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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended October 3, 1998
Commission File No. 0-21404
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SAFETY 1ST, INC.
(Exact Name of Registrant as specified in its Charter)
Massachusetts 04-2836423
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification 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
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The aggregate number of Registrant's shares outstanding on October 31, 1998
was 7,231,122 shares of Common Stock, $.01 par value.
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SAFETY 1ST, INC.
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS AS OF OCTOBER 3, 1998
AND JANUARY 3, 1998 (Unaudited) 3
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 3, 1998
AND SEPTEMBER 27, 1997 (Unaudited) 5
CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 3, 1998
AND SEPTEMBER 27, 1997 (Unaudited) 6
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 3, 1998
AND SEPTEMBER 27, 1997 (Unaudited) 7
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited) 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Unaudited) 9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SAFETY 1ST, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
ASSETS
OCTOBER 3, 1998 JANUARY 3, 1998
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CURRENT ASSETS
Cash $ 446 $ 839
Accounts receivable, less allowance for doubtful accounts
of $900, and $1,700, respectively 29,958 23,411
Inventory 15,710 16,372
Prepaid expenses and other current assets 3,235 1,190
Deferred income taxes 3,300 3,300
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TOTAL CURRENT ASSETS 52,649 45,112
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PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $4,900, and $3,900, respectively 14,183 12,666
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OTHER ASSETS
Mold deposits $ 1,821 $ 1,568
Software systems in process 5,228 5,006
Goodwill, net of amortization of $780 and $561 respectively 6,340 6,546
Deferred income taxes 6,433 6,300
Patents and trademarks, net of amortization of
$541 and $464, respectively 631 634
Other assets 1,522 1,701
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TOTAL OTHER ASSETS 21,975 21,755
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$88,807 $79,533
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SAFETY 1ST, INC.
CONDENSED BALANCE SHEETS - CONTINUED
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY:
OCTOBER 3, 1998 JANUARY 3, 1998
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CURRENT LIABILITIES
Revolving credit facility $ 30,178 $ 25,427
Accounts payable and accrued expenses 17,518 14,685
Current portion of long-term debt 2,706 3,763
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TOTAL CURRENT LIABILITIES 50,402 43,875
Long-term debt 7,434 8,855
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TOTAL LIABILITIES 57,836 52,730
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REDEEMABLE PREFERRED STOCK 17,466 15,839
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 15,000,000 shares authorized,
7,231,122 and 7,187,288 issued at October 3, 1998 and
January 3, 1998, respectively 72 72
Additional paid-in capital 40,524 40,242
Accumulated deficit (27,091) (29,350)
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TOTAL STOCKHOLDERS' EQUITY 13,505 10,964
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$ 88,807 $ 79,533
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Note: The Condensed Balance Sheet at January 3, 1998 has been derived from the
audited financial statements at that date. The accompanying notes are an
integral part of these Condensed Financial Statements.
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SAFETY 1ST, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
OCTOBER 3, 1998 SEPTEMBER 27, 1997
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Net Sales $32,442 $26,446
Cost of Sales 20,035 15,411
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GROSS PROFIT 12,407 11,035
Selling general and administrative expenses 9,785 8,573
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OPERATING INCOME 2,622 2,462
Interest expense 1,066 1,101
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INCOME BEFORE INCOME TAXES 1,556 1,361
Income tax expense (benefit) -- (1,496)
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Net Income 1,556 2,857
Dividends and accretion on redeemable
preferred stock 560 478
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Net income available to common shareholders $ 996 $ 2,379
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Basic earnings per common share $ 0.14 $ 0.33
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Diluted earnings per common share $ 0.12 $ 0.29
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Shares used to compute basic earnings per common share 7,231 7,187
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Shares used to compute diluted earnings per common share 8,510 8,088
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The accompanying notes are an integral part of these
Condensed Financial Statements.
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SAFETY 1ST, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
OCTOBER 3, 1998 SEPTEMBER 27, 1997
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Net Sales $96,330 $79,844
Cost of Sales 58,691 47,516
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GROSS PROFIT 37,639 32,328
Selling general and administrative expenses 29,513 25,364
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OPERATING INCOME 8,126 6,964
Interest expense 3,023 3,364
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INCOME BEFORE INCOME TAXES 5,103 3,600
Income tax expense (benefit) 1,217 (668)
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Net Income 3,886 4,268
Dividends and accretion on redeemable
preferred stock 1,627 478
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Net income available to common shareholders $ 2,259 $ 3,790
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Basic earnings per common share $ 0.31 $ 0.53
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Diluted earnings per common share $ 0.26 $ 0.50
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Shares used to compute basic earnings per common share 7,214 7,187
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Shares used to compute diluted earnings per common share 8,649 7,614
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The accompanying notes are an integral part of these
Condensed Financial Statements.
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SAFETY 1ST, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
OCTOBER 3, 1998 SEPTEMBER 27, 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $3,885 $ 4,268
Adjusted to Reconcile Net Income to Net Cash
provided by (used in) operating activities:
Depreciation 3,037 2,413
Amortization 583 354
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NET CASH PROVIDED BY OPERATING ACTIVITIES
BEFORE CHANGES IN ASSETS AND LIABILITIES: 7,505 7,035
Changes on Assets and Liabilities:
(Increase) Decrease in:
Accounts receivable (6,547) (6,144)
Inventory 662 (456)
Prepaid expenses and other assets (3,253) (938)
Tax refund receivable -- 5,027
Increase (Decrease) in:
Accounts Payable and accrued expenses 3,835 (9,968)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,202 (5,444)
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CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisitions of property and equipment (4,224) (2,148)
Increase in software system in process (223) (2,345)
Acquisition of patents and trademarks (74) (51)
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NET CASH USED IN INVESTING ACTIVITIES (4,521) (4,544)
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CASH FLOW PROVIDED BY FINANCING ACTIVITIES:
Net borrowing from (repayment of) revolving credit facility 4,751 (13,640)
Proceeds from (repayment of) long-term debt (1,875) 12,500
Proceeds from issuance of redeemable preferred stock -- 15,000
Refinancing fees -- (2,350)
Proceeds from exercised Stock Options 283 59
Repayment of notes payable (825) (1,176)
Other (408) 250
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NET CASH PROVIDED BY FINANCING ACTIVITIES 1,926 10,643
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Net (Decrease) Increase in cash (393) 655
Cash and Cash Equivalents - Beginning of period 839 509
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CASH AND CASH EQUIVALENTS - END OF PERIOD $ 446 $ 1,164
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for Interest $2,846 $ 3,242
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The accompanying notes are an integral part of these
Condensed Financial Statements
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SAFETY 1ST, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The Company is a developer, marketer and distributor of child safety and
child care, convenience, activity 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 3, 1998.
The results of the operations for the nine months ended October 3, 1998 are
not necessarily indicative of the operating results for the full year.
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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 3, 1998, and incorporated herein by
reference.
Results of Operations (all $ amounts in thousands):
Three Months Ended October 3, 1998 and September 27, 1997
Net sales for the three months ended October 3, 1998 increased by $5,996, or
22.7%, to approximately $32,442 from $26,446 in the comparable period of 1997.
The increase is primarily attributable to an increase in sales domestically by
$5,841, as the Company's continuing product line carried forward from 1997
increased by 14%.
Gross profit for the three months ended October 3, 1998 was $12,407, or 38.2% of
net sales, as compared to $11,035, or 41.7%, for the three months ended
September 27, 1997. Gross profit percentage was impacted by the following
factors: (i) devaluation of the Canadian dollar, which increases cost of goods
sold for the Canadian subsidiary since all inventory purchases are made in U.S.
dollars; (ii) unusually high number of 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 $1,212 to $9,785, or
30.2% of net sales, for the three months ended October 3, 1998 from $8,573, or
32.4% of net sales, for the comparable period in 1997. 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
improvement as a percentage of sales is due to the leveraging of the existing
fixed cost structure over a larger sales base.
As a result of the above factors, operating income for the three months ended
October 3, 1998 was $2,622. Operating income for the comparable period in 1997
was $2,462.
Interest expense decreased to $1,066 for the three months ended October 3, 1998
from $1,101 for the three months ended September 27, 1997 due to lower average
debt balances in 1998 versus the prior year.
The Company recorded an income tax provision of $0 for the three months ended
October 3, 1998 due to the recognition of approximately $500 of deferred tax
benefit related to the reduction in the valuation allowance, as management
believes it is more likely than not that the deferred tax assets on the balance
sheet will be realized through the generation of future taxable income. In the
third quarter of 1997, the Company reduced the valuation allowance by $2 million
based on a similar analysis of projected future income under the "more likely
than not" criteria.
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Nine Months Ended October 3, 1998 and September 27, 1997
Net sales for the nine months ended October 3, 1998 increased by $16,486, or
20.6%, to $96,330 from $79,844 in comparable period in 1997. The increase is
primarily attributable to an increase in sales domestically by $12,996, and
internationally by $3,490. New product sales were $16,230 for the nine months
ended October 3, 1998 versus $11,775 in the prior comparable period.
Gross profit for the nine months ended October 3, 1998 was $37,639, or 39.1% of
net sales, versus $32,328 or 40.5% for the comparable period in 1997. The
decrease in the percentage is primarily due to the same factors noted for the
three months ended October 3, 1998.
Selling, general and administrative expenses were $29,513, or 30.6% of net
sales, for the nine months ended October 3, 1998. For the comparable period
ending 1997, selling, general and administrative expenses were $25,364, or
31.8%, of net sales, an increase of $4,149.
As a result of the above factors, operating income was $8,126 for the nine
months ended October 3, 1998 versus an operating income of $6,964 during the
same period in 1997.
Interest expense decreased from $3,364 for the nine months ended September 27,
1997 to $3,023 for the same period in 1998 due to lower average debt balances in
1998 versus the prior year.
LIQUIDITY AND CAPITAL RESOURCES (ALL $ AMOUNTS 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 facilities (including a revolving
credit facility in the UK completed during the third quarter), as well as
through internally generated funds.
Net cash provided by operations increased to $2,202 for the nine months ended
October 3, 1998 versus net cash used in operations of $5,444 for the nine months
ended September 27, 1997. The primary cause of the increase was more efficient
working capital management, as inventory turns and days sales outstanding
improved versus the prior year.
Net cash used in investing activities was $4,521 due to the purchase of property
and equipment, principally molds for new product introductions. During 1998, net
cash provided by financing activities was $1,926, primarily related to
borrowings from the Company's revolving credit facility of $4,751 offset by
principal payments on the term loan of $1,875 and repayment of notes payable of
$825 issued in connection with the 1996 acquisition of Orleans Juvenile
Products, Inc.
The Company believes that its cash, together with its borrowing availability
will be sufficient to meet its operating and other cash requirements for the
next twelve months.
YEAR 2000
The Year 2000 problem is a result of computer programs being written using two
digits (rather than four) to define the applicable year. Any of the Company's
programs that have time-sentitive software may recognize a date using "00" as
the year 1900 rather the year 2000. This could result in a major system failure
or miscalculations. The Company presently believes that, with modifications to
existing software and conversion to new software, the Year 2000 problem will
not pose significant operational problems for the Company's computer systems as
modified and converted. The Company is also developing contingency plans to
address Year 2000 issues at customers and suppliers; at this time, the Company
is still assessing the effect the Year 2000 issue will have on customers and
suppliers, and therefore cannot fully determine the impact it will have.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
On November 27, 1997, The Product Development Group, Inc. filed a complaint in
Federal District Court in Massachusetts alleging that the Company had infringed
two patents owned by the plaintiff by selling two of its child security gates.
The complaint seeks injunctive relief and treble damages of an unspecified
amount and attorney's fees. The Company disputes the charges of infringement and
the validity of the patents and intends to defend the lawsuit vigorously. The
case is presently in the discovery stage.
On December 4, 1995, T.S.A. Plastic Molds, Inc. ("TSA") filed a lawsuit against
the Company which alleged certain contract claims amounting to approximately
$94,000 (Canadian funds) based on TSA's construction of two steel molds for the
Company. In November of 1997, TSA amended its complaint to claim damages in
excess of $500,000 (Canadian funds). The Company had filed a cross complaint
against TSA claiming that TSA did not deliver the merchandise ordered by the
Company to the Company's specifications. On August 11, 1998, the parties
executed a Mutual Receipt, Release and Discharge under which the Company and TSA
agreed to settle all disputes between the parties, and on September 1, 1998, the
parties executed a Declaration of Settlement Out of Court. The amount of payment
required to be made by the Company pursuant to the settlement is not material.
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 would be
likely to have a material adverse effect on the financial position of the
Company.
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EXHIBIT INDEX
Exhibit Description
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10.1 Fourth Amendment 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, dated as of May 15, 1998.
10.2 Fifth Amendment 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, dated as of July 4, 1998.
10.3 Loan Agreement dated as of 1st September, 1998 between Safety 1st
(Europe) Limited, as Borrower, and BNY International Limited, as
Lender.
10.4 Invoice Discounting Agreement dated as of 1st September, 1998
between Safety 1st (Europe) Limited and BNY International
Limited.
10.5 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.
11 Statement regarding Computation of Per Share Earnings.
27 Financial Data Schedule.
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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: November 16, 1998 By: /s/ Michael Lerner
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Michael Lerner
Chief Executive Officer
(Principal Executive Officer)
Date: November 16, 1998 By: /s/ Richard E. Wenz
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Richard E. Wenz
President and Chief Operating Officer
Date: November 16, 1998 By: /s/ Joseph Driscoll
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Joseph Driscoll
Chief Financial Officer
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