SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 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 August 9, 2002, there were 25,349,027 Shares of Registrant's Common Stock,
par value $.01 per share, outstanding.
Mace Security International, Inc.
Form 10-Q
Quarter Ended June 30, 2002
Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements 2
Consolidated Balance Sheets - June 30, 2002 (Unaudited)
and December 31, 2001 2
Consolidated Statements of Operations for the three
months ended June 30, 2002 and 2001 (Unaudited) 4
Consolidated Statements of Operations for the six months
ended June 30, 2002 and 2001 (Unaudited) 5
Consolidated Statement of Stockholders' Equity
for the six months ended June 30, 2002 (Unaudited) 6
Consolidated Statements of Cash Flows for the
six months ended June 30, 2002 and 2001 (Unaudited) 7
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3 - Qualitative and Quantitative Disclosures about Market Risk 24
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 25
1
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Mace Security International, Inc.
Consolidated Balance Sheets
(In thousands except share information)
June 30, December 31,
ASSETS 2002 2001
------------ ---------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 7,605 $ 6,612
Accounts receivable, less allowance for doubtful
accounts of $213 and $178 in 2002 and 2001, respectively 719 1,075
Inventories 2,373 2,275
Deferred income taxes 152 145
Prepaid expenses and other current assets 1,709 2,218
------------ ---------------
Total current assets 12,558 12,325
Property and equipment:
Land 32,029 32,592
Buildings and leasehold improvements 36,637 36,315
Machinery and equipment 9,138 8,776
Furniture and fixtures 444 431
------------ ---------------
Total property and equipment 78,248 78,114
Accumulated depreciation and amortization (8,178) (7,204)
------------ ---------------
Total property and equipment, net of accumulated depreciation
and amortization 70,070 70,910
Goodwill, net of accumulated amortization of $2,031 20,139 20,139
Other intangible assets, net of accumulated amortization
of $1,397 and $1,384 in 2002 and 2001, respectively 915 993
Other assets 305 303
------------ ---------------
Total assets $103,987 $104,670
============ ===============
See accompanying notes.
2
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
-------------- -------------------
(Unaudited)
Current liabilities:
Current portion of long term debt and capital lease obligations $ 6,787 $ 2,514
Accounts payable 1,830 2,446
Income taxes payable 85 174
Deferred revenue 214 257
Accrued expenses and other current liabilities 2,138 2,125
-------------- -------------------
Total current liabilities 11,054 7,516
Deferred income taxes 1,125 638
Long term debt, net of current portion 26,670 31,570
Capital lease obligations, net of current portion 359 265
Other liabilities - 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 (5,371) (6,375)
-------------- -------------------
Total stockholders' equity 64,779 63,856
-------------- -------------------
Total liabilities and stockholders' equity $ 103,987 $ 104,670
============== ===================
See accompanying notes.
3
Mace Security International, Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands except share information)
Three Months Ended
June 30,
----------------------------------
2002 2001
--------------- ---------------
Revenues:
Car wash and detailing services $ 9,556 $ 10,761
Lube and other automotive services 1,007 1,156
Fuel and merchandise sales 873 1,065
Security products sales 397 -
Operating agreements 20 60
--------------- ---------------
11,853 13,042
Cost of revenues:
Car wash and detailing services 6,460 7,320
Lube and other automotive services 833 887
Fuel and merchandise sales 754 940
Security products sales 225 -
--------------- ---------------
8,272 9,147
Selling, general and administrative expenses 2,042 1,919
Depreciation and amortization 510 678
Costs of terminated acquisitions 74
--------------- ---------------
Operating income 1,029 1,224
Interest expense, net (553) (733)
Other income 82 77
--------------- ---------------
Income before income taxes 558 568
Income tax expense 201 210
--------------- ---------------
Net income $ 357 $ 358
=============== ===============
Per share of common stock:
Basic $ 0.01 $ 0.01
=============== ===============
Diluted $ 0.01 $ 0.01
=============== ================
Weighted average shares outstanding:
Basic 25,349,027 25,452,935
Diluted 25,423,145 25,511,346
See accompanying notes.
4
Mace Security International, Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands except share information)
Six Months Ended
June 30,
---------------------------------------
2002 2001
------------------- ------------------
Revenues:
Car wash and detailing services $ 19,522 $ 21,375
Lube and other automotive services 2,043 2,362
Fuel and merchandise sales 1,568 2,014
Security products sales 397 -
Operating agreements 80 120
------------------- ------------------
23,610 25,871
Cost of revenues:
Car wash and detailing services 12,986 14,646
Lube and other automotive services 1,622 1,786
Fuel and merchandise sales 1,355 1,796
Security products sales 225 -
------------------- ------------------
16,188 18,228
Selling, general and administrative expenses 3,835 3,757
Depreciation and amortization 982 1,353
Cost of terminated acquisitions - 74
------------------- ------------------
Operating income 2,605 2,459
Interest expense, net (1,116) (1,551)
Other income 147 140
------------------- ------------------
Income before income taxes and cumulative effect of a change
in accounting principle 1,636 1,048
Income tax expense 589 388
------------------- ------------------
Income before cumulative effect of a change in accounting principle 1,047 660
Cumulative effect of a change in accounting principle, net of tax 43 -
------------------- ------------------
Net income $ 1,004 $ 660
=================== ==================
Per share of common stock:
Basic income before cumulative effect of a change in accounting principle $ 0.04 $ 0.03
Cumulative effect of a change in accounting principle, net of tax - -
------------------- ------------------
Basic net income $ 0.04 $ 0.03
=================== ==================
Diluted income before cumulative effect of a change in accounting principle $ 0.04 $ 0.03
Cumulative effect of a change in accounting principle, net of tax - -
------------------- ------------------
Diluted net income $ 0.04 $ 0.03
=================== ==================
Weighted average shares outstanding:
Basic 25,367,786 25,469,035
Diluted 25,430,189 25,498,502
See accompanying notes.
5
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 1,004 1,004
------------ -------------- ---------------- --------------- ---------------
Balance at June 30, 2002 25,349,027 $ 253 $ 69,897 $ (5,371) $ 64,779
============ ============== ================ =============== ===============
See accompanying notes.
6
Mace Security International, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended
June 30,
-------------------------------------
2002 2001
-------------- ------------
Operating activities
Net income $ 1,004 $ 660
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 982 1,353
Provision for losses on receivables 32 20
Deferred income taxes 479 314
Non-cash charge due to change in accounting principle 67 -
Changes in operating assets and liabilities:
Accounts receivable 103 (145)
Inventories (110) 54
Accounts payable (569) (847)
Deferred revenue (39) (172)
Accrued expenses 4 (79)
Income taxes (89) (112)
Prepaid expenses and other assets 603 486
-------------- ------------
Net cash provided by operating activities 2,467 1,532
Investing activities
Purchase of property and equipment (310) (443)
Proceeds from sale of property and equipment - 466
Payments for intangibles (2) (3)
Deposits and other prepaid costs on future acquisitions (14) (32)
-------------- ------------
Net cash used in investing activities (326) (12)
Financing activities
Payments on long-term debt and capital lease obligations (1,067) (1,047)
Payments to purchase stock (81) (87)
-------------- ------------
Net cash used in financing activities (1,148) (1,134)
-------------- ------------
Net increase in cash and cash equivalents 993 386
Cash and cash equivalents at beginning of period 6,612 4,838
-------------- ------------
Cash and cash equivalents at end of period $ 7,605 $ 5,224
============== ============
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
(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 and six month periods ended June 30, 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. Recent Accounting Pronouncements
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 first step of the
goodwill transitional impairment testing was completed during the second quarter
of 2002 and as of December 31, 2001, the transition date (See Note 3, Change in
Accounting Principle).
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.
8
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 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 Six Months Ended
June 30, June 30,
---------------------------------- -------------------------------
2002 2001 2002 2001
--------------- --------------- -------------- -------------
Net income, as reported $ 357 $ 358 $ 1,004 $ 660
Add back: amortization expense, net of tax - $ 140 - $ 280
--------------- --------------- -------------- -------------
Pro forma net income $ 357 $ 498 $ 1,004 $ 940
=============== =============== ============== =============
Basic earnings per common share:
As reported $ 0.01 $ 0.01 $ 0.04 $ 0.03
Pro forma $ 0.01 $ 0.02 $ 0.04 $ 0.04
Diluted earnings per common share:
As reported $ 0.01 $ 0.01 $ 0.04 $ 0.03
Pro forma $ 0.01 $ 0.02 $ 0.04 $ 0.04
Under the provisions of SFAS 142, the Company is also required to perform a
transitional goodwill impairment test within six months of adopting the new
standard and to test for impairment on at least an annual basis thereafter. In
performing the first step of the transitional testing, we determined our
reporting units and estimated the fair values of the reporting units using a
discounted cash flow model. The Company engaged an independent appraisal firm to
derive appropriate discount rates for each reporting unit using the weighted
average cost of capital technique to utilize in the Company's discounted cash
flow calculations. Significant estimates and assumptions were used in assessing
the fair value of the reporting units. These estimates and assumptions involved
future cash flows, growth rates, discount rates, weighted average cost of
capital and estimates of market valuations of each of the reporting units. We
compared the fair value of each reporting unit to its respective carrying value,
including related goodwill. As of December 31, 2001, the transition date, it was
determined through the first step of the transitional test, that there is
potential impairment in the Arizona reporting unit of $5.3 million and in the
truck wash reporting unit of $670,000. Additionally, it was determined that
there is a potential impairment in the Northeast reporting unit of $1.1 million.
Because the carrying values of the net assets of each of these reporting units
(including goodwill) exceed the respective fair values of the reporting units,
the second step of the transitional goodwill impairment test must be completed
to determine the amount of the impairment. We must complete the second step no
later than by the end of December 31, 2002, but we anticipate completing that
step during the third quarter of 2002. In no event will the impairment of these
reporting units exceed $12.5 million, which is the amount of goodwill assigned
to these reporting units.
9
4. Other Intangible Assets
The following table reflects the components of intangible assets, excluding
goodwill (in thousands):
June 30, 2002 January 1, 2002
---------------------------------- -------------------------------
Gross Gross
Carrying Accum. Carrying Accum.
Amount Amort. Amount Amort.
--------------- --------------- ------------- --------------
Amortized intangible assets:
Deferred financing costs $ 361 $ 117 $ 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 $ 2,312 $ 1,397 $ 2,377 $ 1,384
=============== =============== ============= ==============
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. In exchange, Mark Sport paid the Company $20,000 per month
through the term of the Management Agreement as extended. Additionally, Mark
Sport was required to 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 was operated prior to the
Management Agreement. On April 30, 2002, the Management Agreement with Mark
Sport expired. The Company is currently operating the Security Products
Division. Accordingly, the results of operations of the Security Products
Division from May 1, 2002 through June 30, 2002 are included in the consolidated
statements of operations for the three and six months ended June 30, 2002 (See
Note 11, Related Party Transactions).
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.
10
In 2000, the Company was named as a defendant in a suit filed in the United
States District Court for the District of Colorado by Robert Rifkin. The suit
alleges that the Company and its transfer agent delayed in the removal of a
restrictive legend from certain shares of Company common stock owned by the
plaintiff, and that the delay caused the plaintiff to incur a loss in excess of
$335,000. Though the outcome of litigation is always uncertain, the Company
believes that there was no delay in the removal of the legend on the shares.
In July 2001, the Company filed a lawsuit in the Supreme Court of New York
County of the state of New York against LTV Networks, Inc., to collect upon a
promissory note in the amount of $100,000. In January 2002, defendant LTV filed
an answer to the suit denying liability under the promissory note and making
counterclaims. The counterclaims allege that the Company had agreed to lend LTV
$500,000 and that LTV has been damaged in the amount of $10 million because the
Company only lent $100,000 to LTV. The parties are presently completing
discovery and depositions. Though the outcome of litigation is always uncertain,
the Company currently believes that the counterclaims are without merit and
expects to obtain a judgement and collect on the note.
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.
In May 2002, the Company was named as one of three defendants in a suit filed by
Timothy Gamradt and Carla Gamradt in the United States District Court for the
District of Minnesota. The litigation alleges that the plaintiffs are entitled
to damages against the Company due to injuries allegedly sustained by Mr.
Gamradt when a pyrotechnic smoke device known as the "Black Smoke Device" was
discharged by Mr. Gamradt's superior during a training exercise at a federal
prison facility at which Mr. Gamradt was employed as a guard. Mr. Gamradt
alleges that when the device was activated, he suffered injuries to his lungs.
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.
In July 2002, the Company and its former president, Jon Goodrich, were named as
defendants in a lawsuit in the Supreme Court of New York County of the state of
New York filed by Armor Holdings, et al. The suit alleges that the Company and
Mr. Goodrich had violated the non-compete terms of various agreements entered
into in April 1998, which transferred certain of the Company's then lines of
business to the plaintiffs. The suit also alleges that the Company violated a
right of first refusal on sale granted to plaintiffs, when the Company entered
into a Management Agreement with Mark Sport, Inc., to operate the Company's
Security Products Division. Though the outcome of litigation is always
uncertain, the Company believes that all of the claims are without merit, and
will be defending the suit.
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.
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.
11
8. Business Segments Information
The Company currently operates in two segments: the Car Care segment, supplying
complete car care services (including wash, detailing, lube, and minor repairs),
fuel, and merchandise sales; and the Security Products segment. From January 1,
2000 through April 30, 2002, the Company was paid $20,000 per month under a
Management Agreement pursuant to which Mark Sport, an entity controlled by Jon
E. Goodrich, a director of the Company, operated the Company's Security Products
Division. Effective May 1, 2002, the Management Agreement expired and the
Company recommenced operation of the 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 June 30, 2002
Revenues from external customers $ 11,436 $ 417
Intersegment revenues - -
Segment income (loss) $ 380 $ (23)
Segment assets $ 100,477 $ 3,510
Six months ended June 30, 2002
Revenues from external customers $ 23,133 $ 477
Intersegment revenues - -
Segment income (loss) $ 1,032 $ (28)
Three months ended June 30, 2001
Revenues from external customers $ 12,982 $ 60
Intersegment revenues - -
Segment income $ 320 $ 38
Six months ended June 30, 2001
Revenues from external customers $ 25,751 $ 120
Intersegment revenues - -
Segment income $ 584 $ 76
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 as well as valuation
calculations such as the Company's goodwill impairment calculations under the
provisions of SFAS 142.
10. Income Taxes
The Company recorded tax expense of $201,000 and $589,000 for the three and six
months ended June 30, 2002, respectively. 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. Related Party Transactions
In August 1999, Mace entered into a month-to-month lease arrangement with
Bluepointe, Inc., a corporation controlled by Louis D. Paolino, Jr., Mace's
Chairman, Chief Executive Officer and President, for Mace's executive offices in
Mt. Laurel, New Jersey. The leased offices are in a 41,000 square foot class "B"
office building. The lease arrangement provided for monthly rental payments of
$10,000. This monthly lease payment was considered to be more favorable than
could be obtained on the open market for similar facilities. Effective August 1,
2000, after a survey of local real estate market pricing and upon the approval
of the Audit Committee, Mace entered into a five year lease with Bluepointe,
Inc. which provides for an initial monthly rental payment of $15,962, which
increases by 5% per year in the third through fifth years of the lease. Mace
believes that the terms of this lease (based on an annual rate of $19.00 per
square foot ) are competitive when compared to similar facilities in the Mt.
Laurel, New Jersey area. Mace has also entered into a three-year furniture
lease/purchase agreement with Bluepointe, Inc., dated January 1, 2001, which
provided for an initial payment of $20,000 and monthly rental payments
thereafter of $4,513, for the use of the furnishings in Mace's executive
offices. The rental rates were based upon a third-party valuation of the
furnishings, and
12
Mace believes that the terms of the furniture lease are competitive with similar
leasing arrangements available in the local area.
The Company purchased charter airline services from Air Eastern, Inc., and LP
Learjets, LLC, charter airline companies owned by Louis D. Paolino, Jr., the
Company's Chairman, Chief Executive Officer and President. The Company paid
$60,000 in fiscal 2001 and $20,435 through June 30, 2002 for such services. An
additional $15,000 was paid in 2001 to Aeroways, Inc., a chartered air service
company not affiliated with Louis D. Paolino, Jr., for the direct costs of
flying the Learjet 31A owned by LP Learjets, LLC. The Company believes that the
rates charged are competitive when compared with similar services provided by
independent airline charter companies. On November 6, 2001, the Audit Committee
approved an arrangement subject to quarterly review under which the Company
prepays LP Learjets, LLC $5,109 per month for the right to use a Learjet 31A for
100 hours per year. Additionally, when the Learjet 31A is used, the Company pays
to third parties unaffiliated with Louis D. Paolino, Jr., the direct costs of
the Learjet's per-hour use, which include fuel, pilot fees, engine insurance and
landing fees. As of July 2002, the Company is no longer prepaying LP Learjets,
LLC for the future right to use the Learjet 31A.
In 2001, the Company hired Premier Concrete, Inc., a company controlled by
Matthew J. Paolino, the Company's Vice President and a director, to assist with
underground tank removal and complete pavement re-surfacing at one of the
Company's car wash locations. Premier Concrete, Inc., the lowest responsible
bidder for the contract, was paid $34,450 for its services in 2001. The Company
believes that the rates charged are competitive when compared with similar
service provided by independent contractors.
In February 2000, the Company entered into a Management Agreement with Mark
Sport, Inc. ("Mark Sport"), a Vermont corporation 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 Management
Agreement was extended several times through amendments. The Management
Agreement required Mark Sport to pay the Company $20,000 per month beginning
February 2000 and continuing through April 30, 2002, the extended term of the
Management Agreement. Additionally, Mark Sport paid the Company an amount equal
to the amortization and depreciation on the assets of the division. During the
term of the Management Agreement, Mark Sport operated the division in
substantially the same manner as it was operated prior to the Management
Agreement. On February 21, 2002, Mark Sport and the Company amended the
Management Agreement. The amendment extended the term of the Management
Agreement through April 30, 2002, and reconciled the amount owed by Mark Sport
to the Company under the Management Agreement from February 2000 through
December 31, 2001. Mark Sport and the Company agreed in the amendment that Mark
Sport, as of December 31, 2001, owed the Company $127,000, resulting in a
resolution of certain disputes and a reduction of the amounts owed by Mark Sport
of approximately $92,000. The Management Agreement expired on April 30, 2002 and
was further amended on July 22, 2002 to reconcile the amount owed by Mark Sport
to Mace under the Management Agreement for the period January 1, 2002 through
April 30, 2002. Mark Sport and Mace agreed in their final amendment that Mark
Sport owed the Company $100,000 for this period, resulting in a resolution of
certain disputes and a reduction of the amounts recorded by the Company as owed
by Mark Sport of approximately $39,000. At June 30, 2002, prior to the payment
of $100,000 on July 31, 2002 and resolution of disputes in the amount of
$39,000, Mark Sport owed the Company $266,000.
The Company's Security Products Division leases manufacturing and office space
under a five-year lease with Vermont Mill, Inc. ("Vermont Mill"), which provides
for monthly lease payments of $6,667 beginning November 15, 1999. Vermont Mill
is controlled by Jon E. Goodrich, a director of the Company. On February 25,
2002, the Company and Vermont Mill amended the lease. The original lease
provided that Vermont Mill could increase the lease payment $0.50 per square
foot upon demonstration that Vermont Mill had a higher paying third party tenant
for the space occupied by the Company. The lease amendment clarifies that the
Company occupies 44,000 square feet in the Vermont Mill building at a rental
rate of $2.50 per square foot per year. The Company believes that the revised
lease rate is lower than lease rates charged for similar properties in the
Bennington, Vermont area. On July 22, 2002, the lease was further amended to
provide Mace the option and right to cancel the lease with proper notice and a
payment equal to six months of the then current rent for the leased space
occupied by Mace.
Vermont Mill borrowed a total of $228,671 from the Company through December 31,
2001. On February 22, 2002, Vermont Mill executed a three year promissory note
with monthly installments of $7,061 including interest at a rate of 7%. The
Company's Lease Agreement with Vermont Mill provides for a right of offset of
lease payments against this promissory note in the event monthly payments are
not made by Vermont Mill. At June 30, 2002, the balance owed on this promissory
note was $199,701.
13
12. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
-------------------------------- ----------------------------
6/30/02 6/30/01 6/30/02 6/30/01
--------------- ------------- ------------ ------------
Numerator:
Net income (in thousands) $ 357 $ 358 $ 1,004 $ 660
=============== ============ ============ ============
Denominator:
Denominator for basic income
per share - weighted
average shares 25,349,027 25,452,935 25,367,786 25,469,035
Dilutive effect of options
and warrants 74,118 58,411 62,403 29,467
--------------- ------------- ------------ ------------
Denominator for diluted
income
per share - weighted
average shares 25,423,145 25,511,346 25,430,189 25,498,502
=============== ============ ============ ============
Basic income per share $ 0.01 $ 0.01 $ 0.04 $ 0.03
=============== ============ ============ ============
Diluted income per share $ 0.01 $ 0.01 $ 0.04 $ 0.03
=============== ============ ============ ============
13. Subsequent Events
Subsequent to June 30, 2002, the Company acquired the inventory, certain other
assets and the operations of a manufacturer and retailer of small and miniature
electronic security devices. Total consideration under the agreement was
approximately $505,000. At closing, the Company paid $217,000 cash for inventory
as verified at closing by the Company, $15,625 representing the first of twelve
equal monthly installments totaling $187,500 and 13,158 registered shares of
common stock of the Company representing the first of eight monthly payments of
shares totaling 105,263 shares. The transaction will be accounted for using the
purchase method of accounting.
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.
Summary of Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based upon the Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amount of
assets and liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities at the
14
date of the Company's financial statements. Actual results may differ from these
estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The Company
believes that its critical accounting policies include those described below.
Revenue Recognition
Revenue from the Company's Car Care segment is recognized, net of customer
coupon discounts, when services are rendered or fuel or merchandise is sold.
Revenue from the Company's Security Products sales segment is recognized when
shipments are made, or for export sales when title has passed.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using
the first-in first-out (FIFO) method for security and car care products.
Inventories at the Company's Car Care locations consist of various chemicals and
cleaning supplies used in operations and merchandise and fuel for resale to
consumers.
Property and Equipment
Property and equipment are stated at cost. Depreciation is recorded using the
straight-line method over the estimated useful lives of the assets, which are
generally as follows: buildings and leasehold improvements - 15 to 40 years;
machinery and equipment - 2 to 20 years; and furniture and fixtures - 5 to 10
years. Significant additions or improvements extending assets' useful lives are
capitalized; normal maintenance and repair costs are expensed as incurred.
Goodwill
In 2001, goodwill was amortized on a straight line basis over 25 years.
On January 1, 2002, the Company adopted SFAS 142, and as required, discontinued
amortization of goodwill acquired prior to July 1, 2001. 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 first step of the transitional impairment testing was completed during the
second quarter of 2002 and as of December 31, 2001 (See Note 3, Change in
Accounting Principle).
In accordance with SFAS 142, the Company will be subject to a 2002 annual
impairment test as well as impairment tests each year thereafter. Significant
estimates and assumptions are used in assessing the fair value of the reporting
units and determining impairment to goodwill. The Company cannot guarantee that
there will not be impairments in subsequent quarters in 2002 or in subsequent
years.
Other Intangible Assets
Other intangible assets consist primarily of deferred financing costs,
trademarks and a registered national brand name. Prior to 2002, our trademarks
and brand name were amortized on a straight line basis over 15 years. In
accordance with SFAS 142, our trademarks and brand name are considered to have
indefinite lives, and as such, are no longer subject to amortization. These
assets will be tested for impairment annually and whenever there is an
impairment indicator. Deferred financing costs are amortized on a straight line
basis over the terms of the respective debt instruments.
Deferred Acquisition Costs
The Company capitalizes legal, accounting, engineering and other direct costs
paid to outside parties that are incurred in connection with potential
acquisitions. The Company, however, routinely evaluates such capitalized costs
and charges to expense those relating to abandoned acquisition candidates.
Indirect acquisition costs, such as executive salaries, general corporate
overhead, and other corporate services are expensed as incurred.
15
Income Taxes
Deferred income taxes are determined based on the difference between the
financial accounting and tax bases of assets and liabilities. Deferred income
tax expense represents the change during the period in the deferred income tax
assets and deferred income tax liabilities. Deferred tax assets include tax loss
and credit carryforwards and are reduced by a valuation allowance if, based on
available evidence, it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
Deferred Revenue
The Company records a liability for gift certificates and ticket books sold at
its car care locations but not yet redeemed. The Company estimates these
unredeemed amounts based on gift certificates and ticket book sales and
redemptions throughout the year as well as utilizing historical sales and
redemption rates.
Advertising
The Company expenses advertising costs, including advertising production costs,
as they are incurred or the first time advertising takes place. The Company's
costs of coupon advertising are recorded as a prepaid asset and amortized to
advertising expense during the period of distribution and customer response,
typically two to three months.
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
six months ended June 30, 2002 for the car care segment were comprised of
approximately 84% car wash and detailing, 9% lube and other automotive services,
7% 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
During 2001 and for the first four months of 2002, the Company was paid $20,000
per month under a Management Agreement pursuant to which Mark Sport, an entity
controlled by Jon E. Goodrich, a director of the Company, operated the Security
Products segment. Effective May 1, 2002, the Management Agreement expired and
the Company recommenced operation of the Security Products Division. The Company
operates its security products segment in two main divisions, the Consumer
Division and the Mace Anti-Crime Bureau Division. The Company's Consumer
Division manufactures and markets personal safety, and home and auto security
products which are sold through retail stores, major discount stores, and at the
Company's car care facilities. The Mace Anti-Crime Bureau Division provides
expertise in developing and producing criminal deterrent systems for government
and law enforcement agencies, and financial institutions.
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.
Security Products
During 2001 and for the first four months of 2002, the Security Products
Division was operated under a Management Agreement by Mark Sport. Accordingly,
during that time, no costs were incurred by the Company. Beginning in May of
2002, cost of
16
revenues consists primarily of costs to manufacture the security
products including direct labor and related taxes and benefits, and raw material
costs.
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.
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. The Company also charges as an expense any capitalized expenditures
relating to proposed acquisitions that will not be consummated.
At June 30, 2002, capitalized costs related directly to proposed acquisitions
that were not yet consummated were approximately $14,000. 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 and service marks, determined to have
indefinite useful lives.
Other Income and Expense
Other income and expense consists primarily of rental income received on renting
out excess space at our car wash facilities and includes gains and losses on the
sale of equipment.
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:
Six Months Ended
June 30,
--------------------------
2002 2001
--------- --------
Revenues 100.0% 100.0%
Cost of revenues 68.6 70.5
Selling, general and administrative expenses 16.2 14.5
Depreciation and amortization 4.2 5.2
Costs of terminated acquisitions - 0.3
--------- --------
Operating income 11.0 9.5
Interest expense, net (4.7) (6.0)
Other income 0.6 0.5
--------- --------
Income before income taxes and cumulative effect of change in
accounting principle 6.9 4.0
Income tax expense 2.5 1.5
--------- --------
Income before cumulative effect of a change in accounting
principle 4.4 2.5
Cumulative effect of a change in accounting principle, net of tax 0.2 -
--------- --------
Net income 4.2% 2.5%
========= ========
17
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 June 30, 2002, we had working capital of approximately $1.5 million and
cash and cash equivalents of $7.6 million. Working capital was $4.8 million at
December 31, 2001. The decrease in working capital at June 30, 2002 is primarily
attributable to the reclassification 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 six months ended June 30, 2002, net cash provided by
operations was approximately $2.5 million, net cash used in financing activities
was approximately $1.2 million and net cash used in investing activities was
approximately $326,000 resulting in an increase in cash and cash equivalents for
the first six months of 2002 of approximately $1.0 million. Capital expended
during the period included approximately $310,000 for the purchase of operating
equipment.
We estimate aggregate capital expenditures, exclusive of acquisitions of
businesses, of approximately $300,000 for the remainder of the year ending
December 31, 2002.
At June 30, 2002, we had borrowings of approximately $33.8 million. We had two
letters of credit outstanding at June 30, 2002, totaling $304,000 as collateral
relating to worker compensation insurance policies. We do not have a revolving
credit facility. During 2000 and 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.
The Company is obligated under various operating leases, primarily for certain
equipment, vehicles, and real estate. Certain of these leases contain purchase
options, renewal provisions, and contingent rentals for proportionate share of
taxes, utilities, insurance, and annual cost of living increases. Future minimum
lease payments under operating leases with initial or remaining noncancellable
lease terms in excess of one year as of December 31, 2001 are as follows: 2002 -
$1,408,483; 2003 - $1,311,477; 2004 - $1,281,728; 2005 - $1,067,305; 2006 -
$702,083; and 2007 and thereafter - $3,038,389.
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.
18
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 Six Months Ended June 30, 2002
Compared to the Six Months Ended June 30, 2001
Revenues
Car Care Services
Revenues for the six months ended June 30, 2002 were $23.1 million as compared
to $25.7 million for the six months ended June 30, 2001, a decrease of $2.6
million or 10.2%. Of the $2.6 million decrease, approximately $1.8 million was
from wash and detail services, $319,000 was from lube and other automotive
services, $446,000 was from fuel and merchandise sales. Of the $23.1 million of
revenues for the six months ended June 30, 2002, $19.5 million or 84% was
generated from car wash and detailing, $2.0 million or 9% from lube and other
automotive services, and $1.6 million or 7% from fuel and merchandise sales. Of
the $25.7 million of revenues for the six months ended June 30, 2001, $21.4
million or 83% was generated from car wash and detailing, $2.3 million or 9%
from lube and other automotive services, and $2.0 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 and pollen in the first six months of 2002. The Company
also experienced more challenging weather within its Texas region principally
within the Dallas/Ft. Worth market for the current quarter ended June 30, 2002.
These declines in volume were partially offset by increased prices 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 to
$13.83 in 2002, from $13.65 per car in the first half 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 2001 and for the first four months of 2002, pursuant to a Management
Agreement, the Company was paid $20,000 per month. This amount is included under
revenues from operating agreements. Effective May 1, 2002, the Company
recommenced operation of the Security Products Division. Revenues for the two
months in which the Company operated this division, May and June of 2002, were
$397,000.
Cost of Revenues
Car Care Services
Cost of revenues for the six months ended June 30, 2002 were $16.0 million or
69% of revenues with car washing and detailing costs at 67% of respective
revenues, lube and other automotive services costs at 79% of respective
revenues, and fuel and merchandise costs at 86% of respective revenues. Cost of
revenues for the six months ended June 30, 2001 were $18.2 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 car wash and detail revenues to 45.7% in 2002 as compared to 46.9% in the
first six months of 2001.
Security Products
During 2001 and for the first four months of 2002, pursuant to a Management
Agreement, no costs were incurred by us. During May and June of 2002, cost of
revenues were $225,000 or 57% of revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six months ended June 30,
2002 were $3.83 million compared to $3.76 million for the same period in 2001,
an increase of approximately $78,000 or 2%. SG&A costs as a percent of revenues
were 16.2% for the six months ended June 30, 2002 as compared to 14.5% in the
first half of 2001. The increase in SG&A costs is primarily the result of
recommencing operation of the Security Products Division in May 2002, which
added $206,000 of SG&A
19
costs in 2002 combined with an increase in advertising and insurance costs. This
increase was partially offset by a decrease in administrative salaries and
certain office costs.
Depreciation and Amortization
Depreciation and amortization totaled $982,000 for the six months ended June 30,
2002 as compared to $1.35 million 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 six months ended June 30,
2002, was $1.1 million compared to $1.6 million for the six months ended June
30, 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 six months ended June 30, 2002 was $147,000 compared to
$139,000 for the six months ended June 30, 2001.
Income Taxes
We recorded a tax expense of $589,000 for the six months ended June 30, 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.
Results of Operations for the Three Months Ended June 30, 2002
Compared to the Three Months Ended June 30, 2001
Revenues
Car Care Services
Revenues for the three months ended June 30, 2002 were $11.4 million as compared
to $13.0 million for the three months ended June 30, 2001, a decrease of $1.6
million or 12%. Of the $1.6 million decrease, approximately $1.2 million was
from wash and detail services, $149,000 was from lube and other automotive
services, $192,000 was from fuel and merchandise sales. Of the $11.4 million of
revenues for the three months ended June 30, 2002, $9.6 million or 83% was
generated from car wash and detailing, $1.0 million or 9% from lube and other
automotive services, and $873,000 or 8% from fuel and merchandise sales. Of the
$13.0 million of revenues for the three months ended June 30, 2001, $10.8
million or 83% was generated from car wash and detailing, $1.1 million or 9%
from lube and other automotive services, and $1.1 million or 8% from fuel and
merchandise sales. The decrease in wash and detailing revenues was principally
due to the divesting of one of our car wash locations since the second quarter
of 2001, as well as a reduction in the level of pollen in our East region, and
more challenging weather within the Company's Texas region principally within
the Dallas/Ft. Worth market. 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 2001 and for the first four months of 2002, pursuant to a Management
Agreement, the Company was paid $20,000 per month. This amount is included under
revenues from operating agreements. Effective May 1, 2002, the Company
recommenced operation of the Security Products Division. Revenues for the two
months in which the Company operated this division, May and June of 2002, were
$397,000.
20
Cost of Revenues
Car Care Services
Cost of revenues for the three months ended June 30, 2002 were $8.0 million or
70% of revenues with car washing and detailing costs at 67% of respective
revenues, lube and other automotive services costs at 83% of respective
revenues, and fuel and merchandise costs at 86% of respective revenues. Cost of
revenues for the three months ended June 30, 2001 were $9.1 million, or 70% of
revenues. With 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 car direct labor costs as a
percent of car wash and detail revenues to 46.6% in 2002 as compared to 47.6% in
the second quarter of 2001.
Security Products
During 2001 and for the first four months of 2002, pursuant to a Management
Agreement, no costs were incurred by us. During May and June of 2002, cost of
revenues were $225,000 or 57% of revenues.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended June 30,
2002 were $2.0 million compared to $1.9 million for the same period in 2001, an
increase of approximately $123,000 or 6%. SG&A costs as a percent of revenues
were 17.2% for the three months ended June 30, 2002 as compared to 14.7% in the
second quarter of 2001. The increase in SG&A costs is primarily the result of
recommencing operation of the Security Products Division in May 2002, which
added $206,000 of SG&A costs in 2002 combined with an increase in advertising
and insurance costs. This increase was partially offset by a decrease in
administrative salaries and certain office costs.
Depreciation and Amortization
Depreciation and amortization totaled $510,000 for the three months ended June
30, 2002 as compared to $678,000 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 June 30,
2002, was $553,000 compared to $733,000 for the three months ended June 30,
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 June 30, 2002 was $82,000 compared to
$77,000 for the three months ended June 30, 2001.
Income Taxes
We recorded a tax expense of $201,000 for the three months ended June 30, 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
21
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."
Our bid price has been below one dollar since July 10, 2002. Unless the bid
price of our common stock closes above one dollar for at least one day
before August 20, 2002, we may be subject to delisting as described above.
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. 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. The Company cannot guarantee that there will not be
impairments in subsequent quarters in 2002 or in subsequent years that will have
a material impact on earnings and equity of the Company. (See also Note 3,
Change in Accounting Principle.)
Risk related to borrowings. 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.
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. Our business plan
is to also grow our consumer security products division through acquisitions and
internal development of security products. 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.
22
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.
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.
23
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 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 on our Form 10-K
for the year ended December 31, 2001.
24
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.139 Term note dated April 30, 2002, between the Company, its subsidiary, Mace Truck Wash, Inc., and Bank
One, Texas, N.A. in the amount of $342,000.
10.140 Master Lease Agreement dated June 10, 2002, between the Company, its subsidiary, Colonial Full Service
Car Wash, Inc., and Banc One Leasing Corporation in the amount of $193,055.
10.141 Amendment dated July 22, 2002 to Management Agreement between the Company and Mark Sport, Inc.
10.142 Amendment dated July 22, 2002 to Lease Agreement between the Company and Vermont Mill Properties, Inc.
(b) Current Reports on Form 8-K or 8-K/A:
On May 31, 2002, the Company filed a report on Form 8-K dated
May 31, 2002, under Item 5 to report a change in the date of
the Annual Stockholders Meeting and deadlines for submission
of shareholder proposals.
25
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: August 14, 2002
26
EXHIBIT INDEX
Exhibit No. Description
10.139 Term note dated April 30, 2002, between the Company, its subsidiary, Mace Truck Wash, Inc.,
and Bank One, Texas, N.A. in the amount of $342,000.
10.140 Master Lease Agreement dated June 10, 2002, between the Company, its subsidiary, Colonial
Full Service Car Wash, Inc., and Banc One Leasing Corporation in the amount of $193,055.
10.141 Amendment dated July 22, 2002 to Management Agreement between the Company and Mark Sport,
Inc.
10.142 Amendment dated July 22, 2002 to Lease Agreement between the Company and Vermont Mill
Properties, Inc.