-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ToAzf9Y8oTRwPUypr1K1QUMcP8AfZbnYo10SAlAtQ9onHUIC3bXH51rHS8XodAaE +nrDuLFlf3cp107lupq1ZQ== 0001005477-98-001862.txt : 19980601 0001005477-98-001862.hdr.sgml : 19980601 ACCESSION NUMBER: 0001005477-98-001862 CONFORMED SUBMISSION TYPE: PRER14A PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19980529 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MACE SECURITY INTERNATIONAL INC CENTRAL INDEX KEY: 0000912607 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 030311630 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: PRER14A SEC ACT: SEC FILE NUMBER: 000-22810 FILM NUMBER: 98634687 BUSINESS ADDRESS: STREET 1: 160 BENMONT AVE CITY: BENNINGTON STATE: VT ZIP: 05201 BUSINESS PHONE: 8024471503 MAIL ADDRESS: STREET 1: 160 BENMONT AVE CITY: BENNINGTON STATE: VT ZIP: 05201 PRER14A 1 PRELIMINARY REVISED PROXY MATERIAL PRELIMINARY REVISED PROXY MATERIALS SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 Filed by the Registrant |X| Filed by a Party other than the Registrant |_| Check the appropriate box: |X| Preliminary Proxy Statement |_| Definitive Proxy Statement |_| Definitive Additional Materials |_| Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12 MACE SECURITY INTERNATIONAL, INC. ------------------------------------------------ (Name of Registrant as Specified In Its Charter) Name of Person(s) Filing Proxy Statement Payment of Filing Fee (Check the appropriate box): |_| $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2) |_| $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6)i)(3) |X| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. 1) Title of each class of securities to which transaction applies: Common Stock ------------ 2) Aggregate number of securities to which transaction applies: 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11: 4) Proposed maximum aggregate value of transaction: $5,953,851 |X| Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: $1,191 2) Form, Schedule or Registration Statement No.: Schedule 14A 3) Filing Party: Germaine Curtin, Esq., on behalf of Registrant 4) Date Filed: May 29, 1998 DRAFT 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. ------------------------------------------------------ (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 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 Long-term liabilities Deferred income 116,040 113,210 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. Date: May 29, 1998 -------------------------------- Jon E. Goodrich, President Date: May 29, 1998 -------------------------------- Mark A. Capone, Treasurer Chief Financial Officer, VP Finance DRAFT Form 10-KSB/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to ------------- ------------- Commission File Number 69270-NY --------------------- MACE SECURITY INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 03-0311630 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 160 Benmont Avenue, Bennington, Vermont 05201 - ------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (802) 447-1503 -------------- Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to Section 12(g) of the Act: Common Stock 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 ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B (ss.229.405) is not contained herein, and no disclosure will be contained, to the best of registrant's knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [ ]. The registrant's net sales for 1997 were $9,830,591. As of April 8, 1998 the aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price of $1.3125 on that date, was $5,990,292. As of April 8, 1998 the registrant had issued and outstanding 7,081,666 shares of Common Stock. ITEM 6. 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. RESULTS OF OPERATIONS Year Ended December 31, 1997 compared to Year Ended December 31, 1996. The following discussion should be read in conjunction with the accompanying Financial Statements and Notes thereto. Net sales decreased by $993,612 or 9.2% in 1997 compared to 1996. The major component contributing to this decrease is a 40.1% decline in the Consumer division sales from $4,437,020 in 1996 to $2,657,354 in 1997. This decline was offset in part by an increase in Law Enforcement sales to $6,917,627 in 1997 from $6,387,183 in 1996, as well as the additional net sales of $255,609 provided by the Company's new subsidiaries acquired in 1997. Substantially all categories of the Consumer defense spray market realized a sales decrease in 1997 as compared to 1996, which coincides with the continuing trend exhibited by the declining defense spray market. Gross profit as a percent of sales decreased to 28.7% as compared to 39.1% in 1996. Gross profit from the Law Enforcement division decreased to 24.0% in 1997 from 33.5% in 1996. Gross profit from the Consumer Division deceased to 38.1% in 1997 from 47.1% in 1996. Decreases in gross profit margins for the Law Enforcement Division were attributable to a combination of items including the strenght of the US dollar and its negative impact on export pricing, continued strong competitive bidding for international business, book to physical inventory adjustments and additions to inventory reserves for slow moving and obsolete items. Decreases to gross profit margins for the Consumer Division were attributable to a change in product mix to lesser margin buy-sell products as well as additions to inventory reserves for slow moving and obsolete items. General, administrative and selling expenses overall increased 0.6% in 1997 compared to 1996. As a percentage of net sales, these expenses increased to 45.8% in 1997 from 41.4% in 1996. General and administrative expenses increased by $75,483 or 2.9% in 1997 compared to 1996. As a percent of net sales, these expenses increased from 27.3% and 24.1% for 1997 and 1996, respectively, as a result of lower sales in 1997. Selling expenses decreased by $49,059 or 2.6% in 1997 compared to 1996. As a percentage of net sales, these expenses increased to 18.6% in 1997 from 17.3% in 1996. Operating loss as a percentage of net sales increased to 17.2% in 1997 from 2.3% in 1996. Other income/expense was income of net amounts $8,448 in 1997 compared to income of $7,175 in 1996. These net amounts are comprised of interest income and rents from sublets on the Company's leased facility and interest expense on the Company's term loan with FNB. (See "-Liquidity and Capital Resources)." The Company is currently considering acquisitions opportunities in the event the Transaction with AHI is consummated. Acquisitions will be necessary to fill the void from the disposal of the Company's Law Enforcement division." LIQUIDITY AND CAPITAL RESOURCES In October 1996, the Company entered into a credit agreement with KeyBank National Association ("Key") which provided for a maximum of $2,000,000 of credit (the "credit agreement") and was subject to a borrowing base formula. The amounts outstanding under the credit agreement were secured by virtually all of the Company's then owned and after-acquired assets. The credit agreement was separated into two "facilities". One facility provided for a $750,000 term loan maturing October 1, 2000, calling for monthly principal payments of $15,625 plus accrued interest at the Key's "base rate" plus 1.25% (9.5% on December 31, 1996). The Company drew fully on the term loan and used the proceeds to pay off the term loan with Vermont National Bank that totaled $395,823, including interest, and used the remaining $354,177 for working capital purposes. The second facility, a $250,000 line of credit, which originally matured on October 1, 1998 and called for interest to be paid monthly at Key's "base rate" plus 1.25% (9.25% as of December 31, 1996) was canceled in September, 1997. No amounts were drawn on this facility. The credit agreement contained various covenants which included the maintenance of certain financial ratios and limitations on capital expenditures, debt and dividends. As of December 31, 1996, the Company was in violation of most of these covenants. The Company obtained a waiver of these violations for the year ended December 31, 1996 and for the 10 months ended October 31, 1997. In April 1997, the Company's President and the Company's Chairman of the Board supplied the Company with lines of credit for up to $375,000 each ($750,000 in total) with interest at prime plus 1.25%. The lines of credit expired in September 1997. No amounts were drawn on these lines. In September 1997, the Company refinanced its long-term debt with the First National Bank of New England ("FNB") rm 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 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 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 "Subsequent Event"). Prior to this refinancing event, promissory notes to TransTechnology Coproration relating to the acquisition of the assets of Federal Laboratories, was paid in full with cash from operations. At December 31, 1997, the Company's open orders totalled $1,099,455 as compared to $1,681,463 for the prior year-end. Open orders are orders that have not yet been manufactured but are scheduled for production and delivery. Inventory decreased $1,251,174 in 1997, including: a) physical count adjustments relating to the December 31, 1997 physical inventory in the amount of $418,000, b) an auditor-proposed allowance of $440,000 based on sampling in connection with their review of production standards and obsolescence, and c) other production related inventory adjustments in the amount of $159,000 (See Note 1 to "Notes to Consolidated Financial Statements"). The auditor's sampling regarding production standards identified inaccurate labor and material standards (including those relating to both material cost and material production usage), some of which resulted in work in process and finished goods inventory valuations in excess of the lower of cost or market. The nature of the other production related inventory adjustments of $159,000 was a result of the Company reviewing its labor standards at year-end in light of the reduction in the Company's typical aerosol production runs. In 1997, aerosol production runs were shorter than in prior years resulting in higher labor cost per unit. It is anticipated that added cost accounting expertise, periodic test counts to verify book inventory balances and timely reviews of costing standards will improve the Company's internal controls and avoid book to physical adjustments in the future. For the year ended December 31, 1997, capital expenditures were $238,726 compared to $304,403 in 1996. 2 Additionally, the Company is a party to a real estate purchase agreement with the Vermont Economic Development Authority (VEDA) for the purchase of the Center and North Wings of its headquarters, after the satisfaction or waiver of certain contingencies by VEDA. The Company cannot predict when, or if, these contingencies will be met. The purchase price is $1,000,000, payable by delivery of $150,000 in cash and a promissory note to VEDA for $850,000 at 4% interest per annum, based on a 20 year amortization schedule with a balloon payment of $100,000 due at the end of ten years. (See "Properties"). The Company has deposited $75,000 of the total cash portion into an escrow account as required by the agreement. (See Note 10 to "Notes to Financial Statements"). On April 2, 1998, the Company entered into an agreement (the "Purchase Agreement") with Armor Holdings, Inc. and its wholly-owned subsidiary (together "AHI") for the sale of substantially all of the assets of the Company's Law Enforcement division (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 relatedtrademarks 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. The Company expects to apply approximately $175,000 of the purchase price received to pay off the amount due to FNB under its term loans. In addition, the Company will deliver $600,000 of the purchase price to AHI to be held in escrow to secure 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 non 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 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 constitute a substantial part of the Company's assets. The agreed purchase price for the fixed assets and intangibles, including the license fee for the 99-year paid-up license, is the book value as of December 31, 1997 ($3,117,325) plus an additional amount of $200,000, which the Company anticipates spending to tranport the assets to AHI. The agreed purchase price for inventory is the book value at December 31, 1997 ($2,636,325), 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, estimated at approximately $2,000,000. 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. 3 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized. MACE SECURITY INTERNATIONAL, INC. By: /s/ Jon E. Goodrich -------------------------------- Jon E. Goodrich President and CEO Date: May 29, 1998 In accordance with the Exchange Act, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date --------- ----- ---- /s/ Jon E. Goodrich President, CEO May 29, 1998 - ------------------------------ And Director Jon E. Goodrich /s/ Marvin P. Brown Chairman of the May 29, 1998 - ------------------------------ Board Marvin P. Brown /s/ Virginia de Ganahl Russell Director May 29, 1998 - ------------------------------ Virginia de Ganahl Russell /s/ Howard S. Edelman Director May 29, 1998 - ------------------------------ Howard S. Edelman /s/ Neil J. Campolungo Director May 29, 1998 - ------------------------------ Neil J. Campolungo /s Lewis C. Cohen Director May 29, 1998 - ------------------------------ Lewis C. Cohen /s/ R. David Garwood Director May 29, 1998 - ------------------------------ R. David Garwood /s/ Mark A. Capone - ------------------------------ Treasurer/Chief May 29, 1998 Mark A. Capone Financial Officer MACE SECURITY INTERNATIONAL, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page No. Reports of Independent Accountants F-2, F-2A Consolidated Balance Sheets at December 31, 1997 and 1996 F-3 Consolidated Statements of Operations for the Years Ended December 31, 1997 and 1996 F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997 and 1996 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1996 F-6 Notes to Consolidated Financial Statements F-7 F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Mace Security International, Inc. We have audited the accompanying consolidated balance sheet of Mace Security International, Inc. and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mace Security International, Inc. and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. URBACH KAHN & WERLIN PC Albany, New York February 26, 1998 F-2 MACE SECURITY INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996
1997 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents .................................................. $ 1,146,212 $ 345,554 Accounts receivable, net ................................................... 1,880,565 2,567,920 Inventories: Finished goods .......................................................... 1,712,082 1,729,882 Work in process ......................................................... 788,247 1,184,590 Raw material and supplies ............................................... 1,474,376 2,311,407 Prepaid expenses and other ................................................. 314,438 171,271 ------------ ------------ Total current assets .................................................... 7,315,920 8,310,624 Property and equipment, net ................................................... 2,697,961 2,919,230 Intangibles, net .............................................................. 2,718,423 2,761,193 Other assets .................................................................. 136,362 131,543 ------------ ------------ Total Assets ............................................................ $ 12,868,666 $ 14,122,590 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable .............................................................. $ 30,728 $ -- Current maturities of long-term debt ....................................... 113,210 949,827 Accounts payable ........................................................... 333,735 1,012,777 Accrued liabilities ........................................................ 556,624 411,233 ------------ ------------ Total current liabilities ............................................... 1,034,297 2,373,837 Long-term debt, net of current maturities ..................................... 1,660,205 143,271 ------------ ------------ Total liabilities ....................................................... 2,694,502 2,517,108 ------------ ------------ Commitments and contingencies (Note 10) 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 7,081,666 shares in 1997, 6,825,000 shares in 1996 ....................................... 70,817 68,250 Additional paid-in capital ................................................. 13,333,191 13,080,133 Deficit .................................................................... (3,229,844) (1,542,901) ------------ ------------ Total Stockholders' equity .............................................. 10,174,164 11,605,482 ------------ ------------ Total Liabilities and Stockholders' equity .............................. $ 12,868,666 $ 14,122,590 ============ ============
The accompanying notes are an integral part of the financial statements. F-3 MACE SECURITY INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1997 and 1996 1997 1996 ------------ ------------ Net sales .................................. $ 9,830,591 $ 10,824,203 Cost of sales .............................. 7,011,829 6,596,992 ------------ ------------ Gross profit ...................... 2,818,762 4,227,211 Operating expenses: General and administrative ............... 2,681,528 2,606,045 Selling .................................. 1,824,825 1,873,884 ------------ ------------ Operating loss .................... (1,687,591) (252,718) Other income (expense): Write down of long-lived assets .......... -- (28,453) Interest income .......................... 32,130 22,646 Interest expense ......................... (121,877) (97,998) Other income ............................. 98,195 110,980 ------------ ------------ 8,448 7,175 ------------ ------------ Loss before income tax expense .... (1,679,143) (245,543) Income tax expense ......................... 7,800 6,805 ------------ ------------ Net loss .......................... $ (1,686,943) $ (252,348) ============ ============ Net loss per common share ......... $ (.24) $ (.04) ============ ============ Weighted average number of common shares outstanding ......... 6,819,918 6,920,023 ============ ============ The accompanying notes are an integral part of the financial statements. F-4 MACE SECURITY INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended December 31, 1997 and 1996
Common Stock Additional Shares Par Paid-in Capital Deficit ------------ ------------ ------------ ------------ Balance at January 1, 1996 6,805,000 $ 68,050 $ 13,025,471 $ (1,290,553) Shares issued to officer 20,000 200 27,600 -- Fair value of 30,000 stock options issued to consultants -- -- 27,062 -- Net loss -- -- -- (252,348) ------------ ------------ ------------ ------------ Balance at December 31, 1996 6,825,000 68,250 13,080,133 (1,542,901) Shares issued for MSP Retail, Inc. acquisition 176,666 1,767 163,858 -- Shares issued for MSP, Inc. acquisition 80,000 800 89,200 -- Net loss -- -- -- (1,686,943) ------------ ------------ ------------ ------------ Balance at December 31, 1997 7,081,666 $ 70,817 $ 13,333,191 ($ 3,229,844) ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements. F-5 MACE SECURITY INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997 and 1996
1997 1996 ----------- ----------- Operating activities: Net loss ............................................... $(1,686,943) $ (252,348) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation .................................... 454,247 445,018 Amortization .................................... 268,994 267,222 Allowance for bad debts ......................... (47,905) 53,003 Gain on sale of assets .......................... (1,996) (10,249) Write down of long-lived assets ................. -- 28,453 Fair value of stock options issued to consultants -- 27,062 Shares issued as compensation ................... -- 27,800 Changes in: Accounts receivable ............................. 735,260 (1,530,941) Inventories ..................................... 1,334,307 702,869 Prepaid expenses and other ...................... (115,087) 265,594 Accounts payable ................................ (679,042) 394,124 Accrued liabilities ............................. 145,391 (123,683) Other assets .................................... (12,459) (12,483) ----------- ----------- Net cash provided by operating activities ..... 394,767 281,441 ----------- ----------- Investing activities: Purchases of property and equipment .................... (238,726) (304,403) Proceeds from sale of property and equipment ........... 13,744 29,850 Acquisition of subsidiaries ............................ (51,372) -- ----------- ----------- Net cash used in investing activities ......... (276,354) (274,553) ----------- ----------- Financing activities: Payment of principal on long-term debt ................. (525,933) (392,080) Proceeds from long-term debt ........................... 1,206,250 375,753 Payment of notes payable ............................... (3,272) (127,797) Proceeds from notes payable ............................ 34,000 -- Debt issue costs ....................................... (28,800) (22,848) ----------- ----------- Net cash provided by (used in) financing activities ........................ 682,245 (166,972) ----------- ----------- Net increase (decrease) in cash and cash equivalents ....... 800,658 (160,084) Cash and cash equivalents: Beginning of year ...................................... 345,554 505,638 ----------- ----------- End of year ............................................ $ 1,146,212 $ 345,554 =========== ===========
The accompanying notes are an integral part of the financial statements. F-6 MACE SECURITY INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of organization: Mace Security International, Inc. (Mace) is incorporated under the laws of the state of Delaware. Mace and its subsidiaries' revenues are generated primarily through the manufacture, distribution and sale of defense sprays, tear gas grenades, projectiles, cartridges and other self-defense and personal safety products for the consumer and law enforcement markets. Summary of significant accounting policies: Principles of consolidation: The consolidated financial statements include the accounts of Mace and its wholly-owned subsidiaries, MSP, Inc., MSP Retail, Inc., and Mace Security Centers, Inc. (collectively referred to as the Company). All intercompany accounts and transactions have been eliminated. Revenue recognition: Substantially all revenue from domestic sales is recognized when shipments are made and export sales are recognized when title has passed. Cash and cash equivalents: Cash and cash equivalents consist of cash and highly liquid short-term investments with original maturities of three months or less. Accounts receivable: Accounts receivable are presented net of an allowance for doubtful accounts approximating $54,000 at December 31, 1997 ($102,000 at December 31, 1996). Inventories: Inventories, which are stated at the lower of cost (first-out method) or market, are net of valuation adjustments of $440,000 and $456,000 at December 31, 1997 and 1996 respectively. Cost of sales for the year ended December 31, 1997 includes approximately $1,017,000 attributable to lower of cost or market write downs. This adjustment was made in the fourth quarter of 1997. Property and equipment: Property and equipment are stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets. Significant additions or improvements extending assets' useful lives are capitalized; normal maintenance and repair costs are expensed as incurred. The cost of fully depreciated assets remaining in use are included in the respective asset and accumulated depreciation accounts. When items are sold or retired, related gains or losses are included in operations. Intangibles: Trademarks are stated at cost and are amortized on a straight-line basis over 15 years. The excess purchase price over fair values assigned to assets acquired is amortized on a straight-line basis over 15 years. F-7 MACE SECURITY INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. DESCRIPTION OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Research expense: Research and development expense, which is charged to operations as incurred, was approximately $81,000 in 1997 and $53,000 in 1996. Income taxes: The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable for future years to differences between financial statement and tax bases of existing assets and liabilities. The effect of tax rate changes on deferred taxes is recognized in the income tax provision in the period that includes the enactment date. The provision for taxes is reduced by investment and other tax credits in the years such credits become available. Advertising: The Company expenses the production costs of advertising the first time the advertising takes place. Advertising expense was approximately $249,000 and $213,000 in 1997 and 1996, respectively. Net loss per common share: Loss per common share amounts have been computed using the weighted average number of common shares outstanding for the respective periods. Effective December 31, 1997, the Company adopted Statement of Financinal Accounting Standards No. 128 "Earnings Per Share" (SFAS No. 128). This standard requires the presentation of basic and diluted earnings, when applicable, per share. All outstanding options and warrants are anti-dilutive at December 31, 1997. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Disclosures about Fair Value of Financial Instruments: All financial instruments are held for purposes other than trading. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents The carrying amount approximates fair value because of the short term maturity of those instruments. Long Term Debt The carrying value approximates fair value for variable rate debt. Impairment of long-lived assets During 1996, the Company adopted Statement of Financial Accounting Standards No. 121, (SFAS No. 121), the Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of". SFAS No. 121 requires that long-lived assets, including related goodwill, be reviewed for impairment and written down to fair value whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Adoption of SFAS No. 121 resulted in an impairment charge included in other expense of $28,453 in 1996. The impaired assets were primarily trademarks. F-8 MACE SECURITY INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. DESCRIPTION OF ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Measurements of the impairment loss is based on fair value of the asset. Generally, fair value is determined using valuation techniques such as the present value of expected future cash flows. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting Comprehensive Income", which establishes standards for reporting comprehensive income and its components in annual and interim financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods is required. The Company anticipates that adoption of SFAS No. 130 may expand or modify disclosures but will not have an impact on reported consolidated financial position, results of operations or cash flows. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes standards for companies to report information about operating segments in annual financial statements, based on the approach that management utilizes to organize the segments within the Company for management reporting and decision making. In addition, SFAS No. 131 requires that companies report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, and major customers. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. Financial statement disclosure for prior periods are required to be restated. The Company anticiates that adoption of SFAS No. 131 will expand disclosures but will not have an impact on reported consolidated financial positoin, results of operations or cash flows. 2. SUPPLEMENTARY CASH FLOW INFORMATION In September 1997, the Company obtained long-term debt from the First National Bank of New England (See Note 7). As part of this refinancing, the Key Bank long-term debt of $593,750 was paid. This non-cash transaction has been excluded from proceeds from long-term debt, as well as payment of principal on long-term debt. In October 1996, the Company refinanced $395,823 of its long-term debt with Vermont National Bank through the issuance of long-term debt from KeyBank (See Note 7). This non-cash transaction has been excluded from payment of principal on long term debt and proceeds from long-term debt. 3. PROPERTY AND EQUIPMENT The components of property and equipment are summarized below:
Estimated Useful Life (Yrs.) 1997 1996 ------------------ ----------- ----------- Office furniture ......................... 7 $ 128,959 $ 127,144 Computer equipment ....................... 7 428,769 386,608 Vehicles ................................. 5 46,501 37,285 Leasehold improvements ................... 31 1,628,553 1,539,976 Machinery and equipment .................. 5 2,217,610 2,130,302 ----------- ----------- Total property and equipment .......... 4,450,392 4,221,315 Less: Accumulated depreciation ........... (1,752,431) (1,302,085) ----------- ----------- Property and equipment, net ........... $ 2,697,961 $ 2,919,230 =========== ===========
Depreciation expense was $454,247 in 1997 and $445,018 in 1996. Expenditures for maintenance and repairs are charged to income as incurred and amounted to $113,429 in 1997 and $38,290 in 1996. 4. INTANGIBLES The components of intangibles are summarized below: 1997 1996 ---------- ---------- Trademarks ..................................... $3,099,208 $3,099,208 Trademark protection costs ..................... 154,088 154,088 Excess purchase price over fair value assigned to assets acquired ............... 634,470 422,405 ---------- ---------- Total intangibles ............................ 3,887,766 3,675,701 Less: Accumulated amortization ................. 1,169,343 914,508 ---------- ---------- Intangibles, net ............................. $2,718,423 $2,761,193 ========== ========== Amortization expense was $254,834 in 1997 and $251,794 in 1996. F-9 MACE SECURITY INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. NOTES PAYABLE Notes payable at December 31, 1997 consist of an obligation to a financing company, payable in monthly installments with interest at 10.2% in 1997, and due Septemer 1998. In September 1997, the Company obtained a $250,000 working capital line of credit from First National Bank of New England bearing interest at prime plus 1% (9.5% at December 31, 1997) due May 31, 1998. No amounts have been drawn on this line of credit. The Company is using this line for the issuance of letters of credit for international purchases. The Company had $52,500 in letters of credit outstanding at December 31, 1997. 6. ACCRUED LIABILITIES The components of accrued liabilities are summarized below: 1997 1996 -------- -------- Commissions .................................. $130,833 $ 51,924 Customer prepayments ......................... 107,643 70,482 Payroll and related expenses ................. 109,552 120,661 Compensated absences ......................... 8,524 22,101 Professional fees ............................ 65,000 54,297 Advertising .................................. 64,571 30,000 Other ........................................ 70,501 61,768 -------- -------- $556,624 $411,233 ======== ======== 7. LONG-TERM DEBT Long-term debt at December 31 consists of the following:
1997 1996 ---------- ---------- Notes payable--First National Bank of New England, 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, collateralized by all assets of the Company ...................................................... $1,773,415 -- Note payable--stockholder, payable in quarterly installments of $33,957 plus interest at prime in effect at the beginning of each quarter (8.25% at December 31, 1996) maturing January 1997 .. -- 33,957 Note payable--stockholder, payable in quarterly installments in an amount equal to seven percent of annualized net sales of the Federal Laboratories division in excess of an agreed upon base plus interest at prime in effect at the beginning of each quarter (8.25% at December 31, 1996) with no set maturity date; collateralized by the equipment purchased in connection with the Federal Laboratories division acquisition. This liability was satisfied in 1997................................. -- 340,391 Note payable--KeyBank bearing interest at the Bank's "base rate" plus 1.25% (9.5% at December 31, 1996) payable in monthly installments of $15,625 plus interest, due October 1, 1998, collateralized by all assets of the Company. This liability was satisfied in 1997................................. -- 718,750 ---------- ---------- 1,773,415 1,093,098 Less: Current maturities .............................................. 113,210 949,827 ---------- ---------- Total long-term debt .................................................. $1,660,205 $ 143,271 ========== ==========
F-10 MACE SECURITY INTERNATIONAL, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. LONG TERM DEBT (continued) Scheduled principal repayments on long-term debt are as follows: 1998 113,210 1999 125,073 2000 138,170 2001 152,638 2002 168,621 Thereafter 1,075,703 --------- 1,773,415 ========= Interest paid was $129,770 in 1997 and $102,408 in 1996. In October 1996, the Company entered into a credit agreement with KeyBank which provided for a maximum of $2,000,000 of credit (the "credit agreement") and was subject to a borrowing base formula. The amounts outstanding under the credit agreement were secured by virtually all of the Company's then owned and after-acquired assets. The credit agreement was separated into two "facilities". One facility provided for a $750,000 term loan maturing October 1, 2000, calling for monthly principal payments of $15,625 plus accrued interest at the Bank's "base rate" plus 1.25% (9.5% on December 31, 1996). The Company drew fully on the term loan and used the proceeds to pay off the term loan with Vermont National Bank that totaled $395,823, including interest, and used the remaining $354,177 for working capital purposes. The second facility, a $250,000 line of credit, which originally matured on October 1, 1998 and called for interest to be paid monthly at the Bank's "base rate" plus 1.25% (9.25% as of December 31, 1996) was canceled on September 25, 1997. No amounts were drawn on this facility. The credit agreement contained various covenants which included the maintenance of certain financial ratios and limitations on capital expenditures, debt and dividends. As of December 31, 1996, the Company was in violation of most of these covenants. The Company obtained a waiver of these violations for the year ended December 31, 1996 and for the 10 months ended October 31, 1997. In April 1997, the Company's President and the Company's Chairman of the Board supplied the Company with lines of credit for up to $375,000 each ($750,000 in total) with interest at prime plus 1.25%. The lines of credit expired in September 1997. No amounts were drawn on these lines. In September 1997, the Company refinanced its long-term debt with the First National Bank of New England. 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 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 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. Prior to this refinancing event, the obligation to a stockholder relating to the acquisition of the assets of Federal Laboratories, was paid in full with cash from operations. F-11 MACE SECURITY INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. INCOME TAXES The components of income tax expense are: 1997 1996 ----------- ----------- Current $ 7,800 $ 6,805 Deferred -- -- ----------- ----------- Total income tax expense $ 7,800 $ 6,805 =========== =========== The significant components of deferred income tax expense attributed to loss from operations for the years ended December 31, 1997 and 1996 are as follows: 1997 1996 ----------- ----------- Current deferred tax expense $ 37,336 $ 152,618 Loss carry forward (615,707) (247,244) Valuation allowance for deferred tax assets 578,371 94,626 ----------- ----------- $ -- $ -- =========== =========== A comparison of the federal statutory rate to the Company's effective rate is as follows: 1997 1996 -------- -------- U.S. statutory rate (34%) (34%) State taxes, net of federal benefit 1% 2% Miscellaneous permanent differences 1% 2% Valuation allowance for deferred tax assets 34% 34% Adjustments for prior year taxes (1%) (1%) -------- -------- Effective tax rate 1% 3% -------- -------- The significant components of deferred tax assets and liabilities are as follows: 1997 1996 ----------- ----------- Current assets (liabilities): Allowance for doubtful accounts $ 21,587 $ 40,077 Inventories 65,869 92,764 Accrued expenses 9,128 42,407 Other 12,163 7,449 ----------- ----------- Current deferred assets 108,747 182,697 Valuation allowance (108,747) (182,697) ----------- ----------- Net current deferred tax assets $ -- $ -- =========== =========== Noncurrent assets (liabilities): Intangibles (4,758) (7,586) Plant, equipment and depreciation (234,372) (268,158) Net operating loss carry forwards 1,152,000 536,293 ----------- ----------- Net noncurrent deferred assets 912,870 260,549 Valuation allowance (912,870) (260,549) ----------- ----------- Net noncurrent deferred tax assets $ -- $ -- =========== =========== F-12 MACE SECURITY INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. INCOME TAXES (continued) A valuation allowance is provided to reduce the deferred tax assets to a level which, more likely than not, will be realized. The deferred tax assets recorded reflects management's estimate of the amount which will be realized based upon current operating results and contingencies. During the year ended December 31, 1997, the valuation allowance increased by $578,371. At December 31, 1997, the Company has net operating loss carry forward for federal income tax purposes of approximately $2,880,000. The federal net operating loss carry forward, if unused, will begin to expire during the year ended December 31, 2009. Net taxes refunded were $64,628 in 1996. 9. RELATED PARTY TRANSACTIONS The Company paid legal and management/consulting fees to officers and directors approximating $57,350 and $35,360 in 1997 and 1996, respectively. 10. COMMITMENTS AND CONTINGENCIES The Company is a party to various 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. Operating lease expense for equipment, vehicles and real estate amounted to $170,231 and $171,947 for 1997 and 1996, respectively. Certain of these leases contain purchase options, renewal provisions, and contingent rentals for proportionate share of taxes, utilities, insurance and annual cost of living increases. Future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1997 are: 1998 116,526 1999 103,977 2000 28,760 ---------- $ 249,263 ========== The Company has entered into month to month and long-term sublease agreements with tenants of their operating facility in Bennington, Vermont, including a related party. Total sublease rental income was $93,231 and $65,160 in 1997 and 1996, respectively. The Company was obligated under a consulting agreement with a director/stockholder calling for a monthly consulting fee of $1,930 for the period January 1, 1996 to December 31, 1996. Future minimum rental receipts required under operating subleases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1997 are: 1998 73,404 1999 76,404 2000 44,569 ---------- $ 194,377 ========== During 1994, the Company paid $75,000 to a related entity to acquire all of the rights and obligations under a lease agreement, including an option to purchase the south wing of its principal operating facility. Amortization of this deferred cost was $13,440 in 1997 and 1996, respectively. The term of the lease expires on January 31, 2000, and requires monthly payments of $6,064, plus the Company's proportionate share of taxes, insurance, utilities and an annual cost of living increase. The option may be exercised for $600,000 at the end of the lease term. F-13 MACE SECURITY INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. COMMITTMENTS AND CONTINGENCIES (Continued) The Company is party to a Real Estate Purchase Agreement with the Vermont Economic Development Authority (VEDA) for the purchase of the center and north wings of its headquarters, after the satisfaction of certain contingencies by VEDA. The purchase price is $1,000,000, payable in cash of $150,000 and a $850,000 promissory note to VEDA at 4% interest, based on a 20 year amortization schedule with a balloon payment of $100,000 due at the end of ten years. The Company has temporarily elected to lease the facility for $4,000 per month, together with taxes, insurance and utilities. The Company is currently renegotiating its option to extend its lease for an additional five year period. 11. STOCK OPTIONS AND WARRANTS During September 1993, the Company adopted the 1993 Stock Option Plan (the Plan). The Plan provides for the issuance of up to 630,000 shares of common stock upon exercise of the options. The Company has reserved 630,000 shares of common stock to satisfy the requirements of the Plan. The options are non-qualified stock options and are not transferable by the recipient. The Plan is administered by the Compensation Committee of the Board of Directors, which may grant options to employees, directors and consultants to the Company. The term of each option may not exceed fifteen years from the date of grant. Options are exercisable over either a 10 or 15 year period and exercise prices are not less than the market value of the shares on the date of grant. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", in accounting for the stock option plans. Accordingly, no employee compensation cost has been recognized in 1997 and 1996. Had compensation cost and fair value been determined pursuant to Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation", net loss would increase from $1,686,943 to $1,886,293 in 1997 and from $252,348 to $454,085 in 1996. Net loss per share would increase from $.24 to $.27 in 1997 and from $.04 to $.07 in 1996. The weighted average fair value of options granted during 1997 and 1996, for the purpose of SFAS No. 123, is $1.15 and $.85 per share, respectively. In accordance with SFAS No. 123, the fair value of each option granted is estimated on the grant date using the Black-Scholes Single Option model, assuming no dividend yield and an expected volatility of 92.2% and 77.6% in 1997 and 1996, respectively. The weighted-average remaining contractual life of outstanding options under the plan at December 31, 1997 is 13 years. The risk- free interest rate ranges from 6.06% to 6.86% in 1997 and from 5.95% to 6.78% in 1996. Activity with respect to these plans is as follows:
1997 1996 --------------------- --------------------- Weighted Weighted Average Average Exercise Exercise Number Price Number Price ------- ----- ------- ----- Shares under option, January 1 276,400 $1.54 90,100 $5.34 Options granted 162,500 1.40 270,000 1.44 Options exercised -- -- -- -- Options canceled 1,100 5.50 83,700 5.32 ------- ----- ------- ----- Shares under option, December 31 437,800 1.48 276,400 1.54 ======= ===== ======= ===== Options exercisable, December 31 437,800 1.48 276,400 1.54 ======= ===== ======= ===== Shares available for granting of options, December 31 192,200 353,600 ======= =======
F-14 MACE SECURITY INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. STOCK OPTIONS & WARRANTS (continued) The following is a summary of the status of options outstanding at December 31, 1997:
Outstanding Options Exercisable Options ------------------- ------------------- Weighted Average Weighted Weighted Exercise Remaining Average Average Price Contractual Exercise Exercise Range Number Life Price Number Price ----- ------- ----- ----- ------- ----- $5.50 5,300 5.87 $5.50 5,300 $5.50 1.50 320,000 13.69 1.50 320,000 1.50 1.25 62,500 14.54 1.25 62,500 1.25 1.19 50,000 13.64 1.19 50,000 1.19
In connection with the initial public offering of the Company's securities in November 1993, the Company issued a total of 75,000 common stock purchase warrants to the underwriters of the securities. These warrants are exercisable over a four-year period which began in November 1994 at $6.60 per share. In August 1994, the Company issued warrants to purchase 60,000 shares of Mace Security International, Inc. common stock at $4.25 per share in connection with the purchase of certain assets of a business. The warrants are exercisable over a ten year period, expiring on August 24, 2004. During the exercise periods, the Company will reserve a sufficient number of shares of its common stock to provide for the exercise of the rights represented by option and warrant holders. 12. CONCENTRATION OF CREDIT RISK The Company maintains its cash accounts in high quality financial institutions. At times, these balances may exceed insured amounts. The Company limits the concentration of credit risk in receivables from retailers by closely monitoring credit and collection policies. Risk of losses from international sales are minimized by requiring the majority of customers to provide irrevocable confirmed letters of credit and/or cash advances. Management believes that the allowance for doubtful accounts is adequate to absorb estimated losses. 13. EMPLOYEE BENEFIT PLAN The Company maintains a voluntary 401(k) plan covering substantially all of its employees. Employees may contribute from 1% to 20% of their regular wages, up to the limit permitted by the Department of Labor. The Company matches 25% of each dollar contributed by employees up to 16% of their wages. The cost of the plan amounted to $28,354 and $30.573 in 1997 and 1996, respectively. 14. ACQUISITIONS AND SUBSIDIARIES In July 1997, the Company acquired all of the issued and outstanding common stock of MSP, Inc. (MSP), an Aurora, Colorado marketer of a diversified line of consumer safety and security products. This transaction was recorded as a purchase, and the operations of MSP have been included with the Company's from the acquisition date. In the event MSP achieves certain financial goals, an additional 15,000 shares of the Company's common stock is issuable. The purchase cost of $90,000 was represented by 80,000 shares of the Company's stock valued at $1.125 per share. In September 1997, the Company acquired all of the issued and outstanding common stock of MSP Retail, Inc. (MSPR), an operator of two retail stores in the Denver, Colorado area, specializing in the sale of security products for personal and home protection. This transaction was recorded as a purchase, and the operations of MSPR have been included with the Company's from the acquisition date. The purchase price of $212,000 was represented by 176,666 shares of the Company's common stock valued at $.9375 per share and cash of $46,300. F-15 MACE SECURITY INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 14. AQUISITIONS AND SUBSIDIARIES (Continued) Pro forma results of the MSP and MSPR acquisitions, assuming they had been made at the beginning of the periods presented, would not be materially different from the results reported. The excess of the purchase price over the fair values assigned to the assets acquired, approximating $207,000, is being amortized over 15 years. In September 1997, the Company established Mace Security Centers, Inc.,a subsidiary corporation formed for the purpose of offering franchises for the operation of retail stores which will sell personal protection and security products. There has been no operating activity in this corporation through December 31, 1997. 15. SEGMENT INFORMATION The Company operates in principally two industry segments: (1), the manufacture, distribution and sale of Mace(R) brand defense sprays and personal safety products to the civilian consumer market, "Consumer"; and (2), the manufacture, distribution and sale of tear gas grenades, defense sprays, projectiles and cartridges to law enforcement agencies, "Law Enforcement". The Law Enforcement segment represented 70.4% and 59% of sales for the Company in 1997 and 1996, respectively. Intersegment sales are not material and operating income represents total revenues less operating expenses. Identifiable assets are those assets employed in each segment's operation, including an allocated value to each segment of cost in excess of net assets acquired. Information concerning the Company's business segments in fiscal 1997 and 1996 is as follows: 1997 1996 ------------ ------------ NET SALES Consumer $ 2,912,964 $ 4,437,020 Law Enforcement 6,917,627 6,387,183 ------------ ------------ Total net sales $ 9,830,591 $ 10,824,203 ============ ============ OPERATING (LOSS) INCOME Consumer (490,169) 252,739 Law Enforcement (1,197,422) (505,457) ------------ ------------ Total operating loss $ (1,687,591) $ (252,718) ============ ============ IDENTIFIABLE ASSETS Consumer 3,273,180 3,953,740 Law Enforcement 7,257,803 8,969,970 Unallocated, corporate 2,337,683(a) 1,198,880 ------------ ------------ Total assets $ 12,868,666 $ 14,122,590 ============ ============ DEPRECIATION AND AMORTIZATION Consumer 263,554 266,854 Law Enforcement 459,687 445,380 ------------ ------------ Total depreciation and amortization $ 723,241 $ 712,234 ============ ============ CAPITAL EXPENDITURES Consumer 78,508 41,563 Law Enforcement 111,302 225,783 Unallocated, corporate 48,916 37,057 ------------ ------------ Total capital expenditures $ 238,726 $ 304,403 ============ ============ - ---------- (a) Approximately 50% of the assets not allocated to the operating segments relate to cash and cash equivalents held by the Company. The substantial portion of the remaining assets relates to corporate office furniture and equipment not specifically allocable among industry segments. F-16 MACE SECURITY INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 15. SEGMENT INFORMATION (Continued) The Company sells its products on a worldwide basis with its principal markets listed in the table below where information on export sales is summarized for 1997 and 1996 by geographic area for the Company as a whole: 1997 1996 ---------- ---------- GEOGRAPHIC AREA Central/South America $1,739,000 $1,356,000 Middle East 1,170,000 761,000 Asia 213,000 660,000 Canada 136,000 151,000 Europe 126,000 137,000 Other 58,000 92,000 ---------- ---------- Total Export Sales $3,442,000 $3,157,000 ========== ========== 16. SUBSEQUENT EVENTS On April 2, 1998, the Company entered into a purchase agreement with Armor Holdings, Inc. (AHI) for the sale of substantially all of the assets of the Company's Law Enforcement division. The terms of the Agreement provide for certain Law Enforcement division assets, including equipment and intangibles, to be sold at December 31, 1997 book value, plus an additional amount of $200,000, which the Company anticipates expending to transport assets to AHI. The purchase price for these assets, inclusive of a license fee, will approximate $3,117,00. The purchase price for inventory, which is subject to purchase and cost adjustments between December 31, 1997 and the closing date, will be determined based on the Company's standard costs at the date of closing. The Company will retain its cash and accounts receivable from the Law Enforcement division, approximating $2,000,000, and will retain responsibility for all Law Enforcement division payables and other liabilities. The Company will also be paid a $650,000 license fee for AHI's use of the Mace brand, related trademarks and patent use by AHI in the law enforcement market only. The transaction is expected to close in June 1998. F-17 -----END PRIVACY-ENHANCED MESSAGE-----