<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
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 Fiscal Year ended January 2, 1999
Commission File No. 0-21404
SAFETY 1ST, INC.
(Exact Name of Registrant as specified in its Charter)
MASSACHUSETTS 04-2836423
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
210 BOYLSTON STREET 02167
CHESTNUT HILL, MASSACHUSETTS (Zip code)
(Address of principal executive offices)
(617) 964-7744
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO ___
<PAGE> 2
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, 1999 was approximately $10,000,000 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, 1999
was 7,231,122.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive proxy statement for its 1999 Annual Meeting
of Stockholders are incorporated by reference into Part III of this report.
<PAGE> 3
PART I
ITEM 1 -- BUSINESS
GENERAL
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. All references to fiscal 1998,
1997, and 1996 refer to the years ended January 2, 1999, January 3, 1998, and
December 31, 1996, respectively.
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.
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 and 1998, 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.
The Company currently distributes approximately 375 products to approximately
2,000 customers, the largest among them being Wal-Mart, Toys-R-Us, and Kmart. In
1998, 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 continue to enhance its image as a leader in the juvenile products market
and facilitate its continued growth in its core product categories.
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JUVENILE MARKET OVERVIEW
The juvenile products industry has experienced significant growth in retail
sales over the past decade. The Company believes this growth is the 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 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 $4.4 billion in 1997. 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.
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.
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 intends 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 are distributed by Delta Enterprises. The Company intends
on licensing the 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").
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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 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.
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.
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 2, JANUARY 3, DECEMBER 31,
1999 1998 1996
----------------- ----------------- -----------------
NET SALES PERCENT NET SALES PERCENT NET SALES PERCENT
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Child Safety Products ........................ $ 31,016 25.6% $ 28,395 27.0% $ 27,170 25.7%
Child Care, Convenience and Activity Products 88,545 73.0 73,464 70.0 70,164 66.3
Home Security Products ....................... 1,719 1.4 3,119 3.0 8,418 8.0
-------- ----- -------- ----- -------- -----
Total Net Sales .............................. $121,280 100.0% $104,978 100.0% $105,752 100.0%
======== ===== ======== ===== ======== =====
</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.
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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 expanded into the development and marketing of child care,
convenience and activity products. The Company has since added 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,
traditional walkers 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.
NEW PRODUCT INTRODUCTIONS
Juvenile Products
The Company began shipping approximately 54 new juvenile products for sale in
1998, including the Four Wheelin' Walker, 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 1998, in keeping with the new managed growth philosophy, the
Company introduced additional new juvenile products for sale in 1999. This
new assortment includes several bouncers, an ear thermometer, and the Bouncing
Buggy upgrade, in addition to new items in the booster, potty, monitor, and
feeding categories.
The Company currently markets products utilizing the Baby Looney Tunes
trademarks under its license agreement with Warner Brothers, and has developed
19 new products utilizing characters including baby Bugs Bunny for sales in
1998.
PRODUCT DESIGN AND DEVELOPMENT
During the past several years, the Company has introduced the following
quantities of new products:
<TABLE>
<CAPTION>
YEAR
NEW PRODUCTS PEG BULK HOME
INTRODUCED FOR SALE PRODUCTS PRODUCTS SECURITY TOTAL
- ------------------- -------- -------- -------- -----
<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
1999 47 21 4 72
</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.
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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 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 1998, the Company sold its products to approximately 2,000 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 CVS; hardware and home center chains, such as Home Depot and Lowes;
warehouse clubs including BJ's; mail order catalogs such as Perfectly Safe; and
specialty retailers.
For the fiscal year ending January 2, 1999, approximately 23.7%, 22.0%, and 6.4%
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
1998.
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 $23.5 million, for the year ended January 2, 1999,
accounting for 19.5% 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 a distributor in France who is managing
the new business relationship with Carrefour, one of the leading hyper-markets
in France. In conjunction with its new distributors in Europe, the Company has
discontinued 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 multi-language text to give the products
a broader reach to the customer. In 1997, the Company developed 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 Magazine.
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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 1998, the Company derived approximately 58% 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 transported by rail 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 1998, the Company purchased approximately 18.0%, 16.1%, 9.0%, 6.4%, 5.2%,
and 4.6% respectively, of its products from six manufacturers located in the
United States and China. 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. Raw materials are purchased by the manufacturers who deliver
completed products to the Company. The Company believes that an adequate supply
of the raw materials and supplies used in the manufacture of its products is
readily available from existing and alternative sources and at reasonable
prices.
DISTRIBUTION
U.S. product distribution is centralized at the Company's warehouse facility
located in North Londonderry, New Hampshire. Safety 1st Canada leases a
distribution facility in Montreal, Canada and Safety 1st Europe leases a
warehouse facility in England, which is used to service customers primarily
located in the United Kingdom. Product is shipped to these locations direct from
the Far East, direct from U.S. suppliers and, when necessary, from the
Londonderry warehouse facility for distribution throughout Canada and Europe.
Upon arrival at the New Hampshire, Montreal, or United Kingdom distribution
facilities, 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.
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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 industry is highly competitive and includes 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.
EMPLOYEES
As of February 27, 1999, the Company had a total of 315 full-time employees, of
which 264 were based in the United States, 25 were based in Canada, and 26 were
based in the United Kingdom. Of the Company's 315 full-time employees, 6 were
employed in executive capacities, 62 in sales, marketing, and product
development, 202 in distribution and operations, and 45 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.
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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 $590,000 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, a sales and administrative office in England, and 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.
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 2, 1999.
8
<PAGE> 11
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 bids for the Common Stock for the periods indicated as
reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1998:
First Quarter.......................................... $ 9.25 $6.00
Second Quarter......................................... 10.00 6.63
Third Quarter.......................................... 7.50 4.75
Fourth Quarter......................................... 8.25 2.00
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
</TABLE>
On March 15, 1999, the last reported sales price as quoted on the Nasdaq
National Market was $3.125 per share. As of March 15, 1999, 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.
9
<PAGE> 12
ITEM 6 -- SELECTED FINANCIAL DATA
The following selected financial data as of and for the three annual fiscal
periods ended January 2, 1999, 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, 1995 and 1994, is derived from the
Company's financial statements, which have been audited by Grant Thornton LLP,
independent certified public accountants. The selected financial data should be
read in conjunction with the Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report (dollars in thousands, except per
share amounts).
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales .............................................. $ 121,280 $ 104,978 $ 105,752 $ 103,218 $ 70,166
Cost of sales .......................................... 75,011 62,594 88,979 68,673 41,959
Gross profit ........................................... 46,269 42,384 16,773 34,545 28,207
Selling, general and administrative expenses ........... 40,057 34,423 54,385 28,320 17,449
Special Charges and impairment of long-lived assets .... 2,069 587 11,596 -- --
Operating income (loss) ................................ 4,143 7,374 (49,208) 6,225 10,758
Other expenses (income) - net .......................... 4,054 4,117 4,100 1,065 (111)
Income (loss) before income taxes ...................... 89 3,256 (53,308) 5,160 10,869
Net income (loss) ...................................... 1,194 10,452 (44,849) 3,200 6,583
Net income (loss) available to common shareholders ..... (1,011) 3,140 (44,849) 3,200 6,583
Basic earnings (loss) per common share ................. $ (0.14) $ 0.44 $ (6.27) $ 0.45 $ 0.95
Diluted earnings (loss) per common share ............... $ (0.14) $ 0.40 $ (6.27) $ 0.44 $ 0.92
Shares used to compute basic earnings per common share . 7,218 7,187 7,157 7,132 6,956
Shares used to compute diluted earnings per common share 7,218 7,828 7,157 7,250 7,129
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit) .............................. $ (3,309) $ 1,238 $ (25,080) $ 21,483 $ 28,124
Total assets ........................................... 83,735 79,533 71,277 86,319 52,314
Short-term bank debt ................................... 27,054 27,927 36,653 25,390 --
Notes payable and current portion of long-term debt .... 2,873 1,095 1,920 -- --
Long-term debt (excluding capital lease obligations) ... 6,250 8,750 -- -- --
Redeemable preferred stock ............................. 18,044 15,839 -- -- --
Stockholders' equity ................................... 10,143 10,964 2,078 46,019 41,848
</TABLE>
- ----------
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.
10
<PAGE> 13
OVERVIEW
The Company believes that its sales 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.
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 and 1998, 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.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated, certain
financial data (dollars in thousands):
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3, DECEMBER 31,
1999 1998 1996
------- ------- -------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales ............................................... 121,280 104,978 105,752
Cost of sales ........................................... 75,011 62,594 88,979
Gross profit ............................................ 46,269 42,384 16,773
Selling, general and administrative expenses ............ 40,057 34,423 54,385
Special Charges and impairment of long-lived assets ..... 2,069 587 11,596
Operating income (loss) ................................. 4,143 7,374 (49,208)
</TABLE>
Fiscal Year Ended January 2, 1999 Compared to fiscal Year Ended January 3, 1998
Net sales for the year ended January 2, 1999 were $121,280,000, an increase of
$16,302,000 from net sales of $104,978,000 for the year ended January 3, 1998.
Juvenile sales comprised 98.6% of the net sales for the year ended January 2,
1999, and home security sales made up the balance.
Gross profit increased to $46,269,000, or 38.2% of net sales for the year ended
January 2, 1999 from $42,384,000, or 40.4% of net sales for the year ended
January 3, 1998. Gross profit percentage was impacted by the following factors;
(i) devaluation of the Canadian dollar, which increased cost of goods sold for
the Canadian subsidiary because all inventory purchases are made in the U.S.
dollars; (ii) unusually high number of product returns due to the Company's toy
replacement program for the Bounce N' Ride Buggy product, and (iii) higher mix
of bulk products sold, which generally carry a lower gross margin than peg
products.
Selling, general, and administrative expenses increased by $5,634,000 to
$40,057,000 or 33.0% of net sales for the year ended January 2, 1999. The
increase is primarily attributed to an increase in selling related expenses
caused by the sales increase as well as an increase in payroll and payroll
related costs.
11
<PAGE> 14
In the fourth quarter of 1998, the Company recorded special charges of
$2,069,000. Approximately $1,100,000 of the charge relates to the Company's
elimination of the chemical diisononyl phthalate ("phthalates") from all of its
products which are intended for the mouth, including pacifiers and teethers.
This action was taken in response to a public announcement issued by the
Consumer Products Safety Commission which stated that, although there is no
substantial evidence that the use of phthalates is a health hazard, consumers
may want to avoid giving mouthable products that include phthalates to children
under three years of age. The Company has discontinued the use of phthalates in
the manufacture of its mouthable products and anticipates that these products
will be available in phthalate-free versions during the first half of 1999. The
remaining $969,000 of the special charges relates to several one-time items that
occurred in the fourth quarter, including the resolution of two legal matters
which had previously been in dispute, as well as severance costs.
As a result of the above factors, operating income for the year ended January 2,
1999 was $4,143,000 or 3.4% of net sales, a decrease of $3,231,000 from
$7,374,000, or 7.0% of net sales, for the year ended January 3, 1998. Operating
income for the year ended January 2, 1999 excluding the special charges was
$6,212,000 or 5.1% of net sales, a decrease from the comparable period in 1998.
Net interest expense for the year ended January 2, 1999 was $4,054,000 versus
$4,117,000 for the year ended January 3, 1998. During 1997, the Company
refinanced its existing credit facility-refer to the "Liquidity and Capital
Resources" section below.
Net loss available for common shareholders for the year ended January 2, 1999
was ($1,011,000) or ($0.14) per share on a diluted basis, including a tax
benefit of $1,105,000 related to a change in valuation of net deferred tax
assets. Realization of the $11,115,000 net deferred tax assets is dependent on
the Company's ability to generate approximately $32,000,000 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 and 1998, 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 net
deferred tax assets quarterly. In addition, in the year ended January 3, 1998,
the Company recorded accretion of $6,472,000 representing the excess of the
redeemable preferred stock redemption value over the carrying value. This
acceleration related 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 diluted basis, for
the fiscal year ended January 3, 1998.
Fiscal Year Ended January 3, 1998 Compared to Fiscal 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 restructuring
charges. 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 restructuring 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.
12
<PAGE> 15
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 diluted basis, including a tax benefit of
$8,400,000 related to a change in valuation allowance. 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
related 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 diluted basis, compared to a loss of
$44,849,000 or $6.27 per share for the year ended December 31, 1996.
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 income for 1997 was $7,374,000 versus an operating loss of $49,208,000
for 1996, an increase of $56,582,000, due to the above factors.
Interest expense increased from $4,100,000 during 1996 to $4,117,000 in 1997.
The Company recorded an income tax benefit of $7,195,000 in 1997 versus
$8,459,000 in 1996. The income tax benefit primarily relates to the recognition
of certain net operating loss carryforwards. In 1996, the Company had deferred
tax assets arising from net operating loss carryforwards and deductible
temporary differences of $14,400,000 before a valuation allowance of
$10,300,000 and offset against deferred tax liabilities of $1,900,000.
13
<PAGE> 16
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% (8.0% at
January 2, 1999) on the revolving credit facility, and LIBOR plus 3% or prime
plus 2% (8.3% at January 2, 1999) 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 2, 1999, the Company had
$801,510 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 collateralized 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.
On September, 1, 1998 the Company's United Kingdom subsidiary entered into a
three-year pound sterling 2,500,000 financing arrangement consisting of an
Inventory Facility and an Invoice Discounting Facility. The maximum permitted
borrowing amounts are pound sterling 1,250,000 and pound sterling 2,500,000 for
the Inventory Facility and the Invoice Discounting Facility, respectively. The
credit facility, which expires in September 2001, has an interest rate of Lloyds
Bank Plc Base Rate plus 2% for the first twelve months and Lloyds Bank Plc Base
Rate plus 2.25% for the remaining twenty-four months. For the year-ended January
2, 1999, the average interest rate of these borrowings for the year ended
January 2, 1999 was 7.25%. The loan agreement requires the Company to pay a
commitment fee equal to .50% per annum of the difference between total
borrowings and pound sterling 1,200,000 for the first twelve months of the
facility, pound sterling 1,750,000 for the second twelve months of the facility
and pound sterling 2,500,000 for the final twelve months of the facility. As of
January 2, 1999, the Company had pound sterling 211,000 or $350,000 available
under this facility based on the advance rate formula in the loan agreement.
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 provided by operations was $7,629,000 for the year ended January 2,
1999 versus net cash used in operations of $5,300,000 for the year ended January
3, 1998. The increase in the net cash provided by operations was due to improved
working capital management, as evidenced by the decrease in inventory and
accounts receivable for fiscal 1998 despite growing sales in excess of 15%.
For the year ended January 2, 1999, cash flow used in investing activities was
$5,677,000 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 used in financing
activities was $1,894,000, primarily related to 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 current bank facilities will be sufficient to meet
its operating and other cash requirements for the next
14
<PAGE> 17
twelve months.
NEW ACCOUNTING REQUIREMENTS
The Company adopted 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 did 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, which 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.
YEAR 2000
The Year 2000 ("Y2K") 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. In addition, the Company's major customers
and vendors must also be Y2K compliant to ensure that customer orders will be
properly processed and that vendors will be able to supply the Company with
inventory per the terms of its purchase orders. There could be a material
disruption in the Company's business if the computer systems of the Company, its
customers or its vendors are not Y2K compliant.
The Company is addressing the Y2K issue in a three-part approach. The first task
completed was to upgrade the Company's internal computer systems to become Y2K
compliant for recurring transaction processing and financial record-keeping. In
January 1999 the Company migrated to a new BaaN computer system which enables
all significant internal systems to be Y2K compliant. The implementation cost of
this system was approximately $5,400,000. The second issue addressed by the
Company was to work with the Company's customers to ensure that sales orders,
particularly those generated via EDI transmissions, will be able to be processed
with Year 2000 dates. The Company's major customers are large retailers such as
Walmart and Toys 'R Us, who have invested substantial resources relating to Year
2000 issues, and virtually all of the Company's major accounts have been tested
for Y2K processing issues with no significant problems noted to date. The final
issue is to ensure that the Company's vendors will be able to fulfill purchase
orders with Year 2000 dates. The Company uses approximately 10 significant
vendors to source the majority of its product, and all of these vendors (as well
as the smaller vendors) are being thoroughly reviewed by the Company at this
time to ensure that they will be Y2K compliant.
Based on the work performed to date, the Company believes that there will be no
material disruption in its business resulting from Y2K issues. The Company is
developing contingency plans for both customers and vendors to increase its
readiness for potential issues, which will be completed during fiscal 1999. The
cost to complete these contingency plans is estimated to be less than $100,000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE EXPOSURE
The Company's interest rate exposure primarily relates to its revolving credit
facility, which contains interest rates based on either LIBOR or the prime
rate. The Company has locked in the majority of its interest rates for
outstanding borrowings for six months, and therefore concludes that any
near-term change in interest rates comparable to historical interest rate
movements would not materially affect the consolidated results of operations or
financial position for fiscal 1999.
CURRENCY RATE EXPOSURE
The Company's UK and Canadian subsidiaries use the local currency as the
functional currency, and therefore foreign currency translation adjustments are
reflected as a component of stockholders' equity. In addition, these
subsidiaries purchase the majority of their inventory from the US entity in US
dollars, and thus there is foreign currency risk in that fluctuations in the US
dollar versus the local currency could result in increases in cost of goods
sold for the UK and Canadian subsidiaries. To the extent that the Company
expands its international operations, the Company will be exposed to increased
risk of currency fluctuation.
15
<PAGE> 18
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............... 17
Consolidated Financial Statements:
Balance Sheets.............................................. 18
Statements of Operations.................................... 19
Statements of Changes in Stockholders' Equity............... 20
Statements of Cash Flows.................................... 21
Notes to Financial Statements............................... 22
16
<PAGE> 19
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 (the "Company") as of January 2, 1999 and January 3, 1998, 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 2, 1999. 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 2, 1999 and January 3, 1998, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended January 2, 1999, in conformity with generally accepted accounting
principles.
Boston, Massachusetts GRANT THORNTON LLP
February 12, 1999
17
<PAGE> 20
SAFETY 1ST, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash ....................................................... $ 897,602 $ 838,549
Accounts receivable, less allowance for doubtful accounts of
$1,700,000 ............................................... 22,998,283 23,411,211
Inventory .................................................. 15,940,736 16,372,172
Prepaid expenses and other current assets .................. 2,550,462 1,190,497
Deferred income taxes ...................................... 3,300,000 3,300,000
------------ ------------
Total current assets .................................. 45,687,083 45,112,429
------------ ------------
PROPERTY AND EQUIPMENT, AT COST
Molds and tools ............................................ 14,936,099 11,723,661
Computer equipment and software ............................ 2,965,572 2,323,599
Furniture and fixtures ..................................... 2,264,570 2,115,203
Warehouse equipment ........................................ 2,307,541 2,131,104
Leasehold improvements ..................................... 1,857,866 1,676,410
------------ ------------
24,331,648 19,969,977
Less - accumulated depreciation and amortization ........... (10,938,457) (7,304,449)
------------ ------------
Net property and equipment ............................ 13,393,191 12,665,528
============ ============
OTHER ASSETS
Molds in process ........................................... 3,131,026 1,567,990
Software systems in process ................................ 5,382,261 5,005,772
Goodwill, net of accumulated amortization of $853,000
($561,000 in 1997) ....................................... 6,267,150 6,545,520
Patents and trademarks, net of accumulated amortization of
$566,000 ($464,000 in 1997) .............................. 731,500 633,714
Deferred income taxes ...................................... 7,815,700 6,300,000
Deferred financing costs and other assets .................. 1,327,564 1,702,511
------------ ------------
Total other assets ................................ 24,655,201 21,755,507
------------ ------------
$ 83,735,475 $ 79,533,464
============ ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Revolving credit facility .................................. $ 27,053,536 $ 25,426,551
Accounts payable ........................................... 11,411,946 7,536,078
Accrued expenses ........................................... 7,657,697 7,148,943
Notes payable and current portion of long-term debt ........ 2,873,321 3,763,031
------------ ------------
Total current liabilities ............................. 48,996,500 43,874,603
------------ ------------
Long-term debt ............................................. 6,250,000 8,750,000
Capital lease obligation, net of current portion ........... 300,885 105,737
------------ ------------
Total liabilities ................................. 55,547,385 52,730,340
------------ ------------
Commitments and Contingencies ................................... -- --
REDEEMABLE PREFERRED STOCK
$1.00 par value, 100,000 shares of
Preferred Stock authorized; 15,000 shares issued and
outstanding; liquidation preference .................. 18,044,378 15,839,098
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value, 15,000,000
shares authorized, 7,231,122 shares issued and
outstanding ..................................................... 72,311 71,872
(7,187,288 in 1997)
Additional paid-in capital ................................. 40,524,490 40,241,663
Accumulated deficit ........................................ (30,360,323) (29,349,509)
Accumulated other comprehensive deficit .................... (92,766) __
------------ ------------
Total stockholders' equity ........................ 10,143,712 10,964,026
------------ ------------
$ 83,735,475 $ 79,533,464
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE> 21
SAFETY 1ST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 31,
1999 1998 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net sales .............................................. $ 121,279,933 $ 104,977,666 $ 105,751,954
Cost of sales .......................................... 75,011,419 62,593,720 88,978,995
------------- ------------- -------------
Gross profit ........................................... 46,268,514 42,383,946 16,772,959
Selling, general and administrative expenses ........... 40,056,512 34,423,223 54,385,019
Special charges and impairment of long-lived assets .... 2,069,000 586,946 11,596,126
------------- ------------- -------------
Operating income (loss) ................................ 4,143,002 7,373,777 (49,208,186)
Interest expense, net .................................. 4,053,667 4,117,433 4,099,805
------------- ------------- -------------
Income (loss) before income taxes ...................... 89,335 3,256,344 (53,307,991)
Income tax (benefit) ................................... (1,105,131) (7,195,209) (8,458,779)
------------- ------------- -------------
Net income (loss) ...................................... 1,194,466 10,451,553 (44,849,212)
Dividends and accretion on redeemable preferred stock .. 2,205,280 7,311,098 --
------------- ------------- -------------
Net income (loss) available to common shareholders ..... $ (1,010,814) $ 3,140,455 $ (44,849,212)
============= ============= =============
Basic earnings (loss) per common share ................. $ (0.14) $ 0.44 $ (6.27)
============= ============= =============
Diluted earnings (loss) per common share ............... $ (0.14) $ 0.40 $ (6.27)
============= ============= =============
Shares used to compute basic earnings per common share . 7,218,000 7,187,288 7,157,078
============= ============= =============
Shares used to compute diluted earnings per common share 7,218,000 7,827,876 7,157,078
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE> 22
SAFETY 1ST, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK (ACCUMULATED ACCUMULATED
-------------------------- ADDITIONAL DEFICIT) OTHER
NUMBER OF PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS DEFECIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
Comprehensive Income:
Net Income ................................ 1,194,466 1,194,466
Translation adjustments ................... $ (92,766) (92,766)
------------
Total Comprehensive Income ................ 1,101,700
Net proceeds from stock options ........... 43,834 439 282,827 283,266
Redeemable preferred dividends ............ (2,205,280) (2,205,280)
------------ ------------ ------------ ------------ ------------ ------------
Balance - January 2, 1999 ................. 7,231,122 $ 72,311 $ 40,524,490 $(30,360,323) $ (92,766) $ 10,143,712
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE> 23
SAFETY 1ST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 31,
1999 1998 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................... $ 1,194,466 $ 10,451,553 $(44,849,212)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Deferred income taxes ........................................ (1,515,700) (7,382,000) (3,630,960)
Stock compensation expense ................................... -- -- 701,370
Depreciation ................................................. 4,170,398 3,177,588 4,841,106
Amortization ................................................. 785,408 541,467 404,016
Impairment of long-lived assets .............................. -- 586,946 11,596,126
------------ ------------ ------------
Net cash provided by (used in) operating activities before
changes in assets and liabilities ......................... 4,634,572 7,375,554 (30,937,554)
Changes in assets and liabilities
(Increase) decrease in:
Accounts receivable ........................................ 412,928 (3,173,864) 2,353,736
Inventory .................................................. 431,436 773,511 13,376,577
Prepaid expenses and other assets .......................... (2,234,336) (289,727) 1,879,292
Tax refund receivable (payable) ............................ -- 5,026,644 (2,715,369)
Increase (decrease) in:
Accounts payable - trade ................................... 3,875,867 (9,816,636) 6,109,885
Accrued expenses ........................................... 508,754 (5,195,074) 9,852,947
------------ ------------ ------------
Net cash provided by (used in) operating activities 7,629,221 (5,299,592) (80,486)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiaries ..................................... -- (1,490,552)
Acquisition of property and equipment ........................... (729,650) (548,432) (2,386,624)
Increase in molds in process and deposits ....................... (4,636,969) (3,059,763) (3,215,577)
Increase in system software in process .......................... (110,041) (2,350,577) (2,155,195)
Acquisition of patents and trademarks ........................... (200,258) (81,000) (165,686)
------------ ------------ ------------
Net cash used in investing activities ............. (5,676,918) (6,039,772) (9,413,634)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (paydowns) proceeds on revolving credit facility ............ 1,626,985 (11,226,106) 11,262,657
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 ......... (3,609,054) (2,466,286) (750,861)
Refinancing fees ................................................ (194,447) (2,448,457) --
Proceeds from exercised stock options ........................... 283,266 59,359 206,939
------------ ------------ ------------
Net cash (used in) provided by financing activities (1,893,250) 11,668,510 9,979,067
------------ ------------ ------------
Net increase (decrease) in cash ...................................... 59,053 329,146 484,947
Cash balance, beginning of year ...................................... 838,549 509,403 24,456
------------ ------------ ------------
Cash balance, end of year ............................................ 897,602 $ 838,549 $ 509,403
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest ............................................................. $ 3,838,501 $ 3,828,560 $ 3,689,952
============ ============ ============
Income taxes ......................................................... $ -- $ -- $ --
============ ============ ============
Non-cash investing activities:
Increase in accrued obligations ...................................... $ -- $ -- $ 1,013,998
============ ============ ============
Capital lease obligation ............................................. $ 417,274 $ -- $ 486,964
============ ============ ============
</TABLE>
See Note 10 for non-cash acquisition related items.
The accompanying notes are an integral part of these statements.
21
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 31, 1996
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. 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. All references to fiscal 1998, 1997 and
1996 refer to the years ended January 2, 1999, January 3, 1998, and December 31,
1996, respectively.
Inventory
Inventory is valued at the lower of cost (first-in, first-out) or market.
Advertising
Advertising costs are expensed as incurred. Advertising expenses, which consist
primarily of promotional and cooperative advertising allowances provided to
customers, were approximately $5,464,000, $3,497,000 and $5,708,000 for the
years ended January 2, 1999, January 3, 1998 and December 31, 1996,
respectively.
Revenue Recognition
The Company recognizes revenue at the time of shipment to its customers.
Property and Equipment
Property and equipment are recorded at cost, including interest on funds
borrowed to finance the construction of 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 2, 1999 and January 3, 1998,
approximately $62,000 and $153,000, respectively, of interest incurred in
connection with the construction of molds was included in the cost of the molds.
For the years ended January 2, 1999 and January 3, 1998, approximately $266,000
and $203,000 respectively, of interest was capitalized into software systems in
process. The molds and tools are depreciated using the straight-line
22
<PAGE> 25
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.
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 quarterly.
Translation of Foreign Currencies
Operating 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 net deferred tax assets based on expected levels of future earnings.
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 2, 1999, January 3,
1998 and December 31, 1996 were approximately $1,118,000, $757,000 and
$2,060,000, 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.
23
<PAGE> 26
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.
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% (8.0% as
of January 2, 1999) on the revolving credit facility, and LIBOR plus 3% or prime
plus 2% (8.3% as of January 2, 1999) 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 2, 1999, the Company had
$802,000 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 $2,500,000 in 1998 and $1,250,000 in 1997, and are scheduled
to total $2,500,000 in each of the years 1999 through 2001, with the final
payment of $1,250,000 scheduled to be made in 2002. As of January 2, 1999,
$8,750,000 was outstanding under the term loan of which $6,250,000 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 collateralized 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, 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 2, 1999 and January 3, 1998, the average borrowings
under revolving credit facilities were $35,250,000 and $36,900,000,
respectively. The weighted average interest rate of these borrowings for the
years ended January 2, 1999 and
24
<PAGE> 27
January 3, 1998 was 11.3% and 11.2%, respectively. In connection with the
acquisition and restructuring of the credit facility, the Company incurred
$194,000 and $1,662,000, of deferred debt financing costs, of which $391,000 and
$178,000, have been reflected in interest expense on the consolidated statements
of operations for the years ended January 2, 1999 and January 3, 1998,
respectively.
On September, 1, 1998 the Company's United Kingdom subsidiary (Safety 1st
(Europe) Ltd) entered into a three-year pound sterling 2,500,000 financing
arrangement consisting of an Inventory Facility and an Invoice Discounting
Facility. The maximum permitted borrowing amounts are pound sterling 1,250,000
and pound sterling 2,500,000 for the Inventory Facility and the Invoice
Discounting Facility, respectively. The credit facility, which expires in
September 2001, has an interest rate of Lloyds Bank Plc Base Rate plus 2% for
the first twelve months and Lloyds Bank Plc Base Rate plus 2.25% for the
remaining twenty-four months (8.25% at January 2, 1999). For the year-ended
January 2, 1999, the average interest rate of these borrowings for the year
ended January 2, 1999 was 9.0%. The loan agreement requires the Company to pay a
commitment fee equal to .50% per annum of difference between total borrowings
and pound sterling 1,200,000 for the first twelve months of the facility, pound
sterling 1,750,000 for the second twelve months of the facility and pound
sterling 2,500,000 for the final twelve months of the facility. As of January 2,
1999, the Company had pound sterling 95,000, or $157,000, available under this
facility based on the advance rate formula in the loan agreement.
3. 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. 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 $3,044,000, are included in the carrying value of the
preferred stock at January 2, 1999.
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.
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
approximately $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 inventory 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 charge in 1996, the Company
recorded an impairment loss of approximately $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
25
<PAGE> 28
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 $155,000 , $378,000 and
$1,957,000 during the years ended January 2, 1999, January 3, 1998 and December
31, 1996, respectively. Fees for services, including expenses, provided by a
firm associated with a director of the Company amounted to approximately
$484,000, $834,000 and $970,000 during the years ended January 2, 1999, January
3, 1998 and December 31, 1996, 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 2, 1999 and
January 3, 1998 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 2, 1999, January
3, 1998 and December 31, 1996, was approximately $1,400,000, $1,200,000 and
$1,900,000, respectively. Minimum annual rentals for the five fiscal years
subsequent to January 2, 1999 and in the aggregate are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ----------
<S> <C> <C>
1999 .......................................... $ 227,000 $1,540,000
2000 .......................................... 227,000 1,521,000
2001 .......................................... 95,000 1,383,000
2002 .......................................... -- 1,167,000
2003 .......................................... -- 1,009,000
Thereafter .................................... -- 1,448,000
---------- ----------
Total minimum lease payments .................. 549,000 $8,068,000
---------- ==========
Imputed interest .............................. (55,000)
----------
Present value of minimum capital lease ........ 494,000
payments
Current portion ............................... (193,000)
----------
Long-term capital lease obligations ........... $ 301,000
==========
</TABLE>
Letters of Credit
As of January 2, 1999, the Company was contingently liable for unsecured letters
of credit of approximately $1,400,000. These letters of credit were issued to
secure delivery of overseas merchandise.
26
<PAGE> 29
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 2, 1999, January 3, 1998 and December 31, 1996 were $698,000,
$528,000 and $1,493,000, respectively.
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.
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 2, 1999, January 3, 1998 and December 31, 1996, two
customers accounted for approximately 46% (24% and 22%), 44% (23% and 21%) and
36% (22% and 14%), respectively, of net sales.
For the years ended January 2, 1999, January 3, 1998, and December 31, 1996, two
suppliers accounted for approximately 34% (18% and 16%), 37% (20% and 17%), and
33% (21% and 12%), respectively, 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.
27
<PAGE> 30
Income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 31,
1999 1998 1996
------------ ------------ ------------
<S> <C> <C> <C>
Domestic ................. $ (706,000) $ 1,754,000 $(53,557,000)
Foreign .................. 795,000 1,502,000 249,000
------------ ------------ ------------
$ 89,000 $ 3,256,000 $(53,308,000)
============ ============ ============
</TABLE>
The components of income tax (benefit) expense were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------------
JANUARY 2, JANUARY 3, DECEMBER 31,
1999 1998 1996
------------ ------------ ------------
<S> <C> <C> <C>
Federal .................. $ (220,000) $ 760,000 $(18,125,000)
State .................... -- 411,000 (788,000)
Foreign .................. 260,000 34,000 109,000
Valuation allowance ...... (1,145,000) (8,400,000) 10,345,000
------------ ------------ ------------
$ (1,105,000) $ (7,195,000) $ (8,459,000)
============ ============ ============
Current .................. $ 411,000 $ 187,000 $ (4,725,000)
Deferred ................. (1,516,000) (7,382,000) (3,734,000)
------------ ------------ ------------
$ (1,105,000) $ (7,195,000) $ (8,459,000)
============ ============ ============
</TABLE>
The components of the net deferred tax asset (liability) were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------
JANUARY 2, JANUARY 3,
1999 1998
------------ ------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Net operating loss carryforward .......... $ 11,372,000 $ 11,037,000
Accounts receivable allowances ........... 654,000 624,000
Inventories .............................. 285,000 449,000
Balance sheet reserves and allowances .... 1,977,000 1,334,000
Other .................................... 419,000 437,000
------------ ------------
Total deferred tax assets ................ 14,707,000 13,881,000
Less: valuation allowance ................ (800,000) (1,945,000)
------------ ------------
Net deferred tax asset ................... 13,907,000 11,936,000
============ ------------
DEFERRED TAX LIABILITIES:
Depreciation ............................. (2,670,000) (2,214,000)
Patents and trademarks ................... (122,000) (122,000)
------------ ------------
Total deferred tax liabilities ........... (2,792,000) (2,336,000)
------------ ------------
Total net deferred tax asset ............. $ 11,115,000 $ 9,600,000
============ ============
</TABLE>
The Company has recorded a valuation allowance of $800,000 as of January 2,
1999. The net change in the valuation allowance for fiscal 1998 is $1,145,000
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 $11,115,000 net deferred tax asset is dependent on the
Company's ability to generate approximately $32,000,000 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 and 1998, 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.
28
<PAGE> 31
Deferred income taxes are not provided on the undistributed earnings of foreign
subsidiaries aggregating approximately $1,615,000 at January 2, 1999 as such
earnings are expected to be permanently reinvested in these companies.
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 2, JANUARY 3, DECEMBER 31,
1999 1998 1996
------------ ------------ ------------
<S> <C> <C> <C>
Statutory rate ...................... $ 30,000 $ 1,107,000 $(18,125,000)
State and local taxes, net of federal
benefit.............................. -- 411,000 (788,000)
Valuation allowance ................. (1,145,000) (8,400,000) 10,345,000
Foreign net operating loss
carryforwards........................ -- (546,000) --
Other ............................... 10,000 233,000 109,000
------------ ------------ ------------
$ (1,105,000) $ (7,195,000) $ (8,459,000)
============ ============ ============
</TABLE>
9. EMPLOYEE BENEFIT PLANS
Stock Option Plans
As of January 2, 1999, 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, 1,883,775 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 former 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 2, 1999, January 3, 1998 and December 31, 1996 are 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, 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 7.53
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 7.53
Granted ............................................... 362,950 6.53 -- --
Exercised ............................................. (43,334) 6.56 (500) 6.50
Canceled .............................................. (111,001) 6.76 (42,375) 7.53
---------- ------ ---------- ------
Balance - January 2, 1999 ............................. 1,639,750 6.69 244,025 7.53
---------- ------ ---------- ------
Options Exercisable - January 2, 1999 ................. 1,166,404 $ 6.76 235,611 $ 7.46
---------- ------ ---------- ------
</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 original exercise prices
ranging from $12.00 to $27.00 per share.
29
<PAGE> 32
The following table summarizes option data as of January 2, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- --------- ------ ------ --------- ------
<S> <C> <C> <C> <C> <C>
Employees
$ 5.00 - $10.00...... 1,628,907 7.6 $ 6.62 1,155,949 $ 6.66
10.01 - 15.00...... 2,509 6.3 11.31 2,121 11.45
15.01 - 20.00...... 8,334 6.5 19.00 8,333 19.00
--------- ------ ------ --------- ------
1,639,750 7.6 $ 6.69 1,166,404 $ 6.76
--------- ------ ------ --------- ------
Non-Employees
$ 6.00 - $10.00...... 218,025 5.9 $ 6.98 209,611 $ 6.88
10.01 - 15.00...... 26,000 4.9 12.12 26,000 12.12
--------- ------ ------ --------- ------
244,025 5.9 $7.53 235,611 $ 7.46
--------- ------ ------ --------- ------
</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 2, 1999,
January 3, 1998 and December 31, 1996. Compensation cost charged to operations,
which the Company recorded for options granted to non-employees, other than
directors, was $701,000 for the year ended December 31, 1996.
The weighted average fair value at the date of grant for options granted during
the years ended January 2, 1999, January 3, 1998 and December 31, 1996 was
$2.01, $1.98 and $6.25, respectively. The fair value of options at the date of
grant was estimated using the Black-Scholes model with the following weighted
average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------
JANUARY 2, JANUARY 3, DECEMBER 31,
1999 1998 1996
--------- --------- ----------
<S> <C> <C> <C>
Expected life(years) .................... 3 3 5
Interest ................................ 6.5% 6.14% 6.27%
Volatility .............................. 40% 40% 60%
Dividend yield .......................... 0% 0% 0%
</TABLE>
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 2, JANUARY 3, DECEMBER 31,
1999 1998 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net income (loss) - as reported ................ $ (1,011,000) $ 3,140,000 $ (44,849,000)
Net income (loss) - pro forma .................. $ (2,823,000) $ 1,151,000 $ (46,855,000)
Net income (loss) per common share - as reported $ (0.14) $ 0.40 $ (6.27)
Net income (loss) per common share - pro forma . $ (0.39) $ 0.15 $ (6.55)
</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 ended January 2, 1999, January 3, 1998, and December
31, 1996, the Company did not elect to contribute to this plan.
30
<PAGE> 33
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 ($205,000 outstanding as of January 2, 1999 after post-closing
adjustments), and payment of acquisition costs of $1,032,000. 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 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.
11. OPERATING SEGMENTS
The consolidated financial statements include the accounts of wholly-owned
subsidiaries in the United Kingdom and Canada. These geographic locations are
also considered the Company's operating segments.
METHOD OF DETERMINING SEGMENT PROFIT OR LOSS
Management evaluates the performance of its operating segments individually to
monitor the different factors affecting financial performance. Segment profit or
loss includes substantially all of the segment's costs of production,
distribution and administration. The Company manages income taxes on a global
basis, thus evaluates segment performance based on operating profit or loss. The
Company manages financial costs, such as exchange gains and losses and interest
income and expense, on a global basis. Information about the Company's
operations in the different geographic areas as of and for the fiscal years
ended January 2, 1999, and January 3, 1998 is as follows (amounts in thousands):
<TABLE>
<CAPTION>
UNITED
UNITED KINGDOM
STATES AND CANADA ELIMINATIONS CONSOLIDATED
-------- -------- -------- --------
<S> <C> <C> <C> <C>
JANUARY 2, 1999
Net sales to unaffiliated customers .................................. $104,700 $ 16,580 $ -- $121,280
Transfers between geographic locations ............................... 7,871 (7,871) --
-------- -------- -------- --------
Total ................................................................ $112,571 $ 16,580 $ (7,871) $121,280
======== ========= ======== ========
Operating profit ..................................................... $ 2,190 $ 1,939 $ 14 $ 4,143
======== ========= ======== ========
Identifiable assets .................................................. $ 77,503 $ 6,232 $ -- $ 83,735
======== ========= ======== ========
JANUARY 3, 1998
Net sales to unaffiliated customers .................................. $ 92,312 $ 12,666 $ -- $104,978
Transfers between geographic locations ............................... 4,968 -- (4,968) --
-------- -------- -------- --------
Total ................................................................ $ 97,280 $ 12,666 $ (4,968) $104,978
======== ========= ======== ========
Operating profit ..................................................... $ 5,738 $ 1,494 $ 142 $ 7,374
======== ========= ======== ========
Identifiable assets .................................................. $ 76,848 $ 2,543 $ 142 $ 79,533
======== ========= ======== ========
</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, no allocations of general
corporate expenses have been made.
Identifiable assets of geographic areas are those assets related to the
Company's operations in each area. Cash at January 2, 1999 includes
approximately $343,000 of amounts held in foreign bank accounts.
International sales from domestic operations were approximately $6,998,000,
$7,759,000 and $9,562,000, for the years ended January 2, 1999, January 3, 1998,
and December 31, 1996, respectively.
Foreign currency fluctuations could have a material effect on the Company's
financial position and results of operations.
31
<PAGE> 34
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: 7,218,000 in 1998,
7,187,288 in 1997, and 7,157,078 in 1996. 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: 7,218,000 in 1998,
7,827,876 in 1997 and 7,157,078 in 1996. Weighted-average share figures for 1997
include common stock equivalents of 640,588. Common stock equivalents have been
excluded from weighted-average shares for 1996 and 1998 as inclusion would be
anti-dilutive. Options to purchase 1,883,775 and 397,968 shares of common stock
at prices ranging from $4.75 to $19.00 were outstanding at January 2, 1999 and
January 3, 1998, respectively, 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 2, 1999 and January 3, 1998 (dollars in thousands,
except per share amounts):
<TABLE>
<CAPTION>
JANUARY 2, 1999 APRIL 4 JULY 4 OCTOBER 3 JANUARY 2(1)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ........................................ $ 30,936 $ 32,952 $ 32,442 $ 24,950
Gross Profit ..................................... 12,342 12,889 12,407 8,630
Operating Income ................................. 2,412 3,092 2,621 (3,983)
Net Income ....................................... 937 1,392 1,556 (2,692)
Net Income (loss) available to Common Shareholders 413 850 996 (3,270)
Basic earnings (loss) per common share ........... $ .06 $ .12 $ .14 $ (.45)
Diluted earnings (loss) per common share (4) ..... $ .05 $ .10 $ .12 $ (.45)
</TABLE>
<TABLE>
<CAPTION>
JANUARY 3, 1998 MARCH 31 JUNE 28 SEPTEMBER 27(2) JANUARY 3(3)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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 (4) ..... .03 .17 .29 (.09)
</TABLE>
(1) Special charges for the fourth quarter ended January 2, 1999 totaled
$2,069,000. Approximately $1,100,000 of the charge relates to the
Company's elimination of the chemical diisononyl phthalate ("phthalates")
from all of its products which are intended for the mouth, including
pacifiers and teethers. This action was taken in response to a public
announcement issued by the Consumer Products Safety Commission which
stated that although there is no substantial evidence that the use of
phthalates is a health hazard, consumers may want to avoid giving
mouthable products that include phthalates to children under three years
of age. The Company has discontinued the use of phthalates in the
manufacture of its mouthable products and anticipates that these products
will be available in phthalate-free versions during the first half of
1999. The remaining $969,000 of the special charges relates to several
one-time items that occurred in the fourth quarter, including the
resolution of two matters which had previously been in dispute, as well as
severance costs.
(2) The Company recorded a tax benefit of $2,000,000 ($.25 per share) related
to a change in the valuation allowance.
(3) 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, and also
recorded accelerated accretion relating to its preferred stock of
$6,372,000 (which reduced earnings by $0.88 per share).
(4) 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.
32
<PAGE> 35
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
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
Report of the Independent Certified Public Accountants
Consolidated Balance Sheets at January 2, 1999 and January 3, 1998
Consolidated Statements of Operations for the Three Fiscal Years
Ended January 2, 1999, January 3, 1998 and December 31, 1996
Consolidated Statements of Changes in Stockholders' Equity for the
Three Fiscal Years Ended January 2, 1999, January 3, 1998, and
December 31, 1996
Consolidated Statements of Cash Flows for the Three Fiscal Years
Ended January 2, 1999, January 3, 1998 and December 31, 1996
33
<PAGE> 36
(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 2, 1999,
January 3, 1998 and December 31, 1996 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)
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)
34
<PAGE> 37
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.
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
35
<PAGE> 38
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
10(gg)**** Fourth Amendment to Credit Agreement (dated as of July
30, 1999) 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, dated as of May 15, 1998.
10(hh)**** Fifth Amendment to Credit Agreement (date 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, dated as of July 4, 1998.
10(ii)**** Loan Agreement dated as of 1st September, 1998 between
Safety 1st (Europe) Limited, as Borrower, and BNY International
Limited.
10(jj)**** Invoice Discounting Agreement dated as of 1st September,
1998 between Safety 1st (Europe) Limited and BNY International
Limited.
10(kk)**** Company's side letter dated July 24, 1998 to BNY
International Limited waiving ownership claims in goods shipped to
Safety 1st (Europe) Limited and proceeds therefrom.
10(ll) Sixth Amendment to Credit Agreement (date 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, dated as of March 22, 1999.
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
36
<PAGE> 39
* 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.
*** Previously filed with Company's report on Form 10-K dated April 2,
1998 and incorporated herein by reference.
**** Previously filed with Company's report on Form 10-Q dated November
16, 1998 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
the total assets of the Company and its subsidiaries on a consolidated
basis.
(b) Reports On Form 8-K
None
(c) Exhibits - See (a)(3) above
(d) Financial Statement Schedules - See (a)(2) above
37
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SAFETY 1ST, INC. (Registrant)
By: /s/ Michael Lerner Date: March 30, 1999
-------------------------------
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
- -------------------------- Director (Principal Executive Officer) March 30, 1999
Michael Lerner
/s/ Richard E. Wenz Chief Operating Officer March 30, 1999
- --------------------------
Richard E. Wenz
/s/ Joseph S. Driscoll Chief Financial Officer March 30, 1999
- --------------------------
Joseph S. Driscoll
/s/ Michael S. Bernstein Director March 30, 1999
- -------------------------- Executive Vice President
Michael S. Bernstein
/s/ Robert J. Drummond Director March 30, 1999
- --------------------------
Robert J. Drummond
/s/ Laurence S. Levy Director March 30, 1999
- --------------------------
Laurence S. Levy
/s/ Mark Owens Director March 30, 1999
- --------------------------
Mark Owens
/s/ Michael Batal Director March 30, 1999
- --------------------------
Michael Batal
/s/ John Howard Director March 30, 1999
- --------------------------
John Howard
</TABLE>
38
<PAGE> 41
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: Date: March 30, 1999
-------------------------------
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>
- -------------------------- Chief Executive Officer and
Michael Lerner Director (Principal Executive Officer) March 30, 1999
- -------------------------- Chief Operating Officer March 30, 1999
Richard E. Wenz
- -------------------------- Chief Financial Officer March 30, 1999
Joseph S. Driscoll
- -------------------------- Director March 30, 1999
Michael S. Bernstein Executive Vice President
- -------------------------- Director March 30, 1999
Robert J. Drummond
- -------------------------- Director March 30, 1999
Laurence S. Levy
- -------------------------- Director March 30, 1999
Mark Owens
- -------------------------- Director March 30, 1999
Michael Batal
- -------------------------- Director March 30, 1999
John Howard
</TABLE>
39
<PAGE> 42
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 12, 1999
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 2,
1999. 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 12, 1999
40
<PAGE> 43
SCHEDULE II
SAFETY 1ST, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS CHARGED
BEGINNING OF TO COST AND
DESCRIPTION PERIOD EXPENSES DEDUCTION END OF PERIOD
<S> <C> <C> <C> <C>
JANUARY 2, 1999
Accounts Receivable Allowances $1,700,000 $ 990,000 $ 990,000 $1,700,000
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
</TABLE>
41
<PAGE> 1
EXHIBIT 10(LL)
SIXTH AMENDMENT TO CREDIT AGREEMENT
THIS SIXTH AMENDMENT (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 2, 1999 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 as of October 29, 1997, January 23, 1998, March 31, 1998, May 15, 1998
and July 4, 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
amend certain provisions of the Credit Agreement as set forth herein; and
WHEREAS, the undersigned 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:
<PAGE> 2
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 2, the Credit Agreement is hereby amended as follows:
(a) The definition of "Supplemental Amount" in Section 1.1 of the
Credit Agreement is amended and restated as follows:
"'Supplemental Amount' means (a) $2,000,000 from March __,
1999 to May 2, 1999, (b) $1,500,000 from May 3, 1999 to August 1,
1999, (c) $1,000,000 from August 2, 1999 to October 31, 1999, (d)
$500,000 from November 1, 1999 to December 30, 1999 and (e) $0
thereafter."
(b) Section 7.2(u) of the Credit Agreement is amended and restated
as follows:
"(u) Minimum Consolidated EBITDA. Safety will not, for each
period set forth below, permit EBITDA of Safety and its Subsidiaries
to be less than the amount set forth below opposite such period:
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
four fiscal quarters ended January 2, 1999 $ 9,000,000
one fiscal quarter ended April 3, 1999 4,500,000
two fiscal quarters ended July 3, 1999 10,500,000
three fiscal quarters ended October 2, 1999 15,500,000
four fiscal quarters ended on the last day of 20,000,000"
each fiscal quarter thereafter
</TABLE>
(c) Section 7.2(v) of the Credit Agreement is amended and restated
as follows:
"(v) Minimum Consolidated Fixed Charge Coverage Ratio. Safety
will not, for each period set forth below, permit Consolidated Fixed
Charge Coverage Ratio to be less than the ratio set forth below
opposite such period:
-2-
<PAGE> 3
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
four fiscal quarters ended January 2, 1999 0.75:1
one fiscal quarter ended April 3, 1999 1.20:1
two fiscal quarters ended July 3, 1999 1.20:1
three fiscal quarters ended October 2, 1999 1.20:1
four fiscal quarters ended on the last day of 1.20:1"
each fiscal quarter thereafter
</TABLE>
SECTION 2. EFFECTIVENESS. This Amendment shall become effective upon
the Agent's receipt of (a) this Amendment, duly executed by the Borrowers and
the Majority Lenders, (b) payment (i) of an amendment fee of $50,000 for the
ratable benefit of the Lenders and (ii) of 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 and (c) the following
documents, each of which shall be in form and substance satisfactory to the
Agent:
(i) Certified copies of the resolutions of the Board of
Directors of each Borrower approving this Amendment, the documents
delivered in connection herewith and the matters contemplated
hereby.
(ii) 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.
(iii) A certificate executed by an Authorized Officer
certifying that (A) the representations and warranties contained in
Section 3 hereof are true and correct on and as of the date of such
certificate as though made on and as of such date, (B) 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 (C) no Default or Event of Default has occurred
and is continuing.
-3-
<PAGE> 4
(iv) 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.
(v) A consent, substantially in the form of Exhibit A hereto,
duly executed by the Guarantors.
(vi) Such other documents, instruments, opinions, materials
and information as the Agent may request.
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
Amendment and the Credit Agreement as amended hereby (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 such Borrower.
-4-
<PAGE> 5
(b) This Amendment and the Credit Agreement as amended hereby
constitute the legal, valid and binding obligations of such Borrower enforceable
against such Borrower in accordance with their respective 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 October 3, 1998 there has occurred no change, occurrence,
development or event which has had or could reasonably be expected to have a
Material Adverse Effect.
(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 4. 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 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, the Issuing Bank 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.
-5-
<PAGE> 6
(d) This Amendment shall be deemed to be a Credit Document for all
purposes.
SECTION 5. 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 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 Amendment and the
documents contemplated hereby or delivered in connection herewith, and agrees to
hold the Agent, the Lenders and the Issuing Bank harmless from and against any
and all liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes.
SECTION 7. 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).
-6-
<PAGE> 7
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: _________________________________
Name:
Title:
SAFETY 1ST HOME PRODUCTS CANADA INC.
By: _________________________________
Name:
Title:
LENDERS
BT COMMERCIAL CORPORATION
By: _________________________________
Name:
Title:
LASALLE NATIONAL BANK
By: _________________________________
Name:
Title:
BNY FINANCIAL CORPORATION
By: _________________________________
Name:
Title:
-7-
<PAGE> 8
SUMMIT COMMERCIAL/GIBRALTAR CORP.
By: _________________________________
Name:
Title:
FINOVA CAPITAL CORPORATION
By: _________________________________
Name:
Title:
-8-
<PAGE> 9
EXHIBIT A
CONSENT
Dated as of January 2, 1999
Each of the undersigned hereby (a) consents to the terms and
provisions of the Sixth Amendment, dated as of January 2, 1999 (the
"Amendment"), 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
meanings assigned in the Credit Agreement), among Safety 1st, Inc., Safety 1st
Home Products Canada Inc., as Borrowers, each of the financial institutions from
time to time parties thereto as Lenders, BT Commercial Corporation, as Agent and
Bankers Trust Company, as Issuing Bank and (b) confirms and agrees that the
Credit Documents to which it is a party are, and shall continue to be, in full
force and effect and are hereby ratified and confirmed in all respects except
that, upon the effectiveness of, and on and after the date of, the Amendment,
all references in the Credit Agreement to the Credit Documents to which it is a
party shall mean and be a reference to the Credit Agreement as amended by the
Amendment.
This Consent may be executed by the parties hereto in one or more
counterparts, each of which shall be an original and all of which taken together
shall constitute one and the same agreement. This Consent may be executed and
delivered by telecopier or other facsimile transmission with the same force and
effect as if the same was a fully executed and delivered original manual
counterpart.
SAFETY 1ST INTERNATIONAL, INC.
By: _________________________________
Name:
Title:
3232301 CANADA INC.
By: _________________________________
Name:
Title:
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 12, 1999 accompanying the consolidated
financial statements and Schedule II included in the Annual Report of Safety
1st, Inc. and Subsidiaries on Form 10-K for the fiscal year ended January 2,
1999. 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, 1999
<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 and export
controls, currency fluctuations and changes in governmental policies,
particularly those affecting trade with China. Although, the Company continues
to explore alternative manufacturing sources outside of China, there can be no
assurance that the Company will be able to utilize alternative sources of supply
in a timely and cost effective manner.
In addition, because the Company relies largely on foreign manufacturers, the
Company is required to order products further in advance of customer orders than
would generally be the case if such products were manufactured domestically. The
risk of ordering products in this manner is greater during the initial
introduction of new products since it is difficult to determine demand for such
<PAGE> 2
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,
these 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 1998, 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SAFETY 1ST
FORM 10-K FOR THE YEAR ENDED JANUARY 2, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 100.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JAN-02-1999
<CASH> 897,602
<SECURITIES> 0
<RECEIVABLES> 24,698,283
<ALLOWANCES> 1,700,000
<INVENTORY> 15,940,736
<CURRENT-ASSETS> 45,687,083
<PP&E> 24,331,648
<DEPRECIATION> (10,938,457)
<TOTAL-ASSETS> 83,735,475
<CURRENT-LIABILITIES> 48,996,500
<BONDS> 0
18,044,378
0
<COMMON> 72,311
<OTHER-SE> 10,071,401
<TOTAL-LIABILITY-AND-EQUITY> 83,735,475
<SALES> 121,279,933
<TOTAL-REVENUES> 121,279,933
<CGS> 75,011,419
<TOTAL-COSTS> 75,011,419
<OTHER-EXPENSES> 44,194,512
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,053,667
<INCOME-PRETAX> 89,335
<INCOME-TAX> (1,105,131)
<INCOME-CONTINUING> 1,194,466
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,194,466
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
