================================================================================
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 JUNE 30, 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
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 9, 2000 24,594,467 Shares of Common Stock
================================================================================
Mace Security International, Inc.
Form 10-QSB
Quarter Ended June 30, 2000
Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - June 30, 2000
and December 31, 1999 2
Condensed Consolidated Statements of Operations for the three
months ended June 30, 2000 and 1999 (Restated) 4
Condensed Consolidated Statements of Operations for the six
months ended June 30, 2000 and 1999 (Restated) 5
Condensed Consolidated Statement of Stockholders' Equity
for the six months ended June 30, 2000 6
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and 1999 (Restated) 7
Notes to Condensed Consolidated Financial Statements 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
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.
Condensed Consolidated Balance Sheets
June 30, December 31,
ASSETS 2000 1999
------------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 3,825,937 $ 2,320,804
Accounts receivable, less allowance for doubtful
accounts of $57,583 and $102,393 in 2000 and 1999,
respectively 1,089,992 1,874,547
Inventory 2,600,677 2,800,853
Deferred income taxes 137,231 139,705
Prepaid expenses and other current assets 2,040,950 2,506,853
------------- ------------
Total current assets 9,694,787 9,642,762
Property and equipment:
Land 31,257,714 30,429,075
Buildings and leasehold improvements 34,491,147 31,718,084
Machinery and equipment 7,073,204 6,329,030
Furniture and fixtures 234,730 231,936
------------- ------------
Total property and equipment 73,056,795 68,708,125
Accumulated depreciation and amortization (4,549,373) (3,826,784)
------------- ------------
68,507,422 64,881,341
Excess of cost over net assets of acquired businesses, net of
accumulated amortization of $427,196 and $276,605 in 2000
and 1999, respectively 21,179,426 20,723,085
Other intangible assets, net of accumulated amortization
of $893,550 and $1,144,428 in 2000 and 1999, respectively 917,808 1,029,347
Other assets 1,777,168 1,838,821
------------- ------------
TOTAL ASSETS $102,076,611 $98,115,356
============= ============
See accompanying notes.
2
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
------------- ------------
(Unaudited)
Current liabilities:
Current portion of notes payable to related parties $ 1,116,961 $ 1,493,806
Current portion of long-term debt 6,841,364 3,102,003
Current portion of capital lease obligations 58,599 66,371
Accounts payable 2,571,879 3,372,950
Income taxes payable 81,732 110,725
Deferred revenue 265,119 557,154
Accrued expenses and other current liabilities 1,996,698 2,342,299
------------- ------------
Total current liabilities 12,932,352 11,045,308
Deferred income taxes 631,064 587,625
Long-term debt, net of current portion 24,842,367 27,794,865
Capital lease obligations, net of current portion 298,855 327,232
Other liabilities 1,070,622 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 shares of 24,574,425 and
22,821,675 in 2000 and 1999, respectively 245,744 228,216
Additional paid-in capital 69,034,293 63,992,607
Accumulated deficit (6,926,298) (7,600,607)
------------- ------------
62,353,739 56,620,216
Less treasury stock at cost -256,666 common shares (52,388) (52,388)
------------- ------------
Total stockholders' equity 62,301,351 56,567,828
------------- ------------
Total liabilities and stockholders' equity $102,076,611 $98,115,356
============= ============
See accompanying notes.
3
Mace Security International, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended
June 30,
-------------------------
2000 1999
----------- -----------
(Restated)
Revenues:
Car wash and detailing services $ 9,522,239 $2,435,904
Lube and other automotive services 1,241,150 507,435
Fuel and merchandise sales 1,296,774 256,995
Security product sales - 902,117
Operating agreements 111,275 434,639
----------- -----------
12,171,438 4,537,090
Cost of revenues:
Car wash and detailing services 6,725,326 1,512,331
Lube and other automotive services 958,622 429,348
Fuel and merchandise sales 1,131,885 209,574
Security product sales - 480,310
----------- -----------
8,815,833 2,631,563
Selling, general and administrative expenses 1,907,565 1,051,958
Depreciation and amortization 605,567 174,171
Costs of terminated acquisitions 580,000 -
Restructuring, asset abandonment costs and
change in control charges - 1,519,000
----------- -----------
Operating income (loss) 262,473 (839,602)
Interest expense, net (759,455) (147,153)
Other income 124,199 74,223
----------- -----------
Loss from continuing operations before
income taxes (372,783) (912,532)
Income tax benefit (118,000) (371,000)
----------- -----------
Loss from continuing operations (254,783) (541,532)
Discontinued Operations:
(Loss) income from discontinued operations, net of an income tax benefit of
$41,000 in 2000 and income tax expense of $21,000 in 1999 (74,956) 75,539
Gain on disposal of ICS, net of $107,000 of applicable income tax expense 723,581 -
----------- -----------
Net income (loss) $ 393,842 $ (465,993)
=========== ===========
Basic income (loss) per share
From continuing operations $ (0.01) $ (0.06)
From discontinued operations 0.03 0.01
----------- -----------
Total $ 0.02 $ (0.05)
=========== ===========
Weighted average number of shares outstanding 24,062,663 9,422,244
=========== ===========
Diluted income (loss) per share
From continuing operations $ (0.01) $ (0.06)
From discontinued operations 0.03 0.01
----------- -----------
Total $ 0.02 $ (0.05)
=========== ===========
Weighted average number of shares outstanding 24,062,663 9,422,244
=========== ===========
See accompanying notes.
4
Mace Security International, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Six Months Ended
June 30,
--------------------------
2000 1999
------------ -----------
(Restated)
Revenues:
Car wash and detailing services $18,802,957 $ 3,789,924
Lube and other automotive services 2,424,103 541,701
Fuel and merchandise sales 2,563,856 329,537
Security product sales - 1,605,998
Operating agreements 140,756 434,639
------------ -----------
23,931,672 6,701,799
Cost of revenues:
Car wash and detailing services 12,982,806 2,207,417
Lube and other automotive services 1,842,696 457,617
Fuel and merchandise sales 2,215,608 250,912
Security product sales - 844,342
------------ -----------
17,041,110 3,760,288
Selling, general and administrative expenses 3,559,735 1,979,516
Depreciation and amortization 1,168,416 301,321
Costs of terminated acquisitions 580,000 -
Restructuring, asset abandonment costs and
change in control charges - 1,519,000
------------ -----------
Operating income (loss) 1,582,411 (858,326)
Interest expense, net (1,472,409) (174,807)
Other income 208,327 28,501
------------ -----------
Income (loss) from continuing operations before
income taxes 318,329 (1,004,632)
Income tax expense (benefit) 103,000 (384,000)
------------ -----------
Income (loss) from continuing operations 215,329 (620,632)
Discontinued Operations:
Loss from discontinued operations, net of applicable income tax
expense of $130,000 in 2000 and $34,000 in 1999 (264,601) (17,362)
Gain on disposal of ICS, net of $107,000 of applicable income tax expense 723,581 -
------------ -----------
Net income (loss) $ 674,309 $ (637,994)
============ ===========
Basic income (loss) per share
From continuing operations $ 0.01 $ (0.07)
From discontinued operations 0.02 -
------------ -----------
Total $ 0.03 $ (0.07)
============ ===========
Weighted average number of shares outstanding 23,394,274 8,808,912
============ ===========
Diluted income (loss) per share
From continuing operations $ 0.01 $ (0.07)
From discontinued operations 0.02 -
------------ -----------
Total $ 0.03 $ (0.07)
============ ===========
Weighted average number of shares outstanding 24,654,065 8,808,912
============ ===========
See accompanying notes.
5
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
Sale of common stock less
commissions and issuance
expenses of $157,910................ 876,659 8,767 760,384 769,151
Exercise of common stock options
and warrants......................... 43,750 438 80,779 81,217
Common stock issued in purchase
acquisitions......................... 1,060,586 10,606 4,355,559 4,366,165
Common stock issued for services...... 40,000 400 199,600 200,000
Common stock issued to satisfy debt
obligation........................... 162,234 1,622 585,235 586,857
Common stock issued for debt
guarantee............................. 19,521 195 68,129 68,324
Cancellation of shares received from
sale of ICS.......................... (450,000) (4,500) (1,008,000) (1,012,500)
Net income............................ 674,309 674,309
---------- --------- ------------ ------------ --------- ------------
Balance at June 30, 2000.............. 24,574,425 $245,744 $69,034,293 $(6,926,298) $(52,388) $62,301,351
========== ========= ============ ============ ========= ============
See accompanying notes.
6
Mace Security International, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
-------------------------
2000 1999
----------- -----------
(Restated)
Operating activities
Income (loss) from continuing operations $ 215,329 $ (620,632)
Discontinued operations, net of income tax 458,980 (17,362)
----------- -----------
Net income (loss) 674,309 (637,994)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 1,168,416 301,321
Provision for losses on receivables 12,361 155,877
Write-down of assets - 99,666
Loss on disposal of property and equipment 15,235 -
Deferred income taxes (103,087) (360,282)
Non-cash portion of restructuring and change in control charges - 1,267,000
Net gain on sale of ICS, including cash surrendered (975,199) -
Non-cash expenses of discontinued operations 24,206 21,609
Changes in operating assets and liabilities:
Accounts receivable 617,734 (32,662)
Inventory (254,533) (348,676)
Accounts payable (474,686) 52,875
Deferred revenue (154,937) 80,875
Accrued expenses (282,718) 735,769
Income taxes (28,993) -
Prepaid expenses and other assets 1,192,706 (1,761,201)
Discontinued operations - 82,299
Other - (76,732)
----------- -----------
Net cash provided by (used in) operating activities 1,430,814 (420,256)
Investing activities
Acquisition of businesses, net of cash acquired (25,000) (1,299,908)
Purchase of property and equipment (700,299) (233,448)
Proceeds from sale of property and equipment 15,468 -
Payments for intangibles (310,651) (40,264)
Payments received on notes receivable from shareholder - 845,398
Deposits and other prepaid costs on future acquisitions (24,938) -
----------- -----------
Net cash used in investing activities (1,045,420) (728,222)
Financing activities
Proceeds from revolving line of credit, long term debt and
capital lease obligations 1,950,000 98,349
Payments on revolving line of credit, long-term debt
and capital lease obligations (1,677,702) (154,884)
Proceeds from issuance of common stock, net of offering costs 850,368 3,987,914
Net payments on note payable to shareholder (2,927) (2,815)
Dividends paid to former stockholders of pooled companies - (752,326)
----------- -----------
Net cash provided by financing activities 1,119,739 3,176,238
----------- -----------
Net increase in cash and cash equivalents 1,505,133 2,027,760
Cash and cash equivalents at beginning of period 2,320,804 4,672,695
----------- -----------
Cash and cash equivalents at end of period $ 3,825,937 $ 6,700,455
=========== ===========
See accompanying notes.
7
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 and six
months ended June 30, 1999 to reflect the acquisitions of 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 and six months ended June 30, 1999 include the results
of operations of Eager Beaver for those same periods. The results of operations
for the three and six month periods ended June 30, 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, as amended, 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
Since April 1, 1999, the Company has acquired 63 car care facilities and five
truck wash facilities through the acquisition of 18 separate businesses
including: 45 full service facilities, one self service facility, and 13
exterior only facilities in Pennsylvania, New Jersey, Delaware, Texas, Florida
and Arizona; four facilities were subsequently divested. The five full service
truck wash facilities are located in Arizona, Indiana, Ohio and Texas.
Of the 16 acquisitions completed through June 30, 2000, 13 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 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.
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.
8
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 using the purchase method of accounting.
On July 1, 1999, the Company acquired substantially all the assets of Stephen
Bulboff and Stephen B. Properties, Inc. (collectively, "Shammy Shine" or
"Stephen Bulboff") in exchange for 860,000 unregistered shares of common stock
of the Company and cash consideration of $1,900,000. Shammy Shine owns and
operates a total of ten exterior only car washes in Pennsylvania, New Jersey and
Delaware. This transaction has been accounted for using the purchase method of
accounting.
On August 24, 1999, the Company acquired, through a wholly owned subsidiary,
substantially all of the assets of Shammy Man Car Wash ("Shammy Man") in
exchange for 62,649 unregistered shares of common stock, cash consideration of
$475,000, and the assumption of approximately $400,000 of debt. This transaction
has been accounted for using the purchase method of accounting.
On September 9, 1999, the Company acquired all of the assets of Quaker Car Wash,
Inc. ("Quaker") in exchange for 224,072 unregistered shares of common stock and
approximately $1,055,000 of cash consideration. This transaction 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
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
9
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.
Acquisitions Accounted for Under the Pooling of Interests Method
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 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 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 continuing operations of the Company, 50's
Classic, and Eager Beaver for the six months ended June 30, 2000 and 1999 are as
follows:
Revenues Net Income (Loss)
------------------ -----------------
Six Months Ended June 30, 2000 (In Thousands)
Mace Security International, Inc. $20,940 $ (398)
50's Classic Car Wash 456 81
Eager Beaver Car Wash 2,536 532
------------------ -----------------
Combined $23,932 $ 215
================== =================
Six Months Ended June 30, 1999
Mace Security International, Inc. $ 4,073 $(1,192)
50's Classic Car Wash 397 17
Eager Beaver Car Wash 2,232 554
------------------ -----------------
Combined $ 6,702 $ (621)
================== =================
Additionally, 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. 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. Accordingly, ICS's results of
operations, as well as the gain on the ICS sale, have been accounted for as
discontinued operations.
4. Operating Agreements
During the three and 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 locations.
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.
Additionally, the Company is currently being paid $20,000 per month 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.
10
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
------------- -------------
(In Thousands)
Revenues
Car wash and detailing services $613 $804
Fuel and merchandise sales 35 53
Security products operating lease payments 60 100
------------- -------------
708 957
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 $111 $140
============= =============
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 "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 $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 and six months
ended June 30, 1999.
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.
Law Enforcement
ICS Division
------------- -----------------
Three months ended June 30, 2000
Revenues $ 160,520 -
Loss from discontinued operations $ (74,956) -
Gain on disposal $ 723,581 (1) -
Six months ended June 30, 2000
Revenues $ 518,753 -
Loss from discontinued operations $ (264,601) -
Gain on disposal $ 723,581 (1) -
Three months ended June 30, 1999
Revenues $ 948,838 $318,461
Income from discontinued operations $ 33,238 $ 42,301
Six months ended June 30, 1999
Revenues $1,613,204 $620,042
Income (loss) from discontinued operations $ 54,392 $(71,754)
(1) Includes a net loss of $77,308 from operations of ICS from the
measurement date to the disposal date.
11
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 quarter ending June 30, 2000,
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. Costs of previously capitalized expenditures principally
relate to the termination of the Planet Truck Wash acquisition and acquisition
related expenses associated with the proposed Wash Depot Holdings, Inc. ("Wash
Depot") merger. Management currently believes that Wash Depot will not be able
to satisfy certain conditions precedent to closing by September 30, 2000, after
which date the Company is entitled to terminate the Wash Depot Merger Agreement.
Of the $580,000 costs of terminated acquisitions, 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.
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 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.
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.
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 only one business segment: the Car Care
segment, supplying complete car care services
12
(including wash, detailing, lube, and minor repairs), fuel and merchandise
sales. 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. The Agreement provides for a six month
renewal option. 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. 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, 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
Segment assets $98,043 $ 4,034
Three months ended June 30, 1999
Revenues from external customers $ 3,635 $ 902
Intersegment revenues - -
Segment income (loss) $ 571 $(1,112)
Six months ended June 30, 1999
Revenues from external customers $ 5,096 $ 1,606
Intersegment revenues - -
Segment income (loss) $ 1,073 $(1,694)
9. 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, change in
control charges, and acquisition costs.
10. Income Taxes
The Company recorded a tax expense from continuing operations of $103,000 for
the six months ended June 30, 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 six months ended June 30, 2000 is
primarily due to the use of net operating loss carryforwards.
13
11. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
-------------------------- -------------------------------
6/30/00 6/30/99 6/30/00 6/30/99
------------- ----------- ------------- ----------------
Numerator:
(Loss) income from continuing operations $ (254,783) $ (541,532) $ 215,329 $ (620,632)
Income (loss) from discontinued operations 648,625 75,539 458,980 (17,362)
------------- ----------- ------------- ----------------
Net income (loss) $ 393,842 $ (465,993) $ 674,309 $ (637,994)
============= =========== ============= ================
Denominator:
Denominator for basic income (loss)
per share - weighted average shares 24,062,663 9,422,244 23,394,274 8,808,912
Dilutive effect of options and warrants - - 1,259,791 -
------------- ----------- ------------- ----------------
Denominator for diluted income (loss)
per share - weighted average shares 24,062,663 9,422,244 24,654,065 8,808,912
============= =========== ============= ================
Basic income (loss) per share:
From continuing operations $ (0.01) $ (0.06) $ 0.01 $ (0.07)
From discontinued operations 0.03 0.01 0.02 -
------------- ----------- ------------- ----------------
Total $ 0.02 $ (0.05) $ 0.03 $ (0.07)
============= =========== ============= ================
Diluted income (loss) per share:
From continuing operations $ (0.01) $ (0.06) $ 0.01 $ (0.07)
From discontinued operations 0.03 0.01 0.02 -
------------- ----------- ------------- ----------------
Total $ 0.02 $ (0.05) $ 0.03 $ (0.07)
============= =========== ============= ================
For periods resulting in a loss from continuing operations, the Company's
options and warrants outstanding have not been included in the calculation of
diluted earnings per share in that it would be anti-dilutive.
12. Subsequent Events
Subsequent to June 30, 2000, the Company acquired all of the assets of two car
wash locations. Total consideration under the agreements was approximately
$4,790,000 consisting of approximately 302,000 shares of common stock of the
Company, $990,000 of cash and $2,350,000 of debt assumed. The transactions will
be 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. Under the proposed merger agreement, Wash Depot was to
be merged into a subsidiary of the Company through the issuance of approximately
8.0 million shares of the Company's common stock, par value $.01, and the
assumption of approximately $153 million of debt. Closing under the agreement
was subject to several conditions including: Mace and Wash Depot shareholder
approvals, lender consents, antitrust clearance and other typical closing
conditions. Management currently believes that Wash Depot will not be able to
satisfy certain conditions precedent to closing by September 30, 2000, after
which date the Company is entitled to terminate the Wash Depot Merger Agreement.
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
14
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 June 30, 2000, we had negative
working capital of approximately $3.2 million. 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 nearly
100% 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.
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
15
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.
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.
16
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.
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
17
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,
2000 Compared to the Six Months Ended June 30, 1999.
Revenues
The Company currently operates in one business segment: the Car Care segment,
supplying complete car care services (including wash, detailing, lube, and minor
repairs), fuel and merchandise sales.
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 six months ended June 30, 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. The Agreement provides for a six month renewal option. 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.
Computer Products and Services
On June 2, 2000, the Company sold its computer products subsidiary, ICS, and
accordingly, all results of operations have been classified as "discontinued
operations".
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
18
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.
During the quarter ended June 30, 2000, the Company terminated or made a
decision to terminate various pending acquisitions resulting in a write-off of
$580,000 of deferred acquisition costs.
At June 30, 2000, capitalized costs and acquisition deposits related directly to
proposed acquisitions that were not yet consummated were approximately $1.6
million. The majority of these costs related to two car wash acquisitions
consummated subsequent to June 30, 2000. 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 from continuing operations of $103,000 for
the six months ended June 30, 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 six months ended June 30, 2000 is
primarily due to 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,
-----------------
2000 1999
-------- -------
Revenues 100.0 % 100.0 %
Cost of revenues 71.2 56.1
Selling, general and administrative expenses 14.9 29.5
Depreciation and amortization 4.9 4.5
Costs of terminated acquisitions 2.4 -
Restructuring, asset abandonment costs and change in control charges - 22.7
-------- -------
Operating income (loss) 6.6 (12.8)
Interest expense, net (6.2) (2.6)
Other income 0.9 0.4
-------- -------
Operating income (loss) 1.3 (15.0)
Income tax expense (benefit) 0.4 (5.7)
-------- -------
Income (loss) from continuing operations 0.9 (9.3)
Loss from discontinued operations (1.1) (0.2)
Gain on disposal of ICS 3.0 -
-------- -------
Net income (loss) 2.8 % (9.5)%
======== =======
19
Revenues
Revenues for the six months ended June 30, 2000 totaled $23.9 million, of which
$18.8 million, or 79%, was generated from car wash and detailing, $2.4 million
or 10%, from lube and other automotive services, $2.6 million or 10%, from fuel
and merchandise sales, and $141,000 or 1% was earned under operating agreements.
For the six months ended June 30, 1999, revenues totaled $5.1 million with $3.8
million generated from car wash and detailing, $542,000 from lube services,
$330,000 from fuel and merchandise sales, and $435,000 from operating
agreements. This increase in total revenues is attributable to the 13 purchase
acquisitions completed from May 1999 to June 30, 2000.
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 an operating agreement for the
six months ended June 30, 2000 was $857,000.
Cost of Revenues
Cost of revenues for the six months ended June 30, 2000 were $17.0 million or
71% of revenues with car wash 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 86% of respective revenues. Cost of revenues for the
six months ended June 30, 1999 were $2.9 million or 57.2% of revenues. The
increase in cost of revenues as a percent of revenues is attributable to the 13
purchase acquisitions completed from May 1999 to June 30, 2000, certain of
which provided services at profit margins lower than margins generated from
prior year's mix of services.
Selling, general and administrative expenses for the six months ended June 30,
2000 were $3.6 million compared to $2.0 million for the six months ended June
30, 1999, an increase of $1.6 million or 80%. The primary reason for this
increase is the infrastructure established during the past fifteen months in
order to effectively enter the Car Care Industry and execute the Company's
growth strategy. 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.
Additionally, the Company wrote off $580,000 of acquisition related costs
associated with terminated pending acquisitions.
Depreciation and amortization totaled $1.2 million for the six months ended June
30, 2000 as compared to $301,000 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 from continuing operations of $103,000 for
the six months ended June 30, 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 six months ended June 30, 2000 is
primarily due to the use of net operating loss carryforwards.
Results of Operations for the Three Months Ended June 30,
2000 Compared to the Three Months Ended June 30, 1999
Revenues
Revenues for the three months ended June 30, 2000 totaled $12.2 million, of
which $9.5 million or 78% was generated from car washing and detailing, $1.2
million or 10% from lube and other automotive services, $1.3 million or 11% from
fuel and merchandise sales, and $111,000 or 1% from income earned under
operating agreements.
During the quarter, the Company managed several car wash locations under
operating agreements, under which the Company is entitled to all profits
generated from the operation of those locations. The income earned under these
agreements is shown as revenues net of related operating expenses. Revenues
including gross revenue generated by locations under operating agreements was
$12.8 million consisting of $10.1 million or 79% from car wash and detailing,
$1.2 million or 10% from lube and other automotive services, $1.4 million or 11%
from fuel and merchandise sales. Additionally, $60,000 was earned under an
operating
20
agreement regarding the Company's security products division.
For the three months ended June 30, 1999, revenues were $3.6 million with $2.4
million from car washing and detailing, $507,000 from lube services, $257,000
from fuel and merchandise sales, and $435,000 from operating agreements.
Cost of Revenues
Cost of revenues for the three months ended June 30, 2000 were $8.8 million or
72% 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 was 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.
Cost of revenues for the three months ended June 30, 1999 were $2.2 million or
59.2% of revenues.
Selling, general and administrative expenses for the three months ended June 30,
2000 were $1.9 million compared to $1.1 million for the three months ended June
30, 1999, an increase of $.8 million, or 80%. The primary reason for the
increase is the infrastructure established during the fifteen months ended June
30, 2000 in order to effectively enter the Car Care Industry and execute the
Company's growth strategy. 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.
Additionally, the Company wrote off $580,000 of acquisition related costs
associated with terminated pending acquisitions.
Depreciation and amortization totaled $605,000 for the three months ended June
30, 2000 as compared to $174,000 for the same period in 1999. This increase is
the net result of increased depreciation expense from entering the Car Care
industry, which required a substantial investment in property and equipment, and
the recording of goodwill associated with acquisitions, which increased
amortization expense.
Taxes
The Company recorded a tax benefit from continuing operations of $118,000 for
the three months ended June 30, 2000. Tax benefit 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 June 30, 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 June 30, 2000, the Company had a working capital deficit of approximately
$3.2 million, including cash and cash equivalents of $3.8 million. For the six
months ended June 30, 2000, net cash provided by operations was approximately
$1.4 million, net cash provided by financing activities was approximately $1.1
million and net cash used in investing activities was approximately $1.0 million
resulting in an increase in cash and cash equivalents of approximately $1.5
million. Capital expended during the period included $700,000 for the purchase
of operating equipment and real estate, and $310,000 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 $500,000 for the remainder of the
year ending December 31, 2000. At June 30, 2000, the Company had borrowings of
$33.2 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
21
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 $1.1 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 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.
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. Purchased
shares through June 30, 2000 totaled approximately $490,000. 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.
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.
22
PART II
OTHER INFORMATION
Item 5. Other Information
The Company's 2000 annual meeting of stockholders is expected to be held in
December of 2000. 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 October
1, 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
October 1, 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).+
*10.126 Merger Agreement and Plan of Reorganization dated March 8,
2000, by and among Wash Depot Holdings, Inc., Mace Security
International, Inc., and Mace Holdings, Inc., a wholly owned
subsidiary of Mace Security International, Inc. (Exhibit 2.1
to the Company's Current Report on Form 8-K dated April 27,
2000).+
*10.127 Acknowledgment of Schedules and Clarification of Certain
Provisions of Merger Agreement dated April 27, 2000 (Exhibit
2.2 to the Company's Current Form on 8-K dated April 27,
2000).
*10.128 Form of Equity Purchase Agreement to be issued by Mace to
Fusion Capital (included as Exhibit A to Master Facility
Agreement in Exhibit 10.1 of S-3) (Exhibit 4.1 to the
Company's Current Form on S-3 dated April 11, 2000).
*10.129 Master Facility Agreement, dated as of April 5, 2000, between
Mace and Fusion Capital (Exhibit 10.1 to the Company's Current
Form on S-3 dated April 11, 2000).
27 Financial Data Schedules (Electronic filed only).
______________________________________________________________________
* Incorporated by reference as indicated to the Company's
Current Report on Form 8-K or the Company's Registration
Statement on Form S-3.
+ 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 April 7, 2000, the Company filed a report on Form 8-K dated March
24, 2000, under Item 2 to report the acquisition of the assets of five
truck wash facilities (the "Red Baron Truck Washes") by Mace Truck
Wash, Inc., a subsidiary of the Company. In accordance with the
applicable regulations under the Securities and Exchange Act of 1934,
the Company has concluded that Securities and Exchange Act rules do
not require the filing of financial statements with respect to the
acquired company.
On May 4, 2000, the Company filed a report on Form 8-K dated April 27,
2000, under Item 2 to report that the Company executed a merger
agreement under which Wash Depot agreed to a proposed merger into a
subsidiary of the Company.
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 and Principal Accounting Officer
DATE: August 11, 2000
24
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedules (Electronic filed only)
25