-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AqepbkXvaVjQdIgP0jJAiVgGDgPpBiE7yue/XPcfea6GNkp6FbXKee0kzB1O0s87 MA+I5BQ3at88MBd+iDBf2w== 0000950135-96-002479.txt : 19960605 0000950135-96-002479.hdr.sgml : 19960605 ACCESSION NUMBER: 0000950135-96-002479 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19960604 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST YEARS INC CENTRAL INDEX KEY: 0000055698 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PLASTIC PRODUCTS [3080] IRS NUMBER: 042149581 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-62673 FILM NUMBER: 96576747 BUSINESS ADDRESS: STREET 1: ONE KIDDIE DR CITY: AVON STATE: MA ZIP: 02322-1171 BUSINESS PHONE: 5085881220 MAIL ADDRESS: STREET 1: ONE KIDDIE DR CITY: AVON STATE: MA ZIP: 02322-1171 FORMER COMPANY: FORMER CONFORMED NAME: KIDDIE PRODUCTS INC DATE OF NAME CHANGE: 19920703 S-1/A 1 AMENDMENT NO. 2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1996 REGISTRATION NO. 33-62673 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ THE FIRST YEARS INC. (Formerly Kiddie Products, Inc.) (Exact name of registrant as specified in its charter) MASSACHUSETTS 5098 04-2149581 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification Number)
------------------------ ONE KIDDIE DRIVE, AVON, MASSACHUSETTS 02322 (508) 588-1220 (Address, including zip code and telephone number, including area code, of registrant's principal executive offices) ------------------------ RONALD J. SIDMAN CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT THE FIRST YEARS INC. ONE KIDDIE DRIVE AVON, MASSACHUSETTS 02322 (508) 588-1220 (Name and address, including zip code, and telephone number, including area code, of agent for service) ------------------------ Copies to: KEITH F. HIGGINS, ESQ. GITTA M. KURLAT, ESQ. PETER B. TARR, ESQ. ROPES & GRAY KURLAT ASSOCIATES HALE AND DORR ONE INTERNATIONAL PLACE ONE BOSTON PLACE 60 STATE STREET BOSTON, MASSACHUSETTS 02110 BOSTON, MASSACHUSETTS 02108 BOSTON, MASSACHUSETTS 02109
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / / THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE FIRST YEARS INC. CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF PART I OF FORM S-1
REGISTRATION STATEMENT LOCATION IN PROSPECTUS ITEM AND CAPTION ---------------------- ---------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus.... Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus............................. Inside Front Cover Page and Outside Back Cover Page of Prospectus; Additional Information 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........ Prospectus Summary; Risk Factors 4. Use of Proceeds........................... Use of Proceeds 5. Determination of Offering Price........... Not Applicable 6. Dilution.................................. Not Applicable 7. Selling Security Holders.................. Principal and Selling Stockholders 8. Plan of Distribution...................... Outside Front Cover Page of Prospectus; Inside Front Cover Page of Prospectus; Underwriting 9. Description of Securities to be Registered................................ Outside Front Cover Page of Prospectus; Description of Capital Stock; Underwriting 10. Interests of Named Experts and Counsel.... Legal Matters; Experts 11. Information With Respect to the Registrant................................ Prospectus Summary; Risk Factors; Use of Proceeds; Dividend Policy; Capitalization; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Principal and Selling Stockholders; Description of Capital Stock; Underwriting; Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities............................... Not Applicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JUNE 4, 1996 1,600,000 SHARES [COMPANY LOGO] COMMON STOCK ------------------------ Of the 1,600,000 shares of Common Stock offered hereby, 400,000 shares are being sold by The First Years Inc. (the "Company" or "The First Years") and 1,200,000 shares are being sold by certain stockholders of the Company (the "Selling Stockholders"). See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. The Common Stock trades on the Nasdaq National Market under the symbol "KIDD". On June 3, 1996, the last reported sale price of the Common Stock was $17.25 per share. See "Price Range of Common Stock." THERE ARE CERTAIN RISKS ASSOCIATED WITH THIS OFFERING. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------ UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(2) - ------------------------------------------------------------------------------------------------------ Per Share..................... $ $ $ $ - ------------------------------------------------------------------------------------------------------ Total(3)...................... $ $ $ $ - ------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------ (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company and the Selling Stockholders estimated at $76,700 and $183,300, respectively. (3) The Company has granted the Underwriters a 30-day option to purchase up to 240,000 additional shares of Common Stock solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting."
------------------------ The shares of Common Stock are offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, subject to the right of the Underwriters to reject any order in whole or in part. It is expected that the delivery of the shares of Common Stock will be made on or about , 1996. A.G. EDWARDS & SONS, INC. ADAMS, HARKNESS & HILL, INC. THE DATE OF THIS PROSPECTUS IS , 1996 4 [THE FIRST YEARS] IFC [Child on parent's shoulders with Company logo superimosed.] THE FIRST YEARS(R), Ideas Inspired by Parents(R), TumbleMates(R), Firstronics(R) and Washables(R) are registered trademarks of The First Years Inc. Simplicity(TM), Sure(TM), Choice(TM), Clip'n Go(TM), Neats(TM), PackMates(TM), Nurserytronics(TM), Step-by-Step(TM) and First Gifts(TM) are trademarks of The First Years Inc. 3M(R) and SCOTCHGARD(R) are registered trademarks of Minnesota Mining and Manufacturing Company. WINNIE THE POOH(R), POOH(R), DISNEY BABIES(R), and 101 DALMATIANS(R) are registered trademarks of Disney Enterprises, Inc. ------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. ------------------------ IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS AND THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." 5 Our products are inspired and pretested by parents for parents. They are designed in consultation with eminent pediatrician Dr. T. Berry Brazelton, and staff members of the Child Development Unit, Children's Hospital in Boston. The First Years is a benefactor of The Child Development Unit. [Montage of eight photographs depicting various company products, staff members of the Child Development unit at Boston Children's Hospital and Company employees with their children] FIRSTGIFTS(TM) Delightful -- and practical -- gift items and product ensembles for celebrating a birth, a birthday, or any special occasion. FEEDING & SOOTHING Creative designs -- from bottles and breast pumps to teethers and pacifiers -- that provide convenience and quality for parents. [Montage of eight photographs depicting various Company products, Company employees with their children and a separate photograph of a child.] PLAY & DISCOVER Toys that combine fun with emotional and physical development, from the classic Soft Ducky to our innovative Firstronics line. CARE & SAFETY Excellence in childcare, health, and safety -- in the nursery, around the house, and on the road. [THE FIRST YEARS LOGO] 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Except as otherwise indicated, the information in this Prospectus assumes the Underwriters' over allotment option is not exercised. All information reflects the two-for-one, three-for-one, and two-for-one stock splits effected on June 14, 1991, December 15, 1992 and December 29, 1995, respectively. The First Years Inc. is a leading developer and worldwide marketer of a broad line of innovative, high-quality, value-priced, developmentally-sound products for infants and toddlers. Since 1973, the Company has sold products under its well-known brand name and principal trademark, THE FIRST YEARS. In the last three years, the Company has entered into licensing agreements with The Walt Disney Companies to feature Winnie the Pooh characters on a variety of its products in various countries. The Company's product line now contains approximately 300 items and is divided into five categories -- Feeding & Soothing, Care & Safety, Play & Discover, Gifts & Sets and Winnie the Pooh. Retail prices for the Company's products range from approximately $0.99 to $69.99. Major channels through which the Company sells its products include mass merchants, supermarkets, drug stores, department stores, wholesale clubs, convenience stores, specialty stores, mail-order catalogs and catalog showrooms. The Company currently has over 1,000 customers in over 40 countries. Major customers include Wal*Mart, Toys "R" Us, Target, Kmart, J. C. Penney, Kroger and Baby Superstore. The Company believes that a number of recent demographic trends in the United States have had a favorable impact on the market for juvenile products in general and the appeal of the Company's product line in particular. In the U.S. and many other developed countries, children are being born to dual-income parents and parents are having children at later ages. The Company also believes that parents in general, and especially older parents, are now more aware of the developmental importance of a child's early years and more concerned about safety, quality and value in juvenile products and that they are also more willing and able to pay for products that embody these qualities. Capitalizing on its reputation for parenting expertise and product quality, its development of products that are based on Ideas Inspired by Parents and its longstanding relationship with Dr. T. Berry Brazelton and the Child Development Unit at Boston's Children's Hospital, the Company believes it is well positioned to produce new and innovative products that meet the requirements of today's parents. The Company believes that its growth will result in large part from the continued expansion of its existing product line for infants and toddlers up to three years of age and the development of products for children from three to six years of age. The Company introduced 45 new products in 1994, 90 new products in 1995 and intends to introduce over 60 new products in 1996. Among the 1995 items were initial entries into product segments that were new to the Company. Those entries included several higher-priced furnishings, such as bath seats, booster seats and step stools; higher-priced boxed toys; electronic products for the nursery, including a nursery monitor and crib tape player/night light; travel-related products such as diaper bags and child carriers; and 25 products featuring Winnie the Pooh characters. In 1996, the Company is expanding each of its product categories, including the introduction of 26 new products featuring Winnie the Pooh characters. During this period of rapid product development, net sales have increased from approximately $46.1 million in 1993 to $75.8 million in 1995. The Company believes that its future growth will also come from the expansion of its distribution in both domestic and international markets. The Company's strategy in the United States is to increase its penetration in all of its major channels of distribution. Internationally, the Company has expanded its sales in Europe with the opening of a sales office in the United Kingdom in 1992 and has increased distribution of its products in the past few years in Canada, Central and South America, the Middle East and the Pacific Rim. The Company believes that its products have been well received by international consumers and that the number of births and rising income levels in international markets present significant opportunities for growth. The Company was incorporated in 1952 in Massachusetts under the name Kiddie Products, Inc. The Company changed its name to The First Years Inc. in May 1995. The Company's headquarters are located at One Kiddie Drive, Avon, Massachusetts 02322, and its telephone number is (508) 588-1220. 3 7 THE OFFERING Common Stock offered by: The Company............................................. 400,000 shares The Selling Stockholders................................ 1,200,000 shares Total.............................................. 1,600,000 shares Common Stock to be outstanding after completion of this Offering(1)................................................ 4,935,570 shares Use of proceeds.............................................. Debt repayment and working capital. See "Use of Proceeds." Nasdaq National Market symbol................................ KIDD
- --------------- (1) Based on shares outstanding at June 3, 1996. Does not include 453,662 shares issuable upon the exercise of outstanding options under the Company's stock plans. SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- STATEMENT OF INCOME DATA: Net sales........................ $37,993 $45,267 $46,124 $53,233 $75,757 $15,802 $23,009 Cost of products sold............ 20,199 23,645 26,654 29,498 45,109 9,256 13,947 Selling, general, and administrative expenses........ 14,776 18,430 17,857 18,916 23,961 5,158 6,926 Income before income taxes....... 3,306 3,315 1,278 4,861 6,207 1,383 1,972 Net income....................... 1,916 1,930 796 2,989 3,724 830 1,187 Earnings per share(1)............ $ 0.43 $ 0.43 $ 0.18 $ 0.66 $ 0.80 $ 0.18 $ 0.25 Weighted average number of shares outstanding.................... 4,497 4,497 4,497 4,497 4,663 4,662 4,689
SUMMARY BALANCE SHEET AT MARCH 31, 1996:
AS ACTUAL ADJUSTED(2) ------- ----------- Current assets........ $37,242 $$37,242 Property, plant, and equipment - net..... 6,708 6,708 ------- ----------- $43,950 $43,950 ======= =========
AS ACTUAL ADJUSTED(2) ------- ----------- Current liabilities... $16,272 $ 9,863 Long term liabilities......... 715 715 Stockholders' equity.............. 26,963 33,372 ------- ----------- $43,950 $43,950 ======= =========
- --------------- (1) The net proceeds from the sale of approximately 387,000 of the shares of Common Stock offered by the Company hereby will be used to repay certain indebtedness. Assuming these shares had been issued and the indebtedness repaid as of January 1, 1995, pro forma earnings per share for 1995 would have been $0.76. (2) Adjusted to reflect the sale of the 400,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $17.25 per share (the last reported sale price on June 3, 1996) and after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company related to the Offering, and the application of the net proceeds therefrom. See "Use of Proceeds." RISK FACTORS There are certain risks associated with this Offering. See "Risk Factors." 4 8 RISK FACTORS Prospective purchasers of the Common Stock offered hereby should consider carefully the following risk factors in addition to the other information contained elsewhere in this Prospectus before purchasing shares of Common Stock offered hereby. In addition, certain statements in this Prospectus, including statements about new product introductions, the growth of international sales, the renewal of license agreements, and the sufficiency of the Company's capital resources to meet anticipated capital requirements, are forward looking statements that are subject to inherent risks and uncertainties. Certain important factors that could cause actual results to vary materially are identified below. NEW PRODUCT INTRODUCTIONS The growth of the Company has been, and will continue to be, dependent upon its ability to continue to introduce new products. There can be no assurance that the Company will continue to maintain its present rate of growth, that it will continue to generate new product ideas, or that new products will be successfully introduced. See "Business -- Product Design, Development and Marketing." RELIANCE ON LICENSED PRODUCTS A substantial factor contributing to the growth in the Company's net sales in 1995 and in the first three months of 1996 has been its licensing agreements with The Walt Disney Companies to feature Winnie the Pooh characters on a variety of its products in various countries. Net sales of these licensed products were approximately 20% of the Company's net sales in 1995 and 30% of the Company's net sales in the first three months of 1996. The U.S. licensing agreement expires at the end of 1996 and the Company is currently negotiating with Disney to renew such agreement. However, there can be no assurance that it will be renewed or that, if renewed, it will result in sales increases in future periods. See "Business -- Agreements with The Walt Disney Companies." DEPENDENCE UPON MAJOR CUSTOMERS The two largest customers of the Company, Wal*Mart and Toys "R" Us, accounted for approximately 26% and 22%, respectively, of net sales during 1994, and approximately 28% and 21%, respectively, of net sales during 1995. In addition, these two customers accounted for 61% of trade receivables outstanding at December 31, 1994 and 1995. A significant reduction of purchases by, or difficulty in the collection of receivables from, either of these customers could have a material adverse effect on the Company's business. See "Business -- Sales." 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. There can be no assurance that the Company will be able to continue to compete effectively in the juvenile products market. See "Business -- Competition." RELIANCE ON FOREIGN MANUFACTURERS The Company does not own or operate its own manufacturing facilities. In each of 1994 and 1995, the Company derived approximately 53% and 46%, respectively, of its net sales from products manufactured by others in the Far East, mainly in the Peoples' Republic of China ("China"). The Company has no long-term contracts with these manufacturing sources. Foreign manufacturing is subject to a number of risks including transportation delays and interruptions, quotas and other import or export controls, the imposition of tariffs, currency fluctuations, misappropriation of intellectual property, political and economic disruptions, and changes in governmental policies. From time to time, the United States has attempted to impose additional restrictions on trade with China. Enactment of legislation or the imposition of restrictive regulations conditioning or revoking China's 5 9 "most favored nation" ("MFN") trading status 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. President Clinton has recently extended China's MFN trading status until July 3, 1997. The European Union (the "EU") has recently enacted a quota and tariff system with respect to the importation into the EU of certain toy products originating in China. Although the Company continues to evaluate alternative sources of supply outside of China, there can be no assurance that the Company will be able to develop alternative sources of supply in a timely and cost-effective manner. Also, the Company, because of its substantial reliance on suppliers in foreign countries, is required to order products further in advance of customer orders than would generally be the case if such products were produced in the United States. The risk of ordering products in this manner is greater during the initial introduction of new products since it is difficult to determine the demand for such products. See "Business -- Manufacturing and Sources of Supply." COST AND AVAILABILITY OF CERTAIN MATERIALS Plastic and paperboard are significant cost components of the Company's products and packaging. Because the primary resource used in manufacturing plastic is petroleum, the cost and availability of plastic for use in the Company's products varies to a great extent with the price of petroleum. The inability of the Company's suppliers to acquire sufficient plastic or paperboard at reasonable prices would adversely affect the Company's ability to maintain its profit margins in the short term. See "Business -- Manufacturing and Sources of Supply." PRODUCT LIABILITY RISKS The Company's juvenile products are used for and by small children and infants. The Company carries product liability insurance in amounts which management deems adequate to cover risks associated with such use; however, there can be no assurance that existing or future insurance coverage will be sufficient to cover all product liability risks. See "Business -- Legal Proceedings." GOVERNMENT REGULATION The Company's products are subject to the provisions of the Federal Consumer Product Safety Act, the Federal Hazardous Substances Act, the Federal Flammable Fabrics Act and the Child Safety Protection 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, depending on the particular product. See "Business -- Government Regulation." 6 10 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the 400,000 shares of Common Stock offered by the Company hereby (at an assumed public offering price of $17.25 per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company) are estimated to be approximately $6,409,300 ($10,300,900 if the Underwriters' over-allotment option is exercised in full). The Company intends to use the net proceeds to repay outstanding bank debt ($6.3 million outstanding as of May 31, 1996 bearing interest at a weighted average rate of 7.35%) and for working capital (including the purchase of capital equipment for tooling, predominantly molds and dies). Pending the application of the net proceeds as described above, the net proceeds to the Company from this offering will be placed in interest-bearing bank accounts or invested in United States government securities, certificates of deposit of major banks, money market mutual funds or investment-grade commercial paper. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company will not receive any proceeds from the sale of the 1,200,000 shares of Common Stock being offered hereby by the Selling Stockholders. PRICE RANGE OF COMMON STOCK The Common Stock has been quoted on the Nasdaq National Market under the symbol "KIDD" since March 1, 1995. Prior to that time, the Common Stock was traded on the Nasdaq Small-Cap Market. The following table sets forth the high and low sales prices for the Common Stock for the periods indicated as reported by Nasdaq and retroactively adjusted to reflect the Company's two-for-one stock split effected on December 29, 1995.
HIGH LOW ------- ------ 1994 First Quarter......................................... 5 1/4 4 1/4 Second Quarter........................................ 7 1/2 4 1/4 Third Quarter......................................... 8 1/16 6 1/2 Fourth Quarter........................................ 9 3/4 7 1/2 1995 First Quarter......................................... 12 8 5/8 Second Quarter........................................ 10 1/8 8 3/8 Third Quarter......................................... 11 3/4 9 3/8 Fourth Quarter........................................ 11 5/8 10 1996 First Quarter......................................... 12 1/2 9 3/4 Second Quarter (through June 3, 1996)................. 18 1/4 11 3/4
On June 3, 1996 the last reported sale price as reported on the Nasdaq National Market was $17.25 per share. As of May 21, 1996, there were approximately 116 record holders of the Common Stock. 7 11 CAPITALIZATION The following table sets forth the short-term borrowings and capitalization of the Company as of March 31, 1996, and as adjusted to give effect to the sale of the 400,000 shares of Common Stock offered by the Company (at an assumed public offering price of $17.25 per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company) and the application of the net proceeds therefrom.
MARCH 31, 1996 --------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Short-term borrowings (including current portion of long-term debt)...... $ 8,633 $ 2,224 ======= ======= Long-term debt (less current portion).................................... $ 67 $ 67 ------- ------- Stockholders' equity: Common stock, $0.10 par value, 15,000,000 shares authorized, 4,517,742 shares issued and outstanding and 4,917,742 shares issued and outstanding as adjusted(1)............................................. 452 492 Paid-in capital.......................................................... 13 6,382 Retained earnings........................................................ 26,498 26,498 ------- ------- Total stockholders' equity............................................. 26,963 33,372 ------- ------- Total capitalization..................................................... $27,030 $33,439 ======= ======= - --------------- (1) Excludes options to purchase Common Stock under the Company's stock plans of which there were options outstanding to purchase an aggregate of 470,587 shares at March 31, 1996.
DIVIDEND POLICY From 1991 to 1995, the Company paid a cash dividend on its Common Stock of approximately $0.085 per share in June of each year. In 1996, the Company increased its annual cash dividend to $0.10 per share which was paid on June 3, 1996. The Company currently expects that comparable cash dividends will continue to be paid in the future. However, the declaration and payment of any such cash dividends in the future will depend upon the Company's earnings, financial condition, capital needs, and other factors deemed relevant by the Board of Directors. There can be no assurance that the Company will continue to pay dividends in the future. 8 12 SELECTED FINANCIAL DATA The selected financial data presented below as of and for each of the five years ended December 31, 1995 have been derived from the Company's audited financial statements. The selected financial data as of and for the three-month periods ended March 31, 1995 and 1996 have been derived from the unaudited financial statements of the Company. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for these periods. Operating results for the three months ended March 31, 1996 are not necessarily indicative of the results that may be expected for any future period. This data should be read in conjunction with the Financial Statements, related notes, and other financial information included elsewhere in this Prospectus.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA:(1) Net sales....................... $37,993 $45,267 $46,124 $53,233 $75,757 $15,802 $23,009 Cost of products sold........... 20,199 23,645 26,654 29,498 45,109 9,256 13,947 ------- ------- ------- ------- ------- ------- ------- Gross profit.................... 17,794 21,622 19,470 23,735 30,648 6,546 9,062 Selling, general, and administrative expenses....... 14,776 18,430 17,857 18,916 23,961 5,158 6,926 Severance-related expenses...... -- -- 373 -- -- -- -- Offering expenses............... -- -- -- -- 310 -- -- Interest income (expense), net 288 123 38 42 (170) (5) (164) ------- ------- ------- ------- ------- ------- ------- Income before income taxes...... 3,306 3,315 1,278 4,861 6,207 1,383 1,972 Income taxes.................... 1,390 1,385 482 1,872 2,483 553 785 ------- ------- ------- ------- ------- ------- ------- Net income...................... $ 1,916 $ 1,930 $ 796 $ 2,989 $ 3,724 $ 830 $ 1,187 ======= ======= ======= ======= ======= ======= ======= Earnings per share(2)........... $ 0.43 $ 0.43 $ 0.18 $ 0.66 $ 0.80 $ 0.18 $ 0.25 Weighted average number of shares outstanding............ 4,497 4,497 4,497 4,497 4,663 4,662 4,689
DECEMBER 31, MARCH 31, ----------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- -------- ------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital................. $15,081 $14,634 $15,126 $17,245 $20,203 $18,096 $20,969 Total assets.................... 22,383 24,695 24,533 28,853 41,712 31,533 43,950 Short-term debt................. 133 133 133 133 6,333 1,333 8,633 Long-term debt.................. 633 500 367 233 100 200 67 Stockholders' equity............ 17,751 19,306 19,720 22,350 25,763 23,190 26,963 - --------------- (1) From 1991 to 1995 a cash dividend of approximately $0.085 per share of Common Stock was paid in June of each year. On June 3, 1996, the Company paid a cash dividend of $0.10 per share of Common Stock. (2) The net proceeds from the sale of approximately 387,000 of the shares of Common Stock offered by the Company hereby will be used to repay certain indebtedness. Assuming these shares had been issued and the indebtedness repaid as of January 1, 1995, pro forma earnings per share for 1995 would have been $0.76.
9 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's recent growth has been to a large extent the result of a substantial increase in sales of new products and the addition in 1995 and 1996 of products featuring Winnie the Pooh characters under licensing agreements with The Walt Disney Companies. These licensed products accounted for approximately 20% of net sales in 1995 and approximately 30% of net sales in the first three months of 1996. The Company plans to introduce the Winnie the Pooh characters on additional products and in additional geographic areas in the latter part of 1996 and in 1997. The Company expects to continue its new product development program aggressively. However, it does not believe that sales from new product introductions are necessarily related to the number of new products introduced. As part of its marketing strategy, the Company has recently entered new product areas, such as furnishings and licensed character products, that it believes have significant sales potential. These product areas offer lower gross profit margins than the Company's historical product areas and have had the effect of lowering the Company's overall gross margin percentage. However, because of the resulting increases in sales, total profits have increased. International sales have had an increasingly larger impact on the Company's financial results. In 1992, international sales represented approximately 5% of net sales; in 1995, international sales were approximately 10% of net sales. The Company believes that international sales as a percentage of net sales will increase in future periods. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain items in the Company's statements of income as a percentage of net sales:
THREE MONTHS ENDED MARCH YEAR ENDED DECEMBER 31, 31, ----------------------- -------------- 1993 1994 1995 1995 1996 ----- ----- ----- ----- ----- Net sales........................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of products sold............................... 57.8 55.4 59.5 58.6 60.6 Gross profit........................................ 42.2 44.6 40.5 41.4 39.4 Selling, general, and administrative expenses....... 38.7 35.5 31.6 32.6 30.1 Income before taxes................................. 2.8 9.1 8.2 8.8 8.6 Net income.......................................... 1.7 5.6 4.9 5.3 5.2
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995 Net sales for the first three months of 1996 were $23.0 million, an increase of $7.2 million or 45.6% as compared to $15.8 million for the comparable period last year. The increase was due to new product introductions and expanded retail distribution in domestic and foreign markets. Cost of products sold for the first three months of 1996 was $13.9 million, an increase of $4.6 million or 50.7%, as compared to $9.3 million for the comparable period last year. As a percentage of net sales, cost of products sold in the first three months of 1996 increased to 60.6% from 58.6% in the comparable period of 1995. The increase was primarily due to increased sales of higher-priced, lower-margin products and licensing fees. Selling, general, and administrative expenses for the first three months of 1996 were $6.9 million, an increase of $1.7 million or 34.3%, as compared to $5.2 million for the first three months of 1995. The increase resulted primarily from costs related to increased sales volume. As a percentage of net sales, selling, general, and administrative expenses for the first three months of 1996 decreased to 30.1% from 32.6% for the 10 14 comparable period in 1995. The decrease reflects the economies of scale provided by a higher volume of business. Income tax expense as a percentage of pretax income was approximately 40% for the first three months of 1996 and 1995. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Net sales in 1995 were $75.8 million, an increase of $22.6 million, or 42.3%, as compared to $53.2 million in 1994. The increase was due to new product introductions and expanded retail distribution in domestic and foreign markets. Net sales particularly benefited from the introduction of newly licensed Winnie the Pooh products and the introduction of new products that have higher average selling prices than products previously offered by the Company. Cost of products sold in 1995 was $45.1 million, an increase of $15.6 million or 52.9%, as compared to $29.5 million in 1994. As a percentage of net sales, cost of products sold in 1995 increased to 59.5% from 55.4% in the comparable period of 1994. The increase was due to increased sales of higher-priced, lower margin items, licensing fees, increased cost of products due to raw material price increases, and air freight shipments from overseas production facilities incurred primarily in the first three months of the year. Selling, general, and administrative expenses in 1995 were $24.0 million, an increase of $5.1 million, or 26.7%, as compared to $18.9 million in 1994. The increase resulted primarily from costs related to increased sales volume. As a percentage of net sales, selling, general, and administrative expenses in 1995 decreased to 31.6% from 35.5% in 1994. The decrease reflects the economies of scale provided by a higher volume of business. During the fourth quarter of 1995, the Company sought to issue additional shares of Common Stock in order to increase its working capital and improve the liquidity of its stock. Due to uncertain market conditions affecting the retail sector and the price of the Company's stock, the Company decided to postpone the public offering. As a result, the Company incurred offering expenses that resulted in a pretax charge of approximately $310,000 ($186,000 net of tax benefit). Income tax expense as a percentage of pretax income increased to 40.0% in 1995 from 38.5% in 1994, principally as a result of an increased provision for state taxes. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 Net sales in 1994 were $53.2 million, an increase of $7.1 million, or 15.4%, as compared to net sales of $46.1 million in 1993. The increase was due primarily to new product introductions and expanded retail distribution in domestic and foreign markets. Cost of products sold in 1994 was $29.5 million, an increase of $2.8 million, or 10.7%, as compared to $26.7 million in 1993. As a percentage of net sales, cost of products sold decreased to 55.4% in 1994 from 57.8% in 1993 due to sales of higher margin products including new products introduced in 1994. Selling, general, and administrative expenses in 1994 were $18.9 million, an increase of $1.0 million, or 5.9%, as compared to $17.9 million in 1993. The increase is attributable to higher costs directly related to increased sales volume. As a percentage of net sales, selling, general, and administrative expenses decreased in 1994 to 35.5% from 38.7%. The decrease reflects the economies of scale resulting from a higher volume of business, including increased sales in Europe, and the effects of a program initiated in 1993 to reduce operating expenses. Income tax expense as a percentage of pretax income increased slightly to 38.5% in 1994 from 37.7% in 1993. LIQUIDITY AND CAPITAL RESOURCES Net working capital increased by approximately $800,000 from $20.2 million at December 31, 1995 to $21 million at March 31, 1996 primarily due to profitable operations. Accounts receivable increased by $2.1 11 15 million primarily as a result of increased sales, and inventories increased by approximately $600,000 to meet continued demand for the Company's products. Cash decreased by approximately $500,000 primarily resulting from increases in accounts receivable and a decrease in accounts payable which were partially offset by an increase in short-term borrowings. Unsecured lines of credit of $18 million, which are subject to annual renewal, are available from banks. Amounts outstanding under these lines are payable upon demand by the banks. During the first three months of 1996, the Company has borrowed various amounts from time to time up to $9.9 million, of which $8.5 million at a weighted average interest rate of 7.55% was outstanding as of March 31, 1996. From 1991 to 1995, the Company paid a cash dividend of approximately $0.085 per share of Common Stock in June of each year. On June 3, 1996, the Company paid a cash dividend of $0.10 per share of Common Stock. The Company made capital expenditures of approximately $700,000 in the first three months of 1996 and expects to spend approximately $1.3 million more on capital expenditures in the remaining months of 1996. The Company expects cash flow from operations, availability under the Company's lines of credit and the net proceeds from this Offering to be sufficient to meet its cash needs for working capital and capital expenditures for at least the next two years. INFLATION AND FOREIGN CURRENCY FLUCTUATIONS Inflation has not had a material effect on the Company's operating results over the past three years. The Company enters into forward exchange contracts to minimize the impact of fluctuations in currency exchange rates on future cash flows emanating from sales denominated in foreign currencies. The Company does not purchase such contracts for trading purposes. During 1995, the Company entered into forward exchange contracts with a bank whereby the Company is committed to deliver foreign currency at predetermined rates. The contracts expire within one year. The Company's future commitment under these contracts approximated $3.9 million as of March 31, 1996. At March 31, 1996, the exchange rates for such currencies covered by the contracts approximated the predetermined rate included therein. The Company routinely assesses the financial strength of the bank which is counterparty to the forward exchange contracts. As of June 1, 1996, management believes that the Company had no significant exposure to credit risk relative to such contracts. RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), was issued. This statement, which will be required in 1996, establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. The Company does not expect that the adoption of SFAS 121 will have a material impact on the financial statements. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," became effective for the Company beginning January 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply APB Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock-based compensation awards to employees and will disclose the required pro forma effect on net income and earnings per share, as required by SFAS No. 123. 12 16 BUSINESS The First Years Inc. is a leading developer and worldwide marketer of a broad line of innovative, high-quality, value-priced, developmentally-sound products for infants and toddlers. Since 1973, the Company has sold its products under its well-known brand name and principal trademark, THE FIRST YEARS. In the last three years, the Company has entered into licensing agreements with The Walt Disney Companies to feature Winnie the Pooh characters on a variety of its products in various countries. The Company's product line now contains approximately 300 items and is divided into five categories -- Feeding & Soothing, Care & Safety, Play & Discover, Gifts & Sets and Winnie the Pooh. Retail prices for the Company's products range from approximately $0.99 to $69.99. Major channels through which the Company sells its products include mass merchants, supermarkets, drug stores, department stores, wholesale clubs, convenience stores, specialty stores, mail-order catalogs and catalog showrooms. The Company currently has over 1,000 customers in over 40 countries. Major customers include Wal*Mart, Toys "R" Us, Target, Kmart, J. C. Penney, Kroger and Baby Superstore. JUVENILE PRODUCTS MARKETS According to the Juvenile Products Manufacturers Association ("JPMA"), the United States market for juvenile products has shown continuous growth for the past 15 years. According to JPMA, factory shipments by member companies increased approximately 6.6% in 1994 and were projected to grow approximately 14% in 1995. This growth has been supported by favorable demographic trends. More than four million babies have been born in the United States every year from 1989 to 1994, which rate has been relatively constant, and the population of children under age five has increased from 19.6 million in 1980 to 23.6 million in 1994. More importantly, many of these children are being born to dual-income couples and couples who are waiting longer to have children. These trends, the Company believes, have contributed to increased awareness by parents of the developmental importance of a child's early years; increased concern about product quality, safety and value; and increased purchases of juvenile products by both parents and grandparents. In turn, retailers have become more aware of the growth potential in the market and have been more willing to establish improved, updated, and enlarged juvenile product departments in their stores. Additionally, the baby product "superstore" concept, which gives exposure to a broader range of juvenile products, has been successfully introduced and is likely to become more widespread. The Company distributes its products on a worldwide basis but is not aware of any available worldwide juvenile product market statistics. The JPMA estimates that the U.S. market alone in 1995, for products produced by member companies, was about $2.1 billion in factory shipments. This JPMA figure includes products for children up to three years of age and includes strollers, car seats, non-apparel soft goods, and feeding, nursing, health, care, safety, and play accessory items, but does not include clothing, diapers, formula and many toys. The JPMA also estimates that the U.S. market for these products is approximately one-third of the total world market. BUSINESS STRATEGY The Company's mission is to develop and market products that help make the process of parenting a happier, healthier and easier experience for both parents and their young children worldwide. Major elements of the strategy to achieve this mission are as follows: - CREATING PARENT-INSPIRED PRODUCTS. The Company uses its knowledge of parenting and child development to develop and sell high-quality, innovative and value-priced products. In keeping with its corporate motto and trademark, Ideas Inspired by Parents, the Company designs its product line with the advice of small focus groups of expectant and new parents from its 600-member Parents Council who meet frequently to review the Company's new products and product ideas. The Company also develops its products in consultation with the Child Development Unit ("CDU") at Children's Hospital in Boston, Massachusetts and its founder and Director Emeritus, Dr. T. Berry Brazelton, considered by many parents to be the nation's foremost authority on parenting. 13 17 The Company has always placed great emphasis on innovative product development. Several years ago, however, the Company recognized that consumers were becoming more receptive to new concepts that offer greater quality, safety and value and that retailers were vigorously seeking new and innovative juvenile products. In response to this emerging trend, the Company decided to enhance its product development process in order to increase both the number of new products and the amount of innovation which it was bringing to the market. The Company believes that this initiative has resulted in a substantial increase in the number of, and degree of innovation in, the products it has brought to the market in recent years. In 1996, the Company has begun to introduce new products on a quarterly basis for the first time. The Company intends to continue emphasizing product innovation and development and to devote substantial resources to its product development process. - EXPANDING AND ENHANCING ITS PRODUCT LINE. The Company believes that its understanding of the needs of parents and children, its reputation for high-quality and value-priced products with consumers and retailers and its product development process, position it well to expand its current categories. In 1995, the Company introduced products in a number of new categories including licensed character products, electronic products for the nursery, booster seats and child carriers. The Company has also recently introduced products for children in the three to six age range and is currently developing additional products for this age range. In the last three years, the Company entered into licensing agreements with The Walt Disney Companies to feature Winnie the Pooh characters on a variety of its products in various countries. The Company intends, where appropriate, to pursue additional licensing arrangements for established characters with images that are consistent with the Company's product line. - INCREASING PENETRATION IN DOMESTIC DISTRIBUTION CHANNELS. Although the Company has been successful in selling to virtually all major domestic distribution channels, it is aggressively seeking to increase its penetration of these channels. This strategy includes both adding customers in existing channels as well as increasing its shelf space with existing customers. As part of this strategy, the Company has introduced several new sub-categories of products with common themes, marketed under distinct trademarks. The first such introduction was the TumbleMates line of interchangeable cups and lids in 1992, followed by the Firstronics electronic toys, the Washables line of watertight, dishwasher-safe toys, the Step-by-Step line of multi-function furnishings, and the PackMates line of bags, child carriers and travel accessories, among others. The Company believes that marketing a collection of products with a common theme is a more efficient and effective means of selling its products to both retailers and consumers. - EXPANDING ITS INTERNATIONAL CUSTOMER BASE. The Company intends to continue expanding its business internationally. The Company believes that the markets in certain developing countries are growing substantially faster than the United States market as a result of favorable demographic trends and increases in per capita income. The Company has established a sales office in the United Kingdom for sales in the European market. The Company has also set up distribution centers in Belgium and Canada for distribution of its products in Europe and Canada. Additionally, the Company has also expanded its sales efforts in Canada, the Middle East, Central and South America, and in the Pacific Rim. To support these efforts, the Company has developed multi-lingual packaging. - CAPITALIZING ON BRAND NAME RECOGNITION. By producing since its inception high quality products that meet parenting needs, THE FIRST YEARS brand name has become widely recognized and valued by a loyal consumer base. Because of the importance of word-of-mouth as an influence in the purchase of juvenile products, the Company considers this to be a significant asset. A consumer-oriented catalog, in-pack product guides, package copy and point-of-purchase materials are also used to communicate the Ideas Inspired by Parents message. PRODUCTS In recent years, the Company has accelerated the general pace of product innovation. In addition, especially in 1995 and 1996, the Company has broadened its product line to include more higher-priced products such as electronic products for the nursery, furnishings such as odor-proof diaper pails, booster seats, bath seats, diaper bags and child carriers. Additional higher-priced products are currently in development. The 14 18 Company's product line, which contains approximately 300 items that range in retail price from approximately $0.99 to $69.99, is categorized and color-coded into five distinct product groups as follows: FEEDING & SOOTHING. The Feeding & Soothing category is comprised of bottles and accessories, nipples, pacifiers, teethers, bowls, drinking cups, dishes, flatware and breast-feeding accessories. Since 1992, this category has included the TumbleMates line of training cups, bowls, plates and utensils, designed for serving, storing and transporting drinks and snacks, and which features a system of interchangeable cups and lids. In 1995, the Company introduced several new products into its TumbleMates line including the Stack & Pack Lunch Kit, the Flatware Travel Set and the Snap-Apart Dish. In 1995, the Company also added to this category the Neats line of stain-resistant bibs specially made with a 3M Scotchgard stain-release system and the following items: the Choice bottle system that allows interchangeability between disposable and reusable bottles; a unibody pacifier, marketed under the Sure trademark; and the Simplicity Manual Breast Pump. In 1996, the Company introduced a spill-proof cup with a lid that fits all cups in the TumbleMates line, new products that relieve teething discomfort such as the new Massaging Action Teether and plans to introduce an innovative, electric/battery breast pump kit. PLAY & DISCOVER. The Play & Discover category consists of an extensive line of entertaining, skill-developing toys for infants and toddlers including crib toys, floor toys and hand-held toys. Since 1994 the Play & Discover category has included the Company's Washables line of 100% watertight and dishwasher-safe toys. In 1995, the Company introduced the High Chair Gym, Floorgym and Playmat, and the Snap & Play People Bus to its Washables line. In 1994, the Company also added to this category its Firstronics line of hand-held electronic toys for children under three years of age. In 1996, the Company plans to introduce numerous new Play & Discover toys including motion-activated electronic toys, a color-change bath toy; the Jukebox Musical Crib Mirror with twinkling lights, and a waterproof electronic "quacking" tub toy, the Shake & Quack Ducky. In 1995, the Company launched the First Animal Game featuring five different games in one with graduated levels of difficulty that help a child learn to identify different animals. This game was named one of Dr. Toy's 100 Best Children's Products of 1995 and was a 1995 North American Parenting Publishing Association (NAPPA) Silver Award Winner. CARE & SAFETY. The Care & Safety category consists of a broad line of fashion and grooming items; home safety products such as door and cabinet latches; and products appropriate for the health and hygiene needs of infants, such as digital thermometers. In 1995, the Company added to this category its Nurserytronics line of electronic products designed especially for use in the nursery, such as the Tape Player and Crib Light and the Rechargeable Pocket Monitor. In 1995, the Company also added to this category a new line of rugged, machine-washable tote bags, child carriers and harnesses, and other travel accessories marketed under the PackMates name. This line includes the Clip'n Go Warm & Cozy Carrier, an insulated detachable infant carrier, and the Full Day Diaper Bag, a nylon carry bag with built-in labeled organizers and adjustable shoulder strap. In 1994 and 1995, additions to this category included the Step-by-Step line of furnishings comprised of an adjustable bath seat, portable booster seat, baby bather, step stool and toilet trainer that are adjustable as a child grows and the Diaper Dispoz-all Diaper Pail, an odor-free diaper pail. In 1996, the Company plans to introduce into this category a new innovative concept in booties and several products in the Nurserytronics and furnishings lines. GIFTS & SETS. The Company markets a variety of specially-designed gift bags and gift sets, which combine the Company's most popular items as attractively-packaged, ready-to-give gifts, or theme-related starter sets. Many of the containers for such gift sets such as the Bear Bank Gift set are also reusable as tote bags, storage containers or keepsakes. Gift sets include the Washables gift pack, the TumbleMates gift pack, 15 19 newborn gift bags and furnishings gift sets. In 1996, the Company intends to introduce additional gift sets targeted to both retailers and wholesale clubs. WINNIE THE POOH. With the planned addition of 26 new products in 1996, the Winnie the Pooh category will consist of approximately 51 staple child care products including teethers, rattles, bibs and bottles, bathing accessories and gift sets featuring Winnie the Pooh characters. This category includes the Pooh Goody Bags which contain an assortment of the Company's products featuring Winnie the Pooh characters and a line of appliqued bibs featuring various Winnie the Pooh designs. In 1996, the Company plans to introduce the Winnie the Pooh characters on numerous additional items throughout its product line including cups, electronic musical toys, teethers, hooded towels, bath puppets, furnishings and a variety of Pooh gift sets. The Company believes that its knowledge of parents and parenting and its reputation for developing "parent-friendly" products creates an opportunity to enter additional product segments for young children (birth to six) in future years. PRODUCT DESIGN, DEVELOPMENT AND MARKETING The Company has always placed great importance on and devotes substantial resources to product development. Product development teams are established for each of the Company's product categories. The goal of the product development teams is to develop new or improved, high-quality and practical products designed to meet the needs of parents and children. In keeping with its corporate philosophy and trademark, Ideas Inspired by Parents, the Company has designed its products since 1973 in consultation with small groups of parents chosen from its 600-member Parents Council. The Company conducts frequent focus groups of these new parents to discuss parenting and child-care issues, brainstorm new products and ideas, and review and test the Company's new products and ideas. The Company also utilizes feedback and ideas from its consumer 1-800 phone number. The Company employs a staff of professionals engaged in the creation of new products and also uses, from time to time, a diverse group of outside designers and developers. For the past 15 years the Company's product line also has been designed in consultation with Dr. T. Berry Brazelton, the well-known pediatrician and authority on child development, and staff members of the Child Development Unit at Children's Hospital in Boston, Massachusetts (the "CDU"), of which Dr. Brazelton is founder and Director Emeritus. In reviewing the Company's new products and product ideas, Dr. Brazelton and the CDU focus on child health and development. Dr. Brazelton and the CDU also assist the Company in developing support information distributed with the products that instructs or educates new parents on the proper use of the products. The Company spent approximately $1.8 million on new product development in 1995, and approximately $1.5 million in each of 1993 and 1994. The Company expects to continue its new product development program aggressively, although the number of new products introduced may vary from year to year. In developing new products, the Company looks to generate ideas and features that are not offered by existing products and which the Company can produce at a reasonable cost and sell at a price that reflects the product's greater quality and value. Most of the Company's new products are shown at the International Juvenile Products Show, which is held in Dallas, Texas in the fall of each year. Certain of the Company's products are shown each year at the following trade shows: the International Housewares Exhibition; the Tokyo Toy Fair; the Boston Baby Faire; the Koln Nursery Fair in Koln, Germany; the International Mass Retail Association; and the National Association of Chain Drug Stores. The Company also seeks to educate parents on child development issues. For over 11 years, the Company has been the exclusive national sponsor of Dr. T. Berry Brazelton's National Seminars, a series of seminars held in communities throughout the country to inform parents and child care professionals about child development and parenting issues. The Company believes that these efforts have and will continue to promote the Company's commitment to child development and child care. An additional factor in the success of the Company's THE FIRST YEARS brand of products in recent years has been the Company's new, contemporary, high visual impact packaging design which was introduced in 1993. The new packaging was thoroughly researched and tested to maximize impulse-buying appeal and is designed to increase brand awareness. In addition, the Company's packaging is designed to educate the consumer as to the benefits and features of the Company's products and serve as a point-of-purchase sales 16 20 tool. The Company has also introduced multi-lingual packaging as it has expanded its sales in international markets. SALES The Company's products are sold nationally and internationally to a broad spectrum of customers including mass merchants, national variety and drug stores, supermarkets, wholesale clubs, convenience stores, toy specialty stores, wholesale distributors, department stores, mail order catalogs and catalog stores. The Company currently has over 1,000 customers in over 40 countries. Major customers include Wal*Mart, Toys "R" Us, Target, Kmart, J.C. Penney, Kroger and Baby Superstore. As testimony to the Company's commitment to providing excellent service and merchandising to its customers, the Company was chosen as the 1995 Vendor of the Year by Smith's Food and Drug Centers and received a Vendor/Partner Award of Excellence from Wal*Mart for the fourth quarter of 1995. The Company's products are sold in the United States, and Canada, primarily through the Company's ten-person internal sales staff and through a network of 48 independent sales representatives. The Company's sales staff is responsible for supervising and training the sales representatives. Such training is conducted at the Company's headquarters and throughout the United States. In Central and South America and the Pacific Rim, the Company's products are sold by its internal sales staff which manages a network of foreign distributors and sales representatives in such areas. Senior management is heavily involved in every phase of the selling process with the Company's largest customers. In Europe and the Middle East, the Company's products are sold by the Company's internal staff at its sales office in Cirencester, England, which is headed by the Director of European Sales. This staff manages a network of foreign distributors and independent sales representatives who generally receive exclusive rights to a defined geographical territory or market segment. The Company's international sales in 1995 were approximately $7.7 million. The Company's international sales in 1993 and 1994 were approximately $3.8 million and $5.3 million, respectively. During 1994, Wal*Mart and Toys "R" Us accounted for approximately 26% and 22% of the Company's net sales, respectively. During 1995, Wal*Mart and Toys "R" Us accounted for approximately 28% and 21% of the Company's net sales, respectively. A significant reduction in purchases by either of these customers could have a material adverse effect on the Company's business. Backlog is not a significant and material aspect of the Company's business. Customers place orders on an as needed basis. As the Company's sales have increased, the amount of unfilled orders at any time has not been indicative of future results. MERCHANDISING To help retailers use their shelf space efficiently in marketing the Company's products, the Company utilizes computerized planogram programs, which divide the space a retailer has allocated for the Company's products to create a mix of the five color-coded product categories that is designed to maximize the retailer's profitability. These programs are used for both large and small shelf spaces and enables the Company's customers to present a visually-appealing display of the Company's color-coded line of products. In recent years, the Company expanded its promotional programs and created a cross-merchandising program for its customers, by which ready-to-use display panels and floor stand display units containing THE FIRST YEARS products are placed next to related items in a customer's store (i.e., the Company's feeding products are placed in a customer's baby food aisle) to encourage synergistic and impulse buying by consumers. These display units are pre-pegged, pre-stocked, easily re-stockable, and can be customized to the customer's needs. The Company believes that these programs have increased the shelf space allocated to the Company's products in major retailers and enhanced its reputation of being committed to customer service. AGREEMENTS WITH THE WALT DISNEY COMPANIES In the past three years the Company has entered into licensing agreements with The Walt Disney Companies to feature Winnie the Pooh characters on a variety of its products in the United States, Canada, 17 21 Puerto Rico, Brazil and in Europe. The U.S. license agreement expires December 31, 1996 and is cancellable upon a change in control of the Company. The Company is currently in negotiations with Disney to renew the U.S. license agreement. Although the Company expects the agreement to be renewed, there can be no assurance that it will be. The Company makes royalty payments on its net sales of licensed products and is subject to a guaranteed minimum royalty payment of approximately $714,000 in the aggregate during the terms of the agreements. Sales of products under these license agreements accounted for approximately 20% of the Company's total net sales in 1995 and 30% of the Company's total net sales in the first three months of 1996. In February 1996, the Company entered into a licensing agreement with Disney Licensed Publishing to feature Winnie the Pooh, Disney Babies and 101 Dalmatians characters on vinyl and fabric early learning play books. The Company plans to introduce the books for sale in 1997. The agreement expires on March 30, 1999. The Company will make royalty payments on its net sales of licensed products and is subject to a guaranteed minimum royalty payment of approximately $65,000 during the term of the agreement. MANUFACTURING AND SOURCES OF SUPPLY The Company does not own or operate its own manufacturing facilities. In 1995 all of the Company's products were manufactured either using the Company's custom tools (molds and dies) or to the Company's specifications by approximately 25 manufacturers located in the United States, Canada, China, Taiwan, Mexico and Thailand. Approximately 53% and 46% respectively of all of its products sold in 1994 and in 1995 were manufactured in Asia, primarily in China. A large percentage of the Company's furnishings and other large products were manufactured in 1994 and 1995 by suppliers in the United States and Canada. Generally the Company uses one manufacturer to make each product from its supplier base in Asia, Canada, and the United States. Due to the high cost of developing duplicate tooling (predominantly molds and dies), most of the Company's products are made using one set of tools; however, the Company has developed duplicate tools for several of its key and high-volume products. The Company believes it has alternative manufacturing sources available for all of its products. Because it owns its single and duplicate tools, it could shift its sources of manufacturing for any product to an alternative supplier. Currently the Company is not dependent on any one supplier, although its largest supplier, which is based in the United States, accounted for products that represented approximately 22% of the Company's net sales in 1994, and approximately 21% of its net sales in 1995. In 1994 approximately 13% of the Company's products sold were manufactured by one supplier located in China, and approximately 11% of its products sold were manufactured by this same supplier in 1995. The Company has not entered into long-term contractual arrangements with any of its suppliers. The principal raw materials used in the production and sale of the Company's products are plastic, paperboard and cloth. Raw materials are purchased by the manufacturers who deliver completed products to the Company. Because the primary source used in manufactured plastic is petroleum, the cost and availability of plastic for use in the Company's products varies to a great extent with the price of petroleum. The inability of the Company's suppliers to acquire sufficient plastic and paperboard at a reasonable price could have a material adverse effect on the Company's profitability. The Company purchases its products from its suppliers primarily in the U.S. dollar and the Hong Kong dollar which is currently pegged to the U.S. dollar. Generally, the Company's suppliers ship the products on the basis of open credit terms or upon the acceptance of products by the Company. In addition, some suppliers require shipment against letters of credit. Foreign manufacturing is subject to a number of risks including transportation delays and interruptions, the imposition of tariffs, quotas, and other import or export controls, currency fluctuations, misappropriation of intellectual property, political and economic disruptions, and changes in governmental policies. From time to time, the United States has attempted to impose additional restrictions on trade with China. On May 15, 1996, the Clinton Administration announced that certain products exported by China would be subject to punitive sanctions (100% tariffs) on June 17, 1996, if China did not close certain factories producing counterfeit videos, compact disks and software. However, the Company has determined that these sanctions will not apply to any of the Company's products. Enactment of legislation or the imposition of restrictive regulations conditioning 18 22 or revoking China's "most favored nation" ("MFN") trading status 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. China's MFN trading status has been extended through July 3, 1997. Unless Congress takes action to override this decision, China will continue to enjoy MFN treatment during this period. The European Union (the "EU") has recently enacted a quota and tariff system with respect to the importation into the EU of certain toy products originating in China. The Company, therefore, continues to evaluate alternative sources of supply outside of China. The Company, because of its substantial reliance on suppliers in foreign countries, is required to order products further in advance of customer orders than would generally be the case if such products were produced in the United States. As a result, the Company is required to carry significant amounts of inventory to meet rapid delivery requirements of customers and to assure itself of continuous allotment of goods from suppliers. 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 with a number of different competitors, depending on the product category, and it competes against no single company across all product categories. Its competitors include large, diversified health care products companies, specialty infant products makers, toy makers and specialty health care products companies. The Company competes principally on the basis of brand name recognition and price/value relationship. In addition, the Company believes that it competes favorably with respect to product quality, customer service and breadth of product line. DISTRIBUTION The Company distributes its products in the United States from its 103,500 square foot warehouse facility in Avon, Massachusetts and from a public warehouse in Fontana, California. The Company distributes its products in Canada from a public warehouse in Toronto, Ontario. In Europe, the Company distributes its products from a public warehouse in Gent, Belgium. The Company uses independent shippers to deliver orders to its customers. Warehouse services at the various public warehouses are performed by warehouse operators unaffiliated with the Company. The Company also uses a computerized management information and control system which allows the Company to determine the status of orders from customers and enables the Company to process orders quickly, respond to customer inquiries and adjust shipping schedules to meet customer requirements. Within this system, the Company uses an electronic data interchange system which enables customers, through computerized telephone communications, to place orders directly with the Company. The Company believes that these systems have improved order processing, expedited shipments and improved customer service. The Company also provides to its customers the service of pre-ticketing and bar-coding its products in accordance with customer specifications. TRADEMARKS, PATENTS AND COPYRIGHTS The Company's principal trademark, THE FIRST YEARS and design, is registered in the United States and in a number of foreign countries. The Company also uses other trademarks for certain of its products and product categories, some of which are registered in the United States and in various foreign countries. Applications are pending in the U.S. and various foreign countries for registration of some of the Company's trademarks. The Company also owns patents, design patents and design registrations, as well as pending applications in the United States and certain foreign countries. Although the Company believes such are important to its business, it does not believe that any single patent, design patent, or design registration, including any which may be issued on a pending application, is material to its business. There can be no assurance that the Company's patents, design patents or design registrations, including those that may be issued on pending applications, will offer any significant competitive advantage for the Company's products. 19 23 The Company also owns copyrights, some of which are registered in the United States. The Company does not believe that any single copyright is material to its business. There can be no assurance that the Company's copyrights will offer any significant competitive advantage for the Company's products. The Company requires all of its employees (other than hourly warehouse employees), including its executive officers, to enter into standard employee agreements pursuant to which the employee agrees to keep confidential any proprietary information of the Company and to assign to the Company all rights which the employee may possess in any proprietary information or technology made or contributed to by the employee during his or her employment or made thereafter as a result of any inventions conceived or work done during such employment. Despite these precautions, it may be possible for a third party to obtain and use the Company's designs without authorization. In addition, effective patent and trade secret protection may be unavailable or limited with respect to various of the Company's products. EMPLOYEES As of March 31, 1996, the Company employed 110 full-time and 3 part-time employees, of whom 10 are executive officers, 49 are in sales, marketing and product development, 37 are in materials, purchasing, quality control, data processing, finance, administration and clerical and 17 are in warehousing positions. None of the Company's employees is represented by a union, and the Company has not experienced any work stoppages. The Company believes that relations with employees are good. GOVERNMENT REGULATION The Company's products are subject to the provisions of the Federal Consumer Product Safety Act, the Federal Hazardous Substances Act, as amended, the Federal Flammable Fabrics Act, and the Child Safety Protection Act and the regulations promulgated thereunder (the "Acts"). The Company's nursery monitors are subject to regulations of the Federal Communications Commission. The Company's medical devices and drug products are subject to the regulations of the Food and Drug Administration. The Acts enable the Consumer Product Safety Commission (the "CPSC") to protect children from hazardous toys and other articles. The CPSC has the authority to exclude from the market certain consumer products which are found to be hazardous. The CPSC's determination is subject to court review. The CPSC can require the repurchase by the manufacturer of articles which are banned. The Federal Flammable Fabrics Act enables the CPSC to regulate and enforce flammability standards for fabrics used in consumer products. Similar laws exist in some states and cities and in various international markets. The Company designs and tests its products to ensure compliance with the various federal, state and international requirements. Any recall of a product could have a material adverse effect on the Company, depending on the particular product. PROPERTIES The Company owns its executive and administrative offices and principal warehouse which are located in a building at One Kiddie Drive, Avon, Massachusetts. The building contains approximately 124,000 square feet of space, of which approximately 20,500 square feet are used for executive and administrative offices; and the balance, approximately 103,500 square feet, is utilized for warehousing. The Company also has sales offices in leased premises in Mission Viejo, California; and Cirencester, England. The Company also uses public warehouses located in Fontana, California; Toronto, Canada; and in Gent, Belgium. The Company believes that its properties (owned and leased) are in good condition and adequate for its current needs. The Company believes that additional warehouse space, if needed, is readily available in close proximity to its Avon facility. 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 management. The Company believes that there are no claims or litigation pending, the outcome of which would have a material adverse effect on the Company's business, financial condition or operating results. 20 24 MANAGEMENT OFFICERS AND DIRECTORS The Company's officers and directors are as follows:
OFFICER OR NAME AGE POSITION DIRECTOR SINCE - ---- --- -------- -------------- Ronald J. Sidman................... 49 Chairman of the Board of Directors, 1975 Chief Executive Officer and President Jerome M. Karp..................... 68 Vice Chairman of the Board of 1969 Directors Benjamin Peltz..................... 57 Treasurer, Senior Vice President and 1975 Director Evelyn Sidman...................... 82 Clerk and Director 1979 Fred T. Page(1)(2)................. 49 Director 1988 Merton N. Alperin(1)(2)............ 73 Director 1988 Joseph M. Connolly................. 55 Vice President -- Operations 1979 John N. Colantuone................. 58 Vice President -- Materials and 1982 Engineering Mark H. Dall....................... 52 Vice President -- Information 1985 Services Adrian E. Roche.................... 40 Vice President -- Worldwide 1992 Marketing Wayne Shea......................... 41 Vice President -- Worldwide Sales & 1991 Merchandising Keith Ciampa....................... 31 Vice President -- Executive Account 1996 Sales John R. Beals...................... 41 Controller and Assistant Treasurer 1990 - --------------- (1) Member of the Audit Committee. (2) Member of the Compensation Committee.
Mr. Sidman has served as President of the Company for over five years and was elected to the offices of Chairman of the Board and Chief Executive Officer on March 28, 1995. Mr. Karp first became a Director of the Company in 1969 and has been the Vice Chairman of the Board of Directors of the Company for over five years. Mr. Peltz has been Senior Vice President and Treasurer of the Company for over five years. Mrs. Sidman first became a Director of the Company in 1979 and has been the Clerk of the Company for over five years. Mr. Page was appointed President -- Network Services of Southern New England Telecommunications Corporation ("SNET") in January 1994, and has been with SNET for over five years. Mr. Alperin, a Certified Public Accountant, has been a financial consultant for over five years. He was the Chairman of the Board of Public Accountancy of Massachusetts for the years 1979, 1982 and 1984. Mr. Connolly has been Vice President -- Operations of the Company for over five years. Mr. Colantuone has been Vice President -- Materials and Engineering of the Company since March 1989. From January 1982 to February 1989, Mr. Colantuone was Vice President of Materials of the Company. 21 25 Mr. Dall has been Vice President -- Information Services of the Company for over five years. Mr. Roche has been Vice President -- Worldwide Marketing of the Company since January 1995. From January 1992 to December 1994, Mr. Roche was Vice President -- European Sales of the Company. From 1989 to 1991, Mr. Roche held several managerial positions for Fisher-Price Kiddie Craft in the United Kingdom, the last of which was Managing Director. Mr. Shea has been Vice President -- Worldwide Sales & Merchandising of the Company since January 1995. From July 1991 to December 1994, Mr. Shea was Vice President -- Service and Merchandising of the Company, and from January 1985 to June 1991, Mr. Shea was Director of Merchandising of the Company. Mr. Ciampa has been the Vice President -- Executive Account Sales since June 1996. From July 1993 to May 1996, Mr. Ciampa was Director of Sales -- Americas and from January 1992 to June 1993 he was Export Sales Manager of the Company. Mr. Beals has been the Assistant Treasurer of the Company since January 1990 and has been the Controller of the Company since July 1985. Evelyn Sidman is the mother of Ronald J. Sidman and the mother-in-law of Benjamin Peltz. ELECTION AND COMPENSATION OF DIRECTORS The Company's Board of Directors is divided into three classes, with members of each class holding office for staggered three-year terms. There are currently two Class I directors (Jerome M. Karp and Fred T. Page), two Class II directors (Evelyn Sidman and Merton N. Alperin) and two Class III directors (Ronald J. Sidman and Benjamin Peltz) whose terms expire, respectively, at the 1999, 1997 and 1998 Annual Meeting of Stockholders. At each Annual Meeting of Stockholders, directors in a class are elected for a term of three years and until their successors are elected and qualified. The Company pays each director who is not an employee of the Company an annual retainer of $12,500 for Board service, plus attendance fees of $750 per meeting for each Board or committee meeting attended. The Company also reimburses expenses incurred in connection with service on the Board. Non-employee directors are also eligible to receive an option each year to purchase 3,000 shares of the Company's Common Stock under the Company's 1993 Stock Option Plan for Non-Employee Directors (the "Directors Plan"), which becomes exercisable on the first anniversary of the date of grant. In addition, each director who has served for at least three years receives a one-time award of an option for 10,000 shares that is exercisable six months after the date of grant. The exercise price of options is equal to the fair market value per share of the Company's Common Stock on the date of grant. Pursuant to the Directors Plan, on May 16, 1996, each of Messrs. Alperin and Page was granted an option to purchase 3,000 shares of Common Stock at an exercise price of $17.125 per share. 22 26 EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth certain information with respect to the annual and long-term compensation for the years ended December 31, 1993, 1994 and 1995 paid or accrued by the Company to each of the following: (i) the Company's Chief Executive Officer and (ii) the Company's four most highly paid executive officers who earned more than $100,000 in 1995 (collectively the "named officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION --------------------- NAME AND ---------------------- SECURITIES UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS(2) COMPENSATION(3) ------------------ ----- --------- --------- --------------------- --------------- Ronald J. Sidman*.................. 1995 $214,384 $276,667 20,000 $30,642 Chairman of the Board of 1994 Directors,....................... 193,539 159,291 10,000 29,319 Chief Executive Officer and 1993 President........................ 220,954 0 53,000 43,770 Marshall B. Sidman**............... 1995 44,165 0 0 51,000 Chairman of the Board of 1994 Directors........................ 172,562 57,323 0 51,096 and Chief Executive Officer........ 1993 197,830 0 0 61,500 Benjamin Peltz..................... 1995 177,363 140,333 10,000 35,817 Senior Vice President,............. 1994 159,645 88,646 8,000 34,523 Treasurer and Director............. 1993 182,803 0 39,000 47,945 John N. Colantuone................. 1995 112,671 38,442 3,000 17,228 Vice President --.................. 1994 105,974 34,929 5,000 11,952 Materials and Engineering.......... 1993 101,342 0 10,000 17,544 Wayne Shea......................... 1995 116,162 39,760 4,000 17,444 Vice President --.................. 1994 101,024 33,323 5,000 11,270 World Wide Sales & Merchandising... 1993 98,420 0 10,000 16,944 Adrian R. Roche.................... 1995 111,822 37,359 2,000 10,865 Vice President --.................. 1994 92,853 29,821 5,000 8,709 World Wide Marketing............... 1993 85,118 0 10,000 8,218 - --------------- (1) The bonus amounts were earned by these individuals in 1995 and 1994 under the Company's Annual Incentive Plan. The Company did not make any bonus payments to the named officers for services rendered during 1993. (2) These numbers represent options to purchase shares of the Company's Common Stock granted pursuant to the Company's 1993 Equity Incentive Plan and have been adjusted to reflect the Company's 2-for-1 stock split effected in December 1995. See "Options/SAR Grants in Last Fiscal Year" for more information on the options granted in 1995. (3) The amounts shown in this column reflect (i) insurance premium payments made on behalf of the following named officers by the Company during 1995 for life insurance policies: Marshall B. Sidman -- $51,000; Ronald J. Sidman -- $12,770; and Benjamin Peltz -- $17,945; and (ii) contributions made by the Company to the Company's defined contribution pension and 401(k) plans on behalf of the following named officers: Ronald J. Sidman -- $17,872; Benjamin Peltz -- $17,872; John N. Colantuone -- $17,228; Wayne Shea -- $17,444; and Adrian E. Roche -- $10,865. * Ronald J. Sidman became Chairman and Chief Executive Officer on March 28, 1995. ** Marshall B. Sidman died on March 24, 1995.
23 27 Option Grants. The following table sets forth grants of stock options pursuant to the Company's 1993 Equity Incentive Plan during 1995 to the named officers reflected in the Summary Compensation Table above: OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF NUMBER OF PERCENTAGE OF STOCK PRICE SECURITIES TOTAL OPTIONS/SARS APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM(2) OPTIONS/SARS EMPLOYEES IN PRICE PER EXPIRATION ------------------------ NAME GRANTED(1) FISCAL YEAR SHARE(1) DATE 5% 10% ---- ------------ ------------------ --------- ---------- ------- -------- Marshall B. Sidman..... 0 Ronald J. Sidman....... 20,000 19.4% $ 9.831 3/23/00 $31,510 $91,254 Benjamin Peltz......... 10,000 9.7 8.938 3/23/00 24,693 54,564 John N. Colantuone..... 3,000 2.9 8.938 3/23/00 7,408 16,369 Wayne Shea............. 4,000 3.9 8.938 3/23/00 9,877 21,826 Adrian E. Roche........ 2,000 1.9 8.938 3/23/00 4,939 10,913 - --------------- (1) Incentive stock options were granted in 1995 pursuant to the Company's 1993 Equity Incentive Plan. The exercise price of the options granted to all the named officers other than Ronald J. Sidman, was equal to the fair market value (the closing sale price) of the Company's Common Stock on the date of grant, March 23, 1995. The exercise price of the options granted to Mr. Sidman was 110% of the fair market value of the Company's Common Stock on such date. The options are exercisable in three equal annual installments beginning on March 23, 1996. (2) In accordance with the rules of the Securities and Exchange Commission, the amounts shown on this table represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date. The gains shown are net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise. Actual gains, if any, on stock option exercises will depend on the future performance of the Company's Common Stock, the optionholder's continued employment through the option period, and the date on which the options are exercised.
Option Exercises and Fiscal Year-End Values. The following table sets forth information with respect to options to purchase the Company's Common Stock granted under the Company's 1993 Equity Incentive Plan including the number of unexercised options outstanding on December 31, 1995 and the value of such unexercised options on December 31, 1995. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS/SAR VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED SHARES OPTIONS/SARS IN-THE-MONEY OPTIONS ACQUIRED AT FISCAL YEAR END AT FISCAL YEAR END(1) ON VALUE --------------------------- --------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------ -------- -------- ----------- ------------- ----------- ------------- Marshall B. Sidman............ -- -- 0 0 0 0 Ronald J. Sidman.............. -- -- 38,670 44,330 $197,300 $148,800 Benjamin Peltz................ -- -- 28,668 28,332 161,400 125,400 John N. Colantuone............ -- -- 8,336 9,664 47,600 45,300 Wayne Shea.................... -- -- 8,336 10,664 47,600 47,300 Adrian E. Roche............... 5,002 $25,322 4,998 7,000 29,000 32,900 - --------------- (1) Value is based on the difference between the option exercise price and the fair market value at December 31, 1995 ($10.875 per share -- the closing sale price of the Company's Common Stock as reported by Nasdaq) multiplied by the number of shares underlying the option.
24 28 EMPLOYMENT AGREEMENTS On March 23, 1995, the Company entered into employment agreements (the "Agreements") with Ronald J. Sidman and Benjamin Peltz (the "Executives"). Unless otherwise indicated, the provisions of the Agreements are substantially similar. The respective Agreements provide that, initially, Mr. Sidman will serve as President and Mr. Peltz will serve as Senior Vice President and Treasurer of the Company, in each case for a term of five years, provided, however, that the Agreements are automatically renewed for additional three-year periods unless either party gives the other party notice of termination at least 90 days prior to the expiration of the initial or any renewal term (the "Term"). The initial base salaries under the Agreement are $214,000 for Mr. Sidman and $177,000 for Mr. Peltz, which amounts may be increased or decreased during the Term in the discretion of the Compensation Committee ("Salary"). The Executives are also entitled to participate in the Company's Annual Incentive Plan ("Annual Bonus"), the Company's 1993 Equity Incentive Plan, and the benefits and benefit plans provided by the Company to its other executive officers during the Term ("Benefits"). If an Executive is terminated for cause, the Salary and Benefits of the Executive cease immediately and the Executive will not be entitled to receive an Annual Bonus for the year in which the termination for cause occurs. In the event of an Executive's death, the Company will pay the Executive's legal representative an amount equal to his Salary then in effect, in 12 equal monthly installments. In the event an Executive becomes disabled, the Executive will receive an amount equal to his Salary then in effect, in 12 equal monthly installments. Any Annual Bonus amounts due an Executive in the year of his death or disability will be paid on a pro rata basis. In the event the Company or an Executive terminates the Agreement for any reason (other than death, disability or cause), any Annual Bonus to which an Executive is entitled will be paid on a pro rata basis. In consideration for their obligation not to disclose the Company's confidential information and not to compete with the Company or solicit its employees during the Term and for a two-year period following termination of their employment by either party for any reason (other than death, disability or cause), the Executives will receive their Salary and Benefits (then in effect) for such two-year period less any amount earned by the Executives from other employment during such period. In August, 1994, the Company entered into an employment agreement with Jerome M. Karp. The agreement provides that Mr. Karp will continue to be employed by the Company on a reduced-time basis for a period of five years until his retirement from the Company on August 8, 1999 (the "Term") and will continue to serve as the Vice Chairman of the Board of Directors subject to election by the Board of Directors. The agreement provides for an annual salary of $100,000 and participation by Mr. Karp in the benefits and benefit plans provided by the Company to its executive officers during the Term, except the Company's Annual Incentive Plan and 1993 Equity Incentive Plan. If Mr. Karp terminates the agreement for any reason, or if Mr. Karp is terminated for cause, his right to salary and the benefits terminates. In the event of Mr. Karp's death, the Company will pay to Mr. Karp's legal representative the lesser of $100,000 or the balance of salary due Mr. Karp in the fifth year of the Term. In the event Mr. Karp becomes disabled, the Company will pay Mr. Karp the sum of $100,000 in 12 equal monthly installments. In the event of certain corporate transactions (merger, sale of all or substantially all of the Company's assets, or sale of a majority of the Company's Common Stock) the agreement terminates and the Company will pay Mr. Karp in a lump sum payment, the lesser of $100,000 or the balance of the salary due Mr. Karp in the fifth year of the Term. As additional consideration for entering into the agreement, Mr. Karp has agreed not to disclose the Company's confidential information and not to compete with the Company or solicit its employees or customers during the Term and for a five-year period following termination of his employment. 25 29 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth, to the knowledge of the Company, the beneficial ownership of the Common Stock of the Company as of June 3, 1996 (except as otherwise indicated) by (i) each director of the Company, (ii) each of the named officers who was serving as executive officers at the end of 1995, (iii) persons owning more than 5% of the Company's Common Stock, (iv) each Selling Stockholder and (v) all directors and executive officers of the Company as a group. Unless otherwise indicated, each stockholder referred to below has sole voting and investment power with respect to shares listed.
SHARES SHARES TO BE BENEFICIALLY OWNED BENEFICIALLY OWNED PRIOR TO OFFERING NUMBER OF AFTER OFFERING ------------------- SHARES BEING ------------------- DIRECTORS AND NAMED EXECUTIVE OFFICERS NUMBER PERCENT OFFERED NUMBER PERCENT - -------------------------------------- --------- ------- ------------ --------- ------- Evelyn Sidman(1).......................... 1,163,400 25.7% 800,000 363,400 7.4% Ronald J. Sidman(2)....................... 552,670 12.1 80,000 472,670 9.5 Benjamin Peltz(3)......................... 354,468 7.8 160,000 194,468 3.9 Jerome M. Karp(4)......................... 160,520 3.5 160,000 520 * Fred T. Page(5)........................... 22,600 * 0 22,600 * John N. Colantuone(6)..................... 11,002 * 0 11,002 * Merton N. Alperin(7)...................... 19,000 * 0 19,000 * Wayne Shea(8)............................. 12,336 * 0 12,336 * Adrian E. Roche(9)........................ 5,664 * 0 5,664 * 5% STOCKHOLDERS Estate of Marshall B. Sidman.............. 811,080 17.9 800,000 11,080 * One Kiddie Drive Avon, MA 02322 Santa Monica Partners, L.P.(10)........... 346,000 7.6 0 346,000 7.0 Two Madison Avenue Larchmont, NY Quest Advisory Corp.(11).................. 347,672 7.7 0 347,672 7.0 Quest Management Company Charles M. Royce 1414 Avenue of the Americas New York, NY SELLING STOCKHOLDERS Eleanor J. Karp........................... 114,000 2.5 114,000 0 * All directors and executive officers as a group(12) (13 persons).................. 2,327,827 49.4 1,200,000 1,127,827 22.1 - --------------- * Less than 1% of outstanding shares of Common Stock. (1) Includes 811,080 shares owned beneficially by Mrs. Sidman as the personal representative of the estate of her late husband, Marshall B. Sidman, 800,000 of which are being sold in this Offering. Mrs. Sidman has sole voting and investment power over such shares. (2) Includes 48,670 shares issuable to Mr. Sidman pursuant to currently exercisable stock options. Mr. Sidman is the son of Evelyn Sidman. (3) Includes 34,668 shares issuable to Mr. Peltz pursuant to currently exercisable stock options. 4,800 shares are owned jointly by Mr. and Mrs. Peltz.
26 30 (4) Includes 114,000 shares owned beneficially by Mr. Karp's wife, Eleanor J. Karp, who has sole voting and investment power with respect to such shares, which are being sold in this Offering. Mr. Karp disclaims any beneficial interest in such shares. (5) Includes 19,000 shares issuable to Mr. Page pursuant to currently exercisable options. (6) Includes 11,002 shares issuable to Mr. Colantuone pursuant to currently exercisable options. (7) Includes 19,000 shares issuable to Mr. Alperin pursuant to currently exercisable options. (8) Includes 11,336 shares issuable to Mr. Shea pursuant to currently exercisable stock options. (9) Includes 5,664 shares issuable to Mr. Roche pursuant to currently exercisable stock options. (10) As reported on Schedule 13D filed with the Securities and Exchange Commission in August 1994, Lawrence J. Goldstein, general partner of Santa Monica Partners, L.P., may be deemed to beneficially own 346,000 shares of the Company's outstanding Common Stock and shares voting and dispositive power with Santa Monica Partners, L.P. over such shares. (11) As reported on Schedule 13G filed with the Securities and Exchange Commission in February 1996, Quest Advisory Corp., Quest Management Company and Charles M. Royce are members of a "group" within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934; Quest Advisory Corp. has sole voting and dispositive power over 304,072 shares; Quest Management Company has sole voting and dispositive power over 43,600 shares; and Mr. Royce may be deemed to beneficially own the shares of Quest Advisory Corp. and Quest Management Company but disclaims beneficial ownership of the shares held by each. (12) The total for all directors and executive officers as a group includes 175,507 shares issuable to the directors and officers pursuant to currently exercisable stock options. The total also includes shares owned beneficially by spouses which have been counted only once. DESCRIPTION OF CAPITAL STOCK The description of the capital stock below is qualified in its entirety by reference to the Company's Articles of Organization (the "Articles") and By-Laws (the "By-Laws"), copies of which are filed as exhibits to the Registration Statement of which this Prospectus is a part. AUTHORIZED AND OUTSTANDING CAPITAL STOCK The Company is authorized to issue up to 15,000,000 shares of Common Stock, $0.10 par value. On June 1, 1996, there were 4,535,570 shares outstanding. COMMON STOCK Holders of Common Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Holders of a majority of the voting power of Common Stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of Common Stock are entitled to receive ratably (based on the number of shares of Common Stock that they hold) such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor. Upon the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive ratably the net assets of the Company available after the payment of all debts and other liabilities. Holders of Common Stock have no preemptive, subscription or redemption rights. The outstanding shares of Common Stock are, and the shares offered by the Company in this offering will be, when issued and paid for, fully paid and nonassessable. CERTAIN CHARTER AND BY-LAW PROVISIONS The Company's Articles and By-Laws contain certain provisions that are intended to enhance the likelihood of continuity and stability in the composition of the Company's Board of Directors and in the policies formulated by the Board and to delay or prevent a change in control of the Company if the Board 27 31 determines that such a change in control is not in the best interest of the Company and its stockholders. These provisions could have the effect of discouraging certain attempts to acquire the Company or remove incumbent management even if some or a majority of the Company's stockholders deem such an attempt to be in its best interest. Pursuant to the By-Laws, the Board shall consist of not less than three Directors. The Company is subject to the provisions of Chapter 156B, Section 50A, of the Massachusetts General Laws, which automatically divides the board of directors into three classes. Pursuant to Section 50A, directors can be removed only for cause by the affirmative vote of the holders of a majority of the voting power of the then outstanding shares of capital stock of the Company generally entitled to vote in the election of directors voting together as a single class. Although Section 50A allows a corporation to elect not to have its provisions apply, the Company has not so elected. The By-Laws and Chapter 156B of the Massachusetts General Laws provide that stockholders may take action without a meeting only if all shareholders entitled to vote on the action consent to the action in writing. The written consents must be filed with the records of the meeting of stockholders. This provision may discourage any person or entity from making a tender offer for Common Stock, because such person or entity, even if it acquired a majority of the outstanding voting securities of the Company, would be able to take action as a stockholder (such as electing new directors or approving a merger) only at a duly called stockholders meeting and not by written consent. The By-Laws also require that in order to call a special meeting of stockholders, a single stockholder or a group of stockholders must hold more than forty percent (40%) of the then outstanding shares of common stock of the Company. The By-Laws establish procedures, including advance notice procedures, with regard to the nomination, other than by or at the direction of the Board of Directors, of candidates for election as directors and with regard to certain matters to be brought before meetings of stockholders of the Company. In general, notice must be received by the Company not less than 60 days nor more than 90 days prior to the meeting and must contain certain specified information concerning the persons to be nominated or the matters to be brought before the meeting and concerning the stockholder submitting the proposal. The Board of Directors is permitted pursuant to Chapter 156B of the Massachusetts General Laws to consider special factors, such as employee welfare and the future prospects of the Company, in determining what the directors reasonably believe to be in the best interests of the Company when evaluating proposed tender or exchange offers or business combinations. The Articles provide that no director of the Company shall be liable to the Company or its stockholders for monetary damages for any breach of fiduciary duty, except to the extent such exculpation from liability is not permitted under applicable law. This provision does not prevent stockholders from obtaining injunctive or other equitable relief against directors nor does it shield directors from liability under federal or state securities laws. The By-Laws provide that the Company shall indemnify its directors and officers to the full extent permitted by law. MASSACHUSETTS ANTI-TAKEOVER LAWS The Company is covered by the provisions of Chapter 110F of the Massachusetts General Laws, the Business Combination Statute. Under Chapter 110F, a Massachusetts corporation with more than 200 stockholders of record may not engage in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless (i) the interested stockholder obtains the approval of the Board of Directors prior to becoming an interested stockholder, (ii) the interested stockholder acquires 90% of the outstanding voting stock of the corporation (excluding shares held by certain affiliates of the corporation) at the time it becomes an interested stockholder or (iii) the business combination is approved by both the Board of Directors and the holders of two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder). An "interested stockholder" is a person who, together with affiliates and associates, owns (or at 28 32 any time within the prior three years did own) 5% or more of the outstanding voting stock of the corporation. A "business combination" includes a merger, a stock or asset sale, and other transactions resulting in a financial benefit to the interested stockholder. The By-Laws provide that the provisions of Chapter 110D of the Massachusetts General Laws, the Control Share Statute, will not apply to the Company. The Control Share Statute, however, provides that the Company may in the future become prospectively subject to the statute by vote of its Board of Directors. In general, if this statute were applicable, it would provide that any person or entity that acquired 20% or more of the Company's outstanding voting stock could not vote such stock unless the other stockholders of the Company were to so authorize. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock of the Company is State Street Bank and Trust Company. 29 33 UNDERWRITING The Underwriters named below have severally agreed with the Company and the Selling Stockholders, subject to the terms and conditions of the Underwriting Agreement, to purchase the respective numbers of shares of Common Stock set forth opposite their names below.
NUMBER UNDERWRITER OF SHARES ----------- --------- A.G. Edwards & Sons, Inc. .............................................. Adams, Harkness & Hill, Inc. ........................................... --------- Total................................................................. 1,600,000 =========
The Underwriting Agreement provides that the Underwriters are obligated to purchase all of the shares of Common Stock, if any are purchased. The Company has been advised by A.G. Edwards & Sons, Inc. and Adams, Harkness & Hill, Inc., the Representatives of the Underwriters (the "Representatives"), that the Underwriters propose to offer the Common Stock to the public at the offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share and that the Underwriters and such dealers may reallow a discount of not in excess of $ per share to other dealers. The public offering price and the concession and discount to dealers may be changed by the Representatives after the public offering. The Company has granted the Underwriters an option, expiring at the close of business on the 30th day subsequent to the date of the Underwriting Agreement, to purchase up to 240,000 additional shares of Common Stock at the public offering price, less the underwriting discount set forth on the cover page of this Prospectus. The Underwriters may exercise such option solely to cover over-allotments, if any, in the sale of the shares. To the extent the Underwriters exercise such option, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage of the option shares as the number of shares set forth opposite each Underwriter's name in the preceding table bears to 1,600,000 and the Company will be obligated to sell such shares to the Underwriters. The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Act"). The Company, the Selling Stockholders and all directors of the Company have agreed that they will not, directly or indirectly, offer, sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for, or any rights to purchase or acquire, Common Stock for a period of 180 days after the date of this Prospectus (the "Lockup Period"), except pursuant to the Underwriting Agreement, without the prior written consent of A.G. Edwards & Sons, Inc. The Representatives have advised the Company that they do not intend to confirm sales to any account over which they exercise discretionary authority. The rules of the Securities and Exchange Commission (the "Commission") generally prohibit the Underwriters and other members of the selling group from making a market in the Company's Common Stock during the "cooling-off" period immediately preceding the commencement of sales in the offering. The Commission has, however, adopted an exemption from these rules that permits passive market making under certain conditions. These rules permit an Underwriter or other member of the selling group, if any, to continue to make a market in the Company's Common Stock subject to the conditions, among others, that its bid not exceed the highest bid by a market maker not connected with the offering and that its net purchases on any one trading day not exceed prescribed limits. Pursuant to these exemptions, certain Underwriters and other members of the selling group, if any, may engage in passive market making in the Company's Common Stock during the cooling-off period. 30 34 LEGAL MATTERS The validity of the shares of Common Stock offered hereby is being passed upon for the Company by Ropes & Gray, Boston, Massachusetts. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Hale and Dorr, Boston, Massachusetts. EXPERTS The financial statements as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION The Company is subject to the reporting requirements of the Securities Exchange Act of 1934 and, in accordance therewith, files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and the Commission's regional offices located at Seven World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661. Copies of such materials also may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Common Stock of the Company is traded on the Nasdaq National Market. Reports and other information concerning the Company may be inspected at the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act of 1933 with respect to the Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, to which reference is hereby made. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to above are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement reference is hereby made to the exhibit for a more complete description of the matter involved, and each statement shall be deemed qualified in its entirety by such reference. The Registration Statement, including exhibits and schedules thereto, may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's Regional Offices at Seven World Trade Center, Thirteenth Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies may be obtained at the prescribed rates from the Public Reference Section of the Commission at its principal office in Washington, D.C. 31 35 INDEX TO FINANCIAL STATEMENTS
PAGE ---- INDEPENDENT AUDITORS' REPORT.......................................................... F-2 FINANCIAL STATEMENTS: Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (unaudited)... F-3 Statements of Income for the Years Ended December 31, 1993, 1994, and 1995 and for the Three Months Ended March 31, 1995 and 1996 (unaudited).................. F-4 Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1994 and 1995 and for the Three Months Ended March 31, 1996 (unaudited).............. F-5 Statements of Cash Flows for the Years Ended December 31, 1993, 1994, and 1995 and for the Three Months Ended March 31, 1995 and 1996 (unaudited).............. F-6 Notes to Financial Statements.................................................... F-7
F-1 36 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of The First Years Inc. Avon, Massachusetts We have audited the accompanying balance sheets of The First Years Inc. (formerly Kiddie Products, Inc.) as of December 31, 1995 and 1994, and the related statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the 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, such financial statements present fairly, in all material respects, the financial position of The First Years Inc. as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Boston, Massachusetts March 7, 1996 F-2 37 THE FIRST YEARS INC. BALANCE SHEETS
DECEMBER 31, MARCH 31, ------------------------- ----------- NOTES 1994 1995 1996 ----- ---- ---- ---- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents....................... 1,8 $ 2,329,041 $ 552,568 $ 59,306 Accounts receivable (less allowance for doubtful accounts, $185,000 in 1994, 1995 and 1996)............................... 8 9,266,235 14,191,630 16,243,208 Inventories..................................... 1 10,413,835 19,009,784 19,637,900 Prepaid expenses and other assets............... 295,921 778,074 429,148 Deferred tax asset.............................. 1,3 624,500 872,300 872,300 ----------- ----------- ----------- Total current assets......................... 22,929,532 35,404,356 37,241,862 ----------- ----------- ----------- PROPERTY, PLANT, AND EQUIPMENT.................... 1 Land............................................ 167,266 167,266 167,266 Building........................................ 3,737,861 3,737,861 3,741,291 Machinery and molds............................. 5,413,075 6,481,504 7,002,819 Furniture and equipment......................... 2,986,905 3,183,379 3,350,811 ----------- ----------- ----------- Total........................................ 12,305,107 13,570,010 14,262,187 Less accumulated depreciation................... 6,381,854 7,262,286 7,554,413 ----------- ----------- ----------- Property, plant, and equipment -- net........ 5,923,253 6,307,724 6,707,774 ----------- ----------- ----------- TOTAL ASSETS............................ $28,852,785 $41,712,080 $43,949,636 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt............... 2 $ 133,333 $ 133,333 $ 133,333 Short-term borrowings........................... 2 -- 6,200,000 8,500,000 Accounts payable................................ 4,034,263 6,903,478 6,000,755 Accrued benefit plans expense................... 7 259,557 255,271 117,542 Accrued payroll expenses........................ 782,890 1,105,004 678,484 Accrued selling expenses........................ 256,161 604,434 558,761 Federal and state income taxes payable.......... 1,3 218,500 -- 283,600 ----------- ----------- ----------- Total current liabilities.................... 5,684,704 15,201,520 16,272,475 ----------- ----------- ----------- LONG-TERM DEBT -- Less portion due currently...... 2 233,334 100,001 66,667 ----------- ----------- ----------- DEFERRED TAX LIABILITY............................ 1,3 584,800 647,300 647,300 ----------- ----------- ----------- COMMITMENTS AND CONTINGENCIES..................... 5,6,8 STOCKHOLDERS' EQUITY.............................. 4,7 Common Stock authorized 15,000,000 shares as of March 31, 1996 and December 31, 1995 and 7,500,000 shares as of December 31, 1994 at $.10 par value............................... 225,043 451,514 451,774 Paid-in capital................................. 98,194 -- 13,102 Retained earnings............................... 22,026,710 25,311,745 26,498,318 ----------- ----------- ----------- Total stockholders' equity...................... 22,349,947 25,763,259 26,963,194 ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................ $28,852,785 $41,712,080 $43,949,636 =========== =========== ===========
See notes to financial statements. F-3 38 THE FIRST YEARS INC. STATEMENTS OF INCOME
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, --------------------------------------- ------------------------- NOTES 1993 1994 1995 1995 1996 ----- ---- ---- ---- ---- ---- (UNAUDITED) NET SALES................. 1,6,8 $46,124,088 $53,233,109 $75,757,322 $15,801,777 $23,009,281 COST OF PRODUCTS SOLD..... 1 26,653,704 29,498,457 45,108,546 9,256,243 13,947,171 ----------- ----------- ----------- ----------- ----------- GROSS PROFIT.............. 19,470,384 23,734,652 30,648,776 6,545,534 9,062,110 SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES................ 1,7 17,857,049 18,915,908 23,961,206 5,157,790 6,925,847 SEVERANCE-RELATED EXPENSES................ 9 373,000 -- -- -- -- ----------- ----------- ----------- ----------- ----------- OPERATING INCOME.......... 1,240,335 4,818,744 6,687,570 1,387,744 2,136,263 OTHER INCOME (EXPENSES): Interest expense........ (28,912) (24,575) (186,338) (13,433) (165,373) Interest income......... 66,204 66,605 16,718 8,697 1,183 Offering expenses....... 10 -- -- (310,457) -- -- ----------- ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES................... 1,277,627 4,860,774 6,207,493 1,383,008 1,972,073 PROVISION FOR INCOME TAXES................... 1,3 481,500 1,871,400 2,483,000 553,200 785,500 ----------- ----------- ----------- ----------- ----------- NET INCOME................ $ 796,127 $ 2,989,374 $ 3,724,493 $ 829,808 $ 1,186,573 =========== =========== =========== =========== =========== EARNINGS PER SHARE........ 1 $0.18 $0.66 $0.80 $0.18 $0.25 =========== =========== =========== =========== =========== AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING...... 4,496,520 4,497,244 4,663,491 4,661,846 4,689,426 =========== =========== =========== =========== =========== DIVIDENDS PAID PER SHARE................... $0.085 $0.085 $0.085 $0.000 $0.000 =========== =========== =========== =========== ===========
See notes to financial statements. F-4 39 THE FIRST YEARS INC. STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995 AND THREE MONTHS ENDED MARCH 31, 1996
COMMON STOCK ---------------------- PAR PAID-IN RETAINED NOTES SHARES VALUE CAPITAL EARNINGS ----- --------- -------- --------- ----------- BALANCE, JANUARY 1, 1993..................... 2,248,260 $224,826 $ 75,354 $19,005,617 Dividends paid............................. -- -- -- (382,204) Net income................................. -- -- -- 796,127 --------- -------- --------- ----------- BALANCE, DECEMBER 31, 1993................... 2,248,260 224,826 75,354 19,419,540 Stock issued under stock option plans...... 7 2,170 217 22,840 -- Dividends paid............................. -- -- -- (382,204) Net income................................. -- -- -- 2,989,374 --------- -------- --------- ----------- BALANCE, DECEMBER 31, 1994................... 2,250,430 225,043 98,194 22,026,710 Stock issued under stock option plans...... 7 7,141 714 70,957 -- Dividends paid............................. -- -- -- (382,852) Stock split, two-for-one................... 4 2,257,571 225,757 (169,151) (56,606) Net income................................. -- -- -- 3,724,493 --------- -------- --------- ----------- BALANCE, DECEMBER 31, 1995................... 4,515,142 451,514 0 25,311,745 Stock issued under stock option plans (unaudited)............................. 2,600 260 13,102 -- Net income (unaudited)..................... -- -- -- 1,186,573 --------- -------- --------- ----------- BALANCE, MARCH 31, 1996 (unaudited).......... 4,517,742 $451,774 $ 13,102 $26,498,318 ========= ======== ========= ===========
See notes to financial statements. F-5 40 THE FIRST YEARS INC. STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------------------- --------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................... $ 796,127 $ 2,989,374 $ 3,724,493 $ 829,808 $ 1,186,573 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation.................................. 778,652 878,250 992,291 253,750 292,127 Provision for doubtful accounts............... 17,177 23,673 86,227 25,147 53,746 Loss on disposal of equipment................. 105,170 47,877 70,258 0 0 Increase (decrease) arising from working capital items: Accounts receivable......................... (994,400) (2,077,176) (5,011,624) (2,264,138) (2,105,324) Inventories................................. (931,295) (2,184,385) (8,595,949) (2,098,165) (628,116) Prepaid expenses and other assets........... (42,222) (53,315) (482,153) (40,978) 348,926 Accounts payable............................ 20,979 1,549,774 2,869,215 914,073 (902,723) Accrued benefit plans expense............... (51,060) (376,128) (4,286) 82,004 (137,729) Accrued payroll expenses.................... (366,866) 730,508 322,114 (628,210) (426,520) Accrued selling expenses.................... (95,394) (142,477) 348,273 (125,214) (45,673) Federal and state income taxes payable...... (72,100) (9,200) (218,500) 430,100 283,600 Change in deferred income taxes............. 51,800 107,200 (185,300) 0 0 ----------- ----------- ----------- ----------- ----------- Net cash provided by (used for) operating activities................ (783,432) 1,483,975 (6,084,941) (2,621,823) (2,081,113) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant, and equipment................................. (794,222) (1,374,721) (1,447,018) (209,992) (692,177) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of industrial revenue bonds....... (133,333) (133,333) (133,333) (33,333) (33,334) Dividends paid.............................. (382,204) (382,204) (382,852) -- -- Common stock issued under stock option plans..................................... -- 23,057 71,671 10,667 13,362 Net proceeds from short-term borrowings..... -- -- 6,200,000 1,200,000 2,300,000 ----------- ----------- ----------- ----------- ----------- Net cash provided by (used for) financing activities................ (515,537) (492,480) 5,755,486 1,177,334 2,280,028 ----------- ----------- ----------- ----------- ----------- DECREASE IN CASH AND CASH EQUIVALENTS......... (2,093,191) (383,226) (1,776,473) (1,654,481) (493,262) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...................................... 4,805,458 2,712,267 2,329,041 2,329,041 552,568 ----------- ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD...... $ 2,712,267 $ 2,329,041 $ 552,568 $ 674,560 $ 59,306 =========== =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -- Cash paid during the year for: Interest.................................. $ 28,912 $ 24,575 $ 186,338 $ 13,433 $ 165,373 =========== =========== =========== =========== =========== Income taxes.............................. $ 501,800 $ 1,773,400 $ 3,269,100 $ 123,100 $ 119,600 =========== =========== =========== =========== ===========
See notes to financial statements. F-6 41 THE FIRST YEARS INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business -- The First Years Inc. (the "Company") is a developer, marketer, and distributor of certain basic accessory and related products for infants and toddlers. The Company was founded and incorporated in 1952. Since its inception, the Company has engaged in this single line of business, with one class of similar products. The following is a summary of significant accounting policies. Interim Financial Information -- The Balance Sheet as of March 31, 1996, the Statements of Income for the three months ended March 31, 1995 and 1996, the Statement of Stockholders' Equity for the three months ended March 31, 1996 and the Statements of Cash Flows for the three months ended March 31, 1995 and 1996 are unaudited. All adjustments and accruals (consisting only of normal recurring adjustments) have been made which, in the opinion of management, are necessary for a fair presentation. Results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results that may be expected for any future period. Revenue Recognition -- Revenue is recognized when products are shipped. Cash Equivalents -- Highly liquid investments with a maturity of three months or less when purchased have been classified as cash equivalents in the accompanying financial statements. Such investments are carried at cost which approximates market value. Inventories -- Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist principally of finished goods, unpackaged components, and supplies. Property, Plant, and Equipment -- Property, plant, and equipment is stated at cost. Depreciation is provided based on the estimated useful lives of the various classes of assets (building, 15 to 40 years; machinery and molds, 5 to 10 years; furniture and equipment, 5 to 10 years) using the straight-line method. Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of -- In March 1995, Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"), was issued. This statement, which will be required in 1996, establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. The Company does not expect that the adoption of SFAS 121 will have a material impact on the financial statements. Income Taxes -- Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates. Stock-Based Compensation -- In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," which will be effective for the Company beginning January 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply APB Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded (see Note 7). The Company will continue to apply APB Opinion No. 25 to its stock-based compensation awards to employees and will disclose the required pro forma effect on net income and earnings per share, as required by SFAS No. 123. Earnings Per Share -- Earnings per share are based on the weighted average number of shares outstanding during each year (retroactively adjusted to reflect the two-for-one stock split effected on December 29, 1995 and the three-for-one stock split effected on December 15, 1992) and common equivalent shares, consisting of the effect of stock options outstanding, if dilutive (4,663,491, 4,497,244 and 4,496,520 F-7 42 THE FIRST YEARS INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) shares in 1995, 1994 and 1993, respectively) (see Note 7). Earnings per share assuming full dilution have not been presented because the dilutive effect is immaterial. Risk and Uncertainties -- The Company has adopted Accounting Standards Executive Committee Statement of Position 94-6, "Disclosure of Certain Significant Risks and Uncertainties." The disclosures required by this SOP focus primarily on the nature of an entity's operations, the use of estimates in preparation of financial statements and on risks and uncertainties that could significantly affect the amounts reported in the financial statements (see Note 8). Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Research and Development Costs -- Research and development costs are expensed as incurred. During 1995, 1994, and 1993, research and development costs approximated $1,834,000, $1,466,000, and $1,493,000, respectively. Foreign Currency Translation -- The Company's functional currency is the U.S. dollar. Accordingly, monetary assets and liabilities of the Company's foreign operations are translated from the respective local currency to the U.S. dollar using year-end exchange rates while nonmonetary items are translated at historical rates. Income and expense accounts are translated at the average rates in effect during the year. Accordingly, translation adjustments and transaction gains and losses are recognized in income in the year of occurrence and are recorded as a component of cost of sales. Foreign Exchange Contracts -- The Company enters into forward exchange contracts to minimize the impact of fluctuations in currency exchange rates on future cash flows emanating from sales denominated in foreign currencies. The Company does not purchase such contracts for trading purposes. Gains and losses related to foreign exchange contracts which qualify as accounting hedges of firm commitments are deferred and recognized in income when the hedged transaction occurs. Gains and losses related to foreign exchange contracts which do not qualify for hedge accounting are marked to market currently and recognized as a foreign currency transaction gain or loss. Fair Value of Financial Instruments -- The fair value of the Company's assets and liabilities which constitute financial instruments as defined in Statement of Financial Accounting Standards No. 107 approximate their recorded value. 2. DEBT Long-term debt consists of unsecured industrial revenue bonds ("IRB"), with interest payable quarterly at 65% of the prime rate (5.5% at December 31, 1995 and 1994) and principal payable in equal quarterly installments of $33,333 through September 30, 1997. Under the terms of the IRB Agreement, the Company must comply with certain covenants, none of which impose a significant limitation on the Company. The Company has available unsecured lines of credit totaling $15,000,000 with two banks. Both lines are subject to annual renewal and require no compensating balances. One line bears interest at the prime rate or the LIBOR rate plus 2.0% and the other line at the prime rate less 0.25% or the LIBOR rate plus 1.75%. During 1995, the Company borrowed various amounts up to $6,500,000 under the lines. As of December 31, F-8 43 THE FIRST YEARS INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. DEBT (CONTINUED) 1995, a balance of $6,200,000, which bears interest at 7.9%, remains outstanding. No other short-term borrowings were incurred by the Company during 1995 or 1994. During the first three months of 1996, the Company borrowed various amounts up to $9,900,000 (unaudited). As of March 31, 1996, a balance of $8,500,000 (unaudited) remains outstanding which bears a weighted average interest rate of 7.55% (unaudited). During May 1996, the Company increased its unsecured lines of credit to $18,000,000. The terms of the lines remain unchanged from those specified above. 3. INCOME TAXES Components of the Company's net deferred tax asset at December 31 are as follows:
1995 1994 -------- -------- Deferred tax assets: Reserves not currently deductible.......................... $ 79,000 $ 62,900 Capitalized packaging costs not currently deductible....... 442,000 360,200 Capitalized inventory costs not currently deductible....... 261,100 116,900 Other...................................................... 90,200 84,500 -------- -------- 872,300 624,500 -------- -------- Deferred tax liabilities: Excess tax depreciation over financial reporting depreciation............................................ 642,800 580,300 Other...................................................... 4,500 4,500 -------- -------- 647,300 584,800 -------- -------- Net deferred tax asset....................................... $225,000 $ 39,700 ======== ========
There was no valuation allowance for the years ended December 31, 1995 and 1994. The provision for income taxes consists of the following:
1995 1994 1993 ---------- ---------- -------- Federal: Current......................................... $2,104,000 $1,432,700 $352,300 Deferred........................................ (185,300) 107,200 51,800 ---------- ---------- -------- Total federal..................................... 1,918,700 1,539,900 404,100 State............................................. 564,300 331,500 77,400 ---------- ---------- -------- Provision for income taxes........................ $2,483,000 $1,871,400 $481,500 ========== ========== ========
A reconciliation of the statutory federal income tax rate and the effective tax rate as a percentage of pretax income is as follows:
1995 1994 1993 ---- ---- ---- Statutory rate........................................... 34.0% 34.0% 34.0% State income taxes, net of federal income tax benefit.... 6.0 4.5 4.0 Other.................................................... -- -- (0.3) ---- ---- ---- - - - Effective rate........................................... 40.0% 38.5% 37.7% ===== ===== =====
F-9 44 THE FIRST YEARS INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. COMMON STOCK In December 1995, the Company's Board of Directors (the "Board") declared a two-for-one split of the Company's common stock. The stock split, effected in the form of a stock dividend, was distributed on December 29, 1995 to stockholders of record in 1995. Earnings per share amounts shown in the accompanying financial statements have been adjusted to reflect the 1995 stock split. 5. COMMITMENTS AND CONTINGENCIES Foreign Exchange Contracts -- During 1995 and 1994, the Company entered into forward exchange contracts with a bank whereby the Company is committed to deliver foreign currency at predetermined rates. The contracts expire within one year. The Company's future commitment under these contracts approximated $4,500,000 and $3,100,000 as of December 31, 1995 and 1994, respectively. At December 31, 1995 and 1994, the exchange rates for such currencies covered by the contracts approximated the predetermined rates included therein. Other Commitments -- At December 31, 1995 and 1994, letters of credit outstanding aggregated approximately $1,925,000 and $1,275,000, respectively. During 1994, the Company entered into an employment agreement with an executive officer which provides for an annual salary of $100,000 through August 1999. On March 23, 1995, the Company entered into employment agreements with two key senior executive officers which provide for aggregate annual base salaries through March 2000 of $391,000, subject to any increases or decreases established from time to time in the discretion of the Compensation Committee of the Board of Directors and, in the event of termination, provide for noncompetition payments for two years equal to their annual base salaries. Contingencies -- The Company is involved in legal proceedings which have arisen in the ordinary course of business. Management believes the outcome of these proceedings will not have a material adverse impact on the Company's financial condition or operating results. 6. ROYALTIES During 1995 and 1994, the Company entered into various agreements which provide for the payment of royalties on sales of certain licensed products. The agreements have terms ranging from one to fifteen years and require minimum royalty payments of $729,000 during the terms of the agreements. Outstanding minimum royalty payments under these agreements amounted to $92,800 at December 31, 1995. 7. BENEFIT PLANS Defined Contribution Plan -- The Company has a defined contribution trusteed benefit plan covering eligible employees, requiring annual contributions based upon certain percentages of salaries of employees. The Company's policy is to fund pension expense accrued. Pension expense aggregated $259,000, $267,000, and $661,000 in 1995, 1994, and 1993, respectively. Stock Option Plans -- In May 1993, the Company's stockholders approved the adoption of The First Years Inc. 1993 Equity Incentive Plan and The First Years Inc. 1993 Stock Option Plan for Non-employee Directors (the "plans") which cover key salaried employees and directors of the Company. The Board of Directors has reserved 670,000 shares (adjusted to reflect the two-for-one stock split effected on December 29, 1995) for issuance under the plans and 20,000 shares for a stock option agreement granted outside of the plans. The exercise price for the options granted may not be less than the fair market value of the optioned stock at the date of grant, 110% of fair market value in the case of options granted to a 10% stockholder. Options granted must be exercised within the period prescribed by the Compensation Committee of the Board of Directors; the options vest in accordance with the vesting provisions prescribed at the time of grant. F-10 45 THE FIRST YEARS INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) A summary of activity (all years adjusted to reflect the two-for-one stock split effected on December 29, 1995) of stock options granted under the plan is as follows:
NUMBER OF OPTIONS NUMBER OF AVAILABLE EXERCISE PRICE OPTIONS FOR PER SHARE OUTSTANDING GRANT --------------- ----------- -------- January 1, 1993 Authorized.................................. -- -- 440,000 Granted..................................... $5.31 to $5.84 206,000 (206,000) Canceled.................................... $5.31 (2,000) 2,000 ------- -------- December 31, 1993............................. 204,000 236,000 Authorized.................................. -- -- 20,000 Granted..................................... $4.56 to $5.63 126,300 (126,300) Canceled.................................... $4.56 to $5.31 (20,828) 20,828 Exercised................................... $5.31 (4,340) -- ------- -------- December 31, 1994............................. 305,132 150,528 Authorized.................................. -- -- 230,000 Granted..................................... $8.94 to $9.83 128,920 (128,920) Canceled.................................... $4.56 to $5.31 (8,192) 8,192 Exercised................................... $4.56 to $5.31 (14,282) -- ------- -------- December 31, 1995............................. 411,578 259,800 ======= ========
At December 31, 1995, 166,999 options were exercisable at $4.56 to $5.84 per share. 8. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS Concentrations of Credit Risk -- Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, trade receivables and forward exchange contracts (see Note 5). The Company's cash equivalents consist of money market funds placed with major banks and financial institutions. The Company's trade receivables principally include amounts due from retailers geographically dispersed. The Company's two largest customers accounted for 61% of the trade receivables outstanding at December 31, 1995 and 1994. The Company routinely assesses the financial strength of its customers and purchases credit insurance to limit its potential exposure to trade receivable credit risks. The Company routinely assesses the financial strength of the bank which is the counterparty to the forward exchange contracts. As of December 31, 1995, management believes it had no significant exposure to credit risks. Major Customer and Export Sales -- The Company derived 10% or more of its sales from its largest customer. Such amounts aggregated $21,966,000, $14,256,000, and $12,920,000 in 1995, 1994, and 1993, respectively. The Company's second largest customer accounted for sales of $16,500,000, $12,118,000, and $8,814,000 in 1995, 1994, and 1993, respectively. No other customer accounted for 10% or more of the Company's sales. Export sales, primarily to Europe, Canada, South America and the Pacific Rim were approximately $7,745,000 in 1995. Reliance on Licensed Products -- A licensing agreement (see Note 6) with a major entertainment company will expire at the end of 1996. Sales of products licensed under the agreement amounted to 20% of F-11 46 THE FIRST YEARS INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS (CONTINUED) the Company's total net sales for year ended December 31, 1995. Management is in the process of renegotiating continuance of this agreement. Reliance on Foreign Manufacturers -- The Company does not own or operate its own manufacturing facilities. In each of 1995 and 1994, the Company derived approximately 46% and 53%, respectively, of its net sales from products manufactured by others in the Far East, mainly in the Peoples' Republic of China. A change in suppliers could cause a delay in manufacturing and a possible loss of sales which would affect operating results adversely, depending on the particular product. 9. SEVERANCE-RELATED EXPENSES In July 1993, to improve operating productivity, the Company streamlined staff and outsourced certain packaging and product assembly operations. As a result, 34 employees were laid-off. Severance-related expenses relating to the layoffs amounted to a pretax charge of $373,000 and primarily consisted of severance pay, benefit considerations and outplacement services, which were paid by December 31, 1994. 10. OFFERING EXPENSES During 1995, the Company initiated a public offering of shares of its common stock to increase its working capital and improve liquidity of its common stock. Due to uncertain market conditions affecting the retail sector and the price of its stock, the Company decided to postpone indefinitely the public offering. As a result, the Company wrote off offering expenses amounting to $310,000 in December 1995. * * * * * * F-12 47 [THE FIRST YEARS] IBC [Child on parent's shoulders with Company logo superimosed.] 48 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESMAN, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR SINCE THE DATES AS OF WHICH INFORMATION IS SET FORTH HEREIN. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 5 Use of Proceeds....................... 7 Price Range of Common Stock........... 7 Capitalization........................ 8 Dividend Policy....................... 8 Selected Financial Data............... 9 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 10 Business.............................. 13 Management............................ 21 Principal and Selling Stockholders.... 26 Description of Capital Stock.......... 27 Underwriting.......................... 30 Legal Matters......................... 31 Experts............................... 31 Additional Information................ 31 Index to Financial Statements......... F-1
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1,600,000 SHARES THE FIRST YEARS INC. [LOGO] COMMON STOCK -------------------- PROSPECTUS -------------------- A.G. EDWARDS & SONS, INC. ADAMS, HARKNESS & HILL, INC. , 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 49 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered, other than the underwriting discounts and commissions. All amounts shown are estimates, except the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. ("NASD") filing fee and the Nasdaq National Market Listing fee.
PAYABLE BY PAYABLE SELLING ITEM AMOUNT BY COMPANY STOCKHOLDERS ---- -------- ---------- ------------ SEC Registration Fee........................... $ 9,577 $ 2,394 $ 7,183 NASD Filing Fee................................ 3,191 798 2,393 Nasdaq National Market Listing Fee............. 15,600 15,600 -- Blue Sky Fees and Expenses..................... 12,000 3,000 9,000 Transfer Agent and Registrar Fees.............. 3,500 875 2,625 Accounting Fees and Expenses................... 50,000 12,500 37,500 Legal Fees and Expenses........................ 100,000 25,000 75,000 Printing Expenses.............................. 50,000 12,500 37,500 Miscellaneous.................................. 16,132 4,033 12,099 -------- ------- -------- Total................................ $260,000 $76,700 $183,300 ======== ======= ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Registrant's Articles of Organization provide that the Company's Directors shall not be liable to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that the exculpation from liabilities is not permitted under the Massachusetts Business Corporation Law as in effect at the time such liability is determined. The By-Laws provide that the Registrant shall indemnify its directors and officers to the full extent permitted by the laws of The Commonwealth of Massachusetts. In addition, the Company holds a Directors and Officers Liability and Corporate Indemnification Policy. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Not applicable. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES The following is a list of exhibits filed as a part of this registration statement. (a) Exhibits
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 1 Form of Underwriting Agreement.** 3.1 Restated Articles of Organization as currently in effect.* 3.2 By-Laws of the Company and any amendments thereto, as currently in effect (filed as Exhibit (3)(ii) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 4 Specimen Certificate for shares of Common Stock, $.10 par value of the Company.* 5 Opinion of Ropes & Gray.*
II-1 50
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.1 Security and Trust Agreement among Town of Avon, acting by and through its Industrial Development Financing Authority, The First Years Inc., and State Street Bank and Trust Company relating to issuance of industrial revenue bonds, dated as of October 1, 1982 (filed as Exhibit (10)(c) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.2 Bond Purchase Agreement among Town of Avon, acting by and through its Industrial Development Financing Authority, The First Years Inc., and State Street Bank and Trust Company, dated as of October 1, 1982 (filed as Exhibit (10)(d) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.3 Loan Agreement between Town of Avon, acting by and through its Industrial Development Financing Authority, and The First Years Inc., dated as of October 1, 1982 (filed as Exhibit (10)(e) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference) 10.4 Put Agreement between State Street Bank and Trust Company and The First Years Inc., dated as of October 1, 1982 (filed as Exhibit (10)(f) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.5 The First Years Inc. 1993 Equity Incentive Plan, as amended through January 19, 1995 (filed as Exhibit (10)(g) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.6 Agreement between The First Years Inc. and Jerome M. Karp dated August 8, 1994 (filed as Exhibit 10(c) to the Form 10-Q Report for the quarter ended June 30, 1994 and incorporated herein by reference). 10.7 Employment Agreement between The First Years Inc. and Benjamin Peltz, dated March 23, 1995 (filed as Exhibit (10)(j) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.8 Employment Agreement between The First Years Inc. and Ronald J. Sidman, dated March 23, 1995 (filed as Exhibit (10)(k) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.9 The First Years Inc. 1993 Stock Option Plan for Non-employee Directors, as amended through January 19, 1995 (filed as Exhibit (10)(h) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.10 The First Years Inc. 1995 Restated Annual Incentive Plan, effective as of July 1, 1995.* 10.11 Agreement with The Walt Disney Company dated March 28, 1994.* 11 Statement re: Computation of Per Share Earnings.** 23.1 Consent of Ropes & Gray (contained in its opinion filed as Exhibit 5 hereto).* 23.2 Deloitte & Touche LLP consent and report on Schedule.** 24 Power of Attorney (included in the signature page of this Registration Statement)*. - --------------- * Previously filed. ** Filed herewith.
(b) Financial Statement Schedule -- Schedule II, Valuation and Qualifying Accounts Report of Independent Accountants on Financial Schedule (see Exhibit 23.2) ITEM 17. UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under "Item 14 -- Indemnification of Directors and Officers" above, or otherwise, the Registrant has been advised II-2 51 that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the Offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 52 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 2 to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Avon, Commonwealth of Massachusetts, on this 4th day of June, 1996. THE FIRST YEARS INC. By: /S/ BENJAMIN PELTZ ------------------------------------ Benjamin Peltz Senior Vice President and Treasurer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- RONALD J. SIDMAN* Chief Executive Officer, June 4, 1996 - --------------------------------------- Chairman of the Board of Ronald Sidman Directors and President (Chief Executive Officer) JEROME M. KARP* Vice Chairman of the Board of June 4, 1996 --------------------------------------- Directors Jerome M. Karp /S/ BENJAMIN PELTZ Treasurer, Senior Vice June 4, 1996 - ---------------------------------------- President and Director (Chief Benjamin Peltz Financial and Accounting Officer) EVELYN SIDMAN* Director June 4, 1996 - --------------------------------------- Evelyn Sidman FRED T. PAGE* Director June 4, 1996 - --------------------------------------- Fred T. Page MERTON N. ALPERIN* Director June 4, 1996 - --------------------------------------- Merton N. Alperin *By /S/ BENJAMIN PELTZ ---------------------------------- Benjamin Peltz Attorney-in-fact
II-4 53 SCHEDULE II THE FIRST YEARS INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
ADDITIONS CHARGED BALANCE, TO COSTS BALANCE, BEGINNING AND END DESCRIPTION OF YEAR EXPENSES DEDUCTIONS(1) OF YEAR - ---------------------------------------------------- --------- -------- -------------- -------- VALUATION ACCOUNTS DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Allowance for Doubtful Accounts: Year ended December 31: 1993......................................... $ 270,000 $ 17,177 $102,177 $185,000 ======== ======== ======== ======== 1994......................................... $ 185,000 $ 23,673 $ 23,673 $185,000 ======== ======== ======== ======== 1995......................................... $ 185,000 $ 86,227 $ 86,227 $185,000 ======== ======== ======== ========
(1) Net accounts written off. S-1 54 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ------------------------------------------------------------------------------------ 1 Form of Underwriting Agreement.** 3.1 Restated Articles of Organization as currently in effect.* 3.2 By-Laws of the Company and any amendments thereto, as currently in effect (filed as Exhibit (3)(ii) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 4 Specimen Certificate for shares of Common Stock, $.10 par value of the Company.* 5 Opinion of Ropes & Gray.* 10.1 Security and Trust Agreement among Town of Avon, acting by and through its Industrial Development Financing Authority, The First Years Inc., and State Street Bank and Trust Company relating to issuance of industrial revenue bonds, dated as of October 1, 1982 (filed as Exhibit (10)(c) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.2 Bond Purchase Agreement among Town of Avon, acting by and through its Industrial Development Financing Authority, The First Years Inc., and State Street Bank and Trust Company, dated as of October 1, 1982 (filed as Exhibit (10)(d) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.3 Loan Agreement between Town of Avon, acting by and through its Industrial Development Financing Authority, and The First Years Inc., dated as of October 1, 1982 (filed as Exhibit (10)(e) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference) 10.4 Put Agreement between State Street Bank and Trust Company and The First Years Inc., dated as of October 1, 1982 (filed as Exhibit (10)(f) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.5 The First Years Inc. 1993 Equity Incentive Plan, as amended through January 19, 1995 (filed as Exhibit (10)(g) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.6 Agreement between The First Years Inc. and Jerome M. Karp dated August 8, 1994 (filed as Exhibit 10(c) to the Form 10-Q Report for the quarter ended June 30, 1994 and incorporated herein by reference). 10.7 Employment Agreement between The First Years Inc. and Benjamin Peltz, dated March 23, 1995 (filed as Exhibit (10)(j) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.8 Employment Agreement between The First Years Inc. and Ronald J. Sidman, dated March 23, 1995 (filed as Exhibit (10)(k) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.9 The First Years Inc. 1993 Stock Option Plan for Non-employee Directors, as amended through January 19, 1995 (filed as Exhibit (10)(h) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). 10.10 The First Years Inc. 1995 Restated Annual Incentive Plan, effective as of July 1, 1995.* 10.11 Agreement with The Walt Disney Company dated March 28, 1994.* 11 Statement re: Computation of Per Share Earnings.** 23.1 Consent of Ropes & Gray (contained in its opinion filed as Exhibit 5 hereto).*
55 23.2 Deloitte & Touche LLP consent and report on Schedule.** 24 Power of Attorney (included in the signature page of this Registration Statement)*.
- --------------- * Previously filed. ** Filed herewith. EX-1 2 UNDERWRITING AGREEMENT 1 Draft of June 3, 1996 Subject to Change THE FIRST YEARS INC. 1,600,000 SHARES COMMON STOCK ($.01 PAR VALUE) UNDERWRITING AGREEMENT June __, 1996 A.G. EDWARDS & SONS, INC. ADAMS, HARKNESS & HILL, INC. As Representatives of the Several Underwriters c/o A.G. Edwards & Sons, Inc. One North Jefferson Avenue St. Louis, Missouri 63103 The undersigned, The First Years Inc., a Massachusetts corporation (the "Company"), and the persons listed on Schedule I hereto (the "Selling Shareholders"), hereby address you as the representatives (the "Representatives") of each of the persons, firms and corporations listed on Schedule II hereto (collectively, the "Underwriters") and hereby confirm their agreement with the several Underwriters as follows: 1. DESCRIPTION OF SHARES. The Company proposes to issue and sell to the Underwriters 400,000 shares of its Common Stock, par value $.10 per share, and the Selling Shareholders severally propose to sell to the Underwriters a total of 1,200,000 shares of the Company's Common Stock, par value $.10 per share, as set forth on Schedule I hereto (such 1,600,000 shares of Common Stock are herein referred to as the "Firm Shares"). Solely for the purpose of covering over-allotments in the sale of the Firm Shares, the Company further proposes to grant the right to the Underwriters to purchase up to an additional 240,000 shares of Common Stock, par value $.10 per share (the "Option Shares"), as provided in Section 3 of this Agreement. The Firm Shares and the Option Shares are herein sometimes referred to as the "Shares" and are more fully described in the Prospectus hereinafter defined. 2. PURCHASE, SALE AND DELIVERY OF FIRM SHARES. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees and each Selling Shareholder agrees, severally and not jointly, to sell to the Underwriters, and each such Underwriter agrees, severally and not jointly, (a) to purchase from the Company and from each of the Selling 2 Shareholders, pro rata, at a purchase price of $ per share, the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II hereto and (b) to purchase from the Company any additional number of Option Shares which such Underwriter may become obligated to purchase pursuant to Section 3 hereof. The Company and the Selling Shareholders will deliver definitive certificates for the Firm Shares at the office of A.G. Edwards & Sons, Inc., 77 Water Street, New York, New York ("Edwards' Office"), or such other place as you and the Company may mutually agree upon, for the accounts of the Underwriters against payment to the Company and the Selling Shareholders of the purchase price for the Firm Shares sold by them to the several Underwriters by wire transfer or certified or bank cashier's check in clearing house (next day available) funds payable to the order of the Company and the Selling Shareholders, respectively, and delivered to the offices of Ropes & Gray, One International Place, Boston, MA 02110, or at such other place as may be agreed upon between you and the Company (the "Place of Closing"), at 10:00 a.m., Boston time, on ____________, 1996, or at such other time and date not later than three full business days thereafter as you and the Company may agree, such time and date of payment and delivery being herein called the "Closing Date." The certificates for the Firm Shares so to be delivered will be made available to you for inspection at Edwards' Office (or such other place as you and the Company may mutually agree upon) at least one full business day prior to the Closing Date and will be in such names and denominations as you may request at least three full business days prior to the Closing Date. It is understood that an Underwriter, individually, may (but shall not be obligated to) make payment on behalf of the other Underwriters whose checks shall not have been received prior to the Closing Date for Shares to be purchased by such Underwriter. Any such payment by an Underwriter shall not relieve the other Underwriters of any of their obligations hereunder. It is understood that the Underwriters propose to offer the Shares to the public upon the terms and conditions set forth in the Registration Statement hereinafter defined. 3. PURCHASE, SALE AND DELIVERY OF THE OPTION SHARES. The Company hereby grants an option to the Underwriters to purchase from them on a pro rata basis up to 240,000 Option Shares on the same terms and conditions as the Firm Shares; provided, however, that such option may be exercised only for the purpose of covering any over-allotments which may be made by them in the sale of the Firm Shares. No Option Shares shall be sold or delivered unless -2- 3 the Firm Shares previously have been, or simultaneously are, sold and delivered. The option is exercisable on behalf of the several Underwriters by you, as Representatives, at any time, and on one occasion, before the expiration of 30 days from the date of this Agreement, for the purchase of all or part of the Option Shares covered thereby, by notice given by you to the Company in the manner provided in Section 13 hereof, setting forth the number of Option Shares as to which the Underwriters are exercising the option, and the date of delivery of said Option Shares, which date shall not be less than three business days after such notice unless otherwise agreed to by the parties. You may terminate the option at any time, as to any unexercised portion thereof, by giving written notice to the Company to such effect. You, as Representatives, shall make such allocation of the Option Shares among the Underwriters as may be required to eliminate purchases of fractional Shares. Delivery of the Option Shares with respect to which the option shall have been exercised shall be made to or upon your order at Edwards' Office (or at such other place as you and the Company may mutually agree upon), against payment by you of the per share purchase price to the Company by wire transfer or certified or bank cashier's check or checks, payable in clearing house (next day available) funds. Such payment and delivery shall be made at 10:00 a.m., St. Louis time, on the date designated in the notice given by you as above provided for, unless some other date and time are agreed upon, which date and time of payment and delivery are called the "Option Closing Date." The certificates for the Option Shares so to be delivered will be made available to you for inspection at Edwards' Office at least one full business day prior to the Option Closing Date and will be in such names and denominations as you may request at least two full business days prior to the Option Closing Date. On the Option Closing Date, the Company shall provide the Underwriters such representations, warranties, opinions and covenants with respect to the Option Shares as are required to be delivered on the Closing Date with respect to the Firm Shares. 4. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY AND THE SELLING SHAREHOLDERS. (a) The Company represents and warrants to and agrees with each Underwriter that: (i) A Registration statement (Registration No. 33-62673) on Form S-1 with respect to the Shares, including a preliminary prospectus, and such amendments to such Registration statement as may have been required to the date of this Agreement, has been carefully prepared by the Company -3- 4 pursuant to and in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission under the Act. Copies of such Registration Statement, including any amendments thereto, each related preliminary prospectus (meeting the requirements of Rule 430 or 430A of the Rules and Regulations) contained therein, the exhibits, financial statements and schedules have heretofore been delivered by the Company to you. If such Registration Statement has not become effective under the Act, a further amendment to such Registration Statement, including a form of final prospectus, necessary to permit such Registration Statement to become effective will be filed promptly by the Company with the Commission. If such Registration Statement has become effective under the Act, a final prospectus containing information permitted to be omitted at the time of effectiveness by Rule 430A of the Rules and Regulations will be filed promptly by the Company with the Commission in accordance with Rule 424(b) of the Rules and Regulations. The term "Registration Statement" as used herein means the Registration statement as amended at the time it becomes or became effective under the Act (the "Effective Date"), including financial statements and all exhibits and, if applicable, the information deemed to be included by Rule 430A of the Rules and Regulations. The term "Prospectus" as used herein means the prospectus as first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is required, the form of final prospectus included in the Registration Statement at the Effective Date. The term "Preliminary Prospectus" as used herein shall mean a preliminary prospectus as contemplated by Rule 430 or 430A of the Rules and Regulations included at any time in the Registration Statement. (ii) The Commission has not issued, and is not to the knowledge of the Company threatening to issue, an order preventing or suspending the use of any Preliminary Prospectus or the Prospectus nor instituted proceedings for that purpose. Each Preliminary Prospectus at its date of issue, the Registration Statement and the Prospectus and any amendments or supplements thereto contains or will contain, as the case may be, all statements which are required to be stated therein by, and in all material respects conform or will conform, as the case may be, to the requirements of, the Act and the Rules and Regulations. Neither the Registration Statement nor any amendment thereto, as of the applicable effective date, and neither the Prospectus nor any supplement thereto contains or will contain, as the case may be, any -4- 5 untrue statement of a material fact or omits or will omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representation or warranty as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of the Underwriters specifically for use in the preparation thereof. (iii) The filing of the Registration Statement and the execution and delivery of this Agreement have been duly authorized by the Board of Directors of the Company; this Agreement constitutes a valid and legally binding obligation of the Company enforceable in accordance with its terms (except to the extent the enforceability of the indemnification and contribution provisions of Section 7 hereof may be limited by public policy considerations as expressed in the Act as construed by courts of competent jurisdiction, and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium and other laws affecting creditors' rights generally and by general principles of equity); the issue and sale of the Shares by the Company and the performance of this Agreement and the consummation of the transactions herein contemplated will not result in a violation of the Company's articles of organization or bylaws or result in a breach or violation of any of the terms and provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of the Company under, any statute, or under any indenture, mortgage, deed of trust, note, loan agreement, sale and leaseback arrangement or other agreement or instrument to which the Company is a party or by which they are bound or to which any of the properties or assets of the Company is subject, or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, except to such extent as does not materially adversely affect the business of the Company (a "Material Adverse Effect"); no consent, approval, authorization, order, registration or qualification of or with any court or governmental agency or body is required for the consummation of the transactions herein contemplated, except such as may be required by the National Association of Securities Dealers, Inc. (the "NASD") or any state securities laws. (iv) Except as described in the Prospectus, the Company has not sustained since the date of the latest audited -5- 6 financial statements included in the Prospectus any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree. Except as contemplated in the Prospectus, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, the Company has not incurred any material liabilities or material obligations, direct or contingent, other than in the ordinary course of business, or entered into any material transactions not in the ordinary course of business, and there has not been any material change in the capital stock or long-term debt of the Company or any material adverse change in the condition (financial or other), net worth, business, affairs, management, prospects or results of operations of the Company. The Company has filed all necessary federal, state and foreign income and franchise tax returns and paid all taxes shown as due thereon; all tax liabilities are adequately provided for on the books of the Company except to the extent such business would not have a Material Adverse Effect; the Company has made all necessary payroll tax payments and is current and up-to-date as of the date of this Agreement; and the Company has no knowledge of any tax proceeding or action pending or threatened against the Company that would have a Material Adverse Effect. (v) Except as described in the Prospectus, there is not now pending or, to the knowledge of the Company, threatened or contemplated, any action, suit or proceeding to which the Company is a party before or by any court or public, regulatory or governmental agency or body which, if determined adversely to the Company, might be expected to result (individually or in the aggregate) in a Material Adverse Effect; and there are no contracts or documents of the Company which would be required to be filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations which have not been filed as exhibits to the Registration Statement. (vi) The Company has duly and validly authorized capital stock as described in the Prospectus; all outstanding shares of Common Stock of the Company and the Shares conform, or when issued will conform, to the description thereof in the Registration Statement and the Prospectus and have been, or, when issued and paid for will be, duly authorized, validly issued, fully paid and nonassessable; and the issuance of the Shares to be purchased from the Company hereunder is not subject to preemptive rights. -6- 7 (vii) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the Commonwealth of Massachusetts, with full power and authority (corporate and other) to own, lease and operate its properties and conduct its business as described in the Registration Statement; the Company is duly qualified to do business as a foreign corporation in good standing in each state or other jurisdiction in which its ownership or leasing of property or conduct of business legally requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect; the Company has no subsidiaries, does not control, directly or indirectly, any corporation, firm, partnership, association, or other business organization, and does not own any shares of stock or any other securities of (other than bank certificates of deposit, shares or units of interest in "money market" funds, or as set forth in the Prospectus) or have any interest in, any corporation, firm, partnership, association, or other business organization. (viii) Deloitte & Touche LLP, the accounting firm which has certified or reviewed portions of the financial statements filed with the Commission as a part of the Registration Statement, some of which are included in the Prospectus, is an independent public accounting firm within the meaning of the Act and the Rules and Regulations. (ix) The financial statements and schedules of the Company, including the notes thereto, filed with and as a part of the Registration Statement, present fairly in all material respects the financial position of the Company as of the respective dates thereof and the results of operations and statements of cash flow for the respective periods covered thereby, all in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved except as otherwise disclosed in the Prospectus. The selected financial data included in the Registration Statement and Prospectus present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements in the Registration Statement and Prospectus. (x) The Company is not in default with respect to any contract or agreement to which it is a party, except such defaults which in the aggregate would not have a Material Adverse Effect. (xi) The Company is not in violation of any laws, ordinances or governmental rules or regulations to which it is subject, and the Company has not failed to obtain any -7- 8 licenses, permits, franchises, easements, consents, or other governmental authorizations necessary to the ownership, leasing and operation of its properties or to the conduct of its business, except such violations or failures as would not have a Material Adverse Effect. The Company has not at any time during the past five years (A) made any unlawful contributions to any candidate for any political office, or failed fully to disclose any contribution in violation of law, or (B) made any payment to state, federal or foreign government officer or officers, or other person charged with similar public or quasi-public duty (other than payment required or permitted by applicable law). (xii) Except as described in the Prospectus, the Company owns or possesses, adequate patents, patent licenses, trademarks, trademark licenses, service marks and trade names necessary to conduct the business now operated by it, and the Company has not received any notice of infringement of or conflict with asserted rights of others with respect to any patents, patent licenses, trademarks, trademark licenses, service marks or trade names which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect. (xiii) The Company has good and marketable title to all property owned by it, free and clear of all liens, encumbrances, restrictions and defects except such as are described in the Registration Statement or do not interfere with the use made and proposed to be made of such property; and any property held under lease or sublease by the Company is held under valid, subsisting and enforceable leases or subleases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property by the Company, and the Company has no notice or knowledge of any material claim of any sort which has been, or may be, asserted by anyone adverse to the Company's rights as lessee or sublessee under any lease or sublease described above, or affecting or questioning the Company's rights to the continued possession of the leased or subleased premises under any such lease or sublease in conflict with the terms thereof. (xiv) Except as described in the Prospectus, the Company is in compliance in all material respects with the requirements of federal, state or local regulation relating to air, water, solid waste management, hazardous or toxic substances, or the protection of health or the environment. Except as described in the Prospectus, there is not present on property owned or leased by the Company any waste or hazardous substances in violation of law and the Company will -8- 9 not be deemed an "owner or operator" of a "facility" or "vessel" which owns, possesses, transports, generates or disposes of a "hazardous substance" in violation of applicable law as those terms are defined in ss. 9601 of the Comprehensive, Response Compensation and Liability Act of 1980, 42 U.S.C. ss. 9601 ET SEQ. (xv) No labor disturbance exists with the employees of the Company or is imminent that would have a Material Adverse Effect. (xvi) The Company has not taken and will not take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in stabilization or manipulation of the price of the Company's Common Stock, and the Company is not aware of any such action taken or to be taken by affiliates of the Company. (b) Each Selling Shareholder severally represents and warrants to and agrees with each Underwriter and the Company that: (i) All authorizations and consents necessary for the execution and delivery by him or it of this Agreement and the sale and delivery of the Shares to be sold by such Selling Shareholder hereunder have been given and are in full force and effect on the date hereof and will be in full force and effect on the Closing Date. (ii) Such Selling Shareholder has, and on the Closing Date will have, good and valid title to the Shares to be sold by such Selling Shareholder, free and clear of all liens, mortgages, pledges, encumbrances, claims, equities and security interests whatsoever, and will have full right, power and authority to enter into this Agreement and to sell, assign, transfer and deliver the Shares to be sold by such Selling Shareholder hereunder. (iii) Upon delivery of and payment for such Shares hereunder, the several Underwriters will acquire valid and unencumbered title to such Shares to be sold by such Selling Shareholder hereunder, free and clear of all liens, mortgages, pledges, encumbrances, claims, equities and security interests whatsoever. (iv) The consummation by such Selling Shareholder of the transactions contemplated herein and the fulfillment by such Selling Shareholder of the terms hereof will not result in a violation or breach of any terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, note, loan agreement, sale and leaseback arrangement -9- 10 or other agreement or instrument to which such Selling Shareholder is a party, or of any order, rule or regulation applicable to such Selling Shareholder of any court or of any regulatory body of an administrative agency or other governmental body having jurisdiction. (v) Such Selling Shareholder has not taken and will not take, directly or indirectly, any action designed to or which might be reasonably expected to cause or result in stabilization or manipulation of the price of the Company's Common Stock, and such Selling Shareholder is not aware of any such action taken or to be taken by affiliates of such Selling Shareholder. (vi) The information in the Registration Statement and Prospectus and any amendments or supplements thereto as specifically refers to such Selling Shareholder does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (vii) Certificates in negotiable form representing all of the Shares to be sold by such Selling Shareholder hereunder have been placed in the custody of the Company (the "Custodian") under a Custody Agreement (the "Custody Agreement"), duly executed and delivered by such Selling Shareholder, with the Custodian having the authority to deliver the Shares to be sold by such Selling Shareholder hereunder, and that such Selling Shareholder has duly executed and delivered a Power of Attorney (the "Power of Attorney") appointing Ronald J. Sidman and Benjamin Peltz as such Selling Shareholder's attorneys-in-fact (the "Attorneys-in-Fact") with the Attorneys-in-Fact having authority to execute and deliver this Agreement on behalf of such Selling Shareholder, to determine the purchase price to be paid by the Underwriters to the Selling Shareholders as provided in Section 2, to authorize the delivery of the Shares to be sold by him or it hereunder and otherwise to act on behalf of such Selling Shareholder in connection with the transactions contemplated by this Agreement and such Custody Agreement. (viii) The Shares represented by the certificates held in custody for such Selling Shareholder under the Custody Agreement are subject to the interests of the Underwriters hereunder, and the arrangements made by such Selling Shareholder for such custody, and the appointment by such Selling Shareholder of the Custodian under the Custody Agreement and the Attorneys-in-Fact by the Power of Attorney, are to that extent irrevocable. -10- 11 (ix) The obligations of such Selling Shareholders hereunder shall not be terminated by operation of law, whether by the death or incapacity of any individual Selling Shareholder or by the occurrence of any other event, and if any Selling Shareholder should die or become incapacitated, or if any other such event should occur before the delivery of the Shares hereunder, certificates representing the Shares shall be delivered by or on behalf of each Selling Shareholder in accordance with the terms and conditions of this Agreement and of the Custody Agreement, and actions taken by the Custodian pursuant to the Custody Agreement or by the Attorneys-in-Fact pursuant to the Power of Attorney shall be as valid as if such death, incapacity or other event had not occurred, regardless of whether or not the Custodian or Attorneys-in-Fact, or any of them, shall have received notice of such death, incapacity of other event. (x) Such Selling Shareholder is not prompted to sell shares of Common Stock by any information concerning the Company which is not included in the Registration Statement. (c) Any certificate signed by any officer of the Company and delivered to you or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby; and any certificate signed by or on behalf of a Selling Shareholder as such and delivered to you or to counsel for the Underwriters shall be deemed a representation and warranty by such Selling Shareholder to each Underwriter as to the matters covered thereby. 5. ADDITIONAL COVENANTS. The Company and, where expressly indicated, the Selling Shareholders, covenant and agree with the several Underwriters that: (a) If the Registration Statement is not effective under the Act, the Company will use its best efforts to cause the Registration Statement to become effective as promptly as possible, and it will notify you, promptly after it shall receive notice thereof, of the time when the Registration Statement has become effective. The Company (i) will prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations, if required, a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations or otherwise; (ii) will not file any amendment to the Registration Statement or supplement to the Prospectus of which the Underwriters shall not previously have been advised and furnished with a copy or to which the Underwriters shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations; and (iii) will promptly notify you -11- 12 after it shall have received notice thereof of the time when any amendment to the Registration Statement becomes effective or when any supplement to the Prospectus has been filed. (b) The Company will advise the Underwriters promptly, after it shall receive notice or obtain knowledge thereof, of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, or of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution or threatening of any proceedings for that purpose, and the Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (c) The Company will cooperate with the Underwriters and their counsel in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as they may have designated and will make such applications, file such documents, and furnish such information as may be necessary for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent or to subject itself to taxation as doing business in any jurisdiction where it is not now so taxed. The Company will, from time to time, file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Underwriters may reasonably request. (d) The Company will deliver to, or upon the order of, the Underwriters, without charge from time to time, as many copies of any Preliminary Prospectus as they may reasonably request. The Company will deliver to, or upon the order of, the Underwriters without charge as many copies of the Prospectus, or as it thereafter may be amended or supplemented, as they may from time to time reasonably request. The Company consents to the use of such Prospectus by the Underwriters and by all dealers to whom the Shares may be sold, both in connection with the offering or sale of the Shares and for such other purposes and for such period of time thereafter as the Prospectus is required by law to be delivered in connection therewith. The Company will deliver to the Underwriters at or before the Closing Date two signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Underwriters such number of copies of the Registration Statement, without exhibits, and of all amendments thereto, as they may reasonably request. -12- 13 (e) If, during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in your judgment or in the opinion of counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with law. (f) The Company will make generally available to its Shareholders, as soon as it is practicable to do so, but in any event not later than 17 months after the effective date of the Registration Statement, an earnings statement in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earnings statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise the Underwriters in writing when such statement has been so made available. (g) The Company will, for a period of five years from the Closing Date, deliver to the Underwriters at their principal executive offices a reasonable number of copies of annual reports, quarterly reports, current reports and copies of all other documents, reports and information furnished by the Company to its shareholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Securities and Exchange Act of 1934, as amended. The Company will deliver to the Underwriters similar reports with respect to any significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements. Any report, document or other information required to be furnished under this paragraph (g) shall be furnished as soon as practicable after such report, document or information becomes available. (h) The Company will apply the proceeds from the sale of the Shares as set forth in the description under "Use of Proceeds" in the Prospectus, which description complies in all respects with the requirements of Item 504 of Regulation S-K. (i) The Company will supply you with copies of all correspondence to and from, and all documents issued to and by, -13- 14 the Commission in connection with the registration of the Shares under the Act. (j) Prior to the Closing Date (and, if applicable, the Option Closing Date), the Company will furnish to you, as soon as they have been prepared, copies of any unaudited interim financial statements of the Company for any periods subsequent to the periods covered by the financial statements appearing in the Registration Statement and the Prospectus. (k) Prior to the Closing Date (and, if applicable, the Option Closing Date), neither the Company nor any Selling Shareholder will issue any press releases or other communications directly or indirectly and will hold no press conferences with respect to the Company or any of its subsidiaries, the financial condition, results or operations, business, properties, assets or liabilities of the Company or any of its subsidiaries, or the offering of the Shares, without your prior written consent, except as may be required by law. (l) The Company will use its best efforts to maintain the quotation of the shares on the Nasdaq National Market System (the "NNM") or a substantially comparable national securities exchange or trading system. (m) For a period of 180 days from the Effective Date, the Company will not, and will use its best efforts to cause its directors to not, directly or indirectly sell, contract to sell or otherwise dispose of any shares of the Company's Common Stock or rights to acquire such shares without your prior written consent, except for the Shares sold hereunder and except for sales of shares of Common Stock to the Company's employees pursuant to the exercise of options described in the Prospectus under the Company's stock option plans. (n) For a period of 180 days from the Effective Date, the Selling Shareholders will not directly or indirectly sell, contract to sell or otherwise dispose of any shares of the Company's Common Stock or rights to acquire such shares without your prior written consent, except for the Shares sold hereunder. (o) The Company will maintain and keep accurate books and records reflecting their assets and maintain internal accounting controls which provide reasonable assurance that (1) transactions are executed in accordance with management's authorization, (2) transactions are recorded as necessary to permit the preparation of the Company's financial statements and to maintain accountability for the assets of the Company, (3) access to the assets of the Company is permitted only in accordance with management's authorization, and (4) the recorded accounts of the -14- 15 assets of the Company are compared with existing assets at reasonable intervals. 6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of the Underwriters to purchase and pay for the Shares, as provided herein, shall be subject to the accuracy as of the date hereof and as of the Closing Date (and, if applicable, the Option Closing Date), of the representations and warranties of the Company and the Selling Shareholders contained herein, to the performance by the Company and the Selling Shareholders of their covenants and obligations hereunder, and to the following additional conditions: (a) All filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceeding for that purpose shall have been initiated or, to the knowledge of the Company or any Underwriter, threatened or contemplated by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the reasonable satisfaction of the Underwriters. (b) On the Closing Date (and, if applicable, the Option Closing Date), you shall have received the opinion of Ropes & Gray, counsel for the Company and Selling Shareholders, addressed to you and dated the Closing Date (and, if applicable, the Option Closing Date), to the effect that: (i) The Company is a corporation duly organized, validly existing and in good standing with the Secretary of State under the laws of the Commonwealth of Massachusetts with corporate power to own its properties and conduct its business as described in the Prospectus. The Company is duly qualified to do business as a foreign corporation in each jurisdiction in which it owns or leases property. (ii) The authorized capital stock of the Company is as set forth in the Capitalization table contained in the Prospectus. The Shares to be sold by the Selling Shareholders have been duly authorized and validly issued and are fully paid and nonassessable. The Shares to be sold by the Company have been duly authorized and, when delivered and paid for in accordance with this Agreement, will be validly issued, fully paid and nonassessable. (iii) The Shares conform as to matters of law with the description thereof contained in the Prospectus under "Description of Capital Stock." -15- 16 (iv) The filing of the Registration Statement has been duly authorized by the Company. The Underwriting Agreement has been duly authorized, executed and delivered by the Company. (v) The issuance and sale by the Company of the Shares to be sold by it will not (x) violate the Articles of Organization or By-Laws of the Company, (y) breach or result in a default under any agreement or instrument listed as an Exhibit to the Registration Statement or (z) violate any applicable law or regulation, or, to the knowledge of such counsel, any order, writ, injunction or decree, of any jurisdiction, court or governmental instrumentality binding upon the Company or any of its properties, except that such counsel need express no opinion as to state securities or blue sky laws and except that such counsel need express no opinion in this paragraph (v) as to compliance with the antifraud provisions of federal and state securities laws. (vi) To such counsel's knowledge, after reasonable investigation, no holder of any security of the Company has the right to require registration of shares of Common Stock of the Company. (vii) No authorizations or consents of any governmental entity are required to permit the Company to issue and sell the Shares except such as may be required under state securities or blue sky laws, as to which counsel need express no opinion, and except for such as have been obtained under the Act. (viii) The Company is not an "investment company" as defined in Section 3(a) of the Investment Company Act of 1940, as amended. (ix) The Underwriting Agreement has been duly authorized, executed and delivered by each of the Selling Shareholders (through their duly authorized attorney-in-fact). (x) A Power of Attorney and Custody Agreement has been duly authorized, executed and delivered by each of the Selling Shareholders and, pursuant to such Power of Attorney and Custody Agreement, each Selling Shareholder has authorized its Attorney-in-Fact to carry out transactions contemplated in the Underwriting Agreement on its behalf, and to deliver the Shares being sold by him, her or it pursuant to the Underwriting Agreement. -16- 17 (xi) Immediately prior to the closing date, each Selling Shareholder was the sole registered owner of the Shares to be sold by such Selling Shareholder; each Selling Shareholder has full legal right, power and authority, and any approval required by law (other than any approval required by the applicable state securities and blue sky laws) to sell, assign, transfer and deliver the Shares to be sold by him, her or it in the manner provided in the Underwriting Agreement and the Selling Shareholder's Power of Attorney and Custody Agreement; upon registration of the Shares in the names of the Underwriters in the stock records of the Company, assuming the underwriters purchased the Shares in good faith and without notice of any adverse claim within the meaning of Section 8-302 of the Massachusetts Uniform Commercial Code, the Underwriters will have acquired good and valid title to the Shares being sold by such Selling Shareholder free of any adverse claim, any lien in favor of the Company, and any restrictions on transfer imposed by the Company; and the owner of the Shares, if other than such Selling Shareholder, is precluded from asserting against the Underwriters the ineffectiveness of any unauthorized endorsement. Such counsel shall also state the date on which the Registration Statement became effective and that such counsel does not know of the issuance of any stop order suspending the effectiveness of the Registration Statement by the Commission or of any proceeding for that purpose under the Act. Such counsel may state that it has not independently verified the accuracy, completeness or fairness of the statements made or the information contained in the Registration Statement or the Prospectus, and, except with respect to the description referred to in paragraph (iii) above, such counsel is not passing upon and does not assume any responsibility therefor. Such counsel shall also state its belief that the Registration Statement, as of its effective date, and the Prospectus, as of its date, complied as to form in all material respects with the requirements of the Act and the published rules and regulations of the Commission thereunder and that such counsel does not know of any legal or governmental proceeding to which the Company is a party or to which any of its property is subject required to be described in the Prospectus which is not so described, nor of any contract or other document of a character required to be described in the Prospectus or to be filed as an exhibit to the Registration Statement which is not so described or filed. Further, such counsel shall state that nothing has come to its attention that has caused it to believe that as of its effective date, the Registration Statement contained any untrue statement or a material fact or omitted to state any material fact required to be stated therein or necessary -17- 18 to make the statements therein not misleading, or that as of the effective date of the Registration Statement or as of the date hereof the Prospectus contained or contains any untrue statement of a material fact or omitted or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Counsel need not express an opinion as to the financial statements, including the notes and schedules thereto, or any other financial or accounting information set forth or referred to in the Registration Statement or the Prospectus. In rendering the foregoing opinion, such counsel may rely, provided that the opinion shall state that you and they are entitled to so rely, as to matters involving laws of any jurisdiction other than Massachusetts or Federal law, upon opinions addressed to the Underwriters of other counsel satisfactory to them and Hale and Dorr, counsel to the Underwriters. (c) On the Closing Date (and, if applicable, the Option Closing Date), you shall have received the opinion of Fish & Richardson, intellectual property counsel to the Company, addressed to you and dated the Closing Date (and, if applicable, the Option Closing Date), to the effect that: (i) To the best knowledge of such counsel, neither the Registration Statement nor the Prospectus (A) contains any untrue statement of a material fact with respect to trademarks, trade names, patents, mask works, copyrights, licenses, trade secrets or other intellectual property rights owned or used by the Company, or the manner of its use thereof, or any allegation on the part of any person or entity that the Company is infringing any trademarks, trade names, patent rights, mask works, copyrights, licenses, trade secrets or other intellectual property rights of any such person or entity or (B) omits to state any material fact relating to trademarks, trade names, patents, mask works, copyrights, licenses, trade secrets or other intellectual property rights owned or used by the Company, or the manner of its use thereof, or any allegation of which such counsel has knowledge, that is required to be stated in the Registration Statement or the Prospectus or is necessary to make the statements therein not misleading; (ii) To the best knowledge of such counsel, there are no legal or governmental proceedings pending relating to trademarks, trade names, patent rights, mask works, copyrights, licenses, trade secrets or other -18- 19 intellectual property rights of the Company other than prosecution by the Company of its patent applications before the United States Patent Office and appropriate foreign government agencies, and to the best knowledge of such counsel no such proceedings are threatened or contemplated by governmental authorities or others; (iii) The Company duly and properly holds the trademarks, patents, and has duly and properly filed trademark registrations, patent applications and patent cooperation treaty applications, listed in the Prospectus under the caption "Business - Trademarks, Patents and Copyrights". [To be updated] (iv) Such counsel does not know of any contracts or other documents relating to the Company's trademarks, trade names, patents, mask works, copyrights, licenses, trade secrets or other intellectual property rights of a character required to be filed as an exhibit to the Registration Statement or required to be described in the Registration Statement or the Prospectus that are not filed or described as required; (v) To the best knowledge of such counsel, the Company is not infringing or otherwise violating any trademarks, trade names, patents, mask works, copyrights, licenses, trade secrets or other intellectual property rights of others, and to the best knowledge of such counsel, there are no infringements by others of any of the Company's trademarks, trade names, patents, mask works, copyrights, licenses, trade secrets or other intellectual property rights which in the judgment of such counsel could affect materially the use thereof by the Company or the ability of the Company to transfer any or all of such property or rights to a third party; and (vi) To the best knowledge of such counsel, the Company owns or possesses sufficient licenses or other rights to use all trademarks, trade names, patents, mask works, copyrights, licenses, trade secrets or other intellectual property rights necessary to conduct the business now being or proposed to be conducted by the Company as described in the Prospectus. In rendering the foregoing opinion, such counsel may rely, provided that the opinion shall state that you and they are entitled to so rely, as to matters involving laws of any jurisdiction other than Massachusetts or Federal law, upon -19- 20 opinions adverse to the Underwriters of other counsel satisfactory to them and Hale and Dorr, counsel to the Underwriters. (d) You shall have received on the Closing Date (and, if applicable, the Option Closing Date), from Hale and Dorr counsel to the Underwriters, such opinion or opinions, dated the Closing Date (and, if applicable, the Option Closing Date) with respect to the incorporation of the Company, the validity of the Shares, the Registration Statement, the Prospectus and other related matters as you may reasonably require; the Company and the Selling Shareholders shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass on such matters. (e) You shall have received at or prior to the Closing Date a memorandum or memoranda, in form and substance satisfactory to you, with respect to the qualification for offering and sale by the Underwriters of the Shares under state securities or Blue Sky laws of such jurisdictions as the Underwriters may have designated to the Company. (f) On the business day immediately preceding the date of this Agreement and on the Closing Date (and, if applicable, the Option Closing Date), you shall have received from Deloitte & Touche LLP, a letter or letters, dated the date of this Agreement and the Closing Date (and, if applicable, the Option Closing Date), respectively, in the form and substance satisfactory to you, confirming that they are independent public accountants with respect to the Company within the meaning of the Act and the published Rules and Regulations, and the answer to Item 509 of Regulation S-K set forth in the Registration Statement is correct insofar as it relates to them, and stating to the effect set forth in Schedule III hereto. (g) Except as contemplated in the Prospectus, (i) the Company shall not have sustained since the date of the latest audited financial statements included in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree; and (ii) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, the Company shall not have incurred any liability or obligation, direct or contingent, or entered into transactions, and there shall not have been any change in the capital stock or long-term debt of the Company any change in the condition (financial or other), net worth, business, affairs, management, prospect or results of operations of the Company, the effect of which, in any such case described in clause (i) or (ii), is in your judgment so material and adverse as to make it impracticable -20- 21 or inadvisable to proceed with the public offering or the delivery of the Shares being delivered on such Closing Date (and, if applicable, the Option Closing Date) on the terms and in the manner contemplated in the Prospectus. (h) There shall not have occurred any of the following: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange or the American Stock Exchange or the establishing on such exchanges by the Commission or by such exchanges of minimum or maximum prices which are not in force and effect on the date hereof; (ii) a general moratorium on commercial banking activities declared by either federal or state authorities; (iii) the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war, if the effect of any such event specified in this clause (iii) in your judgment makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares in the manner contemplated in the Prospectus; (iv) any calamity or crisis, change in national, international or world affairs, act of God, change in the international or domestic markets, or change in the existing financial, political or economic conditions in the United States or elsewhere, if the effect of any such event specified in this clause (iv) makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares in the manner contemplated in the Prospectus; or (v) the enactment, publication, decree, or other promulgation of any federal or state statute, regulation, rule, or order of any court or other governmental authority, or the taking of any action by any federal, state or local government or agency in respect of fiscal or monetary affairs, if the effect of any such event specified in this clause (v) in your judgment makes it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares in the manner contemplated in the Prospectus. (i) You shall have received certificates, dated the Closing Date (and, if applicable, the Option Closing Date) and signed by the President and the Chief Financial Officer of the Company stating that (i) they have carefully examined the Registration Statement and the Prospectus as amended or supplemented and nothing has come to their attention that would lead them to believe that either the Registration Statement or the Prospectus, or any amendment or supplement thereto as of their respective effective or issue dates, contained, and the Prospectus as amended or supplemented at such Closing Date, contains any untrue statement of a material fact, or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and, that (ii) all representations and warranties made herein by the Company are true and correct in all material respects at such Closing Date, with the same effect as if -21- 22 made on and as of such Closing Date, and all agreements herein to be performed by the Company on or prior to such Closing Date have been duly performed in all material respects. (j) The Company and each of the Selling Shareholders shall not have failed, refused, or been unable, at or prior to the Closing Date (and, if applicable, the Option Closing Date) to have performed any agreement on their part to be performed or any of the conditions herein contained and required to be performed or satisfied by them at or prior to such Closing Date. (k) The Company and the Selling Shareholders shall have furnished to you at the Closing Date (and, if applicable, the Option Closing Date) such other certificates as you may have reasonably requested as to the accuracy, on and as of such Closing Date, of the representations and warranties of the Company and the Selling Shareholders herein and as to the performance by the Company and the Selling Shareholders of their obligations hereunder. (l) The Shares shall have been approved for trading upon official notice of issuance on the NNM. All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to you and to Hale and Dorr, counsel for the several Underwriters and they provide that Hale and Dorr may rely thereon for purposes of rendering the legal opinion referred to in paragraph (d), above. The Company and Selling Shareholders will furnish you with such conformed copies of such opinions, certificates, letters and documents as you may request. If any of the conditions specified above in this Section 6 shall have been satisfied at or prior to the Closing Date (and, if applicable, the Option Closing Date) or waived by you in writing, this Agreement may be terminated by you on notice to the Company and the Selling Shareholders. 7. INDEMNIFICATION. (a) The Company will indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities, joint or several, to which such Underwriter or such controlling person may become subject, under the Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or in any blue sky application or -22- 23 other document executed by the Company or based on any information furnished in writing by the Company, filed in any jurisdiction in order to qualify any or all of the Shares under the securities laws thereof ("Blue Sky Application"), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of circumstances under which they were made, not misleading; and will reimburse each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration statement, such Preliminary Prospectus or the Prospectus, or such amendment or supplement, or any Blue Sky Application in reliance upon and in conformity with written information furnished to the Company by you or by any Underwriter through you, specifically for use in the preparation thereof; and provided, further, that if any Preliminary Prospectus or the Prospectus contained any alleged untrue statement or allegedly omitted to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading and such statement or omission shall have been corrected in a revised Preliminary Prospectus or in the Prospectus or in an amended or supplemented Prospectus, the Company shall not be liable to any Underwriter or controlling person under this subsection (a) with respect to such alleged untrue statement or alleged omission to the extent that any such loss, claim, damage or liability of such Underwriter or controlling person results from the fact that such Underwriter sold Shares to a person to whom there was not sent or given, at or prior to the written confirmation of such sale, such revised Preliminary Prospectus or Prospectus or amended or supplemented Prospectus. This indemnity agreement shall be in addition to any liabilities which the Company may otherwise have. (b) Each Selling Shareholder will indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities, joint or several, to which such Underwriter or controlling person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or any Blue Sky Application or arise out of or are based upon the omission or the alleged omission to state -23- 24 therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, such Preliminary Prospectus or the Prospectus, or such amendment or supplement, or any Blue Sky Application, in reliance upon and in conformity with written information furnished to the Company or any Underwriter by such Selling Shareholder specifically for use in the preparation thereof; and will reimburse any legal or other expenses reasonably incurred by each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act, in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity contained in this subsection (b) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) in respect of any action or claim asserted by a person who purchased any Shares from such Underwriter, if, within the time required by the Act such person was not sent or given a copy of the Prospectus, as then amended or supplemented. This indemnity agreement shall be in addition to any liabilities which the Selling Shareholders may otherwise have. (c) Each Underwriter will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and, each person, if any, who controls the Company within the meaning of the Act, and each Selling Shareholder, against any losses, claims, damages or liabilities, joint or several, to which the Company or any such director, officer or controlling person or any such Selling Shareholder may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, any amendment or supplement thereto, or any Blue Sky Application or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, such Preliminary Prospectus or the Prospectus, such amendment or supplement, or any Blue Sky Application in reliance upon and in conformity with written information furnished to the Company by any such Underwriter specifically for use in the preparation thereof; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person or any such Selling Shareholder in connection -24- 25 with investigating or defending any such loss, claim, damage, liability or action. This indemnity agreement shall be in addition to any liabilities which the Underwriters may otherwise have. (d) Any party which proposes to assert the right to be indemnified under this Section 7 shall, within ten days after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim is to be made against an indemnifying party under this Section 7, notify each such indemnifying party of the commencement of such action, suit or proceeding, enclosing a copy of all papers served, but the omission so to notify such indemnifying party of any such action, suit or proceeding shall not relieve such indemnifying party from any liability which it may have to any indemnified party otherwise than under this Section 7. In case any such action, suit or proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, jointly with any other indemnifying party, similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof. The indemnified party shall have the right to employ its own counsel in any such action, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the employment of counsel by such indemnified party at the expense of the indemnifying party has been authorized by the indemnifying party, (ii) the indemnified party shall have been advised by such counsel in a written opinion that there is a conflict of interest between the indemnifying party and the indemnified party in the conduct of the defense, or certain aspects of the defense, of such action (in which case the indemnifying party shall not have the right to direct the defense of such action with respect to those matters or aspects of the defense on which a conflict exists or may exist on behalf of the indemnified party) or (iii) the indemnifying party shall not in fact have employed counsel to assume the defense of such action, in any of which events such fees and expenses to the extent applicable shall be borne by the indemnifying party. An indemnifying party shall not be liable for any settlement of any action or claim effected without its consent. Each indemnified party, as a condition of such indemnity, shall cooperate in good faith with the indemnifying party in the defense of any such action or claim. -25- 26 (e) If the indemnification provided for in this Section 7 is for any reason, other than pursuant to the terms thereof, juridically determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right to appeal) to be unavailable to an indemnified party under subsections (a), (b) or (c) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company, the Selling Shareholders and the Underwriters from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault, as applicable, of the Company, the Selling Shareholders and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as other relevant equitable considerations. The relative benefits received by, as applicable, the Company, the Selling Shareholders and the Underwriters shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Shareholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Shareholders or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (e) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (e), no -26 27 Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter and no Selling Shareholder shall be required to contribute any amount in excess of the net proceeds received by such Selling Shareholder in connection with the sale of the Shares. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (e) to contribute are several in proportion to their respective underwriting obligations and not joint. No Selling Shareholder shall be liable for contribution under this Section 7(e) except and to the extent that such Selling Shareholder would have been liable to indemnify under Section 7(b) if such indemnification had been enforceable under applicable law. 8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All representations, warranties, and agreements of the Company and the Selling Shareholders contained in Sections 7 and 11 herein or in certificates delivered pursuant hereto, and the agreements of the Underwriters contained in Section 7 hereof, shall remain operative and in full force and effect regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of any Underwriter or any controlling person, the Company or any of its officers, directors or any controlling persons, or the Selling Shareholders, and shall survive delivery of the Shares to the Underwriters hereunder. 9. SUBSTITUTION OF UNDERWRITERS. (a) If any Underwriter shall default in its obligation to purchase the Shares which it has agreed to purchase hereunder, you may in your discretion arrange for you or another party or other parties to purchase such Shares on the terms contained herein. If within thirty-six hours after such default by any Underwriter you do not arrange for the purchase of such Shares, then the Company and the Selling Shareholders shall be entitled to a further period of thirty-six hours within which to procure another party or parties reasonably satisfactory to you to purchase such Shares on such terms. In the event that, within the respective prescribed periods, you notify the Company and the Selling Shareholders that you have so arranged for the purchase of such Shares, or the Company and the Selling Shareholders notify you that they have so arranged for the purchase of such Shares, you or the Company and the Selling Shareholders shall have the right to postpone the Closing Date for a period of not more than seven day, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Registration Statement or the Prospectus which in your opinion may thereby be made necessary. The term -27- 28 "Underwriter" as used in this Agreement shall include any persons substituted under this Section 9 with like effect as if such person had originally been a party to this Agreement with respect to such Shares. (b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters made by you or the Company and the Selling Shareholders as provided in subsection (a) above, the aggregate number of Shares which remains unpurchased does not exceed one tenth of the total Shares to be sold on the Closing Date, then the Company and the Selling Shareholders shall have the right to require each non-defaulting Underwriter to purchase the Shares which such Underwriter agreed to purchase hereunder and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made; but nothing herein shall relieve a defaulting Underwriter from liability for its default. (c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters made by you or the Company and the Selling Shareholders as provided in subsection (a) above, the number of Shares which remains unpurchased exceeds one tenth of the total Shares to be sold on the Closing Date, or if the Company and the Selling Shareholders shall not exercise the right described in subsection (b) above to require the non-defaulting Underwriters to purchase Shares of the defaulting Underwriter or Underwriters, then this Agreement shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company and the Selling Shareholders except for the expenses to be borne by the Company and the Underwriters as provided in Section 11 hereof and the indemnity and contribution agreements in Section 7 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default. 10. EFFECTIVE DATE AND TERMINATION. (a) This Agreement shall become effective at 1:00 p.m., St. Louis time, on the first business day following the effective date of the Registration Statement, or at such earlier time after the effective date of the Registration Statement as you in your discretion shall first release the Shares for offering to the public; provided, however, that the provisions of Section 7 and 11 shall at all times be effective. For the purposes of this Section 10(a), the Shares shall be deemed to have been released to the public upon release by you of the publication of a newspaper advertisement relating to the Shares or upon release of telegrams, facsimile transmissions -28- 29 or letters offering the Shares for sale to securities dealers, whichever shall first occur. (b) This Agreement may be terminated by you at any time before it becomes effective in accordance with Section 10(a) by notice to the Company and the Selling Shareholders; provided, however, that the provisions of this Section 10 and of Section 7 and Section 11 hereof shall at all times be effective. In the event of any termination of this Agreement pursuant to Section 9 or this Section 10(b) hereof, the Company and the Selling Shareholders shall not then be under any liability to any Underwriter except as provided in Section 7 or Section 11 hereof. (c) This Agreement may be terminated by you at any time at or prior to the Closing Date by notice to the Company and the Selling Shareholders if any condition specified in Section 6 hereof shall not have been satisfied on or prior to the Closing Date. Any such termination shall be without liability of any party to any other party except as provided in Sections 7 and 11 hereof. (d) This Agreement also may be terminated by you, by notice to the Company and the Selling Shareholders, as to any obligation of the Underwriters to purchase the Option Shares, if any condition specified in Section 6 hereof shall not have been satisfied at or prior to the Option Closing Date or as provided in Section 9 of this Agreement. If you terminate this Agreement as provided in Sections 10(b), 10(c) or 10(d), you shall notify the Company and the Selling Shareholders by telephone or telegram, confirmed by letter. 11. COSTS AND EXPENSES. The Company and the Selling Shareholders will bear and pay the costs and expenses incident to the registration of the Shares and public offering thereof, including, without limitation, (a) the fees and expenses of the Company's accountants and the fees and expenses of counsel for the Company, (b) the preparation, printing, filing, delivery and shipping of the Registration Statement, each Preliminary Prospectus, the Prospectus and any amendments or supplements thereto (except as otherwise expressly provided in Section 5(d) hereof) and the printing, delivery and shipping of this Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, Underwriters' Questionnaires and Powers of Attorney and Blue Sky Memoranda, (c) the furnishing of copies of such documents (except as otherwise expressly provided in Section 5(d) hereof) to the Underwriters, (d) the registration or qualification of the Shares for offering and sale under the securities laws of the various states, including the reasonable fees and disbursements of -29- 30 Underwriters' counsel relating to such registration or qualification, (e) the fees payable to the NASD and the Commission in connection with their review of the proposed offering of the Shares, (f) all printing and engraving costs related to preparation of the certificates for the Shares, including transfer agent and registrar fees, (g) all initial transfer taxes, if any, (h) all fees and expenses relating to the authorization of the shares for trading on NNM, (i) all travel expenses, including air fare and accommodation expenses, of representatives of the Company in connection with the offering of the Shares and (j) all of the other costs and expenses incident to the performance by the Company of the Registration and offering of the Shares; provided, however, that the Underwriters will bear and pay the fees and expenses of the Underwriters' counsel (other than fees and disbursements relating to the registration or qualification of the Shares for offering and sale under the securities laws of the various states), the Underwriters' out-of-pocket expenses, and any advertising costs and expenses incurred by the Underwriters incident to the public offering of the Shares; and provided, further, that the Selling Shareholders will bear and pay the fees and expenses of the Selling Shareholders' counsel. If this Agreement is terminated by you in accordance with the provisions of Section 10(c) (other than as a result of the failure of the conditions set forth in paragraphs (d), (e) or (h) of Section 6), the Company shall reimburse the Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel to the Underwriters. 12. DEFAULT OF SELLING SHAREHOLDERS. Failure or refusal by any of the Selling Shareholders to sell and deliver on the Closing Date the Shares agreed to be sold and delivered by such Selling Shareholder shall in no manner relieve the other Selling Shareholders or the Company of their respective obligations under this Agreement. If any Selling Shareholder should fail or refuse to sell and deliver his Shares, the remaining Selling Shareholders shall have the right hereby granted to increase, pro rata or otherwise, the number of Shares to be sold by them hereunder to the total number of Shares to be sold by all Selling Shareholders as set forth in Schedule I. If the remaining Selling Shareholders do not fully exercise the right to increase the number of Shares to be sold by them, the Underwriters, at your option, will have the right to elect to purchase or not to purchase the Shares to be sold by the Company and the remaining Selling Shareholders. In the event the Underwriters purchase the Shares of the Company and such other Selling Shareholders pursuant to this Section 12, the Closing Date shall be postponed for a period of not more than seven days in order that the Registration Statement and Prospectus or other documents may be amended or supplemented to the extent necessary under the provisions of the Act and Rules and -30- 31 Regulations or under the securities laws of any jurisdiction. If the Underwriters determine not to purchase the Shares of the Company and the other Selling Shareholders, if any, this Agreement shall terminate and neither the Company nor the Underwriters nor any other Selling Shareholder shall be under any obligation under this Agreement except as provided in Section 7 hereof and except for the obligation of the Company to pay for such expenses as are set forth in Section 11 hereof. Nothing herein shall relieve a defaulting Selling Shareholder from liability for his default or from liability under Section 7 hereof or for expenses imposed by this Agreement upon such Selling Shareholder. 13. NOTICES. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing and if sent to the Underwriters shall be mailed, delivered, sent by facsimile transmission, or telegraphed and confirmed c/o A.G. Edwards & Sons, Inc. at One North Jefferson Avenue, St. Louis, Missouri 63103, Attention: Syndicate, facsimile number (314) 289-7387, or if sent to the Company shall be mailed, delivered, sent by facsimile transmission, or telegraphed and confirmed to the Company at One Kiddie Drive, Avon, Massachusetts 02322-1171, facsimile number (508) 586-4728, or if sent to any Selling Shareholder shall be mailed, delivered, sent by facsimile transmission or telegraphed and confirmed to such Selling Shareholder, c/o the Attorney-in-Fact at One Kiddie Drive, Avon, Massachusetts 02322-1171. Notice to any Underwriter pursuant to Section 7 shall be mailed, delivered, sent by facsimile transmission, or telegraphed and confirmed to such Underwriter's address as it appears in the Underwriters' Questionnaire furnished in connection with the offering of the Shares or as otherwise furnished to the Company and the Selling Shareholder. 14. PARTIES. This Agreement shall inure to the benefit of and be binding upon the Underwriters and the Selling Shareholders, and the Company and their respective successors and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, corporation or other entity, other than the parties hereto and their respective successors and assigns and the controlling persons, officers and directors referred to in Section 7, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained; this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective successors and assigns and said controlling persons and said officers and directors, and for the benefit of no other person, corporation or other entity. No purchaser of any of the Shares from any Underwriter shall be construed a successor or assign by reason merely of such purchase. -31- 32 In all dealings with the Company and the Selling Shareholders under this Agreement A. G. Edwards & Sons, Inc. shall act on behalf of each of the several Underwriters, the Company, and the Selling Shareholders shall be entitled to act and rely upon any statement, request, notice or agreement on behalf of the Underwriters, made or given by A.G. Edwards & Son, Inc. on behalf of the Underwriters, as if the same shall have been made or given in writing by the Underwriters. 15. COUNTERPARTS. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 16. PRONOUNS. Whenever a pronoun of any gender or number is used herein, it shall, where appropriate, be deemed to include any other gender and number. 17. APPLICABLE LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Massachusetts. If the foregoing is in accordance with your understanding, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company, each of the Selling Shareholders and the Underwriters. THE FIRST YEARS INC. By: ______________________________ Title: ___________________________ Selling Shareholders Named in Schedule I Hereto By: ______________________________ Attorney-in-Fact -32- 33 Accepted in St. Louis, Missouri, as of the date first above written, on behalf of ourselves and each of the several Underwriters named in Schedule II hereto. A.G. EDWARDS & SONS, INC. By: ____________________________ Title: Senior Vice President -33- 34 SCHEDULE I Number of Selling Shareholders Firm Shares - -------------------- ----------- Estate of Marshall B. Sidman 800,000 Jerome M. Karp 160,000 Benjamin Peltz 160,000 Ronald J. Sidman 80,000 ------- Total 1,200,000 -34- 35 SCHEDULE II Name Number of Firm Shares - ---- --------------------- A.G. Edwards & Sons, Inc. Adams, Harkness & Hill, Inc. _________ Total 1,600,000 -35- 36 SCHEDULE III Pursuant to Section 6(f) of the Underwriting Agreement, Deloitte & Touche LLP shall furnish letters to the Underwriters to the effect that: (i) They are independent certified public accountants with respect to the Company and its subsidiaries within the meaning of the Act and the applicable Rules and Regulations thereunder. (ii) In their opinion, the financial statements and any supplementary financial information and schedules audited (and, if applicable, prospective financial statements and/or pro forma financial information examined) by them and included in the Prospectus or the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act and the applicable Rules and Regulations thereunder; and, if applicable, they have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the unaudited consolidated interim financial statements, selected financial data, pro forma financial information, prospective financial statements and/or condensed financial statements derived from audited financial statements of the Company for the periods specified in such letter, as indicated in their reports thereon, copies of which have been furnished to the Representative of the Underwriters (the "Representative"). (iii) On the basis of limited procedures, not constituting an audit in accordance with generally accepted auditing standards, consisting of a reading of the unaudited financial statements and other information referred to below, a reading of the latest available interim financial statements of the Company and its subsidiaries, inspection of the minute books of the Company and its subsidiaries since the date of the latest audited financial statements included in the Prospectus, inquiries of officials of the Company and its subsidiaries responsible for financial and accounting matters and such other inquiries and procedures as may be specified in such letter, nothing came to their attention that caused them to believe that: (A) the unaudited statements of income, balance sheets and statements of cash flows included in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the -36- 37 applicable Rules and Regulations thereunder, or are not in conformity with generally accepted accounting principles applied on a basis substantially consistent with the basis for the audited statements of income, balance sheets and statements of cash flows included in the Prospectus. (B) any other unaudited income statement data and balance sheet items included in the Prospectus do not agree with the corresponding items in the unaudited financial statements from which such data and items were derived, and any such unaudited data and items were not determined on a basis substantially consistent with the basis for the corresponding amounts in the audited financial statements included in the Prospectus. (C) the unaudited financial statements which were not included in the Prospectus but from which were derived any unaudited condensed financial statements referred to in Clause (A) and any unaudited income statement data and balance sheet items included in the Prospectus and referred to in Clause (B) were not determined on a basis substantially consistent with the basis for the audited financial statements included in the Prospectus. (D) any unaudited pro forma consolidated condensed financial statements included in the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act and the published rules and regulations thereunder or the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements. (E) as of a specified date not more than five days prior to the date of such letter, there have been any changes in the capital stock or any increase in the long-term debt of the Company and its subsidiaries, or any decreases in working capital, net current assets or net assets or other items specified by the Representative, or any changes in any items specified by the Representative, in each case as compared with amounts shown in the latest balance sheet included in the Prospectus, except in each case for changes, increases or decreases which the Prospectus -37- 38 discloses have occurred or may occur or which are described in such letter. (F) for the period from the date of the latest financial statements included in the Prospectus to the specified date referred to in Clause (E) there were any decreases in net revenues or operating profit or the total or per share amounts of net income or any other changes in any other items specified by the Representative, in each case as compared with the comparable period of the preceding year and with any other period of corresponding length specified by the Representative, except in each case for changes, decreases or increases which the Prospectus discloses have occurred or may occur or which are described in such letter. (iv) In addition to the audit referred to in their report(s) included in the Prospectus and the limited procedures, inspection of minute books, inquiries and other procedures referred to in paragraph (iii) above, they have carried out certain specified procedures, not constituting an audit in accordance with generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by the Representative, which are derived from the general accounting records of the Company and its subsidiaries for the periods covered by their reports and any interim or other periods since the latest period covered by their reports, which appear in the Prospectus, or in Part II of, or in exhibits and schedules to, the Registration Statement specified by the Representative, and have compared certain of such amounts, percentages and financial information with the accounting records of the Company and its subsidiaries and have found them to be in agreement. (v) In the letters delivered pursuant to Section 6(f) of the Underwriting Agreement, Deloitte & Touche LLP shall confirm that they have performed an interim review in accordance with SAS No. 71 of the financial statements of the Company as of March 31, 1996 and for the three month period then ended and the Company has advised Deloitte & Touche LLP that such financial statements are prepared on a basis consistent with the audited financial statements contained in the Prospectus and these financial statements indicate no decrease in consolidated net sales or net income from the corresponding period in the preceding year. -38- EX-11 3 COMPUTATION OF RATIOS OF EARNINGS 1 EXHIBIT 11 THE FIRST YEARS INC. PRIMARY NET INCOME PER SHARE AND FULLY DILUTED NET INCOME PER SHARE
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------ ------------------------ 1994 1995 1995 1996 ---------- ---------- ---------- ---------- PRIMARY NET INCOME PER SHARE: Net income available for common shares and common stock equivalent shares............... $2,989,374 $3,724,493 $ 829,808 $1,186,573 ========== ========== ========== ========== Primary net income per share.............. $0.66 $0.80 $0.18 $0.25 SHARES USED IN COMPUTATION: Weighted average common shares outstanding..... 4,497,244 4,507,058 4,500,978 4,515,487 Common stock equivalents - options............. 53,450 156,433 160,868 173,939 ---------- ---------- ---------- ---------- Total common stock and common stock equivalent dilutive shares......... 4,550,694 4,663,491 4,661,846 4,689,426 ========== ========== ========== ========== FULLY DILUTED NET INCOME PER SHARE: Net income available for common shares and common stock equivalent shares............... $2,989,374 $3,724,493 $ 829,808 $1,186,573 ========== ========== ========== ========== Fully diluted net income per share........ $0.65 $0.80 $0.18 $0.25 SHARES USED IN COMPUTATION: Weighted average common shares outstanding..... 4,497,244 4,507,058 4,500,978 4,515,487 Common stock equivalents - options............. 71,726 166,595 160,868 202,600 ---------- ---------- ---------- ---------- Total common stock and common stock equivalent dilutive shares......... 4,568,970 4,673,653 4,661,846 4,718,087 ========== ========== ========== ==========
EX-23.2 4 CONSENT OF DELOITTE & TOUCHE 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE To the Board of Directors and Stockholders of The First Years Inc. Avon, Massachusetts We consent to the use in this Amendment No. 2 to Registration Statement No. 33-62673 (the "Registration Statement") of The First Years Inc. (formerly Kiddie Products, Inc.) on Form S-1 of our report dated March 7, 1996, appearing in the Prospectus, which is part of the Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. Our audits of the financial statements referred to in our aforementioned report also included the financial statement schedule of The First Years Inc., listed in Item 16(b). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Boston, Massachusetts June 4, 1996 -----END PRIVACY-ENHANCED MESSAGE-----