-----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, FPJFmqF5+yW5FhRoBreF3XlZGK9udrEL9jHVxZmCj8MYJkUqaZCto039ytAU1dIP yP5IIE6RLjs9B2VQ0QnIVQ== 0000950135-99-001754.txt : 19990402 0000950135-99-001754.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950135-99-001754 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99582213 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, 1998; 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 $112,250,758, 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 26, 1999. The number of shares of Registrant's Common Stock outstanding on December 31, 1998 was 10,440,014. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1998. 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 300 items that range in retail price from approximately $0.99 to $89.99, is categorized and marketed into five distinct product categories as follows: Feeding & Soothing. The Feeding & Soothing category is comprised of bottles and accessories, nipples, pacifiers, teethers, bowls, drinking cups, dishes, flatware, bibs, breast-feeding accessories and feeding sets. This category includes the TumbleMates line of training cups, bowls, plates and utensils, designed for serving, storing and transporting drinks and snacks, and which features a system of interchangeable cups and lids. This category also includes the Simplicity line of breast feeding accessories, the Flowright angled feeding system of nipples and bottles, the Sure pacifier and the new All-In-One highchair. 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 1998, the Company introduced the 3-in-1 Gym to Walker which received three prestigious awards from independent panels of child development experts. Care & Safety. The Care & Safety category consists of a broad line of bathing and grooming accessories, home safety and monitoring products such as door and cabinet latches, toilet-training products and products appropriate for the health and hygiene needs of infants. This category includes the Crisp & Clear Plus 900MHz Nursery Monitor. 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 1998, the Company introduced numerous additional items in this category including Pooh PlayPals and Pooh Sports Bottles. 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., Simplicity(TM), Flowright(TM), All-In-One(TM), Sure(TM), Crisp & Clear Plus(TM) and ComforTemp(TM) are trademarks of The First Years Inc. SESAME STREET is a registered trademark of Children's Television Workshop, WINNIE THE POOH(R) and POOH(R) are registered trademarks of Disney Enterprises, Inc. I-1 4 PRODUCT DESIGN, DEVELOPMENT AND MARKETING The Company devotes substantial resources to product development. The Company employs a staff of professionals engaged in the creation of new products and uses a diverse group of outside designers and developers. For the past 18 years the Company's product line also has been designed in consultation with Dr. T. Berry Brazelton, the well-known pediatrician and authority on child development, and staff members of the Child Development Unit at Children's Hospital in Boston, Massachusetts (the "CDU"), of which Dr. Brazelton is founder and Director Emeritus. The Company spent approximately $3.3, $2.6 and $2.2 million on new product development in 1998, 1997 and 1996, 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, Eckerd Drugs, Rite Aid, Albertsons, and J.C. Penney. The Company's products are sold in the United States and Canada primarily through the Company's internal sales staff and a network of 42 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 1998, 1997 and 1996 were approximately $16.7, $16.2 and $11.6 million, respectively, and accounted for approximately 12.6%, 13.5% and 12.5% of the Company's total net sales in 1998, 1997 and 1996, respectively. (See "Notes to Financial Statements, Number 8.") During 1998, Wal*Mart, Toys "R" Us, and Target accounted for approximately 29%, 17%, 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 Since 1996, the Company has entered into and renewed various agreements which provide for the payment of royalties on certain of the Company's products featuring licensed cartoon characters. The agreements have various terms and require minimum royalty payments of $5,380,000 during the terms of these agreements. A major licensing agreement which was to expire at the end of 1998 has been extended through March 31, 1999. Sales of products licensed under the agreement amounted to 42% of the Company's total net sales for the year ended December 31, 1998. Management is in the process of negotiating a renewal of this agreement. While management expects the licensing agreement to be renewed, non-renewal of this I-2 5 licensing agreement or, renewal on terms not favorable to the Company could have a material adverse affect on the Company's business (see Exhibit 99 to this Report, "Important Factors Regarding Forward-Looking Statements" and "Notes to the Financial Statements," Numbers 6 and 8). MANUFACTURING AND SOURCES OF SUPPLY The Company does not own or operate its own manufacturing facilities. In 1998, 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 65% of all of its products sold in 1998 were manufactured in Asia, primarily in China. A large percentage of the Company's furnishings and other large products were manufactured in 1998 by suppliers in the United States and Canada because of the significantly higher shipping costs from the Far East. Generally the Company uses one manufacturer to make each product from its supplier base in Asia, Canada, and the United States. Due to the high cost of developing duplicate tooling (predominantly molds and dies), most of the Company's products are made using one set of tools; however, the Company has developed duplicate tools for several of its key and high-volume products. In December, 1996, the Company entered into an agreement with Exergen Corporation to jointly design and develop the Company's ComforTemp thermometer. The ComforTemp is an instant underarm thermometer which uses an infrared temperature-taking technology developed and patented by Exergen. The Company is dependent on Exergen for Exergen's technology and proprietary components. The Company introduced the Comfortemp to the market in 1997. There can be no assurance that the Company will continue to obtain such proprietary components from Exergen or that the ComforTemp thermometer, will result in substantial sales. The Company believes it has alternative manufacturing sources available for all of its other products. Because it owns its tools, it could shift its sources of manufacturing for such other products to an alternative supplier. In 1998, the Company's largest supplier, which is based in the United States, accounted for products that represented approximately 13% of its net sales in 1998. Other than as described above, the Company has not entered into long-term contractual arrangements with any of its suppliers. The principal raw materials used in the production and sale of the Company's products are plastic, paperboard and cloth. Raw materials are purchased by the manufacturers who deliver completed products to the Company. Because the primary source used in manufactured plastic is petroleum, the cost and availability of plastic for use in the Company's products varies to a great extent with the price of petroleum. The inability of the Company's suppliers to acquire sufficient plastic and paperboard at a reasonable price could have a material adverse effect on the Company's profitability. The Company did not experience any difficulties in obtaining materials in 1998. 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 Normal Trade Relations ("NTR") trading status could have a material adverse effect upon the Company's business because products originating from China could be subjected to substantially higher rates of duty. China's NTR trading status has been extended through July 3, 1999. Unless Congress takes action to override this decision, China will continue to enjoy NTR treatment during this period. The European Community (the "EC") has enacted a quota and tariff system with respect to the importation into the EC of certain toy products originating in China. The Company, therefore, continues to evaluate alternative sources of supply outside of China. I-3 6 The Company, because of its substantial reliance on suppliers in foreign countries, is required to order products further in advance of customer orders than would generally be the case if such products were produced in the United States. As a result, the Company is required to carry significant amounts of inventory to meet rapid delivery requirements of customers and to assure itself of continuous allotment of goods from suppliers. 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, 1998, the Company employed 148 full-time and 7 part-time employees, of whom 6 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 I-4 7 Protection Act, and the regulations promulgated thereunder (the "Acts"). The Company's nursery monitors are subject to regulations of the Federal Communications Commission. The Company's medical devices and drug products are subject to the regulations of the Food and Drug Administration. The Acts enable the Consumer Product Safety Commission (the "CPSC") to protect children from hazardous toys and other articles. The CPSC has the authority to exclude from the market certain consumer products which are found to be hazardous. The CPSC's determination is subject to court review. The CPSC can require the repurchase by the manufacturer of articles which are banned. The Federal Flammable Fabrics Act enables the CPSC to regulate and enforce flammability standards for fabrics used in consumer products. Similar laws exist in some states and cities and in various international markets. The Company designs and tests its products to ensure compliance with the various federal, state and international requirements. Any recall of a product could have a material adverse effect on the Company, depending on the particular product. 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.......................... 52 President, Chairman of the Board of Directors, and Chief Executive Officer 1975 Jerome M. Karp............................ 71 Vice Chairman of the Board of Directors 1969 Benjamin Peltz............................ 59 Director 1975 Evelyn Sidman............................. 85 Clerk and Director 1979 Fred T. Page.............................. 52 Director 1988 Kenneth R. Sidman......................... 53 Director 1998 Lewis M. Weston........................... 72 Director 1998 Walker J. Wallace......................... 54 Director 1999 John R. Beals............................. 44 Treasurer, Senior Vice President -- Finance and Chief Financial Officer 1990 Wayne Shea................................ 44 Senior Vice President -- Worldwide Sales and Merchandising 1991 Bruce Baron............................... 38 Senior Vice President -- Operations 1997 James N. Turner........................... 41 Senior Vice President -- Marketing and New Product Development 1998
- --------------- 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. Page has been the President -- Network Services of Southern New England Telecommunications Corporation ("SNET"), a subsidiary of Southwestern Bell, since January, 1994 and has been with SNET for over 5 years. Kenneth R. Sidman has been Vice President, Business & Technology Development, at Norton Performance Plastics Corp., Wayne, NJ, a subsidiary of Compagnie de Saint-Gobain, since 1997. Mr. Sidman joined Norton Performance Plastics Corp. in 1984 as Director, New Business Development, and from 1992 to 1997, was Vice President, Marketing & New Business Development. Mr. Lewis M. Weston has been a Limited Partner of Goldman, Sachs & Co., since 1978. He has been with Goldman Sachs since 1951 and was made a General Partner in 1967. He was Partner in charge of the Syndicate Department from 1969 to 1978, a period during which he was also active with the National Association of Securities Dealers (NASD), serving three years as a member of the NASD's Board of Governors. Currently, Mr. Weston is a board member of South East Asia Venture Investment Company (SEAVIC) and SEAVIC, III, Singapore, and the Thai Prime Fund, Singapore, as well as a member of the I-5 8 International Advisory Board of Banco Finantia, Lisbon, Portugal. He also serves on the Investors Representative Committee of the China Dynamic Investment Fund. Walker J. Wallace was with Proctor & Gamble for 30 years, from 1967 to 1997. He was made a Vice President of Proctor & Gamble in 1991 and served as Vice President -- Worldwide Strategic Planning for various core product categories (laundry and cleaning products, paper products, diapers) from 1993 to 1997. Mr. Wallace is on the Board of the Student Loan Funding Resources in Cincinnati, Ohio. Mr. Beals has been Senior Vice President -- Finance since March, 1998 and Treasurer of the Company since January, 1998. He has been Chief Financial Officer of the Company since July, 1997. From July, 1997 to March, 1998 he was Vice President -- Finance of the Company and from January, 1990 to June, 1997, he was the Assistant Treasurer and Controller of the Company. Mr. Shea has been Senior Vice President of Worldwide Sales & Merchandising since July, 1997. From January, 1995 to June, 1997, Mr. Shea was Vice President Worldwide Sales & Merchandising and from July, 1991 to December, 1994, Mr. Shea was Vice President of Service and Merchandising of the Company. Mr. Baron has been Senior Vice President -- Operations since August, 1997. Prior to that time, Mr. Baron was Vice President of Operations at Crabtree & Evelyn from 1988 to July, 1997. Mr. Turner has been Senior Vice President -- Marketing and New Product Development since July, 1998. Prior to that time, from July, 1995 to June, 1998, he was the Vice President -- Product Development of Tupperware Services and from November, 1992 to June, 1995 he was Vice President -- Marketing of Tupperware Asia Pacific. 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 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 1998 and 1997 as reported by Nasdaq and retroactively adjusted to reflect the Company's 2-for-1 stock split effected on June 29, 1998. 1998
QUARTER LOW HIGH ------- --- ---- First....................................................... $10 1/2 $18 1/8 Second...................................................... 15 1/4 20 Third....................................................... 12 19 1/2 Fourth...................................................... 9 18 1/4
1997
QUARTER LOW HIGH ------- --- ---- First....................................................... $ 7 3/4 $ 8 15/16 Second...................................................... 7 1/2 10 7/8 Third....................................................... 9 3/4 14 1/2 Fourth...................................................... 10 1/4 14 3/8
(b) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
APPROXIMATE NUMBER OF RECORD HOLDERS TITLE OF CLASS (AS OF DECEMBER 31, 1998) -------------- ------------------------- Common Stock, $.10 Par Value 155
(c) DIVIDEND POLICY In 1997 and 1998, the Company paid a cash dividend on its Common Stock of $0.05 and $0.06 per share, respectively, which were paid on June 2, 1997 and June 29, 1998, respectively. The Company currently expects that comparable cash dividends will continue to be paid in the future. However, the declaration and payment of any such cash dividends in the future will depend upon the Company's earnings, financial condition, capital needs, and other factors deemed relevant by the Board of Directors. There can be no assurance that the Company will continue to pay dividends in the future. The Company's Board of Directors declared on May 8, 1998, a 2-for-1 stock split effected in the form of a 100% stock dividend payable on June 29, 1998 to holders of record on May 29, 1998. II-1 10 ITEM 6. SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- SELECTED INCOME STATEMENT DATA: Net sales................. $132,716,379 $120,695,988 $93,110,361 $75,757,322 $53,233,109 Cost of products sold..... 80,737,193 71,185,634 55,463,255 45,108,546 29,498,457 Selling, general and administrative expenses................ 39,011,893 37,165,878 28,580,039 23,961,206 18,915,908 Interest expense.......... -- 27,709 358,637 186,338 24,575 Interest income........... 590,822 168,922 27,349 16,718 66,605 Offering expenses......... -- -- -- 310,457 -- Income before income taxes................... 13,558,115 12,485,689 8,735,779 6,207,493 4,860,774 Provision for income taxes................... 5,545,300 5,040,900 3,494,300 2,483,000 1,871,400 Net income................ 8,012,815 7,444,789 5,241,479 3,724,493 2,989,374 Basic earnings per share**................. $0.78 $0.75 $0.55 $0.41 $0.33 Diluted earnings per share**................. $0.75 $0.71 $0.53 $0.40 $0.33 Dividends paid per share*.................. $0.06 $0.05 $0.05 $0.05 $0.05 Basic weighted average number of shares outstanding**........... 10,338,857 10,003,774 9,466,356 9,014,116 8,994,488 Diluted weighted average number of shares outstanding**........... 10,669,503 10,453,062 9,891,982 9,326,982 8,994,488 SELECTED BALANCE SHEET DATA: Total assets.............. $ 69,275,895 $ 60,571,561 $47,049,537 $41,712,080 $28,852,785 Long-term debt............ -- -- -- 100,001 233,334 Stockholders' equity...... 52,647,404 44,009,004 35,866,440 25,763,259 22,349,947 Stockholders' equity per share**................. $4.93 $4.21 $3.63 $2.76 $2.49
- --------------- * Adjusted to reflect the two-for-one stock split effected on June 29, 1998 and December 29, 1995, respectively. ** Adjusted to reflect the two-for-one stock split effected on June 29, 1998 and December 29, 1995, respectively and restated to reflect adoption of Statement of Financial Accounting Standard No. 128 in the fourth quarter of 1997. 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. Forward-looking statements involve risks, uncertainties or other factors which may cause material differences in actual results or performance. These factors include, but are not limited to, the ability to introduce new products, dependence on licensed products, and the renewal of a major license, reliance upon major customers and foreign suppliers, competitive market pressures, changes in consumer preferences and in the retail industry, risks related to year 2000 compliance and other factors, described more fully in Exhibit 99 of this Annual Report for the year ended December 31, 1998. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Net sales in 1998 were $132.8 million, an increase of $12.1 million, or 10.0%, as compared to $120.7 million in 1997. The increase was due to new product introductions and expanded retail distribution in domestic and foreign markets. An additional factor affecting sales was a charge of $3.0 million relating to sales returns of certain products containing diisononyl phthalate ("DINP"), a plastic softener. As a percent of sales, net sales to foreign markets decreased to 12.6% in 1998 from 13.5% in 1997 as sales increases in Europe were partially offset by reduced sales in Latin America and the Pacific Rim due to poor economic conditions. The Company currently believes economic conditions in Latin America and the Pacific Rim may negatively affect sales potential during the short to medium term but that in the long term substantial opportunity exists. As a percentage of net sales, sales of licensed products increased to 48.4% in 1998 from 43.1% in 1997. The Company derives a significant portion of its sales from products under license. A major licensing agreement, which was to expire at the end of 1998, has been extended through March 31, 1999. Sales of products licensed under the agreement amounted to 42% of the Company's total net sales for the year ended December 31, 1998. Management is in the process of negotiating a renewal of this agreement. While management expects the licensing agreement to be renewed, non-renewal of this licensing agreement or, renewal on terms not favorable to the Company could have a material adverse affect on the Company's business. The Company also currently believes that the growth in licensed products as a percent of total sales may begin to lessen as demand for licensed products matures. Cost of products sold in 1998 was $80.7 million, an increase of $9.5 million or 13.4%, as compared to $71.2 million in 1997. As a percentage of net sales, cost of products sold in 1998 increased to 60.8% from 59.0% in the comparable period of 1997. The increase was primarily due to a charge of $1.1 million relating to write-off of inventory of certain products containing DINP. Without the charge related to DINP, cost of products sold would have remained consistent at 58.9% in 1998 and 59.0% in 1997, respectively. Selling general and administrative expenses in 1998 were $39.0 million, an increase of $1.8 million, or 5.0%, as compared to $37.2 million of such expenses in 1997. The increase was primarily due to costs related to increased sales volume and payroll and payroll related costs. As a percentage of net sales, selling, general, and administrative expenses decreased to 29.4% in 1998 from 30.8% in the comparable period of 1997. The decrease reflects a reduction in advertising expenses in 1998 as well as the continued effective management of selling, general, and administrative expenses. Income tax expense as a percentage of pretax income increased to 40.9% in 1998 from 40.4% in 1997 as a portion of the Company's taxable income was taxed at a higher statutory rate. YEAR 2000 ISSUE The "Year 2000 Issue" (Y2K) relates to problems that may result from the incorrect processing of information using dates or date sensitive data by computers and other machines utilizing embedded microprocessors. The problem is attributable to the computer or software recognizing the year as a two digit number "00" as opposed to the Year "2000". As year 2000 approaches, uncertainty relating to these Y2K issues must be addressed in order to correct the problem or properly plan for possible contingencies to handle anticipated issues, if any. II-3 12 The Company started addressing the Y2K issue in 1996 and has been following a plan, in phases, to identify, inventory, prioritize and correct all known Y2K issues. The project plan incorporates the various phases and will evaluate both information technology (IT) related hardware and software as well as non-IT issues such as facilities operations and product related technology. The project will also attempt to obtain assurance from mission critical vendors (banks, transfer agents, manufacturing suppliers, utilities and other suppliers of critical services to the Company) about their Y2K readiness and develop contingency plans for issues that may arise from the failure of those vendors as well as customers to achieve Y2K compliance. The Company has substantially completed its review of all IT related systems and currently believes it will be Y2K compliant by the end of the third quarter of 1999. The Company is currently in the identification and inventory phase of the review of non-IT systems and mission critical third party relationships which is currently expected to be completed during the second quarter of 1999. Based on the review of responses from third-party vendors, which has been substantially completed, the Company currently expects to prioritize the corrective actions required, if any, and commence the corrections phase of the project during the third quarter of 1999. The Company has initiated the contingency planning phase of the Y2K project. A committee, including members of senior management, has been formed to evaluate the response from mission critical third parties regarding assurance of their Y2K readiness. Additionally, the committee is evaluating general operational issues that may be affected by Y2K problems not limited to direct third party relationships and is in the process of incorporating all issues into a formal contingency plan. The contingency plan development is progressing according to the overall Y2K plan and is expected to be substantially complete by the end of the second quarter of 1999. The cost to address the Y2K Issue has not been and is not expected to be material to the Company's financial position or have a material impact on operating results. Since 1996 the Company has incurred expenses of approximately $100,000 to address the Y2K issue and anticipates incurring an additional $100,000 related to the Y2K issue. Anticipated additional costs do not consider costs, if any, related to the failure of third party relationships to become "Year 2000" compliant. All expenses incurred to date have been recognized as expense in the Company's consolidated financial statements in the period incurred. Costs, if any, related to the correction of Y2K issues caused by a third party's failure to be Y2K compliant would be expensed as incurred. Based on the Y2K assessment information obtained and corrections implemented to date, the Company currently believes that the Year 2000 Issue will not have a material adverse effect on its financial position or results of operations. The Company believes that its most reasonably likely, worst case scenario may involve non-compliant third parties, including failure of suppliers, distributors, shipping carriers, utility companies and other similar third parties to provide their services to the Company. The Company is currently inventorying results of a vendor compliance survey which will facilitate the risk assessment and contingency planning phase of non-IT related issues which will include planning for worst case scenarios, however, there can be no assurance that the failure to ensure Year 2000 capability by a supplier, customer, or another third party would not have a material adverse effect on the Company. 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. II-4 13 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. LIQUIDITY AND CAPITAL RESOURCES Net working capital increased by $7.5 million to $45.5 million at December 31, 1998 from $38.0 million at December 31, 1997 primarily due to funds generated from profitable operations and reductions in inventory. Cash increased by $12.1 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 800,000 (post 1998 stock split) newly issued shares and 2,400,000 (post 1998 stock split) 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 1998, the Company had no borrowings under the line of credit. As of December 31, 1998 no balance was outstanding. The Company paid a cash dividend of $0.06 and $0.05 per share of Common Stock in June of 1998 and 1997, respectively. The Company expects cash flow from operations and availability under the Company's lines of credit to be sufficient to meet cash needs for working capital expenditures for the next two years. INFLATION AND FOREIGN CURRENCY FLUCTUATIONS Inflation has not had a material effect on the Company's operating results over the past three years. The Company enters into forward exchange contracts to minimize the impact of fluctuations in currency exchange rates on future cash flows emanating from sales denominated in foreign currencies. The Company does not purchase such contracts for trading purposes. During 1998, the Company entered into forward exchange contracts with a bank whereby the Company is committed to deliver foreign currency at predetermined rates. The contracts expire within one year. The Company's commitment under these contracts approximated $500,000 as of December 31, 1998. At December 31, 1998, 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, 1998, 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." The adoption of SFAS No. 130 resulted in no changes to the consolidated financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." As required, the company adopted SFAS No. 131 in the fourth quarter of 1998. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which will require recognition of all derivatives as either assets or liabilities on the balance sheet at fair value. The Company is currently evaluating the effect of implementing SFAS No. 133, which will be effective for the year beginning January 1, 2000. II-5 14 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK See discussion in second paragraph of Item 7, "Inflation and Foreign Currency Fluctuations", for required quantitative and qualitative disclosure about primary exposure to market risk. The foreign currencies to which the Company has the most significant exchange rate exposure is the British pound. Based on a hypothetical ten percent adverse movement in foreign currency exchange rates, the potential losses in future earnings, fair value of risk-sensitive instruments, and cash flows are immaterial, although the actual effects may differ materially from the hypothetical analysis. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial Statements listed under Item 14.(a) 1. are included in Part IV. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There is nothing to report relating to this Item. II-6 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is included in the Registrant's definitive proxy statement for the 1999 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 1999 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 1999 Annual Meeting of Stockholders. III-1 16 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, 1998 and 1997 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 (a) 2. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 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).
IV-1 17
PAGE ---- Management Contracts and Compensatory Plans (10)(g) The First Years Inc. 1993 Equity Incentive Plan, as amended through March 19, 1998 (filed as Exhibit (10)(g) on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). (10)(h) The First Years Inc. 1993 Stock Option Plan for Directors, as amended through March 19, 1998 (filed as Exhibit (10)(h) on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). (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 (filed as Exhibit (10)(l) on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). (10)(m) First Amendment to Employment Agreement between The First Years Inc. and Benjamin Peltz dated January 16, 1997 (filed as Exhibit (10)(m) on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). (10)(n) The First Years Inc., a Massachusetts Corporation, and Affiliates -- 1998 Annual Incentive Plan, effective as of January 1, 1998. IV-19 (10)(o) Agreement between The First Years Inc. and Wayne Shea dated August 12, 1997 (filed as Exhibit (10)(o) on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference). (10)(p) Agreement between The First Years Inc. and Bruce Baron dated July 10, 1997. IV-19 (10)(q) Agreement between The First Years Inc. and James N. Turner dated June 15, 1998. IV-19 - ------------------------------------------------------------------------------- (21) List of Subsidiaries of the Registrant. IV-19 (23) Consent of Deloitte & Touche LLP dated March 31, 1999. IV-19 (27) Financial Data Schedule -- 12/31/98 IV-19 (99) Important Factors Regarding Forward-Looking Statements. IV-19
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, 1998. IV-2 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE FIRST YEARS INC. .................................... (Registrant) By: /s/ RONALD J. SIDMAN .................................. RONALD J. SIDMAN, CHIEF EXECUTIVE OFFICER, CHAIRMAN OF THE BOARD OF DIRECTORS, AND PRESIDENT Date: March 18, 1999 By: /s/ JOHN R. BEALS .................................. JOHN R. BEALS, TREASURER AND SENIOR VICE PRESIDENT -- FINANCE(CHIEF FINANCIAL OFFICER AND CHIEF ACCOUNTING OFFICER) Date: March 18, 1999 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 18, 1999.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RONALD J. SIDMAN Chief Executive Officer Chairman of March 18, 1999 ........................................ the Board of Directors and President RONALD J. SIDMAN /s/ JEROME M. KARP Vice Chairman of the Board of March 18, 1999 ........................................ Directors JEROME M. KARP /s/ EVELYN SIDMAN Director March 18, 1999 ........................................ EVELYN SIDMAN /s/ BENJAMIN PELTZ Director March 18, 1999 ........................................ BENJAMIN PELTZ /s/ FRED T. PAGE Director March 18, 1999 ........................................ FRED T. PAGE
IV-3 19 THE FIRST YEARS INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
PAGE ---- Independent Auditors' Report................................ IV-5 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1998 and 1997.................................................. IV-6 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997, and 1996..................... IV-7 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997, and 1996......... IV-8 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996............... IV-9 Notes to Consolidated Financial Statements............. IV-10-17 Financial Statement Schedule II -- Valuation and Qualifying Accounts for the Years Ended December 31, 1998, 1997, and 1996...................................................... IV-18
IV-4 20 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of The First Years Inc. Avon, Massachusetts We have audited the accompanying consolidated balance sheets of The First Years Inc. as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 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 4, 1999 (March 29, 1999 as to paragraph 3 of footnote 8) IV-5 21 THE FIRST YEARS INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997
1998 1997 ---- ---- ASSETS Current Assets: Cash and cash equivalents (Notes 1 and 8).............. $19,776,897 $ 7,697,040 Accounts receivable (less allowance for doubtful accounts of $270,000 and $185,000 in 1998 and 1997, respectively) (Note 8)................................ 19,013,127 19,962,226 Inventories (Note 1)................................... 18,520,023 24,372,881 Prepaid expenses and other assets...................... 2,638,634 414,764 Deferred tax asset (Notes 1 and 3)..................... 1,424,500 1,279,000 ----------- ----------- Total current assets.............................. 61,373,181 53,725,911 ----------- ----------- Property, Plant, and Equipment (Note 1): Land................................................... 167,266 167,266 Building............................................... 4,199,790 4,022,095 Machinery and molds.................................... 7,878,103 7,151,019 Furniture and equipment................................ 4,571,636 3,947,144 ----------- ----------- Total............................................. 16,816,795 15,287,524 Less accumulated depreciation.......................... 8,914,081 8,441,874 ----------- ----------- Property, plant, and equipment -- net............. 7,902,714 6,845,650 ----------- ----------- Total Assets...................................... $69,275,895 $60,571,561 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable....................................... $ 9,400,966 $10,163,844 Accrued royalty expense (Note 6)....................... 2,130,027 2,051,721 Accrued payroll expenses............................... 1,200,966 1,143,063 Accrued selling expenses............................... 3,098,232 2,387,029 ----------- ----------- Total current liabilities......................... 15,830,191 15,745,657 ----------- ----------- Deferred Tax Liability (Notes 1 and 3)...................... 798,300 816,900 Commitments and Contingencies (Notes 5, 6 and 8) Stockholders' Equity (Notes 4, 7, 9 and 10): Common stock -- authorized, 15,000,000 shares; issued 10,461,408 and 10,176,000; outstanding, 10,440,014 and 10,169,182 as of December 31, 1998 and 1997, respectively.............................................. 1,046,141 508,800 Paid-in-capital............................................. 7,472,398 6,534,308 Retained earnings........................................... 44,438,589 37,047,709 Less treasury stock at cost, 21,394 and 6,818 shares as of December 31, 1998 and 1997, respectively.................. (309,724) (81,813) ----------- ----------- Total stockholders' equity........................ 52,647,404 44,009,004 ----------- ----------- Total Liabilities and Stockholders' Equity........ $69,275,895 $60,571,561 =========== ===========
See notes to consolidated financial statements. IV-6 22 THE FIRST YEARS INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ---- ---- ---- Net Sales (Notes 1, 6, 8 and 11).................. $132,716,379 $120,695,988 $93,110,361 Cost of Products Sold (Notes 1 and 11)............ 80,737,193 71,185,634 55,463,255 ------------ ------------ ----------- Gross Profit...................................... 51,979,186 49,510,354 37,647,106 Selling, General, and Administrative Expenses (Notes 1 and 7)................................. 39,011,893 37,165,878 28,580,039 ------------ ------------ ----------- Operating Income.................................. 12,967,293 12,344,476 9,067,067 Other Income (Expense): Interest expense............................. -- (27,709) (358,637) Interest income.............................. 590,822 168,922 27,349 ------------ ------------ ----------- Income Before Income Taxes........................ 13,558,115 12,485,689 8,735,779 Provision for Income Taxes (Notes 1 and 3)........ 5,545,300 5,040,900 3,494,300 ------------ ------------ ----------- Net Income (Note 11).............................. $ 8,012,815 $ 7,444,789 $ 5,241,479 ============ ============ =========== Basic Earnings Per Share (Notes 1 and 9).......... $ 0.78 $ 0.75 $ 0.55 ============ ============ =========== Diluted Earnings Per Share (Notes 1 and 9)........ $ 0.75 $ 0.71 $ 0.53 ============ ============ ===========
See notes to consolidated financial statements. IV-7 23 THE FIRST YEARS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
COMMON STOCK -------------------- PAID-IN RETAINED TREASURY SHARES PAR VALUE CAPITAL EARNINGS STOCK ------ --------- ------- -------- -------- Balance, January 1, 1996......... 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) Stock issued under stock option plans (Note 7)..... 183,205 18,321 916,510 -- -- Tax benefit derived from option compensation deduction................. -- -- 540,600 -- -- Dividends paid.............. -- -- -- (621,935) -- Repurchase of 10,576 shares for treasury.............. (10,576) -- -- -- (227,911) Stock split, two-for-one (Note 4).................. 5,182,794 519,020 (519,020) -- -- Net income.................. -- -- -- 8,012,815 -- ---------- ---------- ---------- ----------- --------- Balance, December 31, 1998....... 10,440,014 $1,046,141 $7,472,398 $44,438,589 $(309,724) ========== ========== ========== =========== =========
See notes to consolidated financial statements. IV-8 24 THE FIRST YEARS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ----------- ----------- ----------- Cash Flows from Operating Activities: Net income............................................ $ 8,012,815 $ 7,444,789 $ 5,241,479 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation....................................... 1,415,525 1,397,078 1,228,790 Provision for doubtful accounts.................... 176,034 147,541 152,582 Loss on disposal of equipment...................... 548,469 617,693 37,699 Increase (decrease) arising from working capital items: Accounts receivable.............................. 773,065 (4,180,302) (1,890,417) Inventories...................................... 5,852,858 (5,784,837) 421,740 Prepaid expenses and other assets................ (1,683,270) (39,447) 402,757 Accounts payable................................. (762,878) 3,652,730 344,167 Accrued royalty expense.......................... 78,306 1,203,050 314,870 Accrued payroll expenses......................... 57,903 55,761 (17,702) Accrued selling expenses......................... 711,203 981,020 801,575 Change in deferred income taxes.................... (164,100) (287,700) 50,600 ----------- ----------- ----------- Net cash provided by operating activities..... 15,015,930 5,207,376 7,088,140 ----------- ----------- ----------- Cash Flows from Investing Activities Purchase of property, plant, and equipment.............. (3,021,058) (1,814,698) (2,004,489) ----------- ----------- ----------- Cash Flows from Financing Activities: Repayment of industrial revenue bonds................. -- (100,000) (133,334) Net repayment from short-term borrowings.............. -- -- (6,200,000) Dividends paid........................................ (621,935) (496,747) (453,557) Net proceeds from public offering..................... -- -- 5,121,750 Purchase of treasury stock............................ (227,911) (81,813) -- Common stock issued under stock option plans.......... 934,831 818,335 193,509 ----------- ----------- ----------- Net cash provided by (used for) financing activities.................................. 84,985 139,775 (1,471,632) ----------- ----------- ----------- Increase in Cash and Cash Equivalents................... 12,079,857 3,532,453 3,612,019 Cash and Cash Equivalents, Beginning of Year............ 7,697,040 4,164,587 552,568 ----------- ----------- ----------- Cash and Cash Equivalents, End of Year.................. $19,776,897 $ 7,697,040 $ 4,164,587 =========== =========== =========== Supplemental Disclosures of Cash Flow Information Cash paid during the year for: Interest......................................... $ 0 $ 27,709 $ 358,637 =========== =========== =========== Income taxes..................................... $ 7,584,400 $ 4,684,690 $ 3,087,700 =========== =========== =========== Non-cash transactions: Tax benefit of stock option exercises............ $ 540,600 $ 458,000 $ 0 =========== =========== ===========
See notes to consolidated financial statements. IV-9 25 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business -- The First Years Inc. (the "Company") is a developer, marketer, and distributor of certain basic accessory and related products for infants and toddlers. The Company was founded and incorporated in 1952. Since its inception, the Company has engaged in this single line of business, with one class of similar products. The following is a summary of the Company's significant accounting policies. Basis of Reporting -- The consolidated financial statements include the accounts of all the Company's wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Revenue Recognition -- Revenue is recognized when products are shipped. Cash Equivalents -- Highly liquid investments with a maturity of three months or less when purchased have been classified as cash equivalents in the accompanying financial statements. Such investments are carried at cost, which approximates market value. Inventories -- Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist principally of finished goods, unpackaged components, and supplies. Property, Plant, and Equipment -- Property, plant, and equipment is stated at cost. Depreciation is provided based on the estimated useful lives of the various classes of assets (building, 15 to 40 years; machinery and molds, 5 to 10 years; furniture and equipment, 5 to 10 years) using the straight-line method. Income Taxes -- Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. Employee Stock-Based Compensation -- The Company uses the intrinsic value-based method of Accounting Principles Board Opinion ("APB") No. 25 to account for employee stock-based compensation plans. Earnings Per Share -- In 1997, the Company adopted SFAS No. 128 "Earnings Per Share." All earnings per share amounts for all periods presented have been restated to conform to the requirements of SFAS No. 128. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The primary estimates underlying the Company's consolidated financial statements include allowances for doubtful accounts and obsolete inventories and estimates related to the DINP charges (See footnote 11). Actual results could differ from those estimates. Research and Development Costs -- Research and development costs are expensed as incurred. During 1998, 1997, and 1996, research and development costs approximated $3,320,000, $2,584,000, and $2,209,000, respectively. Foreign Currency Translation -- The Company's functional currency is the U.S. dollar. Accordingly, monetary assets and liabilities of the Company's foreign operations are translated from the respective local currency to the U.S. dollar using year-end exchange rates while nonmonetary items are translated at historical rates. Income and expense accounts are translated at the average rates in effect during the year. Accordingly, translation adjustments and transaction gains and losses are recognized as income in the year of occurrence and are recorded as a component of cost of sales. Foreign Exchange Contracts -- The Company enters into forward exchange contracts to minimize the impact of fluctuations in currency exchange rates on future cash flows emanating from sales denominated in IV-10 26 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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." The adoption of SFAS No. 130 resulted in no changes to the consolidated financial statements. In June 1997, the FSAB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." As required, the Company adopted SFAS No. 131 in the fourth quarter of 1998 (See footnote 12). In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which will require recognition of all derivatives as either assets or liabilities on the balance sheet at fair value. The Company is currently evaluating the effect of implementing SFAS No. 133, which will be effective for the year beginning January 1, 2000. 2. DEBT During 1998 and 1997, 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 the Company borrowed various amounts up to $2,500,000 under the line. No short-term borrowings were incurred by the Company during 1998. As of December 31, 1998 and 1997 no balance was outstanding. The line of credit will expire on June 30, 1999. 3. INCOME TAXES Components of the Company's net deferred tax asset at December 31 are as follows:
1998 1997 ---------- ---------- Deferred tax assets: Reserves not currently deductible............ $ 411,400 $ 266,900 Capitalized packaging costs not currently deductible................................. 586,500 528,900 Capitalized inventory costs not currently deductible................................. 393,700 432,800 Other........................................ 32,900 50,400 ---------- ---------- 1,424,500 1,279,000 ---------- ---------- Deferred tax liabilities: Excess tax depreciation over financial reporting depreciation..................... 793,800 812,400 Other........................................ 4,500 4,500 ---------- ---------- 798,300 816,900 ---------- ---------- Net deferred tax asset............................ $ 626,200 $ 462,100 ========== ==========
IV-11 27 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) There was no valuation allowance for the years ended December 31, 1998 and 1997. The provision for income taxes consists of the following:
1998 1997 1996 ---------- ---------- ---------- Federal: Current......................... $4,318,600 $4,157,200 $2,649,600 Deferred........................ (164,100) (287,700) 50,600 ---------- ---------- ---------- Total federal.............. 4,154,500 3,869,500 2,700,200 State................................ 1,390,800 1,171,400 794,100 ---------- ---------- ---------- Provision for income taxes........... $5,545,300 $5,040,900 $3,494,300 ========== ========== ==========
A reconciliation of the statutory federal income tax rate and the effective tax rate as a percentage of pretax income is as follows:
1998 1997 1996 ---- ---- ---- Statutory rate.................................... 35.0% 34.0% 34.0% State income taxes, net of federal income tax benefit......................................... 6.5 6.4 6.0 Other............................................. (0.6) -- -- ---- ---- ---- Effective tax rate................................ 40.9% 40.4% 40.0% ==== ==== ====
4. COMMON STOCK In May 1998, the Company's Board of Directors (the Board) declared a two-for-one split of the Company's common stock. The 1998 stock split, effected in the form of a stock dividend, was distributed on June 29, 1998 (to stockholders of record on May 29, 1998). Earnings per share amounts shown in the accompanying financial statements have been retroactively adjusted to reflect the 1998 stock split. 5. COMMITMENTS AND CONTINGENCIES Forward Exchange Contracts -- During 1998 and 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 future commitment under these contracts approximated $494,000 and $2,500,000 as of December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, the fair market value of the contracts approximated their carrying amount. Other Commitments -- At December 31, 1998 and 1997, letters of credit outstanding aggregated approximately $33,000 and $125,000, 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. As of July 1997, one of the above mentioned officers terminated employment with the Company and pursuant to the terms of the employment agreement, the Company is currently making noncompetition payments to him. Such payments under the contract will be completed as of June 30, 1999. IV-12 28 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 1998 and 1997, 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 $1,363,000 and $1,398,000 for agreements signed during 1998 and 1997, respectively. Future outstanding minimum royalty commitments under all agreements amounted to $289,000 and $650,000 at December 31, 1998 and 1997, respectively. Royalty expense aggregated $8,311,000, $6,356,000 and $3,197,000 in 1998, 1997 and 1996, 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 $566,000, $545,000, and $472,000 in 1998, 1997, and 1996, respectively. The Company sponsors a 401(k) defined contribution plan covering substantially all Company employees pursuant to which the Company is obligated to match, up to specified amounts, employee contributions. Company contributions to this plan were not material for the periods presented. Stock Option Plans -- In May 1993, the Company's stockholders approved the adoption of The First Years Inc. 1993 Equity Incentive Plan and The First Years Inc. 1993 Stock Option Plan for Non-employee Directors (the "plans") which cover employees and directors of the Company. The Board has reserved 2,680,000 shares for issuance under the plans and 40,000 shares for another stock option plan (all share amounts adjusted to reflect the two-for-one stock split effected on June 29, 1998.) The exercise price for the options granted may not be less than the fair market value of the optioned stock at the date of grant, 110% of fair market value in the case of options granted to a 10% stockholder. Under the plans, employees of the Company may purchase stock on the exercise of their options through the delivery of existing shares of the Company's common stock. The shares delivered to the Company by the employee must have been outstanding for at least six months. The Company acquired 14,576 and 6,818 shares of its common stock for the years ended December 3, 1998 and 1997, respectively, through the exercise of employee stock options. Options granted must be exercised within the period prescribed by the Committee; the options vest in accordance with the vesting provisions prescribed at the time of grant. IV-13 29 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of activity (all years adjusted to reflect the two-for-one stock split effected on June 29, 1998) of stock options granted under the plans is as follows:
WEIGHTED AVERAGE EXERCISE NUMBER OF PRICE NUMBER OF OPTIONS PER OPTIONS AVAILABLE SHARE OUTSTANDING FOR GRANT -------- ----------- --------- January 1, 1996............................................. $3.20 823,156 519,600 Granted................................................ 6.23 137,210 (137,210) Canceled............................................... 4.10 (17,114) 17,114 Exercised.............................................. 2.86 (67,676) -- -------- --------- December 31, 1996........................................... 3.69 875,576 399,504 Granted................................................ 9.16 194,140 (194,140) Canceled............................................... 7.11 (56,610) 56,610 Exercised.............................................. 2.96 (278,040) -- -------- --------- December 31, 1997........................................... 5.16 735,066 261,974 Authorized............................................. -- 1,340,000 Granted................................................ 14.51 258,029 (258,029) Canceled............................................... 9.96 (13,131) 13,131 Exercised.............................................. 3.27 (285,408) -- -------- --------- December 31, 1998........................................... $9.30 694,556 1,357,075 ======== ========= Exercisable at December 31, 1996....................... $3.00 557,870 Exercisable at December 31, 1997....................... $3.66 465,712 Exercisable at December 31, 1998....................... $5.88 341,902
The grant date fair value for options granted in 1998, 1997 and 1996 was $7.43, $4.80 and $2.09, respectively. The following table sets forth information regarding stock options outstanding at December 31, 1998 under the Stock Option Plans as described above:
NUMBER AVERAGE NUMBER WEIGHTED WEIGHTED CURRENTLY EXERCISE OF OPTIONS RANGE OF AVERAGE AVERAGE EXERCISABLE PRICE FOR OUTSTANDING EXERCISE EXERCISE REMAINING AT OPTIONS AT 12/31/98 PRICES PRICE LIFE 12/31/98 EXERCISABLE ----------- --------------- -------- --------- ----------- ----------- 51,612........................... $ 2.28 - $ 3.42 $ 2.49 1.32 51,612 $ 2.59 155,636........................... 3.42 - 5.13 4.64 2.96 155,636 4.67 85,515........................... 5.13 - 7.70 6.07 3.04 57,010 6.17 116,931........................... 7.70 - 11.55 8.47 8.23 54,977 8.77 264,862........................... 11.55 - 17.32 14.15 9.34 22,667 14.23 20,000........................... 17.32 - 25.99 17.75 9.58 -- -- - -------- ------ ---- ------- ------ 694,556........................... $ 9.30 6.08 341,902 $ 7.25 - -------- ====== ==== ======= ====== - --------
IV-14 30 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PRO FORMA DISCLOSURES As described in Note 1, the Company applies the intrinsic value method of APB No. 25 and related Interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, the Company's net income and earnings per share for the years ended December 31, 1998, 1997 and 1996 would have been as follows:
1998 1997 1996 ---- ---- ---- Net income............................ $7,233,876 $7,023,195 $5,038,337 Basic earnings per share.............. $ 0.70 $ 0.70 $ 0.53 Diluted earnings per share............ $ 0.68 $ 0.67 $ 0.51
For purposes of the pro forma disclosures, the fair value of the options granted under the Company's stock option plans during 1998, 1997 and 1996 was estimated on the date of grant using the Binomial option pricing model. Key assumptions used to apply this pricing model are as follows:
1998 1997 1996 ---- ---- ---- Risk free interest rate................ 5.49% 6.41% 6.08% Expected life of option grants......... 7.85 years 9.5 years 4.5 years Expected volatility of underlying stock................................ 38.40% 35.27% 32.87% Expected dividend payment rate......... 0.85% 0.85% 0.85%
The pro forma disclosures include the effects of options granted in 1998, 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 57% and 54% of the trade receivables outstanding at December 31, 1998 and 1997, 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, 1998, management believes it had no significant exposure to credit risks. Major Customers and Export Sales -- The Company derived 10% or more of its sales from its three largest customers. The Company's largest customer accounted for sales of $42,622,000, $33,643,000, and $25,722,000 in 1998, 1997, and 1996, respectively. The Company's second largest customer accounted for sales of $24,413,000, $23,075,000, and $18,257,000 in 1998, 1997, and 1996, respectively. The Company's third largest customer accounted for sales of $15,706,000, $13,315,000 and 9,908,000 in 1998, 1997, and 1996. No other customer accounted for 10% or more of the Company's sales. Export sales, primarily to Europe, Canada, South America and the Pacific Rim, were approximately $16,735,000, $16,250,000 and $11,564,000 in 1998, 1997, and 1996, respectively. Reliance on Licensed Products -- The Company derives a significant portion of its sales from products under license. A major licensing agreement (see Note 6), which was to expire at the end of 1998, has been extended through March 31, 1999. Sales of products licensed under the agreement amounted to 42% of the Company's total net sales for year ended December 31, 1998. Management is in the process of negotiating a renewal of this agreement. While management expects the licensing agreement to be renewed, non-renewal of IV-15 31 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) this licensing agreement or, renewal on terms not favorable to the Company could have a material adverse affect on the Company's business. Reliance on Foreign Manufacturers -- The Company does not own or operate its own manufacturing facilities. In 1998 and 1997, the Company derived approximately 65% and 60%, 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 or disruptions in the normal supply channels resulting form the Year 2000 Issue could cause a delay in manufacturing and a possible loss of sales, which could affect operating results adversely, depending on the particular product. 9. COMPUTATION OF EARNINGS PER SHARE Computation of the earnings per share ("EPS") in accordance with SFAS No. 128 are as follows:
1998 1997 1996 ---- ---- ---- Average shares outstanding.......................... 10,338,857 10,003,774 9,466,356 Effect of dilutive shares........................... 330,646 449,288 425,626 ---------- ---------- ---------- Average diluted shares outstanding.................. 10,669,503 10,453,062 9,891,982 ========== ========== ========== Net Income.......................................... $8,012,815 $7,444,789 $5,241,479 ========== ========== ========== Basic earnings per share............................ $0.78 $0.75 $0.55 ----- ----- ----- ----- ----- ----- Diluted earnings per share.......................... $0.75 $0.71 $0.53 ----- ----- ----- ----- ----- -----
As of December 31, 1998, options to purchase 1,964, 20,000, 56,290, 12,000, and 40,000 shares of common stock at $15 15/16, $17 3/4, $15, $17 and $15 per share, respectively 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 2008, were still outstanding at the end of 1998. As of December 31, 1997, options to purchase 30,000 shares of common stock at $13 1/2 per share were not included in the computation of diluted EPS because the options' exercise price was greater than the average price of the common shares. The options, which expire in 2007, were still outstanding at the end of 1997. As of December 31, 1996, options to purchase 12,000 shares of common stock at $8 9/16 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. 10. OFFERING OF COMMON STOCK During 1996, the Company entered into an agreement with a group of underwriters to sell 3.2 million shares of common stock (the "shares"), consisting of 800,000 newly issued shares and 2,400,000 shares of certain selling stockholders. The closing of the sale was held on July 1, 1996 at which time the Company issued 800,000 new shares and received the net proceeds of $5,121,750. All shares have been adjusted to reflect the two-for-one stock split effected on May 29, 1998. 11. DIISONONYL PHTHALATE ISSUE During the fourth quarter of 1998, the Company incurred a charge relating to sales returns and the write-off of inventory of certain products containing diisononyl phthalate ("DINP"), a plastic softener. Although the results of a study on DINP conducted by the U.S. Consumer Product Safety Commission resulted in the Commission not recommending a ban on products containing DINP, some retailers decided to return certain products containing this material. IV-16 32 THE FIRST YEARS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net sales reflect a charge of $3,000,000 related to the sales returns of certain DINP products. Accounts receivable have been reported net of the $3,000,000 charge as customers are expected to take credits against outstanding balances as of December 31, 1998. Cost of sales reflect a charge of $1,100,000 related to the write-off of inventory of certain products containing DINP. Inventory has been reported net of the $1,100,000 charge. Net income for the year ended December 31, 1998 reflects a total after-tax charge of $2,400,000 related to the DINP issue. 12. SEGMENT INFORMATION During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." This statement establishes new standards for the definition and disclosure of information pertaining to the Company's business segments. SFAS No. 131 requires identification of segments based upon a company's internal structure and reporting methodology. The Company has identified one operating segment as it engages in a single line of business developing and marketing one class of similar products for infants and toddlers distributed through the same channels. See footnote 8 for discussion of major customers and export sales. * * * * * * IV-17 33 SCHEDULE II THE FIRST YEARS INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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: 1998.................................. $185,000 $ 261,034 $176,034(1) $ 270,000 ======== ========== ======== ========== 1997.................................. $185,000 $ 147,541 $147,541(1) $ 185,000 ======== ========== ======== ========== 1996.................................. $185,000 $ 152,582 $152,582(1) $ 185,000 ======== ========== ======== ========== Allowance for obsolete inventory: 1998.................................. $250,000 $ 0 $ 0 $ 250,000 ======== ========== ======== ========== 1997.................................. $ 0 $ 250,000 $ 0 $ 250,000 ======== ========== ======== ========== Allowance for Diisononyl Phthalate product returns: 1998.................................. $ 0 $3,000,000 $126,000 $2,874,000 ======== ========== ======== ==========
- --------------- (1) Net accounts written off. IV-18 34 THE FIRST YEARS INC. EXHIBIT INDEX
EXHIBIT DESCRIPTION - ------- ----------- 10(n) The First Years, a Massachusetts Corporation and Affiliates, 1998 Annual Incentive Plan effective as of January 1, 1998. 10(p) Agreement between The First Years Inc. and Bruce Baron dated July 10, 1997. 10(q) Agreement between The First Years Inc. and James N. Turner dated June 15, 1998. 21 List of Subsidiaries of the Registrant. 23 Consent of Deloitte & Touche LLP dated March 31, 1999. 27 Financial Data Schedule -- 12/31/98 99 Important Factors Regarding Forward-Looking Statements
EX-10.(N) 2 1998 ANNUAL INCENTIVE PLAN 1 EXHIBIT 10(n) THE FIRST YEARS INC. A MASSACHUSETTS CORPORATION , AND AFFILIATES 1998 ANNUAL INCENTIVE PLAN PLAN DESCRIPTION EFFECTIVE DATE: JANUARY 1, 1998 ADOPTED: DECEMBER 3, 1998 2 THE FIRST YEARS INC. A MASSACHUSETTS CORPORATION, AND AFFILIATES 1998 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. * While a person is performing services in one of the following categories, he or she shall not be entitled to participate in this Plan or receive Plan benefits, notwithstanding anything else to the contrary: - A temporary employee, i.e., a person who is classified by the Company as employed on a temporary basis, regardless of how long the person actually works for the Company. - An Independent Contractor, i.e., a person who is classified by the Company as an independent contractor, as evidenced by its failure to withhold taxes from his 3 or her compensation, even if the individual really is the Company's common-law employee. - A Leasing Agency's Employee, i.e, a person working for a Company providing goods or services (including temporary employee services) to the Company, whom the Company does not regard to be its common-law employee, as evidenced by its failure to withhold taxes from his or her compensation, even if the individual really is the Company's common-law employee. 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. * 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 in the total discretion of the Compensation Committee, 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 4 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-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 this restated Plan is January 1, 1998. * The Plan will be administered by the Compensation Committee of the Board of Directors. 5 * 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. EX-10.(P) 3 AGREEMENT BETWEEN THE FIRST YEARS AND BRUCE BARON 1 Exhibit 10 (p) This Agreement is made as of the 10 day of July, 1997 (the "Effective Date") by and between Bruce Baron ("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 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. 2 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, an 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 12 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 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 6-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. 3 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. Termination without cause shall be deemed to include a termination of employment by me by reason of (i) work relocation of more than 50 miles from Avon, MA, (ii) material adverse reduction in employment responsibilities or (iii) material adverse reduction in compensation and benefits 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 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. 4 (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 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/ Bruce Baron 7-10-97 ------------------------------ Bruce Baron Agreed to and accepted by THE FIRST YEARS INC. By: /s/ Ronald J. Sidman ------------------------------ Ronald J. Sidman President, CEO and Chairman of the Board EX-10.(Q) 4 AGREEMENT BETWEEN THE FIRST YEARS AND JANE TURNER 1 Exhibit 10 (q) This Agreement is made as of the 15 day of June, 1998 (the "Effective Date") by and between James N. Turner ("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 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. 2 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, an 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 12 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 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 6-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. 3 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 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. 4 (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 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/ James N. Turner ------------------------------ James N. Turner Agreed to and accepted by THE FIRST YEARS INC. By: /s/ Ronald J. Sidman ------------------------------ Ronald J. Sidman President, CEO and Chairman of the Board EX-21 5 LIST OF SUBSIDIARIES 1 EXHIBIT (21) ----------------------- List of Subsidiaries of the Registrant ----------------- The First Years Inc., a Deleware corporation EX-23 6 CONSENT OF DELLOITTE & TOUCHE 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-67880, No. 33-87196, No. 33-94888, and No. 333-60617 of The First Years Inc. (the "Company") on Form S-8 of our report dated March 4, 1999 (March 29, 1999 as to paragraph 3 of footnote 8), appearing in this Annual Report on Form 10-K of The First Years Inc. for the year ended December 31, 1998. DELOITTE & TOUCHE LLP Boston, Massachusetts March 31, 1999 EX-99 7 IMPORTANT STATEMENTS RE 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 INNOVATION AND TIMELINES OF PRODUCT INTRODUCTIONS The growth of the Company has been, and will continue to be, dependent upon its ability to create new innovative products and to introduce such new products to the market in a timely fashion. There can be no assurance that the Company will continue to generate new product ideas, that such products will be brought to the market in a timely fashion, or that such new products will be well-received by retailers or consumers. Timely product introductions are essential in the juvenile products industry because the Company's orders are cancelable by customers and, in some cases, subject to monetary penalties imposed by customers, if agreed-upon delivery dates are not met. As a result, the inability to introduce products in a timely fashion could have adverse impact on the Company's sales and earnings. The continued growth of the Company will also depend in part on the successful introduction of higher-priced products. There can be no assurance that the Company will be able to successfully develop and introduce such products. In 1999, the Company expects to introduce certain mouthable products that have not been made with the plastics softener disononyl phthalate, to replace the phthalate-containing mouthable products which were returned by certain retailers in the fourth quarter of 1998. There can be no assurance that the Company will be able to identify alternative materials to produce phthalate-free mouthable products that are safer; that such products will be well received by retailers or consumers; or that there will be no delays in introducing such phthalate-free mouthable products in 1999. The failure to do any of the foregoing, could have an adverse impact on the Company's sales and earnings. 2 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 in the USA and in various countries all over the world. These licenses have fixed terms and limit the type of products that may be sold under the license. A major licensing agreement, which was to expire at the end of 1998, has been extended through March 31, 1999. Sales of products licensed under the agreement amounted to 42% of the Company's total net sales for the year ended December 31, 1998. Management is in the process of negotiating a renewal of this agreement. While management expects the licensing agreement to be renewed, non-renewal of this licensing agreement or, renewal on terms not favorable to the Company could have a material adverse affect on the Company's business. 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 preferences, such as consumers abandoning traditional retailers, shopping on the internet, general economic decline, or less favorable demographic trends related to childbirth, among other factors, could have a material adverse effect on the Company's sales and earnings. DEPENDENCE UPON MAJOR CUSTOMERS AND MASS MERCHANDISERS The Company's largest customer, Wal*Mart, accounted for approximately 29% of net sales in 1998 and the three largest customers of the Company, Wal*Mart, Toys "R" Us, and Target accounted for approximately 55% of net sales in 1998. A significant reduction of purchases by any one of these customers could have a material adverse effect on the Company's sales. There could also be a negative effect on the Company's business if any significant customer becomes insolvent or otherwise fails to pay its debts. CHANGES IN THE RETAIL INDUSTRY The Company could be materially adversely affected by conditions in the retail industry in general, including consolidation and the resulting decline in the number of retailers, and other cyclical economic factors. Also, changes in the way retailers and particularly mass merchandisers do business, such as the creation of competing private-label brands by such retailers, could result in significant reduction of purchases of the Company's products by such retailers and thereby have a materially adverse effect on the Company's sales and earnings. - 2 - 3 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 and consumer advertising resources substantially greater than those of the Company. Also, a major technological breakthrough or marketing success by a competitor could adversely affect the Company's competitive position. In addition, in countries where the juvenile products market is mature, particularly in the USA, sales growth is partly dependent on the Company's increasing its market share at the expense of its competitors. There can be no assurance that the Company will be able to continue to compete effectively in the juvenile products market. RELIANCE ON CONTRACT AND FOREIGN MANUFACTURERS The Company does not own or operate its own manufacturing facilities. The Company depends upon independent manufacturers to manufacture high-quality products in a timely manner and relies upon the availability of sufficient production capacity at its existing manufacturers or the ability to utilize alternative sources of supply. A failure by one or more of the Company's significant manufacturers to meet established criteria for pricing, product quality or timeliness could negatively impact the Company's sales and profitability. In addition, if the Company were to experience significant shortages in raw materials or components used in its products, it could have a negative effect on the Company's business, including increased cost or difficulty in delivering products. A substantial portion of the Company's products sold in 1998 was manufactured in Asia. The Company is subject to the usual risks of a business involving foreign suppliers, such as currency fluctuations, government regulation of fund transfers, export and import duties, trade limitations imposed by the United States or foreign governments, and political and labor instability. 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 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, - 3 - 4 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. INVENTORY RISK The juvenile products industry has relatively long lead times for design and production of product and thus, the Company must commit to production tooling and in some cases to production in advance of orders. If the Company fails to accurately forecast consumer demand or if there are changes in consumer preferences or market demand after the Company has made such production commitments, the Company may encounter difficulty in filling customer orders or in liquidating excess inventory, or may find that retailers are canceling orders or returning product, all of which may have an adverse effect on the Company's sales, its margins, profit, and brand image. In addition, the Company must pay for certain tooling if it does not satisfy minimum production quantities. 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. In the fourth quarter of 1998, the Company adopted a policy to introduce to the market phthalate-free versions of almost all of its mouthable products in 1999. There can be no assurance that the Company will be able to identify alternative materials to produce phthalate-free mouthable products that are safer; that there will be no delays in introducing such phthalate-free mouthable products in 1999; or that it will be able to introduce phthalate-free mouthable products that are acceptable to retailers and consumers in terms of price and quality. - 4 - 5 INTERNATIONAL SALES The continued growth of the company will also depend in part on increasing its international sales. The Company's international sales in 1998 accounted for approximately 12.6% of the Company's total net sales. International sales are subject to downturns in the economies and fluctuations in the currencies of foreign countries, and changes in the economic conditions and buying power of consumers in foreign markets, particularly in Asia, Russia, Latin and South America. There can be no assurance that the Company will be successful in expanding its international sales operations. PRODUCT LIABILITY RISKS The Company's juvenile products are used for and by small children and infants. The Company carries product liability insurance in amounts which management deems adequate to cover risks associated with such use; however, there can be no assurance that existing or future insurance coverage will be sufficient to cover all product liability risks. 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, or to recommend the recall of products containing chemicals or other materials deemed by the CPSC to be harmful to children and infants. Similar laws exist in some states and cities and in other countries in which the Company markets its products. Any recall of its products could have a material adverse effect on the Company, depending on the particular product. YEAR 2000 COMPLIANCE The Company is dependent on its suppliers and distributors to implement changes to their computer systems in order to become Year 2000 compliant. The Company is also dependent on the infrastructure and the utility systems of the countries in which its products are made and delivered to, to be operating normally in the year 2000 and beyond. The Company may need to build up inventory in the U.S.A. in 1999 and beyond because of the possible disruption in the normal operation of the infrastructure of such countries. The failure of its suppliers, distributors, utility companies, shipping carriers and other similar third parties in the countries in which the Company's products are made or delivered to be Year 2000 compliant could have a material adverse effect on the Company's sales and earnings. - 5 - 6 BRAND RECOGNITION A company's brand recognition is becoming increasingly important with consumers of juvenile products. Some of the Company's competitors have more recognizable brands than the Company. The Company intends to enhance its brand recognition, but there can be no assurance that such endeavors will be successful. The Company's inability to enhance its brand recognition could have a material adverse impact on the Company's sales. - 6 - EX-27.1 8 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 19,776,897 0 19,283,127 270,000 18,520,023 61,373,181 16,816,795 8,914,081 69,275,895 15,830,191 0 0 0 1,046,141 51,601,263 69,275,895 132,716,379 133,307,201 80,737,193 119,749,086 0 0 0 13,558,115 5,545,300 8,012,815 0 0 0 8,012,815 0.78 0.75
-----END PRIVACY-ENHANCED MESSAGE-----