Form 10-KSB
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
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MACE SECURITY INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 03-0311630
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 Benmont Avenue, Bennington, Vermont 05201
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (802) 447-1503
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Securities registered pursuant to Section 12(b) of the Act: None
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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 $1.4375 on that
date, was $6,560,796.
As of April 8, 1998 the registrant had issued and outstanding 7,081,666 shares
of Common Stock.
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PART I
ITEM 1. BUSINESS
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.
GENERAL
Mace Security International, Inc. (the "Company") is a well known producer
of less-lethal defense sprays for the Consumer and Law Enforcement Markets and a
marketer of consumer safety and security products. The Company also supplies
chemical munitions and accessories to law enforcement, correctional and military
agencies throughout the world (the "Law Enforcement Market") and conducts
training for all types of professionals responsible for the management and
control of violent behavior in individuals. These programs encompass basic and
specialized use of force and weapons training, including chemical munitions and
aerosols.
The Company's goal is to maximize profitability by: strategic acquisitions
and generating planned growth through product diversification, planning for and
meeting the challenges of the ever changing and competitive business climate,
and striving to enlarge market share and expand distribution channels within
each product category.
The Company believes it is one of the leading manufacturers and
distributors of safety and security items to civilian consumers (the "Consumer
Market") and chemical munitions and accessories to the Law Enforcement Market.
The Company was incorporated in Vermont in December of 1987 under the name
Mark Sport, Inc. after Jon E. Goodrich, the Company's President and CEO, and a
former principal stockholder obtained an exclusive license to produce and market
defense sprays to the Consumer Market under the Mace(R) brand trademark within
the continental United States, and a non-exclusive license to market defense
sprays under the Mace(R) trademark outside of the continental United States. In
1992, this license was renegotiated to include a purchase option.
The Company changed its name to Mace Security International, Inc. in
September 1993. In November 1993, prior to its initial public offering, it
merged into a new company incorporated in the state of Delaware.
The Company exercised its option to purchase the Mace(R) trademark and, in
December 1993, the Company paid in full all amounts due under its promissory
note for the purchase of all rights, title and interest to the Mace(R) brand and
related trademarks.
In March 1994, the Company acquired certain assets and liabilities of the
Federal Laboratories division of TransTechnology Corporation, which are operated
by the Company as part of its Law Enforcement division. The Company's Law
Enforcement division offers a full line of chemical munitions and accessories,
most of which are marketed under the Federal Laboratories(R) trademark, designed
for outdoor crowd dispersement and confined area use as well as for riot and
barricade situations.
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In late 1997, the Company entered the retail market for consumer safety
products by purchasing (i) a distribution company specializing in the sourcing
and sales of specialized consumer products; and (ii) two retail stores in the
Denver, Colorado area that are currently operated under the trade name Mace
Security Centers(TM). The Company also opened in November 1997 an additional
Mace Security Center(TM) in Denver, Colorado. In addition, a fourth store in the
Denver area is targeted for a June 1998 opening. The operating results of the
Mace Security Centers(TM) are immaterial at this time. It is too soon to
determine the potential for these stores. The Company has finalized a franchise
program for additional Mace Security Centers(TM). The Denver stores will be used
as prototypes for the franchising program. The first franchise is expected to be
sold in 1998.
PRODUCTS AND LINES OF MERCHANDISE
The Company designs, markets and sells its Consumer product line for use
in protection of the home and automobile, and for personal and child protection.
These products include a line of personal alarms, whistles, window and door
security alarms and defense sprays. The Mace Security Centers(TM) offer a wider
range of products, including home security systems, child monitors, cellular
phones and pagers, and other security devices.
In 1997, Mace Anti Crime Bureau ("MACB"), an extension of the Consumer
division, completed product development of a highly cost competitive "dye-pack"
used by financial institutions for robbery protection. It was introduced to
trade shows in the fall of 1997 as "MaceCash(TM)". MACB is also in the process
of developing other safeguard devices for use by financial institutions and
armored cars in the physical transportation of cash. Other services provided by
MACB to financial institutions are state-of-the-art training videos and crisis
response materials.
The Company's Law Enforcement product line of chemical munitions consists
of, among others, defense sprays, tear gas smoke grenades, projectiles,
launchers, stun munitions and protective masks. The Company's Law Enforcement
Market includes law enforcement, correctional, or military organizations that
deal with violent individuals or situations.
DISTRIBUTION/MARKET SEGMENTS
Distribution of the Company's products and services is aimed at two
distinct segments/markets: Consumer and Law Enforcement.
The Company's sales efforts are coordinated by a team of in-house sales
and support personnel dealing with a network of manufacturers' representatives
and buyers for a variety of distributors and retail accounts.
Consumer Market
The Company's in-house sales and support staff sells products through a
nationwide network of manufacturers' representative groups and sells directly to
wholesale distributors. Significant retail accounts are generally handled
directly by the Company as are mail order and specialty accounts.
The Company's Consumer Market includes: mass merchants/department stores,
consumer catalogues and guns/sporting goods, hardware, auto, convenience, and
drug stores. Each market category is reached through in-house sales managers,
and/or through manufacturers' representatives. Market categories are also
reached through catalogue, magazine and trade publication advertising and
promoting at industry trade shows.
Since late 1997, the Company has expanded its distribution channels to
include three retail stores called Mace Security Centers(TM), in Denver,
Colorado which carry the Company's Consumer products as well as a variety of
other safety products. The Company hopes that this new distribution channel will
result in additional sales and broader retail exposure of the Company's Consumer
products. The Company anticipates selling its first franchise of Mace Security
Centers(TM) in 1998.
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MACB's market includes financial institutions and related businesses
throughout the world. Sales efforts for MaceCash(TM) in the domestic market are
expected to be conducted through direct marketing and the use of independent
sales representatives and distributors as well as exhibition at national trade
shows and advertisement in trade publications. International marketing efforts
are expected to be conducted primarily through independent distributors.
Law Enforcement Market
The Company's Law Enforcement sales are conducted mainly through
manufacturers' representative groups, wholesale law enforcement distributors and
directly to various governmental agencies. Additionally, sales are conducted
through smaller distributors and dealers specializing in the Law Enforcement
supply business. International Law Enforcement sales are primarily generated
through bidding processes from a variety of law enforcement, correctional and
military agencies. Law Enforcement sales continue to be "high profile" sales for
the Company and act as the foundation for the level of market recognition
enjoyed by the Mace(R) brand Consumer products.
The Company markets its Law Enforcement products in over 50 countries
worldwide. The majority of the international sales for 1997 and 1996, which
totaled approximately $3,442,000 and $3,157,000 respectively, were from the
Federal Laboratories(R) product line.
The Company expanded its training division course offerings with the
introduction in 1996 of an advanced level of training programs. The training
division acts in concert with the Law Enforcement sales group to generate
familiarity with the Company's product line for the Law Enforcement Market.
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 the 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.
AHI is a public company with its shares of common stock listed on the
American Stock Exchange under the symbol "ABE". It is engaged in the
manufacture, sale and marketing of ballistic resistant vests, tactical armor,
bomb disposal equipment, less-lethal munitions and anti-riot products and
providing security planning, advisory, and management services.(See "Acquisition
Proposal", "Management Discussions and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources" and "Subsequent Events").
COMPETITION
The Company faces intense competition in both the Consumer and Law
Enforcement Markets.
Domestically, there continues to be a number of companies marketing
defense sprays to civilian consumers. While the Company continues to offer
defense spray products that Management believes distinguish themselves through
brand name recognition, superior product features and formulations and research
and development, the Consumer division has experienced a sales decline for these
products. The Company attributes this decline not only to the strong
competition, but also to lower demand in general. In an attempt to reverse these
factors, the Company has entered the retail market with its new Mace Security
Centers(TM) in Denver, Colorado and anticipates selling its first franchised
Mace Security Center(TM) in 1998.
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The Law Enforcement Market is also highly competitive. The number of
competitors has expanded. Additionally departmental bidding processes and
related sales expenses continually put pressure on pricing and margins. Gross
profit margins in the Law Enforcement division have steadily declined. In 1996
the gross profit margin was 33.5% and in 1997 it was 24%. The Company believes
that it would be in its best interests to sell this division and to concentrate
its efforts on expanding its presence in the Consumer retail market through
Company owned and franchised Mace Security Centers(TM) and investing in
attractive opportunities that may be anticipated to provide reasonable growth,
which opportunities may not be consistent with the historical business of the
Company. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations").
PRODUCTION
The Company has expanded its production line in Bennington, Vermont since
1994 with the transfer of the Federal Laboratories(R) production operations from
Saltsburg, Pennsylvania. Substantially all of the Company's manufacturing
processes are now performed at the Company's Bennington facility.
The Company's Law Enforcement and Consumer defense spray products are
manufactured on one of three aerosol filling machines. Most Consumer Market
products are packaged in sealed, tamper resistant "clamshells."
Production equipment for the Company's chemical munitions is expansive and
consists of: spin welders, presses, volumetric feeders, a prime, powder and wad
machine, a pneumatic black powder loader, silkscreen machines, crimpers and
vacuum heat sealers, among others.
The KinderGard(R) product line is primarily manufactured by an unrelated
company and packaged off-site with the finished goods transferred to the Vermont
facility for distribution. Operating results of the KinderGard(R) product line
are immaterial at this time.
The Company relies on domestic and foreign contractors to supply chemicals
for its defense sprays and chemical munitions and to manufacture certain other
components for its Law Enforcement division products. There are numerous
potential suppliers of the chemicals, components and parts required in the
Company's production process.
The Company has developed strong beneficial long-term relationships with
many of its suppliers including the following: Allplax, Inc., Moldamatic, Inc.,
Piper Impact, Inc., Amber International, Inc. and Springfield Printing, Inc.
In addition, the Company purchases for resale a variety of products
produced by others including gas masks, launchers, whistles, alarms, flashers,
and window locks, among others. With the addition of the Mace Security
Centers(TM), the products purchased for resale through those retail outlets will
include home security systems, child monitors, cellular phones and pagers and
other security devices. There are numerous suppliers available for each of these
items.
MAJOR CUSTOMERS
The Company's top ten customers represented approximately 39.8% of the
total net sales in 1997. No single customer accounted for over 10.6% of those
sales.
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TRADEMARKS/PATENTS
The Company began marketing products in 1988 under the Mace(R) brand name
and related trademarks pursuant to an exclusive license for sales of defense
sprays to the Consumer Market in the continental United States, and a
non-exclusive license for sales to the Consumer Market worldwide. The license
agreement was renegotiated in 1992 to include a purchase option. The Company
exercised this option and purchased outright the Mace(R) brand name and related
trademarks (Pepper Mace(R), Chemical Mace(R), Mace . . . Just in Case(R), CS
Mace(TM) and Magnum Mace(TM)). In conjunction with this purchase, the Company
acquired a non-exclusive worldwide license to promote a patented pepper spray
formula in both markets. There are approximately six years remaining on the
license.
The Company acquired a patent and trademark to the Big Jammer(R) door
brace, as part of its purchase of the assets of Home Protection Concepts, Inc.,
in July 1991.
In 1995, the Company developed the trademark Cool-It!(TM) decontamination
spray. The Company also developed internally the trademarks: Window Jammer(TM),
Sonic Alert(TM), Safety Flasher(TM), Sport Strobe(TM), Child Safe Alarm(TM),
Window Alert(TM), Motion Alert(TM), Emergency Whistle(TM), and Auto Alert(TM).
The Company markets products manufactured by other companies under the foregoing
trademarks. The Company also acquired the trademarks Screecher(R),
Peppergard(R), Slam(R), and Mace (Mexico)(R).
The Company developed the Viper(R) trademark in 1993. In August 1993, the
Company acquired an exclusive worldwide license to the patent for the safety top
device used on the Viper(R) brand defense spray. The Company no longer sells
products under the Viper(R) brand.
As part of the March 1994 acquisition of the assets of the Federal
Laboratories division from TransTechnology Corporation, the Company acquired the
following trademarks: Federal Laboratories(R), TG Guard(TM), Guard(TM),
Triple-Chaser(R), Skat Shell(R), Ferret(R), Mini-Streamer(R) and MPG(TM). The
Company markets many products of its Law Enforcement division under the Federal
Laboratories(R) brand.
In June 1994, as part of a license for a defense spray disarming device,
the Company acquired a co-exclusive license to manufacture and sell products
under U.S. Patent No. 5,310,086 until the expiration of the last patent covering
the invention. The Company does not intend to market products using this patent.
As part of the August 1994 acquisition of the assets of KinderGard
Corporation, the Company acquired the trademark KinderGard(R) which is
registered in the United States and Japan.
As part of a January 1995 license agreement for a child-to-parent strap,
which is part of the KinderGard(R) line, the Company acquired the following
trademarks: Zip-a-Babe(R), Hand n-Hand(R) and Safe-T-Zip(R).
The Company received trademark registration for Muzzle(R) in Canada on
June 17, 1997.
The Company has been issued letters patent on the locking mechanism for
the Mark VI defense spray unit.
Except as described above, the Company holds no material patents or patent
licenses, although it endeavors to maintain the confidentiality, as trade
secrets, of certain formulations and processes.
An essential part of the Company's business strategy has been to
capitalize on, promote aggressively, and
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enhance the public's awareness and confidence in the Mace(R) trademark. The
Company relies on the trademark laws to protect its proprietary rights to the
Mace(R) trademark. The Company uses a newspaper clipping service to identify
significant unauthorized uses of the Mace(R) trademark and provides notice to
such users of the Company's willingness to take legal action for continued
unauthorized use. The Company also engages in trademark advertising in several
literary publications. All of the Company's distributors are authorized to use
the Mace(R) trademark for advertising. The Company is not aware of any
competitors repeatedly misusing the Mace(R) trademark in any material manner.
There can be no assurance, however, that the efforts taken by the Company to
protect its proprietary rights are or will be adequate to prevent
misappropriation or that the frequent use of the Mace(R) trademark by the public
as an encompassing description of defense sprays will not jeopardize its
proprietary status. The Company hopes that the license to AHI to use the Mace(R)
trademark on products sold to the Law Enforcement Market will continue the high
profile and market recognition to enhance the value of the Mace(R) brand name
(See "Acquisition Proposal", "Management Discussions and Analysis of Financial
Condition and Results of Operations, Liquidity and Capital Resources" and
"Subsequent Events").
REGULATORY MATTERS
The distribution, sale, ownership and use of Consumer defense sprays are
legal in all 50 states and the District of Columbia. On January 1, 1996,
California eased restrictions on defense sprays. On November 1, 1996, New York
lifted an overall ban on defense sprays allowing for the sale of oleoresin
capsicum (OC) pepper sprays in licensed pharmacies and licensed gun stores only.
Massachusetts requires both users and sellers to be licensed. Wisconsin allows
the sale of oleoresin capsicum (OC) pepper sprays only and they must be sold
from behind a counter or under glass. Michigan does not permit sales of
chloroacetophenone (CN) sprays. Nevada permits sales of
orthochlorobenzalmalononitrile (CS) sprays only. The Company has been successful
notwithstanding these state regulations. There can be no assurance, however,
that broader, more severe restrictions will not be enacted that would have an
adverse impact on the Company's financial condition.
The Company generates hazardous waste as a by-product of manufacturing
certain products of its Law Enforcement division. The Company believes that it
is in compliance with all state and local statutes governing the disposal of
such hazardous material through its contract with a licensed hazardous material
disposal company. The disposal of hazardous waste expense is not a significant
cost of manufacturing.
The Company has constructed a self-contained testing chamber for its
products which is located inside its Bennington, Vermont facility.
In early 1997 the Company completed the installation of the air filtration
and recirculation equipment in its manufacturing facility. The Company believes
it is in compliance with all federal, state, and local environmental laws.
RESEARCH AND DEVELOPMENT
Research and development expenses were approximately $81,000 in 1997 and
$53,000 in 1996. The Company has an on-site laboratory.
Research and development is used by the Company to maintain its reputation
in the defense spray and chemical munitions industries. The Company is
continually reviewing ideas and potential licensing arrangements to expand its
product lines. Particularly, the Company spent a significant portion of its 1997
research and development budget in the creation of MaceCash(TM) and other Mace
Anti Crime Bureau products.
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EMPLOYEES
As of April 8, 1998, the Company employed 90 individuals of whom 3 were
part time. The Company's employees are not subject to a collective bargaining
agreement.
ACQUISITION PROPOSAL
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) brand and relating 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.
AHI is a public company with its shares of common stock listed on the
American Stock Exchange under the symbol "ABE". It is engaged in the
manufacture, sale and marketing of balistic resistant vests, tactical armor,
bomb disposal equipment, less-lethal munitions and anti-riot products and
providing security planning, advisory, and management services. (See "Management
Discussions and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" and "Subsequent Events").
A consent solicitation statement describing the proposed transaction will
be sent to all shareholders of record as of April 1, 1998. Jon E. Goodrich, the
Company's President and Chief Executive Officer has entered into an agreement
with AHI pursuant to which he has agreed to vote, or submit a consent with
respect to, all of his shares of the Company (2,259,246 shares constituting
approximately 32% of the Company's outstanding stock) in favor of the
Transaction.
ITEM 2. PROPERTIES
The Company leases its headquarters in Bennington, Vermont. Substantially
all of the Company's operations, including administration and sales, and
virtually all of its production facilities are located at the Bennington
facility. The facility consists of approximately 220,000 square feet; 60,000
square feet is referred to as the South Wing of the Holden-Leonard Mill (the
"South Wing") and is leased from one landlord while the remaining 160,000 square
feet is leased from another owner (made up of the "Center Wing" and "North
Wing"). The Company acquired from G&G Realty Inc. a purchase option with respect
to the South Wing and has entered into a real estate purchase agreement with the
Vermont Economic Development Authority for the Center and North Wings.
The term of the South Wing 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 purchase option
may be exercised for $600,000 at the end of the lease term.
The purchase agreement with respect to the Center and North Wings
contemplates that the Company will purchase the property for $1,000,000 after
certain contingencies are satisfied, including specific environmental
contingencies to be met by the seller. If these contingencies are not
satisfactorily met or waived, the Company has a right to lease the Center &
North Wings through August 2007. The lease requires monthly payments of $4,000
together with all utilities, assessments, taxes and maintenance. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" and Note 10 to "Notes to Financial
Statements").
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The Company subleases a portion of the South and North Wings of the
Holden-Leonard Mill. One of the sublease agreements is with a tenant owned
partially by Jon Goodrich, the Company's President and CEO. Rental income from
this tenant was $24,000 in both 1996 and 1997. Total sublease rental income was
$93,231 and $65,160 in 1997 and 1996, respectively.
The Company does not have any current plan to invest in other real estate,
however, the Company may invest in various parcels of real estate from time to
time without stockholder approval.
The Company believes that all of its properties are adequately covered by
insurance and believes its properties are suitable and adequate for its current
and near term needs.
ITEM 3. LEGAL PROCEEDINGS
The following discloses all pending litigation against the Company, other
than routine ligitation, involving claims for damages in excess of $730,000,
which constitutes ten (10%) percent of the Company's current assets at December
31, 1997, and also discloses the disposition of claims previously disclosed.
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. 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. The Company does not
anticipate that this claim will result in the payment of damages in excess of
the Company's insurance coverage.
On August 10, 1995, a suit was filed by B.P. Apparel, Inc., Easley, South
Carolina, in the Court of Common Pleas, County of Lexington, South Carolina. The
Complaint alleged breach of contract, fraud and negligent misrepresentation by
the Company as a result of the actions of a Company employee in facilitating the
sale of an airplane formerly leased by the Company from G&G Realty, Inc.,
Lillington, North Carolina. The plaintiff sought damages in the amount of
$200,000 as well as punitive damages and attorney's fees. This case was
dismissed June 3, 1997.
Although the Company is not aware of any substantiated claim of permanent
personal injury from its products, the Company is aware of reports of incidents
in which, among other things, defense sprays have been mischievously or
improperly used, in some cases 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the NASDAQ Stock Market under the
symbol MACE.
The following table sets forth for the calendar periods indicating the
high and low sales price for the Common Stock for each quarter within the last
two fiscal years.
QUARTER ENDED HIGH LOW
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March 31, 1996 1 3/4 3/4
June 30, 1996 1 3/4 1
September 30, 1996 2 1/4 1
December 31, 1996 1 5/8 1
March 31, 1997 1 3/4 1 1/8
June 30, 1997 1 3/8 7/8
September 30, 1997 1 5/16 25/32
December 31, 1997 1 1/4 7/8
March 31, 1998 1 9/16 7/8
The past performance of the Company's securities is not necessarily
indicative of future performance.
As of April 8, 1998, there were approximately 245 holders of record of the
Company's Common Stock.
The Company has not paid cash dividends on its Common Stock since its
initial public offering. The Company's current bank financing imposes certain
restrictions on the Company's ability to pay dividends. Payment of dividends, if
any, will be at the discretion of the Company's Board of Directors and will
depend on, among other factors, earnings, bank restrictions, capital
requirements and the results of operations and financial condition of the
Company. The Company does not intend to pay dividends in the foreseeable future.
Pursuant to Part III, Section 5(a)(5), of Schedule D of the NASD By-Laws,
to remain eligible for continued inclusion on the NASDAQ Stock Market, among
other things, a security must have a bid price of at least $1.00 per share, the
Company's net tangible assets must be at least $4,000,000 and the market float
(all outstanding shares other than those held by directors, officers, related
parties and persons or entities holding 10% or more of the outstanding shares)
must be as least $5,000,000. To the extent these requirements are not satisfied,
the security is subject to being removed from the NASDAQ Stock Market and listed
on the NASDAQ Small Cap Market.
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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
strength 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 to 27.3%
in 1997 from 24.1% in 1996 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 as a result of additional promotional expenses for the newly acquired
Company owned stores and MaceCash(TM).
Operating loss as a percentage of net sales increased to 17.2% in 1997
from 2.3% in 1996.
Other income/expense(net) was income of $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")
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The Company is currently considering acquisition opportunities in the
event the Transaction with AHI is consumated. Acquisitions will be necessary to
fill the void from the disposal of the Company's Law Enforcement division.
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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 early 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 the financial ratio 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") 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 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.
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.
For the year ended December 31, 1997, capital expenditures were $238,726
compared to $304,403 in 1996. In 1998 the Company intends to open a fourth Mace
Security Center (TM) in the Denver area. Capital outlay for the store is
estimated at $200,000.
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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. ("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.
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. 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 utilize the Mace(R)
brand and other related trademarks in the law enforcement market only, which is
made up of law enforcement, military, correctional and certain governmental
agencies. The assets of the law Enforcement division constitute a substantial
part 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
$2,636,526 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, 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.
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ITEM 7. FINANCIAL STATEMENTS
Financial Statements filed as a part of this report:
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
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 13, 1997, at the direction of its Board of Directors, the
Company advised Coopers & Lybrand, LLP ("Coopers") that due to cost containment
efforts, its engagement of Coopers as its independent public accountants was
terminated, subject to ratification by the Company's shareholders. The Company's
Board of Directors engaged Urbach Kahn & Werlin PC as its new independent public
accountants, to be finally effective upon shareholder approval.
The Company's decision to dismiss Coopers was based solely on cost
considerations. There were no disagreements with Coopers on any matter of
accounting principles or practices, financial statement disclosure or otherwise.
None of the Company's financial statements contained an adverse opinion or
disclaimer of opinion.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons are directors and officers of the Company as of April 8,
1998.
Name Age Title
- ---- --- -----
Marvin P. Brown .................68 Chairman of the Board
Jon E. Goodrich..................52 CEO, President and Director
Mark A. Capone...................49 CFO, Treasurer, Vice President of Finance
Bernard D. Graney, Jr............37 Vice President of Operations, Secretary
Kenneth J. Blakey................53 Vice President of Sales
Howard S. Edelman................62 Director, Vice President of Franchising
Virginia de Ganahl Russell.......66 Director
Neil J. Campolungo...............58 Director
Lewis Cohen......................48 Director
R. David Garwood.................56 Director
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Marvin P. Brown was elected President, Chief Executive Officer, and
director of the Company in January 1997. On March 14, 1997, Mr. Brown resigned
as President and CEO and assumed the position of Chairman of the Board. Since
1993 he has been associated with Wolff Investment Company, Inc., a brokerage
firm member of the National Association of Securities Dealers, Inc., as Director
of Corporate Finance and Senior Vice President. From 1988 through 1992 he had
been a senior vice president of Tucker Anthony, a member of the New York Stock
Exchange. Prior to that period, he had held senior officer positions with
various members of the New York Stock Exchange. He also has served as president
of Zenith Laboratories, Inc., formerly a leading independent manufacturer of
generic pharmaceuticals from 1968 to 1969. Wolff Investment Group, Inc. has
served as a financial consultant to the Company on several occasions from 1993
to 1996. (See "Certain Relationships and Related Transactions" and
"Employment/Consulting Contracts and Termination of Employment and
Change-In-Control arrangements").
Jon E. Goodrich served as Chairman of the Board of Directors of the
Company from its inception in 1987 until June 1995. He served as President of
the Company from its inception until January 15, 1996 when he tendered his
resignation and was renamed Chairman of the Board. On March 14, 1997, he was
reappointed as President and CEO and resigned as Chairman of the Board. He was
also a vice president of Gould & Goodrich Leather, Inc., a manufacturer of
holsters, belts and related products and president of G&G Realty, Inc., a real
estate management corporation until January of 1997 when he resigned from his
positions and terminated his interest in both companies. (See "Certain
Relationships and Related Transactions" and "Employment/Consulting Contracts and
Termination of Employment and Change-in-Control Arrangements").
Mark A. Capone, a CPA, was employed by the Company on September 2, 1997,
as the Company's Chief Financial Officer, and holds the titles of Vice President
of Finance and Treasurer of the Company. Prior to joining the Company, Mr.
Capone operated his own accounting firm providing business consulting and tax
preparation services. He has over 25 years experience in the accounting
profession which includes holding a Senior Financial position with International
Paper Company. Mr. Capone is responsible for all of the Company's accounting and
treasury functions, as well as corporate development.
Bernard D. Graney, Jr., is Vice President of Operations. He has been
employed by the Company for more than five years and has, during that time, held
a variety of managerial positions. He served as the Company's Secretary from
August 1993 until June 1995 and was reappointed Secretary on March 14, 1997.
Kenneth J. Blakey, is Vice President of Law Enforcement Sales. He has been
employed by the Company since 1994. Prior to joining the Company he was employed
by TransTechnology Corporation as the International and Domestic Law Enforcement
Sales Director of the Federal Laboratories division for at least 5 years prior
to joining the Company. Prior to that he was domestic sales manager for Smith &
Wesson chemical company - tear gas division.
Lewis C. Cohen has been a director of the Company since August 7, 1997.
Mr. Cohen is the president and sole shareholder of Apahouser Access Systems,
Inc. since 1976. Apahouser Access Systems, Inc. supplies and services security
hardware and electronic systems to industry, institutions and governmental
entities throughout New England and in the Middle East. Mr. Cohen also serves as
Treasurer and is on the Boards of Trustees of Sterling College in Vermont, the
Corporation at Babson College, Wellesley, Massachusetts, the Institute for
Community and Religion at Brandeis University and the National Foundation for
Jewish Culture.
Neil J. Campolungo has been a director of the Company since May 10, 1997.
Since 1992, has been the Chief Executive Officer and sole shareholder of NJC
Associates, a consulting/marketing firm providing various sales, marketing,
business development, training and entrepreneurial programs to public and
private sector companies. From 1991 to 1996 he was the Division President of
Prentice Hall Legal & Financial Services, a Fortune 500 company. Prior to that
time he served in various senior management positions at Infosearch, Inc., which
was sold
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to Paramount Communications.
Howard S. Edelman became a director on September 26, 1997. Mr. Edelman, a
CPA, has been employed by the Company since July 1, 1997 in connection with the
acquisition by the Company of MSP, Inc., an importer and distributor of unique
pepper sprays and related personal protection products primarily to civilian
overseas markets, entrepreneurs, small retail stores and mail order catalog
firms. Since September 26, 1997, Mr. Edelman has been serving as Vice President
of Franchising, and in that capacity is responsible to develop and manage the
Company's franchise program. Mr. Edelman was the president, a director and major
stockholder of MSP, Inc. (Formerly known as Global International Security
Products) from 1990 until its acquisition by the Company (See "Certain
Relationships and Related Transactions").
R. David Garwood was appointed as a director of the Company on February
27, 1998 to fill a vacancy created when the Board of Directors resolved to
increase the size of the Board to seven members. Mr. Garwood is, and has been
since 1974, the president and founder of R. D. Garwood, Inc., a management firm
based in Atlanta, Georgia that assists manufacturing and marketing firms. Mr.
Garwood's clients include Coca-Cola, Eastman Kodak, Sara Lee, Georgia Pacific,
M&M, Monsanto and others.
Virginia de Ganahl Russell was appointed a director in January 1997. Ms.
Russell, who previously had served as a director of the Company in 1995, is
president of the Vermont Source of National Elegance, a leading nationwide
marketer of marble products. Ms. Russell is Chairman of the Board of the Vermont
Leadership Center of East Charleston, VT and is a member or serves on the board
of various organizations, including the Vermont Chamber of Commerce.
BOARD OF DIRECTORS
The number of directors on the Board is currently fixed at seven. Each
director serves for a term of one year or until a successor is elected and
qualified. Officers are appointed by, and serve at the discretion of, the Board
of Directors. No director missed more than two board meetings held during 1997.
The Chairman receives a fee of $750 and each director $500 per day plus
out of pocket travel, meals and lodging expenses for attendance at each board
meeting. Messrs. Brown , Goodrich and Edelman have waived their right to the
fees. All directors, other than Messrs. Brown and Goodrich have been granted
options to purchase 10,000 shares of Common Stock. In addition, in the event all
or substantially all of the assets of the Company are sold, as would be the case
in the event the Company sells its Law Enforcement division to AHI (see
"Business" and "Subsequent Events") all directors, including Messrs. Brown and
Goodrich, will receive additional options to purchase 10,000 shares.
The Board of Directors has the following standing Committees, among
others: the Audit Committee, the Compensation Committee, the Planning Committee
and the Nominating Committee. The Audit Committee consists of Messrs. Brown,
Cohen and Campolungo. The Audit Committee recommends matters involving the
engagement and discharge of independent auditors, reviews the plans for and
results of the Company's procedures for internal auditing, and reviews the
continuing status of the Company's system of internal accounting controls. The
Compensation Committee consists of Messrs. Brown and Cohen, and Ms. deGanahl
Russell and makes recommendations regarding management compensation and
administers the Company's Non-qualified Stock Option Plan. The Planning
Committee consists of Messrs. Goodrich, Cohen and Ms. deGanahl Russell and is
responsible for recommending long-term strategies to the Board. The Nominating
Committee recommends persons to serve as directors of the Company and consists
of Messrs. Brown and Goodrich.
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Mr. Brown and the Company have a verbal agreement pursuant to which Mr.
Brown provides executive services to the Company on an as needed basis and
receives a salary of $500 per day and reimbursement of business expenses.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based solely on a review of Forms 3 and 4 and amendments thereto furnished
to the Company during its fiscal year ended December 31, 1997, no person (other
than Messrs. Gould, Goodrich and Capone) known to be a director, officer or the
beneficial owner of more than 10% of the Company's outstanding Common Stock,
failed to file on a timely basis, reports required to be filed by Section 16(a)
of the Exchange Act during the most recent fiscal year. All such reports have
since been filed. Mr. Gould, a former director and significant shareholder, no
longer owns more than 10% of the Company's outstanding stock.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the aggregate compensation, cash and
non-cash, awarded to, earned by or paid by the Company to all persons who served
as its Chief Executive Officer at any time during the most recent fiscal year.
No other executive officers received annual compensation (consisting solely of
base salary and bonus, if any) in excess of $100,000 for the year ended December
31, 1997:
Summary Compensation Table
Year
Ended Annual Other
Name and Principal Position December 31 Salary Bonus Compensation
- --------------------------- ----------- ------ ----- ------------
Jon E. Goodrich(1) 1997 $125,214 $ --
President and Chief 1996 124,023 $25,000 --
Executive Officer 1995 161,000 -- --
Robert D. Norman(2) 1997 $ 54,615 $ -- --
Former President and Chief 1996 71,655 -- $27,800(3)
Executive Officer 1995 -- -- --
Marvin Brown(4) 1997 $ 70,000 $ -- --
Chairman of the Board, 1996 -- -- --
Former CEO and President 1995 -- -- --
(1) Mr. Goodrich served as President and CEO until January 15, 1996, and, for
the remainder of 1996, served as an advisor to the Board of Directors. He
was reappointed as President and CEO on March 14, 1997.
(2) Tendered his resignation effective 1/10/97.
(3) Represents the issuance of 20,000 shares of the Company's common stock in
connection with his employment as President, valued at $1.39 per share.
(4) Mr. Brown served as President and CEO from January 10, 1997 to March 14,
1997, and continued to serve as the President's Advisor throughout 1997.
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Options/Warrants
In September 1993, the Board of Directors of the Company adopted the Mace
Security International, Inc. Non-qualified Stock Option Plan (the "Plan"), which
was approved by the stockholders of the Company. The Plan provides for the
issuance of up to 630,000 shares of Common Stock upon exercise of the options.
The options are considered 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, former employees, directors and
distributors for, and consultants to, the Company. The term of each option may
not exceed fifteen years from the date of grant. Immediately exercisable options
to purchase approximately 437,800 shares of Common Stock were outstanding to
employees, former employees, consultants, and former directors as of December
31, 1997 under the Plan. To date no options have been exercised.
The following table shows certain information with respect to options
granted in 1997 to the named current and former executive officers of the
Company.
Options Granted in last Fiscal Year
Number Percentage Exercise Expiration
Name of Options of Total Price Date
- ---- ---------- ---------- -------- ----------
Jon E. Goodrich --- --- --- ---
Marvin P. Brown 100,000 61.5% $1.50 5/10/12
Robert D. Norman --- --- --- ---
The following table shows certain information with respect to the year-end
value of options held by the named current and former executive officers of the
Company. No options were exercised during 1997.
Fiscal Year-End Option Values
Value of Unexercised
Number of Unexercised In the Money
Name Options at 12/31/97(1) Options at 12/31/97(2)
- ---- --------------------- ----------------------
Jon E. Goodrich ----- -----
Robert D. Norman(3) 10,000 $0
Marvin P. Brown(4) 100,000 0
(1) All options are immediately exercisable
(2) Based upon a 12/31/97 closing price of $.875 per share
(3) Options issued in connection with his role as a director
(4) Options issued in connection with his role as the former President and CEO
In connection with the Company's initial public offering, the Company
granted C.L. King & Associates, Inc., its underwriter, warrants to purchase
75,000 shares of the Company's Common Stock at a per share exercise price of
$6.60, and certain "demand" and "piggyback" registration rights with respect to
such shares, for a four year period which began November 12, 1994.
In connection with the acquisition of the trademarks and assets of
KinderGard Corporation, the Company granted to the stockholders of KinderGard
Corporation warrants to purchase 60,000 shares of the Company's Common Stock at
a per share exercise price equal to $4.25 exercisable until August 2004.
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Employment/Consulting Contracts and Termination of Employment and
Change-in-Control Arrangements
Jon E. Goodrich was employed by the Company under an employment agreement
until January 1996. Thereafter he was retained as an advisor to the Board under
an advisory employment agreement. Mr. Goodrich is currently employed as
President and CEO under an employment agreement dated as of March 14, 1997. The
agreement supersedes the September 1, 1993 employment agreement between Mr.
Goodrich and the Company as well as the Advisory Employment Agreement dated as
of January 17, 1996 and is effective until September 1, 1998. Mr. Goodrich is
entitled to an annual salary of $125,000. The agreement prohibits Mr. Goodrich
from accepting employment with any other entity and further prohibits him from
competing with the Company for a two year period following his voluntary
termination of employment with the Company or termination of his employment by
the Company for cause, as defined in the agreement. Should Mr. Goodrich's
employment be terminated without cause, he would be entitled to all payments for
the term of the agreement.
Robert D. Norman, a former director, the former President and CEO and
stockholder, entered into a two-year employment agreement with the Company to
serve as President/Chief Executive Officer dated as of January 16, 1996. The
agreement provided Mr. Norman with an annual salary of $110,000, an annual bonus
equal to $1,000 for every $100,000 of net income for each fiscal quarter, and
20,000 shares of Common Stock which have been issued. Notwithstanding, Mr.
Norman agreed to an annualized salary reduction to $42,000, commencing July 1996
through December, 1996. The agreement prohibits him from competing with the
Company for a two year period following his voluntary termination of employment
with the Company or termination of his employment by the Company for cause, as
defined in the agreement. Mr. Norman resigned in January 1997 in response to a
request from the Board. Mr. Norman received his contractual severance payment
equal to fourteen weeks pay, plus an additional $25,000. Such payment was made
in recognition that his resignation was requested without cause.
Change In Control
On January 9, 1997, a voting agreement was signed representing in excess
of 51% of the Company's outstanding stock. The Agreement dated January 9, 1997,
was among Jon E. Goodrich, the Company's President and Chief Executive Officer,
Robert P. Gould, a former director and former significant shareholder, and
Marvin P. Brown, a former director and newly appointed Chairman of the Board.
The Agreement was terminated on or about December 30, 1997.
On January 10, 1997, at the request of the parties to the voting
agreement, six members of the Board of Directors (Messrs. Foote, Logan, Norman,
Duboff, Mitchell, and Rosberg), the then president, Robert D. Norman, and the
then Executive Vice President, General Counsel and Secretary, Richard Galt,
resigned; Marvin Brown was appointed as President; the size of the Board was
reduced from nine to five members and Ms. Virginia de Ganahl Russell was
appointed as a director.
On March 14, 1997, Robert Gould resigned from the Board and Jon Goodrich,
who had been acting under an advisory agreement with the Company, was reelected
to serve as President and CEO. Marvin Brown resigned as President and accepted
the position of Chairman of the Board.
On May 10, 1997, Mr. Campolungo was appointed to the Board to fill the
vacancy resulting from the resignation of Mr. Gould. On August 7, 1997, the
Board resolved to increase its size to six members and Mr. Cohen was appointed
to fill the newly created position. Mr. Edelman was elected to the Board at the
annual shareholders' meeting on September 26, 1997. Mr. Garwood was appointed to
the Board on February 27, 1998, to fill a vacancy created when the Board of
Directors resolved to increase the size of the Board to seven members.
On March 17, 1998, Jon E. Goodrich entered into a voting agreement with
AHI pursuant to which he agreed to vote all of his shares (2,259,246 shares,
constituting approximately 32% of the Company's outstanding stock) in
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favor of the Transaction and, to secure his agreement, granted to AHI a proxy to
submit a consent on his behalf in connection with the Transaction pursuant to
the consent solicitation to be distributed to all shareholders of record on
April 1, 1998 (See (See "Acquisition Proposal", "Management Discussions and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources" and "Subsequent Events").
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 8, 1998 certain information
with respect to beneficial ownership of the Common Stock of the Company (the
only outstanding security) by each director, each executive officer and all
directors and executive officers as a group and by each person known by the
Company to be the beneficial owner of more than five percent of the Company's
Common Stock. The address for all executive officers and directors is 160
Benmont Avenue, Bennington, Vermont
Amount and Nature Of
Owner Beneficial/Ownership Percent(1)
- ----- --------------------- ----------
Jon E. Goodrich(2) 2,259,246 31.9%
Marvin P. Brown(3) 370,388 5.2%
Neil J. Campolungo(4) 20,000 *
Mark Capone(5) 15,000 *
Lewis C. Cohen(4) 46,000 *
Howard Edelman(4),(6) 118,000 1.6%
R. David Garwood(4) 10,000 *
Virginia de Ganahl Russell(4) 50,000 *
Kenneth J. Blakey(4) 30,000 *
Bernard D. Graney, Jr.(4) 10,000 *
Timothy D. Smith(4) 10,000 *
All executive officers and
directors as a group (11 persons) 2,816,634(7) 38.1%
Ronald I. Heller(3) 695,375 9.8%
M. H. Meyerson & Co., Inc.
525 Washington Blvd., 34th Floor
Jersey City, NJ 07310
David S. Nagleberg(9) 695,375 9.8%
M.H.Meyerson & Co., Inc.
525 Washington Blvd., 34th Floor
Jersey City, NJ 07310
TransTechnology Corporation 580,000 8.2%
700 Liberty Avenue
Union, New Jersey 07083
*Indicates beneficial ownership of less than 1%
(1) Calculation based on 7,081,666 outstanding shares plus shares issuable to
the named person under options exercisable within 60 days.
(2) Excludes shares held by the named persons' spouses. The named directors do
not have shared voting or dispositive power with respect to such shares.
(3) Includes immediately exercisable options to purchase 100,000 shares of
Common Stock granted by the Company and options to purchase 100,000 shares
from each of two private individuals.
(4) Includes immediately exercisable options to purchase 10,000 shares of
Common Stock.
(5) Includes immediately exercisable options to purchase 15,000 shares of
Common Stock.
21
<PAGE>
(6) Includes 80,000 shares paid in connection with the acquisition of MSP,
Inc., which are held in escrow and subject to a put option by the Company
in the event MSP Inc. does not achieve certain pre-tax profit goals, and
options to purchase 20,000 shares of the Company's common stock issued in
connection with Mr. Edelman's employment agreement with the Company. (See
"Certain Relationships and Related Transactions"). These options are
subject to forfeiture in the event MSP, Inc. does not achieve certain
pre-tax profit goals.
(7) The denominator for this calculation is 7,396,666, which includes shares
underlying options held by directors and executive officers that are
exercisable within 60 days but excludes 100,000 shares underlying options
granted to Mr. Brown by Mr. Goodrich to avoid double counting.
(8) Includes shares held by the named person's spouse over which the names
person disclaims beneficial ownership.
(9) Includes 695,375 shares held by a trust for which the named person and his
spouse are the trustees.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Brown, who serves as Chairman of the Board, and the Company have a
verbal agreement pursuant to which Mr. Brown provides executive services to the
Company on an as needed basis and receives a salary of $500 per day and
reimbursement of business expenses.
The Company has entered into an employment agreement with Mr. Edelman, a
Vice President of the Company and a director, pursuant to which Mr. Edelman is
responsible to develop and manage a franchise program for the Company. The
agreement is dated as of July 1, 1997, has a one-year term and provides Mr.
Edelman with an annual salary of $78,000 plus options to purchase 20,000 shares,
exercisable for a five year period commencing with the one year anniversary of
his agreement at an exercise price of $1.25. The options are subject to
forfeiture in the event MSP, Inc., a subsidiary acquired from Mr. Edelman, does
not achieve certain pre-tax profit goals. In the event the pre-tax profit of
MSP, Inc. exceeds certain goals, Mr. Edelman is entitled to receive additional
options to purchase the Company's common stock.
In January 1997, the Company retained the law firm of Donovan & O'Connor,
LLP, a firm at which Mr. Goodrich's brother is a principal, to render legal
services in litigation matters and general corporate matters. The Company paid
$54,354 to such firm in fiscal year ended December 31, 1997.
The Company believes that all transactions with related individuals and
entities were on terms at least as favorable to the Company as those that would
have been reached with unrelated third parties.
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 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 $1,750,000 of the purchase
price received to pay off the amount due to FNB under its term loans. 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. (See "Acquisition Proposal" and "Management
Discussions and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital
22
<PAGE>
Resources").
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 assets of the law Enforcement division constitute a substantial
part 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, 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.
23
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1997.
(b) Exhibits
3(i) Articles of Incorporation - Vermont(1)
3(i)2 Articles of Incorporation - Delaware(1)
3(i)3 Merger Agreement(1)
3(i)4 Certificate of Amendment for Name Change(1)
3(ii) By-Laws(1)
3(ii)2 Amendment No. 1 to By-Laws, effective 11/12/93(1)
3(ii)3 Amendment No. 2 to By-Laws, effective 2/24/96(5)
9.1 Shareholders Voting Agreement between 321 Investments, Inc.,
Rajan Shamdasani, Jon E. Goodrich, Robert P. Gould and
Robert D. Norman dated March 22, 1996(5)
10.1 Employment Agreement between the Company and Jon E. Goodrich
dated as of September 1, 1993(1)
10.2 Consulting Agreement between the Company and Robert P. Gould
dated as of September 1, 1993(1)
10.3 1993 Non-Qualified Stock Option Plan(1)
10.4 Form of Underwriter Warrants(1)
10.5 Form of Selected Dealers Agreement(1)
10.6 Sales Agreement dated May 1, 1992 between the Company and
Mosler Inc.(1)
10.7 Purchase and Sales Agreement dated July 19, 1991 between the
Company and Home Protection Concepts, Inc.(1)
10.8 Purchase and Sales Agreement dated April 1, 1993 between the
Company and Personal Protection Consultants, Inc.(1)
10.9 Purchase Agreement between the Company and Defense
Technology Corp. of America dated October 24, 1992(1)
10.10 Amendment to Purchase Agreement of October 24, 1992 between
Defense Technology Corporation of America and the Company
dated as of August 15, 1993(1)
10.11 Purchase and Sales Agreement between the Company and
Personal Security, Inc., dated as of July 1, 1993(1)
10.12 Purchase and Sale Agreement between the Company and Messrs.
Diamond and Helmrich, dated August 16, 1993(1)
10.13 Lease Agreement between the Company and G&G Realty, Inc.
10.14 Form of Lock-up Agreement(1)
10.15 Term Loan with Vermont National Bank(1)
10.16 Working Capital Line of Credit with Vermont National Bank
for $500,000(1)
10.17 Loan with Vermont National Bank for $400,00
10.18 Guarantees of Messrs. Gould and Goodrich under the loans
with Vermont National Bank(1)
10.19 Waiver/amendment of capital expenditure limitation contained
in the term loan agreement with Vermont National Bank(1)
24
<PAGE>
10.20 Amended and Restated Employment Agreement between the
Company and Jon E. Goodrich(1)
10.21 Aircraft Lease dated as of June 1, 1993 between the Company
and G&G Realty, Inc.(1)
10.22 Trademarks(1)
10.23 Amendment No. 1 to Amended and Restated Employment
Agreement(1)
10.24 Asset Purchase Agreement between the Company and
TransTechnology Corporation dated March 1, 1994(2)
10.25 Agreement for Sale between KinderGard Corporation and Mace
Security International, Inc.(3)
10.26 Consulting Agreement between Sheldon Hibbard and Mace
Security International, Inc.(3)
10.27 Consulting agreement between P.D.M. Corporation and Mace
Security International, Inc.(3)
10.28 Warrants in connection with the acquisition of the assets of
the KinderGard Corporation(3)
10.29 Purchase and Sale Agreement between Robert Mainhardt and
Mace Security International, Inc.(3)
10.30 Consulting and Sales Representative Agreement between Robert
Mainhardt and Mace Security International, Inc.(3)
10.31 License Agreement between Robert MainhardtMace Security
International, Inc.(3)
10.32 Assignment and Assumption Agreement between G&G Realty, Inc.
and Mace Security International, Inc.(3)
10.33 Lease Agreement and Option to Purchase between G&G Realty,
Inc. and James Comi and Rhoda Comi(3)
10.34 Real Estate Purchase Agreement between Vermont Economic
Development Authority and Mace Security International, Inc.(3)
10.35 Consulting Agreement effective April 1, 1994 between Robert
R. Rosberg and Mace Security International, Inc.(4)
10.36 Supplemental Agreement effective January 1, 1995 between
Robert R. Rosberg and Mace Security International, Inc.(4)
10.37 Aircraft Lease effective June 1, 1994 between G&G Realty,
Inc. and Mace Security International, Inc.(4)
10.38 Aircraft Lease Termination Agreement effective March 31,
1995 between G&G Realty, Inc. and Mace Security
International, Inc.(4)
10.39 Line of Credit Note for $1,500,000 with Vermont National Bank(5)
10.40 Term Note for $1,500,000 with Vermont National Bank(5)
10.41 Security Agreement with Vermont National Bank(5)
10.42 Advisory Employment Agreement between Mace Security
International, Inc. and Jon E. Goodrich, dated as of January 17,
1996(6)
10.43 Employment Agreement between Mace Security International,
Inc. and Robert D. Norman, dated as of January 16, 1996(6)
10.44 Letter of Intent between Mace Security International, Inc.
and Gould & Goodrich Leather, Inc., dated March 22, 1996(6)
10.45 Letter of Intent between Mace Security International, Inc.
and 321 Investments, Inc., dated March 22, 1996(6)
10.46 Letter of Intent between Mace Security International, Inc.
and Rajan Shamdasani, dated March 22, 1996(6)
10.47 Employment Agreement between the Company and Richard A. Galt
dated as of August 22, 1996(7).
10.48 Amendment 1 to Employment Agreement between the Company
25
<PAGE>
and Richard A. Galt dated as of August 22, 1996(7).
10.49 Employment Agreement between the Company and Richard A. Galt
dated as of January 22, 1997.(8)
10.50 Amendment 1 to Employment Agreement between the Company and
Richard A. Galt dated as of January 22, 1997.(8)
10.51 Employment Agreement between the Company and Jon E. Goodrich
dated as of March 14, 1997.(8)
10.52 Loan Agreement between the Company and KeyBank National
Association dated March 31, 1997.(8)
10.53 Waiver and Modification of Loan Agreement between the
Company and KeyBank National Association dated April 11,
1997.(8)
10.54 Line of Credit Agreement between the Company and Marvin
Brown dated April 14, 1997.(8)
10.55 Line of Credit Agreement between the Company and Jon E.
Goodrich dated April 14, 1997.(8)
10.56 Waiver and Second Modification of Loan Agreement between the
Company and Key Bank National Association dated June 30,
1997(9)
10.57 Stock Purchase Agreement between the Company and Howard S.
Edelman dated July 1, 1997(9)
10.58 First National Bank of New England Loan closing documents dated
September 25, 1997 - the $800,000 note.(10)
10.59 First National Bank of New England Loan closing documents
dated September 25, 1997 - the $1,000,000 note.(10)
10.60 First National Bank of New England Loan closing documents
dated September 25, 1997 - the $250,000 line of credit.(10)
10.61 Asset purchase Agreement between the Company and MSP Retail,
Inc. dated September 10, 1997.(10)
10.62 First National Bank of New England loan closing documents
dated February 5, 1998 relating to the $800,000 loan
guaranteed by the U.S. Department of Agriculture.(11)
10.63 Purchase Agreement between the Company and Armor Holdings,
Inc. and its subsidiary dated April 2, 1998.(11)
10.64 Fairness Opinion relating to the sale of substantially all
the assets of the Law Enforcement division to Armor
Holdings, Inc.(11)
11 Statement re: computation of per share earnings(11)
(1) Incorporated by reference to the exhibit of the same number filed
with the Company's registration statement on Form SB-2 (33-69270)
that was declared effective on November 12, 1993.
(2) Incorporated by reference to the Company's report on Form 8-K filed
March 14, 1994.
(3) Incorporated by reference to the Company's Form 10-QSB report for
the quarter ended 9/30/94 filed on November 14, 1994. It should be
noted that Exhibits 10.25 through 10.34 were previously numbered
10.1 through 10.10 in that report.
(4) Incorporated by reference to the Company's Form 10-KSB for the year
ended 12/31/94.
(5) Incorporated by reference to the Company's Form 10-KSB for the year
ended December 31, 1995.
(6) Incorporated by reference to the Company's Form 10-QSB for the
quarter ended March 31, 1996.
(7) Incorporated by reference to the Company's Form 10-QSB for the
quarter ended September 30, 1996.
26
<PAGE>
(8) Incorporated by reference to the Company's Form 10-KSB for the year
ended December 31, 1996.
(9) Incorporated by reference to the Company's Form 10-QSB for the
quarter ended June 30, 1997.
(10) Incorporated by reference to the Company's Form 10-QSB for the
quarter ended September 30, 1997.
(11) Filed herewith.
27
<PAGE>
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: March 31, 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 March 31, 1998
- ------------------------------ And Director
Jon E. Goodrich
/s/ Marvin P. Brown Chairman of the March 31, 1998
- ------------------------------ Board
Marvin P. Brown
/s/ Virginia de Ganahl Russell Director March 31, 1998
- ------------------------------
Virginia de Ganahl Russell
/s/ Howard S. Edelman Director March 31, 1998
- ------------------------------
Howard S. Edelman
/s/ Neil J. Campolungo Director March 31, 1998
- ------------------------------
Neil J. Campolungo
/s Lewis C. Cohen Director March 31, 1998
- ------------------------------
Lewis C. Cohen
/s/ R. David Garwood Director March 31, 1998
- ------------------------------
R. David Garwood
/s/ Mark A. Capone
- ------------------------------ Treasurer/Chief March 31, 1998
Mark A. Capone Financial Officer
<PAGE>
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
<PAGE>
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.
/s/ URBACH KAHN & WERLIN PC
Albany, New York
February 26, 1998, except for Note 16 for which the date is
April 2, 1998.
F-2
<PAGE>
[LETTERHEAD OF COOPERS & LYBRAND]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Mace Security International, Inc.
We have audited the accompanying balance sheet of Mace Security International,
Inc. as of December 31, 1996 and the related statement 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mace Security International,
Inc. as of December 31, 1996 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND, L.L.P.
Albany, New York
March 25, 1997, except for Note 7, for which the date is April 14, 1997.
F-2A
<PAGE>
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
<PAGE>
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 .................................. 1,824,82 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 ............ 6,920,023 6,819,918
============ ============
The accompanying notes are an integral part
of the financial statements.
F-4
<PAGE>
MACE SECURITY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Common Stock Additional
Shares Par Paid-in Capital Deficit
------ --- --------------- -------
<S> <C> <C> <C> <C>
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)
========= ======= =========== ===========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
F-5
<PAGE>
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
<PAGE>
MACE SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED 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 are stated at the lower of cost (first-in, first-out
method) or market.
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
<PAGE>
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),"Accounting for 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
<PAGE>
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 disclosures for prior periods are
required to be restated. The Company anticipates that adoption of SFAS No.
131 will expand disclosures but will not have an impact on reported
consolidated financial position, 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:
1997 1996
----------- -----------
Office furniture ...................... $ 128,959 $ 127,144
Computer equipment .................... 428,769 386,608
Vehicles .............................. 46,501 37,285
Leasehold improvements ................ 1,628,553 1,539,976
Machinery and equipment ............... 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.
F-9
<PAGE>
MACE SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
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
F-10
<PAGE>
MACE SECURITY INTERNATIONAL, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. LONG TERM DEBT (continued)
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
========== ==========
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 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
the Key's "base rate" plus 1.25% (9.25% as of December 31, 1996) was
canceled in early 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 contain certain restrictions on the payment of
dividends 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.
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
<PAGE>
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 as ets 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
<PAGE>
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.
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
========
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.
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
<PAGE>
MACE SECURITY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. COMMITMENTS 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:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
Weighted Weighted
Average Average
Exercise Exercise
Number Price Number Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
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
======= =======
</TABLE>
F-14
<PAGE>
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 4% 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
<PAGE>
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 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
============ ============
F-16
<PAGE>
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 fixed assets and intangibles,
to be sold at December 31, 1997 book value, plus an additional amount of
$200,000 for certain expenses of the transaction. The purchase price for the
fixed assets and intangibles, inclusive of a license fee, will approximate
$3,117,000. 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 transaction is expected to close in June 1998.
F-17
LOAN AGREEMENT
FIRST NATIONAL BANK OF NEW ENGLAND ("Lender")
AND
Mace Security International, Inc.
160 Benmont Ave.
Bennington, VT 05201
Your request for First National Bank of New England ("LENDER") to extend to you
a loan in the amount of $800,000 with a United States Department of Agriculture
Rural Business Cooperative Service (RBS) (f/k/a Farmers Home Administration,
"USDA") 80.00% Guarantee has been approved subject to the following provisions:
1. Requirements:
The Borrower shall pay a guaranty fee of 2% of the amount guaranteed
prior to the disbursement of the loan.
The Borrower shall execute all instruments and agreements as Lender may
require in order to document the loan, including:
1. Promissory Note;
2. Commercial Loan Financial Condition Affidavits;
3. Guarantee Agreement;
4. Security Agreement(s);
5. UCC-1 financing statements;
6. And such other instruments and agreements as Lender or
Lender's counsel may require in connection herewith.
2. This Authorization is subject to:
(a) Receipt by Lender of evidence that there has been no unremedied
adverse change since the date of the Application, or since any of
the preceding disbursements, in the financial or any other condition
of Borrower or Guarantors, which would warrant withholding or not
making any such disbursement or any further disbursement.
(b) The representations made by Borrower and Guarantors in its loan
application, the requirements or conditions set forth in Lender's
application form, including the supporting documents thereto, the
conditions set forth herein and any future conditions imposed by
Lender (with prior USDA approval).
<PAGE>
3. Terms of Loan:
(a) Repayment term, interest rate(s) and maturity.
NOTE PAYABLE: The undersigned will pay principal and interest by making
payments in the initial amount of $10,572.06 on the first day of each
month beginning on March 1, 1998. The undersigned will make these payments
until they have paid in full all principal and interest and any other sums
due hereunder. Notwithstanding the foregoing, the entire indebtedness
evidenced by this Note, including, but not limited to, all outstanding
principal and accrued and unpaid interest, shall be due and payable in
full on the tenth (10) anniversary date of this Note.
The undersigned's initial monthly payments shall be calculated in
accordance with the full amortization of the loan evidenced by this Note
by level monthly payments of principal and interest over a ten (10) year
period at the interest rate applicable on the date hereof. On each
Adjustment Date (as herein defined), the amount of the monthly payments
will be adjusted so as to provide for the full amortization of the then
outstanding principal at the interest rate established at each Adjustment
Date in level monthly payments of principal and interest over the
remaining term of the original ten (10) year amortization period.
Interest Rate
Interest shall accrue on the outstanding principal amount of this Note at
a per annum rate of one and one half (1.50) percentage points above the
Prime Rate on a floating basis. The initial interest rate hereunder is ten
(10) percent. On April 1, 1998 and on the first day of each July, October,
January, and April thereafter until all sums due hereunder are paid in
full (each being referred to as an "Adjustment Date"), the interest rate
on the unpaid principal balance hereunder shall be adjusted, without
notice or demand, to a per annum rate of one and one half (1.50)
percentage points above the Prime Rate in effect on the applicable
Adjustment Date (or the following business day in the event that such
Adjustment Date falls on a Saturday, Sunday, or a legal holiday), which
such rate shall remain in effect until the succeeding Adjustment Date.
Interest hereunder shall be computed on a daily basis and on the basis of
a Three Hundred Sixty (360) day year and a thirty (30) day month. The
undersigned further agrees to pay all taxes levied or assessed on this
Note or the debt evidenced hereby against the holder of this Note, and
further agrees to pay all costs, expenses and attorneys' fees incurred in
any action to collect this Note or to defend, protect, preserve, or
realize upon or foreclose any mortgage or security agreement securing this
Note or to protect, defend, preserve, foreclose or sustain the lien of
said mortgage or security agreement or in any litigation or controversy
arising from or connected with said mortgage, security agreement, or this
Note. As used herein, "Prime Rate" shall mean the lowest New York prime
rate as set forth in the money rate section of the Wall Street Journal (or
in any successor publication).
All payments received by the Lender, at the option of the Lender, shall be
applied first to any outstanding charges and expenses incurred by the
Lender in connection with this Note or any documents executed in
connection with this Note, then to any unpaid and accrued
<PAGE>
interest and finally to the outstanding principal due under the Note. The
undersigned agrees that the interest shall accrue at the foregoing rate on
unpaid balance before and after maturity, by acceleration or otherwise.
The Borrower hereby grants to the Lender or Holder hereof a lien and right
of set-off for all of the Borrower's liabilities to Lender or Holder upon
and against all of the Borrower's deposits, credits and other property now
or hereafter in the possession or control of Lender or Holder or in
transit to it. The Lender or Holder may at any time, after an event of
default, apply the same or any part thereof to any of the Borrower's
liabilities to Lender or Holder, whether or not matured at the time of
such application.
Holder should give written notice to the undersigned of each increase or
decrease in the interest (and change in installment amount, if applicable)
within thirty days after the effective date of each rate adjustment;
however, the fluctuation of the interest rate is not contingent on whether
the notice is given.
Borrower agrees to pay a late charge equal to 5% of the payment amount due
if such payment is not received within ten days of the due date. Funds
received from the borrower will be applied first to any outstanding
charges and expenses incurred by the Lender in connection with this Note
or any documents executed in connection with this Note, then to any unpaid
and accrued interest and finally to the outstanding principal due under
the Note.
The Borrower agrees that, in addition to other events of default stated in
the Note or related loan documents, each of the following shall constitute
an "event of default" under the Note:
1. Failure of Borrower or any Guarantor to pay or perform any of
Borrower's or Guarantor's liabilities or obligations to Lender or
any other interest bearing, secured obligation;
2. If Borrower or any Guarantor of any obligation of Borrower to
Lender or Holder shall be in default under any security agreement,
mortgage or other agreement governing, securing or relating to this
Loan.
Use of Proceeds of Loan as follows (show specific uses for which loan is
authorized):
1. Approximately $100,000 for the purchase of equipment
2. Approximately $150,000 for leasehold improvements to the
courtyard
3. Approximately $300,000 for the manufacturing line configuration
4. Approximately $170,000 for the Vermont retail store
5. Approximately $80,000 for permanent working capital and closing
costs
Collateral:
1. Assignment of life insurance with acknowledgment of home
office on Jon E. Goodrich which shall be decreasing term or
existing permanent type
<PAGE>
insurance for $800,000. The proceeds of the life insurance
shall be applied at the time of death to repay the outstanding
balance of $800,000. Original policy to be retained by Lender.
2. The unlimited guarantee of Jon E. Goodrich and the prompt and
punctual payment of the debt.
3. First security interest in all machinery and equipment,
including power driven machinery and equipment
(includemvexcludingincludemvexcluding titled motor vehicles),
furniture and fixtures, leasehold improvements, now owned, to
be acquired with loan proceeds or hereafter acquired together
with all replacements thereof, all attachments, accessories,
parts and tools belonging thereto or for use in connection
therewith and proceeds of the same. UCC SEARCH REQUIRED AFTER
RECORDING.
4. Third security interest in all inventory and accounts, now
owned, to be acquired with loan proceeds or hereafter acquired
together with all replacements thereof and proceeds of the
same, subject only to a first and second held by Lender for a
line of credit in the amount of $250,000 and a commercial term
loan in the amount of $1,000.000. UCC SEARCH REQUIRED AFTER
RECORDING.
4. To further induce Lender to make and USDA to guarantee this Loan, Lender
and USDA impose the following conditions:
(a) Execution of all documents required in Item 1 above.
(b) Reimbursable Expenses - Borrowers will, on demand, reimburse Lender
for any and all expenses incurred, or which may be hereafter
incurred, by Lender from time to time in connection with or by
reason of Borrowers' application for and the making and
administration of the Loan.
(c) Books, Records, and Reports - Borrowers and Guarantors will at all
times keep proper books of account in a manner satisfactory to
Lender and/or USDA. Borrowers and Guarantors hereby authorize Lender
or USDA to make or cause to be made, at Borrowers or Guarantors'
expense and in such manner and at such times as Lender or USDA may
require, (a) inspections and audits of any books, records and papers
in the custody or control of Borrowers or others, relating to
Borrower or Guarantors' financial or business conditions, including
the making of copies thereof and extracts therefrom, and (b)
inspections and appraisals of any of Borrowers or Guarantors'
assets.
Mace Security International, Inc. shall provide an annual fiscal
year end independent Certified Public Accountant (CPA) audited
financial statement to the Lender and USDA for the twelve (12) month
period ending December 31, 1997, and annually thereafter (no later
than 4 months following the expiration of any such period), along
with tax returns for the Borrower.
<PAGE>
Borrowers and Guarantors shall annually provide the Lender and USDA
with complete copies of their federal tax returns and personal
financial statements on First National Bank of New England forms.
Borrowers and Guarantors hereby authorize all Federal, State, and
municipal authorities to furnish reports of examinations, records,
and other information from reports, returns, files and records of
such authorities upon request therefor by Lender or USDA.
Distributions and Compensation - Borrowers and or Guarantors will not,
without the prior written consent of Lender (a) if Borrowers and or
Guarantors are corporations, declare or pay any commercially
unreasonable dividends or make any commercially unreasonable
distribution upon its capital stock, or purchase or retire any of
its capital stock, or consolidate or merge with any other company,
or give any preferential treatment, make any commercially
unreasonable advance, directly or indirectly, by way of loan, gift,
bonus, or otherwise, to any company directly or indirectly,
controlling or affiliated with or controlled by Borrowers and or
Guarantors, or any other company, or to any officer, director or
employee of Borrowers and or Guarantors, or of any such company, (b)
if Borrowers and or Guarantors is a partnership or individual make
any distribution of assets of the business of Borrowers and or
Guarantors, other than reasonable compensation for services, or give
any preferential treatment, make any commercially unreasonable
advance, directly or indirectly, by way of loan, gift, bonus, or
otherwise, to any partner or any of its employees, or to any company
directly or indirectly controlling or affiliated with or controlled
by Borrowers and or Guarantors, or any other company.
Other Provisions:
1. Borrowers and or Guarantors are prohibited from assuming
liabilities or obligations of others.
2. Borrower shall not sell the business without prior approval
from the Lender.
3. Borrowers and or Guarantors shall not in any way alter its
form of business organization without the prior written
consent of Lender.
4. Borrowers and or Guarantors will not sell, exchange, discard,
or otherwise transfer those fixed assets, including real
estate, pledged as collateral to the Lender without the prior
written consent of the Lender.
Prior to the first disbursement, Lender shall be in receipt of satisfactory
evidence that all applicable taxes have been paid, and all zoning regulations
and all licensing regulations have been complied with regard to the property
being mortgaged.
<PAGE>
Insurance Provisions
1. Borrowers shall provide and maintain hazard insurance on all
business personal property in such amounts and for such
coverage as shall be satisfactory in all respects to Lender.
Said insurance shall be maintained for the life of the loan.
Policy coverage on real property shall designate Lender as
loss payee under a standard or New York loss payee clause and
shall provide a minimum to ten (10) days written notice to
Lender of cancellation.
2. Prior to first disbursement, the lender must be in receipt of
evidence of the kind described below from an independent
authoritative source which is sufficient to indicate to the
lender that the property is not in a special flood hazard area
(SFHA). Property is defined as the asset(s) financed as a part
of the USDA financial assistance and/or other collateral
deemed necessary by the field office. If such evidence is not
provided to the lender, the borrower must obtain, and
maintain, a Standard Flood Insurance Policy (SFIP) or other
appropriate special flood hazard insurance in amounts and
coverages equal to the lesser of (1) the insurable value of
the property or (2) the maximum amount of coverage available.
Borrower can show that special flood hazard insurance has been
acquired by submitting a copy of the policy or providing
evidence of premium payment for the appropriate coverage to a
licensed insurance agent. Borrower will not be eligible for
either any future disaster assistance or USDA business loan
assistance if special flood hazard insurance is not maintained
as stipulated herein throughout the entire term of this loan.
Corporate Provisions
1. Corporate Requirements of Mace Security International, Inc.:
Prior to first disbursement on this loan, Mace Security
International, Inc. to provide Lender with:
(a) Resolution of Board of Directors
(b) Certificate of Good Standing from the Secretary of
State's Office.
Environmental Provisions
1. Borrower agrees to comply with all existing and future state
and federal regulations governing the handling, storage and
use of any and all hazardous, toxic, or otherwise regulated,
substances or materials; and further covenants that he will
permit no such materials or substances or by
<PAGE>
products or wastes thereof, to be permanently stored at the
facility, and that borrower will operate the facility in such
a manner that the site will remain free of contaminating
materials, wastes, by products or substances.
2. Borrower agrees to comply with all existing and future state
and federal regulations governing the maintenance and
emplacement of underground storage tanks and further covenants
that borrower will permit no petroleum base waste or hazardous
waste to be stored at the site, and that he will operate the
business in such a manner that the site will remain free of
such contamination waste.
Miscellaneous Provisions.
1. Annual non-financed capital expenditures of Mace Security
International, Inc. in aggregate shall be limited to $100,000.
2. Borrowers will not, prior to payment in full of the
indebtedness evidenced by the Note, without prior written
consent of the holder of the Note, pledge, mortgage or
otherwise cause or permit to be encumbered in any manner
whatsoever any of the Borrowers' property or assets, whether
then owned or thereafter acquired, except for prior security
interests granted to the lender. However, the holder of the
note will permit chattel mortgages on purchased equipment not
to exceed $100,000 annually.
3. Tangible consolidated net worth of Mace Security
International, Inc. shall be at least 10% of tangible assets
upon closing of the $800,000 loan and shall be evidenced by a
management-prepared pro-forma balance sheet and signed and
dated by an appropriate corporate officer to certify its
accuracy.
4. Mace Security International, Inc.'s current ratio, as defined
under generally accepted accounting principles (but excluding
from current debt any subordinated debt) shall be at least
2.0x, measured annually based on the company's 12/31 fiscal
year end CPA-audited financial statements.
5. Mace Security International, Inc.'s debt to net worth ratio,
as defined under generally accepted accounting principles
shall not exceed .35x as measured annually based on the
company's 12/31 fiscal year end CPA- audited financial
statements.
6. Without the prior consent of Lender or USDA, total annual
salaries or drawing by Jon E. Goodrich, including bonuses,
commissions or other compensation, shall be limited to a base
salary of $125,000 per year, with unlimited annual increases,
provided only if Mace Security International, Inc. reports a
net profit in excess of $100,000 and the Borrower and
Guarantor are in compliance with all covenants and the loan
agreement. Further, total annual salaries or drawing by
Timothy Smith, Kenneth Blakely, Bernard Graney, and Mark
Capone, including bonuses, commissions or other compensation,
shall be limited to their current base
<PAGE>
salaries of $43,000, $60,000, $63,000, and $90,000 per year
respectively. Further, annual subsequent increases in
salaries, bonuses, commissions and other compensation paid to
Timothy Smith, Kenneth Blakely, and Bernard Graney shall not
be permitted if it would result in a net loss for the company
for the fiscal year ending December 31st, as defined under
generally accepted accounting principals unless the amount of
such payment(s) causing a net loss for the Borrower is lent
back to the company (after payment of personal taxes) on a
fully subordinated basis. Further, annual subsequent increases
in salaries, bonuses, commissions and other compensation paid
to Timothy Smith, Kenneth Blakely, and Bernard Graney shall
not be permitted unless the Borrower and guarantor are in
compliance with the loan agreement and loan covenants. A
standstill agreement shall be executed in this regard.
7. All debt due officers, related parties, and guarantors shall
be fully subordinated to FNB and remain at standstill until
all debt due to FNB is paid in full.
8. Opinion Letter of Borrower's Counsel.
9. Mace Security International, Inc.'s debt service coverage
ratio, as defined as earnings before interest and taxes plus
depreciation, amortization, less taxes and non-financed
capital expenditures, and dividends, divided by total annual
debt service should be at a minimum 1.25x, and shall be
tested, beginning December 31, 1998, on an annual basis based
on the Company's FYE. Should the $250M line of credit with FNB
not be drawn, the interest payments will not be included in
debt service.
Parties Affected - This Agreement shall be binding upon Borrower and
Borrower's successors and assigns and guarantors and their successors and
assigns. No provision stated herein shall be waived without the prior
written consent of USDA. The Loan shall be administered as provided in the
USDA Lenders Agreement. The terms and conditions of this Loan Agreement
shall survive the loan closing and shall not be merged into the loan
documentation notwithstanding any provisions to the contrary contained
herein. In the event any provision(s) of this Loan Agreement conflicts
with any provision(s) of the loan documentation, including the Security
Agreement by and between Borrower and Lender dated September 25, 1997, as
amended, the provision(s) of this Loan Agreement shall control.
FIRST NATIONAL BANK OF NEW ENGLAND
- --------------------------------------------------------------------------
By: Michael T. Mancuso, V.P. Date
Borrower and guarantors hereby agree to the conditions imposed herein and
further agrees that the terms and conditions herein are for the benefit of, and
may be enforced by, Lender and
<PAGE>
USDA. This Authorization and Loan Agreement and amendments constitute the Loan
Agreement between Lender and Borrower.
- --------------------------------------------------------------------------
Borrower: Mace Security International, Inc. Date
duly authorized representative
- --------------------------------------------------------------------------
Guarantor: Jon E. Goodrich Date
<PAGE>
FIRST AMENDMENT TO TERM NOTE
This First Amendment to the Commercial Term Promissory Note described
below is made as of the ___ day of February, 1998 by and between MACE SECURITY
INTERNATIONAL INC., whose principal place of business is located at 160 Benmont
Avenue, Bennington, Vermont 05201 (the "Borrower"), and FIRST NATIONAL BANK OF
NEW ENGLAND, a banking corporation with a usual place of business at One
Commercial Plaza, Hartford, Connecticut (the "Lender").
Reference is made to a certain Commercial Term Promissory Note given by
Borrower to Lender in the original principal amount of $800,000.00, dated
September 25, 1997 (the "Note"). The U.S. Department of Agriculture Rural
Business Cooperative Service ("RBS") is prepared to issue a guaranty to Lender
for a portion of the loan evidenced by the Note, and the Borrower and the Lender
desire to amend the terms of the Note in certain respects, as hereinafter
described. In furtherance of the foregoing and for mutual consideration received
and acknowledged, the parties hereto agree as follows:
1. Definition of Terms. All other terms not otherwise defined herein shall
have the same meanings as set forth in the Note.
2. Amendment to Interest Adjustment Date. The second subparagraph of
Paragraph 1 entitled Interest is hereby deleted in its entirety and the
following language is inserted in its place:
"The interest rate may be adjusted on the first day of April, 1998, and on
the first day of each July, October, January and April thereafter (or the
following business day in the event that such date falls on a Saturday, Sunday,
or holiday) until all sums due hereunder are paid in full without notice or
demand (each such day being referred to as an "Adjustment Date"), which rate
shall remain in effect until the succeeding Adjustment Date.
Holder should give written notice to the undersigned of each increase or
decrease in the interest within thirty days after the effective date of each
rate adjustment; however, the fluctuation of the interest rate is not contingent
on whether such notice is given."
3. Reference to Loan Agreement. Subparagraph (d) of Paragraph 7 entitled
Events of Default is hereby amended by inserting the following language after
"Note," in the third line thereof: "including but not limited to a certain Loan
Agreement by and among Lender, Borrower, and Jon E. Goodrich as Guarantor, dated
February __, 1998."
4. Other Terms and Conditions Unchanged. The Borrower and the Lender agree
that all other terms and conditions of the Note shall remain unchanged and in
full force and effect and all other terms and conditions are hereby ratified and
confirmed.
Executed as a sealed instrument as of the date first written above.
WITNESS: MACE SECURITY INTERNATIONAL, INC.
By
- ---------------------------------- --------------------------------
its duly authorized:
Page 1 of 2
<PAGE>
WITNESS: FIRST NATIONAL BANK OF NEW ENGLAND
By:
- ---------------------------------- --------------------------------
Its
Page 2 of 2
<PAGE>
FIRST AMENDMENT TO SECURITY AGREEMENT
This First Amendment to the Security Agreement described below is made
this ______ day of February, 1998 by and between MACE SECURITY INTERNATIONAL,
INC., whose principal place of business is located at 160 Benmont Avenue,
Bennington, Vermont 05201 (the "Debtor"), and FIRST NATIONAL BANK OF NEW
ENGLAND, a corporation organized and existing under and by virtue of the laws of
the United States of America, with its office at One Commercial Plaza, Hartford,
Connecticut (the "Secured Party").
The Debtor and the Secured Party are parties to a Security Agreement
September 25, 1997, pursuant to which the Debtor grants to the Secured Party a
security interest in certain Collateral as defined and more particularly
described therein (the "Security Agreement"). The U.S. Department of Agriculture
Rural Business Cooperative Service ("RBS") is prepared to issue a guaranty to
Lender for a portion of the obligations secured by the Security Agreement, and
the Debtor and the Secured Party desire to amend the terms of the Security
Agreement in certain respects, as hereinafter described. In furtherance of the
foregoing and for mutual consideration received and acknowledged, the parties
hereto agree as follows:
1. Definition of Terms. All terms not otherwise defined herein shall have
the same meanings as set forth in the Security Agreement.
2. Financing Agreements. Section III(F) of the Security Agreement, which
defines "Financing Agreements", is hereby amended by deleting the semi-colon (;)
at the end thereof and inserting the following language: ", as amended by a
certain First Amendment to Term Note by and between Debtor and Secured party
dated February _____, 1998, and that certain Loan Agreement by and among Lender,
Borrower, and Jon E. Goodrich as Guarantor, dated February _____, 1998 (the
"Loan Agreement")."
3. Schedule 6(f). Schedule 6(f) of the Security Agreement is hereby
deleted in its entirety, and replaced with the Schedule 6(f) attached hereto and
made a part hereof.
4. Schedule 6(f)(1). Schedule 6(f)(1) of the Security Agreement is hereby
deleted in its entirety.
5. Confirmation of Continued Validity and Priority of Lien. The Debtor and
the Secured Party agree that the lien and priority of the security interest
granted pursuant to the Security Agreement in and to the Collateral shall not be
affected by this First Amendment.
6. Other Terms and Conditions Unchanged. The Debtor and the Secured Party
agree that all other terms and conditions of the Security Agreement shall remain
unchanged and in full force and in effect and all such other terms and
conditions are hereby ratified and confirmed.
Executed as a sealed instrument as of the date first written above.
MACE SECURITY INTERNATIONAL, INC.
(Debtor)
By:
------------------------------
Its duly authorized:
<PAGE>
FIRST NATIONAL BANK OF NEW
ENGLAND
By:
- ------------------------------ ------------------------------
Witness
its
-2-
<PAGE>
Schedule 6(f)
Financial Covenants / Requirements
See the Loan Agreement and the other Financing Agreements.
-3-
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT, dated as of April 2, 1998, among Armor
Holdings, Inc., a Delaware corporation with offices at 13386 International
Parkway, Jacksonville, Florida 32218 ("AHI"), Federal Laboratories, Inc., a
Delaware corporation and a wholly-owned subsidiary of AHI with offices at 13386
International Parkway, Jacksonville, Florida 32218 (the "Purchaser") and Mace
Security International, Inc., a Delaware corporation with offices at 160 Benmont
Avenue, Bennington, Vermont 05201 (the "Seller").
W I T N E S E T H :
WHEREAS, AHI desires to acquire, through the Purchaser, and the
Seller desires to sell, certain of the property and assets of the Seller upon
the terms and subject to the conditions hereinafter set forth.
NOW, THEREFORE, the parties hereto, in consideration of the mutual
promises contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, hereby agree as
follows:
ARTICLE I
Definitions
In addition to terms defined elsewhere in this Agreement, the
following terms when used in this Agreement shall have the meanings indicated
below:
"Affiliate" shall mean, with respect to any Person, any Person that
directly or indirectly controls, is controlled by or is under common control
with the Person in question.
"Agreement" shall mean this Asset Purchase Agreement, together with
all exhibits and schedules referred to herein.
"Backlog" shall mean all of the Seller's (i) international orders
evidenced by fully executed purchase orders and license applications that are A)
set forth on Schedule 1.1 hereto (with margins determined at Seller's Standard
Cost), or B) with respect to international orders received by the Seller from
and after the date hereof, approved in writing by the Purchaser, and (ii)
domestic orders evidenced by fully executed purchase orders that are A) set
forth set forth on Schedule 1.1 hereto , or B) in excess of $7,500, received by
the Seller from and after the date hereof and are approved in writing by the
Purchaser, or C) $7,500 or less, received by the Seller from and after the date
hereof that are either (i) approved in writing by Purchaser or (ii) provide for
the Seller's standard gross margins and accompanied by a guaranty of full
payment made by the Seller in favor of the Purchaser, all of which are entered
on the books of the Seller prior to the Closing Date in the ordinary course of
its business but not yet shipped; provided, however, that Backlog shall be
deemed to exclude the orders set forth on Schedule 1.2 hereto;
"Commission" shall mean the Securities and Exchange Commission.
"Common Stock" shall mean the common stock of AHI, par value $.01
per share.
"Consumer Market" shall mean all markets other than the Law
Enforcement Market.
"CS" shall mean O-chlorobenzalmalononitrile.
<PAGE>
"CS-1" shall mean a compound consisting of CS and a flow agent.
"Environmental Laws" shall mean all laws, regulations and other
federal, state or local governmental requirements, and all applicable judgments,
orders, writs, notices, decrees, permits, licenses, approvals, consents or
injunctions relating to the generation, management, handling, transportation,
treatment, disposal, storage, delivery, discharge, release or emission of any
waste, pollutant or toxic or hazardous substance (including, without limitation,
asbestos, radioactive material and pesticides) utilized by the Seller in its
business or to any other actions, omissions or conditions affecting the
environment.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Financial Statements" shall mean the audited balance sheets of the
Seller as at December 31, 1997, December 31, 1996 and December 31, 1995 and the
related statements of income, cash flows and retained earnings for the fiscal
years then ended, including any related notes, each prepared in accordance with
United States generally accepted accounting principles ("GAAP") consistently
applied with prior periods and publicly filed or to be publicly filed in its
next annual report with the Securities and Exchange Commission.
"Law Enforcement Market" shall mean the market consisting of
domestic and international law enforcement, military, correctional and
governmental agencies and personnel (in their professional capacity), but
exclusive of retail sales of aerosol products at cop shop or security center
stores that are owned or franchised by the Seller and/or its Affiliates.
"Licensed Mark", or "Licensed Marks" shall mean the Mace trademarks
set forth on Schedule 1.3 hereto limited to use as set forth in the License
Agreement, as hereinafter defined.
"Mace Common Stock" shall mean the common stock of the Seller, par
value $.01 per share.
"Patent" shall mean the Patent on the Mark VI mold (Patent No.
5,348,193).
"Person" shall mean any natural person, corporation, unincorporated
organization, limited liability company, partnership, limited liability
partnership, association, joint stock company, joint venture, trust or
government, or any agency or political subdivision of any government, or any
other entity.
"Product" shall have the meaning ascribed to it in Section 3.18
hereof.
"Purchased Marks" shall mean all trademarks, tradenames and service
marks listed on Schedule 1.4 hereto and used exclusively by the Law Enforcement
Division, except for the Licensed Mark and the Patent.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Unrelated Accounting Firm" shall mean a nationally recognized "Big
Six" accounting firm that has not provided audit services to AHI, the Purchaser
or the Seller within two
2
<PAGE>
years prior to the date of this Agreement.
ARTICLE II
Purchase of Assets; Consideration
ss.2.1 Terms of the Purchase.
On the basis of the representations, warranties, covenants,
and agreements contained in this Agreement and subject to the terms and
conditions of this Agreement:
(a) The Seller shall sell, assign, transfer, and convey to the
Purchaser at the Closing, as hereinafter defined, pursuant to instruments of
assignment and bills of sale reasonably satisfactory to the Purchaser, those
properties and assets of the Seller, through the date of the Closing, used in
the operation of the Seller's Federal Laboratories business and law enforcement
aerosol business, which comprise its Law Enforcement Division (the "LE
Division"), and those products manufactured, developed, distributed or sold by
the LE Division or sold by the Seller to the Law Enforcement Market, including,
without limitation, the Purchased Marks, contractual rights, books and records
(other than stock ledgers and stock transfer books), business and good will of
or relating to the foregoing, including, without limitation, those assets more
fully set forth on Schedule 2.1(a) hereto (collectively, the "Purchased
Assets").
(b) Anything in this Agreement to the contrary
notwithstanding, there shall be excluded from the Purchased Assets (the
"Excluded Assets") those assets, properties and rights (i) which pertain
exclusively to the Seller's business of selling products to the Consumer Market,
such as aerosol and buy-sell consumer products (the "Consumer Division"), (ii)
all assets of the Seller's Mace Anti-Crime Bureau, a division that manufactures,
markets and sells products relating to financial security, including but not
limited to security training videos, training materials and publications, dye
packs, alarms, and security transport devices, and the technology and
formulations relating thereto ("MACB"), (iii) comprised of the Licensed Mark,
the Patent and all other trademarks, trade names, service marks and patents used
by the Seller for the manufacture, marketing or sale of its products to the
Consumer Market, exclusive of the Purchased Marks, (iv) which are specifically
set forth in Schedule 2.1(b) hereto, including, but not limited to, CS-1, and
(v) designated by the Purchaser or AHI on or prior to the Closing Date, without
affecting the Purchase Price, as hereinafter defined. The Seller shall continue
to assume all liability for all of such Excluded Assets. The Seller agrees that
the only assets of the Seller used in the operation of both the LE Division and
the Consumer Division are comprised of Mark III, Mark IV molds, and such other
assets listed on Schedule 2.1(c) hereto. The Seller agrees to give the Purchaser
reasonable access to such assets and will reasonably cooperate with the
Purchaser to ensure that the Purchaser is provided with parts from such molds on
substantially the same terms as currently provided by the Seller to the
Purchaser (i.e. any profit margins and costs).
(c) The Purchaser shall pay to the Seller, as set forth below,
aggregate consideration of an amount (the "Purchase Price") equal to the net
book value of the Purchased Assets, which shall be the sum of the following,
but, with respect to (ii), (iii) and (iv) below, in no event less than
$3,117,325.00 , plus the sum of $200,000, less any deposits received by Seller
for Backlog:
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(i) $2,636,526, representing 100% of the net book
value of inventory of the LE Division (as more fully set forth
on Schedule 2.1(a) hereto), as shown on the audited balance
sheet of the Seller for the fiscal year ended December 31,
1997, and consistent with the Seller's valuation as of
December 31, 1996 for the LE Division, which book value shall
be (a) increased by all inventory purchases from December 31,
1997 through the Closing Date (as defined in Section 2.2
hereof) in an amount equal to the Seller's standard cost for
such inventory, and (b) decreased by A) all sales of inventory
from December 31, 1997 through the Closing Date, and B) all
inventory relating to unshipped orders set forth on Schedule
1.2 (all such increases and decreases to inventory shall be
valued consistent with the accounting policies and procedures
applied by the Seller in the preparation of its audited
balance sheets as at December 31, 1997 and 1996, which shall
be consistent with GAAP);
(ii) $1,540,835, representing 100% of the net book
value of the fixed assets of the LE Division (as more fully
set forth on Schedule 2.1(a) hereto), as shown on the audited
financial statements of the Seller for the fiscal year ended
December 31, 1997; provided, however, that the book value of
such fixed assets shall not exceed $1,569,613;
(iii) $926,490, representing 100% of the net book
value of the intangible property of the LE Division, inclusive
of goodwill and the Purchased Marks but exclusive of the
Licensed Mark and Patent (as more fully set forth on Schedule
2.1(a) hereto), priced as shown on the audited financial
statements of the Seller for the fiscal year ended December
31, 1997; provided, however, that the book value of such
intangible property (exclusive of the Mace(R) trademark) shall
not exceed $926,490, and
(iv) $650,000.00, payable to Trademark Corp. (as
hereinafter defined) representing a one-time fee in
consideration for the use of the Licensed Mark and the Patent
pursuant to the License Agreement.
(d) The Purchase Price shall be paid at the Closing by the
Purchaser, in its sole and absolute discretion, in one of the following methods:
(i) 100% of the Purchase Price shall be paid in
cash, by wire transfer or certified or bank cashier's check,
subject to adjustment as set forth in Section 2.4 hereof, of
which the first $600,000 shall be held back and dealt with by
the Purchaser as provided in Section 5.3(d) hereof, and the
remainder thereof shall be paid directly to the Seller; or
(ii) The first $5,200,000 (or if the Purchase
Price is less, such lesser amount) of the Purchase Price shall
be paid in cash, by wire transfer or certified or bank
cashier's check, subject to adjustment as set forth in Section
2.4 hereof, and the remaining portion thereof shall be paid
through the issuance of certificates registered in the
Seller's name for an aggregate
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number of shares registered under the Securities Act and as to
which no stop order is in effect of Common Stock (the "AHI
Shares") having a value, as determined by the average closing
price of the Common Stock on the American Stock Exchange for
the ten consecutive trading day period ending three days prior
to the Closing Date, of which a certificate representing such
number of shares of Common Stock having a value of $600,000
(valued as described above) together with stock powers duly
executed in blank and medallion guaranteed in appropriate form
for transfer and with cash equal and to the extent the AHI
Shares have a value of less than $600,000, shall be held back
and dealt with as provided in Section 6.3(d) hereof.
Notwithstanding the foregoing, the Purchaser shall be
permitted to deliver AHI Shares which are not registered under
the Securities Act, in the event additional time beyond the
Closing Date, as hereinafter defined, is needed to comply with
the Securities Act with respect to the filing of a
post-effective amendment or a prospectus supplement to its
Registration Statement on Form S-4, Registration No.
333-38759, pursuant to which the AHI Shares will be issued;
provided, however that if the AHI Shares are not registered
under the Securities Act by the first Release Date, as
hereinafter defined, then the Seller shall return the AHI
Shares to the Purchaser within ten (10) days of such Release
Date in exchange for payment of the balance of Purchaser Price
(to the Seller and/or the Holdback Account, as appropriate) in
cash as set forth above.
(e) Neither AHI nor the Purchaser shall assume or be
responsible for any obligation or liability of the Seller of any nature, fixed,
absolute, accrued, contingent or otherwise, except for contracts, purchase
orders and similar obligations included in the Purchased Assets.
(f) The Purchaser shall determine allocations among the
Purchased Assets and shall submit such allocations to the Seller and the parties
agree to file tax returns consistent with such allocations.
(g) With respect to any properties or assets sold hereunder
that cannot be physically delivered to the Purchaser because they are in the
possession of third parties or otherwise, the Seller shall give irrevocable
instructions to the party in possession thereof, if such be the case, with
copies to the Purchaser, that all right, title, and interest therein have been
vested in the Purchaser and that the same are to be held for the Purchaser's
exclusive use and benefit.
(h) Except as set forth on Schedule 2.1(h), to the extent
that the assignment by the Seller to the Purchaser of any contract, agreement,
instrument, lease, license, understanding, or arrangement to be assigned to the
Purchaser hereunder shall require the consent of a party other than the Seller
which has not been obtained by the Closing and if AHI and the Purchaser shall
nevertheless elect to consummate the transactions contemplated by this
Agreement, this Agreement shall not constitute an agreement to assign the same
if an attempted assignment without such consent would constitute a breach
thereof unless the Purchaser before or at the Closing elects in a writing
delivered to Seller, specifically identifying such absent consent, to waive such
consent. Except as set forth on Schedule 2.1(h), nothing in this Section 2.1(h)
regarding such non-assignment or such election shall limit any rights AHI or the
Purchaser may have against the Seller as a result of the failure to obtain such
consent.
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ss.2.2 The Closing
The closing of the transactions contemplated by this Agreement
shall take place at the offices of Kane Kessler, P.C., 1350 Avenue of the
Americas, New York, New York, at 10:00 A.M., New York time on or about June 1,
1998, or such other date, time or place as the parties may agree (the "Closing
Date"); provided, however, that the Seller shall be permitted to delay the
Closing Date for up to a maximum of forty-five (45) days to the extent required
to comply with (i) any rules and regulations of the Nasdaq National Market
System requiring shareholder approval of the transactions contemplated hereby,
and (ii) the Exchange Act with respect to the distribution of an Information
Statement to the Seller's stockholders and the filing of such Information
Statement with the Commission. The closing of the transactions contemplated by
this Agreement is herein called the "Closing."
ss.2.3 Transactions at the Closing
The following transactions shall take place at the Closing:
(a) The Seller shall deliver to the Purchaser all such bills
of sale, assignments, evidences of consent, and other instruments or documents
as in the opinion of the Purchaser and its counsel may be necessary or desirable
to evidence or perfect the sale, assignment, transfer, and conveyance of good
and marketable title to the Purchased Assets, in each case free and clear of all
liens, mortgages, security interests, pledges, charges, and encumbrances. The
Seller shall also deliver to the Purchaser all books and records of the Seller
relating to or used in the business of the LE Division, or copies thereof to the
extent such books and records are also used by Seller in connection with its
operation of the Consumer Division.
(b) The Purchaser shall pay the Purchase Price to the Seller,
in accordance with Section 2.1(c) and (d) hereof.
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ss.2.4 Right of the Purchaser to Withhold Future Payments
Without limiting such other rights as AHI or the Purchaser may
have, if, prior to the time the Purchase Price, including, if applicable, the
AHI Shares, are delivered pursuant to Section 2.1(d), the Purchaser has actual
knowledge (as defined in Section 5.2) of a breach of any representation,
warranty, covenant, or agreement of the Seller contained in this Agreement, the
Purchaser shall give written notice thereof to the Seller, who shall then have
ten (10) days to cure, or commence a cure which can and shall be completed
within thirty (30) of such commencement, but in no event later than June 30,
1998, of any such breach (during which time the Closing shall be delayed). After
the expiration of any such ten (10) day period, if such breach shall continue,
the Closing shall, at the election of the Purchaser, be held provided that the
Purchaser may deduct from the cash portion of the Purchase Price payable
pursuant to Section 2.1(d)(i) or (ii) hereof an amount, which shall in no event
exceed $400,000.00, which the Purchaser in good faith believes to be, equal to
the aggregate of Liabilities, as hereinafter defined incurred or demonstrably in
prospect of being incurred by AHI or the Purchaser in connection with such
breach. The Seller shall then have thirty (30) days after the Closing to give
notice to the Purchaser of any objections to the amount of such deduction. If no
such notice of objection is given, then the deduction made by the Purchaser
shall be final and binding on the Seller. If notice of objection is given, the
parties shall consult with each other with respect to the objections. If the
parties are unable to reach agreement within thirty (30) days after the notice
of objection has been given, the issue as to whether a breach occurred shall be
resolved by arbitration in accordance with Section 8.19 hereof and the amount of
any adjustment shall be determined by an Unrelated Accounting Firm. Such
resolution shall be final and binding on the parties. Any adjustments in favor
of the Seller made by the Unrelated Accounting Firm shall be paid to the Seller
with interest accruing from the Closing Date at the thirty (30) day treasury
rate. The fees and expenses of the arbitrators and the Unrelated Accounting Firm
shall be paid half by the Seller and half by the Purchaser. Notwithstanding the
foregoing, within twelve months following the Closing, the Purchaser shall
submit to the Seller written documentation of all Liabilities incurred by the
Purchaser as a direct result of any breach that causes a reduction in the amount
payable to the Seller at Closing pursuant to this Section 2.4. The Purchaser
shall pay to the Seller the amount by which the actual Liabilities incurred by
the Purchaser as a result of any such breach is less than any such deducted
amount. In the same manner the Seller shall reimburse the Purchaser the amount
by which the Liabilities actually incurred by the Purchaser as a result of such
breach exceeds any amount deducted pursuant to this Section 2.4.
ARTICLE III
Representations and Warranties of the Seller
In order to induce AHI and the Purchaser to enter into this
Agreement and the License Agreement and to consummate the transactions
contemplated hereby, the Seller makes the representations, warranties and
covenants set forth below to AHI and the Purchaser. For purposes of this Article
III, all references to the LE Division shall be deemed to include the Purchased
Marks, the Licensed Mark and the Patent.
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ss.3.1 Organization
(a) The Seller is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. The
Seller is duly qualified to transact business in all jurisdictions where the
ownership or leasing of the Purchased Assets or the conduct of the business of
the LE Division requires such qualification. Each jurisdiction in which the
Seller is so qualified is listed on Schedule 3.1 hereto. The Seller has the
requisite corporate power and authority to own or lease and operate its
properties and conduct the business of the LE Division as presently conducted.
(b) Trademark Corp. , is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Trademark
Corp. is duly qualified to transact business in all jurisdictions where the
ownership or leasing of the Licensed Mark requires such qualification. Trademark
Corp. has the requisite corporate power and authority to own and license the
Licensed Marks.
ss.3.2 Authorization; Enforceability
The Seller has the corporate power and authority to execute,
deliver and perform this Agreement. This Agreement and all other documents to be
executed and delivered by the Seller and/or Trademark Corp. pursuant to this
Agreement has been or will be duly authorized, executed and delivered and, when
executed and delivered, will constitute the legal, valid and binding obligations
of the Seller or Trademark Corp., as applicable, enforceable in accordance with
their respective terms, except to the extent that their enforcement is limited
by bankruptcy, insolvency, reorganization or other laws relating to or affecting
the enforcement of creditors' rights generally and by general principles of
equity.
ss.3.3 No Violation or Conflict
The execution, delivery and performance of this Agreement and
the documents attached as Exhibits hereto, as applicable, by the Seller, and the
Security Agreement (as hereinafter defined), by Trademark Corp. and the
consummation by the Seller and Trademark Corp. of the transactions contemplated
hereby and thereby: (a) except as forth on Schedule 3.3 do not violate or
conflict with any provision of law or regulation (whether federal, state or
local), or any writ, order or decree of any court or governmental or regulatory
authority, or any provision of the Seller's Certificate of Incorporation or
Bylaws; and (b) except as set forth on Schedule 3.3 hereto, do not, with or
without the passage of time or the giving of notice, or both, result in the
breach of, or constitute a default, cause the acceleration of performance or
require any consent under, or result in the creation of any lien, charge or
encumbrance upon any of the Purchased Assets, Licensed Mark or the Patent,
(other than pursuant to the Security Agreement) pursuant to any instrument or
agreement to which the Seller or Trademark Corp. is a party or by which the
Seller or Trademark Corp. or their respective properties may be bound or
affected, other than instruments or agreements as to which consent shall have
been obtained or waived at or prior to the Closing.
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ss.3.4 Consents of Governmental Authorities and Others
Except as set forth on Schedule 3.4 hereto, no consent,
approval or authorization of, or registration, qualification or filing with, any
federal, state or local governmental or regulatory authority, or any other
Person, is required in connection with the execution, delivery or performance of
this Agreement by the Seller or the consummation by the Seller of the
transactions contemplated hereby.
ss.3.5 Conduct of Business
Except as disclosed on Schedule 3.5 hereto, since December 31,
1997, the Seller has conducted business of the LE Division in the ordinary and
usual course and there has not occurred any material adverse change in the
condition (financial or otherwise), results of operations, por business of the
LE Division or the Purchased Assets. Without limiting the generality of the
foregoing, except as disclosed on Schedule 3.5 hereto, since December 31, 1997,
the Seller has not, with respect to or affecting the LE Division or its
liabilities or the Purchased Assets: (a) suffered any damage, destruction or
loss, whether or not covered by insurance, on any of its properties, assets, or
business used in the operation of the LE Division; (b) granted or made any
mortgage or pledge or subjected any of its properties or assets used in the
operation of the LE Division or the Purchased Assets to any lien, charge or
encumbrance of any kind, except liens for taxes not currently due other than
liens and encumbrances that will be released at or prior to the Closing; or (c)
received notice of any material adverse change in its relationship with any
financial institution, customer or supplier with which it currently does
business, nor is it aware of any circumstances that could reasonably lead to
such a change, nor does the Seller have any knowledge of any of the foregoing.
ss.3.6 Litigation
Except as set forth on Schedule 3.6 hereto, there are no
actions, suits, investigations, claims or proceedings ("Litigation") pending or,
to the knowledge of the Seller, threatened before any court or by or before any
governmental or regulatory authority or arbitrator, (a) affecting the LE
Division (as plaintiff or defendant) which could reasonably be expected to, have
a material adverse effect on the condition (financial or otherwise), results of
operations, or business of the LE Division or (b) against the Seller relating to
the Purchased Assets, the transactions contemplated by this Agreement or product
liability or similar liability and there exist no facts or circumstances known
to Seller creating any reasonable basis for the institution of any such action,
suit, investigation, claim or proceeding described above. Schedule 3.6 reflects
whether or not Litigation referred to thereon is covered by Seller's insurance
policies for product liability.
ss.3.7 Brokers
The Seller has not employed any financial advisor, broker or
finder, with respect to which the Purchaser has incurred or will incur any
broker's, finder's, investment banking or similar fees, commissions or expenses
in connection with the transactions contemplated by this Agreement.
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ss.3.8 Compliance
The Seller, with respect or relating to the LE Division and
the Purchased Assets is in material compliance with all federal, state, local
and foreign laws, ordinances, regulations, judgments, rulings, orders and other
requirements applicable to it including, without limitation, those relating to
(a) the development, manufacture, packaging, distribution and marketing of
products and (b) employment, safety and health. The Seller is not subject to any
judicial, governmental or administrative order, judgment or decree which relate
to or bind the LE Division or the Purchased Assets. The Purchaser has been
furnished with true and correct copies of all material reports of inspections of
the LE Division through the date hereof, under all applicable federal, state,
foreign and local laws and regulations.
ss.3.9 Rights, Warrants, Options
Except as set forth in Schedule 3.9 hereto, there are no
outstanding (a) securities or instruments convertible into or exercisable for
any of the capital stock or other equity interests of the Seller; (b) options,
warrants, subscriptions or other rights to acquire capital stock or other equity
interests of the Seller; or (c) commitments, agreements or understandings of any
kind, including employee benefit arrangements, relating to the issuance or
repurchase by the Seller of any capital stock or other equity interests of the
Seller.
ss.3.10 Financial Statements and Other Financial Information
The Seller has previously delivered to the Purchaser true and
complete copies of certain financial information other than projections (the
"Financial Information"), it being understood that any portions thereof
pertaining exclusively to the Consumer Division may be deleted. The Financial
Statements and the Financial Information: (a) have been prepared in accordance
with the books of account and records of the Seller; and (b) fairly present, and
are true, correct and complete statements in all material respects of the
Seller's financial condition and the results of its operations at the dates and
for the periods specified therein; and (c) have been prepared in accordance with
GAAP consistently applied with prior periods.
ss.3.11 Title to Personal Property
The Seller has, or will have as of the Closing, good and
marketable title to the Purchased Assets, free and clear of any security
interests, liens, claims, charges or encumbrances whatsoever, except as set
forth in Schedule 3.11 hereto or specifically identified as such in the December
31, 1997 Financial Statements. Except for the Leases specifically identified in
Schedule 3.11 hereto, there are no assets owned by any third party which are
used in the operation of the LE Division, as presently conducted.
ss.3.12 Board Approval
The Board of Directors of the Seller and of Trademark Corp.
has approved this Agreement, the License Agreement and the transactions
contemplated hereby and thereby, in accordance with applicable law and as of the
Closing Date the Board of Directors of Trademark Corp. will have approved the
License Agreement, as hereinafter defined, and the Security Agreement.
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ss.3.13 Insurance
Schedule 3.13 sets forth a true and complete list of all
material insurance policies, exclusive of worker's compensation policies and
directors and officer's insurance (the "Insurance Policies") providing insurance
coverage of any nature used in the operation of the LE Division. The Seller has
previously made available to Purchaser a true and complete copy of all of such
insurance policies, as amended to the date hereof. Such policies are sufficient
for compliance by the Seller with all requirements of law and all agreements to
which the Seller is a party or by which any of its assets are bound. All of such
policies are in full force and effect and are valid and enforceable in
accordance with their terms, and the Seller has complied with all material terms
and conditions of such policies, including premium payments. None of the
insurance carriers has indicated to the Seller an intention to cancel any such
policy. Except as set forth on Schedule 3.13, the Seller has no material claim
pending against any of the insurance carriers under any of such policies
relating to the LE Division and Seller has no knowledge of any actual or alleged
occurrence which could reasonably be expected to give rise to any such claim.
ss.3.14 Licenses
Schedule 3.14 hereto lists all authorizations, consents,
approvals, franchises, licenses, including operating licenses, and permits
required under applicable law or regulation for the operation of the LE Division
as presently operated (the "Governmental Authorizations"). Schedule 3.14 hereto
also lists all products of the LE Division which are exported by part number
(listed under "item") and commodity jurisdiction export numbers (listed under
"class") and also lists all products of the LE Division which are exported but
that do not require Governmental Authorizations. All the Governmental
Authorizations have been duly issued or obtained and are in full force and
effect, and the Seller is in compliance with the terms of all the Governmental
Authorizations. The Seller does not have any knowledge of any facts which could
reasonably be expected to cause it to believe that the Governmental
Authorizations will not be renewed by the appropriate governmental authorities
in the ordinary course. Neither the execution, delivery nor performance of this
Agreement shall adversely affect the status of any of the Governmental
Authorizations.
ss.3.15 Proprietary Rights
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Set forth on Schedule 3.15(a) hereto is a list of (i) the
Purchased Marks, and (ii) books and other records containing each formulation,
procedure, process, trade secret, know-how and proprietary information,
including the formulations, procedures, processes, trade secrets, know-how and
proprietary information licensed pursuant to the License Agreement ("Licensed
Formulations") or used or necessary in connection with the operation of the LE
Division (together with the licensed Formulations, the "Formulations"). Except
as set forth on Schedule 3.15(a) hereto: (a) the Seller is the sole and
exclusive owner of all right, title and interest in and to all of the trademark
registrations and applications for the Purchased Marks and the Licensed marks
listed on Schedule A to License Agreement (the "Schedule A Marks") and has the
right to use all such intellectual property and to license the Licensed Marks,
the Patent and the Licensed Formulations; (b) no royalties or fees (license or
otherwise) are payable by the Seller to any Person by reason of the ownership or
use of any of the Purchased Marks, Licensed Marks, Patent or Formulations
(collectively, the "Intangible Property"); (c) there have been no claims made
against the Seller asserting the invalidity, abuse, misuse, or unenforceability
of the Licensed Marks and the Purchased Marks (the "Marks") and with respect to
the Schedule A Marks and the Purchased marks only (the "Premier Marks"), Seller
has no knowledge of the existence of any reasonable grounds for any such claims;
(d) the Seller has not made any claim of any violation or infringement by others
of its rights in the Marks and, with respect to the Premier Marks only, Seller
has no knowledge of any reasonable grounds for such claims to exist; (e) to the
Seller's knowledge, the use of the Marks is not infringing upon the asserted
rights of others and, to the Seller's actual knowledge, none of the use of the
Intangible Property by the Seller, the operation of the LE Division, the
manufacture of its products, nor are the Formulations infringing upon any rights
of others; (f) the Intangible Property includes all rights necessary for the
Seller to be engaged in the business of the LE Division as presently being
conducted; (g) to Seller's good faith belief, the consummation of the
transactions contemplated hereby will not alter or impair the Marks; (h) no
interest of the Seller's rights to any of the Marks has been assigned,
transferred, licensed or sublicensed by the Seller to third parties, other than
to AHI or an Affiliate of AHI; (i) to the extent that any item constituting part
of the Intangible Property has been registered with, filed in or issued by, as
the case may be, any governmental or other regulatory authority, such
registrations, filings or issuances are listed on Schedule 3.15(a) hereto, and,
to Seller's knowledge, remain in full force and effect.
Notwithstanding the foregoing, Seller makes no representations
or warranty that the Patent or Marks or any registration covered by this
Agreement are valid or that any Formulation constitutes legally protected
proprietary information. Furthermore, it is understood and agreed that Seller
makes no representation or warranty that AHI's or Purchaser's or any of their
respective Affiliate's exercise of any rights under this Agreement will not
result in the infringement of any rights of a third party. Seller shall have no
liability to AHI or Purchaser or any of their respective Affiliates for any
damages of any kind resulting from the infringement of the rights of any third
party as a result of the exercise of the rights granted under the License
Agreement or as a result of any determination that any or all of the Marks or
Patent or any registrations are invalid or unenforceable or any determination
that the Formulations are not legally protected as confidential proprietary
information.
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ss.3.16 Major Customers and Suppliers; Supplies
Attached as Schedule 3.16 hereto is a list of the ten (10)
largest customers (measured by dollar volume) of the LE Division and all
suppliers of significant goods or services used in the operation of the LE
Division for the period ended December 31, 1997. Except as set forth in Schedule
3.16 hereto, there has not been and, to its knowledge, there will not be any
material adverse change in the relations of the Seller with its respective
suppliers, contractors, licensors and lessors used in the operation of the LE
Division, as a result of the announcement or consummation of the transactions
contemplated by this Agreement and the Seller has no knowledge that any of the
Seller's suppliers used in the operation of the LE Division, has or is
contemplating terminating its relationship with the LE Division of the Seller.
To the Seller's knowledge, no such major customer or supplier has experienced
any type of work stoppage or other material adverse circumstances or conditions
that may materially adversely affect the Purchaser's future relationship with
any such supplier. Except as set forth on Schedule 3.16, there are no pending
disputes or controversies between any such supplier of the Seller, and to
Seller's knowledge there exist no facts which in the future could reasonably be
expected to impair the relationship of the Purchaser with such suppliers.
ss.3.17 Tax Matters
All tax returns and tax reports required to be filed with
respect to the LE Division have been timely filed (or appropriate extensions
have been obtained or the issue has been remedied in accordance with applicable
law) with the appropriate governmental agencies in all jurisdictions in which
such returns and reports are required to be filed, all of the foregoing as filed
are true, correct and complete and, in all respects, reflect accurately all
liability for taxes of the Seller for the periods to which such returns relate,
and all amounts shown as owing thereon have been paid. All income, profits,
franchise, sales, use, value added, occupancy, property, excise, payroll, FICA,
FUTA and other taxes (including interest and penalties), if any, collectible or
payable by the Seller or relating to or chargeable against any of its assets,
revenues or income through December 31, 1997, and through the Closing Date, were
fully collected and paid by such date or provided for by adequate reserves in
the December 31, 1997 Financial Statements and all similar items due through the
Closing Date will have been fully paid by that date or provided for by adequate
reserves.
ss.3.18 Products
Except as set forth on Schedule 3.18 hereto, Seller has no
knowledge of any set of facts (i) which could reasonably be expected to furnish
a basis for the recall, withdrawal or suspension of any product, governmental
license, approval or consent of any governmental or regulatory agency with
respect to any product manufactured, developed, distributed or sold by the LE
Division (the "Products"), (ii) which could reasonably be expected to furnish a
basis for the recall, withdrawal or suspension by order of any state, federal or
foreign court of law of any Product, or (iii) which could reasonably be expected
to cause the Seller to recall, withdraw or suspend any such Product from the
market or to change the marketing classification of any such Product. True,
correct and complete copies of all material correspondence received or sent by
or on behalf of the Seller relating to violations of governmental laws, rules or
regulations affecting the LE Division during the past year.
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ss.3.19 Solvency
The Seller is able to pay its debts as they mature and, to the
best of its knowledge, the transfer of the Purchased Assets by the Seller to
Purchaser in accordance with the terms of this Agreement shall not constitute a
voidable preference or transfer in fraud by any creditor of the Seller under
applicable federal or state insolvency law.
ss.3.20 Inventories
The Seller has and, until the Closing, will continue to have
adequate quantities and types of inventory to enable it to conduct the business
of the LE Division as presently conducted and as anticipated to be conducted.
Except as set forth on Schedule 3.20 hereto, all inventory of the Seller and all
fixed and tangible assets which are included in the Purchased Assets is located
in its warehouse facility in Bennington, Vermont. Schedule 3.20 discloses the
locations of such assets.
ss.3.21 Absence of Certain Business Practices
Except as set forth in Schedule 3.21, none of the Seller, its
related parties or any Affiliate of the Seller, or to its knowledge, any other
Person acting on behalf of the Seller, acting alone or together, has with
respect to the business or activities of the LE Division: (a) received, directly
or indirectly, any rebates, payments, commissions, promotional allowances or any
other economic benefits, regardless of their nature or type, from any customer,
supplier, trading company, shipping company, governmental employee or other
Person with whom the Seller has done business directly or indirectly; or (b)
directly or indirectly, given or agreed to give any gift or similar benefit to
any customer, supplier, trading company, shipping company, governmental employee
or other Person who is or may be in a position to help or hinder the business of
the Seller (or assist the Seller in connection with any actual or proposed
transaction) which (i) may subject the Seller to any material damage or any
penalty in any civil, criminal or governmental litigation or proceeding, (ii) if
not given in the past, may have had a material adverse effect on the assets,
business or, operations of the Seller as reflected in the Financial Statements
or (iii) if not continued in the future, may materially adversely affect the
condition (financial or otherwise), business or results of operations of the LE
Division or subject the LE Division to suit or penalty in any private or
governmental litigation or proceeding.
ss.3.22 Accounts and Notes Receivable
In order to facilitate the Seller's continued collection
thereof, the Seller has delivered or will deliver as of the Closing Date to
Purchaser a true and complete aged list of unpaid accounts and notes receivable
owing to the Seller in connection with its operation of the LE Division as of
December 31, 1997, March 31 , 1998 and as of the Closing Date (together with the
Closing Date Receivables referred to in Section 5.12, the "Receivables"). All of
the Receivables (as in effect as of the Closing Date constitute or will
constitute as of the Closing Date only bona fide, valid and binding claims
arising in the ordinary course of the Seller's operation of the LE Division,
subject to no valid counterclaims or setoffs, at the aggregate recorded amount
thereof subject to normal reserves for doubtful accounts.
ss.3.23 LE Division Assets
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The Purchased Assets, except for the Excluded Assets and any
Copyright interests owned by parties other than the Seller, include all assets
owned or used by the Seller which relate to or are used or useful in the
operation of the LE Division or the manufacture or development of the Products.
ss.3.24 Disclosure
The Seller has filed or will file, within required time
periods, in compliance with applicable law, all reports, registration statements
and filings, including any necessary amendments thereto ("Filings"), required to
be filed by it pursuant to the Exchange Act and the Securities Act. No
representation or warranty of the Seller contained in this Agreement, and no
statement, report, Filing or certificate furnished by or on behalf of the Seller
pursuant hereto or in connection with the transactions contemplated hereby,
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary in order to make the statements
contained herein or therein not misleading or omits or will omit to state a
material fact necessary in order to provide the Seller's stockholders with full
and proper information as to the business, financial condition, or results of
operations of the LE Division.
ARTICLE IV
Representations and Warranties of AHI and the Purchaser
In order to induce the Seller to enter into this Agreement and
to consummate the transactions contemplated hereby, AHI and the Purchaser,
jointly and severally, make the representations and warranties set forth below
to the Seller.
ss.4.1 Organization; Standing and Power
Each of AHI and the Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the state of its
incorporation. Each of AHI and the Purchaser is, or will be as of the Closing
Date, duly qualified to transact business as a foreign corporation in all
jurisdictions where the ownership or leasing of its respective properties or the
conduct of its respective businesses requires such qualification. Each of AHI
and the Purchaser has all requisite corporate power and authority to execute,
deliver and perform this Agreement and to consummate the transactions
contemplated hereby.
ss.4.2 Authorization; Enforceability
The execution, delivery and performance of this Agreement by
AHI and the Purchaser and the consummation by AHI and the Purchaser of the
transactions contemplated hereby have been duly authorized by all requisite
corporate action on the part of AHI and the Purchaser. This Agreement and any
and all other documents to be executed and delivered by AHI and the Purchaser
pursuant to this Agreement have been duly executed and delivered by AHI and the
Purchaser, and constitutes the legal, valid and binding obligation of AHI and
the Purchaser, enforceable in accordance with their terms, except to the extent
that their enforcement is limited by bankruptcy, insolvency, reorganization or
other laws relating to or affecting the enforcement of creditors' rights
generally and by general principles of equity.
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ss.4.3 No Violation or Conflict
The execution, delivery and performance of this Agreement by
AHI and the Purchaser and the consummation by AHI and the Purchaser of the
transactions contemplated hereby: (a) except as set forth on Schedule 3.3 do not
violate or conflict with any provision of law or regulation (whether federal,
state or local), or any writ, order or decree of any court or governmental or
regulatory authority, or any provision of AHI's or the Purchaser's Certificate
of Incorporation or Bylaws; and (b) except as set forth on Schedule 3.3 hereto,
do not, with or without the passage of time or the giving of notice, or both,
result in the breach of, or constitute a default, cause the acceleration of
performance or require any consent under, any instrument or agreement to which
AHI or the Purchaser is a party or by which AHI or the Purchaser or their
respective properties may be bound or affected, other than instruments or
agreements as to which consent shall have been obtained or waived at or prior to
the Closing.
ss.4.4 Validity of AHI Common Stock
The AHI Shares, when issued in accordance with the terms and
provisions of this Agreement, will be validly authorized, validly issued, fully
paid and nonassessable. Such AHI Shares shall be of the same class and having
the same rights as the duly authorized shares of Common Stock. Except as set
forth in Section 2.1(d), as of the Closing Date, the AHI Shares have been or
will be registered with the Commission under the Securities Act, such
registration statement is or shall be declared effective and no stop order shall
be in effect as of the Closing Date, with respect to the AHI Shares.
ss.4.5 Brokers
Neither AHI nor the Purchaser has employed any financial
advisor, broker or finder with respect to which the Seller will incur any
broker's, finder's, investment banking or similar fees, commissions or expenses,
in connection with the transactions contemplated by this Agreement.
ARTICLE V
Additional Agreements
ss.5.1 Survival
The representations, warranties, covenants and agreements of
AHI, the Purchaser and the Seller set forth in this Agreement shall survive the
Closing Date for a period of one year; provided, however, that such limitation
shall not apply with respect to any action based upon wrongful intent or
fraudulent actions, or wrongfully intentional: misrepresentations or breaches of
any party.
ss.5.2 Investigation
The representations, warranties, covenants and agreements set
forth in this
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Agreement shall not be affected or diminished in any way by any investigation
(or failure to investigate) at any time by or on behalf of the party for whose
benefit such representations, warranties, covenants and agreements were made;
provided, however, that each of the parties hereto agrees not to intentionally
conceal, prior to the Closing, from the other parties hereto, any actual
knowledge of any breach of any of such representations, warranties, covenants
and agreements. With respect to AHI or the Purchaser, the phrase "actual
knowledge" means the conscious awareness of Rob Schiller, Debbie Conley, Michael
Elliot, and, with respect to inventory only, Ken Kichner. All statements
contained herein or in any schedule, certificate, exhibit, list or other
document delivered pursuant hereto, shall be deemed to be representations and
warranties for purposes of this Agreement.
ss.5.3 Indemnification
(a) By Seller. Subject to the limitations set forth in Section
5.1, the Seller agrees to indemnify and hold harmless AHI, the Purchaser, and
their respective directors, officers, employees and agents from, against and in
respect of, the full amount of any and all liabilities, actions, suits,
proceedings, damages, claims, deficiencies, fines, assessments, judgments,
losses, taxes, penalties, interest, costs and expenses, including, without
limitation, reasonable fees and disbursements of counsel ("Liabilities"),
arising from, (i) any breach or violation of any of the representations,
warranties, covenants or agreements of the Seller contained in this Agreement or
any agreement referred to herein and delivered at or prior to the Closing; (ii)
any act or failure to act of the Seller or the conduct of its business arising
or occurring on or prior to the Closing Date without regard to whether such
claim exists on the Closing Date or arises at any time thereafter in respect of
or relating to, directly or indirectly, the Purchased Assets, the Licensed Mark
or the Patent; (iii) any obligation or liability of the Seller of any nature,
fixed, absolute, accrued, contingent or otherwise, not assumed by AHI or the
Purchaser in accordance with this Agreement, including any obligation or
liability relating to any product distributed, manufactured or sold by the
Seller prior to or after the Closing Date; (iv) any third party claims relating
to the use by the Seller of the Licensed Marks, the Patent or the formulations
licensed pursuant to the License Agreement that do not arise primarily out of or
relate primarily to any act or failure to act on the part of the Purchaser or
AHI; (v) any breach or violation of the Non-Compete Agreements by the parties
thereto, provided, however, that, the Seller shall have no obligation to the
Purchaser under this clause (v) for any actions other than by the Seller; (vi)
any sale by the Purchaser of any of the Products in accordance with Section 5.15
hereof, to the extent any such Liability arises out of any act or failure to act
on the part of the Seller prior to the Closing Date; (vii) any failure by the
Seller to comply with any applicable "bulk sales, "bulk transfer" or similar
laws including the time period and other requirements thereof as then in effect
(the "Bulk Sale Provisions"); and (viii) any violation or alleged violation of
any Environmental Laws relating to the Purchased Assets.
(b) By AHI and the Purchaser. Subject to the limitations set
forth in Section 5.1, AHI and the Purchaser agree, jointly and severally, to
indemnify and hold harmless the Seller and its directors, officers, employees
and agents, from, against and in respect of, the full amount of any and all
Liabilities arising from (i) any breach or violation of any of the
representations, warranties, covenants or agreements of AHI or the Purchaser
contained in this Agreement or any agreement referred to herein and delivered at
or prior to the Closing; (ii) any act or failure to act relating to the
operation by the Purchaser or AHI of the Purchased Assets, the Licensed Mark,
the Patent or the Formulations occurring from and after the Closing Date that
does not arise primarily out of or relate primarily to any act or failure to act
on the part of the Seller; and
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(iii) the sale of any Product by AHI or the Purchaser from and after the Closing
Date, except to the extent that any such Liability arises out of any act of or
failure to act on the part of the Seller that occurred prior to the Closing
Date; provided, however, that such indemnification shall not cover or apply to
any liability for sales taxes imposed upon the Purchaser under applicable law.
(c) Indemnity Procedure. A party or parties hereto agreeing to
be responsible for or to indemnify against any matter pursuant to this Agreement
is referred to herein as the "Indemnifying Party" and the other party or parties
claiming indemnity is referred to as the "Indemnified Party".
(i) An Indemnified Party under this Agreement shall,
with respect to claims asserted against such party by any third party, give
written notice to the Indemnifying Party of any liability which might give rise
to a claim for indemnity under this Agreement within sixty (60) business days of
the receipt of any written claim from any such third party, but not later than
twenty (20) days prior to the date any answer or responsive pleading is due, and
with respect to other matters for which the Indemnified Party may seek
indemnification, give prompt written notice to the Indemnifying Party of any
liability which might give rise to a claim for indemnity; provided, however,
that (i) any failure to give such notice will not waive any rights of the
Indemnified Party except to the extent the rights of the Indemnifying Party are
materially prejudiced, and (ii) with respect to claims by a party hereto, the
Indemnifying Party shall have a period of twenty (20) days in which to cure or
otherwise remedy any claim, provided, that if such breach or claim can be cured
within sixty (60) days, the Indemnified Party shall have up to sixty (60) days
in which to cure such claim and the parties shall first reasonably attempt to
settle any disputes regarding the amount of indemnification through direct
discussions.
(ii) With respect to claims by a third party, the
Indemnifying Party shall have the right, at its election, to take over the
defense or settlement of such claim by giving written notice to the Indemnified
Party at least fifteen (15) days prior to the time when an answer or other
responsive pleading or notice with respect thereto is required. If the
Indemnifying Party makes such election, it may conduct the defense of such claim
through counsel of its choosing (subject to the Indemnified Party's approval of
such counsel, which approval shall not be unreasonably withheld), shall be
solely responsible for the expenses of such defense and shall be bound by the
results of its defense or settlement of the claim. The Indemnifying Party shall
not settle any such claim without prior notice to and consultation with the
Indemnified Party, and no such settlement involving any equitable relief or
which might have an adverse effect on the Indemnified Party may be agreed to
without the written consent of the Indemnified Party (which consent shall not be
unreasonably withheld). So long as the Indemnifying Party is diligently
contesting any such claim in good faith, the Indemnified Party may pay or settle
such claim only at its own expense and the Indemnifying Party will not be
responsible for the fees of separate legal counsel to the Indemnified Party,
unless the named parties to any proceeding include both parties and
representation of both parties by the same counsel would be inappropriate. If
the Indemnifying Party does not make such election, or having made such election
does not, in the reasonable opinion of the Indemnified Party proceed diligently
to defend such claim, then the Indemnified Party may (after 20 days prior
written notice to the Indemnifying Party, or such shorter period as may be
necessary in order that the Indemnified Party's rights are not prejudiced), at
the expense of the Indemnifying Party, elect to take over the defense of and
proceed to handle such claim in its discretion and the Indemnifying Party shall
be bound by any defense or settlement that the Indemnified Party may make in
good faith with respect to such claim. In connection therewith, the
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Indemnifying Party will fully cooperate with the Indemnified Party should the
Indemnified Party elect to take over the defense of any such claim.
(iii) The parties agree to cooperate in defending such
third party claims and the Indemnified Party shall provide such cooperation and
such access to its books, records and properties as the Indemnifying Party shall
reasonably request with respect to any matter for which indemnification is
sought hereunder; and the parties hereto agree to cooperate with each other in
order to ensure the proper and adequate defense thereof.
(iv) With regard to claims of third parties for which
indemnification is payable hereunder, such indemnification shall be paid by the
Indemnifying Party upon the earlier to occur of: (i) the entry of a judgment
against the Indemnified Party and the expiration of any applicable appeal
period, or if earlier, five (5) days prior to the date that the judgment
creditor has the right to execute the judgment; (ii) the entry of an
unappealable judgment or final appellate decision against the Indemnified Party;
or (iii) a settlement of the claim in accordance herewith. Notwithstanding the
foregoing, provided that there is no dispute as to the applicability of
indemnification, the reasonable legal fees and expenses of counsel to the
Indemnified Party shall be reimbursed on a current basis by the Indemnifying
Party if such legal fees and expenses are a liability of the Indemnifying Party.
With regard to other claims for which indemnification is payable hereunder, such
indemnification shall be paid promptly by the Indemnifying Party upon demand by
the Indemnified Party.
(d) Holdback Provisions. In order to secure the obligations of
the Seller hereunder, the Purchaser will retain and hold back from the Purchase
Price, $600,000 of the Purchase Price (the "Holdback Fund") in cash and/or stock
(in accordance with Section 2.1(d) hereof), any cash portion of which will be
deposited by the Purchaser in a segregated interest bearing account, and
$480,000 of which will be released and remitted to the Seller on the 180th day
following the Closing Date, and the remainder of which will be released from the
Holdback Fund on the one year anniversary of the Closing Date (each, a "Release
Date"). Should the Indemnified Party be notified of any claims made while any of
the Holdback Funds are held by the Purchaser as set forth above, an amount equal
to a reasonable estimate of the amount to be indemnified shall remain in escrow
until the final resolution of such claim, notwithstanding the passing of a
Release Date. Upon final resolution of any claim, the Purchaser shall have the
right, to set-off and deduct from the Holdback Fund, upon written notice to the
Seller, such cash or that number of AHI Shares having a value equal to the
amount of any losses for which Seller is required to indemnify the Purchaser
pursuant to the provisions of Section 5.3(a) above. For purpose of this Section
5.3(d), the value of the AHI Shares shall equal the average closing price of
AHI's Common Stock on the American Stock Exchange (or such other exchange as
such shares may then be listed) for the ten consecutive trading day period
ending three trading days prior to the date of determination. In the event any
shares of AHI Common Stock are sold at the request of the Seller while held in
the Holdback Fund, the proceeds of any such sale shall be remitted to and held
as part of the Holdback Fund until released in accordance with the provisions of
this Section. So long as there is no claimed breach of any representation,
warranty, covenant or agreement by the Seller under this Agreement or the other
agreements contemplated hereby, and subject to any rights in favor of third
parties that may be granted by the Seller, the Seller shall be entitled to vote
the AHI Shares in the Holdback Fund and to receive dividends thereon, when, as
and if declared by the Board of Directors of AHI. Notwithstanding anything
contained in this Section 5.3(d) to the contrary, including the passing of a
Release Date, no cash or AHI Shares shall be released from the Holdback Fund
until such time as
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the Warrant Shares (as defined in Section 6.1(n)) have been registered with the
Commission under the Securities Act in accordance with the terms thereof.
(e) No indemnification payment shall be made pursuant to this
Section 5.3 unless and until the amounts the Indemnified Party would otherwise
be entitled to receive as indemnification under this Section 5.3 exceeds
$200,000, (which amount shall be reduced by claims for non-delivery of assets
set forth on Schedule 5.5 on or prior to the due date therefor as set forth in
Section 5.5 based on the net book value thereof at December 31, 1997), excluding
(for purposes of this Section 5.3(e) only) fees and expenses of counsel. If such
amount exceeds $200,000 the Seller shall provide indemnification under this
Section 5.3 for all Liabilities to the extent they exceed $200,000.
(f) Notwithstanding the foregoing, each party assumes
responsibility for the design and manufacture of products using the Formulations
after the date hereof.
ss.5.4 Preparation of Closing Date Schedule
The Seller shall conduct a physical count of all inventory
included in the Purchased Assets during the three day period immediately
preceding the Closing Date and shall prepare a schedule of the inventory
included in the Purchased Assets as of the Closing Date, which shall identify
inventory relating to orders set forth on Schedule 1.2 (the "Closing Date
Schedule"). The Purchaser and its independent accountants shall have the right
and opportunity to observe and confirm the taking of such inventory and shall be
afforded access to the working papers and other records of the Seller and its
accountants in connection with such inventory count. The inventory will be
priced at the value shown on the audited books and records of the Purchaser at
December 31, 1997, and shall be (i) increased by all inventory purchases in
accordance with the terms hereof from December 31, 1997 through the Closing at
the Seller's standard costs for such inventory, and (ii) decreased by (A) all
sales of inventory from December 31, 1997 through the Closing and (B) all
inventory relating to orders set forth on Schedule 1.2 (all such increases and
decreases to inventory) valued consistent with the Seller's policies and
procedures applied in the audited balance sheet dated December 31, 1997).
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ss.5.5 Delivery of Purchased Assets
The Seller shall pack, under the supervision of, and at the
specific and reasonable direction of, the representatives of the Purchaser, all
inventory, raw materials, work in process, finished goods and all of the other
tangible Purchased Assets including inventory and equipment and shall forward
such Purchased Assets from the Seller's plant to the location designated by the
Purchaser in the United States, as promptly as practicable, but in no event
later than ninety (90) days following the Closing Date. The cost of such packing
and shipping shall be borne by the Seller to the extent of $200,000 evidenced by
reasonably satisfactory books and records, and the Seller shall be responsible
for such costs in excess of $200,000. Costs for purposes of this section shall
include Seller's out of pocket costs (including salaries and benefits).
Notwithstanding the foregoing, the Purchaser shall not take delivery of the
Purchased Assets specified on Schedule 5.5 hereto until the earlier of to occur
sixty (60) days following the Closing Date and the fulfillment of the orders set
forth in Schedule 1.2 hereto, upon which occurrence the Seller shall pack such
items at its own expense (in accordance with the Purchaser's reasonable
specifications) and deliver them to the Purchaser within fifteen (15) days
thereof.
ss.5.6 CS Inventory
The Seller is in possession of a quantity of CS-1. To the
extent that the Seller can convert any available quantity of the CS-1 to CS on a
commercially reasonable basis, as determined in good faith by the Seller, the
Seller shall offer for sale to the Purchaser, prior to offer or sale to any
third party, such quantities of CS as the Purchaser, AHI or its Affiliates may,
from time to time request (the "Offered CS"), at such prices to be agreed to
from time to time by the parties, provided, however, that such prices shall at
all times be $3.00 per pound less than the lowest available alternative price
offered by suppliers of CS tear gas satisfying the military specification
MIL-C-51029C, other than AHI of its Affiliates. The parties agree that the
Seller shall have no obligation to maintain any quantity of CS tear gas. In the
event the Purchaser desires to purchase the Offered CS but was unable to agree
with the Seller to a purchase price, then the Offered CS shall not be offered to
any third parties on terms more favorable than was required to be offered to the
Purchaser in accordance with this Section 5.6.
ss.5.7 Mark VI Molds
The Seller shall license to the Purchaser, as part of the
License Agreement, the Patent for the Seller's Mark VI mold, the right to
manufacture such mold and the right to use the Mark VI mold currently in the
possession of AHI for use by the Purchaser for the remainder of such Patents'
useful life for the sale of products in accordance with the terms and conditions
set forth in the License Agreement. The Seller agrees to sell to AHI or its
Affiliates, from time to time, a reasonable supply of Mark VI parts for use in
connection with the sale of products for use by AHI or its Affiliates, at 1.5
times Seller's cost of manufacture for so long as Seller is manufacturing such
parts. The License Agreement shall supersede any and all licenses or rights
granted by the Seller to AHI, its Affiliates or the Purchaser with respect to
such molds. The Seller agrees to give AHI and the Purchaser 90 days written
notice prior to any sale by it of the Patent or the Mark VI mold of the material
terms of such proposed sale.
ss.5.8 Transition
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The Seller agrees to assist the Purchaser with the transition
of the Purchased Assets from the Seller to the Purchaser including the
installation of the equipment comprising Purchased Assets at the facility
designated by the Purchaser. In connection therewith, the Seller agrees to make
the services of its employee, Bernard Graney (at his sole discretion no more
than two consecutive days at a time), or another individual with comparable
background and experience, available to the Purchaser at its offices in Wyoming,
at mutually convenient times upon ten (10) days prior notice by the Purchaser,
to assist with such transition, for an aggregate of fifteen (15) business days
following the Closing Date. The Seller shall make such employee available to the
Purchaser at its offices in Wyoming to assist with such transition, for such
number of additional days as the Purchaser shall reasonably request as set forth
above for a per diem fee equal to 130% of such employee's salary for each such
day (computed on the basis of such employee's annual salary paid to him by the
Seller during the year in which services are rendered) plus reasonable expenses
of travel, lodging and meals.
ss.5.9 Insurance Policies
The Seller agrees to maintain in full force and effect, until
the fifth anniversary of the Closing Date, product liability insurance policies
with companies having an "A" rating or better naming the Purchaser as an
additional insured with respect to all Products in the amount of $1 million per
occurrence, $3 million in the aggregate and a $2 million umbrella. The Purchaser
agrees to maintain in full force and effect, until the seventh anniversary of
the Closing Date, product liability insurance policies with companies having an
"A" rating or better naming the Seller as an additional insured with respect to
all Products using the Licensed Mark, the Patent, the Formulations or the
Purchased Assets, in the amount of $1 million per occurrence, and $3 million in
the aggregate and a $2 million umbrella. As proof of such insurance, each party
will submit to the other a fully paid certificate of insurance naming the other
party as an additional insured.
ss.5.10 Bulk Sale
The Seller agrees to comply with all Bulk Sales Provisions
applicable to the transactions contemplated hereby. The Seller agrees to pay
when due and discharge (a) all claims of creditors and all taxes and interest
and penalties and all other liabilities of any nature and which could be
collected from the Purchaser by reason of the Seller's failure to fully comply
with any of the Bulk Sales Provisions and (b) all sales and other state and
local taxes owing by the Seller in respect of the operation of the LE Division
up to and including the Closing Date.
ss.5.11 Intellectual Property Assignment
(a) The Seller agrees to transfer and assign, at Closing, all
of its right title and interest in and to the Licensed Mark and the Patent, to a
newly formed wholly-owned subsidiary corporation of the Seller organized under
the laws of the State of Delaware ("Trademark Corp.") having a duly adopted
Certificate of Incorporation and By-Laws in the form attached hereto as Exhibit
A (the "Organizational Documents") and By-Laws in the form reasonably acceptable
to Purchaser. The Seller shall cause Trademark Corp. to license to the
Purchaser, pursuant to a License Agreement substantially in the form attached
hereto as Exhibit B (the "License Agreement"), the Licensed Mark and the Patent.
The Seller shall pledge to the Purchaser all of its stock and any other interest
that it owns in Trademark Corp., pursuant to a Pledge Agreement in the form
attached hereto as Exhibit C (the "Pledge Agreement"). The Seller shall cause
Trademark
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Corp. to grant to the Purchaser a first priority security interest in the
Licensed Mark and the Patent pursuant to a Security Agreement in the form
attached hereto as Exhibit D (the "Security Agreement").
(b) During the term the term of the License Agreement the
Seller shall not, (i) alter, amend or repeal or permit the same to occur
(without the unanimous consent of the Board of Directors of Trademark Corp.) any
of the provisions of the Organizational Documents of Trademark Corp. (the
"Charter"), (ii) take or permit to be taken any action in violation of the
Organizational Documents, (iii) make loans to Trademark Corp. provided it may
make capital contributions from time to time due, (iv) transfer, assign or
otherwise convey any interest in Trademark Corp. to any Person, other than AHI
or the Purchaser, that does not agree to be bound by the terms of this Section
5.11(b), the Pledge Agreement and the Security Agreement, or (v) cause the
Trademark Corp. to pledge or encumber any of its assets unless such pledge or
encumbrance is subordinated to the security interest of AHI and the Purchaser
under the Pledge Agreement and the holder thereof agrees in writing to waive the
right to file an involuntary bankruptcy petition against Trademark Corp. with
regard to such debt. The Seller shall cause and maintain at all times the
election of one designee of Licensee (under the License Agreement) to the Board
of Directors of Trademark Corp.
ss.5.12 Receivables
The Seller will deliver to the Purchaser a true and complete
aged list of unpaid accounts and notes receivable owing to the Seller in
connection with its operation of the LE Division as of the Closing Date (the
"Closing Date Receivables").
ss.5.13 Issuance of Warrant
The Seller shall issue to AHI at the Closing the Warrant (as
defined in Section 6.1(n) hereof), which Warrant shall include, but not be
limited to, the terms described in Section 6.1(n) hereof.
ss.5.14 Information Statement
As soon as is practicable following the execution of this
Agreement by the parties, but in no event more than fifteen (15) days following
execution hereof so long as Seller is provided the information with respect to
AHI and/or the Purchaser that is required to be contained in the Information
Statement, the Seller shall prepare and file with the Commission an Information
Statement complying with the Exchange Act and the rules and regulations
promulgated thereunder, and thereafter use its best efforts to timely respond to
the Commission's comments thereto. The Seller further agrees to mail such
Information Statement to its stockholders as soon as is practicable following
the filing of the Information Statement with the Commission and the Seller's
response to the Commission's comments thereto, if any. The Seller further agrees
that the only subject to be addressed in the Information Statement shall be this
Agreement and the transactions contemplated hereby. The Purchaser and AHI agree
to reasonably cooperate with the Seller, and to provide reasonably requested
information with respect to AHI and the Purchaser necessary to complete the
Information Statement.
ss.5.15 Backlog
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(a) Upon the consummation of the transactions contemplated
hereby on the Closing Date, the Backlog shall become the property of the
Purchaser. The Purchaser shall pay to the Seller a commission on each Backlog
order (the "Backlog Commission") shipped following the Closing Date in an amount
equal to 25% of the gross profit on such order, based upon the Seller's standard
costs, earned by the Purchaser on each such item of Backlog. For purposes of
calculating commissions, gross profit shall be selling price less Seller's
standard costs. The Backlog Commission shall be earned by and paid to the Seller
by the Purchaser only upon the satisfaction of the account receivable of the
Purchaser for such item of Backlog. The Purchaser shall pay the Backlog
Commission in cash to the Seller within the earlier to occur of (i) two business
days of an aggregate of $50,000.00 or more in outstanding Backlog Commissions
being earned and owing to the Seller, and (ii) the fifteenth (15th) day of each
month with respect to payment of Backlog Commissions earned during the prior
month. Backlog Commission shall be deemed earned and owing to the Seller upon
satisfaction of the account receivable for such item of Backlog.
(b) The Seller agrees that specifications for all Backlog
orders shall be as set forth on Schedule 5.15 hereto. The Purchaser agrees to
satisfy all specifications for Backlog orders set forth on Schedule 5.15 hereto
and shall not be responsible for satisfying any specifications not set forth
thereon. Schedule 5.15 shall be delivered at Closing.
(c) In the event any Product delivered or attempted to be
delivered by the Purchaser to fill a Backlog order is returned by the customer
due to the fault of the Purchaser in fulfilling such order, the estimated
Backlog Commission (based upon the Seller's standard costs) shall be paid to the
Seller. Such determination of fault shall be made in good faith by the Purchaser
and the Seller; provided, however, that in the event the Purchaser and the
Seller can not agree as to any such determination, such dispute shall be
submitted to arbitration in accordance with Section 8.19 hereof.
(d) Notwithstanding anything in this Agreement to the
contrary, from and after the date hereof, before agreeing to acceptance of any
international order or any domestic order greater than $7,500.00 the Seller
shall first provide the Purchaser with a gross margin report, copy of the
purchase order and terms and product specifications, with respect thereto.
5.16 Joint Obligations
All agreements, covenants, representations and warranties contained
herein on the part of the Purchaser shall be the joint obligation of AHI.
ARTICLE VI
Conditions Precedent; Termination
ss.6.1 Conditions Precedent to the Obligations of AHI and the
Purchaser
Each and every obligation of AHI and the Purchaser to
consummate the transactions described in this Agreement and any and all
liability of AHI and the Purchaser to the Seller shall be subject to the
fulfillment or waiver by AHI and Purchaser on or before the Closing
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Date of the following conditions precedent:
(a) Representations and Warranties True. Each of the
representations and warranties of the Seller contained herein or in any
certificate or other document delivered pursuant to this Agreement or in
connection with the transactions contemplated hereby shall be true and correct
in all respects as of the Closing Date with the same force and effect as though
made on and as of such date (except for changes specifically permitted by this
Agreement), which shall include changes to the schedules as a result of
occurrences following the execution date of this Agreement that are accepted by
Purchaser in writing.
(b) Performance. The Seller shall have performed and complied
in all material respects with all of the agreements, covenants and obligations
under this Agreement to be performed or complied with by each of them on or
prior to the Closing Date.
(c) No Adverse Change. Except as expressly permitted or
contemplated by this Agreement, no event or condition shall have occurred which
has materially adversely affected or may materially adversely affect in any
respect the condition (financial or otherwise) results of operations or business
of the LE Division since the date hereof.
(d) Certificates. The Seller shall have delivered to the
Purchaser a certificate dated the Closing Date, certifying that the conditions
specified in Section 6.1(a), (b) and (c) above have been fulfilled and as to
such other matters as the Purchaser may reasonably request. The Secretary or
Assistant Secretary of the Seller shall have delivered to the Purchaser a
certificate, dated the Closing Date, certifying the names and signatures of the
officers thereof authorized to sign this Agreement and the Exhibits hereto to
which it is a party, the Certificate of Incorporation and Bylaws of the Seller,
resolutions duly adopted by the Board of Directors of the Seller, which have not
been rescinded or modified, authorizing the Agreement and the transactions
contemplated hereby, and the good standing of the Seller as evidence by
certificates of appropriate state authorities.
(e) No Litigation. No litigation, arbitration or other legal
or administrative proceeding shall have been commenced or be pending by or
before any court, arbitration panel or governmental authority or official, and
no statute, rule or regulation of any foreign or domestic, national or local
government or agency thereof shall have been enacted after the date of this
Agreement, and no judicial or administrative decision shall have been rendered,
which in each case enjoins or prohibits, or seeks to enjoin or prohibit, the
consummation of all or any of the transactions contemplated by this Agreement.
(f) Consents. The Seller shall have obtained all
authorizations, consents, waivers and approvals and given all notices as may be
required to consummate the transactions contemplated by this Agreement
including, but not limited to, approval of the Seller's stockholders, delivery
of the Information Statement to its stockholders, notices to creditors of the
Seller in respect of bulk transfer laws, if applicable, or otherwise.
(g) Opinion of Counsel. An opinion letter from counsel to the
Seller addressed to AHI and the Purchaser, in form and substance satisfactory to
the Purchaser shall have been delivered to AHI and the Purchaser at the Closing.
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(h) License Agreement. The Trademark Corp. shall have entered
into the License Agreement.
(i) Pledge Agreement. The Seller shall have entered into the
Pledge Agreement.
(j) Security Agreement. The Seller shall have caused Trademark
Corp. to enter into the Security Agreement.
(k) Non-Competition Agreements. The Seller shall have entered
into on each of the Non-Competition Agreements in the forms attached hereto as
Exhibits E and F, respectively (collectively, the "Non-Competition Agreement").
Each of Jon Goodrich, Chief Executive Officer of the Seller ("Goodrich") and
certain the employees of the Seller whose names are set forth in Schedule 6.1(k)
hereto shall have entered into non-competition and confidentiality agreements in
the form reasonably acceptable to AHI and Purchaser;.
(l) Board Approval. The Board of Directors of AHI and the
Purchaser shall have approved this Agreement and the transactions contemplated
hereby.
(m) Competent Authority. The Seller shall have transferred to
the Purchaser "Competent Authority," to the extent allowed by, and in accordance
with applicable law, to enable the Purchaser to ship the Purchased Assets to the
locations designated by the Purchaser.
(n) Warrant. The Seller shall have issued to AHI an
immediately exercisable three (3) year Warrant, in the form reasonable
acceptable to AHI (the "Warrant"), to purchase 300,000 shares of Mace Common
Stock at an exercise price of $1.25 per share, having customary anti-dilution
protection (the "Warrant Shares"). The principal terms of such Warrant shall
include, but not be limited to, those terms set forth in this Section 6.1(n) and
registration rights imposing an affirmative duty upon the Seller to use its best
efforts to file with the Commission a registration statement on Form S-3 (or
other appropriate form) under the Securities Act covering the Warrant Shares,
have such registration statement declared effective by the Commission as soon as
practicable following the Closing Date, but in no event later than 180 days
following the Closing Date and keep such registration statement effective for a
period of three years after it has been declared effective. All costs relating
to such registration statement, other than underwriting commissions, discounts
and related costs and the fees and expenses of counsel for AHI and the Purchaser
incurred in connection therewith, shall be borne by the Seller.
(o) Closing Date Receivables. The Seller shall have delivered
to the Purchaser or AHI the list of Closing Date Receivables.
ss.6.2 Conditions Precedent to the Obligations of Seller
Each and every obligation of Seller to consummate the transactions
described in this Agreement and any and all liability of Seller to AHI and the
Purchaser shall be subject to the fulfillment or waiver by Seller on or before
the Closing Date of the following conditions precedent:
(a) Representations and Warranties True. Each of the
representations and warranties of AHI and the Purchaser contained herein or in
any certificate or other document
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delivered pursuant to this Agreement or in connection with the transactions
contemplated hereby shall be true and correct in all respects as of the Closing
Date with the same force and effect as though made on and as of such date.
(b) Performance. AHI and the Purchaser have performed and
complied in all respects with all of the agreements, covenants and obligations
required under this Agreement to be performed or complied with by them on or
prior to the Closing Date.
(c) Officers' Certificate. Purchaser shall have delivered to
the Seller a certificate addressed to Seller executed by Purchaser's President
or Chief Executive Officer, dated the Closing Date, certifying that the
conditions specified in Sections 6.2(a) and (b) above have been fulfilled.
(d) Board Approval. The Board of Directors of the Purchaser
and AHI shall have approved this Agreement and the transactions contemplated
hereby.
(e) Registered Shares. In the event the Purchaser elects to
deliver AHI Shares in partial payment of the Purchase Price, the AHI Shares
shall, except as otherwise provided in Section 2.1(d) herein, have been
registered under the Securities Act, the Registration Statement with respect
thereto shall have been declared effective, and no stop order with respect to
the AHI Shares shall be in effect.
(f) Opinion of Counsel. In the event the Purchaser elects to
deliver AHI Shares in partial payment of the Purchase Price, an opinion letter
from counsel to the Purchaser and AHI with respect to the AHI Shares addressed
to the Seller, in form and substance satisfactory to the Seller shall have been
delivered to the Seller at the Closing.
(g) Reaffirmed License Agreement. Purchaser or its appropriate
affiliate shall have reaffirmed the License Agreement dated August 10, 1993
between Seller (formerly known as Mark Sport, Inc.) and Defense Technology Corp
of America.
(h) Fairness Opinion. Seller shall have received an opinion
from an independent investment banking firm that the transactions contemplated
hereby are fair, from a financial point of view, to the Shareholders of Seller;
provided that this condition precedent shall be deemed automatically waived if
such opinion is not received by Seller on or prior to April 14, 1998.
ss.6.3 Best Efforts
Subject to the terms and conditions provided in this
Agreement, each of the parties shall use their respective best efforts in good
faith to take or cause to be taken as promptly as practicable all reasonable
actions that are within its power to cause to be fulfilled those of the
conditions precedent to its obligations or the obligations of the other parties
to consummate the transactions contemplated by this Agreement that are dependent
upon its actions, including obtaining all necessary consents, authorizations,
orders, approvals and waivers. In furtherance of the foregoing, the Seller shall
cooperate fully with Purchaser and the Purchaser and AHI shall cooperate fully
with the Seller, in accordance with the terms hereof.
ss.6.4 Termination
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(a) This Agreement and the transactions contemplated hereby
may be terminated (i) at any time by the mutual consent of the parties hereto;
(ii) by the Seller or the Purchaser, if the Closing has not occurred on or prior
to June 30, 1998 (such date of termination being referred to herein as the
"Termination Date"), provided the failure of the Closing to occur by such date
is not the result of the failure of the party seeking to terminate this
Agreement to perform or fulfill any of its obligations hereunder; (iii) by the
Purchaser at any time at or prior to Closing in its sole discretion if (1) any
of the representations or warranties of the Seller in this Agreement are not in
all respects true, accurate and complete or if the Seller breaches in any
material respect any covenant contained in this Agreement, provided that such
misrepresentation or breach is not cured within ten (10) days or thirty (30)
days if such breach can be cured within such period of time after written notice
thereof, but in any event prior to the Termination Date or (2) any of the
conditions precedent to AHI's or the Purchaser's obligations to conduct the
Closing have not been satisfied by the date required thereof; (iv) by the Seller
at any time at or prior to Closing in its sole discretion if (1) any of the
representations or warranties of AHI or the Purchaser in this Agreement are not
in all respects true, accurate and complete or if AHI or the Purchaser breaches
in any material respect any covenant contained in this Agreement, provided that
such misrepresentation or breach is not cured within ten (10) days or thirty
(30) days if such breach can be cured within such period of time after notice
thereof, but in any event prior to the Termination Date or (2) any of the
conditions precedent to the Seller's obligations to conduct the Closing have not
been satisfied by the date required thereof. If this Agreement is terminated
pursuant to this Section 6.4, written notice thereof shall promptly be given by
the party electing such termination to the other party and, subject to the
expiration of the cure periods provided in clauses (iii) and (iv) above, if any,
this Agreement shall terminate without further actions by the parties and no
party shall have any further obligations under this Agreement. Notwithstanding
the preceding sentence, the respective obligations of the parties under Sections
7.3, 7.7, 8.9, 8.15 and 8.18 shall survive the termination of this Agreement.
Notwithstanding anything to the contrary contained herein, if the termination of
this Agreement is a result of the willful misrepresentation, willful inaccuracy
or omission in a representation, willful breach of warranty, fraud or any
willful failure to perform or comply with any covenant or agreement contained
herein, the aggrieved party shall be entitled to recover from the non-performing
party all out-of-pocket expenses which such aggrieved party has incurred and the
termination of this Agreement shall not be deemed or construed as limiting or
denying any other legal or equitable right or remedy of such party.
ARTICLE VII
Covenants
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ss.7.1 Seller's Interim Operation of the LE Division and the
Purchased Assets
During the period from the date of this Agreement to the
Closing Date, except with Purchaser's prior specific written consent or as
expressly contemplated by this Agreement, the Seller shall operate the LE
Division only in the ordinary and usual course and to preserve intact its
business organization and good will in all respects. Additionally, during the
period from the date of this Agreement to the Closing Date, the Seller shall
not, with respect to the business or activities of the LE Division where
applicable, do any of the following (unless otherwise expressly contemplated by
this Agreement or permitted in writing by Purchaser):
(i) amend its Certificate of Incorporation or By-Laws;
(ii) issue, sell or authorize for issuance or sale, shares of any
class of its securities (including, but not limited to, by way
of stock split or dividend) or any subscriptions, options,
(except as contemplated by Schedule 3.9) warrants, rights or
convertible securities, or enter into any agreements or
commitments of any character obligating it to issue or sell
any such securities;
(iii) declare or pay any stock dividend or similar distribution with
respect to its capital stock;
(iv) voluntarily sell, transfer, surrender, abandon or dispose of
any of its assets or property rights (tangible or intangible),
other than in the ordinary course of business;
(v) grant or make any mortgage or pledge or subject itself or any
of its properties or assets to any lien, charge or encumbrance
of any kind, except liens for taxes not currently due;
(vi) create, incur or assume any liability or indebtedness in
excess of $50,000.00, except for inventory purchases to fill
open purchase orders in the ordinary course of business;
(vii) accept any domestic order in excess of $7,500.00 or any
international order;
(viii) apply any of its assets to the direct or indirect payment,
discharge, satisfaction or reduction of any amount payable
directly or indirectly to or for the benefit of the Seller or
any Affiliate of the Seller or any related party or to the
prepayment of any such amounts, other than compensation
benefits, and expenses payable in the ordinary course of
business to the Seller;
(ix) enter into any agreement which would be a material agreement,
or amend or terminate any existing material agreement, which
is outside the ordinary course of business. With respect to
the foregoing, the Seller shall
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provide Purchaser with a complete list of any such material
agreement not entered into in the ordinary course of business
between the date hereof and the Closing Date;
(x) alter the manner of keeping its books, accounts or records, or
change in any manner the accounting practices therein
reflected;
(xi) enter into any commitment or transaction other than in the
ordinary course of business including, but not limited to, the
making of any loan to any Person;
(xii) do any act, or omit to do any act, or permit to the extent
within the Company's or the Seller's control, any act or
omission to act which would cause a violation or breach of any
of the representations, warranties or a material violation or
breach of the covenants of the Seller set forth in this
Agreement;
(xiii) take any action which has a material adverse effect on the
condition (financial or otherwise), results of operations, or
business of the Seller;
(xiv) alter in any manner any of the Seller's existing working
capital facilities;
(xv) ship to any customer dated or obsolete inventory;
(xvi) produce, purchase or manufacture any inventory, finished goods
or work in process or purchase any fixed assets beyond what is
necessary and needed to fill existing orders; or
(xvii) agree, whether in writing or otherwise, to do any of the
foregoing.
ss.7.2 Access
The Seller shall afford the Purchaser and its agents and
representatives, access throughout the period prior to the Closing Date to the
properties, books, records and contracts of the Seller with respect to the LE
Division and the Purchased Assets, for the purpose of permitting Purchaser to
fully investigate and perform a due diligence review of the Seller, its
businesses, assets and properties, and financial condition, provided that such
access shall be granted during normal business hours in such a manner as to not
unreasonably interfere with the Seller's normal business operations. During such
period the Seller shall furnish promptly to the Purchaser copies of (i) all
correspondence relating to the LE Division received or sent by or on behalf of
the Seller from or to any governmental authority and (ii) all other information
and documents concerning the business, assets, liabilities and properties of or
relating to the LE Division as the Purchaser may reasonably request.
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ss.7.3 Confidentiality (through Closing Date)
Except as otherwise required in the performance of obligations
under this Agreement and except as otherwise required by law, any non-public
information received by a party or its advisors from the other party shall be
kept confidential and shall not be used or disclosed for any purpose other than
in furtherance of the transactions contemplated by this Agreement. The Purchaser
shall not use (or permit to be used) any confidential information in any manner
to compete against the Seller, whether with respect to corporate acquisitions,
sales, financing, development, management, investment, or otherwise. The
obligation of confidentiality shall not extend to information (a) which is or
shall become generally available to the public other than as a result of an
unauthorized disclosure by a party to this Agreement or a person to whom a party
has provided such information, (b) which was available to a party to this
Agreement on a nonconfidential basis prior to its disclosure by one party to the
other pursuant to this Agreement or (c) which is disclosed by the Purchaser in
any legal proceeding requiring any such disclosure. Upon termination of this
Agreement, each party shall promptly return any confidential information
received from the other party and, upon request, shall destroy any copies of
such information in its possession. The covenants of the parties contained in
this Section 7.3 shall survive any termination of this Agreement until the
earlier of (i) three (3) years from the date hereof, or (ii) the date when such
information becomes generally available to the public. Notwithstanding anything
to the contrary contained herein, the foregoing shall in no way prevent or limit
AHI or the Purchaser in conducting its existing and prospective businesses.
ss.7.4 Notification
Each party to this Agreement shall promptly notify the other
party in writing of the occurrence, or pending or threatened occurrence, of any
event that would constitute a breach or violation of this Agreement by any party
or that would cause any representation or warranty made by the notifying party
in this Agreement to be false or misleading in any respect (including without
limitation, any event or circumstance which would have been required to be
disclosed on any schedule to this Agreement had such event or circumstance
occurred or existed on or prior to the date of this Agreement). Any such
notification shall not limit or alter any of the representations, warranties or
covenants of the parties set forth in this Agreement nor any rights or remedies
a party may have with respect to a breach of any representation, warranty or
covenant.
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ss.7.5 Exclusivity
(a) The Seller agrees that unless this Agreement has been
terminated in accordance with Section 6.4 hereof neither the Seller, its Board
of Directors, Mark Capone, the Treasurer of the Seller, nor counsel for the
Seller (collectively, "Agents") will, commencing on the date of this Agreement
and continuing through the Termination Date (the "Exclusive Period"), directly
or indirectly, (i) solicit, encourage or negotiate any proposal (whether
solicited or unsolicited) for, or execute any agreement relating to, a sale of
all or any part of the Seller or its assets or a sale of any equity or debt
security of the Seller or any merger, consolidation, recapitalization or similar
transaction involving the Seller with any other party (any of the foregoing is
referred to as an "Acquisition Proposal"), or (ii) provide any information
regarding the LE Division to any third party for the purpose of soliciting,
encouraging or negotiating an Acquisition Proposal relating to or affecting the
LE Division (it being understood that nothing contained in clauses (i) or (ii)
above shall restrict the Seller or any of its Agents from providing information
as required by legal process). The Seller agrees that neither it nor its Board
of Directors will authorize any person other than Mark Capone, the Chief
Financial Officer of the Seller, to enter into negotiations for or negotiate the
sale of the Purchased Assets, or any portion thereof.
(b) Notwithstanding any contained in Section 7.5(a) to the
contrary, the Board of Directors of the Seller may review and act upon an
unsolicited good faith proposal ("Unsolicited Offer") from any other person
relating to any transaction of the type set forth in this Agreement, and may
participate in any negotiations regarding, furnish to any other person any
information with respect to, and facilitate and encourage, any effort or attempt
by any other person to do or seek any of the foregoing, if the Board of
Directors of the Seller determines, based as to legal matters on the written
advice of counsel, that failing to review or act would constitute a breach of
their fiduciary duty.
(c) In the event that the Purchaser does not consummate the
transactions contemplated by this Agreement as a result of (i) the Seller's
breach of Section 7.5(a) hereof, or (ii) the Seller having received an
Unsolicited Offer and the Board of Directors of the Seller, in the exercise of
their fiduciary duties, shall have recommended an alternate transaction or taken
any alternative action, as permitted by Section 7.5(b) hereof, the Seller shall
pay to the Purchaser a break up fee in the amount of $250,000, together with all
costs and expenses incurred by the Purchaser (including attorneys and other
professional fees and expenses) in connection with the transactions contemplated
hereby.
ss.7.6 Intentionally omitted.
ss.7.7 General Confidentiality
The Seller acknowledges that the Intangible Property and all
other confidential or proprietary information with respect to the business and
operations of the LE Division are valuable, special and unique assets of the
Seller and are an integral part of the Purchased Assets. The Seller shall not,
at any time after the Closing Date, disclose, directly or indirectly, to any
Person, or use or purport to authorize any Person to use any confidential or
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proprietary information with respect to the LE Division, the Purchased Assets,
AHI or the Purchaser without the prior written consent of the Purchaser or
unless required by law, including without limitation, information as to the
financial condition, results of operations, customers, suppliers, products,
products under development, inventions, sources, leads or methods of obtaining
new products or business, Intangible Property, pricing methods or formulas, cost
of supplies, marketing strategies or any other information relating to the
Purchased Assets, AHI or the Purchaser, which could reasonably be regarded as
confidential. The Seller acknowledges that Purchaser would not enter into this
Agreement without the assurance that all such confidential and proprietary
information will be used for the exclusive benefit of AHI and the Purchaser.
ss.7.8 Right of First Offer.
The Seller agrees not to offer, sell or accept an unsolicited
offer (an "Offer") for the sale (the "Sale") of all or any portion of its rights
in and to the Licensed Mark or the Patent, including, but not limited to, any
trademark, tradename, copyright, service mark or other intellectual property
right relating thereto (the "MACE Rights") for a purchase price of less than
$5,000,000 in cash without first giving AHI and the Purchaser written notice of
the Offer (the "Offer Notice") containing the purchase price and, to the extent
known, other material terms and conditions of such proposed Sale (the "Terms").
Upon delivery of the Offer Notice to AHI and the Purchaser, the MACE Rights
shall be deemed to have been offered for sale to AHI and the Purchaser subject
to the Terms. AHI and the Purchaser shall then have the right, exercisable by
giving written notice thereof to the Seller within ten (10) business days
following delivery of the Offer Notice to give notice to the Seller of AHI's
and/or the Purchaser's intent to purchase the MACE Rights, and AHI and the
Purchaser shall thereafter have a period of thirty (30) business days following
delivery of their notice to Seller within such ten (10) day period, to negotiate
with the Seller to purchase the MACE Rights proposed to be sold subject to the
Terms. If AHI or the Purchaser shall exercise its right of first offer with
respect to the MACE Rights proposed to be sold, such purchase shall be closed
within such thirty (30) business day period as hereinabove described. Failure by
AHI or the Purchaser to respond to an Offer Notice within the time periods set
forth above shall be deemed an election by AHI and the Purchaser not to exercise
its right of first offer herein contained, in which case the Sale may be
consummated with a third-party purchaser provided such Sale is (i) of all of the
MACE Rights proposed to be sold at a purchase price or equivalent economic terms
equal to or greater than that set forth in the Offer Notice and (ii) consummated
within sixty (60) days after the delivery of the Offer Notice. The term "Sale"
as used in this Section 7.8 shall be deemed to include any sale of assets or
stock, merger, consolidation, tender offer or other business combination
involving the Seller which would include the "MACE" name or any rights therein.
Notwithstanding the foregoing, the Seller shall provide ten (10) days prior
written notice to AHI and the Purchaser of any sale of the MACE Rights
regardless of the purchase price therefor.
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ss.7.9 Collection of Closing Date Receivables
The Purchaser shall use its best efforts to collect the
Closing Date Receivables on behalf of the Seller. Any Closing Date Receivables
actually collected by the Purchaser shall be paid to the Seller by the Purchaser
not later than the earlier to occur of (i) two business days following their
receipt of an aggregate of $10,000.00 or more in such Receivables by the
Purchaser, and (ii) the fifteenth (15th) day of the month with respect to
Receivables received by the Purchaser during the prior month. The Purchaser
shall have no obligation to resort to legal action or other third party
collection methods with respect to the Closing Date Receivables. Any amounts
received by the Purchaser from the account debtor of a receivable shall be
applied as designated by the account debtor and, if not so designated, then to
the oldest unpaid invoice, provided such invoice is not being disputed by the
customer relating thereto, that is substantially similiar in outstanding amount
to the amount of the funds received, or if there not be any invoice with an
outstanding amount substantially similar to the funds so received, as the
parties may agree. To the extent that any receivable of the Seller remains
outstanding upon expiration of the seventy five (75) day period subsequent to
the due date of such receivable, the Purchaser shall notify the Seller by the
77th day following the Closing Date and the Seller shall have full rights to
collect any such receivables and the Purchaser shall reasonably cooperate with
the Seller in connection therewith. After the expiration of such seventy seven
(77) day period, the Seller may implement any collection methods; provided,
however, that the Seller shall not adversely affect any customer relationships
of the Purchaser in connection with any uncollected receivable.
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ss.7.10 Continuing Obligations
The restrictions set forth in Sections 7.6 and 7.7 are
considered by the parties to be reasonable for the purposes of protecting the
value of the business and good will purchased by Purchaser. AHI, the Purchaser
and the Seller acknowledge that AHI and the Purchaser would be irreparably
harmed and that monetary damages would not provide an adequate remedy to AHI and
the Purchaser in the event the covenants contained in Sections 7.6 and 7.7 were
not complied with in accordance with their terms. Accordingly, the Seller agrees
that any breach or threatened breach by any of them of any provision of Sections
7.6 or 7.7 shall entitle AHI and the Purchaser to injunctive and other equitable
relief to secure the enforcement of these provisions, in addition to any other
remedies (including damages) which may be available to AHI and the Purchaser. If
the Seller breaches the covenant set forth in Section 7.6, the running of the
five (5) year non-compete period described therein shall be tolled for so long
as such breach continues. It is the desire and intent of the parties that the
provisions of Sections 7.6 and 7.7 be enforced to the fullest extent permissible
under the laws and public policies of each jurisdiction in which enforcement is
sought. If any provisions of Sections 7.6 and 7.7 relating to the time period,
scope of activities or geographic area of restrictions is declared by a court of
competent jurisdiction to exceed the maximum permissible time period, scope of
activities or geographic area, as the case may be, the time period, scope of
activities or geographic area shall be reduced to the maximum which such court
deems enforceable. If any provisions of Section 7.6 or 7.7 other than those
described in the preceding sentence are adjudicated to be invalid or
unenforceable, the invalid or unenforceable provisions shall be deemed amended
(with respect only to the jurisdiction in which such adjudication is made) in
such manner as to render them enforceable and to effectuate as nearly as
possible the original intentions and agreement of the parties. In addition, if
any party brings an action to enforce Sections 7.3, 7.6 or 7.7 hereof or to
obtain damages for a breach thereof, the prevailing party in such action shall
be entitled to recover from the non-prevailing party all attorney's fees and
expenses incurred by the prevailing party in such action.
ARTICLE VIII
Miscellaneous
ss.8.1 Notices
Any notice, demand, claim or other communication under this
Agreement shall be in writing and shall be deemed to have been given upon the
delivery, mailing or transmission thereof, as the case may be, if delivered
personally or sent by certified mail, return receipt requested, postage prepaid,
or sent by facsimile or prepaid overnight courier to the parties at the
addresses set forth herein (or at such other addresses as shall be specified by
the parties by like notice). A copy of any notices delivered to AHI or the
Purchaser shall also be sent to Kane Kessler, P.C., 1350 Avenue of the Americas,
New York, New York 10019, Attention: Robert L. Lawrence, Esq., Fax No. (212)
245-3009. A copy of any notices delivered to the Seller shall also be sent to
Herzog Engstron & Koplovitz, 99 Pine Street, Albany, New York 12217, Attention:
Germaine Curtain, Esq.
ss.8.2 Entire Agreement
This Agreement contains every obligation and understanding
between the
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parties relating to the subject matter hereof and merges all prior discussions,
negotiations and agreements, if any, between them, and none of the parties shall
be bound by any conditions, definitions, understandings, warranties or
representations made prior to the date hereof other than as expressly provided
or referred to herein.
ss.8.3 Binding Effect
This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors, heirs, personal
representatives, legal representatives, and permitted assigns. AHI agrees that
it shall be financially responsible to the Seller for all obligations of the
Purchaser under this Agreement.
ss.8.4 Knowledge of the Parties
Except as otherwise specifically set forth in Section 2.4 and
5.2 hereof, where any representation or warranty contained in this Agreement is
expressly qualified by reference to the best knowledge or to the knowledge of
any of the parties hereto, each of the parties hereto acknowledges and confirms
that the persons responsible for negotiating this Agreement and the transactions
contemplated hereby and management selected to complete or review schedules,
and/or perform due diligence with respect thereto, including but not limited to,
Ken Blakey has made due and diligent inquiry as to the matters that are the
subject of such representations and warranties.
ss.8.5 Assignment
This Agreement may not be assigned by any party without the
written consent of the other party, provided, that Purchaser may assign this
Agreement to a corporation of which the Purchaser maintains majority control.
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ss.8.6 Waiver and Amendment
Any representation, warranty, covenant, term or condition of
this Agreement which may legally be waived, may be waived, or the time of
performance thereof extended, at any time by the party hereto entitled to the
benefit thereof, and any term, condition or covenant hereof (including, without
limitation, the period during which any condition is to be satisfied or any
obligation performed) may be amended by the parties thereto at any time. Any
such waiver, extension or amendment shall be evidenced by an instrument in
writing executed on behalf of the appropriate party by its President or any Vice
President or other person, who has been authorized by its Board of Directors to
execute waivers, extensions or amendments on its behalf. No waiver by any party
hereto, whether express or implied, of its rights under any provision of this
Agreement shall constitute a waiver of such party's rights under such provisions
at any other time or a waiver of such party's rights under any other provision
of this Agreement. No failure by any party thereof to take any action against
any breach of this Agreement or default by another party shall constitute a
waiver of the former party's right to enforce any provision of this Agreement or
to take action against such breach or default or any subsequent breach or
default by such other party.
ss.8.7 No Third Party Beneficiary
Except for the provisions of Section 8.5, nothing expressed or
implied in this Agreement is intended, or shall be construed, to confer upon or
give any Person other than the parties hereto and their respective heirs,
personal representatives, legal representatives, successors and permitted
assigns, any rights or remedies under or by reason of this Agreement.
ss.8.8 Severability
In the event that any one or more of the provisions contained
in this Agreement shall be declared invalid, void or unenforceable, the
remainder of the provisions of this Agreement shall remain in full force and
effect, and such invalid, void or unenforceable provision shall be interpreted
as closely as possible to the manner in which it was written.
ss.8.9 Expenses
Each party agrees to pay, without right of reimbursement from
the other party, the costs incurred by it incident to the performance of its
obligations under this Agreement and the consummation of the transactions
contemplated hereby, including, without limitation, costs incident to the
preparation of this Agreement, and the fees and disbursements of counsel,
accountants and consultants employed by such party in connection herewith.
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ss.8.10 Headings
The section and other headings contained in this Agreement are
for reference purposes only and shall not affect the meaning or interpretation
of any provisions of this Agreement.
ss.8.11 Counterparts
This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
ss.8.12 Time of the Essence
Wherever time is specified for the doing or performance of any
act or the payment of any funds, time shall be considered of the essence.
ss.8.13 Injunctive Relief
It is possible that remedies at law may be inadequate and,
therefore, the parties hereto shall be entitled to equitable relief including,
without limitation, injunctive relief, specific performance or other equitable
remedies in addition to all other remedies provided hereunder or available to
the parties hereto at law or in equity.
ss.8.14 Remedies Cumulative
No remedy made available by any of the provisions of this
Agreement is intended to be exclusive of any other remedy, and each and every
remedy shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity.
ss.8.15 Governing Law
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This Agreement has been entered into and shall be construed
and enforced in accordance with the laws of the State of New York without
reference to the choice of law principles thereof. In any litigation in
connection with or arising out or related to this Agreement, any of the
documents referred to herein or transactions contemplated hereby, the Seller
irrevocably consents to and confer personal jurisdiction on the courts of the
State of New York or the United States located within the City of New York and
expressly waive any objections as to venue in any such courts.
ss.8.16 Participation of Parties
The parties hereto acknowledge that this Agreement and all
matters contemplated herein, have been negotiated among all parties hereto and
their respective legal counsel and that all such paries have participated in the
drafting and preparation of this Agreement from the commencement of negotiations
at all times through the execution hereof.
ss.8.17 Further Assurances
The parties hereto shall deliver any and all other instruments
or documents required to be delivered pursuant to, or take such other action
required to be taken, or necessary or proper in order to give effect to, all of
the terms and provisions of this Agreement including, without limitation, all
necessary instruments of assignment and transfer and such other documents as may
be necessary or desirable to transfer ownership of the Purchased Assets.
ss.8.18 Publicity
The first public announcement by each of the parties hereto
regarding this Agreement or the transactions contemplated hereby or thereby
shall only be made with the prior consent, which shall not be unreasonably
withheld, of the other party as to form, content, timing and manner of
distribution. No other public announcement or other publicity regarding this
Agreement or the transactions contemplated hereby or thereby shall be made
without consulting with and the giving of notice to the other party as to form,
content, timing and manner of distribution. Notwithstanding the foregoing,
nothing in this Agreement shall preclude AHI or the Seller from making any
public announcement or filing required by federal or state securities laws or
stock exchange rules provided, that, the other party is afforded the opportunity
to review and comment upon such announcement.
8.19 Arbitration
Any dispute, controversy or claim to be settled by arbitration
pursuant to Section 2.4 and 5.15 hereof shall be settled by arbitration in New
York, New York, in accordance
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with the commercial rules of the American Arbitration Association, by an
arbitration panel consisting of three members, and judgment upon any such
arbitration award rendered by the arbitrators may be entered in any court of
competent jurisdiction. Such arbitrators shall have knowledge and expertise in
the subject matter of the arbitration proceeding. Each of the parties and the
arbitrators shall use its best efforts to keep confidential the existence of any
dispute and arbitration proceedings and all information relating thereto or
submitted in connection therewith and, in the event of judicial proceedings for
the enforcement of this paragraph or any award pursuant thereto, shall cooperate
to seal the record of any such arbitration or judicial proceeding. Each party to
any arbitration shall bear its own expenses in relation thereto, including but
not limited to such party's attorneys' fees, if any; provided however that the
expenses and fees of the arbitration not capable of being attributed to any one
party shall be borne half by the Seller and half by the Purchaser.
* * * * *
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IN WITNESS WHEREOF, the parties hereto have each executed and
delivered this Agreement as of the day and year first above written.
ARMOR HOLDINGS, INC.
By: /s/ Robert Schiller
--------------------------------
Name: Robert Schiller
Title: Vice President
Corporate Development
FEDERAL LABORATORIES, INC.
By: /s/ Robert Schiller
--------------------------------
Name: Robert Schiller
Title: Vice President
MACE SECURITY INTERNATIONAL, INC.
By: /s/ Mark A. Capone
--------------------------------
Name: Mark A. Capone
Title: Treasurer and CFO
41
[LETTERHEAD OF C. L. KING & ASSOCIATES, INC.]
April 9, 1998
Board of Directors
Mace Security International, Inc.
160 Benmont Avenue
Bennington, VT 05201
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of the outstanding shares of Common Stock, par value
$.01 per share, of Mace Security International, Inc. (the "Company") of the
financial terms of the proposed transaction whereby the Company would sell the
assets of its Law Enforcement Division, including the assets of Federal
Laboratories, and an exclusive license of the Mace(R) trademarks for the
manufacturing and sale of Mace(R) brand aerosol defense sprays to the law
enforcement market worldwide. We understand that the Company will receive
approximately six million dollars, excluding cash and receivables estimated in
excess of two million dollars for the sale of these assets.
C. L. King & Associates, Inc., as part of its investment banking business,
is engaged in the valuation of securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities and private placements and in valuations for corporate and
other purposes.
For purposes of this opinion, the Company has furnished us with various
business, financial and other information relating to it, including, but not
limited to, historical and projected financial data. We have discussed this
information with senior management of the Company. We have also reviewed such
other information, conducted such other discussions and performed such other
analyses as we deemed appropriate.
In arriving at our opinion, we have assumed that all the information
provided to us by the Company, its employees and its counsel is complete and
accurate in all material respects. We
<PAGE>
have not independently verified such information, including financial
information, nor have we made an appraisal of the Company's assets. We have also
utilized various publicly available information in conducting our analyses
without independent verification thereof.
C. L. King & Associates, Inc., did not participate in structuring the
Executed Asset Purchase and was not retained to advise the Company or its Board
of Directors with respect to alternatives to the Executed Asset Purchase.
In forming our opinion, we considered, among other factors we deemed
relevant, the following:
1. The financial and other information publicly available regarding the
Company;
2. The business, operations, strategic plans and general prospects of
the Company;
3. The financial results of the Law Enforcement Division since the
Company acquired the Federal Laboratories Division in March 1994
4. Such additional financial and other factors as we deemed relevant;
and
5. The terms and conditions of the Executed Asset Purchase.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Executed Asset Purchase is fair from a financial point of view
to the existing shareholders of the Company.
Very truly yours,
C. L. King & Associates, Inc.
By: /s/ Robert H. Paul
-----------------------------
Robert H. Paul
Senior Vice President
MACE SECURITY INTERNATIONAL, INC.
Exhibit 11
Schedule of Computation of Primary Net Income
Per Share
For the twelve months ended December 31,
1997 1996
----------- -----------
Common stock outstanding at
end of period 7,081,666 6,825,000
Adjustments to ending shares to arrive
at weighted average for the year:
Shares issued for MSP Retail, Inc. Acquisition(2) 121,972 --
Shares issued for MSP, Inc. Acquisition(3) 39,671 --
Shares issued to former President and CEO(1) -- 5,082
----------- -----------
6,920,023 6,819,918
=========== ===========
Net loss $(1,686,943) $ (252,348)
=========== ===========
Net loss per share $ (.24) $ (.04)
=========== ===========
Calculated as follows:
number of shares outstanding multiplied by the reciprocal of the number of
days outstanding divided by the number of days in the period.
(1) Shares offered for the twelve months:
April 3, 1996 20,000*(93/366) 5,082
(2) Shares offered for the twelve months:
September 10, 1997 176,666*(252/365) 121,972
(3) Shares offered for the twelve months:
July 1, 1997 80,000*(181/365) 39,671
