-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UgN/9KUNJMNUSkviA2prvgMkQooAUz3qTfH9+2yZTLrRUL0yMyNnlCtuHbb4dg1P PnLjNdiPBwZxVQ/QmaHvkg== 0000950135-98-001949.txt : 19980331 0000950135-98-001949.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950135-98-001949 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST YEARS INC CENTRAL INDEX KEY: 0000055698 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PLASTIC PRODUCTS [3080] IRS NUMBER: 042149581 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-07024 FILM NUMBER: 98577391 BUSINESS ADDRESS: STREET 1: ONE KIDDIE DR CITY: AVON STATE: MA ZIP: 02322-1171 BUSINESS PHONE: 5085881220 MAIL ADDRESS: STREET 1: ONE KIDDIE DR CITY: AVON STATE: MA ZIP: 02322-1171 FORMER COMPANY: FORMER CONFORMED NAME: KIDDIE PRODUCTS INC DATE OF NAME CHANGE: 19920703 10-K405 1 THE FIRST YEARS 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, 1997; OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-7024 THE FIRST YEARS INC. (Exact Name of Registrant as Specified in its Charter) MASSACHUSETTS 04-2149581 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) ONE KIDDIE DRIVE, AVON, MASSACHUSETTS 02322 (Address of Principal Executive Offices) (Zip Code)
508-588-1220 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED NONE NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.10 PAR VALUE (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No __. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] The aggregate market value of the Common Stock held by nonaffiliates of the Company was $110,256,811, based on the price at which the stock was sold over the counter on the Nasdaq National Market, as reported at the close of business on February 27, 1998. The number of shares of Registrant's Common Stock outstanding on December 31, 1997 was 5,084,591. ================================================================================ 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, 1997. The following sections of such definitive proxy statement are hereby incorporated by reference into Items 10, 11, 12 and 13 of Part III of this Form 10-K: "Common Stock Ownership of Certain Beneficial Owners and Management;" "Election of Directors;" "Executive Compensation" (other than the Board Compensation Committee Report on Executive Compensation and the Performance Chart); and "Compliance with Section 16(a) of the Securities Exchange Act of 1934." 3 PART I ITEM 1. BUSINESS The First Years Inc. (the "Company") is a leading developer and worldwide marketer of a broad line of products for infants and toddlers. Major channels through which the Company sells its products include mass merchants, supermarkets, drug stores, department stores, wholesale clubs, convenience stores, specialty stores, 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. Except as expressly indicated or unless the context otherwise requires, as used in this report, the "Company" means The First Years Inc. a Massachusetts corporation, and its subsidiaries. Products The Company's product line, which contains approximately 320 items that range in retail price from approximately $0.99 to $69.99, is categorized and marketed into five distinct product categories as follows: Feeding & Soothing. The Feeding & Soothing category is comprised of bottles and accessories, nipples, pacifiers, teethers, bowls, drinking cups, dishes, flatware, bibs and breast-feeding accessories. This category includes the TumbleMates line of training cups, bowls, plates and utensils, designed for serving, storing and transporting drinks and snacks, and which features a system of interchangeable cups and lids. This category also includes the Simplicity line of breast feeding accessories, the Flowright angled feeding system of nipples and bottles and the Sure pacifier. Play & Discover. The Play & Discover category consists of an extensive line of entertaining, skill-developing toys for infants and toddlers including crib toys, floor toys, hand-held toys, and large play items. The Play & Discover category includes the Company's Washables line of 100% washable, dishwasher-safe toys and its Firstronics line of hand-held electronic toys for children under three years of age. In 1997, the Company introduced several higher priced items intended for the gift giving market such as The Spinning Musical Plush and the Jukebox Crib Mirror. Care & Safety. The Care & Safety category consists of a broad line of bathing and grooming accessories, home safety and monitoring products such as door and cabinet latches, toilet-training products and products appropriate for the health and hygiene needs of infants. This category includes the Comfortemp instant underarm thermometer and the Booties to Grow line of infant footwear. Winnie the Pooh. The Winnie the Pooh category consists of over 65 basic products including teethers, rattles, bibs, bottles, bathing accessories and gift sets featuring Winnie the Pooh characters. In 1997, the Company introduced numerous additional items in this category including Pooh characters on cups, bottles, teethers, books, electronic musical toys plus a bouncy seat with a toybar. Sesame Street. The Sesame Street category consists of over 30 basic products including teethers, pacifiers, bottles, drinking cups, dishes, flatware, healthcare products, car sun shade, hooded towels, rattles and a toilet trainer. ------------------------ THE FIRST YEARS(R) Ideas Inspired by Parents(R), TumbleMates(R), Firstronics(R), and Washables(R) are registered trademarks of The First Years Inc., Nurserytronics(TM), Simplicity(TM), Flowright(TM), Sure(TM), Booties to Grow(TM) and ComforTemp(TM) are trademarks of The First Years Inc. SESAME STREET is a registered trademark of Children's Television Workshop, WINNIE THE POOH(R) and POOH(R) are registered trademarks of Disney Enterprises, Inc. I-1 4 PRODUCT DESIGN, DEVELOPMENT AND MARKETING The Company devotes substantial resources to product development. The Company employs a staff of professionals engaged in the creation of new products and also uses, from time to time, a diverse group of outside designers and developers. For the past 17 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 $2.6, $2.2 and $1.8 million on new product development in 1997, 1996 and 1995, respectively. Most of the Company's new products are shown at the Juvenile Products Manufacturers Association Trade Show, in Dallas, Texas in the fall of each year, and a variety of other national and international toy and baby fairs. SALES The Company's products are sold nationally and internationally to a broad spectrum of customers including mass merchants, national variety and drug stores, supermarkets, wholesale clubs, convenience stores, toy specialty stores, wholesale distributors, department stores, mail order catalogs and catalog stores. The Company currently has customers in over 60 countries. Major customers include Wal*Mart, Toys "R" Us, Target, Kmart, Kroger, Sears, Rite Aid, Albertsons, and J.C. Penney. The Company's products are sold in the United States and Canada primarily through the Company's internal sales staff and a network of 43 independent sales representatives. The Company's sales staff is responsible for supervising and training the sales representatives. Such training is conducted at the Company's headquarters and throughout the United States. In August, 1997, the Company created a wholly-owned subsidiary, The First Years Inc., a Delaware corporation ("TFY-Delaware"), to consolidate and more efficiently handle the company's sales and distribution operations in the western part of the United States. TFY-Delaware has sales offices in Missouri 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. The Company's international sales in 1997, 1996 and 1995 were approximately $16.2, $11.6 and $7.7 million, respectively, and accounted for approximately 13.5%, 12.5% and 10% of the Company's total net sales in 1997, 1996 and 1995, respectively. (See "Notes to Financial Statements, Number 8.") During 1997, Wal*Mart, Toys "R" Us, and Target accounted for approximately 25%, 16%, and 11% of the Company's net sales, respectively. A significant reduction in purchases by any of these customers could have a material adverse effect on the Company's business. Backlog is not a significant and material aspect of the Company's business. Customers place orders on an as needed basis. As the Company's sales have increased, the amount of unfilled orders at any time has not been indicative of future results. LICENSED CHARACTER PRODUCTS In 1996 and 1997, the Company renewed and entered into various agreements which provide for the payment of royalties on certain of the Company's products featuring licensed cartoon characters. The agreements have terms ranging from one to three years and require minimum royalty payments of $5,312,000 during the terms of these agreements. A major licensing agreement will expire at the end of 1998; however the Company's management is in the process of negotiating continuance of this agreement (see Exhibit 99 to this Report, "Important Factors Regarding Forward-Looking Statements" and "Notes to the Financial Statements," Numbers 6 and 8). I-2 5 MANUFACTURING AND SOURCES OF SUPPLY The Company does not own or operate its own manufacturing facilities. In 1997, 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 60% of all of its products sold in 1997 were manufactured in Asia, primarily in China. A large percentage of the Company's furnishings and other large products were manufactured in 1997 by suppliers in the United States and Canada because of the significantly higher shipping costs from the Far East. Generally the Company uses one manufacturer to make each product from its supplier base in Asia, Canada, and the United States. Due to the high cost of developing duplicate tooling (predominantly molds and dies), most of the Company's products are made using one set of tools; however, the Company has developed duplicate tools for several of its key and high-volume products. In December, 1996, the Company entered into an agreement with Exergen Corporation to jointly design and develop the Company's ComforTemp thermometer. The ComforTemp is an instant underarm thermometer which uses an infrared temperature-taking technology developed and patented by Exergen. The Company is dependent on Exergen for Exergen's technology and proprietary components. The Company introduced the Comfortemp to the market in 1997. There can be no assurance that the Company will continue to obtain such proprietary components from Exergen or that the ComforTemp thermometer, as a new product, will result in substantial sales. The Company believes it has alternative manufacturing sources available for all of its other products. Because it owns its tools, it could shift its sources of manufacturing for such other products to an alternative supplier. In 1997, the Company's largest supplier, which is based in the United States, accounted for products that represented approximately 15% of its net sales in 1997. 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 1997. The Company purchases its products from its suppliers primarily in the U.S. dollar and the Hong Kong dollar which is currently pegged to the U.S. dollar. Generally, the Company's suppliers ship the products on the basis of open credit terms or upon the acceptance of products by the Company. 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 "most favored nation" ("MFN") trading status could have a material adverse effect upon the Company's business because products originating from China could be subjected to substantially higher rates of duty. China's MFN trading status has been extended through July 2, 1998. Unless Congress takes action to override this decision, China will continue to enjoy MFN treatment during this period. The European Community (the "EC") has enacted a quota and tariff system with respect to the importation into the EC of certain toy products originating in China. The Company, therefore, continues to evaluate alternative sources of supply outside of China. The Company, because of its substantial reliance on suppliers in foreign countries, is required to order products further in advance of customer orders than would generally be the case if such products were produced in the United States. As a result, the Company is required to carry significant amounts of inventory I-3 6 to meet rapid delivery requirements of customers and to assure itself of continuous allotment of goods from suppliers. WORKING CAPITAL ITEMS See Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operation." COMPETITION The juvenile products industry is highly competitive and includes numerous domestic and foreign competitors, some of which are substantially larger and have greater financial and other resources than the Company. The Company competes with a number of different competitors, depending on the product category, and it competes against no single company across all product categories. Its competition includes large, diversified health care product companies, specialty infant products makers, toy makers and specialty health care products companies. The Company competes principally on the basis of brand name recognition and price/value relationship. In addition, the Company believes that it competes favorably with respect to product quality, customer service and breadth of product line. DISTRIBUTION The Company distributes its products in the United States from its 103,500 square foot warehouse facility in Avon, Massachusetts and from a public warehouse in Fontana, California. The Company distributes its products in Canada from a public warehouse in Toronto, Ontario. In Europe, the Company distributes its products from a public warehouse in Ghent, Belgium. Warehouse services at the various public warehouses are performed by warehouse operators unaffiliated with the Company. TRADEMARKS, PATENTS AND COPYRIGHTS The Company's principal trademark THE FIRST YEARS and design, is registered in the United States and in a number of foreign countries. The Company also uses other trademarks for certain of its products and product categories, some of which are registered in the United States and in various foreign countries. The Company, also owns patents, design patents and design registrations, as well as pending applications in the United States and certain foreign countries. Although the Company believes such are important to its business, it does not believe that any single patent, design patent, or design registration, including any which may be issued on a pending application, is material to its business. There can be no assurance that such patents, design patents, or design registrations, including those that may be issued on pending applications, will offer any significant competitive advantage for the Company's products. The Company, also owns copyrights, some of which are registered in the United States. The Company does not believe that any single copyright is material to its business. There can be no assurance that such copyrights will offer any significant competitive advantage for the Company's products. EMPLOYEES As of December 31, 1997, the Company employed 128 full-time and 2 part-time employees, of whom 4 are senior executive officers and all of the other employees of the Company are in sales, marketing and product development, in materials, purchasing, quality control, data processing, finance, administration and clerical, and warehousing positions. None of the Company's employees is represented by a union, and the Company has not experienced any work stoppages. The Company believes that relations with employees are good. GOVERNMENT REGULATIONS The Company's products are subject to the provisions of the Federal Consumer Product Safety Act, the Federal Hazardous Substances Act, as amended, the Federal Flammable Fabrics Act, and the Child Safety Protection Act, and the regulations promulgated thereunder (the "Acts"). The Company's nursery monitors are subject to regulations of the Federal Communications Commission. The Company's medical devices and drug products are subject to the regulations of the Food and Drug Administration. The Acts enable the I-4 7 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. 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.......................... 51 President, Chairman of the Board of Directors, and Chief Executive Officer 1975 Jerome M. Karp............................ 70 Vice Chairman of the Board of Directors 1969 Benjamin Peltz............................ 58 Director 1975 Evelyn Sidman............................. 84 Clerk and Director 1979 Fred T. Page.............................. 51 Director 1988 Merton N. Alperin......................... 75 Director 1988 John R. Beals............................. 43 Treasurer, Senior Vice President -- Finance and Chief Financial Officer 1990 Wayne Shea................................ 43 Senior Vice President -- Worldwide Sales and Merchandising 1991 Bruce Baron............................... 37 Senior Vice President -- Operations 1997 John N. Colantuone*....................... 60 Vice President -- Engineering and Product Development 1982
- --------------- Mr. Sidman has been the President of the Company since January 1989 and Chairman of the Board of Directors and Chief Executive Officer since March 1995. Mr. Peltz was the Treasurer of the Company from May, 1970 to January, 1998. He was also the Senior Vice President -- Finance of the Company from January, 1980 until June 30, 1997 when he retired from the Company. Mr. Page has been the President -- Network Services of Southern New England Telecommunications Corporation ("SNET") since January, 1994 and has been with SNET for over 5 years. Mr. Alperin, a Certified Public Accountant, has been a financial consultant for over five years. He was the Chairman of the Board of Public Accountancy of Massachusetts for several years. Mr. Beals was elected Senior Vice President -- Finance on March 19, 1998 and was elected the Treasurer of the Company on January 15, 1998. He has been Chief Financial Officer of the Company since July, 1997. From July, 1997 to March, 1998 he was Vice President -- Finance of the Company and from January, 1990 to June, 1997, he was the Assistant Treasurer and Controller of the Company. Mr. Shea has been Senior Vice President of Worldwide Sales & Merchandising since July, 1997. From January, 1995 to June, 1997, Mr. Shea was Vice President Worldwide Sales & Merchandising and from July, 1991 to December, 1994, Mr. Shea was Vice President of Service and Merchandising of the Company. Mr. Baron has been Senior Vice President since August, 1997. Prior to that time, Mr. Baron was Vice President of Operations at Crabtree & Evelyn from 1988 to July, 1997. *Mr. Colantuone will be retiring from the Company on April 3, 1998. I-5 8 ITEM 2. PROPERTIES The Company owns its executive and administrative offices and principal warehouse which are located in a building at One Kiddie Drive, Avon, Massachusetts. The building contains approximately 124,000 square feet of space, of which approximately 20,500 square feet are used for executive and administrative offices and the balance, approximately 103,500 square feet is utilized for warehousing. The Company also has sales offices in leased premises in Cirencester, England. The Company's subsidiary, TFY-Delaware has sales offices in leased premises in Missouri and Mission Viejo, California. The Company also uses public warehouses located in Toronto, Canada; Fontana, California; and in Ghent, Belgium. The Company believes that its properties (owned and leased) are in good condition and adequate for its current needs. ITEM 3. LEGAL PROCEEDINGS The Company is involved in legal proceedings which have arisen in the ordinary course of business. The Company believes that there are no claims or litigation pending, the outcome of which could have a material adverse effect on the Company's financial condition or operating results. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders of the Company. I-6 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) MARKET INFORMATION The Company's Common Stock is traded on the Nasdaq National Market. Below is a summary of the actual high and low sales prices of the Company's Common Stock for each quarter of 1997 and 1996 as reported by Nasdaq. 1997
QUARTER LOW HIGH ------- --- ---- First....................................................... $15 1/2 $ 17 7/8 Second...................................................... 15 21 3/4 Third....................................................... 19 1/2 29 Fourth...................................................... 20 1/2 28 3/4
1996
QUARTER LOW HIGH ------- --- ---- First....................................................... $ 9 3/4 $ 12 1/2 Second...................................................... 11 3/4 18 1/2 Third....................................................... 12 3/4 15 Fourth...................................................... 14 17
(b) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
APPROXIMATE NUMBER OF RECORD HOLDERS TITLE OF CLASS (AS OF DECEMBER 31, 1997) -------------- ------------------------- Common Stock, $.10 Par Value 142
(c) DIVIDEND POLICY In 1996 and 1997, the Company paid a cash dividend on its Common Stock of $0.10 per share which were paid on June 1, 1996 and June 2, 1997, respectively. The Company currently expects that comparable cash dividends will continue to be paid in the future. However, the declaration and payment of any such cash dividends in the future will depend upon the Company's earnings, financial condition, capital needs, and other factors deemed relevant by the Board of Directors. There can be no assurance that the Company will continue to pay dividends in the future. II-1 10 ITEM 6. SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- SELECTED INCOME STATEMENT DATA: Net sales.................. $120,695,988 $93,110,361 $75,757,322 $53,233,109 $46,124,088 Cost of products sold...... 71,185,634 55,463,255 45,108,546 29,498,457 26,653,704 Selling, general and administrative expenses................. 37,165,878 28,580,039 23,961,206 18,915,908 17,857,049 Severance-related expenses................. -- -- -- -- 373,000 Interest expense........... 27,709 358,637 186,338 24,575 28,912 Interest income............ 168,922 27,349 16,718 66,605 66,204 Offering expenses.......... -- -- 310,457 -- -- Income before income taxes.................... 12,485,689 8,735,779 6,207,493 4,860,774 1,277,627 Provision for income taxes.................... 5,040,900 3,494,300 2,483,000 1,871,400 481,500 Net income................. 7,444,789 5,241,479 3,724,493 2,989,374 796,127 Basic earnings per share**.................. $1.49 $1.11 $0.83 $0.66 $0.18 Diluted earnings per share**.................. $1.42 $1.06 $0.80 $0.66 $0.18 Dividends paid per share*................... $0.10 $0.10 $0.09 $0.09 $0.09 Basic weighted average number of shares outstanding**............ 5,001,887 4,733,178 4,507,058 4,497,244 4,496,520 Diluted weighted average number of shares outstanding**............ 5,226,531 4,945,991 4,663,491 4,497,244 4,496,520 SELECTED BALANCE SHEET DATA: Total assets............... $60,571,561 $47,049,537 $41,712,080 $28,852,785 $24,532,714 Long-term debt............. -- -- 100,001 233,334 366,667 Stockholders' equity....... 44,009,004 35,866,440 25,763,259 22,349,947 19,719,720 Stockholders' equity per share**.................. $8.42 $7.25 $5.52 $4.97 $4.39
- --------------- * Adjusted to reflect the two-for-one stock split effected on December 29, 1995. ** Adjusted to reflect the two-for-one stock split effected on December 31, 1995 and restated to reflect adoption of Statement of Financial Accounting Standard No. 128 in the fourth quarter of 1997. II-2 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STATEMENT OF FORWARD LOOKING INFORMATION: Statements in this Report on Form 10-K that are not strictly historical are "forward-looking" statements, as defined in the Private Securities Litigation Reform Act of 1995. The actual results may differ from those projected in the forward-looking statements due to risks and uncertainties that exist in the Company's operations and business environment and in the development and introduction of new products, described more fully in this Annual Report on Form 10-K for the year ended December 31, 1997, and Exhibit 99 of this Annual Report for the year ended December 31, 1997, filed with the Securities and Exchange Commission. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Net sales in 1997 were $120.7 million, an increase of $27.6 million, or 29.6%, as compared to $93.1 million in 1996. The increase was due to new product introductions, including the Sesame Street brand licensed from the Children's Television Workshop, and expanded retail distribution in domestic and foreign markets. As a percentage of net sales, net sales to foreign markets increased to 13.5% in 1997 from 12.5% in 1996 resulting primarily from increases in Europe, the Pacific Rim and Canada. As a percentage of net sales, licensed products increased to 43.1% in 1997 from 31.8% in 1996. Cost of products sold in 1997 was $71.2 million, an increase of $15.7 million or 28.3%, as compared to $55.5 million in 1996. As a percentage of net sales, cost of products sold in 1997 decreased to 59.0% from 59.6% in the comparable period of 1996. The decrease was primarily due to reduced cost of products resulting from manufacturing efficiencies and increased sales of higher margin products. Selling, general, and administrative expenses in 1997 were $37.2 million, an increase of $8.6 million, or 30.0%, as compared to $28.6 million over such expenses in 1996. The increase resulted primarily from costs related to increased sales volume; payroll and payroll related costs, and integrated marketing communication program expenses. As a percentage of net sales, selling, general, and administrative expenses in 1997 and 1996 remained consistent at 30.8% and 30.7%, respectively. Income tax expense as a percentage of pretax income increased to 40.4% in 1997 from 40.0% in 1996. YEAR 2000 ISSUE The inability of computers, software and other equipment to recognize and properly process data containing a two digit year (i.e. 97) as opposed to a four digit year (i.e. 1997) is commonly referred to as the Year 2000 Issue. The Company is in the process of reviewing its computer systems to identify those areas that could be affected by the "Year 2000" issue and is developing an implementation plan to address the issue. The Company presently believes, with modifications to existing software and converting to new software, the Year 2000 problem will not pose significant operational problems and is not anticipated to be material to its financial position or results of operations in any given year. Additionally, the Company is in the process of initiating communications with significant suppliers, customers and service vendors to determine the extent of the Company's exposure if others fail to remedy their own Year 2000 issues. No guarantee can be made that systems of other companies on which the Company relies upon will be converted on time or that a failure to convert would not have a material effect on the Company. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Net sales in 1996 were $93.1 million, an increase of $17.3 million or 22.9%, as compared to $75.8 million for the comparable period last year. The increase was due to new product introductions and expanded retail distribution in domestic and foreign markets. As a percentage of net sales, net sales to foreign markets increased to 12.5% in 1996 from 10.3% in 1995 resulting primarily from increases in Europe and Canada. As a percentage of net sales, licensed products increased to 31.8% in 1996 from 19.5% in 1995. II-3 12 Cost of products sold in 1996 was $55.5 million, an increase of $10.4 million or 23.0%, as compared to $45.1 million for the comparable period last year. As a percentage of sales, cost of products sold in 1996 and 1995 remained constant at approximately 59.5%. Selling, general, and administrative expenses in 1996 were $28.6 million, an increase of $4.6 million or 19.3% as compared to $24.0 million over such expenses in 1995. The increase resulted primarily from costs related to increased sales volume, payroll and payroll related costs. As a percentage of net sales, selling, general, and administrative expenses for the year of 1996 decreased to 30.7% from 31.6% in 1997. The decrease reflects the economies of scale provided by higher volume of business. Income tax expense as a percentage of pretax income was 40% in 1996 and 1995. LIQUIDITY AND CAPITAL RESOURCES Net working capital increased by $8.4 million to $38.0 million at December 31, 1997 from $29.6 million at December 31, 1996 primarily due to funds generated from profitable operations. Accounts receivable increased by $4.0 million primarily as a result of increased sales. Inventory increased by $5.8 million to meet continued demand from the Company's products. Cash increased by $3.5 million primarily as a result of profitable operations. In 1996, the Company consummated a public offering of common stock. The closing of the sale, consisting of 400,000 newly issued shares and 1,200,000 shares of certain selling stockholders was held on July 1, 1996 at which time the Company issued the new shares and received the net proceeds of $5,121,750. The proceeds of the newly issued shares were used to pay certain indebtedness of the Company. An unsecured line of credit of $10 million which is subject to annual renewal, is available from a bank. Amounts outstanding under the line are payable upon demand by the bank. During 1997, the Company has borrowed various amounts from time to time up to $2.5 million. As of December 31, 1997 no balance was outstanding. During 1996, the Company had available an unsecured line of credit from a second bank totaling $10,000,000. The line was subject to annual renewal and was not renewed at the option of the Company. The Company paid a cash dividend of $0.10 per share of Common Stock in June of 1997 and 1996. The Company expects cash flow from operations and availability under the Company's lines of credit to be sufficient to meet cash needs for working capital expenditures for the next two years. INFLATION AND FOREIGN CURRENCY FLUCTUATIONS Inflation has not had a material effect on the Company's operating results over the past three years. The Company enters into forward exchange contracts to minimize the impact of fluctuations in currency exchange rates on future cash flows emanating from sales denominated in foreign currencies. The Company does not purchase such contracts for trading purposes. During 1997, the Company entered into forward exchange contracts with a bank whereby the Company is committed to deliver foreign currency at predetermined rates. The contracts expire within one year. The Company's commitment under these contracts approximated $2.5 million as of December 31, 1997. At December 31, 1997, the exchange rates for such currencies covered by the contracts approximated the predetermined rates included therein. The Company routinely assesses the financial strength of the bank which is counterparty to the forward exchange contracts. As of December 31, 1997, management believes it had no significant exposure to credit risk relative to such contracts. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information". In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits". These new standards will be effective in the Company's fiscal year ending December 31, 1998. The Company has not determined the effects, if any, that these standards will have on its consolidated financial statements. II-4 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial Statements listed under Item 14.(a) 1. are included in Part IV. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There is nothing to report relating to this Item. II-5 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is included in the Registrant's definitive proxy statement for the 1998 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 1998 Annual Meeting of Stockholders, except that the sections in said definitive proxy statement entitled "Board Compensation Committee Report on Executive Compensation" and the "Stock Performance Chart" shall not be deemed incorporated herein by reference to this 10-K Report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is included in the Registrant's definitive proxy statement for the 1998 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In 1997, the Company repurchased 3,409 shares of the Company's Common Stock, $.10 per value, from Ronald J. Sidman, the President of the Company, for $81,813 in connection with Mr. Sidman's delivery of such 3,409 shares as payment for the exercise of stock options in 1997, in accordance with the provisions of the Company's 1993 Equity Incentive Plan which has been approved by the Company's stockholders. III-1 15 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 14.(a) 1. FINANCIAL STATEMENTS Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 (a) 2. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. 14.(a) 3. EXHIBITS The following are either (i) filed herewith as exhibits to this 10-K Report or (ii) have been filed as exhibits to filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 and are incorporated herein by reference as exhibits to this 10-K Report.
PAGE ---- (3)(i) Restated Articles of Organization as currently in effect (filed as Exhibit (3.1) to Amendment No. 1 to Form S-1 Registration Statement filed with the Commission on October 5, 1995 and incorporated herein by reference). (3)(ii) By-laws of the Company and any amendments thereto, as currently in effect (filed as Exhibit 3(ii) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference.) (10)(a) Security and Trust Agreement among Town of Avon, acting by and through its Industrial Development Financing Authority, Kiddie Products, Inc., and State Street Bank and Trust Company relating to issuance of industrial revenue bonds, dated as of October 1, 1982 (filed as Exhibit 10 (c) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). (10)(b) Bond Purchase Agreement among Town of Avon, acting by and through its Industrial Development Financing Authority, Kiddie Products, Inc., and State Street Bank and Trust Company, dated as of October 1, 1982 (filed as Exhibit 10 (d) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). (10)(c) Loan Agreement between Town of Avon, acting by and through its Industrial Development Financing Authority, and Kiddie Products, Inc., dated as of October 1, 1982 (filed as Exhibit 10 (e) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). (10)(d) Put Agreement between State Street Bank and Trust Company and Kiddie Products, Inc., dated as of October 1, 1982 (filed as Exhibit 10 (f) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). (10)(e) Agreement with Disney Enterprises, Inc. dated December 3, 1996 (filed as Exhibit (10)(f) on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference; certain portions of such Agreement are subject to confidential treatment). (10)(f) Agreement with the Children's Television Workshop dated July 1, 1996 (filed as Exhibit (10)(g) on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference; certain portions of such Agreement are subject to confidential treatment). Management Contracts and Compensatory Plans (10)(g) The First Years Inc. 1993 Equity Incentive Plan, as amended through March 19, 1998. IV-18 (10)(h) The First Years Inc. 1993 Stock Option Plan for Directors, as amended through March 19, 1998. IV-18
IV-1 16
PAGE ---- (10)(i) Agreement between The First Years Inc. and Jerome M. Karp dated August 8, 1994 (filed as Exhibit 10(c) to the Form 10-Q Report for the quarter ended June 30, 1994, and incorporated herein by reference). (10)(j) Employment Agreement between The First Years Inc. and Benjamin Peltz, dated March 23, 1995 (filed as Exhibit 10(j) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). (10)(k) Employment Agreement between The First Years Inc. and Ronald J. Sidman, dated March 23, 1995 (filed as Exhibit 10(k) on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference). (10)(l) First Amendment to Employment Agreement between The First Years Inc. and Ronald J. Sidman dated January 16, 1997. IV-18 (10)(m) First Amendment to Employment Agreement between The First Years Inc. and Benjamin Peltz dated January 16, 1997. IV-18 (10)(n) The First Years Inc., a Massachusetts Corporation, and Affiliates -- 1997 Annual Incentive Plan, effective as of January 1, 1997. IV-18 (10)(o) Agreement between The First Years Inc. and Wayne Shea dated August 12, 1997. IV-18 - ------------------------------------------------------------------------------- (21) List of Subsidiaries of the Registrant. IV-18 (23) Consent of Deloitte & Touche LLP dated March 27, 1998. IV-18 (27.1) Financial Data Schedule -- 12/31/97 IV-18 (27.2) Financial Data Schedule -- 12/31/96 -- Restated IV-18 (27.3) Financial Data Schedule -- 12/31/95 -- Restated IV-18 (99) Important Factors Regarding Forward-Looking Statements. IV-18
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, 1997. IV-2 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE FIRST YEARS INC. .................................... (Registrant) By: /s/ RONALD J. SIDMAN ... RONALD J. SIDMAN, CHIEF EXECUTIVE OFFICER, CHAIRMAN OF THE BOARD OF DIRECTORS, AND PRESIDENT Date: March 19, 1998 By: /s/ JOHN R. BEALS ... JOHN R. BEALS, TREASURER AND SENIOR VICE PRESIDENT -- FINANCE(CHIEF FINANCIAL OFFICER AND CHIEF ACCOUNTING OFFICER) Date: March 19, 1998 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 19, 1998.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RONALD J. SIDMAN Chief Executive Officer Chairman of March 19, 1998 ........................................ the Board of Directors and President RONALD J. SIDMAN /s/ JEROME M. KARP Vice Chairman of the Board of March 19, 1998 ........................................ Directors JEROME M. KARP /s/ EVELYN SIDMAN Director March 19, 1998 ........................................ EVELYN SIDMAN /s/ BENJAMIN PELTZ Director March 19, 1998 ........................................ BENJAMIN PELTZ /s/ MERTON N. ALPERIN Director March 19, 1998 ........................................ MERTON N. ALPERIN /s/ FRED T. PAGE Director March 19, 1998 ........................................ FRED T. PAGE
IV-3 18 THE FIRST YEARS INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE ---- Independent Auditors' Report................................ IV-5 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1997 and 1996.................................................. IV-6 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996, and 1995..................... IV-7 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996, and 1995......... IV-8 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995............... IV-9 Notes to Consolidated Financial Statements............. IV-10-16 Financial Statement Schedule II -- Valuation and Qualifying Accounts for the Years Ended December 31, 1997, 1996, and 1995...................................................... IV-17
IV-4 19 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of The First Years Inc. Avon, Massachusetts We have audited the accompanying consolidated balance sheets of The First Years Inc. as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the accompanying index. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of The First Years Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. DELOITTE & TOUCHE LLP Boston, Massachusetts March 5, 1998 IV-5 20 THE FIRST YEARS INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
1997 1996 ---- ---- ASSETS Current Assets: Cash and cash equivalents (Notes 1 and 8).............. $ 7,697,040 $ 4,164,587 Accounts receivable (less allowance for doubtful accounts of $185,000 in 1997 and 1996) (Note 8)....... 19,962,226 15,929,465 Inventories (Note 1)................................... 24,372,881 18,588,044 Prepaid expenses and other assets...................... 414,764 375,317 Deferred tax asset (Notes 1 and 3)..................... 1,279,000 946,400 ----------- ----------- Total current assets.............................. 53,725,911 40,003,813 ----------- ----------- Property, Plant, and Equipment (Note 1): Land................................................... 167,266 167,266 Building............................................... 4,022,095 4,016,405 Machinery and molds.................................... 7,151,019 7,329,240 Furniture and equipment................................ 3,947,144 3,092,356 ----------- ----------- Total............................................. 15,287,524 14,605,267 Less accumulated depreciation.......................... 8,441,874 7,559,543 ----------- ----------- Property, plant, and equipment -- net............. 6,845,650 7,045,724 ----------- ----------- Total Assets...................................... $60,571,561 $47,049,537 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt (Note 2)............. $ -- $ 100,000 Accounts payable....................................... 10,163,844 6,969,115 Accrued royalty expense (Note 6)....................... 2,051,721 848,671 Accrued payroll expenses............................... 1,143,063 1,087,302 Accrued selling expenses............................... 2,387,029 1,406,009 ----------- ----------- Total current liabilities......................... 15,745,657 10,411,097 ----------- ----------- Deferred Tax Liability (Notes 1 and 3)...................... 816,900 772,000 Commitments and Contingencies (Notes 5, 6 and 8) Stockholders' Equity (Notes 4, 7, 9 and 10): Common stock -- authorized, 15,000,000 shares; issued 5,088,000 and 4,948,980; outstanding, 5,084,591 and 4,948,980 as of December 31, 1997 and 1996, respectively.......................................... 508,800 494,898 Paid-in-capital........................................ 6,534,308 5,271,875 Retained earnings...................................... 37,047,709 30,099,667 Less: 3,409 shares of treasury stock (at cost)......... (81,813) -- ----------- ----------- Total stockholders' equity........................ 44,009,004 35,866,440 ----------- ----------- Total Liabilities and Stockholders' Equity........ $60,571,561 $47,049,537 =========== ===========
See notes to consolidated financial statements. IV-6 21 THE FIRST YEARS INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ---- ---- ---- Net Sales (Notes 1, 6 and 8)........................ $120,695,988 $93,110,361 $75,757,322 Cost of Products Sold (Note 1)...................... 71,185,634 55,463,255 45,108,546 ------------ ----------- ----------- Gross Profit........................................ 49,510,354 37,647,106 30,648,776 Selling, General, and Administrative Expenses (Notes 1 and 7).......................................... 37,165,878 28,580,039 23,961,206 ------------ ----------- ----------- Operating Income.................................... 12,344,476 9,067,067 6,687,570 Other Income (Expense): Interest expense............................... (27,709) (358,637) (186,338) Interest income................................ 168,922 27,349 16,718 Offering expenses (Note 10).................... -- -- (310,457) ------------ ----------- ----------- Income Before Income Taxes.......................... 12,485,689 8,735,779 6,207,493 Provision for Income Taxes (Notes 1 and 3).......... 5,040,900 3,494,300 2,483,000 ------------ ----------- ----------- Net Income.......................................... $ 7,444,789 $ 5,241,479 $ 3,724,493 ============ =========== =========== Basic Earnings Per Share (Notes 1 and 9)............ $1.49 $1.11 $0.83 ===== ===== ===== Diluted Earnings Per Share (Notes 1 and 9).......... $1.42 $1.06 $0.80 ===== ===== =====
See notes to consolidated financial statements. IV-7 22 THE FIRST YEARS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
COMMON STOCK --------------------- PAID-IN RETAINED TREASURY SHARES PAR VALUE CAPITAL EARNINGS STOCK ------ --------- ------- -------- -------- Balance, January 1, 1995............. 2,250,430 $225,043 $ 98,194 $22,026,710 $ -- Stock issued under stock option plans (Note 7)................ 7,141 714 70,957 -- -- Dividends paid.................. -- -- -- (382,852) -- Stock split, two-for-one (Note 4)............................ 2,257,571 225,757 (169,151) (56,606) -- Net income...................... -- -- -- 3,724,493 -- --------- -------- ---------- ----------- -------- Balance, December 31, 1995........... 4,515,142 451,514 -- 25,311,745 -- Stock issued under stock option plans (Note 7)................ 33,838 3,384 190,125 -- -- Dividends paid.................. -- -- -- (453,557) -- Stock issued through public offering (Note 10)............ 400,000 40,000 5,081,750 -- -- Net income...................... -- -- -- 5,241,479 -- --------- -------- ---------- ----------- -------- Balance, December 31, 1996........... 4,948,980 494,898 5,271,875 30,099,667 -- Stock issued under stock option plans (Note 7)................ 139,020 13,902 804,433 -- -- Tax benefit derived from option compensation deduction........ -- -- 458,000 -- -- Dividends paid.................. -- -- -- (496,747) -- Repurchase of 3,409 shares for treasury...................... (3,409) -- -- -- (81,813) Net income...................... -- -- -- 7,444,789 -- --------- -------- ---------- ----------- -------- Balance, December 31, 1997........... 5,084,591 $508,800 $6,534,308 $37,047,709 $(81,813) ========= ======== ========== =========== ========
See notes to consolidated financial statements. IV-8 23 THE FIRST YEARS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ---- ---- ---- Cash Flows from Operating Activities: Net income..................................... $ 7,444,789 $ 5,241,479 $ 3,724,493 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation.............................. 1,397,078 1,228,790 992,291 Provision for doubtful accounts........... 147,541 152,582 86,227 Loss on disposal of equipment............. 617,693 37,699 70,258 Increase (decrease) arising from working capital items: Accounts receivable.................. (4,180,302) (1,890,417) (5,011,624) Inventories.......................... (5,784,837) 421,740 (8,595,949) Prepaid expenses and other assets.... (39,447) 402,757 (482,153) Accounts payable..................... 3,035,130 344,167 2,331,128 Accrued royalty expense.............. 1,203,050 314,870 533,801 Accrued payroll expenses............. 55,761 (17,702) 322,114 Accrued selling expenses............. 981,020 801,575 348,273 Federal and state income taxes Payable............................ 159,600 -- (218,500) Change in deferred income taxes........... (287,700) 50,600 (185,300) ----------- ----------- ----------- Net cash provided by (used for) operating activities.......... 4,749,376 7,088,140 (6,084,941) ----------- ----------- ----------- Cash Flows from Investing Activities -- Purchase of property, plant, and equipment..... (1,814,698) (2,004,489) (1,447,018) ----------- ----------- ----------- Cash Flows from Financing Activities: Repayment of industrial revenue bonds.......... (100,000) (133,334) (133,333) Net proceeds (repayment) from short-term borrowings................................... -- (6,200,000) 6,200,000 Dividends paid................................. (496,747) (453,557) (382,852) Net proceeds from public offering.............. -- 5,121,750 -- Purchase of treasury stock..................... (81,813) -- -- Common stock issued under stock option plans... 818,335 193,509 71,671 Tax benefit of stock option plans.............. 458,000 -- -- ----------- ----------- ----------- Net cash provided by (used for) financing activities.......... 597,775 (1,471,632) 5,755,486 ----------- ----------- ----------- Increase (Decrease) in Cash and Cash Equivalents.... 3,532,453 3,612,019 (1,776,473) Cash and Cash Equivalents, Beginning of Year........ 4,164,587 552,568 2,329,041 ----------- ----------- ----------- Cash and Cash Equivalents, End of Year.............. $ 7,697,040 $ 4,164,587 $ 552,568 =========== =========== =========== Supplemental Disclosures of Cash Flow Information Cash paid during the year for: Interest.................................. $ 27,709 $ 358,637 $ 186,338 =========== =========== =========== Income taxes.............................. $ 4,684,690 $ 3,087,700 $ 3,269,100 =========== =========== ===========
See notes to consolidated financial statements. IV-9 24 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business -- The First Years Inc. (the "Company") is a developer, marketer, and distributor of certain basic accessory and related products for infants and toddlers. The Company was founded and incorporated in 1952. Since its inception, the Company has engaged in this single line of business, with one class of similar products. The following is a summary of the Company's significant accounting policies. Basis of Reporting -- The consolidated financial statements include the accounts of all the Company's wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Revenue Recognition -- Revenue is recognized when products are shipped. Cash Equivalents -- Highly liquid investments with a maturity of three months or less when purchased have been classified as cash equivalents in the accompanying financial statements. Such investments are carried at cost, which approximates market value. Inventories -- Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist principally of finished goods, unpackaged components, and supplies. Property, Plant, and Equipment -- Property, plant, and equipment is stated at cost. Depreciation is provided based on the estimated useful lives of the various classes of assets (building, 15 to 40 years; machinery and molds, 5 to 10 years; furniture and equipment, 5 to 10 years) using the straight-line method. Income Taxes -- Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. Employee Stock-Based Compensation -- The Company uses the intrinsic value-based method of Accounting Principles Board Opinion ("APB") No. 25 to account for employee stock-based compensation plans. Earnings Per Share -- During the fourth quarter of fiscal 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No.128 "Earnings Per Share." SFAS No.128 replaced the presentation of primary earnings per share with a basic earnings per share (which excludes dilution) and a diluted earnings per share. Prior periods earnings per share have been restated to conform to the new presentation. Basic earnings per share is calculated based on the weighted average number of shares outstanding during each year. Diluted earnings per share also includes potential shares, consisting of stock options outstanding, if dilutive (Note 9). Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Research and Development Costs -- Research and development costs are expensed as incurred. During 1997, 1996, and 1995, research and development costs approximated $2,584,000, $2,209,000, and $1,834,000, respectively. Foreign Currency Translation -- The Company's functional currency is the U.S. dollar. Accordingly, monetary assets and liabilities of the Company's foreign operations are translated from the respective local currency to the U.S. dollar using year-end exchange rates while nonmonetary items are translated at historical rates. Income and expense accounts are translated at the average rates in effect during the year. Accordingly, translation adjustments and transaction gains and losses are recognized as income in the year of occurrence and are recorded as a component of cost of sales. IV-10 25 Foreign Exchange Contracts -- The Company enters into forward exchange contracts to minimize the impact of fluctuations in currency exchange rates on future cash flows emanating from sales denominated in foreign currencies. The Company does not purchase such contracts for trading purposes. Gains and losses related to foreign exchange contracts which qualify as accounting hedges of firm commitments are deferred and recognized in income when the hedged transaction occurs. Gains and losses related to foreign exchange contracts which do not qualify for hedge accounting are marked to market currently and recognized as a foreign currency transaction gain or loss. Fair Value of Financial Instruments -- The fair value of the Company's assets and liabilities which constitute financial instruments as defined in 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. New Accounting Pronouncements: -- In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information". In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits". These new standards will be effective in the Company's fiscal year ending December 31, 1998. The Company has not determined the effects, if any, that these standards will have on its consolidated financial statements. 2. DEBT Long-term debt consisted of unsecured industrial revenue bonds ("IRB"), with interest payable quarterly at 65% of the prime rate (5.4% at December 31, 1996) and principal payable in equal quarterly installments of $33,333 through September 30, 1997. As of December 31, 1997 there was no debt outstanding. During 1997 and 1996, the Company had available an unsecured line of credit totaling $10,000,000 with one bank. The line is subject to annual renewal and requires no compensating balances. The line bears interest at the prime rate or the LIBOR rate plus 1.75%. During 1997 and 1996, the Company borrowed various amounts up to $2,500,000 and $7,900,000, respectively, under the line. As of December 31, 1997 and 1996 no balance was outstanding. During 1996, the Company had available an unsecured line of credit from a second bank totaling $10,000,000. The line was subject to annual renewal and was not renewed at the option of the Company. No other short-term borrowings were incurred by the Company during 1997. 3. INCOME TAXES Components of the Company's net deferred tax asset at December 31 are as follows:
1997 1996 ---- ---- Deferred tax assets: Reserves not currently deductible................. $ 266,900 $119,000 Capitalized packaging costs not currently deductible...................................... 528,900 486,600 Capitalized inventory costs not currently deductible...................................... 432,800 301,000 Other............................................. 50,400 39,800 ---------- -------- 1,279,000 946,400 ---------- -------- Deferred tax liabilities: Excess tax depreciation over financial reporting depreciation.................................... 812,400 767,500 Other............................................. 4,500 4,500 ---------- -------- 816,900 772,000 ---------- -------- Net deferred tax asset................................. $ 462,100 $174,400 ========== ========
There was no valuation allowance for the years ended December 31, 1997 and 1996. IV-11 26 The provision for income taxes consists of the following:
1997 1996 1995 ---- ---- ---- Federal: Current............................ $4,157,200 $2,649,600 $2,104,000 Deferred........................... (287,700) 50,600 (185,300) ---------- ---------- ---------- Total federal................. 3,869,500 2,700,200 1,918,700 State................................... 1,171,400 794,100 564,300 ---------- ---------- ---------- Provision for income taxes.............. $5,040,900 $3,494,300 $2,483,000 ========== ========== ==========
A reconciliation of the statutory federal income tax rate and the effective tax rate as a percentage of pretax income is as follows:
1997 1996 1995 ---- ---- ---- Statutory rate........................................... 34.0% 34.0% 34.0% State income taxes, net of federal income tax benefit.... 6.4 6.0 6.0 ---- ---- ---- Effective tax rate....................................... 40.4% 40.0% 40.0% ==== ==== ====
4. COMMON STOCK In December 1995, the Company's Board of Directors (the "Board") declared a two-for-one split of the Company's common stock. The stock split, effected in the form of a stock dividend, was distributed on December 29, 1995 to stockholders of record in 1995. Earnings per share amounts shown in the accompanying financial statements have been retroactively adjusted to reflect the 1995 stock split. 5. COMMITMENTS AND CONTINGENCIES Forward Exchange Contracts -- During 1997 and 1996, the Company entered into forward exchange contracts with a bank whereby the Company is committed to deliver foreign currency at predetermined rates. The contracts expire within one year. The Company's future commitment under these contracts approximated $2,500,000 and $6,000,000 as of December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, the fair market value of the contracts approximated their notional amount. Other Commitments -- At December 31, 1997 and 1996, letters of credit outstanding aggregated approximately $125,000 and $644,000, respectively. During 1994, the Company entered into an employment agreement with an executive officer which provides for an annual salary of $100,000 through August 1999. On March 23, 1995, the Company entered into employment agreements (as amended on January 16, 1997) with two key senior executive officers which provide for aggregate annual base salaries through March 2000 of $391,000, subject to any increases or decreases established from time to time at the discretion of the Compensation Committee of the Board and, in the event of termination, provide for noncompetition payments for two years equal to their annual base salaries. Contingencies -- The Company is involved in legal proceedings which have arisen in the ordinary course of business. Management believes the outcome of these proceedings will not have a material adverse impact on the Company's financial condition or operating results. 6. ROYALTIES During 1997 and 1996, 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 $1,398,000 and $4,715,000 for agreements signed during 1997 and 1996, respectively. Future outstanding minimum royalty commitments under these IV-12 27 agreements amounted to $650,000 and $4,692,000 at December 31, 1997 and 1996, respectively. Royalty expense aggregated $6,356,000, $3,197,000 and $1,472,000 in 1997, 1996 and 1995, 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 $545,000, $472,000, and $217,000 in 1997, 1996, and 1995, respectively. The Company sponsors a 401(k) defined contribution plan covering substantially all Company employees pursuant to which the Company is obligated to match, up to specified amounts, employee contributions. Company contributions to this plan were not material for the periods presented. Stock Option Plans -- In May 1993, the Company's stockholders approved the adoption of The First Years Inc. 1993 Equity Incentive Plan and The First Years Inc. 1993 Stock Option Plan for Non-employee Directors (the "plans") which cover employees and directors of the Company. The Board has reserved 670,000 shares for issuance under the plans and 20,000 shares for another stock option plan (all share amounts adjusted to reflect the two-for-one stock split effected on December 29, 1995). The exercise price for the options granted may not be less than the fair market value of the optioned stock at the date of grant, 110% of fair market value in the case of options granted to a 10% stockholder. Options granted must be exercised within the period prescribed by the 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 December 29, 1995) of stock options granted under the plans is as follows:
WEIGHTED NUMBER OF AVERAGE NUMBER OF OPTIONS EXERCISE PRICE OPTIONS AVAILABLE PER SHARE OUTSTANDING FOR GRANT -------------- ----------- --------- January 1, 1995......................................... $ 5.16 305,132 150,528 Authorized......................................... -- 230,000 Granted............................................ 9.14 128,920 (128,920) Canceled........................................... 5.61 (8,192) 8,192 Exercised.......................................... 5.02 (14,282) -- -------- -------- December 31, 1995....................................... 6.40 411,578 259,800 Granted............................................ 12.46 68,605 (68,605) Canceled........................................... 8.19 (8,557) 8,557 Exercised.......................................... 5.71 (33,838) -- -------- -------- December 31, 1996....................................... 7.37 437,788 199,752 Granted............................................ 18.32 97,070 (97,070) Canceled........................................... 14.22 (28,305) 28,305 Exercised.......................................... 5.91 (139,020) -- -------- -------- December 31, 1997....................................... $10.31 367,533 130,987 ======== ======== Exercisable at December 31, 1995................... $ 5.25 166,999 Exercisable at December 31, 1996................... $ 6.01 278,935 Exercisable at December 31, 1997................... $ 7.31 232,856
The grant date fair value for options granted in 1997, 1996 and 1995 was $9.60, $4.19 and $3.46, respectively. IV-13 28 The following table sets forth information regarding stock options outstanding at December 31, 1997 under the Stock Option Plans as described above:
AVERAGE NUMBER WEIGHTED WEIGHTED NUMBER EXERCISE OF OPTIONS RANGE OF AVERAGE AVERAGE CURRENTLY PRICE FOR OUTSTANDING EXERCISE EXERCISE REMAINING EXERCISABLE OPTIONS AT 12/31/97 PRICES PRICE LIFE AT 12/31/97 EXERCISABLE - ----------- -------- -------- --------- ----------- ----------- 136,905 ............. $ 4.56 - $ 6.84 $ 5.28 1.68 136,905 $ 5.31 96,775 ............. 6.85 - 10.26 9.21 3.62 73,183 9.34 50,305 ............. 10.27 - 15.39 12.08 4.02 16,768 12.34 67,548 ............. 15.40 - 23.09 16.83 9.24 6,000 17.12 16,000 ............. 23.10 - 27.00 26.84 9.72 -- -- ------- ------ ---- ------- ------ 367,533 ............. $10.31 4.25 232,856 $ 8.47 ======= ====== ==== ======= ======
PRO FORMA DISCLOSURES As described in Note 1, the Company applies the intrinsic value method of APB No. 25 and related Interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, the Company's net income and earnings per share for the years ended December 31, 1997, 1996 and 1995 would have been as follows:
1997 1996 1995 ---- ---- ---- Net income......................... $7,023,195 $5,038,337 $3,625,525 Basic earnings per share........... $ 1.40 $ 1.06 $ 0.80 Diluted earnings per share......... $ 1.34 $ 1.02 $ 0.78
For purposes of the pro forma disclosures, the fair value of the options granted under the Company's stock option plans during 1997, 1996 and 1995 was estimated on the date of grant using the Binomial option pricing model. Key assumptions used to apply this pricing model are as follows:
1997 1996 1995 ---- ---- ---- Risk free interest rate................. 6.41% 6.08% 7.01% Expected life of option grants.......... 9.5 years 4.5 years 4.5 years Expected volatility of underlying stock................................. 35.27% 32.87% 36.86% Expected dividend payment rate.......... 0.85% 0.85% 0.85%
The proforma disclosures only include the effects of options granted in 1997, 1996, and 1995. 8. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS Concentrations of Credit Risk -- Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, trade receivables and forward exchange contracts (see Note 5). The Company's cash equivalents consist of money market funds placed with major banks and financial institutions. The Company's trade receivables principally include amounts due from retailers who are geographically dispersed. The Company's three largest customers accounted for 54% and 55% of the trade receivables outstanding at December 31, 1997 and 1996, respectively. The Company routinely assesses the financial strength of its customers and purchases credit insurance to limit its potential exposure to trade receivable credit risks. The Company routinely assesses the financial strength of the bank which is the counterparty to the forward exchange contracts. As of December 31, 1997, management believes it had no significant exposure to credit risks. Major Customers and Export Sales -- The Company derived 10% or more of its sales from its largest customer. Such amounts aggregated $33,643,000, $25,722,000, and $21,966,000 in 1997, 1996, and 1995, respectively. The Company's second largest customer accounted for sales of $23,075,000, $18,257,000, and $16,500,000 in 1997, 1996, and 1995, respectively. The Company's third largest customer accounted for sales of $13,315,000 and 9,908,000 in 1997 and 1996. No other customer accounted for 10% or more of the IV-14 29 Company's sales. Export sales, primarily to Europe, Canada, South America and the Pacific Rim, were approximately $16,250,000 and $11,564,000 in 1997 and 1996, respectively. Reliance on Licensed Products -- The Company derives a significant portion of its sales from products under license. A licensing agreement (see Note 6) with a company will expire at the end of 1998. Sales of products licensed under the agreement amounted to 40% of the Company's total net sales for year ended December 31, 1997. Management is in the process of negotiating continuance of this agreement. Reliance on Foreign Manufacturers -- The Company does not own or operate its own manufacturing facilities. In 1997 and 1996, the Company derived approximately 60% and 55%, respectively, of its net sales from products manufactured by others in the Far East, mainly in the Peoples Republic of China. A change in suppliers could cause a delay in manufacturing and a possible loss of sales, which would affect operating results adversely, depending on the particular product. 9. COMPUTATION OF EARNINGS PER SHARE Computation of the earnings per share ("EPS") in accordance with SFAS No. 128 are as follows:
INCOME SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- FOR THE YEAR ENDED 1995: Net income.................................................. $3,724,493 ---------- BASIC EPS Income available to common stockholders..................... 3,724,493 4,507,058 $0.83 ===== EFFECT OF DILUTIVE SECURITIES Incentive stock options..................................... 156,433 ---------- --------- DILUTED EPS Income available to common stockholders and assumed conversions............................................... $3,724,493 4,663,491 $0.80 ========== ========= ===== FOR THE YEAR ENDED 1996: Net income.................................................. $5,241,479 ---------- BASIC EPS Income available to common stockholders..................... 5,241,479 4,733,178 $1.11 ===== EFFECT OF DILUTIVE SECURITIES Incentive stock options..................................... 212,813 ---------- --------- DILUTED EPS Income available to common stockholders and assumed conversions............................................... $5,241,479 4,945,991 $1.06 ========== ========= ===== FOR THE YEAR ENDED 1997: Net income.................................................. $7,444,789 ---------- BASIC EPS Income available to common stockholders..................... 7,444,789 5,001,887 $1.49 ===== EFFECT OF DILUTIVE SECURITIES Incentive stock options..................................... 224,644 ---------- --------- DILUTED EPS Income available to common stockholders and assumed conversions............................................... $7,444,789 5,226,531 $1.42 ========== ========= =====
As of December 31, 1997, options to purchase 15,000 shares of common stock at $27 per share were not included in the computation of diluted EPS because the options' exercise price was greater than the average price of the common shares. The options, which expire in 2007, were still outstanding at the end of 1997. As of December 31, 1996, options to purchase 6,000 shares of common stock at $17 1/8 per share were not included in the computation of diluted EPS because the options' exercise price was greater than the average price of the common shares. The options, which expire in 2001, were still outstanding at the end of 1996. As of December 31, 1995, no options were anti-dilutive. IV-15 30 10. OFFERING OF COMMON STOCK During 1995, the Company initiated a public offering of shares of its common stock to increase its working capital and improve liquidity of its common stock. Due to uncertain market conditions affecting the retail sector and the price of its stock, the Company decided to postpone indefinitely the public offering. As a result, the Company wrote off offering expenses amounting to $310,000 in December 1995. During 1996, the Company proceeded with the postponed offering of shares and entered into an agreement with a group of underwriters to sell 1.6 million shares of common stock (the "shares"), consisting of 400,000 newly issued shares and 1,200,000 shares of certain selling stockholders. The closing of the sale was held on July 1, 1996 at which time the Company issued 400,000 new shares and received the net proceeds of $5,121,750. * * * * * * IV-16 31 SCHEDULE II THE FIRST YEARS INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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: 1997............................... $185,000 $147,541 $147,541(1) $185,000 ======== ======== ======== ======== 1996............................... $185,000 $152,582 $152,582(1) $185,000 ======== ======== ======== ======== 1995............................... $185,000 $ 86,227 $ 86,227(1) $185,000 ======== ======== ======== ======== Allowance for obsolete inventory: 1997............................... $ 0 $250,000 $ 0 $250,000 ======== ======== ======== ========
- --------------- (1) Net accounts written off. IV-17 32 THE FIRST YEARS INC. EXHIBIT INDEX
EXHIBIT DESCRIPTION - ------- ----------- 10(g) The First Years Inc. 1993 Equity Incentive Plan as amended through March 19, 1998. 10(h) The First Years Inc. 1993 Stock Option Plan for Directors as amended through March 19, 1998. 10(l) First Amendment to the Employment Agreement between The First Years Inc. and Ronald J. Sidman dated January 16, 1997. 10(m) First Amendment to the Employment Agreement between The First Years Inc. and Benjamin Peltz dated January 16, 1997. 10(n) The First Years, a Massachusetts Corporation and Affiliates, 1997 Annual Incentive Plan effective as of January 1, 1997. 10(o) Agreement between The First Years Inc. and Wayne Shea dated August 12, 1997. 21 List of Subsidiaries of the Registrant. 23 Consent of Deloitte & Touche LLP dated March 27, 1998. 27.1 Financial Data Schedule -- 12/31/97 27.2 Financial Data Schedule -- 12/31/96 -- Restated 27.3 Financial Data Schedule -- 12/31/95 -- Restated 99 Important Factors Regarding Forward-Looking Statements
IV-18 EX-10.(G) 2 1993 EQUITY INCENTIVE PLAN 1 Exhibit 10(g) ------------- THE FIRST YEARS INC. 1993 EQUITY INCENTIVE PLAN (AS AMENDED THROUGH MARCH 19, 1998) 1. PURPOSE The purpose of this 1993 Equity Incentive Plan (the "Plan") is to advance the interests of The First Years Inc. (the "Company"), formerly known as Kiddie Products, Inc., by enhancing its ability to attract and retain employees and other persons or entities who are in a position to make significant contributions to the success of the Company and its subsidiaries through ownership of shares of the Company's common stock ("Stock"). The Plan is intended to accomplish these goals by enabling the Company to grant Awards in the form of Options, Stock Appreciation Rights, Restricted Stock or Unrestricted Stock Awards, Deferred Stock Awards, Performance Awards, Loans or Supplement Grants, or combinations thereof, all as more fully described below. 2. ADMINISTRATION Unless otherwise determined by the Board of Directors of the Company (the "Board"), the Plan will be administered by a Committee of the Board designated for such purpose (the "Committee"). The Committee shall consist of at least two directors. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee by a writing signed by a majority of the Committee members. So long as the Stock is registered under the Securities Exchange Act of 1934 (the "1934 Act"), all members of the Committee shall be non-employee directors within the meaning of Rule 16b-3 under the 1934 Act. The Committee will have authority, not inconsistent with the express provisions of the Plan and in addition to other authority granted under the Plan, to (a) grant Awards at such time or times as it may choose; (b) determine the size of each Award, including the number of shares of Stock subject to the Award; (c) determine the type or types of each Award; (d) determine the terms and conditions of each Award; (e) waive compliance by a Participant (as defined below) with any obligations to be performed by the Participant under an Award and waive any term or condition of an Award; (f) amend or cancel an existing Award in whole or in part (and if an award if canceled, grant another Award in its place on such terms as the Board shall specify), except that the Board may not, without the consent of the holder of an Award, take any action under this clause with respect to such Award if such action would adversely affect the rights of such holder; (g) prescribe the form or forms of instruments that are required or deemed appropriate under the Plan, including any written notices and elections required of Participants, and change 2 such forms from time to time; (h) adopt, amend and rescind rules and regulations for the administration of the Plan; and (i) interpret the Plan and decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations and actions of the Board, and all other determinations and actions of the Board made or taken under authority granted by any provision of the Plan, will be conclusive and will bind all parties. Nothing in this paragraph shall be construed as limiting the power of the Committee to make adjustments under Section 7.3 or Section 8.6. 3. EFFECTIVE DATE AND TERM OF PLAN The Plan will become effective on the date on which it is approved by the stockholders of the Company. No Award may be granted under the Plan after ten years following the date of stockholder approval, but Awards previously granted may extend beyond that date. 4. SHARES SUBJECT TO THE PLAN Subject to the adjustment as provided in Section 8.6 below, the aggregate number of shares of Stock that may be delivered under the Plan will be 1,210,000. If any Award requiring exercise by the Participant for delivery of Stock terminates without having been exercised in full, or if any Award payable in Stock or cash is satisfied in cash rather than Stock, the number of shares of Stock as to which such Award was not exercised or for which cash was substituted will be available for future grants. If any Stock purchased on exercise of an Option is paid for through the delivery of shares of Stock or if shares of Stock are held back by the Company, or delivered to the Company, to satisfy a tax withholding requirement on an Award, the number of shares of Stock delivered to or held back by the Company shall be available for future grants. The maximum number of shares for which Options and Stock Appreciation Rights may be granted to any individual over the life of the Plan shall be 600,000, which limitation shall be construed and applied consistently with the rules under Section 162(m) of the Internal Revenue Code. Stock delivered under the Plan may be either authorized but unissued Stock or previously issued Stock acquired by the Company and held in treasury. No fractional shares of Stock will be delivered under the Plan. 5. ELIGIBILITY AND PARTICIPATION Those eligible to receive Awards under the Plan ("Participants") will be persons in the employ of the Company or any of its subsidiaries ("Employees") and other persons or entities -2- 3 (including without limitation non-Employee directors of the Company or a subsidiary of the Company) who, in the opinion of the Committee, are in a position to make a significant contribution to the success of the Company or its subsidiaries. A "subsidiary" for purposes of the Plan will be a corporation in which the Company owns, directly or indirectly, stock possessing 50% or more of the total combined voting power of all classes of stock. 6. TYPES OF AWARDS 6.1. OPTIONS (a) NATURE OF OPTIONS. An Option is an Award entitling the recipient on exercise thereof to purchase Stock at a specified exercise price. Both "incentive stock options," as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") (any Option intended to qualify as an incentive stock option being hereinafter referred to as an "ISO"), and Options that are not incentive stock options, may be granted under the Plan. ISOs shall be awarded only to Employees. (b) EXERCISE PRICE. The exercise price of an Option will be determined by the Board subject to the following: (1) The exercise price of an ISO shall not be less than 100% (110% in the case of an ISO granted to a ten-percent stockholder) of the fair market value of the Stock subject to the Option, determined as of the time the Option is granted. A "ten-percent stockholder" is any person who at the time of grant owns, directly or indirectly, or is deemed to own by reason of the attribution rules of section 424(d) of the Code, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any of its subsidiaries. (2) In no case may the exercise price paid for Stock which is part of an original issue of authorized Stock be less than the par value per share of the Stock. (3) The Committee may reduce the exercise price of an Option at any time after the time of grant, but in the case of an Option originally awarded as an ISO, only with the consent of the Participant. (c) DURATION OF OPTIONS. The latest date on which an Option may be exercised will be the tenth anniversary (fifth anniversary, in the case of an ISO granted to a ten-percent stockholder) of the day immediately preceding the date the Option was granted, or such earlier date as may have been specified by the Committee at the time the Option was granted. -3- 4 (d) EXERCISE OF OPTIONS. Options granted under any single Award will become exercisable at such time or times, and on such conditions, as the Committee may specify. The Committee may at any time and from time to time accelerate the time at which all or any part of the Option may be exercised. Any exercise of an Option must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by (1) any documents required by the Committee and (2) payment in full in accordance with paragraph (e) below for the number of shares for which the Option is exercised. (e) PAYMENT FOR STOCK. Stock purchased on exercise of an Option must be paid for as follows: (1) in cash or by check (acceptable to the Company in accordance with guidelines established for this purpose), bank draft or money order payable to the order of the Company or (2) if so permitted by the instrument evidencing the Option (or in the case of an Option which is not an ISO, by the Committee at or after grant of the Option), (i) through the delivery of shares of Stock which have been outstanding for at least six months (unless the Committee expressly approves a shorter period) and which have a fair market value on the last business day preceding the date of exercise equal to the exercise price, or (ii) by delivery of a promissory note of the Option holder to the Company, payable on such terms as are specified by the Committee, or (iii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price, or (iv) by any combination of the permissible forms of payment; PROVIDED, that if the Stock delivered upon exercise of the Option is an original issue of authorized Stock, at least so much of the exercise price as represents the par value of such Stock must be paid other than by the Option holder's promissory note or personal check. (f) DISCRETIONARY PAYMENTS. If the market price of shares of Stock subject to an Option (other than an Option which is in tandem with a Stock Appreciation Right as described in Section 6.2 below) exceeds the exercise price of the Option at the time of its exercise, the Committee may cancel the Option and cause the Company to pay in cash or in shares of Common Stock (at a price per share equal to the fair market value per share) to the person exercising the Option an amount equal to the difference between the fair market value of the Stock which would have been purchased pursuant to the exercise (determined on the date the Option is canceled) and the aggregate exercise price which would have been paid. The Committee may exercise its discretion to take such action only if it has received a written request from the person exercising the Option, but such a request will not be binding on the Committee. -4- 5 6.2. STOCK APPRECIATION RIGHTS. (a) NATURE OF STOCK APPRECIATION RIGHTS. A Stock Appreciation Right is an Award entitling the recipient on exercise of the Right to receive an amount, in cash or Stock or a combination thereof (such form to be determined by the Committee), determined in whole or in part by reference to appreciation in Stock value. In general, a Stock Appreciation Right entitles the Participant to receive, with respect to each share of Stock as to which the Right is exercised, the excess of the share's fair market value on the date of exercise over its fair market value on the date the Right was granted. However, the Committee may provide at the time of grant that the amount the recipient is entitled to receive will be adjusted upward or downward under rules established by the Committee to take into account the performance of the Stock in comparison with the performance of other stocks or an index or indices of other stocks. The Committee may also grant Stock Appreciation Rights providing that following a change in control of the Company, as determined by the Committee, the holder of such Right will be entitled to receive, with respect to each share of Stock subject to the Right, an amount equal to the excess of a specified value (which may include an average of values) for a share of Stock during a period preceding such change in control over the fair market value of a share of Stock on the date the Right was granted. (b) GRANT OF STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be granted in tandem with, or independently of, Options granted under the Plan. A Stock Appreciation Right granted in tandem with an Option which is not an ISO may be granted either at or after the time the Option is granted. A Stock Appreciation Right granted in tandem with an ISO may be granted only at the time the Option is granted. (c) RULES APPLICABLE TO TANDEM AWARDS. When Stock Appreciation Rights are granted in tandem with Options, the following will apply: (1) The Stock Appreciation Right will be exercisable only at such time or times, and to the extent, that the related Option is exercisable and will be exercisable in accordance with the procedure required for exercise of the related Option. (2) The Stock Appreciation Right will terminate and no longer be exercisable upon the termination or exercise of the related Option, except that a Stock Appreciation Right granted with respect to less than the full number of shares covered by an Option will not be reduced until the number of shares as to which the related Option has been exercised or has terminated exceeds the number of shares not covered by the Stock Appreciation Right. (3) The Option will terminate and no longer be exercisable upon the exercise of the related Stock Appreciation Right. -5- 6 (4) The Stock Appreciation Right will be transferable only with the related Option. (5) A Stock Appreciation Right granted in tandem with an ISO may be exercised only when the market price of the Stock subject to the Option exceeds the exercise price of such option. (d) EXERCISE OF INDEPENDENT STOCK APPRECIATION RIGHTS. A Stock Appreciation Right not granted in tandem with an Option will become exercisable at such time or times, and on such conditions, as the Committee may specify. The Committee may at any time accelerate the time at which all or any part of the Right may be exercised. Any exercise of an independent Stock Appreciation Right must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by any other documents required by the Committee. 6.3. RESTRICTED AND UNRESTRICTED STOCK. (a) NATURE OF RESTRICTED STOCK AWARD. A Restricted Stock Award entitles the recipient to acquire, for a purchase price equal to par value, shares of Stock subject to the restrictions described in paragraph (d) below ("Restricted Stock"). (b) ACCEPTANCE OF AWARD. A Participant who is granted a Restricted Stock Award will have no rights with respect to such Award unless the Participant accepts the Award by written instrument delivered or mailed to the Company accompanied by payment in full of the specified purchase price, if any, of the shares covered by the Award. Payment may be by certified or bank check or other instrument acceptable to the Committee. (c) RIGHTS AS A STOCKHOLDER. A Participant who receives Restricted Stock will have all the rights of a stockholder with respect to the Stock, including voting and dividend rights, subject to the restrictions described in paragraph (d) below and any other conditions imposed by the Committee at the time of grant. Unless the Committee otherwise determines, certificates evidencing shares of Restricted Stock will remain in the possession of the Company until such shares are free of all restrictions under the Plan. (d) RESTRICTIONS. Except as otherwise specifically provided by the Plan, Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of, and if the Participant ceases to be an Employee or otherwise suffers a Status Change (as defined at Section 7.2(a) below) for any reason, must be offered to the Company for purchase for the amount of cash paid for the Stock, or forfeited to the Company if no cash was paid. These restrictions will lapse at such time or times, and on such conditions, as the Committee may specify. The Committee may at any time accelerate the time at which the restrictions on all or any part of the shares will lapse. -6- 7 (e) NOTICE OF ELECTION. Any Participant making an election under Section 83(b) of the Code with respect to Restricted Stock must provide a copy thereof to the Company within 10 days of the filing of such election with the Internal Revenue Service. (f) OTHER AWARDS SETTLED WITH RESTRICTED STOCK. The Committee may, at the time any Award described in this Section 6 is granted, provide that any or all the Stock delivered pursuant to the Award will be Restricted Stock. (g) UNRESTRICTED STOCK. The Committee may, in its sole discretion, approve the sale to any Participant of shares of Stock free of restrictions under the Plan for a price which is not less than the par value of the Stock. 6.4. DEFERRED STOCK. A Deferred Stock Award entitles the recipient to receive shares of Stock to be delivered in the future. Delivery of the Stock will take place at such time or times, and on such conditions, as the Committee may specify. The Committee may at any time accelerate the time at which delivery of all or any part of the Stock will take place. At the time any Award described in this Section 6 is granted, the Committee may provide that, at the time Stock would otherwise be delivered pursuant to the Award, the Participant will instead receive an instrument evidencing the Participant's right to future delivery of Deferred Stock. 6.5. PERFORMANCE AWARDS; PERFORMANCE GOALS. (a) NATURE OF PERFORMANCE AWARDS. A Performance Award entitles the recipient to receive, without payment, an amount in cash or Stock or a combination thereof (such form to be determined by the Committee) following the attainment of Performance Goals. Performance Goals may be related to personal performance, corporate performance, departmental performance or any other category of performance deemed by the Committee to be important to the success of the Company. The Committee will determine the Performance Goals, the period or period during which performance is to be measured and all other terms and conditions applicable to the Award. (b) OTHER AWARDS SUBJECT TO PERFORMANCE CONDITION. The Committee may, at the time any Award described in this Section 6 is granted, impose the condition (in addition to any conditions specified or authorized in this Section 6 or any other provision of the Plan) that Performance Goals be met prior to the Participant's realization of any payment or benefit under the Award. 6.6. LOANS AND SUPPLEMENTAL GRANTS. (a) LOANS. The Company may make a loan to a Participant ("Loan"), either on the date of or after the grant of any Award to the Participant. A Loan may be made either in -7- 8 connection with the purchase of Stock under the Award or with the payment of any Federal, state and local income tax with respect to income recognized as a result of the Award. The Committee will have full authority to decide whether to make a Loan and to determine the amount, terms and conditions of the Loan, including the interest rate (which may be zero), whether the Loan is to be secured or unsecured or with or without recourse against the borrower, the terms on which the Loan is to be repaid and the conditions, if any, under which it may be forgiven. However, no Loan may have a term (including extensions) exceeding ten years in duration. (b) SUPPLEMENTAL GRANTS. In connection with any Award, the Committee may at the time such Award is made or at a later date, provide for and grant a cash award to the Participant ("Supplemental Grant") not to exceed an amount equal to (1) the amount of any federal, state and local income tax on ordinary income for which the Participant may be liable with respect to the Award, determined by assuming taxation at the highest marginal rate, plus (2) an additional amount on a grossed-up basis intended to make the Participant whole on an after-tax basis after discharging all the Participant's income tax liabilities arising from all payments under this Section 6. Any payments under this subsection (b) will be made at the time the Participant incurs Federal income tax liability with respect to the Award. 7. EVENTS AFFECTING OUTSTANDING AWARDS 7.1. DEATH. If a Participant dies, the following will apply: (a) All Options and Stock Appreciation Rights held by the Participant immediately prior to death, to the extent then exercisable, may be exercised by the Participant's executor or administrator or the person or persons to whom the Option or Right is transferred by will or the applicable laws of descent and distribution, at any time within the one year period ending with the first anniversary of the Participant's death (or such shorter or longer period as the Committee may determine), and shall thereupon terminate. In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. Except as otherwise determined by the Committee, all Options and Stock Appreciation Rights held by a Participant immediately prior to death that are not then exercisable shall terminate at death. (b) Except as otherwise determined by the Committee, all Restricted Stock held by the Participant must be transferred to the Company (and, in the event the certificates representing such Restricted Stock are held by the Company, such Restricted Stock will be so transferred without any further action by the Participant) in accordance with Section 6.3 above. -8- 9 (c) Any payment or benefit under a Deferred Stock Award, Performance Award, or Supplemental Grant to which the Participant was not irrevocably entitled prior to death will be forfeited and the Award canceled as of the time of death, unless otherwise determined the Committee. 7.2. TERMINATION OF SERVICE (OTHER THAN BY DEATH). If a Participant who is an Employee ceases to be an Employee for any reason other than death, or if there is a termination (other than by reason of death) of the consulting, service or similar relationship in respect of which a non-Employee Participant was granted an Award hereunder (such termination of the employment or other relationship being hereinafter referred to as a "Status Change"), the following will apply: (a) Except as otherwise determined by the Committee, all Options and Stock Appreciation Rights held by the Participant that were not exercisable immediately prior to the Status Change shall terminate at the time of the Status Change. Any Options or Rights that were exercisable immediately prior to the Status Change will continue to be exercisable for a period of three months (or such longer period as the Committee may determine), and shall thereupon terminate, unless the Award provides by its terms for immediate termination in the event of a Status Change or unless the Status Change results from a discharge for cause which in the opinion of the Committee casts such discredit on the Participant as to justify immediate termination of the Award. In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. For purposes of this paragraph, in the case of a Participant who is an Employee, a Status Change shall not be deemed to have resulted by reason of (i) a sick leave or other bona fide leave of absence approved for purposes of the Plan by the Committee, so long as the Employee's right to reemployment is guaranteed either by statute or by contract, or (ii) a transfer of employment between the Company and a subsidiary or between subsidiary, or to the employment of a corporation (or a parent or subsidiary corporation of such corporation) issuing or assuming an option in a transaction to which section 424(a) of the Code applies. (b) Except as otherwise determined by the Committee, all Restricted Stock held by the Participant at the time of the Status Change must be transferred to the Company (and, in the event the certificates representing such Restricted Stock are held by the Company, such Restricted Stock will be so transferred without any further action by the Participant) in accordance with Section 6.3 above. (c) Any payment or benefit under a Deferred Stock Award, Performance Award, or Supplemental Grant to which the Participant was not irrevocably entitled prior to the Status Change will be forfeited and the Award canceled as of the date of such Status Change unless otherwise determined by the Committee. -9- 10 7.3. CERTAIN CORPORATE TRANSACTIONS. In the event of a consolidation or merger in which the Company is not the surviving corporation or which results in the acquisition of substantially all the Company's outstanding Stock by a single person or entity or by a group of persons and/or entities acting in concert, or in the event of the sale or transfer of substantially all the Company's assets or a dissolution or liquidation of the Company (a "covered transaction"), all outstanding Awards will terminate as of the effective date of the covered transaction, and the following rules shall apply: (a) Subject to paragraphs (b) and (c) below, the Committee may in its sole discretion, prior to the effective date of the covered transaction, (1) make each outstanding Option and Stock Appreciation Right exercisable in full, (2) remove the restrictions from each outstanding share of Restricted Stock, (3) cause the Company to make any payment and provide any benefit under each outstanding Deferred Stock Award, Performance Award, and Supplemental Grant which would have been made or provided with the passage of time had the transaction not occurred and the Participant not suffered a Status Change (or died), and (4) forgive all or any portion of the principal of or interest on a Loan. (b) If an outstanding Award is subject to performance or other conditions (other than conditions relating only to the passage of time and continued employment) which will not have been satisfied at the time of the covered transaction, the Committee may in its sole discretion remove such conditions. If it does not do so, however, such Award will terminate as of the date of the covered transaction notwithstanding paragraph (a) above. (c) With respect to an outstanding Award held by a participant who, following the covered transaction, will be employed by or otherwise providing services to a corporation which is a surviving or acquiring corporation in such transaction or an affiliate of such a corporation, the Committee may, in lieu of the action described in paragraph (a) above, arrange to have such surviving or acquiring corporation or affiliate grant to the Participant a replacement award which, in the judgment of the Committee, is substantially equivalent to the Award. 8. GENERAL PROVISIONS 8.1. DOCUMENTATION OF AWARDS. Awards will be evidenced by such written instruments, if any, as may be prescribed by the Committee from time to time. Such instruments may be in the form of agreements to be executed by both the Participant and the Company, or certificates, letters or similar instruments, which need not be executed by the Participant but acceptance of which will evidence agreement to the terms thereof. -10- 11 8.2. RIGHTS AS A STOCKHOLDER, DIVIDEND EQUIVALENTS. Except as specifically provided by the Plan, the receipt of an Award will not give a Participant rights as a stockholder; the participant will obtain such rights, subject to any limitations imposed by the Plan or the instrument evidencing the Award, upon actual receipt of Stock. However, the Committee may, on such conditions as it deems appropriate, provide that a Participant will receive a benefit in lieu of cash dividends that would have been payable on any or all Stock subject to the Participant's Award had such Stock been outstanding. Without limitation, the Committee may provide for payment to the Participant of amounts representing such dividends, either currently or in the future, or for the investment of such amounts on behalf of the Participant. 8.3. CONDITIONS ON DELIVERY OF STOCK. The Company will not be obligated to deliver any shares of Stock pursuant to the Plan or to remove restriction from shares previously delivered under the Plan (a) until all conditions of the Award have been satisfied or removed, (b) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulation have been complied with, (c) if the outstanding Stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of notice of issuance, and (d) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the Award, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. If an Award is exercised by the Participant's legal representative, the Company will be under no obligation to deliver Stock pursuant to such exercise until the Company is satisfied as to the authority of such representative. 8.4. TAX WITHHOLDING. The Company will withhold from any cash payment made pursuant to an Award an amount sufficient to satisfy all federal, state and local withholding tax requirements (the "withholding requirements"). In the case of an Award pursuant to which Stock may be delivered, the Committee will have the right to require that the Participant or other appropriate person remit to the Company an amount sufficient to satisfy the withholding requirements, or make other arrangements satisfactory to the Committee with regard to such requirements, prior to the delivery of any Stock. If and to the extent that such withholding is required, the Committee may permit the Participant or such other person to elect at such time and in such manner as the Committee -11- 12 provides to have the Company hold back from the shares to be delivered, or to deliver to the Company, Stock having a value calculated to satisfy the withholding requirement. The Committee may make such share withholding mandatory with respect to any Award at the time such Award is made to a Participant. If at the time an ISO is exercised the Committee determines that the Company could be liable for withholding requirements with respect to a disposition of the Stock received upon exercise, the Committee may require as a condition of exercise that the person exercising the ISO agree (a) to inform the Company promptly of any disposition (within the meaning of section 424(c) of the Code) of Stock received upon exercise, and (b) to give such security as the Committee deems adequate to meet the potential liability of the Company for the withholding requirements and to augment such security from time to time in any amount reasonably deemed necessary by the Committee to preserve the adequacy of such security. 8.5. NONTRANSFERABILITY OF AWARDS. Except as otherwise specified by the Committee, no Award (other than an Award in the form of an outright transfer of cash or Unrestricted Stock) may be transferred other than by will or by the laws of descent and distribution, and during an employee's lifetime an Award requiring exercise may be exercised only by the Participant (or in the event of the Participant's incapacity, the person or persons legally appointed to act on the Participant's behalf). 8.6. ADJUSTMENTS IN THE EVENT OF CERTAIN TRANSACTIONS. (a) In the event of a stock dividend, stock split or combination of shares, recapitalization or other change in the Company's capitalization, or other distribution to common stockholders other than normal cash dividends, after the effective date of the Plan, the Committee will make any appropriate adjustments to the maximum number of shares that may be delivered under the Plan under Section 4 above. (b) In any event referred to in paragraph (a), the Committee will also make any appropriate adjustments to the number and kind of shares of stock or securities subject to Awards then outstanding or subsequently granted, any exercise prices relating to Awards and any other provision of Awards affected by such change. The Committee may also make such adjustments to take into account material changes in law or in accounting practices or principles, mergers, consolidations, acquisitions, dispositions or similar corporate transactions, or any other event, if it is determined by the Committee that adjustments are appropriate to avoid distortion in the operation of the Plan. 8.7. EMPLOYMENT RIGHTS, ETC. Neither the adoption of the Plan nor the grant of Awards will confer upon any person any right to continued retention by the Company or any subsidiary as an Employee or -12- 13 otherwise, or affect in any way the right of the Company or subsidiary to terminate an employment, service or similar relationship at any time. Except as specifically provided by the Committee in any particular case, the loss of existing or potential profit in Awards granted under the Plan will not constitute an element of damages in the event of termination of an employment, service or similar relationship even if the termination is in violation of an obligation of the Company to the Participant. 8.8. DEFERRAL OF PAYMENTS. The Committee may agree at any time, upon request of the Participant, to defer the date on which any payment under an Award will be made. 8.9. PAST SERVICES AS CONSIDERATION. Where a Participant purchases Stock under an Award for a price equal to the par value of the Stock the Committee may determine that such price has been satisfied by past services rendered by the Participant. 8.10. FORFEITURE PROVISIONS. The Committee may establish provisions that require the Participant to forfeit an Award, or the economic value of an Award, upon the occurrence of certain events that it may specify, including breach by a Participant of agreements with the Company. 9. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION Neither adoption of the Plan nor the grant of Awards to a Participant will affect the Company's right to grant to such Participant awards that are not subject to the Plan, to issue to such Participant Stock as a bonus or otherwise, or to adopt other plans or arrangements under which Stock may be issued to Employees. The Committee may at any time or times amend the Plan or any outstanding Award for any purpose which may at the time be permitted by law, or may at any time terminate the Plan as to any further grants of Awards, provided that (except to the extent expressly required or permitted by the Plan) no such amendment will, without the approval of the stockholders of the Company, effectuate a change for which stockholder approval is required in order for the Plan to continue to qualify for the award of ISOs under section 422 of the Code. -13- EX-10.(H) 3 1993 STOCK OPTION PLAN 1 Exhibit 10.h ------------ THE FIRST YEARS INC. 1993 STOCK OPTION PLAN FOR DIRECTORS (as amended through March 19, 1998) 1. PURPOSE The purpose of this 1993 Stock Option Plan for Directors (the "Plan") is to advance the interests of The First Years Inc. (the "Company"), formerly Kiddie Products, Inc., by enhancing the ability of the Company to attract and retain directors who are in a position to make significant contributions to the success of the Company and to reward directors for such contributions through ownership of shares of the Company's common stock (the "Stock"). 2. ADMINISTRATION The Plan shall be administered by a committee (the "Committee") of the Board of Directors (the "Board") of the Company designated by the Board for that purpose. Unless and until a Committee is appointed the Plan shall be administered by the entire Board, and references in the Plan to the "Committee" shall be deemed references to the Board. The Committee shall have authority, not inconsistent with the express provisions of the Plan, (a) to issue options granted in accordance with the formula set forth in this Plan to such directors as are eligible to receive options; (b) to prescribe the form or forms of instruments evidencing options and any other instruments required under the Plan and to change such forms from time to time; (c) to adopt, amend and rescind rules and regulations for the administration of the Plan; and (d) to interpret the Plan and to decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations of the Committee shall be conclusive and shall bind all parties. 3. EFFECTIVE DATE AND TERM OF PLAN The Plan shall become effective on the date on which the Plan is approved by the Board of Directors of the Company, subject to approval by the stockholders of the Company. No option shall be granted under the Plan after the completion of ten years from the date on which the Plan was adopted by the Board, but options previously granted may extend beyond that date. 2 4. SHARES SUBJECT TO THE PLAN (a) NUMBER OF SHARES. Subject to adjustment as provided in Section 4(c), the aggregate number of shares of Stock that may be delivered upon the exercise of options granted under the Plan shall be 130,000. If any option granted under the Plan terminates without having been exercised in full, the number of shares of Stock as to which such option was not exercised shall be available for future grants within the limits set forth in this Section 4(a). If any Stock purchased on exercise of an Option is paid for through the delivery of shares of Stock or if shares of Stock are held back by the Company, or delivered to the Company, to satisfy a tax withholding requirement on an Award, the number of shares of Stock delivered to or held back by the Company shall be available for future grants. (b) SHARES TO BE DELIVERED. Shares delivered under the Plan shall be authorized but unissued Stock or, if the Board so decides in its sole discretion, previously issued Stock acquired by the Company and held in treasury. No fractional shares of Stock shall be delivered under the Plan. (c) CHANGES IN STOCK. In the event of a stock dividend, stock split or combination of shares, recapitalization or other change in the Company's capital stock, after the effective date of the Plan, the number and kind of shares of stock or securities of the Company subject to options then outstanding or subsequently granted under the Plan, the maximum number of shares or securities that may be delivered under the Plan, the exercise price, and other relevant provisions shall be appropriately adjusted by the Committee, whose determination shall be binding on all persons. 5. ELIGIBILITY FOR OPTIONS Directors eligible to receive options ("Eligible Directors") shall be those directors of the Company who are not employees of the Company or of any subsidiary of the Company; PROVIDED THAT the Committee may in its discretion choose to designate as an Eligible Director, for some or all purposes of this Plan, a director of a subsidiary of the Company, whether or not employed by the Company or a subsidiary. 6. TERMS AND CONDITIONS OF OPTIONS (a) NUMBER OF OPTIONS. -2- 3 Each Eligible Director, upon his or her election to the Board, shall be awarded an option covering 10,000 shares of Stock, which will become fully vested in three equal annual installments commencing on the first anniversary of such election. On the date of each annual meeting, following the election of directors, each Eligible Director who served on the Board for the entire previous twelve months shall be awarded an option covering 3,000 shares of Stock; each Eligible Director who did not serve on the Board for the entire previous twelve months shall be awarded an option covering a pro-rated number of shares of Stock equal to 250 multiplied by the number of months served on the Board during the previous twelve months. The options awarded under this paragraph (a)(i) shall be collectively referred to as the "Formula Options." (ii) The Committee shall also have the authority under the Plan to award options to purchase stock to Eligible Directors in such amounts and on such terms not inconsistent with this Plan as it shall determine at the time of the award. The options awarded under this paragraph (a)(ii) shall be collectively referred to as the "Discretionary Options." (b) EXERCISE PRICE. The exercise price of each option shall be 100% of the fair market value per share of the Stock at the time the option is granted. In no event, however, shall the option price be less, in the case of an original issue of authorized stock, than par value per share. For purposes of this paragraph, (A) the fair market value of a share of Stock on any date shall be the Closing Price on such day or, if there was no Closing Price on such day, the latest day prior thereto on which there was a Closing Price; and (B) the "Closing Price" of the Stock on any business day will be the last sale price as reported on the principal market on which the Stock is traded or, if no last sale is reported, then the mean between the highest bid and lowest asked prices on that day. (c) DURATION OF OPTIONS. The latest date on which an option may be exercised (the "Final Exercise Date") shall be the date which is ten years from the date the option was granted. (d) EXERCISE OF OPTIONS. (1) Each Formula Option shall become exercisable to the full extent of all shares covered thereby immediately upon the date of the grant; provided, however, that the options covering 10,000 shares of Stock awarded upon an Eligible Director's initial election shall become exercisable in three equal annual installments commencing on the first anniversary of such election. -3- 4 (2) Each Discretionary Option shall become exercisable at such time or times as the Committee shall determine. (3) Any exercise of an option shall be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by (i) any documentation required by the Committee and (ii) payment in full for the number of shares for which the option is exercised. (4) The Committee shall withhold from the number of shares otherwise issuable to the individual upon exercise a number of shares with a fair market value equal to any federal, state, or local withholding tax requirements due upon the exercise of the option. (5) If an option is exercised by the executor or administrator of a deceased director, or by the person or persons to whom the option has been transferred by the director's will or the applicable laws of descent and distribution, the Company shall be under no obligation to deliver Stock pursuant to such exercise until the Company is satisfied as to the authority of the person or persons exercising the option. (e) PAYMENT FOR AND DELIVERY OF STOCK. Stock purchased under the Plan shall be paid for as follows: (i) in cash or by check (acceptable to the Company in accordance with guidelines established for this purpose), bank draft or money order payable to the order of the Company, (ii) through the delivery of shares of Stock (which, in the case of shares of Stock acquired from the Company, have been outstanding for at least six months) having a fair market value on the last business day preceding the date of exercise equal to the purchase price, (iii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price or (iv) by any combination of the permissible forms of payment; PROVIDED, that if the Stock delivered upon exercise of the option is an original issue of authorized Stock, at least so much of the exercise price as represents the par value of such Stock shall be paid other than with a personal check or promissory note of the option holder. An option holder shall not have the rights of a stockholder with regard to awards under the Plan except as to Stock actually received by him or her under the Plan. The Company shall not be obligated to deliver any shares of Stock (a) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with, and (b) if the outstanding Stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of issuance, and (c) until all other legal matters in -4- 5 connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the option, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. (f) NONTRANSFERABILITY OF OPTIONS. Except as otherwise specified by the Committee, no option may be transferred other than by will, by the laws of descent and distribution, or to immediate family members as defined in Rule 16a-1(e) under the Securities Exchange Act of 1934, to a trust for the benefit of immediate family members, or to partnerships and corporations whose sole equity owners are immediate family members, and during a director's lifetime an option may be exercised only by him or her, or by a valid transferee under this Section 6(f). (g) DEATH. Upon the death of any Eligible Director granted options under this Plan, unless the Committee determines otherwise, all options not then exercisable shall terminate. All options held by the director that are exercisable immediately prior to death may be exercised by his or her executor or administrator, or by the person or persons to whom the option is transferred by will or the applicable laws of descent and distribution, at any time within one year after the director's death (subject, however, to the limitations of Section 6(c) regarding the maximum exercise period for such option). After completion of that one-year period, such options shall terminate to the extent not previously exercised. (h) OTHER TERMINATION OF STATUS OF DIRECTOR. Except as the Committee may otherwise specify, if a director's service with the Company terminates for any reason other than death, all options held by the director that are not then exercisable shall terminate. Options that are exercisable on the date of termination shall continue to be exercisable for a period of one year (subject to Section 6(c)). After completion of that one year period, such options shall terminate to the extent not previously exercised, expired or terminated. (i) MERGERS, ETC. In the event of a consolidation or merger in which the Company is not the surviving corporation (other than a consolidation or merger in which the holders of Stock of the Company acquire a majority of the voting stock of the surviving corporation) or which results in the acquisition of substantially all the Company's outstanding Stock by a single person or entity or by a group of persons and/or entities acting in concert, or in the event of a sale or transfer of substantially all of the Company's assets or a dissolution or liquidation of the Company, all options hereunder will terminate; PROVIDED, that 20 days prior to the effective date of any such -5- 6 merger, consolidation, sale, dissolution, or liquidation, all options outstanding hereunder that are not otherwise exercisable shall become immediately exercisable. Notwithstanding the foregoing, in the event that a transaction covered by this Section 6(i) is a merger or consolidation intended to qualify as a pooling of interests for accounting purposes, then the acquiring or surviving corporation shall assume, or otherwise provide replacement options for, all options outstanding under this Plan, with such adjustments to the number of shares covered by such option and the exercise price thereof as may be necessary to reflect the exchange ratio provided for in the merger or consolidation. Such substitute options shall otherwise be on terms and conditions substantially equivalent to those set forth in this Plan, shall be immediately exercisable and, except as to Eligible Directors who become directors of the acquiring or surviving corporation, shall terminate on the 180th day following the consummation of the merger or consolidation. Options held by Eligible Directors who become directors of the acquiring or surviving corporation shall be governed, mutatis mutandis, by the provisions of this Plan and the agreement evidencing the option surrendered in substitution. 7. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT, TERMINATION AND EFFECTIVENESS Neither adoption of the Plan nor the grant of options to a director shall affect the Company's right to grant to such director options that are not subject to the Plan, to issue to such directors Stock as a bonus or otherwise, or to adopt other plans or arrangements under which Stock may be issued to directors. The Committee may at any time terminate the Plan as to any further grants of options. The Committee may at any time or times amend the Plan for any purpose which may at the time by permitted by law. -6- EX-10.(L) 4 FIRST AMENDMENT TO EMPLYMENT AGREEMENT/SIDMAN 1 Exhibit 10(l) FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This First Amendment to the Employment Agreement between The First Years Inc. (the "Company") and Ronald J. Sidman ("Sidman"), dated March 23, 1995 (the "Agreement") is made this 16th day of January, 1997. In consideration of the mutual covenants hereinafter set forth, the parties agree to amend the Agreement as fol1ows: 1. Paragraph 11 is deleted in its entirety and is replaced with the following paragraph: "SEVERANCE. (a) If, at the expiration of this Agreement, the parties do not enter into a new employment or severance agreement, or if Sidman's employment with the Company is terminated during the Term by either party for any reason (other than Death, Disability, or Cause as defined in this Agreement), then the Company will continue to pay to Sidman his Base Salary and provide the Benefits then in effect for twenty-four (24) months, reduced by the amount, if any, that Sidman earns from other employment during such 24-month period, provided Sidman continues to comply with his obligations under Paragraphs 7, 8, 9, and 10 of this Agreement during such 24-month period. Sidman will not be entitled to receive any Annual Bonus for such 24-month period. Sidman will not be obligated to seek employment. (b) If at the expiration of this Agreement, the parties do not enter into a new employment or severance agreement, or if Sidman's employment with the Company is terminated during the Term for any reason (other than for Death or Cause as defined in this Agreement), the Company will continue to pay the premiums for and provide coverage to Sidman under the same group medical and dental plans as the Company provides to the Company's executive officers, and the same medical reimbursement plan being provided to Mr. Sidman and certain other senior executive officers as of the date of this Amendment, until Mr. Sidman is eligible for and entitled to coverage under Medicare; provided that the Company can amend, alter or change such plans as long as such benefits to Sidman under such new plans are no less than those commensurate with Sidman's position at the time of his termination of employment; provided that to the extent such medical benefits cannot be provided to Sidman under the terms of such plans or the plans cannot be so amended in any manner not adverse to the Company, the Company shall pay to Sidman, on an after-tax 2 basis, an amount necessary for Sidman to acquire comparable benefits from an independent insurance carrier; provided further, that the obligations of the Company under this clause 11 (b) shall be terminated if, at any time after the date of his termination of employment with the Company, Sidman is employed by or is otherwise affiliated with a party that offers comparable health benefits to Sidman; and provided he continues to comply with his obligations under Paragraphs 7, 8, 9, and 10. IN WITNESS WHEREOF, the parties have executed this First Amendment this 16th day of January, 1997. THE FIRST YEARS INC. By: /s/ Benjamin Peltz -------------------------- Benjamin Peltz Senior Vice President and Treasurer /s/ Ronald J. Sidman -------------------------- Ronald J. Sidman EX-10.(M) 5 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT/PELTZ 1 EXHIBIT 10(m) FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This First Amendment to the Employment Agreement between The First Years Inc. (the "Company") and Benjamin Peltz ("Peltz"), dated March 23, 1995 (the "Agreement") is made this 16th day of January 1997. In consideration of the mutual covenants hereinafter set forth, the parties agree to amend the Agreement as follows: 1. Paragraph 11 is deleted in its entirety and is replaced with the following paragraph: "SEVERANCE. (a) If, at the expiration of this Agreement, the parties do not enter into a new employment or severance agreement, or if Peltz's employment with the Company is terminated during the Term by either party for any reason (other than Death, Disability, or Cause as defined in this Agreement), then the Company will continue to pay Peltz his Base Salary and provide the Benefits then in effect for twenty-four (24) months, reduced by the amount, if any, that Peltz earns from other employment during such 24-month period, provided Peltz continues to comply with his obligations under Paragraphs 7, 8, 9, and 10 of this Agreement during such 24-month period. Peltz will not be entitled to receive any Annual Bonus for such 24-month period. Peltz will not be obligated to seek employment. (b) If at the expiration of this Agreement, the parties do not enter into a new employment or severance agreement, or if Peltz's employment with the Company is terminated during the Term for any reason (other than for Death or Cause as defined in this Agreement), the Company will continue to pay the premiums for and provide coverage to Peltz under the same group medical and dental plans as the Company provides to the Company's executive officers, and the same medical reimbursement plan being provided to Mr. Peltz and certain other senior executive officers as of the date of this Amendment, until Mr. Peltz is eligible for and entitled to coverage under Medicare; provided that the Company can amend, alter or change such plans as long as such benefits to Peltz under such new plans are no less than those commensurate with Peltz's position at the time of his termination of employment; provided that to the extent such medical benefits cannot be provided to Peltz under the terms of such plans or the plans 2 cannot be so amended in any manner not adverse to the Company, the Company shall pay to Peltz, on an after-tax basis, an amount necessary for Peltz to acquire comparable benefits from an independent insurance carrier; provided further, that the obligations of the Company under this clause 11 (b) shall be terminated if, at any time after the date of his termination of employment with the Company, Peltz is employed by or is otherwise affiliated with a party that offers comparable health benefits to Peltz; and provided he continues to comply with his obligations under Paragraphs 7, 8, 9, and 10. IN WITNESS WHEREOF, the parties have executed this First Amendment this 16th day of January, 1997. THE FIRST YEARS INC. By: /s/ Ronald J. Sidman -------------------------------- Ronald J. Sidman, President /s/ Benjamin Peltz -------------------------------- Benjamin Peltz EX-10.(N) 6 1997 ANNUAL INCENTIVE PLAN 1 EXHIBIT 10(n) THE FIRST YEARS INC. A MASSACHUSETTS CORPORATION AND AFFILIATES 1997 ANNUAL INCENTIVE PLAN PLAN DESCRIPTION Effective Date: January 1, 1997 Adopted: July 31, 1997 2 THE FIRST YEARS INC. A MASSACHUSETTS CORPORATION, AND AFFILIATES 1997 ANNUAL INCENTIVE PLAN PLAN OBJECTIVES * The objectives of the plan are to: -- Encourage salaried employees of the First Years Inc. and its Affiliates (the "Company") to help improve the Company's performance; -- Focus the attention of senior management and other executive officers of the Company on the Company's operating results. ELIGIBILITY * Eligibility will initially include all full-time salaried employees of the Company, if any, who are not covered by any other incentive compensation plan (e.g., Incentive Plans for Sales-Americas and Sales-Europe Employees). * Any employee joining the Company during the fiscal calendar year will be eligible to participate in the incentive plan for that year. * The President of the Company will be responsible for recommending changes in eligibility to the Compensation Committee of the Board of Directors of the Company (the "Compensation Committee") for review and approval. PERFORMANCE MEASURES * Performance under the Plan will be based on Company operating results. * The Compensation Committee will establish performance targets based on the Company's profitability for each fiscal year for various participants in the Plan. * Company performance will be measured on a fiscal calendar year basis. However, quarterly or semi-annual performance targets may be established by the Compensation Committee in its discretion as a basis for tracking performance against the annual performance targets. 3 * Quarterly or semi-annual targets will be arrived at from Company projections for the applicable period. * Any significant, unusual and/or non-recurring items, as determined by Generally Accepted Accounting Principles, will be excluded from the profit calculation in determining the Company's actual performance. INCENTIVE AWARD POTENTIAL * Each year, based upon the recommendations of senior management of the Company, the Compensation Committee will establish the annual potential awards for all senior and non-senior management and other salaried employees. * The Compensation Committee will also establish the annual potential incentive awards for the Chief Executive Officer. INCENTIVE AWARD OF PAYMENT * The Compensation Committee in its discretion may determine to make payment of advance awards on a quarterly or semi-annual basis to all participants following the completion of such quarterly or semi-annual period and the achievement of the performance goal for such quarterly or semi-annual period ("advance awards"). * In the event that the Company does not meet its performance targets established by the Compensation Committee for any fiscal year period, employees will not be required to pay back to the Company any advance awards which have been paid. * Any portion of an annual award for a fiscal year period that has not been paid by the Company via advance awards will be paid by the Company to each participant by the end of the first quarter of the subsequent fiscal year. * For new employees joining the Company during the plan year, the annual award will be prorated based on the number of days service with the Company. * Award payments to employees will be treated as ordinary income. * Appropriate payroll deductions for taxes, Social Security, and so forth, will be made as required. * In the event an employee's employment is terminated (either voluntarily or involuntarily), for any reason, prior to the end of a fiscal year period, and the Compensation Committee has determined to make advance awards on a quarterly or semi- - 2 - 4 annual basis, the employee will receive the advance awards for the prior completed quarter or semi-annual period, if the Company has achieved the performance goal for such quarterly or semi-annual period. * The Compensation Committee, in its discretion, may determine to terminate advance awards of annual awards at any time. In the event advance awards are not made during a fiscal year, the Compensation Committee will have complete discretion to determine if any portion of the annual award will be paid to any employee whose employment is terminated for any reason prior to the end of the fiscal year period. PLAN ADMINISTRATION * The Effective Date of the Restated Plan is January 1, 1997. * The Plan will be administered by the Compensation Committee of the Board of Directors. * The Company and the Board of Directors reserve the right to amend or terminate the Plan. * Nothing contained in this document constitutes a contract for payment nor does it constitute an employment contract between the Company and the employee. The Company reserves the right to terminate an employee at any time. - 3 - EX-10.(O) 7 AGREEMENT BETWEEN THE COMPANY & W. SHEN 1 EXHIBIT 10(o) This Agreement is made as of the 12th day of August, 1997 (the "Effective Date") by and between Wayne Shea ("I") and THE FIRST YEARS INC. (the "Company"). In consideration of my employment with the Company, its subsidiaries, affiliates, successors, or assigns, and the compensation hereafter paid to me by the Company, I agree as follows: 1. I recognize that during my employment with the Company I will receive, develop, or otherwise acquire information which is of a confidential or secret nature. Except as authorized in writing by the Company, I will not disclose or use, directly or indirectly, during or after my employment with the Company, any information of the Company which I obtain during the course of my employment, including information relating to inventions, products, product specifications, processes, procedures, machinery, apparatus, prices, discounts, manufacturing costs, business affairs, future business or product plans, ideas, technical data, the Company's customers, sources of supply, planned advertising, promotion or marketing, or other information which is of a secret or confidential nature, whether or not acquired or developed by me. My obligation under this paragraph shall not apply to information known by me prior to my employment with the Company, information generally known in the Company's field of business, information known to others hereafter without fault by me, or information disclosed to me by a third party without restriction and without breach of obligation to the Company. 2. I will communicate to the Company promptly and fully all discoveries, improvements, and inventions (hereinafter called "inventions") and all writings, drawings, and other works of authorship (hereinafter called "works of authorship") made or conceived or created or authored by me (either solely or jointly with others) during my employment and, as to inventions, for six months thereafter which are along the lines of the actual or anticipated business, work, or investigations of the Company or which result from or are suggested by any work I may do for the Company; and such inventions, whether patented or not, and works of authorship and any copyrights therein, arising from my employment shall be and remain the sole and exclusive property of the Company or its nominees. 3. I will, during my employment, keep and maintain adequate and current written records of all such inventions and works of authorship, in the form of notes, drafts, layouts, sketches, drawings, reports and the like 2 relating thereto, which records shall be and remain the property of and available to the Company at all times. 4. I will, during and after my employment with the Company, without charge to the Company, but at its request and expense, assist the Company and its nominees in every proper way to obtain and vest in it or them title to, and to maintain and support the validity of, patents and copyrights on the inventions and works of authorship referred to in paragraph 2, above, in all countries by executing all necessary or desirable documents, including applications for patents and copyrights, assignments thereof, assignments of priority rights thereof and such other lawful documents as may be requested, and I agree to do such other lawful acts as may be requested for said purposes. 5. Upon the termination of my employment by the Company, I agree to deliver to the Company all property of the Company, including all documents and things evidencing or relating to the subject matter of this Agreement, and including without limitation, the documents referred to in Paragraph 3 above. 6. During the course of my employment by the Company, and for a period of 18 months after the termination of my employment by the Company for any reason whatsoever, I shall not engage or become interested, directly or indirectly, as an employee, owner, consultant, officer, director or partner, through stock ownership, investment of capital, lending of money or property, rendering of services or otherwise, either alone or in association with others, in the operation of any type of business or enterprise competitive with the Company's business of developing, marketing, and distributing products for infants, toddlers, and young children (a "competitor company,") regardless of where such competitor company sells its products or where such competitor company is located. 7. My holding (individually or otherwise) of any investment in any business or enterprise other than the Company shall not be deemed to be a violation of Paragraph 6 if such investment does not constitute over 5% of the outstanding issue of such security, and I do not otherwise accept employment with, act as a consultant to, become an officer, director, or partner of, or otherwise become actively associated with the issuer of such security. 8. I recognize, acknowledge and agree that the foregoing limitations of Paragraphs 6 and 7 are reasonable and 3 properly required for the adequate protection of the Company's business and do not preclude me from pursuing my livelihood. However, if any such limitation is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable. 9. In further consideration of my services and the agreement not to compete set forth in Paragraph 6, the Company agrees that in the event the Company terminates my employment for any reason (other than in the event of my death, Disability, or for Cause as defined in Paragraph 10 below) , then the Company (1) will continue to pay me my base salary (then in effect) for a twelve (12) month period (to be paid in twelve (12) equal monthly installments), reduced by the amount, if any, that I earn from other employment during such 12-month period; and (2) continue to provide the benefits (then in effect for executive officers), provided I continue to comply with my obligations under Paragraphs 1 through 7 during such 12-month period. Notwithstanding the foregoing, I will not participate in the Company's Annual Incentive Plan, 1993 Equity Incentive Plan (or similar cash-based or equity-based bonus plans then in effect for executive officers), or Pension/401K Plans during such 12-month post-employment period. Although I am not under any obligation to seek new employment, in the event I do obtain new employment during such 12- month period, the Company will cease providing the benefits on the day I obtain new employment. In the event I leave the employ of the Company voluntarily, no severance payments and/or benefits will be paid to me by the Company. 10. Termination for Cause for purposes of this Agreement shall be limited to termination for: (i) My gross, willful, and deliberate failure to perform a substantial portion of my duties hereunder for reasons other than disability, which failure continues for more than sixty (60) days after the Company gives written notice to me, setting forth in reasonable detail the nature of such failure; or (ii) conviction of a felony by a court of competent jurisdiction which is upheld upon appeal to a higher court, or upon the lapse of an appeal period if no appeal is taken from such conviction. Any termination for Cause shall be approved by the majority vote of the members of the Company's Board of Directors. Disability, for purposes of this Agreement, shall be limited to the following situations: (1) If I suffer any illness, disability, or incapacity which prevents me 4 from substantially performing my duties, and such illness, disability or incapacity shall be deemed by a duly-licensed physician (who may be my personal physician) to be permanent; or (2) I am unable to substantially perform my duties for a period of twelve (12) consecutive months by reason of illness, disability, or incapacity, and the Board, by majority vote of its members, determines that I am permanently disabled. 11. If I violate any provisions of this Agreement, then the time limitations set forth in this Agreement shall be extended for a period of time equal to the period of time during which such breach occurs and, in the event the Company is required to seek relief from such breach before any court, board, or other tribunal, then the time limitation shall be extended for a period of time equal to the pendency of such proceedings, including all appeals. 12. I acknowledge that any breach of this Agreement by me may give rise to irreparable injury to the Company, which may not be adequately compensated by damages. Moreover, I acknowledge that to the extent that any breach of this Agreement by me may give rise to injury to the Company, which may be adequately compensated by damages, such damages are difficult or impossible to calculate. Accordingly, in the event of a breach or threatened breach of Paragraphs 1 through 7 of this Agreement by me, the Company shall have, in addition to any remedies it may have at law, the right to an injunction or other equitable relief to prevent the violation of its rights hereunder. 13. (a) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (b) This Agreement supersedes all previous agreements, written or oral, between the Company and me relating to the subject matter of this Agreement. This Agreement may not be modified, changed or discharged in whole or in part, except by an agreement in writing signed by the Company and me. This Agreement shall be binding upon me and my heirs and personal representatives, and shall inure to the benefit of the Company and its successors, assigns and nominees, provided that Paragraph 1 above shall be binding upon such heirs and personal representatives only to the extent that they obtain from me confidential information of the Company. (c) No delay or omission by the Company in exercising any right under this Agreement shall operate as a waiver of that or any other right. A waiver or consent given 5 by the Company on any one occasion is effective only in that instance and shall not be construed as a bar to or waiver of any right on any other occasion. (d) I expressly consent to be bound by the provisions of this Agreement for the benefit of the Company or any parent, subsidiary, or affiliate thereof, without the necessity for any separate execution of this Agreement in favor of such parent, subsidiary, or affiliate. (e) This Agreement is governed by the laws of the Commonwealth of Massachusetts, without giving effect to conflict of laws provisions thereof. By: /s/ Wayne Shea -------------------------- Wayne Shea Agreed to and accepted by THE FIRST YEAR INC. By: /s/ Rona1d J. Sidman -------------------------- Rona1d J. Sidman Title: President ----------- EX-21 8 SUBSIDIARIES 1 EXHIBIT (21) -------------------------- List of Subsidiaries of the Registrant ----------------- The First Years Inc., a Delaware corporation EX-23 9 CONSENT OF DELAITTE & TOUCHE LLP 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-67880, No. 33-87196, and No. 33-94888 of The First Years Inc. (the "Company") on Form S-8 of our report dated March 5, 1998, appearing in this Annual Report on Form 10-K of The First Years Inc. for the year ended December 31, 1997. DELOITTE & TOUCHE LLP Boston, Massachusetts March 27, 1998 IV-19 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 1 7,697,040 0 20,147,226 185,000 24,372,881 53,725,911 15,287,524 8,441,874 60,571,561 15,745,657 0 0 0 508,800 43,500,204 60,571,561 120,695,988 120,864,910 71,185,634 108,351,512 0 0 27,709 12,485,689 5,040,900 7,444,789 0 0 0 7,444,789 1.49 1.42
EX-27.2 11 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 4,164,587 0 16,114,465 185,000 18,588,044 40,003,813 14,605,267 7,559,543 47,049,537 10,411,097 0 0 0 494,898 35,371,542 47,049,537 93,110,361 93,137,710 55,463,255 84,043,294 0 0 358,637 8,735,779 3,494,300 5,241,479 0 0 0 5,241,479 1.11 1.06
EX-27.3 12 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 552,568 0 14,376,630 185,000 19,009,784 35,404,356 13,570,010 7,262,286 41,712,080 15,201,520 100,001 0 0 451,514 25,311,745 41,712,080 75,757,322 75,774,040 45,108,546 69,069,752 310,457 0 186,338 6,207,493 2,483,000 3,724,493 0 0 0 3,724,493 .83 .80
EX-99 13 FACTORS REGARDING FORWARD LOOKING STATEMENTS 1 EXHIBIT 99 IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS The Company may occasionally make forward-looking statements and estimates, such as forecasts and projections of the Company's future performance or statements of management's plans and objectives. These forward-looking statements, made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, may be contained in SEC filings, Annual Reports to Stockholders, Press Releases and oral statements, among others, made by the Company. Actual results could differ materially from those in such forward-looking statements. Therefore, no assurances can be given that the results in such forward-looking statements will be achieved. Important factors that could cause the Company's actual results to differ from those contained in such forward-looking statements include, among others, the factors mentioned below. NEW PRODUCT INTRODUCTIONS The growth of the Company has been, and will continue to be, dependent upon its ability to continue to introduce new products. There can be no assurance that the Company will continue to maintain its present rate of growth, that it will continue to generate new product ideas, or that new products will be successfully introduced. In 1997, the Company introduced to the market its comforTemp infra-red instant underarm thermometer. There can be no assurance that such product will be well received by the market or generate substantial sales. RELIANCE ON LICENSED PRODUCTS A substantial factor contributing to the growth in the Company's net sales in the past few years has been its sale of products featuring cartoon characters licensed from other parties, including the use of Winnie the Pooh characters licensed from The Walt Disney Company, and Sesame Street characters licensed from The Children's Television Workshop. These licenses have fixed terms and limit the type of products that may be sold under the license. One major license expires at the end of 1998. The Company's management is in the process of negotiating the renewal of such license. There can be no assurance that such license or any of the Company's other licenses will be renewed or will be renewed on terms favorable to the Company, or that, if renewed, they will result in sales increases in future periods. 2 DEPENDENCE ON CONSUMER PREFERENCES The continued success of the Company's business depends in part on the continued consumer demand for its juvenile products and the Company's ability to anticipate, gauge, and respond to changing consumer demands for juvenile products in a timely manner. Changes in consumer demand due to frequently-changing consumer tastes, general economic decline, or to less favorable demographic trends related to childbirth, among other factors, could have a material adverse effect on the Company's business. Moreover, the Company could be materially adversely affected by conditions in the retail industry in general, including consolidation and the resulting decline in the number of retailers, and other cyclical economic factors. DEPENDENCE UPON MAJOR CUSTOMERS The three largest customers of the Company, Walmart, Toys "R" Us, and Target accounted for approximately 52% of net sales during 1997. A significant reduction of purchases by any one of these customers could have a material adverse effect on the Company's business. COMPETITION Competition is intense in the juvenile product markets in which the Company sells its products. The Company competes with a large number of other companies both domestic and foreign, some of which have diversified product lines, well-known brands and financial, distribution and marketing resources substantially greater than those of the Company. There can be no assurance that the Company will be able to continue to compete effectively in the juvenile products market. RELIANCE ON CONTRACT AND FOREIGN MANUFACTURERS The Company does not own or operate its own manufacturing facilities. A number of manufacturers located in the Far East, primarily in China, supply products and product components to the Company. A substantial portion of all of its products sold in 1997 were manufactured in the Far East. The Company is subject to the usual risks of a business involving foreign suppliers, such as currency fluctuations, government regulation of fund transfers, export and import duties, trade limitations imposed by the United States or foreign governments, and political and labor instability. In particular there are a number of trade-related and other issues creating significant friction between the governments of the United States and China, and the imposition of punitive import duties on certain categories of Chinese products has been threatened in the past and may be implemented in the future. Although the Company continues to evaluate alternative sources of supply outside of China, there can be no assurance that the Company will be able to - 2 - 3 develop alternative sources of supply in a timely and cost-effective manner. The Company has no long-term manufacturing agreements with its suppliers and competes with other juvenile product companies, including companies that are much larger than the Company, for access to production facilities. In December, 1996, the Company entered into an agreement with Exergen Corporation to jointly design and develop the Company's ComforTemp thermometer. The Company is dependent on Exergen for Exergen's technology and proprietary components. There can be no assurance that the Company will continue to obtain such proprietary components from Exergen. The Company, because of its substantial reliance on suppliers in foreign countries, is required to order products further in advance of customer orders than would generally be the case if such products were produced in the United States. The risk of ordering products in this manner is greater during the initial introduction of new products since it is difficult to determine the demand for such products. COST AND AVAILABILITY OF CERTAIN MATERIALS Plastic and paperboard are significant cost components of the Company's products and packaging. Because the primary resource used in manufacturing plastic is petroleum, the cost and availability of plastic for use in the Company's products varies to a great extent with the price of petroleum. The inability of the Company's suppliers to acquire sufficient plastic or paperboard at reasonable prices would adversely affect the Company's ability to maintain its profit margins in the short term. INTERNATIONAL SALES The Company's international sales in 1997 were approximately $16.2 million and accounted for approximately 13.5% of the Company's total net sales in 1997. There can be no assurance that the Company will be successful in expanding its international sales operations. PRODUCT LIABILITY RISKS The Company's juvenile products are used for and by small children and infants. The Company carries product liability insurance in amounts which management deems adequate to cover risks associated with such use; however, there can be no assurance that existing or future insurance coverage will be sufficient to cover all product liability risks. - 3 - 4 GOVERNMENT REGULATIONS The Company's products are subject to the provisions of the Federal Consumer Safety Act, the Federal Hazardous Substances Act, the Federal Flammable Fabrics Act, and the Child Safety Protection Act (the "Acts") and the regulations promulgated thereunder. The Acts authorize the Consumer Product Safety Commission (the "CPSC") to protect the public from products which present a substantial risk of injury. The CPSC can require the repurchase or recall by the manufacturer of articles which are found to be defective and impose fines or penalties on the manufacturer. Similar laws exist in some states and cities and in other countries in which the Company markets its products. Any recall of its products could have a material adverse effect on the Company, depending on the particular product. - 4 - -----END PRIVACY-ENHANCED MESSAGE-----