<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 21, 1999
MACE SECURITY INTERNATIONAL, INC.
---------------------------------
(Exact name of Registrant as Specified in its Charter)
Delaware
(State of Incorporation)
0-22810
(Commission File Number)
03-0311630
(IRS Employer Identification No.)
1000 Crawford Place, Suite 400, Mount Laurel, New Jersey 08054
(Address of Principal Executive Offices)
(856) 778-2300
(Registrant's Telephone Number)
<PAGE>
Item 5. Other Events
REPORTING OF CERTAIN FINANCIAL AND OTHER INFORMATION FOR REGISTRATION AND OTHER
PURPOSES.
The Registrant is filing herewith audited restated consolidated financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations (restated), which reflects the acquisition of Innovative
Control Systems, Inc. on July 9, 1999, 50's Classic Car Wash and CRCD, Inc. on
August 25, 1999, and Eager Beaver Car Wash, Inc. on September 9, 1999. Each of
these acquisitions was accounted for as a pooling of interests.
Such financial information is attached hereto as Exhibit 99 and incorporated
herein by reference. Exhibit 99 is hereby incorporated by reference into the
Registrant's Registration Statements.
<PAGE>
Item 7. Financial Statements and Exhibits
(c) Exhibits.
The Exhibits to this Report are listed in the Exhibit Index set forth
elsewhere herein.
________________________________________________________________________________
Signature
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Mace Security International, Inc.
By: /s/ Gregory M. Krzemien
------------------------
Gregory M. Krzemien
Chief Financial Officer
Date: December 21, 1999
<PAGE>
Mace Security International, Inc.
Exhibit Index
Exhibit No. Description
- ----------- -----------
23.1 Consent of Ernst & Young LLP
23.2 Consent of Urbach Kahn & Werlin PC
23.3 Consent of D. Williams & Co.
23.4 Consent of Daniel Irwin & Associates, P.C.
23.5 Opinion of Urbach Kahn & Werlin PC
23.6 Opinion of D. Williams & Co.
23.7 Opinion of Daniel Irwin & Associates, P.C.
27.1 Financial Data Schedule for the Years Ended December 31, 1998 and
December 31, 1997 (for SEC use only)
99 Financial Information
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-31757) of Mace Security International, Inc. of our report dated
December 16, 1999, with respect to the consolidated financial statements
(restated) of Mace Security International, Inc. as of December 31, 1998 and for
each of the two years in the period ended December 31, 1998 included in this
Form 8-K.
/s/ ERNST & YOUNG LLP
Philadelphia, Pennsylvania
December 16, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement of
Mace Security International, Inc. on Form S-8 (Registration No. 333-31757) filed
on June 9, 1997 of our report dated April 2, 1999 on the consolidated financial
statement of Mace Security International, Inc. (the "Company"), included in the
Company's Annual Report on Form 10-KSB dated April 14, 1999 and the Company's
Current Report on Form 8-K dated December 21, 1999 both filed with the
Securities and Exchange Commission.
/s/ URBACH KAHN & WERLIN PC
Albany, New York
December 20, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement of
Mace Security International, Inc. on Form S-8 (Registration No. 333-31757 filed
on June 9, 1997) of our report dated September 14, 1999 with respect to the
combined financial statements of 50's Classic Car Wash of Lubbock, Inc. and
CRCD, Inc. included in Mace Security International, Inc.'s Current Report on
Form 8-K dated December 21, 1999 filed with the Securities and Exchange
Commission.
/s/ D. WILLIAMS & CO., P.C.
Lubbock, TX
December 20, 1999
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement of
Mace Security International, Inc. on Form S-8 (Registration No. 333-31757 filed
on June 9, 1997) of our report dated September 18, 1999, with respect to the
financial statements of Innovative Control Systems, Inc. included in Mace
Security International, Inc.'s Current Report on Form 8-K dated December 21,
1999 filed with the Securities and Exchange Commission.
/s/ DANIEL P. IRWIN AND ASSOCIATES P.C.
Strafford-Wayne, Pennsylvania
December 20, 1999
<PAGE>
Exhibit 23.5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Mace Security International, Inc.
We have audited the accompanying consolidated balance sheets of Mace
Security International, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mace
Security International, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ URBACH KAHN & WERLIN PC
Albany, New York
April 2, 1999
<PAGE>
Exhibit 23.6
The Board of Directors
50's Classic Car Wash
and CRCD, Inc.
Independent Auditors' Report
We have audited the accompanying combined balance sheets of 50's Classic Car
Wash and CRCD, Inc. (Companies) as of December 31, 1998 and 1997 and the related
combined statements of income, common stock and equity, and cash flows for the
years then ended. The combined financial statements include the financial
statements of 50's Classic Car Wash and CRCD, Inc., which are related through
common ownership and management. These combined financial statements are the
responsibility of the Companies' management. Our responsibility is to express
an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Companies as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ D. Williams & Co., P.C.
September 14, 1999
<PAGE>
Exhibit 23.7
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
Innovative Control Systems, Inc.
112 Meyer Road
Nazareth, Pennsylvania 18064
We have audited the accompanying Balance Sheets of Innovative Control Systems,
Inc. as of December 31, 1998 and December 31, 1997, and the Statement of
Operations, Retained Earnings, Changes in Stockholders' Equity and Cash Flows
for the calendar years then ended. These Financial Statements are the
responsibility of the Company's Management. Our responsibility is to express an
opinion on these Financial Statements based on our audit.
We conducted our audit in accordance with Generally Accepted Auditing Standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Innovative Control Systems,
Inc. as of December 31, 1998 and 1997 and the results of its operations and cash
flows for the periods then ended in conformity with generally accepted
accounting principles.
/s/ DANIEL P. IRWIN AND ASSOCIATES P.C.
Strafford-Wayne, Pennsylvania
September 18, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 4,673 0
<SECURITIES> 0 0
<RECEIVABLES> 1,614 0
<ALLOWANCES> 91 0
<INVENTORY> 1,762 0
<CURRENT-ASSETS> 8,257 0
<PP&E> 8,923 0
<DEPRECIATION> 3,379 0
<TOTAL-ASSETS> 15,926 0
<CURRENT-LIABILITIES> 2,495 0
<BONDS> 4,115 0
0 0
0 0
<COMMON> 82 0
<OTHER-SE> 9,234 0
<TOTAL-LIABILITY-AND-EQUITY> 15,926 0
<SALES> 4,508 3,659
<TOTAL-REVENUES> 9,200 8,144
<CGS> 2,496 2,268
<TOTAL-COSTS> 5,273 5,055
<OTHER-EXPENSES> 3,401 3,001
<LOSS-PROVISION> 131 113
<INTEREST-EXPENSE> 315 461
<INCOME-PRETAX> 363 (229)
<INCOME-TAX> 4 8
<INCOME-CONTINUING> 359 (237)
<DISCONTINUED> (586) (1,209)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (227) (1,446)
<EPS-BASIC> (.03) (.17)
<EPS-DILUTED> (.03) (.17)
</TABLE>
<PAGE>
EXHIBIT 99
Mace Security International, Inc.
Consolidated Financial Statements (Restated)
Years ended December 31, 1998 and 1997
Index to Financial Information
Contents
(a) Financial Information (Restated)
Report of Independent Auditors............................... F-2
Audited Consolidated Financial Statements
-----------------------------------------
Consolidated Balance Sheet................................... 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
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations (Restated)............................. F-23
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Mace Security International, Inc.
We have audited the accompanying consolidated balance sheet (restated) of Mace
Security International, Inc. and subsidiaries as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows (restated) for each of the two years in the period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
certain of the entities constituting the Company (Mace--prior to combination for
pooling of interest acquisitions, Innovative Control Systems, Inc., and 50's
Classic Car Wash and CRCD, Inc., as discussed in Note 1), which statements
reflect total assets constituting 70% at December 31, 1998 and total revenues
constituting 57% in 1998 and 53% in 1997, of the respective consolidated
financial statement totals. Those statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it relates
to data included for those entities is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Mace Security International, Inc. and
subsidiaries at December 31, 1998, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
December 16, 1999
F-2
<PAGE>
Mace Security International, Inc. and Subsidiaries
Consolidated Balance Sheet (Restated)
<TABLE>
<CAPTION>
ASSETS December 31,
1998
----------------
<S> <C>
Current assets:
Cash and cash equivalents (including escrow of $610,800) $ 4,672,695
Accounts receivable, less allowance for doubtful
accounts of $90,904 1,522,710
Inventory 1,761,617
Prepaid expenses and other current assets 299,873
----------------
Total current assets 8,256,895
Property and equipment:
Land 2,129,855
Buildings and leasehold improvements 3,930,558
Machinery and equipment 2,626,072
Furniture and fixtures 236,864
----------------
Total property and equipment 8,923,349
Accumulated depreciation (3,378,974)
----------------
5,544,375
Net assets of discontinued operations 326,835
Other intangible assets, net of accumulated amortization
of $1,009,282 1,020,702
Notes receivable from stockholders/officers 543,985
Other assets 233,190
----------------
Total assets $15,925,982
================
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY December 31,
1998
-----------------
<S> <C>
Current liabilities:
Accounts payable $ 644,021
Deferred revenue 235,604
Accrued expenses and other current liabilities 571,820
Current portion of notes payable to related parties 509,321
Current portion of long-term debt 534,636
-----------------
Total current liabilities 2,495,402
Notes payable to related parties, net of current portion 1,347,252
Long-term debt, net of current portion 2,767,205
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 2,000,000
Issued and outstanding shares - none -
Common stock, $.01 par value:
Authorized shares - 18,000,000
Issued and outstanding shares 8,179,620 81,796
Additional paid-in capital 14,272,243
Accumulated deficit (4,985,528)
-----------------
9,368,511
Less treasury stock at cost -256,666 common shares (52,388)
-----------------
Total stockholders' equity 9,316,123
-----------------
Total liabilities and stockholders' equity $15,925,982
=================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Mace Security International, Inc. and Subsidiaries
Consolidated Statements of Operations (Restated)
<TABLE>
<CAPTION>
Year ended
December 31,
----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Car wash and detailing services $ 4,419,870 $ 4,211,013
Security product sales 2,404,221 2,657,354
Computer products and services 2,029,884 895,252
Fuel, lube and merchandise sales 345,576 380,673
------------ ------------
9,199,551 8,144,292
Cost of revenues:
Car wash and detailing services 2,598,863 2,605,005
Security product sales 1,230,375 1,645,077
Computer products and services 1,206,044 533,994
Fuel, lube and merchandise sales 237,798 271,128
------------ ------------
5,273,080 5,055,204
Selling, general and administrative expenses 2,776,900 2,149,433
Depreciation and amortization 755,339 964,572
------------ ------------
Operating income (loss) 394,232 (24,917)
Interest expense (452,674) (493,172)
Interest income 137,486 32,130
Other income 284,600 256,606
------------ ------------
Income (loss) from continuing operations before income taxes 363,644 (229,353)
Income tax expense 4,358 7,800
------------ ------------
Income (loss) from continuing operations 359,286 (237,153)
Loss from discontinued operations,
net of $0 applicable income taxes (585,903) (1,209,291)
------------ ------------
Net loss $ (226,617) $ (1,446,444)
============ ============
Basic income (loss) per share
From continuing operations $ 0.04 $ (0.03)
From discontinued operations (0.07) (0.14)
------------ ------------
Total $ (0.03) $ (0.17)
============ ============
Weighted average number of shares outstanding 8,341,747 8,274,643
============ ============
Diluted income (loss) per share
From continuing operations $ 0.04 $ (0.03)
From discontinued operations (0.07) (0.14)
------------ ------------
Total $ (0.03) $ (0.17)
============ ============
Weighted average number of shares outstanding 8,364,106 8,274,643
============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
Mace Security International, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Restated)
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Additional
Common Common Paid-in Accumulated Treasury
Shares Stock Capital Deficit Stock Total
--------- --------- ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997............ 8,179,620 $ 81,796 $ 13,563,527 $ (2,359,291) $ - $ $11,286,032
Shares issued to satisfy debt
obligation........................... - - 454,488 - - 454,488
Shares issued for MSP
Retail, Inc. acquisition............. 176,666 1,767 163,858 - - 165,625
Shares issued for MS, Inc.
acquisition.......................... 80,000 800 89,200 - - 90,000
Net loss.............................. - - - (1,446,444) - (1,446,444)
Dividends paid to former stockholders
of pooled companies.................. - - - (452,935) - (452,935)
---------- --------- ------------- ------------- ---------- ------------
Balance at December 31, 1997.......... 8,436,286 84,363 14,271,073 (4,258,670) - 10,096,766
Shares issued as compensation......... - - 1,170 - - 1,170
Shares redeemed in connection
with discontinued operations......... (256,666) (2,567) - - (52,388) (54,955)
Net loss.............................. - - - (226,617) - (226,617)
Dividends paid to former stockholders
of pooled companies.................. - - - (500,241) - (500,241)
---------- --------- ------------- ------------- ---------- -------------
Balance at December 31, 1998.......... 8,179,620 $ 81,796 $ 14,272,243 $ (4,985,528) $ (52,388) $ 9,316,123
========== ========= ============= ============= ========== =============
</TABLE>
See accompanying notes.
F-6
<PAGE>
Mace Security International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Restated)
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Operating activities
Net loss $ (226,617) $ (1,446,444)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 755,339 964,572
Gain on sale of division (271,452) -
Changes in operating assets and liabilities:
Accounts receivable 478,645 721,531
Inventory (173,431) 1,317,682
Accounts payable 24,654 (579,580)
Accrued expenses and other current (295,161) 203,571
Prepaid expenses and other current assets 24,230 (102,708)
Discontinued operations 2,492,252 -
Other (78,863) (10,180)
---------------- ------------------
Net cash provided by operating activities 2,729,596 1,068,444
Investing activities
Acquisition of businesses, net of cash acquired - (51,372)
Proceeds from sale of property and equipment - 13,744
Proceeds attributable to non-current portion of division sold 3,117,235 -
Purchase of property and equipment (185,296) (421,470)
Payments for intangibles (53,539) (24,678)
Other 1,170 454,495
---------------- ----------------
Net cash provided by (used in) investing activities 2,879,570 (29,281)
Financing activities
Payments on notes payable to bank and long-term debt (1,923,076) (675,475)
Proceeds from notes payable to bank and long-term debt 90,955 1,265,936
Net proceeds (payments) on notes payable to related parties 94,768 (491,173)
Dividends paid to former stockholders of pooled companies (500,241) (452,935)
Advances made to stockholders (233,165) (241,835)
Purchase of treasury stock (52,388) -
Debt issue costs - (28,800)
Proceeds from grant payable - 93,800
---------------- ----------------
Net cash used in financing activities (2,523,147) (530,482)
---------------- ----------------
Net increase in cash and cash equivalents 3,086,019 508,681
Cash and cash equivalents at beginning of year 1,586,676 1,077,995
---------------- ----------------
Cash and cash equivalents at end of year $ 4,672,695 $ 1,586,676
================ ================
</TABLE>
See accompanying notes.
F-7
<PAGE>
Mace Security International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Restated)
1. Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Mace
Security International, Inc. (the parent Company) and its wholly owned
subsidiaries (the "Company"). All significant intercompany transactions have
been eliminated in consolidation.
The accompanying consolidated financial statements include the financial
position and results of operations of: (i) Mace Security International, Inc.
(prior to combination), (ii) Innovative Control Systems, Inc. (ICS) which was
acquired on July 9, 1999, (iii) 50's Classic Car Wash and CRCD, Inc.
(collectively, "Classic") which was acquired on August 25, 1999, and (iv) Eager
Beaver Car Wash, Inc. ("Eager Beaver") which was acquired on September 9, 1999.
These transactions were accounted for as poolings of interests. The Company has
released post-combination financial information that included the date of
consummation of these transactions; and accordingly, the consolidated financial
statements have been restated to include the accounts of ICS, Classic, and Eager
Beaver for all periods presented.
Separate financial information of each of the aforementioned entities is as
follows:
<TABLE>
<CAPTION>
Total Assets
Dollars Percentage
<S> <C> <C>
Mace (prior to combination
for pooling of interest acquisitions) $ 9,777,269 61%
ICS 586,952 4%
Classic 726,049 5%
Eager Beaver 4,835,712 30%
-----------------------------
$15,925,982 100%
=============================
<CAPTION>
Total Revenues
Year Ended December 31
-----------------------------------------------
1998 1997
-----------------------------------------------
Dollars Percentage Dollars Percentage
<S> <C> <C> <C> <C>
Mace (prior to combination
for pooling of interest
acquisitions) $2,404,221 26% $2,657,354 33%
ICS 2,029,884 22% 895,252 11%
Classic 779,530 9% 735,179 9%
Eager Beaver 3,985,916 43% 3,856,507 47%
-----------------------------------------------
$9,199,551 100% $8,144,292 100%
===============================================
</TABLE>
2. Summary of Significant Accounting Policies
Description of Business
The Company currently operates in three separate business segments: (i) the Car
Care segment, supplying complete car care services (including wash, detailing,
lube, and minor repairs), and (ii) the Security Products sales segment,
producing and marketing retailing consumer safety and security products, and
(iii) the Computer Products and Services segment, developing and manufacturing
products for management and control of the car care industry.
Revenue recognition
Revenue from the Company's Security Products sales segment is recognized when
shipments are made, or for export sales are recognized when title has passed.
Revenue from the Company's Car Care segment and Computer Products and Services
segment is recognized when goods are shipped or services are rendered. Revenues
related to telephone support provided by the Computer Products and Services
segment with new unit sales are deferred and recognized as income over the life
of the support contract, which is generally twelve months.
F-8
<PAGE>
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.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in first-out (FIFO) method for security and car care products and
using the average cost method for the Computer Products and Services segment.
Inventories at the Company's Car Care locations consist of various chemical
cleaning supplies used in operations and merchandise for resale to consumers.
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 - 25 to 40 years;
machinery and equipment - 5 to 7 years; and furniture and fixtures - 5 to 15
years. Significant additions or improvements extending assets' useful lives are
capitalized; normal maintenance and repair costs are expensed as incurred.
Depreciation expense was $548,111 and $672,681 for the years ended December 31,
1998 and 1997, respectively. Maintenance and repairs are charged to expense as
incurred and amounted to $82,000 in 1998 and $113,000 in 1997.
Intangible Assets
Intangible assets consist of trademarks and capitalized computer software
development costs. Trademarks are stated at cost and amortized on a straight-
line basis over 15 years. The Company accounts for costs of its computer
software to be sold or otherwise marketed in accordance with FAS #86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed". Costs incurred to establish the technological feasibility of a
computer software product to be sold by the Company are charged to expense when
incurred. When technical feasibility is established, costs are capitalized until
the product is commercialized. When the product is commercialized, capitalized
development costs are amortized over the useful life of the product ranging from
three to five years.
Supplementary Cash Flow Information
In September 1997, the Company obtained long-term debt from the First National
Bank of New England (See Note 6). As part of this refinancing, the Key Bank
long-term debt of $593,750 was paid. This non-cash transaction has been excluded
from proceeds from long-term debt, as well as payment of principal on long-term
debt.
Research Expense
Research and development expense, which is charged to operations as incurred,
was approximately $71,000 in 1998 and $109,000 in 1997.
Deferred Revenue
The Company records a liability for outstanding gift certificates and ticket
books at its car care locations sold but not yet redeemed. The Company estimates
these redeemed amounts based on gift certificates and ticket book sales and
redemptions throughout the year as well as utilizing historical sales and
redemptions rates.
F-9
<PAGE>
Revenues related to telephone support services provided by the Company's
Computer Products and Services segment are recorded as a liability and
recognized as income over the life of the support contract, generally a twelve
month period.
Advertising
The Company expenses the production costs of first time advertising when the
advertising takes place. Advertising expense was approximately $328,000 and
$437,000 in 1998 and 1997, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 book
value of cash and cash equivalents, trade receivables, investments in closure
trust funds and trade payables are considered to be representative of their
respective fair values. The carrying value of the Company's long-term debt
approximates fair value based on current rates and terms.
Impairment of Long-lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", the Company evaluates the
recoverability of its long-lived assets which include trademarks, other
intangibles, and other assets whenever changes in circumstances indicate that
the carrying amount may not be recoverable. If indications are that the carrying
amount of the asset is not recoverable, the Company will estimate the future
cash flows expected to result from use of the asset and its eventual
disposition. If the sum of the expected future cash flows is less than the
carrying amount of the asset, the Company recognizes an impairment loss. The
impairment loss recognized is measured as the amount by which the carrying
amount of the asset exceeds its fair value.
During 1998, the Company's sale of its Law Enforcement division resulted in an
impairment loss attributable to a trademark. This loss, approximating $550,000,
is included with the gain on the sale of the Law Enforcement division in 1998,
which is a discontinued operations (Note 4).
3. Acquisitions
Acquisitions Accounted For Under the Pooling of Interests Method
On July 9, 1999, the Company completed its merger with Innovative Control
Systems ("ICS") and issued 603,721 unregistered shares of the Company's common
stock, par value $.01, in exchange for all outstanding shares of ICS. ICS
develops and manufactures products for the management and control of the car
care industry. Its primary product, a software package called "Tunnel Master",
provides car wash equipment control, point of sale and management information.
ICS also distributes products for management and control of auto lube operations
and a product called "Vision Master" which allows a user to access cameras and
view operations remotely using a personal computer. The transaction has been
accounted for using the pooling of interests method; and accordingly, the
accompanying consolidated financial statements include the accounts of ICS for
all periods presented.
On August 25, 1999, the Company completed its merger with 50's Classic Car Wash
and CRCD, Inc. (collectively "Classic") and issued 91,677 unregistered shares
of the Company's common stock, par value $.01, in exchange for all outstanding
shares of Classic. Classic owns and operates a car wash in Lubbock, Texas. The
car wash provides a range of services which include full service car wash,
gasoline sales and a custom detail shop. The transaction has been accounted for
using the pooling of interests method; and accordingly, the accompanying
consolidated financial statements include accounts of Classic for all periods
presented.
On September 9, 1999, the Company completed its merger with Eager Beaver Car
Wash, Inc. ("Eager Beaver") and issued 659,222 unregistered shares of the
Company's common stock, par value $.01, in exchange for all of the outstanding
shares of Eager Beaver. Eager Beaver operates carwash facilities and a
lubrication center from locations throughout west central and south
F-10
<PAGE>
central Florida. Eager Beaver operations provide a full line of car cleaning
services including washing, waxing and detailing services. The transaction has
been accounted for using the pooling of interests method; and accordingly, the
accompanying consolidated financial statements include the accounts of Eager
Beaver for all periods presented. The fiscal year end of Eager Beaver was
January 31. The consolidated results of operations of the Company for the year
ended December 31, 1998 and 1997 include the results of operations of Eager
Beaver for its fiscal year ended January 31, 1999 and 1998, respectively.
A detail of revenues and net income (loss) of the separate companies were as
follows:
<TABLE>
<CAPTION>
Income (loss)
from Continuing
Revenues Operations
---------------- ----------------
<S> <C> <C>
Year ended December 31, 1998:
Mace Security International, Inc. $2,404,221 $ (286,532)
ICS 2,029,884 (150,935)
Classic 779,530 76,660
Eager Beaver 3,985,916 720,093
---------------- ----------------
Combined $9,199,551 $ 359,286
================ ================
Year ended December 31, 1997:
Mace Security International, Inc. $2,657,354 $ (477,652)
ICS 895,252 (333,201)
Classic 735,179 37,508
Eager Beaver 3,856,507 536,192
---------------- ----------------
Combined $8,144,292 $ (237,153)
================ ================
</TABLE>
ICS, Classic, and Eager Beaver were Subchapter S Corporations prior to the
mergers, whereby, the taxable income or loss flowed through to the individual
shareholders. The effects of pro forma taxes as a C Corporation would result in
additional income tax expense of approximately $220,000 and $82,000 for the year
ended December 31, 1998 and 1997, respectively.
Acquisitions Accounted for Under the Purchase Method
In July 1997, the Company acquired all of the issued and outstanding common
stock of MSP, Inc. (MSP), an Aurora, Colorado marketer of a diversified line of
consumer safety and security products. This transaction was accounted for as a
purchase, and the operations of MSP have been included with the Company's from
the acquisition date. In the event MSP achieves certain financial goals, an
additional 15,000 shares of the Company's common stock is issuable. The purchase
price of $90,000 was represented by 80,000 shares of the Company's stock valued
at $1.125 per share.
In September 1997, the Company acquired all of the issued and outstanding common
stock of MSP Retail, Inc. (MSPR), an operator of two retail stores in the
Denver, Colorado area, specializing in the sale of security products for
personal and home protection. This transaction was recorded as a purchase, and
the operations of MSPR have been included with the Company's from the
acquisition date. The purchase price of $212,000 was represented by 176,666
shares of the Company's common stock valued at $.9375 per share and cash of
$46,300.
The operations of MSP, Inc. and MSP, Retail, Inc. were discontinued in 1998
(Note 4).
In September 1997, the Company established Mace Security Centers, Inc., a
subsidiary corporation formed for the purpose of offering franchises for the
operation of retail stores which will sell personal protection and security
products. The subsidiary became active during 1998 selling its first two
franchises.
F-11
<PAGE>
4. Discontinued Operations
On July 14, 1998, the Company sold substantially all of the assets of its Law
Enforcement division within its security products segment for cash of
$4,985,651. The sales price for the fixed assets, license fees, and intangibles
was $3,117,235 which represented the book value as of December 31, 1997. The
sales price for inventory was $1,868,416 which represented the book value at
July 14, 1998. Proceeds from the sale of the inventory are included in net cash
provided by operating activities on the consolidated statement of cash flows.
Accordingly, the operating results of its Law Enforcement division have been
segregated from continuing operations and reported, on a comprehensive basis, as
a separate line item on the consolidated statement of operations entitled "Loss
from discontinued operations" and entitled "Net assets of discontinued
operations" on the consolidated Balance Sheet. In conjunction with the sale of
assets, the Company licensed to the purchaser the use of Mace(R) and related
trademarks and a patent for use by the purchaser in the Law Enforcement market
and received a one-time license fee of $650,000. The Company retained the cash
and customer accounts receivable from the Law Enforcement division at closing.
The Company utilized a portion of the sales price, $1,725,202, to pay off all
outstanding bank debt to a financial institution under its term loan agreements.
A portion of the sales price, $600,000, was retained by the purchaser in escrow
to secure, among other things, the Company's obligations under the
representations and warranties in the purchase agreement. During 1999, this
amount was returned to the Company. Notwithstanding the sale of the Law
Enforcement division, the Company fulfilled its obligation under a nonassignable
Department of Defense contract which was completed in September of 1999.
Accordingly, this contract is included in discontinued operations in the
accompanying consolidated statements of operations for the year ended December
31, 1998 and 1997.
During 1998, the Company disposed of two wholly-owned subsidiaries, MSP, Inc. (a
Colorado distributor) and MSP Retail, Inc. (Colorado retail stores which were
operated as Mace Security Centers(TM). The contracts between the Company and the
former owners of the distributorship and retail stores allowed the Company to
put back the shares of MSP, Inc. and MSP Retail, Inc. to the former owners if
certain pre-tax earnings targets were not met within one year following the
Company's acquisition. In both cases, the aforementioned subsidiaries failed to
make their pre-tax earnings targets. The Company put back the shares of MSP,
Inc. to the former owner in exchange for 80,000 shares of the Company that were
tendered as consideration in the acquisition of MSP, Inc. In a modified version
of the put with respect to MSP Retail, Inc., the Company transferred the net
assets of MSP Retail, Inc. to a corporation owned by the former owner in
exchange for 176,666 shares of the Company that were tendered as consideration
in the acquisition of MSP Retail, Inc. Further, both contracts called for
repayment of working capital loaned by the Company to MSP, Inc. and MSP Retail,
Inc. The repayment amount as defined by the contracts is the money loaned by the
Company reduced by operating losses incurred by the respective subsidiaries
during the twelve-month period each was owned by the Company. As a result of the
disposition of these subsidiaries, the Company incurred losses of $67,013 and
$47,317 related to MSP, Inc. and MSP Retail, Inc., respectively.
5. Accounts Receivable
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. Risk of losses from international sales are
minimized by requiring the majority of customers to provide irrevocable
confirmed letters of credit and/or cash advances. The Company maintains an
allowance for doubtful accounts at a level that management believes is
sufficient to cover potential credit losses.
The changes in the allowance for doubtful accounts are summarized as follows:
Year ended December 31,
---------------------------
1998 1997
---------- ----------
Balance at beginning of year $ 101,936 $ 136,719
Additions (charged to expense) 130,654 113,204
Deductions (141,686) (147,987)
---------- ----------
Balance at end of year $ 90,904 $ 101,936
========== ==========
F-12
<PAGE>
6. Inventories
Inventories at December 31, 1998 consist of the following:
Finished goods $ 598,114
Work in process 126,696
Raw materials and supplies 937,308
Fuel, merchandise inventory and car wash supplies 99,499
----------
$1,761,617
==========
7. Intangibles
The components of intangibles at December 31, 1998 are summarized below:
Trademarks $1,712,853
Trademark protection costs 154,088
Capitalized development costs 163,043
----------
Total intangibles 2,029,984
Less: Accumulated amortization 1,009,282
----------
Intangibles, net $1,020,702
==========
Amortization of intangible assets was $207,228 and $291,891 for the year ended
December 31, 1998 and 1997, respectively.
8. Note Payable to Bank
The Company has a $150,000 demand note payable at December 31, 1998. Interest is
payable on a monthly basis at an annual rate of prime plus one percent (8.75% at
December 31, 1998). This demand note is secured by the accounts receivable,
inventory, and fixed assets of ICS.
The Company also has a $100,000 line of credit facility with the First National
Bank of Abilene. Interest is payable monthly at a rate of 8.75% per year, and
the facility is secured by equipment and inventory of Classic. At December 31,
1998, $5,000 was outstanding under this facility.
F-13
<PAGE>
9. Long-Term Debt and Notes Payable to Related Parties
Long-term debt consists of the following:
December 31,
--------------
1998
--------------
Note payable - SouthTrust Bank, interest rate equal
to the one, three or five year United States Treasury
(as defined) plus 225 basis points; payable in equal
monthly payments of principal and interest, due
with a final balloon payment in March, 2000,
collateralized by car wash facilities of Eager Beaver $2,221,858
Notes payable to First National Bank of Abilene,
interest rate of 8.75%, due in monthly installments
of $7,900 including interest, due in June 2008,
collateralized by equipment and inventory of Classic
621,936
Grant payable to Ben Franklin technology Center
(BFTC), repaid in July 1999 through the issuance
of 25,807 shares of Mace stock 246,920
Notes payable to various financial institutions,
interest rates ranging from 3.9% to 8.9%, payable in
monthly installments of $2,135, due through
October 2002 56,127
Note payable to Sovereign Bank, interest rate
of prime plus one percent (8.75% at December 31,
1998), due on demand, secured by accounts
receivable, inventory and fixed assets of ICS 150,000
Note payable to First National Bank of Abilene,
interest rate of 8.75%, due on demand, secured by
equipment and inventory of Classic 5,000
Affiliate notes payable, interest at an interest
rate of 7%, principal balance due August 2000 1,389,399
Notes payable to stockholder, interest rate of 10%
due monthly, paid in full in August 1999 244,611
Notes payable to related party, interest rate of
prime plus 1/2% (8.25 at December 31, 1998), due
December 1, 1999 100,000
Note payable to related party, no stated interest
rate, due on demand 74,500
Interest only demand note payable to related
party, interest rate of 7% 40,000
Note payable to shareholder, no stated interest
rate, due on demand 8,063
--------------
5,158,414
Less: current portion 1,043,957
--------------
$4,114,457
==============
F-14
<PAGE>
In September 1997, the Company refinanced its long-term debt with the First
National Bank of New England ("FNB"). Two term loans totaling $1,800,000 bearing
interest at prime plus 1.50% (10.0% at December 31, 1997) payable in monthly
installments of $23,791, including interest, due October 1, 2007, were obtained.
Of the proceeds, $593,750 was used to pay off the existing long-term debt.
Additionally, a $250,000 line of credit bearing interest at prime plus 1% (9.5%
at December 31, 1997) due May 31, 1998 was obtained. No amounts have been drawn
on this line of credit. The Company paid off the loan to FNB simultaneously with
the closing of the sale of its Law Enforcement division on July 14, 1998 (Note
4).
The Company has received grants from the Ben Franklin Technology Center (BFTC)
to assist the Company in developing its products and to create and maintain jobs
in Pennsylvania. The grants are repaid when the products for which the grants
are provided are commercialized and the repayments are made on either a royalty
basis or as a lump sum. The liability of $246,920 as of December 31, 1998
represents the total amount of grants received by the Company. This liability
was repaid in July 1999 through the issuance of 25,807 shares of Mace stock.
Maturities of long-term debt are as follows: 1999 - $1,043,957; 2000 -
$3,563,105; 2001 - $60,502; 2002 - $61,108; 2003 - $61,014; 2004 and thereafter
- - $368,728.
Interest paid on all indebtedness was $486,096 and $519,386 for the year ended
December 31, 1998 and 1997, respectively.
10. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
December 31,
1998
------------
Accrued compensation $ 135,300
Accrued professional fees 33,349
Customer prepayments 160,626
Advertising 22,248
Warranty payable 57,590
Other 162,707
------------
$ 571,820
============
11. Stock Option Plans
During September 1993, the Company adopted the 1993 Stock Option Plan (the
Plan). The 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 Plan. The options are non-
qualified stock options and are not transferable by the recipient. The Plan is
administered by the Compensation 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.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that are not developed for use in valuing employee stock options. Under
APB 25, if the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for grants
in 1998 and 1997; risk-free interest rate ranges of 5.53% to 5.88% in 1998 and
from 6.06% to 6.86% in 1997; dividend yield of 0%; expected volatility of the
market price of the Company's common stock of 89.5% in 1998 and 92.2% in 1997;
and a weighted-average expected life of the option of 13 years.
F-15
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997
--------- -----------
<S> <C> <C>
Pro forma net loss $(350,876) $(1,645,794)
Pro forma diluted loss per share $ (0.04) $ (0.20)
</TABLE>
Activity with respect to these plans is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------- ----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Number Price Number Price
-------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Shares under option, January 1 437,800 $1.48 276,400 $1.54
Options granted 98,500 $1.10 162,500 $1.40
Options repurchased (4,800) $5.50 - $ -
Options canceled (30,500) $1.38 (1,100) $5.50
-------------- ----------
Shares under option, December 31 501,000 $1.37 437,800 $1.48
============== ==========
Options exercisable, December 31 501,000 $1.37 437,800 $1.48
Shares available for granting of
options, December 31 129,000 192,200
</TABLE>
Stock options outstanding at December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Weighted Avg. Weighted
Range of Number Remaining Avg. Exercise
Exercise Prices Outstanding Contractual Life Price
--------------- ----------- ---------------- -------------
<S> <C> <C> <C>
$1.63 6,000 14.33 $1.63
$1.50 337,500 12.41 $1.50
$1.25 52,500 13.58 $1.25
$1.21 65,000 14.60 $1.21
$1.19 40,000 12.64 $1.19
-----------
501,000
===========
</TABLE>
In connection with the initial public offering of the Company's securities in
November 1993, the Company issued a total of 75,000 common stock purchase
warrants to the underwriters of the securities. These warrants expired in
November 1998.
In August 1994, the Company issued warrants to purchase 60,000 shares of Mace
Security International, Inc. common stock at
F-16
<PAGE>
$4.25 per share in connection with the purchase of certain assets of a business.
The warrants are exercisable over a ten year period, expiring on August 24,
2004. On July 14, 1998, in connection with the sale of the Law Enforcement
division (Note 4), the Company issued to the purchaser 300,000 warrants to
purchase common stock of the Company at $1.25 per share. These warrants were
fully exercised in March 1999.
The Company also has 100,000 other warrants to purchase common stock outstanding
at December 31, 1998. The warrants are exercisable at any time through August
2009 and have an exercise price of $9.25 per share.
During the exercise period, the Company will reserve a sufficient number of
shares of its common stock to provide for the exercise of the rights represented
by option and warrant holders.
12. 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 liabilities and assets at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
December 31,
1998
---------------
<S> <C>
Deferred tax liabilities:
Tax over book depreciation and amortization............................. $ (215,225)
Other, net.............................................................. (32,548)
---------------
Total deferred tax liabilities.................................... (247,773)
Deferred tax assets:
Allowance for doubtful accounts......................................... 12,878
Inventories............................................................. 45,147
Net operating loss carryforwards........................................ 1,355,600
Other, net.............................................................. 1,357
---------------
Total deferred assets............................................. 1,414,982
Valuation allowance for deferred tax assets................................ (1,167,209)
---------------
Net deferred tax assets.................................................... 247,773
---------------
Net deferred tax assets (liabilities)...................................... $ -
===============
</TABLE>
The valuation allowance for deferred tax assets increased by $146,000 during
1998. At December 31, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of $3,389,000 that begin to expire during the year
ended December 31, 2009, if unused. A valuation allowance has been provided to
reduce the deferred tax assets to a level which, more likely than not, will be
realized. However, due to the change in control discussed in Note 19, use of
these net operating loss carryforwards may be limited.
The components of income tax expense are:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Current (principally state taxes).................... $ 4,358 $ 7,800
Deferred............................................. - -
------------ ------------
Total income tax expense............................. $ 4,358 $ 7,800
============ ============
</TABLE>
The significant components of deferred income tax expense attributed to loss
from continuing operations for the years ended December 31, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Current deferred tax expense......................... $ 58,008 $ 37,336
Loss carry forward................................... (203,600) (615,707)
Valuation allowance for deferred tax assets.......... 145,592 578,371
------------ ------------
$ - $ -
============ ============
</TABLE>
F-17
<PAGE>
A comparison of the federal statutory rate to the Company's effective rate is as
follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
U.S. statutory rate..................................... (34%) (34%)
S Corporation income prior to pooling date.............. (99%) (6%)
State taxes, net of federal benefit..................... 2% 1%
Valuation allowance for deferred tax assets............. 133% 40%
------------ ------------
Effective tax rate 2% 1%
============ ============
</TABLE>
13. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997
------------ -----------
<S> <C> <C>
Numerator:
(Loss) income from continuing operations $ 359,286 $ (237,153)
Loss from discontinued operations (585,903) (1,209,291)
------------ -----------
Net (loss) income $ (226,617) $(1,446,444)
============ ===========
Denominator:
Denominator for basic income (loss)
per share - weighted average shares 8,341,747 8,274,643
Dilutive effect of options and warrants 22,359 -
------------ -----------
Denominator for diluted income (loss)
per share - weighted average shares 8,364,106 8,274,643
============ ===========
Basic income (loss) per share:
From continuing operations $ 0.04 $ (0.03)
From discontinued operations (0.07) (0.14)
------------ -----------
Total $ (0.03) $ (0.17)
============ ===========
Diluted income (loss) per share:
From continuing operations $ 0.04 $ (0.03)
From discontinued operations (0.07) (0.14)
------------ -----------
Total $ (0.03) $ (0.17)
============ ===========
</TABLE>
Concentration of Credit Risk
The Company maintains its cash accounts in high quality financial institutions.
At times, these balances may exceed insured amounts.
15. 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 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, 1998 are as follows: 1999 -
$104,000 and 2000 - $29,000. Rental expense under these leases was $182,000 and
$170,000 for the years ended December 31, 1998 and 1997, respectively.
The Company has entered into month to month and long-term sublease agreements
with tenants of their operating facility in
F-18
<PAGE>
Bennington, Vermont, including a related party. Total sublease rental income was
$110,406 and $93,231 in 1998 and 1997, respectively.
Future minimum rental receipts required under operating subleases that have
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1998 are:
1999 76,848
2000 44,828
--------
$121,676
========
During 1994, the Company paid $75,000 to a related entity to acquire all of the
rights and obligations under a lease agreement, including an option to purchase
the South Wing of its principal operating facility. Amortization of this
deferred cost was $13,440 in 1998 and 1997. The term of the lease expires on
January 31, 2000, and requires monthly payments of $6,161, plus the Company's
proportionate share of taxes, insurance, utilities and an annual cost of living
increase. The option may be exercised for $600,000 at the end of the lease term.
The Company is a party to a real estate purchase agreement with the Vermont
Economic Development Authority (VEDA) for the purchase of the Center and North
Wings of its headquarters, after the satisfaction or waiver of certain
contingencies by VEDA. The purchase price is $1,000,000, payable by delivery of
$150,000 in cash and a promissory note to VEDA for $850,000 at 4% interest per
annum, based on a 20 year amortization schedule with a balloon payment of
$100,000 due at the end of ten years. The Company previously deposited $75,000
of the total cash portion into an escrow account as required by the agreement.
The Company has elected not to purchase the building at this time and is leasing
the premises for $4,000 per month, together with taxes, insurance and utilities.
Subsequent to December 31, 1998, the Company assigned to Vermont Mill
Properties, Inc. ("VMP"), an entity controlled by Jon Goodrich, all of its
rights and obligations under the VEDA Agreement.
Eager Beaver is party to employment agreements with four of its key employees.
The employment agreements have provisions for, among other things, duties,
compensation and non-compensation benefits. Additionally, the employment
agreements provide that in the event of a "change of control", as defined in the
agreements, the employee will receive a lump sum cash payment on the effective
date of the "change of control" as severance in consideration for the employee's
past service to Eager Beaver. In connection with the common stock transaction
described in Note 3, the Company will recognize severance costs of approximately
$1.2 million in its results of operations during the third quarter of 1999
pursuant to these employment agreements.
The Company leases 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 1998 and 1997 revenues of approximately $36,800 and $57,200, respectively
were recognized under these leasing arrangements. These amounts are classified
as other income in the accompanying statements of income.
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 with
all applicable laws relating to its business.
The Company is a party to various legal proceedings related to its normal
business activities. In the opinion of the Company's management, none of these
proceedings are material in relation to the Company's results of operations,
liquidity, cash flows or financial condition.
16. Employee Benefit Plan
The Company maintains a voluntary 401(k) plan covering substantially all of its
employees. Employees may contribute from 1% to 20% of their regular wages, up to
the limit permitted by the Department of Labor. The Company matches 25% of each
dollar contributed by employees up to 4% of their wages. The cost of the plan
amounted to approximately $21,000 and $28,000 in 1998 and 1997, respectively.
17. Related Party Transactions
The Company paid legal and management/consulting fees to officers and directors
approximating $31,000 and $57,350 in 1998 and 1997, respectively.
From time to time and during fiscal 1998 and 1997, Eager Beaver made unsecured
non-interest bearing advances to certain of its stockholders who are also
officers. Substantially all of the advances were subsequently repaid from the
dividend distributions of
F-19
<PAGE>
Eager Beaver.
The Company occupies its corporate offices, a portion of a multi-tenant
building, under an informal arrangement with Bullseye Properties, Inc., an
affiliated company. Under these arrangement, Eager Beaver pays no rent but is
responsible for insurance, maintenance, utilities and certain common area
charges on a pro rata basis.
Eager Beaver provides monthly accounting and administrative services to Bullseye
Properties, Inc. Revenues recognized under this arrangement totaled
approximately $12,100 in each of fiscal 1998 and 1997.
18. Segment Reporting
The Company currently operates in three separate business segments: (i) the Car
Care segment, supplying complete car care services (including wash, detailing,
lube, and minor repairs), and (ii) the Security Products sales segment,
producing and marketing retailing consumer safety and security products, and
(iii) the Computer Products and Services segment, developing and manufacturing
products for management and control of the car care industry.
The Company evaluates performances and allocates resources based on operating
income of each reportable segment rather then at the operating unit level. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies (see Note 2). There are no
intersegment sales.
Selected financial information for each reportable segment is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Revenues:
Car care $ 4,765,446 $4,591,686
Security products 2,404,221 2,657,354
Computer products and services 2,029,884 895,252
------------ -------------
$ 9,199,551 $8,144,292
============ =============
Operating income:
Car care $ 1,060,103 $ 854,558
Security products (545,321) (478,300)
Computer products and services (120,550) (401,175)
------------ -------------
$ 394,232 $ (24,917)
============ =============
Assets:
Car care $ 5,561,761
Security products 9,777,269
Computer products and services 586,952
------------
$15,925,982
============
Capital expenditures:
Car care $ 40,784 $ 158,691
Security products 122,568 238,726
Computer products and services 21,944 24,053
------------ -------------
$ 185,296 $ 421,470
============ =============
Depreciation and amortization:
Car care $ 198,595 $ 207,280
Security products 516,714 723,241
Computer products and services 40,030 34,051
------------ -------------
$ 755,339 $ 964,572
============ ===============
</TABLE>
F-20
<PAGE>
19. Subsequent Events
On March 26, 1999, the Company entered into a Merger Agreement with American
Wash Services, Inc. ("AWS"), a car wash company controlled by Mr. Paolino,
pursuant to which AWS was merged with and into a wholly-owned subsidiary of the
Company on July 1, 1999. Mr. Paolino and Red Mountain Holdings, Ltd., AWS's
other shareholder, received in exchange for all of the shares of AWS,
$4,687,500, in cash, and 628,362 unregistered shares of Common Stock, of which
Mr. Paolino received 470,000 shares and Red Mountain received 158,362 shares.
Mr. Paolino and Mr. Kramer received additional consideration in connection with
this merger:
. Mr. Paolino received a warrant to purchase 1,500,000 shares of Common
Stock at a purchase price of $1.375 per share;
. Mr. Paolino received a warrant to purchase 250,000 shares of Common
Stock at a purchase price of $2.50 per share; and
. Mr. Kramer received a warrant to purchase 75,000 shares of Common Stock
at a purchase price of $1.375 per share.
This transaction was completed on July 1, 1999 and will be accounted for using
the purchase method of accounting.
On May 17, 1999, the Company acquired all of the outstanding stock of Colonial
Full Service Car Wash, Inc. ("Colonial") in exchange for 1,250,991 unregistered
shares of the Company's common stock and the assumption of debt and negative
working capital of approximately $6,734,000. This transaction will be accounted
for using the purchase method of accounting.
On May 18, 1999, the Company acquired certain assets of Genie Car Wash Inc. of
Austin, Genie Car Care Center, Inc., and Genie Car Service Center, Inc.
(collectively, "Genie"). Consideration under the Agreement consisted of 533,333
unregistered shares of common stock of the Company, $1,000,000 of cash, and the
issuance of a $4,750,000 promissory note. The assets acquired consist of
substantially all of the real estate, equipment, and inventories utilized in the
car wash businesses. This transaction will be accounted for using the purchase
method of accounting.
On May 24, 1999, the Company appointed Louis D. Paolino, Jr., Robert M. Kramer
and Gregory M. Krzemien to serve as the Company's President and Chief Executive
Officer, Executive Vice President, Secretary and General Counsel, and Chief
Financial Officer and Treasurer, respectively. Louis D. Paolino, Jr. and
Constantine N. Papadakis also were appointed to the Board of Directors of the
Company to fill the vacancies resulting from the resignations of three
directors.
On June 1, 1999, the Company acquired substantially all of the assets of Gabe's
Plaza Car Wash, Inc. ("Gabe's") in exchange for $210,000 in cash and delivery of
a promissory note for $717,000. The transaction will be accounted for using the
purchase method of accounting.
On June 22, 1999, the Company acquired substantially all of the assets of the
Moorestown Car Wash in exchange for $225,000 and the issuance of 20,930
unregistered shares of common stock of the Company. This transaction will be
accounted for using the purchase method of accounting.
On July 1, 1999, the Company acquired substantially all the assets of Stephen
Bulboff and Stephen B. Properties, Inc. (collectively, "Shammy Shine" or
"Stephen Bulboff") in exchange for 860,000 unregistered shares of common stock
of the Company and cash consideration of $1,900,000. Stephen Bulboff owns and
operates a total of ten exterior only car washes in Pennsylvania, New Jersey and
Delaware. This will be accounted for using the purchase method of accounting.
On August 24, 1999, the Company acquired, through a wholly owned subsidiary,
substantially all of the assets of Shammy Man Car Wash ("Shammy Man") in
exchange for 62,649 unregistered shares of common stock cash consideration of
$475,000 and the assumption of approximately $400,000 of debt. This transaction
has been accounted for using the purchase method of accounting.
On September 9, 1999, the Company acquired all of the assets of Quaker Car Wash,
Inc. ("Quaker") in exchange for 224,072 unregistered shares of common stock and
approximately $1,055,000 of cash consideration. This transaction will
beaccounted for using the purchase method of accounting.
On October 18, 1999, the Company acquired all of the car wash related assets of
White Glove Car Wash ("White Glove") located in Tempe, Arizona. Consideration
consisted of 38,095 unregistered shares of common stock of the Company, $130,000
of cash, and the issuance of a $345,000 promissory note. This transaction will
be accounted for using the purchase method of accounting.
On October 29, 1999, the Company acquired certain real estate and car wash
equipment from Ince Car Wash, Inc. for cash consideration of approximately
$200,000 and the assumption of $2.1 million of long-term debt. The assets will
be used by the
F-21
<PAGE>
Company to operate a full service car wash, fuel center and convenience store in
Lubbock, Texas.
Additionally, on October 29, 1999, the Company consummated the acquisition of
Millennia Car Wash, L.L.C. ("Millennia") which the Company has operated under an
operating agreement since March 31, 1999. Millennia consists of 11 full service
car washes in the Phoenix, Arizona market and six full service car washes in the
San Antonio, Texas market as well as a total of five lube and repair centers,
eight fuel sales operations, and 17 convenience stores. Consideration under the
agreement, as amended, consisted of 3,500,000 unregistered shares of common
stock of the Company and the assumption of approximately $15.0 million of long-
term debt. This transaction will be accounted for using the purchase method of
accounting.
F-22
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Restated)
Disclosure Regarding 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 section, are Forward
Looking Statements. Although the Company believes that the expectations
reflected in such Forward Looking Statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Generally,
these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies, number
of acquisitions and projected or anticipated benefits from acquisitions made by
or to be made by the Company, or projections involving anticipated revenues,
earnings, levels of capital expenditures or other aspects of operating results.
All phases of the Company's operations are subject to a number of uncertainties,
risks and other influences, many of which are outside the control of the Company
and any one of which, or a combination of which, could materially affect the
results of the Company's operations and whether Forward Looking Statements made
by the Company ultimately prove to be accurate. Such important factors
("Important Factors") that could cause actual results to differ materially from
the Company's expectations are disclosed in this section and elsewhere in this
report. All subsequent written and oral Forward Looking Statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by the Important Factors described below that could cause actual
results to differ from the Company's expectations. The forward-looking
statements made herein are only made as of the date of this filing and the
Company undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
Ongoing Capital Requirements. To the extent that internally generated cash is
not sufficient to provide the cash required for future operations, capital
expenditures, acquisitions and debt repayment obligations, the Company will
require additional equity and/or debt financing in order to provide such cash.
The Forward Looking Statements assume that the Company will be able to raise the
capital necessary to finance such requirements at rates that are as good as or
better than those it is currently experiencing. There can be no assurance,
however, that such financing will be available or, if available, will be
available on terms satisfactory to the Company.
Availability of Acquisition Targets. The Company's ongoing acquisition program
is a key element of its expansion strategy. There can be no assurance that the
Company will succeed in locating appropriate acquisition candidates that can be
acquired at price levels that the Company considers appropriate. The Forward
Looking Statements assume that a number of acquisition candidates sufficient to
meet the Company's goals will be available for purchase and that the Company
will be able to complete the acquisitions at prices comparable to those that the
Company has experienced in the past quarter.
Integration. The Company's financial position and results of operations depend
to a large extent on the integration of recently acquired businesses. The
Forward Looking Statements assume that integration of acquired companies will
require from three to six months from the date the acquisition closes. Failure
to achieve effective integration in the anticipated time period could have
adverse effect on the Company's future results of operations.
Economic Conditions. The Company's business is affected by general economic
conditions. The Forward Looking Statements assume that the Company will be able
to achieve internal volume and price growth which are not impacted by an
economic downturn. There can be no assurance that an economic downturn will not
result in a reduction in the volume of business generated at the Company's
operations and/or the price that the Company can charge for its services.
Weather Conditions. Protracted periods of inclement weather adversely affect the
Company's operations by interfering with car washing and detailing. The Forward
Looking Statements assume that such weather conditions will not occur or that
they will be mitigated by the Company's geographic diversification of its
operations.
Dependence on Senior Management. The Company is highly dependent upon its senior
management team. In addition, as the Company continues to grow, its requirements
for operations management with car care industry experience will also increase.
The Forward Looking Statements assume that experienced management will be
available when needed by the Company at compensation levels that are within the
industry norms. The loss of the services of any member of senior management or
the inability to hire experienced operations management could have a material
adverse effect on the Company.
Year 2000 Systems Modifications. The Company expects to be Year 2000 compliant
in a timely manner and expects to have no material exposure with respect to
information technology-related systems. With respect to non-information
technology areas, it
F-23
<PAGE>
is uncertain what risks are associated with the Year 2000 issue and any risks
that may be identified could have a material, adverse effect on the Company's
business, financial condition, and results of operations and cash flows. There
can be no assurances that the systems of customers and vendors on which the
Company relies will be converted in a timely manner and will not have an adverse
effect on the Company's systems or operations. The Forward-Looking Statements
assume that there will be no material adverse effect on the Company's systems or
operations related to the Year 2000 issue.
Results of Operations for the Year ended December 31, 1998 Compared to the Year
Ended December 31, 1997
Revenues
The Company currently operates in three separate business segments: (i) the Car
Care segment, supplying complete car care services (including wash, detailing,
lube, and minor repairs), fuel and merchandise sales, (ii) the Security Products
sales segment, producing and marketing defense sprays, and marketing and
retailing consumer safety and security products, and (iii) the Computer Products
and Services segment.
Car Care Services
The Company owns full service, exterior only and self-service car wash locations
in Florida. The Company earns revenues from washing and detailing automobiles;
and selling merchandise through convenience stores within the car wash
facilities. Revenues generated for the year ended December 31, 1998 for the car
care segment were comprised of approximately 98% car wash and detailing, and 2%
fuel and merchandise.
The majority of revenues are collected in the form of cash or credit card
receipts, thus minimizing customer accounts receivable.
Weather can have a significant impact on volume at the individual locations.
Security Products
The Company operates its security products segment in two main divisions, the
Consumer Division and the Mace Anti-Crime Bureau Division. The Company's
Consumer Division manufactures and markets personal safety, and home and auto
security products. These products are sold through retail stores, major discount
stores, and at the Company's car care facilities. The Mace Anti-Crime Bureau
Division provides expertise in developing and producing criminal deterrent
systems for government and law enforcement agencies, and financial institutions.
Computer Products and Services
The Company's computer products and service segment is a developer, manufacturer
and retailer of specialty point of sale and control software for principally the
car care industries. Its primary product, a software package called "Tunnel
Master", provides car wash equipment control, point of sale and management
information and a software product which provides management and control of lube
operations. The software is usually sold as a package with computer hardware,
car wash tunnel controller equipment and customer service support contracts.
Another software product being marketed is called "Vision Master" which allows
users to access cameras and view operations remotely using a personal computer
from anywhere in the world. These products and services are sold direct and
through independent distributors.
Cost of Revenues
Car Care Services
Cost of revenues consists primarily of direct labor and related taxes and
benefits, chemicals, wash and detailing supplies, rent, real estate taxes,
utilities, maintenance and repairs of equipment and facilities, as well as the
cost of the fuel and merchandise sold.
Security Products
Cost of revenues consists primarily of costs to manufacture the security
products including direct labor and related taxes and benefits, and raw material
costs.
F-24
<PAGE>
Computer Products and Services
Cost of revenues consists primarily of costs to manufacture the products
including direct labor and related taxes and benefits, and raw material costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of management,
clerical and administrative salaries, professional services, insurance premiums,
and costs relating to marketing and sales.
Depreciation and Amortization
Depreciation and amortization consists primarily of depreciation of buildings
and equipment, and amortization of goodwill and other intangible assets.
Buildings and equipment are depreciated over the estimated useful lives of the
assets using the straight line method. Goodwill and other intangibles are
amortized over their useful lives using the straight line method.
Other Income and Expense
Other income and expense includes gains and losses on the sale of equipment,
asset write-downs, and rental income largely from subletting at the Company's
Vermont leased facility.
Taxes
The Company recorded tax expense of $4,358 and $7,800 for the years ended
December 31, 1998 and 1997, respectively. The tax expenses represent corporate
franchise taxes.
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of revenues 57.3 62.1
Selling, general and administrative expenses 30.2 26.4
Depreciation and amortization 8.2 11.8
------- -------
Operating income (loss) 4.3 (0.3)
Interest expense, net (3.4) (5.7)
Other (expense) income 3.1 3.2
------- -------
Income (loss) from continuing operations before income taxes 4.0 (2.8)
Income tax expense 0.1 0.1
------- -------
Income (loss) from continuing operations 3.9 (2.9)
Loss from discontinued operations (6.4) (14.8)
------- -------
Net loss (2.5) (17.7)
======= =======
</TABLE>
Revenues
Car Care Services
Revenues for the year ended December 31, 1998 were $4.8 million as compared to
$4.6 million for the year ended December 31, 1997, an increase of $0.2 or 4%. Of
the $4.8 million of revenues for the year ended December 31, 1998, $4.4 million
or 92% was generated from car wash and detailing, and $0.4 million or 8% from
fuel and merchandise sales. For the year ended December 31,
F-25
<PAGE>
1997, $4.2 million or 91% was generated from car wash and detailing, and $0.3
million or 9% from fuel and merchandise sales.
Security Products
Revenues for the year ended December 31, 1998 were $2.4 million as compared to
$2.7 million for the year ended December 31, 1997, a decrease of $0.3 million,
or 11%. This decrease is due to decreased sales in the consumer defense spray
market partially offset by increased revenues in the Anti-Crime Bureau Division
and franchise fees.
Computer Products and Services
Revenues for the year ended December 31, 1998 were $2.0 million as compared to
$0.9 million for the year ended December 31, 1997, an increase of $1.1 million
or 122%. This increase is due to the introduction of a new version of the
Tunnel Master software.
Cost of Revenues
Car Care Services
Cost of revenues were $2.8 million or 58% of revenues for the year ended
December 31, 1998 as compared to 2.9 million or 63% of revenues for the year
ended December 31, 1997.
Security Products
Cost of revenues for the year ended December 31, 1998 were $1.2 million compared
to $1.6 million for the year ended December 31, 1997. Cost of revenues as a
percentage of revenues for the year ended December 31, 1998, was 51% as compared
to 62% for the year ended December 31, 1997.
Computer Products and Services
Cost of revenues for the year ended December 31, 1998 were $1.2 million compared
to $0.5 million for the year ended December 31, 1997. Cost of revenues as a
percentage of revenues for the year ended December 31, 1998 was 59% as compared
to 60% for the year ended December 31, 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December 31,
1998 were $2.8 million compared to $2.1 million for the year ended December 31,
1997, an increase of $0.6 million or 29%. The primary reasons for this increase
were (i) an increase in expenses at the Mace Security Centers, the Company's
franchise subsidiary, and (ii) increased personnel in the computer products
segment needed to handle increased sales.
Depreciation and amortization totaled $0.8 million for the year ended December
31, 1998 as compared to $1.0 million for the year ended December 31, 1997.
Taxes
The Company recorded tax expense of $4,358 and $7,800 for the years ended
December 31, 1998 and 1997, respectively. The tax expenses represent corporate
franchise taxes.
Liquidity and Capital Resources
The Company's business requires substantial amounts of capital, most notably to
pursue the Company's acquisition strategies and for equipment purchases and
upgrades. The Company plans to meet these capital needs from various financing
sources, including borrowings, internally generated funds, and the issuance of
common stock.
As of December 31, 1998, the Company had working capital of $5.8 million,
including cash and cash equivalents of $4.7 million. For the year ended December
31, 1998, net cash provided by operations was approximately $820,000 (excluding
cash provided by discontinued operations), net cash used in financing activities
was approximately $2.5 million and net cash provided by investing activities was
approximately $2.9 million resulting in an increase in cash and cash equivalents
of $3.1 million.
F-26
<PAGE>
Seasonality and Inflation
The Company believes that its car washing and detailing operations are adversely
affected by periods of inclement weather. The Company has mitigated and intends
to continue to mitigate the impact of inclement weather through geographic
diversification of its operations.
The Company believes that inflation and changing prices have not had, and are
not expected to have any material adverse effect on its results of operations in
the near future.
Year 2000
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed at a time when data
storage was expensive, and the impact of the upcoming century change was not
considered. As a result of this dating limitation, many programs, if not
corrected, may fail or may provide inaccurate results at and after the turn of
the century. We use information systems and systems imbedded in some of our
equipment that carry two digit dating and are thus susceptible to partial or
total failure on, before and after December 31, 1999.
To assess and address our internal information systems, we have established a
Year 2000 remediation plan consisting of the following phases:
1. Inventorying our systems and devices, including information technology
and non-information technology systems, that are vulnerable to the Year
2000 problem;
2. Assessing the criticality of our inventoried items;
3. Remediating our non-compliant items; and
4. Testing the corrections we have applied.
We have completed phases 1 and 2 and are in the process of completing phases 3
and 4 with an expected completion date of December 1999. To date, the Company
has spent approximately $125,000 on the remediation plan. The Company does not
anticipate spending more than an additional $75,000 on remediating currently
owned internal information systems. The amount of remediation effort has not
been and is not anticipated to be extensive due to our use of readily available,
off-the-shelf software and hardware products, manufacturers' support, and
in-house expertise. All costs related to Year 2000 compliance are expensed as
incurred.
Additionally, we are surveying our major suppliers as to their Year 2000
compliance and readiness to ensure that we will not experience any interruption
in service or other adverse effects as a result of their possible non-compliant
computer systems. We will develop contingency plans, if necessary, to address
any third party non-compliance.
Although we believe our Year 2000 remediation plan will be adequate to address
the Year 2000 issue, because the Company is continually acquiring new businesses
and locations, it is an on-going process to convert, assess, and if necessary,
remediate newly acquired systems. This issue is part of our standard due
diligence when evaluating potential acquisitions so that remedial efforts, if
any, can be evaluated and scheduled.
The Company believes that the combination of our remediation plan, vendor
surveys, due diligence in acquisitions, and contingency plans are adequate to
address internal and third party Year 2000 non-compliance. However, if we fail
to make the required remediation efforts, if we do not complete them on time, or
if our major suppliers experience Year 2000 problems in their own operations,
the advent of the Year 2000 could have a material adverse impact on our
operations and financial condition.
Additionally, the Company's Computer Products and Services operations develop
specialty point of sale and control software for principally the car care
industry. Its primary products are: "Tunnel Master", which provides car wash
equipment control, point of sales, and management information; "Clout", which
provides point of sales and service controls to the quick lube industry; and
"Vision Master", which allows users to access cameras and view operations
remotely using a personal computer. Based on our current assessment, we believe
the current versions of our software products are Year 2000 compliant - that is,
they are capable of adequately distinguishing 21/st/ century dates from 20/th/
century dates. However, our products are generally integrated into other third
party company systems involving hardware and software products that we cannot
adequately evaluate for Year 2000 compliance. Although we have not been a party
to any claims involving our products or services related to Year 2000 compliance
issues, we may in the future be required to defend our products or services in
such claims proceedings, or to negotiate resolutions of claims based on Year
2000 issues.
F-27
