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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2001 COMMISSION FILE NO. 0-22810
MACE SECURITY INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
03-0311630
(I.R.S. Employer Identification No.)
1000 Crawford Place, Suite 400, Mount Laurel, NJ 08054
(Address of Principal Executive Offices)
Registrant's Telephone No., including area code: (856) 778-2300
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock:
As of November 7, 2001, there were 25,428,427 Shares of Registrant's Common
Stock, par value $.01 per share, outstanding.
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Mace Security International, Inc.
Form 10-Q
Quarter Ended September 30, 2001
Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets - September 30, 2001 (Unaudited)
and December 31, 2000 2
Consolidated Statements of Operations for the three
months ended September 30, 2001 and 2000 (Unaudited) 4
Consolidated Statements of Operations for the nine
months ended September 30, 2001 and 2000 (Unaudited) 5
Consolidated Statement of Stockholders' Equity
for the nine months ended September 30, 2001 (Unaudited) 6
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2001 and 2000 (Unaudited) 7
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
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.
Consolidated Balance Sheets
September 30, December 31,
ASSETS 2001 2000
--------------- --------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 6,037,854 $ 4,838,023
Accounts receivable, less allowance for doubtful
accounts of $306,123 and $260,825 in 2001 and 2000,
respectively 1,160,412 737,547
Inventory 2,213,130 2,256,477
Deferred income taxes 98,261 118,575
Prepaid expenses and other current assets 3,075,672 2,699,996
--------------- --------------
Total current assets 12,585,329 10,650,618
Property and equipment:
Land 32,592,391 32,597,872
Buildings and leasehold improvements 36,256,721 36,739,752
Machinery and equipment 8,566,967 8,223,801
Furniture and fixtures 428,412 257,549
--------------- --------------
Total property and equipment 77,844,491 77,818,974
Accumulated depreciation and amortization (6,753,349) (5,423,330)
--------------- --------------
71,091,142 72,395,644
Excess of cost over net assets of acquired businesses, net of
accumulated amortization of $1,810,017 and $1,143,239 in
2001 and 2000, respectively 20,360,188 20,881,085
Other intangible assets, net of accumulated amortization
of $1,349,904 and $1,223,702 in 2001 and 2000, respectively 1,023,332 1,142,485
Other assets 161,959 1,061,596
--------------- --------------
Total assets $105,221,950 $106,131,428
=============== ==============
See accompanying notes.
2
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
------------ ------------
(Unaudited)
Current liabilities:
Current portion of long-term debt $ 2,260,922 $ 6,264,630
Current portion of capital lease obligations 164,639 57,633
Accounts payable 2,331,715 2,821,752
Income taxes payable 81,639 190,127
Deferred revenue 123,064 315,743
Accrued expenses and other current liabilities 3,578,454 2,003,370
------------ ------------
Total current liabilities 8,540,433 11,653,255
Deferred income taxes 537,284 272,473
Long-term debt, net of current portion 32,290,524 30,094,300
Capital lease obligations, net of current portion 282,266 268,455
Other liabilities - 965,625
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 10,000,000
Issued and outstanding shares - none - -
Common stock, $.01 par value:
Authorized shares - 100,000,000
Issued and outstanding shares of 25,428,427 and
25,480,590 in 2001 and 2000, respectively 254,284 254,806
Additional paid-in capital 69,959,198 69,905,062
Accumulated deficit (6,642,039) (7,282,548)
------------ ------------
Total stockholders' equity 63,571,443 62,877,320
------------ ------------
Total liabilities and stockholders' equity $105,221,950 $106,131,428
============ ============
See accompanying notes.
3
Mace Security International, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
September 30,
--------------------------
2001 2000
------------ ------------
Revenues:
Car wash and detailing services $ 8,932,935 $ 9,874,420
Lube and other automotive services 1,084,136 1,295,002
Fuel and merchandise sales 888,118 1,454,493
Operating agreements 60,000 60,000
------------ ------------
10,965,189 12,683,915
Cost of revenues:
Car wash and detailing services 6,503,579 7,385,333
Lube and other automotive services 840,207 989,481
Fuel and merchandise sales 794,897 1,285,180
------------ ------------
8,138,683 9,659,994
Selling, general and administrative expenses 1,717,296 1,835,475
Depreciation and amortization 683,742 639,754
Costs of terminated acquisitions 33,080 -
------------ ------------
Operating income 392,388 548,692
Interest expense, net (711,750) (788,023)
Other income 288,643 115,754
------------ ------------
Loss before income taxes (30,719) (123,577)
Income tax benefit (11,000) (40,000)
------------ ------------
Net loss $ (19,719) $ (83,577)
============ ============
Basic loss per share $ - $ -
============ ============
Weighted average number of shares outstanding 25,428,427 24,997,957
============ ============
Diluted loss per share $ - $ -
============ ============
Weighted average number of shares outstanding 25,428,427 24,997,957
============ ============
See accompanying notes.
4
Mace Security International, Inc.
Consolidated Statements of Operations
(Unaudited)
Nine Months Ended
September 30,
------------------------------
2001 2000
-------------- --------------
Revenues:
Car wash and detailing services $ 30,308,114 $ 28,677,377
Lube and other automotive services 3,445,462 3,719,105
Fuel and merchandise sales 2,902,152 4,018,349
Operating agreements 180,000 200,756
-------------- --------------
36,835,728 36,615,587
Cost of revenues:
Car wash and detailing services 21,149,129 20,368,139
Lube and other automotive services 2,626,229 2,832,177
Fuel and merchandise sales 2,590,846 3,500,788
-------------- --------------
26,366,204 26,701,104
Selling, general and administrative expenses 5,473,992 5,395,210
Depreciation and amortization 2,036,681 1,808,170
Costs of terminated acquisitions 106,602 580,000
-------------- --------------
Operating income 2,852,249 2,131,103
Interest expense, net (2,263,042) (2,260,432)
Other income 428,302 324,081
-------------- --------------
Income from continuing operations before income taxes 1,017,509 194,752
Income tax expense 377,000 63,000
-------------- --------------
Income from continuing operations 640,509 131,752
Discontinued Operations:
Loss from discontinued operations,
net of applicable income tax benefit of $130,000 - (264,601)
Gain on disposal of ICS, net of $107,000 of applicable
income tax expense - 723,581
-------------- --------------
Net income $ 640,509 $ 590,732
============== ==============
Basic income per share
From continuing operations $ 0.03 $ 0.01
From discontinued operations - 0.02
-------------- --------------
Total $ 0.03 $ 0.03
============== ==============
Weighted average number of shares outstanding 25,455,350 23,922,676
============== ==============
Diluted income per share
From continuing operations $ 0.03 $ -
From discontinued operations - 0.02
-------------- --------------
Total $ 0.03 $ 0.02
============== ==============
Weighted average number of shares outstanding 25,490,776 24,764,687
============== ==============
See accompanying notes.
5
Mace Security International, Inc.
Consolidated Statement of Stockholders' Equity
(Unaudited)
Number of Par Value Additional
Common of Common Paid-in Accumulated
Shares Stock Capital Deficit Total
----------- ----------- ----------- ------------- -----------
Balance at December 31, 2000...... 25,480,590 $ 254,806 $69,905,062 $(7,282,548) $62,877,320
Common stock issued in purchase
acquisitions.................... 26,137 261 144,239 144,500
Shares purchased and retired...... (78,300) (783) (86,084) (86,867)
Expenses from issuance of
common stock.................... (4,019) (4,019)
Net income........................ 640,509 640,509
----------- ----------- ----------- ------------- -----------
Balance at September 30, 2001..... 25,428,427 $ 254,284 $69,959,198 $(6,642,039) $63,571,443
=========== =========== =========== ============= ===========
See accompanying notes.
6
Mace Security International, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
----------------------------
2001 2000
------------- -------------
Operating activities
Income from continuing operations $ 640,509 $ 131,752
Discontinued operations, net of income tax - 458,980
------------- -------------
Net income 640,509 590,732
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,036,681 1,808,170
Provision for losses on receivables 20,000 12,361
(Gain) loss on disposal of property and equipment (215,891) 16,235
Deferred income taxes 285,125 (146,288)
Net gain on sale of ICS, including cash surrendered - (975,199)
Non-cash expenses of discontinued operations - 24,206
Changes in operating assets and liabilities:
Accounts receivable (20,228) 476,905
Inventory 41,936 (52,925)
Accounts payable (562,482) (778,962)
Deferred revenue (192,679) (197,742)
Accrued expenses 763,618 496,026
Income taxes (108,488) (30,212)
Prepaid expenses and other assets (550,648) 904,251
------------- -------------
Net cash provided by operating activities 2,137,453 2,147,558
Investing activities
Acquisition of businesses, net of cash acquired - (25,000)
Purchase of property and equipment (618,295) (1,073,487)
Proceeds from sale of property and equipment 1,326,825 15,468
Payments for intangibles (15,800) (429,900)
Deposits and other prepaid costs on future acquisitions - 149,165
------------- -------------
Net cash provided by (used in) investing activities 692,730 (1,363,754)
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 (1,539,466) (1,521,822)
Proceeds from issuance of common stock, net of offering costs (4,019) 1,499,141
Payments to purchase stock (86,867) (5,493)
Net payments on note payable to shareholder - (2,927)
------------- -------------
Net cash (used in) provided by financing activities (1,630,352) 918,899
------------- -------------
Net increase in cash and cash equivalents 1,199,831 1,702,703
Cash and cash equivalents at beginning of period 4,838,023 2,320,804
------------- -------------
Cash and cash equivalents at end of period $ 6,037,854 $ 4,023,507
============= =============
See accompanying notes.
7
Mace Security International, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation and Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Mace Security International, Inc. and its wholly owned subsidiaries
(the "Company"). All significant intercompany accounts and transactions have
been eliminated in consolidation. These consolidated financial statements
reflect all adjustments (consisting of normal recurring accruals), which in the
opinion of management, are necessary for a fair presentation of results of
operations for the interim periods presented. The results of operations for the
three and nine month periods ended September 30, 2001, are not necessarily
indicative of the operating results for the full year. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. These interim financial statements should be read in conjunction with
the audited financial statements and notes contained in the Company's Annual
Report on Form 10-KSB, as amended, for the year ended December 31, 2000.
2. Significant Accounting Policies
On June 29, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Intangible Assets. These
statements are expected to result in significant modifications relative to the
Company's accounting for goodwill and other intangible assets. SFAS No. 141
requires that all business combinations initiated after June 30, 2001, must be
accounted for under the purchase method of accounting. SFAS No. 141 was
effective upon issuance. SFAS No. 142 modifies the accounting for all purchased
goodwill and intangible assets. SFAS No. 142 includes requirements to test
goodwill and indefinite lived intangible assets for impairment rather than
amortize them. SFAS No. 142 will be effective for fiscal years beginning after
December 31, 2001, and early adoption is not permitted except for business
combinations entered into after June 30, 2001. The Company is currently
evaluating the provisions of SFAS No. 142, but its preliminary assessment is
that these Statements will have a material impact on the Company's financial
position and results of operations. Upon adoption of SFAS 142, on January 1,
2002, the Company will no longer amortize goodwill, thereby eliminating annual
amortization expense up to approximately $900,000.
3. Business Combinations
Since April 1, 1999, the Company has acquired 62 car care facilities and five
truck wash facilities through the acquisition of 17 separate businesses. The
facilities acquired include: 43 full service facilities, one self service
facility, 11 exterior only facilities and one lube center in Pennsylvania, New
Jersey, Delaware, Texas, Florida and Arizona. Seven facilities have been
divested. The five full service truck wash facilities are located in Arizona,
Indiana, Ohio and Texas.
Of the 17 car and truck wash acquisitions completed through September 30, 2000,
15 were accounted for using the purchase method of accounting. Accordingly,
assets acquired and liabilities assumed have been recorded at their estimated
fair values at the dates of acquisition and their results of operations are
included in the accompanying consolidated statements of operations since the
date of acquisition. The excess of purchase price over the estimated fair
market value of identifiable net assets acquired is being amortized on a
straight-line basis over twenty-five years from the date of acquisition. The
purchase price allocations are based on preliminary estimates as of the
acquisition dates and are finalized within one year from the date of
acquisition.
On March 24, 2000, the Company, through a wholly owned subsidiary, acquired all
of the truck wash related assets of Red Baron Truck Washes, Inc. ("Red Baron")
with a total of five operating locations in Arizona, Indiana, Ohio and Texas.
Consideration consisted of 568,421 registered shares of common stock of the
Company and the issuance of a secured $1 million promissory note to the seller.
The transaction has been accounted for using the purchase method of accounting.
On June 5, 2000, the Company, through a wholly owned subsidiary, acquired
certain assets of Sparsupco, Inc. (the "Beneva Car Wash"). Consideration
consisted of 40,000 registered and 90,712 unregistered shares of common stock of
the Company and $20,000 of cash. The Beneva Car Wash is located in Sarasota,
Florida. The transaction has been accounted for using the purchase method of
accounting.
On July 10, 2000, the Company, through a wholly owned subsidiary, completed the
acquisition of substantially all the assets of Superstar Kyrene, a full service
car wash in the Phoenix, Arizona area, in exchange for 56,521 unregistered
shares of common stock of the Company, cash consideration of approximately
$824,000 and the assumption of approximately $926,000 of debt. The transaction
has been accounted for using the purchase method of accounting.
8
On July 26, 2000, the Company acquired, through a wholly owned subsidiary,
substantially all of the assets of Blue Planet Car Wash ("Blue Planet"), a full
service car wash in the Dallas, Texas area, in exchange for 250,008 unregistered
shares of common stock, and the assumption of approximately $1,554,000 of debt.
This transaction has been accounted for using the purchase method of accounting.
On August 28, 2001, the Company sold, through a wholly-owned subsidiary,
substantially all of the assets of Gabe's Plaza Car Wash in Morrisville,
Pennsylvania. The Company received an aggregate cash sales price of $1.2
million, $315,000 of which was utilized to pay off a promissory note.
4. Operating Agreements
During a portion of the nine months ended September 30, 2000, the Company
managed three car wash locations under operating agreements, under which the
Company was entitled to all profits generated from the operation of the
location. Operating agreements generally arise from pending acquisitions that
will be closed pending completion of certain conditions. The pretax result
earned under the operating agreements is presented in the accompanying
statements of operations as revenue from operating agreements net of all
operating expenses. No locations were operated under operating agreements
during the three months ended September 30, 2000 and 2001, or the nine months
ended September 30, 2001.
The results of operations subject to operating agreements in the nine months
ended September 30, 2000, were as follows:
Nine Months
Ended
September 30,
2000
-------------
Revenues (In Thousands)
Car wash and detailing services $804
Fuel and merchandise sales 53
-------------
857
Cost of revenues
Car wash and detailing services 727
Fuel and merchandise sales 38
-------------
765
Selling, general, and administrative expenses 52
-------------
Operating profit $ 40
=============
In addition to the above results, the Company is currently being paid $20,000
per month under a Management Agreement which allows Mark Sport, Inc., an entity
controlled by Jon E. Goodrich, to operate the Company's Security Products
Division. The Management Agreement commenced in January 2000. Jon Goodrich is
a director of the Company.
5. Discontinued Operations
On May 4, 2000, the Board of Directors of the Company approved a plan to sell
its computer products and services subsidiary, ICS. Accordingly, the operating
results of ICS have been segregated from continuing operations and reported on a
comprehensive basis as a separate line item on the consolidated statement of
operations entitled "Discontinued Operations." On June 2, 2000, the Company
sold ICS in exchange for the return of 450,000 shares of common stock of the
Company and $295,500 of future goods and services from ICS. Revenues related to
the discontinued ICS operations for the nine months ended September 30, 2000,
were $518,753. Loss from discontinued operations for the nine months ended
September 30, 2000, was $264,601, exclusive of a gain on the disposal of ICS of
$723,581.
6. Costs of Terminated Acquisitions
The Company's policy is to charge as an expense any previously capitalized
expenditures relating to proposed acquisitions that in management's current
opinion will not be consummated. During the nine months ended September 30,
2000 and 2001, management decided to terminate certain pending acquisitions or
believes certain pending acquisitions will not be consummated as a result of due
diligence findings or the inability of the seller to meet certain terms and
conditions precedent to closing. In the nine months ended September 30, 2000,
costs of previously capitalized expenditures were principally related to the
termination of the Planet Truck Wash acquisition and acquisition related
expenses associated with the proposed Wash Depot Holdings, Inc.
9
("Wash Depot") merger. Of the $580,000 costs of terminated acquisitions in the
nine months ended September 30, 2000, approximately $209,000 represented
unrecoverable cash and stock deposits and approximately $371,000 represented
external incremental transaction costs including legal, accounting, consulting
and due diligence costs. During the nine months ended September 30, 2001, the
write-off of previously capitalized expenditures totaling $107,000 were
principally related to several possible acquisitions the Company pursued outside
the car wash industry. These costs are primarily related to due diligence costs.
7. Commitments and Contingencies
On January 25, 1994, a suit was filed by Carmeta Gentles on her own behalf and
as a personal representative of the estate of Robert Gentles in Ontario Court
(General Division), Ontario, Canada, claiming intentional or negligent
manufacture and distribution of the Mark V Mace(R) brand defense spray unit and
that its contents contributed to the suffering and death of Robert Gentles while
in the Kingston Penitentiary in October 1993. The Company was added as a third
party defendant on February 8, 1995. The plaintiff seeks five million dollars
in damages. The Company forwarded this suit to its insurance carrier for
defense. Based on discussions with the Company's counsel and insurance carrier,
the Company does not anticipate that this claim will result in the payment of
damages in excess of the Company's insurance coverage.
On December 13, 1999, the Company was named as a defendant in a suit filed in
the state of New York by Janeen Johnson et. al. The litigation concerns a claim
that a self-defense spray manufactured by the Company and used by a law
enforcement officer contributed to the suffering and death of Christopher
Johnson. The Company forwarded the suit to its insurance carrier for defense.
The Company does not anticipate that this claim will result in the payment of
damages in excess of the Company's insurance coverage.
Although the Company is not aware of any substantiated claim of permanent
personal injury from its products, the Company is aware of reports of incidents
in which, among other things, defense sprays have been mischievously or
improperly used, in some cases by minors; have not been instantly effective; or
have been ineffective against enraged or intoxicated individuals. Incidents of
this type, or others, could give rise to product liability or other claims, or
to claims that past or future advertising, packaging or other practices should
be, or should have been, modified, or that regulation of products of this nature
should be extended or changed.
The Company is subject to federal and state environmental regulations, including
rules relating to air and water pollution and the storage and disposal of oil,
other chemicals and waste. The Company believes that it complies with all
applicable laws relating to its business.
Certain of the Company's executive officers have entered into employment
agreements whereby they will be entitled to immediate vesting provisions of
issued options should the officer be terminated upon a change in control of the
Company. Additionally, the employment agreement of the Company's Chief
Executive Officer, Louis D. Paolino, Jr., entitles Mr. Paolino to receive a fee
of $7,000,000 upon termination of employment under certain conditions including
upon termination as a result of a change in control.
The Company is a party to various other legal proceedings related to its normal
business activities. In the opinion of the Company's management, none of these
proceedings are material in relation to the Company's results of operations,
liquidity, cash flows or financial condition.
8. Business Segments Information
The Company currently operates in the Car Care segment, supplying complete car
care services (including wash, detailing, lube, and minor repairs), fuel, and
merchandise sales and receives revenues under a Management Agreement related to
the Company's previously operated Security Products segment. In the first
quarter of 2000, the Company entered into a Management Agreement with Mark
Sport, Inc., a Vermont corporation. Mark Sport, Inc. is controlled by Jon E.
Goodrich, a director of the Company. The Management Agreement entitles Mark
Sport, Inc. to operate the Company's Safety and Security Products Division and
receive all profits or losses for a seven-month term beginning January 1, 2000.
The Agreement was extended for three six-month periods through January 31, 2002,
as provided for in the original Management Agreement. In exchange, Mark Sport,
Inc. pays the Company $20,000 per month beginning February 2000 and continuing
through the term of the Management Agreement as extended. Additionally, Mark
Sport, Inc. must pay the Company an amount equal to the amortization and
depreciation on the assets of the division at the end of the term of the
Agreement as extended. During the term of the Agreement, Mark Sport, Inc. must
operate the division in substantially the same manner as it was operated prior
to the Management Agreement.
10
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 September 30, 2001
Revenues from external customers $ 10,905 $ 60
Intersegment revenues - -
Segment (loss) income $ (58) $ 38
Segment assets $101,357 $3,865
Nine months ended September 30, 2001
Revenues from external customers $ 36,656 $ 180
Intersegment revenues - -
Segment income $ 528 $ 113
Three months ended September 30, 2000
Revenues from external customers $ 12,624 $ 60
Intersegment revenues - -
Segment (loss) income $ (124) $ 40
Nine months ended September 30, 2000
Revenues from external customers $ 36,456 $ 160
Intersegment revenues - -
Segment income $ 24 $ 108
9. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from those estimates. Such estimates
include the Company's estimates of reserves such as the allowance for doubtful
accounts receivable and inventory valuation allowances.
10. Income Taxes
The Company recorded a tax expense of $377,000 for the nine months ended
September 30, 2001. Tax expense reflects the recording of income taxes at an
effective rate of 37%. The effective rate differs from the federal statutory
rate primarily due to state and local income taxes, non-deductible costs related
to acquired intangibles, and the use of net operating loss carryforwards.
11
11. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
------------------------------------------------------------
9/30/01 9/30/00 9/30/01 9/30/00
------------------------------------------------------------
Numerator:
(Loss) income from continuing operations....... $ (19,719) $ (83,577) $ 640,509 $ 131,752
Income from discontinued operations............ - - - 458,980
------------------------------------------------------------
Net (loss) income.............................. $ (19,719) $ (83,577) $ 640,509 $ 590,732
============================================================
Denominator:
Denominator for basic income
per share - weighted average shares.......... 25,428,427 24,977,957 25,455,350 23,922,676
Dilutive effect of options and warrants........ - - 35,426 842,011
------------------------------------------------------------
Denominator for diluted income
per share - weighted average shares.......... 25,428,427 24,977,957 25,490,776 24,764,687
============================================================
Basic income per share:
From continuing operations..................... $ - $ - $ 0.03 $ 0.01
From discontinued operations................... - - - 0.02
------------------------------------------------------------
Total.......................................... $ - $ - $ 0.03 $ 0.03
============================================================
Diluted income per share:
From continuing operations..................... $ - $ - $ 0.03 $ -
From discontinued operations................... - - - 0.02
------------------------------------------------------------
Total.......................................... $ - $ - $ 0.03 $ 0.02
============================================================
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Factors Influencing Future Results and Accuracy of Forward Looking Statements
This report includes forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended ("Forward Looking Statements"). All statements
other than statements of historical fact included in this section, are Forward
Looking Statements. Although the Company believes that the expectations
reflected in such Forward Looking Statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Generally,
these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies, number
of acquisitions and projected or anticipated benefits from acquisitions made by
or to be made by the Company, or projections involving anticipated revenues,
earnings, levels of capital expenditures or other aspects of operating results.
All phases of the Company's operations are subject to a number of uncertainties,
risks and other influences, many of which are outside the control of the Company
and any one of which, or a combination of which, could materially affect the
results of the Company's operations and whether Forward Looking Statements made
by the Company ultimately prove to be accurate. Such important factors
("Important Factors") that could cause actual results to differ materially from
the Company's expectations are disclosed in this section and elsewhere in this
report. All subsequent written and oral Forward Looking Statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by the Important Factors described below that could cause actual
results to differ from the Company's expectations. The Forward Looking
Statements made herein are only made as of the date of this filing and the
Company undertakes no obligation to publicly update such Forward Looking
Statements to reflect subsequent events or circumstances.
We need to raise additional capital. Additional capital will be needed if
acquisitions of car washes or other businesses are made. Our capital
requirements also include working capital for daily operations and capital for
equipment purchases. To the extent that we lack cash to meet our future capital
needs, we will be required to raise additional funds through bank borrowings and
additional equity and/or debt financing, which may result in significant
increases in leverage and interest expense and/or substantial dilution. If we
are unable to raise additional capital, we will need to curtail future
acquisitions.
12
Risks of Acquisitions and New Business Segments. Our strategy has been to
grow through acquisitions. We are currently examining acquisition candidates
outside the car care industry. To the extent we make acquisitions inside or
outside the car care industry, our ability to identify suitable acquisition
candidates, understand new businesses, and consummate acquisitions on
financially favorable terms is a risk. Acquisitions involve risks inherent in
assessing acquisition candidates' values, strengths, weaknesses, risks and
profitability and risks related to the financing, integration and operation of
acquired businesses, including:
i. adverse short-term effects on our reported operating results;
ii. diversion of management's attention;
iii. dependence on hiring, training and retaining key personnel;
iv. risks associated with unanticipated problems or latent liabilities;
and
v. risks inherent with management not having experience in new business
segments acquired.
We cannot assure you that acquisition opportunities will be available, that we
will have access to the capital required to finance potential acquisitions, that
we will continue to acquire businesses, or that any acquired business will be
profitable.
Listing on the Nasdaq National Market. If the Company does not maintain a
minimum bid for thirty consecutive days, it is subject to being delisted from
the Nasdaq National Market. If the Company receives a delisting notice from
Nasdaq, the Company's stock may be traded over-the-counter, more commonly known
as OTC. OTC transactions involve risks in addition to those associated with
transactions in securities traded on the Nasdaq National Market. OTC companies
may have limited product lines, markets or financial resources. Many OTC stocks
trade less frequently and in smaller volumes than Nasdaq-listed stocks. The
values of these stocks may be more volatile than Nasdaq-listed stocks. If the
Company's stock is traded in the OTC market and a market maker sponsors the
Company, the Company may have the price of its stock electronically displayed on
the OTC Bulletin Board, or OTCBB. However, if the Company lacks sufficient
market maker support for display on the OTCBB, it must have its price published
by the National Quotations Bureau LLP in a paper publication known as the "Pink
Sheets." The marketability of the Company's stock will be even more limited if
its price must be published on the "Pink Sheets."
On April 19, 2001, the Company was advised by Nasdaq that its common stock had
failed to trade above one dollar for thirty consecutive business days, and was
therefore not in compliance with Marketplace Rule 4450(a)(5) of the Nasdaq
National Market. Nasdaq advised the Company that it had 90 days to maintain a
bid price of at least one dollar for ten consecutive business days or be
delisted. The Company maintained a minimum bid price of at least one dollar for
ten consecutive business days ending May 4, 2001. On May 11, 2001, the Company
was advised by Nasdaq that it was in compliance with Market Place Rule
4450(a)(5) and was not subject to being delisted.
The Company's bid price has been below one dollar since September 10, 2001. In
response to the extraordinary market conditions following the terrorist attacks
of September 11, 2001, The Nasdaq Stock Market, Inc. has implemented a
moratorium until January 2, 2002, on the minimum bid and public float
requirements for continued listing on Nasdaq. In its moratorium announcement,
Nasdaq further indicated it will consider whether it is appropriate to recommend
further and more permanent action regarding these requirements. Should the
Company's common stock fail to trade above one dollar for thirty consecutive
business days subsequent to January 2, 2002, and should the Nasdaq reinstate the
previous minimum bid price requirement, the Company may be subject to delisting
as described above.
We have a history of losses, and we may incur continuing charges. We have
reported net losses and working capital deficits, and we have expended
substantial funds for acquisitions and equipment. In connection with financing
acquisitions and business growth, we anticipate that we will continue to incur
significant debt and interest charges. Several of our debt agreements, as
amended, contain certain affirmative and negative covenants and require the
maintenance of certain levels of earnings before interest, taxes, depreciation,
and amortization to debt service. If our operating earnings are not sufficient
to maintain the required ratios, we would be in default of our loan agreements.
In addition, we will recognize goodwill amortization charges in connection with
our acquisitions that are accounted for under the "purchase" method of
accounting. The amount of goodwill recognized is the amount by which the
purchase price of a business exceeds the fair market value of the assets
acquired. Goodwill is currently amortized over a period not to exceed 25 years
depending on the business acquired, resulting in an annual non-cash charge to
our earnings during that period. Upon adoption of SFAS 142 on January 1, 2002,
the Company will no longer amortize goodwill.
Our business plan poses risks for us. One of our business objective is to
develop as a full service, integrated car care business through some
acquisitions and through the internal development of our car wash facilities.
We have repositioned our company from a company involved primarily in the
production of consumer defense products to a company that provides car wash and
car care services. This strategy involves a number of risks, including:
Risks associated with growth;
Risks associated with acquisitions;
13
Risks associated with the recruitment and development of management and
operating personnel; and Risks associated with lack of experience in the
car care service industries.
If we are unable to manage one or more of these associated risks effectively, we
may not fully realize our business plan.
We have a limited operating history regarding our car wash and car care
service businesses. Since July 1999, our main business has been the acquisition
and operation of car wash and car care service facilities, which now accounts
for substantially all of our revenues. Because of our relatively limited
operating history with respect to these businesses, we cannot assure you that we
will be able to operate them successfully.
We may not be able to manage growth. If we succeed in growing, growth will
place significant burdens on our management and on our operational and other
resources. We will need to attract, train, motivate, retain and supervise our
senior managers and other employees and develop a managerial infrastructure. If
we are unable to do this, we will not be able to realize our business
objectives.
Our car wash business may suffer under certain weather conditions. Seasonal
trends in some periods may affect our car wash business. In particular, long
periods of rain and cloudy weather can affect adversely our car wash business as
people typically do not wash their cars during such periods. Additionally,
extended periods of warm, dry weather may encourage customers to wash their own
cars which also can affect adversely our car wash business.
Our stock price is volatile. Our common stock's market price has been and
is likely to continue to be highly volatile. Factors like fluctuations in our
quarterly revenues and operating results, our ongoing acquisition program,
market conditions and economic conditions generally may impact significantly our
common stock's market price. In addition, as we continue to acquire additional
car wash businesses, we may agree to issue common stock that will become
available generally for resale and may have an impact on our common stock's
market price.
We may not be able to integrate businesses we acquire and achieve operating
efficiencies. Our future growth and profitability depend substantially on our
ability to operate and integrate acquired businesses. Our strategy is to achieve
economies of scale and brand-name recognition in part through acquisitions that
increase our size. We cannot assure you that our efforts to integrate acquired
operations will be effective or that we will realize expected results. Our
failure to achieve any of these results could have a material adverse effect on
our business and results of operations.
We face potential liabilities associated with acquisitions of businesses.
The businesses we acquire may have liabilities that we do not discover or may be
unable to discover during our preacquisition investigations, including
liabilities arising from environmental contamination or prior owners' non-
compliance with environmental laws or other regulatory requirements, and for
which we, as a successor owner or operator, may be responsible.
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.
Consumer demand for our car wash services is unpredictable. Our financial
condition and results of operations will depend substantially on consumer demand
for car wash services. Our business depends on consumers choosing to employ
professional services to wash their cars rather than washing their cars
themselves or not washing their cars at all. We cannot assure you that consumer
demand for car wash services will increase as our business expands. Nor can we
assure you that consumer demand will maintain its current level.
We must maintain our car wash equipment. Although we undertake to keep our
car washing equipment in proper operating condition, the operating environment
found in car washes results in frequent mechanical problems. If we fail to
properly maintain the equipment, the car wash could become inoperable resulting
in a loss of revenue to us from the inoperable location.
Our car wash and car services face governmental regulation. We are governed
by federal, state and local laws and regulations, including environmental
regulations, that regulate the operation of our car wash centers and other car
services businesses. Car wash centers utilize cleaning agents and waxes in the
washing process that are then discharged in waste water along with oils and
fluids washed off of vehicles. Other car services, such as gasoline and
lubrication, use of a number of oil derivatives and other regulated hazardous
substances. As a result, we are governed by environmental laws and regulations
dealing with, among other things:
14
i. transportation, storage, presence, use, disposal and handling of
hazardous materials and hazardous wastes;
ii. discharge of stormwater; and
iii. underground storage tanks.
If any of the previously mentioned substances were found on our property,
however, including leased properties, or if we were found to be in violation of
applicable laws and regulations, we could be responsible for clean-up costs,
property damage and fines or other penalties, any one of which could have a
material adverse effect on our financial condition and results of operations.
We face significant competition. The extent and kind of competition that we
face varies. The car wash industry is highly competitive. Competition is based
primarily on location, facilities, customer service, available services and
rates. Because barriers to entry into the car wash industry are relatively low,
competition may be expected to continually arise from new sources not currently
competing with us. In this sector of our business we also face competition from
outside the car wash industry, such as gas stations and convenience stores, that
offer automated car wash services. In some cases, these competitors may have
significantly greater financial and operating resources than we do. In our car
service businesses, we face competition from a number of sources, including
regional and national chains, gasoline stations and companies and automotive
companies and specialty stores, both regional and national.
Our operations are dependent substantially on the services of our executive
officers. If we lose one or more of our executive officers, the loss could have
a material adverse effect on our business and results of operations. We do not
maintain key-man life insurance policies on our executive officers.
Our Preferred Stock may affect the rights of the holders of our common
stock; it may also discourage another person to acquire control of Mace. Our
Certificate of Incorporation authorizes the issuance of up to 10,000,000 shares
of Preferred Stock. No shares of Preferred Stock are currently outstanding. It
is not possible to state the precise effect of Preferred Stock upon the rights
of the holders of our common stock until the Board of Directors determines the
respective preferences, limitations and relative rights of the holders of one or
more series or classes of the Preferred Stock. However, such effect might
include: (i) reduction of the amount otherwise available for payment of
dividends on Common Stock, to the extent dividends are payable on any issued
shares of Preferred Stock, and restrictions on dividends on Common Stock if
dividends on the Preferred Stock are in arrears, (ii) dilution of the voting
power of the Common Stock to the extent that the Preferred Stock has voting
rights, and (iii) the holders of Common Stock not being entitled to share in the
Company's assets upon liquidation until satisfaction of any liquidation
preference granted to the Preferred Stock.
The Preferred Stock may be viewed as having the effect of discouraging an
unsolicited attempt by another person to acquire control of Mace and may
therefore have an anti-takeover effect. Issuances of authorized preferred shares
can be implemented, and have been implemented by some companies in recent years
with voting or conversion privileges intended to make an acquisition of the
company more difficult or costly. Such an issuance could discourage or limit the
stockholders' participation in certain types of transactions that might be
proposed (such as a tender offer), whether or not such transactions were favored
by the majority of the stockholders, and could enhance the ability of officers
and directors to retain their positions.
Some provisions of Delaware law may prevent us from being acquired. We are
governed by Section 203 of the Delaware General Corporation Law, which prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with a person who is an "interested stockholder" for a period of three (3)
years, unless approved in a prescribed manner. This provision of Delaware law
may affect our ability to merge with, or to engage in other similar activities
with, some other companies. This means that we may be a less attractive target
to a potential acquirer who otherwise may be willing to pay a price for our
common stock above its market price.
We do not expect to pay cash dividends on our common stock. We do not
expect to pay any cash dividends on our common stock in the foreseeable future.
We will reinvest any cash otherwise available for dividends in our business.
There are additional risks set forth in the incorporated documents. In
addition to the risk factors set forth above, you should review the financial
statements and exhibits incorporated into this report. Such documents may
contain, in certain instances and from time to time, additional and supplemental
information relating to the risks set forth above and/or additional risks to be
considered by you, including, without limitation, information relating to losses
experienced by Mace in particular historical periods, working capital deficits
of Mace at particular dates, information relating to pending and recently
completed acquisitions, descriptions of new or changed federal or state
regulations applicable to Mace, data relating to remediation and the actions
taken by Mace, and estimates at various times of Mace's potential liabilities
for compliance with environmental laws or in connection with pending litigation.
15
Results of Operations for the Nine Months Ended September 30, 2001, Compared to
the Nine Months Ended September 30, 2000
Revenues
Car Care Services
The Company owns full service, exterior only and self service car wash locations
in New Jersey, Pennsylvania, Delaware, Texas, Florida and Arizona, as well as
truck washes in Arizona, Indiana, Ohio and Texas. The Company earns revenues
from washing and detailing automobiles; performing oil and lubrication services,
minor auto repairs, and state inspections; selling fuel; and selling merchandise
through convenience stores within the car wash facilities. Revenues generated
for the nine months ended September 30, 2001, for the car care segment were
comprised of approximately 83% car wash and detailing, 9% lube and other
automotive services, 8% fuel and merchandise.
The majority of revenues are collected in the form of cash or credit card
receipts, thus minimizing customer accounts receivable.
Weather can have a significant impact on volume at the individual locations.
However, the Company believes that the geographic diversity of its operating
locations minimizes weather-related influence on its volume.
Security Products
The Company is currently being paid $20,000 per month under a Management
Agreement which allows Mark Sport, Inc. an entity controlled by Jon E. Goodrich,
a director of the Company, to operate the Security Products segment. Total
revenues under the Management Agreement were $180,000 for the nine months ending
September 30, 2001.
Computer Products and Services
The Company's computer products and services subsidiary, ICS, was sold in June
of 2000 and has accordingly been reflected as discontinued operations in 2000.
Cost of Revenues
Car Care Services
Cost of revenues consists primarily of direct labor and related taxes and
benefits, chemicals, wash and detailing supplies, rent, real estate taxes,
utilities, maintenance and repairs of equipment and facilities, as well as the
cost of the fuel and merchandise sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of management,
clerical and administrative salaries, professional services, insurance premiums,
and costs relating to marketing and sales.
The Company capitalizes direct incremental costs associated with purchase
acquisitions. Indirect acquisition costs, such as executive salaries, corporate
overhead, public relations, and other corporate services and overhead are
expensed as incurred. The Company also charges as an expense any capitalized
expenditures relating to proposed acquisitions that management has determined
will not be consummated. At September 30, 2001, the Company had no capitalized
costs related directly to proposed acquisitions that were not yet consummated.
Depreciation and Amortization
Depreciation and amortization consists primarily of depreciation of buildings
and equipment, and amortization of goodwill and other intangible assets.
Buildings and equipment are depreciated over the estimated useful lives of the
assets using the straight-line method. Goodwill is amortized on a straight-line
basis over 25 years. Other intangibles are amortized over their useful lives
ranging from three to twenty years, using the straight-line method.
Interest Expense, Net
Interest expense, net of interest income, for the nine months ended September
30, 2001, was $2,263,000 compared to $2,260,000 for the nine months ended
September 30, 2000. This is the result of additional interest expense on
borrowings relating to several acquisitions in the nine month period ended
September 30, 2000, and additional working capital borrowings through a
refinancing
16
in the last quarter of 2000. This increase was offset by a decrease in interest
rates on approximately 50% of the Company's long term debt which has interest
rates tied to the prime rate.
Other Income and Expense
Other income and expense includes gains and losses on the sale of equipment and
rental income received on renting out excess space at the Company's car wash
facilities.
Taxes
Income tax expense is derived from tax provisions for interim periods that are
based on the Company's estimated annual effective rate. Currently, the
effective rate differs from the federal statutory rate primarily due to state
and local income taxes, non-deductible costs related to acquired intangibles,
and the use of net operating loss carryforwards.
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues:
Nine Months Ended
September 30,
-----------------
2001 2000
------ --------
Revenues 100.0% 100.0%
Cost of revenues 71.6 72.9
Selling, general and administrative expenses 14.9 14.8
Depreciation and amortization 5.5 4.9
Costs of terminated acquisitions 0.3 1.6
----- ------
Operating income 7.7 5.8
Interest expense, net (6.1) (6.2)
Other income 1.2 0.9
----- ------
Income from continuing operations before income taxes 2.8 0.5
Income tax expense 1.1 0.2
----- ------
Income from continuing operations 1.7 0.3
Loss from discontinued operations - (0.7)
Gain on disposal of ICS - 2.0
----- ------
Net income 1.7% 1.6%
===== ======
Revenues
Car Care Services
Revenues for the nine months ended September 30, 2001, were $36.6 million as
compared to $36.4 million for the nine months ended September 30, 2000, an
increase of $0.2 million or 1%. Of the $0.2 million increase, approximately $1.6
million was from wash and detail services, which was partially offset by
decreases of approximately $274,000 in lube sales, and $1.1 million in fuel and
merchandise sales. Of the $36.6 million of revenues for the nine months ended
September 30, 2001, $30.3 million or 83% was generated from car wash and
detailing, $3.4 million or 9% from lube and other automotive services, and $2.9
million or 8% from fuel and merchandise sales. Of the $36.4 million of revenues
for the nine months ended September 30, 2000, $28.7 million or 79% was generated
from car wash and detailing, $3.7 million or 10% from lube and other automotive
services, and $4.0 million or 11% from fuel and merchandise sales. The net
increase in total revenue in 2001 is attributable to revenues earned at a car
wash and five truck washes the Company acquired during 2000; internal growth
through a focus on selling detailing and additional on-line car wash services
which increased the average wash and detailing revenue per car by 14.7% or $1.88
to $14.67 in the nine months ended September 30, 2001, from $12.79 per car in
the first nine months of 2000; offset partially by a reduction in wash revenues
due to the divestiture of several car wash sites since the third quarter of
2000, and an approximate $1.4 million or 18% decline in lube services, fuel and
merchandise sales.
During a portion of the nine months ended September 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
17
under operating agreements for the nine months ended September 30, 2000, was
$857,000. No locations were operated under operating agreements during the nine
months ended September 30, 2001.
Security Products
During the nine months ended September 30, 2001, pursuant to a Management
Agreement, the Company was paid $180,000. This amount is included under revenues
from operating agreements. The Company was paid $160,000 under this Agreement
for the nine months ended September 30, 2000.
Cost of Revenues
Car Care Services
Cost of revenues for the nine months ended September 30, 2001, were $26.4
million or 72% of revenues with car washing and detailing costs at 70% of
respective revenues, lube and other automotive services costs at 76% of
respective revenues, and fuel and merchandise costs at 89% of respective
revenues.
Cost of revenues for the nine months ended September 30, 2000, were $26.7
million, or 73% of revenues. However, because income earned under operating
agreements is shown as a net figure in revenue, already reduced by cost of
revenues, the cost of revenue percentage for this segment is better analyzed on
a gross method. With revenues and cost of revenues for locations under operating
agreement shown on a gross basis, total cost of revenues for the nine months
ended September 30, 2000, was $27.5 million or 74% of revenues for this segment,
with car wash and detailing costs at 72% of respective revenues, lube and other
automotive services costs at 76% of respective revenues, and fuel and
merchandise costs at 87% of respective revenues. With the Company's increase in
its average wash and detailing revenues per car by $1.88 or 14.7% over the first
nine months of 2000 and continued emphasis on controlling operating costs, the
Company has a net increase in wash and detailing operating margins in the
current year. The overall increase in margin is partially offset by a 6.0%
reduction in car wash volume due largely to inclement weather in the current
year. In the nine months ended September 30, 2001, approximately 32.4% of the
Company's operating days within its markets were rainy or cloudy as compared to
28.4% in the nine months ended September 30, 2000.
Security Products
During 2000 and 2001, pursuant to a Management Agreement, no costs were incurred
by the Company.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September
30, 2001, were $5.48 million compared to $5.40 million for the same period in
2000, an increase of approximately $80,000 or 1%. SG&A costs as a percent of
revenues were 14.9% for the nine months ended September 30, 2001, as compared to
14.8% in the first nine months of 2000. Most of this increase is as a result of
SG&A costs incurred at the six additional locations acquired during 2000 and
three sites transitioned from operating agreements to being owned. The
remainder of the increase is primarily the result of increases in advertising,
insurance costs and business taxes. This increase was partially offset by a
reduction of administrative costs as a result of efficiencies gained through
consolidating all regional back office activity into the Mt. Laurel, New Jersey,
corporate office.
In the nine months ended September 30, 2001, the Company wrote off approximately
$107,000 of acquisition costs associated with terminated pending acquisitions.
Additionally, in the same period in 2000, the Company wrote off $580,000 of
acquisition related costs associated with terminated pending acquisitions.
Depreciation and Amortization
Depreciation and amortization totaled $2.0 million for the nine months ended
September 30, 2001, as compared to $1.8 million for the same period in 2000.
This increase is primarily attributable to the six additional sites acquired
during 2000 and three sites transitioned from an operating agreement to being
owned.
Interest Expense, Net
Interest expense, net of interest income, for the nine months ended September
30, 2001, was $2,263,000 compared to $2,260,000 for the nine months ended
September 30, 2000. This is the result of additional interest expense on
borrowings relating to several acquisitions in the nine month period ended
September 30, 2000, and additional working capital borrowings through a
refinancing
18
in the last quarter of 2000. This increase was offset by a decrease in interest
rates on approximately 50% of the Company's long term debt which has interest
rates tied to the prime rate.
Other Income
In the quarter ended September 30, 2001, the Company sold its facility in
Morrisville, Pennsylvania and recognized a pre-tax gain of approximately
$216,000.
Taxes
The Company recorded a tax expense of $377,000 for the nine months ended
September 30, 2001. Tax expense reflects the recording of income taxes at an
effective rate of 37%. The effective rate differs from the federal statutory
rate primarily due to state and local income taxes, non-deductible costs related
to acquired intangibles, and the use of net operating loss carryforwards.
Results of Operations for the Three Months Ended September 30, 2001 Compared to
the Three Months Ended September 30, 2000
Revenues
Car Care Services
Revenues for the three months ended September 30, 2001, were $10.9 million as
compared to $12.6 million for the three months ended September 30, 2000, a
decrease of $1.7 million or 14%. Of the $1.7 million decrease, approximately
$0.9 million was from wash and detail services, approximately $0.2 was in lube
sales and $0.6 was in fuel and merchandise sales. Of the $10.9 million of
revenues for the three months ended September 30, 2001, $8.9 million or 82% was
generated from car wash and detailing, $1.1 million or 10% from lube and other
automotive services, and $0.9 million or 8% from fuel and merchandise sales. Of
the $12.6 million of revenues for the three months ended September 30, 2000,
$9.9 million or 78% was generated from car wash and detailing, $1.3 million or
10% from lube and other automotive services, and $1.4 million or 12% from fuel
and merchandise sales. The $0.9 million decrease in wash and detail services
was largely the result of more rain and cloud days in the Company's Texas
region, a temporary decrease in car wash volume in all of the Company's regions
due to the terrorist attacks against the United States on September 11, 2001,
and a reduction in wash volume due to the divestiture of several car wash sites
since the third quarter of 2000. The volume decrease was partially offset by
internal price growth through a focus on selling detailing and additional on-
line car wash services which increased the average wash and detailing revenue
per car by 5.8% or $0.80 to $14.54 in the three months ended September 30, 2001,
from $13.74 per car in the three months ended September 30, 2000.
Security Products
During the three months ended September 30, 2001, pursuant to a Management
Agreement, the Company was paid $60,000. This amount is included under revenues
from operating agreements. The Company was paid $60,000 under this Agreement
for the three months ended September 30, 2000.
Cost of Revenues
Car Care Services
Cost of revenues for the three months ended September 30, 2001, were $8.1
million or 75% of revenues with car washing and detailing costs at 73% of
respective revenues, lube and other automotive services costs at 78% of
respective revenues, and fuel and merchandise costs at 90% of respective
revenues.
Cost of revenues for the three months ended September 30, 2000, were $9.7
million, or 77% of revenues, with car wash and detailing costs at 75% of
respective revenues, lube and other automotive services costs at 76% of
respective revenues, and fuel and merchandise costs at 88% of respective
revenues. With the Company's increase in average wash and detailing revenue per
car in the current quarter of $0.80 or 5.8% as compared to the same quarter in
the prior year and continued emphasis on controlling operating costs, the
Company has achieved improved wash and detailing operating margins.
Security Products
During 2000 and 2001, pursuant to a Management Agreement, no costs were incurred
by the Company.
19
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
September 30, 2001, were $1.7 million compared to $1.8 million for the same
period in 2000. SG&A costs as a percent of revenues were 15.7% for the three
months ended September 30, 2001, as compared to 14.5% in the third quarter of
2000.
In the three months ended September 30, 2001, the Company wrote off
approximately $33,000 of costs associated with terminated pending acquisitions.
Depreciation and Amortization
Depreciation and amortization totaled $684,000 for the three months ended
September 30, 2001, as compared to $640,000 for the same period in 2000. This
increase is primarily attributable to the six additional sites acquired during
2000 and three sites transitioned from an operating agreement to being owned.
Interest Expense, Net
Interest expense, net of interest income, for the three months ended September
30, 2001, was $712,000 compared to $788,000 for the three months ended September
30, 2000. This decrease is the result of the decrease in interest rates on
approximately 50% of the Company's long term debt which has interest rates tied
to the prime rate. This decrease was partially offset by additional working
capital borrowings through a refinancing of certain long term debt in the last
quarter of 2000.
Other Income
In the quarter ended September 30, 2001, the Company sold its facility in
Morrisville, Pennsylvania and recognized a pre-tax gain of approximately
$216,000.
Taxes
The Company recorded a tax benefit of $11,000 for the three months ended
September 30, 2001. Tax benefit reflects the recording of income taxes at an
effective rate of 37%. The effective rate differs from the federal statutory
rate primarily due to state and local income taxes, non-deductible costs related
to acquired intangibles, and the use of net operating loss carryforwards.
Liquidity and Capital Resources
The Company's business requires substantial amounts of capital, most notably to
pursue the Company's acquisition strategies and for equipment purchases and
upgrades. The Company plans to meet these capital needs from various financing
sources, including borrowings, internally generated funds, and the issuance of
common stock as the market price of the Company's stock improves.
As of September 30, 2001, the Company had positive working capital of
approximately $4.0 million and cash and cash equivalents of $6.0 million. For
the nine months ended September 30, 2001, net cash provided by operations was
approximately $2.1 million, net cash used in financing activities was
approximately $1.6 million and net cash provided by investing activities was
approximately $693,000 resulting in a net increase in cash and cash equivalents
of approximately $1.2 million. Capital expended during the period included
approximately $634,000 for the purchase of operating equipment, real estate, and
intangibles.
The Company's acquisition program and operations to date have required
substantial amounts of working capital, and the Company expects to continue to
expend funds to support its acquisition program and capital needs for
equipment. The Company estimates aggregate capital expenditures, exclusive of
acquisitions of businesses, of approximately $150,000 for the remainder of the
year ending December 31, 2001.
At September 30, 2001, the Company had borrowings of approximately $35.0
million. The Company has two letters of credit outstanding at September 30,
2001, totaling $625,000 as collateral relating to worker compensation insurance
policies. The Company does not maintain a revolving credit facility. During
2000, the Company refinanced on a long term basis under favorable terms the
majority of its short term debt related to its 1999 and 2000 acquisitions. In
February 2000, the Company entered into a $4.8 million term loan with Bank One,
Texas, NA ("Bank One") to refinance the remaining balance of a short term
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promissory note related to the Genie acquisition and entered into several new
loan agreements with Bank One to finalize the assumption of notes held by Bank
One relating to the Colonial acquisition. Additionally, in November 2000, the
Company entered into a $6.7 million three year term note (15 year amortization
basis) with Bank One to refinance a $1.3 million convertible promissory note to
Bullseye Properties assumed in connection with the acquisition of Eager Beaver,
a $2.1 million SouthTrust Bank note maturing in May 2001, and a $1.0 million
promissory note related to the Red Baron Truck Wash acquisition. The Bank One
term note also provided approximately $800,000 for the purchase of the leased
Beneva Car Wash property and approximately $1.6 million of additional funding,
net of loan closing costs, for capital improvements and working capital.
The Company also had various other long term mortgage notes up for periodic
review during 2001 which the Company has been successful in renewing. Several
of the Company's debt agreements as amended contain certain affirmative and
negative covenants and require the maintenance of certain levels of tangible net
worth and the maintenance of certain debt coverage ratios on an individual
subsidiary and consolidated level. The Company is currently in compliance with
these covenants.
On April 5, 2000, the Company executed a master facility agreement with Fusion
Capital Fund II, LLC ("Fusion") pursuant to which Fusion agreed to enter into up
to two equity purchase agreements, each with an aggregate principal amount of
$12.0 million. The equity purchase agreements allow the Company to suspend the
purchasing of its common stock by Fusion if the price of the Company's common
stock is less than $7.00 per share. The Company is currently not permitting the
purchase of its common stock under the equity purchase agreement due to the
current low trading value of the Company's common stock and the potentially
dilutive effect of such stock purchases. If and when the Company agrees to the
purchase of its stock, Fusion has the right to purchase from the Company shares
of common stock up to $12.0 million at a price equal to the lesser of (1) 140%
of the average of the closing bid prices for our common stock during the 10
trading days prior to the date of the applicable equity purchase agreement or
$7.00, whichever is greater or (2) a price based upon the future performance of
the common stock, in each case without any fixed discount to the market price.
As long as the Company has not suspended Fusion from purchasing its stock, the
equity purchase agreement requires that at the beginning of each month, Fusion
will pay $1.0 million to the Company as partial prepayment for the common stock.
Once the $1.0 million has been applied to purchase shares of our common stock,
Fusion will pay the remaining principal amount upon receipt of our common stock.
The first equity purchase agreement was executed by Fusion on April 17, 2000.
Proceeds from purchased shares through September 30, 2001 totaled approximately
$1.3 million. The second equity purchase agreement will be executed after
delivery of an irrevocable written notice by the Company to Fusion stating that
we elect to enter into such purchase agreement with Fusion. The second equity
purchase agreement may be entered into only after the principal amount under the
first equity purchase agreement is fully converted into the Company's common
stock.
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.
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PART II
OTHER INFORMATION
Item 5. Other Information
On April 19, 2001, the Company was advised by Nasdaq that its common stock had
failed to trade above one dollar for thirty consecutive business days, and was
therefore not in compliance with Marketplace Rule 4450(a)(5) of the Nasdaq
National Market. Nasdaq advised the Company that it had until July 18, 2001, to
maintain a bid price of at least one dollar for ten consecutive business days or
be delisted. The Company maintained a minimum bid price of at least one dollar
for ten consecutive business days ending May 4, 2001. On May 11, 2001, the
Company was advised by Nasdaq that it was in compliance with Market Place Rule
4450(a)(5) and was not subject to being delisted.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.134 Term Note dated November 6, 2001, between the Company, its
subsidiary, Colonial Full Service Car Wash, Inc., and Bank One,
Texas, N.A. in the amount of $380,000.
(b) Current Reports on Form 8-K or 8-K/A:
On September 27, 2001, the Company filed a report on Form 8-K
dated August 28, 2001 under Item 2 to report the sale of all the
assets of Gabe's Plaza Car Wash, located in Morrisville,
Pennsylvania.
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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: November 9, 2001
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