MACE SECURITY INTERNATIONAL INC

In September 2011, we evaluated the market value of our remaining car wash site in Arlington, Texas and a site in Fort Worth, Texas with a business broker. Based on our evaluation, we determined that the estimated future proceeds from these sites were below their net book values by $200,000 and $61,000, respectively. Accordingly, we recorded impairment charges of $261,000 related to these two sites at September 30, 2011. With the continued difficulty in selling the remaining Arlington, Texas car wash facility, we re-evaluated our strategy to dispose of this property and accordingly recorded an additional impairment charge of $250,000 at December 31, 2011.

On March 30, 2011, the Company borrowed $1.4 million with an interest rate of 6% per annum from Merlin to fund the acquisition of TCCI, a wholesale security monitoring company. The loan is secured by a security interest in the “Mace” tradename, a pledge of the stock of the Mace CSSS, Inc., the Company’s wholesale monitoring subsidiary, and a security interest in the assets of Mace CSSS, Inc. The loan was originally due March 30, 2013. The terms of the loan provided that the loan maturity date would be extended to March 30, 2016, if Merlin elected not to call the loan after the completion of the Company's Rights Offering. Merlin did not exercise its right to call the loan by March 27, 2012 (the date required), and accordingly, the maturity date of the loan was extended to March 30, 2016. Merlin has the right to convert the loan into common stock through March 30, 2016. The conversion right is at a per share price of $0.21 (calculated based on the ten day average closing sales price of the common stock, starting with September 14, 2011, the trading day which is 30 trading days after the completion of the Company's Rights Offering, plus forty trading days). In accordance with ASC 815, “Derivatives and Hedging,” the Company determined that the conversion feature of the Debenture met the criteria of an embedded derivative, and therefore the conversion feature of this Debenture needed to be bifurcated and accounted for as a derivative. The conversion option is marked-to-market each reporting period, with future changes in fair value reported in earnings. The fair value of the embedded conversion was estimated at $590,000 at the date of issuance of the debenture and each subsequent quarter using the Monte Carlo model with the following assumptions: risk free interest rate: 0.16%; expected life of the option to convert of 4.7 years; and volatility: 48%. The fair value of the conversion option was estimated at $516,000 at September 30, 2011 using the Black-Scholes valuation model. Accordingly, for the three and nine months ended September 30, 2011, the Company recorded a gain on valuation of derivative of $74,000 to reflect the reduction in the market value of the derivative. Additionally, when the debenture conversion price and number of conversion shares to be issued upon a conversion became known, the initial bifurcated derivative no longer met the criteria to be recorded as a derivative liability. Accordingly, the $516,000 conversion option at September 30, 2011, was reclassified from a liability to stockholder’s equity as additional paid-in-capital and as a discount to the $1.4 million Merlin loan. The conversion option is being accreted as a charge to interest expense over a 60 month period with an offsetting credit to the loan balance.

Our most significant borrowing at March 31, 2012 is the $1.4 million debenture note with Merlin, which is classified as a non-current liability and recorded at $882,000 at March 31, 2012, excluding the unamortized value of a conversion option and the value of warrants related to the debenture totaling $518,000, which are both classified in stockholders’ equity. The debenture note is secured by a security interest in the “Mace” tradename, a pledge of the stock of Mace CSSS, Inc. and a security interest in the assets of Mace CSSS, Inc. See Note 12. Related Party Transactions for additional information and terms regarding the debt instruments with Merlin.

Additionally, upon sale of the Company’s Farmers Branch, Texas warehouse in December 2011 which was used as collateral against the Company’s Chase revolving credit facility, $439,000 of the Company’s cash was deposited into a restricted cash account at Chase as security against the Company’s revolving credit facility and certain letters of credit provided by Chase as collateral relating to workers’ compensation insurance policies.

SG&A expenses for the three months ended March 31, 2012 and 2011 were $1.7 million and $2.2 million, respectively. SG&A expenses as a percentage of revenues decreased to 49% in 2012 as compared to 62% for 2011. The overall decrease in SG&A costs was the result of the continued implementation of corporate wide cost savings measures, including reductions in employees throughout the entire Company. The cost savings were partially realized from a reduction in costs within our security division’s surveillance equipment operations and in our corporate operations. SG&A costs decreased within our electronic surveillance equipment operations by approximately $497,000, or 75%, partially as a result of our continued consolidation efforts to reduce SG&A expenses as noted above and partially as a result of our reduced sales levels. This noted SG&A expense reduction is inclusive of the $100,000 gain recorded in the first quarter of 2012 related to the contingent consideration earned from the sale of the IVS division. Corporate SG&A costs also decreased by $93,000 or 11%. SG&A expense reductions were partially offset by increased SG&A expenses of approximately $68,500 within our wholesale security monitoring operation largely related to the acquisition of TCCI on March 31, 2011.

At March 31, 2012, the Company held $1.4 million of short-term investments as available for sale primarily consisting of preferred stocks, municipal funds, and mutual bond funds. Short-term investments are classified as current assets with fixed or floating rates and maturities ranging from less than one year to less than four years. Substantially all of the investments are rated A+ or better by the rating services Standard & Poor’s (“S&P”) and Moody’s Investors Service (“Moody’s”). There have been no material realized or unrealized gains or losses for the three months ended March 31, 2012. We do not believe that there are any impairments considered to be other than temporary at March 31, 2012.