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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 MARCH 31, 2002 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, Mt. 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 May 7, 2002, there were 25,349,027 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 March 31, 2002
Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 2
Consolidated Balance Sheets - March 31, 2002 (Unaudited) 2
and December 31, 2001
Consolidated Statements of Operations for the three
months ended March 31, 2002 and 2001 (Unaudited) 4
Consolidated Statement of Stockholders' Equity
for the three months ended March 31, 2002 (Unaudited) 5
Consolidated Statements of Cash Flows for the
three months ended March 31, 2002 and 2001 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3 - Qualitative and Quantitative Disclosures about Market Risk 18
PART II - OTHER INFORMATION
Item 1 - Not applicable -
Item 2 - Not applicable -
Item 3 - Not applicable -
Item 4 - Not applicable -
Item 5 - Not applicable -
Item 6 - Exhibits and Reports on Form 8-K 18
1
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Mace Security International, Inc.
Consolidated Balance Sheets
(In thousands except share information)
March 31, December 31,
ASSETS 2002 2001
----------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 6,943 $ 6,612
Accounts receivable, less allowance for doubtful
accounts of $179 and $178 in 2002 and 2001, respectively 852 1,075
Inventories 2,301 2,275
Deferred income taxes 153 145
Prepaid expenses and other current assets 2,177 2,218
--------- ---------
Total current assets 12,426 12,325
Property and equipment:
Land 32,592 32,592
Buildings and leasehold improvements 36,347 36,315
Machinery and equipment 8,878 8,776
Furniture and fixtures 442 431
--------- ---------
Total property and equipment 78,259 78,114
Accumulated depreciation and amortization (7,683) (7,204)
--------- ---------
Total property and equipment, net of accumulated depreciation
and amortization 70,576 70,910
Excess of cost over net assets of acquired businesses, net of
accumulated amortization of $2,031 20,139 20,139
Other intangible assets, net of accumulated amortization
of $1,392 and $1,384 in 2002 and 2001, respectively 918 993
Other assets 293 303
--------- ---------
Total assets $ 104,352 $ 104,670
========= =========
See accompanying notes.
2
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
----------- ------------
(Unaudited)
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 6,756 $ 2,514
Accounts payable 1,987 2,446
Income taxes payable 235 174
Deferred revenue 216 257
Accrued expenses and other current liabilities 1,967 2,125
---------- ----------
Total current liabilities 11,161 7,516
Deferred income taxes 905 638
Long-term debt, net of current portion 26,806 31,570
Capital lease obligations, net of current portion 233 265
Other liabilities 825 825
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 25,349,027 and
25,428,427 in 2002 and 2001, respectively 253 254
Additional paid-in capital 69,897 69,977
Accumulated deficit (5,728) (6,375)
---------- ----------
Total stockholders' equity 64,422 63,856
---------- ----------
Total liabilities and stockholders' equity $ 104,352 $ 104,670
========== ==========
See accompanying notes.
3
Mace Security International, Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands except share information)
Three Months Ended
March 31,
----------------------------
2002 2001
------------ ------------
Revenues:
Car wash and detailing services $ 9,966 $ 10,614
Lube and other automotive services 1,035 1,206
Fuel and merchandise sales 695 949
Operating agreements 60 60
------------ ------------
11,756 12,829
Cost of revenues:
Car wash and detailing services 6,526 7,326
Lube and other automotive services 789 898
Fuel and merchandise sales 601 856
------------ ------------
7,916 9,080
Selling, general and administrative expenses 1,793 1,838
Depreciation and amortization 472 675
------------ ------------
Operating income 1,575 1,236
Interest expense, net (563) (819)
Other income 66 63
------------ ------------
Income before income taxes 1,078 480
Income tax expense 388 178
------------ ------------
Income before cumulative effect of a change in accounting principle $ 690 $ 302
Cumulative effect of a change in accounting principle, net of tax 43 -
------------ ------------
Net income $ 647 $ 302
============ ============
Per share of common stock:
Basic income before cumulative effect of a change in accounting principle $ 0.03 $ 0.01
Cumulative effect of a change in accounting principle, net of tax - -
------------ ------------
Basic net income $ 0.03 $ 0.01
============ ============
Diluted income before cumulative effect of a change in accounting principle $ 0.03 $ 0.01
Cumulative effect of a change in accounting principle, net of tax - -
------------ ------------
Diluted net income $ 0.03 $ 0.01
============ ============
Weighted average shares outstanding:
Basic 25,386,754 25,485,313
Diluted 25,436,763 25,485,836
See accompanying notes.
4
Mace Security International, Inc.
Consolidated Statement of Stockholders' Equity
(Unaudited)
(In thousands except share information)
Number of Par Value Additional
Common of Common Paid-in Accumulated
Shares Stock Capital Deficit Total
------------- ------------- ---------------- -------------- --------------
Balance at December 31, 2001...... 25,428,427 $ 254 $ 69,977 $ (6,375) $ 63,856
Shares purchased and retired...... (79,400) (1) (80) (81)
Net income........................ 647 647
------------- ------------- ---------------- -------------- --------------
Balance at March 31, 2002......... 25,349,027 $ 253 $ 69,897 $ (5,728) $ 64,422
============= ============= ================ ============== ==============
See accompanying notes.
5
Mace Security International, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Three Months Ended
March 31,
-------------------
2002 2001
------- -------
Operating activities
Net income $ 647 $ 302
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 472 675
Deferred income taxes 259 144
Non-cash charge due to change in accounting principle 67 -
Changes in operating assets and liabilities:
Accounts receivable 28 (72)
Inventories (50) 36
Accounts payable (482) (182)
Deferred revenue (48) (136)
Accrued expenses (154) 1
Income taxes 62 (30)
Prepaid expenses and other assets 308 43
------- -------
Net cash provided by operating activities 1,109 781
Investing activities
Purchase of property and equipment (133) (247)
Proceeds from sale of property and equipment - 466
Payments for intangibles - (3)
Deposits and other prepaid costs on future acquisitions (10) (7)
------- -------
Net cash (used in) provided by investing activities (143) 209
Financing activities
Payments on long-term debt and capital lease obligations (554) (421)
Payments to purchase stock (81) (2)
------- -------
Net cash used in financing activities (635) (423)
------- -------
Net increase in cash and cash equivalents 331 567
Cash and cash equivalents at beginning of period 6,612 4,838
------- -------
Cash and cash equivalents at end of period $ 6,943 $ 5,405
======= =======
See accompanying notes.
6
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
(collectively "the Company"). All significant intercompany transactions have
been eliminated in consolidation. These consolidated financial statements
reflect all adjustments (including 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 month period ended March 31, 2002 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-K for the year ended December 31, 2001.
2. Significant Accounting Policies
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") 141, Business Combinations, and SFAS
142, Goodwill and Other Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
fiscal years beginning after December 15, 2001; however, certain provisions of
this Statement apply to goodwill and other intangible assets acquired between
July 1, 2001 and the effective date of SFAS 142. Major provisions of these
Statements and their effective dates for the Company are as follows:
. All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interests method of
accounting is prohibited except for transactions initiated before July 1,
2001.
. Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as part
of a related contract, asset or liability.
. Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized.
. Effective January 1, 2002, all previously recognized goodwill and
intangible assets with indefinite lives will no longer be subject to
amortization.
. Effective January 1, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually and whenever there is an
impairment indicator.
. All acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.
On January 1, 2002, the Company adopted SFAS 142, and as required, discontinued
amortization of goodwill and certain intangible assets determined to have
indefinite useful lives acquired prior to July 1, 2001. This statement also
required that within the first interim period of adoption, the intangible assets
with indefinite lives should be tested for impairment as of the date of
adoption, and that if any impairment results, it should be recognized as a
change in accounting principle. Additionally, SFAS 142 requires that, within six
months of adoption, goodwill be tested for impairment at the reporting unit
level as of the date of adoption. If any impairment is indicated to have existed
upon adoption, it should be measured and recorded before the end of the year of
adoption. SFAS 142 requires that any goodwill impairment loss recognized as a
result of initial application be reported in the first interim period of
adoption as a change in accounting principle and that the income per share
effects of the accounting change be separately disclosed. The Company has not
yet determined the effect of these new impairment tests related to goodwill on
its consolidated financial position or results of operations.
In August 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 applies to all entities, including rate-regulated
entities, that have legal obligations associated with the retirement of a
tangible long-lived asset that result from acquisition, construction or
development and (or) normal operations of the long-lived asset. The application
of this Statement is not limited to certain specialized industries, such as the
extractive or nuclear industries. This Statement also applies, for example, to a
company that operates a manufacturing facility and has a legal obligation to
dismantle the manufacturing plant and restore the underlying land when it ceases
operation of that plant. A liability for an asset retirement obligation should
be recognized if the obligation meets the definition of a liability and can be
reasonably estimated. The initial recording should be at fair value. SFAS 143 is
effective for financial statements issued for fiscal years beginning after June
15, 2002, with earlier application encouraged. The provisions of the Statement
are not expected to have a material impact on the financial condition or results
of operations of the Company.
7
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 retains the existing requirements to
recognize and measure the impairment of long-lived assets to be held and used or
to be disposed of by sale. However, SFAS 144 makes changes to the scope and
certain measurement requirements of existing accounting guidance. SFAS 144 also
changes the requirements relating to reporting the effects of a disposal or
discontinuation of a segment of a business. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. The adoption of this Statement did not have a
significant impact on the financial condition or results of operations of the
Company.
3. Change in Accounting Principle
Effective January 1, 2002, we adopted SFAS 142, "Goodwill and Other Intangible
Assets." In connection with the adoption, we discontinued approximately $886,000
in annual amortization of goodwill. SFAS 142 also requires companies to test
intangibles for impairment on an annual basis. During the first quarter, the
Company performed its first phase of testing under SFAS 142 pertaining to its
evaluation of intangible assets determined to have indefinite useful lives, and
determined that there was an impairment issue with certain trademarks relative
to our security products segment. The fair values of the trademarks were
determined using a royalty savings approach, discounted at appropriate
risk-adjusted rates, which yielded results consistent with available
market-approach data. The impairment of $43,000, net of tax, was recorded as a
cumulative effect of a change in accounting principle at March 31, 2002. The
Company has not yet determined the financial impact, if any, that the impairment
provisions of SFAS 142 as it pertains to goodwill will have on its consolidated
financial statements. As provided under SFAS 142, the initial testing of
goodwill for possible impairment will be completed within the first six months
of 2002 and final testing, if possible impairment has been identified, by the
end of the year.
The following table reflects unaudited adjusted results of operations of the
Company, giving effect to SFAS 142 as if it were adopted on January 1, 2001 (in
thousands except earnings per share):
Three Months Ended
March 31,
----------------------------------
2002 2001
--------------- ---------------
Net income, as reported $ 647 $ 302
Add back: amortization expense, net of tax - $ 139
--------------- ---------------
Adjusted net income $ 647 $ 441
=============== ===============
Basic earnings per common share:
As reported $ 0.03 $ 0.01
Adjusted $ 0.03 $ 0.02
Diluted earnings per common share:
As reported $ 0.03 $ 0.01
Adjusted $ 0.03 $ 0.02
4. Other Intangible Assets
The following table reflects the components of intangible assets, excluding
goodwill (in thousands):
March 31, 2002 January 1, 2002
---------------------------------- -------------------------------
Gross Gross
Carrying Accum. Carrying Accum.
Amount Amort. Amount Amort.
--------------- --------------- -------------- --------------
Amortized intangible assets:
Deferred financing costs $ 359 $ 112 $ 359 $ 104
Non-amortized intangible assets:
Trademarks - security products segment $ 1,835 $ 1,270 $ 1,902 $ 1,270
Service mark - car care segment $ 116 $ 10 $ 116 $ 10
--------------- --------------- -------------- --------------
Total non-amortized intangible assets $ 1,951 $ 1,280 $ 2,018 $ 1,280
--------------- --------------- -------------- --------------
Total intangible assets $ 2,310 $ 1,392 $ 2,377 $ 1,384
=============== =============== ============== ==============
8
The following sets forth the estimated amortization expense on intangible assets
for the fiscal years ending December 31 (in thousands):
2002 $25
2003 19
2004 18
2005 18
2006 18
5. Business Combinations
From April 1, 1999 through July 26, 2000, the Company acquired 62 car care
facilities and five truck wash facilities through the acquisition of 17 separate
businesses including: 42 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 were subsequently
divested. The five full service truck wash facilities are located in Arizona,
Indiana, Ohio and Texas.
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.
6. Operating Agreement
The Company entered into a Management Agreement with Mark Sport, Inc. ("Mark
Sport"), a Vermont corporation. Mark Sport is controlled by Jon E. Goodrich, a
director of the Company. The Management Agreement entitled Mark Sport to operate
the Company's Security Products Division and receive all profits or losses for a
seven-month term beginning January 1, 2000. The Agreement was extended through
April 30, 2002, as provided for in the original Management Agreement. In
exchange, Mark Sport pays the Company $20,000 per month through the term of the
Management Agreement as extended. Additionally, Mark Sport must pay the Company
an amount equal to the amortization and depreciation on the assets of the
division at the end of the term of the Agreement. During the term of the
Agreement, Mark Sport was required to operate the division in substantially the
same manner as it has been operated prior to the Management Agreement. On April
30, 2002, the Management Agreement with Mark Sport expired. The Company is
currently integrating the Security Products Division into the Company's
operations and will begin reporting the financial results of this division
during the second quarter of 2002.
7. Commitments and Contingencies
In December 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.
In October 2001, the Company was named as an additional party defendant in a
suit filed by Alan Berndt and Martha Berndt in the United States District Court
for the Northern District of California. The litigation alleges the Company was
responsible for personal injuries arising out of Mr. Berndt's use of a Gas
Launcher, which may have been manufactured or sold by the Company. We have
forwarded the suit to our insurance carrier for defense. We do not anticipate
that this claim will result in the payment of damages in excess of our 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
9
$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. The Company is
currently being paid $20,000 per month, which started in February 2000, under a
Management Agreement which allows Mark Sport, Inc., an entity controlled by Jon
E. Goodrich, a director of the Company, to operate the Company's Security
Products Division.
Financial information regarding the Car Care and Security Products segments is
as follows:
Car Security
Care Products
--------------- ---------------
(In Thousands)
Three months ended March 31, 2002
Revenues from external customers $ 11,696 $ 60
Intersegment revenues - -
Segment income (loss) $ 652 $ (5)
Segment assets $ 100,827 $ 3,525
Three months ended March 31, 2001
Revenues from external customers $ 12,769 $ 60
Intersegment revenues - -
Segment income $ 264 $ 38
9. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from those estimates. Such estimates
include the Company's estimates of reserves such as the allowance for doubtful
accounts receivable and inventory valuation allowances.
10. Income Taxes
The Company recorded a tax expense of $388,000 for the three months ended March
31, 2002. Tax expense reflects the recording of income taxes at an effective
rate of 36%. 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. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
---------------------------------------
3/31/02 3/31/01
----------------- -----------------
Numerator:
Net income (in thousands)....................... $ 647 $ 302
================= =================
Denominator:
Denominator for basic income
per share - weighted average shares........... 25,386,754 25,485,313
Dilutive effect of options and warrants......... 50,009 523
----------------- -----------------
Denominator for diluted income
per share - weighted average shares........... 25,436,763 25,485,836
================= =================
Basic income per share............................. $ 0.03 $ 0.01
================= =================
Diluted income per share........................... $ 0.03 $ 0.01
================= ================
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the financial condition and results of operations
should be read in conjunction with the financial statements and the notes
thereto included in this Form 10-Q.
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 we believe that the expectations reflected in such
Forward Looking Statements are reasonable, we 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 us, or
projections involving anticipated revenues, earnings, levels of capital
expenditures or other aspects of operating results. All phases of our operations
are subject to a number of uncertainties, risks and other influences, many of
which are outside our control and any one of which, or a combination of which,
could materially affect the results of our operations and whether Forward
Looking Statements made by us ultimately prove to be accurate. Such Risk Factors
that could cause actual results to differ materially from our 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 Risk
Factors described below that could cause actual results to differ from our
expectations. The Forward Looking Statements made herein are only made as of the
date of this filing, and we undertake no obligation to publicly update such
Forward Looking Statements to reflect subsequent events or circumstances.
Introduction
Revenues
Car Care Services
We own 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. We earn 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
three months ended March 31, 2002 for the car care segment were comprised of
approximately 85% car wash and detailing, 9% lube and other automotive services,
6% 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, we believe that the geographic diversity of our operating locations
minimizes weather-related influence on our volume.
Security Products
The Company was paid $20,000 per month under a Management Agreement which
allowed Mark Sport, 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 $60,000 for the three months ending March 31, 2002.
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, car damages, 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.
11
We capitalize 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.
At March 31, 2002, capitalized costs related directly to proposed acquisitions
that were not yet consummated were approximately $10,000. We periodically review
the future likelihood of these acquisitions and record 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 certain intangible assets. Buildings and
equipment are depreciated over the estimated useful lives of the assets using
the straight- line method. Intangible assets, other than goodwill or intangible
assets with indefinite useful lives, are amortized over their useful lives
ranging from three to fifteen years, using the straight line method. In 2001
goodwill was amortized on a straight-line basis over 25 years. With the adoption
of SFAS 142 on January 1, 2002, we no longer amortize goodwill and certain
intangible assets, namely trademarks, determined to have indefinite useful
lives.
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 our car wash facilities.
Income 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:
Three Months Ended
March 31,
-----------------------------
2002 2001
------------ -----------
Revenues 100.0% 100.0%
Cost of revenues 67.3 70.8
Selling, general and administrative expenses 15.3 14.3
Depreciation and amortization 4.0 5.3
------------ -----------
Operating income 13.4 9.6
Interest expense, net (4.8) (6.3)
Other income 0.6 0.5
------------ -----------
Income before income taxes 9.2 3.8
Income tax expense 3.3 1.4
------------ -----------
Income before cumulative effect of a change in accounting 5.9 2.4
principle
Cumulative effect of a change in accounting principle, net of tax 0.4 -
------------ -----------
Net income 5.5% 2.4%
============ ===========
Liquidity and Capital Resources
Our business requires substantial amounts of capital, most notably to pursue our
acquisition strategies and for equipment purchases and upgrades. We plan 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 March 31, 2002, we had working capital of approximately $1.3 million and
cash and cash equivalents of $6.9 million. Working capital was $4.8 million at
December 31, 2001. The decrease in working capital at March 31, 2002 is
primarily attributable to the reclass of approximately $4.7 million of 15 year
amortizing loans from long term to current liabilities as a result of such loans
being due in February 2003. The Company intends to renew these loans with the
current lender. For the three months ended March 31, 2002, net cash provided by
operations was
12
approximately $1.1 million, net cash used in financing activities was
approximately $635,000 and net cash used in investing activities was
approximately $143,000 resulting in an increase in cash and cash equivalents for
the quarter of approximately $331,000. Capital expended during the period
included approximately $133,000 for the purchase of operating equipment.
We estimate aggregate capital expenditures, exclusive of acquisitions of
businesses, of approximately $500,000 for the remainder of the year ending
December 31, 2002.
At March 31, 2002, we had borrowings of approximately $33.8 million. We had two
letters of credit outstanding at March 31, 2002, totaling $625,000 as collateral
relating to worker compensation insurance policies. We do not have a revolving
credit facility.
During 2001, we refinanced on a long term basis under favorable terms the
majority of our short term debt related to our 1999 and 2000 acquisitions. We
also had various other long term mortgage notes up for periodic review during
2001 which we have been successful in renewing. Several of our 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.
On April 5, 2000, we 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 us to suspend the purchasing of
our common stock by Fusion if the price of our common stock is less than $7.00
per share. We are currently not permitting the purchase of our common stock
under the equity purchase agreement due to the current low trading value of our
common stock and the potentially dilutive effect of such stock purchases. If and
when we agree to the purchase of our stock, Fusion has the right to purchase
from us 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 we have not suspended Fusion from purchasing our stock,
the equity purchase agreement requires that at the beginning of each month,
Fusion will pay us $1.0 million 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 December 31, 2001 totaled approximately
$1.3 million. The first equity purchase agreement was extended to February 20,
2003. The second equity purchase agreement will be executed after delivery of an
irrevocable written notice by us 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 our 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.
Results of Operations for the Three Months Ended March 31, 2002
Compared to the Three Months Ended March 31, 2001
Revenues
Car Care Services
Revenues for the three months ended March 31, 2002 were $11.7 million as
compared to $12.8 million for the three months ended March 31, 2001, a decrease
of $1.1 million or 8.4%. Of the $1.1 million decrease, approximately $648,000
was from wash and detail services, $171,000 was from lube and other automotive
services, $254,000 was from fuel and merchandise sales. Of the $11.7 million of
revenues for the three months ended March 31, 2002, $10.0 million or 85% was
generated from car wash and detailing, $1.0 million or 9% from lube and other
automotive services, and $700,000 or 6% from fuel and merchandise sales. Of the
$12.8 million of revenues for the three months ended March 31, 2001, $10.6
million or 83% was generated from car wash
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and detailing, $1.2 million or 9% from lube and other automotive services, and
$1.0 million or 8% from fuel and merchandise sales. The decrease in wash and
detailing revenues was principally due to the divesting of two of our car wash
locations during 2001 combined with a departure from our historic revenue levels
within our Northeast region due to the unusual lack of snow in 2002. This
decline in revenues was partially offset by internal growth through a continued
aggressive focus on selling detailing and additional on-line car wash services
which increased the average wash and detailing revenues per car by 2.8% or $.37
to $13.71 in 2002, from $13.34 per car in the first quarter of 2001. As to the
decline in lube and other automotive services, we discontinued the practice of
providing a free wash to lube customers resulting in decreased lube revenues but
improved overall site gross margin performance. The decline in fuel and
merchandise gross revenues is the result of instituting certain minimum sale
margin criteria which reduced gross fuel sales and the sale of certain low
margin merchandise.
Security Products
During the three months ended March 31, 2002 and 2001, pursuant to a Management
Agreement, the Company was paid $60,000. This amount is included under revenues
from operating agreements.
Cost of Revenues
Car Care Services
Cost of revenues for the three months ended March 31, 2002 were $7.9 million or
68% of revenues with car washing and detailing costs at 65% 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 three months ended March 31, 2001 were $9.1 million, or 71% of
revenues. With our increase in average wash and detailing revenues per car in
2002 and our continued emphasis on controlling direct labor and other operating
costs such as wash and detailing chemicals and supplies, car damages, uniform
expense, and repairs and maintenance costs, we achieved improved wash and
detailing gross margins in 2002. We reduced our direct labor costs as a percent
of wash and detail revenues to 44.9% in 2002 as compared to 46.3% in the first
three months of 2001.
Security Products
During the first quarter of 2002 and 2001, pursuant to a Management Agreement,
no costs were incurred by us.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended March
31, 2002 were $1.79 million compared to $1.84 million for the same period in
2001, a decrease of approximately $45,000 or 2%. SG&A costs as a percent of
revenues were 15.3% for the three months ended March 31, 2002 as compared to
14.3% in the first quarter of 2001. The decrease in SG&A costs is primarily the
result of a decrease in administrative salaries and certain office costs
partially offset by an increase in insurance costs and business taxes.
Depreciation and Amortization
Depreciation and amortization totaled $472,000 for the three months ended March
31, 2002 as compared to $675,000 for the same period in 2001. This decrease is
primarily attributable to the adoption of SFAS 142 on January 1, 2002, under
which the Company no longer amortizes goodwill and other intangible assets
determined to have indefinite useful lives.
Interest Expense, Net
Interest expense, net of interest income, for the three months ended March 31,
2002, was $563,000 compared to $819,000 for the three months ended March 31,
2001. This decrease in our interest expense is the result of a decrease in
interest rates on approximately 50% of our long term debt which has interest
rates tied to the prime rate and a reduction in our outstanding debt as a result
of normal principal payments.
Other Income and Expense
Other income for the three months ended March 31, 2002 was $66,000 compared to
$63,000 for the three months ended March 31, 2001.
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Income Taxes
We recorded a tax expense of $388,000 for the three months ended March 31, 2002.
Tax expense reflects the recording of income taxes at an effective rate of 36%.
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.
Risk Factors
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.
Risks of Acquisitions and New Business Segments. One of our strategies 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 give assurance 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 our common stock does not
maintain a minimum bid price of one dollar for thirty consecutive days, we are
subject to being delisted from the Nasdaq National Market. If our stock is under
$1.00 for thirty consecutive business days, we will be able to maintain our
listing if during the next 90 day period, our stock maintains at least a minimum
bid price of $1.00 for a ten consecutive day period. The ten day period required
can be extended at the discretion of Nasdaq. Upon delisting from the Nasdaq
National Market, our stock would be traded on the Nasdaq SmallCap Market until
we maintain a minimum bid price of one dollar for thirty consecutive days at
which time we can regain listing on the Nasdaq National Market. If our stock
does not maintain a minimum bid price of one dollar for thirty consecutive days
during a 180 day grace period on the Nasdaq SmallCap Market or a 360 day grace
period if compliance with certain core listing standards are demonstrated, we
will receive a delisting notice from the Nasdaq SmallCap Market. Upon delisting
from the Nasdaq SmallCap Market, our 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
or the Nasdaq SmallCap Market (together "Nasdaq-Listed Stocks"). 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 our
stock is traded in the OTC market and a market maker sponsors us, we may have
the price of our stock electronically displayed on the OTC Bulletin Board, or
OTCBB. However, if we lack sufficient market maker support for display on the
OTCBB, we must have our price published by the National Quotations Bureau LLP in
a paper publication known as the "Pink Sheets." The marketability of our stock
will be even more limited if our price must be published on the "Pink Sheets."
We have reported net losses in the past. We have reported net losses and
working capital deficits in the past, 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 tangible net worth and the maintenance of certain debt
coverage ratios on an individual subsidiary and consolidated level. If our
results are not sufficient to maintain the required ratios, we would be in
default of our loan agreements. With the adoption of SFAS 142 on January 1,
2002, we no longer amortize goodwill and certain intangible assets determined to
have indefinite useful lives. Additionally, SFAS 142 requires annual fair value
based impairment tests of goodwill and other intangible assets identified with
indefinite useful lives. Although we have not yet determined the full effect of
these new impairment tests, future charges to our consolidated statement of
operations could result should impairment losses be identified.
15
Our business plan poses risks for us. One of our business objectives is to
develop as a full service, integrated car care business through acquisitions and
through the internal development of our car wash facilities. We have
repositioned our company from one 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:
i. risks associated with growth;
ii. risks associated with acquisitions; and
iii. risks associated with the recruitment and development of management
and operating personnel.
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 and truck wash
businesses. Since July 1999, our main business has been the acquisition and
operation of car wash facilities, which now accounts for substantially all of
our revenues. Because of our relatively limited operating history with respect
to this business, we cannot assure you that we will be able to operate it
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. 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 adversely affect 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 cars
themselves which also can adversely affect 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, if we make an acquisition, 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. If we acquire new businesses, we may not be able to successfully
operate and integrate the acquired businesses. Our strategy is to achieve
economies of scale and brand name recognition in part through acquisitions that
increase our size. We cannot give assurance that we will be able to acquire
businesses or 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 give assurance
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 give assurance that
consumer demand for car wash services will increase as our business expands. Nor
can we give assurance 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.
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Our car wash and car care services operations face governmental
regulations. 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 care 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 care
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:
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,
including leased property, 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 care industry is highly competitive. Competition is based
primarily on location, facilities, customer service, available services and
rates. Because barriers to entry into the car care industry are relatively low,
competition may be expected to continually arise from new sources not currently
competing with us. We also face competition from outside the car care industry,
such as gas stations and convenience stores, that offer automated car wash
services. In some cases, these competitors may have greater financial and
operating resources than we have. In our car wash businesses, we face
competition from a number of sources, including regional and national chains,
gasoline stations, gasoline companies, 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 entity from acquiring 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 our
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 entity to acquire control of us and may therefore
have an anti-takeover effect. Issuances of authorized preferred stock 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 an entity 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 in our business any cash otherwise available for dividends.
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
17
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 us in certain historical periods, working capital deficits 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in our exposure to market risks arising from
fluctuations in foreign currency exchange rates, commodity prices, equity prices
or market interest rates since December 31, 2001 as reported by our Form 10-K
for the year ended December 31, 2001.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Current Reports on Form 8-K or 8-K/A:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Mace Security International, Inc.
BY: /s/ Louis D. Paolino, Jr.
--------------------------------------------
Louis D. Paolino, Jr., Chairman, Chief Executive
Officer and President
BY: /s/ Gregory M. Krzemien
----------------------------------------
Gregory M. Krzemien, Chief Financial Officer
BY: /s/ Ronald R. Pirollo
----------------------------------------------
Ronald R. Pirollo, Controller (Principal Accounting
Officer)
DATE: May 10, 2002
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