<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended April 3, 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
of incorporation or organization) Identification Number)
210 Boylston Street
Chestnut Hill, Massachusetts 02167
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code:
(617) 964-7744
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
The aggregate number of Registrant's shares outstanding on May 1, 1999 was
7,231,122 shares of Common Stock, $.01 par value.
<PAGE> 2
SAFETY 1ST, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS AS OF APRIL 3, 1999
AND JANUARY 2, 1999 (Unaudited) 3
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 3, 1999
AND APRIL 4, 1998 (Unaudited) 5
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 3, 1999
AND APRIL 4, 1998 (Unaudited) 6
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Unaudited) 8
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURES 11
2
<PAGE> 3
SAFETY 1ST, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
ASSETS: APRIL 3, JANUARY 2,
1999 1999
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 337 $ 898
Accounts receivable, less allowance for doubtful accounts
of $1,700 37,793 22,998
Inventory 15,553 15,941
Prepaid expenses and other assets 2,630 2,550
Deferred Income Taxes 3,300 3,300
-------------------------
TOTAL CURRENT ASSETS 59,613 45,687
-------------------------
PROPERTY AND EQUIPMENT, AT COST
Molds and tools 17,255 14,936
Computer equipment and software 3,027 2,965
Furniture and fixtures 2,271 2,265
Warehouse equipment 2,307 2,307
Leasehold improvements 1,859 1,858
Software Systems 5,382 --
-------------------------
32,101 24,331
Less - accumulated depreciation and amortization (12,655) (10,938)
-------------------------
NET PROPERTY AND EQUIPMENT 19,446 13,393
-------------------------
OTHER ASSETS
Molds in process 1,671 3,131
Software systems in process -- 5,382
Goodwill, net of amortization of $926 ($853 in 1998) 6,180 6,267
Patents and trademarks, net of amortization of $598
($566 in 1998) 815 731
Deferred income taxes 6,543 7,816
Deferred financing costs and other assets 1,226 1,328
-------------------------
TOTAL OTHER ASSETS 16,435 24,655
-------------------------
$ 95,494 $ 83,735
-------------------------
</TABLE>
The accompanying notes are an integral part of these Condensed
Financial Statements
3
<PAGE> 4
SAFETY 1ST, INC.
CONDENSED BALANCE SHEETS - CONTINUED
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY: APRIL 3, JANUARY 2,
1999 1999
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Revolving credit facility $ 31,689 $ 27,054
Accounts payable and accrued liabilities 25,090 19,070
Notes payable and current portion of capital lease obligation 2,693 2,873
-------------------------
TOTAL CURRENT LIABILITIES 59,472 48,997
OTHER LIABILITIES
Long-term debt 5,625 6,250
Capital lease obligation, net of current portion 251 301
-------------------------
TOTAL LIABILITIES 65,348 55,548
-------------------------
REDEEMABLE PREFERRED STOCK
$1.00 par value, 100,000 shares of preferred stock authorized;
15,000 shares issued and outstanding; liquidation preference 18,642 18,044
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 15,000,000 shares authorized,
7,231,122 outstanding 72 72
Additional paid-in capital 40,524 40,524
Accumulated deficit (29,098) (30,360)
Accumulated other comprehensive income (deficit) 6 (93)
-------------------------
TOTAL STOCKHOLDERS' EQUITY 11,504 10,143
-------------------------
$ 95,494 $ 83,735
-------------------------
</TABLE>
The accompanying notes are an integral part of these Condensed Financial
Statements
4
<PAGE> 5
SAFETY 1ST, INC.
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
- ---------------------------------------------------------------------------------------
APRIL 3, APRIL 4,
1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Net Sales $ 39,835 $ 30,936
Cost of Sales 24,310 18,594
---------------------------
GROSS PROFIT 15,525 12,342
Selling, general and administrative expenses 11,603 9,930
---------------------------
OPERATING INCOME 3,922 2,412
Interest expense 970 925
---------------------------
INCOME BEFORE INCOME TAXES 2,952 1,487
Income tax expense 1,092 550
---------------------------
NET INCOME 1,860 937
Dividends on redeemable preferred stock 598 524
---------------------------
Net income available to common shareholders $ 1,262 $ 413
---------------------------
Basic earnings per common share $ 0.17 $ 0.06
===========================
Diluted earnings per common share $ 0.15 $ 0.05
===========================
Shares used to compute basic earnings per common share 7,231,000 7,188,000
===========================
Shares used to compute diluted earnings per common share 8,507,000 8,617,000
===========================
</TABLE>
The accompanying are an integral part of these Condensed Financial Statements.
5
<PAGE> 6
SAFETY 1ST, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
- ----------------------------------------------------------------------------------------
APRIL 3, APRIL 4,
1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income 1,860 $ 937
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation 1,724 939
Amortization 210 182
Deferred income taxes 1,273 466
--------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES
BEFORE CHANGES IN ASSETS AND LIABILITIES: 5,067 2,524
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (14,795) (6,143)
Inventory 388 (130)
Prepaid expenses and other assets 25 (1,216)
Increase in:
Accounts payable and accrued expenses 5,840 4,745
--------------------------
NET CASH USED IN OPERATING ACTIVITIES (3,475) (220)
--------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of property and equipment (927) (1,231)
Acquisition of patents and trademarks (116) (28)
--------------------------
NET CASH USED IN INVESTING ACTIVITIES (1,043) (1,259)
--------------------------
CASH FLOW PROVIDED BY FINANCING ACTIVITIES:
Net borrowings from revolving credit facility 4,635 3,647
Proceeds from exercised stock options -- 48
Repayment of notes payable and capital lease obligation (675) (1,092)
Other (3) (92)
--------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,957 2,511
--------------------------
Net increase (decrease) in cash (561) 1,032
Cash and cash equivalents - beginning of period 898 839
--------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD 337 1,871
--------------------------
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 871 $ 884
--------------------------
Taxes -- --
--------------------------
</TABLE>
The accompanying notes are an integral part of these Condensed Financial
Statements
6
<PAGE> 7
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION ($ in thousands)
The Company is a developer, marketer and distributor of child safety and
child care, convenience, activity and home security products.
The accompanying unaudited condensed financial statements of the Company
have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC") and, in the opinion of the management,
reflect all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position, results of operations
and cash flows for the periods presented.
Certain information and footnote disclosures included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed financial
statements should be read in conjunction with the audited financial
statements and notes thereto included in the financial statements filed as
part of the Company's Annual Report on Form 10-K filed for the year ended
January 2, 1999.
The results of the operations for the three months ended April 3, 1999 are
not necessarily indicative of the operating results for the full year.
Total comprehensive income for the three months ended April 3, 1999 was
$99, versus comprehensive deficit of $(93) for the year ended January 2,
1999. Total comprehensive income (deficit) includes foreign currency
translation adjustments.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Statement of Forward-Looking Information:
The Company may occasionally make forward-looking statements and estimates,
such as forecasts and projections of the Company's future performance or
statements of management's plans and objectives. These forward-looking
statements may be contained in SEC filings, Annual Reports to Shareholders,
Press Releases and oral statements, among others, made by the Company.
Actual results could differ materially from those in such forward-looking
statements. Therefore, no assurances can be given that the results in such
forward-looking statements will be achieved. Important factors that could
cause the Company's actual results to differ from those contained in such
forward-looking statements include, among others, those factors set forth
in Exhibit 99 to the Company's Annual Report on Form 10-K for the year
ended January 2, 1999, and incorporated herein by reference.
Results of Operations:
THREE MONTHS ENDED APRIL 3, 1999 AND APRIL 4, 1998 ($ in thousands)
Net sales for the three months ended April 3, 1999 increased 28.8% to
$39,835 from $30,936 in the comparable period of 1998. The majority of the
increase in net sales is due to sales of new products introduced in 1999,
in addition to increased sales from existing products as the Company
obtained greater distribution of its core product line.
Gross profit for the three months ended April 3, 1999 was $15,525, or
39.0% of net sales, as compared to $12,342, or 39.9% for the three months
ended April 4, 1998. The decrease as a percentage of sales was primarily
due to a reduction in selling price to a significant customer in exchange
for their paying freight costs, a component of SG&A.
Selling, general and administrative expenses increased by $1,673 to
$11,603, or 29.1% of net sales, for the three months ended April 3, 1999
from $9,930, or 32.1% of net sales for the comparable period in 1998. This
increase is primarily attributable to an increase in selling related
expenses caused by the sales increase as well as an increase in payroll and
payroll related costs. The reduction as a percentage of sales is due to the
leveraging of fixed costs over a higher sales base, in addition to the
reduction of freight expense due to the change noted in the gross profit
discussion.
As a result of the above factors, operating income for the three months
ended April 3, 1999 was $3,922. The operating income for the comparable
period last year was $2,412. This represents an increase of 62.6%.
Interest expense increased to $970 for the three months ended April 3, 1999
from $925 for the three months ended April 4, 1998.
Liquidity and Capital Resources ($ in thousands)
The Company's primary capital requirements are for working capital and
capital expenditures. The Company's capital needs are provided by
availability under the Company's term loan and revolving credit facility,
as well as through internally generated funds.
Net cash used in operations was $3,475 for the three months ended April 3,
1999. The major use of cash was an increase in accounts receivable of
$14,794 related to the increase in sales offset by an increase in accounts
payable and accrued expenses of $6,875.
8
<PAGE> 9
Cash flows used in investing activities was $1,043 related to the purchase
of property and equipment, principally molds for new product introductions.
Net cash provided by financing activities was $3,957, primarily related to
borrowings from the Company's revolving credit facility of $4,635 offset by
principal repayments of notes payable.
The Company believes that its cash, together with its current bank facility
will be sufficient to meet its operating and other cash requirements for at
least the next twelve months.
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 3. Quantitative and Qualitative Market Risk
For discussion of certain market risks related to the Company, see Part I,
Item 7A "Quantitative and Qualitative Disclosures about Market Risks", in
the Company's Annual Report on Form 10-K for the fiscal year ended January
2, 1999. There have been no significant developments with respect to
derivatives or exposure to market risk.
9
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
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 the Company's management. The
Company believes that there are no claims or litigation pending, the
outcome of which could have a material adverse effect on the financial
position of the Company.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this report:
Exhibit Description
11 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
99 Important Factors Regarding Forward-Looking
Statements (included as Exhibit 99 to
Registrant's Annual Report on Form 10-K for the
year ended January 2, 1999, and incorporated
herein by reference)
(b) There were no reports on Form 8-K filed during the three months ended
April 3, 1999.
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SAFETY 1ST, INC.
a Massachusetts corporation
Date: May 17, 1999 By: /s/ Michael Lerner
------------------------------
Michael Lerner
Chief Executive Officer
(Principal Executive Officer)
Date: May 17, 1999 By: /s/ Richard E. Wenz
-------------------------------------
Richard E. Wenz
President and Chief Operating Officer
Date: May 17, 1999 By: /s/ Joseph S. Driscoll
---------------------------------
Joseph S. Driscoll
Chief Financial Officer
11
<PAGE> 1
EXHIBIT 11
SAFETY 1ST, INC.
BASIC AND DILUTED
EARNINGS PER COMMON SHARE
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
- --------------------------------------------------------------------------------------------
APRIL 3, APRIL 4,
1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
BASIC EARNINGS PER COMMON SHARE
Earnings available for common shares $ 1,262 $ 413
Basic earnings per common share $ 0.17 $ 0.06
SHARES USED IN COMPUTATION
Weighted average common shares outstanding 7,231,000 7,188,000
DILUTED EARNINGS PER COMMON SHARE
Earnings available for common shares and common stock $ 1,262 $ 413
equivalent shares deemed to have a dilutive effect
Diluted earnings per common share $ 0.15 $ 0.05
SHARES USED N COMPUTATION
Weighted average common shares outstanding 7,231,000 7,188,000
Common stock equivalents - stock options and warrants 1,276,000 1,429,000
----------------------------
TOTAL 8,507,000 8,617,000
============================
</TABLE>
The accompanying notes are an integral part of these Condensed Financial
Statements
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SAFETY 1ST,
INC. FORM 10Q FOR THE QUARTERLY PERIOD ENDED APRIL 3, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FORM 10Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> APR-03-1999
<EXCHANGE-RATE> 1
<CASH> 337
<SECURITIES> 0
<RECEIVABLES> 39,403
<ALLOWANCES> 1,700
<INVENTORY> 15,453
<CURRENT-ASSETS> 59,347
<PP&E> 32,101
<DEPRECIATION> 12,755
<TOTAL-ASSETS> 95,700
<CURRENT-LIABILITIES> 59,872
<BONDS> 0
0
18,642
<COMMON> 72
<OTHER-SE> 11,232
<TOTAL-LIABILITY-AND-EQUITY> 95,700
<SALES> 39,835
<TOTAL-REVENUES> 39,835
<CGS> 24,310
<TOTAL-COSTS> 24,310
<OTHER-EXPENSES> 11,603
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 970
<INCOME-PRETAX> 2,952
<INCOME-TAX> 1,092
<INCOME-CONTINUING> 1,860
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,860
<EPS-PRIMARY> .17
<EPS-DILUTED> .15
</TABLE>
