-----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, GOFS3h66IBW94fRKyRYuVo3OSwOVaQ7vrAbWKd0bp8einDNT7x+TfS+HdPLFx4yc Lx53bnQOu2Jqx8KsvAHoag== 0000950135-00-001696.txt : 20000329 0000950135-00-001696.hdr.sgml : 20000329 ACCESSION NUMBER: 0000950135-00-001696 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 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: 10-K405 SEC ACT: SEC FILE NUMBER: 000-07024 FILM NUMBER: 581338 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 10-K405 1 THE FIRST YEARS, INC 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999; OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-7024 THE FIRST YEARS INC. (Exact Name of Registrant as Specified in its Charter) MASSACHUSETTS 04-2149581 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) ONE KIDDIE DRIVE, AVON, MASSACHUSETTS 02322 (Address of Principal Executive Offices) (Zip Code)
508-588-1220 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED NONE NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.10 PAR VALUE (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No __. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] The aggregate market value of the Common Stock held by nonaffiliates of the Company was $64,401,098, based on the price at which the stock was sold over the counter on the Nasdaq National Market, as reported at the close of business on February 29, 2000. The number of shares of Registrant's Common Stock outstanding on December 31, 1999 was 9,616,235. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 DOCUMENTS INCORPORATED BY REFERENCE The Company intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 1999. The following sections of such definitive proxy statement are hereby incorporated by reference into Items 10, 11, 12 and 13 of Part III of this Form 10-K: "Common Stock Ownership of Certain Beneficial Owners and Management;" "Election of Directors;" "Executive Compensation" (other than the Board Compensation Committee Report on Executive Compensation and the Performance Chart); and "Compliance with Section 16(a) of the Securities Exchange Act of 1934." 3 PART I ITEM 1. BUSINESS The First Years Inc. (the "Company") is a leading developer and worldwide marketer of a broad line of products for infants and toddlers. Major channels through which the Company sells its products include mass merchants, supermarkets, drug stores, department stores, wholesale clubs, convenience stores, specialty stores, internet-based retailers, mail-order catalogs and catalog showrooms. 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, and is headquartered in Avon, Massachusetts. The Company also has a wholly-owned subsidiary, the First Years Inc., which is incorporated in Delaware and headquartered in California. Except as expressly indicated or unless the context otherwise requires, as used in this report, the "Company" means The First Years Inc. a Massachusetts corporation, and its subsidiaries. Products The Company's product line, which contains approximately 250 items that range in retail price from approximately $0.99 to $69.99, is categorized and marketed into five distinct product categories as follows: Feeding & Soothing. The Feeding & Soothing category is comprised of bottles and accessories, nipples, pacifiers, teethers, bowls, drinking cups, dishes, flatware, bibs, breast-feeding accessories and feeding sets. This category includes 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. This category also includes the Natural Feeding System of nipples and bottles, and the new Reclining 3-Stage Feeding Seat. 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, hand-held toys, and large play items. This category includes the Company's Washables line of 100% washable, dishwasher-safe toys. In 1999, the Company introduced the 3-in-1 Tummy Play set. Care & Safety. The Care & Safety category consists of a broad line of bathing and grooming accessories, home safety and monitoring products such as door and cabinet latches, toilet-training products and products appropriate for the health and hygiene needs of infants. This category includes the Crisp & Clear Plus 900MHz Nursery Monitor and the new Hands-Free Gate, a foot-pedal operated gate. Winnie the Pooh. The Winnie the Pooh category consists of numerous basic products including teethers, rattles, bibs, bottles, bathing accessories and gift sets featuring Winnie the Pooh characters. In 1999, the Company introduced numerous additional items in this category including a 2-in-1 Bathtub and Color Change Bathseat. Sesame Street. The Sesame Street category consists of numerous basic products including teethers, pacifiers, bottles, drinking cups, dishes, flatware, healthcare products, car sun shade, hooded towels, rattles and a toilet trainer. In 1999, the Company introduced a new Fold-Down Bed Rail. ------------------------ THE FIRST YEARS(R) Ideas Inspired by Parents(R), TumbleMates(R), Firstronics(R), and Washables(R) are registered trademarks of The First Years Inc. Crisp & Clear Plus(TM) and ComforTemp(TM) are trademarks of The First Years Inc. SESAME STREET is a registered trademark of Children's Television Workshop. WINNIE THE POOH(R) and POOH(R) are registered trademarks of Disney Enterprises, Inc. FINANCIAL INFORMATION ABOUT SEGMENTS The Company has one operating segment. It engages in a single line of business of developing and marketing one class of similar products for infants and toddlers through the same retail channels. For financial information regarding such single operating segment, please see Item 14(a).1. "Consolidated Financial Statements." I-1 4 PRODUCT DESIGN, DEVELOPMENT AND MARKETING The Company devotes substantial resources to product development. The Company employs a staff of professionals engaged in the creation of new products and uses a diverse group of outside designers and developers. For the past 19 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. The Company spent approximately $3.8, $3.3 and $2.6 million on new product development in 1999, 1998, and 1997, respectively. Most of the Company's new products are shown at the Juvenile Products Manufacturers Association Trade Show, in Dallas, Texas in the fall of each year, and a variety of other national and international toy and baby fairs. 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, internet-based retailers, mail order catalogs and catalog stores. The Company sells its products in a large number of countries throughout the world. Major customers include Wal*Mart, Toys "R" Us, Target, Kmart, Kroger, Sears, Eckerd Drugs, Rite Aid, Albertsons, and J.C. Penney. The Company's products are sold in the United States and Canada primarily through the Company's internal sales staff and a large network of 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. The Company's wholly-owned subsidiary, The First Years Inc., a Delaware corporation ("TFY-Delaware"), handles the Company's sales and distribution operations in the western part of the United States. TFY-Delaware has sales offices in Missouri, Arkansas and California, and is the Company's exclusive sales agent for certain states in the western part of the United States. 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 Vice President -- International Sales/Europe. This staff manages a network of foreign distributors and independent sales representatives. 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 independent sales representatives in such areas. During 1999, Wal*Mart, Toys "R" Us, and Target accounted for approximately 28%, 19%, and 14% of the Company's net sales, respectively. A significant reduction in purchases by any one 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. LICENSED CHARACTER PRODUCTS Since 1996, the Company has entered into and renewed various agreements which provide for the payment of royalties on certain of the Company's products featuring licensed cartoon characters. The agreements have various terms and require minimum royalty payments of $6,007,000 during the terms of these agreements. A major licensing agreement was renewed in 1999 and will expire at the end of 2000. Sales of products licensed under this major license agreement amounted to 34% of the Company's total net sales for the year ended December 31, 1999. While management currently anticipates negotiating a renewal of the license, non-renewal of this licensing agreement or, renewal on terms not favorable to the Company could have a material adverse affect on the Company's business (see Exhibit 99 to this Report, "Important Factors That May Affect Future Results" and "Notes to Consolidated Financial Statements," Numbers 6 and 8). I-2 5 MANUFACTURING AND SOURCES OF SUPPLY The Company does not own or operate its own manufacturing facilities. In 1999, 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, Thailand, and Mexico. Approximately 54% of all of its products sold in 1999 were manufactured in Asia, primarily in China. A large percentage of the Company's furnishings and other large products were manufactured in 1999 by suppliers in the United States and Canada because of the significantly higher shipping costs from the Far East. 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. In December, 1996, the Company entered into an agreement with Exergen Corporation to jointly design and develop the Company's ComforTemp thermometer. The ComforTemp is an instant underarm thermometer which uses an infrared temperature-taking technology developed and patented by Exergen. The Company is dependent on Exergen for Exergen's technology and proprietary components. The Company introduced the Comfortemp to the market in 1997. There can be no assurance that the Company will continue to obtain such proprietary components from Exergen or that the ComforTemp thermometer, will result in substantial sales. The Company believes it has alternative manufacturing sources available for all of its other products. Because it owns its tools, it could shift its sources of manufacturing for such other products to an alternative supplier. In 1999, the Company's largest supplier, which is based in the United States, accounted for products that represented approximately 12% of its sales in 1999. Other than as described above, 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 did not experience any difficulties in obtaining materials in 1999. 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. The Company also purchases a small percentage of its products in Canadian dollars from one supplier. Generally, the Company's suppliers ship the products on the basis of open credit terms or upon the acceptance of products by the Company. The Company also enters into foreign exchange contracts. (See "Notes to Consolidated Financial Statements," Numbers 1 and 5). 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 Congress has attempted to impose additional restrictions on trade with China. Enactment of legislation or the imposition of restrictive regulations conditioning or revoking China's Normal Trade Relations ("NTR") 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 NTR trading status has been extended through July 3, 2000. Unless Congress takes action to override this decision, China will continue to enjoy NTR treatment during this period. The European Community (the "EC") has enacted a quota and tariff system with respect to the importation into the EC 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 I-3 6 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. WORKING CAPITAL ITEMS See Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operation." 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 competition includes large, diversified health care product 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 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 Ghent, Belgium. Warehouse services at the various public warehouses are performed by warehouse operators unaffiliated with the Company. 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. 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 such 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. 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 such copyrights will offer any significant competitive advantage for the Company's products. EMPLOYEES As of December 31, 1999, the Company employed 150 full-time and 5 part-time employees, of whom 4 are senior executive officers and all of the other employees of the Company are in sales, marketing and product development, materials, purchasing, quality assurance, data processing, finance, administration and clerical, and 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 REGULATIONS 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 I-4 7 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. FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS The Company's domestic sales in 1999, 1998 and 1997 were approximately $122.2, $116, and $104.5 million, respectively, and accounted for approximately 89.4%, 87.4% and 86.5% of the Company's total net sales in 1999, 1998, and 1997, respectively. The Company's international sales (primarily in Europe, Canada, South America and the Pacific Rim) were approximately $14.5, $16.7, and $16.2 million, respectively, and accounted for approximately 10.6%, 12.6% and 13.5% of the Company's total net sales in 1999, 1998, and 1997, respectively. (See "Notes to Consolidated Financial Statements", Number 8.) For information regarding the Company's long-lived assets in the U.S.A. and foreign countries, please see the Company's "Consolidated Balance Sheet as of December 31, 1999 and 1998" and "Notes to Consolidated Financial Statements", Number 12. For information regarding the risks attendant to the Company's international sales and operations, please see "Manufacturing and Sources of Supply" on Page I-3 and "Competition" on Page I-4. EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY The names of the Company's Executive Officers and Directors and certain information about them are set forth below. Officers have served in the capacity indicated in the table below for at least five years, unless otherwise indicated in the notes.
OFFICER OR DIRECTOR NAME AGE POSITION SINCE ---- --- -------- ---------- Ronald J. Sidman.......................... 53 President, Chairman of the Board of Directors, and Chief Executive Officer 1975 Jerome M. Karp............................ 72 Director 1969 Benjamin Peltz............................ 60 Director 1975 Evelyn Sidman............................. 86 Clerk and Director 1979 Fred T. Page.............................. 53 Director 1988 Kenneth R. Sidman......................... 54 Director 1998 Lewis M. Weston........................... 73 Director 1998 Walker J. Wallace......................... 55 Director 1999 John R. Beals............................. 45 Treasurer, Senior Vice President -- Finance and Chief Financial Officer 1990 Wayne Shea................................ 45 Senior Vice President -- Worldwide Sales and Merchandising 1991 Bruce Baron............................... 39 Senior Vice President -- Operations 1997
- --------------- Mr. Sidman has been the President of the Company since January 1989 and Chairman of the Board of Directors and Chief Executive Officer since March 1995. Mr. Karp served as Vice Chairman of the Board of the Company from January, 1989 until his retirement from the Company in August, 1999. Mr. Peltz served as the Treasurer of the Company from May, 1970 to January, 1998 and as the Senior Vice President of the Company from January 1980 until June 30, 1997 when he retired from the Company. I-5 8 Mr. Page was with Southern New England Telecommunications Corporation ("SNET"), a subsidiary of Southwestern Bell, for thirty years from 1969 to 1999. From January, 1994 to March, 1999 he served as President -- Network Services of SNET. Kenneth R. Sidman has been Vice President, Business & Technology Development, at Saint-Gobain Performance Plastics Corp., Wayne, NJ, (formerly Norton Performance Plastics Corp.), since 1997. Mr. Sidman joined Saint-Gobain Performance Plastics Corp. in 1984 as Director, New Business Development, and from 1992 to 1997, was Vice President, Marketing & New Business Development. Mr. Lewis M. Weston is a Retired Partner of Goldman, Sachs & Co. and was a Limited Partner of Goldman Sachs from 1978 to 1999. He had been with Goldman Sachs since 1951 and was made a General Partner in 1967. He was Partner in charge of the Syndicate Department from 1969 to 1978, a period during which he was also active with the National Association of Securities Dealers (NASD), serving three years as a member of the NASD's Board of Governors. Currently, Mr. Weston is a board member of South East Asia Venture Investment Company (SEAVIC) and SEAVIC, III, Singapore, and the Thai Prime Fund, Singapore, as well as a member of the International Advisory Board of Banco Finantia, Lisbon, Portugal. He also serves on the Investors Representative Committee of the China Dynamic Investment Fund. Walker J. Wallace was with Proctor & Gamble for 30 years, from 1967 to 1997. He was made a Vice President of Proctor & Gamble in 1991 and served as Vice President -- Worldwide Strategic Planning for various core product categories (laundry and cleaning products, paper products, diapers) from 1993 to 1997. Mr. Wallace is on the Board of the Student Loan Funding Resources in Cincinnati, Ohio. Mr. Beals has been Senior Vice President -- Finance since March, 1998 and Treasurer of the Company since January, 1998. He has been Chief Financial Officer of the Company since July, 1997. From July, 1997 to March, 1998 he was Vice President -- Finance of the Company and from January, 1990 to June, 1997, he was the Assistant Treasurer and Controller of the Company. Mr. Shea has been Senior Vice President of Worldwide Sales & Merchandising since July, 1997. From January, 1995 to June, 1997, Mr. Shea was Vice President Worldwide Sales & Merchandising and from July, 1991 to December, 1994, Mr. Shea was Vice President of Service and Merchandising of the Company. Mr. Baron has been Senior Vice President -- Operations since August, 1997. Prior to that time, Mr. Baron was Vice President of Operations at Crabtree & Evelyn from 1988 to July, 1997. ITEM 2. PROPERTIES The Company owns its executive and administrative offices and principal warehouse which are located in a 124,000 square-foot building at One Kiddie Drive, Avon, Massachusetts. The Company also has sales offices in leased premises in Cirencester, England. The Company's subsidiary, TFY-Delaware has sales offices in leased premises in Missouri, Arkansas and California. The Company also uses public warehouses located in Toronto, Canada; Fontana, California; and in Ghent, Belgium. The Company believes that its properties (owned and leased) are in good condition and adequate for its current needs. ITEM 3. LEGAL PROCEEDINGS The Company is involved in legal proceedings which have arisen in the ordinary course of business. The Company believes that there are no claims or litigation pending, the outcome of which could have a material adverse effect on the Company's financial condition or operating results. (See also "Notes to Consolidated Financial Statements," Number 11). ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Company. I-6 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) MARKET INFORMATION The Company's Common Stock is traded on the Nasdaq National Market. Below is a summary of the actual high and low sales prices of the Company's Common Stock for each quarter of 1999 and 1998 as reported by Nasdaq and retroactively adjusted to reflect the Company's 2-for-1 stock split effected on June 29, 1998. 1999
QUARTER LOW HIGH ------- --- ---- First....................................................... $12 3/4 $18 Second...................................................... 13 5/8 17 3/4 Third....................................................... 9 1/4 15 Fourth...................................................... 6 3/4 10 1/2
1998
QUARTER LOW HIGH ------- --- ---- First....................................................... $10 1/2 $18 1/8 Second...................................................... 15 1/4 20 Third....................................................... 12 19 1/2 Fourth...................................................... 9 18 1/4
(b) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
APPROXIMATE NUMBER OF RECORD HOLDERS TITLE OF CLASS (AS OF DECEMBER 31, 1999) -------------- ------------------------- Common Stock, $.10 Par Value 169
(c) DIVIDEND POLICY In 1998 and 1999, the Company paid cash dividends on its Common Stock of $0.06 per share, which were paid on June 29, 1998 and June 15, 1999, respectively. 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. The Company's Board of Directors declared on May 8, 1998, a 2-for-1 stock split effected in the form of a 100% stock dividend payable on June 29, 1998 to holders of record on May 29, 1998. II-1 10 ITEM 6. SELECTED FINANCIAL DATA
1999 1998 1997 1996 1995 ------------ ------------ ------------ ----------- ----------- SELECTED INCOME STATEMENT DATA: Net sales.................... $136,651,751 $132,716,379 $120,695,988 $93,110,361 $75,757,322 Cost of products sold........ 79,645,326 80,737,193 71,185,634 55,463,255 45,108,546 Selling, general and administrative expenses.... 42,303,932 39,011,893 37,165,878 28,580,039 23,961,206 Interest expense............. -- -- 27,709 358,637 186,338 Interest income.............. 582,640 590,822 168,922 27,349 16,718 Offering expenses............ -- -- -- -- 310,457 Income before income taxes... 15,285,133 13,558,115 12,485,689 8,735,779 6,207,493 Provision for income taxes... 6,190,500 5,545,300 5,040,900 3,494,300 2,483,000 Net income................... 9,094,633 8,012,815 7,444,789 5,241,479 3,724,493 Basic earnings per share**... $0.89 $0.78 $0.75 $0.55 $0.41 Diluted earnings per share**.................... $0.87 $0.75 $0.71 $0.53 $0.40 Dividends paid per share*.... $0.06 $0.06 $0.05 $0.05 $0.05 Basic weighted average number of shares outstanding**.... 10,226,470 10,338,857 10,003,774 9,466,356 9,014,116 Diluted weighted average number of shares outstanding**.............. 10,402,297 10,669,503 10,453,062 9,891,982 9,326,982 SELECTED BALANCE SHEET DATA: Total assets................. $ 67,913,856 $ 69,275,895 $ 60,571,561 $47,049,537 $41,712,080 Long-term debt............... -- -- -- -- 100,001 Stockholders' equity......... 51,702,426 52,647,404 44,009,004 35,866,440 25,763,259 Stockholders' equity per share**.................... $4.97 $4.93 $4.21 $3.63 $2.76
- --------------- * Adjusted to reflect the two-for-one stock split effected on June 29, 1998 and December 29, 1995, respectively. ** Adjusted to reflect the two-for-one stock split effected on June 29, 1998 and December 29, 1995, respectively and restated to reflect adoption of Statement of Financial Accounting Standard No. 128 in the fourth quarter of 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STATEMENT OF FORWARD LOOKING INFORMATION: Statements in this Report on Form 10-K that are not strictly historical are "forward looking" statements, as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by the words: believe, expect, anticipate, intend, are confident, estimate and similar expressions which by their nature refer to future events. Actual future results may differ materially from those anticipated depending on a variety of factors which include but are not limited to the Company's need for continued innovative product development, and timely product introductions; the Company's reliance on sales of licensed products, consumer preferences, major customers and foreign manufacturers; changes in the retail industry; competition in the juvenile products market; cost and availability of certain materials; risks related to inventory, international sales, products liability, the Company's intellectual property and litigation; importance of brand recognition; currency fluctuation risks; impact of government regulations; and the dependence on, and need for, key personnel. Information with respect to risk factors are contained in Exhibit 99 of this Annual Report on Form 10-K, and quarterly reports on Form 10-Q as filed with the Securities and Exchange Commission. Readers are cautioned not to place undo reliance on these forward-looking statements, which II-2 11 speak only as of the date hereof. The Company assumes no obligation to update the information contained in this press release. YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 Net sales in 1999 were $136.7 million, an increase of $4.0 million or 3.0%, as compared to $132.7 million in 1998. The increase was due to increased demand for the First Years brand products which was partially offset by decreased demand for licensed products in domestic and foreign markets. As a percentage of sales, sales of licensed products decreased to 39.6% in 1999 from 48.4% in 1998 as consumer demand for licensed products lessened, particularly for several items that had been selling well in 1998. Sales of the First Years brand products increased to 60.4% in 1999 from 51.6% in 1998 due primarily to new product introductions. The Company anticipates that the percent of the First Years branded products to total sales will continue to increase as a result of recent trends. An additional factor affecting net sales in 1999 and 1998 was the accounting for sales returns of certain products containing diisononyl phthalate, ("DINP"). As fully disclosed in Note 10 of the Company's financial statements, 1998 net sales reflect a charge of $3.0 million for an accrual of sales returns and 1999 net sales reflect an increase of $0.4 million for a reversal of a portion of the 1998 accrual. As a percent of sales, net sales to foreign markets decreased to 10.6% in 1999 from 12.6% in 1998 as reduced sales in Latin America and Europe were partially offset by sales increases in Canada and the Pacific Rim. The Company currently believes that substantial long term opportunity exists in the foreign markets and will continue to pursue increased sales potential in those markets. Cost of products sold in 1999 was $79.6 million, a decrease of $1.1 million or (1.4)%, as compared to $80.7 million in 1998. As a percentage of net sales, cost of products sold in 1999 decreased to 58.3% from 60.8% in the comparable period of 1998. The decrease was primarily due to the lower than expected inventory writeoffs of certain products containing DINP for which a charge was previously recorded in the fourth quarter of 1998 as well as lower costs associated with the increased percentage of sales of non-licensed higher margin products in 1999. Selling general and administrative expenses in 1999 were $42.3 million, an increase of $3.3 million, or 8.4%, as compared to $39.0 million of such expenses in 1998. The increase was primarily due to costs related to the settlement of a patent lawsuit, legal expenses related to the lawsuit, and market research expenses. As a percentage of net sales, selling, general, and administrative expenses increased to 31.0% in 1999 from 29.4% in the comparable period of 1998. The increase reflects the costs associated with the lawsuit issue as selling, general and administrative expenses as a percent of net sales would be consistent with 1998 if the related costs were excluded. Income tax expense as a percentage of pretax income decreased to 40.5% in 1999 from 40.9% in 1998 as the Company's taxable income was subject to a slightly lower aggregate effective rate on the state level. YEAR 2000 ISSUE The "Year 2000 Issue" (Y2K) related to potential problems resulting from the incorrect processing of information using dates or date sensitive data by computers and other machines utilizing embedded microprocessors. The problem is attributable to the computer or software recognizing the year as a two digit number "00" as opposed to the Year "2000". The Company was adequately prepared for Y2K and did not experience any meaningful disruptions related to the Company's information technology (IT) and non-IT systems. Additionally, the Company did not encounter any disruptions in service or communications with its mission critical service vendors, suppliers of products, logistics vendors or it's customers. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Net sales in 1998 were $132.7 million, an increase of $12.0 million, or 10.0%, as compared to $120.7 million in 1997. The increase was due to new product introductions and expanded retail distribution in domestic and foreign markets. An additional factor affecting sales was a charge of $3.0 million relating to II-3 12 expected sales returns of certain products containing diisononyl phthalate ("DINP"), a plastic softener. As a percent of sales, net sales to foreign markets decreased to 12.6% in 1998 from 13.5% in 1997 as sales increases in Europe were partially offset by reduced sales in Latin America and the Pacific Rim due to poor economic conditions. The Company currently believes economic conditions in Latin America and the Pacific Rim may negatively affect sales potential during the short to medium term but that in the long term substantial opportunity exists. As a percentage of net sales, sales of licensed products increased to 48.4% in 1998 from 43.1% in 1997. The Company derives a significant portion of its sales from products under license. A major licensing agreement, which was to expire at the end of 1998, had been extended through March 31, 1999. Sales of products licensed under the agreement amounted to 42% of the Company's total sales for the year ended December 31, 1998. Cost of products sold in 1998 was $80.7 million, an increase of $9.5 million or 13.4%, as compared to $71.2 million in 1997. As a percentage of net sales, cost of products sold in 1998 increased to 60.8% from 59.0% in the comparable period of 1997. The increase was primarily due to a charge of $1.1 million relating to write-off of inventory of certain products containing DINP. Without the charge related to DINP, cost of products sold would have remained consistent at 58.9% in 1998 and 59.0% in 1997, respectively. Selling general and administrative expenses in 1998 were $39.0 million, an increase of $1.8 million, or 5.0%, as compared to $37.2 million of such expenses in 1997. The increase was primarily due to costs related to increased sales volume and payroll and payroll related costs. As a percentage of net sales, selling, general, and administrative expenses decreased to 29.4% in 1998 from 30.8% in the comparable period of 1997. The decrease reflects a reduction in advertising expenses in 1998 as well as the continued effective management of selling, general, and administrative expenses. Income tax expense as a percentage of pretax income increased to 40.9% in 1998 from 40.4% in 1997 as a portion of the Company's taxable income was taxed at a higher statutory rate. LIQUIDITY AND CAPITAL RESOURCES Net working capital decreased by $2.5 million to $43.0 million at December 31, 1999 from $45.5 million at December 31, 1998 primarily due to decreases in cash. Cash decreased by $6.4 million primarily as a result of the purchase of $10.0 million of treasury shares under the stock repurchase program and purchases of property, plant and equipment associated with the new warehouse computer and racking systems at the Company's Avon facility. The decrease in cash was partially offset by profitable operations. An unsecured line of credit of $10 million which is subject to annual renewal in August of 2000, is available from a bank. Amounts outstanding under the line are payable upon demand by the bank. During 1999 and 1998, the Company had no borrowings under the line of credit. As of December 31, 1999 and 1998 no balances were outstanding. The Company paid a cash dividend of $0.06 per share of Common Stock in June of 1999 and 1998, respectively. The Company expects cash flow from operations and availability under the Company's lines of credit to be sufficient to meet cash needs for working capital expenditures for 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 1999, 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 commitment under these contracts approximated $3.8 million as of December 31, 1999. At December 31, 1999, the exchange rates for such currencies covered by the contracts approximated the predetermined rates included therein. The Company II-4 13 routinely assesses the financial strength of the bank which is counterparty to the forward exchange contracts. As of December 31, 1999, management believes it had no significant exposure to credit risk relative to such contracts. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement, as amended, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2001. Management of the Company are currently evaluating the effect of implementing SFAS No. 133 on the consolidated financial statements. Effective January 1, 1999, the Company adopted the AICPA Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The adoption of this statement resulted in no changes to the consolidated financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK See discussion in second paragraph of Item 7, "Inflation and Foreign Currency Fluctuations", for required quantitative and qualitative disclosure about primary exposure to market risk. The foreign currencies to which the Company has the most significant exchange rate exposure is the British pound. Based on a hypothetical ten percent adverse movement in foreign currency exchange rates, the potential losses in future earnings, fair value of risk-sensitive instruments, and cash flows are immaterial, although the actual effects may differ materially from the hypothetical analysis. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial Statements listed under Item 14.(a) 1. are included in Part IV. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There is nothing to report relating to this Item. II-5 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is included in the Registrant's definitive proxy statement for the 2000 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is included in the Registrant's definitive proxy statement for the 2000 Annual Meeting of Stockholders, except that the sections in said definitive proxy statement entitled "Board Compensation Committee Report on Executive Compensation" and the "Stock Performance Chart" shall not be deemed incorporated herein by reference to this 10-K Report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is included in the Registrant's definitive proxy statement for the 2000 Annual Meeting of Stockholders. III-1 15 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 14.(a) 1. CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 (a) 2. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. 14.(a) 3. EXHIBITS The following are either (i) filed herewith as exhibits to this 10-K Report or (ii) have been filed as exhibits to filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 and are incorporated herein by reference as exhibits to this 10-K Report.
PAGE ---- (3)(i) Restated Articles of Organization as currently in effect (filed as Exhibit (3.1) to Amendment No. 1 to Form S-1 Registration Statement filed with the Commission on October 5, 1995 and incorporated herein by reference). (3)(ii) By-laws of the Company as currently in effect. IV-19 (10)(a) Agreement with Disney Enterprises, Inc. regarding the licensing of Winnie the Pooh characters dated as of November 16, 1998 (filed as Exhibit (10)(r) on Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference; certain portions of such Agreement are subject to confidential treatment). (10)(b) Agreement with Disney Enterprises, Inc. dated as of November 16, 1998 regarding the licensing of Disney standard characters, Disney classic cartoon characters and Disney Babies (filed as Exhibit 10(s) on Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference; certain portions of such Agreement are subject to confidential treatment). (10)(c) Agreement with the Children's Television Workshop dated July 1, 1996 regarding the licensing of Sesame Street characters (filed as Exhibit (10)(g) on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference; certain portions of such Agreement are subject to confidential treatment). (10)(d) Letter Agreement with Children's Television Workshop dated as of July 1, 1999 regarding the renewal of the licensing of Sesame Street characters (certain portions of which are subject to confidential treatment). IV-19 Management Contracts and Compensatory Plans (10)(e) The First Years Inc. 1993 Equity Incentive Plan, as amended through May 20, 1999 (filed as Exhibit (10)(t) on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference). (10)(f) The First Years Inc. 1993 Stock Option Plan for Directors, as amended through October 1, 1999. IV-19 (10)(g) Letter Agreement between The First Years Inc. and Jerome M. Karp dated August 8, 1999 (filed as Exhibit 10(v) on Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference).
IV-1 16
PAGE ---- (10)(h) Employment Agreement between The First Years Inc. and Ronald J. Sidman, dated September 30, 1999 (filed as Exhibit 10(u) on Form 10-Q for the quarter ended September 30, 1999 and incorporated herein by reference). (10)(i) The First Years Inc., a Massachusetts Corporation, and Affiliates -- 1998 Annual Incentive Plan, effective as of January 1, 1998 (filed as Exhibit 10(n) on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). (10)(j) Agreement between The First Years Inc. and Wayne Shea dated August 12, 1997 (filed as Exhibit (10)(o) on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). (10)(k) Agreement between The First Years Inc. and Bruce Baron dated July 10, 1997 (filed as Exhibit 10(p) on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). (10)(l) Agreement between The First Years Inc. and James N. Turner dated June 15, 1998 (filed as Exhibit 10(q) on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). - ------------------------------------------------------------------------------ (21) List of Subsidiaries of the Registrant. IV-19 (23) Consent of Deloitte & Touche LLP dated March 30, 2000. IV-19 (27) Financial Data Schedule -- 12/31/99 IV-19 (99) Important Factors That May Affect Future Results. IV-19
14.(b) REPORT ON FORM 8-K The Company filed one report on Form 8-K with the Securities and Exchange Commission during the quarter ended December 31, 1999. The report on Form 8-K was filed on December 29, 1999 to report the settlement of a patent infringement lawsuit. IV-2 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE FIRST YEARS INC. .................................... (Registrant) By: /s/ RONALD J. SIDMAN .................................. RONALD J. SIDMAN, CHIEF EXECUTIVE OFFICER, CHAIRMAN OF THE BOARD OF DIRECTORS, AND PRESIDENT Date: March 16, 2000 By: /s/ JOHN R. BEALS ................................. JOHN R. BEALS, TREASURER AND SENIOR VICE PRESIDENT -- FINANCE(CHIEF FINANCIAL OFFICER AND CHIEF ACCOUNTING OFFICER) Date: March 16, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 16, 2000.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RONALD J. SIDMAN Chief Executive Officer Chairman March 16, 2000 ........................................ of the Board of Directors and RONALD J. SIDMAN President /s/ JEROME M. KARP Director March 16, 2000 ........................................ JEROME M. KARP /s/ EVELYN SIDMAN Director March 16, 2000 ........................................ EVELYN SIDMAN /s/ BENJAMIN PELTZ Director March 16, 2000 ........................................ BENJAMIN PELTZ /s/ FRED T. PAGE Director March 16, 2000 ........................................ FRED T. PAGE /s/ KENNETH R. SIDMAN Director March 16, 2000 ........................................ KENNETH R. SIDMAN /s/ LEWIS M. WESTON Director March 16, 2000 ........................................ LEWIS M. WESTON /s/ WALKER J. WALLACE Director March 16, 2000 ........................................ WALKER J. WALLACE
IV-3 18 THE FIRST YEARS INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE -------- Independent Auditors' Report................................ IV-5 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1999 and 1998.................................................. IV-6 Consolidated Statements of Income for the Years Ended December 31, 1999, 1998, and 1997..................... IV-7 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998, and 1997......... IV-8 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998, and 1997............... IV-9 Notes to Consolidated Financial Statements............. IV-10-17 Financial Statement Schedule II -- Valuation and Qualifying Accounts for the Years Ended December 31, 1999, 1998, and 1997...................................................... IV-18
IV-4 19 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of The First Years Inc. Avon, Massachusetts We have audited the accompanying consolidated balance sheets of The First Years Inc. as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements present fairly, in all material respects, the financial position of The First Years Inc. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. DELOITTE & TOUCHE LLP Boston, Massachusetts March 2, 2000 IV-5 20 THE FIRST YEARS INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998
1999 1998 ---- ---- ASSETS Current Assets: Cash and cash equivalents (Notes 1 and 8).............. $13,400,728 $19,776,897 Accounts receivable (less allowance for doubtful accounts of $270,000 in 1999 and 1998) (Note 8)....... 21,587,886 19,013,127 Inventories (Note 1)................................... 20,352,845 18,520,023 Prepaid expenses and other assets...................... 1,308,974 2,638,634 Deferred tax asset (Notes 1 and 3)..................... 1,675,000 1,424,500 ----------- ----------- Total current assets.............................. 58,325,433 61,373,181 ----------- ----------- Property, Plant, and Equipment (Note 1): Land................................................... 167,266 167,266 Building............................................... 5,154,845 4,199,790 Machinery and molds.................................... 7,536,378 7,878,103 Furniture and equipment................................ 4,820,691 4,571,636 ----------- ----------- Total............................................. 17,679,180 16,816,795 Less accumulated depreciation.......................... 8,090,757 8,914,081 ----------- ----------- Property, plant, and equipment -- net............. 9,588,423 7,902,714 ----------- ----------- Total Assets...................................... $67,913,856 $69,275,895 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable....................................... $10,329,899 $ 9,400,966 Accrued royalty expense (Note 6)....................... 1,792,475 2,130,027 Accrued payroll expenses............................... 113,409 1,200,966 Accrued selling expenses............................... 3,048,547 3,098,232 ----------- ----------- Total current liabilities......................... 15,284,330 15,830,191 ----------- ----------- Deferred Tax Liability (Notes 1 and 3)...................... 927,100 798,300 ----------- ----------- Commitments and Contingencies (Notes 5, 6 and 8) Stockholders' Equity (Notes 4, 7, and 9): Common stock -- authorized, 15,000,000 shares; issued 10,570,329 and 10,461,408; outstanding, 9,616,235 and 10,440,014 as of December 31, 1999 and 1998, respectively.............................................. 1,057,033 1,046,141 Paid-in-capital............................................. 8,052,623 7,472,398 Retained earnings........................................... 52,907,819 44,438,589 Less treasury stock at cost, 954,094 and 21,394 shares as of December 31, 1999 and 1998, respectively.................. (10,315,049) (309,724) ----------- ----------- Total stockholders' equity........................ 51,702,426 52,647,404 ----------- ----------- Total Liabilities and Stockholders' Equity........ $67,913,856 $69,275,895 =========== ===========
See notes to consolidated financial statements. IV-6 21 THE FIRST YEARS INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1999 1998 1997 ------------ ------------ ------------ Net Sales (Notes 1, 6, 8 and 10)................. $136,651,751 $132,716,379 $120,695,988 Cost of Products Sold (Notes 1 and 10)........... 79,645,326 80,737,193 71,185,634 ------------ ------------ ------------ Gross Profit..................................... 57,006,425 51,979,186 49,510,354 Selling, General, and Administrative Expenses (Notes 1, 7 and 11)............................ 42,303,932 39,011,893 37,165,878 ------------ ------------ ------------ Operating Income................................. 14,702,493 12,967,293 12,344,476 Other Income (Expense): Interest expense............................... -- -- (27,709) Interest income................................ 582,640 590,822 168,922 ------------ ------------ ------------ Income Before Income Taxes....................... 15,285,133 13,558,115 12,485,689 Provision for Income Taxes (Notes 1 and 3)....... 6,190,500 5,545,300 5,040,900 ------------ ------------ ------------ Net Income (Note 10)............................. $ 9,094,633 $ 8,012,815 $ 7,444,789 ============ ============ ============ Basic Earnings Per Share (Notes 1 and 9)......... $0.89 $0.78 $0.75 ===== ===== ===== Diluted Earnings Per Share (Notes 1 and 9)....... $0.87 $0.75 $0.71 ===== ===== =====
See notes to consolidated financial statements. IV-7 22 THE FIRST YEARS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
COMMON STOCK ------------------------ PAID-IN RETAINED TREASURY SHARES PAR VALUE CAPITAL EARNINGS STOCK ----------- ---------- ---------- ----------- ------------ Balance, January 1, 1997......... 4,948,980 $ 494,898 $5,271,875 $30,099,667 $ -- Stock issued under stock option plans (Note 7).............. 139,020 13,902 804,433 -- -- Tax benefit derived from option compensation deduction...... -- -- 458,000 -- -- Dividends paid................. -- -- -- (496,747) -- Repurchase of 3,409 shares for treasury.................... (3,409) -- -- -- (81,813) Net income..................... -- -- -- 7,444,789 -- ----------- ---------- ---------- ----------- ------------ Balance, December 31, 1997....... 5,084,591 508,800 6,534,308 37,047,709 (81,813) Stock issued under stock option plans (Note 7).............. 183,205 18,321 916,510 -- -- Tax benefit derived from option compensation deduction...... -- -- 540,600 -- -- Dividends paid................. -- -- -- (621,935) Repurchase of 10,576 shares for treasury.................... (10,576) -- -- -- (227,911) Stock split, two-for-one (Note 4).......................... 5,182,794 519,020 (519,020) -- -- Net income..................... -- -- -- 8,012,815 -- ----------- ---------- ---------- ----------- ------------ Balance, December 31, 1998....... 10,440,014 1,046,141 7,472,398 44,438,589 (309,724) Stock issued under stock option plans (Note 7).............. 108,921 10,892 457,725 -- -- Tax benefit derived from option compensation deduction...... -- -- 122,500 -- -- Dividends paid................. -- -- -- (625,403) -- Repurchase of 932,700 shares for treasury................ (932,700) -- -- -- (10,005,325) Net income..................... -- -- -- 9,094,633 -- ----------- ---------- ---------- ----------- ------------ Balance, December 31, 1999....... 9,616,235 $1,057,033 $8,052,623 $52,907,819 $(10,315,049) =========== ========== ========== =========== ============
See notes to consolidated financial statements. IV-8 23 THE FIRST YEARS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1999 1998 1997 ------------ ----------- ----------- Cash Flows from Operating Activities: Net income........................................... $ 9,094,633 $ 8,012,815 $ 7,444,789 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation...................................... 1,679,252 1,415,525 1,397,078 Provision for doubtful accounts................... 78,968 176,034 147,541 Loss on disposal of equipment..................... 1,232,322 548,469 617,693 Increase (decrease) arising from working capital items: Accounts receivable............................. (2,653,727) 773,065 (4,180,302) Inventories..................................... (1,832,822) 5,852,858 (5,784,837) Prepaid expenses and other assets............... 1,452,160 (1,683,270) (39,447) Accounts payable................................ 928,933 (762,878) 3,652,730 Accrued royalty expense......................... (337,552) 78,306 1,203,050 Accrued payroll expenses........................ (1,087,557) 57,903 55,761 Accrued selling expenses........................ (49,685) 711,203 981,020 Change in deferred income taxes................... (121,700) (164,100) (287,700) ------------ ----------- ----------- Net cash provided by operating activities.... 8,383,225 15,015,930 5,207,376 ------------ ----------- ----------- Cash Flows from Investing Activities Purchase of property, plant, and equipment............. (4,597,283) (3,021,058) (1,814,698) ------------ ----------- ----------- Cash Flows from Financing Activities: Repayment of industrial revenue bonds................ -- -- (100,000) Dividends paid....................................... (625,403) (621,935) (496,747) Purchase of treasury stock........................... (10,005,325) (227,911) (81,813) Common stock issued under stock option plans......... 468,617 934,831 818,335 ------------ ----------- ----------- Net cash (used for) provided by financing activities................................. (10,162,111) 84,985 139,775 ------------ ----------- ----------- Increase (decrease) in Cash and Cash Equivalents....... (6,376,169) 12,079,857 3,532,453 Cash and Cash Equivalents, Beginning of Year........... 19,776,897 7,697,040 4,164,587 ------------ ----------- ----------- Cash and Cash Equivalents, End of Year................. $ 13,400,728 $19,776,897 $ 7,697,040 ============ =========== =========== Supplemental Disclosures of Cash Flow Information Cash paid during the year for: Interest........................................ $ 0 $ 0 $ 27,709 ============ =========== =========== Income taxes.................................... $ 5,292,295 $ 7,584,400 $ 4,684,690 ============ =========== =========== Non-cash transactions: Tax benefit of stock option exercises........... $ 122,500 $ 540,600 $ 458,000 ============ =========== ===========
See notes to consolidated financial statements. IV-9 24 THE FIRST YEARS INC. NOTES TO CONSOLIDATED 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 the Company's significant accounting policies. Basis of Reporting -- The consolidated financial statements include the accounts of all the Company's wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. 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. Income Taxes -- Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. Employee Stock-Based Compensation -- The Company uses the intrinsic value-based method of Accounting Principles Board Opinion ("APB") No. 25 to account for employee stock-based compensation plans. Earnings Per Share -- In 1997, the Company adopted SFAS No. 128 "Earnings Per Share." All earnings per share amounts for all periods presented have been restated to conform to the requirements of SFAS No. 128. 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. The primary estimates underlying the Company's consolidated financial statements include allowances for doubtful accounts and obsolete inventories and estimates related to the DINP charges (See footnote 10). Actual results could differ from those estimates. Research and Development Costs -- Research and development costs are expensed as incurred. During 1999, 1998, and 1997, research and development costs approximated $3,780,000, $3,320,000, and $2,584,000, 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 as 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 IV-10 25 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 SFAS No. 107 approximate their recorded value. Reclassifications -- Certain reclassifications were made to prior year amounts in order to conform with the current year presentation. Reporting Comprehensive Income -- Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income," which requires businesses to disclose Comprehensive income and its components in their general-purpose financial statements. Comprehensive income was equal to net income for the years ended December 31, 1999 and 1998. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative, including certain derivative instruments embedded in other contracts, and for hedging activities. The statement, as amended, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2001. Management of the Company are currently evaluating the effect of implementing SFAS No. 133 on the consolidated financial statements. Effective January 1, 1999, the Company adopted the AICPA Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The adoption of this statement resulted in no changes to the consolidated financial statements. 2. DEBT During 1999 and 1998, the Company had available an unsecured line of credit totaling $10,000,000 with one bank. The line is subject to annual renewal and requires no compensating balances. The line bears interest at the prime rate or the LIBOR rate plus 1.75%. No short-term borrowings were incurred by the Company during 1999 or 1998. As of December 31, 1999 and 1998 no balance was outstanding. The line of credit will expire in August of 2000. 3. INCOME TAXES Components of the Company's net deferred tax asset at December 31 are as follows:
1999 1998 ---------- ---------- Deferred tax assets: Reserves not currently deductible................ $ 417,800 $ 411,400 Capitalized packaging costs not currently deductible..................................... 643,900 586,500 Capitalized inventory costs not currently deductible..................................... 519,800 393,700 Other............................................ 93,500 32,900 ---------- ---------- 1,675,000 1,424,500 ---------- ---------- Deferred tax liabilities: Excess tax depreciation over financial reporting depreciation................................... 927,100 793,800 Other............................................ 0 4,500 ---------- ---------- 927,100 798,300 ---------- ---------- Net deferred tax asset................................ $ 747,900 $ 626,200 ========== ==========
IV-11 26 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) There was no valuation allowance for the years ended December 31, 1999, 1998, and 1997. The provision for income taxes consists of the following:
1999 1998 1997 ---------- ---------- ---------- Federal: Current.............................. $4,985,600 $4,318,600 $4,157,200 Deferred............................. (121,700) (164,100) (287,700) ---------- ---------- ---------- Total federal................ 4,863,900 4,154,500 3,869,500 State.................................. 1,326,600 1,390,800 1,171,400 ---------- ---------- ---------- Provision for income taxes............. $6,190,500 $5,545,300 $5,040,900 ========== ========== ==========
A reconciliation of the statutory federal income tax rate and the effective tax rate as a percentage of pretax income is as follows:
1999 1998 1997 ---- ---- ---- Statutory rate......................................... 35.0% 35.0% 34.0% State income taxes, net of federal income tax benefit.............................................. 5.9 6.5 6.4 Other.................................................. (0.4) (0.6) -- ---- ---- ---- Effective tax rate..................................... 40.5% 40.9% 40.4% ==== ==== ====
4. COMMON STOCK In May 1998, the Company's Board of Directors (the Board) declared a two-for-one split of the Company's common stock. The 1998 stock split, effected in the form of a stock dividend, was distributed on June 29, 1998 (to stockholders of record on May 29, 1998). Earnings per share amounts shown in the accompanying financial statements have been retroactively adjusted to reflect the 1998 stock split. 5. COMMITMENTS AND CONTINGENCIES Forward Exchange Contracts -- During 1999 and 1998, 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 $3,817,000 and $494,000 as of December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998, the fair market value of the contracts approximated their carrying amount. Other Commitments -- At December 31, 1999 and 1998, letters of credit outstanding aggregated approximately $33,000. During 1999, the Company entered into an employment agreement with an executive officer which provides for annual base salary of $364,000 thru September 30, 2004, subject to any increases established from time to time at the discretion of the Compensation Committee of the Board of Directors. In the event of termination, the agreement provides for certain payments depending on the nature of the termination. 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 the past several years, the Company entered into various agreements which provide for the payment of royalties on sales of certain character and patent licensed products. The agreements have terms IV-12 27 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ranging from one to fifteen years and require minimum royalty payments of $10,127,000 and $1,363,000 for agreements signed during 1999 and 1998, respectively. At December 31, 1999 and 1998 future outstanding minimum royalty commitments under all agreements amounted to $6,057,000 and $289,000, respectively. Royalty expense aggregated $7,909,000, $8,311,000, and $6,356,000 in 1999, 1998 and 1997, respectively. 7. BENEFIT PLANS Defined Contribution Plans -- 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 as accrued. Pension expense aggregated $599,000, $566,000, and $545,000 in 1999, 1998, and 1997, respectively. The Company sponsors a 401(k) defined contribution plan covering substantially all Company employees pursuant to which the Company is obligated to match, up to specified amounts, employee contributions. Company contributions to this plan were not material for the periods presented. 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 employees and directors of the Company. The Board has reserved 2,680,000 shares for issuance under the plans (all share amounts adjusted to reflect the two-for-one stock split effected on June 29, 1998.) 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. Under the plans, employees of the Company may purchase stock on the exercise of their options through the delivery of existing shares of the Company's common stock. The shares delivered to the Company by the employee must have been outstanding for at least six months. The Company acquired 8,400 and 14,576 shares of its common stock for the years ended December 31, 1999 and 1998, respectively, through the exercise of employee stock options. Options granted must be exercised within the period prescribed by the Committee; the options vest in accordance with the vesting provisions prescribed at the time of grant. IV-13 28 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of activity (all years adjusted to reflect the two-for-one stock split effected on June 29, 1998) of stock options granted under the plans is as follows:
WEIGHTED AVERAGE EXERCISE NUMBER OF PRICE NUMBER OF OPTIONS PER OPTIONS AVAILABLE SHARE OUTSTANDING FOR GRANT -------- ----------- --------- January 1, 1997............................................ $ 3.69 875,576 399,504 Granted.................................................. 9.16 194,140 (194,140) Canceled................................................. 7.11 (56,610) 56,610 Exercised................................................ 2.96 (278,040) -- -------- --------- December 31, 1997.......................................... 5.16 735,066 261,974 Authorized............................................... -- 1,340,000 Granted.................................................. 14.51 258,029 (258,029) Canceled................................................. 9.96 (13,131) 13,131 Exercised................................................ 3.27 (285,408) -- -------- --------- December 31, 1998.......................................... 9.30 694,556 1,357,076 Granted.................................................. 14.24 244,896 (244,896) Canceled................................................. 12.97 (45,909) 45,909 Exercised................................................ 4.30 (108,921) -- Expired.................................................. 11.44 (18,000) -- -------- --------- December 31, 1999.......................................... $11.27 766,622 1,158,089 ======== ========= Exercisable at December 31, 1997......................... $ 3.66 465,712 Exercisable at December 31, 1998......................... $ 5.88 341,902 Exercisable at December 31, 1999......................... $ 9.46 428,615
The grant date fair value for options granted in 1999, 1998 and 1997 was $8.24, $7.43 and $4.80, respectively. The following table sets forth information regarding stock options outstanding at December 31, 1999 under the Stock Option Plans as described above:
NUMBER AVERAGE NUMBER WEIGHTED WEIGHTED CURRENTLY EXERCISE OF OPTIONS RANGE OF AVERAGE AVERAGE EXERCISABLE PRICE FOR OUTSTANDING EXERCISE EXERCISE REMAINING AT OPTIONS AT 12/31/99 PRICES PRICE LIFE 12/31/99 EXERCISABLE - ----------- --------------- -------- --------- ----------- ----------- 12,000 ............................... $ 2.75 - $ 4.13 $ 2.78 3.92 12,000 $ 2.52 137,182 ............................... 4.13 - 6.19 4.97 1.63 137,182 4.97 129,167 ............................... 6.19 - 9.28 7.96 6.17 99,445 8.14 350,327 ............................... 9.28 - 13.92 13.62 8.71 113,097 12.55 137,946 ............................... 13.92 - 20.88 15.39 9.13 66,891 15.54 - ----------- ------ ---- ------- ------ 766,622 ............................... $11.27 7.01 428,615 $10.37 =========== ====== ==== ======= ======
IV-14 29 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PRO FORMA DISCLOSURES As described in Note 1, the Company applies the intrinsic value method of APB No. 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, the Company's net income and earnings per share for the years ended December 31, 1999, 1998 and 1997 would have been as follows:
1999 1998 1997 ---------- ---------- ---------- Net income................................. $7,597,937 $7,233,876 $7,023,195 Basic earnings per share................... $0.74 $0.70 $0.70 Diluted earnings per share................. $0.73 $0.68 $0.67
For purposes of the pro forma disclosures, the fair value of the options granted under the Company's stock option plans during 1999, 1998 and 1997 was estimated on the date of grant using the Binomial option pricing model. Key assumptions used to apply this pricing model are as follows:
1999 1998 1997 ---------- ---------- --------- Risk free interest rate...................... 5.09% 5.49% 6.41% Expected life of option grants............... 8.47 years 7.85 years 9.5 years Expected volatility of underlying stock...... 44.82% 38.40% 35.27% Expected dividend payment rate............... 0.85% 0.85% 0.85%
The pro forma disclosures include the effects of options granted in 1999, 1998, 1997 and 1996. 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 who are geographically dispersed. The Company's three largest customers accounted for 62% and 57% of the trade receivables outstanding at December 31, 1999 and 1998, respectively. 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, 1999, management believes it had no significant exposure to credit risks. Major Customers and Export Sales -- The Company derived 10% or more of its sales from its three largest customers. The Company's largest customer accounted for sales of $40,600,000, $42,622,000, and $33,643,000 in 1999, 1998, and 1997, respectively. The Company's second largest customer accounted for sales of $26,688,000, $24,413,000, and $23,075,000 in 1999, 1998, and 1997, respectively. The Company's third largest customer accounted for sales of $20,026,000, $15,706,000 and 13,315,000 in 1999, 1998, and 1997. 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 $14,459,000, $16,735,000 and $16,250,000 in 1999, 1998, and 1997, respectively. Reliance on Licensed Products -- The Company derives a significant portion of its sales from products under license. A major licensing agreement (see Note 6), will expire at the end of 2000. Sales of products licensed under a major licensing agreement amount to 34% and 42% of the Company's total sales for the years ended December 31, 1999 and 1998, respectively. While management currently anticipates negotiating a IV-15 30 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) renewal of the agreement, non-renewal of the agreement or, renewal on terms not favorable to the Company could have a materially adverse affect on the Company's business. Reliance on Foreign Manufacturers -- The Company does not own or operate its own manufacturing facilities. In 1999, 1998, and 1997, the Company derived approximately 54%, 65%, and 60%, respectively, of its sales from products manufactured by others in the Far East, mainly in China. A change in suppliers could cause a delay in manufacturing and a possible loss of sales, which could affect operating results adversely, depending on the particular product. 9. COMPUTATION OF EARNINGS PER SHARE Computation of the earnings per share ("EPS") in accordance with SFAS No. 128 are as follows:
1999 1998 1997 ----------- ----------- ----------- Average shares outstanding.............................. 10,226,470 10,338,857 10,003,774 Effect of dilutive shares............................... 175,827 330,646 449,288 ----------- ----------- ----------- Average diluted shares outstanding...................... 10,402,297 10,669,503 10,453,062 =========== =========== =========== Net Income.............................................. $ 9,094,633 $ 8,012,815 $ 7,444,789 =========== =========== =========== Basic earnings per share................................ $0.89 $0.78 $0.75 ----- ----- ----- ----- ----- ----- Diluted earnings per share.............................. $0.87 $0.75 $0.71 ----- ----- ----- ----- ----- -----
As of December 31, 1999, options to purchase 518,840 shares of common stock were not included in the computation of diluted EPS because the options' exercise price was greater than the average price of the common shares. The options, which expire in 2002 to 2009, had exercise prices ranging from 8 3/4 to 17 3/4 per share. The options were still outstanding at the end of 1999. As of December 31, 1998, options to purchase 130,254 shares of common stock were not included in the computation of diluted EPS because the options' exercise price was greater than the average price of the common shares. The options, which expire in 2003 to 2008, had exercise prices ranging from 15 to 17 3/4 per share. The options were still outstanding at the end of 1998. As of December 31, 1997, options to purchase 30,000 shares of common stock at $13 1/2 per share were not included in the computation of diluted EPS because the options' exercise price was greater than the average price of the common shares. The options, which expire in 2007, were still outstanding at the end of 1997. 10. DIISONONYL PHTHALATE MATTER During the fourth quarter of 1998, the Company incurred a charge relating to sales returns and the write-off of inventory of certain products containing diisononyl phthalate ("DINP"), a plastic softener. Although the results of a study on DINP conducted by the U.S. Consumer Product Safety Commission resulted in the Commission not recommending a ban on products containing DINP, some retailers decided to return certain products containing this material. Net sales for the year ended December 31, 1998 reflect a charge of $3,000,000 related to the sales returns of certain DINP products. Cost of sales for the year ended December 31, 1998 reflect a charge of $1,100,000 related to the write-off of inventory of certain products containing DINP. Net income for the year ended December 31, 1998 reflects a total after-tax charge of $2,400,000 related to the DINP matter. During the third quarter of 1999, the Company increased net sales by $384,000 and cost of sales were decreased by $629,000 due to the lower than expected sales returns and inventory writeoffs of certain products IV-16 31 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) containing DINP for which a charge was previously recorded in the fourth quarter of 1998. Net income for the year ended December 31, 1999 reflects the total after-tax increase of $603,000 related to the DINP matter. 11. LEGAL SETTLEMENT On February 11, 1999 Mark A. Freeman and Timothy K. Stringer brought a civil action against the Company in the United States District Court for the District of Kansas, Civil Action No. 99 2058 KHV. The Complaint in the civil action alleged that the Company's TumbleMates(C) valved drinking cups infringed U.S. Patent 5,186,347. Although the Company vigorously defended the action, it negotiated a settlement of $1,450,000 to remove any uncertainties of a trial and to avoid future legal costs. The settlement reflects no wrong doing on the part of the Company and allows the Company to continue to sell the valved drinking cups without restriction. The expense has been recorded as part of the selling, general and administrative costs in the consolidated financial statements. 12. SEGMENT INFORMATION During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." This statement establishes new standards for the definition and disclosure of information pertaining to the Company's business segments. SFAS No. 131 requires identification of segments based upon a company's internal structure and reporting methodology. The Company has identified one operating segment as it engages in a single line of business of developing and marketing one class of similar products for infants and toddlers distributed through the same channels. The Company has $1,629,126 of molds located in various foreign countries which are considered long-lived assets under SFAS No. 131. See footnote 8 for discussion of major customers and export sales. * * * * * * IV-17 32 SCHEDULE II THE FIRST YEARS INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ADDITIONS BALANCE, CHARGED BEGINNING TO COSTS AND BALANCE DESCRIPTION OF YEAR EXPENSES DEDUCTIONS END OF YEAR ----------- --------- ------------ ---------- ----------- Valuations Accounts Deducted from Assets to which they Apply -- Allowance for doubtful accounts: 1999............................ $ 270,000 $ 78,967 $ 78,967(1) $ 270,000 ========== ========== ========== ========== 1998............................ $ 185,000 $ 261,034 $ 176,034(1) $ 270,000 ========== ========== ========== ========== 1997............................ $ 185,000 $ 147,541 $ 147,541(1) $ 185,000 ========== ========== ========== ========== Allowance for obsolete inventory: 1999............................ $ 250,000 $ 140,000 $ 0 $ 390,000 ========== ========== ========== ========== 1998............................ $ 250,000 $ 0 $ 0 $ 250,000 ========== ========== ========== ========== 1997............................ $ 0 $ 250,000 $ 0 $ 250,000 ========== ========== ========== ========== Allowance for Diisononyl Phthalate product returns: 1999............................ $2,874,000 $ 0 $2,874,000(2) $ 0 ========== ========== ========== ========== 1998............................ $ 0 $3,000,000 $ 126,000 $2,874,000 ========== ========== ========== ==========
- --------------- (1) Net accounts written off. (2) Represents actual returns of $2,490,000 and a $384,000 reversal of allowance due to lower than expected sales returns related to the phthalate matter. IV-18 33 THE FIRST YEARS INC. EXHIBIT INDEX
EXHIBIT DESCRIPTION ------- ----------- (3)(ii) By-Laws of the Company, as currently in effect. 10(d) Letter Agreement with Children's Television Workshop dated as of July 1, 1999 regarding the renewal of the licensing of Sesame Street characters (certain portions of which are subject to confidential treatment). 10(f) The First Years Inc. 1993 Stock Option Plan for Directors, as amended through October 1, 1999. 21 List of Subsidiaries of the Registrant. 23 Consent of Deloitte & Touche LLP dated March 27, 2000. 27 Financial Data Schedule -- 12/31/99. 99 Important Factors That May Affect Future Results.
IV-19 EX-3.(II) 2 BY-LAWS OF THE COMPANY 1 EXHIBIT 3(ii) AMENDED BY-LAWS OF THE FIRST YEARS, INC. (AMENDED AS OF JANUARY 19, 1995) ARTICLE 1. ARTICLES OF ORGANIZATION SECTION 1. The purposes of the Corporation shall be as set forth in the Articles of organization and these By-laws. The powers of the Corporation and of its Directors and Stockholders, and all matters concerning the conduct and regulation of the business of the Corporation shall be subject to such provisions, if any, in regard thereto as are set forth in the Articles of organization. SECTION 2. All reference in these By-laws to the Articles of organization shall be construed to mean the Articles of organization as from time to time amended. ARTICLE II. STOCKHOLDERS SECTION 1. ANNUAL MEETING. The annual meeting of stock- holders shall be held within six months after the end of the Corporation's fiscal year specified in these By-laws, at such time and place within the United States as may be designated in the notice or waiver of notice of such meeting. The date and hour of the annual meeting shall be fixed by the Directors. The purposes for which the annual meeting is to be held, in addition to those prescribed by law, by the Articles of organization or by these By-laws, may be specified by the Directors or the President. In the event that no date for the annual meeting is established or if no annual meeting is held in accordance with the foregoing provisions, a special meeting may be held in lieu thereof, and any action taken at such meeting shall have the same effect as if taken at the annual meeting. (Amended 1/19/95). SECTION 2. SPECIAL MEETINGS. So long as the Corporation has a class of voting stock registered under the Securities Exchange Act of 1934, as amended, special meetings of the stockholders may be called by the President or by the Directors and shall be called by the Clerk, or in case of the death, absence, incapacity or refusal of the Clerk, by any other officer, upon written application of one or more stockholders who hold at least forty percent in interest of the capital stock entitled to vote at the meeting. (Amended 1/19/95). SECTION 3. NOTICE OF BUSINESS. At any meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who is a stockholder of record at the time of giving of the notice provided for in this Section, who shall be entitled to vote at such 2 meeting and who complies with the notice procedures set forth in this Section. For business to be properly brought before a stockholder meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Clerk of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation in the case of an annual meeting not less than 150 days prior to the date such meeting was held in the prior year, or in the case of any other meeting not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholders to be timely must be received no later than the close of business on the seventh day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever is earlier. A stockholder's notice to the Clerk shall set forth as to each matter the stockholder proposes to bring before the meeting (a) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting; (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, and any other stockholders known by such stockholder to be supporting such proposal; (c) the class and number of shares of the Corporation which are beneficially owned by the stockholder and any other stockholders known by such stockholder to be supporting such proposal; and (d) any material interest of the stockholder in such business. Notwithstanding anything in the By-laws to the contrary, no business shall be conducted at a stockholder meeting except in accordance with the procedures set forth in this Section. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of the By- laws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section. SECTION 4. NOTICE OF STOCKHOLDERS' MEETING. A written notice of each meeting of the stockholders, stating the place, day and hour thereof and purposes for which the meeting is called, shall be given by the Clerk, or assistant Clerk, if any, to each stockholder entitled to vote thereat, and to each stockholder who, under the Articles of organization or any amendment thereof, is entitled to such notice, by leaving such notice with him or at his residence or usual place of business, or by mailing it, postage prepaid, and addressed to such stockholder at his residence as it appears on the books of the Corporation, at least seven days before - 2 - 3 the meeting. In case of the death, absence, incapacity, or refusal of the Clerk, or assistant Clerk, if any, such notices may be given by the President or by any other officer or by a person designated either by the Clerk or by the person or persons calling the meeting, or by the Board of Directors. No notice need be given to any stockholder if a written waiver of notice, executed before or after the meeting of the stockholders by the stockholder or his attorney thereunto authorized is filed with the records of the meeting. No notice of any adjourned stockholders, meeting shall be required. (Added 1/19/95). SECTION 5. QUORUM. At any meeting of the stockholders a quorum for the transaction of business shall consist of one or more stockholders appearing in person or by proxy and owning or representing a majority of all of the shares of the Corporation then outstanding and entitled to vote. If a quorum is not present, a lesser number may make a reasonable adjournment of such meeting until a quorum is obtained. SECTION 6. PROXIES AND VOTING. Stockholders entitled to vote shall have one vote for each share of stock held by them. A stockholder may vote either in person or by written proxy which shall be signed by the stockholder, dated not more than six months before the meeting named therein, and filed at the meeting or any adjournment thereof before being voted. Such proxy shall entitle the holder thereof to vote at any adjournment of such meeting, but shall not be valid after the final adjournment of such meeting. An executor, administrator, guardian, conservator, trustee or person in any other representative or fiduciary capacity shall represent the shares of his trust at all meetings of the Corporation and may vote as a stockholder. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged or at prior to its exercise. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by one of them unless at or prior to exercise of the proxy the Corporation receives a specific written notice to the contrary from any one of them. SECTION 7. ACTION AT MEETING. Except as otherwise required by law, the Articles of organization or these By-laws, any matter coming before any meeting of the stockholders at which a quorum is present shall be adopted as the act and deed of the stockholders if approved by the vote of the holders of a majority of the shares present or represented at such meeting and entitled to vote thereon, provided, however, that at all elections by stockholders a plurality of the votes cast for any nominee or nominees shall elect. No ballot shall be required for any election unless requested by a stockholder present or represented at the meeting and entitled to vote in the election. - 3 - 4 SECTION 8. ACTION WITHOUT MEETING. Any action required or permitted at any meeting of the stockholders, may be taken without a meeting if all stockholders entitled to vote on the matter consent to the action by a writing filed with the records of the meetings of stockholders. Such consent shall be treated for all purposes as a vote at a meeting. ARTICLE III. BOARD OF DIRECTORS SECTION 1. POWERS. The Board of Directors may exercise all the powers of the Corporation except such as are reserved to the stockholders by law, by the Articles of organization or by these By-laws. The Directors shall have the power to issue the whole or any part of the unissued balance of the authorized capital stock of the Corporation upon such terms and conditions as they shall determine. SECTION 2. NOMINATION: ELIGIBILITY TO SERVE. Except as otherwise provided in Section 5 of this Article concerning the filling of vacancies on the Board of Directors, only persons who are nominated in accordance with the procedures set forth in this Section shall be eligible to serve as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section, who shall be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Section. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Clerk. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event that less than 70 days, notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholders to be timely must be so received not later than the close of business on the seventh day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever is earlier. Such stockholder I s notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director, all information relating to such persons that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected), and (b) as to the stockholder giving the notice, (i) the names and addresses, as they appear on the Corporation's books, of such stockholder and - 4 - 5 any other stockholders known by such stockholder to be supporting the election of the proposed nominee(s) and (ii) the class and number of shares of the Corporation which are beneficially owned by such stockholder and any other stockholders known by such stockholder to be supporting the election of the proposed nominee(s). At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Clerk that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the By-laws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this Section, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section. (Added 1/19/95) SECTION 3. NUMBER OF DIRECTORS. The number of Directors shall be not less than three (3) except whenever there shall be only two (2) stockholders, the number of directors shall be not less than two (2) and whenever there shall be only one stockholder, the number of directors shall be not less than one (1). Except as otherwise provided by these By-laws or in the Articles of Organization, the number of directors that shall constitute the whole Board of Directors shall be fixed, and the directors elected, by the stockholders at the Annual Meeting, the notice of which will specify the election or reduction in the number of directors as an item of business for such meeting. No director need be a stockholder. (Amended 1/19/95). SECTION 4. ELECTION. The initial Board of Directors shall be elected by the incorporators at the first meeting thereof and thereafter by the stockholders at their annual meeting or at any special meeting, the notice or waiver of notice of which specifies the election of directors as an item of business for such meeting. SECTION S. VACANCIES. Unless otherwise provided by law, any vacancy at any time existing in the Board of Directors, whether resulting from an increase in the size of the Board of Directors, from the death, resignation, disqualification or removal of a director or otherwise, shall be filled solely by the affirmative vote of a majority of the remaining directors then in office. (Amended 1/19/95). SECTION 6. ENLARGEMENT OF THE BOARD OF DIRECTORS. The number of Directors may be increased by the Directors by the affirmative vote of a majority of the Directors then in office or by the stockholders at any meeting. (Amended 1/19/95). - 5 - 6 SECTION 7. TENURE AND RESIGNATION. Except as otherwise provided by law, by the Articles of organization or by these By-laws, Directors shall hold office until the next annual meeting of stockholders and thereafter until their successors are chosen and qualified. Any Director may resign by delivering or mailing, postage prepaid, his written resignation to the Corporation at its principal office or to the President, Clerk or Assistant Clerk, if any. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. SECTION 8. REMOVAL. A Director, whether elected by the stockholders or Directors, may be removed from office with or without cause by vote of a majority of the stockholders entitled to vote in the election of Directors, or for cause by a vote of a majority of the Directors then in office; provided, however, that a Director may be removed for cause only after reasonable notice and opportunity to be heard before the body proposing to remove him. SECTION 9. REGULAR MEETINGS. Regular meetings of the Board of Directors may be held at such times and such places within or without the United States as the Board may, from time to time, determine. A regular meeting of the Board of Directors shall be held without notice immediately after, and at the same place as, the annual meeting of the stockholders or the special meeting of the stockholders held in place of such annual meeting unless a quorum of the Directors is not then present. SECTION 10. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any time and at any place when called by the President, Treasurer, or two or more Directors. SECTION 11. NOTICE OF SPECIAL MEETINGS. The Clerk or Assistant Clerk, if any, shall give reasonable notice of each special meeting of the Board of Directors to each Director. In case of the death, absence, incapacity, or refusal of the Clerk and Assistant Clerk, if any, notice shall be given by the person designated by the Board of Directors to act in the absence of the Clerk, or by the President or Treasurer, or by the officer or Directors calling the meeting. Notice need not be given to any Director if a written waiver of notice, executed by him before or after the meeting or meetings, is filed with the records of the meeting, or to any Director who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. A notice or waiver of notice of a Directors' meeting need not specify the purposes of the meeting. SECTION 12. AGENDA. Any lawful business whatsoever may be transacted at a meeting of the Board of Directors, notwithstanding - 6 - 7 the nature of the business may not have been specified in notice or waiver of notice of the meeting. the SECTION 13. QUORUM. At any meeting of the Directors, a majority of the Directors then in office shall constitute a quorum for the transaction of business, provided always that any number of Directors (whether one or more and whether or not constituting a quorum) present at any meeting or at any adjourned meeting may make any reasonable adjournment thereof. Any motion adopted by vote of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. (Amended 1/19/95) SECTION 14. ACTION BY CONSENT. Any action by the Directors may be taken without a meeting if a written consent thereto is signed by all the Directors and filed with the records of the Directors' meetings. Such consent shall be treated for all purposes as a vote of the Directors. SECTION 15. COMMITTEES. The Board of Directors may, by the affirmative vote of a majority of the Directors then in office, appoint an executive committee or other committees and may by like vote delegate thereto some or all of their powers except those which, by law, the Articles of organization or these By-laws, they are prohibited from delegating. A majority of any such committee may determine its action and fix the time and place of its meetings, unless the Board of Directors shall otherwise provide. The Board of Directors shall have power at any time to fill vacancies in, change the membership of, or discharge any such committee. ARTICLE IV. OFFICERS SECTION 1. ENUMERATION. The officers of the Corporation shall be a President, a Treasurer, a Clerk, and such Vice Presidents, Assistant Treasurers, Assistant Clerks, Secretary, Assistant Secretaries and other officers as may from time to time be determined by the Directors. (Amended 1/19/95). SECTION 2. ELECTION. The President, Treasurer, and Clerk shall initially be elected by the incorporators at the first meeting thereof; thereafter the President, Treasurer and Clerk shall be elected annually by the Directors at their first meeting following the annual meeting of stockholders. other officers may be chosen by the directors at such meeting or any other meeting. SECTION 3. QUALIFICATION. An officer may, but need not, be a Director or stockholder. Any two or more offices may be held by the same person. The Clerk shall be a resident of Massachusetts unless the Corporation has a resident agent appointed for the purpose of service of process. Any officer may be required by the - 7 - 8 Directors to give bond for the faithful performance of his duties to the Corporation in such amount and with such sureties as the Directors may determine. SECTION 4. TENURE AND REMOVAL. The term of office of all officers shall be one year or until their respective successors are elected and qualified. Any officer may be removed from office, with or without cause, by the affirmative vote of a majority of the Directors then in office, provided, however, than an officer may be removed for cause only after reasonable notice and opportunity to be heard by the Board of Directors prior to action thereon. SECTION 5. RESIGNATION. Any officer may resign by delivering or mailing, postage prepaid, his written resignation to the Corporation at its principal office or to the President, Clerk, or Assistant Clerk, if any, and such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. SECTION 6. VACANCIES. A vacancy in any office arising from any cause may be filled for the unexpired portion of the term by the Board of Directors. SECTION 7. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the Corporation shall be appointed by the Directors and shall, subject to the control of the Directors, have general charge and supervision of the business of the Corporation. If no such designation is made, the President shall be the Chief Executive Officer. Unless the Board of Directors otherwise specifies, if there is no Chairman of the Board, the Chief Executive officer shall preside, or designate the person who shall preside, at all meetings of the stockholders and of the Board of Directors. (Added 1/19/95). SECTION 8. CHAIRMAN OF THE BOARD. If a Chairman of the Board of Directors is elected, he shall have the duties and powers as are determined by the Directors. Unless the Board of Directors otherwise specifies, the Chairman of the Board shall preside, or designate the person who shall preside, at all meetings of the stockholders and of the Board of Directors. (Added 1/19/95) SECTION 9. PRESIDENT. The President shall be the Chief Executive Officer of the Corporation except as the Board of Directors may otherwise provide. It shall be his duty and he shall have the power to see that all orders and resolutions of the Directors are carried into effect. He shall, from time to time, report to the Directors all matters within his knowledge which the interests of the Corporation may require to be brought to its notice. The President shall perform such duties and have such powers additional to the foregoing as the Directors shall designate. (Amended 1/19/95). - 8 - 9 SECTION 10. VICE PRESIDENTS. In the absence or disability of the President, his powers and duties shall be performed by the Vice President if only one, or, if more than one, by the one designated for the purposes by the Directors. Each Vice President shall have such other powers and perform such other duties as the Directors shall from time to time designate. The Directors may assign to any Vice President the title of Executive Vice President, Senior Vice President, and any other title selected by the Directors. (Added 1/19/95). SECTION 11. TREASURER. Except as the Directors shall otherwise determine, the Treasurer shall be the Chief Financial and Accounting officer of the Corporation, and shall be in charge of its funds and valuable papers, books of account and accounting records, and shall have such other duties and powers as may be designated from time to time by the Directors. (Amended 1/19/95) SECTION 12. ASSISTANT TREASURERS. In the absence or disability of the Treasurer, his powers and duties shall be performed by the Assistant Treasurer, if only one, or, if more than one, by the one designated for the purpose by the Directors. Each Assistant Treasurer shall have such other powers and perform such other duties as the Directors shall from time to time designate. (Added 1/19/95). SECTION 13. CLERK. The Clerk shall record in books kept for the purpose all votes and proceedings of the stockholders and, if there be no Secretary or Assistant Secretary, of the Directors at their meetings. Unless the Directors shall appoint a transfer agent and/or registrar or other officer or officers for the purpose, the Clerk shall be charged with the duty of keeping, or causing to be kept, accurate records of all stock outstanding, stock certificates issued and stock transfers; and, subject to such other or different rules as shall be adopted from time to time by the Directors, such records may be kept solely in the stock certificate books. The Clerk shall perform such duties and have such powers additional to the foregoing as the Directors shall designate. (Amended 1/19/95). SECTION 14. ASSISTANT CLERKS. In the absence of the Clerk from any meeting of the stockholders or, if there be no Secretary or Assistant Secretary, from any meeting of the Directors, the Assistant Clerk, if one be elected, or, if there be more than one, the one designated for the purpose by the Directors, otherwise a Temporary Clerk designated by the person presiding at the meeting, shall perform the duties of the Clerk. Each Assistant Clerk shall have such other powers and perform such other duties as the Directors may from time to time designate. (Added 1/19/95). - 9 - 10 SECTION 15. SECRETARY AND ASSISTANT SECRETARIES. If a Secretary is elected, he shall keep a record of the meetings of the Directors and in his absence, an Assistant Secretary, if one be elected, or, if there be more than one, the one designated for the purpose by the Directors, otherwise a Temporary Secretary designated by the person presiding at the meeting, shall perform the duties of the Secretary. Each Assistant Secretary shall have such other powers and perform such other duties as the Directors may from time to time designate. (Added 1/19/95). ARTICLE V. INDEMNIFICATION OF OFFICERS AND DIRECTORS The Corporation shall indemnify each person who is or was a Director, officer, employee or agent of the Corporation, or of any other corporation which he served as such at the request of the Corporation, or who served in any capacity with respect to any employee benefit plan at the request of the Corporation, against any and all liability and reasonable expense that may be incurred by him in connection with or resulting from any claim, action, suit or proceeding (whether brought by or in the name of the Corporation or such other corporation or otherwise), civil or criminal, or in connection with an appeal relating thereto, in which he may become involved as a party or otherwise by reason of his being or having been a Director, officer, employee or agent of the Corporation or of such other corporation, or serving or having served in any capacity with respect to any employee benefit plan at the request of the Corporation, or by reason of any past or future action taken or not taken in his capacity as such Director, officer, employee or agent, or in the course of serving in any capacity with respect to any employee benefit plan at the request of the Corporation, whether or not he continues to be such at the time such liability or expense is incurred, provided such person acted in good faith in what he reasonably believed to be the best interest of the Corporation, such other corporation, or to the extent that such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan, as the case may be, and, in addition, in any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful, provided, however, that no indemnification shall be provided for any person, whether acting as a Director or otherwise, with respect to any matter as to which he shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his action was in the best interest of the Corporation, such other corporation, or such employee benefit plan. As used in this Article, the terms "liability" and "expense" shall include, but shall not be limited to, counsel fees and disbursements and amounts of judgments, fines or penalties against and amounts paid in settlement by a Director, officer, employee or agent, other than amounts paid to the Corporation to such other corporation or to such employee benefit plan. Any such Director, officer, employee or agent referred to - 10 - 11 in this Article who has been wholly successful, on merits or otherwise, with respect to any claim, action, suit or proceeding of the character described herein shall be entitled to indemnification as of right. Expenses incurred with respect to any such claim, action, suit or proceeding may be advanced by the Corporation prior to the final disposition thereof upon receipt of an undertaking by or on behalf of the recipient to repay such amount unless it shall ultimately be determined that he is entitled to indemnification under this Article. The rights of indemnification provided in this Article shall be in addition to any rights to which any person concerned may otherwise be entitled by contract or as a matter of law, and shall inure to the benefit of their heirs, executors and administrators of any such person. (Added 6/3/87). ARTICLE VI. CAPITAL STOCK SECTION 1. DESCRIPTION. Each stockholder shall be entitled to a certificate of the capital stock of the Corporation owned by him in such form as shall, in conformity to law, be prescribed from time to time by the Board of Directors. Such certificate shall be signed by the President or Vice President and the Treasurer or an Assistant Treasurer, may bear the seal of the Corporation, shall express an its face its number, date of issue, class, the number of shares for which and the name of the person to whom it is issued. The signature of the President, Vice President, Treasurer and Assistant Treasurer may be facsimile if the stock certificate is signed by a transfer agent and a registrar. If an officer who has signed, or whose facsimile signature has been placed on, a certificate shall have ceased to be such officer before such certificate is issued, it may be issued with the same effect as if he were such officer at the time of its issue. SECTION 2. TRANSFER OF SHARES. Title to a certificate of stock and to the shares represented thereby shall be transferred only by delivery of the certificate properly endorsed or by delivery of the certificate accompanied by a written assignment of the same, or a properly-executed written power of attorney to sell, assign, or transfer the same or the shares represented thereby. Upon surrender of a certificate for the shares being transferred, a new certificate or certificates shall be issued according to the interest of the parties. The person registered on the books of the Corporation as the owner of shares shall have the exclusive right to receive dividends thereon and to vote thereon as such owner, and, except only as may be otherwise required by law, may in all respects be treated by the Corporation as the exclusive owner thereof and the holder in fact thereof, and the Corporation shall not be bound to recognize any equitable or other claim to, or interest in, such shares on the part of any other person except as may be otherwise expressly provided by law. - 11 - 12 SECTION 3. TRANSFER AGENT AND REGISTRAR FOR SHARES OF CORPORATION. The Board of Directors may appoint a Transfer Agent and a Registrar of the certificates of the Corporation. The Transfer Agent shall maintain, among other records, a Shareholders, Ledger, setting forth, among other things, the names and addresses of the holders of all issued shares of the Corporation, the number of shares held by each, the certificate numbers representing such shares, and the date of issue of the certificates representing such shares. The Registrar shall maintain, among other records, a Share Register, setting forth, among other things, the total number of shares of each class of shares which the Corporation is authorized to issue, and the total number of shares actually issued. The Shareholders' Ledger and the Share Register are hereby identified as the Stock Transfer Books of the Corporation; but as between the Shareholders' Ledger and the Share Register, the names and addresses of shareholders, as they appear on the Shareholders' Ledger maintained by the Transfer Agent, shall be the official list of shareholders of record of the Corporation. The name and address of each shareholder of record, as they appear upon the Shareholders' Ledger, shall be conclusive evidence of who are the shareholders entitled to receive notice of the meetings of shareholders, to vote at such meetings, to examine a complete list of the shareholders entitled to vote at meetings, and to own, enjoy and exercise any other property or rights deriving from such shares against the Corporation. Shareholders, but not the Corporation, its Directors, officers, agents or attorneys, shall be responsible for notifying the Transfer Agent, in writing, of any changes in their names and addresses from time to time, and failure to do so will relieve the Corporation, its other shareholders, Directors, officers, agents and attorneys, and its Transfer Agent and Registrar, of liability for failure to direct notices or other documents, or pay over or transfer dividends or other property or rights, to a name and address other than the name and address appearing in the Shareholders' Ledger maintained by the Transfer Agent. SECTION 4. RECORD DATE. The Board of Directors may fix in advance a time which shall not be more than 60 days before the date of any dividend, or making any distribution to stockholders, or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose as the record date for determining the stockholders having the right to notice of, and to vote at, such meetings and any adjournment thereof, or to give such consent or dissent. only stockholders of record on such record date shall have such right, notwithstanding any transfer of stock on the books of the Corporation after the record date. Without fixing a record date, the Board of Directors may for any such purpose close the transfer books for all or any part of such period. - 12 - 13 SECTION 5. LOSS OF CERTIFICATES. In case of the loss, destruction or mutilation of a certificate of stock, a replacement certificate may be issued in place thereof upon such terms as the Board of Directors may prescribe, including, in the discretion of the Board of Directors, a requirement of bond and indemnity to the Corporation. SECTION 6. RESTRICTIONS OF TRANSFER. Every certificate for shares of stock which are subject to any restriction on transfer pursuant to the Articles of organization, the By-laws, or any agreement to which the Corporation is a party, shall have the face of the restriction noted conspicuously on the certificate and shall also set forth on the face or back either the full text of the restriction or a statement that the Corporation will furnish a copy to the holder of such certificate upon written request and without charge. SECTION 7. MISCELLANEOUS. The amount and classes of the capital stock and the par value, if any, of the shares, shall be as fixed in the Articles of Organization. At all times where there are two or more classes of stock,, the several classes of stock shall conform to the description and the terms, and have the respective preferences, voting powers, restrictions and qualifications set forth in the Articles of organization and these By-laws. Every certificate issued when the Corporation is authorized to issue more than one class or series of stock shall set forth on its face or back either the full text of the preferences, voting powers, qualifications and special and relative rights of the shares of each class and series authorized to be issued, or a statement of the existence of such preferences, powers, qualifications and rights, and a statement that the Corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge. SECTION 8. UNCERTIFICATED SHARES. The Directors may provide by resolution that some or all of any or all classes and series of its shares shall be uncertificated shares. Such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. If the Corporation entitles any stockholder of a class or series to receive a certificate representing shares of such class or series, all other holders of shares of such class or series shall be so entitled. The initial transaction statement sent with respect to the issuance or transfer of uncertificated shares which are subject to any restriction on transfer pursuant to the Articles of organization, the By-laws or any agreement to which the Corporation is a party, shall have such restriction noted conspicuously on the statement and shall also set forth either the full text of the restriction or a statement of the existence of such restriction and a statement that the Corporation will furnish a copy of such restriction to the holder of such uncertificated share upon written request and - 13 - 14 without charge. The initial transaction statement sent with respect to the issuance of transfer of uncertificated shares when the Corporation is authorized to issue more than one class or series of stock shall set forth either the full text of the preferences, voting powers, qualifications and special and relative rights of shares of each class and series, if any, authorized to be issued as set forth in Articles of organization, or a statement of the existence of such preferences, powers, qualifications and rights, and a statement that the Corporation will furnish a copy thereof to the holder of such uncertificated share upon written request and without charge. (Added 1/19/95). ARTICLE VII. DIVIDENDS Except as otherwise required by law or by the Articles of Organization, the Board of Directors may in its discretion declare what, if any, dividends shall be paid from the surplus or from the net profits of the Corporation upon the stock of the Corporation, provided, however, that no dividend shall be declared or paid the payment of which would diminish the amount of the paid-in capital. Dividends shall be payable upon such dates as the Board of Directors may designate. Before the payment of any dividend and before making any distribution of profits, the Board of Directors, from time to time, and in its absolute discretion, shall have power to set aside out of the surplus or net profits of the Corporation, such sum or sums as the Board deems proper and sufficient as a reserve fund or for such other purpose as the Board shall deem to be in the best interest of the Corporation. ARTICLE VIII. VOTING OF SHARES IN OTHER CORPORATIONS The Treasurer or any person authorized by the Board of Directors shall have power to vote upon shares of stock held by this Corporation in any other corporation and/or to give a proxy to vote upon such shares. ARTICLE IX. FISCAL YEAR Except as from time to time otherwise provided by the Board of Directors, the fiscal year of the Corporation shall end on the last day of December in each year. ARTICLE X. ASSESSMENTS Shares of stock of this Corporation, when issued, shall be fully paid and non-assessable except for unpaid installments of installment stock. - 14 - 15 ARTICLE XI. POWERS OF OFFICERS TO CONTRACT WITH THE CORPORATION Any and all of the Directors and officers of the Corporation, notwithstanding their official relations to it, may enter into, negotiate, consummate and perform any contract or agreement of any name or nature between the Corporation and themselves, or any and all of the individuals from time to time constituting the Board of Directors of the Corporation or any firm or corporation in which any such Director may be interested, directly or indirectly, whether such individuals or individual, firm or corporation thus contracting with the Corporation shall thereby derive personal or corporate profits or benefits or otherwise, provided such interest is made known to this Corporation prior to the making of such contract or agreement, the intent hereof being to relieve each and every person who may be or become a Director of the Corporation or any corporation in which he may be interested in any way, from any disability that might otherwise exist from contracting with the Corporation. Any Director of the Corporation whether an officer of the Corporation or not, who is interested in any transaction in any manner, as aforesaid, may nevertheless be counted in determining the existence of a quorum at any meeting of the Board of Directors which shall authorize or ratify any such transaction, and any vote thereat to authorize or ratify any such transaction with like force and effect as if he were not so interested. This Article shall not be construed to invalidate any contract or other transaction which would otherwise be valid under the common or statutory law applicable thereto. ARTICLE XII. STOCK OPTIONS The Board of Directors may, from time to time, grant to such persons, including Directors, officers or employees of the Corporation, or of a parent or subsidiary corporation, as the Board may determine, option for the purchase of unissued stock which the Corporation may be authorized to issue or of treasury stock, either with or without a general or specific plan with respect to the granting of such options, on such terms and for such number of shares as the Board may determine. ARTICLE XIII. CHARITABLE CONTRIBUTIONS The Board of Directors may authorize from time to time contributions to be made by the Corporation in such amounts as it may determine to be reasonable to corporations, trusts, funds or foundations organized and operated exclusively for charitable, scientific or educational purposes, no part of the net earnings of which inures to the private benefit of any stockholders or individual. - 15 - 16 ARTICLE XIV. EVIDENCES OF AUTHORITY A certificate by the Clerk or any Assistant Clerk as to any action taken by the stockholders, Directors or any officer or representative of the Corporation shall, as to all persons who rely thereon in good faith, be conclusive evidence of such action. The exercise of any power which by law, by the Articles of Organization, or by these By-laws, or under any vote of the stockholders or the Board of Directors, may be exercised by an officer or any other contingency, shall bind the Corporation in favor of anyone relying thereon in good faith, whether or not such absence or contingency existed. ARTICLE XV. EXECUTION OF INSTRUMENTS. All deeds, leases, transfers, contracts, bonds, notes and other obligations authorized to be executed by an officer of the Corporation in its behalf shall be signed by the President or the Treasurer except as the Directors may generally or in particular cases otherwise determine. ARTICLE XVI. CORPORATE RECORDS. The original or attested copies of the Articles of Organization, By-laws, and records of all meetings of the incorporators and stockholders, and the stock and transfer records which shall contain the names of all stockholders and the record address and the amount of stock held by each, shall be kept in Massachusetts at the principal office of the Corporation, or at any office of its transfer agent or of the Clerk or of the Assistant Clerk, if any. Said copies and records need not all be kept in the same office. They shall be available at all reasonable times to inspection of any stockholder for any purpose but not to secure a list of stockholders for the purpose of selling said list or copies thereof or of using the same for a purpose other than in the interest of the applicant as a stockholder, relative to the affairs of the Corporation. ARTICLE XVII. CONTROL SHARES ACQUISITION The provisions of Chapter 11OD of the Massachusetts General Laws relating to regulation of "Control Shares Acquisitions," as they may be amended from time to time, shall not apply to control share acquisitions (as defined in said Chapter 11OD) of the Corporation. (Added 1/19/95). ARTICLE XVIII. SEAL This Corporation shall have a seal consisting of a circular die with the word "Massachusetts" together with the name of the Corporation and the year of its organization cut or engraved - 16 - 17 thereon. The Board of Directors may change the form of the seal and the inscription thereon at any time. ARTICLE XIX. AMENDMENTS These By-laws (other than Article V) may be altered, amended or repealed by vote of a majority of the Directors then in office, except that the Directors shall not take any action prohibited by law or in conflict with the Articles of organization. The stockholders shall have the power to amend, alter or repeal any provision of these By-laws as provided by law. (Amended 1/19/95). - 17 - EX-10.(D) 3 LETTER AGREEMENT 1 EXHIBIT 10(d) NOTE: THE OMITTED PORTIONS OF THIS DOCUMENT MARKED WITH AN ASTERISK ARE SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CHILDREN'S TELEVISION WORKSHOP Dated as of July 1, 1999 The First Years, Inc. One Kiddie Drive Avon, Massachusetts 02322 Dear Sirs: The following, when signed by you ("Licensee") and by us ("CTW"), will constitute a renewal of the agreement between Licensee and CTW dated as of the 1st day of July, 1996, as the same may have heretofore been amended and/or extended (hereinafter referred to as the "Agreement"), effective as of the date hereof: The Term of the Agreement, with respect to the distribution and sale of Products in the United States, is hereby renewed for an additional period of * years commencing July 1, 1999 and ending *, upon all the terms and conditions therein contained, except as herein otherwise specified: 1. Effective as of the date hereof, the term of the letter of extension, dated as of July 1, 1999, shall be deemed null and void. 2. During the Term of this renewal, Licensee shall have the right to continue to manufacture, distribute and sell the following product items specified below: FEEDING & SOOTHING ITEMS ------------------------ Reuseable & Disposable Bottles Pacifiers and Pacifier Attachers Teethers (the packaging of which shall be carded) Suction Bowls Melamine Set consisting of Section Dish Bowl and Cup Stainless Flatware with Plastic Handles Plastic Snack Containers Splat Mat (for under high chair) Snack Totes (soft fabric, shaped tote to hold snacks) Cups: Trainer Cups, Spout Cups, Straw Cups, Spill Proof Cups Giftset Combinations consisting of the above Products Bibs (The Marketing Date for such Products shall be January 1, 2000) 2 The First Years Inc. Page -2- Dated as of July 1, 1999 PLAY & DISCOVER ITEMS --------------------- Rattles - the packaging of which shall be carded: Plastic Rattles (with or without sound) Soft Fabric Rattles: Rattling Ring Pals, Ring Rattles, Foot Rattles Chewy Buddy Rattles Wrist Rattles CARE & SAFETY ITEMS: -------------------- Hooded Towels Wash Mitts Baby Bather Comb & Brush sets Nightlights (cordless plug-ins) Car Sunshades Bed Rails (The Marketing Date for such Products shall be October 31, 1999) Harness & Handstrap Boo Boo Cold Packs Medicine Feeders Thermometers Step Stools (plastic) Toilet Trainers (3-in-1 Learning Potty) Booties Neck Supports - (Licensee's right to sell existing design of such neck supports shall expire on May 1, 2000) 3. Licensee guarantees that CTW's earnings, during the Term of this renewal, shall be as follows: * 4. The Royalty that is payable to CTW pursuant to subparagraph 5(a) of the Agreement and Item D of Exhibit 1 to the Agreement shall be as follows: * of Gross Proceeds during the period 7/1/99 - 12/31/99, thereafter * of Gross Proceeds * F.O.B. 3 The First Years Inc. Page -3- Dated as of July 1, 1999 5. Licensee's channels of distribution with respect to the sales of Products hereunder shall be through MASS MARKET and MID-TIER DEPARTMENT STORE CHANNELS (as defined in the Agreement). Except as herein expressly modified and/or amended, the Agreement shall remain in full force and effect according to the terms thereof and, as herein modified, amended and/or extended, is hereby expressly ratified and confirmed. This modification, its construction and effect shall be determined in accordance with the laws of the State of New York with respect to agreements to be fully performed therein. If the foregoing accords with your understanding, please sign this modification at the place set forth below. Very truly yours, CHILDREN'S TELEVISION WORKSHOP ACCEPTED AND AGREED TO: By: /s/ Joseph T. Diaz THE FIRST YEARS, INC. ------------------------------------- By: /s/ Ronald J. Sidman Joseph T. Diaz, Group President --------------------------- Products and International Television EX-10.(F) 4 1993 STOCK OPTION PLAN FOR DIRECTORS 1 EXHIBIT 10(f) THE FIRST YEARS INC. 1993 STOCK OPTION PLAN FOR DIRECTORS (as amended through October 1, 1999) 1. PURPOSE The purpose of this 1993 Stock Option Plan for Directors (the "Plan") is to advance the interests of The First Years Inc. (the "Company"), by enhancing the ability of the Company to attract and retain directors who are in a position to make significant contributions to the success of the Company and to reward directors for such contributions through ownership of shares of the Company's common stock (the "Stock"). 2. ADMINISTRATION The Plan shall be administered by a committee (the "Committee") of the Board of Directors (the "Board") of the Company designated by the Board for that purpose. Unless and until a Committee is appointed, the Plan shall be administered by the entire Board, and references in the Plan to the "Committee" shall be deemed references to the Board. The Committee shall have authority, not inconsistent with the express provisions of the Plan (a) to issue options granted in accordance with the formula set forth in this Plan to such directors as are eligible to receive options and to amend the formula from time to time; (b) to issue options on a discretionary basis to such eligible directors as the Committee shall choose; (c) to prescribe the form or forms of instruments evidencing options and any other instruments required under the Plan and to change such forms from time to time; (d) to adopt, amend and rescind rules and regulations for the administration of the Plan and to waive any conditions of any award; and (e) to interpret the Plan and to decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations of the Committee shall be conclusive and shall bind all parties. 3. EFFECTIVE DATE AND TERM OF THE PLAN The Plan shall become effective on the date on which the Plan is approved by the Board of Directors of the Company, subject 2 to approval by the stockholders of the Company. No option shall be granted under the Plan after the completion of ten years from the date on which the Plan was adopted by the Board, but options previously granted may extend beyond that date. 4. SHARES SUBJECT TO THE PLAN (a) NUMBER OF SHARES. Subject to adjustment as provided in Section 4(c), the aggregate number of shares of Stock that may be delivered upon the exercise of options granted under the Plan shall be 560,000. If any option granted under the Plan terminates without having been exercised in full, the number of Shares of Stock as to which such option was not exercised shall be available for future grants within the limits set forth in this Section 4(a). If any Stock purchased on exercise of an Option is paid for through the delivery of shares of Stock or if shares of Stock are held back by the Company, or delivered to the Company, to satisfy a tax withholding requirement on an Award, the number of shares of Stock delivered to or held back by the Company shall not be available for future grants. (b) SHARES TO BE DELIVERED. Shares delivered under the Plan shall be authorized but unissued Stock or, if the Board so decides in its sole discretion, previously issued Stock acquired by the Company and held in treasury. No fractional shares of Stock shall be delivered under the Plan. (c) CHANGES IN STOCK. In the event of a stock dividend, stock split or combination of shares, recapitalization or other change in the Company's capital stock, after the effective date of the Plan, the number and kind of shares of stock or securities of the Company subject to options then outstanding or subsequently granted under the Plan, the maximum number of shares or securities that may be delivered under the Plan, the exercise price, and other relevant provisions shall be appropriately adjusted by the Committee, whose determination shall be binding on all persons. 5. ELIGIBILITY FOR OPTIONS Directors eligible to receive options ("Eligible Directors") shall be those directors of the Company who are not employees 3 of the Company or of any subsidiary of the Company; provided that the Committee may in its discretion choose to designate as an Eligible Director, for some or all purposes of this Plan, a director of a subsidiary of the Company, whether or not employed by the Company or a subsidiary. 6. TERMS AND CONDITIONS OF OPTIONS (a) NUMBER OF OPTIONS. (i) Each Eligible Director, upon his or her election to the Board, shall be awarded an option covering 20,000 shares of Stock, which will become fully vested in three equal annual installments commencing on the first anniversary of such election. On the date of each annual meeting, following the election of directors, each Eligible Director who served on the Board for the entire previous twelve months shall be awarded an option covering 6,000 shares of Stock; each Eligible Director who did not serve on the Board for the entire previous twelve months shall be awarded an option covering a pro-rated number of shares of Stock equal to 500 multiplied by the number of months served on the Board during the previous twelve months. The options awarded under this paragraph (a)(i) shall be collectively referred to as the "Formula Options." (ii) The Committee shall also have the authority under the Plan to award options to purchase stock to Eligible Directors in such amounts and on such terms not inconsistent with this Plan, as it shall determine at the time of the award. The options awarded under this paragraph (a)(ii) shall be collectively referred to as the "Discretionary Options." (b) EXERCISE PRICE. The exercise price of each option shall be 100% of the fair market value per share of the Stock at the time the option is granted. In no event, however, shall the option price be less, in the case of an original issue of authorized stock, than par value per share. For purposes of this paragraph, (A) the fair market value of a share of Stock on any date shall be the Closing Price on such day or, if there were no Closing Price on such day, the latest day prior thereto on which there was a Closing Price; and (B) the "Closing Price" of the Stock on any business day will be the last sale price as reported on the principal market on which 4 the Stock is traded or, if no last sale is reported, then the mean between the highest bid and lowest asked prices on that day. (c) DURATION OF OPTIONS. The latest date on which an option may be exercised (the "Final Exercise Date") shall be the date which is ten years from the date the option was granted. (d) EXERCISE OF OPTIONS. (i) Each Formula Option shall become exercisable to the full extent of all shares covered thereby immediately upon the date of the grant; provided, however, that the options covering 20,000 shares of Stock awarded upon an Eligible Director's initial election shall become exercisable in three equal annual installments commencing on the first anniversary of such election. (ii) Each Discretionary Option shall become exercisable at such time or times as the Committee shall determine. (iii) Any exercise of any option shall be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by (1) any documentation required by the Committee and (2) payment in full for the number of shares for which the option is exercised. (iv) The Committee shall withhold from the number of shares otherwise issuable to the individual upon exercise a number of shares with a fair market value equal to any federal, state, or local withholding tax requirements due upon the exercise of the option. (v) If an option is exercised by the executor or administrator of a deceased director, or by the person or persons to whom the option has been transferred by the director's will or the applicable laws of descent and distribution, the Company shall be under no obligation to deliver Stock pursuant to such exercise until the 5 Company is satisfied as to the authority of the person or persons exercising the option. (e) PAYMENT FOR AND DELIVERY OF STOCK. Stock purchased under the Plan shall be paid for as follows: (i) in cash or by check (acceptable to the Company in accordance with guidelines established for this purpose), bank draft, or money order payable to the order of the Company; (ii) through the delivery of shares of Stock (which, in the case of shares of Stock acquired from the Company, have been outstanding for at least six months) having a fair market value on the last business day preceding the date of exercise equal to the purchase price; (iii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price; or (iv) by any combination of the permissible form of payment; provided that if the Stock delivered upon exercise of the option is an original issue of authorized Stock, at least so much of the exercise price as represents the par value of such Stock shall be paid other than with a personal check or promissory note of the option holder. An Option Holder shall not have the rights of a stockholder with regard to awards under the Plan except as to Stock actually received by him or her under the Plan. The Company shall not be obligated to deliver any shares of Stock (a) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with; (b) if the outstanding stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of issuance; and (c) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the option, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. (f) NONTRANSFERABILITY OF OPTIONS. Except as otherwise specified by the Committee, no option may be transferred other than by will, by the laws of descent and distribution, or to immediate family members as defined in Rule 16a-1(e) 6 under the Securities and Exchange Act of 1934, to a trust for the benefit of immediate family members, or to partnerships and corporations whose sole equity owners are immediate family members, and during a director's lifetime an option may be exercised only by him or her, or by a valid transferee under this Section 6(f). (g) DEATH. Upon the death of any Eligible Director granted options under this Plan, unless the Committee determines otherwise, all options not then exercisable shall terminate. All options held by the director that are exercisable immediately prior to death may be exercised by his or her executor or administrator, or by the person or persons to whom the option is transferred by will or the applicable laws of descent or distribution, at any time within one year after the director's death (subject, however, to the limitations of Section 6(c) regarding the maximum exercise period for such option). After completion of that one-year period, such options shall terminate to the extent not previously exercised. (h) OTHER TERMINATION OF STATUS OF DIRECTOR. Except as the Committee may otherwise specify, if a director's service with the Company terminates for any reason other than death, all options held by the director that are not then exercisable shall terminate. Options that are exercisable on the date of termination shall continue to be exercisable for a period of one year (subject to Section6(c)). After completion of that one-year period, such options shall terminate to the extent not previously exercised, expired or terminated. (i) MERGERS, ETC. In the event of a consolidation or merger in which the Company is not the surviving corporation (other than a consolidation or merger in which the holders of Stock of the Company acquire a majority of the voting stock of the surviving corporation) or which results in the acquisition of substantially all the Company's outstanding Stock by a single person or entity or by a group of persons and/or entities acting in concert, or in the event of a sale or transfer of substantially all of the Company's assets or a dissolution or liquidation of the Company, all options hereunder will terminate; provided that 20 days prior to the effective date of any such merger, consolidation, sale, dissolution, or liquidation, all options outstanding hereunder that are not otherwise exercisable shall become immediately exercisable. 7 Notwithstanding the foregoing, in the event that a transaction covered by this Section 6(i) is a merger or consolidation intended to qualify as a pooling of interests for accounting purposes, then the acquiring or surviving corporation shall assume, or otherwise provide replacement options for, all options outstanding under this Plan, with such adjustments to the number of shares covered by such option and the exercise price thereof as may be necessary to reflect the exchange ratio provided for in the merger or consolidation. Such substitute options shall otherwise be on terms and conditions substantially equivalent to those set forth in this Plan, shall be immediately exercisable and, except as to Eligible Directors who become directors of the acquiring or surviving corporation, shall terminate on the 180th day following the consummation of the merger or consolidation. Options held by Eligible Directors who become directors of the acquiring or surviving corporation shall be governed, mutatis mutandis, by the provisions of this Plan and the agreement evidencing the option surrendered in substitution. 7. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT, TERMINATION AND EFFECTIVENESS Neither adoption of the Plan nor the grant of options to a director shall affect the Company's right to grant to such director options that are not subject to the Plan, to issue to such directors Stock as a bonus or otherwise, or to adopt other plans or arrangements under which Stock may be issued to directors. The Committee may at any time terminate the Plan as to any further grants of options. The Committee may at any time or times amend the Plan for any purpose which may at the time be permitted by law. EX-21 5 LIST OF SUBSIDIARIES 1 EXHIBIT (21) -------------------- List of Subsidiaries of the Registrant -------------------- The First Years Inc., a Delaware Corporation EX-23 6 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-67880, No. 33-87196, No. 33-94888, and No. 333-60617 of The First Years Inc. (the "Company") on Form S-8 of our report dated March 2, 2000, appearing in this Annual Report on Form 10-K of The First Years Inc. for the year ended December 31, 1999. DELOITTE & TOUCHE LLP Boston, Massachusetts March 27, 2000 IV-20 EX-99 7 IMPORTANT FACTORS THAT MAY AFFECT FUTURE RESULTS 1 EXHIBIT 99 IMPORTANT FACTORS THAT MAY AFFECT FUTURE RESULTS Certain written or oral statements made from time to time by The First Years Inc. or its representatives in this report, other reports filed with the Securities & Exchange Commission (the "SEC"), press releases and telephone conference calls contain forward-looking statements that set out anticipated results based on management's plans and assumptions. Forward-looking statements include any statement that may predict, forecast, indicate, or imply future results or performance and may contain the words "believe," "anticipate," "expect," "estimate," "will be," "will continue," "are confident," or words and phrases with similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from the forward-looking statement. The risks and uncertainties are detailed from time to time in reports filed by The First Years Inc. with the SEC including Forms 10-Q, 10-K, and 8-K and include, among others, the factors detailed below. The risks included here are not exclusive. Other sections of this report may include additional factors which could adversely impact The First Years' business and financial performance. Moreover, The First Years operates in a very competitive environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on The First Years' business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. NEED FOR CONTINUED PRODUCT INNOVATION The growth of the Company has been, and will continue to be, dependent upon its ability to create new innovative products and to introduce such new products to the market in a timely fashion. There can be no assurance that the Company will continue to generate new product ideas, that such products will be brought to the market in a timely fashion, or that such new products will be well-received by retailers or consumers. The continued growth of the Company will also depend in part on the successful introduction of higher-priced products. There can be no assurance that the Company will be able to successfully develop and introduce such products. 2 TIMELINESS OF PRODUCT INTRODUCTIONS The Company is under increasing pressure to introduce new innovative products more often and more quickly because the life cycle of many products has significantly shortened over the last several years. This is due partly to the ability of competitors to introduce similar products that compete directly with the Company's successful new products. Timely product introductions are also essential in the juvenile products industry because the Company's orders are cancelable by customers and, in some cases, subject to monetary penalties imposed by customers, if agreed-upon delivery dates are not met. As a result, the inability to introduce products in a timely fashion could have an adverse impact on the Company's sales. RELIANCE ON LICENSED PRODUCTS A substantial factor contributing to the growth in the Company's net sales in the past few years has been its sale of products featuring cartoon characters licensed from other parties, including the use of Winnie the Pooh characters licensed from Disney Enterprises, Inc. and Sesame Street characters licensed from The Children's Television Workshop in the USA and in various countries all over the world. These licenses have fixed terms and limit the type of products that may be sold under the licenses. A major licensing agreement was renewed in 1999 and will expire at the end of 2000. Sales of products licensed under this major license amounted to 34% of the Company's total net sales for the year ended December 31, 1999. While management expects this licensing agreement to be renewed, non-renewal of this major licensing agreement or renewal on terms not favorable to the Company could have a material adverse effect on the Company's business. DEPENDENCE ON CONSUMER PREFERENCES The continued success of the Company's business depends in part on the continued consumer demand for its products and the Company's ability to anticipate, gauge, and respond to changing consumer demands for juvenile products in a timely manner. In 1999 the Company experienced a slowdown in sales of its products featuring cartoon characters licensed from third parties. Changes in consumer preferences, such as consumers abandoning traditional retailers, shopping on the internet, general economic decline, or less favorable demographic trends related to childbirth, among other factors, could have a material adverse effect on the Company's sales and earnings. DEPENDENCE UPON A FEW MAJOR CUSTOMERS The Company's three largest customer, Wal-Mart, Toys "R" Us, and Target accounted for approximately 28%, 19% and 14% of net sales -2- 3 in 1999, respectively. A significant reduction of purchases by any one of these customers could have a material adverse effect on the Company's sales. There could also be a negative effect on the Company's business if any significant customer becomes insolvent or otherwise fails to pay its debts. CHANGES IN THE RETAIL INDUSTRY The Company could be materially adversely affected by conditions in the retail industry in general, including the continuing consolidation in the retail industry and the resulting decline in the number of retailers, and other cyclical economic factors. Also, changes in the way retailers and particularly mass merchandisers do business, such as the creation of competing private-label brands by such retailers, could result in significant reduction of purchases of the Company's products by such retailers and thereby have a materially adverse effect on the Company's sales and earnings. COMPETITIVE RISKS IN THE JUVENILE PRODUCTS MARKET Competition is intense in the juvenile products markets in which the Company sells its products. The Company competes with a large number of other companies both domestic and foreign, some of which have diversified product lines, well-known brands and financial, distribution, and marketing and consumer advertising resources substantially greater than those of the Company. Other major factors that affect competition in the markets in which the Company competes include price competition from competitors, and the Company's ability to maintain or increase the amount of retail shelf space allocated to a particular product. Also, a major technological breakthrough or marketing success by a competitor could adversely affect the Company's competitive position. In addition, in countries where the juvenile products market is mature, particularly in the USA, sales growth is partly dependent on the Company's increasing its market share at the expense of its competitors. There can be no assurance that the Company will be able to continue to compete effectively in the juvenile products market. RELIANCE ON CONTRACT AND FOREIGN MANUFACTURERS The Company does not own or operate its own manufacturing facilities. The Company depends upon independent manufacturers to manufacture high-quality products in a timely manner and relies upon the availability of sufficient production capacity at its existing manufacturers or the ability to utilize alternative sources of supply. A failure by one or more of the Company's significant manufacturers to meet established criteria for pricing, product quality or timeliness could negatively impact the Company's sales and profitability. In addition, if the Company were to experience significant shortages in raw materials or -3- 4 components used in its products, it could have a negative effect on the Company's business, including increased cost or difficulty in delivering products. A substantial portion of the Company's products sold in 1999 was manufactured in Asia. The Company is subject to the usual risks of a business involving foreign suppliers, such as currency fluctuations, government regulation of fund transfers, export and import duties, trade limitations imposed by the United States or foreign governments, and political and labor instability. Enactment of legislation or the imposition of restrictive regulations conditioning or revoking China's Normal Trade Relations ("NTR") 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. 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. The Company has no long-term manufacturing agreements with its suppliers and competes with other juvenile product companies, including companies that are much larger than the Company, for access to production facilities. 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. INVENTORY RISK Many of the Company's products have relatively long lead times for design and production of product and thus the Company must commit to production tooling and to production in advance of orders. If the Company fails to accurately forecast consumer demand or if there are changes in consumer preferences or market demand after the Company has made such production commitments, the Company may encounter difficulty in filling customer orders or in liquidating excess inventory; may find that retailers are canceling orders or returning product; and may have to write off the cost of molds for certain unsuccessful products, all of which may have an adverse effect on the Company's sales, its margins, profit, and brand image. COST AND AVAILABILITY OF CERTAIN MATERIALS AND TRANSPORTATION Plastic, paperboard, other materials, and shipping/transportation costs are significant cost components of the Company's products -4- 5 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 cost of transporting the Company's products also varies with the cost of oil. High transportation costs or the inability of the Company's suppliers to acquire sufficient plastic, paperboard, and other materials at reasonable prices would adversely affect the Company's ability to maintain its profit margins in the short term. RISKS ASSOCIATED WITH INTERNATIONAL SALES The continued growth of the Company will also depend in part on increasing its international sales. The Company's international sales in 1999 accounted for approximately 10.6% of the Company's total net sales. In foreign markets, particularly the U.K., France, Germany and Canada, the Company competes against long-established companies with well-known brand names. In these countries where the juvenile products markets are mature, the Company's sales growth is particularly dependent on the Company's increasing its market share at the expense of the well-established local competitors. International sales are also subject to downturns in the economies and fluctuations in the currencies of foreign countries, and changes in the economic conditions and buying power of consumers in foreign markets, particularly in Asia, Russia, Latin and South America. There can be no assurance that the Company will be successful in expanding its international sales operations. 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. IMPACT OF GOVERNMENT REGULATION Consumer products in general, and in particular products for babies and infants, are coming under increased regulation both domestically and internationally. In addition, consumer activist groups are putting increasing pressure on governments around the world to increase their regulations regarding the safety of the materials used to make juvenile products for babies and infants, such as certain kinds of plastic. The Company's products are subject to the provisions of the Federal Consumer 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 -5- 6 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, or to recommend the recall of products containing chemicals or other materials deemed by the CPSC to be harmful to children and infants. 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. YEAR 2000 COMPLIANCE The Company is dependent on its suppliers and distributors to implement changes to their computer systems in order to be and remain Year 2000 compliant. The Company is also dependent on the infrastructure and the utility systems of the countries in which its products are made and delivered to, to be operating normally in the year 2000 and beyond. The failure of its suppliers, distributors, utility companies, shipping carriers and other similar third parties in the countries in which the Company's products are made or delivered to be and remain Year 2000 compliant could have a material adverse effect on the Company's sales and earnings. BRAND RECOGNITION A company's brand recognition is becoming increasingly important with consumers of juvenile products. Some of the Company's competitors have more recognizable brands than the Company. The Company intends to enhance its brand recognition, but there can be no assurance that such endeavors will be successful. The Company's inability to enhance its brand recognition could have a material adverse impact on the Company's sales. RISK OF CURRENCY FLUCTUATION The Company conducts operations in various foreign countries and a portion of its sales are transacted in local currencies. As a result, the Company's revenues are subject to foreign exchange rate fluctuations. The Company enters into forward currency exchange contracts to hedge its exposure. However, no assurance can be given that fluctuations in foreign currency exchange rates will not have an adverse impact on the Company's revenues, net profits, or financial condition. INTELLECTUAL PROPERTY From time to time the Company has been and in the future may be the subject of litigation challenging its ownership of certain intellectual property. Loss of the Company's principal trademark, -6- 7 "The First Years" could have a serious impact on the Company's business. Because of the importance of the Company's intellectual property, the Company's business is subject to the risk of claims for intellectual property infringement. LITIGATION The Company is subject to the normal risk of litigation with respect to its business operations and intellectual property. DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL The Company is currently dependent upon the ability and experience of its senior management team and other key employees. The Company is currently in the process of an executive search to fill certain key positions. Competition for qualified personnel is intense, and the process of hiring such qualified personnel can be lengthy. The loss of the services of key personnel or the inability to attract and retain additional qualified personnel could have an adverse effect on the Company's operations. -7- EX-27 8 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1 13,400,728 0 21,857,886 270,000 20,352,845 58,325,433 17,679,180 8,090,757 67,913,856 15,284,330 0 0 0 1,057,033 50,645,393 67,913,856 136,651,751 137,234,391 79,645,326 121,949,258 0 0 0 15,285,133 6,190,000 9,094,633 0 0 0 9,094,633 0.89 0.87
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