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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(b) 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)
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Massachusetts 04-2836423
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
210 Boylston Street 02167
Chestnut Hill, Massachusetts (Zip code)
(Address of principal executive
offices)
(617) 964-7744
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each Class which registered
------------------- ----------------
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $.01 PAR VALUE
(Title of Class)
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
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
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The aggregate market value of the Common Stock held by non-affiliates of
the Registrant as of March 14, 1997 was approximately $23,303,389 based on the
last reported sales price as quoted on The Nasdaq Stock Market's National
Market as reported at the close of business on said date.
The number of shares of Registrant's Common Stock outstanding on March 14,
1997 was 7,186,955.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement for its 1997 Annual Meeting
of Stockholders are incorporated by reference into Part III of this report.
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PART I
ITEM 1 - BUSINESS
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GENERAL
Safety 1st, Inc. (the "Company") is a leading developer, marketer and
distributor of child care products. The Company believes that it has increased
consumer awareness of child safety issues and that its flagship brand name,
Safety 1st(R), is closely associated with child safety among consumers. The
Company's first products--the original yellow and black, diamond shaped Baby on
Board and Child on Board automobile window displays--provided the Company with
national attention and distribution for its juvenile products. The Company has
continually broadened its line of safety products from basic items, such as
outlet plugs and drawer and cabinet locks, to safety gates, bed rails and
balcony guards. The Company believes that it is currently the leading supplier
of child safety products in the United States.
By capitalizing on the strength of its Safety 1st brand name, the Company
has expanded its product offerings into related areas. In 1987, the Company
began its successful expansion into the child care, convenience and activity
product areas and now sells items such as baby monitors, walker alternatives,
bath seats, toddler cups, pacifiers, teethers, gates, potty trainers, booster
seats, infant health care items, bath accessories and feeding products. In late
1993, the Company introduced a new line of home security products, which
includes locks, bolts and latches for doors, windows and cabinets as well as
electrical safety items, home automation products, carbon monoxide detectors and
smoke detectors.
The Company believes that sales within the juvenile products industry
increased over the past several years because of the increased marketing
efforts of juvenile products manufacturers combined with favorable demographic
trends. The Company experienced rapid growth with net sales increasing from
$7.7 million in 1989 to $103.2 million in 1995.
By early 1996, the Company was distributing approximately 650 products to
more than 3,700 customers. During the second quarter of the year, the Company
recognized that its product offerings had proliferated to an unmanageable
quantity, including products outside of its core competency. This product
proliferation and continual expansion of the customer base had led to (i)
additional complexity in all operational aspects of the business, (ii) a
significant increase in the ongoing level of general and administrative
expenses, and (iii) an increase in working capital requirements. As a result,
during the second quarter, the Company began a review of its business strategy
and took the first steps to refocus its business on its traditional core
product lines, trade channels and customer base. The Company recorded charges
of $13.8 million during the second quarter primarily related to valuation of
assets affected by this strategic refocus.
Subsequently, during the fourth quarter of 1996, management recognized that
the initial attempts to refocus the Company and to simplify its business
environment had been insufficient and determined that the focus of its products
needed to be substantially narrower than had been previously estimated. The
Company believed that to reduce the substantial financial risks associated with
large scale introductions of new products, while achieving large scale benefits
from simplification of its business practices, additional evaluation of the
Company's products, customers and markets were necessary. As a result, during
the fourth quarter the Company implemented a number of changes and recorded a
pre-tax charge of $32.7 million associated with the redefinition of its
business strategy. Among the steps taken, the Company (i) reduced 1996 juvenile
product offerings from a maximum level during the year of approximately 400 to
approximately 200 at year end, (ii) reduced 1996 home security product
offerings from a maximum level during the year of approximately 250 to
approximately 100 at year end, (iii) reduced the number of package
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assortment options available to a retailer for a given product, thereby reducing
the number of stock keeping units (SKUs) from 2300 to 600 at the end of 1996,
and (iv) increased minimum order quantity requirements from retailers.
With the introduction of approximately 75 new products for sale in 1997,
the Company currently distributes approximately 375 products to approximately
2,500 customers, the largest among them being Wal-Mart, Toys-R-Us, and Kmart.
According to point of sale data compiled by an independent tracking firm, The
NPD Group, Inc., in 1996 the Company gained or maintained leadership positions
in virtually all of its core product categories, including child safety
products, infant health products, potty seats, booster seats, bath tubs, bath
accessories, nursery monitors, alternative walkers, and bath seats. The Company
maintains its belief that continued development of new, innovative and high
quality products within its range of core products which meet the Company's
profitability standards, strong brand name recognition and commitment to
customer service will continue to enhance its image as a leader in the juvenile
products market and facilitate its continued growth in its core product areas
and geographically in international markets.
Except as expressly indicated or unless context otherwise requires, as used
in this report, the "Company" means Safety 1st, Inc., a Massachusetts
corporation organized in March, 1984, and its subsidiaries.
JUVENILE MARKET OVERVIEW
The juvenile products industry has experienced significant growth in retail
sales over the past decade as a result of a marketing driven expansion coupled
with favorable demographic trends. In addition to child safety and child care,
convenience and activity products, the juvenile products industry includes baby
apparel, such as sleepware and bibs, and furniture, such as cribs and juvenile
bedding items. The Company believes that much of the growth in sales of juvenile
products has resulted from the introduction of new products and the increased
marketing efforts of juvenile products manufacturers. The Company believes that
the juvenile products industry will continue to grow and intends to continue
capitalizing on the strength of its Safety 1st brand name through new product
introductions.
Despite a slight decrease in the annual birth rate in recent years, sales
in the juvenile industry increased from approximately $1.5 billion in 1985 to
approximately $3.97 billion in 1995, and it is estimated that industry sales
will exceed $4.0 billion for 1996. The Company believes there are several
demographic factors contributing to this growth. According to industry
statistics, for example, first time parents are the largest group of purchasers
of juvenile products, and have accounted for approximately 40% of total births
over the past few years. The Company believes that today's first time parents
are generally more aware of and place a greater emphasis on child safety.
Studies also indicate that couples are marrying later in life, have higher
disposable income per family due to more dual income households, and,
consequently, are more willing to spend money on their children.
HOME SECURITY MARKET OVERVIEW
The home security products industry is experiencing significant growth
primarily as a result of heightened public concern with crime and home safety
issues. Consequently, the residential home security market, currently estimated
at $5.0 billion sales annually, is expected to grow between 30% and 50%
throughout the 1990s, according to industry estimates. An adjunct to this growth
is the expansion of the "do it yourself" home center chains that offer
consumers less expensive options for making homes safe.
While the Company still believes that the Home Security category represents
opportunity for continued growth, its hardware product line was significantly
affected by the product refocus of 1996. Although the Company reduced its
product offering in this category by approximately 150 items, the Company
believes that home security products are a natural extension of child safety
products and, as a result, the company expects to continue to take
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advantage of consumer recognition of the Safety 1st brand name, the fragmented
sources of supply in the industry, and many of the company's existing customer
relationships, to explore future opportunities to expand its home security
product line, but consistent with a focus on core products in this category.
BUSINESS STRATEGY
MANAGED GROWTH. In 1996, the Company refocused on the basic strengths
of its core business in order to better manage the rapid growth which the
Company had experienced during the previous years. A strategic reduction in the
number of product offerings, retaining the stronger performing, higher margin
products, as well as the elimination of smaller customers, were the focal
points of the Company's change in business strategy. The Company also hired an
experienced President and Chief Operating Officer who has assumed the
responsibility for redefinition of its business strategy and managing the
financial and operational aspects of the business.
The Company's objectives are: to enhance its reputation as a leading
supplier of juvenile products while broadening its product offerings, to
increase sales to existing customers and to expand its customer base
domestically and internationally, consistent with managed growth philosophy
and more stringent profitability objectives.
CREATION OF NEW AND INNOVATIVE PRODUCTS. A key to the Company's success is
its ability to develop and market high quality new products with innovative
features at competitive prices that meet the Company's profitability standards.
In addition to creating new products, the Company has in the past and will
continue to enter into additional licensing agreements enabling the Company to
use well-known trademarks on several lines of its juvenile products. Management
believes that product innovations developed by the Company will continue to
enhance the marketability of its products, as well as its status as an industry
leader.
EXPANSION OF MARKETS AND CUSTOMER BASE. The Company has continually
expanded its child safety product line while also developing child care,
convenience and activity products. This expansion has enabled the Company to
broaden its customer base, from mass merchants and specialty retailers, to
strategic, food and drug chains, hardware and home center chains, catalog
showrooms, warehouse clubs and mail order catalogs. The expansion of the
Company's product line has also enabled it to increase the retail space
allocated to its products by its customers.
The key elements of its product and marketing strategy include producing
supplemental product categories that complement the capacity of the existing
line; enhance category assortments with "good, better, best" product offerings;
develop products on a global basis, and meet world wide standards to help
ensure cross marketing opportunities.
INTERNATIONAL EXPANSION. The Company continues to successfully increase
its market base through expanding international channels of distribution. The
Company sells products in over 55 countries worldwide either directly to house
accounts or through exclusive or non-exclusive distributorships. In January,
1996, the Company completed the acquisition of EEZI Group Holdings Ltd., a
privately owned company located in England and a manufacturer of child
care products (now the Company's wholly-owned subsidiary, Safety 1st (Europe)
Ltd.). Effective February, 1996, the Company assumed control over Orleans
Juvenile Products, Inc., a privately owned Canadian corporation that was the
Canadian distributor of Safety 1st products (now the Company's wholly-owned
subsidiary operating under the name Safety 1st Canada). The transaction was
completed on March 15, 1996. Also, in early 1996, the Company established the
new position of Vice President of International Sales. The Company intends to
continue its commitment to developing a strong market presence internationally.
BRAND NAME RECOGNITION. The Company's strong brand name recognition is a
competitive advantage which has facilitated its expansion into new markets. The
Company believes that it was the first marketer of child safety products, and
more recently of home security products, to use four color photography as part
of its product packaging for blister cards. Management believes that the
Company's blue and yellow graphic packaging, and photography, which depicts
actual use of the product, has contributed to strong brand awareness at the
consumer level, stimulated juvenile product market growth and product sales, and
enhanced the perception of the Company as a juvenile products industry innovator
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and leader. In 1996, the Company began redesigning product packaging,
incorporating bilingual text and a fresh, updated use of the Company's
traditional blue and yellow colors.
COMMITMENT TO SERVING CUSTOMER NEEDS. The Company is committed to
responding quickly and efficiently to its customers' needs. The Company utilizes
an advanced electronic data interchange system, which permits customers to place
orders directly through computerized telecommunications. Management has
instilled at every level of its staff the philosophy that satisfying the needs
of the customer is critical to the continued success of the Company.
PRODUCTS
The Company develops and markets high quality, competitively priced child
safety and child care, convenience and activity products that are characterized
by innovative features and colorful designs. The Company's broad line of
juvenile products are designed to enhance the safety of, or to be used by,
newborns to children five years of age. In late 1993, the Company introduced a
line of home security products for sale in 1994, designed to help keep the
entire family more secure at home.
Initially, the Company was a vendor of small products packaged in blister
packs (i.e., transparent plastic). Because of their small size, large quantities
of blister pack products are usually stocked by retailers in peg board shelving
areas. Beginning in 1990, the Company continued the expansion of its product
line by introducing bulk products (i.e., larger products requiring packaging in
boxes), such as the swivel bath seat and the potty seat. Because of their size
and packaging, bulk products require significantly greater shelf space for
marketing by retailers.
By early 1996, the Company's product line had exceeded 650 products. As a
result, after an extensive profitability analysis of each product, the Company
initiated a program to rationalize its product offerings and to discontinue
products that did not meet certain sales, quality, inventory turn and
profitability objectives. The Company made a strategic decision to discontinue
approximately 350 products. The Company's blister pack products range in
retail price from $.99 to $14.99, and its bulk products range in retail price
from $7.99 to $199.99.
The Company strives to create a range of product price points for its
product categories. For many peg and bulk product categories the Company enters,
it develops an innovative assortment of products to offer its customers a choice
of different features and price points. For example, in 1993 the Company
developed its first electronic product, the Musical Sight `N Sound(TM) Nursery
Monitor, which features a musical chip that automatically plays Brahms' Lullaby
when the baby cries; an auto sensor night light; and LED light display to show
the level of a baby's sounds. Since then the Company has added 5 variations in
this product category, including the Day `N Night(TM) TV Monitor System, with a
5 1/2" screen, to enable parents to watch their baby from another room.
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The following table sets forth the amounts and percentages of the Company's
net sales for the three years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
Net Net Net
Sales Percent Sales Percent Sales Percent
----- ------- ----- ------- ----- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Child Safety Products $ 27,170 25.7% $31,527 30.5% $20,478 29.2%
Child Care, Convenience
and Activity Products 70,164 66.3 64,201 62.2 48,960 69.8
Home Security Products 8,418 8.0 7,490 7.3 728 1.0
-------- ----- ------- ----- ------- -----
Total Net Sales $105,752 100.0% 103,218 100.0% $70,166 100.0%
======== ===== ======= ===== ======= =====
JUVENILE PRODUCTS
</TABLE>
Child Safety Products
The Company's safety-related products consist of a broad line of items
designed to enhance the safety of children at home and while traveling. The
Company's first products, introduced in 1984, were the original yellow and
black, diamond shaped Baby on Board and Child on Board automobile window
displays. Although a limited number of child safety items, such as outlet plugs,
cabinet latches and wooden safety gates, existed prior to 1984, there was no
developed child safety category within the juvenile market. The introduction of
the child and baby automobile display signs helped develop consumer awareness of
the need for child safety and stimulated the significant growth of the child
safety product market to the point where the concept of "child proofing" one's
home or surroundings is a concept recognized by parents today.
The Company markets an extensive line of home safety products, including
kitchen safety items, such as drawer and cabinet latches, stove knob covers,
stove guards, and oven and refrigerator door locks; electricity-related safety
items, such as outlet plugs and switch locks; bathroom safety items, such as
toilet lid locks, inflatable bathtub spout and knob covers and toilet seat
covers; and other home safety items, such as balcony guards, smoke and fire
alarms, window locks and door stops.
The Company also markets a broad line of travel related safety items,
including sun-screens for automobiles, safety harnesses, stroller weather
shields, back seat baby mirrors and car seat neck supporters. In addition, the
Company packages and sells multiple home and travel safety items in kits.
Child Care, Convenience and Activity Products
In 1987, the Company decided to build on its success in the child safety
products market and, with the introduction of the Sof 'Key(TM) teether, expanded
into the development and marketing of child care, convenience and activity
products. The Company has since added other teething related items, including
its Sportsifier(R) pacifiers, its Teethersaurous(R) (dinosaur shaped teethers)
and water teethers; feeding and drinking related items, including nurser
bottles, juice cups, spill proof travel cups, and its Sip 'N Go(R) juice box
holders; and general convenience accessory products including car and toy bags,
pacifier holders, bath cushions for newborns, swivel bath seats for older
infants, high chair mats, booster seats, and bathroom accessories such as
bathtub toys and potty seats.
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The Company's health and hygiene products include baby thermometers, a
fever pacifier (with temperature indicator), a small object tester, medicine
droppers and spoons and baby nail scissors.
NEW PRODUCT INTRODUCTIONS
Juvenile Products
The Company began shipping approximately 70 new juvenile products for sale
in 1996, including the Day `N Night TV monitor, 2 in 1 Infant/Toddler tub,
Odor-less Diaper Pail, Squeeze `N Go security gate, Soft & Secure portable bed
rail, and the Rock `N Fun alternative walker. Each of these new products is
either patented or has a patent pending.
In the fall of 1996, the Company introduced an additional 75 new juvenile
products for sale in 1997. This new assortment includes the Bouncing Buggy
alternative walker, Fold-Up/Travel Bouncer, six Security Gates, and an
assortment of additional safety, feeding/teething, healthcare, playtime and bath
accessories.
The Company currently markets approximately 20 products utilizing the
Disney Babies(R) and Mickey's Stuff for Kids(R) trademarks under its licensing
agreement with The Walt Disney Company. The most recent introductions include an
assortment of Mickey's Stuff for Kids feeding items, and Disney Babies bath and
playtime accessories.
Home Security Products
In late 1993, the Company introduced a line of home security products to
expand its product mix and increase sales to its existing customers. The
Company's home security products include door items, such as entry viewers, door
locks and bolts; window security items, such as window locks and stops; drawer
locks, latches and lid supports; and electrical safety items such as an
auto-sensor night light.
The Company's home security products, most of which are packaged in blister
packs, range in retail price from $.99 to $199. Home security products are
distributed at hardware and home center chains, such as Home Depot and Lowe's
and at mass merchant hardware departments, such as Wal-Mart and Target. The
Company currently sells approximately 115 home security products.
The home security category was significantly affected by the change of
business strategy of the Company and the SKU reduction program in 1996. While
the Company believes that this is an important market, it is currently
reevaluating its position in some segments of the home security category,
including carbon monoxide detectors.
Product Design and Development
During the past several years, the Company has introduced the following
quantities of new products:
<TABLE>
<CAPTION>
NEW PRODUCTS PEG
INTRODUCED FOR SALE PRODUCTS BULK PRODUCTS HOME SECURITY TOTAL
IN:
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993 53 4 0 57
1994 56 8 54 118
1995 52 11 62 125
1996 67 10 97 174
1997 60 14 5 79
</TABLE>
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Although the Company continues to believe that a key component of its
future success is its ability to develop and bring to market new products with
innovative features at competitive prices, as part of the Company's refocus on
its core business strengths in peg products, and in recognition of the added
risk involved in the introduction of bulk products (due to the high development
costs), the Company plans to reduce its new product offerings for sale in 1998.
The Company estimates that in 1997 it will introduce a total of approximately
60 new products for sale in 1998, consisting of approximately 45 peg products,
5 bulk products and 10 home security products. The Company believes that the
introduction of these new products should enable it to achieve its growth
objectives on a sustained basis, by enabling management to focus its energies
on its core strengths which will enable the Company to increase sales with
fewer products.
Almost all of the Company's juvenile products are conceived and developed
by the Company's internal product development group, which is comprised by the
marketing, industrial design, development and engineering departments. The goal
of this team approach is to create new and improved products and develop useful
innovations to products currently on the market. Once the marketing department
researches a category and completes competitive analysis, product ideas are
developed and rough sketches are produced by industrial design, and management
determines the appropriate price point for that product. The decision to
manufacture a product is made only after analysis and determination by the
Company's management that a high quality product can be engineered and produced
on a cost effective basis while meeting the minimum return on investment
objectives.
The company utilizes a sophisticated CAD (Computer Aided Design) system
in its engineering process. The company believes this is a valuable resource
not widely used in the juvenile industry. The technology enables the company to
produce one of a kind "proving models" prior to cutting steel on expensive
molds. These models are functioning samples, and unlike standard prototypes,
provide the product design engineers with the opportunity to test the integrity
of the product and make necessary adjustments before production, substantially
decreasing lead time and reduces product time to market. Prototype samples are
also used to establish packaging parameters early in the development cycle.
Final engineering specifications are prepared and sent to third party
manufacturers where molds are built for final production.
Substantially all of the Company's new juvenile products are introduced at
the Juvenile Products Manufacturer's Association trade show in the fall.
Similarly, most of the company's new home security products are introduced at
the National Hardware Show in the summer. New products are generally available
for sale during the first quarter of the following year.
SALES AND MARKETING
During 1996, the Company sold its products to approximately 2,500 customers
worldwide. Previously, the Company sold to 3,700 customers. The difference in
the number of customers can be accounted for by a combination of a tough retail
environment forcing some small retailers to go out of business, and an increase
by the Company in its minimum order requirements (an element of its 1996
business refocus) which eliminated many smaller accounts. The Company's largest
customers are mass merchants, such as Wal-Mart, Toys-R-Us and Kmart. The
Company also sells to food and drug chains, such as Rite Aid and Kroger;
hardware and home center chains, such as Home Depot and Lowe's; catalog
showrooms, such as Service Merchandise; warehouse clubs including BJ's; mail
order catalogs such as Perfectly Safe; and specialty retailers.
During 1996, approximately 21.6%, 13.0%, and 7.4% of the Company's net
sales were to Wal-Mart, Toys-R-Us and Kmart respectively. No other customer of
the Company accounted for more than 5% of the Company's net sales during 1996.
The Company's products are sold in the United States through the Company's
internal sales and marketing staff and a network of approximately 50 independent
sales organizations paid on a commission basis. Independent sales
representatives are supervised by the Company's sales staff. The Company is
responsible for training the sales representatives and updating them with
respect to new products, special promotions and merchandising displays. The
Company's internal sales staff is also responsible for monitoring customer
satisfaction and is involved in every phase of the selling process with major
customers. The Company's employees and its independent sales representatives
attend numerous trade shows to further its marketing efforts.
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The Company exports its juvenile products to approximately 55 countries
worldwide, including Canada, the United Kingdom, France and Australia. Foreign
sales were approximately $21.2 million, $14.2 million, and $9.0 million in
1996, 1995 and 1994, respectively, accounting for 20.0%, 13.8%, and 12.8% of
net sales in each of such years.
The establishment of Safety 1st Europe will further help increase the
Company's presence in the European market and will enable the Company to
cross-sell all applicable products designed and developed in the United States
and the United Kingdom. The Company believes that its Safety 1st Europe
subsidiary will have strong distribution capability. For example, in 1996,
Safety 1st Europe, began a private label program with MotherCare, one of the
largest retailers in the U.K. The program includes nine products that the
Company produces for MotherCare and packages under the MotherCare brand name.
The private label program is in addition to the products MotherCare purchases
from the Company under the Safety 1st brand name.
In addition, the Company is in the process of establishing distributors for
Germany, France, and Japan and has secured new business with Carrefour, one of
the leading hyper-markets in France. In conjunction with its anticipated new
distributors in France and Germany, the Company plans to discontinue use of
public warehouse facilities in Rotterdam.
The Company believes that its colorful and graphic packaging has
significantly contributed to strong brand awareness among consumers. In 1995 the
Company developed a new contemporary look for its bulk packaging. The successful
response of the new bulk packaging prompted the Company in 1996 to incorporate
the new design in its entire juvenile line for 1997. The new look incorporates
the success of the Company's blue and yellow trade mark with four color
graphics, and adds a more contemporary style with Spanish/English text to give
the products a broader reach to the customer.
The Company also focuses its efforts on increasing public awareness of the
importance of child safety. In 1990, the Company engaged noted child safety
expert and author Vicki Lansky to write the book, CHILD PROOF YOUR HOME: A
Comprehensive Child Safety Guide. The Company believes that the publication and
distribution of this book has helped to develop awareness of child safety issues
and will continue to promote the Company's reputation as a leader and expert in
child safety. The Company also sponsors child safety awareness programs and
other community events. In addition, the Company advertises its juvenile product
line in trade magazines, such as Juvenile Merchandising and Small World. The
Company advertises its home security line in National Home Center News and
Discount Merchandiser and Home Improvement Executive.
SOURCES OF SUPPLY
Manufacturing is performed to the Company's specifications by
manufacturers located in China, Taiwan, Thailand, Korea, Japan, Mexico, the
United States and the United Kingdom. In 1996, the company derived
approximately 61% of its sales from products manufactured in the far east,
mainly in China and Taiwan. Because of substantially higher costs in shipping
larger products, the Company manufactures a greater percentage of its bulk
products in the United States rather than in the Far East. Neither the Company
nor its subsidiaries owns or operates its own manufacturing facilities.
Company employees regularly visit suppliers to supervise the
manufacture of products and to ensure timely delivery and compliance with
Company manufacturing specifications. The Company engages independent testing
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laboratories in the United States and in the Far East to perform quality control
tests of products prior to shipment.
Except for certain purchases by Safety 1st Europe, all purchases by the
Company are in U.S. dollars. The Company's suppliers generally ship goods on
the basis of open credit terms or payment upon the acceptance of goods by the
Company. To a lesser extent, some suppliers require shipment against letters of
credit. Goods produced in the Far East are generally transported to the United
States by ship and then trucked to the Company's warehouse facilities or in
certain instances are shipped directly to foreign and United States customers.
Goods produced domestically are typically shipped to the Company's warehouse
facilities, although on occasion, domestically produced goods are transported
directly to customers. Prior to shipment, the Company has products tested for
quality at the supplier's factory or at independent local laboratories. Upon
delivery of goods to the Company's warehouse and distribution facilities, the
Company conducts quality control tests on a spot basis. The Company bears the
risk of loss while the goods are in transit from its suppliers, but, in the
opinion of Company management, the Company carries adequate insurance to
protect it from this risk.
During 1996, the Company purchased approximately 20.9%, 12.1%, 6.6%, 6.5%,
and 5.7%, respectively, of its products from five manufacturers located in China
and the United States. In early 1997 the Company entered into a three year
agreement with Wiltec Industries, Ltd. ("Wiltec") whose manufacturing
facilities are located in China, under which the Company has committed to
place minimum order levels in exchange for a more favorable pricing
arrangement. With the exception of the Wiltec agreement, the Company is not a
party to any long-term contractual arrangements with any specific manufacturer
and often uses more than one manufacturer to produce a single product with
duplicate molds. The Company currently owns substantially all tools and molds
used by its suppliers to produce its products.
Foreign manufacturing is subject to a number of 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. From time to time, the United
States Congress has attempted to impose additional restrictions on trade with
China. Enactment of legislation or the imposition of restrictive regulations
conditioning or revoking China's "most favored nation" ("MFN") trading status or
other trade sanctions could have a material adverse effect upon the Company's
business because products originating from China could be subjected to
substantially higher rates of duty. Due to continuing uncertainties over China's
MFN status, the Company continues to explore alternative manufacturing sources
located outside of China. Because the Company relies 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 principal raw materials and supplies used in the production and sale of
the Company's juvenile products are plastics, paper products and electronic
components. The principal raw materials and supplies used in the production and
sale of the Company's home security products are comprised of steel and brass
and are primarily packaged in blister/peg packaging. Raw materials are purchased
by the manufacturers who deliver completed products to the Company. The Company
believes that an adequate supply of the raw materials and supplies used in the
manufacture of its products is readily available from existing and alternative
sources and at reasonable prices.
DISTRIBUTION
North American product distribution is centralized at the Company's
warehouse facility located in North Londonderry, New Hampshire. The acquisition
of Orleans Juvenile Products has provided the Company with an additional
distribution facility in Montreal, Canada; product is shipped to this location
direct from the Far East, direct from U.S. suppliers, and when necessary, from
the Londonderry warehouse facility for distribution throughout Canada. Upon
arrival at the New Hampshire or Montreal, the goods are inspected, spot tested
for quality, stocked and, if necessary, repackaged for reshipment to the
Company's customers. The goods are delivered to the Company's customers by
independent shippers or customer carriers. Safety 1st Europe engages the
services of third party distribution facility in the United Kingdom to assemble,
stock and distribute products to United Kingdom customers.
11
<PAGE> 12
During 1996, the Company began the process of implementing a new
enterprise-wide business management computer system, which it believes will
enhance productivity, lower operating costs, facilitate financial controls and
credit verification and improve customer service. Customers typically seek to
maximize sales turnover and minimize inventory costs and, consequently,
require quick response and sometimes 24 hour turn-around of orders. The system
will improve the Company's ability to determine the status of each order within
the shipping process and permit the Company to process orders quickly, respond
to customer inquiries and adjust shipping schedules to meet customer
requirements.
The Company maintains sufficient inventory to enable it to meet customer
requirements and minimize out of stock occurrences. As an additional service to
its customers, the Company frequently pre-tickets and bar codes its products in
accordance with customer specifications.
BACKLOG
A significant portion of the Company's orders are short-term purchase
orders from customers that place orders on an as-needed basis. As the Company's
sales have increased, the amount of unfilled orders at any time has not been
indicative of future sales. As a result, the Company does not believe that the
amount of its unfilled customer orders at any time is meaningful.
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.
TRADEMARKS AND PATENTS
The Company owns the registered trademark "Safety 1st", which is its
primary trademark. The Company believes that consumer recognition of such
trademark has contributed to the Company's success. The Company uses a number of
additional trademarks, some of which are registered with the United States
Patent and Trademark office and in other nations in which it sells its products.
A significant number of products incorporate patented devices or designs. The
Company aggressively protects its patent and trademark rights.
GOVERNMENT REGULATION
In the United States the Company is subject to the provisions of, among
other laws, the Federal Consumer Product Safety Act and the Federal Hazardous
Substance Act (the "Acts"), which empower the Consumer Product Safety Commission
(the "CPSC") to require the repair, replacement or refund of the purchase price
of products that present a substantial risk of injury to the public, and in the
event the CPSC finds that no feasible consumer product safety standard under the
Acts would adequately protect the public, to order such product banned. The CPSC
may also issue civil and criminal penalties for knowing violations of the Acts.
Any such determination by the CPSC is subject to court review. The Company is
also subject to regulations of the Federal Communications Commission (the "FCC")
in connection with its audio and video monitors. The Company maintains a quality
control program with its manufacturers and engages special legal counsel to
facilitate compliance with applicable product safety laws and the regulations of
the CPSC and FCC. Similar laws exist in some states and cities in the United
States and in many jurisdictions throughout the world, and may affect the
ability of the Company to market its products in such jurisdictions.
12
<PAGE> 13
The Company believes that it is in material compliance with all applicable
federal and state laws and regulations.
Employees
As of March 14, 1997, the Company had a total of 203 full-time employees,
of which 178 were based in the United States, 16 were based in Canada, and 9
were based in Europe. Of the Company's 203 full-time employees, 9 were employed
in executive capacities, 42 in sales, marketing, and product development, 87 in
distribution and operations, and 42 in financial, administrative, and clerical
capacities. The Company also employed 22 part-time employees in a clerical
position. The Company utilizes a temporary labor force to a large degree to
assist in the operation of its North Londonderry, New Hampshire warehouse
facility. None of the Company's employees are represented by a labor union, and
the Company considers its employee relations to be satisfactory.
ITEM 2 - PROPERTIES
----------
The Company's principal executive offices are located in Chestnut Hill,
Massachusetts, where the Company occupies approximately 30,000 square feet of
space as a tenant at will, since the expiration of its lease on December 31,
1996. The current annual rent is approximately $420,000 per year.
The Company maintains warehouse and distribution facilities in leased
premises located in North Londonderry, New Hampshire, containing approximately
240,000 square feet of warehouse and distribution space. The facility is
leased pursuant to a lease for a ten year term expiring January 2005, at an
annual rent of approximately $845,000 per year plus real estate taxes and
other operating costs. The Company has an option to extend this lease for an
additional ten year period at an annual rent of approximately $1,095,000 per
year. The Company also has the right to terminate the lease prior to
expiration by giving six months prior notice and (in the case of a termination
during the initial ten year term) paying a termination payment.
The Company maintains warehouse facilities in leased premises located in
Salem, NH containing approximately 50,000 square feet. The facility is leased
pursuant to a two year lease expiring in May, 1998. The annual rent is
approximately $150,000 plus taxes and utilities. The Company intends to
vacate the Salem facility on or before expiration of the lease.
The Company occupies a 50,000 square foot sales office and warehouse
facility in Montreal, Canada and a sales office and a warehouse facility at
separate locations in England. The Company also maintains a show room in
Bentonville, Arkansas.
The Company also uses a public warehouse located in Fareham, Hants,
England.
The Company believes that its leased properties are in good condition and
adequate for its needs.
ITEM 3 - LEGAL PROCEEDINGS
-----------------
In August 1995, and action was commenced in the United States District
Court for the District of Massachusetts against the Company and three of its
officers by Sandra Esner, on behalf of herself and all other similarly situated,
who purchased stock of the Company between February 8, 1995, and April 5, 1995.
The Complaint alleged that the Company violated Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by failing
to disclose in a timely manner the adverse effects concerning the Company's
results for the first quarter of fiscal 1995. The Plaintiff sought monetary
13
<PAGE> 14
damages in an unspecified amount. The parties settled this action and, on
January 29, 1997, the Company obtained a final judgment and order of dismissal
with prejudice of class action from the court. The amount of payment required
to be made by the Company pursuant to the settlement was not material.
Although the Company believes that it had meritorious defenses to the action
and continues to disclaim any wrongdoing, it believes that the settlement was
in the best interests of the Company and its Stockholders.
In June, 1996, the Company made a Prior Disclosure to the United States
Customs Service in Boston regarding undeclared production "assists" that the
Company provided to various Far East manufacturers between 1991 and 1996. The
Company's management believes the assessment by the Customs Service in
this matter will be approximately $400,000, which amount has been provided for
in the Consolidated Financial Statements.
The CPSC is conducting an inquiry with respect to allegations that the
Company untimely reported problems with its #177 bed rail. The Company's
management does not believe the outcome of the bed rail inquiry will have a
materially adverse effect on its operations or financial condition.
The Company encounters personal injury litigation related to its products
in the ordinary course of business. The Company maintains product liability
insurance in amounts deemed adequate by management. The Company believes that
there are no claims or litigation pending, the outcome of which could have a
material adverse effect on the financial position of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
---------------------------------------------------
No matters were submitted to a vote of the Company's security-holders
during the last quarter for the year ended December 31, 1996.
14
<PAGE> 15
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
------------------------------------------
The Common Stock is quoted on The Nasdaq Stock Market's National Market
(the "Nasdaq National Market") under the symbol "SAFT". The following table sets
forth the high and low sales prices for the Common Stock for the periods
indicated as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
---- ---
1995:
<S> <C> <C>
First Quarter.................................. $29.50 $21.00
Second Quarter................................. 26.00 14.38
Third Quarter.................................. 21.56 16.75
Fourth Quarter................................. 20.75 13.50
1996:
First Quarter.................................. $15.25 $11.75
Second Quarter................................. 17.25 7.50
Third Quarter.................................. 11.25 6.38
Fourth Quarter................................. 13.00 8.50
</TABLE>
On March 14, 1997, the last reported sales price as quoted on the Nasdaq
National Market was $6.75 per share. As of March 14, 1997, the Company's Common
Stock was held by approximately 3,600 stockholders of record or through
nominees or street name accounts with brokers.
The Company does not anticipate declaring or paying any cash dividends or
other distributions on its Common Stock in the foreseeable future. It is the
current policy of the Company's Board of Directors to retain any earnings to
finance the operations and expansion of the Company's business. The declaration
of and payment of any cash dividends in the future will depend upon the
Company's earnings, financial condition, capital needs, and on other factors
deemed relevant by the Board of Directors.
On October 18, 1996, the Company issued warrants for the purchase, in the
aggregate, of 50,000 shares of the Company's common stock. The warrants were
issued to Fleet National Bank, granting the right to purchase 25,000 shares, to
the First National Bank of Boston, granting the right to purchase 15,000
shares, and to USTrust, granting the right to purchase 10,000 shares. The
warrants were sold otherwise than for cash as part of the consideration for the
Company's lenders agreeing to restructure the Company's credit facility and
were sold pursuant to an exemption from registration under Section 4(2) of the
Securities Act of 1933. Each warrant was exercisable through October 18, 2003,
or otherwise as provided in the warrant, at the exercise price of $10.00 per
share. All of the warrants were cancelled effective December 31, 1996 in
exchange for $250,000 in connection with a refinancing of the Company's credit
facility that closed as of January 31, 1997.
15
<PAGE> 16
ITEM 6 -- SELECTED FINANCIAL DATA
-----------------------
The following selected financial data as of and for the three year period
ended December 31, 1996, have been derived from the Company's financial
statements appearing elsewhere in this Report which have been audited by Grant
Thornton LLP, independent certified public accountants. The selected financial
data for the years ended and at December 31, 1993 and 1992, except for the
supplemental pro forma income statement data for 1992, is derived from the
Company's financial statements, which have been audited by Grant Thornton LLP,
independent certified public accountants. The selected financial data should
be read in conjunction with the Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ------------------------
Supplemental
Actual ProForma (4)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data (1):
Net sales........................ $105,752 $103,218 $70,166 $43,030 $28,523 $28,523
Cost of sales.................... 88,979 68,673 41,959 24,746 15,467 15,467
Gross profit..................... 16,773 34,545 28,207 18,284 13,056 13,056
Selling, general and
administrative expenses........ 54,385 28,320 17,449 11,085 12,444 9,069
Impairment of long-lived assets.. 11,596 -- -- -- -- --
Operating (loss) income (2)...... (49,208) 6,225 10,758 7,198 612 3,987
Other expense (income) -- net.... 4,100 1,065 (111) 140 588 182
(Loss) income before income
taxes.......................... (53,308) 5,160 10,869 7,058 25 3,805
Net (loss) income (Pro forma
years ended prior to 1994) (3). (44,849) 3,200 6,583 4,216 13 2,271
Net (loss) income per share
(Pro forma years ended prior
to 1994)....................... (6.27) .45 .95 .71 -- .44
Weighted average common
Shares outstanding............. 7,157 7,132 6,957 5,978 5,000 5,161(5)
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31.
----------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit)............. $(25,080) $21,483 $28,124 $13,252 $ (470)
Total assets.......................... 71,277 86,319 52,314 24,496 8,824
Short-term bank debt.................. 36,653 25,390 -- -- 605
Notes payable......................... 1,920 -- -- -- 1,325
Stockholders' equity.................. 2,078 46,019 41,848 18,137 621
</TABLE>
16
<PAGE> 17
(Footnotes for preceding page)
- ---------------
(1) The Company operated as an S Corporation from March 1, 1988 through April
20, 1993, and as a result its income during such period for federal income
tax purposes was passed through to its stockholders. Accordingly, the
historical financial statements for such period do not include a provision
for federal income taxes.
(2) Operating income includes a deduction for bonus compensation paid to the
Company's three executive officers in the amount of $3,225,000 for the year
ended December 31, 1992.
(3) Pro forma net income gives effect to the application of a provision for
income taxes that would have been required had the Company been taxed as a
C Corporation from January 1, 1992 through April 20, 1993. See Note 8 of
Notes to Financial Statements.
(4) Supplemental pro forma income statement data for 1992 has been calculated
(i) as if the employment agreements with the Company's three executive
officers, aggregating $545,000 in annual base salary, were in effect on
January 1, 1992 and the compensation paid to them during 1992 was as
provided for in such agreements instead of the actual compensation expense
which aggregated $3,919,000 (a reduction in compensation expense of
$3,374,000), (ii) assuming the elimination of interest expense of $355,000
and $51,000 on debt outstanding during 1992 to executive officers and a
bank, respectively, as if such debt had been repaid on January 1, 1992 and
replaced by equity financing on such date and (iii) assuming a provision
for income taxes of $1,534,000 that would have been required had the
Company been taxed as a C Corporation and excluding the impact of SFAS No.
109 "Accounting for Income Taxes."
(5) Supplemental pro forma weighted average common shares outstanding used in
the calculation of the supplemental pro forma net income per share is equal
to the 5,000,000 shares outstanding plus the estimated number of shares
(161,000 shares) required to be sold in the Company's initial public
offering to repay the outstanding debt at December 31, 1992 to certain
executive officers of the Company ($1,325,000) and to a bank ($605,000).
17
<PAGE> 18
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
----------------------------------------------
Statement of Forward-Looking Information:
Statements in this report, other than statements of historical
information, are forward-looking statements that are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include known and unknown risks which may cause the
Company's actual results in future periods to differ materially from expected
results. 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.
OVERVIEW
The Company believes that its growth has resulted primarily from the
successful introduction of new products, the expansion of its customer base and
increased sales to its existing customers. In 1987, the Company expanded its
product line from child safety products to include child care, convenience and
activity items. Some of the products that the Company in recent years added are
bulk items (i.e., larger products requiring packaging in boxes) that have
significantly higher unit prices but provide lower gross margins than the
Company's other products, which are generally smaller products packaged in
blister packs (i.e. transparent plastic). In 1993, the Company introduced a new
line of home security products.
By early 1996, the Company was distributing approximately 650 products to
more than 3,700 customers. During the second quarter of the year, the Company
recognized that its product offerings had proliferated to an unmanageable
quantity including products outside of its core competency. This product
proliferation and continual expansion of the customer base had led to (i)
additional complexity in all operational aspects of the business, (ii) a
significant increase in the ongoing level of general and administrative
expenses, and (iii) an increase in working capital requirements. As a result,
during the second quarter, the Company began a review of its business strategy
and took the first steps to refocus its business on its traditional core
product lines, trade channels and customer base. The Company recorded charges
of $13.8 million during the second quarter primarily related to valuation of
assets affected by this strategic refocus.
Subsequently, during the fourth quarter of 1996, management recognized that
the initial attempts to refocus the Company and to simplify its business
environment had been insufficient and determined that the focus of its products
needed to be substantially narrower than had been previously estimated. The
Company believed that to reduce the substantial financial risks associated with
large scale introductions of new products, while achieving large scale benefits
from simplification of its business practices, additional evaluation of the
Company's products, customers and markets were necessary. As a result, during
the fourth quarter the Company implemented a number of changes and recorded a
pre-tax charge of $32.7 million associated with the redefinition of its business
strategy. Among the steps taken, the Company (i) reduced 1996 juvenile product
offerings from a maximum level during the year of approximately 400 to
approximately 200 at year end, (ii) reduced 1996 home security product offerings
from a maximum level during the year of approximately 250 to approximately 100
at year end, (iii) reduced the number of package assortment options available
to a retailer for a given product, thereby reducing the number of stock keeping
units (SKUs) from 2300 to 600 at the end of 1996, and (iv) increased minimum
order quantity requirements from retailers.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.................................... 105,752 103,218 70,166
Cost of sales................................ 88,979 68,673 41,959
Gross profit................................. 16,733 34,545 28,207
Selling, general and administrative
expenses..................................... 54,385 28,320 17,449
Impairment of long-lived assets.............. 11,596 -- --
Operating (loss) income...................... <49,208> 6,225 10,758
</TABLE>
18
<PAGE> 19
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales were $105.8 million in 1996, an increase of $2.5 million, or
2.5%, over net sales in 1995. This increase was primarily due to net sales of
new products in the amount of approximately $33.0 million and increases in
international sales of $7.1 million resulting from the acquisitions of two
international subsidiaries and the expansion into additional international
markets, and offset by a decrease (erosion) in 1996 net revenue of $29.9
million, or 29%, from sales of existing product. Certain of the Company's
products experienced an unusually high rate of returns. Net sales were
affected by returns and defective product of approximately $7.7 million, or
248% over 1995 levels. In addition, during the fourth quarter of 1996, the
Company recorded accruals relating to returns and defective products, customer
credits and other transactions in the amount of $5.6 million, which affected
net sales as compared to 1995 net sales. The Company also recorded a charge of
$1.0 million with respect to similar items in previous quarters.
Gross profit decreased from $34.5 million, or 33.5% of net sales, in 1995
to $16.8 million, or 15.9% of net sales, in 1996, a decrease of $17.7 million.
This decrease was largely a result of the Company's inventory reduction plan
during 1996. The Company's charges to cost of sales included approximately
$14.3 million related to discontinued products, inventory reserves, reduction
of capitalized overhead, and other inventory related matters; approximately
$1.4 million primarily related to the reduction of vendor credits; and
approximately $2.2 million of increases related to the acquisitions of two
international subsidiaries. Included in the $15.7 million cost of sales charges
as described above are fourth quarter charges of approximately $9.4 million.
During 1996, the Company sold certain discontinued products at cost or
below cost which further impacted 1996 net sales and gross profit as compared
to 1995.
Selling, general and administrative (SG&A) expenses increased to $54.4
million in 1996 from $28.3 million in 1995, an increase of $26.1 million. The
increase was partly attributable to charges of approximately $13.0 million;
which resulted primarily from the Company's streamlining efforts and the
shifting of its resources back to its core business. Those charges include $6.0
million in reserves for customer credits on accounts receivable, primarily
related to advertising and promotional allowances, $1.0 million primarily
related to lease termination fees and severance costs; $3.5 million related to
the write-off of certain other assets and increased accruals for product
related reserves; $0.7 million in charges for non-employee stock compensation
expense under SFAS 123; $0.7 million of costs associated with the Company's
debt refinancing; and $0.7 million in purchase adjustments related to the
acquisition of the Company's Canadian and U.K. subsidiaries.
The remaining $13.1 million of the increase in SG&A expenses include
$4.0 million SG&A expenses of the two international subsidiaries; $7.0 million
increase in payroll and payroll related costs associated with the continued
building of Company infrastructure and increased reliance on temporary help;
$1.9 million in professional fees associated with assisting management in legal
matters, product matters, integrating the Company's two new acquisitions and in
meeting the needs of a more complex business; $1.2 million for increased
occupancy and maintenance costs, primarily for expanded distribution capacity;
and $1.1 million increased research and product development costs. The
increases were offset by a $2.1 million decrease in other SG&A expenses.
The Company believes that the decisions made in 1996 relative to product
redefinition, SKU reduction and information systems upgrading will result in a
less complex, less costly and more streamlined and efficient business
operation. However there can be no assurance that the Company will be
successful in achieving the above objectives.
During 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" ("SFAS 121"). Primarily as a
result of the Company's change in strategy, the Company recorded an impairment
loss of $11.6 million in accordance with SFAS 121 for those long-lived
assets such as molds and tools, molds in process and patents. The amount of the
impairment loss is the excess of the carrying amount of the impaired assets over
the fair value of the assets.
Operating loss for 1996 was $49.2 million versus operating income for 1995
of $6.2 million, a decrease of $55.4, due to the above factors.
Interest expense increased from $1.1 million during 1995 to $4.1 million
during 1996 due to additional borrowings under the revolving credit facility as
well as the inclusion of $0.9 million of deferred financing costs incurred
during 1996 in connection with the restructuring of the credit facility.
The Company recorded an income tax benefit of $8.5 million in 1996 versus
an income tax provision of $2.0 million in 1995. The income tax benefit
primarily relates to tax refunds resulting from net operating loss carryback
claims and the recognition of certain net operating loss carryforwards.
19
<PAGE> 20
The Company had deferred tax assets arising from net operating loss
carryforwards and deductible temporary differences of $14.4 million before a
valuation allowance of $10.3 million and offset against deferred tax
liabilities of $1.9 million. Realization of approximately $2.2 million of the
asset is dependent on the Company's ability to generate approximately $6.5
million of taxable income in the carryforward period. Management believes that
as a result of the strategic changes discussed above it is more likely than not
that the asset will be realized. However, there can be no assurance that the
Company will meet its expectations of future income. As a result, the amount of
the deferred tax assets considered realizable could be reduced in the near and
long term if estimates of future income are reduced. Such an occurrence could
materially adversely affect the Company's financial position and results of
operations. The Company will continue to evaluate the realizability of the
deferred tax assets quarterly by assessing the need for a valuation allowance.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net sales were $103.2 million in 1995, an increase of $33.0 million, or
47.1%, over net sales in 1994. This increase was primarily due to net sales of
new products in the amount of $38.1 million, and continued successful increases
in channels of distribution into home centers and hardware markets. During 1995,
four customers, Wal-Mart, Toys-R-Us, Orleans Juvenile Products, and Kmart, in
the aggregate accounted for approximately 49% of net sales; and during 1994, the
same four customers, in the aggregate, accounted for approximately 47% of net
sales.
Gross profit increased 22.5% to $34.5 million in 1995 from $28.2 million in
1994. Gross profit as a percentage of sales declined to 33.5% in 1995 from 40.2%
in 1994 due to an increase in sales of bulk products, which have a lower gross
margin than smaller blister pack items (although this decrease was partially
offset by efficiencies resulting from product value re-engineering), and a net
$4.5 million inventory charge.
SG&A expenses increased to $28.3 million in 1995 from $17.4 million in
1994, an increase of $10.9 million or 62.3%. Of the $10.9 million increase,
approximately $4.7 million is primarily related to increased sales related costs
such as commissions, customer advertising, promotional allowances, shipping
charges and royalties. Salaries, depreciation, and professional fees increased
approximately $3.1 million. This increase resulted from the Company's investment
in building additional infrastructure and capital investment to support its
rapid growth. In addition, the Company increased its reserve for doubtful
accounts ($600,000), reduced the estimated recovery period of certain assets
($580,000) and expensed a termination fee with respect to its former U.K.
distributor ($128,000).
As a result of the above factors, operating income decreased to $6.2
million in 1995 from $10.8 million in 1994.
In December 1993, the Company adopted Statement of Position (SOP) No. 93-7
- - Reporting on Advertising Costs. In accordance with this SOP, the cost of
catalogs may be accounted for as prepaid supplies until they are no longer owned
or expected to be used. Accordingly, the Company has recorded the cost of
undistributed catalogs as a prepaid expense. The adoption of this SOP had the
effect of increasing net income by approximately $215,000. See Note 1 of Notes
to Financial Statements.
20
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
During the past two years, the Company has financed its operations
primarily through borrowings under its term loan and revolving credit facility
and internally generated funds. At December 31, 1996, the Company had a working
capital deficit of $25.0 million including $25.0 million of long-term
indebtedness classified as current (see Note 3 to the Notes to Consolidated
Financial Statements), as compared to a working capital surplus of $21.5
million at December 31, 1995.
Net cash used in operating activities for 1996, 1995 and 1994 was $.1
million, $11.3 million and $9.0 million, respectively.
In 1996, the Company incurred a net loss of $44.8 million, which negatively
impacted liquidity. Operations in 1996 were adversely affected by:
- Increased returns and allowances
- Sales of discontinued product at lower than normal prices
- Write downs and allowances related to disposal of discontinued
products and related molds
- Increased operating expenses
- Interest expense
As a result, the Company funded its operations by utilizing $16 million
generated through increases in trade payables and accrued expenses and $11.3
million from its revolving credit facility. In January 1997, the Company
entered into a credit facility with a new lender consisting of a $25 million
term loan and a $20 million revolving credit facility, both of which expire on
May 1, 1998. The Company's current borrowing arrangements are classified as
short-term. As a result of this refinancing, the Company expects its cost of
funds to increase at compounding rates over the term of the indebtedness. In
addition, the Company's principal shareholder may be required to pledge
additional shares of the Company's stock as additional collateral with respect
to the borrowings. If such collateral is not pledged, it would constitute an
event of default under the terms of the credit facility.
Management has taken certain steps and initiated a plan to improve
both liquidity and operating income. The objectives of the plan are to
simplify business practices, reduce operating costs, and reduce working capital
requirements. Implementation of the plan started in 1996 and is expected to
continue through 1997. The key components of the simplification plan include:
- Emphasis on products which meet strict guidelines for sales,
profitability and quality
- Strict budgetary controls related to all aspects of the Company's
operations
- Implementation of a new fully integrated computer system
- Standardization of case packs
There are no assurances, however, that the actions taken, or to be taken,
by the Company will achieve the above intended objectives.
The Company believes that its cash, together with its current financing
will be sufficient to meet its operating and other cash requirements over the
twelve months. The Company is also seeking other financing on terms which may
be more favorable to the Company to help meet future needs. There are no
assurances that the Company will be able to obtain such financing.
The Company anticipates capital expenditures of approximately $6.0 million
during 1997 compared to $7.8 million during 1996.
21
<PAGE> 22
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
SAFETY 1ST, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants............ 23
Consolidated Financial Statements:
Balance Sheets............................................ 24
Statements of Operations.................................. 26
Statements of Changes in Stockholders' Equity............. 27
Statements of Cash Flows.................................. 28
Notes to Financial Statements............................. 29
</TABLE>
22
<PAGE> 23
Report of Independent Certified Public Accountants
--------------------------------------------------
To the Board of Directors
Safety 1st, Inc.
We have audited the accompanying consolidated balance sheets of
Safety 1st, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits 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 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Safety
1st, Inc. and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Boston, Massachusetts GRANT THORNTON LLP
March 18, 1997
23
<PAGE> 24
SAFETY 1ST, INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash $ 509,403 $ 24,456
Accounts receivable, less allowance for doubtful accounts
of $3,300,000 in 1996 and $1,900,000 in 1995 20,237,347 26,923,557
Inventory 17,145,683 26,286,881
Prepaid expenses 938,288 2,956,653
Tax refund receivable 5,026,644 2,311,275
Deferred income taxes - 882,000
----------- -----------
Total current assets 43,857,365 59,384,822
----------- -----------
Property and equipment, at cost:
Molds and tools 8,592,011 12,710,215
Computer equipment and software 2,393,021 4,851,426
Furniture and fixtures 2,100,349 2,087,203
Warehouse equipment 2,023,072 1,872,600
Leasehold improvements 1,440,124 1,107,582
----------- -----------
16,548,577 22,629,026
Less - accumulated depreciation and amortization (4,385,545) (4,544,025)
----------- -----------
Net property and equipment 12,163,032 18,085,001
----------- -----------
Other assets:
Molds in process 3,240,821 6,261,906
Software systems in process 2,155,195 -
Goodwill, net of accumulated amortization of $267,567
in 1996 and $1,739 in 1995 6,838,554 311,023
Deferred acquisition costs - 1,492,678
Patents and trademarks, net of accumulated amortization
of $353,746 in 1996 and $217,306 in 1995 662,607 783,361
Deferred income taxes 2,218,000 -
Other assets 141,078 -
----------- -----------
Total other assets 15,256,255 8,848,968
----------- -----------
$71,276,652 $86,318,791
=========== ===========
</TABLE>
24
<PAGE> 25
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1995
------------ -----------
<S> <C> <C>
Current liabilities:
Revolving credit facility $ 36,652,657 $25,390,000
Accounts payable - trade 17,371,093 10,998,819
Accrued expenses 12,839,636 1,512,857
Notes payable and current portion of
capital lease obligation 2,074,403 -
------------ -----------
Total current liabilities 68,937,789 37,901,676
------------ -----------
Capital lease obligation, net of current portion 260,651 -
Deferred income taxes -- 2,398,000
------------ -----------
Total liabilities 69,198,440 40,299,676
------------ -----------
Commitments and contingencies
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, 7,178,156 and 7,150,616 shares
issued and outstanding in 1996 and 1995, respectively 71,781 71,506
Additional paid-in capital 34,496,395 33,588,361
(Accumulated deficit) retained earnings (32,489,964) 12,359,248
------------ -----------
Total stockholders' equity 2,078,212 46,019,115
------------ -----------
$ 71,276,652 $86,318,791
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE> 26
SAFETY 1ST, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994
------------------------------------------------------
<S> <C> <C> <C>
Net sales $105,751,954 $103,218,385 $70,166,045
Cost of sales 88,978,995 68,673,500 41,959,321
------------ ------------ -----------
Gross profit 16,772,959 34,544,885 28,206,724
Selling, general and administrative expenses 54,385,019 28,319,680 17,448,556
Impairment of long-lived assets 11,596,126 - -
------------ ------------ -----------
Operating (loss)income (49,208,186) 6,225,205 10,758,168
------------ ------------ -----------
Interest expense (income), net 4,099,805 1,065,660 (110,483)
------------ ------------ -----------
(Loss) income before income taxes (53,307,991) 5,159,545 10,868,651
Income tax (benefit) expense (8,458,779) 1,960,000 4,286,000
------------ ------------ -----------
Net (loss) income $(44,849,212) $ 3,199,545 $ 6,582,651
============ ============ ===========
Net (loss) income per share $ (6.27) $ 0.45 $ 0.95
============ ============ ===========
Weighted average common shares outstanding 7,157,078 7,132,010 6,956,580
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE> 27
SAFETY 1ST, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
COMMON STOCK (ACCUMULATED
--------------------- ADDITIONAL DEFICIT)
NUMBER OF PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1993 6,402,032 $64,020 $15,496,144 $ 2,577,052 $ 18,137,216
Net income 6,582,651 6,582,651
Net proceeds from secondary
public offering 657,500 6,575 16,500,152 16,506,727
Net proceeds from exercise of
stock options 34,517 345 426,827 427,172
Net tax benefit derived from option
compensation deduction 194,214 194,214
---------- -------- ------------ ------------ ------------
Balance - December 31, 1994 7,094,049 70,940 32,617,337 9,159,703 41,847,980
Net income 3,199,545 3,199,545
Net proceeds from exercise of
stock options 56,567 566 750,024 750,590
Net tax benefit derived from option
compensation deduction 221,000 221,000
---------- -------- ------------ ------------ ------------
Balance - December 31, 1995 7,150,616 71,506 33,588,361 12,359,248 46,019,115
Net loss (44,849,212) (44,849,212)
Net proceeds from exercise of
stock options 27,540 275 206,664 206,939
Stock compensation expense 701,370 701,370
---------- -------- ------------ ------------ ------------
Balance - December 31, 1996 7,178,156 $71,781 $34,496,395 $(32,489,964) $ 2,078,212
========== ======== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE> 28
SAFETY 1ST, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(44,849,212) $ 3,199,545 $ 6,582,651
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Deferred income taxes (3,630,960) 602,000 512,000
Option compensation tax benefit - 221,000 194,214
Stock compensation expense 701,370 - -
Depreciation 4,841,106 2,742,293 1,128,357
Amortization 404,016 99,603 59,143
Loss on disposal of property and equipment - 167,806 -
Impairment of long-lived assets 11,596,126 - -
------------ ------------ ------------
Net cash (used in) provided by operating activities
before changes in assets and liabilities (30,937,554) 7,032,247 8,476,365
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 2,353,736 (9,837,075) (9,296,807)
Inventory 13,376,577 (9,360,253) (9,598,514)
Prepaid expenses 1,879,292 (665,305) (1,566,876)
Tax refund receivable (2,715,369) (1,620,306) 150,786
Increase in:
Accounts payable - trade 6,109,885 2,941,962 1,743,521
Accrued expenses 9,852,947 233,457 1,059,481
------------ ------------ ------------
Net cash used in operating activities (80,486) (11,275,273) (9,032,044)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of subsidiaries (1,490,552) - -
Acquisition of property and equipment (2,386,624) (6,649,095) (5,966,678)
Increase in molds in process and deposits (3,215,577) (6,196,906) (3,589,675)
Increase in system software in process (2,155,195) - -
Increase in deferred acquisition costs - (1,492,678) -
Acquisition of patents and trademarks (165,686) (308,602) (337,177)
Acquisition of other intangibles - (312,761) -
Purchase of short-term investments - - (24,492,116)
Proceeds from the sale of short-term investments - - 25,629,955
------------ ------------ ------------
Net cash used in investing activities (9,413,634) (14,960,042) (8,755,691)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds on revolving credit facility 11,262,657 25,390,000 -
Repayment of bank debt assumed (739,668) - -
Repayment of notes payable and capital lease obligation (750,861) - -
Proceeds from exercised stock options 206,939 750,590 427,172
Net proceeds from public offering of common stock - - 16,506,727
------------ ------------ ------------
Net cash provided by financing activities 9,979,067 26,140,590 16,933,899
------------ ------------ ------------
Net increase (decrease) in cash 484,947 (94,725) (853,836)
Cash balance, beginning of year 24,456 119,181 973,017
------------ ------------ ------------
Cash balance, end of year $ 509,403 $ 24,456 $ 119,181
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 3,689,952 $ 1,215,000 $ 37,800
============ ============ ============
Income taxes $ - $ 2,540,000 $ 3,429,000
============ ============ ============
Non-cash investing activities:
Increase (decrease) in accrued deposit obligations $ 1,013,998 $ (65,000) $ 718,002
============ ============ ============
Capital lease obligation $ 486,964 $ - $ -
============ ============ ============
<FN>
See Note 11 for non-cash acquisition related items.
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------
December 31, 1996, 1995, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Safety 1st, Inc. and subsidiaries (the "Company") is a developer, marketer and
distributor of child safety and child care, convenience, activity, and home
security products. The Company sells primarily to retailers, which are affected
by economic fluctuations. Any risk of collection losses is concentrated in this
industry.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Safety 1st (Europe) Ltd., Safety 1st
Home Products Canada, Inc., 3232301 Canada Inc., and Safety 1st International,
Inc. All significant intercompany transactions have been eliminated.
Accounts Receivable
An allowance for doubtful accounts is provided based upon historical bad debt
experience and periodic evaluations of the aging of the accounts. Receivables
are written off when deemed to be uncollectible.
Inventory
Inventory is valued at the lower of cost (first-in, first-out) or market.
Inventory includes an allocation of indirect costs incurred in the production
and acquisition of inventory of $1,245,000 and $2,793,000 as of December 31,
1996 and 1995, respectively.
Slotting Allowances
The Company incurs certain costs in connection with placing its products at the
retail level. These costs are known in the trade as "slotting allowances". The
Company is amortizing these allowances over a one year period from the date
incurred. Unamortized slotting allowances, which are included in prepaid
expenses, amounted to $17,500 and $303,000 at December 31, 1996 and 1995,
respectively.
Advertising
The cost of undistributed catalogs is accounted for as prepaid supplies until
they are no longer owned or expected to be used as provided by Statement of
Position No. 93-7 "Reporting on Advertising Costs". At December 31, 1996 and
1995, prepaid catalog costs were $182,000 and $314,000, respectively. The
Company expects its supply of catalogs to be exhausted within one year.
Advertising expenses, other than catalog costs, are expensed as incurred.
Advertising expenses, which consist primarily of promotional and cooperative
advertising allowances provided to customers, were approximately $5,708,000,
$2,414,000, and $1,267,000, for the years ended December 31, 1996, 1995 and
1994, respectively.
Revenue Recognition
The Company recognizes revenue at the time of shipment to its customers.
29
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------
December 31, 1996, 1995, 1994
Property and Equipment
Property and equipment are recorded at cost, including interest on funds
borrowed to finance the construction of major capital additions. The Company
owns the molds and tools used in the production of the Company's products by
third party manufacturers. During 1996 and 1995, approximately $158,000 and
$140,000, respectively, of interest incurred in connection with the construction
of molds was included in the cost of the molds. The molds and tools are
depreciated using the straight-line method over 7 years. Computer equipment and
software, furniture and fixtures and warehouse equipment are depreciated using
the straight-line method over their estimated useful lives of 3 to 7 years.
Leasehold improvements are amortized using the straight-line method over the
shorter of the lease term or the estimated useful life of the asset. The cost of
assets retired or otherwise disposed of and the accumulated depreciation thereon
are removed from the accounts with any gain or loss realized upon the sale or
disposal charged or credited to operations.
During 1996, the Company adopted Statement of Financial Accounting Standard No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long Lived
Assets to be Disposed Of" ("SFAS 121"). This statement requires that long-lived
assets, certain identifiable intangibles, and goodwill be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, and an estimate of future
undiscounted cash flows is less than the carrying amount of the asset.
Impairment is recorded based on an estimate of future discounted cash flows.
See Note 4.
Patents, Trademarks and Licensing Agreements
The cost of patents and trademarks is amortized using the straight-line method
over their estimated useful life of 7 years and 20 years, respectively. The cost
of acquiring licensing agreements is amortized over the life of the respective
agreement.
Goodwill
The Company amortizes costs in excess of fair value of net assets of businesses
acquired using the straight-line method over a period not to exceed 25 years.
Impairment is reviewed annually in accordance with SFAS 121.
Translation of Foreign Currencies
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 are included in
net income as the functional currency is the U.S. dollar.
Vendor credits
At December 31, 1996 and 1995, the Company had vendor credits outstanding in the
amount of $536,000 and $1,487,000, respectively, which were included in prepaid
expenses. These credits can be used to offset future purchases.
30
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------
December 31, 1996, 1995, 1994
Income Taxes
The Company utilizes the asset/liability method of accounting for income taxes.
Under the asset/liability method, deferred taxes are determined based on the
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect. A valuation allowance is provided
for deferred tax assets except where realization is more likely than not.
Research and Product Development Costs
Research and product development costs are charged to expense when incurred.
Research and development costs for the years ended December 31, 1996, 1995 and
1994 were approximately $2,060,000, $573,000 and $437,000, respectively.
Net (Loss) Income Per Share
Primary earnings per share is computed based upon the weighted average number of
common shares outstanding during the period, plus when their effect is equal to
or greater than 3% dilution, common share equivalents outstanding during the
period using the treasury stock method. Fully diluted earnings per share do not
differ materially from primary earnings per share and therefore are not
presented.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosures
of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Some of the more significant
estimates include depreciation and amortization of long-lived assets, deferred
income taxes, inventory valuations, allowances for defectives, promotions and
returns, and product liability and accruals for other contingencies. Actual
results could differ from those estimates.
Accounting for Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123, "Accounting for Stock Based Compensation"
("SFAS 123"). SFAS 123 establishes a fair value based method of accounting for
stock-based compensation. As permitted by SFAS 123, the Company elected to
account for employee stock-based compensation using the intrinsic value method
as prescribed in Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" and related Interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's common stock at the date of grant over the
amount an employee must pay to acquire stock. In addition, SFAS 123 also
requires that transactions with other than employees, entered into after
December 31, 1995, in which goods or services are the consideration received for
the issuance of equity instruments shall be accounted for based on the fair
value of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable. The Company has adopted SFAS 123
for disclosure purposes and for non-employee stock options. The effect on the
results of operations and financial position is disclosed in Note 10.
Reclassification
Certain accounts in 1995 were reclassified to conform to the 1996 presentation.
31
<PAGE> 32
NOTES TO CONSOLITDATED FINANCIAL STATEMENTS
-------------------------------------------------------------
December 31, 1996, 1995, 1994
2. LIQUIDITY AND OPERATING MATTERS
In 1996, the Company incurred a net loss of $44.8 million which negatively
impacted liquidity. Operations in 1996 were adversely affected by:
- Increased returns and allowances
- Sales of discontinued product at lower than normal prices
- Write downs and allowances related to disposal of discontinued
products and related molds
- Increased operating expenses
- Interest expense
As a result, the Company funded its operations from internal and external
sources.
As more fully described in Note 3, in January 1997, the Company entered into a
credit facility with a new lender consisting of a $25 million term loan and a
$20 million revolving credit facility, both of which expire on May 1, 1998. The
Company's current borrowing arrangements are classified as short-term. As a
result of this refinancing, the Company expects its cost of funds to increase at
compounding rates over the term of the indebtedness. In addition, the Company's
principal shareholder may be required to pledge additional shares of the
Company's stock as additional collateral with respect to the borrowings. If such
collateral is not pledged, it would constitute an event of default under the
terms of the credit facility.
Management has taken certain steps and initiated a plan to improve both
liquidity and operating income. The objectives of the plan are to simplify
business practices, reduce operating costs and reduce working capital
requirements. Implementation of the plan started in 1996 and is expected to
continue through 1997. The key components of the simplification plan include:
- Emphasis on products which meet strict guidelines for sales,
profitability and quality
- Strict budgetary controls related to all aspects of the Company's
operations
- Implementation of a new fully integrated computer system
- Standardization of case packs
There are no assurances, however, that the actions taken, or to be taken, by the
Company will achieve the above intended objectives.
The Company believes that its cash, together with its current financing will be
sufficient to meet its operating and other cash requirements over the next
twelve months. The Company is also seeking other financing on terms which may
be more favorable to the Company to help meet future needs. There are no
assurances that the Company will be able to obtain such financing.
3. REVOLVING CREDIT FACILITY
Prior to the third quarter of 1996, the Company had been operating under a
revolving credit facility with a bank, with a maximum of $50,000,000 available
for borrowing at a rate of interest equal to the bank's prime rate, or at the
Company's option, a LIBOR based rate, as defined. The credit facility was
scheduled to expire on May 31, 1998. As of June 30, 1996, the Company failed to
meet certain financial covenants. Pending the completion of the restructured
credit facility discussed below, the parties operated under a forbearance
agreement that required a reduction in the Company's maximum line of credit, an
increase in the rate of interest to prime plus 1/2 percent, and a provision of a
limited guarantee by the Company's Chief Executive Officer. The Company paid
approximately $120,000 in forbearance fees to its bank.
As of December 31, 1996, the Company had a restructured credit facility with the
same bank, entered into in October 1996, which was scheduled to expire on May
31, 1997. Under the restructured credit facility, the Company had a maximum of
$44,600,000 available for borrowing. The loan consisted of a revolving credit
facility of $31,300,000 at an interest rate of prime plus one percent, a term
loan of $12,300,000 at an interest rate of prime plus one and one-half percent,
and $1,000,000 under a revolver cushion loan at an interest rate of prime plus
three percent. The bank's prime rate as of December 31, 1996 was 8.25%. In
connection with the restructuring of the credit facility, the Company was
required to pay its lender restructuring fees totaling $52,500, issue warrants
for 50,000 shares of the Company's common stock and provide the limited
guarantee of the Company's Chief Executive Officer. The credit facility was
secured by all corporate assets and contained certain financial covenants. As of
December 31, 1996, the Company failed to meet certain financial covenants and as
of such date, the Company paid its bank $250,000 in exchange for the issued
warrants.
32
<PAGE> 33
NOTES TO CONSOLITDATED FINANCIAL STATEMENTS
-------------------------------------------------------------
December 31, 1996, 1995, 1994
For the years ended December 31, 1996 and 1995, the average borrowings under the
revolving credit facility were $38,300,000 and $14,900,000, respectively. The
weighted average interest rate of these borrowings during 1996 and 1995 was
7.96% and 7.21%, respectively. During 1996, in connection with the acquisition
and restructuring of the credit facility, the Company incurred $891,000 of
deferred financing costs, which have been reflected in interest expense on the
consolidated statement of operations.
In January 1997, the Company entered into a credit facility with a new lender
consisting of a $25,000,000 term loan and a $20,000,000 revolving credit
facility, both of which expire on May 1, 1998. It is the Company's intent to
refinance the debt, and therefore the total debt amount is classified as
current. The annual rate of interest on all borrowings for the initial six
months of the facility is equal to the prime rate plus 2.65%, increasing by one
percent every three months thereafter to a maximum annual rate of the prime
rate plus 5.65%. The credit facility contains certain financial covenants and
restrictions including limits on capital expenditures, minimum consolidated net
worth, minimum EBITDA (as defined), interest coverage ratio, cash flow from
accounts payable and inventory and minimum accounts payable, and is secured by
all assets of the Company and the limited personal guarantee of the Company's
Chief Executive Officer, which guaranty is fully secured. Among the covenants
of the credit facility is an obligation that the market value of the Company's
common stock pledged by the Chief Executive Officer as part of the collateral
for the limited personal guaranty be maintained at a minimum of $2,000,000.
Advances under the revolving credit facility, which includes trade letters of
credit, are calculated by an asset based borrowing formula. The loan agreement
requires the Company to pay certain fees including a monthly commitment fee
equal to .50% of the average unused commitment and letter of credit fees equal
to an applicable margin plus 2% based on the face amount of each letter of
credit. The Company and its lender have also entered into a separate letter
agreement that requires the Company to pay a one-time facility fee of
$1,250,000.
As part of the credit facility, the Company has delivered into escrow pursuant
to an escrow agreement, warrants for up to 350,000 shares of the Company's
common stock. The warrants are to be released from escrow and delivered to its
lender as follows: if the credit facility is still in effect at the six month
anniversary date of the credit facility, a warrant for 250,000 shares shall be
delivered; if the credit facility is still in effect at the nine month
anniversary date, a warrant for an additional 50,000 shares shall be delivered;
and if the credit facility is still in effect at the twelve month anniversary
date, a warrant for the final 50,000 shares shall be delivered. In the event
the Company shall be unable to register the stock underlying the warrants
within sixty (60) days after the release of the initial 250,000 warrants, the
Company is obligated to pay its lender up to $100,000 per month until the
earlier of the date of such registration and the date the underlying stock may
be sold under Rule 144 of the Securities Act of 1933.
Changes in interest rates could have an effect on the Company's financial
position and results of operations.
4. IMPAIRMENT OF LONG-LIVED ASSETS AND DISCONTINUED PRODUCTS
During 1996, a pre-tax charge of $47,400,000 as described below was recorded
primarily in connection with the Company's efforts to reduce its stock keeping
units ("SKU"), to streamline product offerings and discontinue products that
did not meet certain sales, inventory turns and profitability objectives.
The Company recorded an impairment loss of $11,600,000 in accordance with
SFAS 121, for those long-lived assets such as molds and tools, mold in process
and patents where the sum of the estimated future undiscounted cash was less
than the carrying amount of the impaired asset over the fair value of asset.
33
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------
December 31, 1996, 1995, 1994
Generally, fair value represents the Company's expected future cash flows
generated by the associated product discounted at a rate commensurate with the
risk involved.
In addition, the Company recorded a cost of sales charge of approximately
$14,300,000 relating to discontinued products, inventory reserves, reduction of
capitalized overhead and other inventory related matters and $1,400,000
primarily related to the reduction of vendor credits. In addition, the Company
recorded a net revenue charge of $6,600,000 relating to returns and defective
products, customer credits and other transactions. Selling, general and
administrative expenses include a charge of $13,000,000 reflects reserves for
customer credits related to advertising and promotional allowances, lease
termination fees, severance costs, write-off of certain assets, accrual of
product related reserves, non-employee stock compensation expense and other
matters. In addition, the Company recorded a charge of $500,000 relating to
deferred financing costs.
5. RELATED PARTY MATTERS
Fees for services, including expenses, provided by a firm associated with the
Chief Financial Officer amounted to approximately $1,957,000 in 1996 and
$1,570,000 in 1995. Fees for services provided by a firm associated with a
director of the Company amounted to approximately $970,000, $545,000 and
$308,000 during the years ended December 1996, 1995 and 1994 respectively.
Services rendered by these firms included fees in connection with the Company's
public offering in 1994, acquisition of subsidiaries, refinancing of debt,
accounting, tax and finance services and other business, legal and tax matters.
6. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain warehouse facilities under an operating lease
arrangement. The agreement, which expires in January 2005, includes minimum
rental payments of approximately $845,000 per year plus real estate taxes and
other operating costs. The Company has an option to extend this lease for an
additional ten year period at an annual rent of approximately $1,095,000. The
Company also has the right to terminate the lease prior to expiration by giving
six months prior notice and (in case of a termination during the initial ten
year term) paying a termination payment. The termination provision includes a
payment table where the cost of termination is reduced for each year of the
lease term. During 1996, the Company obtained a waiver for a violation of a
lease covenant. Effective February 1, 1997, the minimum rental payments
increased by $45,000 per year.
The Company leases certain computer software under an arrangement which
has been classified as a capital lease. The lease has a thirty-six month
payment term and ownership of the asset transfers to the Company at the
conclusion of the lease. The total leased capital assets included in other
assets at December 31, 1996 was $487,000.
The Company leases office, warehousing and other facilities under tenant at will
arrangements. In addition, the Company leases certain equipment under operating
leases.
Rent expense (under operating leases) for the years ended December 31, 1996,
1995 and 1994 was approximately $1,900,000, $1,000,000 and $540,000,
respectively.
34
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------
December 31, 1996, 1995, 1994
<TABLE>
Minimum annual rentals for the five years subsequent to 1996 and in the
aggregate are:
<CAPTION>
Capital Operating
Leases Leases
--------- ----------
<S> <C> <C>
1997 $ 186,994 $ 989,841
1998 186,994 985,761
1999 93,497 911,300
2000 - 845,000
2001 - 845,000
Thereafter - 2,605,000
--------- ----------
Total minimum lease payments 467,485 $7,181,902
--------- ----------
Imputed interest (52,431)
Present value of minimum
capital lease payments 415,054
Current portion (154,403)
----------
Long-term capital lease obligations $ 260,651
=========
</TABLE>
Letters of Credit
As of December 31, 1996, the Company was contingently liable for unsecured
letters of credit of approximately $336,000. These letters of credit were issued
to secure delivery of overseas merchandise.
Royalty and License Agreements
The Company has various license agreements, pursuant to which it has the
non-exclusive right to utilize the licensing company's name or logos. In
addition, the Company pays royalties to developers for product ideas. Royalty
fees range from 2.5% to 10% of related product sales. Royalty fees incurred in
1996, 1995 and 1994 were $1,493,000, $1,130,000 and $124,000, respectively.
Supply Agreement
In February 1997, the Company entered into a three year supply agreement
expiring in April 2000 with one of its major suppliers under which the Company
has committed to place minimum order levels of $13,000,000 in the first year,
$14,300,000 in the second year and $15,700,000 in the third year. In addition,
the Company has a purchase commitment with another vendor in the amount of
$1,728,000. These purchase commitments are not expected to result in losses.
Contingencies
In August 1995, an action was commenced in the United States District Court for
the District of Massachusetts against the Company and three of its officers by a
shareholder of the Company, on behalf of herself and all others similarly
situated, who purchased stock of the Company between February 8, 1995 and April
5, 1995. The Complaint alleges that the Company violated Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder by failing to disclose in a timely manner the adverse effects
concerning the Company's results for the first quarter of fiscal 1995. The
parties settled this action and on January 29, 1997, the Company obtained a
final judgement and Order of Dismissal with prejudice of Class Action from the
Court. The amount of payment required to be made by the Company pursuant to the
settlement was not material.
The Company is subject to certain legal proceedings and claims which have arisen
in the normal course of business. The Company believes that the ultimate
resolution of these claims and proceedings would not have a material adverse
effect on the Company's financial position.
35
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------
December 31, 1996, 1995, 1994
7. MAJOR CUSTOMERS AND SUPPLIERS
During 1996 three customers accounted for approximately 42% of net sales and
during 1995 and 1994, four customers accounted for approximately 49% and 47%,
respectively, of net sales. The loss of any one of these customers could
adversely effect operating results.
During 1996 and 1995, five suppliers accounted for 52% and 43%, respectively,
and in 1994, four suppliers accounted for 55% of total purchases.
Certain of the Company's products are manufactured in China and are therefore
subject to certain trade restrictions. From time to time, the United States
Congress has attempted to impose additional restrictions on trade with China.
Enactment of legislation, or the imposition of restrictive regulations
conditioning or revoking China's "most favored nation" trading status or other
trade sanctions could have a material adverse effect upon the Company's business
products originating from China and the Company could be subjected to
substantially higher rates of duty.
8. INCOME TAXES
The Company records taxes in accordance with Statement of Financial Accounting
Standards No. 109 ("SFAS 109") "Accounting for Income Taxes" which requires use
of the asset/liability method of accounting for income taxes. The
asset/liability method measures deferred income taxes by applying enacted
statutory rates in effect at the balance sheet date to the differences between
the tax basis of assets and liabilities and their reported amounts in the
financial statements. The resulting asset or liability is adjusted to reflect
changes in the tax laws as they occur.
<TABLE>
(Loss) income before income taxes is as follows:
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Domestic $(53,556,624) $5,159,545 $10,868,651
Foreign 248,633 - -
------------ --------- -----------
$(53,307,991) $5,159,545 $10,868,651
============ ========= ===========
</TABLE>
<TABLE>
The components of income tax (benefit) expense for 1996 and 1995 were as
follows:
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Federal $(8,409,290) $1,597,000 $3,347,000
State (160,000) 363,000 939,000
Foreign 110,511 - -
----------- ---------- ----------
$(8,458,779) $1,960,000 $4,286,000
=========== ========== ==========
Current $(4,724,779) $1,358,000 $3,774,000
Deferred (3,734,000) 602,000 512,000
----------- ---------- ----------
$(8,458,779) $1,960,000 $4,286,000
=========== ========== ==========
</TABLE>
36
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------
December 31, 1996, 1995, 1994
<TABLE>
The components of the net deferred income tax asset (liability) were as follows:
<CAPTION>
1996 1995
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforward $ 8,196,000 $ -
Accounts receivable allowances 1,555,000 722,000
Inventories 1,697,000 261,000
Balance sheet reserves and allowances 2,529,000 -
Other 455,000 38,000
------------ -----------
Total deferred tax assets 14,432,000 1,021,000
Less: valuation allowance (10,345,000) -
------------ -----------
Net deferred tax asset 4,087,000 1,021,000
============ ===========
DEFERRED TAX LIABILITIES:
Depreciation (1,568,000) (2,247,000)
Patents and trademarks (200,000) (189,000)
Catalog costs (101,000) (101,000)
------------ -----------
Total deferred tax liabilities (1,869,000) (2,537,000)
------------ -----------
Total net deferred tax asset (liability) $ 2,218,000 $(1,516,000)
============ ===========
</TABLE>
The Company has recorded a valuation allowance of $10,345,000 as of December
31, 1996. The net change in the valuation allowance for 1996 is $10,345,000
which has been recorded through deferred income tax expense. The Company has
approximately $23,000,000 of net operating losses available which expire in the
year 2011.
Realization of approximately $2,200,000 of the deferred tax asset is dependent
upon the Company's ability to generate approximately $6,500,000 in taxable
income in the carryforward period. Management believes it is more likely than
not that the asset will be realized. However, there can be no asurances that
the Company will meet its expectations of future income. As a result, the
amount of the deferred tax assets considered realizable could be reduced in the
near and long term if estimates of future income are reduced. Such an occurrence
could materially adversely effect the Company's financial position and results
of operations. The Company will continue to evaluate the realizability of the
deferred tax assets quarterly by assessing the need for an additional valuation
allowance.
Deferred income taxes are not provided on the undistributed earnings of foreign
subsidiaries aggregating approximately $164,000 at December 31, 1996 as such
earnings are expected to be permanently reinvested in these companies.
<TABLE>
The differences between the statutory federal income tax rate of 34% and income
taxes reported in the statements of operations are as follows:
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Statutory rate $(18,124,717) $1,754,000 $3,695,000
State and local taxes,
net of federal benefit (788,067) 240,000 591,000
Valuation allowance 10,345,000 - -
Other 109,005 (34,000) -
------------ ---------- ----------
$ (8,458,779) $1,960,000 $4,286,000
============ ========== ==========
</TABLE>
9. PUBLIC OFFERINGS
The Company sold 600,000 shares of its common stock on March 4, 1994 in a public
offering and an additional 57,500 shares on March 31, 1994 upon exercise by the
underwriters of their over-allotment option. These 657,500 shares were sold at a
public offering price of $27.25 per share yielding net proceeds of approximately
$16,507,000 after deducting underwriting discounts and expenses related to the
offering. The proceeds were used to repay short-term bank debt of $2,670,000.
The balance of the proceeds approximately $13,837,000, was added to the
Company's working capital.
37
<PAGE> 38
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------
December 31, 1996, 1995, 1994
10. EMPLOYEE BENEFIT PLANS
Stock Option Plans
As of December 31, 1996, the Company had four stock option plans providing for
the granting of options to purchase up to 1,900,000 shares of common stock of
which, as of such date, 1,224,425 options had been granted. Two of these plans
were adopted by the Board of Directors in 1996 subject to shareholder approval
at the Company's next annual meeting. These plans provide for the awarding of
incentive and non-qualified stock options to employees, directors, independent
contractors and others who may contribute to the success of the Company. Options
are exercisable within ten years (5 years for greater than 10% shareholders with
respect to incentive stock options) of the date of grant at a price determined
by the Board of Directors or a committee of the Board of Directors.
Substantially all of these options vest over a period not to exceed thirty
months.
In addition to these four plans, the Company has issued 35,000 non-qualified
options (15,000 options at $12.00 per share and 20,000 options at $21.25 per
share) to a director of the Company at a price not less than the fair market
value on the dates of the grants. During 1995, all of the 15,000 options with an
option price of $12 per share were exercised, and in July 1996, the 20,000
options were repriced to $6.50.
A summary of changes in these option plans and the non-plan options during the
years ended December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Employees Non-Employees
----------------------------------- -----------------------------------
Weighted Average Weighted Average
Number of Options Exercise Price Number of Options Exercise Price
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Balance -- December 31, 1993 255,733 $17.00 125,943 $16.16
Granted 114,350 24.51 50,750 21.52
Exercised (21,692) 12.00 (12,825) 12.00
Canceled (10,503) 16.42 (6,850) 17.20
------- -------
Balance -- December 31, 1994 337,888 19.88 157,018 18.19
Granted 154,850 18.12 16,000 21.50
Exercised (52,406) 12.78 (2,500) 12.00
Canceled (37,857) 18.96 (1,184) 12.00
------- -------
Balance -- December 31, 1995 402,475 20.21 169,334 18.64
Granted 418,850 10.09 118,150 7.78
Exercised (33,539) 7.32 - -
Canceled (72,122) 14.43 (1,684) 12.00
------- -------
Balance -- December 31, 1996 715,664 7.30 285,800 7.06
======= =======
Options Exercisable - December 31, 1996 371,345 $ 6.86 232,050 $ 6.67
======= =======
</TABLE>
The Stock Option Committee of the Board of Directors voted on July 30, 1996, to
amend certain stock option agreements by changing the exercise price to $6.50
per share. These agreements covered 629,756 shares with original exercise prices
ranging from $12.00 to $27.00 per share. In addition, during 1995, the Company
repriced certain stock options at not less than the fair market value on the
dates of the repricing.
38
<PAGE> 39
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------
December 31, 1996, 1995, 1994
The following table summarizes option data as of December 31, 1996:
<TABLE>
<CAPTION>
Number Weighted
Outstanding Weighted Average Number Average
as Remaining Weighted Average Exercisable as Exercise
Range of Exercise Prices of 12/31/96 Contractual Life Exercise Price of 12/31/96 Price
- ------------------------ ----------- ---------------- -------------- --------------- --------
<S> <C> <C> <C> <C> <C>
Employees
- ---------
$ 6.50 - $10.00 696,497 8.6 $ 7.05 358,845 $ 6.49
10.01 - 15.00 10,834 8.5 13.96 4,167 15.00
15.01 - 20.00 8,333 8.6 19.00 8,333 19.00
------- -------
715,664 8.6 $ 7.30 371,345 $ 6.86
======= =======
Non-Employees
- -------------
$ 6.50 - $10.00 264,300 7.9 $ 6.82 232,050 $ 6.67
$10.01 - $15.00 21,500 9.8 $10.00 - -
------- -------
285,800 8.0 $ 7.06 232,050 $ 6.67
======= =======
</TABLE>
Compensation cost charged to operations, which the Company records for options
granted to non-employees, was $701,370 and $0 in the years ended December 31,
1996 and 1995, respectively.
The Company measures compensation in accordance with the provisions of APB
Opinion No. 25 in accounting for its stock compensation plans. Accordingly, no
compensation cost has been recorded for options granted to employees or
directors in the years ended December 31, 1996 or 1995.
The weighted average fair value at the date of grant for options granted during
1996 and 1995 was $6.25 and $10.34, respectively. The fair value of options at
the date of grant was estimated using the Black-Scholes model with the following
weighted average assumptions:
1996 1995
---- ----
Expected life (years)............. 5 5
Interest.......................... 6.27% 6.04%
Volatility........................ 60% 60%
Dividend yield.................... 0% 0%
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1996 and 1995
consistent with the provisions of SFAS 123, the Company's net (loss) income and
(loss) income per share would have been reduced to the pro forma amounts
indicated below:
1996 1995
------------ ----------
Net (loss) income - as reported.......... $(44,849,212) $3,199,545
Net (loss) income - pro forma............ $(46,854,517) $2,060,964
Net (loss) income per common
share - as reported..................... $ (6.27) $ 0.45
Net (loss) income per share
- pro forma............................ $ (6.55) $ 0.29
The initial application of SFAS 123 for pro forma disclosure may not
be representative of the future effects of applying the statement.
39
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------
December 31, 1996, 1995, 1994
Profit sharing Plan
The Company sponsors a Defined Contribution 401-k Plan (401-k Plan), whereby
participants may contribute a percentage of compensation, but not in excess of
the maximum allowed under the Internal Revenue Code. The 401-k Plan provides for
a matching contribution by the Company at the discretion of the Board of
Directors. For the years ended December 31, 1996, 1995 and 1994, the Company did
not elect to contribute to this plan.
11. ACQUISITIONS
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 $260,000, issuance of
notes payable of $949,000 ($270,000 outstanding as of December 31, 1996 after
post-closing adjustments), and payment of acquisition costs of $1,032,000. In
addition, the acquisition agreement provides that if Safety 1st (Europe) Ltd.
were to exceed 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 Company believes that its obligation under this provision will
be significantly less than the maximum potential. The fair value of assets
acquired, including goodwill, was $2,668,000 and liabilities assumed was
$426,000. The excess of the aggregate of purchase price over the fair value of
net assets acquired $2,181,000 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
$1,650,000 (outstanding as of December 31, 1996) and payment of acquisition
costs of $624,000. The fair value of assets acquired, including goodwill, was
$9,496,000 and liabilities assumed was $6,155,000. 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 of
$4,349,000 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.
These acquisitions have been recorded using the purchase method of accounting.
The accompanying consolidated statements of operations reflect the operating
results of the acquired entities since the effective date of the acquisitions.
Pro forma information has not been presented as these acquisitions are not
considered material.
12. FOREIGN OPERATION
The consolidated financial statements include the accounts of wholly-owned
subsidiaries in the United Kingdom and Canada. Information about the Company's
operations in the different geographic areas as of and for the year ended
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
United United Kingdom
States and Canada Eliminations Consolidated
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
1996
Net sales to unaffiliated customers $ 94,014,000 $11,738,000 $ - $105,752,000
Transfers between geographic locations 3,741,000 - (3,741,000) -
------------ ----------- ----------- ------------
Total $ 97,755,000 $11,738,000 $(3,741,000) $105,752,000
============ =========== =========== ============
Operating (loss) profit $(49,481,000) $ 252,000 $ 21,000 $(49,208,000)
============ =========== =========== ============
Identifiable assets $ 69,852,000 $ 1,404,000 $ 21,000 $ 71,277,000
============ =========== =========== ============
</TABLE>
Transfers between the geographic areas primarily represent intercompany export
sales and are accounted for based on established sales prices between the
related companies. In computing operating profit (loss), no allocations of
general corporate expenses have been made.
Identifiable assets of geographic areas are those assets related to the
Company's operations in each area. Cash includes $484,000 of amounts held in
foreign bank accounts.
International sales from domestic operations were approximately $9,562,000,
$5,826,000 and $5,167,000, for the years ended December 31, 1996, 1995, and
1994, respectively. In years 1995 and 1994, sales of $8,400,000 and $3,800,000,
respectively, to Orleans Juvenile Products, which the Company acquired during
1996 (see Note 11), have been excluded.
Foreign currency fluctuations could have a material effect on the Company's
financial position and results of operations.
40
<PAGE> 41
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------
December 31, 1996, 1995, 1994
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
The following is a summary of the unaudited quarterly results of operations for
1996 and 1995 (dollars in thousands, except per share amounts):
<CAPTION>
SEPTEMBER 30
AS
1996 MARCH 31 JUNE 30(1) RESTATED(4) DECEMBER 31(2)
- ---- -------- ---------- ---------- -------------
1996
<S> <C> <C> <C> <C>
Net Sales $32,006 $ 28,609 $29,226 $15,911
Gross Profit 12,893 5,286 9,674 (11,080)
Operating Income (loss) 3,381 (12,314) 804 (41,079)
Net Income (loss) 1,704 (8,193) (233) (38,127)
Net Income (loss) per share (5) 0.24 (1.14) (0.03) (5.32)
<CAPTION>
1995 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31(3)
- ---- -------- ------- ------------ --------------
<S> <C> <C> <C> <C>
Net Sales $26,575 $27,630 $26,683 $22,330
Gross Profit 9,594 10,223 10,006 4,662
Operating Income (loss) 3,510 3,107 3,427 (3,819)
Net Income (loss) 2,105 1,757 1,839 (2,501)
Net Income (loss) per share (5) .30 .25 .26 (.35)
</TABLE>
(1) The Company recorded adjustments in the second quarter of 1996 of
$4,100,000 for inventory valuation adjustments primarily relating to the
Company's plans to discontinue and restructure lower margin products, a
charge of $1,765,000 for vendor credits and customer credit adjustments,
$3,355,000 relating to increases in the reserves for customer credits on
accounts receivable, $1,780,000 related to write-offs of certain prepaid
and other assets and $2,800,000 for increased accruals for professional and
related fees and write-down of molds and other capital assets relating
primarily to the planned discontinuance of certain product lines. These
adjustments reduced second quarter earnings before income taxes by
approximately $13,800,000 and net earnings by approximately $8,628,000
($1.21 per share).
41
<PAGE> 42
NOTES TO CONSOLITDATED FINANCIAL STATEMENTS
-------------------------------------------------------------
December 31, 1996, 1995, 1994
(2) The Company recorded adjustments in the fourth quarter of 1996 of
$32,700,000 in connection with the SKU reduction program to streamline its
product offerings and discontinue products that did not meet certain sales,
inventory turns and profitability objectives. The adjustments consisted of
$5,600,000 primarily related to customer credits and other transactions,
$9,407,000 of cost of sales charges related to discontinued inventory
products, inventory reserves, reduction of capitalized overhead, other
inventory related matters and reductions in vendor credit, $2,700,000 for
customer credits on accounts receivable primarily related to advertising
and promotional allowances, $1,000,000 primarily related to lease
termination fees and severance costs, $1,900,000 related to the write-off
of certain other assets and increased accruals for product related
reserves, and $1,800,000 in purchase adjustments related to the
acquisition of the U.K. and Canadian subsidiaries and costs associated
with the Company's debt refinancing. In addition, the Company recorded a
charge of $10,300,000 in connection with the adoption of SFAS 121
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of" primarily for impairment losses on molds and tools,
molds in process, and patents related to discontinued products.
(3) The Company recognized adjustments in the fourth quarter of 1995 to
increase the reserve for doubtful accounts ($600,000), to recognize
inventory charges and to a lesser degree a write-down to net realizable
value ($4,500,000), to reduce the estimated recovery period of certain
assets ($580,000), and to expense a termination fee with respect to its
former U.K. distributor ($128,000). Management believes these adjustments
had the effect of reducing fourth quarter earnings before income taxes by
approximately $5,800,000 and net earnings by approximately $3,600,000
($.050 per share), both amounts are net of certain recoveries.
(4) The Company restated 1996 third quarter results primarily as a result of
the repricing of certain non-employee stock options in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation". The effect of the restatement reduced net income by
approximately $790,000 ($0.11 share). In addition, certain amounts were
reclassified from selling, general and administrative expenses and net
sales to cost of sales.
(5) The sum of the quarterly net income (loss) per share amounts does not
equal the annual amount reported, as per share amounts are computed
independently for each quarter and for the twelve months based on the
weighted average common shares outstanding in each such period.
42
<PAGE> 43
ITEM 9- CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------------------
None.
PART III
ITEM 10- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this item is included in Registrant's
definitive proxy statement for the 1997 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 11- EXECUTIVE COMPENSATION
----------------------
The information required by this item is included in Registrant's
definitive proxy statement for the 1997 Annual Meeting of Shareholders and is
incorporated herein by reference, except that the sections in said definitive
proxy statement which respond to paragraphs (k) and (l) of Item 402 of
Regulation S-K shall not be deemed incorporated herein by reference or "filed"
with the Securities and Exchange Commission or subject to Section 18 of the
Securities Exchange Act of 1934.
ITEM 12- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this item is included in Registrant's
definitive proxy statement for the 1997 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 13- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this item is included in Registrant's
definitive proxy statement for the 1997 Annual Meeting of Shareholders and is
incorporated herein by reference.
PART IV
ITEM 14- EXHIBITS. FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a) Financial Statements. Financial Statement Schedules and Exhibits
----------------------------------------------------------------
(1) Financial Statements
--------------------
Included in Part II, Item 8 of this Report on pages 22
through 42.
Report of the Independent Certified Public Accountants
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the Three Fiscal
Years Ended December 31, 1996, 1995, and 1994
Consolidated Statements of Changes in Stockholders' Equity
for the Three Fiscal Years Ended December 31, 1996, 1995,
and 1994
Consolidated Statements of Cash Flows for the Three Fiscal
Years Ended December 31, 1996, 1995, and 1994
(2) Financial Statement Schedule
43
<PAGE> 44
Included in PART IV, Item 14(c) of this Report on pages 47
and 48:
Report of Independent Certified Public Accountants on
Financial Statement Schedule For the three Fiscal Years Ended
December 31, 1996, 1995, and 1994 Schedule 11 - Valuation and
Qualifying Accounts
Schedules other than that listed above are omitted for the
reason that they are not required or are not applicable, or
the required information is shown in the financial statements
or notes thereto.
(3) Exhibits
--------
The Company will furnish to any shareholder, upon written
request, any exhibit listed below upon payment by such
shareholder to the Company of the Company's reasonable
expenses in furnishing such exhibit.
Exhibit Description
-------------------
3(a) Registrant's Restated Articles of Organization (Exhibit
to the Registrant's Registration Statement on Form S-1 (No.
33-59016) filed on March 4, 1993, as amended, and incorporated
herein by reference)
3(b) Registrant's Restated By-laws (Exhibit to the
Registrant's Registration Statement on Form S-1 (No. 33-59016)
filed on March 4, 1993, as amended, and incorporated herein by
reference)
4 Specimen Certificates (Exhibit 4 to the Registrant's
Report on Form 10-Q for the period ended March 31, 1996 and
incorporated herein by reference)
10(a) Lease dated January 21, 1994 between Reva Goode and
Bessie Kriensky and Registrant, relating to leased premises at 210
Boylston St., Chestnut Hill, MA (Exhibit to the Registrant's
Registration Statement on Form S-1 (No. 33-74784) filed on
February 3, 1994, as amended, and incorporated herein by
reference)
10(b)* Employment Agreement between Registrant and Michael I.
Lerner (Exhibit to the Registrant's Registration Statement on Form
S-1 (No. 33-59016) filed on March 4, 1993, as amended, and
incorporated herein by reference)
10(c)* Employment Agreement between Registrant and Michael S.
Bernstein (Exhibit to the Registrant's Registration Statement on
Form S-1 (No. 33-59016) filed on March 4, 1993, as amended, and
incorporated herein by reference)
10(d)* 1993 Incentive and Non-Qualified Stock Option Plan
(Exhibit to the Registrant's Registration Statement on Form S-1
(No. 33-59016) filed on March 4, 1993, as amended, and
incorporated herein by reference)
10(e)* 1993-A Employee and Director Stock Option Plan (Exhibit
to the Registrant's Registration Statement on Form S-1 (No.
33-74784) filed on February 3, 1994, as amended, and incorporated
herein by reference)
10(f)* Registrant's 401(k) Plan (Exhibit to the Registrant's
Registration Statement on Form S-1 (No. 3359016) filed on March 4,
1993, as amended, and incorporated herein by reference)
10(g) Indenture of Lease dated September 13, 1994 entered
into by Glenbervie, Inc. and the Registrant pertaining to leased
premises in Londonderry, NH (Exhibit 10.1 to the Registrant's
Report on Form 10-Q for the period ended September 30, 1994 and
incorporated herein by reference)
44
<PAGE> 45
10(h) Agreement for Purchase of Shares dated as of January 4,
1996, between Stephen Paul Tollman and Registrant (excluding
Schedules and Exhibits other than Purchase Price and Warranty
Schedules) (Exhibit 10(h) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995 and incorporated
herein by reference)
10(i) 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) (Exhibit 10(i)
to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference)
10(j)* 1996 Employee and Director Stock Option Plan adopted as
of September 18, 1996 (Exhibit 10.15 to the Registrant's Report on
Form 10-Q for the period ended September 30, 1996 and
incorporated herein by reference)
10(k)* 1996 Nonqualified Stock Option Plan adopted as of
September 18, 1996 (Exhibit 10.16 to the Registrant's Report on
Form 10-Q for the period ended September 30, 1996 and
incorporated herein by reference)
10(l) First Amended and Restated Loan Agreement dated as of
January 31, 1997, among the Registrant, the Lenders listed on the
signature pages thereof, and Goldman Sachs Credit Partners L.P.,
as Agent (Exhibit 10.1 to the Registrant's Report on Form 8-K
dated February 7, 1997 and incorporated herein by reference)
10(m) $20,000,000 Revolving Credit Note dated January 31,
1997, executed by the Registrant in favor of Goldman Sachs Credit
Partners L.P., as Agent (Exhibit 10.2 to the Registrant's Report
on Form 8-K dated February 7, 1997 and incorporated herein by
reference).
10(n) $25,000,000 Term Note dated January 31, 1997, executed
by the Registrant in favor of Goldman Sachs Credit Partners L.P.,
as Agent (Exhibit 10.3 to the Registrant's Report on Form 8-K
dated February 7, 1997 and incorporated herein by reference)
10(o)* Employment Agreement dated February 19, 1997, between
Registrant and Richard E. Wenz
10(p) Amendment to Lease dated November 14, 1996, between the
Reigstrant and Glenbervie, Inc.
11 Statement re: Computation of Per Share Earnings
21 List of Subsidiaries of the Registrant (Exhibit 21 to
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated herein by reference)
23 Consent of Independent Certified Public Accountants
99 Important Factors Regarding Forward-Looking Statements
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c) hereof.
The Company agrees to furnish the Securities and Exchange Commission, upon
request, a copy of each agreement with respect to long-term debt of the Company,
the authorized principal amount of which does not exceed 10% of the total assets
of the Company and its subsidiaries on a consolidated basis.
45
<PAGE> 46
(b) Reports On Form 8-K
-------------------
The Company filed a Report on Form 8-K on October 11, 1996, which
disclosed that the Company and its lenders entered into a Third, a
Fourth and a Fifth Amendment to Forbearance Agreement to extend the
Forbearance Termination Date (as defined in the Agreement) from
September 20, 1996, until September 27, 1996, October 4, 1996, and
October 11, 1996, respectively.
The Company filed a Report on Form 8-K on December 11, 1996, which
disclosed that the Company and its lenders entered into a Fourth
and a Fifth Amendment to Loan Agreement (a) to clarify provisions
regarding the order of application to indebtedness of certain
proceeds and add an event of default for a change in the majority
ownership of the capital stock of the Company from that existing on
March 28, 1996, and (b) to include certain accounts receivable in
the borrowing base formula and establish the order of application
of the proceeds of such accounts receivable to indebtedness, to
reduce the amount of funds available under revolver cushion loans,
waive compliance with certain financial covenants, amend certain
other financial covenants, and grant the lenders the right, in
limited circumstances, to receive a $250,000 fee after December 31,
1996, in exchange for returning all of either the warrants
previously issued to the lenders or the shares received pursuant to
said warrants, respectively.
(c) Exhibits - See (a)(3) above
--------
(d) Financial Statement Schedules - See (a)(2) above
-----------------------------
46
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. (Registrant)
By: /s/ Michael Lerner Date: March 28, 1997
---------------------------
Michael Lerner
Chairman of the Board
<TABLE>
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Michael Lerner Chief Executive Officer and March 28, 1997
- ------------------------- Director (Principal Executive Officer
Michael Lerner
/s/ Richard Caturano Chief Financial Officer, Treasurer and March 28, 1997
- ------------------------- Principal Accounting Officer
Richard Caturano
/s/ Michael S. Bernstein Director March 28, 1997
- ------------------------- Executive Vice President
Michael S. Bernstein
/s/ Curt R. Feuer Director March 28, 1997
- -------------------------
Curt R. Feuer
/s/ Robert J. Drummond Director March 28, 1997
- -------------------------
Robert J. Drummond
/s/ Laurence S. Levy Director March 28, 1997
- -------------------------
Laurence S. Levy
/s/ Ronald J. Jackson Director March 28, 1997
- -------------------------
Ronald J. Jackson
</TABLE>
49
<PAGE> 48
Report of Independent Certified Public Accountants on Schedule
To the Board of Directors
Safety 1st, Inc.
In connection with our audits of the consolidated financial statements of Safety
1st, Inc. and Subsidiaries referred to in our report dated March 18, 1997,
which is included in the annual report on Form 10-K, we have also audited
Schedule II for each of the three years in the period ended December 31, 1996.
In our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
GRANT THORNTON LLP
Boston, Massachusetts
March 18, 1997
47
<PAGE> 49
SCHEDULE II
SAFETY 1ST, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column C-Additions
---------------------------
Column A-Description Column B- Charged to Charged to
beginning cost and accounts- Column D- Column E-
of period expenses describe(1) Deductions end of period
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
----
Accounts Receivable Allowances $1,900,000 $1,370,000 $30,000 $ -- $3,300,000
1995
----
Accounts Receivable Allowances $ 912,000 $1,836,000 $-- $848,000 $1,900,000
1994
----
Accounts Receivable Allowances $ 350,000 $ 782,000 $-- $220,000 $ 912,000
</TABLE>
- --------------
(1) Allowance acquired as part of acquisition.
48
<PAGE> 50
SAFETY 1ST, INC.
Annual Report on Form 10-K
For Fiscal Year Ended December 31, 1996
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
3(a) Registrant's Restated Articles of Organization (Exhibit to the
Registrant's Registration Statement on Form S-1 (No. 33-59016) filed on
March 4, 1993, as amended, and incorporated herein by reference)
3(b) Registrant's Restated By-laws (Exhibit to the Registrant's Registration
Statement on Form S-1 (No. 33-59016) filed on March 4, 1993, as
amended, and incorporated herein by reference)
4 Specimen Certificate (Exhibit 4 to the Registrant's Report on Form 10-Q
for the period ended March 31, 1996 and incorporated herein by
reference)
10(a) Lease dated January 21, 1994 between Reva Goode and Bessie Kriensky and
Registrant, relating to leased premises at 210 Boylston St., Chestnut
Hill, MA (Exhibit to the Registrant's Registration Statement on Form
S-1 (No. 33-74784) filed on February 3, 1994, as amended, and
incorporated herein by reference)
10(b) Employment Agreement between Registrant and Michael I. Lerner (Exhibit
to the Registrant's Registration Statement on Form S-1 (No. 33-59016)
filed on March 4, 1993, as amended, and incorporated herein by
reference)
10(c) Employment Agreement between Registrant and Michael S. Bernstein
(Exhibit to the Registrant's Registration Statement on Form S-1 (No.
33-59016) filed on March 4, 1993, as amended, and incorporated herein
by reference)
10(d) 1993 Incentive and Non-Qualified Stock Option Plan (Exhibit to the
Registrant's Registration Statement on Form S-1 (No. 33-59016) filed on
March 4, 1993, as amended, and incorporated herein by reference)
10(e) 1993-A Employee and Director Stock Option Plan (Exhibit to the
Registrant's Registration Statement on Form S-1 (No. 33-74784) filed on
February 3, 1994, as amended, and incorporated herein by reference)
10(f) Registrant's 401(k) Plan (Exhibit to the Registrant's Registration
Statement on Form S-1 (No. 33-59016) filed on March 4, 1993, as
amended, and incorporated herein by reference)
10(g) Indenture of Lease dated September 13, 1994 entered into by Glenbervie,
Inc. and the Registrant pertaining to leased premises in Londonderry,
NH (Exhibit 10.1 to the Registrant's Report on Form 10-Q for the period
ended September 30, 1994 and incorporated herein by reference)
</TABLE>
<PAGE> 51
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
10(h) Agreement for Purchase of Shares dated as of January 4, 1996, between
Stephen Paul Tollman and Registrant (excluding Schedules and Exhibits
other than Purchase Price and Warranty Schedules) (Exhibit 10(h) to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1995 and incorporated herein by reference)
10(i) 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) (Exhibit 10(i) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference)
10(j) 1996 Employee and Director Stock Option Plan adopted as of September
18, 1996 (Exhibit 10.15 to the Registrant's Report on Form 10-Q
for the period ended September 30, 1996 and incorporated herein by
reference)
10(k) 1996 Nonqualified Stock Option Plan adopted as of September 18, 1996
(Exhibit 10.16 to the Registrant's Report on Form 10-Q for the period
ending September 30, 1996 and incorporated herein by reference)
10(l) First Amended and Restated Loan Agreement dated as of January 31, 1997,
among the Registrant, the Lenders listed on the signature pages
thereof, and Goldman Sachs Credit Partners L.P., as Agent (Exhibit 10.1
to the Registrant's Report on Form 8-K dated February 7, 1997 and
incorporated herein by reference)
10(m) $20,000,000 Revolving Credit Note dated January 31, 1997, executed by
the Registrant in favor of Goldman Sachs Credit Partners L.P., as Agent
(Exhibit 10.2 to the Registrant's Report on Form 8-K dated February 7,
1997 and incorporated herein by reference).
10(n) $25,000,000 Term Note dated January 31, 1997, executed by the
Registrant in favor of Goldman Sachs Credit Partners L.P., as Agent
(Exhibit 10.3 to the Registrant's Report on Form 8-K dated February 7,
1997, and incorporated herein by reference)
10(o) Employment Agreement dated February 19, 1997, between Registrant and
Richard E. Wenz
10(p) Amendment to lease dated November 14, 1996, between the Registrant and
Glenbervie, Inc.
11 Statement re: Computation of Per Share Earnings
21 List of Subsidiaries of the Registrant (Exhibit 21 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference)
23 Consent of Independent Certified Public Accountants
99 Important Factors Regarding Forward-Looking Statements
</TABLE>
2
<PAGE> 1
EXHIBIT 10(o)
<PAGE> 2
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement made as of the 19th day of February, 1997 by and
between Safety 1st, Inc., a Massachusetts corporation (the "Company"), and
Richard E. Wenz of 836 Arlington Heights Road, Suite 205, Elk Grove Village, IL
60007 (the "Employee").
WHEREAS, the Company wishes to employ the Employee as its President and
Chief Operating Officer ("COO"); and
WHEREAS, the Employee desires to serve as the President and COO of the
Company;
NOW THEREFORE, in consideration of the premises and the mutual promises
hereinafter set forth, the Company and the Employee agree as follows:
1. EMPLOYMENT. The Company hereby employs the Employee, and the Employee
accepts such employment with the Company upon the terms and conditions
hereinafter set forth. The Employee's title and duties at the start of this
Agreement shall be those of President and COO.
2. DUTY TO PERFORM SERVICES. The Employee shall devote his full time,
attention and energies to the business of the Company, and shall perform his
services diligently and to the best of his ability. The Employee agrees that in
the rendering of all services to the Company and in all aspects of his
employment, he will comply in all material respects with all directives,
policies, standards and regulations from time to time established by the Board
of Directors of the Company to the extent they are not in conflict with this
Agreement.
3. TERM OF EMPLOYMENT. Subject to Section 11 of this Agreement, this
Agreement shall have a term of three (3) years commencing on the date hereof.
4. COMPENSATION.
------------
(a) During the term of this Agreement, the Company shall pay the Employee a
base salary (the "Base Salary"), payable in accordance with the Company's
standard schedule for salary payments to its executives, in equal installments
at an annual rate equal to $300,000. At the beginning of each fiscal year, the
Board of Directors, or the Compensation Committee acting on its behalf, if such
function is so delegated, shall in its discretion determine any increases in the
Base Salary.
<PAGE> 3
(b) With respect to each fiscal year of the Company during the term of this
Agreement, the Employee shall be entitled to receive additional compensation
("Incentive Compensation") based on the performance of the Employee and the
Company, as the Board of Directors or the Compensation Committee acting on its
behalf, if such function is so delegated, shall in its discretion determine;
provided, however, the Employee's Incentive Compensation shall not exceed 35% of
Employee's then present Base Salary. The Company agrees that the Company shall
pay Employee Incentive Compensation of at least 20% of Employee's Base Salary
for his first year of service with Company. Any sum payable to Employee with
respect to Incentive Compensation shall be payable no later than ninety (90)
days after the end of each fiscal year.
(c) All payments of Base Salary and Incentive Compensation to the Employee
shall be made after deduction of any taxes which are required to be withheld
with respect thereto under applicable federal and state laws.
(d) Employee shall be granted 250,000 options to purchase the Company's
common stock ("Stock Options") at an exercise price equal to the closing sales
price of the Company's common stock on the first day of Employee's employment.
The terms of the Stock Options shall be in accordance with the Incentive Stock
Option Agreement appended hereto as EXHIBIT A.
5. EXPENSES.
--------
(a) The Company shall reimburse the Employee for all reasonable business
expenses incurred by the Employee in connection with his employment by the
Company, including, without limitation, expenses of travel and entertainment.
The Company shall promptly reimburse the Employee for all such expenses upon
presentation of appropriate vouchers, receipts and other supporting documents as
reasonably required by the Company. The Employee shall submit such completed
expense documentation on the Monday following such trip or event, or, if such
submission is not possible, as soon as practicable thereafter.
(b) The Company shall reimburse Executive for reasonable relocation
expenses, including moving expenses, temporary living expenses (up to 4 months
maximum), and incidental expenses (not to exceed $10,000) related to Employee's
relocation, incurred in connection with his acceptance of employment hereunder.
6. VACATIONS; HOLIDAYS; SICK TIME; BENEFITS. The Employee shall be entitled
to vacation time, holiday time and sick leave in accordance with the Company's
policies, as in effect from time to time. The Employee shall be entitled to
2
<PAGE> 4
participate in any and all employee benefit plans from time to time in effect
for employees of the Company, in accordance with generally applicable provisions
of those plans.
7. WRITINGS, INVENTIONS, DISCOVERIES, ETC. The following shall be the
exclusive property of the Company to which the Company shall have the entire
right, title and interest: all computer software, writings (including reports,
source and object codes, manuals and other documentation), discoveries,
inventions, improvements, ideas, names, models, trademarks, innovations and
contributions (including all data and records pertaining thereto), regardless of
what form they may take, and whether or not patentable or copyrightable, and
whether or not reduced to writing (or other copyrightable form), drawings,
practice, or recordation in any form readable or accessible by any person or
machine, (i) which the Employee may produce, develop, write, invent, discover,
originate, make or conceive during the term of his employment by the Company, or
during the one-year period following termination of such employment, either
alone or with others and whether or not during working or business hours or by
or with the use of facilities, materials or proprietary information or rights of
the Company, and (ii) which relate to, or are or may likely be useful in
connection with, any of the Company's businesses or products; the foregoing are
collectively referred to as "Writings and Inventions". The Employee shall
promptly and fully disclose all Writings and Inventions to the Company, and
shall promptly record all Writings and Inventions in such form as the Company
may request. All Writings and Inventions reduced to copyrightable form shall be
considered a "work for hire" for the sole benefit of the Company. The Company
shall own all rights in the Employee's Writings and Inventions, including the
right to use or not to use any of such Writings and Inventions, and the right to
change, alter, supplement, edit, translate or improve any Writings and
Inventions as the Company sees fit.
8. ASSIGNMENTS OF WRITINGS AND INVENTIONS. The Employee hereby assigns to the
Company his entire right, title and interest in and to all Writings and
Inventions. The Employee shall execute and deliver, upon the Company's request
at any time (including any time after termination of the Employee's employment
by the Company), and at the Company's expense, any and all legal instruments or
applications, assignments and other documents or papers that the Company may
deem necessary or desirable to obtain, establish, maintain, protect, perfect or
enjoy its rights, including any patent or copyright rights, in the Writings and
Inventions, and shall assist the Company, at the Company's
3
<PAGE> 5
expense, in obtaining, defending, and enforcing the Company's rights therein,
all without further compensation or royalty payments to the Employee.
9. CONFIDENTIAL INFORMATION.
------------------------
(a) When used in this Agreement "Confidential Information" shall mean all
information which has not been made public concerning the Company's business,
including but not limited to: names of vendors or customers or prospective
vendors or customers, marketing strategies, mailing lists, personnel
information, accounting procedures, income information, financial data,
advertising ideas, financial data, other information or knowledge which a
reasonable person would believe to be of a confidential or secretive nature,
writings (whether or not copyrightable), "know-how", ideas, concepts and design
information, whether patentable or not, and whether conceived or developed by
the Employee on behalf of the Company or made known to Employee by the Company.
The term "Confidential Material" shall mean all physical embodiments of such
Confidential Information, including, without limitation, drawings, customer
lists, contracts, reports, financial reports, manuals and correspondence.
(b) The Employee recognizes that in the performance of his services for the
Company he may gain knowledge of Confidential Information and may have access to
Confidential Materials, both of which he acknowledges are valuable and
protectable assets, and the exclusive property, of the Company.
(c) The Employee agrees that he shall not use, divulge, disclose,
communicate, copy or make accessible any Confidential Information or
Confidential Materials to or for anyone except as authorized in writing by the
Company.
(d) The Employee agrees not to remove from the Company's facilities any
Confidential Materials whether created or produced by the Employee or obtained
from the Company, except as directed by the Company, and agrees to return all
such Confidential Materials to the Company upon request, and in any event upon
the termination of his employment with the Company.
10. NON-COMPETITION.
---------------
(a) During his employment by the Company hereunder and for a period of two
(2) years thereafter (the "Non-Competition Term") (whether or not this Agreement
has terminated for any reason or for no reason), the Employee shall not,
directly or indirectly, whether as owner, partner, shareholder, consultant,
agent, employee, co-venturer or otherwise, or through any Person (as hereafter
defined), engage in the business of developing, licensing or selling
4
<PAGE> 6
products which are substantially equivalent to or competitive with the products
that during the Non-Competition Term, are (a) being licensed or sold or are
under development by the Company, or (b) identified in the Company's business
plan in effect at such time and scheduled for development or marketing within
two years from such date. For purposes of this Section, the term, "Person" shall
mean an individual, a corporation, an association, a partnership, an estate, a
trust and any other entity or organization. Notwithstanding the foregoing, the
Employee may purchase on a national securities exchange or in the
"over-the-counter" market any securities listed on such exchange or publicly
traded in such market.
(b) During the Non-Competition Term, the Employee also shall not directly
or indirectly (i) in any manner persuade or attempt to persuade any officer,
employee or agent of the Company to discontinue his relationship with the
Company without the prior written consent of the Company; (ii) solicit any
customer, or in any manner persuade or attempt to persuade any customer to
discontinue its relationship with the Company without the prior written consent
of the Company; or (iii) assist any other person or party to do any acts
prohibited to Employee in this Section 10.
11. TERMINATION AND EMPLOYMENT.
--------------------------
(a) Termination for Cause. The Company may terminate the employment of the
Employee, for cause (as described below), effective upon written notice to the
Employee, specifying such cause. If the Company terminates the Employee's
employment for cause under this Section 11(a), the Company shall pay all Base
Salary which accrued on or before the date of termination. The Company's
obligation to pay salary and other compensation hereunder for subsequent periods
shall terminate on the effective date of any termination of employment for
cause. Any such termination for cause shall be authorized or ratified by the
Company's Board of Directors. For purposes of this Agreement, termination for
cause shall mean termination for:
(i) deliberate misconduct which materially and adversely reflects upon
the business (monetarily or otherwise), affairs or reputation of the
Company or upon the Employee's ability to perform his duties
hereunder;
(ii) the Employee's failure to perform a substantial portion of his
duties and responsibilities hereunder for reasons other than
disability, which failure continues for more than thirty (30) days
after the Company gives written notice to the Employee which sets
forth in reasonable detail the nature of such failure;
(iii) the conviction of the Employee of a crime involving fraud or moral
turpitude;
(iv) subject to applicable law, the Employee's use of illegal drugs,
abuse of controlled substances or habitual intoxication; or
5
<PAGE> 7
(v) any material breach by the Employee of his obligations hereunder.
(b) Termination without Cause. The Company may terminate the employment of
the Employee without cause, either (i) immediately, subject to payment to
Employee as severance Employee's Base Salary for one (1) year from the date of
termination; or (ii) upon one (1) year's prior written notice to the Employee.
Company's obligation to pay severance or salary under either subsections (i) or
(ii) shall cease upon Employee securing new employment.
(c) Termination by Death. In the event of the death of the Employee during
the term of this Agreement, his employment by the Company and right to Base
Salary shall be deemed to terminate at the end of the calendar month in which
his death occurs.
(d) Termination as a Result of Permanent Disability. In the event of
disability of the Employee for a period in excess of twelve (12) consecutive
months, his employment by the Company and right to Base Salary shall be deemed
to terminate at the end of the calendar month which includes the last day of
such twelve (12) month period.
(e) Termination by Employee. This Agreement (except as otherwise provided
herein), and the Employee's employment by the Company, may be terminated by the
Employee at any time upon at least sixty (60) days prior written notice given to
the Company, and his employment and right to Base Salary shall be deemed to
terminate on the last day of such sixty (60) day period.
(f) The provisions of Section 9 and 10 hereof shall survive any termination
of the employment of the Employee with the Company, and the Employee
acknowledges that this Agreement and the compensation and benefits payable
hereunder are fair and adequate consideration, in part, for both the covenants
of the Employee under Sections 9 and 10 hereof, and the survival of such
covenants after the termination of this Agreement.
12. INJUNCTIVE RELIEF. Each party hereto acknowledges and agrees (a) a remedy
at law for any breach or attempted breach of this Agreement will be inadequate,
(b) each party will be entitled to specific performance and injunctive and other
equitable relief in case of any breach or attempted breach, and (c) not to use
as a defense that any party has an adequate remedy at law. This Agreement shall
be enforceable in a court of equity, or other tribunal with jurisdiction, by a
decree of specific performance, and appropriate injunctive relief may be applied
for and granted in connection herewith. Such remedy shall not be exclusive and
shall be in addition to any other remedies now or hereafter existing at law or
in equity, by statute or otherwise. No delay or omission in exercising any right
or remedy
6
<PAGE> 8
set forth in this Agreement shall operate as a waiver thereof or of any right or
remedy, and no single or partial exercise thereof shall preclude any other or
further exercise thereof or the exercise of any other right or remedy.
13. ARBITRATION. Any controversy or claim arising out of, or relating to this
Agreement or the breach thereof, shall be settled by arbitration in Boston,
Massachusetts, in accordance with the rules than obtaining of the American
Arbitration Association, and judgment on the award rendered may be entered in
any Court having jurisdiction thereof.
14. NOTICES. All notices, requests, demands and other communications required
by or permitted under this Agreement shall be in writing and shall be
sufficiently delivered if delivered by hand or sent by registered or certified
mail, postage prepaid, to the parties at their respective addresses listed
below:
(a) if to the Employee:
Richard Wenz
836 Arlington Heights Road, Suite 205
Elk Grove Village, IL 60007
(b) if to the Company:
Safety 1st, Inc.
210 Boylston Street
Chestnut Hill, MA 02167
ATTN: Michael Lerner, CEO
with a copy to:
Curt R. Feuer, Esq.
Kassler & Feuer, P.C.
101 Arch Street
Boston, MA 02110
Any party may change such party's address by proper notice to the other parties.
14. SURVIVAL. The provisions of this Agreement shall survive the termination
of the Employee's employment hereunder in accordance with their terms.
15. GOVERNING LAW. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of The Commonwealth of Massachusetts.
16. BINDING UPON SUCCESSORS. This Agreement shall be binding upon, and shall
inure to the benefit of, the parties hereto and their respective heirs, legal
representatives, successors and assigns.
17. WAIVERS AND AMENDMENTS.
----------------------
7
<PAGE> 9
(a) This Agreement may be amended, modified or supplemented, and any
obligation hereunder may be waived, only by a written instrument executed by the
parties hereto. The waiver by any party hereto of a breach of any provision of
this Agreement shall not operate as a waiver of any subsequent breach.
(b) No failure on the part of any party to exercise and no delay in
exercising, any right or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or remedy by such party
preclude any other or further exercise thereof or the exercise of any other
right or remedy. All rights and remedies hereunder are cumulative and are in
addition to all other rights and remedies provided by law, agreement or
otherwise.
18. VALIDITY. If for any reason any provision hereof shall be determined to
be void or unenforceable, the validity and effect of the other provisions hereof
shall not be affected thereby.
19. SEVERABILITY. Whenever possible, each provision of this Agreement shall
be interpreted in such manner so as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and interpreted in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein. If any court
shall determine that any provision of Sections 9 and 10 hereof is unenforceable
because of the duration or scope of such provision, such court shall have power
to reduce the scope or duration of such provision, as the case may be, and, in
its reduced form, such provision shall then be enforceable.
IN WITNESS WHEREOF, the Company and the Employee have executed this Agreement
as of the date first above written.
SAFETY 1ST, INC.
By: /s/ Michael Lerner
----------------------------------
Michael Lerner, CEO
EMPLOYEE
/s/ Richard E. Wenz
-------------------------------------
Richard E. Wenz
8
<PAGE> 1
EXHIBIT 10(p)
<PAGE> 2
Exhibit 10(p)
AMENDMENT TO LEASE
NOW COME Glenbervie, Inc., a New Hampshire corporation with a principal
place of business at 1359 Daniel Webster Highway North, Hooksett, NH 03108
("Landlord") and Safety 1st, Inc., a Massachusetts corporation with a mailing
addrss of 210 Boylston Street, Chestnut Hill, Massachusetts 02167 ("Tenant")
parties to a certain "Indenture of lease" dated the 13th day of September 1994,
(the "Lease"), which Lease relates to real property and improvements thereon
located in Londonderry, New Hampshire (the "Premises").
WHEREAS, Tenant has requested that Landlord make certain additional
alternations and improvements to the Premises; and
WHEREAS, Landloard has agreed to make such alternations and
improvements, and Tenant has agreed, in consideration thereof, to increase the
minimum Rent provided for in Section 1.1(g) of the Lease;
NOW, THEREFORE, Landlord and Tenant agree to the following amendments
to the Lease:
1. A new Section 6.4 is hereby added to the Lease, which Section
states as follows:
Section 6.4.
-----------
(a) Landlord agrees that immediately upon the execution and
receipt by it of this "Second Amendment to Lease", it shall commence the
design, permit, and construction process necessary to add the parking areas
shown on Sheets 3 + 4 of the Plans prepared by Burd Engineering dated may 24,
1996 (five sheets) and attached hereto as Exhibit A (the "Added Parking") and
to use due diligence to complete same as soon as reasonably possible. All work
required for completion of the Added Parking shall be the responsibility of the
Landlord, and shall be completed in accordance with applicable laws and
regulations.
(b) Landlord shall use good faith efforts to obtain necessary
governmental and regulatory permits and approvals for the Added Parking as soon
as reasonably possible and to commence construction thereof during the Fall of
1996. Because of the nature of the work required to construct the Added
Parking, it is anticipated that Landlord will only be able to partially
complete such work in the calendar year
-1-
<PAGE> 3
1996, and that work not completed prior to the onset of adverse weather will be
completed in the Spring of 1997. Landlord will use due diligence to
substantially complete the Added Parking by May 15, 1997.
(c) The parties hereto agree to cooperate and work in good faith to
complete the Alterations in accordance with the schedule described in
Subsection 6.4(b) above, subject to unusual and/or unavoidable delays beyond
the respective parties control.
2. Section 1.1(g) is amended and a new subsection 1.1(g)(iii) is
hereby added thereto, which subsection states as follows:
"(iii) Effective on February 1, 1997, the Minimum Rent set forth in (i)
and (ii) above shall be increased by $45,000 per year (or $3,750 per month) for
the remainder of the Lease Term and any extensions thereof.
<TABLE>
3. Section 12.4 is amended by deleting the table contained therein
and substituting the following table therefor:
<CAPTION>
"LEASE YEAR TERMINATION PAYMENT
---------- -------------------
<S> <C>
1 $1,500,000
2 $1,350,000
3 $1,350,000
4 $1,188,000
5 $1,022,000
6 $ 857,000
7 $ 690,000
8 $ 522,000
9 $ 350,000
10 $ 180,000"
</TABLE>
Except as specifically amended herein, the Lease shall remain in full
force and effect in accordance with its original terms.
-2-
<PAGE> 4
Dated: November 14, 1996 GLENBERVIE, INC.
By: /s/ Mark Stebbins
---------------------
Its: President
SAFETY 1ST, Inc.
By: /s/ Richard Caturano, CFO
----------------------------
Its: Richard Caturano, CFO
STATE OF NEW HAMPSHIRE
COUNTY OF HILLSBOROUGH
On this, the day November 1996, before me, the undersigned
authority, personally appeared , who acknowledged himsself to be
the of Glenbervie, Inc., a corporation, and that he, as such
officeer, being authorized so to do, executed the within instrument for the
purposes therein coontained on behalf of said corporation.
Notary Public/Justice of the Peace
==================================
Commonwealth of Massachusetts
County of Suffolk
On this, the 26th day of November 1996, before me, the undersigned
authority, personally appeared Richard Caturano, who acknowledged himself to
be the Treasurer, CFO of Safety 1st, Inc., a corporation, and that he, as such
officer, being authorized so to do, executed the within instrument for the
purposes therin contained on behalf of said corporation.
/s/ James D. Sperling
====================================
Notary Public
My Commission Expires on :
JAMES D. SPERLING, NOTARY PUBLIC
MY COMMISSION EXPIRES APRIL 5, 2002
-3-
<PAGE> 1
EXHIBIT 11
SAFETY 1ST, INC.
PRIMARY NET (LOSS) INCOME PER SHARE
AND FULLY DILUTED NET (LOSS) INCOME PER SHARE
<TABLE>
<CAPTION>
Year Ended
December 31
-----------
1996 1995
---- ----
<S> <C> <C>
PRIMARY NET (LOSS) INCOME PER SHARE
Net (loss) income available for common
shares and common stock equivalent shares
deemed to have dilutive effect $(44,849,212) $3,199,545
============ ==========
Primary net income per share $(6.27) $.44
============ ==========
SHARES USED IN COMPUTATION
Weighted average common shares outstanding 7,157,078 7,132,010
Common stock equivalents - stock options - 118,272
------------ ----------
Total common shares and common stock
equivalent shares deemed to have a
dilutive effect 7,157,078 7,250,282
============ ==========
FULLY DILUTED NET (LOSS) INCOME PER SHARE
Net (loss) income available for common
shares and common stock equivalent
shares deemed to have a dilutive effect $(44,849,212) $3,199,545
============ ==========
Fully diluted net income per
share $(6.27) $.44
============ ==========
SHARES USED IN COMPUTATION
Total common shares and common stock
equivalent shares deemed to have a dilutive
effect 7,157,078 7,250,282
Additional potentially dilutive securities - -
------------ ----------
Total 7,157,078 7,250,282
============ ==========
Note: In 1995, the net income per share computation presented in the statement of operations
does not reflect common stock equivalents, as the dilutive effect is
less than 3%.
</TABLE>
<PAGE> 1
Exhibit 23
Consent of Independent Certified Public Accountants
---------------------------------------------------
We have issued our reports dated March 18, 1997, accompanying the consolidated
financial statements and schedule included in the Annual Report of Safety 1st,
Inc. and Subsidiaries on Form 10-K for the year ended December 31, 1996. We
hereby consent to the incorporation by reference of said reports in the
Registration Statements of Safety 1st, Inc. on Form S-8 (File No. 33-79332,
effective May 26, 1994) and on Forms S-3 (File Nos. 33-78970, effective May
19, 1994 and 33-95656, effective August 21, 1995).
GRANT THORNTON LLP
Boston, Massachusetts
March 18, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SAFETY 1ST
FORM 10K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 10-K
</LEGEND>
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 509,403
<SECURITIES> 0
<RECEIVABLES> 23,537,347
<ALLOWANCES> 3,300,000
<INVENTORY> 17,145,683
<CURRENT-ASSETS> 43,857,365
<PP&E> 16,548,577
<DEPRECIATION> (4,385,545)
<TOTAL-ASSETS> 71,276,652
<CURRENT-LIABILITIES> 68,937,789
<BONDS> 0
0
0
<COMMON> 71,781
<OTHER-SE> 2,006,431
<TOTAL-LIABILITY-AND-EQUITY> 71,276,652
<SALES> 105,751,954
<TOTAL-REVENUES> 105,751,954
<CGS> 88,978,995
<TOTAL-COSTS> 88,978,995
<OTHER-EXPENSES> 65,981,145
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,099,805
<INCOME-PRETAX> (53,307,991)
<INCOME-TAX> (8,458,779)
<INCOME-CONTINUING> (44,849,212)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (44,849,212)
<EPS-PRIMARY> (6.27)
<EPS-DILUTED> (6.27)
</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, made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, 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. From its inception through 1995, the Company
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, as a result of the Company's product repositioning, there can
be no assurance that the Company will be able to attain a vigorous rate of
growth which it had experienced previously, that it will continue to generate
new product ideas which meet the Company's profit and return on investment
objectives or that new product introductions will be well received by the
market.
ABILITY TO IMPLEMENT NEW INFORMATION SYSTEM. The Company is in the process
of implementing a new, fully integrated enterprise-wide computer information
system. The ability of the Company to improve the management of its operations
and working capital are dependent upon the timely and successful implementation
of this system. Any significant delay or inability to adequately implement this
system would have a material adverse affect on the Company's business and its
results of operations.
ABILITY TO MANAGE OPERATIONS AND FUTURE GROWTH. The Company's continued
success is also dependent upon its ability to manage the Company's repositioned
operation, which in turn will require it to continue to implement and improve
the operational and financial systems introduced in late 1996 and in 1997, and
to attract, train and retain qualified employees to meet the Company's needs
during its strategic repositioning and future anticipated growth. These demands
are expected to require additional management resources and the development of
additional expertise by existing management. The failure to manage its
operations effectively would have a material adverse effect on the Company.
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.
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 86 manufacturers located in
China, Taiwan, Thailand, Mexico, the United Kingdom, Canada 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 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.
<PAGE> 2
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.
CREDIT FACILITY. The Company is seeking financing on terms more favorable
to the Company than the terms of its current credit facility. There are no
assurances that the Company will be successful in obtaining such new financing.
COST OF DEBT. Interest rate increases will have an adverse effect on the
Company's earnings.
INTERNATIONAL SALES AND EXPANSION. The Company is actively attempting to
expand its international sales. In 1996, international sales represented 21% 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.
