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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2001 COMMISSION FILE NO. 0-22810
MACE SECURITY INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
03-0311630
(I.R.S. Employer Identification No.)
1000 Crawford Place, Suite 400, Mount Laurel, NJ 08054
(Address of Principal Executive Offices)
Registrant's Telephone No., including area code: (856) 778-2300
Indicate by checkmark 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 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock:
As of August 8, 2001, there were 25,428,427 Shares of Registrant's Common Stock,
par value $.01 per share, outstanding.
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Mace Security International, Inc.
Form 10-Q
Quarter Ended June 30, 2001
Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets - June 30, 2001 (Unaudited)
and December 31, 2000 2
Consolidated Statements of Operations for the three
months ended June 30, 2001 and 2000 (Unaudited) 4
Consolidated Statements of Operations for the six
months ended June 30, 2001 and 2000 (Unaudited) 5
Consolidated Statement of Stockholders' Equity
for the six months ended June 30, 2001(Unaudited) 6
Consolidated Statements of Cash Flows for the
six months ended June 30, 2001 and 2000 (Unaudited) 7
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II - OTHER INFORMATION
Item 5 - Other Information 23
Item 6 - Exhibits and Reports on Form 8-K 23
1
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Mace Security International, Inc.
Consolidated Balance Sheets
June 30, December 31,
ASSETS 2001 2000
------------- -------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 5,224,188 $ 4,838,023
Accounts receivable, less allowance for doubtful
accounts of $290,456 and $260,825 in 2001 and 2000,
respectively 973,321 737,547
Inventory 2,271,261 2,256,477
Deferred income taxes 114,549 118,575
Prepaid expenses and other current assets 2,314,892 2,699,996
------------- -------------
Total current assets 10,898,211 10,650,618
Property and equipment:
Land 33,092,391 32,597,872
Buildings and leasehold improvements 36,620,578 36,739,752
Machinery and equipment 8,543,696 8,223,801
Furniture and fixtures 423,111 257,549
------------- -------------
Total property and equipment 78,679,776 77,818,974
Accumulated depreciation and amortization (6,340,843) (5,423,330)
------------- -------------
72,338,933 72,395,644
Excess of cost over net assets of acquired businesses, net of
accumulated amortization of $1,582,668 and $1,143,239 in
2001 and 2000, respectively 20,578,788 20,881,085
Other intangible assets, net of accumulated amortization
of $1,315,521 and $1,223,702 in 2001 and 2000, respectively 1,053,113 1,142,485
Other assets 205,193 1,061,596
------------- -------------
Total assets $ 105,074,238 $ 106,131,428
============= =============
See accompanying notes.
2
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
------------ ------------
(Unaudited)
Current liabilities:
Current portion of long-term debt $ 2,505,603 $ 6,264,630
Current portion of capital lease obligations 149,969 57,633
Accounts payable 2,124,942 2,821,752
Income taxes payable 77,521 190,127
Deferred revenue 144,141 315,743
Accrued expenses and other current liabilities 2,749,784 2,003,370
------------ ------------
Total current liabilities 7,751,960 11,653,255
Deferred income taxes 582,125 272,473
Long-term debt, net of current portion 32,833,388 30,094,300
Capital lease obligations, net of current portion 311,584 268,455
Other liabilities - 965,625
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 10,000,000
Issued and outstanding shares - none - -
Common stock, $.01 par value:
Authorized shares - 100,000,000
Issued and outstanding shares of 25,428,427 and
25,480,590 in 2001 and 2000, respectively 254,284 254,806
Additional paid-in capital 69,963,217 69,905,062
Accumulated deficit (6,622,320) (7,282,548)
------------ ------------
Total stockholders' equity 63,595,181 62,877,320
------------ ------------
Total liabilities and stockholders' equity $105,074,238 $106,131,428
============ ============
See accompanying notes.
3
Mace Security International, Inc.
Consolidated Statements of Income
(Unaudited)
Three Months Ended
June 30,
-------------------------------------
2001 2000
-------------- -------------
Revenues:
Car wash and detailing services $ 10,760,747 $ 9,522,239
Lube and other automotive services 1,155,646 1,241,150
Fuel and merchandise sales 1,065,220 1,296,774
Operating agreements 60,000 111,275
-------------- -------------
13,041,613 12,171,238
Cost of revenues:
Car wash and detailing services 7,319,646 6,725,326
Lube and other automotive services 887,524 958,622
Fuel and merchandise sales 940,065 1,131,885
-------------- -------------
9,147,235 8,815,833
Selling, general and administrative expenses 1,918,849 1,907,565
Depreciation and amortization 677,855 605,567
Costs of terminated acquisitions 73,522 580,000
-------------- -------------
Operating income 1,224,152 262,473
Interest expense, net (732,711) (759,455)
Other income 76,909 124,199
-------------- -------------
Income (loss) from continuing operations before income
taxes 568,350 (372,783)
Income tax expense (benefit) 210,000 (118,000)
-------------- -------------
Income (loss) from continuing operations 358,350 (254,783)
Discontinued Operations:
Loss from discontinued operations, net of an income
tax benefit of $41,000 - (74,956)
Gain on disposal of ICS, net of $107,000 of applicable
income tax expense - 723,581
-------------- -------------
Net income $ 358,350 $ 393,842
============== =============
Basic income (loss) per share
From continuing operations $ 0.01 $ (0.01)
From discontinued operations - 0.03
-------------- -------------
Total $ 0.01 $ 0.02
============== =============
Weighted average number of shares outstanding 25,452,935 24,062,663
============== =============
Diluted income (loss) per share
From continuing operations $ 0.01 $ (0.01)
From discontinued operations - 0.03
-------------- -------------
Total $ 0.01 $ 0.02
============== =============
Weighted average number of shares outstanding 25,511,346 24,062,663
============== =============
See accompanying notes.
4
Mace Security International, Inc.
Consolidated Statements of Income
(Unaudited)
Six Months Ended
June 30,
----------------------------------------
2001 2000
----------------- -----------------
Revenues:
Car wash and detailing services $ 21,375,179 $ 18,802,957
Lube and other automotive services 2,361,326 2,424,103
Fuel and merchandise sales 2,014,034 2,563,856
Operating agreements 120,000 140,756
----------------- -----------------
25,870,539 23,931,672
Cost of revenues:
Car wash and detailing services 14,645,550 12,982,806
Lube and other automotive services 1,786,022 1,842,696
Fuel and merchandise sales 1,795,949 2,215,608
----------------- -----------------
18,227,521 17,041,110
Selling, general and administrative expenses 3,756,696 3,559,735
Depreciation and amortization 1,352,939 1,168,416
Costs of terminated acquisitions 73,522 580,000
----------------- -----------------
Operating income 2,459,861 1,582,411
Interest expense, net (1,551,292) (1,472,409)
Other income 139,659 208,327
----------------- -----------------
Income from continuing operations before income taxes 1,048,228 318,329
Income tax expense 388,000 103,000
----------------- -----------------
Income from continuing operations 660,228 215,329
Discontinued Operations:
Loss from discontinued operations, net of applicable
income tax benefit of $130,000 - (264,601)
Gain on disposal of ICS, net of $107,000 of applicable
income tax expense - 723,581
----------------- -----------------
Net income $ 660,228 $ 674,309
================= =================
Basic income per share
From continuing operations $ 0.03 $ 0.01
From discontinued operations - 0.02
----------------- -----------------
Total $ 0.03 $ 0.03
================= =================
Weighted average number of shares outstanding 25,469,035 23,394,274
================= =================
Diluted income per share
From continuing operations $ 0.03 $ 0.01
From discontinued operations - 0.02
----------------- -----------------
Total $ 0.03 $ 0.03
================= =================
Weighted average number of shares outstanding 25,498,502 24,654,065
================= =================
See accompanying notes.
5
Mace Security International, Inc.
Consolidated Statement of Stockholders' Equity
(Unaudited)
Number of Par Value Additional
Common of Common Paid-in Accumulated
Shares Stock Capital Deficit Total
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Balance at December 31,
2000..................... 25,480,590 $254,806 $69,905,062 $(7,282,548) $62,877,320
Common stock issued in
purchase acquisitions.... 26,137 261 144,239 144,500
Shares purchased and
retired.................. (78,300) (783) (86,084) (86,867)
Net income................ 660,228 660,228
------------- ------------- --------------- --------------- ---------------
Balance at June 30, 2001.. 25,428,427 $254,284 $69,963,217 $(6,622,320) $63,595,181
============= ============= =============== =============== ===============
See accompanying notes.
6
Mace Security International, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
--------------------------------------
2001 2000
--------------- ----------------
Operating activities
Income from continuing operations $ 660,228 $ 215,329
Discontinued operations, net of income tax - 458,980
--------------- -------------
Net income 660,228 674,309
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,352,939 1,168,416
Provision for losses on receivables 20,000 12,361
Loss on disposal of property and equipment - 15,235
Deferred income taxes 313,678 (103,087)
Net gain on sale of ICS, including cash surrendered - (975,199)
Non-cash expenses of discontinued operations - 24,206
Changes in operating assets and liabilities:
Accounts receivable (144,867) 617,734
Inventory 53,800 (254,533)
Accounts payable (847,364) (474,686)
Deferred revenue (171,602) (154,937)
Accrued expenses (78,639) (282,718)
Income taxes (112,606) (28,993)
Prepaid expenses and other assets 486,319 1,192,706
--------------- -------------
Net cash provided by operating activities 1,531,886 1,430,814
Investing activities
Acquisition of businesses, net of cash acquired - (25,000)
Purchase of property and equipment (442,913) (700,299)
Proceeds from sale of property and equipment 466,049 15,468
Payments for intangibles (2,447) (310,651)
Deposits and other prepaid costs on future acquisitions (32,069) (24,938)
--------------- -------------
Net cash used in investing activities (11,380) (1,045,420)
Financing activities
Proceeds from revolving line of credit, long term debt and
capital lease obligations - 1,950,000
Payments on revolving line of credit, long-term debt
and capital lease obligations (1,047,474) (1,677,702)
Proceeds from issuance of common stock, net of offering
costs - 850,368
Payments to purchase stock (86,867) -
Net payments on note payable to shareholder - (2,927)
--------------- -------------
Net cash (used in) provided by financing activities (1,134,341) 1,119,739
--------------- -------------
Net increase in cash and cash equivalents 386,165 1,505,133
Cash and cash equivalents at beginning of period 4,838,023 2,320,804
--------------- -------------
Cash and cash equivalents at end of period $ 5,224,188 $3,825,937
=============== =============
See accompanying notes.
7
Mace Security International, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Mace Security International, Inc. and its wholly owned subsidiaries
(the "Company"). All significant intercompany accounts and transactions have
been eliminated in consolidation. These consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals), which in the
opinion of management, are necessary for a fair presentation of results of
operations for the interim periods presented. The results of operations for the
three and six month periods ended June 30, 2001 are not necessarily indicative
of the operating results for the full year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
These interim financial statements should be read in conjunction with the
audited financial statements and notes contained in the Company's Annual Report
on Form 10-KSB, as amended, for the year ended December 31, 2000.
2. Significant Accounting Policies
In June 1998, SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" was issued. Subsequent to this statement, SFAS No. 137 was issued,
which amended the effective date of SFAS No. 133 to be all fiscal quarters of
all fiscal years beginning after June 15, 2000. In June 2000, SFAS 138 was
issued, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of SFAS 133". SFAS 133, as amended by SFAS 138,
requires that all derivative instruments be recorded on the balance sheet at
their respective fair values. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on the designation of the hedge transaction. The Company adopted SFAS
133, as amended by SFAS 138, in the first quarter of fiscal year 2001. Based on
the Company's minimal use of derivatives at the current time, the adoption of
this standard did not have a significant impact on earnings or financial
position of the Company as of June 30, 2001.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which
addresses certain criteria for revenue recognition. SAB 101 outlines the
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. The Company implemented the
applicable provisions of SAB 101 in the first quarter of fiscal year 2001.
Management believes the Company's revenue recognition policies comply with the
guidance contained in the SAB, and therefore, the Company's results of
operations were not materially affected.
In May 2000, The Emerging Issues Task Force reached consensus opinions on Issue
00-14, "Accounting for Certain Sales Incentives (Issue 00-14)". Issue 00-14
pertains to the recognition, measurement, and income statement classification of
certain sales incentives, including discounts, coupons, rebates, and free
products or services received by the customer. The issue requires certain
incentives to be classified as a reduction of revenue. Management believes the
Company's revenue recording policies comply with the guidance contained in Issue
00-14, and therefore, the Company's results of operations were not materially
affected.
On June 29, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Intangible Assets. These statements
are expected to result in significant modifications relative to the Company's
accounting for goodwill and other intangible assets. SFAS No. 141 requires that
all business combinations initiated after June 30, 2001 must be accounted for
under the purchase method of accounting. SFAS No. 141 was effective upon
issuance. SFAS No. 142 modifies the accounting for all purchased goodwill and
intangible assets. SFAS No. 142 includes requirements to test goodwill and
indefinite lived intangible assets for impairment rather than amortize them.
SFAS No. 142 will be effective for fiscal years beginning after December 31,
2001 and early adoption is not permitted except for business combinations
entered into after June 30, 2001. The Company is currently evaluating the
provisions of SFAS No. 142, but its preliminary assessment is that these
Statements will have a material impact on the Company's financial position and
results of operations. Upon adoption of SFAS 142, on January 1, 2002, the
Company will no longer amortize goodwill, thereby eliminating annual
amortization expense up to approximately $900,000.
3. Business Combinations
Since April 1, 1999, the Company has acquired 62 car care facilities and five
truck wash facilities through the acquisition of 17 separate businesses
including: 43 full service facilities, one self service facility, 11 exterior
only facilities and one lube center in
8
Pennsylvania, New Jersey, Delaware, Texas, Florida and Arizona; six facilities
were subsequently divested. The five full service truck wash facilities are
located in Arizona, Indiana, Ohio and Texas.
Of the 17 car and truck wash acquisitions completed through September 30, 2000,
15 were accounted for using the purchase method of accounting. Accordingly,
assets acquired and liabilities assumed have been recorded at their estimated
fair values at the dates of acquisition and their results of operations are
included in the accompanying consolidated statements of operations since the
date of acquisition. The excess of purchase price over the estimated fair market
value of identifiable net assets acquired is being amortized on a straight-line
basis over twenty-five years from the date of acquisition. The purchase price
allocations are based on preliminary estimates as of the acquisition dates and
are finalized within one year from the date of acquisition.
On March 24, 2000, the Company, through a wholly owned subsidiary, acquired all
of the truck wash related assets of Red Baron Truck Washes, Inc. ("Red Baron")
with a total of five operating locations in Arizona, Indiana, Ohio and Texas.
Consideration consisted of 568,421 registered shares of common stock of the
Company and the issuance of a secured $1 million promissory note to the seller.
The transaction has been accounted for using the purchase method of accounting.
On June 5, 2000, the Company, through a wholly owned subsidiary, acquired
certain assets of Sparsupco, Inc. (the "Beneva Car Wash"). Consideration
consisted of 130,712 shares of common stock of the Company and $20,000 of cash.
The Beneva Car Wash is located in Sarasota, Florida. The transaction has been
accounted for using the purchase method of accounting.
On July 10, 2000, the Company, through a wholly owned subsidiary, completed the
acquisition of substantially all the assets of Superstar Kyrene, a full service
car wash in the Phoenix, Arizona area, in exchange for 56,521 unregistered
shares of common stock of the Company, cash consideration of approximately
$824,000 and the assumption of approximately $926,000 of debt. The transaction
has been accounted for using the purchase method of accounting.
On July 26, 2000, the Company acquired, through a wholly owned subsidiary,
substantially all of the assets of Blue Planet Car Wash ("Blue Planet"), a full
service car wash in the Dallas, Texas area, in exchange for 250,008 unregistered
shares of common stock, and the assumption of approximately $1,554,000 of debt.
This transaction has been accounted for using the purchase method of accounting.
4. Operating Agreements
During the six months ended June 30, 2000, the Company managed three car wash
locations under operating agreements, under which the Company was entitled to
all profits generated from the operation of the location. Operating agreements
generally arise from pending acquisitions that will be closed pending completion
of certain conditions. The pretax result earned under the operating agreements
is presented in the accompanying statements of operations as revenue from
operating agreements net of all operating expenses. No locations were operated
under operating agreements during the six months ended June 30, 2001.
The results of operations subject to operating agreements in the three and six
months ended June 30, 2000 were as follows:
Three Months Six Months
Ended Ended
June 30, 2000 June 30, 2000
--------------- ---------------
Revenues (In Thousands)
Car wash and detailing services $ 613 $ 804
Fuel and merchandise sales 35 53
--------------- ---------------
648 857
Cost of revenues
Car wash and detailing services 531 727
Fuel and merchandise sales 27 38
--------------- ---------------
558 765
Selling, general, and administrative expenses 39 52
--------------- ---------------
Operating profit $ 51 $ 40
=============== ===============
In addition to the above results, the Company is currently being paid $20,000
per month, which started in February 2000, under a Management Agreement which
allows Mark Sport, Inc., an entity controlled by Jon E. Goodrich, a director of
the Company, to operate the Company's Security Products Division.
9
5. Discontinued Operations
On May 4, 2000, the Board of Directors of the Company approved a plan to sell
its computer products and services subsidiary, ICS. Accordingly, the operating
results of ICS have been segregated from continuing operations and reported on a
comprehensive basis as a separate line item on the consolidated statement of
operations entitled "Discontinued Operations". On June 2, 2000, the Company sold
ICS in exchange for the return of 450,000 shares of common stock of the Company
and $295,500 of future goods and services from ICS. Revenues related to the
discontinued ICS operations for the three and six months ended June 30, 2000
were $160,520 and $518,753, respectively. Losses from discontinued operations
for the three and six months ended June 30, 2000 were $74,956 and $264,601,
respectively, exclusive of a gain on the disposal of ICS of $723,581.
6. 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. During the quarters ended June 30, 2000 and
2001, management decided to terminate certain pending acquisitions or believes
certain pending acquisitions will not be consummated as a result of due
diligence findings or the inability of the seller to meet certain terms and
conditions precedent to closing. In the quarter ending June 30, 2000, costs of
previously capitalized expenditures principally related to the termination of
the Planet Truck Wash acquisition and acquisition related expenses associated
with the proposed Wash Depot Holdings, Inc. ("Wash Depot") merger. Of the
$580,000 costs of terminated acquisitions in the quarter ending June 30, 2000,
approximately $209,000 represented unrecoverable cash and stock deposits and
approximately $371,000 represented external incremental transaction costs
including legal, accounting, consulting and due diligence costs. During the
quarter ending June 30, 2001, the write-off of previously capitalized
expenditures principally related to several possible acquisitions the Company
pursued outside the car wash industry. These costs principally related to due
diligence costs.
7. Commitments and Contingencies
As disclosed in the Company's 1994 Form 10-KSB, on January 25, 1994 a suit was
filed by Carmeta Gentles on her own behalf and as a personal representative of
the estate of Robert Gentles in Ontario Court (General Division), Ontario,
Canada, claiming intentional or negligent manufacture and distribution of the
Mark V Mace(R) brand defense spray unit and that its contents contributed to the
suffering and death of Robert Gentles while in the Kingston Penitentiary in
October 1993. The Company was added as a third party defendant on February 8,
1995. The plaintiff seeks five million dollars in damages. The Company forwarded
this suit to its insurance carrier for defense. Based on discussions with the
Company's counsel and insurance carrier, the Company does not anticipate that
this claim will result in the payment of damages in excess of the Company's
insurance coverage.
On December 13, 1999, the Company was named as a defendant in a suit filed in
the state of New York by Janeen Johnson et. al. The litigation concerns a claim
that a self-defense spray manufactured by the Company and used by a law
enforcement officer contributed to the suffering and death of Christopher
Johnson. The Company forwarded the suit to its insurance carrier for defense.
The Company does not anticipate that this claim will result in the payment of
damages in excess of the Company's insurance coverage.
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. Incidents of
this type, or others, could give rise to product liability or other claims, or
to claims that past or future advertising, packaging or other practices should
be, or should have been, modified, or that regulation of products of this nature
should be extended or changed.
The Company is subject to federal and state environmental regulations, including
rules relating to air and water pollution and the storage and disposal of oil,
other chemicals and waste. The Company believes that it complies with all
applicable laws relating to its business.
Certain of the Company's executive officers have entered into employment
agreements whereby they will be entitled to immediate vesting provisions of
issued options 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
$7,000,000 upon termination of employment under certain conditions including
upon termination as a result of a change in control.
10
The Company is a party to various other legal proceedings related to its normal
business activities. In the opinion of the Company's management, none of these
proceedings are material in relation to the Company's results of operations,
liquidity, cash flows or financial condition.
8. Business Segments Information
The Company currently operates in the Car Care segment, supplying complete car
care services (including wash, detailing, lube, and minor repairs), fuel, and
merchandise sales and receives revenues under a Management Agreement related to
the Company's previously operated Security Products segment. In the first
quarter of 2000, the Company entered into a Management Agreement with Mark
Sport, Inc., a Vermont corporation. Mark Sport, Inc. is controlled by Jon E.
Goodrich, a director of the Company. The Management Agreement entitles Mark
Sport, Inc. to operate the Company's Safety and Security Products Division and
receive all profits or losses for a seven-month term beginning January 1, 2000.
The Agreement was extended for three six month periods through January 31, 2002,
as provided for in the original Management Agreement. In exchange, Mark Sport,
Inc. pays the Company $20,000 per month beginning February 2000 and continuing
through the term of the Management Agreement as extended. Additionally, Mark
Sport, Inc. must pay the Company an amount equal to the amortization and
depreciation on the assets of the division at the end of the term of the
Agreement. During the term of the Agreement, Mark Sport, Inc. must operate the
division in substantially the same manner as it has been operated prior to the
Management Agreement.
Additionally, during 1999 and through June 2, 2000, the Company operated in the
computer hardware and software products and services segment through its
subsidiary, ICS. ICS was sold on June 2, 2000 and accordingly has been
classified as discontinued operations.
Financial information regarding the Car Care and Security Products segments is
as follows:
Car Security
Care Products
------------ ------------
(In Thousands)
Three months ended June 30, 2001
Revenues from external customers $ 12,982 $ 60
Intersegment revenues - -
Segment income $ 320 $ 38
Segment assets $101,258 $3,816
Six months ended June 30, 2001
Revenues from external customers $ 25,751 $ 120
Intersegment revenues - -
Segment income $ 584 $ 76
Three months ended June 30, 2000
Revenues from external customers $ 12,111 $ 60
Intersegment revenues - -
Segment (loss) income $ (295) $ 40
Six months ended June 30, 2000
Revenues from external customers $ 23,831 $ 100
Intersegment revenues - -
Segment income $ 147 $ 68
9. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from those estimates. Such estimates
include the Company's estimates of reserves such as the allowance for doubtful
accounts receivable and inventory valuation allowances.
10. Income Taxes
The Company recorded a tax expense of $388,000 for the six months ended June 30,
2001. Tax expense reflects the recording of income taxes at an effective rate of
37%. The effective rate differs from the federal statutory rate primarily due to
state and local income taxes, non-deductible costs related to acquired
intangibles, and the use of net operating loss carryforwards.
11
11. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
------------------------------ -----------------------------
6/30/01 6/30/00 6/30/01 6/30/00
------------ ------------ ------------ ------------
Numerator:
Income (loss) from continuing operations...... $ 358,350 $ (254,783) $ 660,228 $ 215,329
Income from discontinued operations........... - 648,625 - 458,980
------------ ------------ ------------ ------------
Net income.................................... $ 358,350 $ 393,842 $ 660,228 $ 674,309
============ ============ ============ ============
Denominator:
Denominator for basic income (loss)
per share - weighted average shares........ 25,452,935 24,062,663 25,469,035 23,394,274
Dilutive effect of options and warrants....... 58,411 - 29,467 1,259,791
------------ ------------ ------------ ------------
Denominator for diluted income (loss)
per share - weighted average shares........ 25,511,346 24,062,663 25,498,502 24,654,065
============ ============ ============ ============
Basic income (loss) per share:
From continuing operations.................... $ 0.01 $ (0.01) $ 0.03 $ 0.01
From discontinued operations.................. - 0.03 - 0.02
------------ ------------ ------------ ------------
Total......................................... $ 0.01 $ 0.02 $ 0.03 $ 0.03
============ ============ ============ ============
Diluted income (loss) per share:
From continuing operations.................... $ 0.01 $ (0.01) $ 0.03 $ 0.01
From discontinued operations.................. - 0.03 - 0.02
------------ ------------ ------------ ------------
Total......................................... $ 0.01 $ 0.02 $ 0.03 $ 0.03
============ ============ ============ ============
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 section, are Forward
Looking Statements. Although the Company believes that the expectations
reflected in such Forward Looking Statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Generally,
these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies, number
of acquisitions and projected or anticipated benefits from acquisitions made by
or to be made by the Company, or projections involving anticipated revenues,
earnings, levels of capital expenditures or other aspects of operating results.
All phases of the Company's operations are subject to a number of uncertainties,
risks and other influences, many of which are outside the control of the Company
and any one of which, or a combination of which, could materially affect the
results of the Company's operations and whether Forward Looking Statements made
by the Company ultimately prove to be accurate. Such important factors
("Important Factors") that could cause actual results to differ materially from
the Company's expectations are disclosed in this section and elsewhere in this
report. All subsequent written and oral Forward Looking Statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by the Important Factors described below that could cause actual
results to differ from the Company's expectations. The Forward Looking
Statements made herein are only made as of the date of this filing and the
Company undertakes no obligation to publicly update such Forward Looking
Statements to reflect subsequent events or circumstances.
We need to raise additional capital. Additional capital will be needed if
acquisitions of car washes or other businesses are made. Our capital
requirements also include working capital for daily operations and capital for
equipment purchases. To the extent that we lack cash to meet our future capital
needs, we will be required to raise additional funds through bank borrowings and
additional equity and/or debt financing, which may result in significant
increases in leverage and interest expense and/or substantial dilution. If we
are unable to raise additional capital, we will need to reduce substantially the
scale of our operations and to curtail our business plan.
Risks of Acquisitions and New Business Segments. Our strategy has been to
grow through acquisitions. We are currently examining acquisition candidates
outside the car care industry. To the extent we make acquisitions inside or
outside the car care industry, our ability to identify suitable acquisition
candidates, understand new businesses, and consummate acquisitions on
financially favorable terms is a risk. Acquisitions involve risks inherent in
assessing acquisition candidates' values, strengths, weaknesses, risks and
profitability and risks related to the financing, integration and operation of
acquired businesses, including:
i. adverse short-term effects on our reported operating results;
ii. diversion of management's attention;
iii. dependence on hiring, training and retaining key personnel;
iv. risks associated with unanticipated problems or latent liabilities;
and
v. risks inherent with management not having experience in new business
segments acquired.
We cannot assure you that acquisition opportunities will be available, that we
will have access to the capital required to finance potential acquisitions, that
we will continue to acquire businesses, or that any acquired business will be
profitable.
Listing on the Nasdaq National Market. If the Company does not maintain a
minimum bid for thirty consecutive days, it is subject to being delisted from
the Nasdaq National Market. The Company's recent bid price has been around $1.00
and below. If the Company receives a delisting notice from Nasdaq, the Company's
stock may 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. OTC companies may have limited
product lines, markets or financial resources. Many OTC stocks trade less
frequently and in smaller volumes than Nasdaq-listed stocks. The values of these
stocks may be more volatile than Nasdaq-listed stocks. If the Company's stock is
traded in the OTC market and a market maker sponsors the Company, the Company
may have the price of its stock electronically displayed on the OTC Bulletin
Board, or OTCBB. However, if the Company lacks sufficient market maker support
for display on the OTCBB, it must have its price published by the National
Quotations Bureau LLP in a paper publication known as the "Pink Sheets". The
marketability of the Company's stock will be even more limited if its price must
be published on the "Pink Sheets".
On April 19, 2001, the Company was advised by Nasdaq that its common stock had
failed to trade above one dollar for thirty consecutive business days, and was
therefore not in compliance with Marketplace Rule 4450(a)(5) of the Nasdaq
National Market. Nasdaq advised the Company that it had 90 days to maintain a
bid price of at least one dollar for ten consecutive business days
13
or be delisted. The Company maintained a minimum bid price of at least one
dollar for ten consecutive business days ending May 4, 2001. On May 11, 2001,
the Company was advised by Nasdaq that it was in compliance with Market Place
Rule 4450(a)(5) and was not subject to being delisted.
We have a history of losses, we have working capital deficits and we may
incur continuing charges. We have reported net losses and working capital
deficits in prior fiscal years and we have expended substantial funds for
acquisitions and equipment. In connection with financing acquisitions and
business growth, we anticipate that we will continue to incur significant debt
and interest charges. Several of our debt agreements, as amended, contain
certain affirmative and negative covenants and require the maintenance of
certain levels of earnings before interest, taxes, depreciation, and
amortization to debt service. If our operating earnings are not sufficient to
maintain the required ratios, we would be in default of our loan agreements. In
addition, we will recognize goodwill amortization charges in connection with our
acquisitions that are accounted for under the "purchase" method of accounting.
The amount of goodwill recognized is the amount by which the purchase price of a
business exceeds the fair market value of the assets acquired. Goodwill is
currently amortized over a period not to exceed 25 years depending on the
business acquired, resulting in an annual non-cash charge to our earnings during
that period. Upon adoption of SFAS 142 on January 1, 2002, the Company will no
longer amortize goodwill.
Our business plan poses risks for us. One of our business objective is to
develop as a full service, integrated car care business through some
acquisitions and through the internal development of our car wash facilities. We
have repositioned our company from a company involved primarily in the
production of consumer defense products to a company that provides car wash and
car care services. This strategy involves a number of risks, including:
Risks associated with growth;
Risks associated with acquisitions;
Risks associated with the recruitment and development of management and
operating personnel; and
Risks associated with lack of experience in the car care service
industries.
If we are unable to manage one or more of these associated risks effectively, we
may not fully realize our business plan.
We have a limited operating history regarding our car wash and car care
service businesses. Since July 1999, our main business has been the acquisition
and operation of car wash and car care service facilities, which now accounts
for substantially all of our revenues. Because of our relatively limited
operating history with respect to these businesses, we cannot assure you that we
will be able to operate them successfully.
We may not be able to manage growth. If we succeed in growing, growth will
place significant burdens on our management and on our operational and other
resources. We will need to attract, train, motivate, retain and supervise our
senior managers and other employees and develop a managerial infrastructure. If
we are unable to do this, we will not be able to realize our business
objectives.
Our stock price is volatile. Our common stock's market price has been and
is likely to continue to be highly volatile. Factors like fluctuations in our
quarterly revenues and operating results, our ongoing acquisition program,
market conditions and economic conditions generally may impact significantly our
common stock's market price. In addition, as we continue to acquire additional
car wash businesses, we may agree to issue common stock that will become
available generally for resale and may have an impact on our common stock's
market price.
We may not be able to integrate businesses we acquire and achieve operating
efficiencies. Our future growth and profitability depend substantially on our
ability to operate and integrate acquired businesses. Our strategy is to achieve
economies of scale and brand-name recognition in part through acquisitions that
increase our size. We cannot assure you that our efforts to integrate acquired
operations will be effective or that we will realize expected results. Our
failure to achieve any of these results could have a material adverse effect on
our business and results of operations.
We face potential liabilities associated with acquisitions of businesses.
The businesses we acquire may have liabilities that we do not discover or may be
unable to discover during our preacquisition investigations, including
liabilities arising from environmental contamination or prior owners' non-
compliance with environmental laws or other regulatory requirements, and for
which we, as a successor owner or operator, may be responsible.
14
We face risks associated with our consumer safety products. We face claims
of injury allegedly resulting from our defense sprays. We cannot assure you
that our insurance coverage will be sufficient to cover any judgments won
against us in these lawsuits. If our insurance coverage is exceeded, we will
have to pay the excess liability directly. We are also aware of several claims
that defense sprays used by law enforcement personnel resulted in deaths of
prisoners and of suspects in custody. While we no longer sell defense sprays to
law enforcement agencies, it is possible that the increasing use of defense
sprays by the public could, in the future, lead to additional product liability
claims.
Our car wash business may suffer under certain weather conditions.
Seasonal trends in some periods may affect our car wash business. In
particular, long periods of rain and cloudy weather can affect adversely 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 own cars which also can affect adversely our car wash business.
Consumer demand for our car wash services is unpredictable. Our financial
condition and results of operations will depend substantially on consumer demand
for car wash services. Our 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. We cannot assure you that consumer
demand for car wash services will increase as our business expands. Nor can we
assure you that consumer demand will maintain its current level.
We must maintain our car wash equipment. Although we undertake to keep our
car washing equipment in proper operating condition, the operating environment
found in car washes results in frequent mechanical problems. If we fail to
properly maintain the equipment, the car wash could become inoperable resulting
in a loss of revenue to us from the inoperable location.
Our car wash and car services face governmental regulation. 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
services businesses. Car wash centers utilize cleaning agents and waxes in the
washing process that are then discharged in waste water along with oils and
fluids washed off of vehicles. Other car services, such as gasoline and
lubrication, use of 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:
i. transportation, storage, presence, use, disposal and handling of
hazardous materials and hazardous wastes;
ii. discharge of stormwater; and
iii. underground storage tanks.
If any of the previously mentioned substances were found on our property,
however, including leased properties, or if we were found to be in violation of
applicable laws and regulations, we could be responsible for clean-up costs,
property damage and fines or other penalties, any one of which could have a
material adverse effect on our financial condition and results of operations.
We face significant competition. The extent and kind of competition that we
face varies. The car wash industry is highly competitive. Competition is based
primarily on location, facilities, customer service, available services and
rates. Because barriers to entry into the car wash industry are relatively low,
competition may be expected to continually arise from new sources not currently
competing with us. In this sector of our business we also face competition from
outside the car wash industry, such as gas stations and convenience stores, that
offer automated car wash services. In some cases, these competitors may have
significantly greater financial and operating resources than we do. In our car
service businesses, we face competition from a number of sources, including
regional and national chains, gasoline stations and companies and automotive
companies and specialty stores, both regional and national.
Our operations are dependent substantially on the services of our executive
officers. If we lose one or more of our executive officers, the loss could have
a material adverse effect on our business and results of operations. We do not
maintain key-man life insurance policies on our executive officers.
Our Preferred Stock may affect the rights of the holders of our common
stock; it may also discourage another person to acquire control of Mace. Our
Certificate of Incorporation authorizes the issuance of up to 10,000,000 shares
of Preferred Stock. 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,
15
and (iii) the holders of Common Stock not being entitled to share in the
Company's assets upon liquidation until satisfaction of any liquidation
preference granted to the Preferred Stock.
The Preferred Stock may be viewed as having the effect of discouraging an
unsolicited attempt by another person to acquire control of Mace and may
therefore have an anti-takeover effect. Issuances of authorized preferred
shares can be implemented, and have been implemented by some companies in recent
years with voting or conversion privileges intended to make an acquisition of
the company more difficult or costly. 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.
Some provisions of Delaware law may prevent us from being acquired. 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 a person who is an "interested stockholder" for a period of three (3)
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 price for our
common stock above its market price.
We do not expect to pay cash dividends on our common stock. We do not
expect to pay any cash dividends on our common stock in the foreseeable future.
We will reinvest any cash otherwise available for dividends in our business.
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 Mace in particular historical periods, working capital deficits
of Mace at particular dates, information relating to pending and recently
completed acquisitions, descriptions of new or changed federal or state
regulations applicable to Mace, data relating to remediation and the actions
taken by Mace, and estimates at various times of Mace's potential liabilities
for compliance with environmental laws or in connection with pending litigation.
Results of Operations for the Six Months Ended June 30, 2001 Compared to
the Six Months Ended June 30, 2000
Revenues
Car Care Services
The Company owns 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. The Company earns 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 the six months ended June 30, 2001 for the car care segment were comprised
of approximately 83% car wash and detailing, 9% lube and other automotive
services, 8% fuel and merchandise.
The majority of revenues are collected in the form of cash or credit card
receipts, thus minimizing customer accounts receivable.
Weather can have a significant impact on volume at the individual locations.
However, the Company believes that the geographic diversity of its operating
locations minimizes weather-related influence on its volume.
Security Products
The Company is currently being paid $20,000 per month under a Management
Agreement which allows Mark Sport, Inc. an entity controlled by Jon E. Goodrich,
a director of the Company, to operate the Security Products segment. Total
revenues under the Management Agreement were $120,000 for the six months ending
June 30, 2001.
Computer Products and Services
The Company's computer products and services subsidiary, ICS, was sold in June
of 2000 and has accordingly been reflected as discontinued operations in 2000.
16
Cost of Revenues
Car Care Services
Cost of revenues consists primarily of direct labor and related taxes and
benefits, chemicals, wash and detailing supplies, rent, real estate taxes,
utilities, maintenance and repairs of equipment and facilities, as well as the
cost of the fuel and merchandise sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of management,
clerical and administrative salaries, professional services, insurance premiums,
and costs relating to marketing and sales.
The Company capitalizes direct incremental costs associated with purchase
acquisitions. Indirect acquisition costs, such as executive salaries, corporate
overhead, public relations, and other corporate services and overhead are
expensed as incurred. The Company also charges as an expense any capitalized
expenditures relating to proposed acquisitions that management has determined
will not be consummated.
At June 30, 2001, capitalized costs related directly to proposed acquisitions
that were not yet consummated were approximately $32,000. The Company
periodically reviews the future likelihood of these acquisitions and records
appropriate provisions against capitalized costs associated with projects that
are not likely to be completed.
Depreciation and Amortization
Depreciation and amortization consists primarily of depreciation of buildings
and equipment, and amortization of goodwill and other intangible assets.
Buildings and equipment are depreciated over the estimated useful lives of the
assets using the straight- line method. Goodwill is amortized on a straight-
line basis over 25 years. Other intangibles are amortized over their useful
lives ranging from three to twenty years, using the straight line method.
Interest Expense, Net
Interest expense, net of interest income, for the six months ended June 30, 2001
was $1,551,000 compared to $1,472,000 for the six months ended June 30, 2000.
This increase is the result of additional interest expense on borrowings
relating to several acquisitions in the six month period ended June 30, 2000 and
additional working capital borrowings through a refinancing in the last quarter
of 2000. This increase was partially offset by a decrease in interest rates on
approximately 50% of the Company's long term debt which has interest rates tied
to the prime rate.
Other Income and Expense
Other income and expense includes gains and losses on the sale of equipment and
rental income received on renting out excess space at the Company's car wash
facilities.
Taxes
Income tax expense is derived from tax provisions for interim periods that are
based on the Company's estimated annual effective rate. Currently, the
effective rate differs from the federal statutory rate primarily due to state
and local income taxes, non-deductible costs related to acquired intangibles,
and the use of net operating loss carryforwards.
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues:
Six Months Ended
June 30,
--------------------
2001 2000
-------- --------
Revenues 100.0% 100.0%
Cost of revenues 70.5 71.2
Selling, general and administrative expenses 14.5 14.9
Depreciation and amortization 5.2 4.9
Costs of terminated acquisitions 0.3 2.4
------- -------
Operating income 9.5 6.6
17
Six Months Ended
June 30,
--------------------
2001 2000
------- ---------
Interest expense, net (6.0) (6.2)
Other income 0.5 0.9
------- ---------
Income from continuing operations
before income taxes 4.0 1.3
Income tax expense 1.5 0.4
------- ---------
Income from continuing operations 2.5 0.9
Loss from discontinued operations - (1.1)
Gain on disposal of ICS - 3.0
------- --------
Net income 2.5% 2.8%
======= ========
Revenues
Car Care Services
Revenues for the six months ended June 30, 2001 were $25.75 million as compared
to $23.83 million for the six months ended June 30, 2000, an increase of $1.92
million or 8.1%. Of the $1.92 million increase, approximately $2.57 million was
from wash and detail services, which was partially offset by decreases of
approximately $63,000 in lube sales, and $550,000 in fuel and merchandise sales.
Of the $25.75 million of revenues for the six months ended June 30, 2001, $21.4
million or 83% was generated from car wash and detailing, $2.4 million or 9%
from lube and other automotive services, and $2.0 million or 8% from fuel and
merchandise sales. Of the $23.8 million of revenues for the six months ended
June 30, 2000, $18.8 million or 79% was generated from car wash and detailing,
$2.4 million or 10% from lube and other automotive services, and $2.6 million or
11% from fuel and merchandise sales. The net increase in total revenue in 2001
is attributable to revenues earned at a car wash and five truck washes the
Company acquired during 2000; internal growth through a focus on selling
detailing and additional on-line car wash services which increased the average
wash and detailing revenue per car by 10.8% or $1.33 to $13.65 in the six months
ended June 30, 2001 from $12.32 per car in the first half of 2000; offset
partially by an approximate $613,000 or 12.2% decline in lube services, fuel and
merchandise sales.
During the six months ended June 30, 2000, the Company managed three car wash
locations under operating agreements, under which the Company was entitled to
all profits generated from the operation of those locations. The income earned
under the agreements is shown as revenue net of related operating expenses.
Gross revenue generated by the locations under operating agreements for the six
months ended June 30, 2000 was $857,000. No locations were operated under
operating agreements during the six months ended June 30, 2001.
Security Products
During the six months ended June 30, 2001, pursuant to a Management Agreement,
the Company was paid $120,000. This amount is included under revenues from
operating agreements. The Company was paid $100,000 under this Agreement for
the six months ended June 30, 2000.
Cost of Revenues
Car Care Services
Cost of revenues for the six months ended June 30, 2001 were $18.2 million or
71% of revenues with car washing and detailing costs at 69% of respective
revenues, lube and other automotive services costs at 76% of respective
revenues, and fuel and merchandise costs at 89% of respective revenues.
Cost of revenues for the six months ended June 30, 2000 were $17.0 million, or
71% of revenues. However, because income earned under operating agreements is
shown as a net figure in revenue, already reduced by cost of revenues, the cost
of revenue percentage for this segment is better analyzed on a gross method.
With revenues and cost of revenues for locations under operating agreement shown
on a gross basis, total cost of revenues for the six months ended June 30, 2000
was $17.8 million or 72% of revenues for this segment, with car wash and
detailing costs at 70% of respective revenues, lube and other automotive
services costs at 76% of respective revenues, and fuel and merchandise costs at
86% of respective revenues. With the Company's increase in its average wash and
detailing revenues per car by $1.30 or 10.5% since the first half of 2000 and
continued emphasis on controlling operating costs, the Company has a net
increase in wash and detailing operating margins in the current year. The
overall increase in margin is partially offset by a 2.7% reduction in car wash
volume due largely to inclement weather in the
18
current year. In the six months ended June 30, 2001, approximately 50% of the
Company's operating days within its markets were rainy or cloudy as compared to
37% in the six months ended June 30, 2000.
Security Products
During 2000 and 2001, pursuant to a Management Agreement, no costs were incurred
by the Company.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six months ended June 30,
2001 were $3.76 million compared to $3.56 million for the same period in 2000,
an increase of approximately $200,000 or 5.5%. SG&A costs as a percent of
revenues were 14.5% for the six months ended June 30, 2001 as compared to 14.9%
in the first half of 2000. Most of this increase is as a result of SG&A costs
incurred at the six additional locations acquired during 2000 and two sites
transitioned from operating agreements to being owned. The remainder of the
increase is primarily the result of increases in advertising, insurance costs
and business taxes. This increase was partially offset by a reduction of
administrative costs as a result of efficiencies gained through consolidating
all regional back office activity into the Mt. Laurel, New Jersey corporate
office.
In the second quarter of 2001, the Company wrote off approximately $73,000 of
acquisition costs associated with terminated pending acquisitions.
Additionally, in the second quarter of 2000, the Company wrote off $580,000 of
acquisition related costs associated with terminated pending acquisitions.
Depreciation and Amortization
Depreciation and amortization totaled $1.35 million for the six months ended
June 30, 2001 as compared to $1.17 million for the same period in 2000. This
increase is primarily attributable to the six additional sites acquired during
2000 and two sites transitioned from an operating agreement to being owned.
Taxes
The Company recorded a tax expense of $388,000 for the six months ended June 30,
2001. Tax expense reflects the recording of income taxes at an effective rate
of 37%. The effective rate differs from the federal statutory rate primarily
due to state and local income taxes, non-deductible costs related to acquired
intangibles, and the use of net operating loss carryforwards.
Results of Operations for the Three Months Ended June 30, 2001 Compared to the
Three Months Ended June 30, 2000
Revenues
Car Care Services
Revenues for the three months ended June 30, 2001 were $13.0 million as compared
to $12.1 million for the three months ended June 30, 2000, an increase of $0.9
million or 7.2%. Of the $0.9 million increase, approximately $1.2 million was
from wash and detail services, which was partially offset by decreases of
approximately $86,000 in lube sales and $232,000 in fuel and merchandise sales.
Of the $13.0 million of revenues for the three months ended June 30, 2001, $10.8
million or 83% was generated from car wash and detailing, $1.1 million or 9%
from lube and other automotive services, and $1.1 million or 8% from fuel and
merchandise sales. Of the $12.1 million of revenues for the three months ended
June 30, 2000, $9.5 million or 79% was generated from car wash and detailing,
$1.2 million or 10% from lube and other automotive services, and $1.3 million or
11% from fuel and merchandise sales. The $1.2 million increase in wash and
detail services was attributable to internal price growth through a focus on
selling detailing and additional on-line car wash services which increased the
average wash and detailing revenue per car by 9.2% or $1.18 to $13.97 in the
three months ended June 30, 2001 from $12.79 per car in the three months ended
June 30, 2000.
During the three months ended June 30, 2000, the Company managed three car wash
locations under operating agreements, under which the Company was entitled to
all profits generated from the operation of those locations. The income earned
under the agreements is shown as revenue net of related operating expenses.
Gross revenue generated by the locations under operating agreements for the
three months ended June 30, 2000 was $648,000. No locations were operated under
operating agreements during the three months ended June 30, 2001.
19
Security Products
During the three months ended June 30, 2001, pursuant to a Management Agreement,
the Company was paid $60,000. This amount is included under revenues from
operating agreements. The Company was paid $60,000 under this Agreement for the
three months ended June 30, 2000.
Cost of Revenues
Car Care Services
Cost of revenues for the three months ended June 30, 2001 were $9.1million or
70% of revenues with car washing and detailing costs at 68% of respective
revenues, lube and other automotive services costs at 77% of respective
revenues, and fuel and merchandise costs at 88% of respective revenues.
Cost of revenues for the three months ended June 30, 2000 were $8.8 million, or
73% of revenues. However, because income earned under operating agreements is
shown as a net figure in revenue, already reduced by cost of revenues, the cost
of revenue percentage for this segment is better analyzed on a gross method.
With revenues and cost of revenues for locations under operating agreement shown
on a gross basis, total cost of revenues for the three months ended June 30,
2000 was $9.4 million or 73% of revenues for this segment, with car wash and
detailing costs at 72% of respective revenues, lube and other automotive
services costs at 77% of respective revenues, and fuel and merchandise costs at
87% of respective revenues. With the Company's increase in average wash and
detailing revenue per car in the current quarter of $1.10 or 8.6% as compared to
the same quarter in the prior year and continued emphasis on controlling
operating costs, the Company has achieved improved wash and detailing operating
margins.
Security Products
During 2000 and 2001, pursuant to a Management Agreement, no costs were incurred
by the Company.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended June 30,
2001 were $1.9 million compared to $1.9 million for the same period in 2000.
SG&A costs as a percent of revenues were 14.7% for the three months ended June
30, 2001 as compared to 15.7% in the second quarter of 2000.
Depreciation and Amortization
Depreciation and amortization totaled $678,000 for the three months ended June
30, 2001 as compared to $606,000 for the same period in 2000. This increase is
primarily attributable to the six additional sites acquired during 2000 and two
sites transitioned from an operating agreement to being owned.
In the second quarter of 2001, the Company wrote off approximately $73,000 of
acquisition costs associated with terminated pending acquisitions.
Additionally, in the second quarter of 2000, the Company wrote off $580,000 of
acquisition related costs associated with terminated pending acquisitions.
Interest Expense, Net
Interest expense, net of interest income, for the three months ended June 30,
2001 was $733,000 compared to $759,000 for the three months ended June 30, 2000.
This decrease is the result of the decrease in interest rates on approximately
50% of the Company's long term debt which has interest rates tied to the prime
rate. This decrease was partially offset by additional working capital
borrowings through a refinancing of certain long term debt in the last quarter
of 2000.
Taxes
The Company recorded a tax expense of $210,000 for the three months ended June
30, 2001. Tax expense reflects the recording of income taxes at an effective
rate of 37%. The effective rate differs from the federal statutory rate
primarily due to state and local income taxes, non-deductible costs related to
acquired intangibles, and the use of net operating loss carryforwards.
20
Liquidity and Capital Resources
The Company's business requires substantial amounts of capital, most notably to
pursue the Company's acquisition strategies and for equipment purchases and
upgrades. The Company plans to meet these capital needs from various financing
sources, including borrowings, internally generated funds, and the issuance of
common stock as the market price of the Company's stock improves.
As of June 30, 2001, the Company had positive working capital of approximately
$3.1 million and cash and cash equivalents of $5.2 million. For the six months
ended June 30, 2001, net cash provided by operations was approximately $1.5
million, net cash used in financing activities was approximately $1.1 million
and net cash used in investing activities was approximately $11,000 resulting in
a net increase in cash and cash equivalents of approximately $386,000. Capital
expended during the period included approximately $445,000 for the purchase of
operating equipment, real estate, and intangibles.
The Company's acquisition program and operations to date have required
substantial amounts of working capital, and the Company expects to continue to
expend funds to support its acquisition program and capital needs for
equipment. The Company estimates aggregate capital expenditures, exclusive of
acquisitions of businesses, of approximately $300,000 for the remainder of the
year ending December 31, 2001.
At June 30, 2001, the Company had borrowings of $35.8 million. The Company has
a $400,000 letter of credit outstanding at June 30, 2001 as collateral relating
to an insurance policy. The Company does not maintain a revolving credit
facility. During 2000, the Company refinanced on a long term basis under
favorable terms the majority of its short term debt related to its 1999 and 2000
acquisitions. In February 2000, the Company entered into a $4.8 million term
loan with Bank One, Texas, NA ("Bank One") to refinance the remaining balance of
a short term promissory note related to the Genie acquisition and entered into
several new loan agreements with Bank One to finalize the assumption of notes
held by Bank One relating to the Colonial acquisition. Additionally, in
November 2000, the Company entered into a $6.7 million three year term note (15
year amortization basis) with Bank One to refinance a $1.3 million convertible
promissory note to Bullseye Properties assumed in connection with the
acquisition of Eager Beaver, a $2.1 million SouthTrust Bank note maturing in May
2001, and a $1.0 million promissory note related to the Red Baron Truck Wash
acquisition. The Bank One term note also provided approximately $800,000 for
the purchase of the leased Beneva Car Wash property and approximately $1.6
million of additional funding, net of loan closing costs, for capital
improvements and working capital.
The Company also had various other long term mortgage notes up for periodic
review during 2001 which the Company has been successful in renewing. Several
of the Company's debt agreements as amended contain certain affirmative and
negative covenants and require the maintenance of certain levels of tangible net
worth and the maintenance of certain debt coverage ratios on an individual
subsidiary and consolidated level. The Company is currently in compliance with
these covenants.
On April 5, 2000, the Company executed a master facility agreement with Fusion
Capital Fund II, LLC ("Fusion") pursuant to which Fusion agreed to enter into up
to two equity purchase agreements, each with an aggregate principal amount of
$12.0 million. The equity purchase agreements allow the Company to suspend the
purchasing of its common stock by Fusion if the price of the Company's common
stock is less than $7.00 per share. The Company is currently not permitting the
purchase of its common stock under the equity purchase agreement due to the
current low trading value of the Company's common stock and the potentially
dilutive effect of such stock purchases. When the Company agrees to the
purchase of its stock, Fusion has the right to purchase from the Company shares
of common stock up to $12.0 million at a price equal to the lesser of (1) 140%
of the average of the closing bid prices for our common stock during the 10
trading days prior to the date of the applicable equity purchase agreement or
$7.00, whichever is greater or (2) a price based upon the future performance of
the common stock, in each case without any fixed discount to the market price.
As long as the Company has not suspended Fusion from purchasing its stock, the
equity purchase agreement requires that at the beginning of each month, Fusion
will pay $1.0 million to the Company as partial prepayment for the common stock.
Once the $1.0 million has been applied to purchase shares of our common stock,
Fusion will pay the remaining principal amount upon receipt of our common stock.
The first equity purchase agreement was executed by Fusion on April 17, 2000.
Proceeds from purchased shares through June 30, 2001 totaled approximately $1.3
million. The second equity purchase agreement will be executed after delivery
of an irrevocable written notice by the Company to Fusion stating that we elect
to enter into such purchase agreement with Fusion. The second equity purchase
agreement may be entered into only after the principal amount under the first
equity purchase agreement is fully converted into the Company's common stock.
21
Seasonality and Inflation
The Company believes that its car washing and detailing operations are adversely
affected by periods of inclement weather. The Company has mitigated and intends
to continue to mitigate the impact of inclement weather through geographic
diversification of its operations.
The Company believes that inflation and changing prices have not had, and are
not expected to have any material adverse effect on its results of operations in
the near future.
Year 2000
The Company completed its year 2000 remediation plan prior to the end of 1999.
Although we believe our year 2000 remediation plan was adequate to address the
year 2000 issue, the Company is continually acquiring new businesses and
locations, which may require an on-going process to convert, assess, and if
necessary, remediate newly acquired systems. This issue is part of our standard
due diligence when evaluating potential acquisitions so that remedial efforts,
if any, can be evaluated and scheduled.
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PART II
OTHER INFORMATION
Item 5. Other Information
On April 19, 2001, the Company was advised by Nasdaq that its common stock had
failed to trade above one dollar for thirty consecutive business days, and was
therefore not in compliance with Marketplace Rule 4450(a)(5) of the Nasdaq
National Market. Nasdaq advised the Company that it had until July 18, 2001 to
maintain a bid price of at least one dollar for ten consecutive business days or
be delisted. The Company maintained a minimum bid price of at least one dollar
for ten consecutive business days ending May 4, 2001. On May 11, 2001, the
Company was advised by Nasdaq that it was in compliance with Market Place Rule
4450(a)(5) and was not subject to being delisted.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
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)).
(b) Current Reports on Form 8-K or 8-K/A:
On April 23, 2001, the Company filed a report on Form 8-K dated
April 19, 2001, under Item 5 to report communication received
from Nasdaq regarding the Company's failure to maintain a minimum
bid price of $1.00 over the prior 30 consecutive trading days.
23
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant 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, Chief Executive Officer
and President
BY: /s/ Gregory M. Krzemien
-------------------------
Gregory M. Krzemien, Chief Financial Officer
BY: /s/ Ronald R. Pirollo
-------------------------
Ronald R. Pirollo, Controller (Principal Accounting Officer)
DATE: August 9, 2001
24