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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, 2004
    
    Commission File No. 0-22810
 MACE SECURITY INTERNATIONAL, INC. (Exact name of registrant as specified in its charter)
 Delaware
    
    03-0311630(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 1000 Crawford Place, Suite 400, Mt. Laurel, NJ 08054 (Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants Telephone Number, Including Area Code: (856) 778-2300 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share 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 þ     No o 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. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).

Yes o     No þ The aggregate market value of the voting stock held by non-affiliates of the Registrant on
June 30, 2004 was approximately $63,196,000. Such aggregate market value was computed by reference
to the closing price of the common stock as reported on the Nasdaq National Market on June 30,
2004. For purposes of determining this amount only, Registrant has defined affiliates as including
(a) the executive officers and directors of Registrant on June 30, 2004, and (b) each stockholder
that had informed Registrant that it was the beneficial owner of 10% or more of the outstanding
common stock of Registrant on June 30, 2004. The number of shares of Common Stock, par value $.01 per share, of the Registrant outstanding
as of March 22, 2005 was 15,271,132.




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TABLE OF CONTENTS  PART IITEM 1. DESCRIPTION OF BUSINESSITEM 2. DESCRIPTION OF PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERSITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKSITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESITEM 9B. OTHER INFORMATIONPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURESCOMPENSATION ARRANGEMENTS WITH CERTAIN EXECUTIVE OFFICERS AND DIRECTORSSTATEMENT RE: COMPUTATION OF PER SHARE EARNINGSSUBSIDIARIES OF THE COMPANYCONSENT OF GRANT THORNTON LLPCERTIFICATION OF CHIEF EXECUTIVE OFFICERCERTIFICATION OF CHIEF FINANCIAL OFFICERCERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906    Table of Contents  
 PART I 
 ITEM 1. DESCRIPTION OF BUSINESS GENERAL Mace Security International, Inc. (the Company or Mace) was
incorporated in Delaware on September 1, 1993. On December 17, 2002, we effected a one-for-two
reverse stock split. All stock prices, share amounts, per share information, stock options and
stock warrants reflect the reverse split, unless otherwise noted. Our operations are currently
conducted through two segments: Car and Truck Washes, and Security. Beginning in May of 1999, we began developing our Car and Truck Wash Segment through acquisitions.
We currently own and operate 49 car washes and five 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 digital video surveillance systems and
components that we design, produce and sell. Sales of video systems and components are sold
primarily to installing dealers, system integrators and end users. A video system is typically a
private network that can transmit and receive video, audio and data signals. The video and audio
can be monitored over the internet and recorded to a digital video recorder (DVR ).
Other products in our Security Segment are less-than-lethal defense sprays and other security
devices such as biometric locks and plasma monitors. The main marketing channels for our products
are industry shows, trade publications, catalogs, internet, a call center and mass merchants. Prior
to 2002, this segments main business was primarily the production and sale of
less-than-lethal defense sprays. 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, can be accessed through the
Companys website at www.mace.com. LINES OF BUSINESS Car and Truck Wash Segment. The Company, through its subsidiaries, owns and operates 49 car
washes and five truck washes. We operate 12 car wash locations in the region surrounding
Philadelphia, Pennsylvania, which are located in New Jersey, Pennsylvania and Delaware. We also
operate six car wash locations in and near the Sarasota, Florida area, 12 car wash locations in the
Phoenix, Arizona area, and 19 car wash locations in Texas. We also own five truck washes located
in Arizona, Indiana, Ohio and Texas. Except for eight of the Philadelphia area car washes, which
provide only exterior washing, and one Texas location, which is a self-serve wash and lube
facility, the rest of our locations are full service car washes. 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. 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 (offered at 40 locations), oil and lubrication services (offered at
11 locations), gasoline dispensing services (offered at 18 locations), state inspection services
(offered at six locations), convenience store sales (offered at one location), and merchandise
sales (offered at 40 locations). Our truck wash facilities provide washing and waxing services for
tractor-trailer and fleet transport vehicles. These services are provided by hand. The Car and
Truck Wash Segment provided 71.1%, 88.6%, and 94.5%, of our revenues in fiscal years 2004, 2003,
and 2002, respectively. (See also, the Consolidated Statements of Operationsin the 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 Inflationin Managements Discussion and
Analysis of Financial Condition and Results of Operations, page 32. On December 9, 2004, we announced that we engaged Legg Mason Wood Walker, Incorporated for
the purpose of identifying strategic business alternatives, including the potential sale of all of
our car and truck washes. We will consider such a transaction if the purchase price received would
be sufficient to retire all debt related to the car and truck washes
and provide significant 2




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capital for the growth of our Security Segment. There can be no assurances
that any particular strategic business alternative will be pursued or that any transaction will
occur. Security Segment. The Security Segment offers a wide variety of security related products.
Among the items offered, are video surveillance systems and system components, including analog,
digital and IP cameras, digital video recorders, display units (monitors), matrix switching
equipment for video distribution, robotic camera dome systems, system controls, and consoles for
system assembly markets. Other products offered are defense sprays, personal alarms, biometric
locks, home security alarms, whistles, door jammers, and window and door lock alarms. We also offer
the KinderGard® product line of child proof 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 a tear gas system used
in prisons. Our video systems and system components are designed by our engineering staff in Ft. Lauderdale,
Florida and manufactured by overseas original equipment manufacturers (OEM) with
which we have relationships. Our video systems and system components are warehoused and shipped
from our facilities in Farmers Branch, Texas and Ft. Lauderdale, Florida. Our defense sprays are
made 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 products are marketed through several sales channels, such as dealers, system integrators,
catalog sales, internet, mass merchants and a telephone 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 28.9%,11.4%, and 5.5% of our revenues in fiscal years 2004, 2003, and
2002, respectively. (See also, the Consolidated Statements of
Operations in the financial
statements accompanying this report.) BUSINESS STRATEGIES Car and Truck Wash Segment. Internal Growth. Our strategy is to maintain and increase our sales in our current
markets by providing superior service and through our existing marketing efforts. To maintain and
increase 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. We believe that through consumer education and by developing a strong
brand reputation, known for consistent quality and safe, dependable service across locations, we
can increase consumer participation rates and generate internal growth from existing locations. We
also intend to selectively implement price increases when competitive advantages and appropriate
market conditions exist. Operating Efficiency.We have reduced the total operating expenses of our businesses
by implementing centralized financial controls. In addition, we are continually implementing
programs to take advantage of certain economies of scale in such areas as the purchase of
equipment, chemicals and supplies, 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. Location managers are trained to implement our standardized service menu option list and
high-margin service add-ons at each of our locations. Acquisitions. From May 1999 through December 2000, including a merger with American
Wash Services, Inc., we acquired 62 car wash facilities and five truck wash facilities through the
acquisition of 17 separate businesses. Thirteen car wash facilities have been divested or closed.
The majority of the locations were acquired by acquiring a company, or the assets of a company,
that owned several locations in a given geographic area. We did not acquire any car or truck washes in 2004, 2003, or 2002. On December 9, 2004, we announced that we engaged Legg Mason Wood Walker, Incorporated for
the purpose of identifying strategic business alternatives, including the potential sale of all of
our car and truck washes. We currently own
and operate 49 car washes and five truck washes. We will consider a sale if the purchase price
received would be sufficient to retire all debt 3




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related to the car and truck washes and provide
significant capital for the growth of our Security Segment. We seek to grow the Security Segment
through acquisitions, new product development and new market penetration. There can be no
assurances that any particular strategic business alternative will be pursued or that any
transaction will occur. Security Segment. Internal Growth. The Security Segment designs, manufacturers, markets and sells a
wide range of security products. For the year ended December 31, 2004, revenues from the Security
Segment were $16.6 million. The Company began producing video surveillance systems and system
components in August 2002. Revenues from video surveillance systems and system components have
grown from $380,000 of revenue in 2002 to $2.8 million in 2003 and $14.0 million in 2004. Growth
has been principally achieved through acquiring businesses and the development of advanced product
offerings, as well as expanded advertising and marketing efforts in 2004. For the five years prior
to July 14, 2003, the Company was prohibited from selling defense sprays to the law enforcement
market, under a non-competition agreement with Armor Holdings, Inc. We are now selling our defense
sprays in the law enforcement market under the brand name of TakeDown®. We believe that the
total consumer defense spray market is approximately $10 million to $12 million in annual revenues
and that the law enforcement market is approximately $3 million in annual revenues. We have
recently developed a pepper gel self defense spray. We hope that Pepper Gel will increase
law enforcement sales. Operating Agreements and Acquisitions. In the first quarter of 2000, we entered into
a Management Agreement with Mark Sport, a Vermont corporation controlled by Jon E. Goodrich, a
director of the Company through December, 2003. The Management Agreement entitled Mark Sport to
operate the Security Segment and receive all profits or losses during the term of the Management
Agreement. We retained the ownership of all of the business assets. The Management Agreement
terminated on April 30, 2002. Under the Management Agreement, Mark Sport paid us $20,000 per
month. Additionally, Mark Sport paid us an amount equal to the amortization and depreciation on
the assets of the division. Effective May 1, 2002, the Company recommenced operation of the
Security Segment. 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 fiber optic cameras and a line of consumer do it yourself video
surveillance systems on July 1, 2004, when we acquired two businesses from American Building
Control, Inc. By acquiring the two businesses, Industrial Vision Source® (IVS)
and SecurityandMore® (S&M), we have continued the process of expanding our
Security Segment. 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. MARKETING 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 spend 2% to 3% of regional
revenue on regional advertising campaigns. 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, 2004. We do not believe that the loss of any single customer would have a material adverse
effect on our business or results of operations. 4




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Security Segment.Our video systems and components are marketed through several sales
channels, such as dealers, system integrators, catalogs, 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 Gel, 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, 2004. 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. PRODUCTION AND SUPPLIES Car and Truck Wash Segment.We do not manufacture any of the car or truck wash equipment and
supplies which we use. There are numerous suppliers of the equipment and supplies required by our
car and truck wash operations. Security Segment.Our video systems and components are manufactured principally in Korea,
China, and other foreign countries, by original equipment manufacturers (OEM). The
video systems and components are manufactured to our specifications, 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®
product line of child proof locks, MaceCash dye pack system and TG Guard® Tear Gas
Security System are primarily manufactured by unrelated companies 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, among others. COMPETITION 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. Security Segment.Our video systems and components face competition from many larger companies
such as Sony, Panasonic, and others. A number of these competitors have significantly greater
financial, marketing, and other resources than do we. We also compete with numerous
well-established, smaller, local or regional firms. Increased competition from these companies
could have an adverse effect on our video systems sales. Domestically, there continues to be a number of companies marketing defense sprays to civilian
consumers. While we continue to offer defense spray products that we believe distinguish themselves
through brand name recognition and superior product features and formulations, this segment has
experienced a sales decline for these products. We attribute this decline not only to the strong
competition, but also to lower demand in general. 5




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TRADEMARKS AND PATENTS Car and Truck Wash Business.We own a registered service mark for Super Bright®.We have
selected Super Bright® as our brand name for regions in which we do not have a well
recognized name. During 2002, we upgraded the signage and appearance of many of our car wash
facilities while branding our Pennsylvania, New Jersey, San Antonio, Texas and Lubbock, Texas
locations as Super Bright®. 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. The license agreement was renegotiated in 1992 to include a purchase option. We
exercised this option and purchased outright the Mace® brand name and related trademarks
(Pepper Mace®, Chemical Mace®, Mace . . . Just in Case®, CS Mace and
Magnum Mace). 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 Gel in the law enforcement market and Mace Gel 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
patent 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, Window Jammer, Sonic Alert,
Safety Flasher, Sport Strobe, Window Alert, Motion Alert, Emergency
Whistle, Auto Alert, Screecher®, Peppergard®, Slam®, Mace
(Mexico)®, Viper® defense spray, KinderGard®, TG Guard® and
TakeDown®. In accordance with a 2004 acquisition, we obtained the following trademarks used in our Security
Segment: SecurityandMore®, SecurityandMore.com®, Industrial Vision Source®,
Security Outsourcing Solutions, 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. GOVERNMENT REGULATION/ENVIRONMENTAL COMPLIANCE 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. 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 listing 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. New York requires sellers to be licensed
firearms dealers or pharmacists. Wisconsin allows only pepper sprays and no tear gas. 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 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. 6




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RESEARCH AND DEVELOPMENT Car and Truck Wash Segment.There are no research and development expenditures within the
Car and Truck Wash Segment. Security Segment.Our staff in our Ft. Lauderdale, Florida facility designs various video
systems 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 2004, 2003 or
2002. INSURANCE 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 captive insurance company. Should funds
deposited exceed claims incurred and paid, unused deposited funds are returned to us with interest
on the third anniversary of the policy year-end. The captive insurance program is further secured
by a letter of credit in the amount of $803,000 at December 31, 2004. The Company records a
monthly expense for losses up to the reinsurance limit per claim based on the Companys
tracking of claims and the insurance companys reporting of amounts paid on claims plus their
estimate of reserves for possible future payments. There can be no assurance that our insurance
will provide sufficient coverage in the event a claim is made against us, or that we will be able
to maintain in place such insurance at reasonable prices. An uninsured or under insured claim
against us of sufficient magnitude could have a material adverse effect on our business and results
of operations. U.S. BASED BUSINESS All of our car and truck wash businesses are conducted in the United States. Approximately 4% (or
$673,000), 4% (or $246,000) and 6% (or $150,000) of the 2004, 2003 and 2002 revenues, respectively,
from our Security Segment were derived from customers outside of the United States. Our Electronic
Surveillance products are manufactured in Korea, China, and other foreign countries. We do not
believe we are currently subject to any material risks associated with any foreign operations. EMPLOYEES As of March 1, 2005, we had approximately 1,388 employees, of which approximately 1,280 were
employed in the Car and Truck Wash Segment, 85 employed in the Security Segment, 19 in corporate
clerical and administrative positions, and four in executive management. None of our employees is
covered by a collective bargaining agreement. FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING STATEMENTS This report includes forward looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended (Forward-Looking Statements). All statements other than statements of
historical fact included in this report are Forward-Looking Statements. Although we believe that
the expectations reflected in such Forward-Looking Statements are reasonable, we can give no
assurance that such expectations will prove to be correct. Generally, these statements relate to
business plans or strategies, projected or anticipated benefits or other consequences of such plans
or strategies, number of acquisitions, and projected or anticipated benefits from acquisitions made
by or to be made by us, or projections involving anticipated revenues, earnings, levels of capital
expenditures or other aspects of operating results. All phases of our operations are subject to a
number of uncertainties, risks, and other influences, many of which are outside our control and any
one of which, or a combination of which, could materially affect the results of our operations and
whether Forward-Looking Statements made by us ultimately prove to be accurate. Such important factors that
could cause actual results to differ materially from our expectations are disclosed in this section
and elsewhere in this report. All subsequent written and oral Forward-Looking Statements
attributable to the Company or persons acting on its behalf are expressly qualified in their
entirety by the important factors described below that could cause actual results to differ from
our expectations. The Forward- 7




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Looking Statements made herein are only made as of the date of this
filing, and we undertake no obligation to publicly update such Forward-Looking Statements to
reflect subsequent events or circumstances. If we do not raise additional capital, we may need to substantially reduce the scale of our
operations and curtail our business plan. Our business plan involves growing through acquisitions and internal development, each of which
requires significant capital. Our capital requirements also include working capital for daily
operations and significant capital for equipment purchases. Although we had positive working
capital of $17.5 million as of December 31, 2004, we have a history of net losses and in some years
we have ended our fiscal year with a negative working capital balance. To the extent that we lack
cash to meet our future capital needs, we will need to raise additional funds through bank
borrowings and significant additional equity and/or debt financings, which may result in
significant increases in leverage and interest expense and/or substantial dilution of our
outstanding equity. If we are unable to raise additional capital, we may need to substantially
reduce the scale of our operations and curtail our business plan. If we are not able to manage growth, our business plan may not be realized. Our business objectives include developing our Security Segment, both internally and through
acquisitions, if we can do so under advantageous terms. As such, our business plan is predicated
on growth. If we succeed in growing, it will place significant burdens on our management and on
our operational and other resources. For example, it may be difficult to assimilate the operations
and personnel of an acquired business into our existing business; we must integrate management
information and accounting systems of an acquired business into our current systems; our management
must devote its attention to assimilating the acquired business, which diverts attention from other
business concerns; we may enter markets in which we have limited prior experience; and we may lose
key employees of an acquired business. We will also need to attract, train, motivate, retain, and
supervise senior managers and other employees. If we fail to manage these burdens successfully,
one or more of the acquisitions could be unprofitable, the shift of our managements focus
could harm our other businesses, and we may be forced to abandon our business plan, which relies on
growth. If we violate the financial covenants with our lenders, our borrowings may be accelerated. Our bank debt borrowings as of December 31, 2004 were $29.2 million substantially all of which is
secured by mortgages against certain of our real property. Of such borrowings, $2.6 million is
classified as current as it is due in less than 12 months from December 31, 2004. Our two most
significant borrowings are secured notes payable to General Motors Acceptance Corp.
(GMAC) in the amount of $10.6 million, $9.7 million of which was classified as
non-current debt at December 31, 2004, and secured notes payable to Bank One, Texas, N.A.
(Bank One) in the amount of $14.5 million, $13.0 million of which was classified as
non-current debt at December 31, 2004. The GMAC and Bank One agreements contain affirmative and
negative covenants, including the maintenance of certain levels of tangible net worth, maintenance
of certain levels of unencumbered cash and marketable securities, limitations on capital spending
and the maintenance of certain debt coverage ratios on a consolidated level. The Bank One
agreement is our only debt agreement that contains an express prohibition on incurring additional
debt for borrowed money without the approval of the lender. None of our other agreements contain
such a prohibition. Twenty five car washes, one truck wash and our warehouse and office facility
in Farmers Branch, Texas are encumbered by mortgages. At December 31, 2004, we were not in compliance with our semi-annual consolidated debt coverage
ratio of at least 1.25:1 related to our GMAC notes payable. The Companys debt coverage
ratio related to the GMAC notes payable was .92:1 at December 31, 2004. GMAC granted us a waiver
of acceleration related to the non-compliance with the debt coverage ratio covenant at December 31,
2004, and for measurement periods through January 1, 2006 and, accordingly, a portion of the GMAC
notes payable was reflected as non-current on our financial statements at December 31, 2004. If we
are not able to increase our debt coverage ratio to at least 1.25:1, or we cannot obtain further
waivers of acceleration, the GMAC notes may be reflected as current in future balance sheets and as
a result our stock price may decline. The Company has entered into amendments to the Bank One term loan agreements effective March
31, 2004. The amended debt coverage ratio with Bank One requires the Company to maintain a ratio
of consolidated earnings before interest, income taxes, depreciation and amortization to debt
service of 1.05:1 at December 31, 2004 and thereafter. The Companys debt coverage ratio was
..89:1 at December 31, 2004, which was not in compliance with this Bank One covenant as amended.
The Company received
a waiver of acceleration with respect to this debt coverage ratio from Bank One through January 1,
2006 and, accordingly, a portion of the Bank One notes payable was reflected as non-current on our
financial statements at December 31, 2004. The Bank One amendment also requires the maintenance of
a minimum total unencumbered cash and marketable securities balance of $5.0 8




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million. This cash
balance requirement will be lowered to $1 million upon the Company returning to a debt coverage
ratio of at least 1.10:1. If we are unable to satisfy these covenants or obtain further waivers,
the Bank One notes may be reflected as current in future balance sheets and as a result our stock
price may decline. Our ongoing ability to comply with the debt covenants under our credit arrangements and refinance
our debt depends largely on our achievement of adequate levels of cash flow. Our cash flow has
been and could continue to be adversely affected by weather patterns and economic conditions. In
the future, if our cash flows are less than expected or debt service, including interest expense,
increases more than expected, we may continue to be out of compliance with the Bank One and GMAC
covenants and need to seek additional waivers or amendments. If we default on any of the Bank One or GMAC covenants and are not able to obtain further
amendments or waivers of acceleration, Bank One debt totaling $14.5 million and GMAC debt totaling
$10.6 million, including debt recorded as long-term debt at December 31, 2004, could become due and
payable on demand, and Bank One and/or GMAC could foreclose on the assets pledged in support of the
relevant indebtedness. If our assets (including up to 25 of our car wash facilities and one truck
wash) are foreclosed upon, revenues from our Car and Truck Wash Segment, which comprised 88.6% of
our total revenues for fiscal year 2003 and 71.1% of our total revenues for fiscal year 2004, would
be severely impacted and we could be unable to continue to operate our business. Even if the debt
were accelerated without foreclosure, it would be very difficult for us to continue to operate our
business and we may go out of business. We have reported net losses in the past. If we continue to report net losses, the price of our
common stock may decline, or we could go out of business. For the year ended December 31, 2004, we reported a net loss although our business as a whole
generated positive cash flow from operations. The majority of the reported losses in 2004 related
to non-cash impairment charges of intangible assets, particularly goodwill, in accordance with SFAS
142, Goodwill and Other Intangible Assets. Under SFAS 142, which became effective on January 1,
2002, we no longer amortize goodwill and certain intangible assets determined to have indefinite
useful lives. Additionally, SFAS 142 requires annual fair value based impairment tests of goodwill
and other intangible assets identified with indefinite useful lives. As a result, we may be
required to record additional impairments in the future, which could materially reduce our earnings
and equity. If we lose the services of our executive officers, our business may suffer. If we lose the services of one or more of our executive officers and do not replace them with
experienced personnel, that loss of talent and experience will make our business plan, which is
dependent on active growth and management, more difficult to implement. The employment agreements
of Robert M. Kramer, Gregory M. Krzemien, and Ronald R. Pirollo expired on March 26, 2003. Mr.
Kramer is the chief operating officer of our Car and Truck Wash Segment, and our general counsel
and secretary; Mr. Krzemien is our chief financial officer and treasurer; and Mr. Pirollo is our
chief accounting officer and corporate controller. Messrs. Kramer and Krzemien are working on a
month-to-month at-will basis, and Mr. Pirollo is working on an at-will basis. Without employment
contracts, we may lose the services of any one or more of Messrs. Kramer, Krzemien and Pirollo,
each of whom has been involved in our management for several years and would be difficult to
replace. In addition, we do not maintain key-man life insurance policies on our executive
officers. 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 on the third anniversary of the
policy year-end. The captive insurance program is further secured by a letter of credit in the
amount of $803,000 at December 31, 2004. The Company records a monthly expense for losses up to
the reinsurance limit per claim based on the Companys tracking of claims and the insurance
companys reporting of amounts paid on claims plus their estimate of reserves for possible
future payments. 9




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There can be no assurance that our insurance will provide sufficient coverage in
the event a claim is made against us, or that we will be able to maintain in place such insurance
at reasonable prices. An uninsured or under insured claim against us of sufficient magnitude could
have a material adverse effect on our business and results of operations. Risks Related to our Security Segment If we are not able to operate our Electronic Surveillance Products Division effectively, our
business will suffer. In 2001, we expanded our Security Segment by adding video systems and components. We are incurring
expenses to develop and further expand these products. There are numerous risks associated with
expanding our video surveillance systems and components that may prevent us from operating the
Security Segment profitably, including, among others: risks associated with products which do not
function properly; risks associated with unanticipated liabilities of the acquired companies; risks
inherent with our management having limited experience in the electronic surveillance product
market; risks relating to the size and number of competitors in the video system and component
product market, many of whom may be more experienced or better financed; risks associated with the
costs of entering into new markets and expansion of product lines in existing markets; risks
associated with rapidly evolving technology and having inventory become obsolete; risks associated
with purchasing inventory before having orders for that inventory; risks attendant to locating and
maintaining reliable sources of OEM products and component supplies in the electronic surveillance
industry; risks related to retaining key employees involved in future technology development and
communications with OEM suppliers; and risks associated with developing and introducing new
products in order to maintain competitiveness in a rapidly changing marketplace. We also expect
that there will be costs related to product returns and warranties and customer support that we
cannot quantify or accurately estimate until we have more experience in operating the electronic
surveillance product division. If we are not able to operate our electronic surveillance products
division effectively, our operating and financial results could be adversely impacted. We could become subject to litigation regarding intellectual property rights, which could seriously
harm our business. Although we have not been the subject of any such actions, third parties may in the future assert
against us infringement claims or claims that we have violated a patent or infringed upon a
copyright, trademark or other proprietary right belonging to them. We design most of our security
products and contract with independent suppliers to manufacture those products and deliver them to
us. Certain of these products contain proprietary intellectual property of these independent
suppliers. Third parties may in the future assert claims against our suppliers that such suppliers
have violated a patent or infringed upon a copyright, trademark or other proprietary right
belonging to them. If such infringement by our suppliers or us were found to exist, a party could
seek an injunction preventing the use of their intellectual property. In addition, if an
infringement by us were found to exist, we may attempt to acquire a license or right to use such
technology or intellectual property. Most of our suppliers have agreed to indemnify us against any
such infringement claim, but any infringement claim, even if not meritorious and/or covered by an
indemnification obligation, could result in the expenditure of a significant amount of our
financial and managerial resources. If our original equipment manufacturers fail to adequately supply our products, our security
products sales may suffer. Our products are manufactured on an OEM basis. Reliance upon OEMs, as well as industry supply
conditions, generally involves several risks, including the possibility of defective products
(which can adversely affect our reputation for reliability), a shortage of components and reduced
control over delivery schedules (which can adversely affect our distribution schedules), and
increases in component costs (which can adversely affect our profitability). We have some single-sourced manufacturer relationships, either 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. 10




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If people are injured by our consumer safety products, we could be held liable and face
damage awards. We face claims of injury allegedly resulting from our defense sprays, which we market as
less-than-lethal. For example, we are aware of allegations that defense sprays used by law
enforcement personnel resulted in deaths of prisoners and of suspects in custody. In addition to
use or misuse by law enforcement agencies, the general public may pursue legal action against us
based on injuries alleged to have been caused by our products. We may also face claims by
purchasers of our electronic surveillance systems, if they fail to operate properly during the
commission of a crime. As the use of defense sprays and electronic surveillance systems by the
public increase, we could be subject to additional product liability claims. We have a $25,000
deductible on our insurance policy, meaning that all such lawsuits, even unsuccessful ones, and
ones covered by insurance, cost the company money. Furthermore, if our insurance coverage is
exceeded, we will have to pay the excess liability directly. Our product liability insurance
provides coverage of up to $26 million per occurrence. However, if we are required to directly pay
a claim in excess of our coverage, our income will be significantly reduced, and in the event of a
large claim, we could go out of business. If governmental regulations change or are applied differently, our business could suffer. The distribution, sale, ownership and use of consumer defense sprays are legal in some form in all
50 states and the District of Columbia. Restrictions on the manufacture or use of consumer defense
sprays may be enacted, which would severely restrict the market for our products or increase our
costs of doing business. Some of our consumer defense spray manufacturing operations currently incorporate hazardous
materials, the use and emission of which are regulated by various state and federal environmental
protection agencies, including the United States Environmental Protection Agency. We believe that
we are in compliance with all current state and local statutes governing our handling and disposal
of these hazardous materials, but if there are any changes in environmental permit or regulatory
requirements, or if we fail to comply with any environmental requirements, these changes or
failures may expose us to significant liabilities that would have a material adverse effect on our
business and financial condition. Risks related to our Car and Truck Wash Segment If consumer demand for our car wash service drops, our business will suffer. Our revenues are primarily derived from our Car and Truck Wash Segment. As such, our financial
condition and results of operations will depend substantially on continued consumer demand for car
wash services. Our car wash business depends on consumers choosing to employ professional services
to wash their cars rather than washing their cars themselves or not washing their cars at all.
Also, seasonal trends in some areas affect our car wash business. In particular, long periods of
rain and cloudy weather can adversely affect our car wash business as people typically do not wash
their cars during such periods. Additionally, extended periods of warm, dry weather may encourage
customers to wash their cars themselves which also can adversely affect our car wash business. If
there is a drop in consumer demand, our financial condition and results of operations will be
adversely impacted. We face significant competition and if we cannot compete effectively we may lose money and the
value of our securities could decline. The car care industry is highly competitive. Competition is based primarily on location, customer
service, available services, and price. We face competition from both inside and outside the car
care industry, including gas stations, gasoline companies, automotive companies, specialty stores
and convenience stores that offer automated car wash services. Because barriers to entry into the
car care industry are relatively low, competition may be expected to continually arise from new
sources not currently competing with us. In some cases, our competitors may have greater financial
and operating resources than we do. If we cannot effectively compete, our operating results are
likely to be negatively effected. Our car and truck wash operations face governmental regulations, including environmental
regulations, and if we fail to or are unable to comply with those regulations, our business may
suffer. We are governed by federal, state and local laws and regulations, including environmental
regulations, that regulate the operation of our car wash centers and other car care services
businesses. Other car care services, such as gasoline and lubrication, use a number of oil
derivatives and other regulated hazardous substances. As a result, we are governed by
environmental laws and regulations dealing with, among other things: 11




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i.
    transportation, storage, presence, use, disposal, and handling of hazardous materials and wastes;ii.
    discharge of storm water; andiii.
    underground storage tanks. If uncontrolled hazardous substances were found on any of our properties, including leased
property, or if we were otherwise found to be in violation of applicable laws and regulations, we
could be responsible for clean-up costs, property damage, fines, or other penalties, any one of
which could have a material adverse effect on our financial condition and results of operations. Through our Car and Truck Wash Segment, we face a variety of potential environmental liabilities,
including those arising out of improperly disposing waste oil or lubricants at our lube centers,
improper maintenance of oil discharge ponds, which exist at two of our truck washes, and leaks from
our underground gasoline storage tanks. If we improperly dispose of oil or other hazardous
substances, or if our oil discharge ponds or underground gasoline tanks leak, we could be assessed
fines by federal or state regulatory authorities and/or be required to remediate the property.
Although each case is different, and there can be no assurance as to the cost to remediate an
environmental problem, if any, at one of our properties, the costs for remediation and removal of a
leaking discharge pond typically range from $150,000 to $200,000, and the costs for remediation of
a leaking underground storage tank typically range from $30,000 to $75,000. If our car wash equipment is not maintained, our car washes will not be operable. Many of our car washes have older equipment that requires frequent repair or replacement. Although
we undertake to keep our car washing equipment in proper operating condition, the operating
environment in car washes results in frequent mechanical problems. If we fail to properly maintain
the equipment in a car wash, that car wash could become inoperable resulting in a loss of revenue. Risk Related to the Sale of our Car and Truck Wash Segment If we sell our Car and Truck Wash Segment, our revenues will decrease and our business may suffer. On December 9, 2004, we engaged Legg Mason Wood Walker, Incorporated for the purpose of identifying
strategic business alternatives, including the possible sale of all of our car and truck washes.
We can offer no assurances that we will be able to locate potential buyers for our Car and Truck
Wash Segment or that we will be able to consummate any sales to potential buyers we do locate. If
we are able to sell our Car and Truck Wash Segment, our total revenues will decrease and our
business will become reliant on the success of our Security Segment. Our Security Segment faces
significant risks as set forth herein and may impact our ability to generate positive operating
income or cash flows from operations, may cause our financial results to become more volatile, or
may otherwise materially adversely affect us. Risks Related to our Stock Our stock price has been, and likely will continue to be, volatile and your investment may suffer a
decline in value. The market prices for securities of companies quoted on The NASDAQ Stock Market, including our
market price, have in the past been, and are likely to continue in the future to be volatile. That
volatility depends upon many factors, some of which are beyond our control, including:  
    announcements regarding the results of expansion or development efforts by us or our competitors;
    announcements regarding the acquisition of businesses or companies by us or our competitors;
    announcements regarding the disposition of all or a significant portion of the assets that comprise our Car and Truck
Wash Segment, which may or may not be on favorable terms;
    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; 12




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
    additions or departures of our key personnel;
    operating losses by us;
    actual or anticipated fluctuations in our quarterly financial and operating results and degree of trading
liquidity in our common stock; and
    our ability to maintain our common stock listing on the
Nasdaq National Market. One or more of these factors could cause a decline in our revenues and income or in the price of
our common stock, thereby reducing the value of an investment in our Company. If we lose our listing on the NASDAQ National Market, our stock will become significantly less
liquid and its value may be affected. Our common stock is listed on the NASDAQ National Market with a bid price of $2.84 at the close of
the market on March 22, 2005. Although the recent closing prices of our stock have been well in
excess of $1.00, in 2004 our stock traded at a price as low as $1.78. If the price of our common
stock falls below $1.00 and for 30 consecutive days remains below $1.00, we are subject to being
delisted from the NASDAQ National Market. Upon delisting from the NASDAQ National Market, our
stock would be traded on the NASDAQ SmallCap Market until we maintain a minimum bid price of $1.00
for 30 consecutive days at which time we can regain our listing on the NASDAQ National Market. If
our stock fails to maintain a minimum bid price of $1.00 for 30 consecutive days during a 180-day
grace period on the NASDAQ SmallCap Market or a 360-day grace period if compliance with certain
core listing standards are demonstrated, we could receive a delisting notice from the NASDAQ
SmallCap Market. Upon delisting from the NASDAQ SmallCap Market, our stock would be traded
over-the-counter, more commonly known as OTC. OTC transactions involve risks in addition to those
associated with transactions in securities traded on the NASDAQ National Market or the NASDAQ
SmallCap Market (together NASDAQ-Listed Stocks). Many OTC stocks trade less
frequently and in smaller volumes than NASDAQ-Listed Stocks. Accordingly, our stock would be less
liquid than it would otherwise be. Also, the values of these stocks may be more volatile than
NASDAQ-Listed Stocks. If our stock is traded in the OTC market and a market maker sponsors us, we
may have the price of our stock electronically displayed on the OTC Bulletin Board, or OTCBB.
However, if we lack sufficient market maker support for display on the OTCBB, we must have our
price published by the National Quotations Bureau LLP in a paper publication known as the
Pink Sheets. The marketability of our stock will be even more limited if our price
must be published on the Pink Sheets. Because we are a Delaware corporation, it may be difficult for a third party to acquire us, which
could affect our stock price. We are governed by Section 203 of the Delaware General Corporation Law, which prohibits a publicly
held Delaware corporation from engaging in a business combination with an entity who
is an interested stockholder for a period of three years, unless approved in a
prescribed manner. This provision of Delaware law may affect our ability to merge with, or to
engage in other similar activities with, some other companies. This means that we may be a less
attractive target to a potential acquirer who otherwise may be willing to pay a premium for our
common stock above its market price. If we issue our authorized preferred stock, the rights of the holders of our common stock may be
affected and other entities may be discouraged from seeking to acquire control of our Company. Our certificate of incorporation authorizes the issuance of up to 10 million shares of blank
check preferred stock that could be designated and issued by our board of directors to
increase the number of outstanding shares and thwart a takeover attempt. No shares of preferred
stock are currently outstanding. It is not possible to state the precise effect of preferred stock
upon the rights of the holders of our common stock until the board of directors determines the
respective preferences, limitations, and relative rights of the holders of one or more series or
classes of the preferred stock. However, such effect might include: (i) reduction of the
amount otherwise available for payment of dividends on common stock, to the extent dividends are
payable on any issued shares of preferred stock, and restrictions on dividends on common stock if
dividends on the preferred stock are in arrears, (ii) 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. 13




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The blank check preferred stock may be viewed as having the effect of
discouraging an unsolicited attempt by another entity to acquire control of us and may therefore
have an anti-takeover effect. Issuances of authorized preferred stock can be implemented, and have
been implemented by some companies in recent years, with voting or conversion privileges intended
to make an acquisition of a company more difficult or costly. Such an issuance, or the perceived
threat of such an issuance, could discourage or limit the stockholders participation in
certain types of transactions that might be proposed (such as a tender offer), whether or not such
transactions were favored by the majority of the stockholders, and could enhance the ability of
officers and directors to retain their positions. Our policy of not paying cash dividends on our common stock could negatively affect the price of
our common stock. We have not paid in the past, and do not expect to pay in the foreseeable future, cash dividends on
our common stock. We expect to reinvest in our business any cash otherwise available for
dividends. Our decision not to pay cash dividends may negatively affect the price of our common
stock. There are additional risks set forth in the incorporated documents.In addition to the risk
factors set forth above, you should review the financial statements and exhibits incorporated into
this report. Such documents may contain, in certain instances and from time to time, additional and
supplemental information relating to the risks set forth above and/or additional risks to be
considered by you, including, without limitation, information relating to losses experienced by us
in certain historical periods, working capital deficits at particular dates, information relating
to pending and recently completed acquisitions by us, and estimates at various times of our
potential liabilities for compliance with environmental laws or in connection with pending
litigation. 
 ITEM 2. DESCRIPTION OF PROPERTIES Our corporate headquarters is located in Mount Laurel, New Jersey. We rent approximately 10,000
square feet of space at a current annual cost of approximately $222,000. 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. Lines of Business. The 49 car
wash facilities operated by us as of December 31, 2004 are situated on sites we own or lease. We
own 40 and lease 9 of our car wash facilities. The locations of our car washes and the services
offered at the locations are set forth in summary fashion in the chart below. Type of
    
    Number ofLocations(1)
    
    Car Wash(2)
    
    FacilitiesPhiladelphia, Pennsylvania Area
    
    Full Service
    
    
    3Exterior Washes
    
    
    3Southern New Jersey Area
    
    Full Service
    
    
    1Exterior Washes
    
    
    4Smyrna, Delaware
    
    Exterior Wash
    
    
    1Phoenix, Arizona Area
    
    Full Service
    
    
    12Dallas, Texas Area
    
    Full Service
    
    
    8Self Serve /Lube
    
    
    1Austin, Texas
    
    Full Service
    
    
    3Lubbock, Texas
    
    Full Service
    
    
    3Sarasota, Florida Area
    
    Full Service
    
    
    6San Antonio, Texas
    
    Full Service
    
    
    4
 14




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(1)
    The majority of our locations are owned except for the following number of
locations which are leased:  (i)
    Philadelphia, Pennsylvania (3)(ii)
    Smyrna, Delaware (1)(iii)
    Phoenix, Arizona Area (3)(iv)
    Dallas, Texas Area (2)  (2)
    Several locations also offer other consumer products and related car care services,
such as professional detailing services (offered at 40 locations), oil and lubrication
services (offered at 10 locations), gasoline dispensing services (offered at 19
locations), state inspection services (offered at seven locations), convenience store
sales (offered at one location) and merchandise store sales (offered at 40 locations). We own real estate, buildings, equipment, and other properties that we employ in substantially
all of our car washes. We expect to make substantial investments in additional equipment and
property for expansion, replacement of assets, and in connection with future acquisitions. Many of our car washes are encumbered by first mortgage loans. Of the 49 car washes owned or
leased by us at December 31, 2004, 25 properties and related equipment with a net book value
totaling $45.8 million secured first mortgage loans totaling $27.6 million and 24 properties were
not encumbered. We also own and operate five truck wash facilities. We own the buildings and equipment at each of
our truck washes, and lease the land for all of our truck wash facilities except for the Amarillo,
Texas land which we own and which is encumbered by debt of $295,000 at December 31, 2004. Security Segment Properties. The operations of our Security Segment are located in Ft. Lauderdale,
Florida, Farmers Branch, Texas and Bennington, Vermont. The operations of our less-than-lethal
defense spray 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 $126,800. Vermont Mill is controlled by Jon E. Goodrich, a director of the Company
through December 2003 and President of Mark Sport. We purchased a 20,000 square foot facility in
June 2004 in Ft. Lauderdale, Florida, where our professional video surveillance systems 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 video systems and components
and our high end camera products are warehoused and sold. The Farmers Branch facility is secured by
a first mortgage loan in the amount of $815,000 at December 31, 2004. Additionally, the Company
owned two warehouse bays in Hollywood, FL which were previously utilized in the Security Segment.
At December 31, 2004, the bays were classified at their fair market values in our balance sheet as
assets held for sale. One bay was sold in January 2005 and Louis Paolino III, the son of the
Companys Chief Executive Officer, Louis D. Paolino, Jr., has offered to purchase the
remaining bay for $306,000 in cash, the current estimated fair market value per a third party
independent appraiser. 
 ITEM 3. LEGAL PROCEEDINGS In December 2003, one of the Companys car wash subsidiaries was named as a defendant in a
suit filed by Kristen Sellers in the Circuit Court of the Twelfth Judicial Circuit in and for
Sarasota County, Florida. The suit alleges that the plaintiff is entitled to damages in excess of
$15,000 due to psychological injury and emotional distress sustained when an employee of the car
wash allegedly assaulted Ms. Sellers with sexually explicit acts and words. The Companys
subsidiary is alleged to have been negligent in hiring, retaining and supervising the employee. The
Company forwarded the suit to its insurance carrier for defense. The plaintiff has communicated
that the case could be settled for $95,000. The Company has produced documents requested in a subpoena issued in connection with an
investigation conducted by the United States Securities and Exchange Commission of possible securities law violations. The
subpoena was issued on October 27, 2003. The Company produced all documents that were requested and
has not been contacted by the United States Securities and Exchange Commission regarding the
investigation since February, 2004. The Company intends to fully cooperate with the United States
Securities and Exchange Commissions investigation. On July 20, 2004, the Company received a letter from the United States Securities and
Exchange Commission. This letter requested that the Company voluntarily provide information and
documents relating to Price Legacy Corporations sale of 1,875,000 shares of the
Companys common stock on the open market in April, 2004 and Price Legacy Corporations
payment of $8.95 million to the Company in exchange for the Company removing a sales restriction
from 1,750,000 of the shares that were sold. The Company supplied the information in August of
2004. The Company has not been contacted by the Securities and 15




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Exchange Commission since supplying the information. The Company intends to fully cooperate with the United States Securities and
Exchange Commission in this matter. The Company is a party to various other legal proceedings related to its normal business
activities. In the opinion of the Companys management, none of these proceedings is
material in relation to the Companys results of operations, liquidity, cash flows or
financial condition. Although the Company is not aware of any substantiated claim of permanent personal injury from its
products, the Company is aware of reports of incidents in which, among other things, defense sprays
have been mischievously or improperly used, in some cases by minors; have not been instantly
effective; or have been ineffective against enraged or intoxicated individuals. The Company is subject to federal and state environmental regulations, including rules relating to
air and water pollution and the storage and disposal of oil, other chemicals and waste. The
Company believes that it complies, in all material respects, with all applicable laws relating to
its business. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of the stockholders of Mace Security International, Inc. was held November 30,
2004. The following proposals were submitted to a vote: (i) Election of five directors to the Board
of Directors for one-year terms, (ii) Approval and Adoption of an amendment to Maces Amended
and Restated Certificate of Incorporation to decrease the authorized shares of Common Stock from
100,000,000 to 35,000,000 and decrease the number of authorized shares of Preferred Stock from
10,000,000 to 5,000,000, and (iii) Ratification of the Boards appointment of Grant Thornton
LLP as Maces independent auditors for fiscal year 2004. Proposals (i) and (iii) were adopted by the shareholders. The voting was as follows: Directors:
    
    Votes For
    
    
    Votes Against
    
    
    Abstentions
    
    
    Broker Non-VotesLouis D. Paolino, Jr.
    
    
    13,720,992
    
    
    
    235,056
    
    
    
    
    
    
    
    Mark S. Alsentzer
    
    
    13,788,319
    
    
    
    167,729
    
    
    
    
    
    
    
    Matthew J. Paolino
    
    
    13,847,969
    
    
    
    108,079
    
    
    
    
    
    
    
    Constantine N. Papadakis, Ph.D
    
    
    13,849,659
    
    
    
    106,389
    
    
    
    
    
    
    
    Burton Segal
    
    
    13,849,809
    
    
    
    106,239
    
    
    
    
    
    
    
    Approve and adopt amendment of the
Mace Amended and Restated
Certificate of Incorporation
to decrease authorized shares
    
    
    4,254,481
    
    
    
    46,727
    
    
    
    
    
    
    
    9,654,840Ratify appointment of Grant
Thornton LLP
    
    
    13,928,047
    
    
    
    19,156
    
    
    
    8,845
    
    
    
    
 Executive Officers of the Registrant The following information is furnished in this Part I pursuant to Instruction 3 to Item 401(b) of
Regulation S-K: There are no family relationships between any of the executive officers of the Company. The
following table sets forth information
regarding our executive officers. Name
    
    Age
    
    
    PositionLouis D. Paolino, Jr.
    
    
    48
    
    
    Chairman of the Board, President, and Chief Executive OfficerRobert M. Kramer
    
    
    52
    
    
    Executive Vice President, Chief Operating Officer of the Car and Truck Wash Segment, General Counsel, and SecretaryGregory M. Krzemien
    
    
    45
    
    
    Chief Financial Officer and TreasurerRonald R. Pirollo
    
    
    46
    
    
    Chief Accounting Officer and Corporate Controller
 16




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##### Table of Contents



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. Kramerhas 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 since July
2000. 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. Krzemienhas 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 and is a certified public accountant. Ronald R. Pirollohas served as Chief Accounting Officer and Corporate Controller of the Company
since May 1999. Mr. Pirollo served as Vice President and Corporate Controller of Eastern
Environmental Services, Inc. from July 1997 to June 1999. Prior thereto, Mr. Pirollo was with
Envirite Corporation for ten years, where he served in various financial management positions
including Vice President - Finance. Mr. Pirollo received a B.S. degree in Accounting and an MBA
from Villanova University. 
 PART II 
 ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Price and Dividends of the Registrants Common Equity Our common stock is traded and quoted on the Nasdaq National 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. On December 17, 2002, we effected a one-for-two
reverse stock split. All information in the table below preceding the reverse split has been
restated for the reverse split. HIGH
    
    
    LOWYear Ended December 31, 2003First Quarter
    
    $
    2.04
    
    
    $
    0.88Second Quarter
    
    
    1.73
    
    
    
    1.02Third Quarter
    
    
    2.06
    
    
    
    1.25Fourth Quarter
    
    
    2.62
    
    
    
    1.55Year Ended December 31, 2004First Quarter
    
    $
    2.29
    
    
    $
    1.78Second Quarter
    
    
    14.80
    
    
    
    2.00Third Quarter
    
    
    5.55
    
    
    
    2.50Fourth Quarter
    
    
    6.20
    
    
    
    2.83Year Ending December 31, 2005First Quarter
    
    $
    4.90
    
    
    $
    2.55(through March 22, 2005)
 17




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##### Table of Contents



The closing price for our common stock on March 22, 2005 was $2.84. 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 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, non-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. As of March 22, 2005, we had 59 stockholders of record and approximately 7,300 beneficial owners of
our common stock. We do not anticipate paying any cash dividends in the foreseeable future and
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. Equity Compensation Plan Information See the information contained under the heading Equity Compensation Plan Information
within Item 11 of this Form 10-K regarding shares authorized for issuance under equity compensation
plans approved by stockholders and not approved by stockholders. (b) Recent Sales of Unregistered Securities During fiscal 2004, we sold securities that were not registered under the Securities Act of 1933 at
the time of sale. On May 26, 2004, we sold 915,000 shares of the Companys common stock and issued a warrant
for 183,000 shares of the Companys common stock in exchange for $5,005,050 in cash. The
purchaser was Langley Partners, L.P., an accredited investor. The warrant is exercisable by Langley
Partners, L.P. at any time up to May 26, 2009 at a price of $7.50 per share. The securities sold
were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 and Regulation
D promulgated under the Securities Exchange Act of 1934. The securities were registered for resale
by Langley Partners, L.P. effective September 28, 2004 on a Form S-3 Registration Statement. On December 14, 2004, we sold 750,000 shares of the Companys common stock and issued a
warrant for 150,000 shares of the Companys common stock in exchange for $3,307,500 in cash.
The purchaser was Langley Partners, L.P., an accredited investor. The warrant is exercisable by
Langley Partners, L.P. at any time up to December 14, 2009 at a price of $5.88 per share. The
securities sold were exempt from registration pursuant to Section 4(2) of the Securities Act of
1933 and Regulation D promulgated under the Securities Act of 1934.The securities were registered
for resale by Langley Partners, L.P. effective February 3, 2005 on a Form S-3 Registration
Statement. On December 14, 2004, we sold 400,000 shares of the Companys common stock and issued a
warrant for 50,000 shares of the Companys common stock in exchange for $1,872,000 in cash.
The purchaser was JMB Capital Partners, L.P., an accredited investor. The warrant is exercisable by
JMB Capital Partners, L.P. at any time up to December 14, 2009, at a price of $5.88 per share. The
securities sold were exempt from registration pursuant to Section 4(2) of the Securities Act of
1933 and Regulation D
promulgated under the Securities Act of 1934. The securities were registered for resale by JMB
Capital Partners, L.P. effective February 3, 2005 on a Form S-3 Registration Statement. 18




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##### Table of Contents



(c) Issuer Purchases of Equity Securities Approximate DollarTotal Number of Share
    
    
    Value of Shares thatPurchased as part of
    
    
    May Yet Be PurchasedTotal Number of
    
    
    Average Price Paid
    
    
    Publicly Announced
    
    
    Under the Plans orPeriod
    
    Shares Purchased
    
    
    per Share
    
    
    Plans or Programs
    
    
    Programs (1)October 1 to
October 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,000,000November 1 to
November 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,000,000December 1 to
December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,000,000Total
    
    
    
    
    
    
    
    
    
    
    
   (1)
    
    On July 29, 2004, the Companys Board of Directors approved a share repurchase
program to allow the Company to repurchase up to an aggregate $3,000,000 of its common shares
in the future if market conditions so dictate. During 2004 the Company did not repurchase any
shares. 19




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##### Table of Contents



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 the Managements Discussion and
Analysis of Financial Condition and Results of Operationssection also included in this report. Statement of Operations Data: Year ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(In thousands, except share information)Revenues:Car wash and detailing services
    
    $
    33,381
    
    
    $
    35,655
    
    
    $
    36,696
    
    
    $
    39,859
    
    
    $
    37,812Lube and other automotive services
    
    
    3,504
    
    
    
    4,147
    
    
    
    4,219
    
    
    
    4,487
    
    
    
    4,869Fuel and merchandise sales
    
    
    4,130
    
    
    
    3,613
    
    
    
    3,217
    
    
    
    3,638
    
    
    
    5,061Security sales
    
    
    16,632
    
    
    
    5,581
    
    
    
    2,498
    
    
    
    
    
    
    
    Operating agreements
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    240
    
    
    
    26157,647
    
    
    
    48,996
    
    
    
    46,710
    
    
    
    48,224
    
    
    
    48,003Cost of revenues:Car wash and detailing services
    
    
    23,754
    
    
    
    25,983
    
    
    
    25,674
    
    
    
    27,417
    
    
    
    26,856Lube and other automotive services
    
    
    2,729
    
    
    
    3,188
    
    
    
    3,301
    
    
    
    3,446
    
    
    
    3,789Fuel and merchandise sales
    
    
    3,577
    
    
    
    3,156
    
    
    
    2,802
    
    
    
    3,234
    
    
    
    4,472Security sales
    
    
    11,989
    
    
    
    3,485
    
    
    
    1,523
    
    
    
    
    
    
    
    42,049
    
    
    
    35,812
    
    
    
    33,300
    
    
    
    34,097
    
    
    
    35,117Selling, general and administrative expenses
    
    
    12,642
    
    
    
    9,486
    
    
    
    8,432
    
    
    
    7,366
    
    
    
    7,303Depreciation and amortization
    
    
    2,509
    
    
    
    1,958
    
    
    
    1,953
    
    
    
    2,813
    
    
    
    2,467Costs of terminated acquisitions
    
    
    53
    
    
    
    
    
    
    
    57
    
    
    
    135
    
    
    
    580Goodwill and asset impairment charges
    
    
    8,225
    
    
    
    3,798
    
    
    
    1,165
    
    
    
    
    
    
    
    138Operating (loss) income
    
    
    (7,831
    )
    
    
    (2,058
    )
    
    
    1,803
    
    
    
    3,813
    
    
    
    2,398Interest expense, net
    
    
    (1,890
    )
    
    
    (1,963
    )
    
    
    (2,219
    )
    
    
    (2,885
    )
    
    
    (3,013
    )Other income
    
    
    267
    
    
    
    438
    
    
    
    327
    
    
    
    514
    
    
    
    408(Loss) income from continuing operations before income taxes
    
    
    (9,454
    )
    
    
    (3,583
    )
    
    
    (89
    )
    
    
    1,442
    
    
    
    (207
    )Income tax (benefit) expense
    
    
    (3,044
    )
    
    
    (50
    )
    
    
    (32
    )
    
    
    534
    
    
    
    (66
    )(Loss) income from continuing operations
    
    
    (6,410
    )
    
    
    (3,533
    )
    
    
    (57
    )
    
    
    908
    
    
    
    (141
    )Discontinued Operations:(Loss) gain from discontinued operations, net of
applicable income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (265
    )Gain on disposal of ICS, net of applicable income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    724(Loss) income before cumulative effect of change in accounting principle
    
    
    (6,410
    )
    
    
    (3,533
    )
    
    
    (57
    )
    
    
    908
    
    
    
    318Cumulative effect of change in accounting principle, net of tax benefit
of $2,188
    
    
    
    
    
    
    
    
    
    
    (5,733
    )
    
    
    
    
    
    
    Net (loss) income
    
    $
    (6,410
    )
    
    $
    (3,533
    )
    
    $
    (5,790
    )
    
    $
    908
    
    
    $
    318Basic (loss) income per shareFrom continuing operations
    
    $
    (0.47
    )
    
    $
    (0.28
    )
    
    $
    
    
    
    $
    0.07
    
    
    $
    (0.01
    )From discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.04(Loss) income before cumulative effect of change in accounting principle
    
    
    (0.47
    )
    
    
    (0.28
    )
    
    
    
    
    
    
    0.07
    
    
    
    0.03Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (0.46
    )
    
    
    
    
    
    
    Net (loss) income
    
    $
    (0.47
    )
    
    $
    (0.28
    )
    
    $
    (0.46
    )
    
    $
    0.07
    
    
    $
    0.03Weighted average number of shares outstanding
    
    
    13,679,604
    
    
    
    12,414,816
    
    
    
    12,630,964
    
    
    
    12,724,282
    
    
    
    12,238,421Diluted (loss) income per shareFrom continuing operations
    
    $
    (0.47
    )
    
    $
    (0.28
    )
    
    $
    
    
    
    $
    0.07
    
    
    $
    (0.01
    )From discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.04(Loss) income before cumulative effect of change in accounting principle
    
    
    (0.47
    )
    
    
    (0.28
    )
    
    
    
    
    
    
    0.07
    
    
    
    0.03Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (0.46
    )
    
    
    
    
    
    
    Net (loss) income
    
    $
    (0.47
    )
    
    $
    (0.28
    )
    
    $
    (0.46
    )
    
    $
    0.07
    
    
    $
    0.03Weighted average number of shares outstanding
    
    
    13,679,604
    
    
    
    12,414,816
    
    
    
    12,630,964
    
    
    
    12,742,122
    
    
    
    12,238,421
 20




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##### Table of Contents



Year ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(In thousands)Balance Sheet Data (at end of period):Working capital (deficit)
    
    $
    17,471
    
    
    $
    270
    
    
    $
    (2,210
    )
    
    $
    4,809
    
    
    $
    (1,003
    )Intangible assets, net
    
    $
    6,522
    
    
    $
    11,614
    
    
    $
    14,389
    
    
    $
    21,132
    
    
    $
    22,024Total assets
    
    $
    102,757
    
    
    $
    90,602
    
    
    $
    96,288
    
    
    $
    104,670
    
    
    $
    106,131Long-term debt, including current maturities
    
    $
    29,195
    
    
    $
    31,286
    
    
    $
    33,312
    
    
    $
    34,349
    
    
    $
    36,685Stockholders equity
    
    $
    66,522
    
    
    $
    54,212
    
    
    $
    57,669
    
    
    $
    63,856
    
    
    $
    62,877
 
 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, 2004, and should be read in conjunction with our Consolidated Financial Statements and
related notes thereto included elsewhere herein. The following discussion includes Forward-Looking Statements. The accuracy of such statements
depends upon a variety of factors that may affect our business and operations. Certain of these
factors are discussed under Description of Business  Factors Influencing Future Results and
Accuracy of Forward-Looking Statementsincluded in Item 1 of this report. Summary of Critical Accounting Policies The discussion and analysis of our financial condition and results of operations is based upon the
Companys consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of contingent assets and
liabilities at the date of the Companys financial statements. Actual results may differ from
these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and
uncertainties, and potentially result in materially different results under different assumptions
and conditions. The Companys critical accounting policies are described below. Revenue Recognition 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. Revenues from the Companys Security Segment are recognized when shipments are made, or for
export sales when title has passed. Shipping and handling charges billed are included in revenues;
the cost of which is included in SG&A expenses. Impairment of Long-Lived Assets In accordance with 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, 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. See Note 17 of the
Notes to Consolidated Financial Statementsfor information regarding impairment charges incurred
with respect to our truck wash operations. 21




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##### Table of Contents



Goodwill In accordance with SFAS 142, the Company completed annual impairment tests as of November 30, 2004,
2003, and 2002, and will be subject to an impairment test each year thereafter and whenever there
is an impairment indicator. The Companys annual impairment testing corresponds with the
Companys determination of its annual operating budgets for the upcoming year. The
Companys valuation of goodwill is based on a discounted cash flow model applying an
appropriate discount rate to future expected cash flows and managements annual review of
historical data and future assessment of certain critical operating factors, including, car wash
volumes, average car wash and detailing revenue rates per car, wash and detailing labor cost
percentages, weather trends and recent and expected operating cost levels. Estimating cash flows
requires significant judgment including factors beyond our control and our projections may vary
from cash flows eventually realized. Weather, particularly in our Northeast and Texas regions,
continues to negatively influence our operating results. This negative influence continues to
affect our future cash flow assumptions during our annual goodwill impairment testing resulting in
further goodwill impairment charges in 2004 as part of our November 30, 2004 annual testing. See
Note 3 of the Notes to Consolidated Financial Statementsfor information regarding impairment
charges incurred with respect to our Northeast and Texas reporting units. Adverse business
conditions could affect recoverability of goodwill in the future and accordingly, the Company may
record additional impairments in subsequent years. Other Intangible Assets Other intangible assets consist primarily of deferred financing costs, customer lists, product
lists, trademarks, and a registered national brand name. In accordance with SFAS 142, Goodwill and
Other Intangible Assets, our trademarks and brand name are considered to have indefinite lives, and
as such, are not subject to amortization. These assets are tested for impairment using discounted
cash flow methodology annually and whenever there is an impairment indicator. Estimating future
cash flows requires significant judgment and projections may vary from cash flows eventually
realized. Several impairment indicators are beyond our control, and cannot be predicted with any
certainty whether or not they will occur. Deferred financing costs are amortized on a straight-line
basis over the terms of the respective debt instruments. Customer lists, product lists, and
non-compete agreements are amortized on a straight-line basis over their respective estimated
useful lives. Income Taxes Deferred income taxes are determined based on the difference between the financial accounting and
tax bases of assets and liabilities. Deferred income tax expense (benefit) represents the change
during the period in the deferred income tax assets and deferred income tax liabilities. Deferred
income tax assets include tax loss and credit carryforwards and are reduced by a valuation
allowance if, based on available evidence, it is more likely than not that some portion or all of
the deferred income tax assets will not be realized. Supplementary Cash Flow Information Interest paid on all indebtedness was approximately $2.0 million, $2.0 million and $2.3 million for
the years ended December 31, 2004, 2003 and 2002 respectively. Income taxes paid were approximately
$340,000, $144,000, and $169,000 for the years ended December 31, 2004, 2003 and 2002,
respectively. Noncash investing and financing activities of the Company excluded from the statement
of cash flows include a property addition financed by common stock of $1.6 million, real estate
partially funded by a mortgage of approximately $825,000, and the sale of property and simultaneous
pay down of a related mortgage of $325,000, all in 2004 and property additions financed by debt of
$343,000 and $1.0 million in 2003 and 2002, respectively. Introduction Revenues Car and Truck Wash Services We own full service, exterior only and self-service car wash locations in New Jersey,
Pennsylvania, Delaware, Texas, Florida and Arizona, as well as truck washes in Arizona, Indiana,
Ohio and Texas. We earn revenues from washing and detailing automobiles; performing oil and
lubrication services, minor auto repairs, and state inspections; selling fuel; and selling
merchandise through convenience stores within the car wash facilities. Revenues generated for 2004
for the Car and Truck Wash Segment were comprised of approximately 81% from car washing and
detailing, 9% from lube and other automotive services, and 10% from fuel and merchandise. The
majority of revenues from our Car and Truck Wash Segment are collected in the form of cash or
credit 22




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card receipts, thus minimizing customer accounts receivable. Weather has had and continues to have a significant impact on volume, and therefore revenue, at the
individual locations. We believe that the geographic diversity of our operating locations in
different regions of the country helps mitigate the risk and impact of adverse weather-related
influence on our volume. Security Our Security Segment designs, manufactures, markets and sells a wide range of products. The
Companys primary focus in the Security Segment is the design of digital video surveillance
systems and components that it produces and sells, primarily to installing dealers, system
integrators and end users. A video system is typically a private network that can transmit and
receive video, audio and data signals. Other products in our Security Segment are less-than-lethal
defense sprays and other security devices such as biometric locks and plasma monitors. The main
marketing channels for our products are industry shows, catalogs, internet, sales through a call
center and sales through mass merchants and trade publications. Prior to 2002, this
segments main business was the production and sale of less-than-lethal defense sprays. Cost of Revenues Car and Truck Wash Services Cost of revenues consists primarily of direct labor and related taxes and benefits, certain
insurance costs, chemicals, wash and detailing supplies, rent, real estate taxes, utilities, car
damages, maintenance and repairs of equipment and facilities, as well as the cost of the fuel and
merchandise sold. Security 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 benefits, and raw material
costs. Product warranty costs related to the electronic security surveillance products business
have been minimal in that the majority of customer product warranty claims are reimbursed by the
supplier. Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses consist primarily of management,
clerical and administrative salaries, professional services, insurance premiums, sales commissions,
and other costs relating to marketing and sales. We capitalize direct incremental costs associated with 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 certain intangible assets. Buildings and equipment are depreciated over the
estimated useful lives of the assets using the straight-line method. Intangible assets, other than
goodwill or intangible assets with indefinite useful lives, are amortized over their useful lives
ranging from three to 15 years, using the straight-line method. Costs of Terminated Acquisitions Our policy is to charge as an expense any previously capitalized expenditures relating to proposed
acquisitions that in our current opinion will not be consummated. At December 31, 2004, there were
no capitalized costs related directly to proposed acquisitions that were not yet consummated. We
periodically review the future likelihood of these acquisitions and record appropriate provisions
against capitalized costs associated with projects that are not likely to be completed. 23




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Goodwill and Asset Impairment Charges In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we
periodically review the carrying value of our long-lived assets held and used, and assets to be
disposed of, for possible impairment when events and circumstances warrant such a review. During
the year ended December 31, 2002, we wrote down assets determined to be impaired by approximately
$1.2 million. The asset write-down related to one of our full service car wash sites in Texas and
two full service car wash sites in Arizona. We have determined that due to changing demographics
and increased competition in the geographic areas of these sites, their future expected cash flows
will not be sufficient to recover their respective carrying values. During the quarter ended June
30, 2003, we further wrote down the assets related to one of the full service car wash sites in
Arizona, which we partially wrote down at December 31, 2002, by an additional $351,000. The
additional write-down was the result of the impending loss of a significant customer of this site
resulting in an additional reduction of the future expected cash flows of this site and the ability
to recover the sites carrying value. We closed the facility effective September 30, 2003.
During the quarter ended June 30, 2004, we sold the other Arizona car wash site recording a loss of
$51,000 on the disposition. We continue to market the Texas site for sale and have written down
these assets to their estimated fair market values. Additionally, during the year ended December
31, 2004, we wrote down assets related to our truck wash operations determined to be impaired by
approximately $500,000. 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. In accordance with SFAS 142, Goodwill and Other Intangible Assets,we perform the annual impairment
testing of Goodwill and Other Intangibles as of November 30 each year which corresponds with the
Companys determination of its annual operating budgets for the upcoming year. Our valuation
of goodwill is based on a discounted cash flow model applying an appropriate discount rate to
future expected cash flows and managements annual review of historical data and future
assessment of certain critical operating factors, including, car wash volumes, average car wash and
detailing revenue rates per car, wash and detailing labor cost percentages, weather trends and
recent and expected operating cost levels. In the fourth quarter of 2003, as a result of the annual
impairment test of Goodwill and Other Intangibles in accordance with SFAS 142, we recorded an
impairment of approximately $3.4 million related to our Northeast region reporting unit of our Car
and Truck Wash Segment. This was principally due to a reduction in future projected cash flow as
determined during our 2004 budgeting process, which we undertook in November, 2003. The projection
of cash flow from the Northeast region reporting unit was reduced because fewer cars were washed in
2003 than we had projected in November 2002 for 2003. We projected our car wash volume for 2003
based on the number of cars washed in the Northeast region reporting unit in the previous four
years. We believe that fewer cars were actually washed during 2003 as a result of more inclement
weather than in 2002 and a slower economy. In the fourth quarter of 2004, as a result of the annual
impairment test of Goodwill and Other Intangibles in accordance with SFAS 142, we recorded an
impairment of approximately $1.0 million related to our Northeast region reporting unit of our Car
and Truck Wash Segment. Additionally, we recorded an impairment of approximately $6.7 million
related to our Texas region reporting unit of our Car and Truck Wash Segment. These impairments
were
principally due to reductions in future projected cash flows as determined during our 2005
budgeting process, which we completed in December, 2004. The projections of cash flows from these
reporting units were reduced because of two successive years of reductions in number of cars
washed. We projected our car wash volume for 2004 based on the number of cars washed in these
reporting units in the previous five years. We believe that fewer cars were actually washed during
2004 as a result of more inclement weather than in 2003, and increased competition near certain of
our facilities in Texas and New Jersey. In 2002, the income tax benefit related to the cumulative effect of change in accounting principle
was recorded at an effective tax rate of 36% for the impairments in the Arizona and Truck Wash
reporting units. In 2004, the income tax benefit related to the Texas regions goodwill
impairment was recorded at an effective tax rate of 36%. No income tax benefit was recorded for
the Northeast region reporting units impairment due to the non-deductibility of the
goodwill. The effective rate differs from the federal statutory rate for each year primarily due to
state and local income taxes, non-deductible costs related to intangibles, fixed asset adjustments,
and changes to the valuation allowance. 24




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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. Results of Operations for Each of the Three Years in the Period Ended December 31, 2004 The following table presents the percentage each item in the consolidated statements of operations
bears to total revenues: Year ended December 31,2004
    
    
    2003
    
    
    2002Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenues
    
    
    73.0
    
    
    
    73.1
    
    
    
    71.3Selling, general and administrative expenses
    
    
    21.9
    
    
    
    19.4
    
    
    
    18.0Depreciation and amortization
    
    
    4.3
    
    
    
    4.0
    
    
    
    4.2Costs of terminated acquisitions
    
    
    0.1
    
    
    
    
    
    
    
    0.1Goodwill and asset impairment charges
    
    
    14.3
    
    
    
    7.7
    
    
    
    2.5Operating (loss) income
    
    
    (13.6
    )
    
    
    (4.2
    )
    
    
    3.9Interest expense, net
    
    
    (3.3
    )
    
    
    (4.0
    )
    
    
    (4.8
    )Other income
    
    
    0.5
    
    
    
    0.9
    
    
    
    0.7Loss from continuing operations before income taxes
    
    
    (16.4
    )
    
    
    (7.3
    )
    
    
    (0.2
    )Income tax benefit
    
    
    (5.3
    )
    
    
    (0.1
    )
    
    
    (0.1
    )Loss before cumulative effect of change in accounting principle
    
    
    (11.1
    )
    
    
    (7.2
    )
    
    
    (0.1
    )Cumulative effect of change in accounting principle, net of tax benefit
    
    
    
    
    
    
    
    
    
    
    (12.3
    )Net loss
    
    
    (11.1
    )%
    
    
    (7.2
    )%
    
    
    (12.4
    )%
 Revenues Car and Truck Wash Services Revenues for the year ended December 31, 2004 were $41.0 million as compared to $43.4 million for
the year ended December 31, 2003, a decrease of $2.4 million or 5.5%. Of the $41.0 million of
revenues for the year ended December 31, 2004, $33.4 million or 81% was generated from car wash and
detailing, $3.5 million or 9% from lube and other automotive services, and $4.1 million or 10% from
fuel and merchandise sales. Of the $43.4 million of revenues for the year ended December 31, 2003,
$35.7 million or 82% was generated from car wash and detailing, $4.1 million or 10% from lube and
other automotive services, and $3.6 million or 8% from fuel and merchandise sales. The decrease in
wash and detailing revenues was principally due to an overall car wash volume decline of 10.2% in
2004 from 2003, including 3.9% from the closing or divesting of five car wash locations. Partially
offsetting this decline in volume, the Company experienced an increase in average wash and
detailing revenue per car to $15.14 in 2004, from $14.52 in 2003, a 4.3% increase. 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. Revenue from lube and
other automotive serivces was approximately $3.5 million in 2004 compared to $4.1 million in 2003,
a decrease of $0.6 million or 15%. This decrease in revenue, principally within our Texas region,
is the result of the reduction in car wash volume within this market combined with increased
competition.The increase in fuel and merchandise revenues is primarily the result of higher fuel
prices and the addition of higher quality merchandise in our car wash lobbies. Management expects
car wash volumes to increase as weather trends return to more historic levels of inclement weather
resulting in an improvement in car wash and detailing revenue levels. Revenues for the year ended December 31, 2003 were $43.4 million as compared to $44.1
million for the year ended December 31, 2002, a decrease of $0.7 million or 1.6%. Of the $43.4
million of revenues for the year ended December 31, 2003, $35.7 million 25




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or 82% was generated from
car wash and detailing, $4.1 million or 10% from lube and other automotive services, and $3.6
million or 8% from fuel and merchandise sales. Of the $44.1 million of revenues for the year ended
December 31, 2002, $36.7 million or 83% was generated from car wash and detailing, $4.2 million or
10% from lube and other automotive services, and $3.2 million or 7% from fuel and merchandise
sales. The decrease in wash and detailing revenues was principally due to closing or divesting of
three of our car wash locations and a lube facility during 2003; the temporary closure of a car
wash location in Arizona due to fire damage; a departure from historic revenue levels within the
Northeast region due to several significant snow storms in the first quarter of 2003, an increase
in inclement weather, particularly on weekends, within the Texas region and the impact of a slower
economy. Overall car wash volumes declined 6.9% in 2003 from 2002, including 1.8% from the closing
or divesting of the three car wash locations noted above. Partially offsetting this decline in
volume, the Company experienced an increase in average wash and detailing revenue per car to $14.52
in 2003, from $13.89 in 2002. This increase in average wash and detailing revenue per car was the
result of managements continued focus on aggressively selling detailing and additional
on-line car wash services. The increase in fuel and merchandise revenues is the result of more
aggressive pricing on fuel to attract traffic into our car wash facilities and the addition of
higher quality merchandise in our car wash lobbies. Security Revenues
of the Security Segment were approximately $16.6 million, $5.6 million and
$2.5 million in
2004 and 2003 and 2002, respectively. The increase in revenues is due principally to internal
growth in sales to security systems installers, $7.8 million of sales generated by IVS and S&M
which we acquired in July of 2004, and sales growth in 2004 of $1.1 million generated by Vernex,
which was acquired in September 2003. Management expects revenues to continue to increase in the
electronic surveillance systems area as the Company expands its sales staff and marketing efforts.
Pursuant to a Management Agreement, we earned $80,000 in 2002. This amount is included under
revenues from operating agreements. Effective May 1, 2002, the Company recommenced operation of
the Security Segment. Cost of Revenues Car and Truck Wash Services Cost of revenues for the year ended December 31, 2004 was $30.1 million or 73% of revenues with car
washing and detailing costs at 71% of respective revenues, lube and other automotive services costs
at 78% of respective revenues, and fuel and merchandise costs at 87% of respective revenues. Cost
of revenues for the year ended December 31, 2003 was $32.3 million, or 74% of revenues with car
wash and detailing costs at 73% of respective revenues, lube and other automotive services costs at
78% of respective revenues, and fuel and merchandise costs at 87% of respective revenues. The
Company experienced a slight improvement in wash and detailing operating margins in 2004, despite a
decrease in wash volume of 10.2% as compared to the prior year, as a result of a
decline in insurance related claim costs, lease termination costs recorded in the prior year
related to an underperforming car wash property closed in 2003, and the divestitive or closing of
five unprofitable or marginally profitable car wash sites in 2003 and 2004. Additionally, due to
managements emphasis on monitoring labor staffing on a daily basis, we were successful in
maintaining relatively stable labor costs as a percent of revenues in 2004 and 2003 despite the
decrease in volume. Cost of revenues for the year ended December 31, 2003 was $32.3 million or 74% of revenues with car
washing and detailing costs at 73% of respective revenues, lube and other automotive services costs
at 77% of respective revenues, and fuel and merchandise costs at 87% of respective revenues. Cost
of revenues for the year ended December 31, 2002 was $31.8 million, or 72% of revenues with car
wash and detailing costs at 70% of respective revenues, lube and other automotive services costs at
78% of respective revenues, and fuel and merchandise costs at 87% of respective revenues. In 2003,
as compared to 2002, the Company experienced a deterioration in wash and detailing operating
margins largely due to the decrease in wash volume of 6.9% as compared to the prior year, combined
with increased insurance premiums and related claim costs, lease termination costs related to an
underperforming car wash property closed in 2003, and an increase in labor costs as a percent of
revenues of approximately two percentage points. This deterioration in wash and detailing operating
margins was partially offset by certain temporary and permanent cost savings measures instituted in
March of 2003, including reductions in payroll and related benefit costs, repairs and maintenance
costs and certain other operating expenses. Security Cost of revenues were $12.0 million, or 72% of revenues, $3.5 million or 62% of revenues and
$1.5 million or 61% of revenues for 2004, 2003 and 2002, respectively. For the first four months of
2002, pursuant to a Management Agreement, no costs were incurred by us. The increase in cost of
revenues in 2004 is principally due to the growth in the sale of video surveillance systems and
components which have gross profit margins typically lower than less-then-lethal defense sprays; an
increase in sales of 26




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monitors, which are typically sold at lower profit margins than other video
system components; an increase in sales to larger distributors and system installers at lower
profit margins to gain market share; and the acquisition of IVS and S&M with sales margins lower
than the Companys previously existing security operations. Management does not expect the
cost of revenues as a percent of revenues to increase substantially from current levels. Selling, General and Administrative Expenses Selling, general and administrative expenses for the year ended December 31, 2004 were $12.6
million compared to $9.5 million for the same period in 2003, an increase of approximately $3.1
million or 33%. SG&A costs as a percent of revenues were 21.9% for 2004 as compared to 19.4% in
2003. The increase in SG&A costs is primarily the result of growth of the Security Segment, which
added $2.5 million of SG&A costs in 2004, and an increase of $497,000 in Corporate SG&A costs. The
SG&A cost increase in the Security Segment was comprised of $1.6 million related to the do
it yourself video surveillance system business and the high end digital camera business
acquired in July 2004 including $105,000 of transaction and integration costs as well as increases
in costs of our existing Ft. Lauderdale, FL based video surveillance systems operation. These
increases were in the areas of marketing and selling costs and administration personnel costs as
additional staff was added to handle planned growth. Corporate cost increases related principally
to increased insurance costs, the cost of settling a legal matter for $55,000, and a management
bonus and increased corporate salaries totaling $298,000 in 2004. Management does not expect SG&A
costs as a percent of revenues to substantailly increase in the future. Selling, general and administrative expenses for the year ended December 31, 2003 were $9.5 million
compared to $8.4 million for the same period in 2002, an increase of approximately $1.1 million or
13%. SG&A costs as a percent of revenues were 19.4% for 2003 as compared to 18.1% in 2002. The
increase in SG&A costs is primarily the result of recommencing operation of the Security Segment in
May 2002, which along with the growth in the video surveillance system and components operation
added a combined $1.2 million of SG&A costs in 2003. The Company also incurred approximately
$168,000 of legal fees through December 31, 2003 related to the investigation being conducted by
the United States Securities and Exchange Commission. These increases in costs were partially
offset by certain temporary and permanent cost saving measures initiated in March of 2003,
including reductions in payroll and related benefit costs. Depreciation and Amortization Depreciation
and amortization totaled $2.5 million, $2.0 million and $2.0 million for 2004, 2003
and 2002, respectively. In the fourth quarter of 2004, the Company
recorded an adjustment to reflect the appropriate balances for
certain assets classified as buildings and leasehold improvements
that had been depreciated using incorrect useful lives. Specifically,
the Company recognized $338,000 in additional depreciation and
amortization expense in its consolidated statement of operation for
the quarter ended December 31, 2004 to correct the aforementioned
error in accounting. We decided to record the correction in the
current period and not restate our previously issued financial
statements after taking into consideration (i) that the adjustment, net of applicable income taxes, did not have a material
impact on the financial statements of prior interim or annual periods
taken as a whole; and (ii) that the cumulative impact of the adjustment on stockholders equity was not material
to the financial statements of prior interim or annual periods. 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. The costs of previously
capitalized expenditures related to proposed acquisitions totaled approximately $53,000, $0 and
$57,000 in 2004, 2003 and 2002, repectively. These costs, which principally related to several
possible acquisitions we pursued in the Security Segment, are primarily related to due diligence
costs. Asset Impairment Charges In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
we periodically review the carrying value of our long-lived assets held and used, and assets to be
disposed of, for possible impairment when events and circumstances
warrant such a review. Assets classified as held for sale are
measured at the lower of carrying value or fair value, net of costs
to sell. During the year ended December 31, 2002, we wrote down assets determined to be impaired by approximately
$1.2 million. The asset write-down related to one of our full service car wash sites in Texas and
two full service car wash sites in Arizona. We have determined that due to changing demographics
and increased competition in the geographic areas of these sites, their future expected cash flows
will not be sufficient to recover their respective carrying values. During the quarter ended June
30, 2003, we further wrote down the assets related to one of the full service car wash sites in
Arizona, which we partially wrote down at December 31, 2002, by an additional $351,000. The
additional write-down was the result of the impending loss of a significant customer of this site
resulting in an additional reduction of the future expected cash flows of this site and the ability
to recover the sites carrying value. We closed the facility effective September 30, 2003.
During the quarter ended June 30, 2004, we sold the other Arizona car wash site recording a loss of
$51,000 on the disposition. We continue to market the Texas site for sale and have written down
these assets to their estimated fair market values. Additionally, during the year ended December
31, 2004, we wrote down assets related to our truck wash operations determined to be impaired by
approximately $500,000. 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 27




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carrying values. In the fourth quarter of 2004, as a result of the annual impairment test of Goodwill and Other
Intangibles in accordance with SFAS 142, we recorded impairments of approximately $1.0 million and
$6.7 million related to our Northeast and Texas reporting units, respectively. Additionally, in
the fourth quarter of 2003, we recorded an impairment of approximately $3.4 million related to our
Northeast region reporting unit of our Car and Truck Wash Segment.These 2004 and 2003 impairments
were 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 and New Jersey. Interest Expense, Net Interest expense, net of interest income, for the year ended December 31, 2004, was $1.9 million
compared to $2.0 million for 2003. This decrease in our interest expense was the result of a
reduction in our outstanding debt as a result of routine monthly principal payments, partially
offset by an increase in interest rates in the last quarter of 2004 on approximately 50% of our
long-term debt which has interest rates tied to the prime rate. Interest expense, net of interest income, for the year ended December 31, 2003, was $2.0 million
compared to $2.2 million for 2002. This decrease in our interest expense was the result of a
decrease in interest rates on approximately 50% of our long-term debt which has interest rates tied
to the prime rate and a reduction in our outstanding debt as a result of routine monthly principal
payments. Other Income Other income was $267,000, $438,000, and $327,000 for 2004, 2003 and 2002, respectively. Included
in 2003 is a $107,000 gain on the sale of a car wash facility in our Northeast region. Income Taxes We
recorded income tax benefits of $3.0 million, $50,000, and $32,000 for the years ended December
31, 2004, 2003, and 2002, respectively. Income tax benefit reflects the recording of income taxes
on loss before income taxes at effective rates of approximately 32%, 1%, and 36% for the years
ended December 31, 2004, 2003, and 2002, respectively. In 2004 and 2003 no income tax benefit was
recorded on the Northeast region reporting unit goodwill impairments of approximately $1.0 million
and $3.4 million, respectively, due to the non-deductibility of the goodwill. The effective rate
differs from the federal statutory rate for each year primarily due to state and local income
taxes, non-deductible costs related to intangibles, fixed asset adjustments and
changes to the valuation allowance. In 2002, we recorded an income tax benefit related to the cumulative effect of a change in
accounting principle of approximately $2.2 million which reflects an effective rate of 36% for the
impairment in the Arizona and truck wash reporting units. No income tax benefit was recorded for
the Northeast region reporting unit goodwill impairment due to the non-deductibility of the
goodwill. At December 31, 2004, we had approximately $16.0 million of net operating loss carryforwards for
federal income tax purposes. Components of the net operating loss carryforwards include $14.8
million from continuing operations and $1.2 million from acquired net operating losses attributable
to the acquisition of Colonial Full Service Car Wash, Inc. Liquidity and Capital Resources Liquidity Cash and cash equivalents were $14.5 million at December 31, 2004. The ratio of our total debt to
total capitalization, which consists of total debt plus
stockholders equity, was 30.5% at
December 31, 2004, and 37% at December 31, 2003. The improvements in the Companys cash
position and total debt to total capitalization ratio are directly related to equity infusions 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 Segment, and for equipment purchases
and upgrades for our Car and Truck Wash Segment. We plan to meet these capital needs from various
financing sources, including borrowings, internally generated funds, and the issuance of common
stock if the market price of the Companys stock is at a desirable level. As of December 31, 2004, we had working capital of approximately $17.5 million. At December
31, 2003, working capital was 28




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approximately $270,000. The significant improvement in working
capital at December 31, 2004 is primarily attributable to: 1) $8.95 million of proceeds received
from the removal of a restriction on outstanding shares of the Companys common stock; 2)
$9.4 million of proceeds, net of issuance costs, from the sale of approximately 1.9 million shares
of the Companys common stock to two private institutions through three seperate sale
transactions and the sale of 150,000 shares of the Companys stock to Fusion under a Master
Facility Agreement; 3) $1.9 million of proceeds from the exercise of common stock options; and 4)
$795,000 of proceeds from the sale of an exterior-only car wash in New Jersey and a full-service
car wash in Arizona. Working capital was also positively affected by the renewal and
reclassification to non-current liabilities of approximately $3.3 million of 15-year amortizing
loans with Bank One. The increase in working capital was partially offset by the use of $5.6
million of cash for the acquisitions of IVS and S&M on July 1, 2004; capital expenditure
investments for further growth within the Car and Truck Wash Segment and the Security Segment, as
more fully detailed below; and the reclassification to current liabilities of an additional loan
for $290,000 which is up for renewal in April 2005. The Company intends to renew this loan with the
current lender. Although the Company has been successful in renewing similar loans with the current
lender in the past, including the renewal of loans in 2004 and 2003 totaling $3.3 million and $6.4
million, respectively, there can be no assurance that our lender will continue to provide us with
renewals or with renewals at favorable terms. During the year ending December 31, 2004 and 2003, we made capital expenditures of $1.46 million
and $872,000, respectively, within our Car and Truck Wash Segment. We estimate aggregate capital
expenditures for our Car and Truck Wash Segment, exclusive of acquisitions of businesses, of
approximately $1.3 million for the year ending December 31, 2005. The Company believes its current
cash balance at December 31, 2004 of $14.5 million and cash flow from operating activities in the
remainder of 2005 will be sufficient to meet its car wash capital expenditure funding needs through
at least the next twelve months. In years subsequent to 2005, we estimate that our Car and Truck
Wash Segment will require annual capital expenditures of $750,000 to $1.25 million. Capital
expenditures within our Car and Truck Wash Segment are necessary to maintain the efficiency and
competitiveness of our sites. If the cash provided from operating activities does not improve in
2005 and future years and if current cash balances are depleted, we will need to raise additional
capital to meet these ongoing capital requirements. We have spent approximately $4.9 million through June 30, 2004 in developing our video surveillance
systems operations in Ft. Lauderdale, FL. including the acquisition costs of Micro-Tech and Vernex
and the cost of developing and purchasing inventory for our expanded product line. Additionally, on
July 1, 2004 the Company paid approximately $5.6 million of cash for the acquisition of the S&M and
IVS security operations. We also made capital expenditures of approximately $1.9 million for the
purchase and furnishing of a new facility in Farmers Branch, Texas for our newly acquired S&M and
IVS security operations. Approximately $825,000 of the Farmers Branch, Texas facility purchase
price was financed. We estimate capital expenditures for the Security Segment at approximately
$150,000 for 2005, principally related to improvements and equipment for the new facilities in
Farmers Branch, Texas and Ft. Lauderdale, Florida. We intend to continue to expend significant cash for the purchasing of inventory as we grow and
introduce new video surveillance products in 2005 and in years subsequent to 2005. We anticipate
that inventory purchases will be funded from cash collected from sales and working capital. At
December 31, 2004, we maintained an unused $500,000 revolving credit facility with Bank One to
provide financing for additional video surveillance product inventory purchases. This revolving
credit facility is subject to an availability calculation based on inventory and accounts
receivable (as defined in our bank agreement). Based upon availability calculations at December
31, 2004, the full amount of the revolving credit facility is currently available. The amount of
capital that we will spend in 2005 and in years subsequent to 2005 is largely dependent on the
marketing success we achieve with our video surveillance systems and components. We believe our
cash balance of $14.5 million at December 31, 2004 and the revolving credit facility will provide
for growth in 2005. Unless our operating cash flow improves, our growth will be limited if we
deplete our cash balance. In the past, we have been successful in obtaining financing by selling common stock and obtaining
mortgage loans. Our ability to obtain new financing can be adversely impacted by our stock price.
Our failure to maintain the required current debt service coverage ratios on existing loans also
adversely impacts our ability to obtain additional financing. We are reluctant to sell common stock
at market prices below our per share book value. For the twelve month period ended December 31,
2004 we would have been in default on certain of our debt covenants had we not obtained waivers.
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, 2004, we had borrowings, including capital lease obligations, of
approximately $29.2 million. We had three letters 29




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##### Table of Contents



of credit outstanding at December 31, 2004,
totaling $908,000 as collateral relating to workers compensation insurance policies. We
maintain a $500,000 revolving credit facility, subject to an availability calculation based on
inventory and accounts receivable, to provide financing for additional video surveillance product
inventory purchases. There were no borrowings outstanding under the revolving credit facility at
December 31, 2004. The Company also maintains a $600,000 line of credit for commerical letters of
credit for the importation of inventory. There were no outstanding commerical letters of credit
under this commitment at December 31, 2004. 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. At December 31, 2004, we were not in compliance with our semi-annual consolidated debt coverage
ratio of at least 1.25:1 related to our GMAC notes payable. The Companys debt coverage
ratio related to the GMAC notes payable was .92:1 at December 31, 2004. GMAC granted us a waiver
of acceleration related to the non-compliance with the debt coverage ratio covenant at December 31,
2004, and for measurement periods through January 1, 2006 and, accordingly, a portion of the GMAC
notes payable was reflected as non-current on our financial statements at December 31, 2004. If we
are not able to increase our debt coverage ratio to at least 1.25:1, or we cannot obtain further
waivers of acceleration, the GMAC notes may be reflected as current in future balance sheets and as
a result our stock price may decline. The Company has entered into amendments to the Bank One term loan agreements effective March 31,
2004. The amended debt coverage ratio with Bank One requires the Company to maintain a ratio of
consolidated earnings before interest, income taxes, depreciation and amortization to debt service
of 1.05:1 at December 31, 2004 and thereafter. The Companys debt coverage ratio was .89:1
at December 31, 2004, which was not in compliance with this Bank One covenant as amended. The
Company received a waiver of acceleration with respect to this debt coverage ratio from Bank One
through January 1, 2006 and, accordingly, a portion of the Bank One notes payable was reflected as
non-current on our financial statements at December 31, 2004. The Bank One amendment also requires
the maintenance of a minimum total unencumbered cash and marketable securities balance of $5
million. This cash balance requirement will be lowered to $1 million upon the Company returning to
a debt coverage ratio of at least 1.10 to 1. If we are unable to satisfy these covenants or obtain
further waivers, the Bank One notes may be reflected as current in future balance sheets and as a
result our stock price may decline. The Company sold or closed five unprofitable or marginally profitable car wash facilities and a
lube facility in 2003 and 2004 and increased its prices in March 2004 within the Car and Truck
Wash Segment to help improve cash flows for fiscal 2004. If our future cash flows are less than
expected or debt service including interest expense increases more than expected causing us to
further default
on any of the Bank One covenants or the GMAC covenant in the future, the Company will need to
obtain further amendments or waivers from these lenders. If the Company is unable to obtain
waivers or amendments in the future, Bank One debt currently totaling $14.5 million and GMAC debt
currently totaling $10.6 million, including debt recorded as long-term debt at December 31, 2004,
would become payable on demand by the financial institution upon expiration of the current waivers. The Companys ongoing ability to comply with its debt covenants under its credit arrangements
and refinance its debt depends largely on the achievement of adequate levels of cash flow. Our
cash flow has been and could continue to be adversely affected by weather patterns, economic
conditions, and the requirements to fund the growth of our security business. In the event that
non-compliance with the debt covenants should reoccur, the Company would pursue various
alternatives to attempt to successfully resolve the non-compliance, which might include, among
other things, seeking additional debt covenant waivers or amendments, or refinancing debt with
other financial institutions. There can be no assurance that further debt covenant waivers or
amendments would be obtained or that the debt would be refinanced with other financial institutions
at favorable terms. If we are unable to obtain renewals on maturing loans or refinancing of loans
on favorable terms, our ability to operate would be materially and adversely affected. The Company is obligated under various operating leases, primarily for certain equipment and real
estate within the Car and Truck Wash Segment. Certain of these leases contain purchase options,
renewal provisions, and contingent rentals for our proportionate share of taxes, utilities,
insurance, and annual cost of living increases. 30




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The following are summaries of our contractual obligations and other commercial commitments at
December 31, 2004 (in thousands): Payments Due By PeriodLess than
    
    
    Two to
    
    
    Four to Five
    
    
    More ThanContractual Obligations(1)
    
    Total
    
    
    One Year
    
    
    Three Years
    
    
    Years
    
    
    Five YearsLong-term debt (2)
    
    $
    29,021
    
    
    $
    2,541
    
    
    $
    5,137
    
    
    $
    13,542
    
    
    $
    7,801Capital leases (2)
    
    
    174
    
    
    
    93
    
    
    
    81
    
    
    
    
    
    
    
    Minimum operating
lease payments
    
    
    4,212
    
    
    
    1,093
    
    
    
    1,371
    
    
    
    815
    
    
    
    933$
    33,407
    
    
    $
    3,727
    
    
    $
    6,589
    
    
    $
    14,357
    
    
    $
    8,734
 Amounts Expiring Per PeriodLess Than
    
    
    Two to
    
    
    Four to Five
    
    
    More ThanOther Commercial Commitments
    
    Total
    
    
    One Year
    
    
    Three Years
    
    
    Years
    
    
    Five YearsLine of credit(3)
    
    $
    500
    
    
    $
    500
    
    
    $
    
    
    
    $
    
    
    
    $
    Standby letters of credit(4)
    
    
    908
    
    
    
    908
    
    
    
    
    
    
    
    
    
    
    
    $
    1,408
    
    
    $
    1,408
    
    
    $
    
    
    
    $
    
    
    
    $
    
   (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 $1.9 million.(3)
    
    There were no borrowings outstanding under the Companys line of credit at December
31, 2004.(4)
    
    The Company also maintains a $600,000 line of credit for commerical letters of credit for
the importation of inventory. There were no outstanding commerical letters of
credit under this commitment at December 31, 2004. Outstanding letters of credit of $908,000
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 12, 2003. The principal terms of the employment agreement include: an annual salary of
$400,000; a car at a lease cost of $1,500 per month: provision for certain medical and other
employee benefits; prohibition against competing with Mace during employment and for a three-month
period following a termination of employment; and a $2.5 million payment in the event that Mr.
Paolinos employment is terminated for certain reasons set forth in the employment agreement. The
termination payment is not due in the event of termination due to death or disability or certain
prohibited conduct, as more fully set forth in the employment agreement. The termination payment is
due if Mr. Paolino is terminated for unsatisfactory job performance. The employment agreement also
entitles Mr. Paolino to a $2.5 million change-of-control bonus. The Master Facility Agreement between the Company and Fusion Capital Fund II, LLC (Fusion) and
the Equity Purchase Agreement between the Company and Fusion has been terminated. Under the Master
Facility Agreement, the Company had entered into an Equity Purchase Agreement on April 17, 2000.
Under the Equity Purchase Agreement, Fusion had the right and obligation to purchase up to $10
million of the Companys common stock under certain conditions. On April 21, 2004, the Company and
Fusion entered into a termination and release agreement under which the Company sold Fusion 150,000
registered shares of the Companys common stock at $2.32 per share and terminated the Equity
Purchase Agreement. Cash Flows Operating Activities.Net cash provided by operating activities totaled $1.2 million for
the year ended December 31, 2004 and $137,000 in 2003. The Company generated approximately $147,000
in cash from working capital accounts. The cash generated from working capital was mainly due to
increases in accounts payable and accrued expenses. This was partially offset by growth in the
Companys inventory of approximately $1.4 million from December 31, 2003 to December 31, 2004. The
increase in inventory was 31




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due primarily to growth within our existing Ft. Lauderdale, Florida and
recently acquired Farmers Branch, Texas video surveillance systems and components operations. The
Company also incurred $2.5 million of non-cash depreciation and amortization expense. Net cash provided by operating activities totaled $137,000 for the year ended December 31, 2003 as
compared to net cash provided by operating activities of $3.3 million for the year ended December
31, 2002. The reduction in net cash provided by operating activities in 2003 was pricipally due to
an increased net loss from operations in 2003 and a decrease in cash generated from the changes in
working capital accounts of $2.3 million. The decrease in cash generated from working capital is
mainly attributed to an increase in the Companys inventory and accounts receivable totaling
$1.95 million, due primarily to the increase in inventory and accounts receivable related to the
growth and expansion of the Companys Security Segment. The increase in the loss from
operations is mainly due to the expansion of the Security Segment and the effect of increased
inclement weather, especially in the Northeast and Texas regions, together with a slower economy,
which negatively affected the Companys car count. Investing Activities. Cash used in investing activities totaled $7.8 million for the year ended
December 31, 2004 which includes $5.6 million for the July 1, 2004 acquisition of IVS and S&M, $1.5
million for capital expenditures relating to ongoing car care operations, and $1.4 million for
capital expenditures relating to the Security Segment. These expenditures were partially offset by
proceeds of approximately $795,000 received from the sale of an exterior-only car wash in New
Jersey and a full-service car wash in Arizona. Cash used in investing activities totaled $569,000
for the year ended December 31, 2003 which includes $873,000 for capital expenditures relating to
ongoing car care operations, and $234,000 for the Security Segment. These amounts were partially
offset by $598,000 of cash proceeds from the sale of a car wash facility in our Northeast region. Financing Activities. Cash provided by financing activities was $17.6 million for the year ended
December 31, 2004 which includes $11.3 million of proceeds from the issuance of common stock and
the exercise of stock options and $8.95 million of proceeds from the removal of restrictions on
shares, partially offset by routine principal payments on debt of $2.6 million. Cash used in
financing activities was $2.3 million for the year ended December 31, 2003 which was pricipally for
routine principal payments on debt. 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
affects 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 by having operations in diverse geographic
regions. The Company also experiences a seasonal reduction in volume during the third quarter
within the Companys Arizona and Florida regions as a result of a migration of a significant
portion of those areas populations to cooler climates. 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. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS We are not materially exposed to market risks arising from fluctuations in foreign currency
exchange rates, commodity prices, or equity prices. Interest Rate Exposure A significant portion of our debt is at fixed rates, and as such, changes in market interest rates
would not significantly impact operating results unless and until such debt would need to be
refinanced at maturity. Substantially all of our variable rate debt obligations are tied to the
prime rate, as is our incremental borrowing rate. A one percent increase in the prime and Libor
rates would not have a material effect on the fair value of our variable rate debt at December 31,
2004 and would have had the impact of increasing interest expense by approximately $170,000 in
2004. 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% (5.5% at December 31, 2004). The hedge contract has a 36-month term and
caps the interest rate on the $7 million of variable rate debt at 6.5%. The derivative is
designated as a cash flow hedge and, accordingly, is marked to market with gains and losses on the
contract reported as a component of other comprehensive income (loss) and is classified into
earnings in the earlier of (i) the period the hedged transaction affects earnings, or (ii) the 32




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termination of the hedge contract. At December 31, 2004 the contract which was originally purchased
for $124,000, is included in other assets, at its fair market value of approximately $79,000. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The reports of independent registered public accounting firm and Consolidated Financial Statements
are included in Part III, ITEM 15 of this Report beginning on page F-1. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE In January 2000, we selected the international accounting firm of Grant Thornton LLP to serve as
our new independent accountants for the audit of the Companys Consolidated Financial
Statements for the year ended December 31, 1999. The appointment of Grant Thornton LLP as
continuing auditors for the years ended through December 31, 2004 was approved by our Board of
Directors and ratified by our Stockholders at the Companys Annual Meetings. 
 ITEM 9A. CONTROLS AND PROCEDURES The Companys management conducted an evaluation, under the supervision and with the
participation of the Companys Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls and procedures
as of December 31, 2004. Based on this evaluation and as of the date of the evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures are effective in alerting them in a timely manner to material information
required to be included in the Companys periodic filings with The United States Securities
and Exchange Commission. In addition, management, including the Chief Executive Officer and Chief
Financial Officer, reviewed the Companys internal controls, and there have been no
significant changes in the Companys internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last evaluation. 
 ITEM 9B. OTHER INFORMATION None 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Name
    
    Age
    
    PositionLouis D. Paolino, Jr
    
    
    48
    
    
    Chairman of the Board, President, and Chief
Executive OfficerRobert M. Kramer
    
    
    52
    
    
    Executive Vice President, Chief Operating
Officer of the Car
and Truck Wash Segment,General Counsel and
SecretaryGregory M. Krzemien
    
    
    45
    
    
    Chief Financial Officer and TreasurerRonald R. Pirollo
    
    
    46
    
    
    Chief Accounting Officer and Corporate ControllerMatthew J. Paolino
    
    
    40
    
    
    Director, Vice PresidentMark S. Alsentzer
    
    
    49
    
    
    DirectorConstantine N. Papadakis, Ph.D.
    
    
    59
    
    
    DirectorBurton Segal
    
    
    61
    
    
    Director
 All of the Maces directors serve for terms of one year each until their successors are
elected and qualified. 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. Kramerhas served as Executive Vice President, General Counsel, and Secretary of
the Company since May 1999, and 33




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##### Table of Contents



as Chief Operating Officer of the Car and Truck Wash Segment since
July 2000. 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 Law
School. Gregory M. Krzemienhas 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 and is a certified public accountant. Ronald R. Pirollohas served as Chief Accounting Officer and Corporate Controller of the Company
since May 1999. Mr. Pirollo served as Vice President and Corporate Controller of Eastern
Environmental Services, Inc. from July 1997 to June 1999. Prior thereto, Mr. Pirollo was with
Envirite Corporation for ten years, where he served in various financial management positions
including Vice President - Finance. Mr. Pirollo received a B.S. degree in Accounting and an MBA
from Villanova University. Matthew J. Paolinohas served as a director and as a Vice President of the Company since May 1999.
From 1996 to December 1998, Mr. Paolino served as a director of Eastern Environmental Services,
Inc. as well as Vice President of Risk Management, Asset Management and Special Waste Divisions of
Eastern Environmental Services, Inc. From 1993 to 1996, Mr. Paolino served as Vice President and
General Manager - Soil Remediation Division of USA Waste Services, Inc., which was acquired by
Eastern in August 1997. Mr. Paolino received a B.S. degree in Civil Engineering from Villanova
University in 1986 and a J.D. degree from the Widener School of Law in 1994. Mr. Paolino is the
brother of Louis D. Paolino, Jr., the Chairman, President and Chief Executive Officer of the
Company. Mark S. Alsentzerhas served as a director of the Company since December 1999. From December 1996
through September 2004, Mr. Alsentzer was President and Chief Executive Officer of U.S. Plastic
Lumber Corporation (a plastic and lumber and recycling company). From 1992 to December 1996, Mr.
Alsentzer served as Vice President of Republic Environmental Systems, Inc. (an environmental
services company). Mr. Alsentzer also serves as a director, and since January 4, 2000, as Chairman
of the Board, of U.S. Plastic Lumber Corporation. 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 currently remains a director on the Board of U.S.
Plastic Lumber Corporation and is no longer Chairman, President or Chief Executive Officer. Constantine N. Papadakis, Ph.D.has served as a director of the Company since May 1999. From 1995
through the present, Dr. Papadakis has been President of Drexel University. From 1986 through
1995, Dr. Papadakis was Dean of the College of Engineering, Geier Professor of Engineering
Education and Professor of Civil Engineering at the University of Cincinnati. Dr. Papadakis also
serves on the board of directors of Sovereign Bank, Met-Pro Corporation, The Philadelphia Stock
Exchange, Corcell, Inc., the Judicial Council of the Supreme Court of Pennsylvania, the Opera
Company of Philadelphia, the National Commission for Cooperative Education, the University City
Science Center, the Ben Franklin Technology Center and the World Trade Center of Greater
Philadelphia. Burton Segalhas served as a director of the Company since December 2003. From 1973 through the
present, Mr. Segal has been a Principal in the Accounting firm of Burton Segal & Co., Certified
Public Accountants. The Board has determined the Messrs. Alsentzer, Papadakis and Segal are independent directors
within the meaning of Rule 4200 (a) (15) of National Association of Securities Dealers
listing standards. Audit Committee Financial Expert The Board of Directors has determined that Burton Segal, 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. Audit Committee The Company has a separately designated standing Audit Committee established in accordance
with Section 3(a)(58)(A) of the 34




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Exchange Act. The members of the Audit Committee are Burton Segal,
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 listing standards and Rule
10A-3 promulgated under the Securities Exchange Act of 1934. 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. 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 Commission 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 2004 were made on a timely basis. 
 ITEM 11. EXECUTIVE 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 Chief Executive Officer and each of the
other most highly compensated executive officers of Mace whose compensation exceeded $100,000 (the
Named Executive Officers) for the three years ended December 31, 2004. SUMMARY COMPENSATION TABLE(1) Long-TermCompensationAwardsFiscal Year
    
    
    
    
    
    
    
    
    
    
    SecuritiesNAME AND
    
    ended
    
    
    Annual Compensation
    
    
    UnderlyingPRINCIPAL POSITIONS
    
    December 31,
    
    
    Salary
    
    
    Bonus
    
    
    Options (#)Louis D. Paolino, Jr.
    
    
    2004
    
    
    $
    400,000
    
    
    $
    200,000
    
    
    
    732,182President, Chief Executive
    
    
    2003
    
    
    $
    346,769
    
    
    
    
    
    
    
    150,000Officer and Chairman of the
Board
    
    
    2002
    
    
    $
    320,000
    
    
    
    
    
    
    
    87,500Robert M. Kramer
Executive Vice President,Chief Operating Officer of the
    
    
    2004
    
    
    $
    163,438
    
    
    
    
    
    
    
    112,500Car and Truck Wash Segment,
    
    
    2003
    
    
    $
    155,692
    
    
    
    
    
    
    
    150,000General Counsel and Secretary
    
    
    2002
    
    
    $
    151,202
    
    
    
    
    
    
    
    37,500Gregory M. Krzemien
    
    
    2004
    
    
    $
    144,485
    
    
    
    
    
    
    
    50,000Chief Financial Officer and
    
    
    2003
    
    
    $
    135,492
    
    
    
    
    
    
    
    150,000Treasurer
    
    
    2002
    
    
    $
    131,596
    
    
    
    
    
    
    
    37,500
 35




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Long-TermCompensationAwardsFiscal Year
    
    
    
    
    
    
    
    
    
    
    SecuritiesNAME AND
    
    ended
    
    
    Annual Compensation
    
    
    UnderlyingPRINCIPAL POSITIONS
    
    December 31,
    
    
    Salary
    
    
    Bonus
    
    
    Options (#)Ronald R. Pirollo
    
    
    2004
    
    
    $
    130,137
    
    
    
    
    
    
    
    25,000Chief Accounting Officer
    
    
    2003
    
    
    $
    118,427
    
    
    
    
    
    
    
    100,000and Corporate Controller
    
    
    2002
    
    
    $
    117,615
    
    
    
    
    
    
    
    15,000
   (1)
    
    The columns captioned Annual Compensation - Other Annual Compensation,
Long-Term Compensation - Restricted Stock Awards, LTIP
Payouts, and All Other Compensation have been omitted because none of the
Named Executive Officers received other annual compensation except for Mr. Paolino who
receives a car at a lease cost of $1,500 per month. Additionally, the Company paid legal fees
in 2004 to Mr. Paolinos attorney of approximately $38,800 which were incurred in
connection with Mr. Paolinos obligation to file Form 4s and Form 13ds in
connection with his ownership of the Companys common stock. The Company (i) made no
restricted stock awards, and (ii) maintained no long-term incentive plan for any of the Named
Executive Officers, in each case during the three fiscal years ended December 31, 2004, except
as noted above. Additionally, the Company has not issued any stock appreciation rights (SARs)
in any of the past three years. Director Compensation Prior to June 30, 2004, Mace did not pay fees to directors, but paid non-employee directors
reasonable travel and out-of-pocket expenses relating to their attendance at meetings. On June 29,
2004, the Independent Directors approved a compensation package for the Independent Directors
consisting of (a) an annual fee of $4,000, prorated for partial years of service, (b) a $750 fee
for in-person attendance at each Board meeting, and (c) a $300 fee for in-person attendance at each
committee meeting. On August 10, 2004, Maces outside directors, Mark S. Alsentzer, Burton Segal, and
Constantine N. Papadakis, Ph.D., were each granted options to purchase 11,000 shares of Mace common
stock at $3.04 per share for their service on the Board of Directors in 2004. Additionally, on
November 2, 2004, Mark S. Alsentzer was granted options to purchase 25,000 shares of Mace common
stock at $5.00 per share to compensate him for not being able to exercise a warrant for 25,000
shares prior to expiration due to the Companys insider trading policy. On November 19, 2004,
Louis D. Paolino, Jr., Matthew J. Paolino, Mark S. Alsentzer, Burton Segal, and Constantine N.
Papadakis, Ph.D., were each granted options to purcahse 14,000 shares of Mace common stock at $5.35
per share for their services on the Board of Directors in 2004. On April 4, 2002, Maces outside directors, Richard B. Muir, Mark S. Alsentzer and
Constantine N. Papadakis, Ph.D., were each granted options to purchase 12,500 shares of Mace common
stock at $2.36 per share for their service on the Board of Directors in 2002. All of the above grants were made under the 1999 Stock Option Plan. Equity Compensation Plan Information Stock options are issued under the 1999 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 the Stock Option Plan, which has been
approved by the stockholders of the Company, 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. 36




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##### Table of Contents



The following table sets forth certain information regarding the Companys Stock Option Plan
and warrants as of December 31, 2004. (c)Number of securities(a)
    
    
    (b)
    
    
    remaining available forNumber of securities to
    
    
    Weighted average
    
    
    future issuance under equitybe issued upon exercise
    
    
    exercise price of
    
    
    compensation plansof outstanding options,
    
    
    outstanding options,
    
    
    (excluding securitiesPlan Category
    
    warrants and rights
    
    
    warrants and rights
    
    
    reflected in column (a))Equity compensation plans
approved by stockholders
    
    
    2,971,264
    
    
    $
    4.03
    
    
    
    4,123,550Equity compensation plans not
approved by stockholders
    
    
    433,000
    
    
    $
    8.02
    
    
    
    N/A
 Option and Warrant Grants in Last Fiscal Year 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, 2004. OPTION GRANTS IN LAST FISCAL YEAR (1)
(Individual Grants) % of TotalNumber of
    
    
    Options
    
    
    
    
    
    
    
    
    
    
    Potential Realizable ValueSecurities
    
    
    Granted to
    
    
    Exercise
    
    
    
    
    
    
    at Assumed Rates of StockUnderlying
    
    
    Employees
    
    
    Price
    
    
    
    
    
    
    Price Appreciation forOptions
    
    
    in Fiscal
    
    
    Per
    
    
    Expiration on
    
    
    Option TermName
    
    Granted
    
    
    Year (1)
    
    
    Share
    
    
    Date
    
    
    5%
    
    
    10%Louis D. Paolino, Jr.
    
    
    568,182
    
    
    
    37.7
    %
    
    $
    4.21
    
    
    
    11/02/14
    
    
    $
    1,505,682
    
    
    $
    3,812,501164,000
    
    
    
    10.9
    %
    
    $
    5.35
    
    
    
    11/19/14
    
    
    $
    551,040
    
    
    $
    1,398,920Gregory M. Krzemien
    
    
    50,000
    
    
    
    3.3
    %
    
    $
    5.35
    
    
    
    11/19/14
    
    
    $
    168,000
    
    
    $
    426,500Robert M. Kramer
    
    
    37,500
    
    
    
    2.5
    %
    
    $
    4.21
    
    
    
    11/02/14
    
    
    $
    99,375
    
    
    $
    251,62575,000
    
    
    
    4.9
    %
    
    $
    5.35
    
    
    
    11/19/14
    
    
    $
    252,000
    
    
    $
    639,750Ronald R. Pirollo
    
    
    25,000
    
    
    
    1.7
    %
    
    $
    5.35
    
    
    
    11/19/14
    
    
    $
    84,000
    
    
    $
    213,250
   (1)
    
    The Company granted options to employees and directors to purchase a total 1,506,182
shares of common stock during the fiscal year ended December 31, 2004. All of these grants
were made at exercise prices equal to the fair market value of the common stock at the date of
grant. 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, 2004, including the number and value
of exercisable and unexercisable stock options as of December 31, 2004. No options were exercised
by any of the Named Executive Officers during the fiscal year ended December 31, 2004.
In-the-money options are those for which the fair market value of the underlying securities exceeds
the exercise price of the option. The closing transaction price of the Companys common stock on
December 31, 2004 was $4.80 per share. 37




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##### Table of Contents



AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES Number of Securities
    
    
    Value of UnexercisedUnderlying Unexercised Options
    
    
    In-the-moneyat Fiscal Year End 2004
    
    
    Options/SARs at Year End 2004Name
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableLouis D. Paolino, Jr.
    
    
    899,682
    
    
    
    75,000
    
    
    $
    1,081,915
    
    
    $
    Gregory M. Krzemien
    
    
    325,000
    
    
    
    25,000
    
    
    $
    784,750
    
    
    $
    Robert M. Kramer
    
    
    417,500
    
    
    
    37,500
    
    
    $
    818,063
    
    
    $
    Ronald R. Pirollo
    
    
    187,500
    
    
    
    12,500
    
    
    $
    450,350
    
    
    $
    
 Employment Agreements 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 agreement dated August 12, 2003. The principal terms of the employment
agreement include: annual salary of $400,000; a car allowance not to exceed $1,500 per month;
provision of certain medical and other employee benefits; prohibition against competing with Mace
during employment and for a three-month period following a termination of employment; and a $2.5
million payment in the event that Mr. Paolinos employment is terminated for certain reasons set
forth in the employment agreement. The termination payment is not due in the event of termination
due to death or disability or certain prohibited conduct, as more fully set forth in the employment
agreement. The termination payment is due if Mr. Paolino is terminated for unsatisfactory job
performance. The employment agreement also entitles Mr. Paolino to a $2.5 million
change-of-control bonus. Other Executive Employment Agreements The primary terms of the employment agreements for Robert M. Kramer, Gregory M. Krzemien, and
Ronald R. Pirollo expired on March 26, 2003. Messrs. Kramer and Krzemien are working on a
month-to-month, at-will basis. Mr. Pirollo or the Company may terminate Mr. Pirollos employment
at any time. Under the prior employment agreements, Mace granted to each of these executive
officers options to purchase shares of Mace common stock at $5.375 per share that vested over a
period of four years. The table below discloses the current salary and initial option grants for
these executive officers. Current
    
    
    InitialName
    
    Office
    
    
    Annual Salary
    
    
    Option GrantRobert M. Kramer
    
    Chief Operating Officer of  the Car
    
    $
    210,000
    
    
    
    100,000and Truck Wash Segment,ExecutiveVice President, General Counseland SecretaryGregory M. Krzemien
    
    Chief Financial Officer
    
    $
    200,000
    
    
    
    62,500and TreasurerRonald R. Pirollo
    
    Chief Accounting Officer
    
    $
    160,000
    
    
    
    25,000and Corporate Controller
 Compensation Committee Interlocks and Insider Participation The Compensation Committee of the Companys Board of Directors consisted of directors Burton Segal,
Mark Alsentzer, and Constantine N. Papadakis, Ph.D. No executive officer of Mace served as a
director or compensation committee member of any entity of which Messrs. Segal, Alsentzer or
Papadakis was an executive officer or director. Compensation Committee Report on Executive Compensation 38




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##### Table of Contents



The Compensation Committee of the Companys Board of Directors consisted of directors Burton Segal,
Mark Alentzer, and Constantine N. Papadakis, Ph.D. The following report of the Compensation Committee is required by the rules of the United States
Securities and Exchange Commission to be included in the Companys Proxy Statement or the
Companys Annual Report on Form 10-K and addresses the Companys executive compensation policies
for the fiscal year ended December 31, 2004. This report shall not be deemed incorporated by
reference into any filing under the Securities Act of 1933, as amended (the Securities Act), or
the Securities Exchange Act of 1934, as amended (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. General.The Companys compensation policies for executives are 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. The Companys current compensation package consists of three components: base salaries, bonuses and
stock options. Together these elements comprise total compensation value. The total compensation
paid to the Companys executive officers is influenced significantly by the need (i) to attract
management employees with a high level of expertise, and (ii) to motivate and retain key executives
for the long-term success of the Company and its stockholders. Compensation for 2004 In 2004, Mace focused its management efforts on maximizing operating profits from its Car and Truck
Wash Segment and continuing the growth of its Security Segment. Additionally, the financing and
re-financing of the Companys long-term debt demanded significant time and attention. Management
also successfully increased the Companys cash position from $3.4 million at December 31, 2003 to
$14.5 million at December 31, 2004. The cash position was increased by the Companys sale of common
stock and a transaction with Price Legacy Corporation that paid the Company $8.95 million for
removal of a contractual restriction on 1.75 million shares owned by Price Legacy Corporation.
The Compensation Committee considered these numerous factors and the Companys financial results in
formulating its executive compensation policies and practices for fiscal 2004. The Committee also
considered the Amper, Politziner and Mattia, P.C. study of compensation levels dated May 2004 for
each executive position when determining compensation. The May 2004 compensation study by Amper, Politziner and Mattia, P.C. concluded that the total
compensation package for Mr. Paolino fell below the peer group median. After considering all
factors, Mr. Paolino was granted 150,000 options on November 19, 2004 and a $200,000 bonus on
February 14, 2005. The bonus and 150,000 options were granted for Mr. Paolinos 2004 performance.
Mr. Paolinos base salary remained the same at $400,000. In 2004, Mr. Paolino also recieved a grant
of 568,182 options. The 568,182 option grant was made to compensate Mr. Paolino for not being able
to exercise a warrant for 568,182 shares prior to its expiration due to the Corporations insider
trading policy. The options granted have an exercise price equal to the market price at the date of
grant. The Compensation Committees basis for the 150,000 option award and bonus awarded to Mr.
Paolino was Mr. Paolinos success in improving the Companys cash postion in 2004 and in achieving
198% growth in the Security Segments revenues from 2003 to 2004. Mr. Paolinos total compensation
for 2004 places his compensation above the 75th percentile of the companies surveyed by
Amper, Poliziner & Mattia, P.C.. The Committee believes that Mr. Paolinos compensation is
appropraite in the context of (i) the Companys 2004 results, and (ii) compensation packages of
chief executive officers at comparable companies. The May 2004 compensation study concluded that the cash compensation of Mr. Kramer, Mr Krzemien and
Mr. Pirollo fell below the peer groups 25th percentile. In November, 2004, Mr. Kramers
cash compensation was increased by $54,000 to a total of $210,000 and Mr. Kramer was granted 75,000
stock options, Mr. Krzemiens cash compensation was increased by $65,000 to a total of $200,000 and
Mr. Krzemien was granted 50,000 stock options and Mr. Pirollos cash compensation was increased by
$40,000 to a total of $160,000 and he was granted 25,000 stock options. Messrs. Kramer, Krzemien
and Pirollo did not recieve a cash compensation increase since April 2002. With the cash
compensation increase, Mr. Kramers and Mr. Krzemiens cash compensation was slightly below the
peer groups 25th percentile and Mr. Pirollos cash compensation was slightly above the
25th percentile. Additionally, Mr. Kramer was granted 37,500 options in 2004 to
compensate him for not being able to exercise a warrant for 37,500 shares prior to its expiration
due to the Corporations insider trading policy. All options granted to Mr. Kramer, Mr. Krzemien
and Mr. Pirollo have an exercise price equal to the market price at the date of grant. The total
compensation for Mr. Kramer, Mr. Krzemien and Mr. Pirollo for 2004 was between the median and the
75th percentile of peer companies surveyed. 39




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##### Table of Contents



Base Compensation.The Committee established annual base salary levels for its executives based on
competitive data, level of experience, position, responsibility, and individual and Company
performance. The Committee has used comparative data provided by Amper, Politziner and Mattia, P.C.
For 2004, the Company has maintained base cash compensation levels for Mr. Paolino near the median
of the peer companies surveyed and for Mr. Kramer, Mr. Krzemien and Mr. Pirollo near the
25th percentile of peer companies. Peer companies included companies providing consumer
services on a national basis. The primary terms of the employment agreements of Mr. Kramer, Mr.
Krzemien, and Mr. Pirollo expired on March 26, 2003. Messrs. Kramer and Krzemien are working on a
month-to-month at will-basis. Mr. Pirollo or the Company may terminate Mr. Pirollos employment at
any time. Stock Options.The Company grants stock options to its executive management under its 1999 employee
stock option plan. Option grants are intended to offer significant returns if the Company is
successful and, therefore, create significant incentives to devote the effort called for in order
to implement the Companys strategic plan. The Compensation Committee believes that executives interests are directly tied to enhanced stockholder value. Thus, stock options are
used to provide the executive management team with a strong incentive to perform in a manner that
should result in the long-term success of the Company. Performance Bonuses.The Company maintains the option to supplement base compensation with awards
of performance bonuses in the form of cash to reward efforts undertaken by its key executive
officers which are extraordinary in nature. The Compensation Committee of the Board of Directors Burton Segal
Mark Alsentzer
Constantine N. Papadakis, Ph.D. 40




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##### Table of Contents



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) COMPARE 5-YEAR
CUMULATIVE TOTAL RETURN
AMONG MACE SECURITY INTERNATIONAL, INC.,
NASDAQ MARKET INDEX AND PEER GROUP INDEX (PERFORMANCE GRAPH) ASSUMES $100 INVESTED ON JAN 1, 2000
ASSUMES DIVIDEND REINVESTED
FISCAL YEARENDING DECEMBER 31, 2004   (1)
    
    The Selected Peer Group Index is comprised of securities of Lo-Jack Corporation and
Precision Auto Care, 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. 41




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##### Table of Contents



COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG MACE SECURITY INTERNATIONAL, INC., THE
NASDAQ MARKET INDEX, AND SELECTED PEER GROUP December 31,1999
    
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004Mace Security International, Inc.
    
    
    100.0
    
    
    
    21.96
    
    
    
    20.85
    
    
    
    25.33
    
    
    
    25.33
    
    
    
    58.18NASDAQ Market Index
    
    
    100.0
    
    
    
    107.32
    
    
    
    77.60
    
    
    
    70.66
    
    
    
    115.87
    
    
    
    174.23Selected Peer Group
    
    
    100.0
    
    
    
    62.85
    
    
    
    50.10
    
    
    
    34.95
    
    
    
    52.55
    
    
    
    56.97
 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 proxy statement 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. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Beneficial Ownership The following beneficial ownership table sets forth information as of January 31, 2005, except for
Langley Partners, L.P. which is based on their Schedule 13G filing dated February 7, 2005,
regarding beneficial 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 United States
Securities and Exchange Commission;.
    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 January 31, 2005, are deemed 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. Amount and Nature
    
    
    Percentage ofName and Address of
    
    of Beneficial
    
    
    Common Stock OwnedBeneficial Owner
    
    Ownership
    
    
    (1)Louis D. Paolino, Jr.
1000 Crawford Place, Suite 400
Mt. Laurel, NJ 08054
    
    
    1,790,640
    (2)
    
    
    11.1
    %Langley Partners, L.P.
535 Madison Avenue, 7th floor
New York, NY 10022
    
    
    1,179,900
    (3)
    
    
    7.6Mark S. Alsentzer
    
    
    577,500
    (4)
    
    
    3.8Matthew J. Paolino
    
    
    283,354
    (5)
    
    
    1.8Robert M. Kramer
    
    
    487,324
    (6)
    
    
    3.1Gregory M. Krzemien
    
    
    350,250
    (7)
    
    
    2.2Ronald R. Pirollo
    
    
    192,500
    (8)
    
    
    1.2Constantine N. Papadakis, Ph.D.
    
    
    72,500
    (9)
    
    
    *Burton Segal
    
    
    25,000
    (10)
    
    
    *
 42




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##### Table of Contents



Amount and Nature
    
    
    Percentage ofName and Address of
    
    of Beneficial
    
    
    Common Stock OwnedBeneficial Owner
    
    Ownership
    
    
    (1)All current directors and executive
officers as a group (8 persons)
    
    
    3,779,068
    (11)
    
    
    21.8
   *
    
    Less than 1% of the outstanding shares of Mace common stock.  (1)
    Percentage calculation is based on 15,271,132 shares outstanding on January 31, 2005.(2)
    Includes options to purchase 899,682 shares.(3)
    Includes warrants to purchase 333,000 shares.(4)
    Includes options to purchase 77,500 shares.(5)
    Includes options to purchase 81,500 shares.(6)
    Includes options to purchase 417,500 shares.(7)
    Includes options to purchase 325,000shares.(8)
    Includes options to purchase 187,500 shares.(9)
    Represents options to purchase 72,500 shares.(10)
    Represents options to purchase 25,000 shares.(11)
    See Notes 2, 4, 5, 6, 7, 8, 9 and 10 above. Equity Compensation Plan Information See the information contained under the heading Equity Compensation Plan Information
within Item 11 of this Form 10-K regarding shares authorized for issuance under equity compensation
plans approved by stockholders and not approved by stockholders. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain Relationships and Related Party Transactions Effective August 1, 2000, Mace entered into a five-year lease with Bluepointe, Inc., a corporation
fifty percent owned by Louis D. Paolino, Jr., Maces Chairman, Chief Executive Officer and
President and fifty percent owned by Mr. Paolinos father Louis D. Paolino, Sr., for
Maces executive offices in Mt. Laurel, New Jersey. Bluepointe, Inc. sold the building to an
unrelated party in May, 2004. The lease terms, which were assumed by the new owner, were subject to
a survey of local real estate market pricing and approval by the Companys Audit Committee
and provide for an initial monthly rental payment of $15,962, which increases by 5% per year in the
third through fifth years of the lease. Mace believes that the terms of this lease (based on an
annual rate of $19.00 per square foot) were competitive when the lease was executed. From November, 2001 through July 2002, the Company prepaid LP Learjets, LLC $5,109 per month for
the right to use a Learjet 31A for 100 hours per year. LP Learjets, LLC is a company owned by Louis
D. Paolino, Jr., the Companys Chairman, Chief Executive Officer and President. When the
Learjet 31A is used, the prepaid amount is reduced by the hourly usage charge as approved by the
Audit Committee, and the Company pays to third parties unaffiliated with Louis D. Paolino, Jr., the
direct costs of the Learjets per-hour use, which include fuel, pilot fees, engine insurance
and landing fees. The balance of unused prepaid flight fees total $31,659 at December 31, 2004. During 2004, Louis D. Paolino, Jr. purchased approximately $20,600 of the Companys products
at a discount from the prices charged to distributors. The total of the discount given to Mr.
Paolino was approximately $6,600. From February 2000 through April 2002, the Company and Mark Sport, Inc. (Mark Sport)
were parties to a Management Agreement. Mark Sport is a Vermont corporation controlled by Jon E.
Goodrich, a former director and current employee of the Company. Mr. Goodrich was a director from
December 1987 through December 2003. Under the Management Agreement, as amended, Mark Sport
operated the Companys Security Segment and received all profits or losses from January 1,
2000 to April 30, 2002 in exchange for certain payments to the Company. At March 31, 2004, Mark
Sport owed the Company $127,000 in payments under the Management Agreement. In April 2004, the
outstanding balance owed by Mark Sport to the Company was paid in full. The Companys Consumer Products Division leases manufacturing and office space under a
five-year lease with Vermont Mill, Inc. (Vermont Mill), which provides for monthly
lease payments of $9,167 through November 2004. Vermont Mill is controlled by Jon E. Goodrich, a
former director and current employee of the Company. The Company has exercised an option to
continue the lease through November 2009. The rent will increase by a CPI factor in November 2004.
The Company believes that the lease rate 43




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##### Table of Contents



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. Additionally, Vermont Mill borrowed a
total of $228,671 from the Company through December 31, 2001. On February 22, 2002, Vermont Mill
executed a three year promissory note with monthly installments of $7,061 including interest at a
rate of 7%. At March 31, 2004, the balance owed on this promissory note was $82,100. In April 2004,
the balance on the promissary note was paid in full. From January 1, 2003 through December 31, 2004, the Companys Security Segment sold
approximately $156,000 of electronic security equipment to two companies, each of which Louis
Paolino, III, the son of the Companys CEO, Louis D. Paolino, Jr., is a partial owner. The
pricing extended to these companies is no more favorable than the pricing given to third party
customers who purchase in similar volume. At December 31, 2004, no balance was owed from these
companies to Mace. Louis Paolino III, the son of the Companys Chief Executive Officer, Louis Paolino, Jr., has
offered to purchase from the Company a warehouse bay in Hollywood, Florida that is no longer used
in the Companys operations. Louis Paolino III has offered to purchase the warehouse bay for
$306,000 in cash. The Company paid $256,688 for the property in 2003. The warehouse property was
appraised by a third party independent appraiser on January 14, 2005 at a estimated market value of
$306,000. On February 14, 2005, the Companys Audit Committee authorized the Company to
proceed with a sale of the warehouse property to Louis Paolino III for $306,000. 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Audit Fees.The Company was billed $162,310 through February 28, 2005, by Grant Thornton LLP for
the audit of Maces annual financial statements for the fiscal year ended December 31, 2004,
and for the review of the financial statements included in Maces Quarterly Reports on Forms
10-Q filed during 2004. The Company was billed $141,000 by Grant Thornton LLP for the audit of
Maces annual financial statements for the fiscal year ended December 31, 2003, and for the
review of the financial statements included in Maces Quarterly Reports on Forms 10-Q filed
during 2003. Tax Fees.The Company was billed $17,684 and $20,260 for tax compliance services rendered by Grant
Thornton LLP during 2004 and 2003, respectively. All Other Fees.Mace was billed $46,788 and $17,983 for non-audit or non-tax services, principally
SEC compliance services, rendered by Grant Thornton LLP during 2004 and 2003, respectively. 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.
The Audit Committee may form and delegate authority to subcommittees consisting of one or more
members when appropriate, including the authority to grant pre-approvals of audit and permitted
non-audit services, provided that decisions of such subcommittee to grant pre-approvals shall be
presented to the full Audit Committee at its next scheduled meeting. 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1)
    
    Consolidated Financial Statements:Report of Independent Certified Public AccountantsConsolidated Balance Sheets as of December 31, 2004 and 2003Consolidated Statements of Operations for the years ended December 31, 2004, 2003, and 2002Consolidated Statements of Stockholders Equity for the years ended December 31, 2004,2003, and 2002Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003, and 2002Notes 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 United States Securities and Exchange Commission (the
Commission) are not required under the related instructions or are inapplicable, and
therefore, have been omitted.
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##### Table of Contents



(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): *3.3
    
    Amended and Restated Bylaws of Mace Security International, Inc. (Exhibit 3.3 to the
Companys Report on Form 10-KSB for the year ended December 31, 1999 (the 1999
Form 10-KSB))*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)*10.3
    
    1993 Non-Qualified Stock Option Plan (1) (3)*10.22
    
    Trademarks(1)*10.28
    
    Warrants in connection with the acquisition of the assets of the KinderGard Corporation(2)*10.71
    
    Employment Contract between Mace Security International, Inc. and Robert M. Kramer dated
March 26, 1999 (3)*10.72
    
    Employment Contract between Mace Security International, Inc. and Gregory M. Krzemien
dated March 26, 1999 (3)*10.73
    
    Amendment No. 1 to Merger Agreement between Louis D. Paolino, Red Mountain Holding, Ltd.
and Mace Security International, Inc. dated April 13, 1999*10.74
    
    Amendment No. 1 to Stock purchase Agreement, between Louis Paolino, Jr. and Mace Security
International, Inc. dated April 13, 1999*10.98
    
    Mace Security International, Inc. 1999 Stock Option Plan (3).(Exhibit 10.98 to the June
30, 1999 Form 10-QSB dated August 13, 1999)*10.123
    
    Loan Agreement and Promissory Note dated February 17, 2000, between the Company, its
subsidiary Mace Car Wash  Arizona, Inc. and Bank One, Texas, NA. (Exhibit 10.123 to the
December 31, 1999 Form 10-KSB dated March 29, 2000)*10.124
    
    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)*10.128
    
    Form of Equity Purchase Agreement to be issued by Mace to Fusion Capital (included as
Exhibit A to Master Facility Agreement in Exhibit 10.1 of S-3). (Exhibit 4.1 to the
Companys Current Form on S-3 dated April 11, 2000).*10.129
    
    Master Facility Agreement, dated as of April 5, 2000, between Mace and Fusion Capital
(Exhibit 10.1 to the Companys Current Form on S-3 dated April 11, 2000).*10.130
    
    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)*10.131
    
    Lease Agreement dated August 1, 2000 among Mace Security International, Inc. and
Bluepointe, Inc. (Exhibit 10.131 to the December 31, 2000 Form 10-KSB dated March 20, 2001)*10.132
    
    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, two additional amendments which are
substantially identical in all material respects, except as to the borrower being Eager
Beaver Car Wash, Inc. and Mace Car Wash B Arizona, Inc., are not being
filed).(Exhibit 10.132 to the December 31, 2000 Form 10-KSB dated March 20, 2001)
 45




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##### Table of Contents



*10.133
    
    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)*10.134
    
    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)*10.135
    
    Amendment dated February 21, 2002 to Management Agreement between the Company and Mark
Sport, Inc. and original Management Agreement dated February 1, 2000 to which the amendment
relates.(Exhibit 10.135 to the December 31, 2001 Form 10-K dated March 11, 2002)*10.136
    
    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)*10.137
    
    Promissory Note between the Company and Vermont Mill Properties, Inc. dated February 22,
2002 in the amount of $228,671. (Exhibit 10.137 to the December 31, 2001 Form 10-K dated
March 11, 2002)*10.138
    
    Extension dated February 6, 2002 of Equity Purchase Agreement between the Company and
Fusion Capital Fund II, LLC. (Exhibit 10.138 to the December 31, 2001 Form 10-K dated March
11, 2002)*10.139
    
    Term note dated April 30, 2002, between the Company, its subsidiary, Mace Truck Wash,
Inc., and Bank One, Texas, N.A. in the amount of $342,000.(Exhibit 10.139 to the June 30,
2002 Form 10-Q dated August 14, 2002)*10.140
    
    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)*10.141
    
    Amendment dated July 22, 2002 to Management Agreement between the Company and Mark
Sport, Inc. (Exhibit 10.141 to the June 30, 2002 Form 10-Q dated August 14, 2002)*10.142
    
    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)*10.143
    
    Asset Purchase Agreement dated as of August 12, 2002, by and among Micro-Tech
Manufacturing, Inc. and Moshe Luski on the one hand, and Mace Security Products, Inc., a
wholly owned subsidiary of Mace Security International, Inc. (Exhibit 10.143 to September
30, 2002 Form 10-Q dated November 12, 2002)*10.144
    
    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)*10.145
    
    Promissory Note and Loan Agreement dated October 31, 2002 between the Company, its
subsidiary, Mace Security Products, Inc. and Wachovia Bank, N.A. in the amount of
$480,000.(Exhibit 10.145 to the December 31, 2002 Form 10-K dated March 19, 2003)*10.146
    
    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)*10.147
    
    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)*10.148
    
    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)*10.149
    
    Note Modification Agreement dated February 21, 2003, between the Company, its
subsidiary, Mace Car Wash B Arizona, Inc. and Bank One, Texas, N.A. in the amount of
$4,281,578.(Exhibit 10.149 to the December 31, 2002 Form 10-K dated March 19, 2003)*10.150
    
    Modification Agreement dated March 14, 2003, between the Company, its subsidiary, Mace
Security Products, Inc. and Wachovia Bank, N.A. (Exhibit 10.150 to the December 31, 2002
Form 10-K dated March 19, 2003)*10.151
    
    Note Modification Agreement dated August 5, 2003, effective July 10, 2003, between the
Company, its subsidiary, Mace Car Wash B Arizona, Inc. and Bank One, Texas, N.A. in
the amount of $731,455. (Exhibit 10.151 to the June 30, 2003 Form 10-Q dated August 12,
2003)*10.152
    
    Employment Contract dated August 12, 2003, between Mace Security International, Inc. and
Louis D. Paolino, Jr. (Exhibit 10.152 to the June 30, 2003 Form 10-Q dated August 12, 2003)
(3)
 46




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##### Table of Contents



*10.153
    
    Consolidated Promissory Note and Amended and Restated Loan Agreement dated
October 20, 2003 between the Company, its wholly owned subsidiary, Mace Security
Products, Inc. and Wachovia Bank, N.A. in the amount of $728,800. (Exhibit 10.153 to
the September 30, 2003 Form 10-Q dated November 12, 2003)*10.154
    
    Amendment dated October 25, 2003 to Employment Contract dated August 12, 2003 by and
between Mace Security International, Inc. and Louis D. Paolino, Jr. (Exhibit 10.154 to the
September 30, 2003 Form 10-Q dated November 12, 2003) (3)*10.155
    
    Modification and Extension of Note and Ratification of Mortgage Liens dated November 28,
2003, between the Company, its subsidiary, Eager Beaver Car Wash, Inc. and Bank One, Texas,
N.A. in the amount of $5,723,079.(Exhibit 10.155 to the December 31, 2004 Form 10-K dated March 12, 2004.)*10.156
    
    Note Modification Agreement and Amendment to Credit Agreement dated December 15, 2003, between the Company, its
subsidiary, Mace Security Products, Inc. and Bank One, Texas, N.A. in the amount of $500,000.(Exhibit 10.156 to the
December 31, 2004 Form 10-K dated March 12, 2004.)*10.157
    
    Note Modification Agreement and Amendment to Credit Agreement dated January 21,
2004, between the Company, its subsidiary, Colonial Full Service
Car Wash, Inc. and Bank One, Texas, N.A. in the amount of
$48,725.50.(Exhibit 10.157 to the December 31, 2004 Form 10-K dated March 12, 2004.)*10.158
    
    Credit Agreement dated as of December 31, 2003 between the Company, its subsidiary,
Eager Beaver Car Wash, Inc., and Bank One Texas, N.A. (pursuant to instruction 2 to Item
601of Regulation S-K, four additional credit agreements which are substantially identical
in all material respects, except as to the borrower being Mace Car Wash  Arizona, Inc.,
Colonial Full Service Car Wash, Inc., Mace Security Products, Inc. and Mace Security
International, Inc., are not being filed.) (Exhibit 10.158 to the December 31, 2004 Form
10-K dated March 12, 2004.)*10.159
    
    Amendment to Credit Agreement dated April 27, 2004, effectiveness of March 31, 2004
between Mace Security
International, Inc., and Bank One Texas, N.A. (Pursant 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 fikled) (Exhibit 10.159
to the March 31,
2004 Form 10-Q dated May 5, 2004)*10.160
    
    Termination Agreement dated April 21, 2004, between Mace Security International, Inc.
and Fusion Capital Fund
II, LLC. (Exhibit 10.160 to March 31, 2004 Form 10-Q dated May 5, 2004.)*10.161
    
    Stock Restriction Removal Agreement dated April 12, 2004, between Mace Security
International, Inc. and Price
Legacy Corporation (Exhibit 10.161 to the March 31, 2004 Form 10-Q dated May 5, 2004.)*10.162
    
    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)*10.163
    
    Securities Purchase Agreement dated May 26, 2004 between the Company and Langley
Partners, L.P. as set forth on the Signature pages therof (Exhibit 10.1 to the June 16,
2004 Form S-3)*10.164
    
    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)*10.165
    
    First Amendment to the Securities Purchase Agreement, dated June 8, 2004 (Exhibit 10.3
to the June 16, 2004 Form S-3)*10.166
    
    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)*10.167
    
    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)*10.168
    
    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)*10.169
    
    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)
 47




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##### Table of Contents



*10.170
    
    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)*10.171
    
    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)*10.172
    
    Warrant to be issued to Langley Partners, L.P. ( Exhibit 99.4 to the December 14, 2004 Form 8-K dated December 16,
2004)*10.174
    
    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)*10.175
    
    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)10.176
    
    Compensatory Arrangements with Certain Executive Officers and Directors.11
    
    Statement Re: 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 Company23.1
    
    Consent of Grant Thornton LLP24
    
    Power of Attorney (included on signature page)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 .31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   *
    
    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.  (1)
    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.(2)
    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.(3)
    Indicates a management contract or compensation plan or arrangement. 48




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##### Table of Contents



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,
Chief Executive Officer,
and President DATED the 29th day of March, 2005. 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.

Louis D. Paolino, Jr.
    
    Chairman of the Board,
Chief Executive Officer,
President and Director
(Principal Executive Officer)
    
    3/29/05/s/ Gregory M. Krzemien

Gregory M. Krzemien
    
    Chief Financial Officer
and Treasurer (Principal
Financial Officer)
    
    3/29/05/s/ Ronald R. Pirollo

Ronald R. Pirollo
    
    Chief Accounting Officer and
Corporate Controller (Principal
Accounting Officer)
    
    3/29/05/s/ Matthew J. Paolino

Matthew J. Paolino
    
    Director, Vice President
    
    3/29/05/s/ Constantine N. Papadakis, Ph.D.

Constantine N. Papadakis, Ph.D.
    
    Director
    
    3/29/05/s/ Mark S. Alsentzer

Mark S. Alsentzer
    
    Director
    
    3/29/05/s/ Burton Segal

Burton Segal
    
    Director
    
    3/29/05
 49




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##### Table of Contents



Mace Security International, Inc.
Consolidated Financial Statements
Years ended December 31, 2004, 2003, and 2002 Contents Report of Independent Registered Public Accounting Firm
    
    F-2Audited Consolidated Financial StatementsConsolidated Balance Sheets
    
    F-3Consolidated Statements of Operations
    
    F-5Consolidated Statements of Stockholders Equity
    
    F-6Consolidated Statements of Cash Flows
    
    F-7Notes to Consolidated Financial Statements
    
    F-8
 F-1




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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. and
Subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of operations, changes in
shareholders equity and cash flows for each of the three years in period ended December 31, 2004.
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 audits 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, 2004 and 2003,
and the consolidated results of its operations and its cash flows for each of the three years in the period ended December
31, 2004, in conformity with accounting principles generally accepted in the United States of America. /s/ Grant Thornton LLP
Philadelphia, Pennsylvania
March 15, 2005 F-2




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##### Table of Contents



Mace Security International, Inc. and Subsidiaries Consolidated Balance Sheets(In thousands, except share information) December 31,2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,499
    
    
    $
    3,414Accounts receivable, less allowance for doubtful
accounts of $449 and $263 in 2004 and 2003, respectively
    
    
    2,556
    
    
    
    1,531Inventories
    
    
    7,067
    
    
    
    3,780Deferred income taxes
    
    
    321
    
    
    
    266Prepaid expenses and other current assets
    
    
    2,102
    
    
    
    1,878Assets held for sale
    
    
    600
    
    
    
    Total current assets
    
    
    27,145
    
    
    
    10,869Property and equipment:Land
    
    
    31,629
    
    
    
    31,391Buildings and leasehold improvements
    
    
    36,263
    
    
    
    34,871Machinery and equipment
    
    
    11,456
    
    
    
    10,172Furniture and fixtures
    
    
    527
    
    
    
    447Total property and equipment
    
    
    79,875
    
    
    
    76,881Accumulated depreciation and amortization
    
    
    (13,003
    )
    
    
    (10,738
    )Total property and equipment, net
    
    
    66,872
    
    
    
    66,143Goodwill
    
    
    3,587
    
    
    
    10,623Other intangible assets, net of accumulated amortization
of $309 and $188 in 2004 and 2003, respectively
    
    
    2,935
    
    
    
    991Deferred income taxes
    
    
    2,008
    
    
    
    1,820Other assets
    
    
    210
    
    
    
    156Total assets
    
    $
    102,757
    
    
    $
    90,602
 See accompanying notes. F-3




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##### Table of Contents



December 31,2004
    
    
    2003LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt and capital lease obligations
    
    $
    2,634
    
    
    $
    5,520Accounts payable
    
    
    4,077
    
    
    
    2,658Income taxes payable
    
    
    278
    
    
    
    172Deferred revenue
    
    
    469
    
    
    
    402Accrued expenses and other current liabilities
    
    
    2,216
    
    
    
    1,847Total current liabilities
    
    
    9,674
    
    
    
    10,599Long-term debt, net of current portion
    
    
    26,480
    
    
    
    25,591Capital lease obligations, net of current portion
    
    
    81
    
    
    
    175Other liabilities
    
    
    
    
    
    
    25Stockholders equity:Preferred stock, $.01 par value:
Authorized shares - 10,000,000
Issued and outstanding shares - none
    
    
    
    
    
    
    Common stock, $.01 par value:
Authorized shares - 100,000,000 Issued and outstanding shares of 15,271,132 and 12,4 51,7 71 in
2004 and 2003, respectively
    
    
    153
    
    
    
    125Additional paid-in capital
    
    
    88,507
    
    
    
    69,785Accumulated other comprehensive loss
    
    
    (30
    )
    
    
    Accumulated deficit
    
    
    (22,108
    )
    
    
    (15,698
    )Total stockholders equity
    
    
    66,522
    
    
    
    54,212Total liabilities and stockholders equity
    
    $
    102,757
    
    
    $
    90,602
 See accompanying notes. F-4




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##### Table of Contents



Mace Security International, Inc. and
Subsidiaries Consolidated Statements of Operations (In thousands, except share information) Year ended December 31,2004
    
    
    2003
    
    
    2002Revenues:Car wash and detailing services
    
    $
    33,381
    
    
    $
    35,655
    
    
    $
    36,696Lube and other automotive services
    
    
    3,504
    
    
    
    4,147
    
    
    
    4,219Fuel and merchandise sales
    
    
    4,130
    
    
    
    3,613
    
    
    
    3,217Security sales
    
    
    16,632
    
    
    
    5,581
    
    
    
    2,498Operating agreements
    
    
    
    
    
    
    
    
    
    
    8057,647
    
    
    
    48,996
    
    
    
    46,710Cost of revenues:Car wash and detailing services
    
    
    23,754
    
    
    
    25,983
    
    
    
    25,674Lube and other automotive services
    
    
    2,729
    
    
    
    3,188
    
    
    
    3,301Fuel and merchandise sales
    
    
    3,577
    
    
    
    3,156
    
    
    
    2,802Security sales
    
    
    11,989
    
    
    
    3,485
    
    
    
    1,52342,049
    
    
    
    35,812
    
    
    
    33,300Selling, general and administrative expenses
    
    
    12,642
    
    
    
    9,486
    
    
    
    8,432Depreciation and amortization
    
    
    2,509
    
    
    
    1,958
    
    
    
    1,953Costs of terminated acquisitions
    
    
    53
    
    
    
    
    
    
    
    57Goodwill and asset impairment charges
    
    
    8,225
    
    
    
    3,798
    
    
    
    1,165Operating (loss) income
    
    
    (7,831
    )
    
    
    (2,058
    )
    
    
    1,803Interest expense, net
    
    
    (1,890
    )
    
    
    (1,963
    )
    
    
    (2,219
    )Other income
    
    
    267
    
    
    
    438
    
    
    
    327Loss before income taxes
    
    
    (9,454
    )
    
    
    (3,583
    )
    
    
    (89
    )Income tax benefit
    
    
    (3,044
    )
    
    
    (50
    )
    
    
    (32
    )Loss before cumulative effect of change in accounting principle
    
    
    (6,410
    )
    
    
    (3,533
    )
    
    
    (57
    )Cumulative effect of change in accounting principle, net of tax benefit of $2,188
    
    
    
    
    
    
    
    
    
    
    (5,733
    )Net loss
    
    $
    (6,410
    )
    
    $
    (3,533
    )
    
    $
    (5,790
    )Basic loss per shareLoss before cumulative effect of change in accounting principle
    
    $
    (0.47
    )
    
    $
    (0.28
    )
    
    $
    Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (0.46
    )Total
    
    $
    (0.47
    )
    
    $
    (0.28
    )
    
    $
    (0.46
    )Weighted average number of shares outstanding
    
    
    13,679,604
    
    
    
    12,414,816
    
    
    
    12,630,964Diluted loss per shareLoss before cumulative effect of change in accounting principle
    
    $
    (0.47
    )
    
    $
    (0.28
    )
    
    $
    Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (0.46
    )Total
    
    $
    (0.47
    )
    
    $
    (0.28
    )
    
    $
    (0.46
    )Weighted average number of shares outstanding
    
    
    13,679,604
    
    
    
    12,414,816
    
    
    
    12,630,964
 See accompanying notes. F-5




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##### Table of Contents



Mace Security International, Inc. and
Subsidiaries Consolidated Statements of Stockholders Equity (In thousands, except share information) AccumulatedAdditional
    
    
    OtherCommon
    
    
    Common
    
    
    Paid-in
    
    
    Comprehensive
    
    
    AccumulatedShares
    
    
    Stock
    
    
    Capital
    
    
    Loss
    
    
    Deficit
    
    
    TotalBalance at December 31, 2001
    
    
    25,428,427
    
    
    $
    254
    
    
    $
    69,977
    
    
    $
    
    
    
    $
    (6,375
    )
    
    $
    63,856Common stock issued in purchase
acquisitions
    
    
    26,316
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    25Shares purchased and retired
    
    
    (624,900
    )
    
    
    (6
    )
    
    
    (416
    )
    
    
    
    
    
    
    
    
    
    
    (422
    )One-for-two reverse stock split
    
    
    (12,422,188
    )
    
    
    (124
    )
    
    
    124
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,790
    )
    
    
    (5,790
    )Balance at December 31, 2002
    
    
    12,407,655
    
    
    
    124
    
    
    
    69,710
    
    
    
    
    
    
    
    (12,165
    )
    
    
    57,669Common stock issued in purchase
acquisitions
    
    
    26,316
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    50Exercise of common stock options
    
    
    30,000
    
    
    
    1
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    40Shares purchased and retired
    
    
    (12,200
    )
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    (14
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,533
    )
    
    
    (3,533
    )Balance at December 31, 2003
    
    
    12,451,771
    
    
    
    125
    
    
    
    69,785
    
    
    
    
    
    
    
    (15,698
    )
    
    
    54,212Common stock issued in purchase
acquisition
    
    
    55,905
    
    
    
    
    
    
    
    193
    
    
    
    
    
    
    
    
    
    
    
    193Exercise of common stock options
    
    
    448,456
    
    
    
    4
    
    
    
    1,872
    
    
    
    
    
    
    
    
    
    
    
    1,876Common stock issued for land and
building
    
    
    250,000
    
    
    
    3
    
    
    
    1,561
    
    
    
    
    
    
    
    
    
    
    
    1,564Sales of common stock, net of issuance
Costs of $372
    
    
    2,065,000
    
    
    
    21
    
    
    
    9,371
    
    
    
    
    
    
    
    
    
    
    
    9,392Proceeds from removal of restriction on
shares, net of income tax of $3,227
    
    
    
    
    
    
    
    
    
    
    5,725
    
    
    
    
    
    
    
    
    
    
    
    5,725Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,410
    )
    
    
    (6,410
    )Change in fair value of cash flow hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30
    )
    
    
    
    
    
    
    (30
    )Total Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,440
    )Balance at December 31, 2004
    
    
    15,271,132
    
    
    $
    153
    
    
    $
    88,507
    
    
    $
    (30
    )
    
    $
    (22,108
    )
    
    $
    66,522
 See accompanying notes. F-6




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##### Table of Contents



Mace Security International, Inc. and
Subsidiaries Consolidated Statements of Cash Flows (In thousands) Year ended December 31,2004
    
    
    2003
    
    
    2002Operating activitiesLoss before cumulative effect of change in accounting principle
    
    $
    (6,410
    )
    
    $
    (3,533
    )
    
    $
    (57
    )Cumulative effect of change in accounting principle, net of tax benefit
    
    
    
    
    
    
    
    
    
    
    (5,733
    )Net loss
    
    
    (6,410
    )
    
    
    (3,533
    )
    
    
    (5,790
    )Adjustments to reconcile net loss to net cash provided
by operating activities:Depreciation and amortization
    
    
    2,509
    
    
    
    1,958
    
    
    
    1,953Provision for losses on receivables
    
    
    225
    
    
    
    86
    
    
    
    98Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    7,920Goodwill and asset impairment charges
    
    
    8,225
    
    
    
    3,798
    
    
    
    1,165Loss (gain) on disposal of property and equipment
    
    
    18
    
    
    
    (104
    )
    
    
    Deferred income taxes
    
    
    (3,470
    )
    
    
    (155
    )
    
    
    (2,423
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    120
    
    
    
    (845
    )
    
    
    (16
    )Inventory
    
    
    (1,428
    )
    
    
    (1,105
    )
    
    
    (195
    )Accounts payable
    
    
    1,419
    
    
    
    60
    
    
    
    198Deferred revenue
    
    
    67
    
    
    
    22
    
    
    
    127Accrued expenses
    
    
    157
    
    
    
    (197
    )
    
    
    (140
    )Income taxes
    
    
    122
    
    
    
    (39
    )
    
    
    37Prepaid expenses and other assets
    
    
    (310
    )
    
    
    191
    
    
    
    401Net cash provided by operating activities
    
    
    1,244
    
    
    
    137
    
    
    
    3,335Investing activitiesAcquisition of businesses, net of cash acquired
    
    
    (5,621
    )
    
    
    
    
    
    
    (217
    )Purchase of property and equipment
    
    
    (2,876
    )
    
    
    (1,112
    )
    
    
    (865
    )Proceeds from sale of property and equipment
    
    
    795
    
    
    
    598
    
    
    
    Payments for intangibles
    
    
    (86
    )
    
    
    (55
    )
    
    
    (14
    )Net cash used in investing activities
    
    
    (7,788
    )
    
    
    (569
    )
    
    
    (1,096
    )Financing activitiesProceeds from long term debt
    
    
    
    
    
    
    11
    
    
    
    Payments on long-term debt and capital lease obligations
    
    
    (2,591
    )
    
    
    (2,380
    )
    
    
    (2,240
    )Proceeds from issuance of common stock
    
    
    11,268
    
    
    
    40
    
    
    
    Gross proceeds from removal of restriction on shares
    
    
    8,952
    
    
    
    
    
    
    
    Payments to purchase stock
    
    
    
    
    
    
    (14
    )
    
    
    (422
    )Net cash provided by (used in) financing activities
    
    
    17,629
    
    
    
    (2,343
    )
    
    
    (2,662
    )Net increase (decrease) in cash and cash equivalents
    
    
    11,085
    
    
    
    (2,775
    )
    
    
    (423
    )Cash and cash equivalents at beginning of year
    
    
    3,414
    
    
    
    6,189
    
    
    
    6,612Cash and cash equivalents at end of year
    
    $
    14,499
    
    
    $
    3,414
    
    
    $
    6,189
 See accompanying notes. F-7




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##### Table of Contents



Mace Security International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements 1. Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements include the accounts of Mace Security
International, Inc. and its wholly owned subsidiaries (collectively, the Company or Mace). All
significant intercompany transactions have been eliminated in consolidation. On December 17,
2002, we effected a one-for-two reverse stock split. All stock prices, share amounts, per share
information, stock options and stock warrants reflect the reverse split, unless otherwise noted.
Certain amounts in the 2003 Financial Statements have been reclassified to conform to the 2004
presentation. 2. Summary of Significant Accounting Policies Description of Business The Company currently operates in two business segments: the Car and Truck Wash Segment, supplying
complete car care and truck wash services (including wash, detailing, lube, and minor repairs) and
the Security Segment, producing for sale consumer safety and personal defense products, as well as
electronic surveillance and monitoring products. The Companys car care and truck wash operations
are principally located in Texas, Arizona, Florida, Pennsylvania, New Jersey, Delaware, Indiana,
and Ohio. Revenue Recognition and Deferred Revenue Revenue from the Companys Car and Truck Wash Segment is recognized, net of customer coupon
discounts, when services are rendered or fuel or merchandise is sold. The Company records a
liability for gift certificates, ticket books, and seasonal and annual passes sold at its car care
locations but not yet redeemed . The Company estimates these unredeemed amounts based on gift
certificates and ticket book sales and redemptions throughout the year as well as utilizing
historical sales and redemption rates per the car washes point-of-sale systems. Seasonal and
annual passes are amortized on a straight-line basis over the time during which the passes are
valid. Revenue from the Companys Security Segment is recognized when shipments are made, or for export
sales when title has passed. Shipping and handling charges and costs are included in revenues and
cost of goods sold, respectively. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid short-term investments with original
maturities of three months or less, and credit card deposits which are converted into cash within
two to three business days. Accounts Receivable The Companys accounts receivable are due from trade customers. Credit is extended based on
evaluation of customers financial condition and, generally, collateral is not required. Accounts
receivable payment terms vary and amounts due from customers are stated in the financial statements
net of an allowance for doubtful accounts. Accounts outstanding longer than the payment terms are
considered past due. The Company determines its allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, the Companys previous loss
history, the customers current ability to pay its obligation to the Company, and the condition of
the general economy and the industry as a whole. The Company writes off accounts receivable when
they are deemed uncollectible, and payments subsequently received on such receivables are credited
to the allowance for doubtful accounts. Risk of losses from international sales within the Security
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 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. F-8




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##### Table of Contents



Assets Held for Sale The Company owned two warehouse bays in Hollywood, FL which were previously utilized in the
Security Segment. At December 31, 2004, the bays were classified at their fair market values in
our balance sheet as assets held for sale. One bay was sold in January 2005 and Louis Paolino III,
the son of the Companys Chief Executive Officer, Louis D. Paolino, Jr., has offered to purchase
the remaining bay for $306,000 in cash, the current estimated fair market value per a third party
independent appraiser. Property and Equipment Property and equipment are stated at cost. Depreciation is recorded using the straight-line method
over the estimated useful lives of the assets, which are generally as follows: buildings and
leasehold improvements  15 to 40 years; machinery and equipment  2 to 20 years; and furniture and
fixtures  5 to 10 years. Significant additions or improvements extending assets useful lives
are capitalized; normal maintenance and repair costs are expensed as incurred. Depreciation expense
was approximately $2.5 million, $1.9 million, and $1.9 million, for the years ended December 31,
2004, 2003, and 2002, respectively. Maintenance and repairs are charged to expense as incurred and
amounted to approximately $950,000 in 2004, $900,000 in 2003, and $1.1 million in 2002. Asset Impairment Charges In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we
periodically review the carrying value of our long-lived assets held and used, and assets to be
disposed of, for possible impairment when events and circumstances
warrant such a review. Assets classified as held for sale are
measured at the lower of carrying value or fair value, net by costs
to sell. During
the year ended December 31, 2002, we wrote down assets determined to be impaired by approximately
$1.2 million. The asset write-down related to one of our full service car wash sites in Texas and
two full service car wash sites in Arizona. We have determined that due to changing demographics
and increased competition in the geographic areas of these sites, their future expected cash
flows will not be sufficient to recover their respective carrying values. During the quarter ended
June 30, 2003, we further wrote down the assets related to one of the full service car wash sites
in Arizona which we partially wrote down at December 31, 2002, by an additional $351,000. The
additional write-down was the result of the impending loss of a significant customer of this site
resulting in an additional reduction of the future expected cash flows of this site and the ability
to recover the sites carrying value. We closed the facility effective September 30, 2003. During
the quarter ended June 30, 2004, we sold the other Arizona car wash site recording a loss of
$51,000 on the disposition. We continue to market the Texas site for sale and have written down
these assets to their estimated fair market values. Additionally, during the year ended December
31, 2004, we wrote down assets related to our truck wash operations determined to be impaired by
approximately $500,000. 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. Goodwill In accordance with SFAS 142, we also completed our annual impairment tests as of November 30, 2004,
2003, and 2002, and will be subject to an impairment test each year thereafter. In the fourth
quarter of 2004, as a result of the annual impairment test of Goodwill and Other Intangibles in
accordance with SFAS 142, we recorded an impairment of approximately $1.0 million related to our
Northeast region reporting unit of our Car and Truck Wash Segment. Additionally, we recorded an
impairment of approximately $6.7 million related to our Texas Region reporting unit of our Car and
Truck Wash Segment. These were principally due to a reduction in future projected cash flows
resulting from an extended departure from our historic revenue levels due to inclement weather, the
lingering effects of a slower economy, and increased competition near several of our facilities in
Texas and New Jersey. Significant estimates and assumptions are used in assessing the fair value of
the reporting units and determining impairment to goodwill (See Note 3, Goodwill). The Company
cannot guarantee that there will not be impairments in subsequent years. In the fourth quarter of
2003, as a result of the annual impairment test of Goodwill and Other Intangibles, we recorded an
impairment of approximately $3 .4 million related to our Northeast region reporting unit of our Car
and Truck Wash Segment. Other Intangible Assets Other intangible assets consist primarily of deferred financing costs, trademarks, customer lists,
product lists, and establishing a registered national brand name . In accordance with SFAS 142,
our trademarks and brand name 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. In 2003, approximately $9,000 related to our security product trademarks was
written off in accordance with SFAS 142. 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 $120,000, $53,000, and $31,000, for the years ended December 31, 2004, F-9




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##### Table of Contents



2003, and 2002, respectively. Deferred financing costs are amortized on a straight-line basis
over the terms of the respective debt instruments. Insurance Commencing July 2002, we are insured through participation in a captive insurance program with
other unrelated businesses including coverage for auto, general liability, and workers
compensation. The Company maintains excess coverage through occurrence-based policies. With
respect to participating in the captive insurance program, we set aside an actuarial determined
amount of cash in a restricted loss fund account for the payment of claims under the policies.
We 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
on or about the third anniversary of the policy year-end. The captive insurance program is further
secured by a letter of credit in the amount of $803,000 at December 31, 2004. The Company records
a monthly expense for losses up to the reinsurance limit per claim based on the Companys tracking
of claims and the insurance companys reporting of amounts paid on claims plus their estimate of
reserves for possible future payments and claims. Costs of Terminated Acquisitions The Companys policy is to charge as an expense any previously capitalized expenditures relating to
proposed acquisitions that in managements current opinion will not be consummated. Income Taxes Deferred income taxes are determined based on the difference between the financial accounting and
tax bases of assets and liabilities. Deferred income tax expense (benefit) represents the change
during the period in the deferred income tax assets and deferred income tax liabilities. Deferred
tax assets include tax loss and credit carry forwards and are reduced by a valuation allowance if,
based on available evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Supplementary Cash Flow Information Interest paid on all indebtedness was approximately $2.0 million, $2.0 million, and $2.3 million,
for the years ended December 31, 2004, 2003 and 2002, respectively. Income taxes paid were approximately $340,000, $ 144,000, and $ 169,000, in 2004, 2003, and
2002, respectively. Noncash investing and financing activities of the Company include a property addition financed by
common stock of $1.6 million, real estate partially funded by a mortgage of approximately $825,000, and the sale of property and simultaneous pay down of a related mortgage of $325,000, all in
2004 and property additions financed by debt of $343,000 and $1.0 million in 2003 and 2002,
respectively. Advertising The Company expenses advertising costs, including advertising production costs, as they are
incurred or the first time advertising takes place. The Companys costs of coupon advertising
are recorded as a prepaid asset and amortized to advertising expense during the period of
distribution and customer response, typically two to three months. Prepaid advertising costs were
$25,000 and $134,000 at December 31, 2004 and 2003, respectively. Advertising expense was
approximately $1.2 million in 2004, $1.1 million in 2003,and $1.1 million in 2002. Stock Based Compensation At December 31, 2003, the Company has two stock-based employee compensation plans, which are more
fully described in Note 10. The Company accounts for those plans under the recognition and
measurement principles of Accounting Principles Board Opinion (APB) No . 25, Accounting for
Stock Issued to Employees, and related interpretations. Stock-based employee compensation costs are
not reflected in net income, as all options granted under the plan had exercise prices equal to the
market value of the underlying common stock on the date of grant. The table below illustrates the
effect on net (loss) income and (loss) income per share if the Company had applied the fair value
recognition provisions of FASB 123, Accounting for Stock-Based Compensation,to stock-based
employee compensation. F-10




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##### Table of Contents



The Company has elected to follow APB 25, and related Interpretations in accounting for its
employee stock options because, as discussed below, the alternative fair value accounting provided
for under SFAS 123, requires use of option valuation models that are not developed for use in
valuing employee stock options. Under APB 25, if the exercise price
of the Companys employee stock options equals the market price of the underlying stock on the date
of grant, no compensation expense is recognized. In
December 2004, the FASB issued Statement 123(R) Share-Based
Payment.SFAS 123(R) requires that the
compensation cost relating to share-based payment transactions be recognized in financial
statements. That cost will be measured based on the fair value of the equity or liability
instruments issued. This statement is effective as of the first interim or annual reporting period
that begins after June 15, 2005. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has
been determined as if the Company had accounted for its employee stock options under the fair
value method of that Statement. The fair values for these options were estimated at the dates of
grant using a Black-Schools option pricing model with the following weighted average assumptions
for grants in 2004, 2003 and 2002; risk-free interest rate ranges of 3.80% to 4.56% in 2004, 3.29%
to 4.45% in 2003, and 3.72% to 5.39% in 2002; dividend yield of 0%; expected volatility of the
market price of the Companys common stock ranging from 20% to 64 % in 2004, 21 % in 2003, and
61% in 2002; and a weighted-average expected life of the option of ten years. The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including the expected stock
price volatility. Because the Companys employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options vesting period. Pro forma results are not likely to be representative of
the effects on reported or pro forma results of operations for future years. The Companys pro
forma information is as follows (in thousands, except per share data): Year Ended December 31,2004
    
    
    2003
    
    
    2002Net loss, as reported
    
    $
    (6,410
    )
    
    $
    (3,533
    )
    
    $
    (5,790
    )Less: Stock-based compensation costs under fair
value based method for all awards
    
    
    (2,089
    )
    
    
    (401
    )
    
    
    (685
    )Pro forma net loss
    
    $
    (8,499
    )
    
    $
    (3,934
    )
    
    $
    (6,475
    )Loss per
share - basicAs reported
    
    $
    (0.47
    )
    
    $
    (0.28
    )
    
    $
    (0.46
    )Pro forma
    
    $
    (0.62
    )
    
    $
    (0.32
    )
    
    $
    (0.51
    )Loss per
share - dilutedAs reported
    
    $
    (0.47
    )
    
    $
    (0.28
    )
    
    $
    (0.46
    )Pro forma
    
    $
    (0.62
    )
    
    $
    (0.32
    )
    
    $
    (0.51
    )
 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, 2004 were as follows: F-11




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\

Carrying
    
    
    FairValue
    
    
    Value(In thousands)Fixed rate debt
    
    $
    12,470
    
    
    $
    14,048Variable rate debt
    
    
    16,725
    
    
    
    16,889Total
    
    $
    29,195
    
    
    $
    30,937
 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. Derivative Instruments 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% (5.5% at December 31, 2004). The hedge contract has a 36-month term and caps the
interest rate on the $7 million of variable rate debt at 6.5%. The derivative is designated as a
cash flow hedge and, accordingly, is marked to market with gains and losses on the contract
reported as a component of other comprehensive income (loss) and is classified into earnings in the
earlier of (i) the period the hedged transaction affects earnings, or (ii) the termination of the
hedge contract. At December 31, 2004 the contract which was originally purchased for $124,000, is
included in other assets at its fair market value of approximately $79,000. Business Combinations In accordance with SFAS 141, Business Combinations,the Company allocates the cost of the
acquired business to the assets acquired and the liabilities assumed based on estimates of fair
values thereof. These estimates are revised during the allocation period as necessary when, and
if, information regarding contingencies becomes available to define and quantify assets acquired
and liabilities assumed. The allocation period varies but does not exceed one year. To the extent
contingencies such as pre-acquisition environmental matters, pre-acquisition liabilities including
deferred revenues, litigation and related legal fees are resolved or settled during the allocation
period, such items are included in the revised allocation of the purchase price. After the
allocation period, the effect of changes in such contingencies is included in results of operations
in the period in which the adjustment is determined. New Accounting Standards In November 2002, the FASB issued FASB Interpretation 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN 45).
FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement
provisions of the interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The adoption of FIN 45 did not have a material impact on the
Companys consolidated balance sheets, results of operations or cash flows. In January 2003, the FASB released Interpretation 46, Consolidation of Variable Interest
Entities(FIN 46) which requires that all primary beneficiaries of Variable Interest Entities
(VIE) consolidate that entity. FIN 46 is effective immediately for Vies created after January 31,
2003 and to Vies in which an enterprise obtains an interest after that date. It applies in the
first fiscal year or interim period beginning after June 15, 2003 to Vies in which an enterprise
holds a variable interest it acquired before February 1, 2003. In December 2003, the FASB
published a revision to FIN 46 (FIN 46R ) to clarify some of the provisions of the interpretation
and to defer the effective date of implementation for certain entities. Under the guidance of FIN
46R, entities that do not have interests in structures that are commonly referred to as special
purpose entities are required to apply the provisions of the interpretation in financial statements
for periods ending after March 14, 2004. The Company does not have interests in special purpose
entities and accordingly, the adoption of FIN 46R did not have a material impact on the Companys consolidated
financial position, results of operations, or cash flows. In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity.SFAS 150 established standards for how an issuer
classifies and measures certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 requires that issuers classify a financial instrument that is within its scope as
a liability (or an asset in some circumstances). SFAS 150 is effective for all financial
instruments entered into or modified after F-12




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May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The adoption of this statement
did not have a material impact on the Companys consolidated financial position or results of
operations. In November 2004, the FASB issued SFAS 151, Inventory Costs- An Amendment of ARB No. 43,
Chapter 4. SFAS 151 amends the guidance in ARB 43, Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 is effective for fiscal years beginning
after June 15, 2005 and is required to be adopted by the Company in the first quarter of fiscal
2006. The Company does not expect SFAS 151 to have a material impact on the Company. In December 2004, the
FASB issued SFAS 153, Exchange of Nonmonetary Assets - An Amendment of
APB Opinion No. 18. Accounting for Nonmonetary Transactions. SFAS 153 eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of
APB Opinion 29, and replaces it with an exception for exchanges that do not have commercial
substances. SFAS 153 is effective for fiscal periods beginning after June 15, 2005. The Company
does not expect SFAS 153 to have a material impact on the Company. In December 2004, the
FASB issued SFAS 12 3(R), Share-Based Payment.SFAS 123(R) requires that
the compensation cost relating to share-based payment transactions be recognized in financial
statements. The cost will be measured based on the fair value of the equity or liability
instruments issued. SFAS 123(R) is effective as of the first interim or annual reporting period
that begins after June 15, 2005. SFAS 123(R) covers a wide range of share-based compensation
arrangements including share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. In addition to the accounting standard
that sets forth the financial reporting objectives and related
accounting principles, SFAS 123(R)
includes an appendix of implementation guidance that provides expanded guidance on measuring the
fair value of share-based payment awards. SFAS 123(R) replaces SFAS 123, Accounting for Stock-Based
Compensation, and supersedes APB Opinion 25, Accounting for Stock Issued to Employees. SFAS 123,
as originally issued in 1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement permitted entities the
option of continuing to apply the guidance in APB Opinion 25, as long as the footnotes to
financial statements disclosed what net income would have been had the preferable fair-value-based
method been used. We will implement this new standard in the third quarter of our fiscal year 2005. We are currently evaluating this statement and the effects on our results of operations. We
believe that implementation of SFAS 123(R) will have a material impact on the Company. 3. Goodwill Under the provisions of SFAS 142, the Company was required to complete the first phase of the
goodwill transitional impairment test within six months of adopting the new standard or by June 30,
2002 and the final phase of the transitional test before the end of the year of adoption, or
December 31, 2002. The first step of the transitional testing was the determination of our
reporting units and the estimation of the fair values of the reporting units. A discounted cash
flow model was used to estimate the fair value of our reporting units. Discount rates were derived
by using the weighted average cost of capital technique. The discount rates were then used by the
Company in the discounted cash flow calculations. Significant estimates and assumptions were used
in assessing the fair value of the reporting units. These estimates and assumptions involved
future cash flows, growth rates, discount rates, weighted average cost of capital, and estimates of
market valuations of each of the reporting units. During the third quarter of 2002, we completed
the transitional requirements for goodwill impairment testing. As a result of the transitional
goodwill impairment testing, we determined that the book value of our Northeast reporting unit
exceeded its current fair value by $1.84 million. The Northeast reporting units current fair
value was based on present expectations for the business in light of the then current economic
environment and the uncertainty associated with recent volume due to unfavorable weather patterns.
Additionally, there was an impairment of $5.34 million in our Arizona reporting unit due to
unfavorable economic conditions combined with a significant increase in local competition. This
charge represented a complete write-off of the goodwill associated with this reporting unit.
Finally, there was an impairment loss of $670,000 in our truck wash reporting unit, primarily
because we did not acquire additional truck washes necessary to achieve the scale needed to attract
national accounts. This charge represented a complete write-off of the goodwill associated with
this reporting unit. We completed our 2003 annual testing of goodwill and intangible assets determined to have
indefinite lives in accordance with SFAS 142 as of November 30, 2003. The methodology applied was
consistent with that of our transitional impairment testing and our 2002 annual test. The growth
rate applied to future cash flows beyond detailed projections was 3%. The discount rates used
varied from 7.25% to 15.0% for our security business and approximately 11% for our car and truck
wash operations. In the fourth quarter of 2003, as a result of the annual impairment test of
Goodwill and Other Intangibles, we recorded an impairment of approximately $3.4 million related to
our Northeast region reporting unit of our Car and Truck Wash Segment. This was principally due to
a reduction in future projected cash flows resulting from extended departures from our historic
revenue levels due to inclement weather and a slower economy. Additionally, in the fourth quarter
of 2004, as a result of the annual impairment test of Goodwill and Other F-13




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Intangibles in accordance
with SFAS 142, we recorded an impairment of approximately $1.0 million related to our Northeast
region reporting unit of our Car and Truck Wash Segment. Additionally, we recorded an impairment of
approximately $6.7 million related to our Texas region reporting unit of our Car and Truck Wash
Segment. These impairments were principally due to reductions in future projected cash flows as
determined during our 2005
budgeting process, which we completed in December, 2004. The projections of cash flows from these
reporting units were reduced primarily due to two successive years of reductions in number of
cars washed. We projected our car wash volume for 2004 based on the number of cars washed in these
reporting units in the previous five years. We believe that fewer cars were actually washed during
2004 as a result of more inclement weather than in 2003, and increased competition near certain of
our facilities in Texas and New Jersey. The methodology applied in our 2004 annual impairment
testing was consistent with that of our 2003 and 2002 testing. We anticipate that the volume of
cars washed in these regions will increase, if weather patterns return to the patterns existing in
prior years. Impairment of goodwill and intangible assets with indefinite lives must be tested on
at least an annual basis and whenever there is an impairment indicator. The Company cannot
guarantee that there will not be impairments in subsequent years. The changes in the carrying
amount of goodwill for the years ended December 31, 2003 and 2004 are as follows (in thousands): SecurityNortheast
    
    
    Texas
    
    
    Products
    
    
    TotalBalance at December 31, 2002
    
    $
    5,528
    
    
    $
    7,620
    
    
    $
    282
    
    
    $
    13,430Reallocation of purchase price
    
    
    
    
    
    
    671
    
    
    
    (40
    )
    
    
    631Impairment loss
    
    
    (3,438
    )
    
    
    
    
    
    
    
    
    
    
    (3,438
    )Balance at December 31, 2003
    
    
    2,090
    
    
    
    8,291
    
    
    
    242
    
    
    
    10,623Impairment Loss
    
    
    (998
    )
    
    
    (6,727
    )
    
    
    
    
    
    
    (7,725
    )Reallocation of purchase price
    
    
    
    
    
    
    
    
    
    
    158
    
    
    
    158Acquisition of IVS and S&M
    
    
    
    
    
    
    
    
    
    
    531
    
    
    
    531Balance at December 31, 2004
    
    $
    1,092
    
    
    $
    1,564
    
    
    $
    931
    
    
    $
    3,587
 4. Business Combinations From April 1, 1999 through July 26, 2000, the Company acquired 62 car care facilities and five
truck wash facilities through the acquisition of 17 separate businesses including: 42 full service
facilities, one self service facility, 11 exterior only facilities and one lube center in
Pennsylvania, New Jersey, Delaware, Texas, Florida, and Arizona; 13 facilities were subsequently
divested or closed. The five full service truck wash facilities are located in Arizonan, Indiana,
Ohio, and Texas. On August 12, 2002, the Company acquired the inventory, certain other assets and the operations of
Micro-Tech Manufacturing, Inc. (Micro-Tech), a manufacturer and retailer of electronic security
devices. Total consideration under the agreement was approximately $505,000. At closing, the
Company paid $217,000 cash for inventory, $15,625 cash representing the first of twelve equal
monthly installments totaling $187,500, and 13,158 (pre-reverse split) registered shares of common
stock of the Company representing the first of eight quarterly payments of shares totaling 105,263
(pre-reverse split) shares. This transaction was accounted for using the purchase method of
accounting in accordance with SFAS 141, Business Combinations. On September 26, 2003, a wholly owned subsidiary within the Companys Security Segment acquired
the inventory, certain other assets and the operations of Vernex, Inc., a manufacturer and
retailer of electronic security monitors. Total consideration under the agreement was $213,000
cash for inventory and the issuance of 42,747 registered shares of the Companys common stock. This transaction was accounted for using the purchase method of accounting in accordance with SFAS 141, Business Combinations On November 12, 2003, the Company sold, through a wholly owned subsidiary, the assets of our car
wash facility located in Voorhees, New Jersey, for approximately $600,000. On July 1, 2004, the Company, through its wholly owned subsidiary, Mace Security Products, Inc.,
acquired substantially all of the operating assets of Industrial Vision Source®(IVS) and
SecurityandMore®(S&M) from American Building Control, Inc. The results of operations of IVS and S&M have been included in
the consolidated financial statements of the Company since July 1, 2004.
S&M supplies video surveillance and security equipment and IVS is a distributor of
technologically advanced imaging components and video equipment. The acquisition of IVS and
S&M furthers the Companys expansion of our Security Products Segment, and specifically the
Electronic Surveillance Products Division. The acquisition also expands our presence in the
southwestern part of the United States and provides us with new mass merchant opportunities, an
active e-commerce web site, a catalog sales channel and a high-end digital and fiber optics camera
product line. The purchase price for IVS and S&M consisted of approximately $5.62 million of cash
and the assumption of $290,000 of current liabilities. The purchase was allocated as follows:
approximately $1.86 million for inventory; $1.37 million for accounts receivable; $100,000 for
equipment; and the remainder of $2.58 F-14




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million allocated to goodwill and other intangible assets. Of
the $2.58 million of acquired intangible assets, $830,000 was assigned to registered trademarks and
$531,000 was assigned to goodwill, neither of which is subject to amortization expense. The
remaining intangible assets were assigned to customer lists for $630,000 and product lists for
$590,000. Customer and product lists were assigned a useful life of 10 years. The acquisition was
accounted for as a business combination in accordance with SFAS 141,
Business Combinations. The proforma financial information presented below gives effect to the IVS and S&M acquisition as
if it had occurred as of the beginning of our fiscal year 2003. 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 2003 or results which may
be achieved in the future. Unedited proforma financial information is as follows (in thousands,
except per shares amounts): Twelve Months EndedDecember 31,2004
    
    
    2003Revenues
    
    $
    68,080
    
    
    $
    70,469Net loss
    
    $
    (6,269
    )
    
    $
    (2,853
    )Loss per share-basic and
dilutive
    
    $
    (0.46
    )
    
    $
    (0.23
    )
 On August 3, 2004, the Company sold an exterior-only car wash facility in New Jersey. Proceeds from
the sale of this facility, which was producing marginal cash flow, were approximately $645,000;
slightly more than the sites net book value. 5. Allowance for Doubtful Accounts The changes in the allowance for doubtful accounts are summarized as follows: Year ended December 31,2004
    
    
    2003
    
    
    2002(In thousands)Balance at beginning of year
    
    $
    263
    
    
    $
    198
    
    
    $
    178Additions (charged to expense)
    
    
    225
    
    
    
    86
    
    
    
    98Adjustments
    
    
    125
    
    
    
    
    
    
    
    239Deductions
    
    
    (164
    )
    
    
    (21
    )
    
    
    (317
    )Balance at end of year
    
    $
    449
    
    
    $
    263
    
    
    $
    198
 6. Inventories Inventories consist of the following: As of December 31,2004
    
    
    2003(In thousands)Finished goods
    
    $
    5,402
    
    
    $
    2,115Work in process
    
    
    112
    
    
    
    94Raw materials and supplies
    
    
    527
    
    
    
    602Fuel, merchandise inventory and car wash supplies
    
    
    1,026
    
    
    
    969$
    7,067
    
    
    $
    3,780
 F-15




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7. Other Intangible Assets December 31, 2004
    
    
    December 31, 2003Gross
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortized intangible assets:Non-compete agreement
    
    $
    28
    
    
    $
    13
    
    
    $
    65
    
    
    $
    7Customer lists
    
    
    699
    
    
    
    79
    
    
    
    62
    
    
    
    23Product lists
    
    
    590
    
    
    
    29
    
    
    
    
    
    
    
    Deferred financing costs
    
    
    421
    
    
    
    188
    
    
    
    390
    
    
    
    158Total amortized intangible assets
    
    
    1,738
    
    
    
    309
    
    
    
    517
    
    
    
    188Non-amortized intangible assets:Trademarks - Security
Segment
    
    
    1,400
    
    
    
    
    
    
    
    556
    
    
    
    Service mark - Car and
Truck Wash Segment
    
    
    106
    
    
    
    
    
    
    
    106
    
    
    
    Total non-amortized intangible assets
    
    
    1,506
    
    
    
    
    
    
    
    662
    
    
    
    Total intangible assets
    
    $
    3,244
    
    
    $
    309
    
    
    $
    1,179
    
    
    $
    188
 The following sets forth the estimated amortization expense on intangible assets for the fiscal
years ending December 31 (in thousands): 2005
    
    $
    1662006
    
    $
    1512007
    
    $
    1482008
    
    $
    1412009
    
    $
    141
 Amortization expense of other intangible assets was approximately $120,000, $ 53,000, and $31,000,
for the years ended December 31, 2004, 2003, and 2002, respectively. The weighted average useful
life of amortizing intangible assets was 10.7 years at December 31, 2004. 8. Long-Term Debt, Notes Payable, and Capital Lease Obligations Long-term debt, notes payable, and capital lease obligations consist of the following: As of December 31,2004
    
    
    2003(In thousands)Notes payable to GMAC Commercial Mortgage (GMAC), interest
rate of 8.52%, due in monthly installments totaling $145,936
including interest, through September 2013, collateralized by
real property, equipment and inventory of certain of the
Millennia Car Wash locations
    
    $
    10,625
    
    
    $
    11,618Note payable to Bank One, Texas, NA, interest rate of prime plus 0.25% (5.50% at December 31, 2004), is
due in monthly installments of $53,508 including interest (adjusted annually), through November 2008,
collateralized by real property and equipment of Eager Beaver Car Wash, Inc.
    
    
    5,306
    
    
    
    5,723Notes payable to Bank One, Texas, NA, interest rate of prime plus 0.25% (5.50% at December 31, 2004) due
in monthly installments totaling $46,522 per month including interest (adjusted annually), through
various dates ranging from January 2005 to February 2008, collateralized by real property and equipment
of certain of the Colonial Car Wash locations
    
    
    3,162
    
    
    
    3,531
 F-16




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##### Table of Contents



As of December 31,2004
    
    
    2003(In thousands)Note payable to Bank One, Texas, NA which refinanced a note payable to Cornett Ltd. Partnership on
February 17, 2000. The Bank One note, which provides for an interest rate of prime plus 0.25% (5.50% at
December 31, 2004), is due in monthly installments of $38,260 including interest (adjusted annually),
renewed through February 2008, collateralized by real property and equipment of the Genie Car Wash
locations
    
    
    3,785
    
    
    
    4,062Note payable to Western National Bank, interest rate of 8.75%,
due in monthly installments of $20,988 including interest,
through October 2014, collateralized by real property and
equipment in Lubbock, Texas
    
    
    1,671
    
    
    
    1,769Note payable to Business Loan Express, interest rate of prime plus 2.5% (7.75% at December 31, 2004), is
due in monthly installments of $11,360 including interest (adjusted annually), through December 2022,
collateralized by real property and equipment of the Blue Planet Car Wash
    
    
    1,372
    
    
    
    1,409Note payable to Merriman Park J.V., interest rate of 5.0% (adjusted annually), due in monthly
installments of $9,585 including interest, through November 2011, collateralized by real property and
equipment of certain of the Colonial Car Wash locations
    
    
    671
    
    
    
    754Note payable to Bank One Texas, NA, interest rate of prime plus 0.25% (5.50% at December 31, 2004), is
due in monthly installments of $6,600 including interest (adjusted annually), through July 2006,
collateralized by real property and equipment of the Superstar Kyrene Car Wash
    
    
    665
    
    
    
    712Note payable to Bank One, Texas, NA, interest rate of prime plus 0.25% (5.50% at December 31, 2004), is
due in monthly installments of $2,705 including interest (adjusted annually) through April 2005,
collateralized by real property and equipment of the Red Baron Amarillo Truck Wash with a net book value
of $396,000 at December 31, 2004.
    
    
    295
    
    
    
    313Note payable to Bank One, Texas, NA, which refinanced the mortgage note payable to Southwest Bank in
October 2001. The Bank One note which provides for an interest rate of prime plus 0.25% (5.50% at
December 31, 2004, is due in monthly installments of $2,966 including interest (adjusted annually),
through October 2009, collateralized by real property and equipment of certain of the Colonial Car Wash
locations
    
    
    318
    
    
    
    339Note payable to Wachovia, interest rate of one month LIBOR plus 2.50% (4.91% at December 31, 2004), is
due in monthly principal payments of $4,049 plus accrued interest, collateralized by real property of
Mace Security Products, Inc.
    
    
    337
    
    
    
    714Capital lease payable to Columbia Credit Company, interest rate of 14.5%, due in monthly installments of
$8,314 including interest, through May 2005, collateralized by certain equipment of the Shammy Man Car
Wash location
    
    
    32
    
    
    
    123Capital leases payable to various creditors, interest rates ranging from 7.75% to 9.97%, due in monthly
installments of $5,744 including interest, through June 2007, collateralized by certain equipment of the
Company
    
    
    141
    
    
    
    204Notes payable to individuals for deferred purchase payment of Micro-
Tech, Inc.
    
    
    
    
    
    
    15Note payable to Bank One, Texas, N.A. interest rate of prime plus 0.25% (5.50% at December 31, 2004) due
in monthly installments of $6,417 including interest (adjusted annually), through September 2009,
collateralized by real property and equipment of Mace Security Products, Inc. Texas with a net book
value of $1,975,000 at December 31, 2004.
    
    
    815
    
    
    
    
 F-17




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##### Table of Contents



As of December 31,2004
    
    
    2003(In thousands)29,195
    
    
    
    31,286Less: current portion
    
    
    2,634
    
    
    
    5,520$
    26,561
    
    
    $
    25,766
 Of the 49 car washes owned or leased by us at December 31, 2004, 25 properties and related
equipment with a net book value totaling $45.8 million secured first mortgage loans totaling $27.6 million. The Company has available a short-term line of credit with Bank One, Texas, N.A. which provides
borrowing for inventory and accounts receivable financing up to $500,000 for the Companys
electronic surveillance operations. The availability under this line of credit is subject to an
inventory and accounts receivable borrowing formula. There were no borrowings outstanding under
this line of credit at December 31, 2004. At December 31, 2004, the Company had three letters of credit outstanding totaling $908,000 as
collateral relating to workers compensation insurance policies. Several of our debt agreements, as amended, contain certain affirmative and negative covenants and
require the maintenance of certain levels of tangible net worth, maintenance of certain
unencumbered cash and marketable securities balances, limitations on capital spending, and the
maintenance of certain debt coverage ratios on a consolidated level. At December 31, 2004, we
were not in compliance with our consolidated debt coverage ratios related to our GMAC notes
payable and Bank One notes payable. With respect to the GMAC notes payable, the Companys debt
service coverage requirement is 1.25:1. At December 31, 2004, the Companys debt service coverage
ratio was .92:1 and accordingly was not in compliance with the GMAC covenant. The Company has
received a waiver of acceleration related to the non-compliance with the debt service coverage
ratio covenant at December 31, 2004 and for measurement periods through January 1, 2006.
Additionally, the Company has entered into amendments to the Bank One term loan agreements
effective March 31, 2004. The amended debt coverage ratio with Bank One requires the Company to
maintain a consolidated earnings before interest, income taxes, depreciation and amortization (EBITDA ) to debt service (collectively  the debt service coverage ratio) of 1.05:1 at December 31,
2004 and thereafter. The Companys debt service coverage ratio was .89:1 at December 31, 2004 and
accordingly was not in compliance with this Bank One covenant at December 31, 2004 as amended. The
Company received a waiver of acceleration with respect to this debt service coverage ratio from
Bank One through January 1, 2006. The Bank One amendment also requires the maintenance of a minimum
total unencumbered cash and marketable securities balance of $5 million. This cash balance
requirement will be lowered to $1 million upon the Company returning to a debt coverage ratio of at
least 1.10:1. The Company sold or closed five unprofitable or marginally profitable car wash facilities and a
lube facility in 2003 and 2004 and increased its prices in March 2004 within the Car and Truck Wash Segment to help improve cash flows for fiscal 2004. If our future cash flows are less than
expected or debt service including interest expense increases more than expected causing us to
further default on any of the Bank One covenants or the GMAC covenant in the future, the Company
will need to obtain further amendments or waivers from these lenders. If the Company is unable to
obtain waivers or amendments in the future, Bank One debt currently totaling $14.5 million
and GMAC debt currently totaling $10.6 million, including debt recorded as long-term debt at
 December 31, 2004, would become payable on demand by the financial institution upon expiration of the current
waivers. The Companys ongoing ability to comply with its debt covenants under its credit
arrangements and refinance its debt depends largely on the achievement of adequate levels of cash
flow. Our cash flow has been and could continue to be adversely affected by weather patterns,
economic conditions, and the requirements to fund our security business that we are attempting to
grow. In the event that non-compliance with the debt covenants should reoccur, the Company would
pursue various alternatives to attempt to successfully resolve the non-compliance, which might
include, among other things, seeking additional debt covenant waivers or amendments, or refinancing
debt with other financial institutions. 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. Certain machinery and equipment notes payable discussed above have been classified as capital
lease obligations in the balance sheet. Maturities of long-term debt are as follows: 2005 - $2.6 million, 2006 - $2.5 million, 2007 - $2.8
million, 2008 - $9.8 million, 2009 - $3.7 million, 2010 and thereafter - $7.8 million. F-18




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9. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consists of the following: As of December 31,2004
    
    
    2003(In thousands)Accrued compensation
    
    $
    945
    
    
    $
    495Property and other non-income taxes
    
    
    317
    
    
    
    267Other
    
    
    954
    
    
    
    1,085$
    2,216
    
    
    $
    1,847
 10. Stock Option Plans During September 1993, the Company adopted the 1993 Stock Option Plan (the 1993 Plan). The 1993
Plan provides for the issuance of up to 630,000 shares of common stock upon exercise of the
options. The Company has reserved 630,000 shares of common stock to satisfy the requirements of the
1993 Plan. The options are non-qualified stock options and are not transferable by the recipient.
The 1993 Plan is administered by the Compensation Committee (the Committee) of the Board of
Directors, which may grant options to employees, directors and consultants to the Company. The
term of each option may not exceed fifteen years from the date of grant. Options are exercisable
over either a 10 or 15 year period and exercise prices are not less than the market value of the
shares on the date of grant. In December 1999, the Companys stockholders approved the 1999 Stock Option Plan (the 1999 Plan)
providing for the granting of incentive stock options or nonqualified stock options to directors,
officers, or employees of the Company. Under the 1999 Plan, 15,000,000 shares of common stock are
reserved for issuance. Incentive stock options and nonqualified options have terms which are
determined by the Committee with exercise prices not less than the market value of the shares on
the date of grant. The options generally expire ten years from the date of grant and are
exercisable based upon graduated vesting schedules as determined by the Committee. As of December
31, 2004, 3,877,944 options have been granted under the 1993 and 1999 Plans including 3,419,760
nonqualified stock options. Activity with respect to these plans is as follows: 2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseNumber
    
    
    Price
    
    
    Number
    
    
    Price
    
    
    Number
    
    
    PriceOptions outstanding beginning of
period
    
    
    1,957,033
    
    
    $
    4.27
    
    
    
    1,305,283
    
    
    $
    5.72
    
    
    
    1,101,875
    
    
    $
    7.14Options granted
    
    
    1,539,932
    
    
    $
    4.05
    
    
    
    791,000
    
    
    $
    1.42
    
    
    
    279,500
    
    
    $
    2.32Options exercised
    
    
    (448,456
    )
    
    $
    4.19
    
    
    
    (30,000
    )
    
    $
    1.32
    
    
    
    
    
    
    
    Options canceled
    
    
    (77,245
    )
    
    $
    9.04
    
    
    
    (109,250
    )
    
    $
    1.81
    
    
    
    (76,092
    )
    
    $
    13.48Options outstanding end of period
    
    
    2,971,264
    
    
    $
    4.03
    
    
    
    1,957,033
    
    
    $
    4.27
    
    
    
    1,305,283
    
    
    $
    5.72Options exercisable
    
    
    2,329,764
    
    
    
    
    
    
    
    1,417,895
    
    
    $
    5.28
    
    
    
    1,037,988
    
    
    $
    6.40Shares available for granting of
options
    
    
    4,123,550
    
    
    
    
    
    
    
    5,586,237
    
    
    
    
    
    
    
    6,267,987
 F-19




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##### Table of Contents



Stock options outstanding at December 31, 2004 under both plans are summarized as follows: WeightedWeighted Avg.
    
    Avg.Range of
    
    Number
    
    
    Remaining
    
    ExerciseExercise Prices
    
    Outstanding
    
    
    Contractual Life
    
    Price$  1.28-$  1.91
    
    
    808,125
    
    
    8.3
    
    $
    1.46$  1.94-$  2.97
    
    
    523,980
    
    
    7.9
    
    $
    2.45$  3.00-$  4.45
    
    
    793,641
    
    
    9.8
    
    $
    4.04$  5.00-$  5.59
    
    
    632,291
    
    
    7.8
    
    $
    5.34$  8.63-$11.75
    
    
    71,160
    
    
    5.1
    
    $
    10.06$13.25-$19.50
    
    
    132,067
    
    
    4.5
    
    $
    15.22$22.00
    
    
    10,000
    
    
    4.4
    
    $
    22.002,971,264
 In August 1994, the Company issued warrants to purchase 30,000 shares of Mace Security
International, Inc. common stock at $8.50 per share (shares and exercise price are adjusted for
one-for-two reverse stock split) in connection with the purchase of certain assets of a business.
Of these warrants, 1,200 were exercised and the remaining 28,800 expired on August 24, 2004. In 1999, the Company issued warrants to purchase a total of 1,328,250 shares of the Companys
common stock at a weighted average exercise price of $4.22 per share (shares and exercise price are
adjusted for one-for-two reverse stock split) in connection with the purchase of certain businesses
and to a director. The terms of the warrants have been established by the Board of Directors. The
warrants are exercisable at various dates through August 2, 2009 and have exercise prices ranging
from $2.75 to $18.50 per share. Through December 31, 2004, 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, 2004, all of which are
exercisable. During the exercise period, the Company will reserve a sufficient number of shares of its common
stock to provide for the exercise of the rights represented by option and warrant holders. 11. Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Companys deferred tax assets and liabilities at
December 31, 2004 and 2003 are as follows: As of December 31,2004
    
    
    2003(In thousands)Deferred tax assets:Allowance for doubtful accounts
    
    $
    134
    
    
    $
    104Inventories
    
    
    28
    
    
    
    39Net operating loss carryforwards
    
    
    6,202
    
    
    
    7,822Deferred revenue
    
    
    184
    
    
    
    159Compensation
    
    
    117
    
    
    
    155Car damage reserve
    
    
    28
    
    
    
    25Accrued workers compensation costs
    
    
    16
    
    
    
    (11
    )Federal Tax Credit
    
    
    179
    
    
    
    Other, net
    
    
    
    
    
    
    17Total deferred tax assets
    
    
    6,888
    
    
    
    8,310Valuation allowance for deferred tax assets
    
    
    (896
    )
    
    
    (872
    )Deferred tax assets after valuation allowance
    
    
    5,992
    
    
    
    7,438Deferred tax liabilities:Property, equipment and intangibles
    
    
    (3,663
    )
    
    
    (5,352
    )Net deferred tax assets
    
    $
    2,329
    
    
    $
    2,086
 F-20




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At December 31, 2004, the Company had a net deferred tax asset of $2.2 million, primarily
representing the tax effect of the $16.0 million of net operating loss carryforwards (NOLs) that
will begin to expire during the year ending December 31, 2008 through 2023, if unused. Realization
of the future tax benefits related to the deferred tax assets is dependent upon many factors,
including the Companys ability to generate taxable income in future years. 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 long duration of the NOL carryforward period, and the Companys future projection
of taxable income. Based on the recent significant growth trend in revenues within the Security
Segment which includes the recent acquisition of IVS and S&M and projected improvements in the Car
and Truck Wash Segment operations as weather trends return to more historic levels of inclement
weather, management believes that future generation of taxable income from operations is more
likely than not to be adequate to allow us to utilize the NOLs and realize the benefits of the net
deferred tax assets. During 2004 the valuation allowance was increased by $24,000. The components of income tax benefit are (In thousands): Year ended December 31,2004
    
    
    2003
    
    
    2002Current (principally state taxes)
    
    $
    112
    
    
    $
    106
    
    
    $
    203Deferred
    
    
    (3,156
    )
    
    
    (156
    )
    
    
    (2,423
    )Total income tax benefit
    
    $
    (3,044
    )
    
    $
    (50
    )
    
    $
    (2,220
    )
 The significant components of deferred income tax benefit attributed to the loss for the years
ended December 31, 2004, 2003, and 2002 are as follows (In thousands): Year ended December 31,2004
    
    
    2003
    
    
    2002Deferred tax (benefit) expense
    
    $
    (1,780
    )
    
    $
    2,074
    
    
    $
    (1,465
    )Loss carryforward
    
    
    (1,400
    )
    
    
    (2,002
    )
    
    
    (1,108
    )Valuation allowance for deferred tax assets
    
    
    24
    
    
    
    (228
    )
    
    
    150$
    (3,156
    )
    
    $
    (156
    )
    
    $
    (2,423
    )
 A reconciliation of income tax benefit computed at the U.S. federal statutory tax rates to total
income tax benefit is as follows: Year ended December 31,2004
    
    
    2003
    
    
    2002(In thousands)Tax at U.S. federal statutory rate
    
    $
    (3,175
    )
    
    $
    (1,255
    )
    
    $
    (2,803
    )State taxes, net of federal benefit
    
    
    (124
    )
    
    
    233
    
    
    
    (184
    )Goodwill impairment
    
    
    349
    
    
    
    1,203
    
    
    
    Nondeductible costs and other acquisition
accounting adjustments
    
    
    16
    
    
    
    7
    
    
    
    654Valuation allowance for deferred tax assets
    
    
    24
    
    
    
    (228
    )
    
    
    150Other adjustments
    

    
    (134
    )
    
    
    (10
    )
    
    
    (37
    )Total income tax benefit
    
    $
    (3,044
    )
    
    $
    (50
    )
    
    $
    (2,220
    )
 12. Loss Per Share F-21




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The following table sets forth the computation of basic and diluted loss per share: (in
thousands except loss per share) Year ended December 31,2004
    
    
    2003
    
    
    2002Numerator (In thousands):Loss before cumulative effect of change in accounting principle
    
    $
    (6,410
    )
    
    $
    (3,533
    )
    
    $
    (57
    )Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (5,733
    )Net loss
    
    $
    (6,410
    )
    
    $
    (3,533
    )
    
    $
    (5,790
    )Denominator:Denominator for basic loss
per share - weighted average shares
    
    
    13,679,604
    
    
    
    12,414,816
    
    
    
    12,630,964Dilutive effect of options and warrants
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted loss
per share - weighted average shares
    
    
    13,679,604
    
    
    
    12,414,816
    
    
    
    12,630,964Basic loss per share:Loss before cumulative effect of change in accounting
principle
    
    $
    (0.47
    )
    
    $
    (0.28
    )
    
    $
    Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (0.46
    )Total
    
    $
    (0.47
    )
    
    $
    (0.28
    )
    
    $
    (0.46
    )Diluted loss per share:Loss before cumulative effect of change in accounting
principle
    
    $
    (0.47
    )
    
    $
    (0.28
    )
    
    $
    Cumulative effect of change in accounting principle
    
    
    
    
    
    
    
    
    
    
    (0.46
    )Total
    
    $
    (0.47
    )
    
    $
    (0.28
    )
    
    $
    (0.46
    )
 The dilutive effect of options and warrants of 491,082, 40,399 and 25,344 at December 31, 2004,
2003 and 2002, respectively, have not been included in the calculation of diluted earnings per
share because they are anti-dilutive. 13. Concentration of Credit Risk The Company maintains its cash accounts in high quality financial institutions. At times, these
balances may exceed insured amounts. 14. Commitments and Contingencies The Company is obligated under various operating leases, primarily for certain equipment, vehicles,
and real estate. Certain of these leases contain purchase options, renewal provisions, and
contingent rentals for the proportionate share of taxes, utilities, insurance, and annual cost of
living increases. Future minimum lease payments under operating leases with initial or remaining
noncancellable lease terms in excess of one year as of December 31, 2004 are as follows: 2005 -
$1.1 million; 2006 - $ 743,000; 2007 - $628,000; 2008 - $496,000; 2009 - $318,000 and thereafter - $933,000.
Rental expense under these leases was $1.3 million, $1.7 million, and $1.6 million, for
the years ended December 31, 2004, 2003, and 2002, respectively. The Company subleases a portion of the building space at several of its car wash facilities either
on a month-to-month basis or under cancellable leases. During fiscal 2004, 2003, and 2002
revenues under these leases were approximately $163,000, $214,000, and $192,000, respectively.
These amounts are classified as other income in the accompanying statements of operations. The Company is subject to federal and state environmental regulations, including rules relating to
air and water pollution and the storage and disposal of oil, other chemicals, and waste. The Company believes that it complies, in all material respect, with all applicable laws relating to its
business. Certain of the Companys executive officers have entered into employee stock option agreements
whereby options issued to them shall be entitled to immediate vesting should the officer be
terminated upon a change in control of the Company. Additionally, the employment agreement of the
Companys Chief Executive Officer, Louis D. Paolino, Jr., entitles Mr. Paolino to receive a fee of
$2.5 million upon termination of employment under certain conditions. The employment agreement also
provides for a bonus of $2.5 million upon a change in control. The Company is a party to various legal proceedings related to its normal business activities. In
the opinion of the Companys F-22




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##### Table of Contents



management, none of these proceedings are material in relation to the Companys results of
operations, liquidity, cash flows, or financial condition. 15. Employee Benefit Plans Two subsidiaries of the Company maintained voluntary 401(k) plans which covered substantially all
of their respective employees. Both plans were terminated in 2002. 16. Operating Agreements The Company has been directly
operating its Security Products Segment since May 1, 2002. Previous
to May 1, 2002, the Security Products Segment was operated by Mark Sport under a management
agreement which expired on April 30, 2002. Mark Sport is controlled by Jon E. Goodrich, a director
of the Company through December, 2003. Under the Management Agreement, beginning on January 1,
2000, Mark Sport operated the segment and received all profits and losses therefrom. In exchange,
Mark Sport paid the Company a monthly fee and, upon termination of the agreement, an amount equal
to the amortization and depreciation of the assets of the division. (See Note 19, Related Party
Transactions.) 17. Asset Impairment Charges In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we
periodically review the carrying value of our long-lived assets held and used, and assets to be
disposed of, for possible impairment when events and circumstances
warrant such a review. Assets classified as held for sale are
measured at the lower of carrying value or fair value, net of costs
to sell. During
the year ended December 31, 2002, we wrote down assets determined to be impaired by approximately
$1.2 million. The asset write-down related to one of our full service car wash sites in Texas and
two full service car wash sites in Arizona. We have determined that due to changing demographics
and increased competition in the geographic areas of these sites, their future expected cash flows
will not be sufficient to recover their respective carrying values. During the quarter ended June
30, 2003, we further wrote down the assets related to one of the full service car wash sites in
Arizona which we partially wrote down at December 31, 2002, by an additional $351,000. The
additional write-down was the result of the impending loss of a significant customer of this site
resulting in an additional reduction of the future expected cash flows of this site and the ability
to recover the sites carrying value. We closed the facility effective September 30, 2003. During
the quarter ended June 30, 2004, we sold the other Arizona car wash site recording a loss of
$51,000 on the disposition. We continue to market the Texas site for sale and have written down
these assets to their estimated fair market values. Additionally, during the year ended December
31, 2004, we wrote down assets related to our truck wash operations determined to be impaired by
approximately $500,000. 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. 18. Costs of Terminated Acquisitions The Companys policy is to charge as an expense any previously capitalized expenditures relating to
proposed acquisitions that in managements current opinion will not be consummated. The costs of
previously capitalized expenditures related to proposed acquisitions totaled approximately $53,000,
$0, and $57,000 in 2004, 2003 and 2002, respectively. These costs, which principally related to
several possible acquisitions the Company pursued outside the car wash industry, are primarily
related to due diligence costs. 19. Related Party Transactions Effective August 1, 2000, Mace entered into a five-year lease with Bluepointe, Inc., a corporation
fifty percent owned by Louis D. Paolino, Jr., Maces Chairman, Chief Executive Officer and
President and fifty percent owned by Mr. Paolinos father Louis D. Paolino, Sr., for Maces
executive offices in Mt. Laurel, New Jersey. Bluepointe, Inc. sold the building to an unrelated
party in May, 2004. The lease terms, which were assumed by the new owner, were subject to a survey
of local real estate market pricing and approval by the Companys Audit Committee and provide for
an initial monthly rental payment of $15,962, which increases by 5% per year in the third through
fifth years of the lease. Mace believes that the terms of this lease (based on an annual rate of
$19.00 per square foot) were competitive when the lease was executed. From November, 2001 through July 2002, the Company prepaid LP Learjets, LLC $5,109 per month for
the right to use a Learjet 31A for 100 hours per year. LP Learjets, LLC is a company owned by Louis
D. Paolino, Jr., the Companys Chairman, Chief Executive Officer and President. When the Learjet 31A is used, the prepaid amount is reduced by the hourly usage charge as approved by the Audit
Committee, and the Company pays to third parties unaffiliated with Louis D. Paolino, Jr., the
direct costs of F-23




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##### Table of Contents



the Learjets per-hour use, which include fuel, pilot fees, engine insurance and landing fees.
The balance of unused prepaid flight
fees total $31,659 at December 31, 2004. During 2004, Louis D. Paolino, Jr. purchased approximately $20,600 of the Companys products at a
discount from the prices
charged to distributors. The total of the discount given to
Mr. Paolino was approximately $6,600. From February 2000 through April 2002, the Company and Mark Sport, Inc. (Mark Sport) were parties
to a Management
Agreement. Mark Sport is a Vermont corporation controlled by Jon E. Goodrich, a former director and
current employee of the
Company. Mr. Goodrich was a director from December 1987 through December 2003. Under the Management
Agreement, as
amended, Mark Sport operated the Companys Security Segment and received all profits or losses from
January 1, 2000 to April 30,
2002 in exchange for certain payments to the Company. At March 31, 2004, Mark Sport owed the
Company $127,000 in payments
under the Management Agreement. In April 2004, the outstanding balance owed by Mark Sport to the
Company was paid in full. The Companys Consumer Products Division leases manufacturing and office space under a five-year
lease with Vermont Mill, Inc.
(Vermont Mill), which provides for monthly lease payments of $9,167 through November 2004.
Vermont Mill is controlled by
Jon E. Goodrich, a former director and current employee of the Company. The Company has exercised
an option to continue the lease
through November 2009. The rent will increase by a CPI factor in November 2004. 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. Additionally, Vermont Mill borrowed a total of $228,671 from the
Company through December 31,
2001. On February 22, 2002, Vermont Mill executed a three year promissory note with monthly
installments of $7,061 including
interest at a rate of 7%. At March 31, 2004, the balance owed on this promissory note was $82,100.
In April 2004, the balance on
the promissary note was paid in full. From January 1, 2003 through December 31, 2004, the Companys Electronic Surveillance Products
Division sold approximately
$156,000 of electronic security equipment to two companies, each of which Louis Paolino, III, the
son of the Companys CEO, Louis
D. Paolino, Jr., is a partial owner. The pricing extended to these companies is no more favorable
than the pricing given to third party
customers who purchase in similar volume. At December 31, 2004, no balance was owed from these
companies to Mace. Louis Paolino III, the son of the Companys Chief Executive Officer, Louis Paolino, Jr., has
offered to purchase from the Company
a warehouse bay in Hollywood, Florida that is no longer used in the Companys operations. Louis
Paolino III has offered to purchase
the warehouse bay for $306,000 in cash. 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. On February 14,
2005, the Companys Audit Committee authorized the Company to proceed with a sale of the warehouse
property to Louis Paolino
III for $306,000. 20. Segment Reporting The Company currently operates in two segments: the Car and Truck Wash Segment, supplying complete
car care services (including
wash, detailing, lube, and minor repairs), fuel, and merchandise sales; and the Security Segment.
From January 1, 2000 through April
30, 2002, the Company was paid $20,000 per month under a Management Agreement pursuant to which
Mark Sport, an entity
controlled by Jon E. Goodrich, a director of the Company through December, 2003, operated the
Companys Security Segment.
Effective May 1, 2002, the Management Agreement expired and the Company recommenced operation of
the Security 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. Selected financial information for each reportable segment is as follows: F-24




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##### Table of Contents



Year ended December 31,2004
    
    
    2003
    
    
    2002(In thousands)Revenues:Car and
truck wash - external customers
    
    $
    41,015
    
    
    $
    43,415
    
    
    $
    44,132Security - external customers
    
    
    16,632
    
    
    
    5,581
    
    
    
    2,498Security - operating agreement
    
    
    
    
    
    
    
    
    
    
    80$
    57,647
    
    
    $
    48,996
    
    
    $
    46,710Segment Operating (loss) income:Corporate (1)
    
    $
    (3,485
    )
    
    $
    (2,987
    )
    
    $
    (3,044
    )Car and truck wash
    
    
    4,300
    
    
    
    4,917
    
    
    
    6,004Security
    
    
    (368
    )
    
    
    (190
    )
    
    
    (15
    )Security - operating agreement
    
    
    
    
    
    
    
    
    
    
    80$
    447
    
    
    $
    1,740
    
    
    $
    3,025Assets:Car and truck wash
    
    $
    84,495
    
    
    $
    83,262
    
    
    $
    91,294Security
    
    
    18,478
    
    
    
    7,340
    
    
    
    4,994$
    102,973
    
    
    $
    90,602
    
    
    $
    96,288Capital expenditures:Corporate
    
    $
    5
    
    
    $
    5
    
    
    $
    11Car and truck wash
    
    
    1,456
    
    
    
    872
    
    
    
    1,357Security
    
    
    3,809
    
    
    
    578
    
    
    
    625$
    5,270
    
    
    $
    1,455
    
    
    $
    1,993Depreciation and amortization:Corporate
    
    $
    62
    
    
    $
    62
    
    
    $
    66Car and truck wash
    
    
    2,187
    
    
    
    1,795
    
    
    
    1,839Security
    
    
    260
    
    
    
    101
    
    
    
    48$
    2,509
    
    
    $
    1,958
    
    
    $
    1,953
   (1)
    
    Corporate functions include the corporate treasury, legal, financial reporting,
information technology, corporate tax, corporateinsurance, human resources, investor relations, and other typical centralized administrative functions. A reconciliation of operating income for reportable segments to total reported operating (loss)
income is as follows: Year ended December 31,2004
    
    
    2003
    
    
    2002(In thousands)Total operating income for
reportable segments
    
    $
    447
    
    
    $
    1,740
    
    
    $
    3,025Costs of terminated acquisitions
    
    
    (53
    )
    
    
    
    
    
    
    (57
    )Goodwill and asset impairment charges
    
    
    (8,225
    )
    
    
    (3,798
    )
    
    
    (1,165
    )Total reported operating (loss) income
    
    $
    (7,831
    )
    
    $
    (2,058
    )
    
    $
    1,803
 21. Selected Quarterly Financial Information (In thousands, except per share information)
(Unaudited) Year Ended December 31, 20041st Quarter
    
    

2nd Quarter
    
    

3rd Quarter
    
    

4th Quarter
    
    
    TotalRevenues
    
    $
    12,675
    
    
    $
    12,605
    
    
    $
    16,647
    
    
    $
    15,720
    
    
    $
    57,647Gross profit
    
    $
    3,677
    
    
    $
    3,459
    
    
    $
    4,157
    
    
    $
    4,305
    
    
    $
    15,598Net income (loss)
    
    $
    217
    
    
    $
    (14
    )
    
    $
    (229
    )
    
    $
    (6,384
    )
    
    $
    (6,410
    )Diluted net income
(loss) per share
    
    $
    0.02
    
    
    $
    
    
    
    $
    (0.02
    )
    
    $
    (0.44
    )
    
    $
    (0.47
    )
 F-25




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##### Table of Contents



Year Ended December 31, 20031st Quarter
    
    

2nd Quarter
    
    

3rd Quarter
    
    

4th Quarter
    
    
    TotalRevenues
    
    $
    12,611
    
    
    $

    12,317
    
    
    $
    11,897
    
    
    $
    12,171
    
    
    $
    48,996Gross profit
    
    $
    3,680
    
    
    $
    3,387
    
    
    $
    2,949
    
    
    $
    3,168
    
    
    $
    13,184Net income (loss)
    
    $
    342
    
    
    $
    (88
    )
    
    $
    (182
    )
    
    $
    (3,605
    )
    
    $
    (3,533
    )Diluted net income
(loss) per share
    
    $
    0.03
    
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.29
    )
    
    $
    (0.28
    )
 Year Ended December 31, 20021st Quarter
    
    

2nd Quarter
    
    

3rd Quarter
    
    

4th Quarter
    
    
    TotalRevenues
    
    $
    11,756
    
    
    $
    11,853
    
    
    $
    11,840
    
    
    $
    11,261
    
    
    $
    46,710Gross Profit
    
    $
    3,840
    
    
    $
    3,581
    
    
    $
    3,146
    
    
    $
    2,843
    
    
    $
    13,410Income (loss) before cumulative
effect of change in accounting
principle
    
    $
    691
    
    
    $
    357
    
    
    $
    (116
    )
    
    $
    (989
    )
    
    $
    (57
    )Net (loss) income
    
    $
    (5,042
    )
    
    $
    357
    
    
    $
    (116
    )
    
    $
    (989
    )
    
    $
    (5,790
    )Diluted income (loss) before
cumulative effect of change in
accounting principle
    
    $
    0.06
    
    
    $
    0.03
    
    
    $
    (0.01
    )
    
    $
    (0.08
    )
    
    $
    Diluted net (loss) income per share
    
    $
    (0.40
    )
    
    $
    0.03
    
    
    $
    (0.01
    )
    
    $
    (0.08
    )
    
    $
    (0.46
    )
 In the fourth quarter of
2004, the Company recorded an adjustment to reflect the appropriate
balances for certain assets classified as buildings and leasehold
improvements that had been depreciated using incorrect useful lives.
Specifically, the Company recognized $338,000 in additional
depreciation and amortization expense in its consolidated statement
of operation for the quarter ended December 31, 2004 to correct the
aforementioned error in accounting. We decided to record the
correction in the current period and not restate our previously
issued financial statements after taking into consideration (i) that
the adjustment, net of applicable income taxes, did not
have a material impact on the financial statements of prior interim
or annual periods taken as a whole; and (ii) that the cumulative
impact of the adjustment on stockholders equity was
not material to the financial statements of prior interim or annual
periods. F-26




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##### Table of Contents



EXHIBIT INDEX ExhibitNo.
    
    Description10.176
    
    Compensation Arrangements with Certain Executive Officers and Directors11
    
    Statement Re: Computation of Per Share Earnings21
    
    Subsidiaries of the Company23.1
    
    Consent of Grant Thornton LLP24
    
    Power of Attorney (included on signature page)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 F-27