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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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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, 1996; 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 $65,263,873. 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, 1997.
The number of shares of Registrant's Common Stock outstanding on December
31, 1996 was 4,948,980.
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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,
1996. 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
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.
Products
The Company's product line, which contains approximately 320 items that
range in retail price from approximately $0.99 to $69.99, is categorized and
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. 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 Neats line of
stain-resistant bibs specially made with a 3M Scotchgard stain-release system.
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 1996, the Firstronics line was expanded to include a new
line of sports-oriented toys called Sportstronics. In 1996, the Company also
introduced its first large play, stationary toy into this category with its
2-in-1 Playcenter, an infant activity center that converts to a toddler play
table.
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. This category includes the Nurserytronics line of
electronic products designed especially for use in the nursery; a line of
machinewashable travel tote bags, child carriers and harnesses, marketed under
the PackMates name, and 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. 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 45 basic
products including teethers, rattles, bibs, bottles, bathing accessories and
gift sets featuring Winnie the Pooh characters. In 1996, the Company introduced
numerous additional items in this category including Pooh characters on cups,
hooded towels, bath puppets, teethers, and electronic musical toys.
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THE FIRST YEARS(R) Ideas Inspired by Parents(R), TumbleMates(R),
Firstronics(R), and Washables(R) are registered trademarks of The First Years
Inc. Neats(TM), PackMates(TM), Nurserytronics(TM), Step-by-Step(TM), and First
Gifts(TM) are trademarks of The First Years Inc. 3m(R) and SCOTCHGARD(R) are
registered trademarks of Minnesota Mining and Manufacturing Company, WINNIE THE
POOH(R) and POOH(R) are registered trademarks of Disney Enterprises, Inc.
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PRODUCT DESIGN, DEVELOPMENT AND MARKETING
The Company devotes substantial resources to product development. The
Company employs a staff of professionals engaged in the creation of new products
and also uses, from time to time, a diverse group of outside designers and
developers. For the past 16 years the Company's product line also has been
designed in consultation with Dr. T. Berry Brazelton, the well-known
pediatrician and authority on child development, and staff members of the Child
Development Unit at Children's Hospital in Boston, Massachusetts (the "CDU"), of
which Dr. Brazelton is founder and Director Emeritus.
The Company spent approximately $2.2, $1.8 and $1.5 million on new product
development in 1996, 1995 and 1994, 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 40 countries. Major
customers include Wal*Mart, Toys "R" Us, Target, Kmart, Kroger, Sears, and J.C.
Penney.
The Company's products are sold in the United States and Canada primarily
through the Company's thirteen-person internal sales staff and 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.
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. The Company's
international sales in 1996 and 1995 were approximately $11.6 and $7.7 million,
respectively, and accounted for approximately 12% and 10% of the Company's total
net sales in 1996 and 1995, respectively. (See "Notes to Financial Statements,
Number 8.")
During 1996, Wal*Mart, Toys "R" Us, and Target accounted for approximately
26%, 19%, and 10% 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.
MERCHANDISING
To help retailers use their shelf space efficiently in marketing the
Company's products, the Company utilizes 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.
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 are pre-pegged,
pre-stocked, easily re-stockable, and can be customized to the customer's needs.
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LICENSED CHARACTER PRODUCTS
In 1996, the Company renewed and entered into various agreements which
provide for the payment of royalties on certain of the Company's products
featuring licensed cartoon characters. The agreements have terms ranging from
one to three years and require minimum royalty payments of $4,682,000 during the
terms of these agreements. Sales of products under these license agreements
accounted for approximately 32% of the Company's total net sales in 1996.
MANUFACTURING AND SOURCES OF SUPPLY
The Company does not own or operate its own manufacturing facilities. In
1996, 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 55% of all of its products sold in
1996 were manufactured in Asia, primarily in China. A large percentage of the
Company's furnishings and other large products were manufactured in 1996 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 tools, it could shift its sources of
manufacturing for any product to an alternative supplier.
In 1996, the Company was not dependent on any one supplier, although its
largest supplier, which is based in the United States, accounted for products
that represented approximately 20% of its net sales in 1996. In 1996
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 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 1996.
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. China's MFN
trading status has been extended through July 3, 1997. Unless Congress takes
action to override this decision, China will continue to enjoy MFN treatment
during this period. The European Community (the "EC") has enacted a quota and
tariff system with respect to the importation into the EC of certain toy
products originating in China. The Company, therefore, continues to evaluate
alternative sources of supply outside of China.
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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. 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.
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, 1996, the Company employed 120 full-time and 2 part-time
employees, of whom 11 are executive officers, 52 are in sales, marketing and
product development, 39 are in materials, purchasing, quality control, data
processing, finance, administration and clerical, and 20 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.
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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
- ---- --- -------- ----------
Ronald J. Sidman................... 50 President, Chairman of the Board of
Directors, and Chief Executive Officer 1975
Jerome M. Karp..................... 69 Vice Chairman of the Board of Directors 1969
Benjamin Peltz*.................... 57 Treasurer, Senior Vice President --
Finance, and Director 1975
Evelyn Sidman...................... 83 Clerk and Director 1979
Fred T. Page....................... 50 Director 1988
Merton N. Alperin.................. 74 Director 1988
Joseph M. Connolly................. 56 Vice President -- Operations 1979
John N. Colantuone................. 59 Vice President -- Materials and Engineering 1982
Adrian E. Roche.................... 41 Vice President -- Worldwide Marketing 1992
John R. Beals*..................... 42 Controller and Assistant Treasurer 1990
Wayne Shea......................... 42 Vice President -- Worldwide Sales &
Merchandising 1991
Keith Ciampa....................... 32 Vice President -- Executive Accounts 1996
Mark H. Dall....................... 53 Vice President -- Information Services 1985
Clive R. Wooster................... 42 Vice President -- International
Sales/Europe 1997
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* Effective as of July 1, 1997, Mr. Peltz's position will be split in two. He
will continue to be the Treasurer of the Company. Mr. Beals will be promoted
to Vice President -- Finance, and Chief Financial Officer, and will remain as
Assistant Treasurer of the Company; and Mr. Stephen Lyons, currently the
Company's Assistant Controller since January, 1995, will be promoted to
Controller of the Company.
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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.
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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.
Keith Ciampa, age 32, has been Vice President -- Executive Accounts since
June, 1996. From July, 1993 to May, 1996, Mr. Ciampa was Director of
Sales-Americas, and from January, 1992 to June 1993, he was Export Sales Manager
of the Company.
Mr. Clive R. Wooster, age 42, has been Vice President -- International
Sales/Europe since March 13, 1997. From October, 1994 to March 12, 1997, he was
Director of Sales/Europe; and from April, 1992 to September, 1994, he was the
General Manager of the Company's UK Sales Office.
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, England.
The Company also uses public warehouses located in Fontana, California;
Toronto, Canada; 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.
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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 1995 and 1996 as reported by Nasdaq and as adjusted to
reflect the Company's 2-for-1 stock split effected on December 29, 1995.
1996
QUARTER LOW HIGH
- ------- --- ----
First........................................................................ $ 9 3/4 $ 12 1/2
Second....................................................................... 11 3/4 18 1/2
Third........................................................................ 12 3/4 15
Fourth....................................................................... 14 17
1995
QUARTER LOW HIGH
- ------- --- ----
First........................................................................ $ 8 5/8 $ 12
Second....................................................................... 8 3/8 10 1/8
Third........................................................................ 9 3/8 11 3/4
Fourth....................................................................... 10 11 5/8
(B) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
APPROXIMATE NUMBER
OF RECORD HOLDERS
TITLE OF CLASS (AS OF DECEMBER 31, 1996)
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Common Stock, $.10 Par Value 135
(C) DIVIDEND POLICY
From 1991 to 1995, the Company paid a cash dividend on its Common Stock of
$0.085 per share in June of each year. In 1996, the Company increased its annual
cash dividend to $0.10 per share which was paid on June 1, 1996. 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.
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ITEM 6. SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
SELECTED INCOME STATEMENT DATA:
Net sales................... $93,110,361 $75,757,322 $53,233,109 $46,124,088 $45,267,323
Cost of products sold....... 55,463,255 45,108,546 29,498,457 26,653,704 23,645,594
Selling, general and
administrative expenses... 28,580,039 23,961,206 18,915,908 17,857,049 18,429,803
Severance-related
expenses.................. -- -- -- 373,000 --
Interest expense............ 358,637 186,338 24,575 28,912 31,961
Interest income............. 27,349 16,718 66,605 66,204 154,913
Offering expenses........... -- 310,457 -- -- --
Income before income
taxes..................... 8,735,779 6,207,493 4,860,774 1,277,627 3,314,878
Provision for income
taxes..................... 3,494,300 2,483,000 1,871,400 481,500 1,385,100
Net income.................. 5,241,479 3,724,493 2,989,374 796,127 1,929,778
Earnings per share*......... $1.06 $0.80 $0.66 $0.18 $0.43
Dividends paid per share*... $0.10 $0.09 $0.09 $0.09 $0.08
Weighted average number of
shares outstanding*....... 4,941,196 4,663,491 4,497,244 4,496,520 4,496,520
SELECTED BALANCE SHEET DATA:
Total assets................ $47,049,537 $41,712,080 $28,852,785 $24,532,714 $24,694,765
Long-term debt.............. -- 100,001 233,334 366,667 500,000
Stockholders' equity........ 35,866,440 25,763,259 22,349,947 19,719,720 19,305,797
Stockholders' equity per
share*.................... $7.26 $5.52 $4.97 $4.39 $4.29
- ---------------
* Adjusted to reflect the two-for-one stock split effected on December 29, 1995.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENT OF FORWARD LOOKING INFORMATION:
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 as discussed below. 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.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales in 1996 were $93.1 million, an increase of $17.3 million or
22.9%, as compared to $75.8 million for the comparable period last year. The
increase was due to new product introductions and expanded retail distribution
in domestic and foreign markets.
As of a percentage of net sales, net sales to foreign markets increased to
12.5% in 1996 from 10.3% in 1995 resulting primarily from increases in Europe
and Canada. As a percentage of net sales, Winnie the Pooh products increased to
32% in 1996 from 20% in 1995. The Company does not expect the rate of increase
in net sales of Winnie the Pooh products as a percentage of net sales to
continue at the same pace as has occurred in the previous two years due to the
level of distribution achieved during that initial period. The Company expects
to initiate distribution of products featuring licensed Sesame Street characters
during the second quarter of 1997.
Cost of products sold in 1996 was $55.5 million, an increase of $10.4
million or 23.0%, as compared to $45.1 million for the comparable period last
year. As a percentage of sales, cost of products sold in 1996 and 1995 remained
constant at approximately 59.5%.
Selling, general, and administrative expenses in 1996 were $28.6 million,
an increase of $4.6 million or 19.3% as compared to $24.0 million over such
expenses in 1995. The increase resulted primarily from costs related to
increased sales volume, payroll and payroll related costs. As a percentage of
net sales, selling, general, and administrative expenses for the year of 1996
decreased to 30.7% from 31.6% in 1995. The decrease reflects the economies of
scale provided by higher volume of business.
Income tax expense as a percentage of pretax income was 40% in 1996 and
1995.
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.
II-3
12
As a result, the Company wrote-off offering expenses amounting to a pretax
charge of approximately $310,000 ($186,000 net of tax). The offering was
subsequently resumed and consummated in 1996 (see below).
Income tax expense as a percentage of pretax income increased to 40.0% in
1995 from 38.5% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital increased by $9.4 million from $20.2 million at
December 31, 1995 to $29.6 million at December 31, 1996 primarily due to a
secondary public offering of the Company's Common Stock which provided net
proceeds to the Company of $5.1 million and funds generated from profitable
operations. Accounts receivable increased by $1.7 million primarily as a result
of increased sales. Cash increased by $3.6 million primarily as a result of the
above mentioned secondary offering and profitable operations.
In 1996, the Company resumed and consummated a public offering of common
stock which had been postponed in 1995. The closing of the sale, consisting of
400,000 newly issued shares and 1,200,000 shares of certain selling stockholders
was held on July 1, 1996 at which time the Company issued the new shares and
received the net proceeds of $5,121,750. The proceeds of the newly issued shares
were used to pay certain indebtedness of the Company.
Unsecured lines of credit of $20 million which are subject to annual
renewal, are available from banks. Amounts outstanding under these lines are
payable upon demand by the banks. During 1996, the Company has borrowed various
amounts from time to time up to $9.9 million. As of December 31, 1996 no
balances were outstanding.
The Company paid a cash dividend of $0.10 and $0.085 per share of Common
Stock in June of 1996 and 1995, 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 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 1996, the Company entered into forward
exchange contracts with a bank whereby the Company is committed to deliver
foreign currency at predetermined rates. The contracts expire within one year.
The Company's commitment under these contracts approximated $6.0 million as of
December 31, 1996. At December 31, 1996, 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
counterparty to the forward exchange contracts. As of December 31, 1996,
management believes it had no significant exposure to credit risk relative to
such contracts.
II-4
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements listed under Item 14.(a) 1. are included in Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There is nothing to report relating to this Item.
II-5
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included in the Registrant's
definitive proxy statement for the 1997 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 1997 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 1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is nothing to report relating to this Item.
III-1
15
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14.(a) 1. FINANCIAL STATEMENTS
Independent Auditors' Report
Balance Sheets as of December 31, 1996 and 1995
Statements of Income for the Years Ended December 31, 1996, 1995 and
1994
Statements of Stockholders' Equity for the Years Ended December 31,
1996, 1995 and 1994
Statements of Cash Flows for the Years Ended December 31, 1996, 1995
and 1994
(a) 2. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
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 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).
(10)(f) Agreement with Disney Enterprises, Inc. dated December 3, 1996 (certain
portions of which are subject to a confidential treatment request). IV-17
(10)(g) Agreement with the Children's Television Workshop dated July 1, 1996
(certain portions of which are subject to a confidential treatment
request). IV-17
Management Contracts and Compensatory Plans
(10)(h) Kiddie Products, 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).
IV-1
16
PAGE
-------
(10)(i) Kiddie Products, 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)(j) Agreement between Kiddie Products, 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)(k) Employment Agrement between Kiddie Products, 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)(l) Employment Agreement between Kiddie Products, 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)(m) 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-17
(23) Consent of Deloitte & Touche LLP dated March 28, 1997. IV-17
(27) Financial Data Schedule. IV-17
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, 1996.
IV-2
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE FIRST YEARS INC.
....................................
(Registrant)
By: /s/ RONALD J. SIDMAN
..................................
RONALD J. SIDMAN, CHIEF EXECUTIVE
OFFICER,
CHAIRMAN OF THE BOARD OF
DIRECTORS, AND PRESIDENT
Date: March 13, 1997
By: /s/ BENJAMIN PELTZ
..................................
BENJAMIN PELTZ, SENIOR VICE
PRESIDENT AND TREASURER
(CHIEF FINANCIAL OFFICER AND CHIEF
ACCOUNTING OFFICER)
Date: March 13, 1997
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 13, 1997.
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ ---------------
/s/ RONALD J. SIDMAN Chief Executive Officer March 13, 1997
........................................ Chairman of the Board of
RONALD J. SIDMAN Directors and President
/s/ JEROME M. KARP Vice Chairman of the Board of March 13, 1997
........................................ Directors
JEROME M. KARP
/s/ EVELYN SIDMAN Director March 13, 1997
........................................
EVELYN SIDMAN
/s/ BENJAMIN PELTZ Director March 13, 1997
........................................
BENJAMIN PELTZ
/s/ MERTON N. ALPERIN Director March 13, 1997
........................................
MERTON N. ALPERIN
/s/ FRED T. PAGE Director March 13, 1997
........................................
FRED T. PAGE
IV-3
18
THE FIRST YEARS INC.
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
PAGE
--------
Independent Auditors' Report...................................................... IV-5
Financial Statements:
Balance Sheets as of December 31, 1996 and 1995.............................. IV-6
Statements of Income for the Years Ended December 31, 1996, 1995, and 1994... IV-7
Statements of Stockholders' Equity for the Years Ended December 31, 1996,
1995, and 1994.............................................................. IV-8
Statements of Cash Flows for the Years Ended December 31, 1996, 1995, and
1994........................................................................ IV-9
Notes to Financial Statements................................................ IV-10-15
Financial Statement Schedule II -- Valuation and Qualifying Accounts for the Years
Ended December 31, 1996, 1995, and 1994......................................... IV-16
IV-4
19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The First Years Inc.
Avon, Massachusetts
We have audited the accompanying balance sheets of The First Years Inc. as
of December 31, 1996 and 1995, and the related statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. Our audits also included the financial statement
schedule listed in the accompanying index. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with 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, 1996
and 1995, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 5, 1997
IV-5
20
THE FIRST YEARS INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents (Notes 1 and 8).................... $ 4,164,587 $ 552,568
Accounts receivable (less allowance for doubtful accounts of
$185,000 in 1996 and 1995) (Note 8)......................... 15,929,465 14,191,630
Inventories (Note 1)......................................... 18,588,044 19,009,784
Prepaid expenses and other assets............................ 375,317 778,074
Deferred tax asset (Notes 1 and 3)........................... 946,400 872,300
----------- -----------
Total current assets.................................... 40,003,813 35,404,356
----------- -----------
Property, Plant, and Equipment (Note 1):
Land......................................................... 167,266 167,266
Building..................................................... 4,016,405 3,737,861
Machinery and molds.......................................... 7,329,240 6,481,504
Furniture and equipment...................................... 3,092,356 3,183,379
----------- -----------
Total................................................... 14,605,267 13,570,010
Less accumulated depreciation................................ 7,559,543 7,262,286
----------- -----------
Property, plant, and equipment -- net................... 7,045,724 6,307,724
----------- -----------
Total Assets............................................ $47,049,537 $41,712,080
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt (Note 2)................... $ 100,000 $ 133,333
Short-term borrowings (Note 2)............................... -- 6,200,000
Accounts payable............................................. 6,969,115 6,624,948
Accrued royalty expense (Note 6)............................. 848,671 533,801
Accrued payroll expenses..................................... 1,087,302 1,105,004
Accrued selling expenses..................................... 1,406,009 604,434
----------- -----------
Total current liabilities............................... 10,411,097 15,201,520
----------- -----------
Long-Term Debt -- Less portion due currently (Note 2)............. -- 100,001
Deferred Tax Liability (Notes 1 and 3)............................ 772,000 647,300
Commitments and Contingencies (Notes 5, 6 and 8)
Stockholders' Equity (Notes 4, 7 and 9):
Common stock -- authorized, 15,000,000 shares; issued,
4,948,980 and 4,515,142 as of December 31, 1996 and 1995.... 494,898 451,514
Paid-in-capital.............................................. 5,271,875 --
Retained earnings............................................ 30,099,667 25,311,745
----------- -----------
Total stockholders' equity.............................. 35,866,440 25,763,259
----------- -----------
Total Liabilities and Stockholders' Equity.............. $47,049,537 $41,712,080
=========== ===========
See notes to financial statements.
IV-6
21
THE FIRST YEARS INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
Net Sales (Notes 1, 6 and 8)........................ $93,110,361 $75,757,322 $53,233,109
Cost of Products Sold (Note 1)...................... 55,463,255 45,108,546 29,498,457
----------- ----------- -----------
Gross Profit........................................ 37,647,106 30,648,776 23,734,652
Selling, General, and Administrative Expenses (Notes
1 and 7).......................................... 28,580,039 23,961,206 18,915,908
----------- ----------- -----------
Operating Income.................................... 9,067,067 6,687,570 4,818,744
Other Income (Expense):
Interest expense............................... (358,637) (186,338) (24,575)
Interest income................................ 27,349 16,718 66,605
Offering expenses (Note 9)..................... -- (310,457) --
----------- ----------- -----------
Income Before Income Taxes.......................... 8,735,779 6,207,493 4,860,774
Provision for Income Taxes (Notes 1 and 3).......... 3,494,300 2,483,000 1,871,400
----------- ----------- -----------
Net Income.......................................... $ 5,241,479 $ 3,724,493 $ 2,989,374
=========== =========== ===========
Earnings Per Share (Note 1)......................... $1.06 $0.80 $0.66
===== ===== =====
See notes to financial statements.
IV-7
22
THE FIRST YEARS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
COMMON STOCK
---------------------- PAID-IN RETAINED
SHARES PAR VALUE CAPITAL EARNINGS
--------- --------- ---------- -----------
Balance, January 1, 1994....................... 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
Stock issued under stock option plans
(Note 7)................................ 33,838 3,384 190,125 --
Dividends paid............................ -- -- -- (453,557)
Stock issued through public offering (Note
9)...................................... 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
========= ======== ========== ===========
See notes to financial statements.
IV-8
23
THE FIRST YEARS INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
Cash Flows from Operating Activities:
Net income..................................... $ 5,241,479 $ 3,724,493 $ 2,989,374
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation.............................. 1,228,790 992,291 878,250
Provision for doubtful accounts........... 152,582 86,227 23,673
Loss on disposal of equipment............. 37,699 70,258 47,877
Increase (decrease) arising from working
capital items:
Accounts receivable.................. (1,890,417) (5,011,624) (2,077,176)
Inventories.......................... 421,740 (8,595,949) (2,184,385)
Prepaid expenses and other assets.... 402,757 (482,153) (53,315)
Accounts payable..................... 344,167 2,331,128 1,173,646
Accrued royalty expense.............. 314,870 533,801 --
Accrued payroll expenses............. (17,702) 322,114 730,508
Accrued selling expenses............. 801,575 348,273 (142,477)
Federal and state income taxes
payable............................ -- (218,500) (9,200)
Change in deferred income taxes........... 50,600 (185,300) 107,200
----------- ----------- -----------
Net cash (used for) provided by
operating activities.......... 7,088,140 (6,084,941) 1,483,975
----------- ----------- -----------
Cash Flows from Investing Activities --
Purchase of property, plant, and equipment..... (2,004,489) (1,447,018) (1,374,721)
----------- ----------- -----------
Cash Flows from Financing Activities:
Repayment of industrial revenue bonds.......... (133,334) (133,333) (133,333)
Net proceeds (repayment) from short-term
borrowings................................... (6,200,000) 6,200,000 --
Dividends paid................................. (453,557) (382,852) (382,204)
Net proceeds from public offering.............. 5,121,750 -- --
Common stock issued under stock option plans... 193,509 71,671 23,057
----------- ----------- -----------
Net cash provided by (used for)
financing activities.......... (1,471,632) 5,755,486 (492,480)
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents.... 3,612,019 (1,776,473) (383,226)
Cash and Cash Equivalents, Beginning of Year........ 552,568 2,329,041 2,712,267
----------- ----------- -----------
Cash and Cash Equivalents, End of Year.............. $ 4,164,587 $ 552,568 $ 2,329,041
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information --
Cash paid during the year for:
Interest.................................. $ 358,637 $ 186,338 $ 24,575
=========== =========== ===========
Income taxes.............................. $ 3,087,700 $ 3,269,100 $ 1,773,400
=========== =========== ===========
See notes to financial statements.
IV-9
24
THE FIRST YEARS 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 the Company's 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.
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 -- 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 common equivalent
shares, consisting of the effect of stock options outstanding, if dilutive
(4,941,196, 4,663,491 and 4,497,244 shares in 1996, 1995, and 1994,
respectively) (see Note 7). Earnings per share assuming full dilution have not
been presented because the dilutive effect is immaterial.
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 1996, 1995, and 1994, research and development
costs approximated $2,209,000, $1,834,000, and $1,466,000, respectively.
Foreign Currency Translation -- The Company's functional currency is the
U.S. dollar. Accordingly, monetary assets and liabilities of the Company's
foreign operations are translated from the respective local currency to the U.S.
dollar using year-end exchange rates while nonmonetary items are translated at
historical rates. Income and expense accounts are translated at the average
rates in effect during the year. Accordingly, translation adjustments and
transaction gains and losses are recognized as income in the year of occurrence
and are recorded as a component of cost of sales.
Foreign Exchange Contracts -- The Company enters into forward exchange
contracts to minimize the impact of fluctuations in currency exchange rates on
future cash flows emanating from sales denominated in foreign currencies. The
Company does not purchase such contracts for trading purposes. Gains and losses
related to foreign exchange contracts which qualify as accounting hedges of firm
commitments are deferred and recognized in income when the hedged transaction
occurs. Gains and losses related to foreign exchange
IV-10
25
THE FIRST YEARS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 ("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.
2. DEBT
Long-term debt consists of unsecured industrial revenue bonds ("IRB"), with
interest payable quarterly at 65% of the prime rate (5.4% at December 31, 1996
and 5.5% at December 31, 1995) 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 $20,000,000
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 1.75% and the other line at the prime rate less 0.25% or the LIBOR
rate plus 1.75%. During 1996 and 1995, the Company borrowed various amounts up
to $9,900,000 and $6,500,000, respectively, under the lines. As of December 31,
1996 and 1995 a balance of $0 and $6,200,000 remained outstanding. The average
interest rate on debt outstanding at December 31, 1995 was 7.9%. No other
short-term borrowings were incurred by the Company during 1996 or 1995.
3. INCOME TAXES
Components of the Company's net deferred tax asset at December 31 are as
follows:
1996 1995
-------- --------
Deferred tax assets:
Reserves not currently deductible.................. $119,000 $ 79,000
Capitalized packaging costs not currently
deductible....................................... 486,600 442,000
Capitalized inventory costs not currently
deductible....................................... 301,000 261,100
Other.............................................. 39,800 90,200
-------- --------
946,400 872,300
-------- --------
Deferred tax liabilities:
Excess tax depreciation over financial reporting
depreciation..................................... 767,500 642,800
Other.............................................. 4,500 4,500
-------- --------
772,000 647,300
-------- --------
Net deferred tax asset.................................. $174,400 $225,000
======== ========
There was no valuation allowance for the years ended December 31, 1996 and
1995.
IV-11
26
THE FIRST YEARS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes consists of the following:
1996 1995 1994
---------- ---------- ----------
Federal:
Current............................ $2,649,600 $2,104,000 $1,432,700
Deferred........................... 50,600 (185,300) 107,200
---------- ---------- ----------
Total federal................. 2,700,200 1,918,700 1,539,900
State................................... 794,100 564,300 331,500
---------- ---------- ----------
Provision for income taxes.............. $3,494,300 $2,483,000 $1,871,400
========== ========== ==========
A reconciliation of the statutory federal income tax rate and the effective
tax rate as a percentage of pretax income is as follows:
1996 1995 1994
---- ---- ----
Statutory rate........................................... 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit.... 6.0 6.0 4.5
---- ---- ----
Effective tax rate....................................... 40.0% 40.0% 38.5%
==== ==== ====
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 1996 and 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 future commitment under these contracts approximated
$6,000,000 and $4,500,000 as of December 31, 1996 and 1995, respectively. At
December 31, 1996 and 1995, the exchange rates for such currencies covered by
the contracts approximated the predetermined rates included therein.
Other Commitments -- At December 31, 1996 and 1995, letters of credit
outstanding aggregated approximately $644,000 and $1,925,000, 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 at the discretion of the Compensation Committee of
the Board and, in the event of termination, provide for noncompetition payments
for two years equal to their annual base salaries.
Contingencies -- The Company is involved in legal proceedings which have
arisen in the ordinary course of business. Management believes the outcome of
these proceedings will not have a material adverse impact on the Company's
financial condition or operating results.
6. ROYALTIES
During 1996 and 1995, the Company entered into various agreements which
provide for the payment of royalties on sales of certain character and patent
licensed products. The agreements have terms ranging from one to fifteen years
and require minimum royalty payments of $4,715,000 and $729,000 for agreements
signed during 1996 and
IV-12
27
THE FIRST YEARS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1995, respectively. Future outstanding minimum royalty commitments under these
agreements amounted to $4,692,000 and $92,800 at December 31, 1996 and 1995,
respectively.
7. BENEFIT PLANS
Defined Contribution Plans -- The Company has a defined contribution
trusteed benefit plan covering eligible employees, requiring annual
contributions based upon certain percentages of salaries of employees. The
Company's policy is to fund pension expense as accrued. Pension expense
aggregated $472,000, $217,000, and $246,000 in 1996, 1995, and 1994,
respectively. The Company sponsors a 401(k) defined contribution plan covering
substantially all Company employees pursuant to which the Company is obligated
to match, up to specified amounts, employee contributions. Company contributions
to this plan were not material for the periods presented.
Stock Option Plans -- In May 1993, the Company's stockholders approved the
adoption of The First Years Inc. 1993 Equity Incentive Plan and The First Years
Inc. 1993 Stock Option Plan for Non-employee Directors (the "plans") which cover
employees and directors of the Company. The Board has reserved 670,000 shares
for issuance under the plans and 20,000 shares for another stock option plan
(all share amounts adjusted to reflect the two-for-one stock split effected on
December 29, 1995). The exercise price for the options granted may not be less
than the fair market value of the optioned stock at the date of grant, 110% of
fair market value in the case of options granted to a 10% stockholder.
Options granted must be exercised within the period prescribed by the
Committee; the options vest in accordance with the vesting provisions prescribed
at the time of grant.
A summary of activity (all years adjusted to reflect the two-for-one stock
split effected on December 29, 1995) of stock options granted under the plans is
as follows:
WEIGHTED NUMBER OF
AVERAGE NUMBER OF OPTIONS
EXERCISE PRICE OPTIONS AVAILABLE
PER SHARE OUTSTANDING FOR GRANT
-------------- ----------- ---------
January 1, 1994........................... $ 5.46 204,000 236,000
Authorized........................... -- 20,000
Granted.............................. 4.65 126,300 (126,300)
Canceled............................. 4.97 (20,828) 20,828
Exercised............................ 5.13 (4,340) --
------- --------
December 31, 1994......................... 5.16 305,132 150,528
Authorized........................... -- 230,000
Granted.............................. 9.14 128,920 (128,920)
Canceled............................. 5.61 (8,192) 8,192
Exercised............................ 5.02 (14,282) --
------- --------
December 31, 1995......................... 6.40 411,578 259,800
Granted.............................. 12.46 68,605 (68,605)
Canceled............................. 8.19 (8,557) 8,557
Exercised............................ 5.71 (33,838) --
------- --------
December 31, 1996......................... $ 7.37 437,788 199,752
======= ========
Exercisable at December 31, 1994..... $ 5.46 66,384
Exercisable at December 31, 1995..... $ 5.25 166,999
Exercisable at December 31, 1996..... $ 6.01 278,935
The grant date fair value for options granted in 1996 and 1995 was $4.19
and $3.46, respectively.
IV-13
28
THE FIRST YEARS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth information regarding stock options
outstanding at December 31, 1996 under the Stock Option Plans as described
above:
NUMBER
OF AVERAGE
OPTIONS WEIGHTED WEIGHTED NUMBER EXERCISE
OUTSTANDING RANGE OF AVERAGE AVERAGE CURRENTLY PRICE FOR
AT EXERCISE EXERCISE REMAINING EXERCISABLE OPTIONS
12/31/96 PRICES PRICE LIFE AT 12/31/96 EXERCISABLE
- ------- --------------- -------- --------- ------------ -----------
253,673 .............. $ 4.56 - $ 6.84 $ 5.15 1.42 226,361 $5.31
117,175 .............. 6.85 - 10.26 9.14 3.08 52,574 9.34
60,940 .............. 10.27 - 15.39 12.01 4.01 -- --
6,000 .............. 15.40 - 17.13 17.13 4.42 -- --
- ------- --------------- ------- ----- ---- -----
437,788 .............. $ 4.56 - $17.13 $ 7.37 2.16 278,935 $6.01
======= =============== ======= ===== ==== =====
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, 1996 and 1995 would have been as follows:
1996 1995
---------- ----------
Net income...................................... $5,038,337 $3,625,525
Earnings per share.............................. $ 1.02 $ 0.78
For purposes of the pro forma disclosures, the fair value of the options
granted under the Company's stock option plans during 1996 and 1995 was
estimated on the date of grant using the Binomial option pricing model. Key
assumptions used to apply this pricing model are as follows:
1996 1995
--------- ---------
Risk free interest rate............................. 6.08% 7.01%
Expected life of option grants...................... 4.5 years 4.5 years
Expected volatility of underlying stock............. 32.87% 36.86%
Expected dividend payment rate...................... 0.85% 0.85%
The pro forma disclosures only include the effects of options granted in
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 55% and 68% of the trade receivables outstanding
at December 31, 1996 and 1995, 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, 1996, 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 $25,722,000,
$21,966,000, and $14,256,000 in 1996, 1995, and 1994, respectively. The
Company's second largest customer accounted for sales of $18,257,000,
$16,500,000, and
IV-14
29
THE FIRST YEARS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$12,118,000 in 1996, 1995, and 1994, respectively. The Company's third largest
customer accounted for sales of $9,908,000 in 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 $11,564,000 and
$7,745,000 in 1996 and 1995, respectively.
Reliance on Foreign Manufacturers -- The Company does not own or operate
its own manufacturing facilities. In 1996 and 1995, the Company derived
approximately 55% and 46%, 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. OFFERING OF COMMON STOCK
During 1995, the Company initiated a public offering of shares of its
common stock to increase its working capital and improve liquidity of its common
stock. Due to uncertain market conditions affecting the retail sector and the
price of its stock, the Company decided to postpone the public offering. As a
result, the Company wrote off offering expenses amounting to $310,000 in
December 1995.
During 1996, the Company proceeded with the postponed offering of shares
and entered into an agreement with a group of underwriters to sell 1.6 million
shares of common stock ("the shares"), consisting of 400,000 newly issued shares
and 1,200,000 shares of certain selling stockholders. The closing of the sale
was held on July 1, 1996 at which time the Company issued 400,000 new shares and
received the net proceeds of $5,121,750.
* * * * * *
IV-15
30
SCHEDULE II
THE FIRST YEARS INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
ADDITIONS
BALANCE, CHARGED
BEGINNING TO COSTS AND BALANCE
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS(1) END OF YEAR
- --------------------------------------------- --------- ------------ ------------- -----------
Valuations Accounts Deducted from Assets to
which they Apply --
Allowance for doubtful accounts:
1996............................... $185,000 $152,582 $152,582 $185,000
======== ======== ======== ========
1995............................... $185,000 $ 86,227 $ 86,227 $185,000
======== ======== ======== ========
1994............................... $185,000 $ 23,673 $ 23,673 $185,000
======== ======== ======== ========
- ---------------
(1) Net accounts written off.
IV-16
31
THE FIRST YEARS INC.
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------------------------------------------------------------------------------
10(f) Agreement with Disney Enterprises, Inc. dated December 3, 1996 (certain portions of
which are subject to a confidential treatment request).
10(g) Agreement with Children's Television Workshop dated July 1, 1996 (certain portions
of which are subject to a confidential treatment request).
11 Statement re Computation of Per Share Earnings
23 Consent of Deloitte & Touche LLP dated March 28, 1997.
27 Financial Data Schedule
IV-17