Description

• Management is overpaid and unfriendly to shareholders.
• The Board appears to be in the lap of CEO Louis Paolino.
• The company is late in filing its 10-Q for the quarter ended 3/31/2007.
• The filing delinquency puts the company in violation of Nasdaq listing rules.
• The company recently announced the embezzlement of $340K by a former employee.

• Mace had tangible book value of $52 million on 12/31/2006, compared to market value of $38 million on 6/19/2007. The majority of the tangible book relates to the car wash business, including a substantial amount of real estate at historical cost. We estimate that tangible book value has not eroded materially since 12/31/2006.
• Mace has disposed of significant car wash assets at modest premia to book value. The stated goal is to dispose of all car washes. According to a Mace statement on 2/26/2007, “…if Mace is successful in selling its remaining car washes for the prices it has projected, the Company will have close to $3.00 per share in cash, no debt and a security business with approximately $23.5 million in annual sales.”
• Corporate and real estate investment firm Kelly Capital made an unsolicited indication of interest to buy Mace for $3.00 per share on 1/9/2007. Predictably, the Board rejected the Kelly offer without commencing a formal strategic alternatives process.
• Activist investor Lawndale upped its stake to 9% and nominated Board candidates on 6/15/2007. Another fund, Ancora, increased its stake to 9% on 6/26/2007.
• In a letter dated 6/15/2007, Lawndale identified two sources of cash drain that could be eliminated: (1) excessive executive compensation; and (2) costs related to weak internal controls. According to Lawndale, Mace may have “incurred millions of dollars in investigative and legal expenses in the last two years.” We believe another unnecessary cash drain has been (3) the mismanaged growth of Mace’s enterprise security business. The negative impact of these three issues on net worth has been largely offset by the continued disposition of car washes above book value.
• Management does not have voting control, and the Board is not staggered. Directors and executives own 4.8 million shares or 26%, but this figure includes an incredible 3.1 million options (insiders own only 11% of the basic shares). While most of the options are exercisable, they are struck at an average price of approximately $3.63, making most of them anti-dilutive. Therefore, if insiders wanted to boost their voting power, they might be better off buying shares on the open market than exercising options.
• The Board suffered a large withhold vote at the December 2006 annual meeting despite the absence of a contested election, suggesting widespread shareholder discontent.
• The Mace brand is widely recognized in personal defense, so much so that “Mace” and “pepper spray” are often used interchangeably. Mace also has a branded enterprise security business selling surveillance cameras and related products. The company reports the two security businesses as one segment. We view the pepper spray business as a defensible consumer franchise with respectable normalized returns on capital and modest growth, while the enterprise business has higher growth prospects but also more widely distributed return-on-capital prospects, with management quality being of paramount importance (which may explain Mace’s lack of profitability).
• If the incumbent Board is defeated and replaced with shareholder-friendly nominees, the egregious compensation schemes could be reined in and the self-dealing stopped. The cash from the sale of car washes could either be distributed or reinvested in the security business (assuming that high-ROI opportunities are identified).
• To avert what appears increasingly inevitable, Mace’s incumbent Board may have to declare a significant special dividend to placate shareholders and buy time to try to show that incumbent management can grow the value of the security businesses.

• 11/27/2006: Lawndale boosts stake to 7.5%, demands corporate governance changes
• 12/13/2006: Large Withhold vote at Mace’s uncontested annual meeting
• 1/17/2007: Kelly Capital $3.00 indication of interest buried in unrelated Mace 8-K
• 2/26/2007: Mace rejects Kelly offer without commencing strategic alternatives process
• 5/18/2007: Mace sells 12 car washes for $19 million, creates positive net cash position
• 6/15/2007: Lawndale boosts stake to 9.3%, nominates candidates for majority of Board
• 6/26/2007: Ancora Capital boosts stake to 8.6%
• 7/2/2007: Mace files previously delayed 10-K, including audit by Grant Thornton
• Next 6-12 months: Likely disposition of remaining car washes (23 owned, 2 leased)
• Next 12 months: Possible special dividend of $2.50+ to distribute car wash sale proceeds
• December 2007: Likely annual meeting (record date not yet determined)

• Mace corporate website: http://www.mace.com/
• Mace retail website: http://www.macecatalog.com/
• Mace personal defense website: http://www.macebrand.com/
• Mace 2007 security product catalog (large PDF file): http://www.macepro.com/media/pdf/2007_Mace_Security%20Product_Buyers_Guide.pdf
• Lawndale letter nominating Board candidates, dated 6/15/2007 (scroll to bottom): http://www.sec.gov/Archives/edgar/data/912607/000093583607000252/mace13d.htm
• Lawndale letter, dated 12/15/2006 (scroll to bottom): http://www.sec.gov/Archives/edgar/data/912607/000093583606000368/mace13d.htm
• Lawndale letter, dated 11/27/2006 (scroll to bottom): http://www.sec.gov/Archives/edgar/data/912607/000093583606000358/mace13d.htm
• Kelly Capital indication of interest in unrelated 8-K, dated 1/17/2007: http://www.sec.gov/Archives/edgar/data/912607/000115752307000345/a5312746.htm
• Kelly Capital website: http://www.kellycapital.com/

• Filing of delayed 10-Q (delayed 10-K was filed on 7/2/2007)
• Positive developments resulting from activist shareholder pressure
• Positive developments resulting from potential Board change
• Continued sale of car washes and build-up of net cash balance approaching $3 per share

Catalyst