FORM 10-QSB/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended: March 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________to_________
Commission file number: 0-22810
MACE SECURITY INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 030311630
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
160 Benmont Avenue, Bennington, Vermont 05201
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 802-447-1503
------------
Show by check mark 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 reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
MACE SECURITY INTERNATIONAL, INC.
INDEX
Page No.
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PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
Statements of Operations and Retained Earnings-
Three Months Ended March 31, 1998 and 1997 1
Balance Sheets - March 31, 1998 and December 31, 1997 2
Statements of Cash Flows - Three Months Ended
March 31, 1998 and March 31, 1997 3
Notes to Financial Statements 4
Item 3 - Subsequent Events 8
SIGNATURES
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MACE SECURITY INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(Unaudited)
Three Months Ended March 31,
---------------------------
1997
1998 (Restated)
---- ----------
Net Sales ....................................... $ 669,413 $ 682,428
Cost of sales ................................... 360,204 350,024
----------- -----------
Gross profit .................................. 309,209 332,404
Operating expenses:
General and administrative .................... 335,005 230,930
Selling ....................................... 210,744 104,747
----------- -----------
Operating loss ............................ (236,540) (3,273)
Other (income) expense:
Interest income ............................... (21,103) (2,756)
Interest expense .............................. 44,796 23,763
Other income .................................. (21,842) (17,663)
----------- -----------
1,851 3,344
----------- -----------
Loss from continuing operations before income tax
expense ........................................ (238,391) (6,617)
Income tax expense .............................. 1,950 1,956
----------- -----------
Net loss from continuing operations ............. (240,341) (8,573)
Net loss for discontinued operations ............ (183,247) (268,453)
----------- -----------
Net loss ........................................ (423,588) (277,026)
=========== ===========
Deficit, beginning
of period ..................................... (3,229,844) (1,542,901)
----------- -----------
Deficit, end of period .......................... $(3,653,432) $(1,819,927)
=========== ===========
Loss per share of common stock
Loss from continuing operations ................ (.03) Nil
Loss from discontinued operations .............. (.03) (.04)
----------- -----------
Net loss ....................................... (.06) (.04)
=========== ===========
Weighted average number
of common shares outstanding .................. 6,983,310 6,825,000
The accompanying notes are an integral part of the
financial statements.
1
MACE SECURITY INTERNATIONAL, INC.
BALANCE SHEETS
(Unaudited)
March 31, December 31,
1998 1997
(Restated)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 1,115,475 $ 1,146,212
Accounts receivable, less allowance for
doubtful accounts
($64,454; 1998; $113,076; 1997) ................ 1,482,120 1,880,565
Inventories:
Finished goods ................................. 672,803 539,894
Work in process ................................ 176,138 175,699
Raw material and supplies ...................... 502,914 622,586
Prepaid expenses ................................. 346,925 314,438
------------ ------------
Total current assets ........................... 4,296,375 4,679,394
Net assets of discontinued operations .............. 4,995,077 5,103,851
Property and equipment, Net ........................ 1,116,285 1,157,126
Intangibles, Net ................................... 1,767,412 1,791,933
Other assets ....................................... 189,534 136,362
------------ ------------
Total Assets ................................... $ 12,364,683 $ 12,868,666
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable .................................... 20,744 30,728
Current maturities of long-term debt ............. 116,040 113,210
Accounts payable ................................. 435,150 333,735
Accrued liabilities .............................. 399,610 548,624
Corporate income taxes payable ................... 12,136 8,000
------------ ------------
Total current liabilities ........................ $ 983,680 $ 1,034,297
Long-term debt ..................................... 1,630,427 1,660,205
------------ ------------
Total liabilities .............................. 2,614,107 2,694,502
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share;
authorized 2,000,000 shares; no shares issued
Common stock, par value $.01 per share;
authorized 18,000,000 shares; issued
7,081,666 and 7,081,666 shares
in 1998 and 1997, respectively .................. 70,817 70,817
Additional paid in capital ....................... 13,333,191 13,333,191
Deficit .......................................... (3,653,432) (3,229,844)
------------ ------------
Total stockholders' equity ..................... 9,750,576 10,174,164
------------ ------------
Total Liabilities and Stockholders' equity ..... $ 12,364,683 $ 12,868,666
============ ============
The accompanying notes are an integral part of the
financial statements.
2
MACE SECURITY INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
INCREASE (DECREASE) IN CASH
Three Months Ended March 31,
----------------------------
1998 1997
---- ----
Operating activities:
Net loss .................................... $ (423,588) $ (277,026)
Adjustments to reconcile Net loss to
Net cash provided by operating activities:
Depreciation .............................. 115,973 110,962
Amortization .............................. 69,347 65,746
Allowance for bad debts ................... 11,119 11,473
Changes in assets and liabilities:
Accounts receivable ....................... 387,326 919,380
Inventories ............................... (13,676) (77,709)
Prepaid expenses .......................... (32,487) (27,374)
Discontinued operations ................... 351,654
Accounts payable .......................... 101,415 (443,135)
Accrued liabilities ....................... (149,014) (45,489)
Corporate income tax payable .............. 4,136 8,000
Other assets .............................. (160,226) (32,060)
----------- -----------
Net cash provided by operating
activities ............................ 261,979 212,768
----------- -----------
Investing activities:
Purchase of property and equipment ........... (255,784) (22,550)
Financing activities:
Payment of principal of long-term debt ...... (26,948) (80,832)
Payment of notes payable .................... (9,984) --
----------- -----------
Net cash used in financing
activities ............................. (36,932) (80,832)
----------- -----------
Net increase (decrease) in cash ............... (30,737) 109,386
Cash:
Beginning of period ......................... 1,146,212 345,554
----------- -----------
End of period ................................ $ 1,115,475 $ 454,940
=========== ===========
The accompanying notes are an integral part of the
financial statements.
3
MACE SECURITY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
--------
1. MANAGEMENT OPINION
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments, consisting of only normal, recurring adjustments,
necessary to present fairly the financial position, results of operations and
cash flows for the periods presented. The results of any interim period are not
necessarily indicative of 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. The financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 1997.
2. EARNINGS PER SHARE
Earnings per share on common stock are computed using the weighted average
number of shares of common stock outstanding during each period presented. The
Company adopted Financial Accounting Standard No. 128 for the year ended
December 31 1997. The income/(loss) per common share for the three months ended
March 31, 1998 and 1997 have been calculated in accordance with this Standard.
3. LONG TERM DEBT
In September 1997, the Company refinanced its long-term debt with the First
National Bank of New England ("FNB"). Two term loans totaling $1,800,000 bearing
interest at prime plus 1.50% (10.0% at December 31, 1997) payable in monthly
installments of $23,791, including interest, due October 1, 2007, were obtained.
Of the proceeds, $593,750 was used to pay off the KeyBank National Association
("Key") long-term debt. Additionally, a $250,000 line of credit bearing interest
at prime plus 1% (9.5% at December 31, 1997) due May 31, 1998 was obtained. No
amounts have been drawn on this line of credit.
These facilities include certain dividend restrictions and are collateralized by
the following: (a) assignment of life insurance owned by the Company on the life
of the current President and Chief Executive Officer; and (b) first priority
security interest in all inventory and all other assets of the Company. All
three facilities are personally guaranteed by the current President and Chief
Executive Officer of the Company. The Company plans to pay off the loan to FNB
simultaneously with the closing of the Transaction with AHI (See below and
"Subsequent Events").
Prior to this refinancing event, promissory notes to TransTechnology Corporation
relating to the acquisition of the assets of Federal Laboratories, was paid in
full with cash from operations.
4. INCOME TAXES
The Company's income tax expense for the three months ended March 31, 1998 and
March 31, 1997 represent corporate franchise taxes.
4
5. 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 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 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 discussion with 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.
As disclosed in the Company's Form 10-QSB for the quarter ended June 30, 1995,
on April 19, 1995 a suit was filed by Elaine Thomlinson, et al., in Ontario
Court (General Division), Ontario, Canada, claiming unspecified damages to
multiple school children for personal injuries, pain and suffering, emotional
trauma and financial loss and expense in consequence of their exposure to
noxious and hazardous substances while participating in a simulated emergency
exercise conducted at a local school by municipal authorities. The Company
forwarded this suit to its insurance carrier for defense. Based on discussion
with 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.
6. DISCONTINUED OPERATIONS
As more fully detailed under Management's Discussion and Analysis of Financial
Condition and Results of Operations-Subsequent Events, on April 2, 1998, the
Company entered into an agreement to sell substantially all of the assets of the
Law Enforcement division. Accordingly, the operating results of the Law
Enforcement division have been segregated from continuing operations and
reported as a separate line item on the statements of operations.
The Company has restated its March 31, 1997 financial statements to present the
operating results of the Law Enforcement division as a discontinued operation.
The assets of the Company's Law Enforcement division (those assets subject to
sale) have been reflected as net assets of discontinued operations on the
Company's balance sheet at March 31, 1998 and 1997.
The terms of the agreement provide for a sale of the assets of the Company's Law
Enforcement division at the assets' net book value for fixed assets and
intangibles as at December 31, 1997 and, for inventory, at the net book value on
the date of closing. As such, the Company does not anticipate a gain or loss on
the sale of the discontinued operations.
The Company intends to use the proceeds to reduce debt and provide capital for
future expansion and acquisitions.
5
The operating results of the Company's discontinued Law Enforcement division are
as follows:
Three Months Ended March 31 1998 1997
- ------------------------------------------------------------
Net sales $ 1,757,742 $ 1,656,130
Cost of sales 1,266,697 1,110,208
----------- -----------
Gross Profit 491,045 545,922
Operating expenses:
General and administrative 410,502 560,172
Selling 263,790 254,503
----------- -----------
Net loss (183,247) (268,453)
=========== ===========
Operating expenses, including general and administrative and selling costs, have
generally been allocated between continuing operations and discontinued
operations consistent with the Company's historical methodology for allocating
such costs.
Certain general and administrative expenses, however, including rent and related
occupancy costs, which were historically allocated to the Law Enforcement
division, will likely continue subsequent to the closing date. Such expenses are
not material.
Interest on borrowings under the Company's long-term debt was allocated to
discontinued operations based on the Company's historical methodology for
allocating such costs.
The estimated cost of severance and benefits of the Law Enforcement division
employees has not been determined, however, such amounts are not expected to be
material.
The Company has net operating loss carryforwards. To the extend there is taxable
gain resulting from the sale of the assets of the Law Enforcement division, such
carryforwards are expected to offset any income taxes applicable to the sale.
The components of the net assets of discontinued operations, as included in the
Company's balance sheets at March 31, 1998 and 1997, follow:
March 31/December 31 1998 1997
- ------------------------------------------------
Inventories $2,557,923 $2,636,526
Property and Equipment 1,531,406 1,721,487
Intangibles 905,748 988,718
---------- ----------
Total net assets $4,995,077 $5,346,731
========== ==========
Accounts receivable and all liabilities of the Law Enforcement division will be
retained by the Company and, as such, are not included as net assets of
discontinued operations.
6
7. PRO FORMA FINANCIAL INFORMATION
The Company's pro forma financial statements, as illustrated below, give effect
to the sale of the Law Enforcement division assets, as if such transaction had
occurred, for balance sheet purposes, on December 31, 1997 and, for statement of
operations purposes, on January 1, 1997. These pro forma financial statements
should be read in conjunction with the Company's financial statements and
related notes. The pro forma information is not necessarily indicative of the
results that would have been reported had the sale of the Company's Law
Enforcement division actually occurred on the dates specified, nor is it
indicative of the Company's future results.
PRO FORMA CONDENSED BALANCE SHEET
March 31, December 31,
1998 1997
---- ----
Assets
Cash $ 6,760,552 $ 6,900,063
Other current assets 3,180,900 3,533,182
Property and equipment 1,116,285 1,157,126
Intangibles and other 1,956,946 1,928,295
----------- -----------
$13,014,683 $13,518,666
=========== ===========
Liabilities and Stockholder's Equity
Current liabilities $ 867,640 $ 921,087
Short term portion of
Long-term debt 116,040 113,210
Long-term liabilities
Deferred income 650,000 650,000
Long-term debt 1,630,427 1,660,205
Stockholders' equity 9,750,576 10,174,164
----------- -----------
$13,014,683 $13,518,666
=========== ===========
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
MARCH 31, MARCH 31, DECEMBER 31,
1998 1997 1997
(3 months) (3 months) (12 months)
---------- ---------- -----------
Net sales $ 669,413 $ 682,428 $2,912,964
Cost of sales 360,204 350,024 1,600,974
--------- --------- ----------
Gross profit 309,209 332,404 1,331,990
Operating expenses 545,749 335,677 1,647,159
--------- --------- ----------
Operating loss (236,540) (3,273) (335,169)
Other items (1,851) (3,344) 8,448
--------- --------- ----------
Income (loss) before
income taxes (238,391) (6,617) (326,721)
Income tax expense 1,950 1,956 7,800
--------- --------- ----------
Net income (loss) $(240,341) $ (8,573) $ (334,521)
========= ========= ==========
Net income (loss) per
share (.03) nil (.04)
7
Item 3. Subsequent Events
On April 2, 1998, the Company entered into an agreement (the "Purchase
Agreement") with Armor Holdings, Inc. ("AHI") and its wholly-owned subsidiary
for the sale of substantially all of the assets of the Company's Law Enforcement
division to AHI (the "Transaction"). The terms of the Purchase Agreement require
that, in conjunction with the sale of assets, the Company license to AHI the use
of Mace(R) and related trademarks and a patent for use by AHI in the Law
Enforcement market only. The sale is subject to, among other things, approval by
holders of a majority of the Company's Common Stock and receipt by the Company
of an opinion that the Transaction is fair, from a financial point of view. The
Transaction is expected to close in June 1998.
8
The Company expects to apply approximately $1,750,000 of the purchase price
received to pay off the amount due to FNB under its term loans, representing the
anticipated unamortized balance of the loan at the projected closing date. In
addition, $600,000 of the purchase price will be retained by AHI to secure,
among other things, the Company's obligations under the representations and
warranties in the Purchase Agreement. The remainder of the purchase price will
be available to the Company for the purposes deemed to be appropriate by the
Company's Board of Directors. While the Company has no definitive plans, some or
all of the remaining purchase price may be used for acquisitions, among other
things. Such acquisitions may include companies or assets not consistent with
the Company's historical business.
Pursuant to the terms of the Purchase Agreement, the Company will sell to AHI
all of the fixed assets, intangibles and inventory of the Law Enforcement
division. AHI will also receive a 99-year paid-up license to exploit the Mace(R)
brand and other related trademarks in the law enforcement market only, which is
made up of law enforcement, military, correctional and certain governmental
agencies. The prepaid license fee will be booked as deferred income. (See Note 7
to "Notes to Financial Statements"). The assets of the Law Enforcement division
constitute approximately 40% of the Company's assets.
The purchase price for the fixed assets and intangibles, including the license
fee for the 99-year paid-up license, is $3,117,325 representing the book value
as of December 31, 1997 plus an additional amount of $200,000, to cover certain
expenses of the Transaction. The purchase price for inventory is $2,636,325
representing the book value at December 31, 1997, increased by inventory
purchases since December 31, 1997, valued at the Company's standard cost and
decreased by (i) sales of inventory from December 31, 1997 and (ii) inventory
related to unshipped orders that AHI has not agreed to fill.
The Company will retain its cash and accounts receivable from the Law
Enforcement division. The purchase price will be paid in cash or other
immediately available funds. The Company does not anticipate any material tax
implications resulting from the Transaction. To the extent there is taxable gain
resulting from the Transaction, the Company will utilize its net operating loss
carry forward to cover the taxes, if any, resulting from the sale.
9
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.
/s/ Jon E. Goodrich
Date: June 5, 1998 --------------------------------
Jon E. Goodrich, President
/s/ Mark A. Capone
Date: June 5, 1998 --------------------------------
Mark A. Capone, Treasurer
Chief Financial Officer, VP Finance