<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File No. 0-21404
-------
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SAFETY 1ST, INC.
(Exact Name of Registrant as specified in its Charter)
----------
Massachusetts 04-2836423
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
210 Boylston Street
Chestnut Hill, Massachusetts 02167
(Address of principal executive (Zip code)
offices)
Registrant's telephone number, including area code:
(617) 964-7744
Indicate by check mark whether the Registrant (1) has filed all reports 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
--- ---
The aggregate number of Registrant's shares outstanding on April 30, 1996
was 7,150,616 shares of Common Stock, $.01 par value.
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<PAGE> 2
SAFETY 1ST, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS AS OF DECEMBER 31,
1995 AND MARCH 31, 1996 (UNAUDITED) 3
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995
AND 1996 5
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995
AND 1996 6
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 8
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 9
SIGNATURES 11
EXHIBIT INDEX 12
</TABLE>
<PAGE> 3
Page 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SAFETY 1ST, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 24,456 $ 299,998
Accounts receivable, less allowance
for doubtful accounts of $1,900,000
and $1,300,000, respectively 26,923,557 32,554,040
Inventory 26,286,881 31,285,802
Prepaid expenses 2,956,653 2,326,289
Prepaid income taxes 2,311,275 248,284
Deferred income taxes 882,000 781,573
------------ ------------
Total current assets 59,384,822 67,495,986
------------ ------------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $4,544,025
and $5,551,843, respectively 18,085,001 17,993,767
------------ ------------
OTHER ASSETS:
Deposits 6,261,906 7,321,019
Goodwill -- 7,501,094
Deferred acquisition costs 1,492,678 --
Patents and trademarks, net of amortization of
$217,306 and $250,137, respectively 783,361 780,341
Other 311,023 529,155
------------ ------------
8,848,968 16,131,609
------------ ------------
$ 86,318,791 $101,621,362
============ ============
</TABLE>
The Condensed Balance Sheet at December 31, 1995 has been derived from the
audited financial statements at that date.
The accompanying notes are an integral part of these
Condensed Financial Statements
<PAGE> 4
Page 4
SAFETY 1ST, INC.
CONDENSED BALANCE SHEETS - CONTINUED
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving credit facility $25,390,000 $ 35,811,801
Accounts payable and accrued expenses 12,511,676 12,386,417
Notes payable, current portion -- 2,475,649
------------ ------------
Total current liabilities 37,901,676 50,673,867
OTHER LIABILITIES
Notes payable, net of current portion -- 825,000
Deferred income taxes 2,398,000 2,398,000
------------ ------------
Total liabilities 40,299,676 53,896,867
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value,
100,000 shares authorized, no
shares outstanding -- --
Common stock, $.01 par value, 15,000,000
shares authorized, 7,150,616 and
7,150,616 issued at December 31, 1995
and March 31, 1996, respectively 71,506 71,506
Additional Paid In Capital 33,588,361 33,588,361
Retained earnings 12,359,248 14,063,266
Cumulative translation adjustments -- 1,362
------------ ------------
Total Stockholders' equity 46,019,115 47,724,495
------------ ------------
$86,318,791 $101,621,362
============ ============
</TABLE>
The Condensed Balance Sheet at December 31, 1995 has been derived from the
audited financial statements at that date.
The accompanying notes are an integral part of these
Condensed Financial Statements
<PAGE> 5
Page 5
SAFETY 1ST, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March, 31
----------------------------
1995 1996
---- ----
<S> <C> <C>
Net sales $26,575,109 $32,006,438
Cost of sales 16,980,624 19,113,872
------------ ------------
Gross profit 9,594,485 12,892,566
Selling, general and administrative
expenses 6,084,664 9,511,894
------------ ------------
Operating income 3,509,821 3,380,672
Interest (expense) income - net (60,782) (642,820)
------------ ------------
3,449,039 2,737,852
Income taxes 1,344,000 1,033,834
------------ ------------
Net income $ 2,105,039 $ 1,704,018
============ ============
Net income per share $ .30 $ .24
============ ============
Weighted average shares outstanding 7,109,593 7,150,616
============ ============
</TABLE>
The accompanying notes are an integral part of these
Condensed Financial Statements
<PAGE> 6
Page 6
SAFETY 1ST, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1995 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,105,039 $ 1,704,018
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 441,984 986,712
Amortization 18,000 120,998
Cumulative translation adjustment -- 1,362
------------ -----------
Net cash provided by operating activities
before changes in assets and liabilities: 2,565,023 2,813,090
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (10,441,473) (9,653,278)
Inventory (1,580,074) (1,583,862)
Prepaid expenses 254,305 659,644
Prepaid income tax 690,969 1,932,718
Deferred income taxes 110,000 100,427
Other assets -- 11,507
Increase (decrease) in:
Accounts payable and accrued expenses 2,962,263 (290,941)
------------ -----------
Net cash used in operating activities (5,438,987) (6,010,695)
------------ -----------
Cash flows used in investing activities:
Acquisitions -- (1,616,416)
Acquisition of property and equipment (6,796,811) (538,870)
(Increase) decrease in deposits 5,007,118 (1,059,113)
Acquisition of patents and trademarks (55,112) (31,549)
------------ -----------
Net cash used in investing activities (1,844,805) (3,245,948)
------------ -----------
Cash flows provided by (used in) financing activities:
Net proceeds on revolving credit facility 6,935,000 10,421,802
Repayment of bank debt assumed -- (683,385)
Proceeds from exercised stock options 460,959 --
Loan acquisition fees -- (206,232)
------------ -----------
Net cash provided by financing activities 7,395,959 9,532,185
------------ -----------
Net increase in cash 112,167 275,542
Cash and cash equivalents - beginning
of period 119,181 24,456
------------ -----------
Cash and cash equivalents - end of period $ 231,348 $ 299,998
============ ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for
Interest $ 114,000 $ 526,000
============ ===========
Taxes $ 175,000 $ 0
============ ===========
</TABLE>
See Note 2 to the financial statements for details of other non-cash items
The accompanying notes are an integral part of these
Condensed Financial Statements
<PAGE> 7
Page 7
SAFETY 1ST, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The Company is a developer, marketer and distributor of child safety and
child care, convenience, activity products and home security products.
The accompanying unaudited condensed financial statements of the Company
have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"), and, in the opinion of management, reflect
all adjustments (consisting of only normal recurring adjustments) necessary
to present fairly the financial position, results of operations and cash
flows for the periods presented.
Certain information and footnote disclosures included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed financial
statements should be read in conjunction with the audited financial
statements and notes thereto included in the financial statements filed as
part of the Company's Annual Report on Form 10-K filed for the year ended
December 31, 1995.
Common stock equivalents are not reflected in the net income per share
computation presented in the condensed statements of income, as the dilutive
effect is less than 3%.
Assets and liabilities of foreign subsidiaries, where the functional
currency is the local currency, are translated at current exchange rates and
the related translation adjustments are reported as a component of
stockholders' equity. Income statement accounts are translated at the
average rates during the period. Foreign currency transaction gains and
losses, as well as translation adjustments for assets and liabilities of
foreign subsidiaries where the functional currency is the dollar, are
included in net income.
The results of the operations for the three months ended March 31, 1996 are
not necessarily indicative of the operating results for the full year.
NOTE 2. OTHER MATTERS
On January 4, 1996, the Company acquired all of the outstanding stock of
EEZI Group Holdings Ltd., a United Kingdom manufacturer and distributor of
child care products, now named Safety 1st (Europe) Ltd., for cash of
$265,000, issuance of notes payable of $1,650,000 (subject to post-closing
adjustments), and payment of acquisition costs of $1,145,000, of which
$1,109,000 was paid in 1995. In addition, if Safety 1st (Europe) Ltd.
exceeds certain net income thresholds during the first five years subsequent
to the acquisition date, the purchase price would be increased by not more
than $3,200,000 (subsequently adjusted to an amount not more than
$2,700,000). The fair value of assets acquired, including goodwill, was
$3,214,000 and liabilities assumed was $154,000. The acquisition has been
recorded using the purchase method of accounting. The excess of the
aggregate purchase price over the fair value of net assets acquired
($2,495,000) was recognized as goodwill and is being amortized over 25
years. The net assets acquired primarily included inventory and fixed
assets.
On March 15, 1996, effective February 1, 1996, the Company acquired all of
the outstanding stock of Orleans Juvenile Products Inc., the Canadian
distributor of the Company's products, for cash of $1,067,000, issuance of
notes payable of $1,651,000, and payment of acquisition costs of $632,000,
of which $384,000 was paid in 1995. The fair value of assets acquired,
including goodwill, was $9,407,000 and liabilities assumed was $6,058,000.
The acquisition was accounted for as a purchase, and accordingly, the
purchase price was allocated to the net assets acquired based upon their
estimated fair value. The excess of the purchase price over the fair value
of assets acquired ($5,066,000) was recognized as goodwill and is being
amortized over 25 years. The net assets acquired primarily included accounts
receivable, inventory, accounts payable and bank debt.
The above allocations of the purchase price to the net assets acquired were
based on preliminary estimates and may be revised at a later date.
<PAGE> 8
Page 8
NOTE 2. OTHER MATTERS (continued)
The accompanying consolidated statements of income reflect the operating
results of the acquired entities since the effective date of the
acquisitions. Pro forma financial statements have not been presented as
these acquisition are not considered material to the 1995 results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Results of Operations:
Three Months Ended March 31, 1996 and 1995
Net sales for the three months ended March 31, 1996 increased 20% to
approximately $32,006,000 from $26,575,000 in the comparable period in 1995. The
increase in net sales is due to the increase in sales of existing juvenile
products (consisting of bulk and peggable products) and home security products
and sales of new products introduced for sale in 1996.
Gross profit increased 34% to approximately $12,893,000 from $9,594,000 in the
comparable period in 1995. Gross profit as a percentage of net sales increased
to 40% compared to 36% for the three months ended March 31, 1995 due to improved
gross profit on bulk products as a result of reengineering and production
efficiencies, continued strength in the gross margin on peggable products and
higher margins realized on international sales.
Selling, general and administrative expenses were approximately $9,512,000 in
the 1st quarter of 1996 compared to $6,085,000 in the same period in 1995. The
increase is primarily attributable to increased payroll and payroll related
expenses as a result of the continued building of the Company's infrastructure
through the hiring of middle and upper management positions.
As a result of the above factors, operating income decreased by approximately 4%
from $3,510,000 in the first quarter of 1995 to $3,381,000 in 1996.
Net interest expense increased from $60,782 for the three months ended March 31,
1995 to $642,820 for the same period in 1996 due to increased borrowings.
Liquidity and Capital Resources:
The Company has a revolving credit facility in the amount of $50 million at a
rate of interest equal to the bank's prime rate or, at the Company's option, a
LIBOR based rate, as defined. This facility is secured by substantially all of
the Company's assets and requires the Company to maintain certain financial
ratios and formulas through the term of the facility, which expires in May 1998.
Interest cost associated with borrowed funds is subject to change based on
interest rate fluctuations.
Net cash used in operations increased from $5,439,000 for the three months ended
March 31, 1995 to $6,011,000 for the three months ended March 31, 1996.
Cash flows used in investing activities was $3,246,000 as a result of the
acquisitions of Orleans Juvenile Products Inc., and EEZI Group Holdings Limited
for cash and issuance of notes payable as well as the continued purchase of
property and equipment and other assets, mainly molds for new products to be
introduced in 1996. During 1996, net cash provided by financing activities was
$9,532,000 related to proceeds from the revolving credit line offset by the
repayment of indebtedness of Orleans Juvenile Products Inc. and the payment of
loan financing fees to the Company's bank.
The Company believes that its credit facility together with internally generated
funds will be sufficient to fund business needs of the Company for the
foreseeable future.
<PAGE> 9
Page 9
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
(a) Certain Acquisitions.
On January 4, 1996 the Company acquired all of the issued and outstanding
capital stock of EEZI Group Holdings Ltd., a United Kingdom Company, for a
purchase price of approximately $1,915,000 (subject to post-closing adjustments)
in cash and promissory notes. In addition, if earnings of the acquired company
(now operating as Safety 1st (Europe) Ltd.) exceed certain net income thresholds
during the five years subsequent to the acquisition date, the purchase price
would be increased by up to $2,700,000.
On March 15, 1996, the Company, acting through its wholly owned
subsidiary, 3232301 Canada Inc., a Canadian corporation organized for this
purpose, acquired all of the issued and outstanding capital stock of Orleans
Juvenile Products, Inc., a Canadian corporation, for a purchase price of US
$2,718,000, of which approximately US $1,067,000 was paid in cash and US
$1,651,000 was paid in the form of promissory notes.
The Company funded the cash portion of the purchase price of both
acquisitions from its working capital.
(b) Forward-Looking Statements.
The Company may occasionally make forward-looking statements and estimates,
such as forecasts and projections of the Company's future performance or
statements of management's plans and objectives. These forward-looking
statements may be contained in SEC filings, Annual Reports to Shareholders,
Press Releases and oral statements, among others, made by the Company. Actual
results could differ materially from those in such forward-looking statements.
Therefore, no assurances can be given that the results in such forward-looking
statements will be achieved. Important factors that could cause the Company's
actual results to differ from those contained in such forward-looking statements
include, among others, those factors set forth in Exhibit 99 to this Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
Exhibit DESCRIPTION
- - ------- -----------
<S> <C>
4 Specimen Certificate
10.1 Agreement for Purchase of Shares dated as of
January 4, 1996 between Stephen Paul Tollman
and Registrant (excluding Schedules and
Exhibits other than the Purchase Price and
Warranty Schedules) (Included as Exhibit
10(h) of Registrant's Annual Report on Form
10-K for the year ended December 31, 1995
and incorporated herein by reference)
10.2 Stock Purchase Agreement dated as of March
15, 1996 by and among Registrant, its
subsidiary, 3232301 Canada Inc., and Stephen
Orleans (excluding Schedules and Exhibits).
(Included as Exhibit 10(i) to Registrant's
Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated
herein by reference)
</TABLE>
<PAGE> 10
Page 10
<TABLE>
<S> <C>
10.3 Loan Agreement dated as of March 28, 1996
among Fleet Bank of Massachusetts N.A., the
First National Bank of Boston, Registrant,
Safety 1st International Inc., Safety 1st
Home Products Canada Inc. and Safety 1st
(Europe) Limited. (Included as Exhibit 10(j)
to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995 and
incorporated herein by reference)
10.4 Side Letter, dated March 28, 1996 in
connection with the Loan Agreement, among
Registrant (and subsidiaries), Fleet Bank of
Massachusetts, N.A., and The First National
Bank of Boston.
10.5 Amendment to Loan Agreement, dated April 19,
1996, among Registrant (and subsidiaries),
Fleet National Bank, The First National Bank
of Boston and USTrust
10.6 Amendment To Loan Agreement Among Safety
1st, Inc., Et Al. And Fleet National Bank Of
Massachusetts, The First National Bank of
Boston, And USTrust, dated May 10, 1996
11 Statement re: Computation of Per Share
Earnings
27 Financial Data Schedule
99 Important Factors Regarding Forward-Looking
Statements
</TABLE>
(b) Reports on Form 8-K
None
<PAGE> 11
Page 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Safety 1st, Inc.
a Massachusetts Corporation
Date: May 13, 1996 By: /s/ Michael Lerner
------------------------- -------------------
Michael Lerner
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 1996 By: /s/ Richard Caturano
------------------------ ----------------------
Richard Caturano
Chief Financial Officer
(Principal Financial Officer)
<PAGE> 12
Page 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
- - ------- ----------- ----
<S> <C> <C>
4 Specimen Certificate
10.1 Agreement for Purchase of Shares dated as of January 4,
1996 between Stephen Paul Tollman and Registrant
(excluding Schedules and Exhibits other than the Purchase
Price and Warranty Schedules) (Included as Exhibit 10(h)
of Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995 and incorporated herein by
reference)
10.2 Stock Purchase Agreement dated as of March 15, 1996 by and
among Registrant, its subsidiary, 3232301 Canada, Inc.,
and Stephen Orleans (excluding Schedules and Exhibits).
(Included as Exhibit 10(i) to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference)
10.3 Loan Agreement dated as of March 28, 1996 among Fleet Bank
of Massachusetts N.A., the First National Bank of Boston,
Registrant, Safety 1st International Inc., Safety 1st Home
Products Canada Inc. and Safety 1st (Europe) Limited.
(Included as Exhibit 10(j) to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference)
10.4 Side Letter, dated March 28, 1996 in connection with the Loan
Agreement, among Registrant (and subsidiaries), Fleet Bank of
Massachusetts, N.A., and The First National Bank of Boston.
10.5 Amendment to Loan Agreement, dated April 19, 1996, among
Registrant (and subsidiaries), Fleet National Bank, The
First National Bank of Boston and USTrust
10.6 Amendment To Loan Agreement Among Safety 1st, Inc., Et Al.
And Fleet National Bank Of Massachusetts, The First
National Bank of Boston, And USTrust, dated May 10, 1996
11 Statement re: Computation of Per Share Earnings
27 Financial Data Schedule
99 Important Factors Regarding Forward-Looking Statements
</TABLE>
<PAGE> 1
EXHIBIT 4
===============================================================================
SAFETY 1ST
SAFETY 1ST, INC.
INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
THIS CERTIFICATE IS TRANSFERABLE IN BOSTON, MASSACHUSETTS OR NEW YORK, NEW YORK
COMMON STOCK
THIS CERTIFIES THAT CUSIP 786475 10 3
SEE REVERSE FOR
CERTAIN DEFINITIONS
is the owner of
fully-paid and non-assessable shares of the COMMON STOCK, $.01 par value, of
===============================SAFETY 1ST, INC.==============================
transferable only on the books of the Corporation by the holder hereof in
person or by duly authorized attorney upon surrender of this certificate
properly endorsed.
This certificate and the shares of Common Stock represented hereby are
received and held subject to the laws of the Commonwealth of Massachusetts and
to the Restated Articles of Organization and Restated Bylaws of the
Corporation, all as from time to time amended, and the owner of this certificate
by accepting the same expressly assents thereto. This certificate is not valid
unless countersigned by the Transfer Agent and registered by the Registrar.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by the facsimile signatures of its duly authorized officers and a
facsimile of its corporate seal to be hereunto affixed.
Dated
SAFETY 1ST, INC.
/s/[SIGNATURE] [CORPORATE SEAL] /s/[SIGNATURE]
TREASURER PRESIDENT
[set vertically on page]
COUNTERSIGNED AND REGISTERED
STATE STREET BANK AND TRUST COMPANY
(BOSTON) TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
===============================================================================
<PAGE> 2
SAFETY 1ST, INC.
The Corporation has more than one class of stock authorized to be issued. The
Corporation will furnish without charge to each stockholder upon written
request, a copy of the full text of the preferences, voting powers,
qualifications and special and relative rights of the shares of each class of
stock (and any series thereof) authorized to be issued by the Corporation as
set forth in the Restated Articles of Organization and amendments thereto filed
with the Secretary of State of the Commonwealth of Massachusetts.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - _____________ Custodian ______________
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
JT TEN - as joint tenants with right of Act ________________________
survivorship and not as tenants (State)
in common
Additional abbreviations may also be used though not in the above list.
</TABLE>
For value received _____________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- - --------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Shares
- - -------------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated,__________________________
_____________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF
THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:______________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION(BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
Keep this certificate in a safe place. If it is lost, stolen or destroyed the
Corporation may require a bond of indemnity as a condition to the issuance of a
replacement certificate.
<PAGE> 1
EXHIBIT 10.4
March 28, 1996
Fleet Bank of Massachusetts, N.A.
As Agent
75 State Street
Boston, MA 02110
Attn: Deborah Lawrence, VP
Re: Inventory Stored with Processors
--------------------------------
Dear Ms. Lawrence:
The undersigned have entered into a certain Loan Agreement with Fleet Bank of
Massachusetts, N.A. (The "Bank"), as agent for itself and certain other lenders
dated March 28, 1996 (the "Loan Agreement"). Capitalized terms used but not
defined herein have the meanings ascribed to them in the Loan Agreement.
Pursuant to and on the terms and conditions contained in the Loan Agreement, the
Banks have agreed to make Loans and other advances of credit available to the
undersigned Borrowers up to the lesser of Fifty Million ($50,000,000.00)
Dollars or the Borrowing Base. The Borrowing Base is calculated by reference
to the Net Outstanding Amount of Base Accounts and Net Security Value of Base
Inventory.
The Net Security Value of Base Inventory is calculated with reference to
Inventory in which the lenders have been granted a first priority security
interest and which is subject to the claims of no other persons or entities.
Presently included within the Net Security Value of Base Inventory is certain
Inventory (the "Processor Inventory") which is stored with certain processors
and packagers who perform services for the Borrowers with respect to such
Inventory and who may claim some manner of lien or security interest in the
Inventory.
The attached SCHEDULE A provides detail of Inventory by location and indicates
that there is approximately $2,850,000.00 in domestic United States Processor
Inventory. The undersigned agree that the domestic Processor Inventory plus
Inventory located in Rotterdam will initially be included in the Net Security
Value of Base Inventory. No foreign Processor Inventory of Safety 1st shall be
included in the Net Security Value of Base Inventory, except for Inventory
located in Rotterdam which will be subject to this letter. However, the
maximum amount of domestic Processor Inventory to be included within the Net
Security Value of Base Inventory will be no greater than $3,000,000.00 on and
after June 30, 1996, $1,500,000.00 on or after September 30,1996, and $0.00 on
or after December 31, 1996.
<PAGE> 2
Fleet Bank of Massachusetts, N.A.
Page 2
March 27, 1996
This letter agreement when executed by each of the Borrowers and countersigned
by the Bank and The First National Bank of Boston shall constitute a valid,
binding and enforceable contract under seal within the Commonwealth of
Massachusetts.
SAFETY 1ST INC.
By /s/ Michael Lerner
-----------------------------------
SAFETY 1ST INTERNATIONAL INC.
by /s/ Michael Lerner
-----------------------------------
SAFETY 1ST (EUROPE) LIMITED
by /s/ Michael Lerner
-----------------------------------
3232301 CANADA INC.
By /s/ Michael Lerner
-----------------------------------
SAFETY 1ST HOME PRODUCTS CANADA INC.
By /s/ Michael Lerner
-----------------------------------
ACKNOWLEDGED AND AGREED THIS
27th DAY OF MARCH, 1996
FLEET BANK OF MASSACHUSETTS, N.A.
By /s/ Deborah Lawrence
-----------------------------------
THE FIRST NATIONAL BANK OF BOSTON
By /s/ Gregory G. O'Brien
-----------------------------------
<PAGE> 1
EXHIBIT 10.5
AMENDMENT TO LOAN AGREEMENT
This Amendment is made this 19 day of April, 1996 to that certain Loan
Agreement (the "Loan Agreement") among Safety 1st, Inc., Safety 1st Home
Products Canada Inc., 3232301 Canada Inc., Safety 1st International, Inc.,
Safety 1st (Europe) Limited (collectively, the "Borrowers"), and Fleet National
Bank (formerly known as Fleet Bank of Massachusetts, N.A. and referred to
herein as "Fleet") and The First National Bank of Boston ("FNBB"). Capitalized
terms used but not defined herein shall have the meanings ascribed to them in
the Loan Agreement.
USTrust, a Massachusetts trust company with offices at 40 Court Street,
Boston, Massachusetts ("UST") has agreed to purchase from Fleet a portion of
Fleet's interest in the Maximum Credit pursuant to the provisions of Section
8.13 of the Loan Agreement and Fleet has agreed to transfer and sell to UST a
portion of its interest in the Maximum Credit up to Ten Million
($10,000,000.00) Dollars or twenty (20%) percent of the Maximum Credit, all on
the terms and conditions set forth herein.
For good and valuable consideration, the receipt and legal sufficiency
of which is acknowledged by all parties hereto, it is agreed as follows:
1. UST shall transfer to Fleet in good and immediately available
funds, an amount equal to twenty (20%) percent of the outstanding balance of
Revolving Loans pursuant to Section 2.1 of the Loan Agreement, and shall
establish upon its books a liability equal to twenty (20%) percent of the
stated amount of each Letter of Credit then outstanding for the account of the
Borrower. Annexed as Schedule 1 is a
<PAGE> 2
summary of outstanding Revolving Loans and the Stated Amounts of Letters of
Credit, together with a calculation of UST's Commitment Percentage thereof.
2. The Borrowers shall execute and deliver to the Agent Credit
Notes in the respective amounts of Twenty-Five Million ($25,000,000.00) Dollars
payable to Fleet and Ten Million ($10,000,000.00) Dollars payable to UST in the
forms of the Credit Notes annexed hereto as Exhibits 2 and 2A, and upon receipt
of such duly executed Credit Notes, Fleet shall cancel and return to the
Borrowers the Credit Note dated March 28, 1996 in the amount of Thirty-Five
Million ($35,000,000.00) Dollars made in its favor by the Borrowers. The Agent
shall deliver the Credit Note in the amount of Ten Million ($10,000,000.00)
Dollars to UST upon UST's payment of the amounts referenced in Paragraph 1 and
UST's execution and delivery of this Amendment and the other documents and
agreements to which it is a party which are listed in Exhibit 2B.
3. All references to "Fleet Bank of Massachusetts" made in the
preamble to the Loan Agreement are hereby amended to reference "Fleet National
Bank."
4. Upon the satisfaction of the conditions contained in Paragraphs
1 and 2, above, the following amendments and modifications shall be made to the
Loan Agreement:
(a) The definition of the term "Banks" contained in Section
1.1 of the Loan Agreement is amended to read as follows:
"Banks" shall mean, collectively, (i) Fleet, (ii) FNBB,
and (iii) UST, and any successor or assignee of any of
such Banks as permitted hereunder."
(b) The definition of "Commitment Percentage" contained in
Section 1.1 of the Loan Agreement is amended to reflect
to substitute fifty (50%) percent in relation to Fleet
and to add a subparagraph (iii) immediately after
subparagraph (ii) to read as follows:
2
<PAGE> 3
"(iii) in relation to UST, an initial percentage of
twenty (20%) percent."
(c) The definition of "Credit Notes" contained in Section
2.1 of the Loan Agreement is hereby amended to reference
Fleet, FNBB and UST as holders of Credit Notes.
(d) Section 9.2 of the Loan Agreement is amended to add
the following sentence at the end thereof:
"Written notices to UST shall be sent to Thomas Macina,
Vice President, USTrust, 40 Court Street, Boston,
MA 02108."
5. By its execution and delivery of this Amendment and the other
loan documents and agreements to which it is a party listed in Exhibit 2B and
its acceptance of the Credit Note, UST shall become a party to the Loan
Agreement and to each of the documents, instruments and agreements executed by
the Banks and delivered by the Borrowers and accepted by the Banks in
connection with the Loan Agreement. UST agrees that it is bound by the terms
and conditions of the Loan Agreement and such documents, instruments and
agreements and, in particular, by the provisions of Section 8 of the Loan
Agreement, including, without limitation, the indemnification provisions
thereof.
6. UST acknowledges and agrees to the provisions of the Side
Letter concerning Inventory dated March 28, 1996 which was executed and
delivered in connection with the Loan Agreement pursuant to which the Banks
have agreed on a temporary basis to include certain overseas inventory within
the Net Security Value of Base Inventory, a copy of which side letter is
annexed hereto as Exhibit 6.
7. Each of the Banks acknowledges and agrees that upon the
execution and delivery of this Amendment by all parties hereto, the Side Letter
concerning Unanimous Consent dated March 28, 1996 shall no longer
3
<PAGE> 4
be of any force or effect, and the provisions of Section 9.8 of the Loan
Agreement shall govern all amendments, waivers and modifications of the Loan
Agreement.
8. This Amendment may be executed in any number of counterparts
with the same effect as if the signatures hereto and thereto were upon the same
instrument. This Amendment is executed as a contract under seal within the
Commonwealth of Massachusetts and is subject to and shall be construed in
accordance with the laws of the Commonwealth of Massachusetts.
EXECUTED as an agreement under seal as of April 19, 1996.
FLEET NATIONAL BANK SAFETY 1ST, INC.
By: /s/ Deborah J. Lawrence, V.P. By: /s/ Michael Lerner
------------------------------- --------------------------------
THE FIRST NATIONAL BANK SAFETY 1ST INTERNATIONAL, INC.
OF BOSTON
By: /s/ Gregory G. O'Brien By: /s/ Michael Lerner
------------------------------- --------------------------------
USTRUST SAFETY 1ST HOME PRODUCTS
CANADA INC.
By: /s/ Thomas F. Macina, V.P. By: /s/ Michael Lerner
------------------------------- --------------------------------
3232301 CANADA INC.
By: /s/ Michael Lerner
--------------------------------
SAFETY 1ST (EUROPE) LIMITED
By: /s/ Michael Lerner
--------------------------------
4
<PAGE> 1
EXHIBIT 10.6
AMENDMENT TO LOAN AGREEMENT
AMONG SAFETY 1ST, INC., ET AL.
AND
FLEET NATIONAL BANK OF
MASSACHUSETTS,
THE FIRST NATIONAL BANK OF BOSTON,
AND USTRUST
This Amendment is made to that certain Loan Agreement dated March 28,
1996 (the "Loan Agreement"), by and among Safety 1st, Inc. ("Safety 1st"), a
Massachusetts corporation with offices at 210 Boylston Street, Chestnut Hill,
Massachusetts; Safety 1st (Europe) Limited ("Safety Europe"), a limited
liability company organized under the laws of the United Kingdom, 3232301
Canada, Inc. ("3232301"), a corporation organized under the federal laws of
Canada; Safety 1st Home Products Canada, Inc. ("Safety Canada"), a corporation
organized under the federal laws of Canada; Safety 1st International, Inc.
("Safety International"), a corporation organized under the laws of the U.S.
Virgin Islands; and Fleet National Bank ("Fleet"), a banking corporation
organized under the laws of the United States; the First National Bank of
Boston ("Bank of Boston"), a banking corporation organized under the laws of
the United States; and USTrust ("UST"), a Massachusetts trust company
(collectively "the Banks"). Safety 1st, Safety Europe, 3232301, Safety Canada
and Safety International are sometimes collectively hereinafter referred to as
"the Borrowers".
The Banks and the Borrowers have agreed to amend the Loan Agreement to
modify certain financial covenants contained in Sections 5.22 and 5.23 thereof
and to further modify the Loan Agreement as hereinafter set forth.
<PAGE> 2
In consideration of the foregoing and in consideration of the mutual
undertakings and representations made herein, and for other good and valuable
consideration, the receipt and legal sufficiency of which are hereby
acknowledged by the Borrowers and the Banks, the Borrowers and the Banks agree
as follows:
1. Section 5.22 of the Loan Agreement is amended effective from
and after March 31, 1996 to read as follows:
"5.22 Total Liabilities to Tangible Net Worth Ratio. The
Borrowers shall not at any time permit the ratio of
total liabilities to Consolidated Tangible Net Worth
to exceed 1.50:1.0 for the period commencing March 31,
1996 through September 29, 1996, nor more than 1.25:1.0
at any time on or after September 30, 1996."
2. Section 5.23 of the Loan Agreement is amended effective from and
after March 31, 1996 to read as follows:
"5.23 Minimum Tangible Net Worth. The Borrowers shall
not permit their Consolidated Tangible Net Worth to be
less than $35,000,000 as of March 31, 1996, plus an
amount equal to eighty-five (85%) percent of Borrowers'
cumulative quarterly net profits calculated on an
after tax basis for each fiscal quarter ending after
March 31, 1996, unreduced by any losses incurred by
the Borrowers in any fiscal quarter."
3. On the date of this Amendment, the Borrowers shall pay to Fleet,
as agent for the Banks, the sum of Twenty Five Thousand
($25,000) Dollars as an Amendment Fee, which Amendment Fee shall
be shared by the Banks in accordance with their respective
Commitment Percentages.
4. The definition of the term "Borrowing Base" contained in Section
1 of the Loan Agreement is amended effective March 28, 1996 to
read as follows:
2
<PAGE> 3
"Borrowing Base" shall mean an amount equal to the sum
of: (i) 80% of the Net Outstanding Amount of Base
Accounts attributable to Domestic Accounts Receivable
and Foreign Accounts Receivable plus (ii) (a) for the
period from the date hereof until June 30, 1996, 65%
of the sum of the Net Security Value of Base Inventory
plus Letters of Credit (other than standby letters of
credit); (b) for the period from July 1, 1996 through
and including December 31, 1996, 50% of the sum of the
Net Security Value of Base Inventory plus Letters of
Credit (other than standby letters of credit); and (c)
for the period after December 31, 1996, 40% of the sum
of the Net Security Value of Base Inventory plus Letters
of Credit (other than standby letters of credit);
provided that the maximum portion of the Borrowing
Base comprised of availability against Foreign Accounts
Receivable and inventory located outside the continental
United States shall not be more than Five Million
($5,000,000.00) Dollars. Whenever the Borrowing Base is
used as a measure of loans, it shall be computed as of,
and the loans referred to shall be those reflected in
the Revolving Loan Account at the time in question.
In calculation of the Borrowing Base (x) there shall
be eliminated from the Net Outstanding Amount of Base
Accounts any Accounts due to Safety Europe and Safety
Canada in excess of the sum of direct loans and trade
credit advances from safety 1st to each of Safety
Europe and Safety Canada, and advances from Safety
1st to each of Safety Europe and Safety Canada, and
(y) there shall be eliminated from the Net Security
Value of Base Inventory of Safety Europe and Safety
Canada, Inventory in excess of the 1) direct loans and
trade credit advances from Safety 1st to each
respective company, minus (2) the respective amounts
of Accounts Receivable of such companies included in
the Net Outstanding Amount of Base Accounts in
calculation of the Borrowing Base."
5. In accordance with Section 5.1(vii) of the Loan Agreement,
the Borrowers shall from time to time deliver to the Banks a
Borrowing Base
3
<PAGE> 4
Certificate in the form of the Borrowing Base Certificate
annexed hereto.
6. The Banks acknowledge and agree that the Borrowers shall have
until May 17, 1996 to deliver to the Banks the so-called
management letter issued in connection with Borrowers' fiscal
1995 audited financial statements which was required to be
provided within 120 days of Borrowers' fiscal year end.
7. Except as expressly modified by this Amendment, all of the
terms, conditions and provisions of the Loan Agreement remain
in full force and effect and are expressly ratified and
confirmed by the Borrowers and the Banks. As of the date hereof,
the Borrowers represent and warrant that they have no offsets,
claims, or other defenses to payment of full of their
obligations to the Banks, and reaffirm that all of the
representations and warranties made by them in the Loan
Agreement and the other loan documents, remain true and correct
as of the date of this Amendment.
8. The Borrowers shall take such actions, and execute and deliver
to the Banks such documents and agreements as the Banks may
require to evidence the agreements contained herein, and the
Banks shall take such actions and execute and deliver such
documents and agreements as may be required to evidence their
agreements contained herein.
9. This Amendment and the documents delivered in connection
herewith represent the entire agreement among the parties
with respect to the subject matter hereof, and shall be
construed in accordance with the laws of the Commonwealth
of Massachusetts as an agreement under seal.
WITNESS OUR HANDS AND SEALS THIS 10th DAY OF MAY, 1996.
BORROWERS;
SAFETY 1ST, INC.
By: /s/ Michael Lerner
-----------------------------------
President and CEO
4
<PAGE> 5
SAFETY 1ST (EUROPE) LIMITED
By: /s/ Michael Lerner
-----------------------------------
Director
By:
-----------------------------------
SAFETY 1ST HOME PRODUCTS CANADA, INC.
By: /s/ Michael Lerner
-----------------------------------
CEO
3232301 CANADA, INC.
By: /s/ Michael Lerner
-----------------------------------
President
SAFETY 1ST INTERNATIONAL, INC.
By: /s/ Michael Lerner
-----------------------------------
President
BANKS:
FLEET NATIONAL BANK
By: /s/ Deborah J. Lawrence
-----------------------------------
DEBORAH J. LAWRENCE, Vice President
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ Gregory O'Brien
-----------------------------------
GREGORY O'BRIEN, Managing Director
USTRUST
By: /s/ Errin Siagel
-----------------------------------
ERRIN SIAGEL, Vice President
5
<PAGE> 6
COMMONWEALTH OF MASSACHUSETTS
Middlesex, ss May 10, 1996
Then personally appeared the above-named, Michael Lerner, the President
and CEO of Safety 1st, Inc., and acknowledged the foregoing instrument to be
his free act and deed on behalf of Safety 1st, Inc., before me,
/s/ Marilyn L. Himelfarb
---------------------------------------------
, Notary Public
My Commission Expires: 12/20/2002
COMMONWEALTH OF MASSACHUSETTS
Middlesex, ss May 10, 1996
Then personally appeared the above-named, Michael Lerner, the Director
of Safety 1st (Europe) Limited, and acknowledged the foregoing instrument to be
his free act and deed on behalf of Safety 1st (Europe) Limited, before me,
/s/ Marilyn L. Himelfarb
---------------------------------------------
, Notary Public
My Commission Expires: 12/20/2002
COMMONWEALTH OF MASSACHUSETTS
Middlesex, ss May 10, 1996
Then personally appeared the above-named, Michael Lerner, the CEO of
Safety 1st Home Products Canada, Inc., and acknowledged the foregoing
instrument to be his free act and deed on behalf of Safety 1st Home Products
Canada, Inc., before me,
/s/ Marilyn L. Himelfarb
---------------------------------------------
, Notary Public
My Commission Expires: 12/20/2002
6
<PAGE> 7
COMMONWEALTH OF MASSACHUSETTS
Middlesex, ss May 10, 1996
Then personally appeared the above-named, Michael Lerner, the President
of 3232301 Canada, Inc., and acknowledged the foregoing instrument to be
his free act and deed on behalf of 3232301 Canada, Inc., before me,
/s/ Marilyn L. Himelfarb
---------------------------------------------
, Notary Public
My Commission Expires: 12/20/2002
COMMONWEALTH OF MASSACHUSETTS
Middlesex, ss May 10, 1996
Then personally appeared the above-named, Michael Lerner, the President
of Safety 1st International, Inc., and acknowledged the foregoing instrument
to be his free act and deed on behalf of Safety 1st International, Inc.,
before me,
/s/ Marilyn L. Himelfarb
---------------------------------------------
, Notary Public
My Commission Expires: 12/20/2002
COMMONWEALTH OF MASSACHUSETTS
, ss May , 1996
Then personally appeared the above-named, Deborah J. Lawrence, the
Vice President of Fleet National Bank, and acknowledged the foregoing
instrument to be her free act and deed on behalf of Fleet National Bank,
before me,
---------------------------------------------
, Notary Public
My Commission Expires:
7
<PAGE> 1
EXHIBIT 11
SAFETY 1ST, INC.
PRIMARY NET INCOME
PER SHARE AND FULLY DILUTED
NET INCOME PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1996
<S> <C> <C>
NET INCOME PER SHARE
Net income available for common
shares and common stock equivalent shares
deemed to have dilutive effect $2,105,039 $1,704,018
Primary net income per share $ .29 $ .24
SHARES USED IN COMPUTATION
Weighted average common shares
outstanding 7,109,593 7,150,616
Common stock equivalents - stock options 121,810 21,713
Total common shares and common stock
equivalent shares deemed to have a
dilutive effect 7,231,403 7,172,329
FULLY DILUTED NET INCOME PER SHARE
Net income available for common
shares and common stock equivalent
shares deemed to have a dilutive
effect $2,105,039 $1,704,018
Fully diluted net income per share $ .29 $ .24
SHARES USED IN COMPUTATION
Total common shares and common stock
equivalent shares deemed to have a
dilutive effect 7,109,593 7,150,616
Common stock equivalents - stock options 108,352 27,332
Total 7,217,945 7,177,948
</TABLE>
Note: The net income per share computation presented in the condensed
statement of income does not reflect common stock equivalents, as
the dilutive effect is less then 3%.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SAFETY 1ST
FORM 10Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10Q.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 299,998
<SECURITIES> 0
<RECEIVABLES> 33,854,040
<ALLOWANCES> 1,300,000
<INVENTORY> 31,285,802
<CURRENT-ASSETS> 67,495,986
<PP&E> 23,545,610
<DEPRECIATION> 5,551,843
<TOTAL-ASSETS> 101,621,362
<CURRENT-LIABILITIES> 50,673,867
<BONDS> 0
<COMMON> 71,506
0
0
<OTHER-SE> 47,652,989
<TOTAL-LIABILITY-AND-EQUITY> 101,621,362
<SALES> 32,006,438
<TOTAL-REVENUES> 32,006,438
<CGS> 19,113,872
<TOTAL-COSTS> 19,113,872
<OTHER-EXPENSES> 9,511,894
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 642,820
<INCOME-PRETAX> 2,737,852
<INCOME-TAX> 1,033,834
<INCOME-CONTINUING> 1,704,018
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,704,018
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
<PAGE> 1
EXHIBIT 99
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The Company may occasionally make forward-looking statements and estimates,
such as forecasts and projections of the Company's future performance or
statements of management's plans and objectives. These forward-looking
statements may be contained in SEC filings, Annual Reports to Shareholders,
Press Releases and oral statements, among others, made by the Company. Actual
results could differ materially from those in such forward-looking statements.
Therefore, no assurances can be given that the results in such forward-looking
statements will be achieved. Important factors that could cause the Company's
actual results to differ from those contained in such forward-looking statements
include, among others, the factors mentioned below.
NEW PRODUCT INTRODUCTIONS. Since its organization, the Company has
experienced rapid growth, both in sales and product offerings. The growth of the
Company has been, and will continue to be, largely dependent upon the ability of
the Company to continue to introduce new products which will be accepted by the
market. However, there can be no assurance that the Company will continue to
maintain its present rate of growth, that it will continue to generate new
product ideas or that new product introductions will be well received by the
market.
DEMAND FOR THE COMPANY'S PRODUCTS. The success of the Company's business
depends in large part on continued consumer demand for its juvenile and home
security products. Changes in consumer demand due to general economic weakness
or to less favorable child bearing demographics, among other factors, could have
a material adverse effect on the Company.
ABILITY TO MANAGE GROWTH. The Company's continued success is also dependent
upon its ability to manage the Company's expanded operation, which in turn will
require it to continue to implement and improve its operational and financial
systems and to attract, train and retain qualified employees to meet the
Company's needs during its growth. These demands are expected to require
additional management resources and the development of additional expertise by
existing management. The failure to manage growth effectively would have a
material adverse effect on the Company.
RELIANCE ON CONTRACT MANUFACTURERS: FOREIGN MANUFACTURING. The Company does
not own or operate its own manufacturing facilities. Manufacturing is performed
to the Company's specifications by approximately 75 manufacturers located in
China, Taiwan, Thailand, Mexico, the United Kingdom and the United States. As a
result of not owning its own manufacturing facilities, the Company has less a
degree of control over the product manufacturing cycle necessary to bring
products, both newly introduced and existing products, to market. Failure of a
third party manufacturer to produce a product according to the Company's
specifications or to adhere to the Company's schedules may have a material
adverse effect on the Company's business and its results of operations.
Historically, the Company has derived approximately 60 to 75% of its sales
from products manufactured in the Far East, mainly in China. Obtaining its
products from foreign manufacturers subjects the Company to a number of
additional risks, including transportation delays and interruptions, political
and economic disruptions, the imposition of tariffs, quotas and other import or
export controls, currency fluctuations and changes in governmental policies,
particularly those affecting trade with China. Although, the Company continues
to explore alternative manufacturing sources outside of China, there can be no
assurance that the Company will be able to utilize alternative sources of supply
in a timely and cost effective manner.
In addition, because the Company relies largely on foreign manufacturers,
the Company is required to order products further in advance of customer orders
than would generally be the case if such products were manufactured
domestically. The risk of ordering products in this manner is greater during the
initial introduction of new products since it is difficult to determine demand
for such products.
DEPENDENCE ON MAJOR CUSTOMERS: CREDIT RISKS. The three largest customers of
the Company have historically accounted for approximately 40% of the Company's
net sales. A significant reduction of purchases by any of the Company's largest
customers could have a material adverse effect on the Company's business. The
uncertain economic environment, especially in the retail industry, could
jeopardize the business prospects of the Company's customers and impose
significant credit risks.
PRODUCT LIABILITY RISKS. The Company's juvenile products are used for and by
small children and infants. The Company's home security products, such as the
carbon monoxide detector, are intended for protection of health and safety of
individuals. The Company carries product liability insurance in amounts which
management deems
<PAGE> 2
adequate to cover risks associated with such use; however there can be no
assurance that existing or future insurance coverage will be sufficient to cover
all product liability risks.
GOVERNMENT REGULATION. The Company's products are subject to the provisions
of the Federal Consumer Product Safety Act and the Federal Hazardous Substances
Act (the "Acts") and the regulations promulgated thereunder. The Acts authorize
the Consumer Product Safety Commission (the "CPSC") to protect the public from
products which present a substantial risk of injury. The CPSC can require the
repurchase or recall by the manufacturer of articles which are found to be
defective and impose fines or penalties on the manufacturer. Similar laws exist
in some states and cities and in other countries in which the Company markets
its products. Any recall of its products could have a material adverse effect on
the Company.
COMPETITION. The juvenile products and home security industries are highly
competitive and include numerous domestic and foreign competitors, some of which
are substantially larger and have greater financial and other resources than the
Company. The Company competes on the basis of product innovations, brand name
recognition, price, quality, customer service and breadth of product line.
COST OF DEBT. The Company's expanding operations may cause the Company to
incur additional debt. Interest rate increases will have a resulting adverse
effect on the Company's earnings.
INTERNATIONAL SALES AND EXPANSION. The Company is actively attempting to
expand its international sales. In 1995, international sales represented 14% of
the Company's revenue. To the extent that customers of the Company's products
pay for their purchases in U.S. dollars, currency fluctuations which favor the
U.S. dollar could have a material adverse effect on the Company's business and
its results of operations.
