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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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(b) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from January 1, 1997 to January 3, 1998
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:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
None None
</TABLE>
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.
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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. [X]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of March 16, 1998 was approximately $23,300,000 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 16, 1998
was 7,187,288.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement for its 1998 Annual Meeting
of Stockholders are incorporated by reference into Part III of this report.
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PART I
ITEM 1 - BUSINESS
GENERAL
Safety 1st, Inc. (the "Company") is a leading developer, marketer and
distributor of juvenile 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 categories. In 1987, the Company
began its successful expansion into the child care, convenience and activity
product categories, and now sells items such as baby monitors, walker
alternatives, activity gyms, bath seats, toddler cups, pacifiers, teethers,
gates, potty trainers, booster seats, infant health care items, bath
accessories, feeding products and travel accessories. In late 1993, the Company
introduced a new line of home security products, which includes locks, bolts and
latches for doors, windows and cabinets.
The Company believes that sales within the juvenile products industry increased
over the past several years because of the introduction of new products and the
increased marketing efforts of juvenile product manufacturers combined with
favorable demographic trends. Between 1989 and 1996 the Company experienced
significant growth with net sales increasing from $7.7 million to $105.8
million. For the year ended January 3, 1998, the Company reported sales of
$105.0 million.
In 1996, the Company faced significant financial and operational challenges and
recorded a net loss of $44.8 million. The Company recognized that its product
offerings had exceeded a manageable level and included products outside of its
core competency. This, combined with the continual expansion of the customer
base, had led to additional complexity in all operational aspects of the
business, as well as a significant increase in general and administrative
expenses, and an increase in the Company's working capital requirements. As a
result, the Company evaluated its business strategy and took the first steps to
refocus its business on its traditional core product lines, trade channels and
customer base. An extensive analysis of each product was conducted based on
various criteria including certain sales, quality, inventory turn, margin
contribution and profitability objectives. The analysis indicated that
approximately 350 of the Company's 650 products did not meet these criteria, and
a strategic decision was made to eliminate these products from the line. In
addition, the Company took decisive steps to further simplify operations with
the reduction of package assortment options available to a retailer for a given
product, and decreasing the number of stock keeping units (SKUs) from 2,300 to
600 at the end of 1996.
During 1997, the Company began to experience the positive effects of the
initiatives undertaken in 1996. With a much sharper focus, simplified business
practices, and a significantly reduced product line, the Company rebuilt its
operational structure and placed stronger emphasis on improved fiscal
management. By the end of the fiscal year, the Company had tightened expense
controls to achieve a meaningful reduction in selling, general and
administrative expenses, realized increased profit margins and had overhauled
its capital structure to increase strategic flexibility.
The Company currently distributes approximately 375 products to approximately
2,500 customers, the largest among them being Wal-Mart, Toys-R-Us, and Kmart. In
1997, point of sale data compiled by an independent tracking firm, The NPD
Group, Inc., indicated the Company had 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, bath seats, and bed rails.
The Company maintains its belief that continued development of new, innovative,
high quality products which meet the Company's new profitability standards,
combined with strong brand name recognition and commitment to customer service,
will
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continue to enhance its image as a leader in the juvenile products market and
facilitate its continued growth in its core product categories.
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 marketing-driven expansion coupled
with favorable demographic trends. In addition to child safety, childcare,
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 product manufacturers combined with favorable
demographic trends. The Company also 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 $4.2 billion in 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 over
$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. The Company believes that home security
products are a natural extension of child safety products and, as a result,
currently distributes approximately 115 products in this category.
BUSINESS STRATEGY
CORPORATE OBJECTIVES. The Company's overall 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 a managed growth
philosophy and more stringent profitability objectives.
FISCAL MANAGEMENT. During 1997, the Company's primary objectives were to
increase Safety 1st's profitability and restore shareholder value while
maintaining its managed growth philosophy. With approximately 50% fewer products
in 1997, the Company maintained a focus on the basic strengths of its core
business and believes it was able to improve its operational structure through
more efficient fiscal management. During 1997, the Company had tightened expense
controls to achieve a meaningful reduction in selling, general and
administrative expenses, realized increased profit margins and had overhauled
its capital structure to increase strategic flexibility.
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 criteria. In
addition to creating new products, the Company has and will continue to enter
into additional licensing agreements enabling the Company to use well-known
trademarks on several lines of its juvenile products. In 1997, the Company also
began leveraging its own brand by licensing the "Safety 1st" name to a line of
baby strollers which will be distributed by Delta Enterprises in 1998. The
Company intends on licensing the
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Safety 1st brand name only within categories that the Company does not plan on
entering, and will only align itself with non-competing manufacturers that share
the same high quality standards and innovative style. Management believes that
product innovations developed by the Company, and if applicable by non-competing
manufacturers, 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.
INTERNATIONAL EXPANSION. The Company continues to successfully increase its
market base through expanding international channels of distribution. The
Company sells products in over 60 countries worldwide either directly to house
accounts, through distributorships or through its two foreign subsidiaries. In
January, 1996, the Company completed the acquisition of EEZI Group Holdings
Ltd., a privately owned distributor of child care products located in England
(now the Company's wholly-owned subsidiary, Safety 1st (Europe) Ltd. ("Safety
1st Europe"). In February, 1996, the Company purchased 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 Home Products Canada, Inc. ("Safety 1st
Canada").
BRAND NAME RECOGNITION. The Company's strong brand name recognition is a
competitive advantage that 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 depicting 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 and
leader.
COMMITMENT TO SERVING CUSTOMER NEEDS. The Company is committed to responding
quickly and efficiently to its customers' needs. The Company utilizes an
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 1994, the Company introduced a line of home
security products, 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.
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.
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The following table sets forth the amounts and percentages of the Company's net
sales for the three years ended (dollars in thousands):
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 31, DECEMBER 31,
1998 1996 1995
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NET SALES PERCENT NET SALES PERCENT NET SALES PERCENT
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<S> <C> <C> <C> <C> <C> <C>
Child Safety Products $ 28,395 27.0% $ 27,170 25.7% $ 31,527 30.5%
Child Care,
Convenience and 73,464 70.0 70,164 66.3 64,201 62.2
Activity Products
Home Security Products 3,119 3.0 8,418 8.0 7,490 7.3
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Total Net Sales $104,978 100.0% $105,752 100.0% $103,218 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
JUVENILE PRODUCTS
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 security 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, 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. According to
an independent tracking study provided by The NPD Group, the Company currently
holds over 50% market share in the child safety category of the juvenile
industry.
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(R) 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 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 accessories, including
car and toy bags, pacifier holders, bath tubs and cushions for newborns, swivel
bath seats for older infants, high chair mats, booster seats, and bathroom
accessories such as bathtub toys and potty seats. The Company's activity
products include electronic toys, walker alternatives and a musical baby gym.
The Company's health and hygiene products include baby thermometers, fever
pacifiers (with temperature indicator), a small object tester, medicine droppers
and spoons and baby nail clippers.
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NEW PRODUCT INTRODUCTIONS
JUVENILE PRODUCTS
The Company began shipping approximately 74 new juvenile products for sale in
1997, including the Bouncing Buggy alternative walker, Fold-Up/Travel Bouncer,
four security gates, and an assortment of additional safety, feeding/teething,
healthcare, playtime and bath accessories. Certain of these new products are
either patented or have a patent pending.
In the fall of 1997, in keeping with the new managed growth philosophy, the
Company introduced an additional 54 new juvenile products for sale in 1998. This
new assortment includes the 4 Wheelin' Walker, Deluxe Musical Activity Gym, Top
of the Stairs Gate and Fold Up Travel Potty.
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. In 1997, the Company also acquired the
rights to the Baby Looney Tunes license from Warner Brothers, and has developed
19 new products utilizing characters including baby Bugs Bunny for sales in
1998.
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.
PRODUCT DESIGN AND DEVELOPMENT
During the past several years, the Company has introduced the following
quantities of new products:
<TABLE>
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YEAR
NEW PRODUCTS PEG
INTRODUCED FOR SALE PRODUCTS BULK PRODUCTS HOME SECURITY TOTAL
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<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
1998 49 5 0 54
</TABLE>
Almost all of the Company's juvenile products are conceived and developed by the
Company's internal product development group, which is comprised of the
marketing, research and 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 identifies a market trend, or recognizes an
opportunity to add innovation to a particular market segment, it completes
competitive analysis. Product ideas are then developed, rough sketches are
produced by the research and development department, and management determines
the appropriate price point for that product. The decision to introduce 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 established return on investment objectives.
The Company utilizes a sophisticated Computer Aided Design ("CAD") 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 full production, substantially
decreasing lead time and reducing product time to market. Prototype samples are
also used to establish packaging parameters early
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in the development cycle and used as sales samples. 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. New
products are generally available for sale during the first quarter of the
following year.
SALES AND MARKETING
During 1997, the Company sold its products to approximately 2,500 customers
worldwide. 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.
For the fiscal year ending January 3, 1998, approximately 23.3%, 20.5%, and 5.8%
of the Company's net sales were to three customers. No other customer of the
Company accounted for more than 5% of the Company's net sales during fiscal
1997.
The Company's products are sold in the United States through the Company's
internal sales 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.
The Company exports its juvenile products to approximately 60 countries
worldwide, including Canada, the United Kingdom, France and Australia. Foreign
sales were approximately $20.4 million, for the year ended January 3, 1998,
accounting for 19.4% of net sales.
The acquisition of Safety 1st Europe is helping to increase the Company's
presence in the European market. 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 1997, the Company also established distributors for Germany and France, who
are managing the new business relationship, developed by the Company, with
Carrefour, one of the leading hyper-markets in France. In conjunction with its
new distributors in France and Germany, the Company is discontinuing the use of
the 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 trademark with four color graphics,
and adds a more contemporary style with English/Spanish text to give the
products a broader reach to the customer. In 1997, the Company also began
developing seven-language packaging to further improve efficiencies for
international customers while giving the brand a more cohesive look for the
global marketplace.
The Company continually focuses its efforts on increasing public awareness of
the importance of child safety. The Company sponsors child safety awareness
programs and other community events that support its commitment to children
issues. In addition, the Company advertises its juvenile product line in trade
magazines, such as Juvenile Merchandising and Small World, and in selected
consumer publications such as American Baby and Child
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Magazine.
SOURCES OF SUPPLY
Manufacturing is performed to the Company's specifications by manufacturers
located in the United States, China, Taiwan, Thailand, Korea, Japan, Mexico, and
the United Kingdom. In 1997, the Company derived approximately 49% 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 sources a
greater percentage of its bulk products in the United States rather than in the
Far East. Neither the Company nor any of 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 the Company's
manufacturing specifications. The Company engages independent testing
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 1997, the Company purchased approximately 19.6%, 17.4%, 8.6%, 8.3%, 7.8%,
and 5.4% respectively, of its products from six manufacturers located in the
United States and China. In early 1997 the Company entered into a three year
agreement with a supplier 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 this supply
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.
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DISTRIBUTION
U.S. product distribution is centralized at the Company's warehouse facility
located in North Londonderry, New Hampshire. Safety 1st Canada utilizes its own
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 distribution facility, 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. Through January 1998,
Safety 1st Europe engaged the services of a third party distribution facility in
the United Kingdom to assemble, stock and distribute products to United Kingdom
customers; however, effective February 1998, Safety 1st Europe entered into a
ten year agreement to lease a warehouse facility.
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. 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. The Company
believes that it is in material compliance with all applicable federal and state
laws and regulations.
8
<PAGE> 11
EMPLOYEES
As of February 27, 1998, the Company had a total of 235 full-time employees, of
which 194 were based in the United States, 23 were based in Canada, and 18 were
based in Europe. Of the Company's 235 full-time employees, 9 were employed in
executive capacities, 54 in sales, marketing, and product development, 115 in
distribution and operations, and 57 in financial, administrative, and clerical
capacities. 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 $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, by making a
termination payment.
The Company occupies a 50,000 square foot sales office and warehouse facility in
Montreal, Canada and a sales office in England. The Company also used a public
warehouse located in Fareham, Hants, England through January 1998. The Company
signed a ten-year lease commencing in February 1998 for a 28,000 square foot
warehouse facility in Norfolk, England. The Company also maintains a show room
in Bentonville, Arkansas.
The Company believes that its leased properties are in good condition and
adequate for its needs.
ITEM 3 - LEGAL PROCEEDINGS
On September 8, 1997, Tele Electronics (Taiwan) Co., Ltd. ("Tele Electronics")
filed a lawsuit in Middlesex Superior Court in Massachusetts against the Company
alleging breach of contract arising out of two purchase orders. The suit seeks
monetary damages for the alleged breach of contract in the amount of $3.45
million and also alleges unfair and deceptive business practices and seeks,
under this theory, an award equal to three times the alleged contractual
damages. Tele Electronics also sought preliminary injunctive relief which, after
a hearing, the Court denied. The Company denies the allegations of the lawsuit,
believes it has meritorious defenses, is defending the matter vigorously and has
also filed a counterclaim against Tele Electronics for damages caused by various
acts and omissions of Tele Electronics, relating to prior purchase orders. The
Company's counterclaim seeks monetary damages totaling approximately $1.3
million.
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 any potential assessment by the Customs Service in this
matter has been provided for in the consolidated financial statements.
On February 5, 1998, Elamex, S.A. de C.V. ("Elamex"), a Mexican corporation,
filed a lawsuit in Federal District Court in Massachusetts against the Company,
alleging breach of express and/or implied contract arising out of a purchase
order to manufacture carbon monoxide detectors. The suit seeks monetary damages
in the amount of $191,000, plus interest and other unquantified consequential
damages. The suit also alleges unfair and deceptive business practices and
seeks, under this theory, an award equal to three times the alleged actual
damages. The Company denies the allegations of the lawsuit and intends to defend
the matter vigorously. An answer has been filed but no discovery has occurred.
The Company has filed a counterclaim against Elamex, seeking damages of
9
<PAGE> 12
approximately $250,000 for funds expended in reliance on the anticipated
performance of the contract by Elamex.
On November 26, 1997, T.S.A. Plastic Molds Inc. ("TSA") amended its original
lawsuit filed on December 4, 1995, which alleged that the Company owed a
contractual balance of $94,000 from TSA's construction of two steel molds. The
amended complaint claims damages in excess of $500,000 (Canadian funds). The
Company has filed a cross-complaint against TSA claiming that TSA did not
deliver the merchandise ordered by the Company to the Company's specifications.
The Company believes it has meritorious defenses to the lawsuit and intends to
defend the matter vigorously.
The Company encounters personal injury litigation related to its products and
other litigation in the ordinary course of business.
With respect to the matters discussed above, the Company maintains product
liability and other 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 Company's operations or
financial condition.
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 January 3, 1998.
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
---- ---
<S> <C> <C>
Fiscal 1997:
First Quarter........ $11.25 $ 5.00
Second Quarter....... 7.75 5.38
Third Quarter........ 7.88 5.13
Fourth Quarter....... 7.00 5.00
Fiscal 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 16, 1998, the last reported sales price as quoted on the Nasdaq
National Market was $7.50 per share. As of March 16, 1998, the Company's Common
Stock was held by approximately 2,300 stockholders of record or through nominees
or street name accounts with brokers.
The Company is currently prohibited from declaring or paying any cash dividends
based on the covenants of its credit facility and the terms of its outstanding
Preferred Stock. Therefore, the Company does not anticipate declaring or paying
any cash dividends or other distributions on its Common Stock in the foreseeable
future. The declaration of and payment of any cash dividends in the future will
depend upon the Company's compliance with the terms of the credit facility,
earnings, financial condition, capital needs, and on other factors deemed
relevant by the Board of Directors.
ITEM 6 -- SELECTED FINANCIAL DATA
The following selected financial data as of and for the three year fiscal
periods ended January 3, 1998, 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 December 31, 1994 and 1993, except for the supplemental
pro forma income statement data for 1993, is derived from the Company's
financial statements, which have been audited by Grant Thornton LLP, independent
certified public
10
<PAGE> 13
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 (dollars in thousands, except per share amounts).
<TABLE>
<CAPTION>
YEARS ENDED
JANUARY 3, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
Income Statement Data (1): 1998 1996 1995 1994 1993
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $104,978 $ 105,752 $103,218 $ 70,166 $43,030
Cost of sales 62,594 88,979 68,673 41,959 24,746
Gross profit 42,384 16,773 34,545 28,207 18,284
Selling, general and
administrative expenses 34,423 54,385 28,320 17,449 11,085
Impairment of long-lived
assets 587 11,596 -- -- --
Operating income (loss) 7,374 (49,208) 6,225 10,758 7,198
Other expenses (income) - net 4,117 4,100 1,065 (111) 140
Income (loss) before income
taxes 3,256 (53,308) 5,160 10,869 7,058
Net income (loss) (Pro forma
in 1993) (2) 10,452 (44,849) 3,200 6,583 4,216
Net income (loss) available
to common shareholders 3,140 (44,849) 3,200 6,583 4,216
Basic earnings per common
share (Pro forma in 1993)(2) (3) $ 0.44 $ (6.27) $ 0.45 $ 0.95 $ 0.71
Diluted earnings per common
share (Pro forma in 1993)(2) (3) $ 0.40 $ (6.27) $ 0.44 $ 0.92 $ 0.70
Shares used to compute basic
earnings per common share 7,187 7,157 7,132 6,956 5,978
Shares used to compute diluted
earnings per common
share 7,828 7,157 7,250 7,129 6,045
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED
JANUARY 3, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
Balance Sheet Data: 1998 1996 1995 1994 1993
---------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $ 1,238 $(25,080) $21,483 $28,124 $13,252
Total assets 79,533 71,277 86,319 52,314 24,496
Short-term bank debt 27,927 36,653 25,390 -- --
Notes payable 1,095 1,920 -- -- --
Long-term debt (excluding
capital lease obligations) 8,750 -- -- -- --
Redeemable preferred stock 15,839 -- -- -- --
Stockholders' equity 10,964 2,078 46,019 41,848 18,137
</TABLE>
- ------------
(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 this period do not include a provision
for federal income taxes.
(2) 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, 1993 through April 20, 1993.
(3) The Company adopted SFAS 128 in 1997. All prior period earnings per common
share have been restated to conform to the provision of this statement.
11
<PAGE> 14
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statement of Forward-Looking Information:
The Company may occasionally make forward-looking statements and estimates, such
as forecasts and projections of the Company's future performance or statements
of management's plans and objectives. These forward-looking statements may be
contained in SEC filings, Annual Reports to Shareholders, Press Releases and
oral statements, among others, made by the Company. Actual results could differ
materially from those in such forward-looking statements. Therefore, no
assurances can be given that the results in such forward-looking statements will
be achieved. Important factors that could cause the Company's actual results to
differ from those contained in such forward-looking statements include, among
others, those factors set forth in Exhibit 99 to this report.
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 1994, the Company introduced a
line of home security products.
Between 1989 and 1996, the Company experienced significant growth, with net
sales increasing from $7.7 million to $105.8 million. For the year ended January
3, 1998, Safety 1st reported sales of $105.0 million. The Company believes flat
sales for 1997 can be attributed to its new managed growth philosophy,
initiated at the end of 1996, that called for fundamental shifts in corporate
business practices, and the strategic steps taken to refocus the Company back to
core strengths.
In 1996, the Company faced significant financial and operational challenges and
recorded a net loss of $44.8 million. The Company recognized that its product
offerings had exceeded a manageable level and included products outside of its
core competency. This, combined with the continual expansion of the customer
base, had led to additional complexity in all operational aspects of the
business, as well as a significant increase in general and administrative
expenses, and an increase in the Company's working capital requirements. As a
result, the Company evaluated its business strategy and took the first steps to
refocus its business on its traditional core product lines, trade channels and
customer base. An extensive analysis of each product was conducted based on
revised performance requirements of certain sales, quality, inventory turn,
margin contribution and profitability objectives. The analysis indicated that
approximately 350 of the Company's 650 products did not meet these criteria, and
a strategic decision was made to eliminate these products from the line. In
addition, the Company took decisive steps to further simplify operations with
the reduction of package assortment options available to a retailer for a given
product, decreasing the number of stock keeping units (SKUs) from 2,300 to 600
at the end of 1996.
During 1997, the Company began to experience the positive effects of the
initiatives undertaken in 1996. With a sharper focus, simplified business
practices, and a significantly reduced product line, the Company rebuilt its
operational structure and placed stronger emphasis on improved fiscal
management. By the end of the fiscal year, the Company had tightened expense
controls to achieve a meaningful reduction in selling, general and
administrative expenses, replaced its financing facility to increase strategic
flexibility, and increased gross profit.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated, certain
financial data (dollars in thousands):
12
<PAGE> 15
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 31, DECEMBER 31,
1998 1996 1995
---------- ------------ ------------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales 104,978 105,752 103,218
Cost of sales 62,594 88,979 68,673
Gross profit 42,384 16,773 34,545
Selling, general and administrative
expenses 34,423 54,385 28,320
Impairment of long-lived assets 587 11,596 --
Operating income (loss) 7,374 (49,208) 6,225
</TABLE>
Fiscal Year Ended January 3, 1998 Compared to Year Ended December 31, 1996
Net sales for the year ended January 3, 1998 were $104,978,000, a decrease of
$774,000 from net sales of $105,752,000 for the year ended December 31,
1996. Juvenile sales comprised 97% of the net sales for the year ended January
3, 1998, and home security sales made up the balance.
Gross profit increased to $42,384,000, or 40.4% of net sales for the year ended
January 3, 1998 from $16,773,000, or 15.9% of net sales for the year ended
December 31, 1996, and $39,204,000, or 34.9%, excluding the 1996 special charges
described below. The increase in gross profit percentage is due to favorable
product mix, improved product costs, and significant reductions in products
returned by customers.
Selling, general, and administrative expenses decreased by $19,962,000 to
$34,423,000 for the year ended January 3, 1998 from $54,385,000 for the year
ended December 31, 1996. Excluding the 1996 special charges, selling, general
and administrative expenses were $41,536,000 for the year ended December 31,
1996. The decrease is primarily attributed to continued focus on cost controls
during the year ended January 3, 1998 primarily in the areas of temporary help,
professional fees and freight costs. Also during the year ended January 3, 1998,
the Company recorded a pre-tax charge of $587,000 related to the impairment of
long-lived assets.
As a result of the above factors, operating income for the year ended January 3,
1998 was $7,374,000. The operating loss for the year ended December 31, 1996 was
$49,208,000.
Net interest expense for the year ended January 3, 1998 was $4,117,000 versus
$4,100,000 for the year ended December 31, 1996. During 1997, the Company
refinanced its existing credit facility-refer to the "Liquidity and Capital
Resources" section below.
Net income available for common shareholders for the year ended January 3, 1998
was $3,140,000, or $0.40 per share on a fully diluted basis, including a tax
benefit of $8,400,000 related to a change in valuation allowance. Realization of
the $9,600,000 net deferred tax asset is dependent on the Company's ability to
generate approximately $26,000,000 in taxable income during the carryforward
period. Management believes it is more likely than not that the asset will be
realized based upon the strategic initiatives undertaken in 1996 to simplify
operations by reducing the number of SKU's, discontinuing products that did not
meet certain sales, quality, and profitability criteria and to tighten expense
control. During 1997, the Company began to experience the positive effects of
these initiatives and expects to continue to benefit in future years. However,
there can be no assurances 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. In addition,
the Company recorded accretion of $6,472,000 representing the excess of the
redeemable preferred stock redemption value over the carrying value. This
acceleration relates to the change in terms of the redeemable preferred stock
which provides for immediate redemption at either the Company or the holders'
option. Excluding these items net income available to common shareholders, which
takes into account both dividends and accretion on redeemable preferred stock,
would have been $1,212,000, or $0.15 per share on a fully diluted basis,
compared to a loss of $44,849,000, or $6.27 per share, for the year ended
December 31, 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net sales were $105,800,000 in 1996, an increase of $2,500,000, or 2.5%, over
net sales in 1995. This increase was primarily due to net sales of new products
in the amount of approximately $33,000,000 and increases in international sales
of $7,100,000 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 $29,900,000, 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 $7,700,000, or 248% over 1995 levels. In addition, during the
fourth quarter of 1996, the Company recorded accruals relating to returns and
13
<PAGE> 16
defective products, customer credits and other transactions in the amount of
$5,600,000, which affected net sales as compared to 1995 net sales. The
Company also recorded a charge of $1,000,000 with respect to similar items in
previous quarters.
Gross profit decreased from $34,500,000, or 33.5% of net sales, in 1995 to
$16,800,000, or 15.9% of net sales, in 1996, a decrease of $17,700,000. 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 $14,300,000
related to discontinued products, inventory reserves, reduction of capitalized
overhead, and other inventory related matters; approximately $1,400,000
primarily related to the reduction of vendor credits; and approximately
$2,200,000 of increases related to the acquisitions of two international
subsidiaries. Included in the $15,700,000 cost of sales charges as described
above are fourth quarter charges of approximately $9,400,000.
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 $54,400,000 in
1996 from $28,300,000 in 1995, an increase of $26,100,000. The increase was
partly attributable to charges of approximately $13,000,000; which resulted
primarily from the Company's streamlining efforts and the shifting of its
resources back to its core business. Those charges include $6,000,000 in
reserves 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; $3,500,000 related to the write-off of
certain other assets and increased accruals for product related reserves;
$700,000 in charges for non-employee stock compensation expense under SFAS 123;
$700,000 of costs associated with the Company's debt refinancing; and $700,000
in purchase adjustments related to the acquisition of the Company's Canadian and
U.K. subsidiaries.
The remaining $13,100,000 of the increase in SG&A expenses include $4,000,000
SG&A expenses of the two international subsidiaries; $7,000,000 increase in
payroll and payroll related costs associated with the continued building of
Company infrastructure and increased reliance on temporary help; $1,900,000 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; $1,200,000 for increased occupancy and maintenance
costs, primarily for expanded distribution capacity; and $1,100,000 increased
research and product development costs. The increases were offset by a
$2,100,000 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 $49,200,000 versus operating income for 1995 of
$6,200,000, a decrease of $55,400,000, due to the above factors.
Interest expense increased from $1,100,000 during 1995 to $4,100,000 during 1996
due to additional borrowings under the revolving credit facility as well as the
inclusion of $900,000 of deferred financing costs incurred during 1996 in
connection with the restructuring of the credit facility.
The Company recorded an income tax benefit of $8,500,000 in 1996 versus an
income tax provision of $2,000,000 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. The Company had
deferred tax assets arising from net operating loss carryforwards and deductible
temporary differences of $14,400,000 before a valuation allowance
14
<PAGE> 17
of $10,300,000 and offset against deferred tax liabilities of $1,900,000.
Realization of approximately $2,200,000 of the asset is dependent on the
Company's ability to generate approximately $6,500,000 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.
LIQUIDITY AND CAPITAL RESOURCES
On July 30, 1997, the Company entered into a five-year $55,000,000 refinancing
of its existing $45,000,000 credit facility. The refinancing included a
$40,000,000 credit facility providing for $27,500,000 of revolving working
capital financing and a $12,500,000 term loan. In January 1998, this credit
facility was amended to increase the revolving line of credit from $27,500,000
to $35,000,000. The credit facility, which expires in July 2002, has an interest
rate, at the Company's option, of LIBOR plus 2.75% or prime plus 1.75% (8.89% at
January 3, 1998) on the revolving credit facility, and LIBOR plus 3% or prime
plus 2% (8.90% at January 3, 1998) on the term loan. In addition, the loan
agreement requires the Company to pay a commitment fee equal to .50% per annum
of the average unused commitment and letter of credit fees equal to 1.4% of the
face amount of each letter of credit. As of January 3, 1998, the Company had
$955,000 available to be borrowed under the revolving credit facility based upon
the advance rate formula in the loan agreement. The principal amount of the term
loan is payable in twenty consecutive equal installments of $625,000, nineteen
of which are payable on the first day of each calendar quarter commencing
October 1, 1997 and the final installment is payable on July 30, 2002. The
credit facility contains certain financial covenants and restrictions including
minimum tangible net worth, minimum current ratio, minimum EBITDA (as defined),
minimum fixed charge coverage, and limits on capital expenditures and dividend
payments, and is secured by all assets of the Company.
The July 30, 1997 refinancing also included a $15,000,000 private placement of
15,000 shares of six-year Series A redeemable preferred stock and the issuance
of ten-year warrants to purchase approximately 1,270,000 shares of the Company's
common stock, subject to adjustment, at an exercise price of $0.01 per share, as
described in Notes 2 and 3 to the consolidated financial statements.
The Company has exchanged the Series A Preferred Stock with its holders for
Series B Preferred Stock which contains substantially identical features other
than redemption rights. The holders of the Series B Preferred Stock have the
right to redeem the Series B Preferred Stock immediately under certain
conditions including the surrender of the ten-year warrants. Upon such
occurrence, if the Company redeemed any of the preferred shares, the Company
would be in default of covenants under its credit facility which prohibits the
redemption of the preferred stock. Conversely, failure to honor the redemption
could result in a default under the terms of the preferred stock.
For the period from January 1, 1997 through July 30, 1997, the Company had
financed its operations with a $45,000,000 credit facility consisting of a
$25,000,000 term-loan and a $20,000,000 revolving credit facility, both of which
were scheduled to expire on May 1, 1998. The annual rate of interest on all
borrowings for the initial six months of the facility was equal to the prime
rate plus 2.65%, increasing by one percent every three months thereafter to a
maximum annual rate of prime plus 5.65%.
Net cash used in operations was $5,300,000 for the year ended January 3, 1998
versus net cash used in operations of $80,000 for the year ended December 31,
1996. The increase in the net cash used in operations was due to a decrease in
accounts payable and accrued expenses in order to get vendor payables back in
terms as well as an increase in accounts receivable due to higher fourth quarter
sales compared to the prior year offset by a decrease in inventory as a result
of the significant SKU reduction implemented at the end of 1996 and the receipt
of a tax refund.
For the year ended January 3, 1998, cash flow used in the investing activities
was $6,040,000 related to the purchase of property and equipment, principally
molds for new product introductions as well as the purchase of an integrated
computer system which is in the process of being implemented. Net cash provided
by financing activities was $11,669,000, primarily related to the net proceeds
from the Company's debt and equity refinancing in July 1997, offset by net
paydowns on the revolving credit facility as well as payment of the notes
payable issued in connection with the acquisition of Orleans Juvenile Products,
Inc. in February 1996.
The Company believes that its cash, together with the new financing will be
sufficient to meet its operating and other cash requirements for the next twelve
months.
15
<PAGE> 18
FUTURE ACCOUNTING REQUIREMENTS
The Company intends to adopt Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"), and Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), in fiscal 1998. Both standards will require
additional disclosure but will not have a material effect on the Company's
reported financial position or results of operations. SFAS 130 establishes
standards for the reporting and display of comprehensive income and is expected
to be reflected in the Company's first quarter 1998 interim financial
statements. Comprehensive income equals the total of net income and all other
non-owner changes in equity. SFAS 131 changes the way companies report segment
information and requires segments to be determined and reported based on how
management measures performance and makes decisions about allocating resources.
It also requires public companies to report certain information about their
products and services, the geographic areas in which they operate, and their
major customers. SFAS 131 will be reflected in the Company's 1998 Annual Report.
YEAR 2000
The Year 2000 problem is a result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. The Company presently believes that, with
modifications to existing software and conversion to new software, the Year 2000
problem will not pose significant operational problems for the Company's
computer systems as modified and converted. The Company has invested
approximately $5,000,000 in a new software system as of January 3, 1998, and
does not expect the remaining investment required to complete the implementation
to exceed $1,000,000.
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<PAGE> 19
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SAFETY 1ST, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
Report of Independent Certified Public Accountants......... 18
Consolidated Financial Statements:
Balance Sheets........................................ 19
Statements of Operations.............................. 21
Statements of Changes in Stockholders' Equity......... 22
Statements of Cash Flows.............................. 23
Notes to Financial Statements......................... 24
17
<PAGE> 20
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 January 3, 1998 and December 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three fiscal years in the period ended January 3, 1998.
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 January 3, 1998 and December 31, 1996, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended January 3, 1998, in conformity with generally accepted accounting
principles.
Boston, Massachusetts GRANT THORNTON LLP
February 27, 1998
(except for Note 3, as to
which the date is April 2, 1998)
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SAFETY 1ST, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 31,
1998 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 838,549 $ 509,403
Accounts receivable, less allowance for doubtful
accounts of $1,700,000 ($3,300,000 in 1996) 23,411,211 20,237,347
Inventory 16,372,172 17,145,683
Prepaid expenses 1,190,497 938,288
Tax refund receivable -- 5,026,644
Deferred income taxes 3,300,000 --
------------ ------------
Total current assets 45,112,429 43,857,365
------------ ------------
PROPERTY AND EQUIPMENT AT COST
Molds and tools 11,723,661 8,592,011
Computer equipment and software 2,323,599 2,393,021
Furniture and fixtures 2,115,203 2,100,349
Warehouse equipment 2,131,104 2,023,072
Leasehold improvements 1,676,410 1,440,124
------------ ------------
19,969,977 16,548,577
Less - accumulated depreciation and amortization (7,304,449) (4,385,545)
------------ ------------
Net property and equipment 12,665,528 12,163,032
------------ ------------
OTHER ASSETS
Molds in process 1,567,990 3,240,821
Software systems in process 5,005,772 2,155,195
Goodwill, net of accumulated amortization of $561,000
($268,000 in 1996) 6,545,520 6,838,554
Patents and trademarks, net of accumulated
amortization of $464,000 ($354,000 in 1996) 633,714 662,607
Deferred income taxes 6,300,000 2,218,000
Deferred financing costs and other assets 1,702,511 141,078
------------ ------------
Total other assets 21,755,507 15,256,255
------------ ------------
$ 79,533,464 $ 71,276,652
============ ============
</TABLE>
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LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 31,
1998 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Revolving credit facility $ 25,426,551 $ 36,652,657
Accounts payable 7,536,078 17,371,093
Accrued expenses 7,148,943 12,839,636
Current maturities of long-term debt 2,500,000 --
Notes payable and current portion of
capital lease obligation 1,263,031 2,074,403
------------ ------------
Total current liabilities 43,874,603 68,937,789
------------ ------------
Long-term debt 8,750,000 --
Capital lease obligation, net of current portion 105,737 260,651
------------ ------------
Total liabilities 52,730,340 69,198,440
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
REDEEMABLE PREFERRED STOCK
$1.00 par value, 100,000 shares of Preferred
Stock authorized; 15,000 shares issued
and outstanding; $15,839,098 liquidation
preference 15,839,098 --
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value, 15,000,000
shares authorized, 7,187,288
shares issued and outstanding
(7,178,156 in 1996) 71,872 71,781
Additional paid-in capital 40,241,663 34,496,395
Accumulated deficit (29,349,509) (32,489,964)
------------ ------------
Total stockholders' equity 10,964,026 2,078,212
------------ ------------
$ 79,533,464 $ 71,276,652
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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SAFETY 1ST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------------------
JANUARY 3, DECEMBER 31, DECEMBER 31,
1998 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
Net sales $ 104,977,666 $ 105,751,954 $103,218,385
Cost of sales 62,593,720 88,978,995 68,673,500
------------- ------------- ------------
Gross profit 42,383,946 16,772,959 34,544,885
Selling, general and administrative expenses 34,423,223 54,385,019 28,319,680
Impairment of long-lived assets 586,946 11,596,126 --
------------- ------------- ------------
Operating income (loss) 7,373,777 (49,208,186) 6,225,205
------------- ------------- ------------
Interest expense, net 4,117,433 4,099,805 1,065,660
------------- ------------- ------------
Income (loss) before income taxes 3,256,344 (53,307,991) 5,159,545
Income tax (benefit) expense (7,195,209) (8,458,779) 1,960,000
------------- ------------- ------------
Net income (loss) 10,451,553 (44,849,212) 3,199,545
Dividends and accretion on redeemable
preferred stock 7,311,098 -- --
------------- ------------- ------------
Net income (loss) available to common
shareholders $ 3,140,455 $ (44,849,212) $ 3,199,545
============= ============= ============
Basic earnings (loss) per common share $ 0.44 $ (6.27) $ 0.45
============= ============= ============
Diluted earnings (loss) per common share $ 0.40 $ (6.27) $ 0.44
============= ============= ============
Shares used to compute basic earnings
per common share 7,187,288 7,157,078 7,132,010
============= ============= ============
Shares used to compute diluted earnings
per common share 7,827,876 7,157,078 7,250,282
============= ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 24
SAFETY 1ST, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<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, 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
Net income 10,451,553 10,451,553
Net proceeds from issuance of
warrants to purchase common
stock 5,686,000 5,686,000
Net proceeds from exercise of
stock options 9,132 91 59,268 59,359
Accretion on redeemable
preferred stock (6,472,000) (6,472,000)
Redeemable preferred dividends (839,098) (839,098)
--------- ------- ----------- ------------ -----------
Balance - January 3, 1998 7,187,288 $71,872 $40,241,663 $(29,349,509) $10,964,026
========= ======= =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 25
SAFETY 1ST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------------------
JANUARY 3, DECEMBER 31, DECEMBER 31,
1998 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 10,451,553 $(44,849,212) $ 3,199,545
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Deferred income taxes (7,382,000) (3,630,960) 602,000
Option compensation tax benefit -- -- 221,000
Stock compensation expense -- 701,370 --
Depreciation 3,177,588 4,841,106 2,742,293
Amortization 541,467 404,016 99,603
Loss on disposal of property and equipment -- -- 167,806
Impairment of long-lived assets 586,946 11,596,126 --
------------ ------------ ------------
Net cash provided by (used in) operating
activities before changes in assets and liabilities 7,375,554 (30,937,554) 7,032,247
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable (3,173,864) 2,353,736 (9,837,075)
Inventory 773,511 13,376,577 (9,360,253)
Prepaid expenses and other assets (289,727) 1,879,292 (665,305)
Tax refund receivable 5,026,644 (2,715,369) (1,620,306)
Increase (decrease) in:
Accounts payable - trade (9,816,636) 6,109,885 2,941,962
Accrued expenses (5,195,074) 9,852,947 233,457
------------ ------------ ------------
Net cash used in operating activities (5,299,592) (80,486) (11,275,273)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries -- (1,490,552) --
Acquisition of property and equipment (548,432) (2,386,624) (6,649,095)
Increase in molds in process and deposits (3,059,763) (3,215,577) (6,196,906)
Increase in system software in process (2,350,577) (2,155,195) --
Increase in deferred acquisition costs -- -- (1,492,678)
Acquisition of patents and trademarks (81,000) (165,686) (308,602)
Acquisition of other intangibles -- -- (312,761)
------------ ------------ ------------
Net cash used in investing activities (6,039,772) (9,413,634) (14,960,042)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (paydowns) proceeds on revolving credit facility (11,226,106) 11,262,657 25,390,000
Proceeds from issuance of long-term notes payable 12,500,000
Proceeds from issuance of redeemable
preferred stock and warrants 15,000,000 -- --
Loan from officer 250,000 -- --
Repayment of bank debt assumed -- (739,668) --
Repayment of notes payable and capital lease
obligation (2,466,286) (750,861) --
Refinancing fees (2,448,457) -- --
Proceeds from exercised stock options 59,359 206,939 750,590
------------ ------------ ------------
Net cash provided by financing activities 11,668,510 9,979,067 26,140,590
------------ ------------ ------------
Net increase (decrease) in cash 329,146 484,947 (94,725)
Cash balance, beginning of year 509,403 24,456 119,181
------------ ------------ ------------
Cash balance, end of year $ 838,549 $ 509,403 $ 24,456
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 3,828,560 $ 3,689,952 $ 1,215,000
============ ============ ============
Income taxes $ -- $ -- $ 2,540,000
============ ============ ============
Non-cash investing activities:
Increase (decrease) in accrued obligations $ -- $ 1,013,998 $ (65,000)
============ ============ ============
Capital lease obligation $ -- $ 486,964 $ --
============ ============ ============
</TABLE>
See Note 10 for non-cash acquisition related items.
The accompanying notes are an integral part of these statements.
23
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 3, 1998, DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Safety 1st, Inc. and subsidiaries (the "Company") is a developer, marketer and
distributor of juvenile products including 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.
CHANGE IN FISCAL YEAR
Effective in 1997, the Company changed its reporting period from a calendar
year to a 52/53 week period ending on the Saturday closest to December 31. The
Company's 1997 fiscal year ended on January 3, 1998. There was no
material effect on the statement of operations.
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 approximately $1,245,000 as of both January 3,
1998 and December 31, 1996.
ADVERTISING
The cost of undistributed catalogs is accounted for as prepaid supplies until
they are no longer owned or expected to be used. At January 3, 1998 and December
31, 1996, prepaid catalog costs were $53,590 and $182,000, 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 $3,497,000,
$5,708,000, and $2,414,000, for the years ended January 3, 1998, December 31,
1996 and 1995, respectively.
REVENUE RECOGNITION
The Company recognizes revenue at the time of shipment to its customers.
24
<PAGE> 27
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. For the years ended January 3, 1998 and December 31,
1996, approximately $153,000 and $158,000, respectively, of interest incurred in
connection with the construction of molds was included in the cost of the molds.
For the year ended January 3, 1998, approximately $203,000 of interest was
capitalized into software systems in process. The molds and tools are
depreciated using the straight-line method over 5 to 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.
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
and assets and liabilities are translated using the exchange rate at each
balance sheet date. Foreign currency transaction gains and losses are included
in net income, translation adjustments, if significant, are recorded as a
separate component of stockholders' equity, as the functional currency is the
local currency.
INCOME TAXES
The Company utilizes the asset/liability method of accounting for income taxes.
Under the asset/liability method, deferred income 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 January 3, 1998, December 31,
1996 and 1995 were approximately $756,700, $2,060,000 and $573,000,
respectively.
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.
25
<PAGE> 28
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128") which establishes standards for computing and presenting earnings per
share. The new standard replaces the presentation of primary earnings per share
prescribed by Accounting Principles Board Opinion No. 15, "Earnings per Share"
("APB 15") with a presentation of basic earnings per share and also requires
dual presentation of basic and diluted earnings per share on the face of the
statement of operations for all entities with complex capital structures. Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share is computed similarly to
fully diluted earnings per share pursuant to APB 15. The Company adopted SFAS
No. 128 in the fourth quarter of 1997 and has restated all prior periods
in its consolidated financial statements.
ACCOUNTING FOR STOCK BASED COMPENSATION
In October 1995, the FASB issued Statement of Financial Accounting Standard No.
123, "Accounting for Stock Based Compensation" ("SFAS 123") which 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 9.
RECLASSIFICATION
Certain accounts in 1996 were reclassified to conform to the 1997 presentation.
FUTURE ACCOUNTING REQUIREMENTS
The Company intends to adopt Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"), and Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"), in fiscal 1998. Both standards will require
additional disclosure but will not have a material effect on the Company's
reported financial position or results of operations. SFAS 130 establishes
standards for the reporting and display of comprehensive income and is expected
to be reflected in the Company's first quarter 1998 interim financial
statements. Comprehensive income equals the total of net income and all other
non-owner changes in equity. SFAS 131 changes the way companies report segment
information and requires segments to be determined and reported based on how
management measures performance and makes decisions about allocating resources.
It also requires public companies to report certain information about their
products and services, the geographic areas in which they operate, and their
major customers. SFAS 131 will be reflected in the Company's 1998 Annual Report.
2. REVOLVING CREDIT FACILITY AND TERM LOAN
On July 30, 1997, the Company entered into a five-year $55,000,000 refinancing
of its existing $45,000,000 credit facility. The refinancing included a
$40,000,000 credit facility providing for $27,500,000 of revolving working
capital financing and a $12,500,000 term loan. In January 1998, this credit
facility was amended to increase the revolving line of credit from $27,500,000
to $35,000,000. The credit facility, which expires in July 2002, has an interest
rate, at the Company's option, of LIBOR plus 2.75% or prime plus 1.75% (8.89% as
of January 3, 1998) on the revolving credit facility, and LIBOR plus 3% or prime
plus 2% (8.90% as of January 3, 1998) on the term loan. In addition, the loan
agreement requires the Company to pay a commitment fee equal to .50% per annum
of the average unused commitment and letter of credit fees equal to 1.4% of the
face amount of each letter of credit. As of January 3, 1998, the Company had
$955,000 available to be borrowed under the revolving credit facility based upon
the advance rate formula in the loan agreement. The principal amount of the term
loan is payable in twenty consecutive equal installments of $625,000, nineteen
of which are payable on the first day of each calendar quarter. Total principal
payments were $1,250,000 in 1997, and are scheduled to total $2,500,000 in each
of the years 1998 through 2001, with the final payments of $1,250,000 scheduled
to be made in 2002.
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<PAGE> 29
As of January 3, 1998, $11,250,000 was outstanding under the term loan of which
$8,750,000 is classified as long-term debt. The credit facility contains
certain financial covenants and restrictions including minimum tangible net
worth, minimum current ratio, minimum EBITDA (as defined), minimum fixed charge
coverage, and prohibitions on redemption of preferred stock, in addition to
limits on capital expenditures and dividend payments, and is secured by all
assets of the Company.
The refinancing also included a $15,000,000 private placement of 15,000 shares
of six-year Series A redeemable preferred stock and the issuance of ten-year
warrants to purchase approximately 1,270,000 shares of the Company's common
stock, subject to adjustment, at an exercise price of $0.01 per share, as
described in Note 3.
For the period from January 1, 1997 through July 30, 1997, the Company financed
its operations with a $45,000,000 credit facility consisting of a $25,000,000
term-loan and a $20,000,000 revolving credit facility, both of which were
scheduled to expire on May 1, 1998. The annual rate of interest on all
borrowings for the initial six months of the facility was equal to the prime
rate plus 2.65% increasing by one percent every three months thereafter to a
maximum annual rate of prime plus 5.65%.
For the years ended January 3, 1998 and December 31, 1996, the average
borrowings under revolving credit facilities were $36,900,000 and $38,300,000,
respectively. The weighted average interest rate of these borrowings for the
years ended January 3, 1998 and December 31, 1996 was 11.2% and 7.96%,
respectively. In connection with the acquisition and restructuring of the credit
facility, the Company incurred $1,662,000 and $891,000, of deferred debt
financing costs, of which $178,000 and $891,000, have been reflected in interest
expense on the consolidated statements of operations for the years ended January
3, 1998 and December 31, 1996, respectively.
3. SERIES A REDEEMABLE PREFERRED STOCK
In connection with the refinancing of the Company's credit facility on July 30,
1997, as described in Note 2, the Company issued in a private placement 15,000
shares, $1 par value, six year Series A redeemable preferred stock (of the
100,000 shares of preferred stock authorized) with a liquidation preference of
$1,000 per share plus accrued but unpaid dividends at the dividend rate of
either 10% in cash or 13.25% non-cash, compounded quarterly. The redeemable
preferred stock includes the issuance of ten-year warrants to purchase
approximately 1,270,000 shares of the Company's common stock, subject to a
reduction of approximately 127,000 shares if certain 1998 earnings before
interest and taxes ("EBIT") targets are met, at an exercise price of $.01 per
share. The proceeds of $15,000,000 from the private placement were allocated to
redeemable preferred stock and the warrants in the amount of $8,528,000 (net of
issuance costs of $472,000) and $5,686,000 (net of issuance costs of $314,000),
respectively, based on the estimated values at issue date. The excess of the
redeemable preferred stock redemption value of $15,000,000 over the carrying
value of $8,528,000 was accreted in the fiscal year ended January 3, 1998. This
acceleration of the accretion is due to a change in terms of the redeemable
preferred stock which provides for immediate redemption at either the Company's
option or, if certain conditions are met, at the holders' option. Pursuant to
an agreement among the parties in December 1997, the change was effected by an
exchange between the Company and the holders of Series A Preferred Stock for
shares of Series B Preferred Stock containing substantially identical features
other than the provision relating to the rights of immediate redemption.
Accrued but unpaid dividends of $839,098, are included in the carrying value of
the preferred stock at January 3, 1998.
4. IMPAIRMENT OF LONG-LIVED ASSETS AND DISCONTINUED PRODUCTS
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.
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.
For the year ended January 3, 1998, the Company recorded a pre-tax charge of
$587,000 related to the impairment of long-lived assets.
For the year ended December 31, 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. As part of this
27
<PAGE> 30
charge in 1996, 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. In addition,
during 1996, 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 included a charge of $13,000,000 for 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
former Chief Financial Officer amounted to approximately $378,000, $1,957,000
and $1,570,000 during the years ended January 3, 1998, December 31, 1996 and
1995, respectively. Fees for services, including expenses, provided by a firm
associated with a director of the Company amounted to approximately $834,000,
$970,000 and $545,000 during the years ended January 3, 1998, December 31, 1996
and 1995, respectively. Services rendered by these firms included fees in
connection with the Company's 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.
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 January 3, 1998 and
December 31, 1996 was $487,000.
The Company leases office, warehousing and other facilities under various
arrangements. In addition, the Company leases certain equipment under operating
leases.
Rent expense under operating leases for the years ended January 3, 1998,
December 31, 1996 and 1995, was approximately $1,200,000, $1,900,000 and
$1,000,000, respectively.
28
<PAGE> 31
Minimum annual rentals for the five fiscal years subsequent to January 3, 1998
and in the aggregate are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ------------
<S> <C> <C>
1998 $ 186,994 $1,424,000
1999 109,080 1,357,000
2000 -- 1,262,000
2001 -- 1,227,000
2002 -- 1,191,000
Thereafter -- 2,553,000
--------- ----------
Total minimum lease payments 296,074 $9,014,000
==========
Imputed interest (22,306)
---------
Present value of minimum
capital lease payments 273,768
Current portion (168,031)
---------
Long-term capital lease obligations $ 105,737
=========
</TABLE>
LETTERS OF CREDIT
As of January 3, 1998, the Company was contingently liable for unsecured letters
of credit of approximately $900,000. 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 12% of related product sales. Royalty fees for the years
ended January 3, 1998, December 31, 1996 and 1995 were $528,000, $1,493,000 and
$1,130,000, respectively.
SUPPLY AGREEMENT
In February 1997, the Company entered into a supply agreement expiring in April
2000 with one of its major suppliers under which the Company has committed to
place minimum order levels of $14,300,000 in 1998 and $15,700,000 in 1999. This
purchase commitment is not expected to result in losses.
CONTINGENCIES
On September 8, 1997, Tele Electronics (Taiwan) Co., Ltd. ("Tele Electronics")
filed a lawsuit in Middlesex Superior Court in Massachusetts against the Company
alleging breach of contract arising out of two purchase orders. The suit seeks
monetary damages for the alleged breach of contract in the amount of $3.45
million and also alleges unfair and deceptive business practices and seeks,
under this theory, an award equal to three times the alleged contractual
damages. Tele Electronics also sought preliminary injunctive relief which, after
a hearing, the Court denied. The Company denies the allegations of the lawsuit,
believes it has meritorious defenses, is defending the matter vigorously and has
also filed a counterclaim against Tele Electronics for damages caused by various
acts and omissions of Tele Electronics, relating to prior purchase orders. The
Company's counterclaim seeks monetary damages totaling approximately $1.3
million.
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 any potential assessment by the Customs Service in this
matter has been provided for in the consolidated financial statements.
On February 5, 1998, Elamex, S.A. de C.V. ("Elamex"), a Mexican corporation,
filed a lawsuit in Federal District Court in Massachusetts against the Company,
alleging breach of express and/or implied contract arising out of a purchase
order to manufacture carbon monoxide detectors. The suit seeks monetary damages
in the amount of $191,000, plus interest and other unquantified consequential
damages. The suit also alleges unfair and deceptive
29
<PAGE> 32
business practices and seeks, under this theory, an award equal to three times
the alleged actual damages. The Company denies the allegations of the lawsuit
and intends to defend the matter vigorously. An answer has been filed but no
discovery has occurred. The Company has filed a counterclaim against Elamex,
seeking damages of approximately $250,000 for funds expended in reliance on the
anticipated performance of the contract by Elamex.
On November 26, 1997, T.S.A. Plastic Molds Inc. ("TSA") amended its original
lawsuit filed on December 4, 1995, which alleged that the Company owed a
contractual balance of $94,000 from TSA's construction of two steel molds. The
amended complaint claims damages in excess of $500,000 (Canadian funds). The
Company has filed a cross-complaint against TSA claiming that TSA did not
deliver the merchandise ordered by the Company to the Company's specifications.
The Company believes it has meritorious defenses to the lawsuit and intends to
defend the matter vigorously.
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.
With respect to the matters discussed above, the Company believes that there are
no claims or litigation pending, the outcome of which could have a material
adverse effect on the Company's operations or financial condition.
7. MAJOR CUSTOMERS AND SUPPLIERS
For the years ended January 3, 1998 and December 31, 1996 and 1995, two
customers accounted for approximately 44% (23% and 21%), 36% (22% and 14%) and
34%(20% and 14%), respectively, of net sales. The loss of any one of these
customers could adversely affect operating results.
For the years ended January 3, 1998 and December 31, 1996, two suppliers
accounted for approximately 37% (20% and 17%) and 33% (21% and 12%),
respectively, of total purchases, and for the year ended December 31, 1995 one
supplier accounted for 13% 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 and 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.
Income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------------
JANUARY 3, DECEMBER 31, DECEMBER 31,
1998 1996 1995
------------- -------------- -------------
<S> <C> <C> <C>
Domestic $ 1,753,801 $ (53,556,624) $5,159,545
Foreign 1,502,543 248,633 --
------------- -------------- -----------
$ 3,256,344 $ (53,307,991) $5,159,545
============= ============== =============
</TABLE>
30
<PAGE> 33
The components of income tax (benefit) expense were as follows:
YEARS ENDED
--------------------------------------------------
JANUARY 3, DECEMBER 31, DECEMBER 31,
1998 1996 1995
----------- ------------ ------------
Federal $ 760,141 $(18,124,717) $1,597,000
State 411,326 (788,067) 363,000
Foreign 33,324 109,005 --
Valuation
allowance (8,400,000) 10,345,000 --
----------- ------------ ----------
$(7,195,209) $ (8,458,779) $1,960,000
=========== ------------ ----------
Current $ 186,791 $ (4,724,779) $1,358,000
Deferred (7,382,000) (3,734,000) 602,000
----------- ------------ ----------
$(7,195,209) $ (8,458,779) $1,960,000
=========== ============ ==========
The components of the net deferred income tax asset (liability) were as follows:
YEARS ENDED
---------------------------
JANUARY 3, DECEMBER 31,
1998 1996
----------- ------------
DEFERRED TAX ASSETS:
Net operating loss carryforward $11,037,000 $ 8,196,000
Accounts receivable allowances 624,000 1,555,000
Inventories 449,000 1,697,000
Balance sheet reserves and allowances 1,334,000 2,529,000
Other 437,000 455,000
----------- ------------
Total deferred tax assets 13,881,000 14,432,000
Less: valuation allowance (1,945,000) (10,345,000)
----------- ------------
Net deferred tax asset 11,936,000 4,087,000
----------- ------------
DEFERRED TAX LIABILITIES:
Depreciation (2,214,000) (1,568,000)
Patents and trademarks (122,000) (200,000)
Catalog costs -- (101,000)
----------- ------------
Total deferred tax liabilities (2,336,000) (1,869,000)
----------- ------------
Total net deferred tax asset $ 9,600,000 $ 2,218,000
=========== ============
The Company has recorded a valuation allowance of $1,945,000 as of January 3,
1998. The net change in the valuation allowance for fiscal 1997 is $8,400,000
which has been included as a component of the income tax benefit. The Company
has approximately $31,000,000 of net operating losses available which expire in
years 2011 through 2012.
Realization of the $9,600,000 net deferred tax asset is dependent on the
Company's ability to generate approximately $26,000,000 in taxable income during
the carryforward period. Management believes it is more likely than not that the
asset will be realized based upon the strategic initiatives undertaken in 1996
to simplify operations by reducing the number of SKU's, discontinuing products
that did not meet certain sales, quality, and profitability objectives and to
tighten expense control. During 1997, the Company began to experience the
positive effects of these initiatives and expects to continue to benefit in
future years. However, there can be no assurances 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.
Deferred income taxes are not provided on the undistributed earnings of foreign
subsidiaries aggregating approximately $1,615,000 at January 3, 1998 as such
earnings are expected to be permanently reinvested in these companies.
31
<PAGE> 34
The differences between the statutory federal income tax rate of 34% and income
taxes reported in the statements of operations are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------
JANUARY 3, DECEMBER 31, DECEMBER 31,
1998 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
Statutory rate $ 1,107,156 $(18,124,717) $ 1,754,000
State and local taxes,
net of federal benefit 411,326 (788,067) 240,000
Valuation allowance (8,400,000) 10,345,000 --
Foreign net operating
loss carryforwards (546,349) -- --
Other 232,658 109,005 (34,000)
----------- ------------ -----------
$(7,195,209) $ (8,458,779) $ 1,960,000
=========== ============ ===========
</TABLE>
9. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS
As of January 3, 1998, the Company had four stock option plans providing for the
granting of options to purchase up to 2,400,000 shares of common stock of which,
as of such date, 1,698,035 options were outstanding. 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 January 3, 1998, December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
EMPLOYEES NON-EMPLOYEES
----------------------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
---------- -------- ------- --------
<S> <C> <C> <C> <C>
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
Granted 776,800 6.52 1,100 6.27
Exercised (3,032) 6.50 -- --
Canceled (58,297) 6.74 -- --
--------- ------ ------- ------
Balance - January 3, 1998 1,431,135 6.76 286,900 7.06
--------- ------ ------- ------
Options Exercisable - January 3, 1998 907,012 $ 6.76 271,832 $ 6.90
--------- ------ ------- ------
</TABLE>
The Compensation 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
32
<PAGE> 35
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.
The following table summarizes option data as of January 3, 1998:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING AVERAGE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
- ---------------- ----------- ---------------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Employees
$ 5.00 - $10.00 1,413,018 8.6 $ 6.63 889,693 $ 6.56
10.01 - 15.00 9,784 7.3 14.45 8,986 14.80
15.01 - 20.00 8,333 7.5 19.00 8,333 19.00
--------- --- ------ ------- ------
1,431,135 8.6 $ 6.76 907,012 $ 6.76
--------- --- ------ ------- ------
Non-Employees
$ 6.00 - $10.00 285,900 6.9 $ 7.03 270,832 $ 6.87
10.01 - 15.00 1,000 5.9 15.00 1,000 15.00
--------- --- ------ ------- ------
286,900 6.9 $ 7.06 271,832 $ 6.90
--------- --- ------ ------- ------
</TABLE>
The Company measures compensation in accordance with the provisions of
Accounting Principles Board 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 January 3, 1998,
December 31, 1996 or 1995. Compensation cost charged to operations, which the
Company recorded for options granted to non-employees, other than directors, was
$701,000 and $0 for the years ended December 31, 1996 and 1995, respectively.
The weighted average fair value at the date of grant for options granted during
the years ended January 3, 1998, December 31, 1996 and 1995 was $1.98, $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:
YEARS ENDED
----------------------------------------
JANUARY 3, DECEMBER 31, DECEMBER 31,
1998 1996 1995
---------- ------------ ------------
Expected life (years) ... 3 5 5
Interest ................ 6.14% 6.27% 6.04%
Volatility .............. 40% 60% 60%
Dividend yield .......... 0% 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 consistent with the provisions of
SFAS 123, the Company's net income (loss) available to common shareholders and
income (loss) per common share on a diluted basis would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------
JANUARY 3, DECEMBER 31, DECEMBER 31,
1998 1996 1995
----------- ------------- -------------
<S> <C> <C> <C>
Net income (loss) - as reported ................... $ 3,140,455 $ (44,849,212) $ 3,199,545
Net income (loss) - pro forma .................... $ 1,150,595 $ (46,854,517) $ 2,060,964
Net income (loss) per common share - as reported .. $ 0.40 $ (6.27) $ 0.44
Net income (loss) per common share - pro forma .... $ 0.15 $ (6.55) $ 0.28
</TABLE>
The initial application of SFAS 123 for pro forma disclosure may not be
representative of the future effects of applying the statement.
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
33
<PAGE> 36
ended January 3, 1998, December 31, 1996 and 1995, the Company did not elect to
contribute to this plan.
10. ACQUISITIONS
On January 4, 1996, the Company acquired all of the outstanding stock of EEZI
Group Holdings Ltd., a United Kingdom distributor of juvenile products, now
named Safety 1st (Europe) Ltd., for cash of $260,000, issuance of notes payable
of $949,000 ($270,000 outstanding as of January 3, 1998 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 of
$2,181,000 was recognized as goodwill and is being amortized over 25 years. The
net assets acquired included primarily inventory and fixed assets.
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
($825,000 outstanding as of January 3, 1998) 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 included primarily 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.
11. FOREIGN OPERATIONS
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 fiscal years
ended January 3, 1998 and December 31, 1996 is as follows:
<TABLE>
<CAPTION>
UNITED
UNITED KINGDOM
STATES AND CANADA ELIMINATIONS CONSOLIDATED
------------ ----------- ------------ -------------
<S> <C> <C> <C> <C>
January 3, 1998
---------------
Net sales to unaffiliated customers ... $ 92,312,000 $12,666,000 $ -- $ 104,978,000
Transfers between geographic locations 4,968,000 -- (4,968,000) --
------------ ----------- ----------- -------------
Total ................................. $ 97,280,000 $12,666,000 $(4,968,000) $ 104,978,000
============ =========== =========== =============
Operating profit ...................... $ 5,738,000 $ 1,494,000 $ 142,000 $ 7,374,000
============ =========== =========== =============
Identifiable assets ................... $ 76,848,000 $ 2,543,000 $ 142,000 $ 79,533,000
============ =========== =========== =============
December 31, 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
34
<PAGE> 37
general corporate expenses have been made.
Identifiable assets of geographic areas are those assets related to the
Company's operations in each area. Cash at January 3, 1998 includes $557,000 of
amounts held in foreign bank accounts.
International sales from domestic operations were approximately $7,759,000,
$9,562,000 and $5,826,000, for the years ended January 3, 1998, December 31,
1996, and 1995, respectively. In 1995, sales of $8,400,000 to Orleans Juvenile
Products, which the Company acquired during 1996 (see Note 10), have been
excluded.
Foreign currency fluctuations could have a material effect on the Company's
financial position and results of operations.
12. EARNINGS PER SHARE
Basic earnings per share are based on the weighted-average number of shares of
common stock outstanding at year-end, which are as follows: 7,187,288 in 1997,
7,157,078 in 1996 and 7,132,010 in 1995. Diluted earnings per share are based on
the weighted-average number of shares of common stock and common stock
equivalents outstanding at year-end, which were as follows: 7,827,876 in 1997,
7,157,078 in 1996 and 7,250,282 in 1995. Weighted-average share figures for 1997
and 1995 include common stock equivalents of 640,588 and 118,272, respectively.
Common stock equivalents have been excluded from weighted-average shares for
1996 as inclusion would be anti-dilutive. Options to purchase 397,968 shares of
common stock at prices ranging from $7.25 to $19.00 were outstanding at year-end
but were not included in the computation of diluted earnings per share because
the exercise prices of the options were greater than the average market price of
the common stock for the respective period.
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the years ended January 3, 1998 and December 31, 1996 (dollars in thousands,
except per share amounts):
JANUARY 3, 1998 MARCH 31 JUNE 28 SEPTEMBER 27 (3) JANUARY 3 (4)
- --------------------------------------------------------------------------------
Net Sales $24,269 $29,128 $26,446 $25,134
Gross Profit 9,593 11,700 11,035 10,056
Operating Income 1,466 3,036 2,462 409
Net Income 197 1,213 2,858 6,184
Net Income (loss) available
to Common Shareholders 197 1,213 2,380 (649)
Basic earnings (loss) per
common share .03 .17 .33 (.09)
Diluted earnings (loss) per
common share (5) .03 .17 .29 (.09)
<TABLE>
<CAPTION>
DECEMBER 31,1996 MARCH 31 JUNE 30 (1) SEPTEMBER 30 DECEMBER 31 (2)
- ------------------------------------------------------------------------------------
<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)
Basic earnings (loss) per
common share 0.24 (1.14) (0.03) (5.32)
Diluted earnings (loss) per
common share (5) 0.24 (1.14) (0.03) (5.32)
</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
35
<PAGE> 38
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).
(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 primarily for
impairment losses on molds and tools, molds in process, and patents related
to discontinued products.
(3) The Company recorded a tax benefit of $2,000,000 ($.25 per share) related
to a change in the valuation allowance.
(4) The Company recorded an adjustment in the fourth quarter of fiscal 1997 of
$587,000 in connection with impairment of long-lived assets. The adjustment
decreased fourth quarter net income by $370,000 ($.05 per share). In
addition, the Company recorded a tax benefit of $6,400,000 ($.89 per share)
related to a change in the valuation allowance.
(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.
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 1998 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 1998 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 1998 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 1998 Annual Meeting of Shareholders and is
incorporated herein by reference.
PART IV
36
<PAGE> 39
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 17 through 36
Report of the Independent Certified Public Accountants
Consolidated Balance Sheets at January 3, 1998 and December 31,
1996
Consolidated Statements of Operations for the Three Fiscal Years
Ended January 3, 1998, December 31, 1996, and 1995
Consolidated Statements of Changes in Stockholders' Equity for
the Three Fiscal Years Ended January 3, 1998, December 31,
1996, and 1995
Consolidated Statements of Cash Flows for the Three Fiscal Years
Ended January 3, 1998, December 31, 1996, and 1995
(2) Financial Statement Schedule
Included in PART IV, Item 14(c) of this Report on pages 42 and
43:
Report of Independent Certified Public Accountants on Financial
Statement Schedule For the three Fiscal Years Ended January 3,
1998, December 31, 1996, and 1995 Schedule II - 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(a) 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)
4(b)** Designation of Series A Preferred Stock of the Company
4(c) Designation of Series B Preferred Stock of the Company
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)
37
<PAGE> 40
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)
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 ended September 30, 1996 and
incorporated herein by reference)
10(l)* Employment Agreement dated February 19, 1997, between
Registrant and Richard E. Wenz (Exhibit 10(o) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference)
10(m) Amendment to Lease dated November 14, 1996, between the
Reigstrant and Glenbervie, Inc. (Exhibit 10(p) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference)
10(n)** Stock and Warrant Purchase Agreement dated as of July 30,
1997, among Company, BT Capital Partners, Inc. and Bear, Stearns
& Co., Inc.
10(o)** Warrant dated July 30, 1997, for 63,418 shares of the
Company's common stock issued to BT Capital Partners, Inc.
10(p)** Warrant dated July 30, 1997, for 63,418 shares of the
Company's common stock issued to Bear, Stearns & Co., Inc.
10(q)** Warrant dated July 30, 1997 for 570,755 shares of the
Company's common stock issued to BT Capital Partners, Inc.
10(r)** Warrant dated July 30, 1997 for 570,755 shares of the
Company's common stock issued to Bear, Stearns & Co., Inc.
38
<PAGE> 41
10(s)** Registration Rights Agreement dated as of July 30, 1997,
among the Company, BT Capital Partners, Inc., Bear, Stearns &
Co., Inc., and Michael Lerner
10(t)** Voting Agreement dated as of July 30, 1997, among the
Company, Michael Lerner, Michael S. Bernstein, BT Capital
Partners, Inc. and Bear, Stearns & Co., Inc.
10(u)** Letter dated July 30, 1997 from BT Capital Partners, Inc.
to the Company regarding compliance with certain regulations of
the United States Small Business Administration
10(v)** Credit Agreement dated as of July 30, 1997, among the
Company and Safety Home Products Canada, Inc., as Borrowers,
BT Commercial Corporation, as Lender and Agent, and Bankers Trust
Company, as Issuing Bank
10(w) First Amendment dated October 29, 1997, to Credit Agreement
dated as of July 30, 1997, among the Company and Safety Home
Products Canada, Inc., as Borrowers, BT Commercial Corporation,
as Lender and Agent, and Bankers Trust Company, as Issuing Bank
10(x) Second Amendment and Waiver to Credit Agreement dated as of
January 23, 1998, to Credit Agreement dated as of July 30, 1997,
among the Company and Safety Home Products Canada, Inc., as
Borrowers, BT Commercial Corporation, as Lender and Agent, and
Bankers Trust Company, as Issuing Bank
10(y) $7,000,000 Revolving Note dated January 23, 1998, executed
by the Company and Safety 1st Home Products Canada, Inc., in
favor BNY Financial Corporation
10(z) $7,000,000 Revolving Note dated January 23, 1998, executed
by the Company and Safety 1st Home Products Canada, Inc., in
favor BT Commercial Corporation
10(aa) $7,000,000 Revolving Note dated January 23, 1998, executed
by the Company and Safety 1st Home Products Canada, Inc., in
favor Finova Capital Corporation
10(bb) $7,000,000 Revolving Note dated January 23, 1998, executed
by the Company and Safety 1st Home Products Canada, Inc. in favor
of LaSalle National Bank
10(cc) $7,000,000 Revolving Note dated January 23, 1998, executed
by the Company and Safety 1st Home Products Canada, Inc., in
favor Summit Commercial/Gibralter Corp.
10(dd) Waiver to Credit Agreement dated as February 18, 1998
among the Company and Safety Home Products Canada, Inc., as
Borrowers, BT Commercial Corporation, as Lender and Agent, and
Bankers Trust Company, as Issuing Bank
10(ee) Share Exchange Agreement
10(ff) Third Amendment and Waiver to Credit Agreement
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
27 Financial Data Schedule
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.
** Previously filed with the Company's report on Form 8-K dated August 6, 1997
and incorporated herein by reference.
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
39
<PAGE> 42
the total assets of the Company and its subsidiaries on a consolidated basis.
(b) Reports On Form 8-K
The Company filed a report on Form 8-K on February 7, 1997, which
disclosed (i) that the Company entered into a new credit facility
with a new lender and (ii) that the Company obtained a final
judgment and order of dismissal with prejudice of a class action
lawsuit.
The Company filed a report on Form 8-K on May 1, 1997, which
disclosed that the Company had changed its fiscal year-end.
The Company filed a report on Form 8-K on August 6, 1997 which
disclosed that on July 30, 1997, the Company had entered into a
$55 million refinancing of its business, comprised of a $15
million equity investment made by BT Capital Partners, Inc. and
Bear, Stearns & Co., Inc., and a $40 million credit facility
provided by BT Commercial Corporation.
The Company filed a report on Form 8-K/A on September 16, 1997,
which presented pro forma financial information reflecting the
$55 million credit facility entered into by the Company on July
30, 1997.
The Company filed a report on Form 8-K on November 21, 1997,
which disclosed that the Company had changed its fiscal year-end.
(c) Exhibits - See (a)(3) above
(d) Financial Statement Schedules - See (a)(2) above
40
<PAGE> 43
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: April 2, 1998
---------------------
Michael Lerner
Chairman of the Board
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------ ------------------------------------------- --------------
<S> <C> <C>
/s/ Michael Lerner Chief Executive Officer and April 2, 1998
- ------------------------ Director (Principal Executive Officer)
Michael Lerner
/s/ Richard E. Wenz Chief Operating Officer and Acting April 2, 1998
- ------------------------ Chief Financial Officer and Treasurer
Richard E. Wenz
/s/ Joseph S. Driscoll Principal Accounting Officer and Controller April 2, 1998
- ------------------------
Joseph S. Driscoll
/s/ Michael S. Bernstein Director April 2, 1998
- ------------------------ Executive Vice President
Michael S. Bernstein
/s/ Curt R. Feuer Director April 2, 1998
- ------------------------
Curt R. Feuer
/s/ Robert J. Drummond Director April 2, 1998
- ------------------------
Robert J. Drummond
/s/ Laurence S. Levy Director April 2, 1998
- ------------------------
Laurence S. Levy
/s/ Mark Owens Director April 2, 1998
- ------------------------
Mark Owens
/s/ James Dworkin Director April 2, 1998
- ------------------------
James Dworkin
/s/ John Howard Director April 2, 1998
- ------------------------
John Howard
</TABLE>
41
<PAGE> 44
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 February 27, 1998
(except for note 3, as to which the date is April 2, 1998) which is included in
the annual report on Form 10-K, we have also audited Schedule II for each of the
three fiscal years in the period ended January 3, 1998. In our opinion, this
schedule presents fairly, in all material respects, the information required to
be set forth therein.
GRANT THORNTON LLP
Boston, Massachusetts
February 27, 1998
42
<PAGE> 45
SCHEDULE II
SAFETY 1ST, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN C-
ADDITIONS
COLUMN B- CHARGED TO
BEGINNING COST AND COLUMN D- COLUMN E-
COLUMN A-DESCRIPTION OF PERIOD EXPENSES DEDUCTION END OF PERIOD
- ------------------------------ ---------- ---------- --------- -------------
<S> <C> <C> <C> <C>
JANUARY 3, 1998
Accounts Receivable Allowances $3,300,000 $1,400,000 $3,000,000 $1,700,000
DECEMBER 31, 1996
Accounts Receivable Allowances $1,900,000 $1,400,000 $ -- $3,300,000
DECEMBER 31, 1995
Accounts Receivable Allowances $ 912,000 $1,836,000 $ 848,000 $1,900,000
</TABLE>
43
<PAGE> 46
SAFETY 1ST, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED JANUARY 3, 1998
EXHIBIT INDEX
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(a) 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)
4(b)** Designation of Series A Preferred Stock of the Company
4(c) Designation of Series B Preferred Stock of the Company
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)
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 ended September 30, 1996 and
incorporated herein by reference)
44
<PAGE> 47
10(l) Employment Agreement dated February 19, 1997, between
Registrant and Richard E. Wenz (Exhibit 10(o) to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference)
10(m) Amendment to Lease dated November 14, 1996, between the
Reigstrant and Glenbervie, Inc. (Exhibit 10(p) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by reference)
10(n)** Stock and Warrant Purchase Agreement dated as of July 30,
1997, among Company BT Capital Partners, Inc. and Bear, Stearns
& Co., Inc.
10(o)** Warrant dated July 30, 1997, for 63,418 shares of the
Company's common stock issued to BT Capital Partners, Inc.
10(p)** Warrant dated July 30, 1997, for 63,418 shares of the
Company's common stock issued to Bear Stearns & Co., Inc.
10(q)** Warrant dated July 30, 1997 for 570,755 shares of the
Company's common stock issued to BT Capital Partners, Inc.
10(r)** Warrant dated July 30, 1997 for 570,755 shares of the
Company's common stock issued to Bear Stearns & Co., Inc.
10(s)** Registration Rights Agreement dated as of July 30, 1997,
among the Company, BT Capital Partners, Inc., Bear, Stearns &
Co., Inc. and Michael Lerner
10(t)** Voting Agreement dated as of July 30, 1997, among the
Company, Michael Lerner, Michael S. Bernstein and BT Capital
Partners, Inc., Bear, Stearns & Co., Inc.
10(u)** Letter dated July 30, 1997 from BT Capital Partners, Inc.
to the Company regarding compliance with certain regulations of
the United States Small Business Administration
10(v)** Credit Agreement dated as of July 30, 1997, among the
Company and Safety Home Products Canada, Inc., as Borrowers,
BT Commercial Corporation, as Lender and Agent, and Bankers Trust
Company, as Issuing Bank
10(w) First Amendment dated October 29, 1997, to Credit Agreement
dated as of July 30, 1997, among the Company and Safety Home
Products Canada, Inc., as Borrowers, BT Commercial Corporation,
as Lender and Agent, and Bankers Trust Company, as Issuing Bank
10(x) Second Amendment and Waiver to Credit Agreement dated as of
January 23, 1998, to Credit Agreement dated as of July 30, 1997,
among the Company and Safety Home Products Canada, Inc., as
Borrowers, BT Commercial Corporation, as Lender and Agent, and
Bankers Trust Company, as Issuing Bank
10(y) $7,000,000 Revolving Note dated January 23, 1998, executed
by the Company and Safety 1st Home Products Canada, Inc., in
favor BNY Financial Corporation
10(z) $7,000,000 Revolving Note dated January 23, 1998, executed
by the Company and Safety 1st Home Products Canada, Inc., in
favor BT Commercial Corporation
10(aa) $7,000,000 Revolving Note dated January 23, 1998, executed
by the Company and Safety 1st Home Products Canada, Inc., in
favor Finova Capital Corporation
10(bb) $7,000,000 Revolving Note dated January 23, 1998, executed
by the Company and Safety 1st Home Products Canada, Inc. in favor
of LaSalle National Bank
10(cc) $7,000,000 Revolving Note dated January 23, 1998, executed
by the Company and Safety 1st Home Products Canada, Inc., in
favor Summit Commercial/Gibralter Corp.
10(dd) Waiver to Credit Agreement dated as February 18, 1998
among the Company and Safety Home Products Canada, Inc., as
Borrowers, BT Commercial Corporation, as Lender and Agent, and
Bankers Trust Company, as Issuing Bank
10(ee) Share Exchange Agreement
10(ff) Third Amendment and Waiver to Credit Agreement
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
27 Financial Data Schedule
99 Important Factors Regarding Forward-Looking Statements
** Previously filed with the Company's report on Form 8-K dated August 6, 1997
and incorporated herein by reference.
45
<PAGE> 1
Exhibit 4(c)
DESIGNATION OF
SERIES B PREFERRED STOCK
SECTION 1. DESIGNATION OF AMOUNT; RANKING.
The issuance of Fifteen Thousand (15,000) shares of the Series B
Preferred Stock is hereby authorized. When issued and outstanding, the Series B
Preferred Stock shall rank senior to all other issued and outstanding classes
and series of equity securities of the Corporation now existing or hereafter
created (collectively, the "Junior Stock") with respect to dividend rights,
rights of redemption, rights of conversion and rights of Liquidation (as
hereinafter defined).
SECTION 2. DEFINITIONS.
As used herein, the following terms shall have the following meanings:
"AFFILIATE" means, with respect to any specified Person, (1) any
other Person who, directly or indirectly, owns or controls, is under common
ownership or control with, or is owned or controlled by, such specified Person,
(2) any other Person who is an executive officer or partner or is, directly or
indirectly, the beneficial owner of ten percent (10%) or more of any class of
equity Securities, of the specified Person or a Person described in clause (1)
above, (3) any other Person of whom the specified Person is an executive officer
or partner or is, directly or indirectly, the beneficial owner of ten percent
(10%) or more of any class of equity Securities, (4) any other Person in whom
the specified Person has a substantial beneficial interest or as to whom the
specified Person serves as trustee or in a similar capacity, or (5) any relative
or spouse of the specified Person or any of the foregoing Persons, any relative
of such spouse or any spouse of any such relative. As used in this definition,
the term "control" means the possession, directly or indirectly, of the power to
direct the management and policies of a Person, whether through the ownership of
voting securities, by contract or otherwise. As used in this definition, the
term "relative" means any parent, grandparent, great-grandparent, child,
grandchild, great-grandchild, sibling, first uncle, first aunt or first cousin
(in each case, whether natural or adoptive).
"APPLICABLE DIVIDEND RATE" means, for each Dividend Period (i) for
dividends paid in cash on the last day of such period, at a rate of 10.0% per
annum and (ii) in all other circumstances, at a rate of 13.25% per annum.
"BEAR STEARNS" shall have the meaning ascribed thereto in the Stock
and Warrant Purchase Agreement.
"BEST KNOWLEDGE" shall have the meaning ascribed thereto in the
Stock and Warrant Purchase Agreement.
"BOARD" shall mean the Board of Directors of the Corporation.
<PAGE> 2
"BT CAPITAL" shall have the meaning ascribed thereto in the Stock
and Warrant Purchase Agreement.
"BUSINESS" shall have the meaning ascribed thereto in the Stock and
Warrant Purchase Agreement.
"CHANGE OF CONTROL" means the occurrence of any of the following
events: (i) any Person or any Persons, excluding Lerner and the Investors,
acting together which would constitute a "group" for purposes of Section 13(d)
of the Exchange Act, together with any Affiliates thereof, shall beneficially
own, directly or indirectly, 30% or more of the total voting stock of the
Corporation; (ii) all or substantially all of the Corporation's assets, on a
consolidated basis, are sold as an entirety to any Person or related group of
Persons or there shall be consummated any consolidation or merger of the
Corporation (A) in which the Corporation is not the continuing or surviving
corporation (other than a consolidation or merger with a wholly-owned Subsidiary
of the Corporation in which all shares of Common Stock outstanding immediately
prior to the effectiveness thereof are changed into or exchanged for the same
consideration) or (B) pursuant to which the Common Stock would be converted into
cash, securities or other property, in any case, other than a consolidation or
merger of the Corporation in which the holders of the Common Stock immediately
prior to the sale of assets or consolidation or merger have, directly or
indirectly, at least a majority of the Common Stock of the transferee or
continuing or surviving corporation immediately after such sale of assets or
consolidation or merger or (iii) Lerner shall cease to beneficially own at least
30% of the total voting stock of the Corporation.
"COMMON EQUIVALENTS" shall have the meaning ascribed thereto in the
Voting Agreement.
"COMMON STOCK" means, collectively, the Common Stock, $.01 par
value, of the Corporation.
"DESIGNATIONS" means, with respect to the Series B Preferred Stock
of the Corporation, the designations, powers, preference and relative,
participating, optional and other special rights, and the qualifications,
limitations and restrictions thereof.
"DIVIDEND PERIOD" means (a) the period commencing as of the Original
Issuance Date and expiring as of September 30, 1997 or the date of redemption
of a share of Series B Preferred Stock, if earlier, and (b) thereafter each
period commencing on a Preferred Dividend Payment Date and expiring on the day
immediately preceding the next Preferred Dividend Payment Date or the date of
redemption of a share of Series B Preferred Stock, if earlier.
"EFFECTIVE DATE" shall mean December 30, 1997.
"ENCUMBRANCE" shall have the meaning ascribed thereto in the Stock
and Warrant Purchase Agreement.
-2-
<PAGE> 3
"EQUITY OFFERING" shall mean any underwritten public offering for
the account of the Corporation of Common Stock pursuant to a registration
statement filed under the Securities Act.
"EVENT OF DEFAULT" means a material breach of any of the
representations, warranties or covenants in any of the Related Documents that
continues (x) with respect to payment defaults, 10 days and (y) with respect to
all other defaults, 30 days after Notice from any holder of Series B Preferred
Stock.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"EXISTING INDEBTEDNESS" means the Indebtedness of the Corporation
under the Credit Agreement.
"GUARANTY" means any obligation, contingent or otherwise, of any
Person guaranteeing or having the economic effect of guaranteeing any
Indebtedness or other obligation of any other Person in any manner, whether
directly or indirectly, including any obligation of such Person, direct or
indirect, (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation or to purchase (or to advance
or supply funds for the purchase of) any security for the payment of such
Indebtedness or other obligation, (ii) to purchase property, securities or
services for the purpose of assuring the owner of such Indebtedness or other
obligation of the payment thereof, (iii) to purchase or otherwise pay for
merchandise, materials, supplies, services or other property under an
arrangement which provides that payment for such merchandise, materials,
supplies, services or other property shall be made regardless of whether
delivery of such merchandise, materials, supplies, services or other property is
ever made or tendered, or (iv) to maintain the working capital, equity capital
or other financial statement condition of any primary obligor, PROVIDED,
HOWEVER, that the term Guaranty shall not include endorsement of instruments for
deposit and collection in the ordinary course of business.
"INDEBTEDNESS" of any Person means, without duplication, (a) all
obligations of such Person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such Person evidenced by (or which
customarily would be evidenced by) bonds, debentures, notes or similar
instruments, (c) all reimbursement obligations of such Person with respect to
letters of credit and similar instruments, (d) all obligations of such Person
under conditional sale or other title retention agreements relating to property
or assets purchased by such Person, (e) all obligations of such Person
incurred, issued or assumed as the deferred purchase price of property or
services other than accounts payable incurred and paid on terms customary in
the business of such Person (it being understood that the "deferred purchase
price" in connection with any purchase of property or assets shall include only
that portion of the purchase price which shall be deferred beyond the date on
which the purchase is actually consummated), (f) all obligations secured by (or
for which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien on property owned or acquired by such
Person, whether or not the obligations secured thereby have been assumed, (g)
all obligations of such Person under forward sales, futures, options and other
similar hedging arrangements (including interest rate hedging or protection
agreements), (h) all obligations of such Person to purchase or otherwise pay
for merchandise, materials, supplies, services or other
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property under an arrangement which provides that payment for such merchandise,
materials, supplies, services or other property shall be made regardless of
whether delivery of such merchandise, materials, supplies, services or other
property is ever made or tendered, (i) all Guaranties by such Person of
obligations of others and (j) all capitalized lease obligations of such Person.
"INVESTORS" shall have the meaning ascribed thereto in the Stock and
Warrant Purchase Agreement.
"LERNER" means Michael Lerner and any Affiliate of Michael Lerner.
"LIABILITY" means, to the Best Knowledge of the Corporation, any
material liability or obligation, asserted or unasserted, absolute or
contingent, accrued or unaccrued, liquidated or unliquidated and whether due or
to become due, regardless of when asserted.
"LIEN" means any security interest, lien, pledge, claim, charge,
escrow, encumbrance, option, right of first offer, right of first refusal,
preemptive right, mortgage, indenture, security agreement or other similar
agreement, arrangement, contract, commitment, understanding or obligation,
whether written or oral and whether or not relating in any way to credit or the
borrowing of money.
"LIQUIDATION" shall mean any voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation.
"MATERIAL ADVERSE EFFECT" means, with respect to any Person, a
material adverse effect on the business, condition (financial and otherwise),
operations, results of operations, assets (including levels of working capital
and components thereof), Liabilities and customer, vendor and employee
relationships of such Person.
"ORIGINAL COST" initially means, with respect to any share of Series
B Preferred Stock, $1,000. In the event of any change (by way of any
recapitalization, subdivision or recombination) in the number or kind of shares
of Preferred Stock, the Original Cost of such shares of Preferred Stock
immediately prior to such change shall be allocated ratably among such shares of
Preferred Stock immediately after such change.
"ORIGINAL ISSUANCE DATE" shall mean July 30, 1997.
"PERSON" shall be construed as broadly as possible and shall include
an individual, a partnership (including a limited liability partnership), a
corporation, an association, a joint stock company, a limited liability company,
a trust, a joint venture, an unincorporated organization and a Governmental
Authority.
"QUALIFIED HOLDER" means (i) each Person who initially acquires
Series B Preferred Stock from the Corporation and (ii) any other holder of
Series B Preferred Stock who, together with its Affiliates, owns at least 25% of
the outstanding shares of Series B Preferred Stock at the time in question.
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"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement dated as of July 30, 1997 among the Corporation and the Investors
named therein, as amended from time to time.
"RELATED DOCUMENTS" means, this Certificate of Designation, the
Stock and Warrant Purchase Agreement, the Warrants, the SBA Letter, the Voting
Agreement, the Registration Rights Agreement and the Credit Agreement.
"REQUISITE HOLDERS" shall mean, at any time, Persons holding a
majority of the shares of Series B Preferred Stock outstanding at such time.
"SBA LETTER" shall have the meaning ascribed thereto in the Stock
and Warrant Purchase Agreement.
"SECURITIES" means "securities" as defined in Section 2(1) of the
Securities Act.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or
any similar federal law then in force.
"CREDIT AGREEMENT" shall have the meaning ascribed thereto in the
Stock and Warrant Purchase Agreement.
"STOCK AND WARRANT PURCHASE AGREEMENT" means the Stock and Warrant
Agreement dated as of July 30, 1997 among the Corporation and the Investors
named therein, as amended from time to time.
"STOCK OPTION PLANS" shall have the meaning ascribed thereto in the
Stock and Warrant Purchase Agreement.
"SUBSIDIARY" shall have the meaning ascribed thereto in the Stock
and Warrant Purchase Agreement.
"VOTING AGREEMENT" means the Voting Agreement dated as of July 30,
1997 among the Corporation, the Investors and the Stockholders named therein, as
amended from time to time.
"WARRANTS" shall have the meaning ascribed thereto in the Stock and
Warrant Purchase Agreement.
SECTION 3. DIVIDENDS AND DISTRIBUTIONS.
(a) When, as, and if declared by the Board, out of funds legally available
for that purpose, the holders of Series B Preferred Stock shall be entitled to
receive dividends, which shall accrue on a daily basis at the Applicable
Dividend Rate on the sum of the Original Cost of a share of Series B Preferred
Stock plus all accumulated and unpaid dividends thereon, payable on each March
31, June 30, September 30 and December 31 (each, a "PREFERRED DIVIDEND PAYMENT
DATE"), the first such Preferred Dividend Payment Date being as of September
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30, 1997. Dividends shall accrue at the Applicable Dividend Rate regardless of
whether the Board has declared a dividend payment or whether there are any
profits, surplus or other funds of the Corporation legally available for
dividends. Any dividends which accrue pursuant to this SECTION 3(a) and which
are not paid on the next succeeding Preferred Dividend Payment Date shall be
classified as "accumulated dividends" and shall remain "accumulated and unpaid
dividends" until paid or otherwise satisfied pursuant to this Certificate of
Designation. Dividends on each share of Preferred Stock shall accrue pursuant
to this SECTION 3(a) from and including the Original Issuance Date to and
including the date such share is redeemed in full and all accrued but unpaid
dividends thereon are also paid in full. All payments due under this SECTION
3(a) to any holder of shares of Series B Preferred Stock shall be made to the
nearest cent.
(b) The dividends payable with respect to the Series B Preferred Stock on
each Preferred Dividend Payment Date shall be paid to the holders of shares of
the Preferred Stock as they appear on the stock records of the Corporation on
such date (the "PREFERRED RECORD DATE") as shall be fixed by the Board, which
Preferred Record Date shall not be more than 60 days prior to the applicable
Preferred Dividend Payment Date and shall not precede the date upon which the
resolution fixing such Preferred Record Date is adopted, and if the Board shall
not fix a Preferred Record Date, the Preferred Record Date shall be deemed to
be the same date as the applicable Preferred Dividend Payment Date.
(c) No dividend or distribution shall be paid to the holders of any class
of Series B Preferred Stock pursuant to this SECTION 3 in any form of
consideration other than cash (or the accumulation thereof in accordance with
the provisions of this Certificate) unless the Requisite Holders, at the time
of the distribution, approve such distribution (including the valuation of the
consideration being distributed).
(d) Except as otherwise provided herein, if at any time the Corporation
pays less than the total amount of dividends then accrued with respect to the
Series B Preferred Stock, such payment shall be distributed ratably among the
holders of the Series B Preferred Stock based upon the number of shares of
Series B Preferred Stock then held by each holder.
SECTION 4. LIQUIDATION.
In the event of any Liquidation, the holders of shares of Series B
Preferred Stock then outstanding shall be entitled to receive, out of the assets
of the Corporation legally available for distribution to its stockholders,
before any payment shall be made to the holders of any stock ranking on
Liquidation junior to the Series B Preferred Stock, an amount per share equal to
the Original Cost of such share plus an amount equal to all accrued and unpaid
dividends (whether or not declared) on each share, if any, to the date of
payment (the "SERIES B PREFERRED LIQUIDATION PREFERENCE"). If, upon any
Liquidation, the assets of the Corporation available for distribution to its
stockholders shall be insufficient to pay the holders of shares of the Series B
Preferred Stock the full amounts to which they respectively shall be entitled,
the holders of shares of Series B Preferred Stock shall share ratably in any
distribution of assets according to the respective amounts which would be
payable with respect to the shares held by them upon such distribution if all
amounts payable on or with respect to said
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shares were paid in full. In the event of any Liquidation, after payment shall
have been made to the holders of shares of Series B Preferred Stock in the full
amount to which they are entitled, the holders of shares of capital stock
ranking junior to the Series B Preferred Stock on Liquidation shall be
entitled, to the exclusion of the holders of the Series B Preferred Stock, to
share, according to their respective rights and preferences, in all remaining
assets of the Corporation available for distribution to its stockholders.
SECTION 5. REDEMPTION.
(a) REDEMPTION AT THE CORPORATION'S OPTION. The Corporation may redeem at
any time and at its option, any or all of the shares of Series A Preferred Stock
then outstanding. The per share redemption price at which shares of Class B
Preferred Stock are to be redeemed pursuant to this SECTION 5(a) shall be equal
to the Original Cost thereof plus all accrued and unpaid dividends thereon. If
less than all of the outstanding shares of the Class B Preferred Stock are to be
redeemed pursuant to this SECTION 5(a), the shares shall be redeemed from the
holders thereof PRO RATA based upon the number of shares of Class B Preferred
Stock held by each such holder. At least 10 days but not more than 180 days
prior to the date fixed for any redemption pursuant to this SECTION 5(a) (each,
a "Company Redemption Date") of shares of the Class B Preferred Stock, a written
notice (the "Company Redemption Notice") shall be given to each holder of record
of shares of the Class B Preferred Stock to be redeemed. Such notice shall
specify (1) the number of shares being redeemed from such holder, (2) the
Company Redemption Date, (3) the amount to be paid for each share of Class B
Preferred Stock to be redeemed and (4) any conditions precedent to the
redemption. The Company Redemption Notice shall call upon such holder to
surrender to the Corporation on the Company Redemption Date, the certificate or
certificates representing the number of shares of the Class B Preferred Stock to
be redeemed from such holder as specified in the Company Redemption Notice. If
less than all of the shares represented by any certificate are redeemed, a new
certificate shall be issued representing the shares not redeemed.
(b) OTHER REDEMPTIONS. (i) At any time on or after the first to occur of
(A) the sixth anniversary of the Original Issuance Date, (B) 180 days after the
date upon which the Corporation repays all its indebtedness under the Credit
Agreement (but not earlier than the fifth anniversary of the Original Issuance
Date), (C) a Change of Control, (D) an Equity Offering or (E) 90 days after the
occurrence or continuation of an Event of Default; AND (provided that conditions
(A) and (B) described in clause (ii) of this Section 5(b) are met and complied
with) at any time on and after the Effective Date; the Requisite Holders may
elect to have the Corporation redeem all (but not less than all) of the
outstanding shares of Series B Preferred Stock (except in the case of either the
occurrence of the situation described in (i) of the definition of Change of
Control with respect to 51% (and not 30%) or more of the total voting stock or
of the occurrence of any of the situations described in (ii) of the definition
of Change of Control, and in any such case all of the outstanding shares of
Series B Preferred Stock shall, at the election of the Corporation by service of
notice to the holders of shares of Series B Preferred Stock, be mandatorily
redeemed, in which case the Corporation shall be required to redeem all
outstanding shares of Series B Preferred Stock) at a price per share equal to
the Original Cost thereof plus all accrued and unpaid dividends thereon, by
giving written notice to the Corporation of such election (which written notice
shall be deemed to have been given in the case of the occurrence of any of the
situations described in the prior parenthetical provided that the Corporation
shall previously have served prior notice as required by the provisions
contained in the prior parenthetical) (the "INVESTOR NOTICE OF ELECTION"),
whereupon the Corporation shall be obligated to repurchase such shares of Series
B Preferred Stock on such date (the "INVESTOR REDEMPTION DATE") as shall be
determined by the Corporation, but in any event not earlier than 10 days and not
later than 30 days after the date on which the Investor Notice of Election is
delivered (or deemed to be delivered, as the case may be) to the Corporation.
Promptly (but in no event later than five days) after the delivery of the
Investor Notice of Election to the Corporation (or its deemed delivery, as the
case may be), the Corporation shall send written notice (the "REDEMPTION
NOTICE") to each of the holders of the Series B Preferred Stock. The Redemption
Notice shall specify the Investor Redemption Date and the location of the
Corporation's principal executive office or place of business where the closing
will occur.
(ii) If the Requisite Holders wish to elect to have the Corporation
redeem the outstanding shares of Series B Preferred Stock at any time on and
after the Effective Date but
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prior to the first to occur of the events described in clause (A) through (E) of
Section 5(b)(i), they may do so only if (A) they are, at such time, collectively
the registered owners of all of the Warrants issued by the Corporation pursuant
to the Stock and Warrant Purchase Agreement, except for any Warrants cancelled
in accordance with their terms (together with any Warrants issued after the
Original Issue Date in substitution or exchange for any Warrants in accordance
with the provisions of the Stock and Warrant Purchase Agreement or the
Warrants), and (b) they surrender all such Warrants to the Corporation for
cancellation for no consideration simultaneously with the delivery of the
Investor Notice of Election.
(c) REDEMPTION CLOSING.
(i) The closing of the Corporation's redemption of the Series B
Preferred Stock pursuant to SECTIONS 5(a) and 5(b) above shall take place
at 11:00 a.m. New York City time on the date upon which the Change of
Control is consummated, the Company Redemption Date or the Investor
Redemption Date (as applicable) at the Corporation's principal executive
office or place of business. At the closing, the Corporation shall pay to
each of the holders of the Series B Preferred Stock, against the
Corporation's receipt from such holder of the certificate or certificates
representing the shares of such series of Series B Preferred Stock then
held by such holder, an amount equal to the aggregate payment due pursuant
to this Section for all such shares. All such payments shall be made by
wire transfer of immediately available funds, or if such holder shall not
have specified wire transfer instructions to the Corporation prior to the
closing, by certified or official bank check made payable to the order of
such holder.
(ii) In the event of a redemption pursuant to clause (D) of SECTION
5(b) above, the Series B Preferred Stock shall be redeemable only to the
extent of the net proceeds to the Corporation from such Equity Offering
after repayment, if applicable, of sums contractually payable, if any, by
the Corporation pursuant to the Credit Agreement. If the funds of the
Corporation legally available subsequent to an Equity Offering for
redemption of shares of Series B Preferred Stock are insufficient to
redeem the total number of such shares to be redeemed on such date, (A)
those funds which are legally available shall be used to redeem the
maximum possible number of shares ratably among the holders of such shares
based upon the aggregate number of such shares held by each such holder
and (B) the net proceeds to the Corporation from any subsequent Equity
Offerings shall be used to redeem the remaining number of shares left
outstanding after the ratable redemption contemplated under clause (A)
hereunder.
(iii) If the funds of the Corporation legally available (and without
rendering the Corporation insolvent) for redemption of shares of Series B
Preferred Stock on any Investor Redemption Date are insufficient to redeem
the total number of such shares to be redeemed on such date, those funds
which are legally available (and which will not render the Corporation
insolvent) shall be used to redeem the maximum possible number of shares
ratably among the holders of such shares based upon the aggregate number
of such shares held by each such
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holder. At any time thereafter when additional funds of the Corporation
are legally available (and which will not render the Corporation
insolvent) for the redemption of shares (including, without limitation,
funds from any Equity Offerings) such funds shall immediately be used to
redeem the balance of the shares which the Corporation has become
obligated to redeem on any Investor Redemption Date but which it had not
redeemed.
(iv) No shares of Series B Preferred Stock are entitled to any
dividends accruing after the date on which the full redemption price for
such share is paid to the holder thereof. On such date all rights of the
holder of such share shall cease, and such share shall not be deemed to be
outstanding.
(v) Any shares of Series A Preferred Stock which are redeemed or
otherwise acquired by the Corporation shall be canceled and shall not be
reissued (as treasury shares), sold or transferred.
(vi) Neither the Corporation nor any subsidiaries of the Corporation
shall offer to purchase, redeem or acquire any shares of Series B
Preferred Stock other than pursuant to the terms of this Certificate of
Designation or pursuant to a purchase offer made to all holders of Series
B Preferred Stock pro rata based upon the number of such shares owned by
each such holder.
SECTION 6. VOTING.
(a) Except as otherwise required by law and by paragraph (b) below, the
holders of Series B Preferred Stock shall not be entitled to vote such shares on
any matter on which the stockholders of the Corporation shall be entitled to
vote, and shares of Series B Preferred Stock shall not be included in
determining the number of shares voting or entitled to vote on any such matters.
(b) So long as any shares of Series B Preferred Stock are outstanding, the
Corporation shall not, without the affirmative vote of the holders of at least a
majority of the shares of Series B Preferred Stock then outstanding, or the
unanimous written consent of the holders of all the outstanding shares of Series
B Preferred Stock, in each case with holders of Series B Preferred Stock being
entitled to one vote for each share held on any matter as to which they shall be
entitled to vote, change the Designations with respect to the Series B Preferred
Stock so as to affect such stock adversely.
SECTION 7. COVENANTS.
(a) As long as any shares of Series B Preferred Stock remain outstanding,
the Corporation shall, and shall cause its Subsidiaries, as applicable, to:
(i) pay or accrue, as the case may be, the required dividends on the
shares of Series B Preferred Stock and any other amounts payable under
the Related Documents in accordance with the terms of this Certificate.
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(ii) pay and discharge, and cause each of its Subsidiaries to pay
and discharge, before the same shall become delinquent, (i) all amounts of
taxes, assessments and governmental charges or levies imposed upon it or
upon its property and (ii) all lawful claims that, if unpaid, could
reasonably be expected by law to become an Encumbrance upon its property;
provided, however, that neither the Corporation nor any of its
Subsidiaries shall be required to pay or discharge any such tax,
assessment, charge or claim (y) that is being contested in good faith and
by proper proceedings and as to which appropriate reserves are being
maintained or (z) the non-payment or non-discharge of which could not
reasonably be expected to have a Material Adverse Effect.
(iii) shall preserve and maintain, and cause each of its
Subsidiaries to preserve and maintain, its corporate existence; provided,
however, that any Subsidiary may merge or consolidate with any other
Subsidiary or the Corporation. The Corporation shall preserve and
maintain, and cause each of its Subsidiaries to preserve and maintain, its
rights (charter and statutory), and all material permits, licenses,
approvals, privileges and franchises necessary or desirable in the normal
conduct of its business, except any thereof the non-preservation or
non-maintenance of which could not reasonably be expected to have a
Material Adverse Effect.
(iv) shall keep, and cause each of its Subsidiaries to keep, proper
books of record and account, in which entries which are full and correct
in all material respects shall be made of all financial transactions and
the assets and business of the Corporation and each such Subsidiary in
accordance with generally accepted accounting principles.
(v) shall maintain and preserve, and cause each of its Subsidiaries
to maintain and preserve, all of its properties that are reasonably
required in the conduct of its business in good working order and
condition, ordinary wear, tear and depletion excepted, except any thereof
the non-maintenance or non-preservation of which could not reasonably be
expected to have a Material Adverse Effect.
(vi) conduct, and cause each of its Subsidiaries to conduct, all
transactions otherwise permitted under the Related Documents with any of
their Affiliates on terms that are fair and reasonable and no less
favorable to the Company or such Subsidiary than it would obtain in a
comparable arm's-length transaction with a Person not an Affiliate.
(b) The Corporation shall not, without the affirmative consent or approval
of the Requisite Holders:
(i) in any manner authorize, create, designate, issue or sell any
class or series of capital stock of the Corporation (including any shares
of treasury stock) or rights, options, warrants or other Securities
convertible into or exercisable or
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exchangeable for capital stock or any debt security which by its terms is
convertible into or exchangeable for any equity security or has any other
equity participation feature or any security that is a combination of
debt and equity, which, in each case as to the equity or convertible
component thereof, as to the payment of dividends, distribution of assets
or redemptions, including, without limitation, distributions to be made
upon the liquidation, dissolution or winding up of the Corporation or a
merger, consolidation or sale of the assets thereof, is senior to or pari
passu with the Series B Preferred Stock;
(ii) reclassify any Securities of the Corporation into shares of any
class or series of capital stock of the Corporation (A) ranking, either as
to payment of dividends, distributions of assets or redemptions,
including, without limitation, distributions to be made upon the
liquidation, dissolution or winding up of the Corporation or a merger,
consolidation or sale of the assets thereof, senior to or pari passu with
the Series B Preferred Stock or (B) which in any manner adversely affects
the rights of the holders of Series B Preferred Stock in their capacity as
such;
(iii) in any manner authorize, issue or sell any shares of Series B
Preferred Stock other than as contemplated by the Stock and Warrant
Purchase Agreement or this Certificate;
(iv) reclassify, cancel or in any manner alter or change the terms,
designations, powers, preferences or relative, optional or other special
rights, or the qualifications, limitations or restrictions thereof, of the
Series B Preferred Stock;
(v) amend, repeal or modify any provision of this Certificate of
Designation that adversely affects the powers, preferences or special
rights of the Series B Preferred Stock;
(vi) redeem or repurchase any shares of capital stock of the
Corporation or any warrants, options or other derivative Securities or
rights to acquire any shares of capital stock of the Corporation (other
than (x) pursuant to the Stock and Warrant Purchase Agreement, (y) the
redemption of capital stock of the Corporation pursuant to the provisions
of this Certificate of Designation and (z) the "cashless exercise" of
employee stock options pursuant to the Stock Option Plans);
(vii) incur any Indebtedness or create any Lien on the assets of the
Corporation in connection therewith except for (i) the Existing
Indebtedness or Indebtedness used to refinance the Existing Indebtedness
or (ii) funded Indebtedness incurred for normal, ordinary course working
capital requirements which is only secured (if at all) by current assets;
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(viii) enter to any commitment to a third party, or otherwise bind
the Corporation to a third party, concerning any single or series of
related capital expenditures in excess of a limit set annually by the
Board;
(ix) declare, pay or set aside or reserve amounts for the payment of
any dividend on or with respect to any Common Stock or other capital stock
issued by the Corporation that is junior to or on a par with the Series B
Preferred Stock;
(x) enter into any transaction with any Affiliate of the Corporation
(an "AFFILIATE TRANSACTION") on terms more favorable to such Affiliate
than would have been obtainable in a transaction with an unrelated third
party on an arms-length basis in the ordinary course of business;
(xi) enter into or engage in any business or activity other than the
Business;
(xii) enter into any agreement or commitment or otherwise become
bound or obligated to do or perform any of the foregoing actions; or
(xiii) permit the number of members of the Board (other than members
appointed or selected by the Investors) of the Corporation to exceed ten
(10) and the Corporation agrees to use its best efforts to add the
respective designees of BT Capital and Bear Stearns to the extent it is
obligated to do so pursuant to the Voting Agreement.
SECTION 8. INFORMATION RIGHTS.
(a) FINANCIAL REPORTS. The Corporation shall furnish each Qualified Holder
with the following:
(i) QUARTERLY STATEMENTS. (a) Upon the request of such Qualified
Holder, within 45 days after the end of each quarterly accounting period,
except after the end of the fourth quarterly accounting period in the
Corporation's fiscal year in which case the time period shall be 90 days,
an unaudited financial report of the Corporation, which report shall be
prepared in accordance with generally accepted accounting principles
consistently applied, and which shall include the following:
(A) a profit and loss statement for such quarterly accounting
period, together with a cumulative profit and loss statement from the
first day of the current year to the last day of such quarterly accounting
period;
(B) a balance sheet as at the last day of such quarterly
accounting period;
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(C) a cash flow analysis for such quarterly accounting period
on a cumulative basis for the fiscal year to date;
(D) a schedule showing all expenditures of a capital nature in
excess of $250,000 individually during such quarterly accounting period;
and
(E) a comparison between the actual figures for such quarterly
accounting period and the comparable figures (with respect to clauses (i)
and (ii) only) for the prior year (if any) for such quarterly accounting
period, with an explanation of any material differences between them.
(ii) Copies of all financial statements, reports, press releases,
notices, proxy statements and other documents sent by the Corporation to
its stockholders generally or released to the public and copies of all
regular and periodic reports filed by the Corporation with the SEC, or any
securities exchange.
(iii) Upon the request of such Qualified Holder, copies of all
reports prepared for or delivered to the management of the Corporation by
its Accountants;
(iv) Upon the request of such Qualified Holder, any other routinely
collected financial or other information available to management of the
Corporation (including, without limitation, routinely collected
statistical data);
(v) Upon the request of such Qualified Holder, within sixty (60)
days after commencement of each new fiscal year, a business plan and
projected financial statements for such fiscal year, which financial
statements shall include a comparison between the actual figures for such
fiscal year and the comparable figures for the prior year (if any) for
such fiscal year, with an explanation of any material differences between
them; and
(vi) Promptly following its receipt of notice of the commencement of
any action, suit, claim, legal or administrative or arbitration proceeding
or investigation, any of which could reasonably be expected, on the basis
of current economic conditions and other facts and circumstances known to
the Corporation at the time, to have a material adverse effect on the
financial condition and operations of the Corporation, the Corporation
shall deliver a written notice to each Qualified Holder describing in
reasonable detail such proceeding.
(B) ACCESS TO RECORDS AND PROPERTIES.
(i) The Corporation shall afford to any Qualified Holder and its
employees, counsel and other authorized representatives, during normal
business hours, access, upon reasonable advance notice, to all of the
books, records and properties of the Corporation and to make copies of
such records and permit such Persons to discuss all aspects of the
Corporation with any officers, employees or accountants of the
Corporation; provided, however, that such investigation shall
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not unreasonably interfere with the operations of the Corporation. The
Corporation will instruct its independent public accountants to discuss
such aspects of the financial condition of the Corporation with any such
holder and its representatives as such holder may reasonably request, and
to permit such holder and its representatives to inspect, copy and make
extracts from such financial statements, analyses, work papers and other
documents and information (including electronically stored documents and
information) prepared by such accountants with respect to the Corporation
as such holder may reasonably request. All costs and expenses incurred by
such holder and its representatives in connection with exercising such
rights of access shall be borne by such Persons, and all out-of-pocket
costs and expenses incurred by the Corporation in complying with any
extraordinary requests by such holder and its representatives in
connection with exercising such access rights shall be borne by such
holder.
(ii) Each Qualified Holder shall use best efforts to maintain the
confidentiality of any confidential and proprietary information obtained
by it under this SECTION 8 and shall not use, or permit the use of, any of
such confidential and proprietary information in its business or the
business of any company in which it may have an ownership interest or in
any manner or for any other purpose except as contemplated hereby;
provided, however, that the foregoing shall in no way limit or otherwise
restrict the ability of such holder or such authorized representatives to
disclose any such information concerning the Corporation which it may be
required to disclose (i) to its partners or limited partners to the extent
required to satisfy its
fiduciary obligations to such persons or (ii) otherwise pursuant to or as
required by law.
(c) OBSERVER RIGHTS.
(i) The Corporation hereby covenants that the holders of Preferred
Stock shall have the right to have that number of representatives (each
such representative, an "OBSERVER") determined as hereinafter provided
present at all meetings of the Board. Such right shall from time to time
be exercisable by delivery to the Corporation of written notice from the
Requisite Holders specifying the names of such Observers. The number of
Observers shall at all times and from time to time be equal to that number
of members of the Board that the holders of the Common Equivalents are
then entitled to designate pursuant to the Voting Agreement but whose
seats on the Board are at the time vacant.
(ii) The Corporation will give each Observer reasonable prior notice
(it being agreed that the same prior notice given to the Board shall be
deemed reasonable prior notice) in any manner permitted in the
Corporation's By-laws for notices to directors of the time and place of
any proposed meeting of the Board, such notice in all cases to include
true and complete copies of all documents furnished to any director in
connection with such meeting. Each such Observer will be entitled to be
present in person as an observer at any such meeting or, if a
-14-
<PAGE> 15
meeting is held by telephone conference, to participate therein for the
purpose of listening thereto.
(iii) The Corporation will deliver to each Observer copies of all
papers which may be distributed from time to time to the directors of the
Corporation at such time as such papers are so distributed to them,
including copies of any written consent.
SECTION 9. MISCELLANEOUS.
(a) REGISTRATION OF TRANSFER. The Corporation shall keep at its principal
office (or such other place as the Corporation reasonably designates) a
register for the registration of shares of the Series B Preferred Stock. Upon
the surrender of any certificate representing shares of the Series B Preferred
Stock at such place, the Corporation shall, at the request of the registered
holder of such certificate, execute and deliver a new certificate or
certificates in exchange therefor representing in the aggregate the number of
shares of the Series B Preferred Stock represented by the surrendered
certificate, and the Corporation forthwith shall cancel such surrendered
certificate. Each such new certificate will represent such number of shares of
the Series B Preferred Stock as is requested by the holder of the surrendered
certificate and will be substantially identical in form to the surrendered
certificate. Subject to any other restrictions on transfer to which such holder
or the Series B Preferred Stock may be bound, the Corporation will also
register such new certificate in such name as requested by the holder of the
surrendered certificate.
(b) REPLACEMENT. Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder will be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing one or more shares of the Series B Preferred Stock, and in the case
of any such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided, however, that if the holder is a
nationally-chartered financial institution or other institutional investor, its
own agreement will be satisfactory), or, in the case of any such mutilation upon
surrender of such certificate, the Corporation shall (at its expense) execute
and deliver in lieu of such number of shares of the Series B Preferred Stock
represented by such lost, stolen, destroyed or mutilated certificate and dated
the date of such lost, stolen, destroyed or mutilated certificate.
(c) NOTICES. All notices referred to herein shall be in writing, shall be
delivered personally or by first class mail, postage prepaid, and shall be
deemed to have been given when so delivered or mailed to the Corporation at its
principal executive offices and to any stockholder at such holder's address as
it appears in the stock records of the Corporation (unless otherwise specified
in a written notice to the Corporation by such holder).
* * * * *
15
<PAGE> 1
EXHIBIT 10(w)
[LOGO] BT COMMERCIAL CORPORATION
14 Wall Street, 3rd Floor, New York, New York 10005
JEFF OGDEN
Senior Vice President Mailing Address:
Tel: 212-618-2609 P.O. Box 318, Church Street Station
Fax: 212-618-2630 New York, New York 10008
October 29, 1997
Safety 1st, Inc.
210 Boylston Street
Chestnut Hill, MA 02167
Attention: Richard Wenz
Re: Credit Agreement dated as of July 30, 1997
------------------------------------------
Gentlemen:
Reference is made to the Credit Agreement dated as of July 30, 1997 (as
amended, supplemented or otherwise modified from time to time, the "Credit
Agreement"; capitalized terms used herein and not otherwise defined herein
shall,
have the meaning ascribed to such terms in the Credit Agreement) among Safety
1st, Inc. and Safety 1st Home Products Canada, Inc., as borrowers (collectively,
the "Borrowers"), each of the financial institutions from time to time parties
thereto, as lenders (the "Lenders"), BT Commercial Corporation, as agent (the
"Agent"), and Bankers Trust Company, as Issuing Bank (the "Issuing Bank").
Section 7.2(q) of the Credit Agreement provides that the Borrowers and
their respective Subsidiaries shall not, at any time when Revolving Loans are
outstanding, maintain more than $100,000 in the aggregate in deposit accounts.
You have requested that the Lenders amend Section 7.2(q) to permit the Borrowers
and their respective Subsidiaries to maintain up to $200,000 in the aggregate in
deposit accounts.
In accordance with Section 10.11 of the Credit Agreement, the Borrowers and
the Majority Lenders hereby amend Section 7.2(q) of the Credit Agreement by
deleting "$100,000" and substituting therefor "$200,000."
Except as expressly provided herein, all of the terms and provisions of the
Credit Agreement and the other Credit Documents are ratified and confirmed and
shall remain
<PAGE> 2
Safety 1st, Inc.
October 29, !997
Page 2
in full force and effect. This letter shall not be deemed to constitute a waiver
or modification by the Lenders of any other provision of the Credit Agreement
or any other Credit Document.
This letter may be executed in counterparts, each of which when so executed
and delivered shall be deemed to be an original, and all of which taken together
shall constitute one and the same instrument. Any signature executed by a party
and delivered by facsimile transmission shall be deemed to be an original
signature hereto. This letter will not be effective until a fully executed copy
is received by the Agent.
BT COMMERCIAL CORPORATION
By: /s/ Frederic W. Thomas
-----------------------------------------
Name: Frederic W. Thomas
Title: V.P.
ACKNOWLEDGED AND CONSENTED TO:
SAFETY 1ST HOME PRODUCTS CANADA, INC.
By: /s/ Richard E. Wenz
---------------------------------
Name: Richard E. Wenz
Title: V.P.
SAFETY 1ST, INC.
By: /s/ Richard E. Wenz
---------------------------------
Name: Richard E. Wenz
Title: President
cc: Curt R. Feuer, Esq.
<PAGE> 1
EXHIBIT 10(x)
SECOND AMENDMENT AND WAIVER TO CREDIT AGREEMENT
THIS SECOND AMENDMENT AND WAIVER (this "AMENDMENT"), to the Credit
Agreement dated as of July 30, 1997, among SAFETY 1ST, INC., a Massachusetts
corporation ("SAFETY"), SAFETY 1ST HOME PRODUCTS CANADA INC., a Canadian federal
corporation ("SAFETY CANADA" and, together with Safety, the "BORROWERS"), each
of the financial institutions from time to time parties thereto as lenders (the
"LENDERS"), BT COMMERCIAL CORPORATION, as agent (in such capacity, the "AGENT")
for the Lenders and BANKERS TRUST COMPANY, as issuer of letters of credit (in
such capacity, the "ISSUING BANK"), is made as of January 23, 1998 among the
Borrowers and the Lenders.
WHEREAS, the Borrowers, the Lenders, the Agent and the Issuing Bank are
parties to the Credit Agreement, dated as of July 30, 1997 (as heretofore
amended on October 29, 1997 and as the same may be further amended,
supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT";
capitalized terms used herein shall have the meanings assigned to them in the
Credit Agreement unless otherwise defined herein);
WHEREAS, the Borrowers have requested that the Lenders agree to amend the
Credit Agreement to, among other things, increase the Commitment of each Lender;
and
WHEREAS, the Lenders are agreeable to such amendments, but only on the
terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the parties hereto hereby agree as follows:
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. Effective as of the date hereof,
but subject to the satisfaction of the conditions precedent set forth in
Section 3, the Credit Agreement is hereby amended as follows:
(a) Section 1.1 of the Credit Agreement is amended by inserting the
following definitions in their proper alphabetical sequence:
"'OUTSTANDING SUPPLEMENTAL AMOUNT' means, on any day, the amount by
which (a) the sum of (i) the outstanding principal balance of the Revolving
Loans on such day and (ii) the Letter of Credit Obligations outstanding on
such day exceeds (b) the sum of (i) the
<PAGE> 2
Accounts Borrowing Base on such day and (ii) the Inventory Borrowing Base
on such day.
'SUPPLEMENTAL AMOUNT' means (a) $1,500,000 from January 23, 1998 to
February 22, 1998, (b) $1,000,000 from February 23, 1998 to March 22, 1998,
(c) $500,000 from March 23, 1998 to April 22, 1998 and (d) $0 thereafter.
'SUPPLEMENTAL AMOUNT FEE' is defined in Section 4.5 (b)."
(b) The definition of "Accounts Borrowing Base" in Section 1.1 of the
Credit Agreement is amended by deleting "75%" and substituting therefor "80%."
(c) The definition of "Borrowing Base" in Section 1.1 of the Credit
Agreement is amended by
(i) deleting "and" in subsection (a) thereof and substituting
therefor; and
(ii) inserting at the end of subsection (b) thereof the following:
"and (c) the supplemental Amount on such day."
(d) The definition of "Fees" in Section 1.1 of the Credit Agreement is
amended by inserting "Supplemental Amount Fee" immediately after "Unused Line
Fee,."
(e) The definition of "Line of Credit" in Section 1.1 of the Credit
Agreement is amended by deleting "$27,500,000" and substituting therefor
"$35,000,000."
(f) The definition of "Unused Line Fee" is amended by inserting "(a)"
immediately after "4.5."
(g) Section 2.6 (c) of the Credit Agreement is amended and restated as
follows:
"(c) DISTRIBUTION OF INTEREST, UNUSED LINE FEES AND SUPPLEMENTAL
AMOUNT FEES. Interest on the Revolving Loans (including Agent Advances),
together with the amount of the Unused Line Fee and the Supplemental Amount
Fee, shall be allocated by the Agent to each Lender in accordance with the
Proportionate Share of Revolving Loans actually advanced by and repaid to
each Lender, and shall accrue from and including the date such Revolving
Loans are so advanced and to but excluding the date such Revolving Loans
are either repaid by a Borrower or actually settled under this Section.
After the end of each month, the Agent shall, upon receipt from a Borrower,
-2-
<PAGE> 3
distribute to each Lender its Proportionate Share of the interest, Unused
Line Fee and Supplemental Amount Fee accrued during such month. The Agent
shall, upon receipt from a Borrower, distribute interest on Eurodollar Rate
Loans promptly after it is received from a Borrower.
(h) Section 4.5 of the Credit Agreement is amended and restated as follows:
"Section 4.5. UNUSED LINE FEE AND SUPPLEMENTAL AMOUNT FEE.
(a) The Borrowers shall jointly and severally pay to the Agent for
distribution to the Lenders on the first Business Day of each month and on
the Expiration Date a fee equal to 0.50% per annum calculated monthly in
arrears on the average unused portion of the total Commitments at the close
of business each day during the immediately preceding month or occurring
prior to the Expiration Date (the 'UNUSED LINE FEE').
(b) The Borrowers shall jointly and severally pay to the Agent for
distribution to the Lenders on the first Business Day of each month a fee
equal to 0.50% per annum calculated monthly in arrears on the average daily
amount of the Outstanding Supplemental Amount during the immediately
preceding month (the 'SUPPLEMENTAL AMOUNT FEE')."
(i) Schedule 1 to the Credit Agreement is amended and restated in the
form of Annex I hereto.
SECTION 2. WAIVER. Effective as of the date hereof, but subject to the
satisfaction of the conditions of effectiveness set forth in Section 3 hereof,
the Lenders hereby waive compliance with Section 7.2(u) of the Credit Agreement
with respect to the two fiscal quarters ended December 31, 1997, PROVIDED that
this waiver will not be effective if the EBITDA of Safety and its Subsidiaries
for the two fiscal quarters ended December 31, 1997 is less than $5,500,000.
SECTION 3. EFFECTIVENESS. This Amendment shall become effective upon
the Agent's receipt of (a) this Amendment, duly executed by the Borrowers and
the Lenders, and (b) payment (i) of an amendment fee of $37,500 for the ratable
benefit of the Lenders and (ii) for all costs and expenses incurred by the Agent
in connection with the preparation, execution and delivery of this Amendment and
the documents contemplated hereby, including, without limitation, the reasonable
fees and expenses of counsel to the Agent. Sections 1 and 2 hereof shall become
effective when, and only when, the Agent shall have additionally received
-3-
<PAGE> 4
all of the following documents, each of which shall be in form and substance
satisfactory to the Agent:
(a) Certified copies of (i) the resolutions of the Board of Directors
of each Borrower approving this Amendment, the documents delivered in connection
herewith and the matters contemplated hereby and thereby and (ii) all documents
evidencing other necessary corporate actions and governmental approvals, if any,
with respect to this Amendment and the transactions contemplated hereby.
(b) A certificate of the Secretary or an Assistant Secretary of each
Borrower certifying the names and true signatures of the officers of such
Borrower who are authorized to sign this Amendment and the documents delivered
in connection herewith to which such Borrower is a party.
(c) An opinion of counsel for the Borrowers, covering such matters
relating to this Amendment as the Agent shall reasonably request, including an
opinion to the effect that the transactions contemplated hereby do not conflict
with or constitute a default under Safety's Series A Preferred Stock.
(d) A certificate signed by a duly authorized officer of Safety
certifying that (i) the representations and warranties contained in Section 4
hereof are true and correct on and as of the date of such certificate as though
made on and as of such date, (ii) the representations and warranties contained
in Section 6.1 of the Credit Agreement are true and correct on and as of the
date of such certificate as though made on and as of such date, except to the
extent that such representations and warranties expressly relate solely to an
earlier date (in which case such representations and warranties shall have been
true and correct on and as of such earlier date) and (iii) no Default or Event
of Default has occurred and is continuing.
(e) A certificate executed by an Authorized Officer certifying that,
since September 30, 1997, there has been change, occurrence, development or
event which has had or could reasonably be expected to have a Material Adverse
Effect.
(f) A certificate executed by the chief financial officer of each
Credit Party to the effect that such Credit Party is solvent after giving
effect to the transactions contemplated by this Amendment.
(g) A consent, substantially in the form of Exhibit A hereto, duly
executed by the Guarantors.
-4-
<PAGE> 5
(h) Amended and Restated Revolving Notes, each substantially in the
form of Exhibit B, duly executed by the Borrowers in favor of each Lender.
(i) Such other documents, instruments, opinions, materials and
information as the Agent may request.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE BORROWERS. Each of
the Borrowers represents and warrants as follows:
(a) The execution, delivery and performance by each Borrower of this
Amendment, the Credit Agreement as amended hereby and the documents delivered in
connection herewith to which such Borrower is a party (i) are within such
Borrower's corporate powers and authority, have been duly authorized by all
necessary corporate action and do not contravene (A) such Borrower's Governing
Documents (including, without limitation, the certificate of designation for any
preferred stock of a Borrower), (B) any Requirement of Law applicable to it or
any of its properties or (C) any franchise, license, permit, indenture,
contract, lease, agreement, instrument or other commitment to which it is a
party or by which it or any of its properties are bound, (ii) will not result in
a Default or an Event of Default and (iii) will not result in or require the
creation or imposition of any Lien upon or with respect to any property now
owned or hereafter acquired by any Borrower (other than Liens permitted by the
Credit Agreement).
(b) This Amendment, the Credit Agreement as amended hereby and the
documents delivered in connection herewith to which such Borrower is a party
constitute the legal, valid and binding obligations of such Borrower enforceable
against such Borrower in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency or similar laws
affecting creditor's rights generally and general principles of equity.
(c) There is no pending or, to the best of its knowledge, threatened
litigation, proceeding, inquiry or other action seeking an injunction or other
restraining order with respect to the transactions contemplated by this
Amendment or the Credit Agreement as amended hereby.
(d) Since September 30, 1997 there has occurred no change, occurrence,
development or event which has had or could reasonably be expected to have a
Material Adverse Effect.
-5-
<PAGE> 6
(e) All consents, filings and approvals required in connection with
the execution, delivery and performance by such Borrower of this Amendment and
the Credit Agreement as amended hereby have been obtained or made and are in
full force and effect.
SECTION 5. REFERENCE TO AND EFFECT ON THE CREDIT DOCUMENTS.
(a) Upon the effectiveness of this Amendment, on and after the date
hereof, each reference in the Credit Agreement to (i) "this Agreement,"
"hereunder," "hereof," "herein" and words of like import, and such words or
words of like import in each reference in the Credit Documents, shall mean and
be a reference to the Credit Agreement as amended hereby.
(b) Except as specifically amended and waived hereby, all of the terms
and provisions of the Credit Agreement shall remain in full force and effect and
are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as an amendment to or a waiver
of any right, power or remedy of the Agent or the Lenders under any of the
Credit Documents, or constitute an amendment to or a waiver of any provision of
any of the Credit Documents.
(d) This Amendment shall be deemed to be a Credit Document for
all purposes.
SECTION 6. EXECUTION IN COUNTERPARTS; ETC. This Amendment may be
executed in counterparts each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute one
and the same instrument. This Amendment and each of the other documents
delivered in connection herewith may be executed and delivered by telecopier
with the same force and effect as if the Game was a fully executed and delivered
original manual counterpart.
SECTION 7. COSTS, EXPENSES AND TAXES. The Borrowers shall
jointly and severally pay any and all stamp and other taxes payable or
determined to be payable in connection with the execution and delivery of this
Amendment and the documents contemplated hereby or delivered in connection
herewith, and agrees to hold the Lenders harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or omission to
pay such taxes.
-6-
<PAGE> 7
SECTION 8. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND
ENFORCEMENT OF THIS AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW
YORK WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES THEREOF (OTHER
THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed by their respective officers thereunto duly authorized as of the
date first above written.
BORROWERS
---------
SAFETY 1ST, INC.
By: /s/ Richard E. Wenz
-------------------------------------
Name:
Title:
SAFETY 1ST, HOME PRODUCTS CANADA INC.
By: /s/ Richard E. Wenz
-------------------------------------
Name: Richard E. Wenz
Title:
LENDERS
-------
BT COMMERCIAL CORPORATION
By: /s/ Frederic W. Thomas, Jr.
-------------------------------------
Name: Frederic W. Thomas, Jr.
Title: V.P.
LASALLE NATIONAL BANK
By: /s/ Christopher G. Clifford
-------------------------------------
Name: Christopher G. Clifford
Title: Sr. Vice President
BNY FINANCIAL CORPORATION
By: /s/ Frank Imperato
-------------------------------------
Name:
Title: V.P.
-8-
<PAGE> 9
SUMMIT COMMERCIAL/GIBRALTAR CORP.
By: /s/ Harvey Freidman
-------------------------------------
Name: Harvey Freidman
Title: Exec. Vice Pres.
FINOVA CAPITAL CORPORATION
By: /s/ Mary Anne V. Richardson
-------------------------------------
Name: Mary Anne V. Richardson
Title: A.V.P.
-9-
<PAGE> 10
ANNEX I
SCHEDULE 1
List of Lenders, Lending Offices
and Commitments
---------------------------------
<TABLE>
<CAPTION>
LENDER REVOLVING
COMMITMENT
<S> <C>
BT Commercial Corporation $7,000,000
14 Wall Street, 3rd Floor
New York, New York 10005
LaSalle National Bank $7,000,000
135 S. LaSalle Street, Suite 425
Chicago, Illinois 60603
BNY Financial Corporation $7,000,000
1290 Avenue of the Americas
New York, New York 10104
Summit Commercial/Gibraltar Corp. $7,000,000
546 Fifth Avenue
New York, New York 10036
Finova Capital Corporation $7.000,000
355 South Grand Avenue
Suite 2400
Los Angeles, California 90071
</TABLE>
<PAGE> 1
EXHIBIT 10(y)
AMENDED AND RESTATED REVOLVING NOTE
$7,000,000 January 23, 1998
FOR VALUE RECEIVED, the undersigned, SAFETY 1ST, INC., a. Massachusetts
corporation, and SAFETY 1ST HOME PRODUCTS CANADA INC., a Canadian federal
corporation, (collectively, the "BORROWERS"), jointly and severally promise to
pay to the order of BNY Financial Corporation (the "LENDER") at care of BT
Commercial Corporation, as Agent, 14 Wall Street, New York, New York 10005, in
lawful money of the United States of America and in immediately available
funds, the principal amount of SEVEN MILLION DOLLARS ($7,000,000), or such
lesser amount as may then constitute the unpaid aggregate principal amount of
the Lender's Proportionate Share of the Revolving Loans outstanding on the
Expiration Date.
The Borrowers jointly and severally agree to pay interest at said office,
in like money, on the unpaid principal amount owing hereunder from time to time
from the date hereof until paid in full (both before and after judgment) on the
dates and at the rates specified in Article IV of the Credit Agreement (as
defined below).
If any payment on this note becomes due and payable on a day other than a
Business Day, such payment shall be extended to the next succeeding Business
Day, and with respect to payments of principal, interest thereon shall be
payable at the then applicable rate during such extension.
This note is one of the Revolving Notes referred to in the Credit
Agreement, dated as of July 30, 1997 (as amended, supplemented or otherwise
modified from time to time, the "Credit Agreement"), among the Borrowers, the
Lender, the other financial institutions parties thereto, BT Commercial
Corporation, as Agent (in such capacity, the "Agent") and Bankers Trust
Company, as Issuing Bank (in such capacity, the "Issuing Bank"), and is subject
to, and entitled to, all provisions and benefits thereof and is subject to
voluntary and mandatory prepayment in whole or in part as provided therein.
Capitalized terms used herein shall have the meanings given to such terms in the
Credit Agreement unless otherwise defined herein. The Credit Agreement, among
other things, provides for the making of Revolving Loans by the Lender to the
Borrowers from time to time in an aggregate amount not to exceed at any time
outstanding the U.S. dollar amount first above mentioned.
<PAGE> 2
Upon the occurrence and during the continuance of an Event of Default, the
Agent may, among other things, by delivery of written notice to the Borrowers
from the Agent, take any or all of the following actions, without prejudice to
the rights of the Agent, the Lender or any holder of this note to enforce its
claims against the Borrowers: (a) declare all Obligations due hereunder to be
immediately due and payable (except with respect to any Event of Default set
forth in Section 8.1(g) of the Credit Agreement, in which case all Obligations
due hereunder shall automatically become immediately due and payable without the
necessity of any notice or other demand) without presentment, demand, protest
or any other action or obligation of the Lender; and (b) immediately terminate
the Commitments; and at all times thereafter, all loans and advances made by the
Lender pursuant to the Credit Agreement shall be at the Lender's sole
discretion.
This note is secured by the collateral described in the Security Agreements
and other Collateral Documents.
The Borrowers hereby waive presentment, demand, protest and notice of any
kind in connection with this note. No failure to exercise, and no delay in
exercising any rights hereunder on the part of the holder hereof shall operate
as a waiver of such rights.
This note shall not be revoked or impaired as to either Borrower by the
revocation or release of any obligations of the other Borrower.
Each Borrower hereby agrees that, until the Obligations are paid in full
and the Credit Agreement and all outstanding Letters of Credit are terminated,
it shall not assert any claim or other right that it may now have or hereafter
acquire against the other Borrower that arises from the existence, payment,
performance or enforcement of such Borrower's obligations under this note or the
Credit Agreement, the other Credit Documents or the Obligations or guarantees
thereof, including, without limitation, any right of subrogation, reimbursement,
exoneration, contribution or indemnification and any right to participate in any
claim or remedy of the Agent or any Lender against the other Borrower, or any
collateral securing any Obligation, whether or not such claim, remedy or right
arises in equity or under contract, statute or common law, including, without
limitation, the right to take or receive from the other Borrower, directly or
indirectly, in cash or other property or by set-off or in any other manner,
payment or security on account of such claim, remedy or right. If any amount
shall be paid to either Borrower in violation of the preceding sentence at any
time prior to the indefeasible cash payment in full of the Obligations and the
termination of the Credit Agreement and all outstanding Letters of Credit, such
Borrower shall immediately give the Agent notice of its receipt of such amount
and such amount shall be held in trust for the benefit of the Agent and the
Lenders owed the Obligations which gave rise to such Borrower's right of
recovery, segregated from other funds of such Borrower, and shall forthwith
<PAGE> 3
be paid to the Agent to be credited and applied to the Obligations then due and
payable, whether matured or unmatured, in such order as the Agent may determine.
Each Borrower acknowledges that it will receive direct and indirect benefits
from the Credit Agreement and the transactions consummated in connection
therewith and that the waiver set forth in this paragraph is knowingly made in
contemplation of such benefits. Until all of the Obligations shall have been
paid in full in cash and the termination of the Credit Agreement and all
outstanding Letters of Credit, neither Borrower will enforce any other claim or
exercise any other rights which it may have against the other Borrower.
This note (a) is issued in substitution and exchange for (but not in
payment of) the Revolving Note dated October 31, 1997 made by the Borrowers in
favor of the Lender (the "Original Note") and (b) amends and restates the
Original Note in its entirety.
THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS NOTE SHALL BE GOVERNED
BY THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS OTHER THAN
SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW) AND DECISIONS OF THE
STATE OF NEW YORK.
SAFETY 1ST, INC.
Witness: /s/ Paula L. Murphy By: /s/ Richard E. Wenz
--------------------------- -------------------------------
Name:
Title:
SAFETY 1ST HOME PRODUCTS CANADA
INC.
Witness: /s/ Paula L. Murphy By: /s/ Richard E. Wenz
--------------------------- -------------------------------
Name:
Title:
-3-
<PAGE> 1
EXHIBIT 10(z)
AMENDED AND RESTATED REVOLVING NOTE
$7,000,000 January 23, 1998
FOR VALUE RECEIVED, the undersigned, SAFETY 1ST, INC., a Massachusetts
corporation, and SAFETY 1ST HOME PRODUCTS CANADA INC., a Canadian federal
corporation, (collectively, the "BORROWERS"), jointly and severally promise to
pay to the order of BT Commercial Corporation (the "LENDER") at care of BT
Commercial Corporation, as Agent, 14 Wall Street New York, New York 10005, in
lawful money of the United States of America and in immediately available funds,
the principal amount of SEVEN MILLION DOLLARS ($7,000,000), or such lesser
amount as may then constitute the unpaid aggregate principal amount of the
Commercial Lender's Proportionate Share of the Revolving Loans outstanding on
the Expiration Date.
The Borrowers jointly and severally agree to pay interest at said office,
in like money, on the unpaid principal amount owing hereunder from time to time
from the date hereof until paid in full (both before and after judgment) on the
dates and at the rates specified in Article IV of the Credit Agreement (as
defined below).
If any payment on this note becomes due and payable on a day other than a
Business Day such payment shall be extended to the next succeeding Business Day,
and with respect to payments of principal, interest thereon shall be payable at
the then applicable rate during such extension.
This note is one of the Revolving Notes referred to in the Credit
Agreement, dated as of July 30, 1997 (as amended, supplemented or otherwise
modified from time to time, the "CREDIT AGREEMENT"), among the Borrowers, the
Lender, the other financial institutions parties thereto, BT Commercial
Corporation, as Agent (in such capacity, the "AGENT") and Bankers Trust Company,
as Issuing Bank (in such capacity, the "ISSUING BANK"), and is subject to, and
entitled to, all provisions and benefits thereof and is subject to voluntary and
mandatory prepayment in whole or in part as provided therein. Capitalized terms
used herein shall have the meanings given to such terms in the Credit Agreement
unless otherwise defined herein. The Credit Agreement, among other things,
provides for the making of Revolving Loans by the Lender to the Borrowers from
time to time in an aggregate amount not to exceed at any time outstanding the
U.S. dollar amount first above mentioned.
<PAGE> 2
Upon the occurrence and during the continuance of an Event of Default, the
Agent may, among other things, by delivery of written notice to the Borrowers
from the Agent, take any or all of the following actions, without prejudice to
the rights of the Agent, the Lender or any holder of this note to enforce its
claims against the Borrowers: (a) declare all Obligations due hereunder to be
immediately due and payable (except with respect to any Event of Default set
forth in Section 8.1(g) of the Credit Agreement, in which case all Obligations
due hereunder shall automatically become immediately due and payable without the
necessity of any notice or other demand) without presentment, demand, protest or
any other action or obligation of the Lender; and (b) immediately terminate the
Commitments; and at all times thereafter, all loans and advances made by the
Lender pursuant to the Credit Agreement shall be at the Lender's sole
discretion.
This note is secured by the collateral described in the Security Agreements
and other Collateral Documents.
The Borrowers hereby waive presentment, demand, protest and notice of any
kind in connection with this note. No failure to exercise, and no delay in
exercising any rights hereunder on the part of the holder hereof shall operate
as a waiver of such rights.
This note shall not be revoked or impaired as to either Borrower by the
revocation or release of any obligations of the other Borrower.
Each Borrower hereby agrees that, until the Obligations are paid in full
and the Credit Agreement and all outstanding Letters of Credit are terminated,
it shall not assert any claim or other right that it may now have or hereafter
acquire against the other Borrower that arises from the existence, payment,
performance or enforcement of such Borrower's obligations under this note or the
Credit Agreement, the other Credit Documents or the Obligations or guarantees
thereof, including, without limitation, any right of subrogation, reimbursement,
exoneration, contribution or indemnification and any right to participate in any
claim or remedy of the Agent or any Lender against the other Borrower, or any
collateral securing any Obligation, whether or not such claim, remedy or right
arises in equity or under contract, statute or common law, including, without
limitation, the right to take or receive from the other Borrower, directly or
indirectly, in cash or other property or by set-off or in any other manner,
payment or security on account of such claim, remedy or right. If any amount
shall be paid to either Borrower in violation of the preceding sentence at any
time prior to the indefeasible cash payment in full of the Obligations and the
termination of the Credit Agreement and all outstanding Letters of Credit, such
Borrower shall immediately give the Agent notice of its receipt of such amount
and such amount shall be held in trust for the benefit of the Agent and the
Lenders owed the Obligations which gave rise to such Borrower's right of
recovery, segregated from other funds of such Borrower, and shall forthwith
<PAGE> 3
be paid to the Agent to be credited and applied to the Obligations then due and
payable, whether matured or unmatured, in such order as the Agent may determine.
Each Borrower acknowledges that it will receive direct and indirect benefits
from the Credit Agreement and the transactions consummated in connection
therewith and that the waiver set forth in this paragraph is knowingly made in
contemplation of such benefits. Until all of the Obligations shall have been
paid in full in cash and the termination of the Credit Agreement and all
outstanding Letters of Credit, neither Borrower will enforce any other claim or
exercise any other rights which it may have against the other Borrower.
This note (a) is issued in substitution and exchange for (but not in
payment of) the Revolving Note dated October 31, 1997 made by the Borrowers in
favor of the Lender (the "Original Note") and (b) amends and restates the
Original Note in its entirety.
THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS NOTE SHALL BE GOVERNED
BY THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS OTHER THAN
SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW) AND DECISIONS OF THE
STATE OF NEW YORK.
SAFETY 1ST, INC.
Witness: /s/ Paula L. Murphy By: /s/ Richard E. Wenz
--------------------------- ----------------------------------
Name:
Title:
SAFETY 1ST HOME PRODUCTS CANADA
INC.
Witness: /s/ Paula L. Murphy By: /s/ Richard E. Wenz
--------------------------- ----------------------------------
Name:
Title:
-3-
<PAGE> 1
EXHIBIT 10(aa)
AMENDED AND RESTATED REVOLVING NOTE
$7,000,000 January 23, 1998
FOR VALUE RECEIVED, the undersigned, SAFETY 1ST, INC., a Massachusetts
corporation, and SAFETY 1ST HOME PRODUCTS CANADA INC., a Canadian federal
corporation, (collectively, the "BORROWERS"), jointly and severally promise to
pay to the order of Finova Capital Corporation (the "LENDER") at care of BT
Commercial Corporation, as Agent, 14 Wall Street New York, New York 10005, in
lawful money of the United States of America and in immediately available funds,
the principal amount of SEVEN MILLION DOLLARS ($7,000,000), or such lesser
amount as may then constitute the unpaid aggregate principal amount of the
Lender's Proportionate Share of the Revolving Loans outstanding on the
Expiration Date.
The Borrowers jointly and severally agree to pay interest at said office,
in like money, on the unpaid principal amount owing hereunder from time to time
from the date hereof until paid in full (both before and after judgment) on the
dates and at the rates specified in Article IV of the Credit Agreement (as
defined below).
If any payment on this note becomes due and payable a day other than a
Business Day such payment shall be extended to the next succeeding Business Day,
and with respect to payments of principal, interest thereon shall be payable at
the then applicable rate during such extension.
This note is one of the Revolving Notes referred to in the Credit
Agreement, dated as of July 30, 1997 (as amended, supplemented or otherwise
modified from time to time, the "CREDIT AGREEMENT"), among the Borrowers, the
Lender, the other financial institutions parties thereto, BT Commercial.
Corporation, as Agent (in such capacity, the "AGENT") and Bankers Trust
Company, as Issuing Bank (in such capacity, the "ISSUING "BANK"), and is subject
to, and entitled to, all provisions and benefits thereof and is subject to
voluntary and mandatory prepayment in whole or in part as provided therein.
Capitalized terms used herein shall have the meanings given to such terms in the
Credit Agreement unless otherwise defined herein. The Credit Agreement, among
other things, provides for the making of Revolving Loans by the Lender to the
Borrowers from time to time in an aggregate amount not to exceed at any time
outstanding the U.S. dollar amount first above mentioned.
<PAGE> 2
Upon the occurrence and during the continuance of an Event of Default, the
Agent may, among other things, by delivery of written notice to the Borrowers
from the Agent, take any or all of the following actions, without prejudice to
the rights of the Agent, the Lender or any holder of this note to enforce its
claims against the Borrowers: (a) declare all Obligations due hereunder to be
immediately due and payable (except with respect to any Event of Default set
forth in Section 8.1(g) of the Credit Agreement, in which case all Obligations
due hereunder shall automatically become immediately due and payable without the
necessity of any notice or other demand) without presentment, demand, protest or
any other action or obligation of the Lender; and (b) immediately terminate the
Commitments; and at all times thereafter, all loans and advances made by the
Lender pursuant to the Credit Agreement shall be at the Lender's sole
discretion.
This note is secured by the collateral described in the Security Agreements
and other Collateral Documents.
The Borrowers hereby waive presentment, demand, protest and notice of any
kind in connection with this note. No failure to exercise, and no delay in
exercising any rights hereunder on the part of the holder hereof shall operate
as a waiver of such rights.
This note shall not be revoked or impaired as to either Borrower by the
revocation or release of any obligations of the other Borrower.
Each Borrower hereby agrees that, until the Obligations are paid in full
and the Credit Agreement and all outstanding Letters of Credit are terminated,
it shall not assert any claim or other right that it may now have or hereafter
acquire against the other Borrower that arises from the existence, payment,
performance or enforcement of such Borrower's obligations under this note or the
Credit Agreement, the other Credit Documents or the Obligations or guarantees
thereof, including, without limitation, any right of subrogation, reimbursement,
exoneration, contribution or indemnification and any right to participate in any
claim or remedy of the Agent or any Lender against the other Borrower, or any
collateral securing any Obligation, whether or not such claim, remedy or right
arises in equity or under contract, statute or common law, including, without
limitation, the right to take or receive from the other Borrower, directly or
indirectly, in cash or other property or by set-off or in any other manner,
payment or security on account of such claim, remedy or right. If any amount
shall be paid to either Borrower in violation of the preceding sentence at any
time prior to the indefeasible cash payment in full of the Obligations and the
termination of the Credit Agreement and all outstanding Letters of Credit, such
Borrower shall immediately give the Agent notice of its receipt of such amount
and such amount shall be held in trust for the benefit of the Agent and the
Lenders owed the Obligations which gave rise to such Borrower's right of
recovery, segregated from other funds of such Borrower, and shall forthwith
<PAGE> 3
be paid to the Agent to be credited and applied to the Obligations then due and
payable, whether matured or unmatured, in such order as the Agent may determine.
Each Borrower acknowledges that it will receive direct and indirect benefits
from the Credit Agreement and the transactions consummated in connection
therewith and that the waiver set forth in this paragraph is knowingly made in
contemplation of such benefits. Until all of the Obligations shall have been
paid in full in cash and the termination of the Credit Agreement and all
outstanding Letters of Credit, neither Borrower will enforce any other claim or
exercise any other rights which it may have against the other Borrower.
This note (a) is issued in substitution and exchange for (but not in
payment of) the Revolving Note dated October 31, 1997 made by the Borrowers in
favor of the Lender (the "Original Note") and (b) amends and restates the
Original Note in its entirety.
THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS NOTE SHALL BE GOVERNED
BY THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS OTHER THAN
SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW) AND DECISIONS OF THE
STATE OF NEW YORK.
SAFETY 1ST, INC.
Witness: /s/ Paula L. Murphy By: /s/ Richard E. Wenz
--------------------------- ----------------------------------
Name:
Title:
SAFETY 1ST HOME PRODUCTS CANADA
INC.
Witness: /s/ Paula L. Murphy By: /s/ Richard E. Wenz
--------------------------- ----------------------------------
Name:
Title:
-3-
<PAGE> 1
EXHIBIT 10(bb)
AMENDED AND RESTATED REVOLVING NOTE
$7,000,000 January 23, 1998
FOR VALUE RECEIVED, the undersigned, SAFETY 1ST, INC., a Massachusetts
corporation, and SAFETY 1ST HOME PRODUCTS CANADA INC., a Canadian federal
corporation, (collectively, the "BORROWERS"), jointly and severally promise to
pay to the order of LaSalle National Bank (the "LENDER") at care of BT
Commercial Corporation, as Agent, 14 Wall Street, New York, New York 10005, in
lawful money of the United States of America and in immediately available funds,
the principal amount of SEVEN MILLION DOLLARS ($7,000,000), or such lesser
amount as may then constitute the unpaid aggregate principal amount of the
Lender's Proportionate Share of the Revolving Loans outstanding on the
Expiration Date.
The Borrowers jointly and severally agree to pay interest at said office,
in like money, on the unpaid principal amount owing hereunder from time to time
from the date hereof until paid in full (both before and after judgment) on the
dates and at the rates specified in Article IV of the Credit Agreement (as
defined below).
If any payment on this note becomes due and payable on a day other than a
Business Day, such payment shall be extended to the next succeeding Business
Day, and with respect to payments of principal, interest thereon shall be
payable at the then applicable rate during such extension.
This note is one of the Revolving Notes referred to in the Credit
Agreement, dated as of July 30, 1997 (as amended, supplemented or otherwise
modified from time to time, the "CREDIT AGREEMENT"), among the Borrowers, the
Lender, the other financial institutions parties thereto, BT Commercial
Corporation, as Agent (in such capacity, the "AGENT") and Bankers Trust
Company, as Issuing Bank (in such capacity, the "ISSUING BANK"), and is subject
to, and entitled to, all provisions and benefits thereof and is subject to
voluntary and mandatory prepayment in whole or in part as provided therein.
Capitalized terms used herein shall have the meanings given to such terms in the
Credit Agreement unless otherwise defined herein. The Credit Agreement, among
other things, provides for the making of Revolving Loans by the Lender to the
Borrowers from time to time in an aggregate amount not to exceed at any time
outstanding the U.S. dollar amount first above mentioned.
<PAGE> 2
Upon the occurrence and during the continuance of an Event of Default, the
Agent may, among other things, by delivery of written notice to the Borrowers
from the Agent, take any or all of the following actions, without prejudice to
the rights of the Agent, the Lender or any holder of this note to enforce its
claims against the Borrowers: (a) declare all Obligations due hereunder to be
immediately due and payable (except with respect to any Event of Default set
forth in Section 8.1(g) of the Credit Agreement, in which case all Obligations
due hereunder shall automatically become immediately due and payable without the
necessity of any notice or other demand) without presentment, demand, protest or
any other action or obligation of the Lender; and (b) immediately terminate the
Commitments; and at all times thereafter, all loans and advances made by the
Lender pursuant to the Credit Agreement shall be at the Lender's sole
discretion.
This note is secured by the collateral described in the Security Agreements
and other Collateral Documents.
The Borrowers hereby waive presentment, demand, protest and notice of any
kind in connection with this note. No failure to exercise, and no delay in
exercising any rights hereunder on the part of the holder hereof shall operate
as a waiver of such rights.
This note shall not be revoked or impaired as to either Borrower by the
revocation or release of any obligations of the other Borrower.
Each Borrower hereby agrees that, until the Obligations are paid in full
and the Credit Agreement and all outstanding Letters of Credit are terminated,
it shall not assert any claim or other right that it may now have or hereafter
acquire against the other Borrower that arises from the existence, payment,
performance or enforcement of such Borrower's obligations under this note or the
Credit Agreement, the other Credit Documents or the Obligations or guarantees
thereof, including, without limitation, any right of subrogation, reimbursement,
exoneration, contribution or indemnification and any right to participate in any
claim or remedy of the Agent or any Lender against the other Borrower, or any
collateral securing any Obligation, whether or not such claim, remedy or right
arises in equity or under contract, statute or common law, including, without
limitation, the right to take or receive from the other Borrower, directly or
indirectly, in cash or other property or by set-off or in any other manner,
payment or security on account of such claim, remedy or right. If any amount
shall be paid to either Borrower in violation of the preceding sentence at any
time prior to the indefeasible cash payment in full of the Obligations and the
termination of the Credit Agreement and all outstanding Letters of Credit, such
Borrower shall immediately give the Agent notice of its receipt of such amount
and such amount shall be held in trust for the benefit of the Agent and the
Lenders owed the Obligations which gave rise to such Borrower's right of
recovery, segregated from other funds of such Borrower, and shall forthwith
<PAGE> 3
be paid to the Agent to be credited and applied to the Obligations then due and
payable, whether matured or unmatured, in such order as the Agent may determine.
Each Borrower acknowledges that it will receive direct and indirect benefits
from the Credit Agreement and the transactions consummated in connection
therewith and that the waiver set forth in this paragraph is knowingly made in
contemplation of such benefits. Until all of the Obligations shall have been
paid in full in cash and the termination of the Credit Agreement and all
outstanding Letters of Credit, neither Borrower will enforce any other claim or
exercise any other rights which it may have against the other Borrower.
This note (a) is issued in substitution and exchange for (but not in
payment of) the Revolving Note dated October 31, 1997 made by the Borrowers in
favor of the Lender (the "Original Note") and (b) amends and restates the
Original Note in its entirety.
THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS NOTE SHALL BE GOVERNED
BY THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS OTHER THAN
SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW) AND DECISIONS OF THE
STATE OF NEW YORK.
SAFETY 1ST, INC.
Witness: /s/ Paula L. Murphy By: /s/ Richard E. Wenz
---------------------------- ----------------------------------
Name:
Title:
SAFETY 1ST HOME PRODUCTS CANADA
INC.
Witness: /s/ Paula L. Murphy By: /s/ Richard E. Wenz
---------------------------- ----------------------------------
Name:
Title:
-3-
<PAGE> 1
EXHIBIT 10(cc)
AMENDED AND RESTATED REVOLVING NOTE
$7,000,000 January 23, 1998
FOR VALUE RECEIVED, the undersigned, SAFETY 1ST, INC., a Massachusetts
corporation, and SAFETY 1ST HOME PRODUCTS CANADA INC., a Canadian federal
corporation, (collectively, the "BORROWERS"), jointly and severally promise to
pay to the order of Summit Commercial/Gibraltar Corp. (the "LENDER") at care of
BT Commercial Corporation, as Agent, 14 Wall Street, New York, New York 10005,
in lawful money of the United States of America and in immediately available
funds, the principal amount of SEVEN MILLION DOLLARS ($7,000,000), or such
lesser amount as may then constitute the unpaid aggregate principal amount of
the Lender's Proportionate Share of the Revolving Loans outstanding on the
Expiration Date.
The Borrowers jointly and severally agree to pay interest at said office,
in like money, on the unpaid principal amount owing hereunder from time to time
from the date hereof until paid in full (both before and after judgment) on the
dates and at the rates specified in Article IV of the Credit Agreement (as
defined below).
If any payment on this note becomes due and payable on a day other than a
Business Day, such payment shall be extended to the next succeeding Business
Day, and with respect to payments of principal, interest thereon shall be
payable at the then applicable rate during such extension.
This note is one of the Revolving Notes referred to in the Credit
Agreement, dated as of July 30, 1997 (as amended, supplemented or otherwise
modified from time to time, the "CREDIT AGREEMENT"), among the Borrowers, the
Lender, the other financial institutions parties thereto, BT Commercial
Corporation, as Agent (in such capacity, the "AGENT") and Bankers Trust Company,
as Issuing Bank (in such capacity, the "ISSUING BANK"), and is subject to, and
entitled to, all provisions and benefits thereof and is subject to voluntary and
mandatory prepayment in whole or in part as provided therein. Capitalized terms
used herein shall have the meanings given to such terms in the Credit Agreement
unless otherwise defined herein. The Credit Agreement, among other things,
provides for the making of Revolving Loans by the Lender to the Borrowers from
time to time in an aggregate amount not to exceed at any time outstanding the
U.S. dollar amount first above mentioned.
<PAGE> 2
Upon the occurrence and during the continuance of an Event of Default, the
Agent may, among other things, by delivery of written notice to the Borrowers
from the Agent, take any or all of the following actions, without prejudice to
the rights of the Agent, the Lender or any holder of this note to enforce its
claims against the Borrowers: (a) declare all Obligations due hereunder to be
immediately due and payable (except with respect to any Event of Default set
forth in Section 8.1(g) of the Credit Agreement, in which case all Obligations
due hereunder shall automatically become immediately due and payable without the
necessity of any notice or other demand) without presentment, demand, protest or
any other action or obligation of the Lender; and (b) immediately terminate the
Commitments; and at all times thereafter, all loans and advances made by the
Lender pursuant to the Credit Agreement shall be at the Lender's sole
discretion.
This note is secured by the collateral described in the Security Agreements
and other Collateral Documents.
The Borrowers hereby waive presentment, demand, protest and notice of any
kind in connection with this note. No failure to exercise, and no delay in
exercising any rights hereunder on the part of the holder hereof shall operate
as a waiver of such rights.
This note shall not be revoked or impaired as to either Borrower by the
revocation or release of any obligations of the other Borrower.
Each Borrower hereby agrees that, until the Obligations are paid in full and the
Credit Agreement and all outstanding Letters of Credit are terminated, it shall
not assert any claim or other right that it may now have or hereafter acquire
against the other Borrower that arises from the existence, payment, performance
or enforcement of such Borrower's obligations under this note or the Credit
Agreement, the other Credit Documents or the Obligations or guarantees thereof,
including, without limitation, any right of subrogation, reimbursement,
exoneration, contribution or indemnification and any right to participate in any
claim or remedy of the Agent or any Lender against the other Borrower, or any
collateral securing any Obligation, whether or not such claim, remedy or right
arises in equity or under contract, statute or common law, including, without
limitation, the right to take or receive from the other Borrower, directly or
indirectly, in cash or other property or by set-off or in any other manner,
payment or security on account of such claim, remedy or right. If any amount
shall be paid to either Borrower in violation of the preceding sentence at any
time prior to the indefeasible cash payment in full of the Obligations and the
termination of the Credit Agreement and all outstanding Letters of Credit, such
Borrower shall immediately give the Agent notice of its receipt of such amount
and such amount shall be held in trust for the benefit of the Agent and the
Lenders owed the Obligations which gave rise to such Borrower's right of
recovery, segregated from other funds of such Borrower, and shall forthwith
<PAGE> 3
be paid to the Agent to be credited and applied to the Obligations then due and
payable, whether matured or unmatured, in such order as the Agent may determine.
Each Borrower acknowledges that it will receive direct and indirect benefits
from the Credit Agreement and the transactions consummated in connection
therewith and that the waiver set forth in this paragraph is knowingly made in
contemplation of such benefits. Until all of the Obligations shall have been
paid in full in cash and the termination of the Credit Agreement and all
outstanding Letters of Credit, neither Borrower will enforce any other claim or
exercise any other rights which it may have against the other Borrower.
This note (a) is issued in substitution and exchange for (but not in
payment of) the Revolving Note dated October 31, 1997 made by the Borrowers in
favor of the Lender (the "Original Note") and (b) amends and restates the
Original Note in its entirety.
THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS NOTE SHALL BE
GOVERNED BY THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS
OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW) AND DECISIONS
OF THE STATE OF NEW YORK.
SAFETY 1ST, INC.
Witness: /s/ Paula L. Murphy By: /s/ Richard E. Wenz
------------------------- -----------------------------------
Name:
Title:
.
SAFETY 1ST HOME PRODUCTS CANADA
INC.
Witness: /s/ Paula L. Murphy By: /s/ Richard E. Wenz
------------------------- -----------------------------------
Name:
Title:
-3-
<PAGE> 1
EXHIBIT 10(dd)
WAIVER TO CREDIT AGREEMENT
THIS WAIVER (this "WAIVER"), to the Credit Agreement dated as of
July 30, 1997, among SAFETY 1ST, INC., a Massachusetts corporation ("SAFETY"),
SAFETY 1ST HOME PRODUCTS CANADA INC., a Canadian federal corporation ("SAFETY
CANADA" and, together with Safety, the 'BORROWERS"), each of the financial
institutions from time to time parties thereto as lenders (the "LENDERS" ), BT
COMMERCIAL CORPORATION, as agent (in such capacity, the "AGENT") for the Lenders
and BANKERS TRUST COMPANY, as issuer of letters of credit (in such capacity, the
"ISSUING BANK"), is made as of February 18, 1998 among the Borrowers and the
undersigned Lenders.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Borrowers, the Lenders, the Agent and the Issuing Bank
are parties to the Credit Agreement, dated as of July 30, 1997 (as heretofore
amended on October 29, 1997 and January 23, 1998 and as the same may be further
amended, supplemented or otherwise modified from time to time, the "CREDIT
AGREEMENT"; capitalized terms used herein shall have the meanings assigned to
them in the Credit Agreement unless otherwise defined herein);
WHEREAS, the Borrowers have requested that the Lenders agree to waive
a certain provision of the Credit Agreement, and the undersigned Lenders are
agreeable to such waiver, but only on the terms and subject to the conditions
set forth herein;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the parties hereto hereby agree as follows:
SECTION 1. WAIVER. Effective as of the date hereof, but subject to the
satisfaction of the conditions of effectiveness set forth in Section 2 hereof,
the Lenders hereby waive compliance with Section 7.2.(v) of the Credit Agreement
with respect to the period ended December 31, 1997, PROVIDED that this waiver
will not be effective if the Consolidated Fixed Charge Coverage Ratio for the
period ended December 31, 1997 is less than 1:1.
<PAGE> 2
SECTION 2. EFFECTIVENESS. This Waiver shall become effective upon the
Agent's receipt of this Waiver, duly executed by the Borrowers and the Majority
Lenders.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE BORROWERS. Each of
the Borrowers represents and warrants as follows:
(a) The execution, delivery and performance by each Borrower of this
Waiver (i) are within such Borrower's corporate powers and authority, have been
duly authorized by all necessary corporate action and do not contravene (A)
such Borrower's Governing Documents (including, without limitation, the
certificate of designation for any preferred stock of a Borrower), (B) any
Requirement of Law applicable to it or any of its properties or (C) any
franchise, license, permit, indenture, contract, lease, agreement, instrument or
other commitment to which it is a party or by which it or any of its properties
are bound, (ii) will not result in a Default or an Event of Default and (iii)
will not result in or require the creation or imposition of any Lien upon or
with respect to any property now owned or hereafter acquired by any Borrower
(other than Liens permitted by the Credit Agreement).
(b) This Waiver constitutes the legal, valid and binding obligations
of such Borrower enforceable against such Borrower in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency or
similar laws affecting creditor's rights generally and general principles of
equity.
SECTION 4. REFERENCE TO AND EFFECT ON THE CREDIT DOCUMENTS.
(a) Upon the effectiveness of this Waiver, on and after the date
hereof, each reference in the Credit Agreement to (i) "this Agreement,"
"hereunder," "hereof," "herein" and words of like import, and such words or
words of like import in each reference in the Credit Documents, shall mean and
be a reference to the Credit Agreement as waived hereby.
(b) Except as specifically waived hereby, all of the terms and
provisions of the Credit Agreement shall remain in full force and effect and are
hereby ratified and confirmed.
(e) The execution, delivery and effectiveness of this Waiver shall
not, except as expressly provided herein, operate as an amendment to or a waiver
of any right, power or remedy of the Agent or the Lenders under any of the
Credit Documents, or constitute an amendment to or a waiver of any provision of
any of the Credit Documents.
<PAGE> 3
(d) This Waiver shall be deemed to be a Credit Document for all
purposes.
SECTION 5. EXECUTION IN COUNTERPARTS; ETC. This Waiver may be executed
in counterparts each of which when so executed and delivered shall be deemed to
be an original and all of which taken together shall constitute one and the same
instrument. This Waiver may be executed and delivered by telecopier with the
same force and effect as if the same was a fully executed and delivered original
manual counterpart.
SECTION 6. COSTS, EXPENSES AND TAXES. The Borrowers shall jointly and
severally pay any and all stamp and other taxes payable or determined to be
payable in connection with the execution and delivery of this Waiver and the
documents contemplated hereby or delivered in connection herewith, and agrees to
hold the Lenders harmless from and against any and all liabilities with respect
to or resulting from any delay in paying or omission to pay such taxes. The
Borrowers shall jointly and severally pay for all of the reasonable costs and
expenses incurred by the Agent in connection with the preparation, negotiation
and execution of this Waiver, including, without limitation, the reasonable fees
and expenses of counsel to the Agent.
SECTION 7. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT
OF THIS Waiver SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT
GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES THEREOF (OTHER THAN SECTION
5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).
-3-
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
BORROWERS
---------
SAFETY 1ST, INC.
By: /s/ Richard E. Wenz
-------------------------------------
Name: Richard E. Wenz
Title: President & COO
SAFETY 1ST, HOME PRODUCTS CANADA INC.
By: /s/ Richard E. Wenz
-------------------------------------
Name: Richard E. Wenz
Title: Vice President
LENDERS
-------
BT COMMERCIAL CORPORATION
By: /s/ Frederic W. Thomas, Jr.
-------------------------------------
Name: Frederic W. Thomas, Jr.
Title: V.P.
LASALLE NATIONAL BANK
By: /s/ Christopher G. Clifford
-------------------------------------
Name: Christopher G. Clifford
Title: Senior Vice President
BNY FINANCIAL CORPORATION
By:
-------------------------------------
Name:
Title:
-4-
<PAGE> 5
SUMMIT COMMERCIAL/GIBRALTAR CORP.
By: /s/ Harvey Friedman
-------------------------------------
Name:
Title: EXEC. VICE PRES.
FINOVA CAPITAL CORPORATION
By:
-------------------------------------
Name:
Title:
-1-
<PAGE> 1
EXHIBIT 10(ee)
SHARE EXCHANGE AGREEMENT
Agreement effective as of the 2nd day of April, 1998, by and among
SAFETY 1ST, INC., a Massachusetts corporation, having a principal place of
business at 210 Boylston Street, Chestnut Hill, MA 02167 (the "Company"), BEAR,
STEARNS & CO., INC. having a principal place of business at 245 Park Avenue, New
York, New York 10167 ("Bear Stearns") and BT CAPITAL PARTNERS, INC. having a
principal place of business at 130 Liberty Street, New York, New York 10006 ("BT
Capital"). Each capitalized term used herein without definition shall have the
meaning assigned thereto in the Purchase Agreement (as defined below) and in the
Exhibits thereto.
Whereas, pursuant to a Stock and Warrant Purchase Agreement dated as of
July 30, 1997 (the "Purchase Agreement"), the Company issued 7,500 shares of
Series A Preferred Stock to Bear Stearns and 7,500 shares of Series A Preferred
Stock to BT Capital; and
Whereas, pursuant to a Certificate of Designation of Series B Preferred
Stock (the "Certificate of Designation") the Company has designated additional
shares of its preferred stock as Series B Preferred Stock (the "Series B
Preferred Stock"); and
Whereas, the parties desire to memorialize their prior agreement on or
before December, 1997 by which (i) the Company would be permitted to redeem at
any time, and at its option, any or all of the shares of Series A Preferred
Stock then outstanding, and (ii) the Investors would be permitted under certain
conditions to redeem at any time, and at their option, all of the shares of
Series A Preferred Stock then outstanding, and wish to effect such agreement by
exchanging the Series A Preferred Stock with Series B Preferred Stock (the
"Exchange").
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
1. Any references contained in the Purchase Agreement, the Voting
Agreement, or any of the Warrants to "Series A Preferred Stock", to "Purchased
Shares", to "Shares" or to "Restricted Securities" shall, with respect to
matters relating to events or transactions occurring on and after this date, be
deemed to refer to the Series B Preferred Stock. For purposes of resolving any
ambiguity, the Company acknowledges that the computation of the Series B
Preferred Liquidation Preference (as defined in the Certificate of Designation)
and the price per share to be paid upon any redemption of the Series B Preferred
Stock shall include the amount of accrued and unpaid dividends (whether or not
declared) on the Series A Preferred Stock through the effective date of the
Exchange.
2. On or promptly after the execution of this Agreement:
(a) BT Capital shall surrender to the Company Certificate No.
P-1 representing 7,500 shares of the Company's Series A Preferred Stock, and in
exchange therefor, the Company shall issue and deliver to BT Capital
Certificate No. P-3 representing 7,500 shares of the Company's Series B
Preferred Stock.
(b) Bear Stearns shall surrender to the Company Certificate
No. P-2 representing 7,500 shares of the Company's Series A Preferred Stock,
and in exchange therefor, the Company
<PAGE> 2
shall issue and deliver to Bear Stearns Certificate No. P-4 representing 7,500
shares of the Company's Series B Preferred Stock.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to the Investors that the shares of Series B Preferred
Stock, when issued as aforesaid, will be duly authorized, validly issued, fully
paid and nonassessable and not subject to any pre-emptive rights, rights of
first refusal or other similar rights of the stockholders of the Company.
4. This agreement may be executed in counterparts each of which when so
executed and delivered shall be deemed to be an original and all of which taken
together shall constitute one in the same agreement. This Agreement may be
executed and delivered by telecopier with the same force and effect as if the
same were a fully executed and delivered original manual counterpart.
5. The validity, interpretation and enforcement of this Agreement shall
be governed by the laws of the State of New York.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the date
first set forth above.
Witness: SAFETY 1ST, INC.
By: /s/ Richard E. Wenz
- ------------------------ ----------------------------------
Name: Richard E. Wenz
-----------------------------
Its President and COO
------------------------
hereunto duly authorized
BEAR, STEARNS & CO., INC.
By: /s/ John D. Howard
- ------------------------ -----------------------------------
Name: John D. Howard
-----------------------------
Its Senior M.D.
------------------------
hereunto duly authorized
BT CAPITAL PARTNERS, INC.
/s/ Ingrid Baerwald By: /s/ James M. Dworkin
- ------------------------ ----------------------------------
Ingrid Baerwald Name: James M. Dworkin
-----------------------------
Its Managing Director
------------------------
hereunto duly authorized
<PAGE> 1
EXHIBIT 10(ff)
THIRD AMENDMENT AND WAIVER TO CREDIT AGREEMENT
----------------------------------------------
THIS THIRD AMENDMENT AND WAIVER (this "AMENDMENT"), to the Credit
Agreement dated as of July 30, 1997, among SAFETY 1ST, INC., a Massachusetts
Corporation ("SAFETY"), SAFETY 1ST HOME PRODUCTS CANADA INC., a Canadian
federal corporation ("SAFETY CANADA" and, together with Safety, the
"BORROWERS"), each of the financial institutions from time to time parties
thereto as lenders (the "LENDERS"), BT COMMERCIAL CORPORATION, as agent (in such
capacity, the "AGENT") for the Lenders and BANKERS TRUST COMPANY, as issuer of
letters of credit (in such capacity, the "ISSUING BANK"), is made as of
March 31, 1998 among the Borrowers and the undersigned Lenders.
W I T N E S E T H :
- - - - - - - - -
WHEREAS, the Borrowers, the Lenders, the Agent and the Issuing Bank are
parties to the Credit Agreement, dated as of July 30, 1997 (as heretofore
amended on October 29, 1997 and January 23, 1998 and as the same may be further
amended, supplemented or otherwise modified from time to time, the "CREDIT
AGREEMENT"; capitalized terms used herein shall have the meanings assigned to
them in the Credit Agreement unless otherwise defined herein);
WHEREAS, Safety issued 15,000 shares of its Series A Preferred Stock (the
"SERIES A PREFERRED STOCK") to certain investors (the "INVESTORS") pursuant to
the Stock Purchase Agreement;
WHEREAS, Safety desires to issue 15,000 shares of a new class of preferred
stock (the "SERIES B ISSUANCE") to be designated as its Series B Preferred
Stock (the "SERIES B PREFERRED STOCK") containing terms set forth in a
Designation of Series B Preferred Stock, substantially in the form of Exhibit A
attached hereto (the "SERIES B CERTIFICATE OF DESIGNATION").
WHEREAS, Safety and the Investors desire to memorialize their prior
agreement to modify the terms of the Series A Preferred Stock to permit Safety
at any time to redeem any or all of the shares of its preferred stock and to
permit the Investors, under the circumstances described in the Series B
Certificate of Designation, to require Safety to redeem all of the shares of its
preferred stock then outstanding, which modification would be accomplished
pursuant to a Share Exchange Agreement, substantially in the form of Exhibit B
attached hereto (the "EXCHANGE AGREEMENT") under which each Investor agrees to
exchange its shares of Series A Preferred Stock for an equal number of shares of
Series B Preferred Stock (the "EXCHANGE").
<PAGE> 2
WHEREAS, the Borrowers have requested that the undersigned Lenders agree to
amend and waive certain provisions of the Credit Agreement to permit Safety to
consummate the Series B Issuance and the Exchange; and
WHEREAS, the undersigned Lenders are agreeable to such amendments and
waivers, but only on the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the parties hereto hereby agree as follows:
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. Effective as of December 31,
1997, but subject to the satisfaction of the conditions precedent set forth in
Section 3, the Credit Agreement is hereby amended as follows:
(a) Section 1.1 of the Credit Agreement is amended by inserting the
following definitions in their proper alphabetical sequence;
"'Series B Certificate of Designation' means the Certificate of
Designation relating to the Series B Preferred Stock.
'Series B Preferred Stock' means 15,000 shares of Series B Preferred
Stock issued by Safety, which contain the terms and conditions set forth in
the Series B Certificate of Designation.'"
(b) Section 7.2(d) of the Credit Agreement is amended by (i) inserting
"(i)" immediately after "except that" and (ii) inserting the following
immediately before the period at the end of such Section: "and (ii) Safety may
file the Series B Certificate of Designation."
(c)Section 7.2(h) of the Credit Agreement is amended by (i) deleting
"Certificate of Designation of Safety dated as of July 28, 1997" and
substituting therefor "Series B Certificate of Designation" and (ii) deleting
"Safety's Series A Preferred Stock" and substituting therefor "the Series B
Preferred Stock."
SECTION 2. WAIVERS. Effective as of December 31, 1997, but subject to the
satisfaction of the conditions of effectiveness set forth in Section 3 hereof:
-2-
<PAGE> 3
(a) the Lenders hereby waive compliance with Section 7.2(j) of the
Credit Agreement, but solely to the extent required to permit Safety to
consummate the Series B Issuance and the Exchange; and
(b) the Lenders hereby waive compliance with Section 7.2(l)(ii) of the
Credit Agreement, but solely to the extent required to permit Safety to
consummate the Series B Issuance and the Exchange.
SECTION 3. EFFECTIVENESS. This Amendment shall become effective upon
the Agent's receipt of (a) this Amendment, duly executed by the Borrowers and
the majority Lenders and duly consented to by the Guarantors, and (b) evidence
satisfactory to it that the Exchange Agreement has become effective in
accordance with its terms.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE BORROWERS. Each of the
Borrowers represents and warrants as follows:
(a) The execution, delivery and performance by each Borrower of this
Amendment, the Credit Agreement as amended hereby and any documents delivered
in connection herewith to which such Borrower is a party (i) are within such
Borrower's corporate powers and authority, have been duly authorized by all
necessary corporate action and do not contravene (A) such
Borrower's Governing Documents (including, without limitation, the certificate
of designation for any preferred stock of a Borrower), (B) any Requirement of
Law applicable to it or any of its properties or (C) any franchise, license,
permit, indenture, contract, lease, agreement, instrument or other commitment
to which it is a party or by which it or any of its properties are bound, and
(ii) will not result in or require the creation or imposition of any Lien upon
or with respect to any property now owned or hereafter acquired by any Borrower
(other than Liens permitted by the Credit Agreement).
(b) This Amendment, the Credit Agreement as amended hereby and any
documents delivered in connection herewith to which such Borrower is a party
constitute the legal, valid and binding obligations of such Borrower
enforceable against such Borrower in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency or similar laws
affecting creditor's rights generally and general principles of equity.
-3-
<PAGE> 4
(c) There is no pending or, to the best of its knowledge, threatened
litigation, proceeding, inquiry or other action seeking an injunction or other
restraining order with respect to the transactions contemplated by this
Amendment or the Credit Agreement as amended hereby.
(d) Since December 31, 1997 there has occurred no change, occurrence,
development or event which has had or could reasonably be expected to have a
Material Adverse Effect.
(e) After giving effect to this Amendment, no Default or Event of
Default has occurred and is continuing.
(f) No shares of the Series A Preferred Stock will be outstanding upon
the Consummation of the Exchange.
SECTION 5. REFERENCE TO AND EFFECT ON THE CREDIT DOCUMENTS.
(a) Upon the effectiveness of this Amendment, on and after the date
hereof, each reference in the Credit Agreement to (i) "this Agreement,"
"hereunder," "hereof," "herein" and words of like import, and such words or
words of like import in each reference in the Credit Documents, shall mean and
be a reference to the Credit Agreement as amended hereby.
(b) Except as specifically amended and waived hereby, all of the terms
and provisions of the Credit Agreement shall remain in full force and effect
and are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as an amendment to or a
waiver of any right, power or remedy of the Agent or the Lenders under any of
the Credit Documents, or constitute an amendment to or a waiver of any
provision of any of the Credit Documents.
(d) Nothing in this Amendment shall be deemed to constitute a consent
by the Lenders to any obligation Safety may have to redeem any or all of the
shares of the Series B Preferred Stock pursuant to Section 5(b) of the Series B
Certificate of Designation or otherwise.
(e) This Amendment shall be deemed to be a Credit Document for all
purposes.
SECTION 6. EXECUTION IN COUNTERPARTS; ETC. This Amendment may be
executed in counterparts each of which when so executed and delivered shall be
deemed to be an original and all of which taken together shall constitute one
and the same instrument. This Amendment and each of the other documents
-4-
<PAGE> 5
delivered in connection herewith may be executed and delivered by telecopier
with the same force and effect as if the same was a fully executed and
delivered original manual counterpart.
SECTION 7. COSTS, EXPENSES AND TAXES. The Borrowers shall jointly and
severally pay any and all stamp and other taxes payable or determined to be
payable in connection with the execution and delivery of this Amendment and the
documents contemplated hereby or delivered in connection herewith, and agrees
to hold the Lenders harmless from and against any and all liabilities with
respect to or resulting from any delay in paying or omission to pay such taxes.
The Borrowers shall jointly and severally pay for all of the reasonable
out-of-pocket expenses incurred by the Agent in connection with the
preparation, negotiation and closing of this Amendment, including, without
limitation, the reasonable fees and expenses of Luskin, Stern & Eisler LLP,
counsel to the Agent.
SECTION 8. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT
OF THIS AMENDMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK
WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES THEREOF (OTHER THAN
SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
BORROWERS
SAFETY 1ST, INC.
By: /s/ Richard E. Wenz
-------------------------------------
Name: Richard E. Wenz
Title: President & COO
SAFETY 1ST HOME PRODUCTS CANADA, INC.
By: /s/ Richard E. Wenz
-------------------------------------
Name: Richard E. Wenz
Title: Vice President
LENDERS
BT COMMERCIAL CORPORATION
By: /s/ Bruce Phoel
-------------------------------------
Name: Bruce Phoel
Title: Sr. Vice President
LASALLE NATIONAL BANK
By:
-------------------------------------
Name:
Title:
BNY FINANCIAL CORPORATION
By: /s/ Barry S. Renow
-------------------------------------
Name: Barry S. Renow
Title: Asst. Vice President
-6-
<PAGE> 7
SUMMIT COMMERCIAL/GIBRALTAR CORP.
BY: /s/ Harvey Friedman
---------------------------
NAME: Harvey Friedman
TITLE: Ex. Vice President
FINOVA CAPITAL CORPORATION
BY: /s/ Thomas Gibbons
---------------------------
NAME: Thomas Gibbons
TITLE: Vice President
Agreed and Consented as of the
First Date Written Above:
SAFETY 1ST INTERNATIONAL, INC.
BY: /s/ Richard E. Wenz
---------------------------------
NAME: Richard E. Wenz
TITLE: Vice President
SAFETY 1ST (EUROPE) LIMITED
BY: /s/ Richard E. Wenz
---------------------------------
NAME: Richard E. Wenz
TITLE: Director
3232301 CANADA, INC.
BY: /s/ Richard E. Wenz
---------------------------------
NAME: Richard E. Wenz
TITLE: Vice President
-7-
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 27, 1998 (except for note 3, as to
which the date is April 2, 1998), accompanying the consolidated financial
statements and we have issued our report dated February 27, 1998 on Schedule II,
included in the Annual Report of Safety 1st, Inc. and Subsidiaries on Form 10-K
for the fiscal year ended January 3, 1998. 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 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SAFETY 1ST
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 100.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> JAN-01-1997
<PERIOD-END> JAN-03-1998
<EXCHANGE-RATE> 1
<CASH> 838,549
<SECURITIES> 0
<RECEIVABLES> 25,111,211
<ALLOWANCES> 1,700,000
<INVENTORY> 16,372,172
<CURRENT-ASSETS> 45,112,429
<PP&E> 19,969,977
<DEPRECIATION> (7,304,449)
<TOTAL-ASSETS> 79,533,464
<CURRENT-LIABILITIES> 43,874,603
<BONDS> 0
15,839,098
0
<COMMON> 71,872
<OTHER-SE> 10,892,154
<TOTAL-LIABILITY-AND-EQUITY> 79,533,464
<SALES> 104,977,666
<TOTAL-REVENUES> 104,977,666
<CGS> 62,593,720
<TOTAL-COSTS> 62,593,720
<OTHER-EXPENSES> 35,010,169
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,117,433
<INCOME-PRETAX> 3,256,344
<INCOME-TAX> (7,195,209)
<INCOME-CONTINUING> 10,451,553
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,451,553
<EPS-PRIMARY> .44
<EPS-DILUTED> .40
</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. In addition, the new computer system is fully compliant with
Year 2000, whereas the current system used by the Company requires modifications
to become Year 2000 compliant. Any significant delay or inability to adequately
implement this system may 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 the 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 over 20 manufacturers located in the Far East,
the United Kingdom, Canada and the United States. As a result of not owning its
own manufacturing facilities, the Company has less 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 over 50% 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
<PAGE> 2
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 50% 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 environment 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, thee
can be no assurance that existing or future insurance coverage will be
sufficient to cover all product liability risks.
GOVERNMENT REGULATION. The Company's products are subject to the provisions of
the Federal Consumer Product Safety Act and the Federal Hazardous Substances Act
(the "Acts") and the regulations promulgated thereunder. The Acts authorize the
Consumer Product Safety Commission (the "CPSC") to protect the public from
products which present a substantial risk of injury. The CPSC can require the
repurchase or recall by the manufacturer of articles which are found to be
defective and impose fines or penalties on the manufacturer. Similar laws exist
in some states and cities and in other countries in which the Company markets
its products. Any recall of its products could have a material adverse effect on
the Company.
COMPETITION. The juvenile products and home security industries are highly
competitive and include numerous domestic and foreign competitors, some of which
are substantially larger and have greater financial and other resources than the
Company. The Company competes on the basis of product innovations, brand name
recognition, price, quality, customer service and breadth of product line.
COST OF DEBT. 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 1997, international sales represented 19% 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.
PREFERRED STOCK REDEMPTION: The holders of the Company's Series B Preferred
Stock have the right to require the Company to redeem the preferred stock
immediately under certain conditions, provided that the holders surrender their
ten-year warrants to purchase approximately 1,270,000 shares of Common Stock.
Upon such occurrence the Company may be in default under the provision of its
credit facility which prohibits the redemption of the preferred stock. Failure
to honor the redemption would result in a default under the terms of the
preferred stock.
