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: March 31, 1999
--------------
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
------------
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.
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
Statements of Operations and Accumulated Deficit
Three Months Ended March 31, 1999 and 1998 1
Balance Sheets - March 31, 1999 and December 31, 1998 2
Statements of Cash Flows - Three Months Ended
March 31, 1999 and March 31, 1998 3
Notes to Financial Statements 4
Item 2 - Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1 - Legal Proceedings 9
Item 6 - Exhibits and Reports on Form 8-K 9
SIGNATURES 10
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MACE SECURITY INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
Three Months Ended March 31,
1999 1998
Net Sales $ 703,881 $ 669,413
Cost of sales 364,032 360,204
Gross profit 339,849 309,209
Operating expenses:
General and administrative 633,492 335,005
Selling 168,148 210,744
Operating loss (461,791) (236,540)
Other income (expense):
Interest income 46,132 21,103
Interest expense - (44,796)
Other income (52,546) 21,842
(6,414) (1,851)
Loss before income tax expense (468,205) (238,391)
Income tax expense - 1,950
Loss from continuing operations (468,205) (240,341)
Loss from discontinued operations (114,055) (183,247)
Net loss $ (582,260) $ (423,588)
Accumulated deficit, beginning of the period (4,102,279) (3,229,844)
Accumulated deficit, end of the period $(4,684,539) $(3,653,432)
Net loss per common share:
From continuing operations $ (0.07) $ (0.03)
From discontinued operations (0.02) (0.03)
Total net loss per common share $ (0.09) $ (0.06)
Weighted average of common
shares outstanding 6,837,200 6,983,310
The accompanying notes are an integral
part of the financial statements.
1
MACE SECURITY INTERNATIONAL, INC.
BALANCE SHEETS
(Unaudited)
March 31, December 31,
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 3,941,781 $ 3,572,422
Cash escrow 130,800 610,800
Accounts receivable, less allowances for doubtful
accounts ($138,072 in 1999; $64,454 in 1998) 1,657,771 1,271,031
Inventories:
Finished goods 668,928 438,168
Work in process 146,095 126,696
Raw material and supplies 691,914 937,308
Prepaid expenses and other 256,029 285,208
Total current assets 7,493,318 7,241,633
Net assets of discontinued operations 179,270 326,835
Property and equipment, Net 943,553 1,079,196
Intangibles, Net 890,521 912,131
Other assets 208,846 217,474
Total Assets $ 9,715,508 $ 9,777,269
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 109,636 $ 297,553
Accrued expenses 458,108 232,942
Total liabilities 567,744 530,495
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
7,200,000 in 1999, issued and
outstanding 6,825,000 in 1998 72,000 68,250
Additional paid in capital 13,812,691 13,333,191
Treasury stock (52,388) (52,388)
Accumulated deficit (4,684,539) (4,102,279)
Total stockholders' equity 9,147,764 9,246,774
Total Liabilities and Stockholders'
equity $ 9,715,508 $ 9,777,269
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,
1999 1998
Operating activities:
Net loss $ (582,260) $ (423,588)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation 62,691 115,973
Amortization 24,814 69,347
Allowance for bad debts 105,877 11,119
Write down of equipment 99,666 -
Changes in:
Accounts receivable (492,617) 387,326
Inventories (4,765) (13,676)
Prepaid expenses 104,874 (32,487)
Discontinued operations 147,565 351,654
Accounts payable (187,917) 101,415
Accrued liabilities 225,767 (149,014)
Corporate income tax payable (600) 4,136
Other assets (34,559) (160,226)
Net cash provided by (used in)
operating activities (531,464) 261,979
Investing activities:
Purchase of property and equipment (62,427) (255,784)
Decrease in cash escrow account 480,000 -
Net cash provided by (used in)
investing activities 417,573 (255,784)
Financing activities:
Payment of principal of long-term debt - (26,948)
Payment of notes payable - (9,984)
Proceeds from exercise of stock
options and warrants 483,250 -
Net cash provided by (used in)
financing activities 483,250 (36,932)
Net increase (decrease) in cash and
cash equivalents 369,359 (30,737)
Cash and cash equivalents:
Beginning of period 3,572,422 1,146,212
End of period $3,941,781 $1,115,475
The accompanying notes are an integral part
of the financial statements.
3
MACE SECURITY INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENT
(Unaudited)
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, 1998.
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 loss per common share for the three months ended March
31, 1999 and 1998 have been calculated in accordance with this Standard.
3. 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.
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.
4
4. DISCONTINUED OPERATIONS
On July 14, 1998, the Company sold substantially all of the assets of its Law
Enforcement division. The purchase price was $4,985,651, paid in cash. 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 only and received a one-time license
fee of $650,000. The Company retained the cash and accounts receivables from
the Law Enforcement division at closing.
The Company applied $1,725,202 of the purchase price received to pay off the
amount due to FNB under its term loans.
A portion of the purchase 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. On January 20,
1999, $480,000 of the escrow was returned to the Company. The remainder will
be released on or about July 14, 1999 so long as no claim is brought against
the Company for which the purchaser is entitled to set off against the escrow
funds.
Notwithstanding the sale of the Law Enforcement division, the Company
continues to fulfill its obligation under a nonassignable Department of
Defense contract which is expected to be completed in August of 1999.
Consequently, this contract is included in discontinued operations.
Sale of Subsidiaries
In the three months ended September 30, 1998, the Company disposed of two
wholly-owned subsidiaries, MSP, Inc. (a Colorado distributor) and MSP Retail,
Inc. (Colorado retail stores which were operated as Mace Security
Centers(TM)). The contracts between the Company and the former owners of the
distributorship and retail stores allowed the Company to put back the shares
of MSP, Inc. and MSP Retail, Inc. to the former owners if certain pre-tax
earnings targets were not met within one year following the Company's
acquisition. In both cases, the aforementioned subsidiaries failed to make
their pre-tax earnings targets.
The Company put back the shares of MSP, Inc. to the former owner in exchange
for 80,000 shares of the Company that were tendered as consideration in the
acquisition of MSP, Inc.
In a modified version of the put with respect to MSP Retail, Inc., the
Company transferred the net assets of MSP Retail, Inc. to a corporation owned
by the former owner in exchange for 176,666 shares of the Company that were
tendered as consideration in the acquisition of MSP Retail, Inc.
Further, both contracts called for repayment of working capital loaned by the
Company to MSP, Inc. and MSP Retail, Inc. The repayment amount as defined by
the contracts is the money loaned by the Company reduced by operating losses
incurred by the respective subsidiary during the twelve-month period each was
owned by the Company. As a result of the disposition of these subsidiaries,
the Company incurred a loss of $67,013 with respect to MSP, Inc. and $47,317
with respect to MSP Retail, Inc.
5
5. PROPOSED CHANGE OF CONTROL, PRIVATE PLACEMENT AND MERGER WITH AMERICAN
WASH SERVICES, INC.
The Company has entered into an agreement (the "Stock Purchase Agreement") in
which Louis D. Paolino, Jr. has agreed to become the Company's Chairman and
Chief Executive Officer.
As a condition to Mr. Paolino's agreement to serve as CEO, the Stock Purchase
Agreement requires that the Company's current Board of Directors, other than
Mr. Goodrich, resign and be replaced by a new Board selected by Mr. Paolino.
Further, the Stock Purchase Agreement requires that Mr. Paolino purchase
3,735,000 shares of the Company's Common Stock. A portion of such shares are
expected to be purchased by members of Mr. Paolino's management team by
assignment of Mr. Paolino's right to purchase such shares.
The Stock Purchase Agreement also provides that as an additional condition to
Mr. Paolino's agreement to purchase the shares, substantially simultaneously
with such sale, the Company will sell in a private placement 1,850,000 shares
of the Company's Common Stock. The shares will not be registered under the
Securities Act of 1933, and thus, will not be freely tradable for a period of
at least one year from the closing of the sale of the shares.
The sales of the above-referenced 5,585,000 shares will result in a total
capital investment by Mr. Paolino, members of Mr. Paolino's management team
and others of approximately $8.83 million.
Following the stock sales, Mr. Paolino will become the Company's largest
shareholder and Jon E. Goodrich will become Vice President of the existing
business, Mace consumer sales, which is expected to continue to operate in
Bennington, Vermont.
As a condition to the referenced stock purchases, the Company will
substantially simultaneously with the stock sales acquire by merger American
Wash Services, Inc., a company headed by Mr. Paolino. The purchase price for
American Wash will be $4,687,500 in cash, 628,362 unregistered shares of the
Company's Common Stock and the issuance to Mr. Paolino and his designee of
assignable warrants to purchase a total of 1,825,000 shares of the Company's
Common Stock. The total consideration to be paid to the Company upon the
exercise of all such warrants is approximately $2,791,000. The warrants will
not be exercisable until the expiration of 120 days following the closing and
will have terms of 64 months. The shares issued in the merger and issuable
under the warrants will not be registered under the Securities Act of 1933,
and thus, will not be freely tradable for a period of at least one year from
the closing of the sale of the shares.
Mr. Paolino's and American Wash Services, Inc.'s obligation to complete the
transactions are conditioned on, among other things, the completion by the
Company of the private placement of stock, no material adverse change in the
financial condition of the Company, and receipt from NASDAQ of comfort that
the transactions will not effect the continued listing of the Company's stock
on the NASDAQ National Market System. No assurance can be made that these
transactions will be consummated.
In addition, the Company expects to acquire car wash operations independent of
Mr. Paolino and American Wash Services, Inc. The Company expects to start
closing these acquisitions in the second quarter.
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 identified below and
may vary significantly based on a number of factors including, but not
limited to, marketing success, product development, production, manufacturing
costs, competitive conditions and the change in economic conditions of the
various markets the Company serves. Actual future results may differ
materially from those suggested in the following statements.
For the three months ended March 31, 1999 of continuing operations only
The following discussion should be read in conjunction with the accompanying
financial statements and notes thereto.
RESULTS OF OPERATIONS:
Net sales for the three-month period ended March 31, 1999 increased $34,468
or 5% compared to the same period in 1998. This increase is principally due
to increased Consumer division sales of $162,553 over the same period last
year which more than offset the loss of sales from the Mace Security
Centers(TM) which were discontinued in the third quarter of 1998. (See Note 4
of "Notes to Financial Statements").
Gross profit was 48.2% of net sales for the three months ended March 31, 1999
as compared to 46.2% for the similar period in 1998.
Operating expenses were 114% of net sales for the three months ended March 31,
1999 as compared to 81.5% for the corresponding period in 1998.
General and administrative expenses increased 89% to $633,492 for the three
months ended March 31, 1999 as compared to the same period in 1998. This
increase relates to approximately $200,000 of costs, primarily professional
fees, associated with the proposed merger, as well as higher operating
expenses of $91,837 by the franchise subsidiary Mace Security Centers, Inc.
over the same period last year. In addition, the Consumer division is
absorbing some of the general and administrative expenses of the Company
which previously were allocated in part to other divisions, which have now
been discontinued.
Selling expenses for the three months ended March 31, 1999 decreased by 20%
to $168,148 as compared to the same period in 1998.
Other income (expense) was $(6,414) and $(1,851) for the three-month periods
ended March 31, 1999 and 1998, respectively. The increase in other expense
was a combination of a $99,666 write down of computer equipment that became
redundant as a result of the Company's recent change over to a Y2K compliant
system offset by increases in interest income and increased rentals from
sublets at the Company's headquarters.
7
LIQUIDITY AND CAPITAL RESOURCES:
Cash increased by $369,359 during the quarter ended March 31, 1999 as a
result of the collection of $480,000 of escrowed funds held back by the
purchaser of the Law Enforcement division and proceeds of $483,250 from the
exercise of stock options and warrants offset in part by a significant
increase in accounts receivable.
Accounts receivable increased $492,617 during the three months ended March
31, 1999 principally due to a $556,000 sale from discontinued operations
occurring at the end of the quarter.
Accounts payable and accrued expenses increased by $37,249 during the three
months ended March 31,1999.
In September 1997, the Company refinanced its long-term debt through 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
Company's long-term debt through Key Bank of New York. 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. The Company paid off the loan to FNB
simultaneously with the closing of the sale of its Law Enforcement division
in July of 1998.
Prior to consummating the loan with FNB, promissory notes to TransTechnology
Corporation relating to the acquisition of the assets of Federal Laboratories
(the key assets of the Company's Law Enforcement division), were paid in full
with cash from operations.
8
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, 1998. 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 6 - Exhibits and Reports on Form 8-K
(a) Exhibits (27) Financial Data Schedule
(b) Reports on Form 8-K None
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: May 17, 1999 ---------------------------------
Jon E. Goodrich, President
/s/ Mark A. Capone
Date: May 17, 1999 ---------------------------------
Mark A. Capone, Treasurer
Chief Financial Officer,
VP Finance
10