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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, 1995; 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.
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(Exact Name of Registrant as Specified in its Charter)
MASSACHUSETTS 04-2149581
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE KIDDIE DRIVE, AVON, MASSACHUSETTS 02322
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(Address of Principal Executive Offices) (Zip Code)
508-588-1220
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(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
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.10 PAR VALUE
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(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 .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. /X/
The aggregate market value of the common stock held by non-affiliates of
the Company was $25,993,242 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 28, 1996.
The number of shares of Registrant's Common Stock outstanding on December
31, 1995 was 4,515,142.
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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,
1995. 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."
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PART I
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Item 1. Business
The First Years Inc. (the "Company") is a leading developer and worldwide
marketer of a broad line of high-quality, value-priced, developmentally-sound
products for infants and toddlers. Since 1973, the Company has sold its products
under its well-known brand name and principal trademark, THE FIRST YEARS.
Recently, the Company has entered into licensing agreements with The Walt Disney
Companies to feature Winnie the Pooh characters on a variety of its products in
various countries. 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.
Products
In recent years, the Company has accelerated the general pace of product
innovation. In 1995, the Company broadened its product line to include more
higher-priced products such as electronic products for the nursery, furnishings
such as odor-proof diaper pails, booster seats, bath seats, diaper bags, and a
line of child carriers. The Company's product line, which contains approximately
300 items that range in retail price from approximately $0.99 to $39.99, is
categorized and color-coded 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, and breast-feeding accessories. Since 1992, this category has included
the TumbleMates line of training cups, bowls, plates and utensils, designed for
serving, storing and transporting drinks and snacks, and which features a system
of interchangeable cups and lids. In 1995, the Company introduced several new
products into its TumbleMates line including the Stack & Pack Lunch Kit, the
Flatware Travel Set and the Snap-Apart Dish.
In 1995, the Company also added to this category the Neats line of
stain-resistant bibs specially made with a 3M Scotchgard stain-release system,
and the following items: The Choice bottle system that allows interchangeability
between disposable and reusable bottles, a unibody pacifier, marketed under the
Sure trademark; and the Simplicity Manual Breast Pump.
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THE FIRST YEARS INC.[Registered Trademark], Ideas Inspired by
Parents[Registered Trademark], TumbleMates[Registered Trademark],
Firstronics[Registered Trademark] and Washables[Registered Trademark] are
registered trademarks of the First Years Inc. Simplicity[Trademark],
Sure[Trademark], Choice[Trademark], Clip 'n Go[Trademark], Neats[Trademark],
PackMates[Trademark], Nurserytronics[Trademark], Step-by-Step[Trademark], and
First Gifts[Trademark] are trademarks of The First Years Inc.
3m[Registered Trademark] and SCOTCHGARD[Registered Trademark] are registered
trademarks of Minnesota Mining and Manufacturing Company. WINNIE THE
POOH[Registered Trademark] and POOH[Registered Trademark] are registered
trademarks of Disney Enterprises, Inc. (formerly The Walt Disney Company).
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Play & Discover. The Play & Discover category consists of an extensive line of
entertaining, skill-developing toys for infants and toddlers including crib
toys, floor toys, and hand-held toys. Since 1994 the Play & Discover category
has included the Company's Washables line of 100% washable, dishwasher-safe
toys. In 1995, the Company introduced the High Chair Gym, Floorgym and Playmat,
and the Snap & Play People Bus to its Washables line.
In 1994, the Company also added to this category its Firstronics line of
hand-held electronic toys for children under three years of age. In 1995, the
Company introduced its Counting Calculator and Sing-a-Long Microphone into the
Firstronics line.
Care & Safety. The Care & Safety category consists of a broad line of fashion
and grooming items, home safety products such as door and cabinet latches, and
products appropriate for the health and hygiene needs of infants, such as
digital thermometers. In 1995, the Company added to this category its
Nurserytronics line of electronic products designed especially for use in the
nursery, such as a tape player and crib light and a rechargeable pocket monitor.
In 1995, the Company also added to this category a new line of rugged, machine-
washable travel tote bags, child carriers and harnesses, marketed under the
PackMates name. This line includes the Clip'n Go 2-Way Front Carrier, a
detachable infant carrier; the Clip'n Go Warm & Cozy Carrier, an insulated
detachable infant carrier; and the Day Trip Diaper Bag, a nylon diaper bag with
built-in labeled organizers and adjustable shoulder strap.
In 1994 and 1995, additions to this category included the Step-by-Step line of
furnishings comprised of a bath seat, booster seat, baby bather, step stool and
toilet trainer that are adjustable as a child grows.
First Gifts. The Company markets a variety of specially-designed gift bags and
gift sets, which combine the Company's most popular items as attractively-
packaged, ready-to-give gifts, or theme-related starter sets. Many of the
containers for such gift sets, such as the Bear Bank Gift Set, are also
reusable as tote bags, storage containers, or keepsakes. Gift sets include the
Washables gift pack, the TumbleMates gift pack, newborn gift bags and
furnishings gift sets.
Winnie the Pooh. The Winnie the Pooh category consists of over 40 basic products
including teethers, rattles, bibs, bottles, bathing accessories and gift sets
featuring Winnie the Pooh characters. In 1995, the Company launched its Pooh
Goody Bags which contain an assortment of the Company's products featuring
Winnie the Pooh characters and a line of appliqued bibs featuring various Winnie
the Pooh designs.
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Product Design, Development and Marketing
The Company devotes substantial resources to product development. Product
development teams are established for each of the Company's product categories.
The goal of the product development teams is to develop new or improved,
high-quality and practical products designed to meet the needs of parents and
children. In keeping with its corporate philosophy and trademark, Ideas Inspired
by Parents, the Company has designed its products since 1973 in consultation
with small groups of parents chosen from its 600-member Parents Council. The
Company conducts frequent focus groups of these new parents to discuss parenting
and child-care issues, brainstorm new products and ideas, and review and test
the Company's new products and ideas.
The Company employs a staff of professionals engaged in the creation of new
products and also uses, from time to time, a diverse group of outside designers
and developers. For the past 15 years the Company's product line also has been
designed in consultation with Dr. T. Berry Brazelton, the well-known
pediatrician and authority on child development, and staff members of the Child
Development Unit at Children's Hospital in Boston, Massachusetts (the "CDU"), of
which Dr. Brazelton is founder and Director Emeritus. In reviewing the Company's
new products and product ideas, Dr. Brazelton and the CDU focus on child health
and development. Dr. Brazelton and the CDU also assist the Company in developing
support information distributed with the products that instructs or educates new
parents on the proper use of the products.
The Company spent approximately $1.8 million on new product development in 1995
and approximately $1.5 million in each of 1994 and 1993. The Company expects to
continue its new product development program aggressively, although the number
of new products introduced may vary from year to year.
In developing new products, the Company looks to generate ideas and features
that are not offered by existing products and which the Company can produce at
a reasonable cost and sell at a price that reflects the product's greater
quality and value. Most of the company's new products are shown at the
International Juvenile Products Show, which is held in Dallas, Texas in the
fall of each year. Certain of the Company's products are also shown each year
at the following trade shows: the International Housewares Exhibition, the
Harrogate Nursery Faire in Harrogate England, the International Mass Retail
Association, and the National Association of Chain Drug Stores.
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
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stores, mail order catalogs and catalog stores. The Company currently has over
1,000 customers in over 40 countries. Major customers include Wal-Mart, Toys "R"
Us, Target, Kmart, Kroger and Baby Superstore.
In the United States and Canada the Company's products are sold by the Company's
ten-person internal sales staff and by a network of 48 independent sales
representatives. The Company's sales staff is responsible for supervising and
training the sales representatives. Such training is conducted at the Company's
headquarters and throughout the United States. In Central and South America and
the Pacific Rim, the Company's products are sold by its internal sales staff
which manages a network of foreign distributors and independent sales
representatives in such areas. Senior management is heavily involved in every
phase of the selling process with the Company's largest customers.
In Europe and the Middle East, the Company's products are sold by the Company's
internal staff at its sales office in Cirencester, England, which is headed by
the Director of European Sales. This staff manages a network of foreign
distributors and independent sales representatives who generally receive
exclusive rights to a defined geographical territory or market segment. The
Company's international sales in 1995 were approximately $7.7 million.
During 1995, Wal*Mart and Toys "R" Us accounted for approximately 28% and 21% of
the Company's net sales, respectively. A significant reduction in purchases by
either of these customers could have a material adverse effect on the Company's
business.
Backlog is not a significant and material aspect of the Company's business.
Customers place orders on an as needed basis. As the Company's sales have
increased, the amount of unfilled orders at any time has not been indicative of
future results.
Merchandising
To help retailers use their shelf space efficiently in marketing the Company's
products, the Company utilizes state of the art computerized planogram programs
which divide the space a retailer has allocated for the Company's products to
create a mix of the five product categories that is designed to maximize the
retailer's profitability. This system is used for both large and small shelf
spaces and enables the Company's customers to present a visually-appealing
display of the Company's color-coded line of products.
In recent years, the Company expanded its promotional programs and created a
cross-merchandising program for its customers, by which ready-to-use display
panels and floor stand display units containing THE FIRST YEARS products are
placed next to related items in a customer's store (i.e., the Company's feeding
products are placed in a customer's baby food aisle) to encourage synergistic
and impulse buying by consumers. These display units
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are pre-pegged, pre-stocked, easily re-stockable, and can be customized to the
customer's needs.
Agreements with The Walt Disney Companies
In the past three years, the Company has entered into licensing agreements with
The Walt Disney Companies to feature Winnie the Pooh characters on a variety of
its products in the United States, Canada, Puerto Rico, and Brazil, and in
Europe through an agreement with the Walt Disney Company (France) S.A. The U.S.
license agreement expires at the end of 1996. The Company makes royalty payments
on its net sales of licensed products and was subject in 1995 to a guaranteed
minimum royalty payment of approximately $714,000 in the aggregate. Sales of
products under these license agreements accounted for 20% of the Company's total
net sales in 1995.
Manufacturing and Sources of Supply
The Company does not own or operate its own manufacturing facilities. In 1995,
all of the Company's products were manufactured either using the Company's
custom tools (molds and dies) or to the Company's specifications by
approximately 25 manufacturers located in the United States, Canada, China,
Taiwan, Thailand, and Mexico. Approximately 46% of all of its products sold in
1995 were manufactured in Asia, primarily in China. A large percentage of the
Company's furnishings and other large products were manufactured in 1995 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. The
Company believes it has alternative manufacturing sources available for all of
its products. Because it owns its single and duplicate tools, it could shift its
sources of manufacturing for any product to an alternative supplier.
Currently the Company is not dependent on any one supplier, although its largest
supplier, which is based in the United States, accounted for products that
represented approximately 21% of its net sales in 1995. In 1995 approximately
11% of the Company's products sold were manufactured by one supplier located in
China. 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
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manufactured plastic is petroleum, the cost and availability of plastic for use
in the Company's products varies to a great extent with the price of petroleum.
The inability of the Company's suppliers to acquire sufficient plastic and
paperboard at a reasonable price could have a material adverse effect on the
Company's profitability.
The Company purchases its products from its suppliers primarily in the U.S.
dollar and the Hong Kong dollar which is currently pegged to the U.S. dollar.
Generally, the Company's suppliers ship the products on the basis of open credit
terms or upon the acceptance of products by the Company. In addition, some
suppliers require shipment against letters of credit.
Foreign manufacturing is subject to a number of risks including transportation
delays and interruptions, the imposition of tariffs, quotas, and other import or
export controls, currency fluctuations, misappropriation of intellectual
property, political and economic disruptions, and changes in governmental
policies. From time to time, the United States Congress has attempted to impose
additional restrictions on trade with China. Enactment of legislation or the
imposition of restrictive regulations conditioning or revoking China's "most
favored nation" ("MFN") trading status could have a material adverse effect upon
the Company's business because products originating from China could be
subjected to substantially higher rates of duty. In May 1995, China's MFN
trading status was extended through July 3, 1996. Unless Congress takes action
to override this decision, China will continue to enjoy MFN treatment during
this period. The European Community (the "EC") has recently enacted a quota and
tariff system with respect to the importation into the EC of certain toy
products originating in China. The Company, therefore, continues to evaluate
alternative sources of supply outside of China.
The Company, because of its substantial reliance on suppliers in foreign
countries, is required to order products further in advance of customer orders
than would generally be the case if such products were produced in the United
States. As a result, the Company is required to carry significant amounts of
inventory to meet rapid delivery requirements of customers and to assure itself
of continuous allotment of goods from suppliers.
Competition
The juvenile products industry is highly competitive and includes numerous
domestic and foreign competitors, some of which are substantially larger and
have greater financial and other resources than the Company. The Company
competes with a number of different competitors, depending on the product
category, and it competes against no single company across all product
categories. Its 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
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relationship. In addition, the Company believes that it competes favorably with
respect to product quality, customer service and breadth of product line.
Distribution
Product distribution in the United States is centralized at the Company's
103,500 square foot warehouse facility in Avon, Massachusetts. The Company ships
certain of its products, primarily some of those made in Asia, to a public
warehouse in Fontana, California, thereby enabling it to reduce shipping time
and cost to its customers primarily in Western parts of the United States. The
Company distributes its products in Canada from a public warehouse in Toronto,
Ontario. In Europe, the Company distributes its products from a public warehouse
in Gent, Belgium.
The Company uses independent shippers to deliver orders to its customers.
Warehouse services at the various public warehouses are performed by warehouse
operators unaffiliated with the Company.
The Company also uses a computerized management information and control system
which allows the Company to determine the status of orders from customers and
enables the Company to process orders quickly, respond to customer inquiries and
adjust shipping schedules to meet customer requirements. Within this system, the
Company uses an electronic data interchange system which enables customers
through computerized telephone communications, to place orders directly with the
Company.
The Company also provides to its customers the service of pre-ticketing and
bar-coding its products in accordance with customer specifications.
Trademarks, Patents and Copyrights
The Company's principal trademark, THE FIRST YEARS and design, is registered in
the United States and in a number of foreign countries. The Company also uses
other trademarks for certain of its products and product categories, some of
which are registered in the United States and in various foreign countries.
Applications are pending in the U.S. and various foreign countries for
registration of some of the Company's trademarks.
The Company also owns patents, design patents and design registrations, as well
as pending applications in the United States and certain foreign countries.
Although the Company believes such are important to its business, it does not
believe that any single patent, design patent, or design registration, including
any which may be issued on a pending application, is material to its business.
There can be no assurance that the Company's patents, design patents, or design
registrations, including those that may be issued on pending applications, will
offer any significant competitive advantage for the Company's products.
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The Company also owns copyrights, some of which are registered in the United
States. The Company does not believe that any single copyright is material to
its business. There can be no assurance that the Company's copyrights will offer
any significant competitive advantage for the Company's products.
Employees
As of December 31, 1995, the Company employed 103 full-time and 3 part-time
employees, of whom 10 are executive officers, 44 are in sales, marketing and
product development, 35 are in materials, purchasing, quality control, data
processing, finance, administration and clerical, and 17 are in warehousing
positions. None of the Company's employees is represented by a union, and the
Company has not experienced any work stoppages. The Company believes that
relations with employees are good.
Government Regulations
The Company's products are subject to the provisions of the Federal Consumer
Product Safety Act, the Federal Hazardous Substances Act, as amended, the
Federal Flammable Fabrics Act, and the Child Safety Protection Act, and the
regulations promulgated thereunder (the "Acts"). The Company's nursery monitors
are subject to regulations of the Federal Communications Commission. The
Company's medical devices and drug products are subject to the regulations of
the Food and Drug Administration. The Acts enable the 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
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Ronald J. Sidman 49 President, Chairman 1975
of the Board of
Directors, and Chief
Executive Officer
Jerome M. Karp 68 Vice Chairman of the 1969
Board of Directors
Benjamin Peltz 56 Treasurer, Senior Vice 1975
President and Director
Evelyn Sidman 82 Clerk and Director 1979
Fred T. Page 49 Director 1988
Merton N. Alperin 73 Director 1988
Joseph M. Connolly 55 Vice President of 1979
Operations
John N. Colantuone 58 Vice President of 1982
Materials and
Engineering
Mark H. Dall 52 Vice President of 1985
Information Services
Adrian E. Roche 40 Vice President of 1992
Worldwide Marketing
Wayne Shea 41 Vice President of 1991
Worldwide Sales &
Merchandising
John R. Beals 41 Controller and 1990
Assistant Treasurer
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Mr. Sidman has served as President of the Company for over five years and
was elected to the offices of Chairman of the Board of Directors and Chief
Executive Officer on March 28, 1995.
Mr. Page was appointed President - Network Services of Southern New England
Telecommunications Corporation ("SNET") in January of 1994, and has been with
SNET for over five years.
Mr. Alperin, a Certified Public Accountant, has been a financial consultant
for over five years. He was the Chairman of the Board of Public Accountancy of
Massachusetts for the years 1979, 1982 and 1984.
Mr. Roche has been Vice President of Worldwide Marketing since January,
1995. From January, 1992 to December, 1994, Mr. Roche was Vice President of
European Sales of the Company. Prior to that time, from 1989 to 1991, Mr. Roche
held several managerial positions for Fisher-Price Kiddie Craft in the United
Kingdom, the last of which was Managing Director.
Mr. Shea has been Vice President of Worldwide Sales & Merchandising since
January, 1995. From July, 1991 to December, 1994, Mr. Shea was Vice President
of Service and Merchandising of the Company, and from January, 1985 to June,
1991, Mr. Shea was Director of Merchandising of the Company.
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 Mission Viejo, California, and in Cirencester, Gloucestershire, England.
The Company also uses public warehouses located in Fontana, California; Toronto,
Canada; and in Gent, Belgium.
The Company believes that its properties (owned and leased) are in good
condition and adequate for its current needs.
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.
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PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) MARKET INFORMATION
The Company's Common Stock has been quoted on the Nasdaq National Market
since March 1, 1995. Prior to that time, the Company's Common Stock was traded
on the Nasdaq Small-Cap Market. Below is a summary of the actual high and low
sales prices of the Company's Common Stock for each quarter of 1994 and 1995 as
reported by Nasdaq and retroactively adjusted to reflect the Company's 2-for-1
stock split effected on December 29, 1995.
1995
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Quarter Low High
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First.................. $ 8 5/8 $12
Second................. 8 3/8 10 1/8
Third.................. 9 3/8 11 3/4
Fourth................. 10 11 5/8
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1994
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Quarter Low High
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First.................. $ 4 1/4 $ 5 1/4
Second................. 4 1/4 7 1/2
Third.................. 6 1/2 8 1/16
Fourth................. 7 1/2 9 3/4
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(b) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
Approximate Number
of Record Holders
Title of Class (as of December 31, 1995)
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Common Stock, $.10 Par Value 116
(c) DIVIDEND POLICY
In June of each year commencing in 1991, the Company has paid a cash
dividend on its Common Stock of approximately $0.085 per share (retroactively
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adjusted to reflect the Company's 2-for-1 stock split effected on December
29, 1995). The most recent annual cash dividend was paid on June 1, 1995. 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 December 6, 1995, a 2-for-1 stock
split effected in the form of a stock dividend to holders of record on December
18, 1995. The new stock certificates were mailed to stockholders on or about
December 29, 1995.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED INCOME STATEMENT DATA:
1995 1994 1993 1992 1991
Net sales $75,757,322 $53,233,109 $46,124,088 $45,267,323 $37,992,806
Cost of products sold 45,108,546 29,498,457 26,653,704 23,645,594 20,198,525
Selling, general and administrative expenses 23,961,206 18,915,908 17,857,049 18,429,803 14,776,389
Interest expense 186,338 24,575 28,912 31,961 49,322
Interest income 16,718 66,605 66,204 154,913 337,100
Severance-related expenses - - 373,000 - -
Offering expenses 310,457 - - - -
Income before income taxes 6,207,493 4,860,774 1,277,627 3,314,878 3,305,670
Provision for income taxes 2,483,000 1,871,400 481,500 1,385,100 1,390,000
Net income 3,724,493 2,989,374 796,127 1,929,778 1,915,670
Earnings per share* $ 0.80 $ 0.66 $ 0.18 $ 0.43 $ 0.43
Dividends paid per share* $ 0.085 $ 0.085 $ 0.085 $ 0.084 $ 0.084
Weighted average number of
shares outstanding* 4,663,491 4,497,244 4,496,520 4,496,520 4,496,520
SELECTED BALANCE SHEET DATA:
Total assets $41,712,080 $28,852,785 $24,532,714 $24,694,765 $22,382,973
Long-term debt 100,001 233,334 366,667 500,000 633,334
Stockholders' equity 25,763,259 22,349,947 19,719,720 19,305,797 17,750,729
Stockholders' equity per share* $ 5.52 $ 4.97 $ 4.39 $ 4.29 $ 3.95
<FN>
* Adjusted to reflect the two-for-one, three-for-one and two-for-one stock splits effected on December 29,
1995, December 15, 1992 and June 14, 1991, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales in 1995 were $75.8 million, an increase of $22.6 million, or 42.3%, as
compared to $53.2 million in 1994. The increase was due to new product
introductions and expanded retail distribution in domestic and foreign markets.
Net sales particularly benefited from the introduction of newly licensed Winnie
the Pooh products and the introduction of new products that have higher average
selling prices than products previously offered by the Company.
Cost of products sold in 1995 was $45.1 million, an increase of $15.6 million or
52.9%, as compared to $29.5 million in 1994. As a percentage of net sales, cost
of products sold in 1995 increased to 59.5% from 55.4% in the comparable period
of 1994. The increase was due to increased sales of higher-priced, lower margin
items, increased cost of products due to raw material price increases, licensing
fees, and air freight shipments from overseas production facilities incurred
primarily in the first three months of the year.
Selling, general, and administrative expenses in 1995 were $24.0 million, an
increase of $5.1 million, or 26.7%, as compared to $18.9 million over such
expenses in 1994. The increase resulted primarily from costs related to
increased sales volume. As a percentage of net sales, selling, general, and
administrative expenses in 1995 decreased to 31.6% from 35.5% in 1994. The
decrease reflects the economies of scale provided by higher volume of business.
During 1995, the Company sought to issue additional shares of common stock in
order to increase its working capital and improve the liquidity of its stock.
Due to uncertain market conditions affecting the retail sector and the price of
the Company's stock, the Company decided to postpone indefinitely the public
offering. As a result, the Company wrote-off offering expenses amounting to a
pretax charge of approximately $310,000 ($186,000 net of tax). No additional
costs related to the write-off are anticipated.
Income tax expense as a percentage of pretax income increased to 40.0% in 1995
from 38.5% in 1994.
II-2
14
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net sales in 1994 were $53.2 million, an increase of $7.1 million, or 15.4%, as
compared to net sales of $46.1 million in 1993. The increase was due primarily
to new product introductions and expanded retail distribution in domestic and
foreign markets.
Cost of products sold in 1994 was $29.5 million, an increase of $2.8 million, or
10.7%, as compared to $26.7 million in 1993. As a percentage of net sales, cost
of products sold decreased to 55.4% in 1994 from 57.8% in 1993 due to sales of
higher margin products including new products introduced in 1994.
Selling, general, and administrative expenses in 1994 were $18.9 million, an
increase of $1.0 million, or 5.9%, as compared to $17.9 million in 1993. The
increase is attributable to higher costs directly related to increased sales
volume. As a percentage of net sales, selling, general, and administrative
expenses decreased in 1994 to 35.5% from 38.7%. The decrease reflects the
economies of scale resulting from a higher volume of business, including
increased sales in Europe, and the effects of a program initiated in 1993 to
reduce operating expenses.
Income tax expense as a percentage of pretax income increased slightly to 38.5%
in 1994 from 37.7% in 1993.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital increased by $3.0 million from $17.2 million at December 31,
1994 to $20.2 million at December 31, 1995 primarily due to profitable
operations. Accounts receivable increased by $4.9 million primarily as a result
of increased sales. Inventories increased by $8.6 million to meet continued
demand for the Company's products. Cash decreased by $1.8 million primarily
resulting from increases in accounts receivable and inventories which were
partially offset by increases in accounts payable, accrued expenses and
short-term borrowings.
Unsecured lines of credit of $15 million which are subject to annual renewal,
are available from banks. Amounts outstanding under these lines are payable upon
demand by the banks. During 1995, the Company has borrowed various amounts from
time to time up to $6.5 million, of which $6.2 million at an interest rate of
7.9% was outstanding as of December 31, 1995.
The Company has paid a cash dividend of approximately $0.085 per share of Common
Stock in June of each year commencing in 1991 (adjusted for a two for one stock
split as of December 29,1995).
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 at least the next two years.
INFLATION AND FOREIGN CURRENCY FLUCTUATIONS
Inflation has not had a material effect on the Company's operating results over
the past three years.
The Company enters into forward exchange contracts to minimize the impact of
fluctuations in currency exchange rates on future cash flows emanating from
sales denominated in foreign currencies. The Company does not purchase such
contracts for trading purposes. During 1995, the Company entered into forward
exchange contracts with a bank whereby the Company is committed to deliver
foreign currency at predetermined rates. The contracts expire within one year.
The Company's commitment under these contracts approximated $4,500,000 as of
December 31, 1995. At December 31, 1995, the exchange rates for such currencies
covered by the contracts approximated the predetermined rate included therein.
The Company routinely assesses the financial strength of the bank which is
counterpart to the forward exchange contracts. As of December 31, 1995,
management believes it had no significant exposure to credit risk relative to
such contracts.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, Statement of Financial Accounting Standards No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("SFAS 121"), was issued. This statement, which will be required in
II-3
1996, establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. The Company does not expect that the adoption of SFAS 121 will
have a material impact on the financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," which will be effective for the Company beginning January 1,
1996. SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25,
which recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to
its stock-based compensation awards to employees and will disclose the required
pro forma effect on net income and earnings per share, as required by SFAS No.
123.
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-4
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 1996 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 1996 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 1996 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions
There is nothing to report relating to this Item.
III-1
16
PART IV
- --------------------------------------------------------------------------------
Item 14. Exhibits, (a)1. Financial Statements
Financial Statement --------------------
Schedules, and Independent Auditors' Report
Reports on Balance Sheets as of December 31, 1995 and 1994
Form 8-K Statements of Income for the Years Ended
December 31, 1995, 1994, and 1993.
Statements of Stockholders' Equity for the
Years Ended December 31, 1995, 1994, and 1993.
Statements of Cash Flows for the Years Ended
December 31, 1995, 1994, and 1993.
(a)2. Schedule II - Valuation and Qualifying
Accounts for the Years Ended December 31,
1995, 1994, and 1993.
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 of notes
thereto.
IV-1
17
14.(a) 3. Exhibits Page
-------- ----
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.
(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, The First Years Inc., and State
Street Bank and Trust Company relating to issuance of industrial revenue bonds,
dated as of October 1, 1982 (filed as Exhibit 10 (c) on Form 10-K for the year
ended December 31, 1994 and incorporated herein by reference).
(10)(b) Bond Purchase Agreement among Town of Avon, acting by and through its
Industrial Development Financing Authority, The First Years Inc., and State
Street Bank and Trust Company, dated as of October 1, 1982 (filed as Exhibit 10
(d) on Form 10-K for the year ended December 31, 1994 and incorporated herein by
reference).
(10)(c) Loan Agreement between Town of Avon, acting by and through its
Industrial Development Financing Authority, and The First Years Inc., dated as
of October 1, 1982 (filed as Exhibit 10 (e) on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).
(10)(d) Put Agreement between State Street Bank and Trust Company and The
First Years Inc., dated as of October 1, 1982 (filed as Exhibit 10 (f) on Form
10-K for the year ended December 31, 1994 and incorporated herein by reference).
(10)(e) Agreement with The Walt Disney Company dated March 28, 1994 (filed as
Exhibit 10.11 on Form S-1 Registration Statement filed with the Commission on
September 15, 1995 and incorporated herein by reference).
IV-2
18
Page
----
Management Contracts and Compensatory Plans
(10)(f) The First Years Inc. 1993 Equity Incentive Plan, as amended through
January 19, 1995 (filed as Exhibit 10 (g) on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).
(10)(g) The First Years Inc. 1993 Stock Option Plan for Non-employee
Directors, as amended through January 19, 1995 (filed as Exhibit 10 (h) on Form
10-K for the year ended December 31, 1994 and incorporated herein by reference).
(10)(h) 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)(i) 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)(j) 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)(k) The First Years Inc. 1995 Restated Annual Incentive Plan, effective as
of July 1, 1995 (filed as Exhibit 10.10 on Form S-1 Registration Statement filed
with the Commission on September 15, 1995 and incorporated herein by
reference.).
(11) Statement re Computation of Per Share Earnings. IV-18
(23) Consent of Deloitte & Touche LLP, dated March 29, 1996. IV-19
(27) Financial Data Schedule.
14.(b) Report on Form 8-K
The Company filed one report on Form 8-K with the Securities and Exchange
Commission during the fiscal year ended December 31, 1995. The Report was filed
on December 6, 1995 to report the 2- for-1 stock split of the Company's Common
Stock, $.10 par value, effected in the form of a 100% stock dividend which was
declared by the Company's Board of Directors on such date.
IV-3
19
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 21, 1996
By: /s/ Benjamin Peltz
--------------------------------------------
Benjamin Peltz, Senior Vice President and Treasurer
(Chief Financial Officer and Chief Accounting Officer)
Date: March 21, 1996
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 21, 1996.
Signature Title Date
Chief Executive Officer
Chairman of the Board of
/s/ Ronald J. Sidman Directors and President March 21, 1996
- -----------------------------------------------------------------
Ronald J. Sidman
Vice Chairman of the
/s/ Jerome M. Karp Board of Directors March 21, 1996
- -----------------------------------------------------------------
Jerome M. Karp
/s/ Evelyn Sidman Director March 21, 1996
- -----------------------------------------------------------------
Evelyn Sidman
/s/ Benjamin Peltz Director March 21, 1996
- -----------------------------------------------------------------
Benjamin Peltz
/s/ Merton N. Alperin Director March 21, 1996
- -----------------------------------------------------------------
Merton N. Alperin
/s/ Fred T. Page Director March 21, 1996
- -----------------------------------------------------------------
Fred T. Page
IV-4
20
THE FIRST YEARS INC.
(FORMERLY KIDDIE PRODUCTS, INC.)
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT IV-6
FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 1995 and 1994 IV-7
Statements of Income for the Years Ended December 31, 1995,
1994, and 1993 IV-8
Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1994, and 1993 IV-9
Statements of Cash Flows for the Years Ended December 31, 1995,
1994, and 1993 IV-10
Notes to Financial Statements IV-11-16
FINANCIAL STATEMENT SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993 IV-17
IV-5
21
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The First Years Inc.
Avon, Massachusetts
We have audited the accompanying balance sheets of The First Years Inc.
(formerly Kiddie Products, Inc.) as of December 31, 1995 and 1994, and the
related statements of income, stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 1995. Our audit also included
the financial statement schedule listed in the accompanying index. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of The First Years Inc. as of December 31, 1995
and 1994, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles. 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 7, 1996
IV-6
22
THE FIRST YEARS INC.
(FORMERLY KIDDIE PRODUCTS, INC.)
- --------------------------------------------------------------------------------
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
1995 1994
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Notes 1 and 8) $ 552,568 $ 2,329,041
Accounts receivable (less allowance for doubtful
accounts, $185,000 in 1995 and 1994) (Note 8) 14,191,630 9,266,235
Inventories (Note 1) 19,009,784 10,413,835
Prepaid expenses and other assets 778,074 295,921
Deferred tax asset (Notes 1 and 3) 872,300 624,500
----------- -----------
Total current assets 35,404,356 22,929,532
----------- -----------
PROPERTY, PLANT, AND EQUIPMENT (Note 1):
Land 167,266 167,266
Building 3,737,861 3,737,861
Machinery and molds 6,481,504 5,413,075
Furniture and equipment 3,183,379 2,986,905
----------- -----------
Total 13,570,010 12,305,107
Less accumulated depreciation 7,262,286 6,381,854
----------- -----------
Property, plant, and equipment - net 6,307,724 5,923,253
----------- -----------
TOTAL ASSETS $41,712,080 $28,852,785
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 2) $ 133,333 $ 133,333
Short-term borrowings (Note 2) 6,200,000 -
Accounts payable 6,903,478 4,034,263
Accrued benefit plans expense (Note 7) 255,271 259,557
Accrued payroll expenses 1,105,004 782,890
Accrued selling expenses 604,434 256,161
Federal and state income taxes payable
(Notes 1 and 3) - 218,500
----------- -----------
Total current liabilities 15,201,520 5,684,704
----------- -----------
LONG-TERM DEBT- Less portion due
currently (Note 2) 100,001 233,334
----------- -----------
DEFERRED TAX LIABILITY (Notes 1 and 3) 647,300 584,800
----------- -----------
COMMITMENTS AND CONTINGENCIES
(Notes 5, 6 and 8)
STOCKHOLDERS' EQUITY (Notes 4 and 7):
Common stock - authorized, 15,000,000 shares as of
December 31, 1995 and 7,500,000 shares as of
December 31, 1994 at $.10 par value 451,514 225,043
Paid-in capital - 98,194
Retained earnings 25,311,745 22,026,710
----------- -----------
Total stockholders' equity 25,763,259 22,349,947
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $41,712,080 $28,852,785
=========== ===========
See notes to financial statements.
IV-7
23
THE FIRST YEARS INC.
(FORMERLY KIDDIE PRODUCTS, INC.)
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
- --------------------------------------------------------------------------------
1995 1994 1993
NET SALES (Notes 1, 6 and 8) $75,757,322 $53,233,109 $46,124,088
COST OF PRODUCTS SOLD (Note 1) 45,108,546 29,498,457 26,653,704
----------- ----------- -----------
GROSS PROFIT 30,648,776 23,734,652 19,470,384
SELLING, GENERAL, AND ADMINISTRATIVE
EXPENSES (Notes 1 and 7) 23,961,206 18,915,908 17,857,049
SEVERANCE-RELATED EXPENSES (Note 9) -- -- 373,000
----------- ----------- -----------
OPERATING INCOME 6,687,570 4,818,744 1,240,335
OTHER INCOME (EXPENSE):
Interest expense (186,338) (24,575) (28,912)
Interest income 16,718 66,605 66,204
Offering expenses (Note 10) (310,457) -- --
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 6,207,493 4,860,774 1,277,627
PROVISION FOR INCOME TAXES
(Notes 1 and 3) 2,483,000 1,871,400 481,500
----------- ----------- -----------
NET INCOME $ 3,724,493 $ 2,989,374 $ 796,127
=========== =========== ===========
EARNINGS PER SHARE - (Note 1 ) $ 0.80 $ 0.66 $ 0.18
=========== =========== ===========
See notes to financial statements.
IV-8
24
THE FIRST YEARS INC.
(FORMERLY KIDDIE PRODUCTS, INC.)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
- ----------------------------------------------------------------------------------------------------
Common Stock Paid-in Retained
Shares Par Value Capital Earnings
BALANCE, JANUARY l, 1993 2,248,260 $224,826 $ 75,354 $19,005,617
Dividends paid -- -- -- (382,204)
Net income -- -- -- 796,127
--------- -------- -------- -----------
BALANCE, DECEMBER 31, 1993 2,248,260 224,826 75,354 19,419,540
Stock issued under stock option plans
(Note 7) 2,170 217 22,840 --
Dividends paid -- -- -- (382,204)
Net income -- -- -- 2,989,374
--------- -------- -------- -----------
BALANCE, DECEMBER 31, 1994 2,250,430 225,043 98,194 22,026,710
Stock issued under stock option plans
(Note 7) 7, 141 714 70,957 --
Dividends paid -- -- -- (382,852)
Stock split, two-for-one (Note 4) 2,257,571 225,757 (169,151) (56,606)
Net income -- -- -- 3,724,493
--------- -------- -------- -----------
BALANCE, DECEMBER 31, 1995 4,515,142 $451,514 $ -- $25,311,745
========= ======== ======== ===========
See notes to financial statements.
IV-9
25
THE FIRST YEARS INC.
(FORMERLY KIDDIE PRODUCTS, INC.)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
- -------------------------------------------------------------------------------------------------------------------
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,724,493 $ 2,989,374 $ 796,127
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation 992,291 878,250 778,652
Provision for doubtful accounts 86,227 23,673 17,177
Loss on disposal of equipment 70,258 47,877 105,170
Increase (decrease) arising from working capital items:
Accounts receivable (5,011,624) (2,077,176) (994,400)
Inventories (8,595,949) (2,184,385) (931,295)
Prepaid expenses and other assets (482,153) (53,315) (42,222)
Accounts payable 2,869,215 1,549,774 20,979
Accrued benefit plans expense (4,286) (376,128) (51,060)
Accrued payroll expenses 322,114 730,508 (366,866)
Accrued selling expenses 348,273 (142,477) (95,394)
Federal and state income taxes payable (218,500) (9,200) (72,100)
Change in deferred income taxes (185,300) 107,200 51,800
----------- ----------- -----------
Net cash provided by (used for) operating activities (6,084,941) 1,483,975 (783,432)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of property, plant, and equipment (1,447,018) (1,374,721) (794,222)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of industrial revenue bonds (133,333) (133,333) (133,333)
Net proceeds from short-term borrowings 6,200,000 -- --
Dividends paid (382,852) (382,204) (382,204)
Common stock issued under stock option plans 71,671 23,057 --
----------- ----------- -----------
Net cash provided by (used for) financing activities 5,755,486 (492,480) (515,537)
----------- ----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,776,473) (383,226) (2,093,191)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,329,041 2,712,267 4,805,458
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 552,568 $ 2,329,041 $ 2,712,267
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 186,338 $ 24,575 $ 28,912
=========== =========== ===========
Income taxes $ 3,269,100 $ 1,773,400 $ 501,800
=========== =========== ===========
See notes to financial statements.
IV-10
26
THE FIRST YEARS INC.
(FORMERLY KIDDIE PRODUCTS, INC.)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - The First Years Inc. (the "Company") is a developer, marketer,
and distributor of certain basic accessory and related products for
infants and toddlers. The Company was founded and incorporated in 1952.
Since its inception, the Company has engaged in this single line of
business, with one class of similar products. The following is a summary
of significant accounting policies.
REVENUE RECOGNITION - Revenue is recognized when products are shipped.
CASH EQUIVALENTS - Highly liquid investments with a maturity of three
months or less when purchased have been classified as cash equivalents in
the accompanying financial statements. Such investments are carried at
cost which approximates market value.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out) or market. Inventories consist principally of finished goods,
unpackaged components, and supplies.
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment is stated
at cost. Depreciation is provided based on the estimated useful lives of
the various classes of assets (building, 15 to 40 years; machinery and
molds, 5 to 10 years; furniture and equipment, 5 to 10 years) using the
straight-line method.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF - In March 1995, Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"), was
issued. This statement, which will be required in 1996, establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to
be disposed of. The Company does not expect that the adoption of SFAS 121
will have a material impact on the financial statements.
INCOME TAXES - Deferred tax assets and liabilities are determined based on
the differences between the financial statement and tax bases of assets
and liabilities using enacted tax rates.
STOCK-BASED COMPENSATION - In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," which will be
effective for the Company beginning January 1, 1996. SFAS No. 123 requires
expanded disclosures of stock-based compensation arrangements with
employees and encourages (but does not require) compensation cost to be
measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25,
which recognizes compensation cost based on the intrinsic value of the
equity instrument awarded (see Note 7). The Company will continue to apply
APB Opinion No. 25 to its stock-based compensation awards to employees and
will disclose the required pro forma effect on net income and earnings per
share, as required by SFAS No. 123.
EARNINGS PER SHARE - Earnings per share are based on the weighted average
number of shares outstanding during each year (retroactively adjusted to
reflect the two-for-one stock split effected on December 29, 1995 and the
three-for-one stock split effected on December 15, 1992) and common
equivalent shares, consisting of the effect of stock options outstanding,
if dilutive (4,663,491, 4,497,244 and 4,496,520 shares in 1995, 1994 and
1993, respectively) (see Note 7). Earnings per share assuming full
dilution have not been presented because the dilutive effect is
immaterial.
IV-11
27
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RISKS AND UNCERTAINTIES - The Company has adopted Accounting Standards
Executive Committee Statement of Position 94-6, "Disclosure of Certain
Significant Risks and Uncertainties." The disclosures required by this SOP
focus primarily on the nature of an entity's operations, the use of
estimates in preparation of financial statements and on risks and
uncertainties that could significantly affect the amounts reported in the
financial statements (see Note 8).
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs are
expensed as incurred. During 1995, 1994, and 1993, research and
development costs approximated $1,834,000, $1,466,000, and $1,493,000,
respectively.
FOREIGN CURRENCY TRANSLATION - The Company's functional currency is the
U.S. dollar. Accordingly, monetary assets and liabilities of the Company's
foreign operations are translated from the respective local currency to
the U.S. dollar using year-end exchange rates while nonmonetary items are
translated at historical rates. Income and expense accounts are translated
at the average rates in effect during the year. Accordingly, translation
adjustments and transaction gains and losses are recognized in income in
the year of occurrence and are recorded as a component of cost of sales.
FOREIGN EXCHANGE CONTRACTS - The Company enters into forward exchange
contracts to minimize the impact of fluctuations in currency exchange
rates on future cash flows emanating from sales denominated in foreign
currencies. The Company does not purchase such contracts for trading
purposes. Gains and losses related to foreign exchange contracts which
qualify as accounting hedges of firm commitments are deferred and
recognized in income when the hedged transaction occurs. Gains and losses
related to foreign exchange contracts which do not qualify for hedge
accounting are marked to market currently and recognized as a foreign
currency transaction gain or loss.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair value of the Company's
assets and liabilities which constitute financial instruments as defined
in Statement of Financial Accounting Standards No. 107 approximate their
recorded value.
2. DEBT
Long-term debt consists of unsecured industrial revenue bonds ("IRB"),
with interest payable quarterly at 65% of the prime rate (5.5% at December
31, 1995 and 1994) and principal payable in equal quarterly installments
of $33,333 through September 30, 1997.
Under the terms of the IRB agreement, the Company must comply with certain
covenants, none of which impose a significant limitation on the Company.
The Company has available unsecured lines of credit totaling $15,000,000
with two banks. Both lines are subject to annual renewal and require no
compensating balances. One line bears interest at the prime rate or the
LIBOR rate plus 2.0% and the other line at the prime rate less 0.25% or
the LIBOR rate plus 1.75%. During 1995, the Company borrowed various
amounts up to $6,500,000 under the lines. As of December 31, 1995 a
balance of $6,200,000, which bears interest at 7.9%, remains outstanding.
No other short-term borrowings were incurred by the Company during 1995 or
1994.
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28
3. INCOME TAXES
Components of the Company's net deferred tax asset at December 31 are as follows:
1995 1994
Deferred tax assets:
Reserves not currently deductible $ 79,000 $ 62,900
Capitalized packaging costs not currently deductible 442,000 360,200
Capitalized inventory costs not currently deductible 261,100 116,900
Other 90,200 84,500
-------- --------
872,300 624,500
-------- --------
Deferred tax liabilities:
Excess tax depreciation over financial reporting depreciation 642,800 580,300
Other 4,500 4,500
-------- --------
647,300 584,800
-------- --------
Net deferred tax asset $225,000 $ 39,700
======== ========
<FN>
There was no valuation allowance for the years ended December 31, 1995 and 1994.
The provision for income taxes consists of the following:
1995 1994 1993
Federal:
Current $2,104,000 $1,432,700 $352,300
Deferred (185,300) 107,200 51,800
---------- ---------- --------
Total federal 1,918,700 1,539,900 404,100
State 564,300 331,500 77,400
---------- ---------- --------
Provision for income taxes $2,483,000 $1,871,400 $481,500
========== ========== ========
<FN>
A reconciliation of the statutory federal income tax rate and the effective tax rate as a percentage of
pretax income is as follows:
1995 1994 1993
Statutory rate 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit 6.0 4.5 4.0
Other - - (0.3)
---- ---- ----
Effective tax rate 40.0% 38.5% 37.7%
==== ==== ====
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29
4. COMMON STOCK
In December 1995, the Company's Board of Directors (the "Board") declared
a two-for-one split of the Company's common stock. The stock split,
effected in the form of a stock dividend, was distributed on December 29,
1995 to stockholders of record in 1995. Earnings per share amounts shown
in the accompanying financial statements have been adjusted to reflect the
1995 stock split.
5. COMMITMENTS AND CONTINGENCIES
FOREIGN EXCHANGE CONTRACTS - During 1995 and 1994, the Company entered
into forward exchange contracts with a bank whereby the Company is
committed to deliver foreign currency at predetermined rates. The
contracts expire within one year. The Company's future commitment under
these contracts approximated $4,500,000 and $3,100,000 as of December 31,
1995 and 1994, respectively. At December 31, 1995 and 1994, the exchange
rates for such currencies covered by the contracts approximated the
predetermined rates included therein.
OTHER COMMITMENTS - At December 31, 1995 and 1994, letters of credit
outstanding aggregated approximately $1,925,000 and $1,275,000,
respectively.
During 1994, the Company entered into an employment agreement with an
executive officer which provides for an annual salary of $100,000 through
August 1999. On March 23, 1995, the Company entered into employment
agreements with two key senior executive officers which provide for
aggregate annual base salaries through March 2000 of $391,000, subject to
any increases or decreases established from time to time in the discretion
of the Compensation Committee of the Board of Directors and, in the event
of termination, provide for noncompetition payments for two years equal to
their annual base salaries.
CONTINGENCIES - The Company is involved in legal proceedings which have
arisen in the ordinary course of business. Management believes the outcome
of these proceedings will not have a material adverse impact on the
Company's financial condition or operating results.
6. ROYALTIES
During 1995 and 1994, the Company entered into various agreements which
provide for the payment of royalties on sales of certain licensed
products. The agreements have terms ranging from one to fifteen years and
require minimum royalty payments of $729,000 during the terms of the
agreements. Outstanding minimum royalty payments under these agreements
amounted to $92,800 at December 31, 1995.
7. BENEFIT PLANS
DEFINED CONTRIBUTION PLAN - The Company has a defined contribution
trusteed benefit plan covering eligible employees, requiring annual
contributions based upon certain percentages of salaries of employees. The
Company's policy is to fund pension expense accrued. Pension expense
aggregated $259,000, $267,000, and $661,000 in 1995, 1994, and 1993,
respectively.
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30
7. BENEFIT PLANS (CONTINUED)
STOCK OPTION PLANS - In May 1993, the Company's stockholders approved the
adoption of The First Years Inc. 1993 Equity Incentive Plan and The First
Years Inc. 1993 Stock Option Plan for Non-employee Directors (the "plans")
which cover key salaried employees and directors of the Company. The Board
of Directors has reserved 670,000 shares (adjusted to reflect the
two-for-one stock split effected on December 29, 1995) for issuance under
the plans and 20,000 shares for a stock option agreement granted outside
of the plans. The exercise price for the options granted may not be less
than the fair market value of the optioned stock at the date of grant,
110% of fair market value in the case of options granted to a 10%
stockholder.
Options granted must be exercised within the period prescribed by the
Compensation Committee of the Board of Directors; the options vest in
accordance with the vesting provisions prescribed at the time of grant.
A summary of activity (all years adjusted to reflect the two-for-one
stock split effected on December 29, 1995) of stock options granted under
the plans is as follows:
NUMBER OF
NUMBER OF OPTIONS
EXERCISE PRICE OPTIONS AVAILABLE
PER SHARE OUTSTANDING FOR GRANT
January l, 1993
Authorized - 440,000
Granted $5.32 to $5.84 206,000 (206,000)
Canceled $5.32 (2,000) 2,000
------- --------
December 31, 1993 204,000 236,000
Authorized 20,000
Granted $4.56 to $5.63 126,300 (126,300)
Canceled $4.56 to $5.31 (20,828) 20,828
Exercised $5.31 (4,340) -
------- --------
December 31, 1994 305,132 150,528
Authorized - 230,000
Granted $8.94 to $9.83 128,920 (128,920)
Canceled $4.56 to $5.31 (8,192) 8,192
Exercised $4.56 to $5.31 (14,282) -
------- --------
December 31, 1995 411,578 259,800
======= =======
<FN>
At December 31, 1995, 166,999 options were exercisable at $4.56 to $5.84 per share.
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31
8. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
CONCENTRATIONS OF CREDIT RISK - Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally
of cash equivalents, trade receivables and forward exchange contracts (see
Note 5). The Company's cash equivalents consist of money market funds
placed with major banks and financial institutions. The Company's trade
receivables principally include amounts due from retailers geographically
dispersed. The Company's two largest customers accounted for 61% of the
trade receivables outstanding at December 31, 1995 and 1994. The Company
routinely assesses the financial strength of its customers and purchases
credit insurance to limit its potential exposure to trade receivable
credit risks. The Company routinely assesses the financial strength of the
bank which is the counterparty to the forward exchange contracts. As of
December 31, 1995, management believes it had no significant exposure to
credit risks.
MAJOR CUSTOMERS AND EXPORT SALES - The Company derived 10% or more of its
sales from its largest customer. Such amounts aggregated $21,966,000,
$14,256,000, and $12,920,000 in 1995, 1994, and 1993, respectively. The
Company's second largest customer accounted for sales of $16,500,000,
$12,118,000, and $8,814,000 in 1995, 1994, and 1993, respectively. No
other customer accounted for 10% or more of the Company's sales. Export
sales, primarily to Europe, Canada, South America and the Pacific Rim
were approximately $7,745,000 in 1995.
RELIANCE ON LICENSED PRODUCTS - A licensing agreement (see Note 6) with a
major entertainment company will expire at the end of 1996. Sales of
products licensed under the agreement amounted to 20% of the Company's
total net sales for year ended December 31, 1995. Management is in the
process of renegotiating continuance of this agreement.
RELIANCE ON FOREIGN MANUFACTURERS - The Company does not own or operate
its own manufacturing facilities. In each of 1995 and 1994, the Company
derived approximately 46% and 53%, respectively, of its net sales from
products manufactured by others in the Far East, mainly in the Peoples'
Republic of China. A change in suppliers could cause a delay in
manufacturing and a possible loss of sales which would affect operating
results adversely, depending on the particular product.
9. SEVERANCE-RELATED EXPENSES
In July 1993, to improve operating productivity, the Company streamlined
staff and outsourced certain packaging and product assembly operations. As
a result, 34 employees were laid-off. Severance-related expenses relating
to the layoffs amounted to a pretax charge of $373,000 and primarily
consisted of severance pay, benefit considerations and outplacement
services, which were paid by December 31, 1994.
10. OFFERING EXPENSES
During 1995, the Company initiated a public offering of shares of its
common stock to increase its working capital and improve liquidity of its
common stock. Due to uncertain market conditions affecting the retail
sector and the price of its stock, the Company decided to postpone
indefinitely the public offering. As a result, the Company wrote off
offering expenses amounting to $310,000 in December 1995.
* * * * * *
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32
SCHEDULE II
THE FIRST YEARS INC.
(FORMERLY KIDDIE PRODUCTS INC.)
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
- ------------------------------------------------------------------------------------------
ADDITIONS
CHARGED
BALANCE, TO COSTS BALANCE,
BEGINNING AND END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS (1) OF YEAR
VALUATION ACCOUNTS DEDUCTED
FROM ASSETS TO WHICH THEY APPLY-
Allowance for doubtful accounts:
1995 $185,000 $86,227 $ 86,227 $185,000
======== ======= ======== ========
1994 $185,000 $23,673 $ 23,673 $185,000
======== ======= ======== ========
1993 $270,000 $17,177 $102,177 $185,000
======== ======= ======== ========
<FN>
(1) Net accounts written off.
IV-17