10-K405 1 b38145fye10-k405.txt 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, 2000; 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 non-affiliates of the Company was $70,963,641, based on the closing price of the common stock on the Nasdaq National Market on February 28, 2001. The number of shares of Registrant's Common Stock outstanding on February 28, 2001 was 9,175,765. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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, 2000. 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;" "Compensation and Other Information Concerning Executive Officers" (other than the Board Compensation Committee Report on Executive Compensation and the Stock Performance Chart); and "Section 16(a) Beneficial Ownership Reporting Compliance." 3 PART I ITEM 1. BUSINESS The First Years Inc. (the "Company") is a leading developer and international 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 subsidiary. Products The Company's product line, which contains more than 250 items that range in retail price from approximately $0.99 to $59.99, is marketed under The First Years brand and several licensed brands, including Winnie The Pooh, Disney Mickey and Sesame Street. Utilizing these brands, the Company sells a broad range of products for infants and toddlers in three categories, Feeding & Soothing, Play & Discover and Care & Safety. Products in Feeding & Soothing include bottles and accessories, nipples, teethers, bowls, drinking cups, dishes, flatware, bibs, breast-feeding accessories and feeding sets. Products in Care & Safety include bathing and grooming accessories, home safety and monitoring products such as door and cabinet latches, toilet-training products and products that are appropriate for the health and hygiene needs of infants. Products in Play & Discover include entertaining, skill-developing toys for infants and toddlers, such as crib toys, hand-held toys, and large play items. ------------------------ THE FIRST YEARS(R), Expert developed Parent approved(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 Company. SESAME STREET(R) is a registered trademark of Sesame Workshop. DISNEY MICKEY(R), WINNIE THE POOH(R) and POOH(R) are registered trademarks of Disney Enterprises, Inc. 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 $4.2, $3.8 and $3.3 million on new product development in 2000, 1999, and 1998, respectively. Most of the Company's new products are shown at the Juvenile Products Manufacturers Association Trade Show, held in Dallas, Texas in the fall of each year, and of other national and international toy and baby fairs. I-1 4 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, Peyton's, Sears, Eckerd Drugs, Rite Aid, 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 2000, Wal*Mart, Toys "R" Us, and Target accounted for approximately 24%, 20%, and 13% 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 material aspect of the Company's business. Customers place orders on an as needed basis. 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 by the company of royalties on certain of the Company's products featuring licensed cartoon characters. The agreements that are currently in effect have various terms and require minimum royalty payments of $4,998,000 during the terms of these agreements. Our most significant licensing agreement was renewed in 2000 and will expire at the end of 2002. Sales of products licensed under this major license agreement amounted to 29% of the Company's total net sales for the year ended December 31, 2000. (see Exhibit 99 to this Report, "Important Factors That May Affect Future Results" and "Notes to Consolidated Financial Statements," Numbers 6 and 8). MANUFACTURING AND SOURCES OF SUPPLY The Company does not own or operate its own manufacturing facilities. In 2000, 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 69% of all of its products sold in 2000 were manufactured in Asia, primarily in China. A large percentage of the Company's furnishings and other large products were manufactured in 2000 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. I-2 5 In 2000, the Company's largest supplier, which is based in the United States, manufactured products that represented approximately 10% of its sales. 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 2000. 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. 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 currency 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 was granted permanent NTR status by the United States government in October 2000. Unless steps are taken in the future to revoke this status, China will continue to enjoy NTR treatment. 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 produced in the United States. As a result, the Company may be 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's 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 I-3 6 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 related design, is registered in the United States and in a number of foreign countries. The Company also owns and licenses 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 and licenses 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, 2000, the Company employed 153 full-time and 3 part-time employees, of whom five were senior executive officers. 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 are 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 the regulations of the Federal Communications Commission. The Company's medical devices and drug products are subject to the regulations of the Food and Drug Administration. The Acts enable the Consumer Product Safety Commission (the "CPSC") to protect children from hazardous toys and other articles. The CPSC has the authority to exclude from the market certain consumer products which are found to be hazardous. The CPSC's determination is subject to court review. The CPSC can require the repurchase by the manufacturer of articles which are banned. The Federal Flammable Fabrics Act enables the CPSC to regulate and enforce flammability standards for fabrics used in consumer products. Similar laws exist in some states and cities and in various international markets. The Company designs and tests its products to ensure compliance with the various federal, state and international requirements. Any recall of a product could have a material adverse effect on the Company, depending on the particular product. 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-4 7 FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS The Company's domestic net sales in 2000, 1999, and 1998 were approximately $118.6, $122.2, and $116 million, respectively, and accounted for approximately 88.8%, 89.4% and 87.4% of the Company's total net sales in 2000, 1999, and 1998, respectively. The Company's international net sales (primarily in Europe, Canada, South America and the Pacific Rim) were approximately $15.0, $14.5, and $16.7 million, respectively, and accounted for approximately 11.2%, 10.6% and 12.6% of the Company's total net sales in 2000, 1999, and 1998, 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, 2000 and 1999" 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", above. 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....................... 54 President, Chairman of the Board of 1975 Directors, and Chief Executive Officer Jerome M. Karp......................... 73 Director 1969 Benjamin Peltz......................... 61 Director 1975 Evelyn Sidman.......................... 87 Clerk and Director 1979 Fred T. Page........................... 54 Director 1988 Kenneth R. Sidman...................... 55 Director 1998 Lewis M. Weston........................ 74 Director 1998 Walker J. Wallace...................... 56 Director 1999 John R. Beals.......................... 46 Treasurer, Senior Vice 1990 President-- Finance and Chief Financial Officer Bruce Baron............................ 40 Senior Vice President-- Operations 1997 James A. Connors, Jr................... 44 Senior Vice President -- Product 2000 Development Richard F. Schaub, Jr.................. 41 Executive Vice President -- Marketing 2000 and Sales Mark C. Strozik........................ 41 Vice President -- Human Resources 2001
--------------- Mr. Ronald J. 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. Jerome M. Karp served as Vice Chairman of the Board of the Company from January 1989 until his retirement from the Company in August, 1999. Mr. Benjamin 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 1997 when he retired from the Company. Mrs. Evelyn Sidman has been Clerk of the Company since 1979. Mr. Fred T. 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. Mr. Page is now an independent consultant. I-5 8 Mr. 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 served as Vice President, Marketing & New Business Development for Saint-Gobain Performance Plastics Corp. 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 the Thai Prime Fund, Singapore, as well as a member of the International Advisory Board of Banco Finantia, Lisbon, Portugal. Mr. Walker J. Wallace was with Procter & Gamble for 30 years, from 1967 to 1997. He was made a Vice President of Procter & 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. John R. Beals has been Senior Vice President -- Finance of the Company 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. Bruce Baron has been Senior Vice President -- Operations of the Company since August 1997. Prior to that time, Mr. Baron was Vice President of Operations at Crabtree & Evelyn from 1988 to July 1997. Mr. James A. Connors, Jr. has been Senior Vice President -- Product Development of the Company since May 2000. Prior to that time, from September 1994 to July 1998, he was Vice President Operations Engineer of Hasbro Manufacturing Services and from July 1998 to May 2000 he was Senior Vice President Operations Engineering of Hasbro Global Operations. Mr. Richard F. Schaub, Jr. has been Executive Vice President -- Marketing and Sales of the Company since October 2000. Prior to that time, from March 1999 to September 2000, he was Managing Director of Maclaren USA Inc; from September 1997 to March 1999, he was Senior Vice President, Marketing of Evenflo Company, Inc. and from September 1994 to September 1997, he was President of Priss Prints, Inc. Mr. Mark C. Strozik has been Vice President -- Human Resources of the Company since March 2001. Prior to that time, from October 1998 to March 2001, he was Manager of Human Resources, Employment and Human Resources Information Systems of Ocean Spray Cranberries, Inc. and from May 1994 to October 1998 he was Human Resources Manager of Health New England. 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 I-6 9 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-7 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's Common Stock is traded on the Nasdaq National Market under the symbol "KIDD". Below is a summary of the actual high and low sales prices of the Company's Common Stock for each quarter of 2000 and 1999 as reported by Nasdaq. 2000
QUARTER LOW HIGH ------- --- ---- First....................................................... $ 6 7/8 $10 Second...................................................... 7 3/8 11 1/8 Third....................................................... 8 3/4 12 1/4 Fourth...................................................... 8 1/16 10 5/8
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
DIVIDEND POLICY In 1999 and 2000, the Company paid cash dividends on its Common Stock in the amount of $0.06 per share, which were paid on June 15, 1999 and June 15, 2000, 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 foreseeable future. APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS As of February 28, 2001, the Company had approximately 170 holders of record of its Common Stock. II-1 11 ITEM 6. SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996 ------------ ------------ ------------ ------------ ----------- SELECTED INCOME STATEMENT DATA: Net sales................... $133,512,200 $136,651,751 $132,716,379 $120,695,988 $93,110,361 Cost of products sold ***... 84,791,616 85,471,577 85,582,344 75,867,398 59,366,781 Selling, general, and administrative expenses ***....................... 34,977,281 36,477,681 34,166,742 32,484,114 24,676,513 Interest expense............ -- -- -- 27,709 358,637 Interest income............. 743,260 582,640 590,822 168,922 27,349 Income before income taxes..................... 14,486,563 15,285,133 13,558,115 12,485,689 8,735,779 Provision for income taxes..................... 5,835,600 6,190,500 5,545,300 5,040,900 3,494,300 Net income.................. 8,650,963 9,094,633 8,012,815 7,444,789 5,241,479 Basic earnings per share**................... $0.91 $0.89 $0.78 $0.75 $0.55 Diluted earnings per share**................... $0.90 $0.87 $0.75 $0.71 $0.53 Dividends paid per share*... $0.06 $0.06 $0.06 $0.05 $0.05 Basic weighted average number of shares outstanding**............. 9,500,726 10,226,470 10,338,857 10,003,774 9,466,356 Diluted weighted average number of shares outstanding**............. 9,619,928 10,402,297 10,669,503 10,453,062 9,891,982 SELECTED BALANCE SHEET DATA: Total assets................ $ 71,694,380 $ 67,913,856 $ 69,275,895 $ 60,571,561 $47,049,537 Long-term debt.............. -- -- -- -- -- Stockholders' equity........ 54,902,789 51,702,426 52,647,404 44,009,004 35,866,440 Stockholders' equity per share**................... $5.71 $4.97 $4.93 $4.21 $3.63
--------------- * Adjusted to reflect the two-for-one stock split effected on June 29, 1998. ** Adjusted to reflect the two-for-one stock split effected on June 29, 1998 and restated to reflect adoption of Statement of Financial Accounting Standard No. 128 in the fourth quarter of 1997. *** Prior year amounts adjusted to reflect certain reclassifications in order to conform with current year presentation (See Note 1 of the financial statements). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STATEMENT CONCERNING 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 ability to develop innovative products and to introduce new products in a timely manner; 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 raw materials; risks related to inventory, international sales and supplies, products liability, the Company's intellectual property and litigation; importance of brand recognition; foreign currency fluctuation risks; impact of government regulations; and the dependence on, and need for, key personnel. Information with respect to risk factors is 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 undue reliance on these forward- II-2 12 looking statements, which speak only as of the date hereof. The Company assumes no obligation to update the forward looking information contained in this Annual Report on Form 10-K. Certain prior year amounts have been adjusted to reflect reclassifications in order to conform with current year presentations (See Note 1 of the financial statements). YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Net sales in 2000 were $133.5 million, a decrease of $3.2 million or (2.3)%, as compared to net sales of $136.7 million in 1999. The decrease was due primarily to decreased demand for licensed products in domestic and foreign markets which was partially offset by an 8% increase in net sales from The First Years brand products compared to 1999. As a percentage of sales, sales of licensed products decreased to 33.8% in 2000 from 39.6% in 1999 as consumer demand for licensed products lessened, particularly for several products that sold well in 1999. Sales of The First Years brand products increased to 66.2% in 2000 from 60.4% in 1999 due primarily to new product introductions. The Company anticipates that the proportion of net sales from The First Years branded products to total net sales will continue to increase as a result of recent trends. As a percentage of total net sales, foreign net sales increased to 11.2% in 2000 from 10.6% in 1999 as reduced sales in Latin America and Europe were partially offset by sales increases in Canada and the Pacific Rim. The Company continues to believe 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 2000 was $84.8 million, a decrease of $0.7 million or (0.8)%, as compared to $85.5 million in 1999. As a percentage of net sales, cost of products sold in 2000 increased to 63.5% from 62.5% in 1999. The increase was primarily due to the higher costs associated with the increased percentage of sales of non-licensed lower margin products in 2000. Selling, general, and administrative expenses in 2000 were $35.0 million, a decrease of $1.5 million, or (4.1)%, as compared to $36.5 million of such expenses in 1999. The decrease was primarily due to the absence in 2000 of settlement and legal costs related to a patent lawsuit which were incurred in 1999. The reduction in costs were partially offset by increases in other expenses primarily payroll and payroll related costs. As a percentage of net sales, selling, general, and administrative expenses decreased to 26.2% in 2000 from 26.7% in 1999. The decrease reflects the costs associated with the 1999 patent lawsuit as selling, general and administrative expenses as a percent of net sales would be consistent with 1999 if these related costs were excluded. Income tax expense as a percentage of pretax income decreased slightly to 40.3% in 2000 from 40.5% in 1999 due to normal fluctuations in the Company's taxable income. 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 net sales, net 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. An additional factor affecting net sales in 1999 and 1998 was the accounting for sales returns of certain products containing diisononyl phthalate, ("DINP"). As 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 total net sales, foreign net sales 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. Cost of products sold in 1999 was $85.5 million, a decrease of $0.1 million or (0.1)%, as compared to $85.6 million in 1998. As a percentage of net sales, cost of products sold in 1999 decreased to 62.5% from 64.5% 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. II-3 13 Selling, general, and administrative expenses in 1999 were $36.5 million, an increase of $2.3 million, or 6.7%, as compared to $34.2 million of such expenses in 1998. The increase was primarily due to costs related to the settlement of the 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 26.7% in 1999 from 25.7% in the comparable period of 1998. The increase reflects the costs associated with the patent 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. LIQUIDITY AND CAPITAL RESOURCES Net working capital increased by $3.4 million to $46.4 million at December 31, 2000 from $43.0 million at December 31, 1999 primarily due to funds generated from profitable operations. Cash increased as additional cash generated from profitable operations and from reduced inventories and accounts receivable were partially offset by repurchases of the Companies stock and purchases of equipment. On October 26, 2000 the Company announced that its Board of Directors approved an increase in the total dollar amount that the Company can use to repurchase shares of its common stock under the Company's discretionary stock repurchase program. The total amount the Company can use to purchase shares under this program was increased from $15 million to $20 million. As of December 31, 2000, the Company had purchased 1,474,000 shares of the Company's common stock at a cost of $15.5 million. An unsecured line of credit of $10 million which is subject to annual renewal in October 2001, is available from a bank. Amounts outstanding under the line are payable upon demand by the bank. During 2000 and 1999, the Company had no borrowings under the line of credit. As of December 31, 2000 and 1999 no balances were outstanding. The Company paid a cash dividend of $0.06 per share of Common Stock in June of 2000 and 1999, 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 for operations and capital expenditures for the next year. 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 foreign currency forward exchange contracts from time to time 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. Under these contracts, the Company enters into arrangements with a bank whereby the Company is committed to deliver foreign currency at predetermined rates. The Company had no outstanding foreign currency forward exchange contracts at December 31, 2000. RECENT ACCOUNTING PRONOUNCEMENTS On January 1, 2001, the Company adopted the provisions of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments. Specifically it requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet at fair value. The accounting for changes in the fair value of a derivative (that is unrealized gains or losses) will be recorded as a component of an entity's net income or other comprehensive income, depending upon designation (as defined in the statement). The adoption of SFAS No. 133 was not material to the Company's consolidated financial statements. During 2000, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," which provides the SEC staff's views in applying generally accepted II-4 14 accounting principles to revenue recognition. SAB No. 101 was effective for the Company on October 1, 2000. The adoption of SAB No. 101 was not material to the Company's consolidated financial statements. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions involving Stock Compensation", an interpretation of APB No. 25. FIN 44 was effective July 1, 2000. The adoption of FIN 44 was not material to the Company's consolidated financial statements. During 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-10, "Accounting for Shipping and Handling Fees and Costs." EITF No. 00-10 addresses the statement of earnings classification of shipping and handling costs billed to customers and was effective for the fourth quarter of 2000. The adoption of EITF No. 00-10 resulted in a reclassification of prior year amounts in order to conform with the current year presentation. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK See discussion under Item 7, "Inflation and Foreign Currency Fluctuations", for required quantitative and qualitative disclosure about primary exposure to market risk. The foreign currency 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 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. II-5 15 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 2001 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 2001 Annual Meeting of Stockholders, except that the sections in the 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 Annual Report on Form 10-K. 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 2001 Annual Meeting of Stockholders and is incorporated herein by reference ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is included in the Registrant's definitive proxy statement for the 2001 Annual Meeting of Stockholders and is incorporated herein by reference. III-1 16 PART IV 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, 2000 and 1999 Consolidated Statements of Income for the Years Ended December 31, 2000, 1999, and 1998 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000, 1999, and 1998 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999, and 1998 (a) 2. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 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 Annual 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 Annual Report on Form 10-K.
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 [Reg. No. 33-62673] and incorporated herein by reference). (3)(ii) By-laws of the Company as currently in effect (filed as Exhibit (3)(ii) to Form 10-K for the fiscal year ended December 31, 1999 and incorporated herein by reference). (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) to 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) to 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) to 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 (filed as Exhibit 10(d) to Form 10-K for the fiscal year ended December 31, 1999 and incorporated herein by reference; certain portions of such agreement are subject to confidential treatment). (10)(m) Agreement with Disney Enterprises, Inc. dated as of August 1, 2000 relating to the licensing of Winnie the Pooh, Disney Classics and Disney Standard cartoon characters (filed as Exhibit 10(w) to Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference; certain portions of such Agreement are subject to confidential treatment).
IV-1 17 Management Contracts and Compensatory Plans
PAGE ---- (10)(e) The First Years Inc. 1993 Equity Incentive Plan, as amended through May 20, 1999 (filed as Exhibit (10)(t) to 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 (filed as Exhibit 10(f) to Form 10-K for the fiscal year ended December 31, 1999 and incorporated herein by reference). (10)(g) Letter Agreement between The First Years Inc. and Jerome M. Karp dated August 8, 1999 (filed as Exhibit 10(v) to Form 10-Q for the quarter ended September 30, 1999, and incorporated herein by reference). (10)(h) Employment Agreement between The First Years Inc. and Ronald J. Sidman, dated September 30, 1999 (filed as Exhibit 10(u) to 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) to 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) to 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) to 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) to Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). (10)(m) Non-Compete Agreement between The First Years Inc. and Richard F. Schaub, Jr. dated August 29, 2000 IV-20 (10)(n) Change of Control Agreement between The First Years Inc. and Richard F. Schaub, Jr. dated August 29, 2000 IV-20 (10)(o) Promissory Note and Agreement between The First Years Inc. and Richard F. Schaub, Jr. dated September 28, 2000 IV-20 (10)(p) Agreement between The First Years Inc. and James A. Connors, Jr. dated May 8, 2000. IV-20 ------------------------------------------------------------------------------ (21) List of Subsidiaries of the Registrant. IV-20 (23) Consent of Deloitte & Touche LLP dated March 30, 2001. IV-20 (99) Important Factors That May Affect Future Results. IV-20
14.(b) REPORT ON FORM 8-K The Company did not file any reports on Form 8-K with the Securities and Exchange Commission during the quarter ended December 31, 2000. IV-2 18 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 29, 2001 By: /s/ JOHN R. BEALS ---------------------------------- JOHN R. BEALS, TREASURER AND SENIOR VICE PRESIDENT -- FINANCE(CHIEF FINANCIAL OFFICER AND CHIEF ACCOUNTING OFFICER) Date: March 29, 2001 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 29, 2001.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RONALD J. SIDMAN Chief Executive Officer Chairman of the March 29, 2001 ------------------------------------------------ Board of Directors and President RONALD J. SIDMAN /s/ JEROME M. KARP Director March 29, 2001 ------------------------------------------------ JEROME M. KARP /s/ EVELYN SIDMAN Director March 29, 2001 ------------------------------------------------ EVELYN SIDMAN /s/ BENJAMIN PELTZ Director March 29, 2001 ------------------------------------------------ BENJAMIN PELTZ /s/ FRED T. PAGE Director March 29, 2001 ------------------------------------------------ FRED T. PAGE /s/ KENNETH R. SIDMAN Director March 29, 2001 ------------------------------------------------ KENNETH R. SIDMAN /s/ LEWIS M. WESTON Director March 29, 2001 ------------------------------------------------ LEWIS M. WESTON /s/ WALKER J. WALLACE Director March 29, 2001 ------------------------------------------------ WALKER J. WALLACE
IV-3 19 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, 2000 and 1999.................................................. IV-6 Consolidated Statements of Income for the Years Ended December 31, 2000, 1999, and 1998..................... IV-7 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000, 1999, and 1998......... IV-8 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999, and 1998............... IV-9 Notes to Consolidated Financial Statements............. IV-10-18 Financial Statement Schedule II-- Valuation and Qualifying Accounts for the Years Ended December 31, 2000, 1999, and 1998...................................................... IV-19
IV-4 20 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. and subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. 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. and subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 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. /S/ DELOITTE & TOUCHE LLP Boston, Massachusetts February 27, 2001 IV-5 21 THE FIRST YEARS INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999
2000 1999 ----------- ----------- ASSETS Current Assets: Cash and cash equivalents (Notes 1 and 8).............. $21,180,242 $13,400,728 Accounts receivable (less allowance for doubtful accounts of $270,000 in 2000 and 1999) (Note 8)....... 19,527,429 21,587,886 Inventories (Note 1)................................... 18,443,713 20,352,845 Prepaid expenses and other assets...................... 756,357 1,308,974 Deferred tax asset (Notes 1 and 3)..................... 2,069,900 1,675,000 ----------- ----------- Total current assets.............................. 61,977,641 58,325,433 ----------- ----------- Property, Plant, and Equipment (Note 1): Land................................................... 167,266 167,266 Building............................................... 5,254,150 5,154,845 Machinery and molds.................................... 7,233,145 7,536,378 Furniture and equipment................................ 6,269,346 4,820,691 ----------- ----------- Total............................................. 18,923,907 17,679,180 Less accumulated depreciation.......................... 9,207,168 8,090,757 ----------- ----------- Property, plant, and equipment-- net.............. 9,716,739 9,588,423 ----------- ----------- Total Assets...................................... $71,694,380 $67,913,856 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable....................................... $11,270,519 $10,329,899 Accrued royalty expense (Note 6)....................... 946,623 1,792,475 Accrued payroll expenses............................... 334,721 113,409 Accrued selling expenses............................... 3,023,528 3,048,547 ----------- ----------- Total current liabilities......................... 15,575,391 15,284,330 ----------- ----------- Deferred Tax Liability (Notes 1 and 3)...................... 1,216,200 927,100 ----------- ----------- Commitments and Contingencies (Notes 5, 6, and 8) Stockholders' Equity (Notes 4, 7, and 9): Common stock -- authorized, 50,000,000 shares; issued 10,679,337 and 10,570,329; outstanding, 9,175,765 and 9,916,235 as of December 31, 2000 and 1999, respectively.............................................. 1,067,934 1,057,033 Paid-in-capital............................................. 8,714,711 8,052,623 Retained earnings........................................... 60,985,483 52,907,819 Less treasury stock at cost, 1,503,572 and 954,094 shares as of December 31, 2000 and 1999, respectively............... (15,865,339) (10,315,049) ----------- ----------- Total stockholders' equity........................ 54,902,789 51,702,426 ----------- ----------- Total Liabilities and Stockholders' Equity........ $71,694,380 $67,913,856 =========== ===========
See notes to consolidated financial statements. IV-6 22 THE FIRST YEARS INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998 ------------ ------------ ------------ Net Sales (Notes 1, 6, 8, and 10).................. $133,512,200 $136,651,751 $132,716,379 Cost of Products Sold (Notes 1 and 10)............. 84,791,616 85,471,577 85,582,344 ------------ ------------ ------------ Gross Profit....................................... 48,720,584 51,180,174 47,134,035 Selling, General, and Administrative Expenses (Notes 1, 7, and 11)............................. 34,977,281 36,477,681 34,166,742 ------------ ------------ ------------ Operating Income................................... 13,743,303 14,702,493 12,967,293 Interest income.................................... 743,260 582,640 590,822 ------------ ------------ ------------ Income Before Income Taxes......................... 14,486,563 15,285,133 13,558,115 Provision for Income Taxes (Notes 1 and 3)......... 5,835,600 6,190,500 5,545,300 ------------ ------------ ------------ Net Income (Note 10)............................... $ 8,650,963 $ 9,094,633 $ 8,012,815 ============ ============ ============ Basic Earnings Per Share (Notes 1 and 9)........... $0.91 $0.89 $0.78 ===== ===== ===== Diluted Earnings Per Share (Notes 1 and 9)......... $0.90 $0.87 $0.75 ===== ===== =====
See notes to consolidated financial statements. IV-7 23 THE FIRST YEARS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
COMMON STOCK ----------------------- PAID-IN RETAINED TREASURY SHARES PAR VALUE CAPITAL EARNINGS STOCK ---------- ---------- ---------- ----------- ------------ Balance, January 1, 1998.......... 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) Stock issued under stock option plans (Note 7)............... 109,008 10,901 569,688 -- -- Tax benefit derived from option compensation deduction....... -- -- 42,400 -- -- Compensation charge related to grant of common stock option....................... -- -- 50,000 -- -- Dividends paid.................. -- -- -- (573,299) -- Repurchase of 549,478 shares for treasury..................... (549,478) -- -- -- (5,550,290) Net income...................... -- -- -- 8,650,963 -- ---------- ---------- ---------- ----------- ------------ Balance, December 31, 2000........ 9,175,765 $1,067,934 $8,714,711 $60,985,483 $(15,865,339) ========== ========== ========== =========== ============
See notes to consolidated financial statements. IV-8 24 THE FIRST YEARS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998 ----------- ------------ ----------- Cash Flows from Operating Activities: Net income........................................... $ 8,650,963 $ 9,094,633 $ 8,012,815 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation...................................... 2,019,279 1,679,252 1,415,525 Compensation charge related to grant of common stock option.................................... 50,000 -- -- Provision for doubtful accounts................... 87,324 78,968 176,034 Loss on disposal of equipment..................... 415,389 1,232,322 548,469 Increase (decrease) arising from working capital items: Accounts receivable............................. 1,973,133 (2,653,727) 773,065 Inventories..................................... 1,909,132 (1,832,822) 5,852,858 Prepaid expenses and other assets............... 595,017 1,452,160 (1,683,270) Accounts payable................................ 940,620 928,933 (762,878) Accrued royalty expense......................... (845,852) (337,552) 78,306 Accrued payroll expenses........................ 221,312 (1,087,557) 57,903 Accrued selling expenses........................ (25,019) (49,685) 711,203 Change in deferred income taxes................... (105,800) (121,700) (164,100) ----------- ------------ ----------- Net cash provided by operating activities.... 15,885,498 8,383,225 15,015,930 ----------- ------------ ----------- Cash Flows used for Investing Activities: Purchase of property, plant, and equipment........... (2,562,984) (4,597,283) (3,021,058) ----------- ------------ ----------- Cash Flows from Financing Activities: Dividends paid....................................... (573,299) (625,403) (621,935) Purchase of treasury stock........................... (5,550,290) (10,005,325) (227,911) Common stock issued under stock option plans......... 580,589 468,617 934,831 ----------- ------------ ----------- Net cash (used for) provided by financing activities................................. (5,543,000) (10,162,111) 84,985 ----------- ------------ ----------- Increase (decrease) in Cash and Cash Equivalents....... 7,779,514 (6,376,169) 12,079,857 Cash and Cash Equivalents, Beginning of Year........... 13,400,728 19,776,897 7,697,040 ----------- ------------ ----------- Cash and Cash Equivalents, End of Year................. $21,180,242 $ 13,400,728 $19,776,897 =========== ============ =========== Supplemental Disclosures of Cash Flow Information Cash paid during the year for: Interest..................................... $ 0 $ 0 $ 0 =========== ============ =========== Income taxes................................. $ 4,635,972 $ 5,292,295 $ 7,584,400 =========== ============ ===========
See notes to consolidated financial statements. IV-9 25 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business -- The First Years Inc., a Massachusetts corporation, (the "Company"), is a developer, marketer, and distributor of basic accessories 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 the Company's wholly owned subsidiary. 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. 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 and related interpretations, 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 accounting principles generally accepted in the United States of America 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 2000, 1999, and 1998, research and development costs approximated $4,246,000, $3,780,000, and $3,320,000, 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 non-monetary 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 (loss) in the year of occurrence and are recorded as a component of cost of sales. Foreign Exchange Contracts -- The Company enters into foreign currency 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. IV-10 26 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Gains and losses related to foreign currency forward exchange contracts which qualify as accounting hedges of firm commitments are deferred and recognized as income (loss) when the hedged transaction occurs. Gains and losses related to foreign currency 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, 2000, 1999, and 1998. New Accounting Pronouncements On January 1, 2001, the Company adopted the provisions of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments. Specifically it requires that an entity recognize all derivatives as either assets or liabilities on the balance sheet at fair value. The accounting for changes in the fair value of a derivative (that is unrealized gains or losses) will be recorded as a component of an entity's net income or other comprehensive income, depending upon designation (as defined in the statement). The adoption of SFAS No. 133 was not material to the Company's consolidated financial statements. During 2000, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," which provides the SEC staff's views in applying generally accepted accounting principles to revenue recognition. SAB No. 101 was effective for the Company on October 1, 2000. The adoption of SAB No. 101 was not material to the Company's consolidated financial statements. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions involving Stock Compensation" an interpretation of APB No. 25. FIN 44 was effective July 1, 2000. The adoption of FIN 44 was not material to the Company's consolidated financial statements. During 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-10, "Accounting for Shipping and Handling Fees and Costs." EITF No. 00-10 addresses the statement of earnings classification of shipping and handling costs billed to customers and was effective for the fourth quarter of 2000. The adoption of EITF No. 00-10 resulted in a reclassification of prior year amounts in order to conform with the current year presentation. 2. DEBT During 2000 and 1999, the Company had available an unsecured line of credit totaling $10,000,000 with a 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 2000 or 1999. As of December 31, 2000 and 1999, no balance was outstanding. The line of credit will expire in October 2001. IV-11 27 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. INCOME TAXES Components of the Company's net deferred tax asset at December 31 are as follows:
2000 1999 ---------- ---------- Deferred tax assets: Expenses not currently deductible....................... $ 547,900 $ 417,800 Capitalized packaging costs not currently deductible.... 828,800 643,900 Capitalized inventory costs not currently deductible.... 545,000 519,800 Other................................................... 148,200 93,500 ---------- ---------- 2,069,900 1,675,000 Deferred tax liabilities: Excess tax depreciation over financial reporting depreciation......................................... 1,216,200 927,100 ---------- ---------- Net deferred tax asset.................................... $ 853,700 $ 747,900 ========== ==========
There was no valuation allowance for the years ended December 31, 2000, 1999, and 1998. The provision for income taxes consists of the following:
2000 1999 1998 ---------- ---------- ---------- Federal: Current...................................... $4,559,600 $4,985,600 $4,318,600 Deferred..................................... (105,800) (121,700) (164,100) ---------- ---------- ---------- Total federal........................ 4,453,800 4,863,900 4,154,500 State.......................................... 1,381,800 1,326,600 1,390,800 ---------- ---------- ---------- Provision for income taxes..................... $5,835,600 $6,190,500 $5,545,300 ========== ========== ==========
A reconciliation of the statutory federal income tax rate and the effective tax rate as a percentage of pretax income is as follows:
2000 1999 1998 ---- ---- ---- Statutory rate............................................. 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit...... 6.1 5.9 6.5 Other...................................................... (0.8) (0.4) (0.6) ---- ---- ---- Effective tax rate......................................... 40.3% 40.5% 40.9% ==== ==== ====
4. COMMON STOCK In May 1998, the Company's Board of Directors 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 -- In 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 IV-12 28 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) expire within one year. The Company's future commitment under these contracts approximated $3,817,000 as of December 31, 1999. The Company had no foreign currency forward exchange contracts as of December 31, 2000. Other Commitments -- At December 31, 2000 and 1999, 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 through September 30, 2004, subject to any increases approved 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. The Company enters into employment agreements with certain other executive officers. The various agreements provide for payments related to change of control events, agreements not to compete with the Company, and severance payments depending on the nature of the executive's 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 ranging from one to fifteen years and require minimum royalty payments of $4,998,000 and $10,127,000 for agreements signed during 2000 and 1999, respectively. At December 31, 2000 and 1999 future outstanding minimum royalty commitments under all agreements amounted to $3,871,000 and $6,057,000, respectively. Royalty expense aggregated $6,387,000, $7,909,000, and $8,311,000 in 2000, 1999, and 1998, 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 $551,000, $599,000, and $566,000 in 2000, 1999, and 1998, 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 (collectively, the "Option Plans") which cover employees and non-employee directors of the Company, respectively. The Board has reserved 2,980,000 shares for issuance under the Option Plans (all share amounts adjusted to reflect the two-for-one stock split effected on June 29, 1998). The exercise price for the incentive stock options granted under the Option Plans may not be less than the fair market value of the common stock at the date of grant, 110% of fair market value in the case of options granted to a 10% stockholder. In 2000, a director of the Company received an option to purchase 12,435 shares of the Company's Common Stock at an exercise price of $7.625 per share as compensation for consulting services. The Company recorded a charge to operations of $50,000 in 2000 for the compensation expense related to the stock option grant. IV-13 29 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Under the Option 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 did not acquire any shares for the year ended December 31, 2000 and acquired 8,400 shares of its common stock for the year ended December 31, 1999 through the exercise of employee stock options. Options granted must be exercised within the period prescribed by the Compensation Committee; the options vest in accordance with the vesting provisions prescribed at the time of grant. 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 Option Plans is as follows:
WEIGHTED AVERAGE EXERCISE NUMBER OF PRICE NUMBER OF OPTIONS PER OPTIONS AVAILABLE SHARE OUTSTANDING FOR GRANT --------- ----------- --------- January 1, 1998............................................. $ 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 Granted................................................... 7.83 477,971 (477,971) Canceled.................................................. 9.73 (80,846) 80,846 Exercised................................................. 5.33 (109,008) -- --------- --------- December 31, 2000........................................... $10.43 1,054,739 760,964 ========= ========= Exercisable at December 31, 1998.......................... $ 5.88 341,902 Exercisable at December 31, 1999.......................... $ 9.46 428,615 Exercisable at December 31, 2000.......................... $11.49 532,601
The grant date fair value for options granted in 2000, 1999, and 1998 was $4.74, $8.24, and $7.43, respectively. IV-14 30 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth information regarding stock options outstanding at December 31, 2000 under the Stock Option Plans as described above:
WEIGHTED NUMBER AVERAGE NUMBER WEIGHTED WEIGHTED CURRENTLY EXERCISE OF OPTIONS RANGE OF AVERAGE AVERAGE EXERCISABLE PRICE FOR OUTSTANDING EXERCISE EXERCISE REMAINING AT OPTIONS AT 12/31/00 PRICES PRICE LIFE 12/31/00 EXERCISABLE ----------- ------------- -------- --------- -------------- ----------- 12,000 $2.75 -- $ 2.78 2.92 12,000 $ 2.78 $4.13 41,824 4.13 -- 6.19 5.10 3.10 41,824 5.10 508,050 6.19 -- 9.28 7.75 8.58 124,354 7.91 354,919 9.28 -- 13.92 13.24 7.90 237,786 13.00 137,946 13.92 -- 15.39 8.13 116,637 15.44 20.88 ----------- ------ ---- ------- ------ 1,054,739 $10.43 8.01 532,601 $11.49 =========== ====== ==== ======= ======
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 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, 2000, 1999, and 1998 would have been as follows:
2000 1999 1998 ---------- ---------- ---------- Net income......................................... $6,976,525 $7,597,937 $7,233,876 Basic earnings per share........................... $0.73 $0.74 $0.70 Diluted earnings per share......................... $0.73 $0.73 $0.68
For purposes of the pro forma disclosures, the fair value of the options granted under the Company's stock option plans during 2000, 1999, and 1998 was estimated on the date of grant using the Binomial option pricing model. Key assumptions used to apply this pricing model are as follows:
2000 1999 1998 ---------- ---------- ---------- Risk free interest rate......................... 6.35% 5.09% 5.49% Expected life of option grants.................. 7.65 years 8.47 years 7.85 years Expected volatility of underlying stock......... 45.50% 44.82% 38.40% Expected dividend payment rate.................. 0.85% 0.85% 0.85%
The pro forma disclosures include the effects of options granted in 2000, 1999, 1998, and 1997. 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 foreign currency 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 60% and 62% of the trade receivables outstanding at December 31, 2000 and 1999, 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 IV-15 31 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the bank which is the counterparty to the forward exchange contracts. As of December 31, 2000, management believes it had no significant exposure to credit risks. Major Customers and Export Sales -- The Company derived 10% or more of its gross sales from its three largest customers. The Company's largest customer accounted for sales of $34,361,000, $40,600,000, and $42,622,000 in 2000, 1999, and 1998, respectively. The Company's second largest customer accounted for sales of $27,942,000, $26,688,000, and $24,413,000 in 2000, 1999, and 1998, respectively. The Company's third largest customer accounted for sales of $18,940,000, $20,026,000, and $15,706,000 in 2000, 1999, and 1998. No other customer accounted for 10% or more of the Company's sales. Net export sales, primarily to Europe, Canada, South America, and the Pacific Rim, were approximately $14,958,000, $14,459,000, and $16,735,000 in 2000, 1999, and 1998, respectively. Reliance on Licensed Products -- The Company derives a significant portion of its net sales from products under license. Net sales of products licensed under our most significant licensing agreement amount to $38,578,000, $46,681,000 and $56,257,000 or 29%, 34%, and 42% of the Company's total net sales for the years ended December 31, 2000, 1999, and 1998, respectively. This licensing agreement was renewed in 2000 and will expire at the end of 2002. Reliance on Foreign Manufacturers -- The Company does not own or operate its own manufacturing facilities. In 2000, 1999, and 1998, the Company derived approximately 69%, 54%, and 65%, respectively, of its sales from products manufactured by others in the Far East, primarily 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 is as follows:
2000 1999 1998 ---------- ----------- ----------- Average shares outstanding........................... 9,500,726 10,226,470 10,338,857 Effect of dilutive shares............................ 119,202 175,827 330,646 ---------- ----------- ----------- Average diluted shares outstanding................... 9,619,928 10,402,297 10,669,503 ========== =========== =========== Net income........................................... $8,650,963 $ 9,094,633 $ 8,012,815 ========== =========== =========== Basic earnings per share............................. $0.91 $0.89 $0.78 ===== ===== ===== Diluted earnings per share........................... $0.90 $0.87 $0.75 ===== ===== =====
As of December 31, 2000, options to purchase 498,865 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 2007 to 2010, had exercise prices ranging from $9 5/8 to $17 per share. The options were still outstanding at the end of 2000. 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. IV-16 32 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. DIISONONYL PHTHALATE MATTER During the fourth quarter of 1998, the Company recorded 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 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(R) valved drinking cups infringed U.S. Patent 5,186,347. In 1999, 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 wrongdoing 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's product line consists of three categories, Feeding & Soothing, Play & Discover, and Care & Safety. Net sales for the year ended December 31, 2000 from each of these products categories amounted to $55,701,000, $30,432,000, and $47,379,000, respectively. Net sales for the year ended December 31, 1999 for each category amounted to $60,525,000, $30,500,000, and 45,635,000, respectively. The Company has $1,341,882 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, export sales, and licensed product sales. IV-17 33 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Selected quarterly financial data for the years ended December 31, 2000 and 1999 is as follows:
BASIC DILUTED NET GROSS NET EARNINGS EARNINGS CALENDAR QUARTER SALES PROFIT (1) INCOME PER SHARE PER SHARE ---------------- ----------- ----------- ---------- --------- --------- 2000 First................................ $36,762,253 $13,400,792 $3,011,533 $0.31 $0.31 Second............................... 34,260,931 12,379,942 2,294,580 0.24 0.24 Third................................ 32,237,407 11,597,282 1,840,174 0.19 0.19 Fourth............................... 30,251,609 11,342,568 1,504,676 0.16 0.16 1999 First................................ 35,246,190 13,329,978 2,968,331 0.28 0.28 Second............................... 36,553,805 13,269,672 2,649,001 0.25 0.25 Third................................ 31,794,094 12,700,370 2,438,792 0.24 0.24 Fourth............................... 33,057,662 11,880,154 1,038,509 0.11 0.10
Basic and diluted earnings per share are computed independently for each of the periods presented. Accordingly, the sum of the quarterly earnings per share amounts may not agree to the total for the year. --------------- (1) Quarterly amounts adjusted to reflect certain reclassifications. * * * * * * IV-18 34 SCHEDULE II THE FIRST YEARS INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
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: 2000.............................. $ 270,000 $ 87,324 $ 87,324(1) $ 270,000 ========== ========== ============ ========== 1999.............................. $ 270,000 $ 78,967 $ 78,967(1) $ 270,000 ========== ========== ============ ========== 1998.............................. $ 185,000 $ 261,034 $ 176,034(1) $ 270,000 ========== ========== ============ ========== Allowance for obsolete inventory: 2000.............................. $ 390,000 $ 0 $ 90,000 $ 300,000 ========== ========== ============ ========== 1999.............................. $ 250,000 $ 140,000 $ 0 $ 390,000 ========== ========== ============ ========== 1998.............................. $ 250,000 $ 0 $ 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 DINP matter. IV-19 35 THE FIRST YEARS INC. EXHIBIT INDEX
EXHIBIT DESCRIPTION ------- ----------- (10)(m) Non-Compete Agreement between The First Years Inc. and Richard F. Schaub, Jr. dated August 29, 2000. (10)(n) Change of Control Agreement between The First Years Inc. and Richard F. Schaub, Jr. dated August 29, 2000. (10)(o) Promissory Note and Agreement between The First Years Inc. and Richard F. Schaub, Jr. dated September 28, 2000. (10)(p) Agreement between The First Years Inc. and James A. Connors, Jr. dated May 8, 2000. 21 List of Subsidiaries of the Registrant. 23 Consent of Deloitte & Touche LLP dated March 30, 2001. 99 Important Factors That May Affect Future Results.
IV-20