock, was made February
22, 2008 and the third grant is expected be made on or about August 21, 2008.
Because the grants are fully vested on the date of grant, they do not provide
an
incentive against Mr. Paolino resigning his employment.
Cash
Flows
Operating
Activities.
Net cash
used in operating activities totaled $9.3 million for the year ended December
31, 2007. Cash used in operating activities in 2007 was primarily due to a
net
loss from continuing operations of $9.4 million, which included $896,000 in
non-cash stock-based compensation charges and $1.5 million of depreciation
and
amortization. Cash was also impacted by an increase in accounts payable and
accrued expenses of $1.3 million and an increase in inventory of $2.2 million.
Net
cash
used in operating activities totaled $3.1 million for the year ended December
31, 2006. Cash used in operating activities in 2006 was primarily due to a
net
loss from continuing operations of $8.1 million offset partially by $1.4 million
in non-cash stock based compensation charges and $2.1 million of cash provided
by discontinued operations. Net cash provided by operating activities totaled
$1.3 million for year ended December 31, 2005. Cash provided by operating
activities in 2005 was primarily due to the loss from continuing operations
of
$5.7 million, which included $1.2 million of depreciation and amortization,
and
$3.4 million of cash provided by discontinued operations.
Investing
Activities.
Cash
provided by investing activities totaled approximately $15.1 million for the
year ended December 31, 2007, which includes cash provided by investing
activities from discontinued operations of $22.4 million related to the sale
of
24 car wash sites and five truck washes in the year ended December 31, 2007
offset by the acquisition of Linkstar Interactive, Inc. of $6.9 million.
Investing activity in 2007 also included capital expenditures of $365,000
related to ongoing car wash operations, $252,000 for Security Segment operations
and Corporate and $172,000 for discontinued operations. Cash provided by
investing activities totaled approximately $1.5 million for the year ended
December 31, 2006, which includes capital expenditures of $151,000 related
to
ongoing car wash operations and proceeds of approximately $1.85 million from
the
sale of a Dallas, Texas car wash site, $353,000 for Security Segment operations
and Corporate, and $806,000 for discontinued operations and proceeds of
approximately $1.0 million from the sale of our Deptford, New Jersey
site.
Cash
used
in investing activities totaled $4.8 million for the year ended December 31,
2005, which includes $1.9 million for the November 23, 2005 acquisition of
Securetek, $197,000 for capital expenditures relating to ongoing car care
operations, $465,000 for capital expenditures relating to the Security Segment
operations and Corporate, $942,000 for discontinued operations, and $2.6 million
for the purchase of short-term investments. These expenditures were partially
offset by proceeds of approximately $1.1 million received from the sale of
fixed
assets.
36
Financing
Activities.
Cash
used in financing activities was approximately $1.8 million for the year ended
December 31, 2007, which includes $892,000 of routine principal payments on
debt
from continuing operations and $824,000 from routine principal payments on
debt
related to discontinued operations. Cash used in financing activities was
approximately $2.7 million for the year ended December 31, 2006, which includes
$860,000 of routine principal payments on debt related to continuing operations,
$1.3 million of routine principal payments on debt related to discontinued
operations, and $527,000 cash used to pay off debt relating to the Dallas,
Texas
car wash site sold in the third quarter of 2006. Cash used in financing
activities was $2.6 million for the year ended December 31, 2005, which includes
routine principal payments on debt of $1.2 million from continuing operations,
and $1.3 million from discontinued operations.
Seasonality
and Inflation
The
Company believes that its car washing and detailing operations are adversely
affected by periods of inclement weather. In particular, long periods of rain
and cloudy weather adversely affect our car wash volumes and related lube and
other automotive services as people typically do not wash their cars during
such
periods. Additionally, extended periods of warm, dry weather, usually
encountered during the Company’s third quarter, may encourage customers to wash
their cars themselves which also can adversely affect our car wash business.
The
Company has attempted to mitigate the risk of unfavorable weather patterns
in
the past by having operations in diverse geographic regions. The Company does
not believe its security or digital media marketing operations are subject
to
seasonality.
The
Company believes that inflation and changing prices have not had, and are not
expected to have, a material adverse effect on its results of operations in
the
near future.
Summary
of Critical Accounting Policies
The
discussion and analysis of our financial condition and results of operations
is
based upon the Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities at the date of the Company's financial
statements. Actual results may differ from these estimates under different
assumptions or conditions.
Critical
accounting policies are defined as those that are reflective of significant
judgments and uncertainties, and potentially result in materially different
results under different assumptions and conditions. The Company’s critical
accounting policies are described below.
Revenue
Recognition and
Deferred Revenue
The
Company’s recognizes revenue in accordance with Staff Accounting Bulletin
(“SAB”) No. 104, Revenue Recognition in Financial Statements. Under SAB
No. 104, the Company recognizes revenue when the following criteria have been
met: persuasive evidence of an arrangement exists, the fees are fixed and
determinable, no significant obligations remain and collection of the related
receivable is reasonably assured. Allowances for sales returns, discounts and
allowances, are estimated and recorded concurrent with the recognition of the
sale and are primarily based on historical return rates.
Revenues
from the Company’s Security Segment are recognized when shipments are made and
title has passed.
Revenues
from the Company’s Digital Media Marketing Segment are recognized in accordance
with SAB No. 104, Revenue Recognition in Financial Statements. The
ecommerce division recognizes revenue and the related product costs for trial
product shipments after the expiration of the trial period. Marketing costs
incurred by the ecommerce division are recognized as incurred. The online
marketing division recognizes revenue and cost of sales consistent with the
provisions of the Emerging Issues Task Force (“EITF”) Issue No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent, the
Company records revenue based on the gross amount received from advertisers
and
the amount paid to the publishers placing the advertisements as cost of sales.
37
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 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.
Accounts
Receivable
The
Company’s accounts receivable are due from trade customers. Credit is extended
based on evaluation of customers’ financial condition and, generally, collateral
is not required. Accounts receivable payment terms vary and amounts due from
customers are stated in the financial statements net of an allowance for
doubtful accounts. Accounts outstanding longer than the payment terms are
considered past due. The Company determines its allowance by considering a
number of factors, including the length of time trade accounts receivable are
past due, the Company’s previous loss history, the customer’s current ability to
pay its obligation to the Company, and the condition of the general economy
and
the industry as a whole. The Company writes off accounts receivable when they
are deemed uncollectible, and payments subsequently received on such receivables
are credited to the allowance for doubtful accounts. Risk of losses from
international sales within the Security Segment are reduced by requiring
substantially all international customers to provide 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, e-commerce 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 Segment consist
of defense sprays, child safety products, electronic security monitors, cameras
and digital recorders, and various other consumer security and safety products.
Inventories within the e-commerce division of the Digital Media Marketing
segment consist of several health and beauty products. The Company continually
reviews the book value of slow moving inventory items, as well as, discontinued
product lines to determine if inventory items are property valued. The Company
identifies slow moving or discontinued product lines and assesses the ability
to
dispose of them at a price greater than costs. If it is determined that costs
is
less than market value, then cost is used for inventory valuation. If market
value is less then costs, then an adjustment is made to the Company’s
obsolescence reserve to adjust the inventory to market value.
Advertising
and Marketing Costs
The
Company expenses advertising costs in its Security and Car Wash Segments,
including advertising production cost, as the costs are incurred or the first
time the advertisement appears. Marketing costs in the Company’s Digital Media
Marketing Segment, which consist of the costs to acquire new members for its
e-commerce business, are expensed as incurred rather than deferred and amortized
over the expected life of a customer, based on the Company’s application of
Statement of Position (“SOP”) 93-7. Under SOP 93-7, a company could capitalize
and amortize direct-response advertising costs in a stable, established market
where a company can demonstrate a history of profitability in the related
product or advertising campaign. The Company’s determination is that neither the
history nor stable market criteria are currently met.
Impairment
of Long-Lived Assets
In
accordance with SFAS 144, Accounting
for the Impairment or Disposal of Long-Lived Assets,
we
periodically review the carrying value of our long-lived assets held and used,
and assets to be disposed of, when events and circumstances warrant such a
review. If significant events or changes in circumstances indicate that the
carrying value of an asset or asset group may not be recoverable, we perform
a
test of recoverability by comparing the carrying value of the asset or asset
group to its undiscounted expected future cash flows. Cash flow projections
are
sometimes based on a group of assets, rather than a single asset. If cash flows
cannot be separately and independently identified for a single asset, we
determine whether an impairment has occurred for the group of assets for which
we can identify the projected cash flows. If the carrying values are in excess
of undiscounted expected future cash flows, we measure any impairment by
comparing the fair value of the asset group to its carrying value. If the fair
value of an asset or asset group is determined to be less than the carrying
amount of the asset or asset group, an impairment in the amount of the
difference is recorded.
Goodwill
In
accordance with SFAS 142, Goodwill
and Other Intangible Assets,
the
Company completes its annual impairment tests as of November 30 of each year.
In
addition, an impairment test is conducted whenever there is an impairment
indicator. The Company’s annual impairment testing corresponds with the
Company’s determination of its annual operating budgets for the upcoming year.
The Company’s valuation of goodwill is based on a discounted cash flow model
applying an appropriate discount rate to future expected cash flows and
management’s annual review of historical data and future assessment of certain
critical operating factors, including security product sales and related costs,
car wash volumes, average car wash and detailing revenue rates per car, wash
and
detailing labor cost percentages, weather trends and recent and expected
operating cost levels. Estimating cash flows requires significant judgment
including factors beyond our control and our projections may vary from cash
flows eventually realized. Adverse business conditions could affect
recoverability of goodwill in the future and, accordingly, the Company may
record additional impairments in subsequent years.
38
Other
Intangible Assets
Other
intangible assets consist primarily of deferred financing costs, non-compete
agreements, customer lists, software costs, product lists and trademarks. In
accordance with SFAS 142, Goodwill
and Other Intangible Assets,
our
trademarks are considered to have indefinite lives, and as such, are not subject
to amortization. These assets are tested for impairment using discounted cash
flow methodology annually and whenever there is an impairment indicator.
Estimating future cash flows requires significant judgment and projections
may
vary from cash flows eventually realized. Several impairment indicators are
beyond our control, and determining whether or not they will occur cannot be
predicted with any certainty. Deferred financing costs are amortized on a
straight-line basis over the terms of the respective debt instruments. Customer
lists, product lists, software costs, patents and non-compete agreements are
amortized on a straight-line or accelerated basis over their respective assigned
estimated useful lives.
Income
Taxes
Deferred
income taxes are determined based on the difference between the financial
accounting and tax bases of assets and liabilities. Deferred income tax expense
(benefit) represents the change during the period in the deferred income tax
assets and deferred income tax liabilities. In establishing the provision for
income taxes and deferred income tax assets and liabilities, and valuation
allowances against deferred tax assets, the Company makes judgments and
interpretations based on enacted laws, published tax guidance and estimates
of
future earnings. Deferred income tax assets include tax loss and credit
carryforwards and are reduced by a valuation allowance if, based on available
evidence, it is more likely than not that some portion or all of the deferred
income tax assets will not be realized.
Stock-Based
Compensation
The
Company has two stock-based employee compensation plans. On January 1, 2006,
the
Company adopted SFAS 123 (R), Share-Based
Payment,
which
requires that the compensation cost relating to share-based payment transactions
be recognized in financial statements. We adopted SFAS 123(R) using the modified
prospective method, which results in recognition of compensation expense for
all
share-based awards granted or modified after December 31, 2005 as well as all
unvested awards outstanding at the date of adoption. The cost is recognized
as
compensation expense over the vesting period of the instruments, based upon
the
grant date fair value of the equity or liability instruments issued. In the
year
ended December 31, 2007, the adoption of SFAS 123(R) resulted in stock
compensation expense and therefore a reduction of income from before income
taxes of $924,300 ($895,000 in continuing operations-SG&A, $800 in
continuing operations-cost of revenues and $28,500 in discontinued operations).
SG&A stock compensation expense includes a $335,800 non-cash compensation
charge related to a grant of fully vested options to Louis D. Paolino, Jr.,
the
Company’s Principal Executive Officer, pursuant to the terms of his employment
agreement dated August 21, 2006. Mr. Paolino’s employment agreement provides for
fully vested stock option grants at the signing date and on the first and second
anniversary dates of the employment agreement. Under the provisions of the
employment agreement, the Company accounted for the forthcoming grant to Mr.
Paolino based on the effective service inception date of August 2007 and accrued
the $648,000 as an estimate in the quarter ended September 30, 2007 based on
the
value of the prior year grant. Mr. Paolino was ultimately granted 300,000 fully
vested stock options, under the provisions of Mr. Paolino’s contract, on
February 22, 2008 which were valued at $335,800 based on the Black Scholes
valuation model. The actual amount of the grant was based on an independent
compensation study commissioned by the Company’s Compensation Committee. An
adjustment to the amount of the estimated stock-based compensation charge of
$313,000 based on the compensation study and actual grant on February 22, 2008
was recorded in the fourth quarter of 2007.
In
the
year ended December 31, 2006, SFAS 123(R) resulted in stock compensation expense
and therefore a reduction of income before income taxes of $1.4 million ($1.36
million in continuing operations-SG&A expense and $28,500 in discontinued
operations). The Company expects the application of SFAS 123(R) to result in
stock compensation expense and therefore a reduction of income before income
taxes in 2008 of $1.1 million to $1.2 million. The Company’s actual stock
compensation expense in 2008 could differ materially from this estimate
depending on the timing, magnitude and vesting of new awards, the number of
new
awards and changes in the market price or the volatility of the Company’s common
stock.
39
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
With
the
payoff of the Arizona fixed rate mortgages in the second quarter of 2007, nearly
100% of the Company’s debt at December 31, 2007, including debt related to
discontinued operations, is at variable rates. Substantially all of our variable
rate debt obligations are tied to the prime rate, as is our incremental
borrowing rate. A one percent increase in the prime rates would not have a
material effect on the fair value of our variable rate debt at December 31,
2007. The impact of increasing interest rates by one percent would be an
increase in interest expense of approximately $141,000 in 2007.
On
October 14, 2004, we entered into an interest rate cap that effectively changes
our interest rate exposure on approximately $7 million of variable rate debt.
The variable rate debt floats at prime plus .25. The interest rate cap contract
had a 36-month term and capped the interest rate on the $7 million of variable
rate debt at 6.5%. The contract expired at September 30, 2007.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
reports of independent registered public accounting firm and Consolidated
Financial Statements are included in Part IV, Item 15 of this
Report.
ITEM
9. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A(T). CONTROLS
AND PROCEDURES
(a)
Disclosure Controls and Procedures
The
Company’s disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Company in the reports that it
files
or submits under the Exchange Act, is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules, and include
controls and procedures designed to ensure that such information is accumulated
and communicated to the Company’s management, including its principal executive
and financial officers, to allow timely decisions regarding required disclosure.
Based on the evaluation of the effectiveness of the Company’s disclosure
controls and procedures as of December 31, 2007 required by Rule 13a-15(b)
under
the Exchange Act and conducted by the Company’s chief executive officer and
chief financial officer, such officers concluded that the Company’s disclosures
controls and procedures were effective as of December 31, 2007. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal
Control-Integrated Framework.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
(b)
Management’s Annual Report on Internal Control over Financial
Reporting
The
management of Mace Security International, Inc. and its subsidiaries is
responsible for establishing and maintaining adequate internal control over
financial reporting. With the participation of the Principal Executive Officer
and the Principal Financial Officer, management has evaluated the effectiveness
of its internal control over financial reporting as of December 31, 2007. Based
on such evaluation, management has concluded that Mace Security International,
Inc.’s internal control over financial reporting is effective as of December 31,
2007.
Changes
in Internal Control Over Financial Reporting and Remediation
Actions
As
we
previously disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2006 and our Quarterly Reports on Form 10-Q for the quarters ending
March 31, 2007, June 30, 2007 and September 30, 2007, we began the remediation
of the material weakness in our internal controls over cash and financial
reporting associated with the Company’s Florida based security operation
through: (i) hiring of new divisional accounting personnel for this location
(ii) restrictions on access to cash disbursement activity at the Florida
Security Division; (iii) reinforcement of control procedures at the regional
level for maintenance of the purchase order clearing account, cash accounts,
and
other significant balance sheet accounts; (iv) reinforcement of controls over
timely review of account reconciliations and journal entries; and (v) increased
corporate supervision of regional accounting personnel. We have completed the
remediation and will continue to closely monitor the effectiveness of our
processes, procedures and controls, and will make further changes as management
determines appropriate.
40
ITEM
9B. OTHER
INFORMATION
None.
PART
III
ITEM
10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERANCE
DIRECTORS
|
Name
|
Age
|
Position
|
||
|
Louis
D. Paolino, Jr.
|
51
|
Director,
Chairman of the Board
|
||
|
Mark
S. Alsentzer
|
52
|
Director
|
||
|
Gerald
T. LaFlamme
|
68
|
Director
|
||
|
John
C. Mallon
|
72
|
Director,
Lead Independent Director
|
||
|
Constantine
N. Papadakis, Ph.D
|
62
|
Director
|
||
|
Dennis
Raefield
|
59
|
Director
|
All
of
Mace’s directors serve for terms of one year each until their successors are
elected and qualified. All of the above directors were elected on December
14,
2007.
Louis
D. Paolino, Jr. has
served as the Chairman of the Board, President and Chief Executive Officer
of
the Company since May 1999. From June 1996 through December 1998, Mr. Paolino
served as Chairman of the Board, President and Chief Executive Officer of
Eastern Environmental Services, Inc. Prior thereto, he was President of Soil
Remediation of Philadelphia, Inc., a company engaged in the business of treating
contaminated soil. From September 1993 to June 1996, Mr. Paolino served as
a
Vice President of USA Waste Services, Inc. From November 1995 to January 1996,
Mr. Paolino served on the Board of Directors of Metal Management, Inc., formerly
known as General Parametrics Corp., a publicly traded company. Mr. Paolino
received a B.S. in Civil Engineering from Drexel University.
Mark
S. Alsentzer has
served as a director since December 15, 1999. From January 2006 to the present,
Mr. Alsentzer has been the Chief Executive Officer and Director of Pure Earth,
Inc. From December 1996 to October 2005, Mr. Alsentzer was a director of U.S.
Plastic Lumber Corporation (a plastic lumber and recycling company). From
December 1996 to July 2004, Mr. Alsentzer was the President and Chief Executive
Officer of U.S. Plastic Lumber Corporation (a plastic lumber and recycling
company). From 1992 to December 1996, Mr. Alsentzer was Vice President of
Republic Environmental System, Inc. (an environmental services company). On
July
23, 2004, U.S. Plastic Lumber Corporation filed a voluntary petition under
Chapter 11 of the United States Bankruptcy Code. At the time of the Chapter
11
filing, Mark S. Alsentzer was Chairman, President and Chief Executive Officer
of
U.S. Plastic Lumber Corporation. Mr. Alsentzer is no longer Chairman, a
director, President or Chief Executive Officer of U.S. Plastic Lumber
Corporation.
Gerald
T. LaFlamme has
served as a director since December 14, 2007. From 2004 to the present, Mr.
LaFlamme has been President of JL Development Company, Inc. (a real estate
development and consulting company). From 2001 to 2004, Mr. LaFlamme was Senior
Vice President and CFO of Davidson Communities, LLC (a regional home builder).
From 1978 to 1997, Mr. LaFlamme was Area Managing Partner for Ernst & Young,
LLP, and a predecessor accounting firm in San Diego, CA. Mr. LaFlame is a
director and Chairman of the Audit Committee of Arlington Hospitality Inc.
On
August 31, 2005, Arlington Hospitality Inc. filed a voluntary petition under
Chapter 11 of the United States Bankruptcy Code. At the time of the Chapter
11
filing, Mr. LaFlamme was a director.
John
C. Mallon has
served as a director since December 14, 2007. From 1994 to the present, Mr.
Mallon has been the Managing Director of Mallon Associates (an investment bank
and broker specializing in the security industry). From 1994 to 2006, Mr. Mallon
was the Editor and Publisher of Mallon’s Security Investing and Mallon’s
Security Report (financial newsletters tracking more than 250 public security
companies). Mr. Mallon is a director of and Chairman of the Audit Committee
of
Good Harbor Partners Acquisition Corporation (a public special purpose
acquisition corporation focusing on acquisitions in the global security market).
Mr. Mallon is a director of and Chairman of the Board of IBI Armored Services,
Inc. (a privately held national armored trucking, and money processing
company).
41
Constantine
N. Papadakis, Ph.D. has
served as a director since May 24, 1999. From 1995 to the present, Dr. Papadakis
has been the President of Drexel University. From 1986 to 1995, Dr. Papadakis
was Dean of the College of Engineering at the University of Cincinnati. Dr.
Papakakis is a director of Met-Pro Corporation, The Philadelphia Stock Exchange,
Amkor Technology, Inc., Aqua America, Inc., CDI, Inc., The Executive Committee
of the Greater Philadelphia Chamber of Commerce, the Opera Company of
Philadelphia, the National Commission for Cooperative Education, and the World
Trade Center of Philadelphia.
Dennis
Raefield has
served as a director since October 16, 2007. From April 2007 to the present,
Mr.
Raefield has been the President of Reach Systems, Inc. (formerly Edge
Integration Systems, Inc.) (a manufacturer of security access control systems).
From February 2005 to February 2006, Mr. Raefield was President of Rosslare
Security Products, Inc. (a manufacturer of diverse security products). From
February 2004 to February 2005, Mr. Raefield was President of NexVision
Consulting (security business consultant). From January 2003 to February 2004,
Mr. Raefield was President of Ortega InfoSystems (a software developer). From
October 1998 to November 2002, Mr. Raefield was President of Ademco and
Honeywell Access Systems (a division of Honeywell, Inc. that manufactured access
control systems).
EXECUTIVE
OFFICERS
|
Name
|
Age
|
Position
|
||
|
Louis
D. Paolino, Jr.
|
51
|
President
and Chief Executive Officer
|
||
|
Robert
M. Kramer
|
55
|
Executive
Vice President, General Counsel and Secretary
|
||
|
Gregory
M. Krzemien
|
48
|
Chief
Financial Officer and Treasurer
|
Louis
D. Paolino, Jr. has
served as the Chairman of the Board, President and Chief Executive Officer
of
the Company since May 1999. From June 1996 through December 1998, Mr. Paolino
served as Chairman of the Board, President and Chief Executive Officer of
Eastern Environmental Services, Inc. Prior thereto, he was President of Soil
Remediation of Philadelphia, Inc., a company engaged in the business of treating
contaminated soil. From September 1993 to June 1996, Mr. Paolino served as
a
Vice President of USA Waste Services, Inc. From November 1995 to January 1996,
Mr. Paolino served on the Board of Directors of Metal Management, Inc., formerly
known as General Parametrics Corp., a publicly traded company. Mr. Paolino
received a B.S. in Civil Engineering from Drexel University.
Robert
M. Kramer
has
served as Executive Vice President, General Counsel, and Secretary of the
Company since May 1999, and as Chief Operating Officer of the Car and Truck
Wash
Segment from July 2000 to July 2006. Mr. Kramer also served as a director of
the
Company from May 1999 to December 2003. From June 1996 through December 1998,
he
served as General Counsel, Executive Vice President and Secretary of Eastern
Environmental Services, Inc. Mr. Kramer is an attorney and has practiced law
since 1979 with various firms, including Blank Rome Comisky & McCauley,
Philadelphia, Pennsylvania and Arent Fox Kitner Poltkin & Kahn, Washington,
D.C. From 1989 to December 2000, Mr. Kramer had been the sole partner of Robert
M. Kramer & Associates, P.C. From December 1989 to December 1997, Mr. Kramer
served on the Board of Directors of American Capital Corporation, a registered
securities broker dealer. Mr. Kramer received B.S. and J.D. degrees from Temple
University.
Gregory
M. Krzemien
has
served as the Chief Financial Officer and Treasurer of the Company since May
1999. From August 1992 through December 1998, he served as Chief Financial
Officer and Treasurer of Eastern Environmental Services, Inc. From October
1988
to August 1992, Mr. Krzemien was a senior audit manager with Ernst & Young
LLP. Mr. Krzemien received a B.S. degree in Accounting from the Pennsylvania
State University.
CORPORATE
GOVERNANCE
Audit
Committee and Audit Committee Financial Expert
The
Board
of Directors has determined that Gerald T. LaFlamme, the Chairman of the
Company’s Audit Committee, is an audit committee financial expert as defined by
Item 401(h) of Regulation S-K of the Exchange Act. The Company has a separately
designated standing Audit Committee established in accordance with Section
3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are Gerald
T. LaFlamme, Chairman, Mark S. Alsentzer, and Constantine N. Papadakis, Ph.D.
The Board of Directors has determined that each member of the Audit Committee
is
independent within the meaning of Rule 4200(a)(15) of the National Association
of Securities Dealers’ Nasdaq Global Market listing standards and Rule 10A-3
promulgated under the Securities Exchange Act of 1934. The Charter of the Audit
Committee is posted on our website at www.mace.com.
42
Section
16(a) Beneficial Ownership Reporting Compliance.
Section
16(a) of the Exchange Act requires Mace’s directors and executive officers, as
well as persons beneficially owning more than 10% of Mace’s outstanding shares
of common stock and certain other holders of such shares (collectively, “Covered
Persons”), to file with the SEC and the Nasdaq Stock Market (the “Nasdaq”),
within specified time periods, initial reports of ownership, and subsequent
reports of changes in ownership, of common stock and other equity securities
of
Mace. Based upon Mace’s review of copies of such reports furnished to it and
upon representations of Covered Persons that no other reports were required,
to
Mace’s knowledge, all of the Section 16(a) filings required to be made by the
Covered Persons with respect to 2007 were made on a timely basis, except that
Form 3 Reports required to be filed within ten days of a person being elected
as
a director were filed late by Gerald T. LaFlamme, John C. Mallon and Dennis
Raefield.
Code
of Ethics and Corporate Governance
The
Company has adopted a Code of Ethics and Business Conduct for directors,
officers (including the chief executive officer, chief financial
officer, and chief accounting officer), and employees. The Code of Ethics and
Business Conduct is posted on our website at www.mace.com.
The
Board
of Directors adopted Corporate Governance Guidelines. Stockholders are
encouraged to review the Corporate Governance Guidelines at our website at
www.mace.com
for
information concerning the Company’s governance practices. Copies of the
charters of the committees of the Board are also available on the Company’s
website.
Nominating
Committee
The
Corporation has a Nominating Committee composed of all independent directors.
The Nominating Committee has a charter that is available for inspection on
the
Company’s web site, www.mace.com
under
the
heading of Investors Relations. The Nominating Committee considers candidates
for Board membership suggested by its members, other Board members, and
management. The Nominating Committee will also consider recommendations by
stockholders of nominees for directors to be elected at the Company’s annual
meeting of stockholders, if they are received on or before September 1 of the
year of the meeting. In evaluating nominations received from stockholders,
the
Committee will apply the same criteria and follow the same process used to
evaluate candidates recommended by members of the Nominating Committee.
Stockholders wishing to recommend a nominee for director are to submit such
nomination in writing, along with any other supporting materials the stockholder
deems appropriate, to the Secretary of the Company at the Company’s offices at
240 Gibraltar Road, Suite 220, Pennsylvania Business Campus, Horsham,
Pennsylvania 19044. There were no material changes to the procedures by which
stockholders may recommend nominees to the Company’s board of directors in 2007.
ITEM
11. EXECUTIVE
COMPENSATION
COMPENSATION
DISCUSSION AND ANALYSIS
Introduction.
The
Compensation Committee is responsible for developing the Company’s philosophy
and structure for executive compensation. Consistent with this philosophy,
on an
annual basis the Compensation Committee reviews and sets the compensation of
the
following executive officers (the “Executive Officers”):
| a) |
Louis
D. Paolino, Jr., the Chairman of the Board, Chief Executive Officer
(“CEO”), and President;
|
|
b)
|
Gregory
M. Krzemien, the Chief Financial Officer (“CFO”) and
Treasurer;
|
|
c)
|
Robert
M. Kramer, the Executive Vice President and General Counsel;
and
|
| d) |
Ronald
R. Pirollo, the Chief Accounting Officer and Corporate Controller.
Mr.
Pirollo was employed for part of 2007, having resigned on July 25,
2007.
|
The
Company’s executive compensation program is based on principles designed to
align executive compensation with the Company’s business strategy of creating
wealth for its shareholders and creating long-term value for the business.
The
Compensation Committee believes in establishing base executive compensation
which is comparable to the median base compensation paid by comparable companies
with bonuses tied to the execution of business strategies approved by the Board.
It is the Company’s philosophy to evaluate its executive compensation structure
with other companies of comparative size, type and geographic scope. The
Company’s compensation policy for executives is intended to further the
interests of the Company and its stockholders by encouraging growth of its
business through securing, retaining, and motivating management employees of
high caliber who possess the skills necessary to the development and growth
of
the Company. This was especially true in 2007, as the Company was in the process
of selling its car washes and focusing its energy on the Security Segment.
The
Compensation Committee believes that the entrepreneurial spirit of Mr. Paolino
is critical to the success of Mace. The Compensation Committee also recognizes
the importance of continuity of management through the time of transition and
believes that Mr. Paolino’s management team is experienced and capable.
43
Compensation
and Benefits Philosophy.
The
compensation and benefits programs for the Executive Officers are designed
with
the goal of providing compensation and benefits that are fair, reasonable and
competitive. The programs are intended to help the Company recruit and retain
qualified executives, motivate executive performance to achieve specific
strategic objectives of the Company, and align the interests of executive
management with the long-term interests of the Company’s
stockholders.
The
design of specific programs is based on the following guiding
principles:
Competitiveness:
Compensation and benefit programs are designed to be competitive with those
provided by companies with whom we compete for talent. In general, programs
are
considered competitive when all factors of a job are considered with
compensation levels at the 50th percentile as measured against these competitor
companies.
Performance:
The Company believes that the best way to accomplish the alignment of
compensation plans with the interest of its executives and shareholders is
to
link pay directly to individual and Company performance.
Cost:
Compensation and benefit programs are designed to be cost-effective and
affordable, ensuring that the interests of the Company’s stockholders are
considered. This is especially critical during this time of transition, as
we
cannot afford to add executives to strengthen our “bench.”
Comparator
Group: The relevant comparator group for compensation and benefit programs
consists primarily of companies of comparative size, similar businesses and
geographic scope. These are the firms with which the Company competes for
talent. The comparator group was chosen to include companies with similar market
capitalization, similar revenue size, direct competitors, and also included
some
companies in areas where the Company intended to do business in the future.
The
comparator group used by the Company was modified in December 2007. The reason
for the modification was to select companies that the Compensation Committee
believed were more closely aligned to the Company.
The
comparator companies used when establishing the compensation for Mr. Paolino’s
August 21, 2006 Employment Contract and Mr. Krzemein’s and Mr. Kramer’s February
12, 2007 Employment Contracts were:
|
Abatix
Corporation
|
DHB
Industries
|
Markwest
Energy Part
|
|||
|
Able
Laboratories
|
Devcon
International
|
Numerex
|
|||
|
Adams
Respiratory
|
ECC
Capital Corp.
|
Pacific
Ethanol Prove
|
|||
|
Allied
Defense Group
|
Emtec
Inc.
|
RAE
Systems
|
|||
|
American
Science Engineering
|
Hansen
Natural Corporation
|
Strattec
Security Corp.
|
|||
|
Atlas
America
|
Integrated
Alarm Services Corp.
|
Sunopta
|
|||
|
Boss
Holdings
|
Inphonic
Inc.
|
Sunpower
Corp
|
|||
|
Ceradyne
|
Identix
|
Taser
International
|
|||
|
Cogent
|
Ionatron
|
Therapeutics
|
|||
|
Cohu
|
Kaanapali
Land LLC
|
Versar
Inc.
|
|||
|
Compudyne
|
Lojack
Corp.
|
Vicon
Industries
|
|||
|
Datatec
Systems
|
MGP
Ingrediants
|
Viisage
Technology
|
|||
|
Waste
Services, Inc.
|
In
addition to the comparator group above, Compensation Resources, Inc., the
Company’s compensation consultant used in connection with Mr. Paolino’s 2006
Employment Contract and Mr. Krzemien’s and Mr. Kramer’s 2007 Employment
Contract, examined a much broader group of companies in varied industries with
a
similar financial profile as Mace. This group included 120 companies, and the
findings from the larger sample indicated that our peer group was statistically
relevant.
The
comparator companies used by the Company were modified in December 2007. The
Hay
Group, the Company’s compensation consultant used the comparator companies set
forth below in connection with determining the second option grant made to
Mr.
Paolino under Mr. Paolino’s Employment Agreement dated August 21,
2006.
|
Command
Security Corp
|
Lasercard
Corp
|
Taser
International, Inc.
|
|||
|
Goldleaf
Financial Solutions
|
Looksmart
Ltd
|
Think
Partnership, Inc.
|
|||
|
Innodata
Isogen, Inc.
|
Napco
Security Systems, Inc
|
Track
Data Corp
|
|||
|
Kintera,
Inc.
|
RAE
Systems, Inc.
|
Tumbleweed
Comm. Co
|
|||
|
Versar,
Inc.
|
44
Roles,
Responsibilities and Charter of the Committee. The
primary purpose of the Compensation Committee is to conduct reviews of the
Company’s general executive compensation policies and strategies, oversee and
evaluate the Company’s overall compensation structure and programs and establish
the compensation for the Executive Officers. Direct responsibilities include,
but are not limited to:
| · |
Determining
and approving the compensation level of the
CEO;
|
| · |
Evaluating
and approving compensation levels of the other Executive
Officers;
|
| · |
Evaluating
and approving all grants of equity-based compensation to Executive
Officers;
|
| · |
Recommending
to the Board compensation policies for outside directors;
and
|
| · |
Designing
performance-based and equity-based incentive plans for the CEO and
other
Executive Officers and reviewing other benefit programs presented
to the
Compensation Committee by the CEO.
|
Overall
Program Components. The
key
components of Mace’s executive compensation package are direct compensation and
company-sponsored benefit plans. These components are administered with the
goal
of providing total compensation that recognizes meaningful differences in
individual performance, is competitive, varies the opportunity based on
individual and corporate performance, and is valued by the Company’s executives.
The Company seeks to achieve its compensation objectives through five key
compensation elements:
|
·
|
A
base salary;
|
|
·
|
Structured
performance bonuses (with respect to Mr. Paolino’s Employment Contract),
Periodic (generally annual) grants of long-term, equity-based compensation
(i.e., longer-term incentives), such as stock options, which may
be
subject to performance-based and/or time-based vesting
requirements;
|
|
Change
in control arrangements that are designed to retain executives and
provide
continuity of management in the event of an actual or threatened
change of
control;
|
|
·
|
Special
awards and/or bonuses for duties that are above and beyond the normal
scope of duties for a given executive;
and
|
|
·
|
Perquisites
and benefits.
|
Competitive
Consideration. In
making
compensation decisions with respect to each element of compensation, the
Compensation Committee considers the competitive market for executives and
compensation levels provided by comparable companies. The Compensation Committee
regularly reviews the compensation practices at companies with which it competes
for talent, including businesses engaged in activities similar to those of
the
Company, as noted in the list above.
The
Compensation Committee does not attempt to set each compensation element for
each executive within a particular range related to levels provided by industry
peers or the comparator group. The Committee does use market comparisons as
one
factor in making compensation decisions. Some of the other factors considered
when making individual executive compensation decisions include individual
contribution and performance, reporting structure, internal pay relationship,
complexity and importance of role and responsibilities, leadership and growth
potential.
Executive
Compensation Practices.
The
Company’s practices with respect to each of the five key compensation elements
identified above, as well as other elements of compensation, are set forth
below, followed by a discussion of the specific factors considered in
determining key elements of fiscal year 2007 compensation for the Executive
Officers.
Base
Salary. Base
salary is designed to attract and retain experienced executives who can drive
the achievement of the Company’s business goals. Base salaries are generally
targeted slightly above the median of the competitive market for Mr. Paolino
and
slightly under the median for the other Executive Officers. While an executive’s
initial base salary is determined through an assessment of comparative market
levels for the position, the major factors in determining base salary increases
are individual performance, pertinent experience and an increase in
responsibility. Executives who are new to a role may have base salaries below
the market median; similarly, an executive who has significant experience and
tenure and has demonstrated sustained superior performance over time may have
salaries above the market median.
The
minimum salary for the CEO, CFO, and General Counsel are established by
employment agreement. The amount of any increase over this minimum for the
CEO,
CFO and General Counsel, and salary in the case of Mr. Pirollo (whose salary
was
not specified in an employment agreement), are determined by the Compensation
Committee based on a variety of factors, including:
|
·
|
The
nature and responsibility of the position and, to the extent available,
salary norms for persons in comparable positions at comparable
companies;
|
|
·
|
The
expertise of the individual executive;
|
|
·
|
The
competitiveness of the market for the executive’s services;
|
|
·
|
The
recommendations of the CEO (except in the case of his own compensation),
and
|
|
·
|
The
amount of structured bonuses paid under the executive’s Employment
Contract (in the case of Mr.
Paolino.
|
45
Where
not
specified by contract, salaries are generally reviewed annually.
Fiscal
Year 2007 Base Salary Decisions.
Among
Mace’s Chief Executive Officer and the other most highly compensated executive
officers whose compensation exceeded $100,000 (the “Named Executive Officers”),
Mr. Paolino, Mr. Krzemien, and Mr. Kramer are employed pursuant to agreements
described under Employment Agreements below. Mr. Paolino’s base salary was not
increased during fiscal year 2007. Mr. Paolino’s base salary of $450,000 was
established in his Employment Contract dated August 21, 2006. Mr. Paolino’s
Employment Contract was entered into after a compensation analysis was conducted
in July and August of 2006. In August of 2006, Mr. Paolino’s base salary was
changed from $400,000 to $450,000 for the remainder of 2006. Mr. Paolino’s base
salary was not changed in 2007. The competitive market was utilized in
establishing the base salary in Mr. Paolino’s Employment Contract. The analysis
and the data showed that cash compensation (base salary and cash bonus) in
2006,
for the CEO position at the 50th
percentile, was $480,000. The Compensation Committee felt that base salary
cash
compensation of $450,000 was sufficient for Mr. Paolino. The Compensation
Committee did not change Mr. Paolino’s base compensation in 2007. When
considering whether or not to change Mr. Paolino’s base compensation, the
Compensation Committee considered the performance of the Company during 2007
and
the amount of structured bonuses paid to Mr. Paolino under the terms of his
Employment Contract. As the Company lost $6.2 million in 2007 and Mr. Paolino
received $637,000 in structured bonuses, the Compensation Committee did not
consider any increase in base salary for Mr. Paolino in 2007. The structured
bonuses paid to Mr. Paolino under the terms of his Employment Agreement are
described under the “Annual
Incentives for Named Executive Officers”
heading
below.
Between
September 2006 and December 2006, compensation analyses were performed for
Mr.
Krzemien’s position, Mr. Kramer’s position and Mr. Pirollo’s position by
Compensation Resources, Inc. Taking into account the results of the studies
and
the performance of the Named Executive Officers, the Compensation Committee
increased the base salary of Mr. Krzemien, Mr. Kramer and Mr. Pirollo and
entered into Employment Contracts, with Mr. Krzemien and Mr. Kramer. Mr.
Krzemien’s base salary was increased to $230,000 from $200,000, Mr. Kramer’s
salary was increased to $230,000 from $210,000, and Mr. Pirollo’s salary was
increased to $180,000 from $160,000. The increases all occurred on February
12,
2007. The increases were based on the competitive marketplace, and the
individual performance of the Named Executive Officers. The base salaries of
Mr.
Krzemien, Mr. Kramer and Mr. Pirollo were not adjusted in 2005 or
2006.
Annual
Incentives for Named Executive Officers.
There is
no formal incentive plan in place that rewards the Named Executive Officers
for
annual results. It is the opinion of the Compensation Committee and management
that due to the current nature of the business, and the Company’s exit from the
car wash segment, an Annual Incentive Plan and appropriate goal setting during
this time of reorganization is extremely difficult, and could potentially reward
non-desired behaviors. Therefore, we believe that equity participation provides
a better line of sight and rewards the executives for increasing shareholder
value and long-term growth of the Company. However, it is the intent of the
Committee to implement a formal Annual Incentive Plan that will focus on key
financial, operational, and individual goals when the business model stabilizes.
Implementation of a formal incentive plan may occur in 2008.
Under
the
terms of Mr. Paolino’s August 21, 2006 Employment Contract, he is entitled to a
Mergers and Acquisition Transaction Bonus (“Transaction Bonus”) as a reward for
his efforts in acquiring new business lines, and divesting those businesses
that
no longer fit the strategic plan for the Company. This Transaction Bonus is
1%
of the transaction value of any car wash sold, and 3% of the value of any other
businesses bought or sold. The 3% reward is reduced by any fees paid to an
investment banker hired by the Company where the investment banker located
the
transaction and conducted all negotiations (no deduction is made for any
fairness opinion fee). In 2007, all Transaction Bonuses totaled $637,000. The
Company’s 2006 Compensation Committee believed that the Company would save
significantly by providing a Transaction Bonus to the CEO, and thereby avoiding
the larger fees that would be paid to an Investment Banking Firm that
specializes in this area. Mr. Paolino brings special skills and abilities to
the
Company, and for which the 2006 Compensation Committee decided to reward and
encourage through the structured Transaction Bonus.
The
Compensation Committee has discretion to provide bonuses to the Executive
Officers for exceptional results, special circumstances, and other
non-quantitative measures. In 2007, no annual bonuses, special awards or
recognition were granted by the Compensation Committee, and none of the
Executive Officers received any annual incentive payments, other than the
Transaction Bonus paid to Mr. Paolino under the terms of his Employment
Contract.
Long-term
Incentive Compensation. The
long-term equity-based award is designed to attract and retain executives and
certain other key employees, and to strengthen the link between compensation
and
increased returns for stockholders through share price appreciation. The Company
uses stock options as its long-term incentive compensation. Awards granted
to
individual executives are discretionary and may be made annually under the
Company’s 1999 Stock Option Plan (the “Option Plan”). The number of shares
granted is at the discretion of the Compensation Committee and are generally
awarded each year for the previous year’s performance, or when the Company
conducts a market-based review to ensure compensation is in line with the
outside world. The options are typically subject to a ten-year life and vest
per
the terms of each option agreement. Options are issued at the market close
price
for the Company’s common stock on the date the option is authorized. The value
of each option is not adjusted during the option’s lifetime.
46
The
Company has adopted a policy on stock option grants that includes the following
provisions relating to the timing of option grants:
|
·
|
All
awards of stock options to Executive Officers are awarded by the
Compensation Committee when each Executive Officer’s compensation and
performance is reviewed by the Compensation
Committee.
|
|
·
|
All
awards of stock options to employees who are not Executive Officers
are
awarded by the Compensation Committee based on the Executive Officer’s
recommendations after review by the Compensation
Committee.
|
|
·
|
Option
grants are not timed with the release of material non-public
information.
|
|
·
|
Except
for inducement grants for new employees, Executive Officers recommend
an
award of stock options based on a review of the employee’s performance and
compensation.
|
|
·
|
The
grant date of the stock options is always the date the Compensation
Committee authorizes the grant or a date in the
future.
|
|
·
|
The
exercise price is the closing price of the underlying common stock
on the
grant date authorized by the Compensation
Committee.
|
|
·
|
Stock
option awards for Executive Officers are promptly announced on a
Form
4 filing.
|
The
long-term incentive program calls for stock options to be granted with exercise
prices of not less than fair market value of the Company’s stock on the date of
authorization and to vest over time, based on continued employment, with rare
exceptions made by the Compensation Committee. The Compensation Committee will
not grant stock options with exercise prices below the market price of the
Company’s stock on the date of authorization, and will not reduce the exercise
price of stock options (except in connection with adjustments to reflect
recapitalizations, stock or extraordinary dividends, stock splits, mergers,
spin-offs and similar events permitted by the relevant plan) without shareholder
approval. New option grants to Executive Officers normally have a term of ten
years.
Long-term
equity grants are positioned at or below the median of the competitive market
when performance is at target levels. When performance falls below target
levels, funding will be below the market median or eliminated. When performance
exceeds target levels, funding may be above the market median.
Overall
grant levels are at the discretion of the Compensation Committee. The size
of
individual long-term equity based awards is determined using compensation
guidelines developed based on individual performance.
Fiscal
Year 2007 Stock Option Decisions.
In
fiscal 2007, the Compensation Committee awarded long-term compensation to
Executive Officers pursuant to the program described above resulting in the
awards of stock options identified in the Grant of Plan Based
Awards
Table.
In
determining the annual grant of options, the Committee considered any
contractual requirements, market data on total compensation packages, the value
of long-term incentive grants at targeted external companies, total shareholder
return, share usage and shareholder dilution and, except in the case of the
award to the Chief Executive Officer, the recommendations of the Chief Executive
Officer.
Mr.
Paolino’s Employment Contract provides that he was to receive an option grant
within five days of August 21, 2007, based on a market assessment. The amount
of
option shares which were required to be granted are determined by the Company’s
Compensation Committee, based on a current compensation study of the Chief
Executive Officer position. The amount of option shares, at time of grant,
plus
the $450,000 annual compensation paid to Mr. Paolino, is to equal no less than
the “market consensus total direct compensation” amount paid by comparable
companies to their chief executive officers, as set forth in a compensation
study to be obtained by the Compensation Committee. The Compensation Committee
obtained a compensation study for the Chief Executive Officer position from
the
Hay Group. The compensation study indicated that the median market consensus
for
Total Direct Compensation was $722,834 and the 75th
percentile market consensus for total direct compensation was $970,238. The
Compensatory Committee decided to award Mr. Paolino with an amount of options
that would equal $335,800 in Black Scholes value. On February 22, 2008, Mr.
Paolino was issued 300,000 options in satisfaction of the employment contract
obligation. The options with respect to the grant are fully vested on the date
of the grant.
Between
September 2006 and December 2006, compensation analyses were performed on Mr.
Krzemien’s, Mr. Kramer’s and Mr. Pirollo’s positions. Option grants were made to
bring Mr. Krzemien’s, Mr. Kramer’s and Mr. Pirollo’s compensation closer to the
level of market consensus of the comparator group. In February 2007, new
employment agreements were signed with Mr. Kramer and Mr. Krzemien. The new
agreements provided that Mr. Kramer and Mr. Krzemien would each receive grants
of 60,000 options, of which one-third vested immediately on the date of grant,
February 12, 2007, one-third vests one year from the date of the grant, and
the
balance two years from the grant. These options have a ten year life. Mr.
Pirollo was granted 25,000 options on February 12, 2007 with the same vesting
schedule and life.
47
Change
of Control Arrangements. The
Company entered into a change of control arrangement with Mr. Paolino in 2006
and with Mr. Kramer and Mr. Krzemien in 2007. The Company entered into the
arrangements in order to encourage the executives to remain employed with the
Company during a period when the Company is changing its business from the
car
wash industry to the security business and e-commerce business. The Compensation
Committee was concerned that the uncertain atmosphere could result in Mr.
Paolino, Mr. Kramer, and Mr. Krzemien seeking employment at another company.
The
2006 and 2007 Compensation Committee believed that it was important to retain
its key executives as the Company transitioned its business.
Mr.
Paolino’s change in control payment is linked to the single trigger of a change
of control event. Mr. Paolino’s change of control payment is in the amount of
2.99 times his five-year average compensation. The Compensation Committee
believed that it was appropriate for the Chief Executive Officer to have a
single trigger, which would result in a change of control payment. The 2.99
amount was selected as it was under the threshold of the amount where an excise
tax under Section 280G of the Internal Revenue Code would be imposed.
Compensation Resources, Inc., the Company’s compensation consultant advised the
Compensation Committee that a payment of 2.99 times total compensation was
prudent, and that a single trigger was used among companies in the comparator
group. If Mr. Paolino is paid the change of control payment, he can be
discharged by the Company, without cause, with no further payment.
Mr.
Kramer’s and Mr. Krzemien’s payments are linked to three separate events. Mr.
Kramer and Mr. Krzemien receive a one-time payment of their base annual salary
(currently $230,000) in the event that both a change of control occurs and
Mr.
Paolino no longer is Chief Executive Officer of the Company (“Double Trigger”).
After the Double Trigger occurs, if the Company chooses to terminate Mr. Kramer
or Mr. Krzemien, respectively, or the Company breaches their respective
employment agreement, the affected Executive Officer would receive an additional
one-time payment of his base annual salary (“Triple Trigger”). The Compensation
Committee, after consultation with Compensation Resources, Inc., believed the
lesser payment and the Double Trigger and Triple Trigger was sufficient to
encourage the retention of Mr. Kramer and Mr. Krzemien.
Additionally,
as a further inducement to encourage the continued employment of Mr. Kramer,
Mr.
Krzemien and Mr. Pirollo, the options that were issued to them on February12,
2007 all vest immediately upon a change of control.
Details
of Change of Control Provision for Mr. Paolino. Louis
D.
Paolino, Jr., in August 2006, received a new three-year employment contract.
Upon a change in control, Mr. Paolino is entitled to a payment of 2.99 times
Mr.
Paolino’s average total compensation (base salary plus any bonuses plus the
value of any option awards, valued using the Black Scholes method) over the
past
five years. If Mr. Paolino receives the change of control payment, his
employment can then be terminated by the Company without cause and with no
further payment. Prior to a change of control payment, the Company can terminate
Mr. Paolino, without cause upon the payment of 2.99 times Mr. Paolino’s
five-year average total compensation. The Company computes the 2.99 payment
as
of December 31, 2007 as $3,851,000.
Details
of Change of Control Provision for Mr. Krzemien. Mace
currently employs Gregory M. Krzemien, its Chief Financial Officer and
Treasurer, under an employment contract entered into on February 12, 2007.
Under
the employment contract, Mr. Krzemien is entitled to receive a one time
retention payment equal to his then annual base compensation upon the occurrence
of both of: (a) a change in control of the Company; and (b) Louis D. Paolino,
Jr. ceasing to be the Chief Executive Officer of the Company. Additionally,
after Mr. Krzemien is paid the retention payment, he is entitled to receive
a
termination payment equal to his then annual base compensation, if his
employment contract is terminated without cause, or if the Company breaches
his
employment contract. As of December 31, 2007, the annual base compensation
of
Mr. Krzemien was $230,000. If a change of control occurred and Mr. Paolino
was
terminated as the Chief Executive Officer on December 31, 2007, Mr. Krzemien
would have received a retention payment of $230,000. Additionally, if on
December 31, 2007, a change in control occurred and Mr. Paolino was terminated
as the Chief Executive Officer, and the Company decided to either terminate
Mr.
Krzemien without cause or the Company breached Mr. Krzemien’s employment
contract, Mr. Krzemien would have been paid a total of $460,000.
Details
of Change of Control Provision for Mr. Kramer. Mace
currently employs Robert Kramer, its Executive Vice President and General
Counsel, under an employment contract entered on February 12, 2007. Under the
employment contract, Mr. Kramer is entitled to receive a one-time retention
payment equal to his then annual base compensation upon the occurrence of both
of: (a) a change in control of the Company and (b) Louis D. Paolino, Jr. ceasing
to be the Chief Executive Officer of the Company. Additionally, after Mr. Kramer
is paid the retention payment, he is entitled to receive a termination payment
equal to his then annual base compensation, if his employment contract is
terminated without cause, or if the Company breaches his employment contract.
As
of December 31, 2007, the annual base compensation of Mr. Kramer was $230,000.
If a change of control had occurred and Mr. Paolino was terminated as the Chief
Executive Officer on December 31, 2007, Mr. Kramer would have received a
retention payment of $230,000. Additionally, if on March 15, 2007, a change
in
control had occurred and Mr. Paolino was terminated as the Principal Executive
Officer, and the Company decided to either terminate Mr. Kramer without cause
or
the Company breached Mr. Kramer’s employment contract, Mr. Kramer would have
been paid a total of $460,000.
48
Benefits
and Perquisites. With
limited exceptions, the Committee supports providing benefits and perquisites
to
the Executive Officers that are substantially the same as those offered to
other
officers of the Company. In the case of the CEO, the Company allowed his
assistant to aid him with his personal business during the first half of 2007.
There is no incremental cost to the Company of allowing Mr. Paolino’s assistant
to aid him with his personal business. In fiscal 2007, Mr. Paolino, per his
contract, was entitled to $1,500 per month that the Company uses to lease him
a
premium vehicle. Mr. Kramer and Mr. Krzemien as of February 12, 2007 became
entitled to a $700 per month car allowance. Mr. Pirollo received a $500 per
month car allowance.
Total
Compensation. In
making
decisions with respect to elements of an Executive Officers’ compensation, the
Compensation Committee considers the total compensation that may be awarded
to
the executive, including salary, special awards/bonus and long-term incentive
compensation. In addition, in reviewing and approving employment agreements
for
Executive Officers, the Compensation Committee considers the other benefits
to
which the officer is entitled by the agreement, including compensation payable
upon termination of the agreement under a variety of circumstances. The
Compensation Committee’s goal is to award compensation that is reasonable when
all elements of potential compensation are considered.
Policy
with respect to the $1 million deduction limit. Section
162(m) of the Internal Revenue Code generally disallows a tax deduction to
public corporations for compensation over $1,000,000 paid for any fiscal year
to
the corporation’s Principal Executive Officer and the four other most highly
compensated executive officers as of the end of the fiscal year. However, the
statute exempts qualifying performance-based compensation from the deduction
limit if certain requirements are met.
The
Compensation Committee designs certain components of Executive Officer
compensation to permit full deductibility. The Compensation Committee believes,
however, that shareholder interests are best served by not restricting the
Compensation Committee’s discretion and flexibility in crafting compensation
programs, even though such programs may result in certain non-deductible
compensation expenses. Accordingly, the Compensation Committee has from time
to
time approved elements of compensation for certain officers that are not fully
deductible, and reserves the right to do so in the future in appropriate
circumstances.
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The
Compensation Committee of the Company’s Board of Directors for year ended
December 31, 2007 consisted of directors (i) Burton Segal, Mark Alsentzer,
and
Constantine N. Papadakis, Ph.D. from January 1, 2007 to December 14, 2007,
and
(ii) Constantine Papadakis, Ph.D., Dennis Raefield and John C. Mallon from
December 14, 2007 to December 31, 2007. No executive officer of Mace served
as a
director or compensation committee member of any entity of which Messrs. Segal,
Alsentzer, Papadakis, Mallon or Raefield was an executive officer or
director.
COMPENSATION
COMMITTEE REPORT
The
Compensation Committee of the Company’s Board of Directors consists of directors
Constantine N. Papadakis, Ph.D, John C. Mallon and Dennis Raefield of whom
the
Board has determined are independent pursuant to the Nasdaq Stock Market, Inc.’s
Marketplace Rules. This report shall not be deemed incorporated by reference
into any filing under the Securities Act or the Exchange Act, by virtue of
any
general statement in such filing incorporating this Form 10-K by reference,
except to the extent that the Company specifically incorporates the information
contained in this section by reference, and shall not otherwise be deemed filed
under either the Securities Act or the Exchange Act.
The
Compensation Committee has reviewed and discussed with management the Executive
Compensation Discussion and Analysis contained in this Form 10-K Annual Report
for year ended December 31, 2007. Based on the review and discussions, the
Compensation Committee recommended to the Board of Directors that the Executive
Compensation Discussion and Analysis be included in the Proxy Statement.
The
Compensation Committee of the Board of Directors
Constantine
N. Papadakis, Ph.D.
John
C.
Mallon
Dennis
Raefield
49
EXECUTIVE
COMPENSATION TABLES
AND NARRATIVES
The
following table provides summary information concerning cash and certain other
compensation paid or accrued by Mace to, or on behalf of the Named Executive
Officers for the years ended December 31, 2007 and 2006.
|
SUMMARY
COMPENSATION TABLE(1)
|
|||||||||||||||||||
|
Name
and Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)(2)
|
Option
Awards
($)
(3)
|
All
Other
Compensation
($) (4)
|
Total
|
|||||||||||||
|
Louis
D. Paolino, Jr.
Chairman
of the Board, President and Chief Executive Officer
|
2007
2006
|
$
$
|
450,000
417,307
|
$
$
|
637,000
-
|
$
$
|
415,630
790,119
|
$
$
|
19,545
26,728
|
$
$
|
1,522,175
1,234,154
|
||||||||
|
Robert
M. Kramer
Executive
Vice President, General Counsel and Secretary
|
2007
2006
|
$
$
|
227,308
210,000
|
$
$
|
-
-
|
$
$
|
109,721
70,812
|
$
$
|
7,431
4,070
|
$
$
|
344,460
284,882
|
||||||||
|
Gregory
M. Krzemien
Chief
Financial Officer and Treasurer
|
2007
2006
|
$
$
|
225,962
200,000
|
$
$
|
-
-
|
$
$
|
101,742
56,650
|
$
$
|
7,731
1,809
|
$
$
|
335,435
258,459
|
||||||||
|
Ronald
R. Pirollo (5)
Chief
Accounting Officer and Corporate Controller
|
2007
2006
|
$
$
|
103,385
160,000
|
$
$
|
-
-
|
$
$
|
17,455
23,604
|
$
$
|
2,907
5,085
|
$
$
|
123,747
188,689
|
||||||||
(1) The
Company (i) granted no restricted stock awards, and (ii) maintained no other
long-term incentive plan for any of the Named Executive Officers, in each case
during the fiscal year ended December 31, 2007. Additionally, the Company has
never issued any stock appreciation rights (SARs).
(2) Total
of
Transaction Bonus paid to Mr. Paolino during 2007 under the terms of his
Employment Contract.
(3) The
amounts in this column reflect the dollar amount recognized for financial
statement reporting purposes for the fiscal years ended December 31, 2007 and
2006, in accordance with SFAS 123(R) for all existing stock option awards and
thus include amounts from awards granted in and prior to 2007. Assumptions
used
in the calculation of this amount are included in Note 2 to the Company’s
Audited Financial Statements for the fiscal year ended December 31, 2007.
(4)
Mr.
Paolino receives a car at a lease cost of $1,500 per month through May 2007
and
a car allowance of $1,500 per month beginning in June 2007 for the remainder
of
2007 upon expiration of his then current car lease. Mr. Paolino also received
a
discount of $1,545 and $8,728 on the purchase of security products from the
Company during the fiscal years ended December 31, 2007 and 2006, respectively.
Mr. Krzemien, Mr. Kramer, and Mr. Pirollo received reimbursement for certain
commuting expenses. Additionally, during the first half of 2007 and in 2006
the
Company allowed Mr. Paolino’s assistant to aid him with his personal business,
which has no incremental cost to the Company.
(5) Mr.
Pirollo resigned on July 25, 2007.
50
Louis
D. Paolino, Jr. Employment Agreement
Mace
currently employs Louis D. Paolino, Jr., as its President and Chief Executive
Officer under a three-year Employment Contract dated August 21, 2006 and
expiring on August 21, 2009 (“Paolino Employment Agreement”). The Company
obtained a Compensation Study from Compensation Resources, Inc., an independent
third party consulting firm, prior to entering into the Paolino Employment
Agreement.
The
initial base salary under the Paolino Employment Agreement is $450,000. The
Paolino Employment Agreement provides for three separate option grants to Mr.
Paolino for common stock under Mace’s 1999 Stock Option Plan at an exercise
price equal to the close of market on the date of grant. The first grant was
issued on August 21, 2006 and was an option exercisable into 450,000 shares
of
common stock at an exercise price of $2.30. The second options grant (“Second
Grant”) was to be awarded within five days of the August 21, 2007 (this award in
the amount of 300,000 was made on February 22, 2008) and the third options
grant
(“Third Grant”) is to be awarded within five days of August 21, 2008. The amount
of shares of the Second Grant and Third Grant (“Option Shares”) shall be
exercisable into is to be determined by the Company’s Compensation Committee,
based on a then current compensation study of the Principal Executive Officer
position. The amount of Option Shares, at time of grant, plus the $450,000
annual compensation paid to Mr. Paolino, is to equal no less than the “market
consensus total direct compensation,” amount paid by the comparable companies to
their chief executive officers, as set forth in a compensation study to be
obtained by the Compensation Committee. The options with respect to each of
the
grants shall be fully vested on the date of the grant.
Under
the
Paolino Employment Agreement, Mr. Paolino is to receive a bonus of (a) one
percent (1%) of the sales price of any car washes sold (excepting one car wash
under contract on the date of the Paolino Employment Agreement and which has
been sold); and (b) three percent (3%) of the purchase or sale price of any
other business sold or purchased. The three (3%) amount is reduced by the amount
of any fee paid to an investment banker hired by the Company where the
investment banker located the transaction and conducted all negotiations. The
three percent (3%) commission is not reduced for a fee paid to any investment
banker for a fairness opinion or other valuation. In 2007 the described bonus
paid to Mr. Paolino equaled $637,000.
Upon
termination of employment by the Company without cause or upon a change in
control, Mr. Paolino is entitled to a payment of 2.99 times Mr. Paolino’s
average total compensation (base salary plus any bonuses plus the value of
any
option award, valued using the Black Scholes method) over the past five years.
If Mr. Paolino receives the change of control bonus, his employment can then
be
terminated by the Company without cause and without the payment of a second
2.99
times payment. The Company computes the 2.99 payment as of December 31, 2007
as
$3,851,000.
Under
the
Paolino Employment Agreement, Mr. Paolino receives a car at a lease cost of
$1,500 per month and Company standard medical and other employee benefits.
Mr.
Paolino is prohibited from competing with the Company during his period of
employment and for a three-month period following a termination of employment.
Gregory
M. Krzemien Employment Agreement
Mace
currently employs Gregory M. Krzemien as its Chief Financial Officer and
Treasurer under an Employment Contract dated February 12, 2007 and expiring
on
February 12, 2010 (“Krzemien Employment Agreement”). The Company’s Compensation
Committee obtained a Compensation Study from Compensation Resources, Inc. prior
to entering into the Krzemien Employment Agreement. The initial base salary
under the Krzemien Employment Agreement is $230,000. In accordance with the
Krzemien Employment Agreement, Mr. Krzemien received an option grant for 60,000
shares of common stock under the Company’s Stock Option Plan at an exercise
price of $2.73, the close of market on the date of grant. The options were
granted on February 12, 2007. The options vested one-third on the date of the
grant, one-third on February 12, 2008, and one-third on February 12,
2009.
Under
the
Krzemien Employment Agreement, Mr. Krzemien will receive a one-time retention
payment equal to Mr. Krzemien’s then annual base compensation (currently
$230,000) upon the occurrence of both of (a) a change in control of the Company
and (b) Louis D. Paolino, Jr. ceasing to be Chief Executive Officer of the
Company. After Mr. Krzemien receives the retention payment, if Mr. Krzemien’s
employment is then terminated without cause or if the Company breaches the
Krzemien Employment Agreement, Mr. Krzemien is entitled to an additional
one-time payment equal to Mr. Krzemien’s then annual base compensation. The
current total amount of both the retention payment and termination payment
is
$460,000.
Mr.
Krzemien receives a car allowance of $700 which began in February 2007 and
the
Company’s standard medical and other employee benefits. Mr. Krzemien is
prohibited from competing with the Company during his period of employment
and
for a three-month period following termination of employment.
51
Robert
M. Kramer Employment Agreement
Mace
currently employs Robert M. Kramer as its Executive Vice President, General
Counsel and Secretary under an Employment Contract dated February 12, 2007
and
expiring on February 12, 2010 (“Kramer Employment Agreement”). The Company’s
Compensation Committee obtained a Compensation Study from Compensation
Resources, Inc. prior to entering into the Kramer Employment Agreement. The
initial base salary under the Kramer Employment Agreement is $230,000. In
accordance with the Kramer Employment Agreement, Mr. Kramer received an option
grant for 60,000 shares of common stock under the Company’s Stock Option Plan at
an exercise price of $2.73, the close of market on the date of grant. The
options were granted on February 12, 2007. The options vested one-third on
the
date of the grant, one-third on February 12, 2008 and one-third on February
12,
2009.
Under
the
Kramer Employment Agreement, Mr. Kramer will receive a one-time retention
payment equal to Mr. Kramer’s then annual base compensation (currently $230,000)
upon the occurrence of both of (a) a change in control of the Company and (b)
Louis D. Paolino, Jr. ceasing to be Principal Executive Officer of the Company.
After Mr. Kramer receives the retention payment, if Mr. Kramer’s employment is
then terminated without cause or if the Company breaches the Kramer Employment
Agreement, Mr. Kramer is entitled to an additional one-time payment equal to
Mr.
Kramer’s then annual base compensation. The current total amount of both the
retention payment and termination payment is $460,000.
Mr.
Kramer receives a car allowance of $700 per month beginning in February 2007,
and the Company’s standard medical and other employee benefits. Mr. Kramer is
prohibited against competing with the Company during his period of employment
and for a three-month period following termination of employment.
Ronald
R. Pirollo Employment Agreement
Mr.
Pirollo was employed during all of 2006. Mr. Pirollo resigned on July 25, 2007.
The primary terms of the employment agreement of Ronald R. Pirollo expired
on
March 26, 2003. Mr. Pirollo or the Company was entitled to terminate Mr.
Pirollo’s employment at any time. Mr. Pirollo’s salary during 2006 through March
15, 2007 was $160,000 annually. From March 15, 2007 to Mr. Pirollo’s
resignation, his annual salary was $180,000. On June 19, 2007, Mr. Pirollo
and
the Company entered into a Retention Agreement providing for Mr. Pirollo to
be
paid a lump sum cash payment equal to Mr. Pirollo’s then current annual base
salary ($180,000) upon the occurrence of both of the following while Mr. Pirollo
was an employee: (a) Louis D. Paolino, Jr. no longer serving as the Company’s
Chief Executive Officer and (b) an event constituting a change in control of
the
Company as defined in the Retention Agreement. The Retention Agreement is no
longer in effect as Mr. Pirollo is no longer an employee of the
Company.
Potential
Payments upon Termination or Change of Control
For
a
description of compensation that would become payable under existing
arrangements in the event of a change of control or termination of each Named
Executive officers employment under several different circumstances, see the
discussion under Change of Control Arrangements in the Compensation Discussion
and Analysis Sub-Section which is part of the Executive Compensation Section
of
this report. The following table quantifies the amounts payable upon a change
of
control or the termination of each of the current Named Executive
Officers.
Change
of
Control Payment and Termination Payments - Louis D. Paolino, Jr., Chief
Executive Officer
|
Event
Triggering Payment
|
Severance
Payment(1)
|
Acceleration
of Option Awards(10)
|
|||||
|
Change
of Control(2)
|
$
|
3,851,000
|
$
|
-
|
|||
|
Termination
by Company before Change of Control(3)
|
$
|
3,851,000
|
$
|
-
|
|||
|
Termination
by Company after Change of Control Payment(4)
|
$
|
-
|
$
|
-
|
|||
|
Termination
by Mr. Paolino(5)
|
$
|
3,851,000
|
$
|
-
|
|||
Change
of
Control Payment and Termination Payments - Gregory Krzemien, Chief Financial
Officer
|
Event
Triggering Payment
|
Severance
Payment(7)
|
Acceleration
of Option Awards (10)
|
|||||
|
Change
of Control and Mr. Paolino ceasing to be CEO(2)(6)
|
$
|
230,000
|
$
|
-
|
|||
|
Termination
by Company without Cause(8)
|
$
|
230,000
|
$
|
-
|
|||
|
Termination
by Mr. Krzemien(9)
|
$
|
230,000
|
$
|
-
|
|||
52
Change
of
Control Payment and Termination Payments - Robert M. Kramer, Executive Vice
President, General Counsel and Secretary
|
Event
Triggering Payment
|
Severance
Payment(7)
|
Acceleration
of Option Awards (10)
|
|||||
|
Change
of Control and Mr. Paolino ceasing to be CEO(2)(6)
|
$
|
230,000
|
$
|
-
|
|||
|
Termination
by Company without Cause(8)
|
$
|
230,000
|
$
|
-
|
|||
|
Termination
by Mr. Kramer(9)
|
$
|
230,000
|
$
|
-
|
|||
(1)
The
amount to be paid is 2.99 times Mr. Paolino’s average total compensation (base
salary plus any bonuses plus the value of any option award, valued using the
Black Scholes formula) over the past five years. The stated amount was
calculated based on Mr. Paolino’s average total compensation over the past five
years as of December 31, 2007.
(2)
A
Change of Control Event is defined in the Named Executive Officer’s Employment
Agreement as any of the events set forth in items (i) through and including
(iii) below: (i) the acquisition in one or more transactions by any “Person,”
excepting the employee, as the term “Person” is used for purposes of Sections
13(d) or 14(d) of the Exchange Act, of “Beneficial Ownership” (as the term
beneficial ownership is used for purposes or Rule 13d-3 promulgated under the
Exchange Act) of the fifty percent (50%) or more of the combined voting power
of
the Company’s then outstanding voting securities (the “Voting Securities”), for
purposes of this item (i), Voting Securities acquired directly from the Company
and from third parties by any Person shall be included in the determination
of
such Person’s Beneficial Ownership of Voting Securities; (ii) the approval by
the shareholders of the Company of: (A) a merger, reorganization or
consolidation involving the Company, if the shareholders of the Company
immediately before such merger, reorganization or consolidation do not or will
not own directly or indirectly immediately following such merger, reorganization
or consolidation, more than fifty percent (50%) of the combined voting power
of
the outstanding Voting Securities of the corporation resulting from or surviving
such merger, reorganization or consolidation in substantially the same
proportion as their ownership of the Voting Securities immediately before such
merger, reorganization or consolidation, or (B) a complete liquidation or
dissolution of the Company, or (C) an agreement for the sale or other
disposition of 50% or more of the assets of the Company and a distribution
of
the proceeds of the sale to the shareholders; or (iii) the acceptance by
shareholders of the Company of shares in a share exchange, if the shareholders
of the Company immediately before such share exchange do not or will not own
directly or indirectly following such share exchange own more than fifty percent
(50%) of the combined voting power of the outstanding Voting Securities of
the
corporation resulting from or surviving such share exchange in substantially
the
same proportion as the ownership of the Voting Securities outstanding
immediately before such share exchange.
(3)
Termination by majority vote of the Board of Directors, without cause. The
payment is not due upon a termination based on the inability of Mr. Paolino
to
perform his duties for 120 consecutive days because of illness, or termination
based on Mr. Paolino causing $500,000 or more in expenses to the Company due
to
Mr. Paolino engaging in willful misconduct or a felony.
(4)
If
the Change of Control Payment is made to Mr. Paolino, the Board of Directors
may
terminate him without any further payment.
(5)
If
the Company requires Mr. Paolino to perform his duties from an office more
than
a fifty mile radius from Fort Lauderdale, Florida or changes Mr. Paolino’s
duties and authority as the Company’s Chief Executive Officer, Mr. Paolino may
terminate his Employment Agreement, and the Company is then obligated to pay
Mr.
Paolino 2.99 times Mr. Paolino’s average total compensation (base salary plus
any bonuses plus the value of any option award, valued using the Black Scholes
formulae) over the past five years. The stated amount was calculated based
on
Mr. Paolino’s average total compensation over the past five years as of December
31, 2007.
(6)
Payment is due (“Retention Payment”) on the occurrence of a Change of Control
Event plus Mr. Paolino no longer serving as the Company’s Chief Executive
Officer, either before or after the Change of Control Event.
(7)
Payment is the amount of the Named Executive Officer’s then current annual base
salary. The named Executive’s current base salary as of December 31, 2007 is
$230,000.
(8)
The
payment is not due upon a termination based on the inability of the Named
Executive Officer to perform his duties for 120 consecutive days because of
illness or termination or based on the Named Executive Officer being terminated
for Cause. Cause is the Named Executive Officer committing fraud,
misrepresentation, theft or embezzlement against the Company, conviction of
a
felony, material intentional violations of the Company’s policies or a material
breach by the Named Executive Officer of his Employment Agreement. The Company
does not have the right to terminate without cause, until the Retention Payment
has been paid (see footnote 6 above).
(9)
If
the Company breaches or defaults the Named Executive Officer’s Employment
Agreement, the Named Executive Officer may terminate his Employment Agreement
and the Company is then obligated to pay the Named Executive Officer his then
annual base salary. Upon termination by the Named Executive Officers upon a
breach by the Company, the Company remains obligated to pay the Retention
Payment, if it would have become due but for the breach or default of the
Company.
(10)
Assumes exercise of all in-the-money stock options for which vesting accelerated
at $2.03 per share (the closing price of the Company’s common stock on December
31, 2007).
53
Grants
of Stock Options
The
following table sets forth certain information concerning individual grants
of
stock options to the Named Executive Officers during the fiscal year ended
December 31, 2007.
GRANTS
OF PLAN-BASED AWARDS
|
Name
|
Grant
Date
|
All
other Option
Awards:
Number
of Securities
Underlying
Options
|
Exercise
Price of Option Awards per Share
|
Grant
Date Fair Value of Stock and Option Awards
|
|||||||||
|
Louis
D. Paolino, Jr.
|
-
|
-
|
-
|
-
|
|||||||||
|
Gregory
M. Krzemien
|
2/12/2007
|
60,000
|
$
|
2.73
|
$
|
111,726
|
|||||||
|
Robert
M. Kramer
|
2/12/2007
|
60,000
|
$
|
2.73
|
$
|
111,726
|
|||||||
|
Ronald
R. Pirollo
|
2/12/2007
|
25,000
|
$
|
2.73
|
$
|
46,553
|
|||||||
On
February 22, 2008, Mr. Paolino received an option to purchase 300,000 shares
of
common stock at an exercise price of $1.69 per share. The option grant was
based
on the competitive total direct compensation in the marketplace. The Black
Scholes value of the option grant, plus Mr. Paolino’s base salary, was intended
to bring Mr. Paolino to an appropriate level for similarly situated executives.
The market study prepared by Hay Group indicated that the median market
consensus for Total Direct Compensation (Cash Compensation plus Equity) was
$722,834 and the 75th percentile market consensus for Total Direct Compensation
was $970,238. The Compensation Committee decided to award Mr. Paolino with
an
amount of options that would equal $335,800 in Black Scholes value. The option
to purchase 300,000 shares was immediately exercisable. The intent was to reward
Mr. Paolino for his performance, and provide him with the motivation to stay
with the Company and grow the stock price to benefit the shareholders. Under
Mr.
Paolino’s August 21, 2006, Employment Agreement, the option was required to have
been awarded within five days of August 21, 2007. The Compensation Committee
did
not make the stock option award by the required date because the Compensation
Committee wanted to take more time to decide on the proper amount of the
award.
Aggregated
Option and Warrant Exercises in Last Fiscal Year
The
following table sets forth certain information regarding stock options held
by
the Named Executive Officers during the fiscal year ended December 31, 2007,
including the number of exercisable and un-exercisable stock options as of
December 31, 2007 by grant. No options were exercised by any of the Named
Executive Officers during the fiscal year ended December 31, 2007.
54
|
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
|
||||||||||||||||
|
Name
|
Number
of Securities
Underlying
Unexercised Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Option
Exercise
Price
($)
|
Option
Grant Date
|
Option
Expiration
Date
|
|||||||||||
|
Louis
D. Paolino, Jr.(1)
|
5,000
|
-
|
2.56
|
10/18/2000
|
10/18/2010
|
|||||||||||
|
87,500
|
-
|
2.36
|
4/4/2002
|
4/4/2012
|
||||||||||||
|
150,000
|
-
|
1.32
|
7/14/2003
|
7/14/2013
|
||||||||||||
|
568,182
|
-
|
4.21
|
11/2/2004
|
11/2/2014
|
||||||||||||
|
14,000
|
-
|
5.35
|
11/19/2004
|
11/19/2014
|
||||||||||||
|
150,000
|
-
|
5.35
|
11/19/2004
|
11/19/2014
|
||||||||||||
|
15,000
|
-
|
2.64
|
10/31/2005
|
10/31/2015
|
||||||||||||
|
100,000
|
50,000
|
2.40
|
3/23/2006
|
3/23/2016
|
||||||||||||
|
450,000
|
-
|
2.30
|
8/21/2006
|
8/21/2016
|
||||||||||||
|
Gregory
M. Krzemien (2)
|
62,500
|
-
|
5.38
|
3/26/1999
|
3/26/2009
|
|||||||||||
|
50,000
|
-
|
1.38
|
3/30/2001
|
3/30/2011
|
||||||||||||
|
37,500
|
-
|
2.36
|
4/4/2002
|
4/4/2012
|
||||||||||||
|
150,000
|
-
|
1.32
|
7/14/2003
|
7/14/2013
|
||||||||||||
|
50,000
|
-
|
5.35
|
11/19/2004
|
11/19/2014
|
||||||||||||
|
40,000
|
20,000
|
2.40
|
3/23/2006
|
3/23/2016
|
||||||||||||
|
20,000
|
40,000
|
2.73
|
2/12/2007
|
2/12/2017
|
||||||||||||
|
Robert
M. Kramer (3)
|
81,395
|
-
|
5.38
|
3/26/1999
|
3/26/2009
|
|||||||||||
|
18,605
|
-
|
11.00
|
12/27/1999
|
12/27/2009
|
||||||||||||
|
5,000
|
-
|
2.56
|
10/18/2000
|
10/18/2010
|
||||||||||||
|
50,000
|
-
|
5.38
|
3/30/2001
|
3/30/2011
|
||||||||||||
|
37,500
|
-
|
2.36
|
4/4/2002
|
4/4/2012
|
||||||||||||
|
150,000
|
-
|
1.32
|
7/14/2003
|
7/14/2013
|
||||||||||||
|
37,500
|
-
|
4.21
|
11/2/2004
|
11/2/2014
|
||||||||||||
|
75,000
|
-
|
5.35
|
11/19/2004
|
11/19/2014
|
||||||||||||
|
50,000
|
25,000
|
2.40
|
3/23/2016
|
3/23/2016
|
||||||||||||
|
20,000
|
40,000
|
2.73
|
2/12/2007
|
2/12/2017
|
||||||||||||
| (1) |
All
options are fully vested, except for the option for 150,000 shares
granted
to Mr. Paolino on March 23, 2006, of which 100,000 options are vested
and
50,000 are not vested. The 50,000 unvested options vest on March
23,
2008.
|
| (2) |
All
options are fully vested, except for the option for 60,000 shares
granted
to Mr. Krzemien on March 23, 2006 and the option for 60,000 shares
granted
on February 12, 2007. The 20,000 shares unvested of the March 23,
2006
grant, fully vest on March 23, 2008. 20,000 shares of the 60,000
shares
granted on February 12, 2007 vested immediately, 20,000 shares vested
on
February 12, 2008 and 20,000 will vest on February 12,
2009.
|
| (3) |
All
options are fully vested, except for the option for 75,000 shares
granted
to Mr. Kramer on March 23, 2006 and the option for 60,000 shares
granted
on February 12, 2007. The 25,000 shares unvested of the March 23,
2006
grant fully vest on March 23, 2008. 20,000 shares of the 60,000 shares
granted on February 12, 2007 vested immediately, 20,000 shares vested
on
February 12, 2008 and 20,000 will vest on February 12,
2009
|
55
DIRECTOR
COMPENSATION
The
following table provides summary information concerning cash and certain other
compensation paid or accrued by Mace to or on behalf of Mace’s Directors for the
year ended December 31, 2007, other than Louis D. Paolino, Jr. whose
compensation is described on page 53 of this Form 10-K Annual Report for fiscal
year ended December 31, 2007.
|
Name
|
Fees
Earned
or
Paid
in
Cash
($)
|
Option
Awards
($)
(1)
|
All
Other
Compensation
($)
|
Total
|
|||||||||
|
Constantine
N. Papadakis, Ph.D
|
$
|
34,500
|
$
|
-
|
$
|
-
|
$
|
34,500
|
|||||
|
Mark
Alsentzer
|
$
|
32,000
|
$
|
-
|
$
|
-
|
$
|
32,000
|
|||||
|
Burton
Segal
|
$
|
32,000
|
$
|
-
|
$
|
-
|
$
|
32,000
|
|||||
|
Matthew
Paolino (2)
|
$
|
25,500
|
$
|
-
|
$
|
-
|
$
|
25,500
|
|||||
|
Dennis
Raefield
|
$
|
2,000
|
$
|
-
|
$
|
-
|
$
|
2,000
|
|||||
|
Gerald
T. LaFlamme
|
$
|
1,500
|
$
|
-
|
$
|
-
|
$
|
1,500
|
|||||
|
John
C. Mallon
|
$
|
1,500
|
$
|
-
|
$
|
-
|
$
|
1,500
|
|||||
|
1.
|
The
aggregate options outstanding at December 31, 2007 were as follows:
Mark
Alsentzer-107,500 options; Constantine Papadakis, Ph.D.-102,500 options;
Burton Segal-55,000 options; and Matthew Paolino-111,500 options.
Assumptions used in the calculation of these amounts are included
in Note
2 to the Company’s Audited Financial Statement for the fiscal year ended
December 31, 2007. The amounts in this column reflect the dollar
amount
recognized, in accordance with the Statement of Financial Accounting
Standards No. 123 (revised 2004) “Share-Based Payment” (“SFAS 123(R)”),
for financial reporting purposes for the fiscal year ended December
31,
2007. There were no options granted to non-employee directors in
2007. In
2006, each non-employee Director and Mathew Paolino received a grant
of
15,000 options which grants vested immediately and had a grant date
fair
market value of $25,643. The 2006 grant was made as part payment
for
serving on the Board during 2007.
|
|
2.
|
For
the year ended December 31, 2007, Matthew Paolino received $4,327
in
salary as a Vice President of the Company and did not receive any
directors fees. Matthew Paolino’s position as a Vice President was
terminated on January 26, 2007.
|
For
the
year 2007, the Board of Directors, approved of the following fees to be paid
to
Directors who are not employees of the Company with respect to their calendar
year 2008 service: a $15,000 annual cash retainer fee to be paid in a lump
sum;
a $1,000 fee to each non-employee Director for each Board of Director or
Committee meeting attended in person; and a $500 fee to each non-employee
Director for each Board of Director or Committee meeting exceeding thirty
minutes in length attended by telephone; and a grant of 15,000 options at the
close of market on December 12, 2006 to each non-employee Director and Matthew
Paolino. The grants vested immediately and had a grant date fair market value
of
$25,643. For the year 2008, the Board of Directors, approved of the following
fees to be paid to Directors who are not employees of the Company with respect
to their calendar year 2008 service: a $15,000 annual cash retainer fee to
be
paid in a lump sum; a $1,000 fee to each non-employee Director for each Board
of
Director or Committee meeting attended in person; a $500 fee to each
non-employee Director for each Board of Director or Committee meeting exceeding
thirty minutes in length attended by telephone; and a grant of 15,000 options
at
the close of market on January 8, 2008 to each non-employee Director. The grants
vested immediately.
56
ITEM
12
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Securities
Authorized for Issuance Under Equity Compensation Plans
The
Company has two Stock Option Plans that have been approved by the shareholders.
The plans are the 1999 Stock Option Plan and the 1993 Stock Option Plan. Stock
options are issued under the 1999 Stock Option Plan and 1993 Stock Option Plan
at the discretion of the Compensation Committee to employees at an exercise
price of no less than the then current market price of the common stock and
generally expire ten years from the date of grant. Allocation of available
options and vesting schedules are at the discretion of the Compensation
Committee and are determined by potential contribution to, or impact upon,
the
overall performance of the Company by the executives and employees. Stock
options are also issued to members of the Board of Directors at the discretion
of the Compensation Committee. These options may have similar terms as those
issued to officers or may vest immediately. The purpose of both Stock Option
Plans is to provide a means of performance-based compensation in order to
provide incentive for the Company’s employees. Warrants have been issued in
connection with the sale of the shares of the Company’s stock, the purchase and
sale of certain businesses and to a director. The terms of the warrants have
been established by the Board of Directors of the Company. Certain of the
warrants have been approved by stockholders.
The
following table sets forth certain information regarding the Company’s Stock
Option Plan and warrants as of December 31, 2007.
|
Plan
Category
|
(a)
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
(b)
Weighted
average exercise price of outstanding options, warrants and rights
|
(c)
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in
column)
|
|||||||
|
1993
Stock Option Plan
|
18,959
|
$
|
3.11
|
56,999
|
||||||
|
1999
Stock Option Plan
|
4,421,056
|
$
|
3.51
|
2,580,147
|
||||||
|
Total
of both Equity Compensation Plans approved by stockholders
|
4,440,015
|
$
|
3.31
|
2,637,146
|
||||||
|
Equity
compensation plans not approved by stockholders
|
433,000
|
$
|
8.02
|
N/A
|
||||||
|
Total
|
4,873,015
|
$
|
3.91
|
2,637,146
|
||||||
Beneficial
Ownership
The
following beneficial ownership table sets forth information as of February
29,
2008 regarding ownership of shares of Mace common stock by the following
persons:
| · |
each
person who is known to Mace to own beneficially more than 5% of the
outstanding shares of Mace common stock, based upon Mace’s records or the
records of the SEC;
|
| · |
each
director of Mace;
|
| · |
each
Named Executive Officer; and
|
| · |
all
directors and executive officers of Mace, as a
group.
|
Unless
otherwise indicated, to Mace’s knowledge, all persons listed on the beneficial
ownership table below have sole voting and investment power with respect to
their shares of Mace common stock. Shares of Mace common stock subject to
options or warrants exercisable within 60 days of February 29, 2008 are
considered outstanding for the purpose of computing the percentage ownership
of
the person holding such options or warrants, but are not deemed outstanding
for
computing the percentage ownership of any other person.
57
|
Name
and Address of Beneficial
Owner
|
Amount
and Nature of Beneficial Ownership
|
Percentage
of
Common
Stock
Owned (1)
|
|||||
|
Louis
D. Paolino, Jr.
|
2,780,640
|
(2)
|
15.1
|
%
|
|||
|
Lawndale
Capital Management, LLC
591
Redwood Highway, Suite 2345
Mill
Valley, CA 94941
|
1,574,479
|
(3)
|
9.6
|
||||
|
Ancora
Capital, Inc.
One
Chagrin Highlands
2000
Auburn Drive, Suite 300
Cleveland,
Ohio 44122
|
1,327,500
|
(4)
|
8.1
|
||||
|
Robert
M. Kramer
|
649,539
|
(5)
|
3.8
|
||||
|
Mark
S. Alsentzer
|
622,500
|
(6)
|
3.8
|
||||
|
Gregory
M. Krzemien
|
475,250
|
(7)
|
2.8
|
||||
|
Constantine
N. Papadakis, PhD.
|
127,500
|
(8)
|
*
|
||||
|
Dennis
Raefield
|
25,000
|
(9)
|
*
|
||||
|
Gerald
T. LaFlamme
|
15,000
|
(10)
|
*
|
||||
|
John
C. Mallon
|
15,000
|
(11)
|
*
|
||||
|
All
current directors and executive officers as a group (8
persons)
|
4,710,429
|
(12)
|
24.0
|
%
|
|||
*
Less
than 1% of the outstanding shares of Mace common stock.
(1) Percentage
calculation is based on 16,465,253 shares outstanding on February 29, 2008.
(2) Includes
options to purchase 1,889,682 shares.
(3)
According
to their Schedule 13D Amendment 7 filed with the SEC on October 16, 2007,
consists of 1,574,479 shares to which Lawndale Capital Management, LLC
(“Lawndale”) has shared voting and dispositive power. The Schedule 13D was filed
jointly by Lawndale, Andrew Shapiro and Diamond A. Partners, L.P. (“Diamond”).
Lawndale is the investment advisor to and the general partner of Diamond, which
is an investment limited partnership. Mr. Shapiro is the sole manager of
Lawndale. Mr. Shapiro is also deemed to have shared voting and dispositive
power
with respect to the shares reported as beneficially owned by Lawndale. Diamond
has shared voting and dispositive power with respect to 1,241,038 shares of
the
Company.
(4) According
to their Schedule 13D Amendment 4 filed with the SEC on January 14, 2008, Ancora
Group, which includes Ancora Capital, Inc.; Ancora Securities, Inc., the main
subsidiary of Ancora Capital, Inc.; Ancora Advisors, LLC; Ancora Trust, the
master trust for the Ancora Mutual Funds; Ancora Foundation, a private
foundation; Merlin Partners, an investment limited partnership; and various
owners and employees of the aforementioned entities have aggregate beneficial
ownership of 1,327,700 shares. Ancora Securities, Inc. is registered as a
broker/dealer with the SEC and the National Association of Securities Dealers.
Ancora Advisors, LLC is registered as an investment advisor with the SEC under
the Investment Advisors Act of 1940, as amended. The Ancora Trust, which
includes Ancora Income Fund, Ancora Equity Fund, Ancora Special Opportunity
Fund, Ancora Homeland Security Fund and Ancora Bancshares, are registered with
the SEC as investment companies under the Investment Company Act of 1940, as
amended. Mr. Richard Barone is the controlling shareholder of Ancora Capital,
controls 31% of Ancora Advisors, LLC owns approximately 15% of Merlin Partners,
and is Chairman of and has an ownership interest in the various Ancora Funds.
Ancora Advisors, LLC has the power to dispose of the shares owned by the
investment clients for which it acts as advisor, including Merlin Partners,
for
which it is also the General Partner, and the Ancora Mutual Funds. Ancora
Advisors, LLC disclaims beneficial ownership of such shares, except to the
extent of its pecuniary interest therein. Ancora Securities, Inc. acts as the
agent for its various clients and has neither the power to vote nor the power
to
dispose of the shares. Ancora Securities, Inc. disclaims beneficial ownership
of
such shares. All entities named herein each disclaim membership in a Group
within the meaning of Section 13(d)(3) of the Exchange Act and the Rules and
Regulations promulgated there under.
58
(5) Includes
options to purchase 570,000 shares.
(6) Includes
options to purchase 122,500 shares. Also includes 200,000 shares that have
been
delivered by Mr. Alsentzer in street name to Argyll Equities, LLC (“Argyll”), as
collateral for a $600,000 loan obtained by Mr. Alsentzer on April 27, 2004
(“Pledged Shares”). Mr. Alsentzer had advised the Company that he retained the
right to vote the Pledged Shares. By letter dated May 4, 2005, Mr. Alsentzer
requested that Argyll confirm in writing that the Pledged Shares were in
Argyll's possession and being held as collateral, under the terms of Mr.
Alsentzer’s agreement with Argyll. To date, Mr. Alsentzer has not received the
requested confirmation or any notice of default from Argyll. Based on the
information the Company has received, the Company is not able to determine
whether Mr. Alsentzer retains beneficial ownership over the Pledged
Shares.
(7) Includes
options to purchase 450,000 shares.
(8) Includes
options to purchase 117,500 shares.
(9) Includes
options to purchase 15,000 shares.
(10) Represents
options to purchase 15,000 shares.
(11) Includes
options to purchase 15,000
(12) See
Notes
2 and 5 through 11 above.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Certain
Relationships and Related Party Transactions
The
Company’s Security Segment leases manufacturing and office space under a
five-year lease with Vermont Mill, Inc. (“Vermont Mill”). Vermont Mill is
controlled by Jon E. Goodrich, a former director and current employee of the
Company. In November 2004, the Company exercised an option to continue the
lease
through November 2009 at a rate of $10,576 per month. The Company 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. Rent expense under this lease was $127,000 for years ending December
31,
2006 and 2007.
The
Company’s Audit Committee Charter, Section IV.E.(vi), provides that the Audit
Committee annually reviews all existing related party transactions or other
conflicts of interest that exist between employees and directors and the
Company. The Audit Committee Charter also requires that the Audit Committee
review all proposed related party transactions. As provided in Section IV.E.(iv)
of the Audit Committee
Charter, the Company may not enter into a related party transaction, unless
the
transaction is first approved of by the Audit Committee. The Audit Committee
Charter is in writing and is available for review on the Company’s website at
www.mace.com,
under
the Investor Relations heading. The current members of the Audit Committee
are
Constantine N. Papadakis, Ph.D., Mark Alsentzer and Gerald LaFlamme. When
reviewing related party transactions, the Audit Committee considers the benefit
to the Company of the transaction and whether the transaction furthers the
Company’s interest. The decisions of the Audit Committee are set forth in
writing in the minutes of the meetings of the Audit Committee.
Director
Independence
Mace
has
Corporate Governance Guidelines. The Corporate Governance Guidelines provide
that a majority of the Company’s directors should be independent, as defined by
the rules of the NASDAQ Global Market and Section 3.14 of the Company’s
ByLaws. Section
3.14 of the Company’s ByLaws is available for review on the Company’s website at
www.mace.com,
under
the Investor Relations heading. The Board has
determined that Messers. Alsentzer, LaFlamme, Mallon, Papadakis and Raefield
are
independent under these rules. In addition, all of the Audit Committee members
are independent under the Audit Committee independence standards established
by
the NASDAQ Global Market and the rules promulgated by the SEC. The
Board has
an
Audit
Committee, a Compensation Committee, a Nominating Committee and an Ethics and
Corporate Governance Committee. The independent directors are the sole members
of all of the named committees.
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Audit
Fees.
The
Company was billed $273,781 by Grant Thornton LLP for the audit of Mace’s annual
financial statements for the fiscal year ended December 31, 2007, and for the
review of the financial statements included in Mace’s Quarterly Reports on Forms
10-Q filed during 2007 through March 25, 2008. The Company was
billed $456,314, by Grant Thornton LLP for the audit of Mace’s annual financial
statements for the fiscal year ended December 31, 2006, and for the review
of
the financial statements included in Mace’s Quarterly Reports on Forms 10-Q
filed during 2006.
59
Audit
Related Fees.
The
Company did not incur any audit related fees during 2007 or 2006.
Tax
Fees. The
Company was billed $36,428 and $64,553 for tax compliance services rendered
by
Grant Thornton LLP during 2007 and 2006, respectively.
All
Other Fees.
The
Company did not incur any other fees during 2007 or 2006.
Other
Matters.
The
Audit Committee of the Board of Directors has considered whether the provision
of financial information systems design and implementation services and other
non-audit services is compatible with maintaining the independence of Mace’s
independent auditors, Grant Thornton LLP. The Audit Committee pre-approves
all
auditing services and permitted non-audit services (including the fees and
terms
thereof) to be performed for the Company by its independent auditors. All
auditing services and permitted non-audit services in 2007 and 2006 were
pre-approved. The Audit Committee may delegate authority to the chairman, or
in
his or her absence, a member designated by the Chairman to grant pre-approvals
of audit and permitted non-audit services, provided that decisions of such
person or subcommittee to grant pre-approvals shall be presented to the full
Audit Committee at its next scheduled meeting.
PART
IV
ITEM
15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a)
(1)
|
Consolidated
Financial Statements:
|
|
|
Report
of Independent Registered Public Accounting Firm
|
||
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
||
|
Consolidated
Statements of Operations for the years ended December 31, 2007, 2006,
and
2005
|
||
|
Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2007,
2006, and 2005
|
||
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006,
and
2005
|
||
|
Notes
to Consolidated Financial Statements
|
||
|
(a)
(2)
|
The
requirements of Schedule II have been included in the Notes to
Consolidated Financial Statements. All other schedules for which
provision
is made in the applicable accounting regulations of the SEC are not
required under the related instructions or are inapplicable, and
therefore, have been omitted.
|
|
|
(a)
(3)
|
Exhibits:
|
|
|
The
following Exhibits are filed as part of this report (exhibits marked
with
an asterisk have been previously filed with the Commission and are
incorporated herein by this
reference):
|
|
*2.2
|
Asset
Purchase Agreement dated December 7, 2006, between Mace Security
International, Inc., Mace Car Wash, Inc., Mace Car Wash-Arizona,
Inc., and
Twisted Cactus Enterprises, LLC. (Exhibit 10.1 to the December 7,
2006
Form 8-K dated December 13, 2006)
|
|
|
*3.3
|
Amended
and Restated Bylaws of Mace Security International, Inc. (Exhibit
3.1 to
the Company’s Current Report on Form 8-K dated October 16,
2007.
|
|
|
*3.4
|
Amended
and Restated Certificate of Incorporation of Mace Security International,
Inc. (Exhibit 3.4 to the 1999 Form 10-KSB)
|
|
|
*3.5
|
Certificate
of Amendment of Amended and Restated Certificate of Incorporation
of Mace
Security International, Inc. (Exhibit 3.5 to the 2000 Form
10-KSB)
|
|
|
*3.6
|
Certificate
of Amendment of Amended and Restated Certificate of Incorporation
of Mace
Security International, Inc. (Exhibit 3.6 to the 2002 Form
10-K)
|
|
|
*3.7
|
The
Company’s Amended and Restated Certificate of Incorporation (Exhibit 4.1
to the June 16, 2004 Form S-3)
|
|
|
*3.8
|
Amended
and Restated ByLaws of the Company dated October 16, 2007 (Exhibit
3.1 to
the October 16, 2007 Form 8K dated October 16, 2007)
|
|
|
*10.1
|
1993
Non-Qualified Stock Option Plan (1)
|
|
|
*10.2
|
Trademarks(1)
|
|
|
*10.3
|
Warrants
in connection with the acquisition of the assets of the KinderGard
Corporation (2)
|
|
|
*10.4
|
Mace
Security International, Inc. 1999 Stock Option Plan. (Exhibit 10.98
to the
June 30, 1999 Form 10-QSB dated August 13, 1999)
(3)
|
60
| *10.5 |
Business
Loan Agreement dated January 31, 2000, between the Company, its subsidiary
- Colonial Full Service Car Wash, Inc., and Bank One, Texas, N.A.;
Promissory Note dated February 2, 2000 between the same parties as
above
in the amount of $400,000 (pursuant to instruction 2 to Item 601
of
Regulation S-K, two additional Promissory Notes, which are substantially
identical in all material respects except as to the amount of the
Promissory Notes) are not being filed in the amount of: $19,643.97
and
$6,482; and a Modification Agreement dated as of January 31, 2000
between
the same parties as above in the amount of $110,801.55 (pursuant
to
instruction 2 to Item 601 of Regulation S-K, Modification Agreements,
which are substantially identical in all material respects except
to the
amount of the Modification Agreement) are not being filed in the
amounts
of: $39,617.29, $1,947,884.87, $853,745.73, and $1,696,103.31. (Exhibit
10.124 to the December 31, 1999 Form 10-KSB dated March 29,
2000)
|
|
|
*10.6
|
Loan
Agreement and Promissory Note dated November 28, 2000, between the
Company, its subsidiary Eager Beaver Car Wash, Inc. and Bank One,
Texas,
N.A. in the amount of $6,754,400. (Exhibit 10.130 to the December
31, 2000
Form 10-KSB dated March 20, 2001)
|
|
|
*10.7
|
Amendment
dated March 13, 2001, to Business Loan Agreement between the Company,
its
subsidiary Colonial Full Service Car Wash, Inc., and Bank One, Texas,
N.A.
(pursuant to instruction 2 to Item 601 of Regulation S-K, one additional
amendment which is substantially identical in all material respects,
except as to the borrower being Eager Beaver Car Wash, Inc., is not
being
filed). (Exhibit 10.132 to the December 31, 2000 Form 10-KSB dated
March
20, 2001)
|
|
|
*10.8
|
Modification
Agreement between the Company, its subsidiary - Colonial Full Service
Car
Wash, Inc., and Bank One, Texas, N.A. in the amount of $2,216,000
(pursuant to Instruction 2 to Item 601 of Regulation S-K, Modification
Agreements, which are substantially identical in all material respects
except to amount and extension date of the Modification Agreement
are not
being filed in the original amounts of $984,000 (extended to August
20,
2004) and $1,970,000 (extended to June 21, 2004).(Exhibit 10.133
to the
June 30, 2001 Form 10-Q dated August 9, 2001)
|
|
|
*10.9
|
Term
Note dated November 6, 2001, between the Company, its subsidiary,
Colonial
Full Service Car Wash, Inc., and Bank One, Texas, N.A. in the amount
of
$380,000. (Exhibit 10.134 to the September 30, 2001 Form 10-Q dated
November 9, 2001)
|
|
|
*10.10
|
Amendment
dated February 25, 2002 to Lease Agreement between the Company and
Vermont
Mill Properties, Inc. and original Lease Agreement dated November
15, 1999
to which the amendment relates. (Exhibit 10.136 to the December 31,
2001
Form 10-K dated March 11, 2002)
|
|
|
*10.11
|
Master
Lease Agreement dated June 10, 2002, between the Company, its subsidiary,
Colonial Full Service Car Wash, Inc., and Banc One Leasing Corporation
in
the amount of $193,055. (Exhibit 10.140 to the June 30, 2002 Form
10-Q
dated August 14, 2002)
|
|
|
*10.12
|
Amendment
dated July 22, 2002 to Lease Agreement between the Company and Vermont
Mill Properties, Inc. (Exhibit 10.142 to the June 30, 2002 Form 10-Q
dated
August 14, 2002)
|
|
|
*10.13
|
Lease
Schedule and Addendum dated August 28, 2002 in the amount of $39,434
to
Master Lease Agreement dated June 10, 2002, between the Company,
its
subsidiary, Colonial Full Service Car Wash, Inc., and Banc One Leasing
Corporation. (Exhibit 10.144 to the September 30, 2002 Form 10-Q
dated
November 12, 2002)
|
|
|
*10.14
|
Line
of Credit Note and Credit Agreement dated December 15, 2002 between
the
Company, its subsidiary, Mace Security Products, Inc. and Bank One
Texas,
N.A. in the amount of $500,000. (Exhibit 10.146 to the December 31,
2002
Form 10-K dated March 19, 2003)
|
|
|
*10.15
|
Amendment
dated February 21, 2003 to Business Loan Agreement between the Company,
its subsidiary, Eager Beaver Car Wash, Inc., and Bank One, Texas,
N.A.
(pursuant to instruction 2 to Item 601 of Regulation S-K, two additional
amendments which are substantially identical in all material respects,
except as to the borrower being Mace Truck Wash, Inc. and Mace Security
Products, Inc., are not being filed). (Exhibit 10.147 to the December
31,
2002 Form 10-K dated March 19, 2003)
|
|
|
*10.16
|
Note
Modification Agreement dated February 21, 2003, between the Company,
its
subsidiary, Colonial Full Service Car Wash, Inc. and Bank One, Texas,
N.A.
in the amount of $348,100. (Exhibit 10.148 to the December 31, 2002
Form
10-K dated March 19, 2003)
|
|
|
*10.17
|
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. (Exhibit 10.155
to
the December 31, 2004 Form 10-K dated March 12, 2004.)
|
|
|
*10.18
|
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. (Exhibit
10.156
to the December 31, 2004 Form 10-K dated March 12,
2004)
|
|
|
*10.19
|
Note
Modification Agreement and Amendment to Credit Agreement dated January
21,
2004, between the Company, its subsidiary, Colonial Full Service
Car Wash,
Inc. and Bank One, Texas, N.A. in the amount of $48,725.50. (Exhibit
10.157 to the December 31, 2004 Form 10-K dated March 12,
2004)
|
|
|
*10.20
|
Credit
Agreement dated as of December 31, 2003 between the Company, its
subsidiary, Eager Beaver Car Wash, Inc., and Bank One Texas, N.A.
(pursuant to instruction 2 to Item 601of Regulation S-K, four additional
credit agreements which are substantially identical in all material
respects, except as to the borrower being Mace Car Wash - Arizona,
Inc.,
Colonial Full Service Car Wash, Inc., Mace Security Products, Inc.
and
Mace Security International, Inc., are not being filed.) (Exhibit
10.158
to the December 31, 2004 Form 10-K dated March 12,
2004.)
|
61
|
*10.21
|
Amendment
to Credit Agreement dated April 27, 2004, effectiveness of March
31, 2004
between Mace Security International, Inc., and Bank One Texas, N.A.
(Pursuant to instruction 2 to Item 601 of Regulation S-K, four Additional
credit agreements which are substantially identical in all material
respects, except as to borrower being the Company’s subsidiaries, Mace Car
Wash-Arizona, Inc., Colonial Full Service Car Wash, Inc. Mace Security
Products Inc. and Eager Beaver Car Wash, Inc., are not being filed)
(Exhibit 10.159 to the March 31, 2004 Form 10-Q dated May 5,
2004)
|
|
|
*10.22
|
Warrant
dated May 26, 2004 to purchase 183,000 shares of the Company’s common
stock, issued to Langley Partners, L.P. (Exhibit 4.3 to the June
16, 2004
Form S-3)
|
|
|
*10.23
|
Securities
Purchase Agreement dated May 26, 2004 between the Company and Langley
Partners, L.P. as set forth on the Signature pages thereof (Exhibit
10.1
to the June 16, 2004 Form S-3)
|
|
| *10.24 |
Registration
Rights Agreement dated May 26, 2004 between the Company and Langley
Partners, L.P. as set forth on the Signature pages thereof (Exhibit
10.2
to the June 16, 2004 Form S-3)
|
|
|
*10.25
|
First
Amendment to the Securities Purchase Agreement, dated June 8, 2004
(Exhibit 10.3 to the June 16, 2004 Form S-3)
|
|
|
*10.26
|
Agreement
for purchase and Sale of Assets by and among MDI Operating, L.P.
America
Building Control, Inc. and Mace Security International, Inc. (Exhibit
2.1
to the July 1, 2004 Form 8-K)
|
|
|
*10.27
|
Modification
Agreement between the Company , its subsidiary - Colonial Full Service
Car
Wash, Inc., and Bank One, Texas, N.A. in the original amount of $984,000
(pursuant to Instruction 2 to Item 601 of Regulation S-K, Modification
Agreements, which are substantially identical in all material respects
except to amount and extension date of the Modification Agreement,
are not
being filed in the original amounts of $2,216,000 (extended to August
20,
2009) and $380,000 (extended to October 6, 2009)). (Exhibit 10.167
to the
September 30, 2004 Form 10-Q dated November 12, 2004)
|
|
|
*10.28
|
Promissory
Note dated September 15, 2004, between the Company, its subsidiary,
Mace
Security Products, Inc., and Bank One, Texas, N.A. in the amount
of
$825,000. (Exhibit 10.168 to the September 30, 2004 Form 10-Q dated
November 12, 2004)
|
|
|
*10.29
|
First
Amendment to Asset Purchase Agreement dated August 27, 2004, between
Vernex, Inc. and Mace Security Products, Inc. (Exhibit 10.169 to
the
September 30, 2004 Form 10-Q dated November 12, 2004)
|
|
|
*10.30
|
Securities
Purchase Agreement between Mace and Langley Partners, L.P. (Exhibit
99.2
to the December 14, 2004 Form 8-K dated December 16,
2004)
|
|
|
*10.31
|
Registration
Rights Agreement between Mace and Langley Partners, L.P. (Exhibit
99.3 to
the December 14, 2004 Form 8-K dated December 16, 2004)
|
|
|
*10.32
|
Warrant
to be issued to Langley Partners, L.P. (Exhibit 99.4 to the December
14,
2004 Form 8-K dated December 16, 2004)
|
|
|
*10.33
|
Registration
Rights Agreement between Mace and JMB Capital, L.P. (Exhibit 99.6
to the
December 14, 2004 Form 8-K dated December 16, 2004)
|
|
|
*10.34
|
Warrant
to be issued to JMB Capital Partners, L.P. (Exhibit 99.7 to the December
14, 2004 Form 8-K dated December 16, 2004)
|
|
|
*10.35
|
Note
Modification Agreement dated December 22, 2004 between the Company,
its
subsidiary, Mace Security Products Inc. and Bank One, Texas, N.A.
in the
amount of $500,000. (Exhibit 10.1 to the March 31, 2005 Form 10-Q
dated
May 10, 2005)
|
|
|
*10.36
|
Note
Modification Agreement dated December 1, 2005 between the Company,
its
subsidiary Mace Security Products, Inc. and JPMorgan Bank One Bank,
N.A.
in the amount of $500,000. (Exhibit 10.179 to the December 31, 2005
Form
10-K dated July 14, 2006)
|
|
|
*10.37
|
Asset
Purchase Agreement dated February 28, 2006, between Mace Security
International, Inc., Mace Car Wash, Inc., Mace Car Wash-Arizona,
Inc., and
CW Acquisition, LLC. (Exhibit 10.1 to the February 28, 2006 Form
8-K dated
March 6, 2006) +
|
|
|
*10.38
|
Amendment
to Credit Agreement dated October 31, 2006, effective September 30,
2006
between Mace Security International, Inc., and JP Morgan Chase Bank,
N.A.
(Pursuant to instruction 2 to Item 601 of Regulation S-K, five additional
credit agreements which are substantially identical in all material
respects, except as to borrower being the Company’s subsidiaries, Mace
Truck Wash, Inc., Mace Car Wash-Arizona, Inc., Colonial Full Service
Car
Wash, Inc., Mace Security Products Inc., and Eager Beaver Car Wash,
Inc.,
are not being filed). (Exhibit 10.1 to the September 30, 2006 Form
10-Q
dated November 13, 2006)
|
|
|
*10.39
|
Employment
Agreement dated August 21, 2006 between Mace Security International,
Inc.
and Louis D. Paolino, Jr. (Exhibit 10.1 to the August 21, 2006 Form
8-K
dated August 22, 2006) (3)
|
|
|
*10.40
|
Employment
Agreement dated February 12, 2007 between Mace Security International,
Inc. and Gregory M. Krzemien (Exhibit 10.1 to the February 8, 2007
Form
8-K dated February 14, 2007) (3)
|
62
| *10.41 |
Employment
Agreement dated February 12, 2007 between Mace Security International,
Inc., and Robert M. Kramer. (Exhibit 10.2 to the February 8, 2007
Form 8-K
dated February 14, 2007) (3)
|
|
|
*10.42
|
Retention
Agreement between Mace Security International, Inc. and Ronald Pirollo,
dated as of June 19, 2007. (Exhibit 10.1 to the June 19, 2007 Form
8-K
dated June 25, 2007) (3)
|
|
|
*10.43
|
Extension
Agreement dated April 6, 2007 to Asset Purchase Agreement dated December
7, 2006, between Mace Security International, Inc., Mace Car Wash,
Inc.,
Mace Car Wash-Arizona Inc., and Twisted Cactus Enterprises, LLC.
(Exhibit
10.186 to the December 31, 2006 Form 10-K dated July 2,
2007)
|
|
|
*10.44
|
Stock
Purchase Agreement, dated July 12, 2007, by and among Mace Security
International, Inc., Linkstar Interactive, Inc. and Maurry Mendelovich,
Colin McIntyre, Michael Katz, Shawn Mendelovich, Christine McIntyre
and
Emily Pender. (Exhibit 2.1 to the July 12, 2007 Form 8-K dated July
18,
2007)
|
|
|
*10.45
|
Asset
Purchase Agreement dated November 8, 2007, among Mace Security
International, Inc., Eager Beaver Car Wash Inc. and Wash Depot Holdings,
Inc. (Exhibit 10.1 to the November 8, 2007 Form 8-K dated November
15,
2007)
|
|
|
*10.46
|
Global
Truck Wash Facility Acquisition Agreement dated December 31, 2005,
between
Eagle United Truck Wash, LLC and Mace Truck Wash, Inc. (Exhibit 99.1
to
the December 31, 2005 Form 10-K dated July 14, 2006) +
|
|
|
11
|
Statement
Regarding: Computation of Per Share Earnings.
|
|
|
*14
|
Code
of Ethics and Business Conduct (Exhibit 14 to the December 31, 2003
Form
10-K dated March 12, 2004)
|
|
|
21
|
Subsidiaries
of the Company
|
|
|
23.1
|
Consent
of Grant Thornton LLP
|
|
|
24
|
Power
of Attorney (included on signature page)
|
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
*99.1
|
Corporate
Governance Guidelines dated October 16, 2007 (Exhibit 99.1 to the
October
16, 2007 8-K dated October 16,
2007)
|
*Incorporated
by reference
+Schedules
and other attachments to the indicated exhibit have been omitted. The Company
agrees to furnish supplementally to the Commission upon request a copy of any
omitted schedules or attachments.
| (10) |
Incorporated
by reference to the exhibit of the same number filed with the Company's
registration statement on Form SB-2 (33-69270) that was declared
effective
on November 12, 1993.
|
| (11) |
Incorporated
by reference to the Company's Form 10-QSB report for the quarter
ended
September 30, 1994 filed on November 14, 1994. It should be noted
that
Exhibits 10.25 through 10.34 were previously numbered 10.1 through
10.10
in that report.
|
| (12) |
Indicates
a management contract or compensation plan or
arrangement.
|
63
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the 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/ Louis D. Paolino, Jr.
|
|||
|
Louis
D. Paolino, Jr.
Chairman
of the Board,
Principal
Executive Officer,
and
President
|
DATED
the 31 day of March, 2008
KNOW
ALL
MEN BY THESE PRESENTS that the undersigned does hereby constitute and appoint
Louis D. Paolino, Jr. and Gregory M. Krzemien, or either of them acting alone,
his true and lawful attorney-in-fact and agent, with full power of substitution
and revocation for him and in his name, place and stead, in any and all
capacities, to sign this Report on Form 10-K of Mace Security International,
Inc. and any and all amendments to the Report and to file the same with all
exhibits thereto, and other documents in connection therewith, with the United
States Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done as fully to all intents and purposes
as
he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated:
|
Name
|
Title
|
Date
|
||
|
/s/
Louis D. Paolino, Jr.
|
Chairman
of the Board,
|
March
31, 2008
|
||
|
Louis
D. Paolino, Jr.
|
Chief
Executive Officer,
President
and Director
|
|||
|
(Principal
Executive Officer)
|
||||
|
/s/
Gregory M. Krzemien
|
Chief
Financial Officer
|
March
31, 2008
|
||
|
Gregory
M. Krzemien
|
and
Treasurer
(Principal
Financial Officer)
|
|||
|
/s/
Mark S. Alsentzer
|
Director
|
March
31, 2008
|
||
|
Mark
S. Alsentzer
|
||||
|
/s/
Constantine N. Papadakis, Ph.D.
|
Director
|
March
31, 2008
|
||
|
Constantine
N. Papadakis, Ph.D.
|
||||
|
/s/
Gerald T. LaFlamme
|
Director
|
March
31, 2008
|
||
|
Gerald
T. LaFlamme
|
||||
|
/s/
John C. Mallon
|
Director
|
March
31, 2008
|
||
|
John
C. Mallon
|
||||
|
/s/
Dennis Raefield
|
Director
|
March
31, 2008
|
||
|
Dennis
Raefield
|
64
Mace
Security International, Inc.
Audited
Consolidated Financial Statements
Years
ended December 31, 2007, 2006, and 2005
Contents
|
Report
of Independent Registered Public Accounting Firm
|
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 Registered Public Accounting Firm
Board
of
Directors
Mace
Security International, Inc. and Subsidiaries
We
have
audited the accompanying consolidated balance sheets of Mace Security
International, Inc. (a Delaware corporation) and Subsidiaries (the Company)
as
of December 31, 2007 and 2006 and the related consolidated statements of
operations, changes in stockholders’ equity and cash flows for each of the three
years in the period ended December 31, 2007. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mace Security
International, Inc. and Subsidiaries as of December 31, 2007 and 2006, and
the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.
As
discussed in note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 123(R), Share-Based
Payment,
on
January 1, 2006.
/s/
Grant
Thornton LLP
Philadelphia,
Pennsylvania
March
31,
2008
F-2
Mace
Security International, Inc. and
Subsidiaries
Consolidated
Balance Sheets
(In
thousands, except share and par value information)
|
|
December
31,
|
||||||
|
2007
|
2006
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
8,103
|
$
|
4,055
|
|||
|
Short-term
investments
|
4,249
|
3,571
|
|||||
|
Accounts
receivable, less allowance for doubtful accounts
of $791 and $690 in 2007 and 2006, respectively
|
2,920
|
2,223
|
|||||
|
Inventories
|
9,296
|
7,170
|
|||||
|
Prepaid
expenses and other current assets
|
2,241
|
1,797
|
|||||
|
Assets
held for sale
|
5,665
|
25,745
|
|||||
|
Total
current assets
|
32,474
|
44,561
|
|||||
|
Property
and equipment:
|
|||||||
|
Land
|
12,322
|
17,509
|
|||||
|
Buildings
and leasehold improvements
|
17,418
|
23,291
|
|||||
|
Machinery
and equipment
|
6,353
|
8,325
|
|||||
|
Furniture
and fixtures
|
558
|
625
|
|||||
|
Total
property and equipment
|
36,651
|
49,750
|
|||||
|
Accumulated
depreciation and amortization
|
(8,477
|
)
|
(11,443
|
)
|
|||
|
Total
property and equipment, net
|
28,174
|
38,307
|
|||||
|
Goodwill
|
8,231
|
1,623
|
|||||
|
Other
intangible assets, net of accumulated amortization of
$1,123 and $779 in 2007 and 2006, respectively
|
5,565
|
2,923
|
|||||
|
Other
assets
|
992
|
184
|
|||||
|
Total
assets
|
$
|
75,436
|
$
|
87,598
|
|||
The
accompanying notes are an integral
part
of these financial statements.
F-3
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Current
portion of long-term debt and notes payable
|
$
|
2,022
|
$
|
1,235
|
|||
|
Accounts
payable
|
4,661
|
4,087
|
|||||
|
Income
taxes payable
|
778
|
315
|
|||||
|
Deferred
revenue
|
174
|
319
|
|||||
|
Accrued
expenses and other current liabilities
|
2,581
|
2,209
|
|||||
|
Liabilities
related to assets held for sale
|
4,494
|
9,840
|
|||||
|
Total
current liabilities
|
14,710
|
18,005
|
|||||
|
|
|||||||
|
Long-term
debt, net of current portion
|
7,160
|
13,087
|
|||||
|
|
|||||||
|
Commitments
|
-
|
-
|
|||||
|
|
|||||||
|
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 16,465,253 and 15,275,382 in 2007 and 2006,
respectively
|
165
|
153
|
|||||
|
Additional
paid-in capital
|
93,685
|
89,850
|
|||||
|
Accumulated
other comprehensive income
|
322
|
413
|
|||||
|
Accumulated
deficit
|
(40,495
|
)
|
(33,910
|
)
|
|||
|
53,677
|
56,506
|
||||||
|
Less
treasury stock at cost - 53,909 shares
|
(111
|
)
|
-
|
||||
|
Total
stockholders’ equity
|
53,566
|
56,506
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
75,436
|
$
|
87,598
|
|||
The
accompanying notes are an integral
part
of these financial statements.
F-4
Mace
Security International, Inc. and Subsidiaries
Consolidated
Statements of Operations
(In
thousands, except share and per share information)
|
Year
ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Revenues:
|
||||||||||
|
Car
wash and detailing services
|
$
|
11,704
|
$
|
12,881
|
$
|
13,835
|
||||
|
Lube
and other automotive services
|
3,091
|
3,445
|
3,232
|
|||||||
|
Fuel
and merchandise
|
2,391
|
2,928
|
3,771
|
|||||||
|
Security
|
22,278
|
23,366
|
24,909
|
|||||||
|
Digital
media marketing
|
7,625
|
-
|
-
|
|||||||
|
47,089
|
42,620
|
45,747
|
||||||||
|
Cost
of revenues:
|
||||||||||
|
Car
wash and detailing services
|
9,494
|
10,187
|
10,289
|
|||||||
|
Lube
and other automotive services
|
2,464
|
2,727
|
2,441
|
|||||||
|
Fuel
and merchandise
|
2,250
|
2,769
|
3,504
|
|||||||
|
Security
|
16,223
|
17,427
|
17,658
|
|||||||
|
Digital
media marketing
|
6,120
|
-
|
-
|
|||||||
|
36,551
|
33,110
|
33,892
|
||||||||
|
Selling,
general and administrative expenses
|
18,344
|
16,150
|
12,257
|
|||||||
|
Depreciation
and amortization
|
1,431
|
1,342
|
1,242
|
|||||||
|
Goodwill
and asset impairment charges
|
627
|
151
|
1,563
|
|||||||
|
Operating
loss
|
(9,864
|
)
|
(8,133
|
)
|
(3,207
|
)
|
||||
|
Interest
expense, net
|
(450
|
)
|
(709
|
)
|
(661
|
)
|
||||
|
Other
income
|
1,045
|
851
|
346
|
|||||||
|
Loss
from continuing operations before income tax expense
|
(9,269
|
)
|
(7,991
|
)
|
(3,522
|
)
|
||||
|
Income
tax expense
|
98
|
156
|
2,186
|
|||||||
|
Loss
from continuing operations
|
(9,367
|
)
|
(8,147
|
)
|
(5,708
|
)
|
||||
|
Income
from discontinued operations, net of tax expense of $0 in 2007, $0
in
2006, and $253 in 2005
|
2,782
|
1,365
|
688
|
|||||||
|
Net
loss
|
$
|
(6,585
|
)
|
$
|
(6,782
|
)
|
$
|
(5,020
|
)
|
|
|
Per
share of common stock (basic and diluted):
|
||||||||||
|
Loss
from continuing operations
|
$
|
(0.60
|
)
|
$
|
(0.53
|
)
|
$
|
(0.38
|
)
|
|
|
Income
from discontinued operations, net of tax
|
0.18
|
0.09
|
0.05
|
|||||||
|
Net
loss
|
$
|
(0.42
|
)
|
$
|
(0.44
|
)
|
$
|
(0.33
|
)
|
|
|
Weighted
average shares outstanding:
|
||||||||||
|
Basic
|
15,810,705
|
15,274,498
|
15,271,637
|
|||||||
|
Diluted
|
15,810,705
|
15,274,498
|
15,271,637
|
|||||||
The
accompanying notes are an integral
part
of these financial statements.
F-5
Mace
Security International, Inc. and Subsidiaries
Consolidated
Statements of Stockholders' Equity
(In
thousands, except share information)
|
Common
Stock
|
|
Additional
Paid-in
|
|
Accumulated
Other Comprehensive
|
|
Accumulated
|
|
Treasury
|
|
|
|
|||||||||||
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Income
(Loss)
|
|
Deficit
|
|
Stock
|
|
Total
|
||||||||
|
Balance
at December 31, 2004
|
15,271,132
|
$
|
153
|
$
|
88,507
|
$
|
(30
|
)
|
$
|
(22,108
|
)
|
$
|
-
|
$
|
66,522
|
|||||||
|
Net
costs from issuance of common stock
|
-
|
-
|
(53
|
)
|
-
|
-
|
-
|
(53
|
)
|
|||||||||||||
|
Exercise
of common stock options
|
1,750
|
-
|
4
|
-
|
-
|
-
|
4
|
|||||||||||||||
|
Change
in fair value of cash flow hedge
|
-
|
-
|
-
|
41
|
-
|
-
|
41
|
|||||||||||||||
|
Unrealized
gain on short-term investments, net of tax
|
-
|
-
|
-
|
156
|
-
|
-
|
156
|
|||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
(5,020
|
)
|
-
|
(5,020
|
)
|
|||||||||||||
|
Total
comprehensive loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(4,823
|
)
|
||||||||||||||
|
Balance
at December 31, 2005
|
15,272,882
|
153
|
88,458
|
167
|
(27,128
|
)
|
61,650
|
|||||||||||||||
|
Stock-based
compensation expense
|
-
|
-
|
1,388
|
-
|
-
|
-
|
1,388
|
|||||||||||||||
|
Exercise
of common stock options
|
2,500
|
-
|
4
|
-
|
-
|
-
|
4
|
|||||||||||||||
|
Change
in fair value of cash flow hedge
|
-
|
-
|
-
|
6
|
-
|
-
|
6
|
|||||||||||||||
|
Unrealized
gain on short-term investments, net of tax
|
-
|
-
|
-
|
240
|
-
|
-
|
240
|
|||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
(6,782
|
)
|
-
|
(6,782
|
)
|
|||||||||||||
|
Total
comprehensive loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(6,536
|
)
|
||||||||||||||
|
Balance
at December 31, 2006
|
15,275,382
|
153
|
89,850
|
413
|
(33,910
|
)
|
56,506
|
|||||||||||||||
|
Common
stock issued in purchase acquisition
|
1,176,471
|
12
|
2,883
|
-
|
-
|
-
|
2,895
|
|||||||||||||||
|
Exercise
of common stock options
|
13,400
|
-
|
28
|
-
|
-
|
-
|
28
|
|||||||||||||||
|
Purchase
of treasury stock
|
-
|
-
|
-
|
-
|
-
|
(111
|
)
|
(111
|
)
|
|||||||||||||
|
Stock-based
compensation expense
|
-
|
-
|
924
|
-
|
-
|
-
|
924
|
|||||||||||||||
|
Change
in fair value of cash flow hedge
|
-
|
-
|
-
|
(17
|
)
|
-
|
-
|
(17
|
)
|
|||||||||||||
|
Unrealized
gain (loss) on short-term investments, net of tax
|
-
|
-
|
-
|
(74
|
)
|
-
|
-
|
(74
|
)
|
|||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
(6,585
|
)
|
-
|
(6,585
|
)
|
|||||||||||||
|
Total
comprehensive loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(6,676
|
)
|
||||||||||||||
|
Balance
at December 31, 2007
|
16,465,253
|
$
|
165
|
$
|
93,685
|
$
|
322
|
$
|
(40,495
|
)
|
$
|
(111
|
)
|
$
|
53,566
|
|||||||
The
accompanying notes are an integral
part
of these financial statements.
F-6
Mace
Security International, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(In
thousands)
|
Year
ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Operating
activities
|
||||||||||
|
Net
loss
|
$
|
(6,585
|
)
|
$
|
(6,782
|
)
|
$
|
(5,020
|
)
|
|
|
Income
from discontinued operations, net of tax
|
2,782
|
1,365
|
688
|
|||||||
|
Loss
from continuing operations
|
(9,367
|
)
|
(8,147
|
)
|
(5,708
|
)
|
||||
|
Adjustments
to reconcile loss from continuing operations to net cash (used
in)
provided by operating activities:
|
||||||||||
|
Depreciation
and amortization
|
1,456
|
1,341
|
1,242
|
|||||||
|
Stock-based
compensation
|
896
|
1,360
|
-
|
|||||||
|
Provision
for losses on receivables
|
377
|
300
|
231
|
|||||||
|
Gain
on sale of property and equipment
|
(3
|
)
|
(663
|
)
|
(333
|
)
|
||||
|
Gain
on short-term investments
|
(752
|
)
|
(311
|
)
|
(264
|
)
|
||||
|
Asset
impairment charge-hurricane damage
|
-
|
-
|
107
|
|||||||
|
Goodwill
and asset impairment charges
|
627
|
151
|
1,563
|
|||||||
|
Deferred
income taxes
|
-
|
-
|
2,313
|
|||||||
|
Changes
in operating assets and liabilities:
|
||||||||||
|
Accounts
receivable
|
(40
|
)
|
61
|
(262
|
)
|
|||||
|
Inventories
|
(2,227
|
)
|
446
|
(198
|
)
|
|||||
|
Prepaid
expenses and other assets
|
(447
|
)
|
854
|
(478
|
)
|
|||||
|
Accounts
payable
|
435
|
(173
|
)
|
(92
|
)
|
|||||
|
Deferred
revenue
|
46
|
47
|
46
|
|||||||
|
Accrued
expenses
|
884
|
(403
|
)
|
(85
|
)
|
|||||
|
Income
taxes payable
|
66
|
(55
|
)
|
(209
|
)
|
|||||
|
Net
cash used in operating activities-continuing operations
|
(8,049
|
)
|
(5,192
|
)
|
(2,127
|
)
|
||||
|
Net
cash (used in) provided by operating activities-discontinued operations
|
(1,207
|
)
|
2,075
|
3,408
|
||||||
|
Net
cash (used in) provided by operating activities
|
(9,256
|
)
|
(3,117
|
)
|
1,281
|
|||||
|
Investing
Activities
|
||||||||||
|
Acquisition
of business, net of cash acquired
|
(6,947
|
)
|
-
|
(1,900
|
)
|
|||||
|
Purchase
of property and equipment
|
(617
|
)
|
(504
|
)
|
(627
|
)
|
||||
|
Proceeds
from sale of property and equipment
|
297
|
1,845
|
1,086
|
|||||||
|
Purchase
of short-term investments
|
-
|
-
|
(2,600
|
)
|
||||||
|
Payments
for intangibles
|
(15
|
)
|
(20
|
)
|
(12
|
)
|
||||
|
Net
cash (used in) provided by investing activities-continuing
operations
|
(7,282
|
)
|
1,321
|
(4,053
|
)
|
|||||
|
Net
cash provided by (used in) investing activities-discontinued
operations
|
22,385
|
194
|
(792
|
)
|
||||||
|
Net
cash provided by (used in) investing activities
|
15,103
|
1,515
|
(4,845
|
)
|
||||||
|
Financing
activities
|
||||||||||
|
Payments
on long-term debt and capital lease obligations
|
(892
|
)
|
(1,387
|
)
|
(1,249
|
)
|
||||
|
Proceeds
(cost) of issuance of common stock
|
28
|
4
|
(49
|
)
|
||||||
|
Payments
to repurchase stock
|
(111
|
)
|
-
|
-
|
||||||
|
Net
cash used in financing activities-continuing operations
|
(975
|
)
|
(1,383
|
)
|
(1,298
|
)
|
||||
|
Net
cash used in financing activities-discontinued operations
|
(824
|
)
|
(1,320
|
)
|
(1,277
|
)
|
||||
|
Net
cash used in financing activities
|
(1,799
|
)
|
(2,703
|
)
|
(2,575
|
)
|
||||
|
Net
increase (decrease) in cash and cash equivalents
|
4,048
|
(4,305
|
)
|
(6,139
|
)
|
|||||
|
Cash
and cash equivalents at beginning of year
|
4,055
|
8,360
|
14,499
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
8,103
|
$
|
4,055
|
$
|
8,360
|
||||
The
accompanying notes are an integral
part
of these financial statements.
F-7
Mace
Security International, Inc. and Subsidiaries
Notes
to Consolidated Financial Statements
1. Description
of Business and Basis of Presentation
The
accompanying consolidated
financial statements include the accounts of Mace Security International, Inc.
and its wholly owned subsidiaries (collectively, the “Company” or “Mace”). All
significant intercompany transactions have been eliminated in consolidation.
The
Company currently operates in three business segments: the Security Segment,
producing for sale, consumer safety and personal defense products, as well
as
electronic surveillance and monitoring products; the Digital Media Marketing
Segment, providing online marketing services and selling consumer products
on
the internet; and the Car and Truck Wash Segment, supplying complete car care
services (including wash, detailing, lube, and minor repairs). The Company
entered the Digital Media Marketing business with its acquisition of Linkstar
Interactive, Inc. (“Linkstar”) on July 20, 2007 (See Note 4. Business
Acquisitions and Divestitures). The Company’s remaining car and truck wash
operations as of December 31, 2007 were located in Texas and Florida. The
Company entered into two separate agreements in November 2007 to sell five
of
its six Florida full service car washes and a third agreement in January 2008
to
sell the Company’s final car wash in the Sarasota, Florida area. All six Florida
car washes were sold from January 4, 2008 to March 3, 2008. The Company also
completed the sale of its Arizona car wash region in May 2007 and completed
the
divesture of its Northeast car wash region in August 2007. Additionally, the
Company completed the sale of five truck washes on December 31, 2007 subject
to
a lease-to-sell agreement entered into on December 31, 2005 with Eagle United
Truck Wash, LLC (“Eagle”) to lease Mace’s five truck washes for two years
beginning January 1, 2006. The Company did not recognize revenue or operating
expenses of the truck washes during the term of the lease other than rental
income, depreciation expense and interest expense. As of December 31, 2007,
the
results for the Arizona, Northeast, and Florida car wash regions and the
Company’s truck washes have been classified as discontinued operations in the
statement of operations and the statement of cash flows. The statements of
operations and the statements of cash flows for the prior years have been
restated to reflect the discontinued operations in accordance with Statement
of
Financial Accounting Standards (“SFAS”) 144, Accounting
for the Impairment or Disposal of Long-Lived Assets
(See
Note 5. Discontinued Operations and Assets Held for Sale).
2.
Summary
of Significant Accounting Policies
Revenue
Recognition and
Deferred Revenue
The
Company’s recognizes revenue in accordance with Staff Accounting Bulletin
(“SAB”) No. 104, Revenue Recognition in Financial Statements. Under SAB
No. 104, the Company recognizes revenue when the following criteria have been
met: persuasive evidence of an arrangement exists, the fees are fixed and
determinable, no significant obligations remain and collection of the related
receivable is reasonably assured. Allowances for sales returns, discounts and
allowances, are estimated and recorded concurrent with the recognition of the
sale and are primarily based on historical return rates.
Revenue
from the Company’s Security Segment is recognized when shipments are made, or
for export sales when title has passed. Shipping and handling charges and costs
of $713,000, $745,000 and $478,000 in 2007, 2006, and 2005, respectively, are
included in revenues and selling, general, and administrative (SG&A)
expenses.
Revenues
from the Company’s Digital Media Marketing Segment are recognized in accordance
with SAB No. 104, Revenue Recognition in Financial Statements. The
ecommerce division recognizes revenue and the related product costs for trial
product shipments after the expiration of the trial period. Marketing costs
incurred by the ecommerce division are recognized as incurred. The online
marketing division recognizes revenue and cost of sales consistent with the
provisions of the Emerging Issues Task Force (“EITF”) Issue No. 99-19,
Reporting Revenue Gross as a Principal versus Net as an Agent, the
Company records revenue based on the gross amount received from advertisers
and
the amount paid to the publishers placing the advertisements as cost of sales.
Shipping and handling charges related to the ecommerce division of $384,000
are
included in SG&A expenses for the year ended December 31, 2007.
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.
Sales tax collected from customers and remitted to the applicable taxing
authorities is accounted for on a net basis, with no impact to revenues. The
Company records a liability for gift certificates, ticket books, and seasonal
and annual passes sold at its car 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.
F-8
Cash
and Cash Equivalents
Cash
and
cash equivalents consist of cash and highly liquid short-term investments with
original maturities of three months or less, and credit card deposits which
are
converted into cash within two to three business days.
Short-Term
Investments
At
December 31, 2007, the Company had approximately $4.3 million of investments
classified as available for sale in three funds which are stated at market
value. The Company may exit one of the funds at the end of any calendar quarter
with 30 days advanced written notice and the other funds may be exited with
one
business day notice. The Company realized a total gain
of
$752,000, $323,000 and $266,000, respectively, in the years ended December
31,
2007, 2006 and 2005. Additionally, a cumulative unrealized gain, net of tax,
of
approximately $322,000 is included as a separate component of equity in
Accumulated Other Comprehensive Income at December 31, 2007.
Accounts
Receivable
The
Company’s accounts receivable are due from trade customers. Credit is extended
based on evaluation of customers’ financial condition and, generally, collateral
is not required. Accounts receivable payment terms vary and amounts due from
customers are stated in the financial statements net of an allowance for
doubtful accounts. Accounts outstanding longer than the payment terms are
considered past due. The Company determines its allowance by considering a
number of factors, including the length of time trade accounts receivable are
past due, the Company’s previous loss history, the customer’s current ability to
pay its obligation to the Company, and the condition of the general economy
and
the industry as a whole. The Company writes off accounts receivable when they
are deemed uncollectible, and payments subsequently received on such receivables
are credited to the allowance for doubtful accounts. Risk of losses from
international sales within the Security Segment are reduced by requiring
substantially all international customers to provide 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, e-commerce 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 Segment consist
of defense sprays, child safety products, electronic security monitors, cameras
and digital recorders, and various other consumer security and safety products.
Inventories within the e-commerce division of the Digital Media Marketing
segment consist of several health and beauty products. The Company continually
reviews the book value of slow moving inventory items, as well as, discontinued
product lines to determine if inventory items are property valued. The Company
identifies slow moving or discontinued product lines and assesses the ability
to
dispose of them at a price greater than costs. If it is determined that costs
is
less than market value, then cost is used for inventory valuation. If market
value is less then costs, then an adjustment is made to the Company’s
obsolescence reserve to adjust the inventory to market value.
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 - 5 to 20 years; and furniture and fixtures - 5 to
10
years. Significant additions or improvements extending assets' useful lives
are
capitalized; normal maintenance and repair costs are expensed as incurred.
Depreciation expense is approximately $1.0 million, $1.1 million and $1.1
million for the years ended December 31, 2007, 2006, and 2005, respectively.
Maintenance and repairs are charged to expense as incurred and amounted to
approximately $431,000, in 2007, $456,000 in 2006 and $443,000 in
2005.
Asset
Impairment Charges
In
accordance with the Statement of Financial Accounting Standards (“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.
Goodwill
In
accordance with SFAS 142, we also completed our annual impairment tests as
of
November 30, 2007, 2006 and 2005 and will be subject to an impairment test
each
year thereafter. In the fourth quarter of 2007, as a result of the annual
impairment test, we recorded an impairment of goodwill of approximately $280,000
related to our consumer-direct electronic surveillance operation in Texas.
In
the fourth quarter of 2006, as a result of the annual impairment test, we
recorded an impairment of approximately $105,000 related to our high end digital
and machine vision cameras and professional imaging components operation in
Texas. These impairment charges were due to reductions in our future projected
cash flows as sales levels in these divisions continue to deviate from historic
levels as a result of competitive pressures. Additionally, in the fourth quarter
of 2005, as a result of the annual impairment test, we recorded an impairment
of
approximately $1.56 million related to our Texas region reporting unit of our
Car and Truck Wash Segment. This impairment charge was due to reductions in
our
future projected cash flows as volumes in this region continue to deviate from
historic revenue levels. Significant estimates and assumptions are used in
assessing the fair value of the reporting units and determining impairment
to
goodwill (See Note 5, Goodwill).
The
Company cannot guarantee that there will not be impairments in subsequent
years.
F-9
Other
Intangible Assets
Other
intangible assets consist of deferred financing costs, trademarks, customer
lists, non-compete agreements, product lists, and patent costs. In accordance
with SFAS 142, our trademarks are considered to have indefinite lives and as
such, are not subject to amortization. These assets will be tested for
impairment annually and whenever there is an impairment indicator. As a result
of our annual impairment testing in 2007, we recorded an impairment of
trademarks of approximately $66,000 related to our consumer direct electronic
surveillance operations and an impairment of trademarks of approximately
$101,000 related to our high end digital and machine vision cameras and
professional imaging components operations, both located in Texas. 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 $417,000, $283,000 and $172,000 for the years ended December
31, 2007, 2006, and 2005, respectively. Deferred financing costs are amortized
on a straight-line basis over the terms of the respective debt instruments.
Insurance
The
Company insures for auto, general liability, and workers’ compensation claims
through participation in a captive insurance program with other unrelated
businesses. The Company maintains excess coverage through occurrence-based
policies. With respect to participating in the captive insurance program, the
Company set aside an actuarially determined amount of cash in a restricted
“loss
fund” account for the payment of claims under the policies. The Company funds
these accounts annually as required by the captive insurance company. Should
funds deposited exceed claims ultimately incurred and paid, unused deposited
funds are returned to the Company with interest on or about the fifth
anniversary of the policy year-end. The captive insurance program is further
secured by a letter of credit in the amount of $1,065,000 at December 31, 2007.
The Company records a monthly expense for losses up to the reinsurance limit
per
claim based on the Company’s tracking of claims and the insurance company’s
reporting of amounts paid on claims plus an estimate of reserves for possible
future losses on reported claims as well as claims incurred but not
reported.
Income
Taxes
Deferred
income taxes are determined based on the difference between the financial
accounting and tax bases of assets and liabilities. Deferred income tax expense
(benefit) represents the change during the period in the deferred income tax
assets and deferred income tax liabilities. Deferred tax assets include tax
loss
and credit carryforwards and are reduced by a valuation allowance if, based
on
available evidence, it is more likely than not that some portion or all of
the
deferred tax assets will not be realized. Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation
No.
48, Accounting
for Uncertainty in Income Taxes
(“FIN
48”), an interpretation of FASB Statement No. 109 (“SFAS 109”). FIN 48
prescribes a model for the recognition and measurement of a tax position taken
or expected to be taken in a tax return, and provides guidance on derecognition,
classification, interest and penalties, disclosure and transition.
Implementation of FIN 48 did not result in a cumulative effect adjustment to
retained earnings. At December 31, 2007, the Company did not have any
significant unrecognized tax benefits.
Supplementary
Cash Flow Information
Interest
paid on all indebtedness was approximately $1.5 million, $2.0 million and $2.1
million for the years ended December 31, 2007, 2006 and 2005, respectively.
Income
taxes paid were approximately $81,000, $146,000 and $86,000 in 2007, 2006,
and
2005, respectively.
Noncash
investing and financing activity of the Company include the recording of a
$500,000 note payable to Company Shareholders issued as part of the
consideration paid for the acquisition of Linkstar, a $920,000 note receivable
recorded as part of the consideration received from the sale of the Company’s
truck washes on December 31, 2007, and the sale of property and simultaneous
pay
down of related mortgages of $9.2 million, all in 2007.
F-10
Advertising
The
Company expenses advertising costs, including advertising production costs,
as
they are incurred or when the first time advertising takes place. The Company’s
costs of coupon advertising are recorded as a prepaid asset and amortized to
advertising expense during the period of distribution and customer response,
which is typically two to four months. Prepaid advertising costs were $22,000
and $96,000 at December 31, 2007 and 2006, respectively. Advertising expense
was
approximately $767,000 in 2007, $980,000 in 2006 and $947,000 in
2005.
Stock
Based Compensation
The
Company has two stock-based employee compensation plans. Prior to January 1,
2006, the Company accounted for those plans under the recognition and
measurement principles of APB 25, Accounting
for Stock Issued to Employees,
and
related interpretations. In 2005, stock-based employee compensation costs were
not reflected in results of operations, 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.
SFAS
123
(R) replaces SFAS 123, Accounting
for Stock-Based Compensation
(“SFAS
123"), and supersedes APB Opinion 25. SFAS 123, as originally issued in 1995,
established as preferable, a fair-valued-based method of accounting for
share-based payment transaction with employees. However, SFAS 123 permitted
entities the option of continuing to apply the guidance in APB 25 as long as
the
footnotes to financial statements disclosed what net income would have been
had
the preferable fair-valued-based method been used. On January 1, 2006, the
Company adopted SFAS 123(R), Share-Based
Payment,
which
requires that the compensation cost relating to share-based payment transactions
be recognized in the financial statements. We adopted SFAS 123 (R) using the
modified prospective method, which results in recognition of compensation
expense for all share-based awards granted or modified after December 31, 2005
as well as all unvested awards outstanding at the date of adoption. The cost
is
recognized as compensation expense on a straight-line basis over the life of
the
instruments, based upon the grant date fair value of the equity or liability
instruments issued. Total stock compensation expense is approximately $924,300
in 2007 ($895,000 included in SG&A expense, $800 included in cost of revenue
and $28,500 in discontinued operations) and $1.4 million in 2006 ($1.36 million
included in SG&A expense and $28,500 in discontinued operations).
The
fair
values of the Company’s options were estimated at the dates of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions:
|
Year
ended December 31,
|
|||||
|
2007
|
2006
|
2005
|
|||
|
Expected
term (years)
|
10
|
10
|
10
|
||
|
Risk-free
interest rate
|
4.24%
to 5.16%
|
4.36%
to 5.14%
|
4.06%
to 4.57%
|
||
|
Volatility
|
52%
|
44%
to 52%
|
52%
to 56%
|
||
|
Dividend
yield
|
0%
|
0%
|
0%
|
||
Expected
term: The Company’s expected life is based on the period the options are
expected to remain outstanding. The Company estimated this amount based on
historical experience of similar awards, giving consideration to the contractual
terms of the awards, vesting requirements and expectations of future
behavior.
Risk-free
interest rate: The Company uses the risk-free interest rate of a U.S. Treasury
Note with a similar term on the date of the grant.
Expected
volatility: The Company calculates the volatility of the stock price based
on
historical value and corresponding volatility of the Company’s stock price over
the prior three years.
Dividend
yield: The Company uses a 0% expected dividend yield as the Company has not
paid
and does not anticipate declaring dividends in the near future.
Forfeitures:
The Company estimates forfeitures based on historical experience and factors
of
known historical or future projected work force reduction actions to anticipate
the projected forfeiture rates.
The
weighted-averages of the fair value of stock option grants are $1.67, $1.53
and
$1.88 per share in 2007, 2006 and 2005, respectively. As of December 31, 2007,
total unrecognized stock-based compensation expense is $591,000, which has
a
weighted average period to be recognized of approximately 1.3
years.
F-11
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):
|
2005
|
||||
|
Net
loss, as reported
|
$
|
(5,020
|
)
|
|
|
Less:
Stock-based compensation costs under fair value
based method for all awards
|
(648
|
)
|
||
|
Pro
forma net loss
|
$
|
(5,668
|
)
|
|
|
Loss
per share - basic
|
||||
|
As
reported
|
$
|
(0.33
|
)
|
|
|
Pro
forma
|
$
|
(0.37
|
)
|
|
|
Loss
per share - diluted
|
||||
|
As
reported
|
$
|
(0.33
|
)
|
|
|
Pro
forma
|
$
|
(0.37
|
)
|
|
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those
estimates.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist primarily of cash and cash equivalents,
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, 2007 and
2006, including debt recorded as liabilities related to assets held for sale,
were as follows (in thousands):
|
2007
|
2006
|
||||||||||||
|
Carrying
Value
|
Fair
Value
|
Carrying
Value
|
Fair
Value
|
||||||||||
|
Fixed
rate debt
|
$
|
500
|
$
|
500
|
$
|
8,820
|
$
|
8,826
|
|||||
|
Variable
rate debt
|
13,058
|
13,279
|
15,146
|
15,335
|
|||||||||
|
Total
|
$
|
13,558
|
$
|
13,779
|
$
|
23,966
|
$
|
24,161
|
|||||
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.
F-12
Derivative
Instruments
SFAS
133,
Accounting
for Derivative Instruments and Hedging Activities
(“SFAS
133"), as amended by SFAS 137 and SFAS 138, specifies the accounting and
disclosure requirements for such instruments.
On
October 14, 2004, we entered into an interest rate cap arrangement that
effectively changed our interest rate exposure on approximately $7 million
of
variable rate debt. The variable rate debt floated at prime plus .25%. The
hedge
contract had a 36-month term and capped the interest rate on the $7 million
of
variable rate debt at 6.5%. The contract expired on September 30,
2007.
The
interest rate cap arrangement was effective in hedging changes in cash flows
related to certain debt obligations during 2007, 2006 and 2005.
Business
Combinations
In
accordance with SFAS 141, Business
Combinations,
the
Company allocates the cost of an 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
September 2006, the FASB issued SFAS 157, Fair
Value Measurements.
This
standard defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within those
fiscal years. The adoption of SFAS 157 is not expected to have a material impact
on the Company’s consolidated results of operations, cash flows, and financial
position.
In
February 2007, the FASB issued SFAS 159, The
Fair Value Option for Financial Assets and Financial Liabilities-Including
an
amendment of FASB Statement No. 115
(“SFAS
159"). SFAS 159 expands the use of fair value accounting but does not affect
existing standards, which require assets and liabilities to be carried at fair
value. Under SFAS 159, a company may elect to use fair value to measure accounts
and loans receivable, available-for-sale and held-to-maturity securities, equity
method investments, accounts payable, guarantees, issued debt and other eligible
financial instruments. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. The adoption of SFAS 159 is not expected to have a material
impact on the Company’s consolidated results of operations, cash flows or
financial position.
Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation
No.
48, Accounting
for Uncertainty in Income Taxes
(“FIN
48”), an interpretation of FASB Statement No. 109 (“SFAS 109”). FIN 48
prescribes a model for the recognition and measurement of a tax position taken
or expected to be taken in a tax return, and provides guidance on derecognition,
classification, interest and penalties, disclosure and transition.
Implementation of FIN 48 did not result in a cumulative effect adjustment to
retained earnings. At December 31, 2007, the Company did not have any
significant unrecognized tax benefits.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations.
This
statement replaces SFAS No. 141, Business
Combinations,
requires an acquirer to recognize the assets acquired, the liabilities assumed
and any noncontrolling interest in the acquiree at the acquisition date,
measured at their fair values as of that date, with limited exceptions. SFAS
No.
141R requires costs incurred to effect the acquisition to be recognized
separately from the acquisition as period costs. SFAS No. 141R also requires
the
acquirer to recognize restructuring costs that the acquirer expects to incur,
but is not obligated to incur, separately from the business combination. In
addition, this statement requires an acquirer to recognize assets and
liabilities assumed arising from contractual contingencies as of the acquisition
date, measured at their acquisition-date fair values. Other key provisions
of
this statement include the requirement to recognize the acquisition-date fair
values of research and development assets separately from goodwill and the
requirement to recognize changes in the amount of deferred tax benefits that
are
recognizable due to the business combination in either income from continuing
operations in the period of the combination or directly in contributed capital,
depending on the circumstances. With the exception of certain tax-related
aspects described above, this statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the
first annual reporting period after December 15, 2008. The Company will comply
with the provisions of SFAS No. 141R should the Company complete an acquisition
subsequent to December 31, 2008.
F-13
3.
Business
Acquisitions and
Divestitures
Acquisitions
On
November 23, 2005, the Company, through its wholly owned subsidiary, Mace
Security Products, Inc., acquired the inventory and customer accounts of
Securetek, Inc. (“Securetek”) which specializes in the sale of electronic video
surveillance system components to security alarm dealers and installers. The
results of operations of Securetek have been included in the consolidated
financial statements of the Company since November 23, 2005. The purchase price
for Securetek consisted of $1.9 million cash. The purchase price was allocated
$489,000 to inventory with the remainder to goodwill and other intangible
assets. Of the $1.53 million of acquired intangible assets, $485,000 was
assigned to customer lists, $85,000 to trademarks and a covenant-not-to-compete
and the remainder of $957,000 to goodwill. Customer lists and the
covenant-not-to compete were assigned useful lives of 10 years and 3.5 years,
respectively. The acquired business was relocated and integrated into the
Company’s existing security operation in Ft. Lauderdale, Florida. The
acquisition was accounted for as a business combination in accordance with
SFAS
141, Business
Combinations.
On
July
20, 2007, the Company completed the purchase of all of the outstanding common
stock of Linkstar Interactive, Inc. (“Linkstar”) from Linkstar’s shareholders.
Linkstar is an online internet advertising and e-commerce direct marketing
company. Linkstar’s primary assets are inventory, accounts receivable,
proprietary software, customer contracts, and its business methods. The
acquisition of Linkstar enables the Company to expand the marketing of its
security products through online channels and provides the Company with a
presence in the online and digital media services industry. The Company paid
approximately $10.5 million to the Linkstar shareholders consisting of $7.0
million in cash at closing, $500,000 of promissory notes bearing a 5% interest
rate due on January 3, 2008 and 1,176,471 unregistered shares of the Company’s
common stock. The Company’s stock was issued based on a closing price of $2.55
per share or a total value of $2.9 million, net of estimated costs to register
the stock. In addition to the $10.5 million of consideration at closing, the
Company incurred approximately $261,000 in related acquisition costs and
recorded an additional estimated receivable of $160,000 for working capital
acquired below the minimum working capital requirement of $500,000, as per
the
purchase agreement. The purchase price was allocated as follows: approximately
(i) $248,000 cash; (ii) $183,000 for inventory; (iii) $1.12 million for accounts
receivable; (iv) $41,000 for prepaids; (v) $80,000 for equipment; (vi) the
assumption of $1.26 million of liabilities, and (vii) the remainder, or $10.18
million, allocated to goodwill and other intangible assets. Of the $10.18
million of acquired intangible assets, $478,000 was assigned to trademarks
and
$6.89 million was assigned to goodwill, neither of which is subject to
amortization expense. The remaining intangible assets were assigned to customer
relationships for $1.57 million, non-compete agreements for $367,000 and
software for $883,000. The allocation of the purchase price of the Linkstar
acquisition reflects certain reclasses from the allocation reported as of
September 30, 2007 as a result of refinements to certain data utilized for
the
acquisition valuation. Customer relationships, non-compete agreements, and
software costs were assigned a life of nine, seven, and six years, respectively.
The acquisition was accounted for as a business combination in accordance with
SFAS 141, Business
Combinations.
The
proforma financial information presented below gives effect to the Linkstar
acquisition as if it had occurred as of the beginning of our fiscal year 2006.
The information presented below is for illustrative purposes only and is not
necessarily indicative of results that would have been achieved if the
acquisition actually had occurred as of the beginning of 2006 or results which
may be achieved in the future.
Unaudited
proforma financial information, assuming the Linkstar acquisition occurred
on
January 1, 2005, is as follows (in thousands, except per shares
amounts):
|
Year
Ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Revenues
|
$
|
57,840
|
$
|
54,894
|
$
|
48,040
|
||||
|
Net
Loss
|
$
|
(6,458
|
)
|
$
|
(7,147
|
)
|
$
|
(5,405
|
)
|
|
|
Loss
per share-basic and dilutive
|
$
|
(0.39
|
)
|
$
|
(0.
43
|
)
|
$
|
(0.33
|
)
|
|
Divestitures
On
December 20, 2005, the Company, through a wholly owned subsidiary, sold an
exterior-only car wash facility in Pennsylvania. Proceeds from the sale of
this
facility were approximately $400,000, resulting in a $240,000 gain on
disposal.
On
June
19, 2006, the Company, through a wholly owned subsidiary, sold an exterior-only
car wash facility in New Jersey. Proceeds from the sale of this facility were
approximately $1.0 million, resulting in a $202,000 gain on disposal.
F-14
On
September 28, 2006, the Company, through a wholly owned subsidiary, sold a
full
service car wash facility in Dallas, Texas. Proceeds from the sale of this
facility were approximately $1.85 million, resulting in a $461,000 gain on
disposal.
In
the
first quarter ended March 31, 2007, the Company sold seven car washes consisting
of: (i) three full service car washes in the Philadelphia area on January 29,
2007 and a full service car wash in Cherry Hill, New Jersey on February 1,
2007
for a total of $7.8 million in cash at a gain of approximately $1.0 million;
(ii) an exterior car wash in Moorestown, New Jersey on January 5, 2007 for
$350,000 cash, which approximates book value; (iii) an exterior car wash in
Philadelphia, Pennsylvania on March 1, 2007 for $475,000 in cash at a gain
of
approximately $141,000; and (iv) a full service car wash in Fort Worth, Texas
on
March 7, 2007 for $285,000 in cash at a gain of approximately
$9,000.
In
the
second quarter ended June 30, 2007, the Company sold 14 car washes consisting
of: (i) an exterior car wash in Yeadon, Pennsylvania on May 14, 2007 for
$100,000 in cash at a gain of approximately $90,000; (ii) twelve full service
car washes in the Phoenix, Arizona area representing our entire Arizona region
on May 17, 2007 for $19,380,000 in cash at a gain of approximately $413,000;
and
(iii) an exterior car wash in Smyrna, Delaware on May 31, 2007 for $220,000
in
cash at a gain of approximately $202,000.
In
the
third quarter ended September 30, 2007, the Company sold its two remaining
exterior car wash sites in Camden and Sicklerville, New Jersey on August 3,
2007
for total cash consideration of $1.38 million at a gain of approximately
$179,000.
In
the
fourth quarter ending December 31, 2007, the Company sold two of its San
Antonio, Texas car wash sites in two separate transactions on November 8, 2007
and November 13, 2007 for total cash consideration of $2.96 million at a total
gain of approximately $38,000.
Additionally,
on December 31, 2007, the Company completed its sale of its five truck washes
under its lease-to-sell agreement with Eagle United Truck Wash, LLC (“Eagle”).
Eagle purchased the five truck washes for total consideration of $1.2 million,
consisting of $280,000 cash and a $920,000 five year note payable to Mace
secured by mortgages on the truck washes. The current portion of the note
payable, approximately $28,000, is included in prepaid expenses and other
current assets and the non-current portion, approximately $892,000 is included
in other assets. The Company recorded a gain of approximately $279,000 on the
sale.
4.
Discontinued Operations and Assets
Held for Sale
On
December 7, 2006, the Company signed an agreement with Twisted Cactus
Enterprises, LLC to sell its Arizona car washes. This transaction closed on
May
17, 2007. Additionally, the Company sold nine of its Northeast region car washes
in the nine months ended September 30, 2007 which represent all of the revenues
within the Northeast region. The Company completed the sale of its truck washes
on December 31, 2007 under a lease-to-sell agreement executed on December 31,
2005 with Eagle to lease Mace’s five truck washes beginning January 1, 2006
through December 31, 2007. The Company did not recognize revenue or operating
expenses during the term of the lease other than rental income, depreciation
expense and interest expense. The Company also entered into two separate
agreements on November 8, 2007 and November 19, 2007 to sell five of its six
full service car washes and a third agreement in January 2008 to sell its final
car wash in the Sarasota, Florida area. All six Florida car washes were sold
from January 4, 2008 to March 3, 2008. Accordingly, for financial statement
purposes, the assets, liabilities, results of operations and cash flows of
the
operations of our Arizona, Northeast and Florida car washes and our truck washes
have been segregated from those of continuing operations and are presented
in
the Company’s consolidated financial statements as discontinued operations.
Revenues
from discontinued operations were $10.0 million, $20.1 million and $22.5 million
for the fiscal years 2007, 2006 and 2005, respectively. Operating income from
discontinued operations was $714,000, $1.7 million and $1.7 million for the
fiscal years 2007, 2006 and 2005, respectively.
In
the
third quarter ended September 30, 2007, the Company signed agreements to sell
a
full service car wash in Fort Worth, Texas in addition to the five Florida
full
service car wash agreements entered into in November 2007 as noted above. These
six car washes are presented in the Company’s consolidated financial statements
as assets and liabilities held for sale.
F-15
Assets
and liabilities held for sale are comprised of the following at December 31,
2007 (in thousands):
|
Assets
held for sale:
|
Fort
Worth,
Texas
|
Florida
|
Total
|
|||||||
|
Inventory
|
$
|
61
|
$
|
133
|
$
|
194
|
||||
|
Property,
plant and equipment, net
|
918
|
4,471
|
5,389
|
|||||||
|
Intangibles
|
-
|
82
|
82
|
|||||||
|
Total
assets
|
$
|
979
|
$
|
4,686
|
$
|
5,665
|
||||
|
Liabilities
related to assets held for sale:
|
||||||||||
|
Deferred
Revenue
|
$
|
-
|
$
|
118
|
$
|
118
|
||||
|
Current
portion of long-term debt
|
180
|
3,592
|
3,772
|
|||||||
|
Long-term
debt, net of current portion
|
604
|
-
|
604
|
|||||||
|
Total
liabilities
|
$
|
784
|
$
|
3,710
|
$
|
4,494
|
||||
5.
Goodwill
In
the
fourth quarter of 2005, we recorded an additional impairment of approximately
$1.56 million related to our Texas region reporting unit of our Car and Truck
Wash Segment. This impairment charge was due to reductions in our future
projected cash flows as volumes in this region continue to deviate from historic
revenue levels. 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. In the fourth quarter of 2006, as a result of the annual
impairment test of Goodwill and Other Intangibles in accordance with SFAS142,
we
recorded an impairment of approximately $105,000 related to our high end digital
and machine vision cameras and professional imaging components operation in
Texas. The impairment charge was due to reduction in our future projected cash
flows as sales levels in this division continue to deviate from historic levels
as a result of competitive pressures. In the fourth quarter of 2007, as a result
of the annual impairment test of Goodwill and Other Intangibles in accordance
with SFAS 142, we recorded an impairment of goodwill of approximately $280,000
related to our consumer direct electronic surveillance operation located in
Texas. 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, 2005, 2006 and 2007 are as follows (in thousands):
|
|
Northeast
Car Washes
|
Texas
Car Washes
|
Security
Segment
|
Digital
Media Marketing Segment
|
Total
|
|||||||||||
|
Balance
at December 31, 2004
|
$
|
1,092
|
$
|
1,564
|
$
|
931
|
$
|
-
|
$
|
3,587
|
||||||
|
Impairment
loss
|
-
|
(1,564
|
)
|
-
|
-
|
(1,564
|
)
|
|||||||||
|
Reallocation
of purchase price
|
-
|
-
|
(160
|
)
|
-
|
(160
|
)
|
|||||||||
|
Acquisition
of Securetek
|
-
|
-
|
957
|
-
|
957
|
|||||||||||
|
Balance
at December 31, 2005
|
1,092
|
-
|
1,728
|
-
|
2,820
|
|||||||||||
|
Impairment
loss
|
-
|
-
|
(105
|
)
|
-
|
(105
|
)
|
|||||||||
|
Reclass
to assets held for sale
|
(1,092
|
)
|
-
|
-
|
-
|
(1,092
|
)
|
|||||||||
|
Balance
at December 31, 2006
|
-
|
-
|
1,623
|
-
|
1,623
|
|||||||||||
|
Acquisition
of Linkstar
|
-
|
-
|
-
|
6,888
|
6,888
|
|||||||||||
|
Impairment
loss
|
-
|
-
|
(280
|
)
|
-
|
(280
|
)
|
|||||||||
|
Balance
at December 31, 2007
|
$
|
-
|
$
|
-
|
$
|
1,343
|
$
|
6,888
|
$
|
8,231
|
||||||
F-16
6. Allowance
for Doubtful Accounts
The
changes in the allowance for doubtful accounts are summarized as
follows:
|
Year
ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
(In
thousands)
|
||||||||||
|
Balance
at beginning of year
|
$
|
690
|
$
|
593
|
$
|
449
|
||||
|
Additions
(charged to expense)
|
354
|
302
|
232
|
|||||||
|
Adjustments
|
(4
|
)
|
(12
|
)
|
-
|
|||||
|
Deductions
|
(249
|
)
|
(193
|
)
|
(88
|
)
|
||||
|
Balance
at end of year
|
$
|
791
|
$
|
690
|
$
|
593
|
||||
7.
Inventories
Inventories
consist of the following:
|
As
of December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
(In
thousands)
|
|||||||
|
Finished
goods
|
$
|
8,171
|
$
|
5,929
|
|||
|
Work
in process
|
69
|
77
|
|||||
|
Raw
materials and supplies
|
413
|
337
|
|||||
|
Fuel,
merchandise inventory and car wash supplies
|
643
|
827
|
|||||
|
$
|
9,296
|
$
|
7,170
|
||||
The
changes in the reserve for obsolete inventory accounts are summarized as
follows:
|
Year
ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
(In
thousands)
|
||||||||||
|
Balance
at beginning of year
|
$
|
833
|
$
|
569
|
$
|
510
|
||||
|
Additions
(charged to expense)
|
338
|
451
|
481
|
|||||||
|
Adjustments
|
-
|
-
|
(150
|
)
|
||||||
|
Deductions
|
(144
|
)
|
(187
|
)
|
(272
|
)
|
||||
|
Balance
at end of year
|
$
|
1,027
|
$
|
833
|
$
|
569
|
||||
F-17
8.
Other
Intangible Assets
|
December
31, 2007
|
December
31, 2006
|
||||||||||||
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
||||||||||
|
(In
thousands)
|
|||||||||||||
|
Amortized
intangible assets:
|
|||||||||||||
|
Non-compete
agreement
|
$
|
465
|
$
|
91
|
$
|
98
|
$
|
46
|
|||||
|
Customer
lists
|
2,751
|
591
|
1,184
|
356
|
|||||||||
|
Product
lists
|
590
|
207
|
590
|
148
|
|||||||||
|
Software
|
883
|
61
|
-
|
-
|
|||||||||
|
Patent
Costs
|
5
|
-
|
5
|
-
|
|||||||||
|
Deferred
financing costs
|
231
|
173
|
387
|
229
|
|||||||||
|
Total
amortized intangible assets
|
4,925
|
1,123
|
2,264
|
779
|
|||||||||
|
Non-amortized
intangible assets:
|
|||||||||||||
|
Trademarks
- Security Segment
|
1,285
|
-
|
1,438
|
-
|
|||||||||
|
Trademarks
- Digital Media Marketing Segment
|
478
|
-
|
-
|
-
|
|||||||||
|
Total
non-amortized intangible assets
|
1,763
|
-
|
1,438
|
-
|
|||||||||
|
Total
intangible assets
|
$
|
6,688
|
$
|
1,123
|
$
|
3,702
|
$
|
779
|
|||||
The
following sets forth the estimated amortization expense on intangible assets
for
the fiscal years ending December 31 (in thousands):
|
2008
|
$
|
596
|
||
|
2009
|
$
|
560
|
||
|
2010
|
$
|
551
|
||
|
2011
|
$
|
551
|
||
|
2012
|
$
|
542
|
Amortization
expense of other intangible assets was approximately $417,000, $283,000 and
$172,000 for the years ended December 31, 2007, 2006, and 2005, respectively.
The weighted average useful life of amortizing intangible assets was 8.4 years
at December 31,
2007.
F-18
9.
Long-Term
Debt, Notes Payable, and Capital Lease Obligations
Long-term
debt, notes payable, and capital lease obligations, including debt related
to
discontinued operations, consist of the following:
|
As
of December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
(In
thousands)
|
|||||||
|
Notes
payable to Capmark Finance, Inc. (“Capmark”), interest rate of 8.52%,
collateralized by real property, equipment and inventory of certain
of the
Arizona region Car Wash locations. Paid in full, May 18,
2007.
|
$
|
-
|
$
|
8,789
|
|||
|
Note
payable to JPMorgan Chase Bank, N.A. (“Chase”), the successor of Bank One,
Texas, N.A., interest rate of prime plus 0.25% (7.50% at December
31,
2007), is due in monthly installments of $61,109 including interest
(adjusted annually), through November 2008, collateralized by real
property and equipment of Eager Beaver Car Wash, Inc. Paid in full,
March
3, 2008.
|
4,311
|
4,683
|
|||||
|
Notes
payable to Chase, interest rate of prime plus 0.25% (7.50% at December
31,
2007) due in monthly installments totaling $45,083 per month including
interest (adjusted annually) through various dates ranging from August
2009 to February 2013, collateralized by real property and equipment
of
certain of the Colonial Car Wash locations.
|
2,512
|
2,835
|
|||||
|
Note
payable to Chase, which refinanced a note payable to Cornett Ltd.
Partnership on February 17, 2000. The Chase note, which provides
for an
interest rate of prime plus 0.25% (7.50% at December 31, 2007), is
due in
monthly installments of $46,811 including
interest (adjusted annually), renewed through
February, 2013, collateralized by real property and equipment of
the Genie
Car Wash locations.
|
2,990
|
3,280
|
|||||
|
Note
payable to Western National Bank, interest rate of 5.25%,(the interest
rate is established every 5 years, based on prime rate plus 0.5%),
due in
monthly installments of $20,988 including interest, through October
2014,
collateralized by real property and equipment in Lubbock,
Texas.
|
1,246
|
1,425
|
|||||
|
Note
payable to Business Loan Express, interest rate of prime plus 2.5%
(9.75%
at December 31, 2007), is due in monthly installments of $13,473
including
interest (adjusted annually), through December 2022, collateralized
by
real property and equipment of the Blue Planet Car Wash in Dallas,
Texas.
|
1,275
|
1,307
|
|||||
|
Note
payable to Chase, interest rate of prime plus 0.25%, collateralized
by
real property and equipment of the Superstar Kyrene Car Wash in Tempe,
Arizona. Paid in full, May 18, 2007.
|
-
|
582
|
|||||
|
Note
payable to Chase, interest rate of prime plus 0.25%, collateralized
by
real property and equipment of the Red Baron Amarillo Truck Wash.
Paid in
full, December 31, 2007.
|
-
|
274
|
|||||
|
Capital
leases payable to various creditors, interest rates ranging from
7.75% to
9.97%, due in monthly installments totaling $5,930 including interest,
through July 2007, collateralized by certain equipment of the
Company.
|
-
|
31
|
|||||
|
Note
payable to Chase, interest rate of prime plus 0.25% (7.50% at December
31,
2007) due in monthly installments of $8,202 including interest (adjusted
annually), through September 2009, collateralized by real property
and
equipment of Mace Security Products, Inc. in Farmers Branch,
Texas.
|
724
|
760
|
|||||
|
Term
note payable to Linkstar shareholders as part of purchase, interest
rate
5%. Payment due January 2008 (principal plus interest).
|
500
|
-
|
|||||
|
|
13,558
|
23,966
|
|||||
|
Less:
current portion
|
6,398
|
10,879
|
|||||
|
|
$
|
7,160
|
$
|
13,087
|
|||
Of
the 21
car washes owned or leased by us at December 31, 2007, 15 properties and related
equipment with a net book value totaling $24.1 million had secured first
mortgage loans totaling $12.3 million.
At
December 31, 2007, we had borrowings, including borrowings related to
discontinued operations, of approximately $13.6 million, substantially all
of
which is secured by mortgages against certain of our real property. Of such
borrowings, approximately $6.4 million, including $4.4 million of long-term
debt
included in liabilities related to assets held for sale, is reported as current
as it is due or expected to be repaid in less than twelve months from December
31, 2007. Current debt includes $500,000 of notes payable to Company
shareholders issued as part of the consideration for the acquisition of Linkstar
Interactive, Inc. on July 20, 2007. The notes payable were paid in January
2008
along with accrued interest at 5%.
We
have
three letters of credit outstanding at December 31, 2007, totaling $1,149,000
as
collateral relating to workers’ compensation insurance policies. We maintain a
$500,000 revolving credit facility to provide financing for additional
electronic surveillance product inventory purchases. There were no borrowings
outstanding under the revolving credit facility at December 31,
2007. The
Company also maintains a $300,000 bank commitment for commercial letters of
credit for the importation of inventory. There were outstanding commercial
letters of credit under this commitment totaling $153,000 at December 31,
2007.
F-19
Certain
machinery and equipment notes payable discussed above have been classified
as
capital lease obligations in the balance sheet.
Maturities
of long-term debt, including debt related to discontinued operations, are as
follows: 2008 - $5.795 million, 2009 - $3.26 million, 2010 - $693,000, 2011
-
$744,000, 2012 - $797,000, 2013 and thereafter - $2.269 million.
10.
Accrued
Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities consist of the following:
|
As
of December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
(In
thousands)
|
|||||||
|
Accrued
compensation
|
$
|
662
|
$
|
782
|
|||
|
Property
and other non-income taxes
|
217
|
158
|
|||||
|
Other
|
1,702
|
1,269
|
|||||
|
$
|
2,581
|
$
|
2,209
|
||||
11. Interest
Expense, net
Interest
expense, net of interest income consists of the following (in
thousands):
|
Year
Ended December 31
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Interest
expense
|
$
|
(906
|
)
|
$
|
(889
|
)
|
$
|
(947
|
)
|
|
|
Interest
income
|
456
|
180
|
286
|
|||||||
|
$
|
(450
|
)
|
$
|
(709
|
)
|
$
|
(661
|
)
|
||
12. Other
Income
Other
income consists of the following (in thousands):
|
Year
Ended December 31
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Investment
income
|
$
|
752
|
$
|
323
|
$
|
266
|
||||
|
Deposit
recovery
|
150
|
-
|
-
|
|||||||
|
Rental
income
|
39
|
43
|
78
|
|||||||
|
Gain
on sale of fixed assets
|
47
|
461
|
92
|
|||||||
|
Hurricane
damage loss
|
-
|
-
|
(123
|
)
|
||||||
|
Other
|
57
|
24
|
33
|
|||||||
|
$
|
1,045
|
$
|
851
|
$
|
346
|
|||||
F-20
13.
Stock
Option Plans
During
September 1993, the Company adopted the 1993 Stock Option Plan (“the 1993
Plan”). The 1993 Plan provides for the issuance of up to 630,000 shares of
common stock upon exercise of the options. The Company has reserved 630,000
shares of common stock to satisfy the requirements of the 1993 Plan. The options
are non-qualified stock options and are not transferable by the recipient.
The
1993 Plan is administered by the Compensation Committee (“the Committee”) of the
Board of Directors, which may grant options to employees, directors and
consultants to the Company. The term of each option may not exceed fifteen
years
from the date of grant. Options are exercisable over either a 10 or 15 year
period and exercise prices are not less than the market value of the shares
on
the date of grant.
In
December 1999, the Company’s stockholders approved the 1999 Stock Option Plan
(“the 1999 Plan”) providing for the granting of incentive stock options or
nonqualified stock options to directors, officers, or employees of the Company.
Under the 1999 Plan, 15,000,000 shares of common stock are reserved for
issuance. Incentive stock options and nonqualified options have terms which
are
determined by the Committee with exercise prices not less than the market value
of the shares on the date of grant. The options generally expire ten years
from
the date of grant and are exercisable based upon graduated vesting schedules
as
determined by the Committee. As of December 31, 2007, 5,717,444 options have
been granted under the 1993 and 1999 Plans including 4,274,760 nonqualified
stock options.
Activity
with respect to these plans is as follows:
|
2007
|
2006
|
2005
|
|||||||||||||||||
|
|
Number
|
Weighted
Average Exercise
Price
|
Number
|
Weighted
Average Exercise
Price
|
Number
|
Weighted
Average Exercise
Price
|
|||||||||||||
|
Options
outstanding beginning of period
|
3,995,015
|
3.63
|
3,108,682
|
$
|
4.00
|
2,971,264
|
$
|
4.03
|
|||||||||||
|
Options
granted
|
555,000
|
2.45
|
984,500
|
$
|
2.36
|
300,000
|
$
|
2.73
|
|||||||||||
|
Options
exercised
|
(13,400
|
)
|
2.10
|
(2,500
|
)
|
$
|
1.80
|
(1,750
|
)
|
$
|
1.85
|
||||||||
|
Options
forfeited
|
(96,600
|
)
|
2.63
|
(95,667
|
)
|
$
|
2.73
|
(160,832
|
)
|
$
|
2.30
|
||||||||
|
Options
outstanding end of period
|
4,440,015
|
3.51
|
3,995,015
|
$
|
3.63
|
3,108,682
|
$
|
4.00
|
|||||||||||
|
Options
exercisable
|
3,767,013
|
3,479,015
|
2,696,684
|
||||||||||||||||
|
Shares
available for granting of options
|
2,637,149
|
3,095,549
|
3,984,382
|
||||||||||||||||
Stock
options outstanding at December 31, 2007 under both plans are summarized as
follows:
|
Range
of Exercise
Prices
|
Number
Outstanding
|
Weighted
Avg.
Remaining
Contractual
Life
|
Weighted
Avg.
Exercise
Price
|
|||||||
|
$1.28-$1.91
|
747,209
|
5.2
|
1.43
|
|||||||
|
$1.94-$2.97
|
2,009,313
|
5.0
|
2.42
|
|||||||
|
$3.00-$4.45
|
837,974
|
6.6
|
3.94
|
|||||||
|
$5.00-$5.59
|
632,291
|
4.8
|
5.34
|
|||||||
|
$8.63-$11.75
|
71,160
|
2.1
|
10.06
|
|||||||
|
$13.25-$19.50
|
132,068
|
1.5
|
15.22
|
|||||||
|
$22.00
|
10,000
|
1.4
|
22.00
|
|||||||
F-21
The
Company received cash from options exercised during the fiscal years 2007,
2006
and 2005 of $28,000, $4,500 and $3,200, respectively. The impact of these cash
receipts are included in financing activities in the accompanying consolidated
statements of cash flows.
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 were 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, 2005, 281,818
warrants to purchase common stock have been exercised and 996,432 warrants
to
purchase common stock have expired.
In
2004,
the Company issued warrants to purchase a total of 383,000 shares of the
Company’s common stock at a weighted average price of $6.65 per share which
expire in 2009. The Company has a total of 433,000 warrants to purchase common
stock outstanding at December 31, 2007, 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.
14.
Income
Taxes
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities at December 31, 2007 and 2006
are
as follows:
|
As
of December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
(In
thousands)
|
|||||||
|
Deferred
tax assets:
|
|||||||
|
Allowance
for doubtful accounts
|
$
|
329
|
$
|
267
|
|||
|
Inventories
|
28
|
28
|
|||||
|
Net
operating loss carryforwards
|
11,452
|
9,229
|
|||||
|
Deferred
revenue
|
111
|
201
|
|||||
|
Compensation
|
39
|
39
|
|||||
|
Car
damage reserve
|
84
|
109
|
|||||
|
Accrued
workers compensation costs
|
38
|
38
|
|||||
|
Federal
Tax Credit
|
152
|
179
|
|||||
|
Vesting
Stock Options
|
547
|
547
|
|||||
|
Other,
net
|
188
|
53
|
|||||
|
Total
deferred tax assets
|
12,968
|
10,690
|
|||||
|
Valuation
allowance for deferred tax assets
|
(10,683
|
)
|
(6,750
|
)
|
|||
|
Deferred
tax assets after valuation allowance
|
2,285
|
|
3,940
|
||||
|
Deferred
tax liabilities:
|
|||||||
|
Property,
equipment and intangibles
|
(2,285
|
)
|
(3,940
|
)
|
|||
|
Net
deferred tax assets
|
$
|
-
|
$
|
-
|
|||
F-22
At
December 31, 2007, the Company had U.S. federal net operating loss carryforwards
of approximately $ 27.6 million. The U.S. federal net operating loss
carryforwards expire as follows:
|
Year
of Expiration
|
Amount
|
|||
|
2018
|
$
|
1,119
|
||
|
2019
|
4,507
|
|||
|
2020
|
3,241
|
|||
|
2021
|
1,583
|
|||
|
2022
|
2,822
|
|||
|
2023
|
4,411
|
|||
|
2024
|
5
|
|||
|
2025
|
1,250
|
|||
|
2026
|
6,897
|
|||
|
2027
|
1,807
|
|||
|
$
|
27,642
|
|||
Realization
of the future tax benefits related to the deferred tax assets is dependent
upon
many factors, including the Company’s ability to generate taxable income in
future years. The Company performed a detailed review of the considerations
influencing our ability to realize the future benefit of the NOLs, including
the
extent of recently used NOLs, the turnaround of future deductible temporary
differences, the duration of the NOL carryforward period, and the Company’s
future projection of taxable income. Utilization of our net operating loss
and
tax credit carryforwards may be subject to annual limitations due to the
ownership change limitations provided by the Internal Revenue Code and similar
state provisions. Such an annual limitation could result in the expiration
of
the net operating loss or tax credits before utilization. The Company increased
its valuation allowance against deferred tax assets by $3.9 million in 2007
and
$2.6 million in 2006 with a total valuation allowance of $10.6 million at
December 31, 2007 representing the amount of its deferred income tax assets
in
excess of the Company’s deferred income tax liabilities. The valuation allowance
was recorded because management was unable to conclude that realization of
the
net deferred income tax asset was more likely than not. This determination
was a
result of the Company’s continued losses in its fiscal year ended December 31,
2007, the uncertainty of the timing of the Company’s transition from the Car
Wash business, and the ultimate extent of growth in the Company’s Digital Media
Marketing and Security Segments.
Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation
No.
48, Accounting
for Uncertainty in Income Taxes
(“FIN
48”), an interpretation of FASB Statement No. 109 (“SFAS 109”). FIN 48
prescribes a model for the recognition and measurement of a tax position taken
or expected to be taken in a tax return, and provides guidance on derecognition,
classification, interest and penalties, disclosure and transition.
Implementation of FIN 48 did not result in a cumulative effect adjustment to
retained earnings. At December 31, 2007, the Company did not have any
significant unrecognized tax benefits. The total amount of interest and
penalties recognized in the statements of operations for each of the years
in
the three-year period ended December 31, 2007 was insignificant and when
incurred is reported as interest expense.
The
components of income tax expense (benefit) are:
|
Year
ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
(In
thousands)
|
||||||||||
|
Current
(principally state taxes)
|
$
|
98
|
$
|
156
|
$
|
126
|
||||
|
Deferred
|
-
|
-
|
2,313
|
|||||||
|
Total
income tax expense (benefit)
|
$
|
98
|
$
|
156
|
$
|
2,439
|
||||
F-23
The
significant components of deferred income tax expense (benefit) attributed
to
the loss for the years ended December 31, 2007, 2006, and 2005 are as
follows:
|
Year
ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
(In
thousands)
|
||||||||||
|
Deferred
tax (benefit) expense
|
$
|
(1,710
|
)
|
$
|
62
|
$
|
133
|
|||
|
Loss
carryforward
|
(2,223
|
)
|
(2,686
|
)
|
(1,110
|
)
|
||||
|
Valuation
allowance for deferred tax assets
|
3,933
|
2,624
|
3,290
|
|||||||
|
$
|
-
|
$
|
-
|
$
|
2,313
|
|||||
A
reconciliation of income tax benefit computed at the U.S. federal statutory
tax
rates to total income tax expense is as follows:
|
Year
ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
(In
thousands)
|
||||||||||
|
Tax
at U.S. federal statutory rate
|
$
|
(3,728
|
)
|
$
|
(2,322
|
)
|
$
|
(903
|
)
|
|
|
State
taxes, net of federal benefit
|
(107
|
)
|
(151
|
)
|
40
|
|||||
|
Nondeductible
costs and other acquisition accounting
adjustments
|
-
|
5
|
12
|
|||||||
|
Valuation
allowance for deferred tax assets
|
3,933
|
2,624
|
3,290
|
|||||||
|
Total
income tax expense (benefit)
|
$
|
98
|
$
|
156
|
$
|
2,439
|
||||
15.
Loss
Per Share
The
following table sets forth the computation of basic and diluted loss per share
(in thousands except loss per share):
|
Year
ended December 31,
|
||||||||||
|
|
2007
|
2006
|
2005
|
|||||||
|
Numerator
(In thousands):
|
||||||||||
|
Net
loss
|
(6,585
|
)
|
$
|
(6,782
|
)
|
$
|
(5,020
|
)
|
||
|
Denominator:
|
||||||||||
|
Denominator
for basic loss per
share - weighted average shares
|
15,810,705
|
15,274,498
|
15,271,637
|
|||||||
|
Dilutive
effect of options and warrants
|
-
|
-
|
-
|
|||||||
|
Denominator
for diluted loss per
share - weighted average shares
|
15,810,705
|
15,274,498
|
15,271,637
|
|||||||
|
Basic
loss per share:
|
||||||||||
|
Net
loss
|
$
|
(0.42
|
)
|
$
|
(0.44
|
)
|
$
|
(0.33
|
)
|
|
|
Diluted
loss per share:
|
||||||||||
|
Net
loss
|
$
|
(0.42
|
)
|
$
|
(0.44
|
)
|
$
|
(0.33
|
)
|
|
The
dilutive effect of options and warrants of 375,292, 334,055, and 275,044 at
December 31, 2007, 2006, and 2005, respectively, have not been included in
the
calculation of diluted earnings per share because they are
anti-dilutive.
16.
Concentration
of Credit Risk
The
Company maintains its cash accounts in high quality financial institutions.
At
times, these balances may exceed insured amounts.
F-24
17.
Commitments
and Contingencies
The
Company is obligated under various operating leases, primarily for certain
equipment, vehicles, and real estate. Certain of these leases contain purchase
options, renewal provisions, and contingent rentals for the proportionate share
of taxes, utilities, insurance, and annual cost of living increases. Future
minimum lease payments under operating leases with initial or remaining
noncancellable lease terms in excess of one year as of December 31, 2007 for
continuing operations are as follows: 2008 - $998,000; 2009 - $778,000; 2010
-
$644,000; 2011 - $480,000; 2012 - $451,000 and thereafter - $951,000 million.
Rental expense under these leases was $878,000, $782,000 and $711,000 for the
years ended December 31, 2007, 2006, and 2005, 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 2007, 2006, and 2005 revenues under these leases were approximately
$39,000, $43,000 and $78,000, 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
upon a change in control of the Company. Additionally, the employment agreement
of the Company’s Principal Executive Officer, Louis D. Paolino, Jr., dated
August 21, 2006, entitles Mr. Paolino to a payment of 2.99 times Mr. Paolino’s
average total compensation (base salary plus any bonuses plus the value of
any
option award, valued using the Black-Scholes method) over the past five years,
upon termination of employment under certain conditions or upon a change in
control. The employment agreement also provides that if Mr. Paolino receives
the
change of control bonus, his employment agreement can then be terminated without
an additional payment.
In
December 2003, one of the Company’s car wash subsidiaries was named as a
defendant in a suit filed by Kristen Sellers in the Circuit Court of the Twelfth
Judicial Circuit in and for Sarasota County, Florida. The suit alleged that
the
plaintiff was entitled to damages in excess of $15,000 due to psychological
injury and emotional distress sustained when an employee of the car wash
allegedly assaulted Ms. Sellers with sexually explicit acts and words. The
case
was settled in April 2006 and the Company’s insurer has paid the plaintiff
$200,000 in compensation and approximately $55,000 in reimbursement of
litigation costs.
On
March
13, 2006, the Company was served with a search warrant issued by the United
States District Court for the District of New Jersey relating to a criminal
immigration investigation. A search of the Company’s headquarters and four out
of the Company’s 48 car washes was conducted by representatives of the United
States Department of Investigations and Customs Enforcement and certain other
agencies. Three of the car washes searched are located in Pennsylvania and
the
fourth is located in New Jersey. Documents were seized and a number of car
wash
employees of Car Care, Inc., a wholly-owned subsidiary of the Company, were
taken into custody by the United States immigration authorities. The Company
was
also served with a federal grand jury subpoena seeking similar documents. The
Company has completed its response to the subpoena. The Company has been
informed by the government that it is a subject of the government’s
investigation. The Company’s Audit Committee retained independent outside
counsel (“Special Counsel”) to conduct an independent investigation of the
Company’s hiring practices at the Company’s car washes and other related
matters. Special Counsel provided a written summary of findings on April 18,
2006 to the Company’s Audit Committee. The investigative finding included, among
other things, a finding that the Company’s internal controls for financial
reporting at the corporate level are adequate and appropriate, and that there
is
no financial statement impact implicated by the Company’s hiring practices,
except for a potential contingent liability. Beginning on April 21, 2006,
Special Counsel began to receive for review some additional and previously
requested but unavailable documents and information, including the documents
the
government seized on March 13, 2006. On May 18, 2006, Special Counsel issued
its
Review of Information Supplemental to Internal Investigation which stated that
the review of the additional documents and information had not changed the
conclusions contained in the April 18, 2006 summary of findings. See Item 3,
Legal Proceedings. The Company incurred $704,000 in legal, consulting and
accounting expenses associated with the Audit Committee investigations in fiscal
2006 and $1.47 million ($674,000 and $796,000, in fiscal 2007 and 2006,
respectively) of legal fees associated with the governmental investigation
and
Company’s defense and negotiations with the government. In accordance with the
Company’s By-Laws, the Company is obligated to indemnify and advance legal costs
for its officers and directors. The Company has incorporated additional internal
control procedures at the corporate, regional and site level to further enhance
the existing internal controls with respect to the Company’s hiring procedures
at the car wash locations to prevent the hiring of undocumented workers. There
is a possibility that the United States Attorney for the Eastern District of
Pennsylvania may prosecute the Company at the conclusion of its investigation.
Violations of law may result in civil, administrative or criminal fines or
penalties. Due to the ongoing nature of the criminal investigation, it is not
possible at this time to predict the outcome of the investigation or the impact
of costs of ultimately resolving this matter on our results of operations or
financial condition. However, any fees, expenses, fines or penalties which
might
be incurred by the Company in connection with the hiring of undocumented workers
may have a material impact on the Company’s results of operations and financial
condition. The Company has made no provision for any future costs associated
with the investigations or any future costs associated with the Company’s
defense or negotiations with governmental authorities to resolve these
outstanding issues.
F-25
During
January 2008, the Environmental Protection Agency (“EPA”) conducted a site
investigation at the Company’s Bennington, Vermont location and the building the
facility is located within. The Company does not own the building or land and
leases 44,000 square feet of the building from Vermont Mill Properties, Inc
(“Vermont Mill”). During February 2008, a search of the Company’s Bennington,
Vermont location and the building it is located within was conducted under
a
search warrant issued by the U.S. District Court for the District of Vermont.
Both the site investigation and search were focused on discovering whether
hazardous substances were being improperly stored. Subsequent to the
investigation and search, the EPA notified the Company and the building owner
that remediation of certain hazardous wastes are required. The hazardous
materials and waste identified by the EPA were (i) metal contaminated soils
on
the building grounds (waste from sand blasting paint from the building, the
Company believes that the building owner and not Mace is responsible for any
soil clean up); (ii) approximately 130 drums of hazardous waste (waste gases
generated from testing the defense spray units sold by the Company and defective
spray units); (iii) 55 thousand pounds of 2-chlorobenzalmalononitrile stored
in
eight pound plastic containers (a chemical used to make tear gas); and (iv)
three steal drums containing a chemical used to make pyrotechnic grenades (this
material is held for resale). The EPA is requiring the Company and the building
owner to remove and properly dispose of the hazardous waste and properly store
of all hazardous material. The EPA in findings of fact issued on February 20,
2008 estimated the cost for the removal and proper storage at $300,000,
including the cost for any soil clean up which is not the responsibility of
the
Company. We estimate the range of possible loss attributable to the Company
to
be from approximately $285,000 to $365,000 including the cost of disposal of
the
waste materials, as well as expenses incurred with environmental engineers
and
legal counsel. An accrual of approximately $285,000 has been recorded as of
December 31, 2007 for this matter representing management’s best estimate of
probable loss, as defined by SFAS No. 5, Accounting
for Contingencies.
The
EPA, the Company and the building owner have entered into an Administrative
Consent Order which will govern the removal of hazardous waste and storage
of
hazardous material. The Administrative Consent Order requires that the Company
provide a $500,000 bond to secure its obligations under the Administrative
Consent Order. The Company is unable at this time to determine whether further
action will be taken by the United States Attorney or if any charges, fines
or
penalties will be sought from the Company.
The
Company is a party to various other legal proceedings related to its normal
business activities. In the opinion of the Company’s management, none of these
proceedings are material in relation to the Company’s results of operations,
liquidity, cash flows, or financial condition.
18.
Asset Impairment Charges
In
accordance with SFAS 144, Accounting
for the Impairment or Disposal of Long-Lived Assets (“SFAS144”),
we
periodically review the carrying value of our long-lived assets held and used,
and assets to be disposed of, for possible impairment when events and
circumstances warrant such a review. Assets classified as held for sale are
measured at the lower of carrying value or fair value, net of costs to sell.
Continuing
Operations
In
the
fourth quarter of 2005, as a result of the annual impairment test of Goodwill
and Other Intangibles in accordance with SFAS 144, we recorded an impairment
of
approximately $1.56 million related to our Texas region reporting unit of our
Car and Truck Wash Segment. This impairment was principally due to reductions
in
future projected cash flows resulting from extended departures from our historic
revenue levels as a result of inclement weather and increased competition near
several of our facilities in Texas. During the quarter ended September 30,
2006,
we wrote down assets related to a full service car wash in Fort Worth, Texas
by
approximately $40,000. Additionally, during the quarter ended December 31,
2007,
we wrote down assets related to a full service car wash in San Antonio, Texas
by
approximately $180,000.We determined that based on current data utilized to
estimate the fair value of these car wash facilities, the future expected cash
flows would not be sufficient to recover their carrying values. Further, in
the
fourth quarter of 2006, as a result of our annual impairment test of Goodwill
and Other Intangibles in accordance with SFAS 142, we recorded an impairment
of
goodwill of approximately $105,000 related to our high end digital and machine
vision cameras and professional imaging components operation in Texas. In the
fourth quarter of 2007, as a result of our annual impairment test of goodwill
and other intangibles, we recorded an impairment of goodwill of approximately
$280,000 and an impairment of trademarks of approximately $66,000 related to
our
consumer direct electronic surveillance operations and an impairment of
trademarks of approximately $101,000 related to our high end digital and machine
vision cameras and professional imaging components operations, both located
in
Texas. These goodwill and trademark impairment charges were due to reductions
in
our future projected cash flows as sales levels in these divisions continue
to
deviate from historic levels as a result of competitive pressures.
F-26
Discontinued
Operations
During
the quarter ended September 30, 2005, we wrote down assets related to our truck
wash operations determined to be impaired by approximately $500,000 as a result
of our SFAS 144 quarterly reviews. We have determined that due to a reduction
in
truck wash volumes resulting from an increase in inclement weather, increased
competition, the significant increase in fuel costs which had the effect of
reducing spending on truck washing, and demographic changes to certain of our
facilities, their future expected cash flows would not be sufficient to recover
their respective carrying values. The Company executed a lease-to-sell agreement
on December 31, 2005 with Eagle to lease Mace’s five truck washes beginning
January 1, 2006 for up to two years. During the quarter ended September 30,
2006, we wrote down assets related to a full service car wash in Moorestown,
New
Jersey, by approximately $40,000. We determined that based on current data
utilized to estimate the fair value of this car wash facility, the future
expected cash flows would not be sufficient to recover its carrying
value.
19.
Related
Party Transactions
The
Company’s Security Segment leases manufacturing and office space under a
five-year lease with Vermont Mill. Vermont Mill is controlled by Jon E.
Goodrich, a former director and current employee of the Company. In November
2004, the Company exercised an option to continue the lease through November
2009 at a rate of $10,576 per month. The Company 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. Rent expense
under this lease was $127,000 for years ending December 31, 2007, 2006 and
2005.
On
September 29, 2005, Louis Paolino III, the son of the Company’s Chief Executive
Officer, Louis Paolino, Jr., purchased from the Company a warehouse bay in
Hollywood, Florida that is no longer used in the Company’s operations for
$306,000 in cash. The Company’s Audit Committee authorized the Company on
February 14, 2005 to proceed with a sale of the warehouse property to Louis
Paolino III for $306,000. The Company paid $256,688 for the property in 2003.
The warehouse property was appraised by a third party independent appraiser
on
January 18, 2005 at an estimated market value of $306,000.
20.
Segment Reporting
The
Company currently operates in three segments: the Security Segment, the Digital
Media Marketing Segment, and the Car and Truck Wash 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-27
Selected
financial information for each reportable segment from continuing operations
is
as follows:
|
Year
ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Revenues:
|
(In
thousands)
|
|||||||||
|
Car
and truck wash - external customers
|
$
|
17,186
|
$
|
19,254
|
$
|
20,838
|
||||
|
Security
- external customers
|
$
|
22,278
|
$
|
23,366
|
$
|
24,909
|
||||
|
Digital
media marketing - external customers
|
$
|
7,625
|
$
|
-
|
$
|
-
|
||||
|
$
|
47,089
|
$
|
42,620
|
$
|
45,747
|
|||||
|
Segment
Operating (loss) income:
|
||||||||||
|
Corporate
(1)
|
$
|
(6,186
|
)
|
$
|
(6,291
|
)
|
$
|
(3,450
|
)
|
|
|
Car
and truck wash
|
79
|
777
|
1,834
|
|||||||
|
Security
|
(2,445
|
)
|
(2,468
|
)
|
(28
|
)
|
||||
|
Digital
media marketing
|
(685
|
)
|
-
|
-
|
||||||
|
$
|
(9,237
|
)
|
$
|
(7,982
|
)
|
$
|
(1,644
|
)
|
||
|
Assets:
|
||||||||||
|
Car
and truck wash
|
$
|
37,962
|
$
|
42,771
|
$
|
75,876
|
||||
|
Security
|
18,748
|
19,082
|
20,235
|
|||||||
|
Digital
media marketing
|
13,062
|
-
|
-
|
|||||||
|
$
|
69,772
|
$
|
61,853
|
$
|
96,111
|
|||||
|
Capital
expenditures:
|
||||||||||
|
Corporate
|
35
|
$
|
12
|
$
|
10
|
|||||
|
Car
and truck wash
|
365
|
151
|
197
|
|||||||
|
Security
|
205
|
341
|
455
|
|||||||
|
Digital
media marketing
|
12
|
-
|
-
|
|||||||
|
617
|
$
|
504
|
$
|
662
|
||||||
|
Depreciation
and amortization:
|
||||||||||
|
Corporate
|
30
|
$
|
32
|
$
|
43
|
|||||
|
Car
and truck wash
|
739
|
793
|
800
|
|||||||
|
Security
|
497
|
517
|
399
|
|||||||
|
Digital
media marketing
|
165
|
-
|
-
|
|||||||
|
$
|
1,431
|
$
|
1,342
|
$
|
1,242
|
|||||
(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 is as follows:
|
Year
ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
(In
thousands)
|
||||||||||
|
Total
operating loss for reportable segments
|
$
|
(9,237
|
)
|
$
|
(7,982
|
)
|
$
|
(1,644
|
)
|
|
|
Goodwill
and asset impairment charges
|
(627
|
)
|
(151
|
)
|
(1,563
|
)
|
||||
|
Total
reported operating loss
|
$
|
(9,864
|
)
|
$
|
(8,133
|
)
|
$
|
(3,207
|
)
|
|
21.
Subsequent Events
Subsequent
to December 31, 2007, the Company sold six car washes in the Sarasota, Florida
area from January 4, 2008 to March 3, 2008. On January 4, 2008 the Company
completed the sale of the car wash located in Brandenton, Florida for $1.3
million at a gain of approximately $548,000 on disposal. Also on January 4,
2008, the Company sold four full service car wash facilities in the Sarasota,
Florida area for approximately $10.3 million, resulting in a gain of
approximately $6.3 million on disposal. Finally, on March 3, 2008 the Company
sold its North Sarasota, Florida car wash, the Company’s final car wash site in
Florida, for approximately $875,000, resulting in gains of approximately
$177,000. Included in Assets held for sales and Liabilities related to assets
held for sale at December 31, 2007 are the five Florida car washes sold in
January 2008.
F-28
We
entered into agreements on March 15, 2008 with a third party to lease and
ultimately purchase one of our full service car wash in San Antonio, Texas.
Pursuant to the agreements, the lessee must pay us $3,325 per month to lease
the
car wash, and is responsible for all underlying property and operating expenses.
By May 1, 2009, the lessee is obligated under a sale agreement to purchase
the
car wash site for $500,000 cash. If the purchase obligation is not satisfied,
we
will regain possession of the car wash and the lessee will forfeit to us a
$35,000 deposit made at the commencement of the agreements.
22.
Florida Security Division
In
April
2007, we determined that the former divisional controller of the Florida
Security division embezzled funds from the Company. We initially conducted
an
internal investigation, and our Audit Committee subsequently engaged a
consulting firm to conduct an independent forensic investigation. As a result
of
the investigation, we identified that the amount embezzled by the employee
during fiscal 2006 was approximately $240,000, with an additional $99,000 in
the
first quarter of fiscal 2007. The embezzlement occurred from a local petty
cash
checking account and from diversion of customer cash payments at the Florida
Security division. Additionally, the investigation uncovered an unexplained
inventory shortage in 2006 in the Florida Security division of approximately
$350,000 which may be due to theft. We filed a civil complaint against the
former employee in June 2007 and intend to pursue all legal measures to recover
our losses. SG&A expenses include charges of $240,000 and $99,000 in fiscal
year 2006 and 2007, respectively, representing embezzled funds at our Florida
Security division. If we recover any of the embezzled funds, such amounts will
be recorded as recoveries in future periods when they are received.
F-29
23.
Selected Quarterly Financial Information (In thousands, except per share
information) (Unaudited)
|
Year
Ended December 31, 2007
|
|||||||||
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
Total
|
||||||||||||
|
Revenues
|
$
|
9,815
|
$
|
9,814
|
$
|
12,991
|
$
|
14,469
|
$
|
47,089
|
||||||
|
Gross
profit
|
$
|
2,187
|
$
|
2,042
|
$
|
2,746
|
$
|
3,563
|
$
|
10,538
|
||||||
|
Loss
from continuing operations
|
$
|
(2,209
|
)
|
$
|
(1,984
|
)
|
$
|
(3,227
|
)
|
$
|
(1,947
|
)
|
$
|
(9,367
|
)
|
|
|
Income
(loss) from discontinued operations
|
$
|
1,551
|
$
|
720
|
$
|
(2
|
)
|
$
|
513
|
$
|
2,782
|
|||||
|
Net
loss
|
$
|
(658
|
)
|
$
|
(1,264
|
)
|
$
|
(3,229
|
)
|
$
|
(1,434
|
)
|
$
|
(6,585
|
)
|
|
|
Diluted
(loss) income per share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
(0.14
|
)
|
$
|
(0.13
|
)
|
$
|
(0.20
|
)
|
$
|
(0.12
|
)
|
$
|
(0.60
|
)
|
|
|
Discontinued
operations
|
$
|
0.10
|
$
|
0.05
|
$
|
0.00
|
$
|
0.03
|
$
|
0.18
|
||||||
|
Net
loss
|
$
|
(0.04
|
)
|
$
|
(0.08
|
)
|
$
|
(0.20
|
)
|
$
|
(0.09
|
)
|
$
|
(0.42
|
)
|
|
|
Year
Ended December 31, 2006
|
|||||||||
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
Total
|
||||||||||||
|
Revenues
|
$
|
11,248
|
$
|
11,138
|
$
|
10,579
|
$
|
9,655
|
$
|
42,620
|
||||||
|
Gross
profit
|
$
|
2,811
|
$
|
2,591
|
$
|
2,432
|
$
|
1,676
|
$
|
9,510
|
||||||
|
Loss
from continuing operations
|
$
|
(1,377
|
)
|
$
|
(2,236
|
)
|
$
|
(1,904
|
)
|
$
|
(2,631
|
)
|
$
|
(8,147
|
)
|
|
|
Income
(loss) from discontinued operations
|
$
|
411
|
$
|
356
|
$
|
(365
|
)
|
$
|
963
|
$
|
1,365
|
|||||
|
Net
loss
|
$
|
(966
|
)
|
$
|
(1,879
|
)
|
$
|
(2,269
|
)
|
$
|
(1,668
|
)
|
$
|
(6,782
|
)
|
|
|
Diluted
(loss) income per share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
(0.09
|
)
|
$
|
(0.14
|
)
|
$
|
(0.13
|
)
|
$
|
(0.17
|
)
|
$
|
(0.53
|
)
|
|
|
Discontinued
operations
|
$
|
0.03
|
$
|
0.02
|
$
|
(0.02
|
)
|
$
|
0.06
|
$
|
0.09
|
|||||
|
Net
loss
|
$
|
(0.06
|
)
|
$
|
(0.12
|
)
|
$
|
(0.15
|
)
|
$
|
(0.11
|
)
|
$
|
(0.44
|
)
|
|
|
Year
Ended December 31, 2005
|
|||||||||
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
Total
|
||||||||||||
|
Revenues
|
$
|
11,126
|
$
|
12,878
|
$
|
10,866
|
$
|
10,877
|
$
|
45,747
|
||||||
|
Gross
profit
|
$
|
2,756
|
$
|
3,558
|
$
|
2,721
|
$
|
2,820
|
$
|
11,855
|
||||||
|
Income
(loss) from continuing operations
|
$
|
(527
|
)
|
$
|
(9
|
)
|
$
|
(543
|
)
|
$
|
(4,629
|
)
|
$
|
(5,708
|
)
|
|
|
Income
(loss) from discontinued operations
|
$
|
539
|
|
$
|
448
|
$
|
(585
|
)
|
$
|
286
|
$
|
688
|
||||
|
Net
income (loss)
|
$
|
11
|
$
|
439
|
$
|
(1,128
|
)
|
$
|
(4,342
|
)
|
$
|
(5,020
|
)
|
|||
|
Diluted
income (loss) per share:
|
||||||||||||||||
|
Continuing
operations
|
$
|
(0.03
|
)
|
$
|
0.00
|
$
|
(0.03
|
)
|
$
|
(0.30
|
)
|
$
|
(0.38
|
)
|
||
|
Discontinued
operations
|
$
|
0.03
|
$
|
0.03
|
$
|
(0.04
|
)
|
$
|
0.02
|
$
|
0.05
|
|||||
|
Net
income (loss)
|
$
|
0.00
|
$
|
0.03
|
$
|
(0.07
|
)
|
$
|
(0.28
|
)
|
$
|
(0.33
|
)
|
|||
All
quarters have been restated to reflect our Arizona, Northeast and Florida car
wash regions and our Truck washes as discontinued operations, consistent with
our presentation at December 31, 2007.
In
the
fourth quarter of 2006, the Company recorded adjustments, (i) to reverse
previously recorded depreciation expense on assets held for sale of
approximately $357,000, (ii) to reverse an accrual for accounting fees of
approximately $120,000, and (iii) adjustments to certain balance sheet accounts
as a result of our investigation into the irregularities in the accounting
information in Florida Security Products division (approximately $500,000 in
additional expenses, including approximately $130,000 of embezzled funds.)
These
adjustments which total a net expense of approximately $23,000, which related
to
activity in the first three quarters of 2006, were recorded in the fourth
quarter of 2006.
In
the
fourth quarter of 2007, the Company recorded an adjustment to reclass an
unrealized gain on short-term investments of $167,000 from Other Comprehensive
Income to a realized gain on short-term investments in other income. The
realized gains related to prior years.
F-30
EXHIBIT
INDEX
|
Exhibit
No.
|
Description | |
|
Statement
Re: Computation of Per Share Earnings
|
||
|
21
|
Subsidiaries
of the Company
|
|
|
23.1
|
Consent
of Grant Thornton LLP
|
|
|
24
|
Power
of Attorney (included on signature page)
|
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
F-31