===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2000 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
160 Benmont Avenue, Bennington, VT 05201
(Former Address of Principal Executive Offices)
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 May 8, 2000 24,494,513 Shares of Common Stock
===============================================================================
Mace Security International, Inc.
Form 10-QSB
Quarter Ended March 31, 2000
Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 2000
and December 31, 1999 2
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999 (Restated) 4
Condensed Consolidated Statement of Stockholders' Equity
for the three months ended March 31, 2000 5
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999 (Restated) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II - OTHER INFORMATION
Item 5 - Other Information 22
Item 6 - Exhibits and Reports on Form 8-K 22
1
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Mace Security International, Inc.
Condensed Consolidated Balance Sheets
March 31, December 31,
ASSETS 2000 1999
-------------- --------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 3,316,448 $ 2,320,804
Accounts receivable, less allowance for doubtful
accounts of $91,771 and $102,393 in 2000 and 1999,
respectively 1,699,396 1,874,547
Inventory 3,059,030 2,800,853
Deferred income taxes 146,500 139,705
Prepaid expenses and other current assets 1,547,272 2,506,853
-------------- --------------
Total current assets 9,768,646 9,642,762
Property and equipment:
Land 30,429,075 30,429,075
Buildings and leasehold improvements 34,061,105 31,718,084
Machinery and equipment 6,769,060 6,329,030
Furniture and fixtures 232,911 231,936
-------------- --------------
Total property and equipment 71,492,151 68,708,125
Accumulated depreciation and amortization (4,205,589) (3,826,784)
-------------- --------------
67,286,562 64,881,341
Excess of cost over net assets of acquired businesses, net of
accumulated amortization of $486,692 and $276,605 in 2000
and 1999, respectively 21,240,032 20,723,085
Other intangible assets, net of accumulated amortization
of $1,186,863 and $1,144,428 in 2000 and 1999, respectively 1,259,633 1,029,347
Other assets 1,896,817 1,838,821
-------------- --------------
Total assets $101,451,690 $98,115,356
============== ==============
See accompanying notes.
2
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
-------------- --------------
(Unaudited)
Current liabilities:
Current portion of notes payable to related parties $ 1,477,571 $ 1,493,806
Current portion of long-term debt 3,427,794 3,102,003
Current portion of capital lease obligations 62,028 66,371
Accounts payable 2,947,938 3,372,950
Income taxes payable 139,426 110,725
Deferred revenue 365,544 557,154
Accrued expenses and other current liabilities 2,195,466 2,342,299
-------------- --------------
Total current liabilities 10,615,767 11,045,308
Deferred income taxes 681,248 587,625
Long-term debt, net of current portion 28,284,345 27,794,865
Capital lease obligations, net of current portion 313,959 327,232
Other liabilities 245,622 1,792,498
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 50,000,000
Issued and outstanding shares - none - -
Common stock, $.01 par value:
Authorized shares - 200,000,000
Issued and outstanding shares of 23,901,805 and
22,821,675 in 2000 and 1999, respectively 239,018 228,216
Additional paid-in capital 68,444,259 63,992,607
Accumulated deficit (7,320,140) (7,600,607)
-------------- --------------
61,363,137 56,620,216
Less treasury stock at cost - 256,666 common shares (52,388) (52,388)
-------------- --------------
Total stockholders' equity 61,310,749 56,567,828
-------------- --------------
Total liabilities and stockholders' equity $101,451,690 $98,115,356
============== ==============
See accompanying notes.
3
Mace Security International, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
March 31,
--------------------------------------
2000 1999
--------------- ---------------
(Restated)
Revenues:
Car wash and detailing services $ 9,280,718 $1,354,020
Lube and other automotive services 1,182,953 34,266
Fuel and merchandise sales 1,267,082 72,542
Security product sales - 703,881
Computer products and services 358,233 664,366
Operating agreements 29,481 -
--------------- ---------------
12,118,467 2,829,075
Cost of revenues:
Car wash and detailing services 6,257,480 695,086
Lube and other automotive services 884,074 28,269
Fuel and merchandise sales 1,083,723 41,338
Security product sales - 364,032
Computer products and services 404,274 394,816
--------------- ---------------
8,629,551 1,523,541
Selling, general and administrative expenses 1,862,559 1,145,836
Depreciation and amortization 577,084 134,920
--------------- ---------------
Operating income 1,049,273 24,778
Interest expense, net (720,934) (37,041)
Other income (expense) 84,128 (45,683)
--------------- ---------------
Income (loss) from continuing operations before
income taxes 412,467 (57,946)
Income tax expense 132,000 -
--------------- ---------------
Income (loss) from continuing operations 280,467 (57,946)
Loss from discontinued operations, net of $0
applicable income taxes - (114,055)
--------------- ---------------
Net income (loss) $ 280,467 $ (172,001)
=============== ===============
Basic income (loss) per share
From continuing operations $ 0.01 $ (0.01)
From discontinued operations - (0.01)
--------------- ---------------
Total $ 0.01 $ (0.02)
=============== ===============
Weighted average number of shares outstanding 23,175,411 8,191,820
=============== ===============
Diluted income (loss) per share
From continuing operations $ 0.01 $ (0.01)
From discontinued operations - (0.01)
--------------- ---------------
Total $ 0.01 $ (0.02)
=============== ===============
Weighted average number of shares outstanding 24,778,754 8,191,820
=============== ===============
See accompanying notes.
4
Mace Security International, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Number of Par Value Additional
Common of Common Paid-in Accumulated Treasury
Shares Stock Capital Deficit Stock Total
----------- ----------- ------------- ------------- ---------- -------------
Balance at December 31, 1999...... 22,821,675 $228,216 $63,992,607 $(7,600,607) $(52,388) $56,567,828
Exercise of common stock options
and warrants..................... 33,750 338 69,004 69,342
Common stock issued in purchase
acquisitions..................... 879,874 8,799 3,740,696 3,749,495
Common stock issued for services.. 40,000 400 199,600 200,000
Common stock issued to satisfy
debt obligation.................. 106,985 1,070 385,787 386,857
Common stock issued for debt
guarantee........................ 19,521 195 68,129 68,324
Other............................. (11,564) (11,564)
Net income........................ 280,467 280,467
---------- ---------- ------------ ------------ --------- ------------
Balance at March 31, 2000......... 23,901,805 $239,018 $68,444,259 $(7,320,140) $(52,388) $61,310,749
========== ========== ============ ============ ========= ============
See accompanying notes.
5
Mace Security International, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
----------------------------------
2000 1999
------------ -------------
(Restated)
Operating activities
Net income (loss) $ 280,467 $ (172,001)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 577,084 134,920
Provision for losses on receivables 12,361 105,877
Write-down of assets - 99,666
Deferred income taxes 98,169 -
Changes in operating assets and liabilities:
Accounts receivable 162,790 (422,703)
Inventory (232,685) (188,221)
Accounts payable (439,391) (169,260)
Deferred revenue (191,610) 22,020
Accrued expenses (209,976) 404,812
Income taxes 17,360 (600)
Prepaid expenses and other current assets 1,342,267 2,077
Discontinued operations - 147,565
Other - (76,732)
------------ -------------
Net cash provided by (used in) operating activities 1,416,836 (112,580)
Investing activities
Purchase of property and equipment (284,024) (88,467)
Payments for intangibles (249,928) (13,349)
Payments received on notes receivable from shareholder - 475,000
Deposits and other prepaid costs on future acquisitions (101,438) -
------------ -------------
Net cash (used in) provided by investing activities (635,390) 373,184
Financing activities
Proceeds from revolving line of credit, long term
debt and capital lease obligations 950,000 -
Payments on revolving line of credit, long-term
debt and capital lease obligations (790,653) (40,837)
Proceeds from issuance of common stock, net of
offering costs 57,778 483,250
Net payments on note payable to shareholder (2,927) (4,895)
Dividends paid to former stockholders of pooled companies - (492,999)
------------ -------------
Net cash provided by (used in) financing activities 214,198 (55,481)
------------ -------------
Net increase in cash and cash equivalents 995,644 205,123
Cash and cash equivalents at beginning of period 2,320,804 4,672,695
------------ -------------
Cash and cash equivalents at end of period $3,316,448 $4,877,818
============ =============
See accompanying notes.
6
Mace Security International, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed 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 condensed 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
Company has restated previous financial information for the three months ended
March 31, 1999 to reflect the acquisitions of Innovative Control Systems, Inc.
("ICS") on July 9, 1999, 50's Classic Car Wash of Lubbock, Inc. and CRCD, Inc.
(collectively "50's Classic") on August 25, 1999, and Eager Beaver Car Wash,
Inc. ("Eager Beaver") on September 9, 1999, all accounted for as poolings of
interests. Although the 1998 fiscal year end of Eager Beaver was January 31,
1999, the consolidated results of operations of the Company for the three months
ended March 31, 1999 include the results of operations of Eager Beaver for the
same three month period. The results of operations for the three month period
ended March 31, 2000 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 for the year ended
December 31, 1999.
2. Significant Accounting Policies
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which was
effective for fiscal years beginning after June 15, 1999. SFAS No. 133 must be
adopted prospectively and retroactive application is not permitted. SFAS No.
133 will require the Company to record all derivatives on the balance sheet at
fair value. Changes in derivative fair values will either be recognized in
earnings as offsets to the changes in fair value of related hedged assets,
liabilities and firm commitments or for forecasted transactions, deferred and
recorded as a component of accumulated other comprehensive income (loss) in
stockholders' equity until the hedged transactions occur and are recognized in
earnings. The ineffective portion of a hedging derivative's change in fair
value will be immediately recognized in earnings. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133". SFAS No. 133 is now
effective for fiscal years beginning after June 15, 2000. The Company expects
to adopt SFAS No. 133 on January 1, 2001 and does not believe the effect of
adopting SFAS No. 133 will have any material effect on its consolidated
financial position or results of operations.
3. Business Combinations
The Company has been a well known producer of less-than-lethal defense sprays
for the consumer market and a marketer of consumer safety and security products.
The Company has recently undergone a change in control (discussed elsewhere in
these notes), and has implemented a strategic plan to enter the car care
industry through acquisitions of existing and well-managed car care facilities
nationwide.
Since April 1, 1999, the Company has acquired 60 car care facilities and five
truck wash facilities through the acquisition of 15 separate businesses. The car
washes include 46 full service facilities, one self service facility, and 13
exterior only facilities in Pennsylvania, New Jersey, Delaware, Texas, Florida
and Arizona. The five full service truck wash facilities are located in Arizona,
Indiana, Ohio and Texas. Additionally, the Company is managing, under operating
agreements, a full service facility in Texas, and two truck wash facilities in
Texas.
Of the 15 acquisitions completed through March 31, 2000, 12 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 condensed consolidated statements of operations since the date
7
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
will be finalized within one year from the date of acquisition.
Acquisitions Accounted for Under the Purchase Method
On May 17, 1999, the Company acquired all of the outstanding stock of Colonial
Full Service Car Wash, Inc. ("Colonial") in exchange for 1,250,991 unregistered
shares of the Company's common stock and the assumption of debt and negative
working capital of approximately $6,579,000. This transaction has been
accounted for using the purchase method of accounting.
On May 18, 1999, the Company acquired certain assets of Genie Car Wash of
Austin, Inc., Genie Car Care Center, Inc., and Genie Car Service Center, Inc.
(collectively, "Genie"). Consideration under the Agreement consisted of 533,333
unregistered shares of common stock of the Company, $1,000,000 of cash, and the
issuance of promissory notes in the amounts of $4,750,000 and $180,000. The
assets acquired consist of substantially all of the real estate, equipment, and
inventories utilized in the car wash businesses. This transaction has been
accounted for using the purchase method of accounting.
On June 1, 1999, the Company acquired substantially all of the assets of Gabe's
Plaza Car Wash, Inc. ("Gabe's") in exchange for $210,000 in cash and delivery of
a promissory note for $717,000. The transaction has been accounted for using
the purchase method of accounting.
On June 22, 1999, the Company acquired substantially all of the assets of the
Moorestown Car Wash in exchange for $225,000 and the issuance of 20,930
unregistered shares of common stock of the Company. This transaction has been
accounted for using the purchase method of accounting.
On July 1, 1999, the Company completed, pursuant to a Merger Agreement dated
March 26, 1999, its merger with American Wash Services, Inc. ("AWS"), a car wash
company controlled by Louis D. Paolino, Jr., the Company's Chairman, Chief
Executive Officer and President, pursuant to which AWS was merged with and into
a wholly-owned subsidiary of the Company. Mr. Paolino and Red Mountain
Holdings, Ltd., AWS's other shareholder, received in exchange for all of the
shares of AWS, $4.8 million in cash, and 628,362 unregistered shares of Common
Stock, of which Mr. Paolino received 470,000 shares and Red Mountain received
158,362 shares. Mr. Paolino and Mr. Robert M. Kramer, the current Executive
Vice President and General Counsel of the Company, received additional
consideration in connection with this merger:
. Mr. Paolino received a warrant to purchase 1,500,000 shares of Common Stock
at a purchase price of $1.375 per share;
. Mr. Paolino received a warrant to purchase 250,000 shares of Common Stock at
a purchase price of $2.50 per share; and
. Mr. Kramer received a warrant to purchase 75,000 shares of Common Stock at a
purchase price of $1.375 per share.
The transaction has been accounted for as a purchase.
On July 1, 1999, the Company acquired substantially all the assets of Stephen
Bulboff and Stephen B. Properties, Inc. (collectively, "Shammy Shine" or
"Stephen Bulboff") in exchange for 860,000 unregistered shares of common stock
of the Company and cash consideration of $1,900,000. Stephen Bulboff owns and
operates a total of ten exterior only car washes in Pennsylvania, New Jersey and
Delaware. This transaction has been accounted for as a purchase.
On August 24, 1999, the Company acquired, through a wholly owned subsidiary,
substantially all of the assets of Shammy Man Car Wash ("Shammy Man") in
exchange for 62,649 unregistered shares of common stock cash consideration of
$475,000 and the assumption of approximately $400,000 of debt. This transaction
has been accounted for using the purchase method of accounting.
On September 9, 1999, the Company acquired all of the assets of Quaker Car Wash,
Inc. ("Quaker") in exchange for 224,072 unregistered shares of common stock and
approximately $1,055,000 of cash consideration. This transaction has been
accounted for using the purchase method of accounting.
On October 18, 1999, the Company, through a wholly owned subsidiary, acquired
all of the car wash related assets of White Glove Car Wash ("White Glove")
located in Tempe, Arizona. Consideration consisted of 38,095 unregistered
shares of common stock of the Company, $130,000 of cash, and the issuance of a
$345,000 promissory note. The transaction has been accounted for using the
purchase method of accounting.
On October 29, 1999, the Company consummated the acquisition of Millennia Car
Wash, LLC ("Millennia") which the Company operated under an operating agreement
from April 1, 1999 to October 28, 1999. Millennia consists of 11 full service
8
car washes in the Phoenix, Arizona market and four full service car washes in
the San Antonio, Texas market as well as a total of five lube and repair
centers, eight fuel sales operations, and 17 convenience stores. Consideration
under the agreement, as amended, consisted of 3,500,000 unregistered shares of
common stock of the Company and the assumption of approximately $15.0 million of
long-term debt. The transaction has been accounted for using the purchase method
of accounting.
On December 29, 1999, the Company, through a wholly owned subsidiary, acquired
all of the assets of Cherry Hill Car Wash, Inc. and 1505 Associates General
Partnership (collectively, "Cherry Hill Car Wash") located in Cherry Hill, New
Jersey. Consideration consisted of 63,309 unregistered shares of common stock of
the Company and $1,900,000 of cash. The transaction has been accounted for using
the purchase method of accounting.
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.
Additionally, on March 8, 2000, the Company entered into a merger agreement with
Wash Depot Holdings, Inc. ("Wash Depot"). Under the Merger Agreement, Wash Depot
will be merged into a subsidiary of the Company. If the merger closes, the
Company will issue approximately 8.0 million shares of the Company's common
stock, par value $.01, and assume approximately $153 million of long-term debt.
Wash Depot, an operator of 73 car wash locations in 15 states, is a private
company headquartered in Saugus, Massachusetts. Of Wash Depot's 73 car wash
locations, all contain professional detailing services, 72 contain convenience
stores or similar related retail product shops, 15 contain oil and lubrication
centers and eight contain gasoline dispensing services. Closing under the
agreement is subject to several conditions, including: Mace and Wash Depot
shareholder approvals, lender consents, antitrust clearance and other typical
closing conditions. Though the Company is optimistic that closing will occur, no
assurance can be given that the closing conditions will be satisfied. The
transaction, should it close, will be accounted for using the purchase method of
accounting.
Acquisitions Accounted for Under the Pooling of Interests Method
On July 9, 1999, the Company acquired all of the outstanding shares of
Innovative Control Systems, Inc. ("ICS"). Approximately 604,000 unregistered
shares of common stock of the Company were issued in exchange for all of the
outstanding shares of ICS. Additionally, the Company assumed approximately
$750,000 of ICS's debt. ICS is the premier supplier and developer of
computerized management control systems for the car wash, lube center and
convenience store industries. The transaction has been accounted for using the
pooling of interests method of accounting; and accordingly, the accompanying
consolidated financial statements include the accounts of ICS for all periods
presented.
On August 25, 1999, the Company acquired all of the outstanding shares of 50's
Classic Car Wash of Lubbock, Inc. and CRCD, Inc. (collectively, "50's Classic").
Approximately 91,700 shares of unregistered shares of common stock of the
Company were issued in exchange for all of the outstanding shares of 50's
Classic. Additionally, the Company assumed at closing approximately $617,000 of
50's Classic's debt. 50's Classic owns and operates a full service car wash in
Lubbock, Texas. The transaction has been accounted for using the pooling of
interests method of accounting; and accordingly, the accompanying consolidated
financial statements include the accounts of 50's Classic for all periods
presented.
On September 9, 1999, the Company acquired all of the outstanding shares of
Eager Beaver Car Wash, Inc. ("Eager Beaver") for consideration of approximately
659,200 unregistered shares of common stock of the Company. Additionally, the
Company assumed approximately $3.8 million of debt. Eager Beaver owns and
operates five full service car washes on the west coast of Florida that provide
a complete line of car care services including washing, waxing, and lubrication
services. The transaction has been accounted for using the pooling of interests
method of accounting; and accordingly, the accompanying consolidated financial
statements include the accounts of Eager Beaver for all periods presented.
Combined and separate results of operations of the Company, ICS, 50's Classic,
and Eager Beaver for the three months ended March 31, 2000 and 1999 are as
follows:
9
Three Months Ended March 31, 2000 Revenues Net Income (Loss)
---------------- -----------------
(In Thousands)
Mace Security International, Inc. $10,122 $ 101
Innovative Control Systems, Inc. 358 (189)
50's Classic Car Wash 251 46
Eager Beaver Car Wash 1,387 322
---------------- -----------------
Combined $12,118 $ 280
================ =================
Three Months Ended March 31, 1999 Revenues Net Income (Loss)
---------------- -----------------
(In Thousands)
Mace Security International, Inc. $ 704 $(582)
Innovative Control Systems, Inc. 664 34
50's Classic Car Wash 195 9
Eager Beaver Car Wash 1,266 367
---------------- -----------------
Combined $ 2,829 $(172)
================ =================
4. Operating Agreements
During the three months ended March 31, 2000, the Company managed one car wash
location under an operating agreement, 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 agreement is
presented in the accompanying statements of operations as revenue from operating
agreements net of all operating expenses.
The results of operations subject to operating agreements in the three months
ended March 31, 2000 were as follows:
Three Months
Ended
March 31, 2000
--------------
Revenues (In Thousands)
Car wash and detailing services $191
Lube and other automotive services -
Fuel and merchandise sales 18
--------------
209
Cost of revenues
Car wash and detailing services 196
Lube and other automotive services -
Fuel and merchandise sales 11
--------------
207
Selling, general, and administrative expenses 13
Depreciation and amortization -
--------------
Operating loss $(11)
==============
In addition to the above results, the Company is currently being paid $20,000
per month starting in February 2000 under an 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.
5. Discontinued Operations
On July 14, 1998, the Company sold substantially all of the assets of its Law
Enforcement division within its security products segment. Accordingly, the
operating results of its Law Enforcement division have been segregated from
continuing operations and reported, on a comprehensive basis, as a separate line
item on the consolidated statement of operations entitled "Loss from
discontinued operations." In conjunction with the sale of assets, the Company
licensed to the purchaser the use of Mace(R) and related trademarks and a patent
for use by the purchaser in the Law Enforcement market and received a one-time
license fee of
10
$650,000.
A portion of the sales price, $600,000, was retained by the purchaser in escrow
to secure, among other things, the Company's obligations under the
representations and warranties in the purchase agreement. During 1999, this
amount was returned to the Company. Notwithstanding the sale of the Law
Enforcement division, the Company fulfilled its obligation under a nonassignable
Department of Defense contract which was completed in September of 1999.
Accordingly, this contract is included in discontinued operations in the
accompanying consolidated statement of operations for the three months ended
March 31, 1999.
6. 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 July 27, 1998, the Company was added as a defendant in a suit filed in the
state of West Virginia by Susan H. Jackman, et. al. The litigation concerns an
attack on Mrs. Jackman by two dogs and the alleged failure of a "Muzzle(R)"
product distributed by the Company to repel the dogs. The suit claims product
liability and negligence and seeks one million dollars in damages. The Company
forwarded this 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.
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.
7. Business Segments Information
The Company currently operates in two separate business segments: (1) the Car
Care segment, supplying complete car care services (including wash, detailing,
lube, and minor repairs), fuel and merchandise sales, and (2) the Computer
Hardware and Software Products and Services segment.
During 1999, the Company operated in the Security Products segment, producing
and marketing defense sprays, and marketing and retailing consumer safety and
security products. 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 Devices Division and receive all profits or losses for a seven-
month term beginning January 1, 2000. In exchange, Mark Sport, Inc. pays the
Company $20,000 per month beginning February 2000 and continuing through the
term of the Management Agreement. Additionally, Mark Sport, Inc. must pay the
Company an amount equal to the amortization and depreciation on the assets of
the division. 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.
11
Financial information regarding these segments is as follows:
========================================================================================================
Computer
Car Security Products
Care Products and Services
- --------------------------------------------------------------------------------------------------------
(In Thousands)
Three months ended March 31, 2000
Revenues from external customers $11,720 $ 40 $ 358
Intersegment revenues - - $ 51
Segment income (loss) $ 442 $ 27 $(189)
Three months ended March 31, 1999
Revenues from external customers $ 1,461 $ 704 $ 664
Intersegment revenues - - -
Segment income (loss) $ 376 $(582) $ 34
========================================================================================================
8. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the 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, inventory
valuation allowances, and the Company's estimate of restructuring and change in
control charges.
9. Income Taxes
The Company recorded a tax expense of $132,000 for the three months ended March
31, 2000. Tax expense reflects the recording of Federal and State taxes at a
rate of 32%. An effective rate lower than the Federal and State statutory rate
for the three months ended March 31, 2000 is primarily due to the use of net
operating loss carryforwards.
12
10. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
------------------------------------
3/31/00 3/31/99
----------- ----------
Numerator:
Income (loss) from continuing operations................. $ 280,467 $ (57,946)
Loss from discontinued operations........................ - (114,055)
----------- ----------
Net income (loss)........................................ $ 280,467 $ (172,001)
=========== ==========
Denominator:
Denominator for basic income (loss)
per share - weighted average shares.................... 23,175,411 8,191,820
Dilutive effect of options and warrants.................. 1,603,343 -
----------- ----------
Denominator for diluted income (loss)
per share - weighted average shares.................... 24,778,754 8,191,820
=========== ==========
Basic income (loss) per share:
From continuing operations............................... $ 0.01 $ (0.01)
From discontinued operations............................. - (0.01)
----------- ----------
Total.................................................... $ 0.01 $ (0.02)
=========== ==========
Diluted income (loss) per share:
From continuing operations............................... $ 0.01 $ (0.01)
From discontinued operations............................. - (0.01)
----------- ----------
Total.................................................... $ 0.01 $ (0.02)
=========== ==========
11. Subsequent Events
On April 5, 2000, the Company executed a master facility agreement with Fusion
Capital Fund II, LLC pursuant to which Fusion Capital agreed to enter into up to
two equity purchase agreements, each with an aggregate principal amount of
$12,000,000. Each equity purchase agreement grants Fusion Capital the right to
purchase from the Company shares of common stock up to $12,000,000 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. The equity purchase agreement requires that at
the beginning of each month, Fusion Capital will pay $1 million to the Company
as partial prepayment for the common stock. Once the $1 million has been
applied to purchase shares of our common stock, Fusion Capital will pay the
remaining principal amount upon receipt of our common stock. The first equity
purchase agreement was executed by Fusion Capital on April 17, 2000. The second
equity purchase agreement will be executed after delivery of an irrevocable
written notice by the Company to Fusion Capital stating that we elect to enter
into such purchase agreement with Fusion Capital. 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.
13
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. At March 31, 2000, we had negative
working capital of approximately $847,000. Our business plan will require
significant additional capital to fund acquisitions and internal development and
growth. Our capital requirements also include working capital for daily
operations and significant 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 significant 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.
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 recently 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. 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 amortized over a period not to exceed 25 years
depending on the business acquired, resulting in a non-cash charge to our
earnings during that period. As we continue to acquire additional businesses,
our financial position and results of operations may fluctuate significantly
from period to period.
Our business plan poses risks for us. Our business objective is to develop
and grow a full service, integrated car care business through acquisitions of
car washes and through the internal development of our car wash facilities by
adding gasoline pumps, oil change facilities and convenience stores to our
locations. We have repositioned our company from a company involved primarily in
the production of consumer defense products to a company that offers 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 service industries.
If we are unable to manage one or more of these associated risks effectively, we
may not realize our business plan.
We have a limited operating history regarding our car wash and car service
businesses. Since July 1999, our main business has been the acquisition and
operation of car wash and car service facilities, which now account for more
than 96% 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.
14
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.
Risks of Acquisitions. Our strategy to grow in part through acquisitions
depends upon our ability to identify suitable acquisition candidates, and to
consummate acquisitions on financially favorable terms. This strategy involves
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:
Adverse short-term effects on our reported operating results;
Diversion of management's attention;
Dependence on hiring, training and retaining key personnel; and
Risks associated with unanticipated problems or latent liabilities.
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.
We may not be able to integrate businesses we acquire and achieve operating
efficiencies. We are in the process of combining the businesses and assets that
we have acquired recently into an integrated operating structure. 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.
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 can affect adversely our car wash business as
people typically do not wash their cars during such periods. Conversely,
extended periods of warm, dry weather may encourage customers to wash their own
cars which 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.
15
Our car wash and other car service businesses 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 service 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 a number of oil derivatives and other regulated hazardous
substances. As a result, we are governed by environmental laws and regulations
dealing with, among other things:
Transportation, storage, presence, use, disposal and handling of hazardous
materials and hazardous wastes;
Discharge of stormwater; and
Underground storage tanks.
If any of the previously mentioned substances were found on our property,
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.
Our consumer safety product businesses face governmental regulation. The
distribution, sale, ownership and use of consumer defense sprays are legal in
some form in all 50 states and the District of Columbia. We cannot assure you,
however, that restrictions on the manufacture or use of consumer defense sprays
will not be enacted that would have an adverse impact on our financial
condition. 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 Environmental Protection Agency. We believe that we are in
compliance currently with all state and local statutes governing our 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 have a material adverse effect on
our business and financial condition.
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, particularly Louis D. Paolino, Jr. Our operations are dependent
substantially on the services of our executive officers, particularly Louis D.
Paolino, Jr., our Chairman of the Board, Chief Executive Officer and President.
If we lose Mr. Paolino's services or that of one or more of our other 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 from acquiring control of us. Our
Certificate of Incorporation authorizes the issuance of up to 50,000,000 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: 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; dilution of the voting power of the Common
Stock to the extent that the Preferred Stock has voting rights; and 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.
16
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 Three Months ended March 31, 2000 Compared to the
Three Months Ended March 31, 1999.
Revenues
The Company currently operates in two separate business segments: (1) the Car
Care segment, supplying complete car care services (including wash, detailing,
lube, and minor repairs), fuel and merchandise sales, and (2) the Computer
Hardware and Software Products and Services segment, developing and
manufacturing specialty point of sale and control software for principally the
car care industries.
Car Care Services
The Company owns or operates pursuant to operating agreements full service,
exterior only and self-service car wash locations in New Jersey, Pennsylvania,
Delaware, Texas, Florida and Arizona, as well as truck wash locations in
Arizona, Indiana, Ohio and Texas. The Company earns revenues from washing and
detailing automobiles; washing trucks; 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 three months ended March 31, 2000 for the car care segment were
comprised of approximately 79% car wash and detailing, 10% lube and other
automotive services, and 11% 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
In 1999 the Company operated its security products segment in two main
divisions, the Consumer Division and the Mace Anti-Crime Bureau Division. The
Company's Consumer Division manufactured and marketed personal safety, and home
and auto security products. These products were sold through retail stores,
major discount stores, and at the Company's car care facilities. The Mace Anti-
Crime Bureau Division provided expertise in developing and producing criminal
deterrent systems for government and law enforcement agencies, and financial
institutions.
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 Devices Division
and receive all profits or losses for a seven-month term beginning January 1,
2000. In exchange, Mark Sport, Inc. pays the Company $20,000 per month
beginning February 2000 and continuing through the term of the Management
Agreement. Additionally, Mark Sport, Inc. must pay the Company an amount equal
to the amortization and depreciation on the assets of the division. 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.
17
Computer Products and Services
The Company's computer products and services segment positions the Company as a
developer, manufacturer and retailer of specialty point of sale and control
software for principally the car care industry. Its primary product, a
software package called "Tunnel Master", provides car wash equipment control,
point of sale and management information and a software product which provides
management and control of lube operations. The software is usually sold as a
package with computer hardware, car wash tunnel controller equipment and
customer service support contracts. Another software product being marketed is
called "Vision Master" which allows users to access cameras and view operations
remotely using a personal computer from anywhere in the world. These products
and services are sold directly and through independent distributors.
Cost of Revenues
Car Care Services
Cost of revenues consists primarily of direct labor and related taxes and
benefits, chemicals, wash and detailing supplies, rent, real estate taxes,
utilities, maintenance and repairs of equipment and facilities, as well as the
cost of the fuel and merchandise sold.
Computer Products and Services
Cost of revenues consists primarily of costs to develop, manufacture or purchase
the computer software and equipment, including direct labor and related taxes
and benefits, and raw material costs as well as computer support staff salaries
and related taxes and benefits.
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 previously
capitalized expenditures relating to proposed acquisitions that in management's
current opinion will not be consummated.
At March 31, 2000, capitalized costs and acquisition deposits related directly
to proposed acquisitions that were not yet consummated were approximately $1.8
million. 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 and other intangibles are
amortized over their useful lives using the straight line method.
Other Income and Expense
Other income and expense includes gains and losses on the sale of equipment,
asset write-downs, and rental income.
Taxes
The Company recorded a tax expense of $132,000 for the three months ended March
31, 2000. Tax expense reflects the recording of Federal and State taxes at a
rate of 32%. An effective rate lower than the Federal and State statutory rate
for the three months ended March 31, 2000 is primarily due to the use of net
operating loss carryforwards.
18
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues:
Three Months Ended
March 31,
------------------------------
2000 1999
----------- -------------
Revenues 100.0 % 100.0 %
Cost of revenues 71.2 53.8
Selling, general and administrative expenses 15.4 40.5
Depreciation and amortization 4.7 4.8
----------- -------------
Operating income 8.7 0.9
Interest expense, net (6.0) (1.3)
Other income (expense) 0.7 (1.7)
----------- -------------
Income (loss) from continuing operations before income taxes 3.4 (2.1)
Income tax expense 1.1 -
----------- -------------
Income (loss) from continuing operations 2.3 (2.1)
Loss from discontinued operations - (4.0)
----------- -------------
Net income (loss) 2.3 % (6.1) %
=========== =============
Revenues
Car Care Services
Revenues for the three months ended March 31, 2000 totaled $11.73 million, of
which $9.28 million, or 79%, was generated from car wash and detailing, $1.18
million, or 10%, from lube and other automotive services, and $1.27 million, or
11%, from fuel and merchandise sales. For the three months ended March 31, 1999,
revenues totaled $1.5 million with $1.4 million generated from car wash and
detailing, $34,000 from lube services and $73,000 from fuel and merchandise
sales. This increase in total revenues is attributable to the twelve purchase
acquisitions completed from May 1999 to March 31, 2000.
During the three months ended March 31, 2000, the Company managed one car wash
location under an operating agreement, under which the Company was entitled to
all profits generated from the operation of that location. The income earned
under the agreement is shown as revenue net of related operating expenses. Gross
revenue generated by the location under an operating agreement for the three
months ended March 31, 2000 was $191,000.
Computer Products and Services
Revenues for the three months ended March 31, 2000 were $358,000 compared to
$664,000 for the three months ended March 31, 1999, a decrease of $306,000, or
46%. This decrease is attributable to fewer sales of tunnel controller systems
in the current period. The Company is currently developing several new products
including a hand-held terminal, an OEM controller and a quick lube point of
sales system. The Company anticipates that the development of these new products
will enhance sales within this segment.
Cost of Revenues
Car Care Services
Cost of revenues for the three months ended March 31, 2000 were $8.2 million, or
70% of revenues with car wash and detailing costs at 67% of respective revenues,
lube and other automotive services costs at 75% of respective revenues, and fuel
and merchandise costs at 86% of respective revenues. Cost of revenues for the
three months ended March 31, 1999 were $765,000 or 52% of revenues. The
increase in cost of revenues as a percent of revenues is attributable to the
twelve purchase acquisitions completed from May 1999 to March 31, 2000, certain
of which provided services at profit margins lower than margins generated from
prior year's mix of services.
19
Computer Products and Services
Cost of revenues for the three months ended March 31, 2000 were $404,000
compared to $395,000 for the three months ended March 31, 1999. Cost of revenues
for the three months ended March 31, 2000 were 113% as compared to 59% for the
same period in 1999. The increase in cost of revenues as a percentage of
revenues is primarily due to decreased revenues as previously noted with a
relatively fixed cost structure for support, distribution and manufacturing
costs.
Selling, general and administrative expenses for the three months ended March
31, 2000 were $1.9 million compared to $1.2 million for the three months ended
March 31, 1999, an increase of $0.7 million, or 62%. The primary reason for
this increase is the infrastructure established during the past twelve months in
order to effectively enter the Car Care Industry and execute the Company's
growth strategy. These increased costs included accounting, finance, legal and
administrative costs necessary to integrate the acquisitions consummated. This
increase is partially offset by cost controls placed on previously private
companies and favorable pricing for supplies, insurance, and other indirect
costs due to economies of scale and the cost savings associated with the
discontinuance on January 1, 2000 of the operation of the security products
division.
Depreciation and amortization totaled $577,000 for the three months ended March
31, 2000 as compared to $135,000 for the same period in 1999. This increase is
the result of entering the Car Care Industry, which required a substantial
investment in property and equipment. Additionally, certain acquisitions
resulted in the recording of goodwill, which increased amortization expense.
The increase was partially offset by the elimination of depreciation and
amortization expense as a result of the discontinuance on January 1, 2000 of the
operation of the security products division. The division is being operated by
a third party and the Company is paid $20,000 per month plus reimbursement for
certain expenses.
Taxes
The Company recorded a tax expense of $132,000 for the three months ended March
31, 2000. Tax expense reflects the recording of Federal and State taxes at a
rate of 32%. An effective rate lower than the Federal and State statutory rate
for the three months ended March 31, 2000 is primarily due to the use of net
operating loss carryforwards.
Liquidity and Capital Resources
The Company's business requires substantial amounts of capital, most notably to
pursue the Company's acquisition strategies and for equipment purchases and
upgrades. The Company plans to meet these capital needs from various financing
sources, including borrowings, internally generated funds, and the issuance of
common stock.
As of March 31, 2000, the Company had a working capital deficit of $847,000,
including cash and cash equivalents of $3.3 million. For the three months ended
March 31, 2000, net cash provided by operations was approximately $1.4 million,
net cash provided by financing activities was approximately $214,000 and net
cash used in investing activities was approximately $635,000 resulting in an
increase in cash and cash equivalents of approximately $1.0 million. Capital
expended during the period included $101,000 of deposits and prepaid costs on
future acquisitions, $284,000 for the purchase of operating equipment and real
estate, and $250,000 for intangibles, primarily deferred financing costs
associated with new or refinanced debt.
The Company's acquisition program and operations to date have required
substantial amounts of working capital, and the Company expects to expend
substantial funds to support its acquisition program and capital needs for
equipment. The Company estimates aggregate capital expenditures, exclusive of
acquisitions of businesses, of approximately $1.2 million for the year ending
December 31, 2000. At March 31, 2000, the Company had borrowings of $33.6
million, including debt which has recently been refinanced. The Company does
not have any letters of credit outstanding nor does it maintain a revolving
credit facility. At December 31, 1999, the Company had approximately $11.7
million of debt which required refinancing in the first quarter of 2000,
including a $4.75 million promissory note related to the acquisition of Genie,
approximately $4.8 million of debt with Bank One, Texas N.A. ("Bank One")
assumed by the Company in connection with the Colonial acquisition, and a $2.15
million note payable to SouthTrust Bank relating to the Eager Beaver merger. In
February 2000, the Company financed the remaining $4.35 million balance of the
Genie promissory note through a three year term note (15 year amortization
basis) with Bank One, finalized the assumption of the Colonial notes with Bank
One and extended the original maturities of the notes due on various dates in
2001, and entered into an extension agreement with respect to the SouthTrust
Bank note until May 2001. Current portion of notes payable to related parties
includes a Convertible Promissory Note in the amount of approximately $1.3
million, convertible into the Company's common stock and callable by the holder
by providing the Company with a 90 day notice. Current portion of long-term debt
includes a $1.0 million promissory note related to the Red Baron acquisition due
in October 2000. The Company is pursuing refinancing this promissory note on a
long-term basis. The Company has currently addressed
20
its capital needs through the completion of several private sales of the
Company's common stock. The Company is also actively working with several
parties to raise additional funds through additional equity or debt placements.
No assurance can be given that additional financing will be available, or if
available, that it will be available at acceptable terms.
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.
Additionally, the Company's Computer Products and Services operations develop
specialty point of sale and control software for principally the car care
industry. Its primary products are: "Tunnel Master", which provides car wash
equipment control, point of sales, and management information; "Clout", which
provides point of sales and service controls to the quick lube industry; and
"Vision Master", which allows users to access cameras and view operations
remotely using a personal computer. Based on our current assessment, we believe
the current versions of our software products are Year 2000 compliant - that is,
they are capable of adequately distinguishing 21st century dates from 20th
century dates. However, our products are generally integrated into other third
party company systems involving hardware and software products that we cannot
adequately evaluate for Year 2000 compliance. Although we have not been a party
to any claims involving our products or services related to Year 2000 compliance
issues, we may in the future be required to defend our products or services in
such claims proceedings, or to negotiate resolutions of claims based on Year
2000 issues.
21
PART II
OTHER INFORMATION
Item 5. Other Information
The Company's 2000 annual meeting of stockholders was originally expected to be
held in December of 2000. In connection with the previously announced proposed
merger of a subsidiary of the Company with Wash Depot, Inc., which is subject to
a vote by the Company's stockholders, the Company has decided to hold its 2000
annual meeting in July of 2000, subject to delays which may be caused by actions
outside the Company's control. As a result of this change, the deadline for
inclusion, pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, of
a stockholder proposal in the Company's proxy statement and form of proxy for
the 2000 annual meeting shall be June 9, 2000. The Company has not received to
date any stockholders' proposals for inclusion in the proxy materials for the
2000 annual meeting. Similarly, a notice of stockholder proposal submitted
outside the processes of Rule 14a-8 of the Exchange Act will be considered
untimely if received by the Company after June 9, 2000 and the Company's proxy
for the 2000 annual meeting of stockholders may confer discretionary authority
on an officer of the Company to vote on any such matter without any discussion
of the matter in the proxy statement for the annual meeting. Proposals must be
sent to the Company at 1000 Crawford Place, Suite 400, Mt. Laurel, New Jersey
08054, Attention: Corporate Secretary.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
*10.125 Asset Purchase Agreement dated as of January 24, 2000, by and
among James Grandlich, Raymond Grandlich, and Arthur
Grandlich, residents of the state of Arizona, Red Baron Truck
Washes, Inc. and Mace Truck Wash, Inc., a wholly owned
subsidiary of Mace Security International, Inc. (Exhibit 2.1
to the Company's Current Report on Form 8-K dated March 24,
2000).+
27 Financial Data Schedules (Electronic filed only).
_____________________________________________________________________
* Incorporated by reference as indicated to the Company's
Current Report on Form 8-K.
+ 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.
(b) Current Reports on Form 8-K or 8-K/A:
On January 10, 2000, the Company filed a report on Form 8-K dated
December 29, 1999, under Item 2 to report the acquisition of the
assets of the car wash facility having the address 1505 East Marlton
Pike, Cherry Hill, New Jersey (the "Cherry Hill Car Wash").
Historical financial statements of Cherry Hill Car Wash and pro forma
financial information of the Company required under "Item 7: Financial
Statements and Exhibits" were filed on Form 8-K/A on March 9, 2000.
On January 14, 2000, the Company filed a report on Form 8-K dated
January 10, 2000, under Item 4 to report a change in the Company's
certifying accountants from Ernst & Young LLP (who served as
independent accountants of the Company since May 1999) to Grant
Thornton LLP.
On February 11, 2000, the Company filed a report on Form 8-K/A dated
January 10, 2000, under Item 4 to file a revised letter from the
Company's prior independent accountants relating to the change in the
Company's certifying accountants.
On March 9, 2000, the Company filed a report on Form 8-K/A dated
December 29, 1999, under Item 7 to provide audited combined financial
statements for the two years ended December 31, 1998 and 1997 and the
unaudited financial statements for the nine months ended September 30,
1999 and 1998, and the unaudited pro forma consolidated financial
statements for the year ended December 31, 1998 and the nine months
ended September 30, 1999 with respect to the acquisition of Cherry
Hill Car Wash.
22
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: May 12, 2000
23
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedules (Electronic filed only)
24