<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000 COMMISSION FILE NO. 0-22810
MACE SECURITY INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
03-0311630
(I.R.S. Employer Identification No.)
1000 Crawford Place, Suite 400, Mount Laurel, NJ 08054
(Address of Principal Executive Offices)
Registrant's Telephone No., including area code: (856) 778-2300
Indicate by checkmark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 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
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity:
As of November 9, 2000 25,535,839 Shares of Common Stock
================================================================================
<PAGE>
Mace Security International, Inc.
Form 10-QSB
Quarter Ended September 30, 2000
Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2000 (Unaudited)
and December 31, 1999 2
Condensed Consolidated Statements of Operations for the three
months ended September 30, 2000 and 1999 (Restated) (Unaudited) 4
Condensed Consolidated Statements of Operations for the nine
months ended September 30, 2000 and 1999 (Restated) (Unaudited) 5
Condensed Consolidated Statement of Stockholders' Equity
for the nine months ended September 30, 2000 (Unaudited) 6
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 (Restated) (Unaudited) 7
Notes to Condensed Consolidated Financial Statements (Unaudited) 8
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II - OTHER INFORMATION
Item 5 - Other Information 23
Item 6 - Exhibits and Reports on Form 8-K 23
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Mace Security International, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,023,507 $ 2,320,804
Accounts receivable, less allowance for doubtful
accounts of $56,342 and $102,393 in 2000 and 1999,
respectively 1,230,821 1,874,547
Inventory 2,399,069 2,800,853
Deferred income taxes 124,921 139,705
Prepaid expenses and other current assets 2,269,980 2,506,853
------------ -----------
Total current assets 10,048,298 9,642,762
Property and equipment:
Land 32,682,714 30,429,075
Buildings and leasehold improvements 36,687,023 31,718,084
Machinery and equipment 7,937,409 6,329,030
Furniture and fixtures 236,976 231,936
------------ -----------
Total property and equipment 77,544,122 68,708,125
Accumulated depreciation and amortization (4,969,706) (3,826,784)
------------ -----------
72,574,416 64,881,341
Excess of cost over net assets of acquired businesses, net
of accumulated amortization of $926,324 and $276,605 in
2000 and 1999, respectively 21,289,548 20,723,085
Other intangible assets, net of accumulated amortization
of $1,185,840 and $1,144,428 in 2000 and 1999, respectively 929,883 1,029,347
Other assets 205,228 1,838,821
------------ -----------
Total assets $105,047,373 $98,115,356
============ ===========
</TABLE>
See accompanying notes.
2
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Notes payable to related parties $ 1,097,025 $ 1,493,806
Current portion of long-term debt 7,201,972 3,102,003
Current portion of capital lease obligations 57,607 66,371
Accounts payable 2,321,356 3,372,950
Income taxes payable 80,513 110,725
Deferred revenue 222,314 557,154
Accrued expenses and other current liabilities 3,045,442 2,342,299
------------ -----------
Total current liabilities 14,026,229 11,045,308
Deferred income taxes 575,553 587,625
Long-term debt, net of current portion 26,020,318 27,794,865
Capital lease obligations, net of current portion 284,211 327,232
Other liabilities 965,625 1,792,498
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 50,000,000
Issued and outstanding shares - none - -
Common stock, $.01 par value:
Authorized shares - 200,000,000
Issued shares of 25,437,039 and
22,821,675 in 2000 and 1999, respectively 254,370 228,216
Additional paid-in capital 69,930,942 63,992,607
Accumulated deficit (7,009,875) (7,600,607)
------------ -----------
63,175,437 56,620,216
Less treasury stock at cost - 256,666 common shares
in 1999 - (52,388)
------------ -----------
Total stockholders' equity 63,175,437 56,567,828
------------ -----------
Total liabilities and stockholders' equity $105,047,373 $98,115,356
============ ===========
</TABLE>
See accompanying notes.
3
<PAGE>
Mace Security International, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------------
2000 1999
----------------- ----------------
(Restated)
<S> <C> <C>
Revenues:
Car wash and detailing services $ 9,874,420 $ 5,133,542
Lube and other automotive services 1,295,002 1,024,880
Fuel and merchandise sales 1,454,493 642,329
Security product sales - 692,413
Operating agreements 60,000 46,199
----------- -----------
12,683,915 7,539,363
Cost of revenues:
Car wash and detailing services 7,385,333 3,415,808
Lube and other automotive services 989,481 693,983
Fuel and merchandise sales 1,285,180 529,722
Security product sales - 345,228
----------- -----------
9,659,994 4,984,741
Selling, general and administrative expenses 1,835,475 1,529,165
Depreciation and amortization 639,754 308,603
Costs of terminated acquisitions - -
Merger costs - 1,875,000
----------- -----------
Operating income (loss) 548,692 (1,158,146)
Interest expense, net (788,023) (335,170)
Other income 115,754 132,578
----------- -----------
Loss from continuing operations before
income taxes (123,577) (1,360,738)
Income tax benefit (40,000) (361,875)
----------- -----------
Loss from continuing operations (83,577) (998,863)
Discontinued Operations:
Income from discontinued operations, net of income tax
expense of $27,000 - 169,818
----------- -----------
Net loss $ (83,577) $ (829,045)
=========== ===========
Basic (loss) income per share
From continuing operations $ - $ (0.06)
From discontinued operations - 0.01
----------- -----------
Total $ - $ (0.05)
=========== ===========
Weighted average number of shares outstanding 24,997,957 17,245,702
=========== ===========
Diluted (loss) income per share
From continuing operations $ - $ (0.06)
From discontinued operations - 0.01
----------- -----------
Total $ - $ (0.05)
=========== ===========
Weighted average number of shares outstanding 24,997,957 17,245,702
=========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
Mace Security International, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------
2000 1999
----------------- ----------------
(Restated)
<S> <C> <C>
Revenues:
Car wash and detailing services $28,677,377 $ 8,923,466
Lube and other automotive services 3,719,105 1,566,581
Fuel and merchandise sales 4,018,349 971,866
Security product sales - 2,298,411
Operating agreements 200,756 480,838
----------- -----------
36,615,587 14,241,162
Cost of revenues:
Car wash and detailing services 20,368,139 5,623,225
Lube and other automotive services 2,832,177 1,151,600
Fuel and merchandise sales 3,500,788 780,634
Security product sales - 1,189,570
----------- -----------
26,701,104 8,745,029
Selling, general and administrative expenses 5,395,210 3,508,681
Depreciation and amortization 1,808,170 609,924
Costs of terminated acquisitions 580,000 -
Merger costs - 1,875,000
Restructuring, asset abandonment costs and change in
control charges - 1,519,000
----------- -----------
Operating income (loss) 2,131,103 (2,016,472)
Interest expense, net (2,260,432) (509,977)
Other income 324,081 161,079
----------- -----------
Income (loss) from continuing operations before
income taxes 194,752 (2,365,370)
Income tax expense (benefit) 63,000 (745,875)
----------- -----------
Income (loss) from continuing operations 131,752 (1,619,495)
Discontinued Operations:
(Loss) gain from discontinued operations, net of applicable
income tax expense of $130,000 in 2000 and $61,000 in 1999 (264,601) 152,456
Gain on disposal of ICS, net of $107,000 of applicable income
tax expense 723,581 -
----------- -----------
Net income (loss) $ 590,732 $(1,467,039)
=========== ===========
Basic income (loss) per share
From continuing operations $ 0.01 $ (0.14)
From discontinued operations 0.02 0.01
----------- -----------
Total $ 0.03 $ (0.13)
=========== ===========
Weighted average number of shares outstanding 23,922,676 11,652,009
=========== ===========
Diluted income (loss) per share
From continuing operations $ - $ (0.14)
From discontinued operations 0.02 0.01
----------- -----------
Total $ 0.02 $ (0.13)
=========== ===========
Weighted average number of shares outstanding 24,764,687 11,652,009
=========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
Mace Security International, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Number of Par Value Additional
Common of Common Paid-in Accumulated Treasury
Shares Stock Capital Deficit Stock Total
----------- --------- ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999........... 22,821,675 $228,216 $63,992,607 $(7,600,607) $(52,388) $56,567,828
Sale of common stock less commissions
and issuance expenses of $162,061.... 1,527,359 15,274 1,402,650 1,417,924
Exercise of common stock options
and warrants......................... 43,750 438 80,779 81,217
Common stock issued in purchase
acquisitions......................... 1,277,300 12,773 4,667,775 4,680,548
Common stock issued for services....... 40,000 400 199,600 200,000
Common stock issued to satisfy debt
obligation........................... 162,234 1,622 585,235 586,857
Common stock issued for debt
guarantee............................ 19,521 195 68,129 68,324
Cancellation of shares received
from sale of ICS..................... (450,000) (4,500) (1,008,000) (1,012,500)
Shares purchased and retired........... (4,800) (48) (5,445) (5,493)
Treasury shares retired................ (52,388) 52,388 -
Net income............................. 590,732 590,732
----------- -------- ----------- ----------- -------- -----------
Balance at September 30, 2000.......... 25,437,039 $254,370 $69,930,942 $(7,009,875) $ - $63,175,437
=========== ======== =========== =========== ======== ===========
</TABLE>
See accompanying notes.
6
<PAGE>
Mace Security International, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------
2000 1999
----------------- ----------------
(Restated)
<S> <C> <C>
Operating activities
Income (loss) from continuing operations $ 131,752 $ (1,619,495)
Discontinued operations, net of income tax 458,980 152,456
----------- ------------
Net income (loss) 590,732 (1,467,039)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,808,170 609,924
Provision for losses on receivables 12,361 126,797
Loss on disposal of property and equipment 16,235 -
Deferred income taxes (146,288) (534,875)
Non-cash portion of restructuring and change in control charges - 1,267,000
Net gain on sale of ICS, including cash surrendered (975,199) -
Non-cash expenses of discontinued operations 24,206 35,475
Changes in operating assets and liabilities:
Accounts receivable 476,905 (414,410)
Inventory (52,925) (365,374)
Accounts payable (778,962) (542,330)
Deferred revenue (197,742) (12,003)
Accrued expenses 496,026 183,704
Income taxes (30,212) (168,383)
Prepaid expenses and other assets 904,251 (526,044)
Discontinued operations - 293,835
Other - (76,732)
----------- ------------
Net cash provided by (used in) operating activities 2,147,558 (1,590,455)
Investing activities
Acquisition of businesses, net of cash acquired (25,000) (8,364,008)
Purchase of property and equipment (1,073,487) (748,329)
Proceeds from sale of property and equipment 15,468 -
Payments for intangibles (429,900) (125,718)
Payments received on notes receivable from shareholder - 891,916
Deposits and other prepaid costs on future acquisitions 149,165 (1,721,374)
----------- ------------
Net cash used in investing activities (1,363,754) (10,067,513)
Financing activities
Proceeds from revolving line of credit, long term debt and capital
lease obligations 950,000 76,836
Payments on revolving line of credit, long-term debt and capital
lease obligations (1,521,822) (2,526,799)
Proceeds from issuance of common stock, net of offering costs 1,499,141 14,380,300
Payments to purchase stock (5,493) -
Net (payments) borrowings on note payable to shareholder (2,927) 244,860
Dividends paid to former stockholders of pooled companies - (1,278,232)
----------- ------------
Net cash provided by financing activities 918,899 10,896,965
----------- ------------
Net increase (decrease) in cash and cash equivalents 1,702,703 (761,003)
Cash and cash equivalents at beginning of period 2,320,804 4,672,695
----------- ------------
Cash and cash equivalents at end of period $ 4,023,507 $ 3,911,692
=========== ============
</TABLE>
See accompanying notes.
7
<PAGE>
Mace Security International, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include
the accounts of Mace Security International, Inc. and its wholly owned
subsidiaries (the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation. These condensed
consolidated financial statements reflect all adjustments (consisting of normal
recurring accruals), which in the opinion of management, are necessary for a
fair presentation of results of operations for the interim periods presented.
The results of operations for the three and nine month periods ended September
30, 2000 are not necessarily indicative of the operating results for the full
year. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These interim financial statements
should be read in conjunction with the audited financial statements and notes
contained in the Company's Annual Report on Form 10-KSB, as amended, for the
year ended December 31, 1999.
2. Significant Accounting Policies
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which was
effective for fiscal years beginning after June 15, 1999. SFAS No. 133 must be
adopted prospectively and retroactive application is not permitted. SFAS No.
133 will require the Company to record all derivatives on the balance sheet at
fair value. Changes in derivative fair values will either be recognized in
earnings as offsets to the changes in fair value of related hedged assets,
liabilities and firm commitments or for forecasted transactions, deferred and
recorded as a component of accumulated other comprehensive income (loss) in
stockholders' equity until the hedged transactions occur and are recognized in
earnings. The ineffective portion of a hedging derivative's change in fair
value will be immediately recognized in earnings. In June 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133". SFAS No. 133 is now
effective for fiscal years beginning after June 15, 2000. The Company expects
to adopt SFAS No. 133 on January 1, 2001 and does not believe the effect of
adopting SFAS No. 133 will have any material effect on its consolidated
financial position or results of operations.
3. Business Combinations
Since April 1, 1999, the Company has acquired 62 car care facilities and five
truck wash facilities through the acquisition of 18 separate businesses
including: 44 full service facilities, one self service facility, and 13
exterior only facilities in Pennsylvania, New Jersey, Delaware, Texas, Florida
and Arizona; four facilities were subsequently divested. The five full service
truck wash facilities are located in Arizona, Indiana, Ohio and Texas.
Of the 18 acquisitions completed through September 30, 2000, 15 were accounted
for using the purchase method of accounting. Accordingly, assets acquired and
liabilities assumed have been recorded at their estimated fair values at the
dates of acquisition and their results of operations are included in the
accompanying condensed consolidated statements of operations since the date of
acquisition. The excess of purchase price over the estimated fair market value
of identifiable net assets acquired is being amortized on a straight-line basis
over twenty-five years from the date of acquisition. The purchase price
allocations are based on preliminary estimates as of the acquisition dates and
are finalized within one year from the date of acquisition.
Acquisitions Accounted for Under the Purchase Method
On May 17, 1999, the Company acquired all of the outstanding stock of Colonial
Full Service Car Wash, Inc. ("Colonial") in exchange for 1,250,991 unregistered
shares of the Company's common stock and the assumption of debt and negative
working capital of approximately $6,579,000. This transaction has been
accounted for using the purchase method of accounting.
On May 18, 1999, the Company acquired certain assets of Genie Car Wash of
Austin, Inc., Genie Car Care Center, Inc., and Genie Car Service Center, Inc.
(collectively, "Genie"). Consideration under the Agreement consisted of 533,333
unregistered shares of common stock of the Company, $1,000,000 of cash, and the
issuance of promissory notes in the amounts of $4,750,000 and $180,000. The
assets acquired consist of substantially all of the real estate, equipment, and
inventories utilized in the car wash businesses. This transaction has been
accounted for using the purchase method of accounting.
On June 1, 1999, the Company acquired substantially all of the assets of Gabe's
Plaza Car Wash, Inc. ("Gabe's") in exchange for $210,000 in cash and delivery of
a promissory note for $717,000. The transaction has been accounted for using
the purchase method of accounting.
8
<PAGE>
On June 22, 1999, the Company acquired substantially all of the assets of the
Moorestown Car Wash in exchange for $225,000 and the issuance of 20,930
unregistered shares of common stock of the Company. This transaction has been
accounted for using the purchase method of accounting.
On July 1, 1999, the Company completed, pursuant to a Merger Agreement dated
March 26, 1999, its merger with American Wash Services, Inc. ("AWS"), a car wash
company controlled by Louis D. Paolino, Jr., the Company's Chairman, Chief
Executive Officer and President, pursuant to which AWS was merged with and into
a wholly owned subsidiary of the Company. Mr. Paolino and Red Mountain
Holdings, Ltd., AWS's other shareholder, received in exchange for all of the
shares of AWS, $4.8 million in cash, and 628,362 unregistered shares of Common
Stock, of which Mr. Paolino received 470,000 shares and Red Mountain received
158,362 shares. Mr. Paolino and Mr. Robert M. Kramer, the current Executive
Vice President and General Counsel of the Company, received additional
consideration in connection with this merger:
. Mr. Paolino received a warrant to purchase 1,500,000 shares of Common Stock
at a purchase price of $1.375 per share;
. Mr. Paolino received a warrant to purchase 250,000 shares of Common Stock at
a purchase price of $2.50 per share; and
. Mr. Kramer received a warrant to purchase 75,000 shares of Common Stock at a
purchase price of $1.375 per share.
The transaction has been accounted for using the purchase method of accounting.
On July 1, 1999, the Company acquired substantially all the assets of Stephen
Bulboff and Stephen B. Properties, Inc. (collectively, "Shammy Shine" or
"Stephen Bulboff") in exchange for 860,000 unregistered shares of common stock
of the Company and cash consideration of $1,900,000. Shammy Shine owns and
operates a total of ten exterior only car washes in Pennsylvania, New Jersey and
Delaware. This transaction has been accounted for using the purchase method of
accounting.
On August 24, 1999, the Company acquired, through a wholly owned subsidiary,
substantially all of the assets of Shammy Man Car Wash ("Shammy Man") in
exchange for 62,649 unregistered shares of common stock, cash consideration of
$475,000, and the assumption of approximately $400,000 of debt. This
transaction has been accounted for using the purchase method of accounting.
On September 9, 1999, the Company acquired all of the assets of Quaker Car Wash,
Inc. ("Quaker") in exchange for 224,072 unregistered shares of common stock and
approximately $1,055,000 of cash consideration. This transaction has been
accounted for using the purchase method of accounting.
On October 18, 1999, the Company, through a wholly owned subsidiary, acquired
all of the car wash related assets of White Glove Car Wash ("White Glove")
located in Tempe, Arizona. Consideration consisted of 38,095 unregistered
shares of common stock of the Company, $130,000 of cash, and the issuance of a
$345,000 promissory note. The transaction has been accounted for using the
purchase method of accounting.
On October 29, 1999, the Company consummated the acquisition of substantially
all of the car wash related assets of Millennia Car Wash, LLC ("Millennia")
which the Company operated under an operating agreement from April 1, 1999 to
October 28, 1999. Millennia consists of 11 full service car washes in the
Phoenix, Arizona market and four full service car washes in the San Antonio,
Texas market as well as a total of five lube and repair centers, eight fuel
sales operations, and 17 convenience stores. Consideration under the agreement,
as amended, consisted of 3,500,000 unregistered shares of common stock of the
Company and the assumption of approximately $15.0 million of long-term debt.
The transaction has been accounted for using the purchase method of accounting.
On December 29, 1999, the Company, through a wholly owned subsidiary, acquired
all of the assets of Cherry Hill Car Wash, Inc. and 1505 Associates General
Partnership (collectively, "Cherry Hill Car Wash") located in Cherry Hill, New
Jersey. Consideration consisted of 63,309 unregistered shares of common stock
of the Company and $1,900,000 of cash. The transaction has been accounted for
using the purchase method of accounting.
On March 24, 2000, the Company, through a wholly owned subsidiary, acquired all
of the truck wash related assets of Red Baron Truck Washes, Inc. ("Red Baron")
with a total of five operating locations in Arizona, Indiana, Ohio and Texas.
Consideration consisted of 568,421 registered shares of common stock of the
Company and the issuance of a secured $1 million promissory note to the seller.
The transaction has been accounted for using the purchase method of accounting.
On June 5, 2000, the Company, through a wholly owned subsidiary, acquired
certain assets of Sparsupco, Inc. (the "Beneva Car Wash"). Consideration
consisted of 130,712 shares of common stock of the Company and $20,000 of cash.
The Beneva Car Wash is located in Sarasota, Florida. The transaction has been
accounted for using the purchase method of accounting.
On July 10, 2000, the Company, through a wholly owned subsidiary, completed the
acquisition of substantially all the assets of
9
<PAGE>
Superstar Kyrene, a full service car wash in the Phoenix, Arizona area, in
exchange for 56,521 unregistered shares of common stock of the Company, cash
consideration of approximately $824,000 and the assumption of approximately
$926,000 of debt. The transaction has been accounted for using the purchase
method of accounting.
On July 26, 2000, the Company acquired, through a wholly owned subsidiary,
substantially all of the assets of Blue Planet Car Wash ("Blue Planet"), a full
service car wash in the Dallas, Texas area, in exchange for 250,008 unregistered
shares of common stock, and the assumption of approximately $1,554,000 of debt.
This transaction has been accounted for using the purchase method of accounting.
Acquisitions Accounted for Under the Pooling of Interests Method
On August 25, 1999, the Company acquired all of the outstanding shares of 50's
Classic Car Wash of Lubbock, Inc. and CRCD, Inc. (collectively, "50's Classic").
Approximately 91,700 unregistered shares of common stock of the Company were
issued in exchange for all of the outstanding shares of 50's Classic.
Additionally, the Company assumed at closing approximately $617,000 of debt.
50's Classic owns and operates a full service car wash in Lubbock, Texas. The
transaction has been accounted for using the pooling of interests method of
accounting; and accordingly, the accompanying consolidated financial statements
include the accounts of 50's Classic for all periods presented.
On September 9, 1999, the Company acquired all of the outstanding shares of
Eager Beaver Car Wash, Inc. ("Eager Beaver") for consideration of approximately
659,200 unregistered shares of common stock of the Company. Additionally, the
Company assumed approximately $3.8 million of debt. Eager Beaver owns and
operates five full service car washes on the west coast of Florida that provide
a complete line of car care services including washing, waxing, and lubrication
services. The transaction has been accounted for using the pooling of
interests method of accounting; and accordingly, the accompanying consolidated
financial statements include the accounts of Eager Beaver for all periods
presented.
Combined and separate results of continuing operations of the Company, 50's
Classic, and Eager Beaver for the nine months ended September 30, 2000 and 1999
are as follows:
<TABLE>
<CAPTION>
Revenues Net Income (Loss)
-------- -----------------
Nine Months Ended September 30, 2000 (In Thousands)
<S> <C> <C>
Mace Security International, Inc. $32,533 $ (548)
50's Classic Car Wash 710 124
Eager Beaver Car Wash 3,373 556
------- -------
Combined $36,616 $ 132
======= =======
Nine Months Ended September 30, 1999
Mace Security International, Inc. $10,601 $ (963) (1)
50's Classic Car Wash 628 (58) (1)
Eager Beaver Car Wash 3,012 (598) (1)
------- -------
Combined $14,241 $(1,619)
======= =======
</TABLE>
(1) Includes merger costs and related tax provision.
Additionally, on July 9, 1999, the Company acquired all of the outstanding
shares of Innovative Control Systems, Inc. ("ICS"). Approximately 604,000
unregistered shares of common stock of the Company were issued in exchange for
all of the outstanding shares of ICS. Additionally, the Company assumed
approximately $750,000 of ICS's debt. On June 2, 2000, the Company sold ICS in
exchange for the return of 450,000 shares of common stock of the Company and
$295,500 of future goods and services from ICS. Accordingly, ICS's results of
operations, as well as the gain on the ICS sale, have been accounted for as
discontinued operations.
4. Operating Agreements
During a portion of the nine months ended September 30, 2000, the Company
managed three car wash locations under operating agreements, under which the
Company was entitled to all profits generated from the operation of the
locations. During the nine months ended September 30, 2000, the Company
completed the acquisition of two of these car wash locations and terminated the
acquisition of the third location. Operating agreements generally arise from
pending acquisitions that will be closed pending completion of certain
conditions. The pretax result earned under the operating agreements is
presented in the accompanying statements of operations as revenue from operating
agreements net of all operating expenses. Additionally, the Company is
currently being paid $20,000 per month under an agreement which allows Mark
Sport, Inc., an entity controlled by Jon E. Goodrich, a director of the Company,
to operate the Company's Security Products Division.
10
<PAGE>
The results of operations subject to operating agreements in the nine months
ended September 30, 2000 were as follows:
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
2000
----------------
(In Thousands)
<S> <C>
Revenues
Car wash and detailing services $ 804
Fuel and merchandise sales 53
Security products operating lease payments 160
------
1,017
Cost of revenues
Car wash and detailing services 727
Fuel and merchandise sales 38
------
765
Selling, general, and administrative expenses 51
------
Operating profit $ 201
======
</TABLE>
5. Discontinued Operations
On July 14, 1998, the Company sold substantially all of the assets of its Law
Enforcement division within its security products segment. Accordingly, the
operating results of its Law Enforcement division have been segregated from
continuing operations and reported, on a comprehensive basis, as a separate line
item on the consolidated statement of operations entitled "Discontinued
Operations." In conjunction with the sale of assets, the Company licensed to
the purchaser the use of Mace(R) and related trademarks and a patent for use by
the purchaser in the Law Enforcement market and received a one-time license fee
of $650,000. A portion of the sales price, $600,000, was retained by the
purchaser in escrow to secure, among other things, the Company's obligations
under the representations and warranties in the purchase agreement. During
1999, this amount was returned to the Company. Notwithstanding the sale of the
Law Enforcement division, the Company fulfilled its obligation under a
nonassignable Department of Defense contract which was completed in September of
1999. Accordingly, this contract is included in discontinued operations in the
accompanying consolidated statement of operations for the three and nine months
ended September 30, 1999.
On May 4, 2000, the Board of Directors of the Company approved a plan to sell
its computer products and services subsidiary, ICS. Accordingly, the operating
results of ICS have been segregated from continuing operations and reported on a
comprehensive basis as a separate line item on the consolidated statement of
operations entitled "Discontinued Operations". On June 2, 2000, the Company
sold ICS in exchange for the return of 450,000 shares of common stock of the
Company and $295,500 of future goods and services from ICS.
<TABLE>
<CAPTION>
Law Enforcement
ICS Division
--------------- ------------------
<S> <C> <C>
Three months ended September 30, 2000
Revenues $ - $ -
Loss from discontinued operations $ - $ -
Nine months ended September 30, 2000
Revenues $ 518,753 $ -
Loss from discontinued operations $ (264,601) $ -
Gain on disposal $ 723,581(1) $ -
Three months ended September 30, 1999
Revenues $ 786,137 $ 515,009
Income from discontinued operations $ 74,032 $ 95,786
Nine months ended September 30, 1999
Revenues $2,399,341 $1,135,051
Income from discontinued operations $ 128,424 $ 24,032
</TABLE>
(1) Includes a net loss of $77,308 from operations of ICS from the
measurement date to the disposal date.
11
<PAGE>
6. Costs of Terminated Acquisitions
The Company's policy is to charge as an expense any previously capitalized
expenditures relating to proposed acquisitions that in management's current
opinion will not be consummated. During the quarter ending June 30, 2000,
management decided to terminate certain pending acquisitions the Company
believes will not be consummated as a result of due diligence findings or the
inability of the seller to meet certain terms and conditions precedent to
closing. Costs of previously capitalized expenditures principally relate to the
termination of the Planet Truck Wash acquisition and acquisition related
expenses associated with the proposed Wash Depot Holdings, Inc. ("Wash Depot")
merger. The Company terminated the Wash Depot Merger Agreement on September 30,
2000 as a result of certain conditions precedent to closing not being satisfied
by Wash Depot. Of the $580,000 costs of terminated acquisitions, approximately
$209,000 represented unrecoverable cash and stock deposits and approximately
$371,000 represented external incremental transaction costs including legal,
accounting, consulting and due diligence costs.
7. Commitments and Contingencies
As disclosed in the Company's 1994 Form 10-KSB, on January 25, 1994 a suit was
filed by Carmeta Gentles on her own behalf and as a personal representative of
the estate of Robert Gentles in Ontario Court (General Division), Ontario,
Canada, claiming intentional or negligent manufacture and distribution of the
Mark V Mace(R) brand defense spray unit and that its contents contributed to the
suffering and death of Robert Gentles while in the Kingston Penitentiary in
October 1993. The Company was added as a third party defendant on February 8,
1995. The plaintiff seeks five million dollars in damages. The Company
forwarded this suit to its insurance carrier for defense. Based on discussions
with the Company's counsel and insurance carrier, the Company does not
anticipate that this claim will result in the payment of damages in excess of
the Company's insurance coverage.
On July 27, 1998, the Company was added as a defendant in a suit filed in the
state of West Virginia by Susan H. Jackman, et. al. The litigation concerns an
attack on Mrs. Jackman by two dogs and the alleged failure of a "Muzzle(R)"
product distributed by the Company to repel the dogs. The suit claims product
liability and negligence and seeks one million dollars in damages. The Company
forwarded this suit to its insurance carrier for defense. The Company does not
anticipate that this claim will result in the payment of damages in excess of
the Company's insurance coverage.
On December 13, 1999, the Company was named as a defendant in a suit filed in
the state of New York by Janeen Johnson et. al. The litigation concerns a claim
that a self-defense spray manufactured by the Company and used by a law
enforcement officer contributed to the suffering and death of Christopher
Johnson. The Company forwarded the suit to its insurance carrier for defense.
The Company does not anticipate that this claim will result in the payment of
damages in excess of the Company's insurance coverage.
Although the Company is not aware of any substantiated claim of permanent
personal injury from its products, the Company is aware of reports of incidents
in which, among other things, defense sprays: have been mischievously or
improperly used, in some cases by minors; have not been instantly effective; or
have been ineffective against enraged or intoxicated individuals. Incidents of
this type, or others, could give rise to product liability or other claims, or
to claims that past or future advertising, packaging or other practices should
be, or should have been, modified, or that regulation of products of this nature
should be extended or changed.
The Company is subject to federal and state environmental regulations, including
rules relating to air and water pollution and the storage and disposal of oil,
other chemicals and waste. The Company believes that it complies with all
applicable laws relating to its business.
Certain of the Company's executive officers have entered into employment
agreements whereby they will be entitled to immediate vesting provisions of
issued options should the officer be terminated upon a change in control of the
Company. Additionally, the employment agreement of the Company's Chief
Executive Officer, Louis D. Paolino, Jr., entitles Mr. Paolino to receive a fee
of $7,000,000 upon termination of employment under certain conditions including
upon termination as a result of a change in control.
The Company is a party to various other legal proceedings related to its normal
business activities. In the opinion of the Company's management, none of these
proceedings are material in relation to the Company's results of operations,
liquidity, cash flows or financial condition.
8. Business Segments Information
The Company currently operates in 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. During 1999, the
Company operated in the Security Products segment, producing
12
<PAGE>
and marketing defense sprays, and marketing and retailing consumer safety and
security products. In the first quarter of 2000, the Company entered into a
Management Agreement with Mark Sport, Inc., a Vermont corporation. Mark Sport,
Inc. is controlled by Jon E. Goodrich, a director of the Company. The Management
Agreement entitles Mark Sport, Inc. to operate the Company's Safety and Security
Devices Division and receive all profits or losses for a seven-month term
beginning January 1, 2000. The Agreement was extended for a six month period
through January 31, 2001, as provided for in the original Management Agreement.
In exchange, Mark Sport, Inc. pays the Company $20,000 per month beginning
February 2000 and continuing through the term of the Management Agreement as
extended. Additionally, Mark Sport, Inc. must pay the Company an amount equal to
the amortization and depreciation on the assets of the division at the end of
the term of the Agreement. During the term of the Agreement, Mark Sport, Inc.
must operate the division in substantially the same manner as it has been
operated prior to the Management Agreement. Additionally, during 1999 and
through June 2, 2000, the Company operated in the computer hardware and software
products and services segment through its subsidiary, ICS. ICS was sold on June
2, 2000 and accordingly has been classified as discontinued operations.
Financial information regarding the Car Care and Security Products segments is
as follows:
<TABLE>
<CAPTION>
Car Security
Care Products
-------------- --------------
(In Thousands)
<S> <C> <C>
Three months ended September 30, 2000
Revenues from external customers $ 12,624 $ 60
Intersegment revenues - -
Segment (loss) income $ (124) $ 40
Nine months ended September 30, 2000
Revenues from external customers $ 36,456 $ 160
Intersegment revenues - -
Segment income $ 24 $ 108
Segment assets $100,910 $ 4,137
Three months ended September 30, 1999
Revenues from external customers $ 6,847 $ 692
Intersegment revenues - $ 10
Segment loss $ (911)(1) $ (88)
Nine months ended September 30, 1999
Revenues from external customers $ 11,943 $ 2,298
Intersegment revenues - $ 10
Segment income (loss) $ 163(1) $(1,782)
</TABLE>
(1) Includes costs to merge with ICS, net of applicable income taxes.
9. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements. Actual results could
differ from those estimates. Such estimates include the Company's estimates of
reserves such as the allowance for doubtful accounts receivable, inventory
valuation allowances, income tax valuation allowances, and the Company's
estimate of restructuring, change in control charges, and acquisition costs.
10. Income Taxes
The Company recorded a tax expense from continuing operations of $63,000 for the
nine months ended September 30, 2000. Tax expense reflects the recording of
Federal and State taxes at a rate of 32%. An effective rate lower than the
Federal and State statutory rate for the nine months ended September 30, 2000 is
primarily due to the use of net operating loss carryforwards.
13
<PAGE>
11. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- -----------------------------
9/30/00 9/30/99 9/30/00 9/30/99
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
(Loss) income from continuing operations................. $ (83,577) $ (998,863) $ 131,752 $(1,619,495)
Income from discontinued operations...................... - 169,818 458,980 152,456
----------- ----------- ----------- -----------
Net (loss) income........................................ $ (83,577) $ (829,045) $ 590,732 $(1,467,039)
=========== =========== =========== ===========
Denominator:
Denominator for basic (loss) income per share -
weighted average shares................................. 24,977,957 17,245,702 23,922,676 11,652,009
Dilutive effect of options and warrants.................. - - 842,011 -
----------- ----------- ----------- -----------
Denominator for diluted (loss) income per share -
weighted average shares........................ 24,977,957 17,245,702 24,764,687 11,652,009
=========== =========== =========== ===========
Basic (loss) income per share:
From continuing operations............................... $ - $ (0.06) $ 0.01 $ (0.14)
From discontinued operations............................. - 0.01 0.02 0.01
----------- ----------- ----------- -----------
Total.................................................... $ - $ (0.05) $ 0.03 $ (0.13)
=========== =========== =========== ===========
Diluted (loss) income per share:
From continuing operations............................... $ - $ (0.06) $ - $ (0.14)
From discontinued operations............................. - 0.01 0.02 0.01
----------- ----------- ----------- -----------
Total.................................................... $ - $ (0.05) $ 0.02 $ (0.13)
=========== =========== =========== ===========
</TABLE>
For periods resulting in a loss from continuing operations, the Company's
options and warrants outstanding have not been included in the calculation of
diluted earnings per share in that it would be anti-dilutive.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Factors Influencing Future Results and Accuracy of Forward Looking Statements
This report includes forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended ("Forward Looking Statements"). All statements
other than statements of historical fact included in this section, are Forward
Looking Statements. Although the Company believes that the expectations
reflected in such Forward Looking Statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Generally,
these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of such plans or strategies, number
of acquisitions and projected or anticipated benefits from acquisitions made by
or to be made by the Company, or projections involving anticipated revenues,
earnings, levels of capital expenditures or other aspects of operating results.
All phases of the Company's operations are subject to a number of uncertainties,
risks and other influences, many of which are outside the control of the Company
and any one of which, or a combination of which, could materially affect the
results of the Company's operations and whether Forward Looking Statements made
by the Company ultimately prove to be accurate. Such important factors
("Important Factors") that could cause actual results to differ materially from
the Company's expectations are disclosed in this section and elsewhere in this
report. All subsequent written and oral Forward Looking Statements attributable
to the Company or persons acting on its behalf are expressly qualified in their
entirety by the Important Factors described below that could cause actual
results to differ from the Company's expectations. The Forward Looking
Statements made herein are only made as of the date of this filing and the
Company undertakes no obligation to publicly update such Forward Looking
Statements to reflect subsequent events or circumstances.
We need to raise additional capital. At September 30, 2000, we had
negative working capital of approximately $4.0 million. Our business plan will
require significant additional capital to fund acquisitions and internal
development and growth. Our capital requirements also include working capital
for daily operations and significant capital for equipment purchases. To the
extent that we lack cash to meet our future capital needs, we will be required
to raise additional funds through bank borrowings and significant additional
equity and/or debt financing, which may result in significant increases in
leverage and interest expense
14
<PAGE>
and/or substantial dilution. If we are unable to raise additional capital, we
will need to reduce substantially the scale of our operations and to curtail our
business plan.
We have a history of losses, we have working capital deficits and we may
incur continuing charges. We have reported net losses and working capital
deficits in prior fiscal years and we have recently expended substantial funds
for acquisitions and equipment. In connection with financing acquisitions and
business growth, we anticipate that we will continue to incur significant debt
and interest charges. In addition, we will recognize goodwill amortization
charges in connection with our acquisitions that are accounted for under the
purchase method of accounting. The amount of goodwill recognized is the amount
by which the purchase price of a business exceeds the fair market value of the
assets acquired. Goodwill is amortized over a period not to exceed 25 years
depending on the business acquired, resulting in a non-cash charge to our
earnings during that period. As we continue to acquire additional businesses,
our financial position and results of operations may fluctuate significantly
from period to period.
Our business plan poses risks for us. Our business objective is to develop
and grow a full service, integrated car care business through acquisitions of
car washes and through the internal development of our car wash facilities by
adding gasoline pumps, oil change facilities and convenience stores to our
locations. We have repositioned our company from a company involved primarily
in the production of consumer defense products to a company that offers car wash
and car care services. This strategy involves a number of risks, including:
Risks associated with growth;
Risks associated with acquisitions;
Risks associated with the recruitment and development of management and
operating personnel; and
Risks associated with lack of experience in the car service industries.
If we are unable to manage one or more of these associated risks effectively, we
may not realize our business plan.
We have a limited operating history regarding our car wash and car service
businesses. Since July 1999, our main business has been the acquisition and
operation of car wash and car service facilities, which now account for nearly
100% of our revenues. Because of our relatively limited operating history with
respect to these businesses, we cannot assure you that we will be able to
operate them successfully.
We may not be able to manage growth. If we succeed in growing, growth will
place significant burdens on our management and on our operational and other
resources. We will need to attract, train, motivate, retain and supervise our
senior managers and other employees and develop a managerial infrastructure. If
we are unable to do this, we will not be able to realize our business
objectives.
Our stock price is volatile. Our common stock's market price has been and
is likely to continue to be highly volatile. Factors like fluctuations in our
quarterly revenues and operating results, our ongoing acquisition program,
market conditions and economic conditions generally may impact significantly our
common stock's market price. In addition, as we continue to acquire additional
car wash businesses, we may agree to issue common stock that will become
available generally for resale and may have an impact on our common stock's
market price.
Risks of Acquisitions. Our strategy to grow in part through acquisitions
depends upon our ability to identify suitable acquisition candidates, and to
consummate acquisitions on financially favorable terms. This strategy involves
risks inherent in assessing acquisition candidates' values, strengths,
weaknesses, risks and profitability and risks related to the financing,
integration and operation of acquired businesses, including:
Adverse short-term effects on our reported operating results;
Diversion of management's attention;
Dependence on hiring, training and retaining key personnel; and
Risks associated with unanticipated problems or latent liabilities.
We cannot assure you that acquisition opportunities will be available, that we
will have access to the capital required to finance potential acquisitions, that
we will continue to acquire businesses, or that any acquired business will be
profitable.
We may not be able to integrate businesses we acquire and achieve operating
efficiencies. We are in the process of combining the businesses and assets that
we have acquired recently into an integrated operating structure. Our future
growth and profitability depend substantially on our ability to operate and
integrate acquired businesses. Our strategy is to achieve economies of scale
and brand-name recognition in part through acquisitions that increase our size.
We cannot assure you that our efforts to integrate acquired operations will be
effective or that we will realize expected results. Our failure to achieve any
of these results could have a material adverse effect on our business and
results of operations.
15
<PAGE>
We face potential liabilities associated with acquisitions of businesses.
The businesses we acquire may have liabilities that we do not discover or may be
unable to discover during our preacquisition investigations, including
liabilities arising from environmental contamination or prior owners' non-
compliance with environmental laws or other regulatory requirements, and for
which we, as a successor owner or operator, may be responsible.
We face risks associated with our consumer safety products. We face claims
of injury allegedly resulting from our defense sprays. We cannot assure you
that our insurance coverage will be sufficient to cover any judgments won
against us in these lawsuits. If our insurance coverage is exceeded, we will
have to pay the excess liability directly. We are also aware of several claims
that defense sprays used by law enforcement personnel resulted in deaths of
prisoners and of suspects in custody. While we no longer sell defense sprays to
law enforcement agencies, it is possible that the increasing use of defense
sprays by the public could, in the future, lead to additional product liability
claims.
Our car wash business may suffer under certain weather conditions.
Seasonal trends in some periods may affect our car wash business. In
particular, long periods of rain can affect adversely our car wash business as
people typically do not wash their cars during such periods. Conversely,
extended periods of warm, dry weather may encourage customers to wash their own
cars which can affect adversely our car wash business.
Consumer demand for our car wash services is unpredictable. Our financial
condition and results of operations will depend substantially on consumer demand
for car wash services. Our business depends on consumers choosing to employ
professional services to wash their cars rather than washing their cars
themselves or not washing their cars at all. We cannot assure you that consumer
demand for car wash services will increase as our business expands. Nor can we
assure you that consumer demand will maintain its current level.
We must maintain our car wash equipment. Although we undertake to keep our
car washing equipment in proper operating condition, the operating environment
found in car washes results in frequent mechanical problems. If we fail to
properly maintain the equipment, the car wash could become inoperable resulting
in a loss of revenue to us from the inoperable location.
Our car wash and other car service businesses face governmental regulation.
We are governed by federal, state and local laws and regulations, including
environmental regulations, that regulate the operation of our car wash centers
and other car service businesses. Car wash centers utilize cleaning agents and
waxes in the washing process that are then discharged in waste water along with
oils and fluids washed off of vehicles. Other car services, such as gasoline
and lubrication, use a number of oil derivatives and other regulated hazardous
substances. As a result, we are governed by environmental laws and regulations
dealing with, among other things:
Transportation, storage, presence, use, disposal and handling of hazardous
materials and hazardous wastes;
Discharge of stormwater; and
Underground storage tanks.
If any of the previously mentioned substances were found on our property,
including leased properties, or if we were found to be in violation of
applicable laws and regulations, we could be responsible for clean-up costs,
property damage and fines or other penalties, any one of which could have a
material adverse effect on our financial condition and results of operations.
Our consumer safety product businesses face governmental regulation. The
distribution, sale, ownership and use of consumer defense sprays are legal in
some form in all 50 states and the District of Columbia. We cannot assure you,
however, that restrictions on the manufacture or use of consumer defense sprays
will not be enacted that would have an adverse impact on our financial
condition. Some of our consumer defense spray manufacturing operations
currently incorporate hazardous materials, the use and emission of which are
regulated by various state and federal environmental protection agencies,
including the Environmental Protection Agency. We believe that we are in
compliance currently with all state and local statutes governing our disposal of
these hazardous materials, but if there are any changes in environmental permit
or regulatory requirements, or if we fail to comply with any environmental
requirements, these changes or failures may have a material adverse effect on
our business and financial condition.
We face significant competition. The extent and kind of competition that
we face varies. The car wash industry is highly competitive. Competition is
based primarily on location, facilities, customer service, available services
and rates. Because barriers to entry into the car wash industry are relatively
low, competition may be expected to continually arise from new sources not
currently competing with us. In this sector of our business we also face
competition from outside the car wash industry, such as gas stations and
convenience stores, that offer automated car wash services. In some cases,
these competitors may have significantly greater financial and operating
resources than we do. In our car service businesses, we face competition from a
number of sources, including regional and national chains, gasoline stations and
companies and automotive companies and
16
<PAGE>
specialty stores, both regional and national.
Our operations are dependent substantially on the services of our executive
officers, particularly Louis D. Paolino, Jr. Our operations are dependent
substantially on the services of our executive officers, particularly Louis D.
Paolino, Jr., our Chairman of the Board, Chief Executive Officer and President.
If we lose Mr. Paolino's services or that of one or more of our other executive
officers, the loss could have a material adverse effect on our business and
results of operations. We do not maintain key-man life insurance policies on our
executive officers.
Our Preferred Stock may affect the rights of the holders of our common
stock; it may also discourage another person from acquiring control of us. Our
Certificate of Incorporation authorizes the issuance of up to 50,000,000 shares
of Preferred Stock. No shares of Preferred Stock are currently outstanding. It
is not possible to state the precise effect of Preferred Stock upon the rights
of the holders of our common stock until the Board of Directors determines the
respective preferences, limitations and relative rights of the holders of one or
more series or classes of the Preferred Stock. However, such effect might
include: reduction of the amount otherwise available for payment of dividends on
Common Stock, to the extent dividends are payable on any issued shares of
Preferred Stock, and restrictions on dividends on Common Stock if dividends on
the Preferred Stock are in arrears; dilution of the voting power of the Common
Stock to the extent that the Preferred Stock has voting rights; and the holders
of Common Stock not being entitled to share in the Company's assets upon
liquidation until satisfaction of any liquidation preference granted to the
Preferred Stock.
The Preferred Stock may be viewed as having the effect of discouraging an
unsolicited attempt by another person to acquire control of Mace and may
therefore have an anti-takeover effect. Issuances of authorized preferred
shares can be implemented, and have been implemented by some companies in recent
years with voting or conversion privileges intended to make an acquisition of
the company more difficult or costly. Such an issuance could discourage or
limit the stockholders' participation in certain types of transactions that
might be proposed (such as a tender offer), whether or not such transactions
were favored by the majority of the stockholders, and could enhance the ability
of officers and directors to retain their positions.
Some provisions of Delaware law may prevent us from being acquired. We are
governed by Section 203 of the Delaware General Corporation Law, which prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with a person who is an "interested stockholder" for a period of three (3)
years, unless approved in a prescribed manner. This provision of Delaware law
may affect our ability to merge with, or to engage in other similar activities
with, some other companies. This means that we may be a less attractive target
to a potential acquirer who otherwise may be willing to pay a price for our
common stock above its market price.
We do not expect to pay cash dividends on our common stock. We do not
expect to pay any cash dividends on our common stock in the foreseeable future.
We will reinvest any cash otherwise available for dividends in our business.
There are additional risks set forth in the incorporated documents. In
addition to the risk factors set forth above, you should review the financial
statements and exhibits incorporated into this report. Such documents may
contain, in certain instances and from time to time, additional and supplemental
information relating to the risks set forth above and/or additional risks to be
considered by you, including, without limitation, information relating to losses
experienced by Mace in particular historical periods, working capital deficits
of Mace at particular dates, information relating to pending and recently
completed acquisitions, descriptions of new or changed federal or state
regulations applicable to Mace, data relating to remediation and the actions
taken by Mace, and estimates at various times of Mace's potential liabilities
for compliance with environmental laws or in connection with pending litigation.
Results of Operations for the Nine Months ended September 30, 2000
Compared to the Nine Months Ended September 30, 1999
Revenues
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.
Car Care Services
The Company owns or operates pursuant to operating agreements full service,
exterior only and self-service car wash locations in New Jersey, Pennsylvania,
Delaware, Texas, Florida and Arizona, as well as truck wash locations in
Arizona, Indiana, Ohio and Texas. The Company earns revenues from washing and
detailing automobiles; washing trucks; performing oil and lubrication services,
minor auto repairs, and state inspections; selling fuel; and selling merchandise
through convenience stores within the
17
<PAGE>
car wash facilities. Revenues generated for the nine months ended September 30,
2000 for the car care segment were comprised of approximately 79% car wash and
detailing, 10% lube and other automotive services, and 11% fuel and merchandise.
The majority of revenues are collected in the form of cash or credit card
receipts, thus minimizing customer accounts receivable.
Weather can have a significant impact on volume at the individual locations.
However, the Company believes that the geographic diversity of its operating
locations minimizes weather-related influence on its volume.
Security Products
In 1999 the Company operated its security products segment in two main
divisions, the Consumer Division and the Mace Anti-Crime Bureau Division. The
Company's Consumer Division manufactured and marketed personal safety, and home
and auto security products. These products were sold through retail stores,
major discount stores, and at the Company's car care facilities. The Mace Anti-
Crime Bureau Division provided expertise in developing and producing criminal
deterrent systems for government and law enforcement agencies, and financial
institutions.
In the first quarter of 2000, the Company entered into a Management Agreement
with Mark Sport, Inc., a Vermont corporation. Mark Sport, Inc. is controlled by
Jon E. Goodrich, a director of the Company. The Management Agreement entitles
Mark Sport, Inc. to operate the Company's Safety and Security Devices Division
and receive all profits or losses for a seven-month term beginning January 1,
2000. The Agreement was extended for a six month period through January 31,
2001 as provided for in the original Management Agreement. In exchange, Mark
Sport, Inc. pays the Company $20,000 per month beginning February 2000 and
continuing through the term of the Management Agreement. Additionally, Mark
Sport, Inc. must pay the Company an amount equal to the amortization and
depreciation on the assets of the division. During the term of the Agreement,
Mark Sport, Inc. must operate the division in substantially the same manner as
it has been operated prior to the Management Agreement.
Computer Products and Services
On June 2, 2000, the Company sold its computer products subsidiary, ICS, and
accordingly, all results of operations have been classified as "discontinued
operations".
Cost of Revenues
Car Care Services
Cost of revenues consists primarily of direct labor and related taxes and
benefits, chemicals, wash and detailing supplies, rent, real estate taxes,
utilities, maintenance and repairs of equipment and facilities, as well as the
cost of the fuel and merchandise sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of management,
clerical and administrative salaries, professional services, insurance premiums,
and costs relating to marketing and sales.
The Company capitalizes direct incremental costs associated with purchase
acquisitions. Indirect acquisition costs, such as executive salaries, corporate
overhead, public relations, and other corporate services and overhead are
expensed as incurred. The Company also charges as an expense any previously
capitalized expenditures relating to proposed acquisitions that in management's
current opinion will not be consummated. During the quarter ended June 30,
2000, the Company terminated or made a decision to terminate various pending
acquisitions resulting in a write-off of $580,000 of deferred acquisition costs.
At September 30, 2000, capitalized costs and acquisition deposits related
directly to proposed acquisitions that were not yet consummated were
approximately $63,000. The Company periodically reviews the future likelihood
of these acquisitions and records appropriate provisions against capitalized
costs associated with projects that are not likely to be completed.
Depreciation and Amortization
Depreciation and amortization consists primarily of depreciation of buildings
and equipment, and amortization of goodwill and other intangible assets.
Buildings and equipment are depreciated over the estimated useful lives of the
assets using the straight line method. Goodwill and other intangibles are
amortized over their useful lives using the straight line method.
Other Income and Expense
Other income and expense includes gains and losses on the sale of equipment,
asset write-downs, and rental income.
18
<PAGE>
Taxes
The Company recorded a tax expense from continuing operations of $63,000 for the
nine months ended September 30, 2000. Tax expense reflects the recording of
Federal and State taxes at a rate of 32%. An effective rate lower than the
Federal and State statutory rate for the nine months ended September 30, 2000 is
primarily due to the use of net operating loss carryforwards.
The following table presents the percentage each item in the consolidated
statements of operations bears to total revenues:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of revenues 72.9 61.4
Selling, general and administrative expenses 14.8 24.6
Depreciation and amortization 4.9 4.3
Costs of terminated acquisitions 1.6 -
Merger costs - 13.2
Restructuring, asset abandonment costs and change in control charges - 10.6
---------- ----------
Operating income (loss) 5.8 (14.1)
Interest expense, net (6.2) (3.6)
Other income 0.9 1.1
---------- ----------
Income (loss) from continuing operations before income taxes 0.5 (16.6)
Income tax expense (benefit) 0.2 (5.2)
---------- ----------
Income (loss) from continuing operations 0.3 (11.4)
(Loss) gain from discontinued operations (0.7) 1.1
Gain on disposal of ICS 2.0 -
---------- ----------
Net income (loss) 1.6% (10.3)%
========== ==========
</TABLE>
19
<PAGE>
Revenues
Revenues for the Car Care segment for the nine months ended September 30, 2000
totaled $36.4 million, of which $28.7 million or 79% was generated from car wash
and detailing, $3.7 million or 10% from lube and other automotive services, $4.0
million or 11% from fuel and merchandise sales, and $41,000 was earned under
operating agreements. For the nine months ended September 30, 1999, revenues
for the Car Care segment totaled $11.9 million with $8.9 million generated from
car wash and detailing, $1.6 million from lube services, $1.0 million from fuel
and merchandise sales, and $480,000 from operating agreements. This increase in
total revenues is primarily attributable to the 15 purchase acquisitions
completed from May 1999 to September 30, 2000. Revenue increases were also
realized through internal growth from the selling of detailing and additional
on-line car wash services.
During the nine months ended September 30, 2000, the Company managed three car
wash locations under operating agreements, under which the Company was entitled
to all profits generated from the operation of those locations. The income
earned under the agreements is shown as revenue net of related operating
expenses. Gross revenue generated by the locations under operating agreements
for the nine months ended September 30, 2000 was $857,000.
Cost of Revenues
Cost of revenues for the Car Care segment for the nine months ended September
30, 2000 were $26.7 million or 73% of revenues with car wash and detailing costs
at 71% of respective revenues, lube and other automotive services costs at 76%
of respective revenues, and fuel and merchandise costs at 87% of respective
revenues. Cost of revenues for the Car Care segment for the nine months ended
September 30, 1999 were $7.6 million or 63% of revenues. The increase in cost
of revenues as a percent of revenues is attributable to the 15 purchase
acquisitions completed from May 1999 to September 30, 2000, certain of which
provided services at profit margins lower than margins generated from prior
year's mix of services.
Selling, general and administrative expenses for the nine months ended September
30, 2000 were $5.4 million compared to $3.5 million for the nine months ended
September 30, 1999, an increase of $1.9 million or 54%. The primary reason for
this increase is the infrastructure established during the past eighteen months
in order to effectively enter the Car Care Industry and execute the Company's
growth strategy. This increase is partially offset by cost controls placed on
previously private companies, favorable pricing for supplies, insurance, and
other indirect costs due to economies of scale, cost savings resulting from the
Company's recent corporate consolidation of regional offices, and the cost
savings associated with the discontinuance on January 1, 2000 of the operation
of the security products division.
Additionally, the Company wrote off $580,000 of acquisition related costs
associated with terminated pending acquisitions.
Depreciation and amortization totaled $1.8 million for the nine months ended
September 30, 2000 as compared to $610,000 for the same period in 1999. This
increase is the result of entering the Car Care Industry, which required a
substantial investment in property and equipment. Additionally, certain
acquisitions resulted in the recording of goodwill, which increased amortization
expense. The increase was partially offset by the elimination of depreciation
and amortization expense as a result of the discontinuance on January 1, 2000 of
the operation of the security products division. The division is being operated
by a third party and the Company is paid $20,000 per month plus reimbursement
for certain expenses.
Taxes
The Company recorded a tax expense from continuing operations of $63,000 for the
nine months ended September 30, 2000. Tax expense reflects the recording of
Federal and State taxes at a rate of 32%. An effective rate lower than the
Federal and State statutory rate for the nine months ended September 30, 2000 is
primarily due to the use of net operating loss carryforwards.
Results of Operations for the Three Months Ended September 30, 2000
Compared to the Three Months Ended September 30, 1999
Revenues
Revenues for the Car Care segment for the three months ended September 30, 2000
totaled $12.6 million, of which $9.9 million or 78% was generated from car
washing and detailing, $1.3 million or 10% from lube and other automotive
services, and $1.4 million or 12% from fuel and merchandise sales.
Additionally, $60,000 was earned under an operating agreement regarding the
Company's security products division.
20
<PAGE>
For the three months ended September 30, 1999, revenues for the Car Care segment
were $6.8 million with $5.1 million from car washing and detailing, $1.0 from
lube services, $642,000 from fuel and merchandise sales, and $46,000 from
operating agreements.
Cost of Revenues
Cost of revenues for the Car Care segment for the three months ended September
30, 2000 were $9.7 million or 77% of revenues. Cost of revenues for the Car
Care segment for the three months ended September 30, 1999 were $4.6 million or
68% of revenues. The increase in costs of revenues as a percent of revenues in
the quarter ending September 30, 2000 is largely a result of certain direct
labor inefficiencies combined with a greater mix of detailing service revenues
which require more labor than wash services. Additionally, significant time
invested by management on the terminated Wash Depot acquisition combined with
certain turnover in regional management and the seasonal decline in car wash
volume during this quarter, resulted in this increase in our labor expense and
in labor as a percent of revenues.
Selling, general and administrative expenses for the three months ended
September 30, 2000 were $1.8 million compared to $1.5 million for the three
months ended September 30, 1999, an increase of $.3 million, or 20%. The
primary reason for the increase is the infrastructure established during the
eighteen months ended September 30, 2000 in order to effectively enter the Car
Care Industry and execute the Company's growth strategy. This increase is
partially offset by cost controls placed on previously private companies and
favorable pricing for supplies, insurance, and other indirect costs due to
economies of scale.
Depreciation and amortization totaled $640,000 for the three months ended
September 30, 2000 as compared to $309,000 for the same period in 1999. This
increase is the result of increased depreciation expense from entering the Car
Care industry, which required a substantial investment in property and
equipment, and the recording of goodwill associated with acquisitions, which
increased amortization expense.
Taxes
The Company recorded a tax benefit of $40,000 for the three months ended
September 30, 2000. Tax benefit reflects the recording of Federal and State
taxes at a rate of 32%. An effective rate lower than the Federal and State
statutory rate for the three months ended September 30, 2000 is primarily due to
the use of net operating loss carryforwards.
Liquidity and Capital Resources
The Company's business requires substantial amounts of capital, most notably to
pursue the Company's acquisition strategies and for equipment purchases and
upgrades. The Company plans to meet these capital needs from various financing
sources, including borrowings, internally generated funds, and the issuance of
common stock.
As of September 30, 2000, the Company had a working capital deficit of
approximately $4.0 million, including cash and cash equivalents of $4.0 million.
For the nine months ended September 30, 2000, net cash provided by operations
was approximately $2.1 million, net cash provided by financing activities was
approximately $.9 million and net cash used in investing activities was
approximately $1.4 million resulting in an increase in cash and cash equivalents
of approximately $1.7 million. Capital expended during the period included $1.1
million for the purchase of operating equipment and real estate, and $430,000
for intangibles, primarily deferred financing costs associated with new or
refinanced debt.
The Company's acquisition program and operations to date have required
substantial amounts of working capital, and the Company expects to continue to
expend funds to support its acquisition program and capital needs for
equipment. The Company estimates aggregate capital expenditures, exclusive of
acquisitions of businesses, of approximately $100,000 for the remainder of the
year ending December 31, 2000. The Company has currently addressed its capital
needs through the completion of several private sales of the Company's common
stock. The Company is also actively working with several parties to raise
additional funds through additional equity or debt placements. No assurance can
be given that additional financing will be available, or if available, that it
will be available at acceptable terms.
At December 31, 1999, the Company had approximately $11.7 million of debt which
required refinancing in the first quarter of 2000, including a $4.75 million
promissory note related to the acquisition of Genie, approximately $4.8 million
of debt with Bank One, Texas N.A. ("Bank One") assumed by the Company in
connection with the Colonial acquisition, and a $2.15 million note payable to
SouthTrust Bank relating to the Eager Beaver merger. In February 2000, the
Company financed the remaining $4.35 million balance of the Genie promissory
note through a three year term note (15 year amortization basis) with Bank One,
finalized the assumption of the Colonial notes with Bank One and extended the
original maturities of the notes due on various dates in 2001, and entered into
an extension agreement with respect to the SouthTrust Bank note until May 2001.
At September 30, 2000, the Company had borrowings of $34.7 million. The Company
does not have any letters of credit outstanding nor does it maintain a revolving
credit facility.
Notes payable to related parties at September 30, 2000 includes a Convertible
Promissory Note in the amount of approximately $1.1 million, convertible into
the Company's common stock and callable by the holder by providing the Company
with a 90 day notice. The promissory note was called by the holder and is due on
November 28, 2000. Current portion of long-term debt at September 30, 2000
includes a $1.0 million promissory note related to the Red Baron Truck Wash
acquisition completed in March 2000 which became due in October 2000. The
Company entered into an agreement with the note holder to extend the due date to
October 2001 with a principal payment of $100,000 in November 2000 and principal
payments of $50,000 per month beginning December 1, 2000. The Company has
received and has executed a commitment letter with a financial institution for a
three year term note (15 year amortization basis) to refinance certain maturing
debt including the $1.1 million note payable to related parties, the $2.1
million SouthTrust Bank note maturing
21
<PAGE>
in May 2001, and the Red Baron $1.0 million promissory note. The commitment is
subject to normal closing conditions which the Company expects to meet; however,
no assurances can be given that the loan will close. Current portion of long
term debt at September 30, 2000 also includes an installment note with a balance
of approximately $340,000 which matured on October 18, 2000. The Company has
entered into a Modification Agreement with respect to this note which provided
for a principal payments of $125,000 in October 2000, a $50,000 payment in
November 2000, with the balance of the note due on April 1, 2001. Additionally,
a mortgage loan matured in October 2000 with an approximate balance of $397,000.
Although the Company has not executed the loan documents to finalize the renewal
of this loan, the related financial institution provided notice to the Company
that it would renew the mortgage for a year under principally the same terms and
conditions. The Company also has various other long term mortgage notes up for
periodic review during the next four quarters. The Company is currently working
on renewals of the notes with the related financial institutions which the
company expects to receive; however, no assurances can be given that the loans
will be renewed. Several of the Company's debt agreements 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. These
covenants were met as of September 30, 2000.
On April 5, 2000, the Company executed a master facility agreement with Fusion
Capital Fund II, LLC pursuant to which Fusion Capital agreed to enter into up to
two equity purchase agreements, each with an aggregate principal amount of
$12,000,000. Each equity purchase agreement grants Fusion Capital the right to
purchase from the Company shares of common stock up to $12,000,000 at a price
equal to the lesser of (1) 140% of the average of the closing bid prices for our
common stock during the 10 trading days prior to the date of the applicable
equity purchase agreement or $7.00, whichever is greater or (2) a price based
upon the future performance of the common stock, in each case without any fixed
discount to the market price. The equity purchase agreement requires that at
the beginning of each month, Fusion Capital will pay $1 million to the Company
as partial prepayment for the common stock. Once the $1 million has been
applied to purchase shares of our common stock, Fusion Capital will pay the
remaining principal amount upon receipt of our common stock. The first equity
purchase agreement was executed by Fusion Capital on April 17, 2000. Purchased
shares through September 30, 2000 totaled approximately $1,143,000. The second
equity purchase agreement will be executed after delivery of an irrevocable
written notice by the Company to Fusion Capital stating that we elect to enter
into such purchase agreement with Fusion Capital. The second equity purchase
agreement may be entered into only after the principal amount under the first
equity purchase agreement is fully converted into the Company's common stock.
Seasonality and Inflation
The Company believes that its car washing and detailing operations are adversely
affected by periods of inclement weather. The Company has mitigated and intends
to continue to mitigate the impact of inclement weather through geographic
diversification of its operations.
The Company believes that inflation and changing prices have not had, and are
not expected to have any material adverse effect on its results of operations in
the near future.
Year 2000
The Company completed its year 2000 remediation plan prior to the end of 1999.
Although we believe our Year 2000 remediation plan was adequate to address the
Year 2000 issue, the Company is continually acquiring new businesses and
locations, which may require an on-going process to convert, assess, and if
necessary, remediate newly acquired systems. This issue is part of our standard
due diligence when evaluating potential acquisitions so that remedial efforts,
if any, can be evaluated and scheduled.
22
<PAGE>
PART II
OTHER INFORMATION
Item 5. Other Information
The Company's 2000 Annual Meeting of Stockholders will be held on December 12,
2000. The deadline for inclusion, pursuant to Rule 14a-8 under the Securities
Exchange Act of 1934, of a stockholder proposal in the Company's proxy statement
and form of proxy for the 2000 annual meeting was October 1, 2000. The Company
has not received to date any stockholders' proposals for inclusion in the proxy
materials for the 2000 annual meeting. July 1, 2001, is the deadline for
stockholders to submit proposals pursuant to Rule 14a-8 of the Exchange Act for
inclusion in Mace's proxy statement for Mace's 2001 Annual Meeting of
Stockholders. A notice of a stockholder proposal submitted outside of the
processes of Rule 14a-8 of the Exchange Act is considered untimely after
September 6, 2001, and Mace's proxy for the 2001 Annual Meeting of Stockholders
may confer discretionary authority to vote on such matter without any discussion
of such matter in the proxy statement for such meeting. Proposals must be sent
to the Company at 1000 Crawford Place, Suite 400, Mt. Laurel, New Jersey, 08054,
Attention: Corporate Secretary.
---------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedules (Electronic filed only).
(b) Current Reports on Form 8-K or 8-K/A:
None
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Mace Security International, Inc.
BY: /s/ Louis D. Paolino, Jr.
--------------------------------------------------------------
Louis D. Paolino, Jr., Chairman, Chief Executive Officer
and President
BY: /s/ Gregory M. Krzemien
--------------------------------------------------------------
Gregory M. Krzemien, Chief Financial Officer
BY: /s/ Ronald R. Pirollo
--------------------------------------------------------------
Ronald R. Pirollo, Controller and Principal Accounting Officer
DATE: November 13, 2000
23
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Schedules (Electronic filed only)
24
