FORM 10-QSB
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: September 30, 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.
(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
Indicate 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.
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
Statements of Operations and Accumulated
Deficits - Three Months and Nine Months
Ended September 30, 1998 and 1997 1
Balance Sheets - September 30, 1998 and
December 31, 1997 2
Statements of Cash Flows - Nine Months Ended
September 30, 1998 and September 30, 1997 3
Notes to Financial Statements 4
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II OTHER INFORMATION
Item 1 - Legal Proceedings 10
Item 4 - Submission of Matters to a Vote of
Security Holders 10
Item 6 - Exhibits and Reports on Form 8-K 10
SIGNATURES 11
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MACE SECURITY INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICITS
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Restated) (Restated)
Net Sales $ 718,871 $ 691,243 $ 2,079,981 $ 2,070,026
Cost of Sales 371,515 356,174 1,072,362 1,051,724
----------- ----------- ----------- -----------
Gross Profit 347,356 335,069 1,007,619 1,018,302
Operating expenses:
General and Administrative 330,063 223,683 915,801 573,804
Selling 127,143 147,319 519,784 362,855
----------- ----------- ----------- -----------
Operating income (loss) (109,850) (35,933) (427,966) 81,643
Other income (expense):
Interest income 52,420 7,143 92,199 14,551
Interest expense (6,670) (26,702) (100,449) (73,982)
Other income 51,317 26,081 140,052 72,881
----------- ----------- ----------- -----------
97,067 6,522 131,802 13,450
----------- ----------- ----------- -----------
Income (loss) before income
tax expense (12,783) (29,411) (296,164) 95,093
Income tax expense 302 1,680 4,198 7,117
----------- ----------- ----------- -----------
Income (loss) from continuing
operations (13,085) (31,091) (300,362) 87,976
Income (loss) from discontinued
operations 60,799 (266,128) (498,296) (643,517)
----------- ----------- ----------- -----------
Net income (loss) 47,714 (297,219) (798,658) (555,541)
Accumulated Deficit, beginning of period $(4,076,216) $(1,801,223) $(3,229,844) $(1,542,901)
----------- ----------- ----------- -----------
Accumulated Deficit, end of period $(4,028,502) $(2,098,442) $(4,028,502) $(2,098,442)
=========== =========== =========== ===========
Income (loss) per share common share:
From continuing operations NIL NIL (.04) .01
From discontinued operations .01 (.04) (.07) (.09)
----------- ----------- ----------- -----------
Net income (loss) .01 (.04) (.11) (.08)
=========== =========== =========== ===========
Weighted average number
of common shares outstanding 6,963,260 6,945,326 7,041,764 6,865,550
=========== =========== =========== ===========
The accompanying notes are an integral part
of the financial statements.
1
MACE SECURITY INTERNATIONAL, INC.
BALANCE SHEETS
(Unaudited)
September 30, December 31,
1998 1997
(Restated)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents (including escrow of $600,000 in 1998) $ 4,439,134 $ 1,146,212
Accounts receivable, less allowance for
doubtful accounts
($79,929, 1998; $113,076; 1997) 1,584,067 1,880,565
Inventories:
Finished goods 670,184 539,894
Work in process 113,776 175,699
Raw material and supplies 535,414 622,586
Prepaid expenses 225,728 314,438
----------- -----------
Total current assets 7,568,303 4,679,394
Net assets of discontinued operations 202,746 5,103,851
Property and equipment, net 1,068,288 1,157,126
Intangibles, net 924,762 1,791,933
Other assets 310,976 136,362
----------- -----------
Total Assets $10,075,075 $12,868,666
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable 0 30,728
Current maturities of long-term debt 0 113,210
Accounts payable 226,516 333,735
Accrued liabilities 526,910 548,624
Corporate income taxes payable 1,595 8,000
----------- -----------
Total current liabilities 755,021 1,034,297
Long-term debt 0 1,660,205
----------- -----------
Total liabilities 755,021 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 and outstanding
6,825,000 in 1998 and 7,081,666 in 1997 68,250 70,817
Additional paid in capital 13,333,191 13,333,191
Treasury Stock (52,885) --
Accumulated Deficit (4,028,502) (3,229,844)
----------- -----------
Total Stockholders' equity 9,320,054 10,174,164
----------- -----------
Total Liabilities and Stockholders' equity $10,075,075 $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
Nine Months Ended September 30,
1998 1997
----------- -----------
Operating activities:
Net (loss) income $ (798,658) $ (555,541)
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation 217,046 335,112
Amortization 162,542 198,995
Allowance for bad debts 33,719 (21,678)
Gain on sale of assets -- (1,200)
Changes in operating assets and liabilities:
Accounts receivable 262,779 775,604
Notes receivable - related parties -- (12,918)
Inventories 18,805 256,715
Prepaid expenses 88,710 (24,260)
Discontinued operations 4,901,105 --
Accounts payable (107,219) (589,564)
Accrued liabilities (21,714) (32,619)
Corporate income tax payable (6,405) 6,344
Other assets 529,518 2,781
----------- -----------
Net cash provided by operating activities 5,280,228 337,771
----------- -----------
Investing activities:
Purchase of property and equipment (128,208) (109,636)
Proceeds from sale of property and equipment (54,955) 1,200
Cash disbursed for acquisition -- (46,363)
Purchase of temporary investments -- (800,595)
----------- -----------
Net cash used in investing activities (183,163) (955,394)
----------- -----------
Financing activities:
Payment of principal of long-term debt (1,773,415) (499,348)
Proceeds from issuance of long-term debt -- 1,177,450
Payment of notes payable (30,728) --
----------- -----------
Net cash provided by (used in) financing activities (1,804,143) 678,102
----------- -----------
Net increase (decrease) in cash 3,292,922 60,479
Cash:
Beginning of period 1,146,212 345,554
----------- -----------
End of period $ 4,439,134 $ 406,033
=========== ===========
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 nine months ended September 30, 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 June 30,
1998) payable in monthly installments of $23,791, including interest,
due October 1, 2007, were obtained. Additionally, a $250,000 line of
credit bearing interest at prime plus 1% was obtained. No amounts were
drawn on this line of credit. The Company paid off the loans to FNB
simultaneously with the closing of the sale of the Law Enforcement
division (the "Transaction") on July 14, 1998 to Armor Holdings, Inc.
and its wholly-owned subsidiary ("AHI") (See below "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources")
4. INCOME TAXES
The Company's income tax expense for the three and nine months ended
September 30, 1998 represents corporate franchise taxes.
5. COMMITMENTS AND CONTINGENCIES
The Company is not aware of any commitments or contingencies that would
require disclosure.
6. DISCONTINUED OPERATIONS
Law Enforcement Division
As more fully detailed under "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Description of
Dispositions", the Company sold substantially all of the assets of its
Law Enforcement division on July 14, 1998. Accordingly, the operating
results of its Law Enforcement division have been segregated from
continuing operations and reported as a separate line item on the
statements of operations entitled "Income (loss) from discontinued
operations" and entitled "Net assets of discontinued operations" on
the Balance Sheets.
4
As a result of the AHI Transaction the Company was required to restate
its financial statements to reflect this Transaction as if it happened
on the earliest date reported.
Other Items
In the three months ended September 30, 1998, the Company discontinued
operations of its two wholly owned subsidiaries, MSP, Inc. a
distributor of consumer products and MSP Retail, Inc., a subsidiary
formed to operate the Mace Security Centers(TM) retail stores that were
located in Colorado. Both subsidiaries were formed to acquire assets of
established companies. The contracts for the acquisition of the assets
of both subsidiaries allowed the Company to unwind the transactions in
the event the subsidiaries (that were operated by the former owners of
the assets sold to the Company) failed to achieve certain pretax profit
goals within the one year following the acquisition by the Company.
Both subsidiaries failed to meet the established goals.
In both cases the shares of MSI that were delivered in escrow as a
portion of the purchase price for the assets were returned to MSI
(80,000 shares for MSP. Inc. and 176,666 shares for MSP Retail, Inc.)
In addition, both contracts called for the repayment to MSI of working
capital loaned to the subsidiaries by MSI, reduced by losses incurred
by the subsidiaries during the one year period. As a result of
unwinding these transactions the Company incurred a loss of $67,013
with respect to MSP, Inc. and $47,317 with respect to MSP Retail, Inc.
(See "Management's Discussion and Analysis of Financial Condition and
Results of Operations")
The Company has reviewed the book value of its Mace (R) trademark in
light of the sale to AHI. The Transaction with AHI included a license
allowing only AHI to use the Mace (R) trademark in the Law Enforcement
market. Accordingly, the Company has concluded that the future use of the
Mace (R) trademark has significantly changed. Following the provisions of
Financial Accounting Statement No. 121, the Company has determined that
the present value of future cash flows for the Mace (R) trademark outside
the Law Enforcement market is approximately $850,000. The Company took
a charge of $550,000 to reduce the book value of the Mace (R) trademark
to the $850,000 level. The Company charged the $550,000 to Discontinued
Operations as the sale to AHI triggered the significant change in the
use of the mark.
The operating results of the Company's discontinued operations are as
follows:
Nine Months Ended September 30 1998 1997
--------------------------------------------------------------------
Net sales $5,088,922 $5,336,363
Cost of sales 3,687,694 3,565,248
---------- ----------
Gross Profit 1,401,228 1,771,115
Operating expenses:
General and administrative 1,172,357 1,479,222
Selling 652,105 935,410
---------- ----------
Other Income * 224,938
Loss before estimated disposition costs (198,296) (643,517)
Estimated disposition costs (300,000) --
---------- ----------
Net loss from discontinued operations $ (498,296) $ (643,517)
========== ==========
5
* Other Income is comprised of the following:
Recognition of the AHI pre-paid license fee $ 650,000
Write down of the Mace (R) trademark (550,000)
Gain on sale of fixed assets and
intangibles sold to AHI 168,319
Loss on discontinuance of MSP, Inc. (67,013)
Loss on discontinuance of MSP Retail, Inc. (47,317)
Refunds of insurance premiums 75,290
Other Net (4,341)
---------
Total Other Income 224,938
=========
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 between its Consumer and Law
Enforcement divisions.
On June 30, 1998 the Company established a reserve of $300,000 to cover
one-time charges associated with the disposition of the Law Enforcement
division. The primary components of the reserve are severance pay,
legal, accounting and other professional fees and environmental clean
up and disposal 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.
The Company has net operating loss carryforwards. To the extent 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 September 30, 1998 and
December 31,1997, follow:
September 30/December 31 1998 1997
-------------------------------------------------------------
Inventories $166,896 $2,636,526
Property and Equipment 35,850 1,540,835
Intangibles 926,490
-------- ----------
Total net assets $202,746 $5,103,851
======== ==========
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
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following can be interpreted as including forward looking statements
under the Private Securities Litigation Reform Act of 1995. Such statements
are typically identified by the words "intends", "plans", "effort",
"anticipates", "believes", "expects", or words of similar import. Various
important factors that could cause actual results to differ materially from
those expressed in the forward looking statements are expressed below and may
vary significantly based on a number of factors including, but not limited
to, the ability of the Company to identify acquisition candidates. Actual
future results may differ materially from those suggested in the following
statements.
The following discussion should be read in conjunction with the accompanying
financial statements and notes thereto.
RESULTS OF OPERATIONS:
Results of Continuing Operations
Net sales for the three and nine month periods ended September 30, 1998
increased by 4% and 1% over the identical periods in 1997. For the three and
nine months ended September 30, 1998 Consumer division sales increased
$1,517, and decreased by $375,088, respectfully. The decrease of consumer
sales of $375,088 was offset by $368,495 of retail sales of the Company's
Mace Security Centers(TM) which did not exist in the same periods in 1997.
Gross profit was 48.3% and 48.4% of net sales respectively for the three and
nine month periods ended September 30, 1998 as compared to 48.5% and 49.2%
for the same periods in 1997.
Operating expenses for the three and nine month periods ended September 30,
1998 were 63.6% and 69% of net sales as compared to 53.7% and 45.2% for the
corresponding periods in 1997.
General and administrative expenses for the three and nine months ended
September 30, 1998 increased by $106,380 and $341,997, respectively, over the
same periods in 1997. These increases were principally due to $160,774 and
$250,302 of general and administrative expenses attributable to Mace Security
Centers(TM) retail stores, MSP, Inc. and the franchising corporation, MSC, Inc.
which did not exist in the same periods in 1997.
Selling expenses for the three and nine months ended September 30, 1998
decreased by $20,176 and increased by $156,929 over the same periods in 1997.
As with general and administrative expenses, the principal reason for the
increase in selling expenses for the nine month period ended September 30,
1998 was $148,956 of selling expenses related to Mace Security Centers(TM)
retail stores, MSP, Inc. and the franchising corporation, MSC, Inc. which
did not exist in the same periods in 1997.
Other income, net was $97,067 for the three month period ended September 30,
1998, reflecting reduced interest expense and increased rentals over the same
period in 1997.
Description of Dispositions
On July 14, 1998, the Company sold substantially all of the assets of
the Company's Law Enforcement division (the "Transaction") to Armor Holdings,
Inc. and its wholly-owned subsidiary ("AHI"). The terms of the purchase
agreement required 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.
Pursuant to the terms of the Purchase Agreement, the Company sold to AHI all
of the fixed assets, intangibles and inventory of the Law Enforcement
division. AHI received 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 assets of the Law Enforcement division constituted
approximately 40% of the Company's assets.
7
The purchase price for the fixed assets and intangibles, including the
license fee for the 99-year paid-up license, was $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
was $1,868,416, representing the book value at July 14, 1998.
The Company retained its cash and accounts receivable from the Law
Enforcement division. The Company does not expect 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.
In the three months ended September 30, 1998, the Company discontinued
operations of its two wholly owned subsidiaries, MSP, Inc. a distributor of
consumer products and MSP Retail, Inc., a subsidiary formed to operate Mace
Security Centers(TM) retail stores that were located in Colorado. Both
subsidiaries were formed to acquire assets of established companies. The
contracts for the acquisition of the assets of both subsidiaries allowed the
Company to unwind the transactions in the event the subsidiaries (that were
operated by the former owners of the assets sold to the Company) failed to
achieve certain pretax profit goals within the one year following the
acquisition by the Company. Both subsidiaries failed to meet the established
goals.
In both cases the shares of MSI that were delivered in escrow as a portion of
the purchase price for the assets were returned to MSI (80,000 shares for
MSP. Inc. and 176,666 shares for MSP Retail, Inc.) In addition, both
contracts called for the repayment to MSI of working capital loaned to the
subsidiaries by MSI, reduced by losses incurred by the subsidiaries during
the one year period. As a result of unwinding these transactions the Company
incurred a loss of $67,013 with respect to MSP, Inc. and $47,317 with respect
to MSP Retail, Inc.
The Company has reviewed the book value of its Mace (R) trademark in light of
the sale to AHI. The Transaction with AHI included a license allowing only
AHI to use the Mace (R) trademark in the Law Enforcement market. Accordingly,
the Company has concluded that the future use of the Mace (R) trademark has
significantly changed. Following the provisions of Financial Accounting
Statement No. 121, the Company has determined that the present value of
future cash flows for the Mace (R) trademark outside the Law Enforcement
market is $850,000. The Company took a charge of $550,000 to reduce the book
value of the Mace trademark to the $850,000 level. The Company charged the
$550,000 to Discontinued Operations as the sale to AHI triggered the
significant change in the use of the mark.
LIQUIDITY AND CAPITAL RESOURCES:
Cash increased by $3,115,093 during the nine months ended September 30, 1998
principally due to the sale of the law enforcement division to AHI.
Accounts receivable decreased $296,498 from December 31, 1997 to September
30, 1998 as a result of decreases in sales due primarily to the sale of the
law enforcement division to AHI.
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 June 30, 1998) payable in
monthly installments of $23,791, including interest, due October 1, 2007,
were obtained. Additionally, a $250,000 line of credit bearing interest at
prime plus 1% was obtained. No amounts were drawn on this line of credit.
The Company paid off the loans to FNB simultaneously with the closing of the
Transaction with AHI.
8
The Company applied $1,724,725 of the purchase price received from the
Transaction to pay off the amount due to FNB under its term loans (See Note 3
to "Notes to Financial Statements"). In addition, $600,000 of the purchase
price was retained by AHI in an interest bearing escrow account to secure,
among other things, the Company's obligations under the representations and
warranties in the Purchase Agreement. The escrowed amount is included in the
cash section of the balance sheet of the Company at September 30, 1998. The
remainder of the purchase price is 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.
FORWARD LOOKING INFORMATION
The Company is continuing to consider all opportunities to maximize
shareholder value, including but not limited to, potential acquisitions or
dispositions, strategic alliances, stock issuances and/or restructuring
management.
9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company is not aware of any legal proceedings other than those disclosed
in the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997, as amended. There have been no material changes or
activity in any of the proceedings disclosed in such Annual Report.
Although the Company is not aware of any substantiated claim of permanent
personal injury from its products, the Company is aware of recent reports of
incidents in which, for example, defense spray products have been
mischievously or improperly used, in some case 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.
Item 4 - Submission of Matters to a Vote of Security Holders
On or about June 15, 1998, the Company mailed to its shareholders a
Consent Solicitation Statement and consent card to seek the consents
necessary to consummate the sale of substantially all of the assets of the
Company's Law Enforcement division to AHI. On July 13, 1998, twenty business
days following the mailing of the Consent Solicitation Statement, the Company
received 4,057,474 consents to the Transaction, constituting approximately
57%of the outstanding shares of the Company's common stock. The Transaction
required the approval of holders voting at least a majority if the Company's
outstanding common stock. The Transaction closed on July 14, 1998.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits (27) Financial Data Schedule
(b) Reports on Form 8-K 8-K filed on July 29, 1998 with respect to the
transaction with AHI
10
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.
Date: November 16, 1998 _____________________________________
JON E. GOODRICH
President and Chief Executive Officer
Date: November 16, 1998 _____________________________________
MARK A. CAPONE
Chief Financial Officer
11