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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, 1997; OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-7024
THE FIRST YEARS INC.
(Exact Name of Registrant as Specified in its Charter)
MASSACHUSETTS 04-2149581
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
ONE KIDDIE DRIVE,
AVON, MASSACHUSETTS 02322
(Address of Principal Executive Offices) (Zip Code)
508-588-1220
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.10 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
The aggregate market value of the Common Stock held by nonaffiliates of the
Company was $110,256,811, based on the price at which the stock was sold over
the counter on the Nasdaq National Market, as reported at the close of business
on February 27, 1998.
The number of shares of Registrant's Common Stock outstanding on December
31, 1997 was 5,084,591.
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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,
1997. The following sections of such definitive proxy statement are hereby
incorporated by reference into Items 10, 11, 12 and 13 of Part III of this Form
10-K: "Common Stock Ownership of Certain Beneficial Owners and Management;"
"Election of Directors;" "Executive Compensation" (other than the Board
Compensation Committee Report on Executive Compensation and the Performance
Chart); and "Compliance with Section 16(a) of the Securities Exchange Act of
1934."
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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.
Except as expressly indicated or unless the context otherwise requires, as
used in this report, the "Company" means The First Years Inc. a Massachusetts
corporation, and its subsidiaries.
Products
The Company's product line, which contains approximately 320 items that
range in retail price from approximately $0.99 to $69.99, is categorized and
marketed into five distinct product categories as follows:
Feeding & Soothing. The Feeding & Soothing category is comprised of
bottles and accessories, nipples, pacifiers, teethers, bowls, drinking cups,
dishes, flatware, bibs and breast-feeding accessories. This category includes
the TumbleMates line of training cups, bowls, plates and utensils, designed for
serving, storing and transporting drinks and snacks, and which features a system
of interchangeable cups and lids. This category also includes the Simplicity
line of breast feeding accessories, the Flowright angled feeding system of
nipples and bottles and the Sure pacifier.
Play & Discover. The Play & Discover category consists of an extensive
line of entertaining, skill-developing toys for infants and toddlers including
crib toys, floor toys, hand-held toys, and large play items. The Play & Discover
category includes the Company's Washables line of 100% washable, dishwasher-safe
toys and its Firstronics line of hand-held electronic toys for children under
three years of age. In 1997, the Company introduced several higher priced items
intended for the gift giving market such as The Spinning Musical Plush and the
Jukebox Crib Mirror.
Care & Safety. The Care & Safety category consists of a broad line of
bathing and grooming accessories, home safety and monitoring products such as
door and cabinet latches, toilet-training products and products appropriate for
the health and hygiene needs of infants. This category includes the Comfortemp
instant underarm thermometer and the Booties to Grow line of infant footwear.
Winnie the Pooh. The Winnie the Pooh category consists of over 65 basic
products including teethers, rattles, bibs, bottles, bathing accessories and
gift sets featuring Winnie the Pooh characters. In 1997, the Company introduced
numerous additional items in this category including Pooh characters on cups,
bottles, teethers, books, electronic musical toys plus a bouncy seat with a
toybar.
Sesame Street. The Sesame Street category consists of over 30 basic
products including teethers, pacifiers, bottles, drinking cups, dishes,
flatware, healthcare products, car sun shade, hooded towels, rattles and a
toilet trainer.
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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., Nurserytronics(TM), Simplicity(TM), Flowright(TM), Sure(TM), Booties to
Grow(TM) and ComforTemp(TM) are trademarks of The First Years Inc. SESAME STREET
is a registered trademark of Children's Television Workshop, WINNIE THE POOH(R)
and POOH(R) are registered trademarks of Disney Enterprises, Inc.
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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 17 years the Company's product line also has been
designed in consultation with Dr. T. Berry Brazelton, the well-known
pediatrician and authority on child development, and staff members of the Child
Development Unit at Children's Hospital in Boston, Massachusetts (the "CDU"), of
which Dr. Brazelton is founder and Director Emeritus.
The Company spent approximately $2.6, $2.2 and $1.8 million on new product
development in 1997, 1996 and 1995, respectively. Most of the Company's new
products are shown at the Juvenile Products Manufacturers Association Trade
Show, in Dallas, Texas in the fall of each year, and a variety of other national
and international toy and baby fairs.
SALES
The Company's products are sold nationally and internationally to a broad
spectrum of customers including mass merchants, national variety and drug
stores, supermarkets, wholesale clubs, convenience stores, toy specialty stores,
wholesale distributors, department stores, mail order catalogs and catalog
stores. The Company currently has customers in over 60 countries. Major
customers include Wal*Mart, Toys "R" Us, Target, Kmart, Kroger, Sears, Rite Aid,
Albertsons, and J.C. Penney.
The Company's products are sold in the United States and Canada primarily
through the Company's internal sales staff and a network of 43 independent sales
representatives. The Company's sales staff is responsible for supervising and
training the sales representatives. Such training is conducted at the Company's
headquarters and throughout the United States.
In August, 1997, the Company created a wholly-owned subsidiary, The First
Years Inc., a Delaware corporation ("TFY-Delaware"), to consolidate and more
efficiently handle the company's sales and distribution operations in the
western part of the United States. TFY-Delaware has sales offices in Missouri
and California, and is the Company's exclusive sales agent for certain states in
the western part of the United States.
In Europe and the Middle East, the Company's products are sold by the
Company's internal staff at its sales office in Cirencester, England, which is
headed by the Vice President -- International Sales/Europe. This staff manages a
network of foreign distributors and independent sales representatives. In
Central and South America and the Pacific Rim, the Company's products are sold
by its internal sales staff which manages a network of foreign distributors and
independent sales representatives in such areas.
The Company's international sales in 1997, 1996 and 1995 were approximately
$16.2, $11.6 and $7.7 million, respectively, and accounted for approximately
13.5%, 12.5% and 10% of the Company's total net sales in 1997, 1996 and 1995,
respectively. (See "Notes to Financial Statements, Number 8.")
During 1997, Wal*Mart, Toys "R" Us, and Target accounted for approximately
25%, 16%, and 11% of the Company's net sales, respectively. A significant
reduction in purchases by any of these customers could have a material adverse
effect on the Company's business.
Backlog is not a significant and material aspect of the Company's business.
Customers place orders on an as needed basis. As the Company's sales have
increased, the amount of unfilled orders at any time has not been indicative of
future results.
LICENSED CHARACTER PRODUCTS
In 1996 and 1997, the Company renewed and entered into various agreements
which provide for the payment of royalties on certain of the Company's products
featuring licensed cartoon characters. The agreements have terms ranging from
one to three years and require minimum royalty payments of $5,312,000 during the
terms of these agreements. A major licensing agreement will expire at the end of
1998; however the Company's management is in the process of negotiating
continuance of this agreement (see Exhibit 99 to this Report, "Important Factors
Regarding Forward-Looking Statements" and "Notes to the Financial Statements,"
Numbers 6 and 8).
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MANUFACTURING AND SOURCES OF SUPPLY
The Company does not own or operate its own manufacturing facilities. In
1997, all of the Company's products were manufactured either using the Company's
custom tools (molds and dies) or to the Company's specifications by
approximately 25 manufacturers located in the United States, Canada, China,
Taiwan, Thailand, and Mexico. Approximately 60% of all of its products sold in
1997 were manufactured in Asia, primarily in China. A large percentage of the
Company's furnishings and other large products were manufactured in 1997 by
suppliers in the United States and Canada because of the significantly higher
shipping costs from the Far East.
Generally the Company uses one manufacturer to make each product from its
supplier base in Asia, Canada, and the United States. Due to the high cost of
developing duplicate tooling (predominantly molds and dies), most of the
Company's products are made using one set of tools; however, the Company has
developed duplicate tools for several of its key and high-volume products. In
December, 1996, the Company entered into an agreement with Exergen Corporation
to jointly design and develop the Company's ComforTemp thermometer. The
ComforTemp is an instant underarm thermometer which uses an infrared
temperature-taking technology developed and patented by Exergen. The Company is
dependent on Exergen for Exergen's technology and proprietary components. The
Company introduced the Comfortemp to the market in 1997. There can be no
assurance that the Company will continue to obtain such proprietary components
from Exergen or that the ComforTemp thermometer, as a new product, will result
in substantial sales. The Company believes it has alternative manufacturing
sources available for all of its other products. Because it owns its tools, it
could shift its sources of manufacturing for such other products to an
alternative supplier.
In 1997, the Company's largest supplier, which is based in the United
States, accounted for products that represented approximately 15% of its net
sales in 1997. The Company has not entered into long-term contractual
arrangements with any of its suppliers.
The principal raw materials used in the production and sale of the
Company's products are plastic, paperboard and cloth. Raw materials are
purchased by the manufacturers who deliver completed products to the Company.
Because the primary source used in manufactured plastic is petroleum, the cost
and availability of plastic for use in the Company's products varies to a great
extent with the price of petroleum. The inability of the Company's suppliers to
acquire sufficient plastic and paperboard at a reasonable price could have a
material adverse effect on the Company's profitability. The Company did not
experience any difficulties in obtaining materials in 1997.
The Company purchases its products from its suppliers primarily in the U.S.
dollar and the Hong Kong dollar which is currently pegged to the U.S. dollar.
Generally, the Company's suppliers ship the products on the basis of open credit
terms or upon the acceptance of products by the Company.
Foreign manufacturing is subject to a number of risks including
transportation delays and interruptions, the imposition of tariffs, quotas, and
other import or export controls, currency fluctuations, misappropriation of
intellectual property, political and economic disruptions, and changes in
governmental policies. From time to time, the United States Congress has
attempted to impose additional restrictions on trade with China. Enactment of
legislation or the imposition of restrictive regulations conditioning or
revoking China's "most favored nation" ("MFN") trading status could have a
material adverse effect upon the Company's business because products originating
from China could be subjected to substantially higher rates of duty. China's MFN
trading status has been extended through July 2, 1998. Unless Congress takes
action to override this decision, China will continue to enjoy MFN treatment
during this period. The European Community (the "EC") has enacted a quota and
tariff system with respect to the importation into the EC of certain toy
products originating in China. The Company, therefore, continues to evaluate
alternative sources of supply outside of China.
The Company, because of its substantial reliance on suppliers in foreign
countries, is required to order products further in advance of customer orders
than would generally be the case if such products were produced in the United
States. As a result, the Company is required to carry significant amounts of
inventory
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to meet rapid delivery requirements of customers and to assure itself of
continuous allotment of goods from suppliers.
WORKING CAPITAL ITEMS
See Item 7, "Management Discussion and Analysis of Financial Condition and
Results of Operation."
COMPETITION
The juvenile products industry is highly competitive and includes numerous
domestic and foreign competitors, some of which are substantially larger and
have greater financial and other resources than the Company. The Company
competes with a number of different competitors, depending on the product
category, and it competes against no single company across all product
categories. Its competition includes large, diversified health care product
companies, specialty infant products makers, toy makers and specialty health
care products companies. The Company competes principally on the basis of brand
name recognition and price/value relationship. In addition, the Company believes
that it competes favorably with respect to product quality, customer service and
breadth of product line.
DISTRIBUTION
The Company distributes its products in the United States from its 103,500
square foot warehouse facility in Avon, Massachusetts and from a public
warehouse in Fontana, California. The Company distributes its products in Canada
from a public warehouse in Toronto, Ontario. In Europe, the Company distributes
its products from a public warehouse in Ghent, Belgium. Warehouse services at
the various public warehouses are performed by warehouse operators unaffiliated
with the Company.
TRADEMARKS, PATENTS AND COPYRIGHTS
The Company's principal trademark THE FIRST YEARS and design, is registered
in the United States and in a number of foreign countries. The Company also uses
other trademarks for certain of its products and product categories, some of
which are registered in the United States and in various foreign countries.
The Company, also owns patents, design patents and design registrations, as
well as pending applications in the United States and certain foreign countries.
Although the Company believes such are important to its business, it does not
believe that any single patent, design patent, or design registration, including
any which may be issued on a pending application, is material to its business.
There can be no assurance that such patents, design patents, or design
registrations, including those that may be issued on pending applications, will
offer any significant competitive advantage for the Company's products.
The Company, also owns copyrights, some of which are registered in the
United States. The Company does not believe that any single copyright is
material to its business. There can be no assurance that such copyrights will
offer any significant competitive advantage for the Company's products.
EMPLOYEES
As of December 31, 1997, the Company employed 128 full-time and 2 part-time
employees, of whom 4 are senior executive officers and all of the other
employees of the Company are in sales, marketing and product development, in
materials, purchasing, quality control, data processing, finance, administration
and clerical, and warehousing positions. None of the Company's employees is
represented by a union, and the Company has not experienced any work stoppages.
The Company believes that relations with employees are good.
GOVERNMENT REGULATIONS
The Company's products are subject to the provisions of the Federal
Consumer Product Safety Act, the Federal Hazardous Substances Act, as amended,
the Federal Flammable Fabrics Act, and the Child Safety Protection Act, and the
regulations promulgated thereunder (the "Acts"). The Company's nursery monitors
are subject to regulations of the Federal Communications Commission. The
Company's medical devices and drug products are subject to the regulations of
the Food and Drug Administration. The Acts enable the
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Consumer Product Safety Commission (the "CPSC") to protect children from
hazardous toys and other articles. The CPSC has the authority to exclude from
the market certain consumer products which are found to be hazardous. The CPSC's
determination is subject to court review. The CPSC can require the repurchase by
the manufacturer of articles which are banned. The Federal Flammable Fabrics Act
enables the CPSC to regulate and enforce flammability standards for fabrics used
in consumer products. Similar laws exist in some states and cities and in
various international markets. The Company designs and tests its products to
ensure compliance with the various federal, state and international
requirements. Any recall of a product could have a material adverse effect on
the Company, depending on the particular product.
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The names of the Company's Executive Officers and Directors and certain
information about them are set forth below. Officers have served in the capacity
indicated in the table below for at least five years, unless otherwise indicated
in the notes.
OFFICER OR
DIRECTOR
NAME AGE POSITION SINCE
---- --- -------- ----------
Ronald J. Sidman.......................... 51 President, Chairman of the Board of
Directors, and Chief Executive Officer 1975
Jerome M. Karp............................ 70 Vice Chairman of the Board of Directors 1969
Benjamin Peltz............................ 58 Director 1975
Evelyn Sidman............................. 84 Clerk and Director 1979
Fred T. Page.............................. 51 Director 1988
Merton N. Alperin......................... 75 Director 1988
John R. Beals............................. 43 Treasurer, Senior Vice President -- Finance
and Chief Financial Officer 1990
Wayne Shea................................ 43 Senior Vice President -- Worldwide Sales
and Merchandising 1991
Bruce Baron............................... 37 Senior Vice President -- Operations 1997
John N. Colantuone*....................... 60 Vice President -- Engineering and Product
Development 1982
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Mr. Sidman has been the President of the Company since January 1989 and
Chairman of the Board of Directors and Chief Executive Officer since March 1995.
Mr. Peltz was the Treasurer of the Company from May, 1970 to January, 1998.
He was also the Senior Vice President -- Finance of the Company from January,
1980 until June 30, 1997 when he retired from the Company.
Mr. Page has been the President -- Network Services of Southern New England
Telecommunications Corporation ("SNET") since January, 1994 and has been with
SNET for over 5 years.
Mr. Alperin, a Certified Public Accountant, has been a financial consultant
for over five years. He was the Chairman of the Board of Public Accountancy of
Massachusetts for several years.
Mr. Beals was elected Senior Vice President -- Finance on March 19, 1998
and was elected the Treasurer of the Company on January 15, 1998. He has been
Chief Financial Officer of the Company since July, 1997. From July, 1997 to
March, 1998 he was Vice President -- Finance of the Company and from January,
1990 to June, 1997, he was the Assistant Treasurer and Controller of the
Company.
Mr. Shea has been Senior Vice President of Worldwide Sales & Merchandising
since July, 1997. From January, 1995 to June, 1997, Mr. Shea was Vice President
Worldwide Sales & Merchandising and from July, 1991 to December, 1994, Mr. Shea
was Vice President of Service and Merchandising of the Company.
Mr. Baron has been Senior Vice President since August, 1997. Prior to that
time, Mr. Baron was Vice President of Operations at Crabtree & Evelyn from 1988
to July, 1997.
*Mr. Colantuone will be retiring from the Company on April 3, 1998.
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ITEM 2. PROPERTIES
The Company owns its executive and administrative offices and principal
warehouse which are located in a building at One Kiddie Drive, Avon,
Massachusetts. The building contains approximately 124,000 square feet of space,
of which approximately 20,500 square feet are used for executive and
administrative offices and the balance, approximately 103,500 square feet is
utilized for warehousing. The Company also has sales offices in leased premises
in Cirencester, England. The Company's subsidiary, TFY-Delaware has sales
offices in leased premises in Missouri and Mission Viejo, California.
The Company also uses public warehouses located in Toronto, Canada;
Fontana, California; and in Ghent, Belgium.
The Company believes that its properties (owned and leased) are in good
condition and adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings which have arisen in the
ordinary course of business. The Company believes that there are no claims or
litigation pending, the outcome of which could have a material adverse effect on
the Company's financial condition or operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Company.
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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 1997 and 1996 as reported by Nasdaq.
1997
QUARTER LOW HIGH
------- --- ----
First....................................................... $15 1/2 $ 17 7/8
Second...................................................... 15 21 3/4
Third....................................................... 19 1/2 29
Fourth...................................................... 20 1/2 28 3/4
1996
QUARTER LOW HIGH
------- --- ----
First....................................................... $ 9 3/4 $ 12 1/2
Second...................................................... 11 3/4 18 1/2
Third....................................................... 12 3/4 15
Fourth...................................................... 14 17
(b) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
APPROXIMATE NUMBER
OF RECORD HOLDERS
TITLE OF CLASS (AS OF DECEMBER 31, 1997)
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Common Stock, $.10 Par Value 142
(c) DIVIDEND POLICY
In 1996 and 1997, the Company paid a cash dividend on its Common Stock of
$0.10 per share which were paid on June 1, 1996 and June 2, 1997, respectively.
The Company currently expects that comparable cash dividends will continue to be
paid in the future. However, the declaration and payment of any such cash
dividends in the future will depend upon the Company's earnings, financial
condition, capital needs, and other factors deemed relevant by the Board of
Directors. There can be no assurance that the Company will continue to pay
dividends in the future.
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ITEM 6. SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
SELECTED INCOME STATEMENT DATA:
Net sales.................. $120,695,988 $93,110,361 $75,757,322 $53,233,109 $46,124,088
Cost of products sold...... 71,185,634 55,463,255 45,108,546 29,498,457 26,653,704
Selling, general and
administrative
expenses................. 37,165,878 28,580,039 23,961,206 18,915,908 17,857,049
Severance-related
expenses................. -- -- -- -- 373,000
Interest expense........... 27,709 358,637 186,338 24,575 28,912
Interest income............ 168,922 27,349 16,718 66,605 66,204
Offering expenses.......... -- -- 310,457 -- --
Income before income
taxes.................... 12,485,689 8,735,779 6,207,493 4,860,774 1,277,627
Provision for income
taxes.................... 5,040,900 3,494,300 2,483,000 1,871,400 481,500
Net income................. 7,444,789 5,241,479 3,724,493 2,989,374 796,127
Basic earnings per
share**.................. $1.49 $1.11 $0.83 $0.66 $0.18
Diluted earnings per
share**.................. $1.42 $1.06 $0.80 $0.66 $0.18
Dividends paid per
share*................... $0.10 $0.10 $0.09 $0.09 $0.09
Basic weighted average
number of shares
outstanding**............ 5,001,887 4,733,178 4,507,058 4,497,244 4,496,520
Diluted weighted average
number of shares
outstanding**............ 5,226,531 4,945,991 4,663,491 4,497,244 4,496,520
SELECTED BALANCE SHEET
DATA:
Total assets............... $60,571,561 $47,049,537 $41,712,080 $28,852,785 $24,532,714
Long-term debt............. -- -- 100,001 233,334 366,667
Stockholders' equity....... 44,009,004 35,866,440 25,763,259 22,349,947 19,719,720
Stockholders' equity per
share**.................. $8.42 $7.25 $5.52 $4.97 $4.39
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* Adjusted to reflect the two-for-one stock split effected on December 29,
1995.
** Adjusted to reflect the two-for-one stock split effected on December 31, 1995
and restated to reflect adoption of Statement of Financial Accounting
Standard No. 128 in the fourth quarter of 1997.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENT OF FORWARD LOOKING INFORMATION:
Statements in this Report on Form 10-K that are not strictly historical are
"forward-looking" statements, as defined in the Private Securities Litigation
Reform Act of 1995. The actual results may differ from those projected in the
forward-looking statements due to risks and uncertainties that exist in the
Company's operations and business environment and in the development and
introduction of new products, described more fully in this Annual Report on Form
10-K for the year ended December 31, 1997, and Exhibit 99 of this Annual Report
for the year ended December 31, 1997, filed with the Securities and Exchange
Commission.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales in 1997 were $120.7 million, an increase of $27.6 million, or
29.6%, as compared to $93.1 million in 1996. The increase was due to new product
introductions, including the Sesame Street brand licensed from the Children's
Television Workshop, and expanded retail distribution in domestic and foreign
markets. As a percentage of net sales, net sales to foreign markets increased to
13.5% in 1997 from 12.5% in 1996 resulting primarily from increases in Europe,
the Pacific Rim and Canada. As a percentage of net sales, licensed products
increased to 43.1% in 1997 from 31.8% in 1996.
Cost of products sold in 1997 was $71.2 million, an increase of $15.7
million or 28.3%, as compared to $55.5 million in 1996. As a percentage of net
sales, cost of products sold in 1997 decreased to 59.0% from 59.6% in the
comparable period of 1996. The decrease was primarily due to reduced cost of
products resulting from manufacturing efficiencies and increased sales of higher
margin products.
Selling, general, and administrative expenses in 1997 were $37.2 million,
an increase of $8.6 million, or 30.0%, as compared to $28.6 million over such
expenses in 1996. The increase resulted primarily from costs related to
increased sales volume; payroll and payroll related costs, and integrated
marketing communication program expenses. As a percentage of net sales, selling,
general, and administrative expenses in 1997 and 1996 remained consistent at
30.8% and 30.7%, respectively.
Income tax expense as a percentage of pretax income increased to 40.4% in
1997 from 40.0% in 1996.
YEAR 2000 ISSUE
The inability of computers, software and other equipment to recognize and
properly process data containing a two digit year (i.e. 97) as opposed to a four
digit year (i.e. 1997) is commonly referred to as the Year 2000 Issue.
The Company is in the process of reviewing its computer systems to identify
those areas that could be affected by the "Year 2000" issue and is developing an
implementation plan to address the issue. The Company presently believes, with
modifications to existing software and converting to new software, the Year 2000
problem will not pose significant operational problems and is not anticipated to
be material to its financial position or results of operations in any given
year.
Additionally, the Company is in the process of initiating communications
with significant suppliers, customers and service vendors to determine the
extent of the Company's exposure if others fail to remedy their own Year 2000
issues. No guarantee can be made that systems of other companies on which the
Company relies upon will be converted on time or that a failure to convert would
not have a material effect on the Company.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales in 1996 were $93.1 million, an increase of $17.3 million or
22.9%, as compared to $75.8 million for the comparable period last year. The
increase was due to new product introductions and expanded retail distribution
in domestic and foreign markets. As a percentage of net sales, net sales to
foreign markets increased to 12.5% in 1996 from 10.3% in 1995 resulting
primarily from increases in Europe and Canada. As a percentage of net sales,
licensed products increased to 31.8% in 1996 from 19.5% in 1995.
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Cost of products sold in 1996 was $55.5 million, an increase of $10.4
million or 23.0%, as compared to $45.1 million for the comparable period last
year. As a percentage of sales, cost of products sold in 1996 and 1995 remained
constant at approximately 59.5%.
Selling, general, and administrative expenses in 1996 were $28.6 million,
an increase of $4.6 million or 19.3% as compared to $24.0 million over such
expenses in 1995. The increase resulted primarily from costs related to
increased sales volume, payroll and payroll related costs. As a percentage of
net sales, selling, general, and administrative expenses for the year of 1996
decreased to 30.7% from 31.6% in 1997. The decrease reflects the economies of
scale provided by higher volume of business.
Income tax expense as a percentage of pretax income was 40% in 1996 and
1995.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital increased by $8.4 million to $38.0 million at December
31, 1997 from $29.6 million at December 31, 1996 primarily due to funds
generated from profitable operations. Accounts receivable increased by $4.0
million primarily as a result of increased sales. Inventory increased by $5.8
million to meet continued demand from the Company's products. Cash increased by
$3.5 million primarily as a result of profitable operations.
In 1996, the Company consummated a public offering of common stock. The
closing of the sale, consisting of 400,000 newly issued shares and 1,200,000
shares of certain selling stockholders was held on July 1, 1996 at which time
the Company issued the new shares and received the net proceeds of $5,121,750.
The proceeds of the newly issued shares were used to pay certain indebtedness of
the Company.
An unsecured line of credit of $10 million which is subject to annual
renewal, is available from a bank. Amounts outstanding under the line are
payable upon demand by the bank. During 1997, the Company has borrowed various
amounts from time to time up to $2.5 million. As of December 31, 1997 no balance
was outstanding.
During 1996, the Company had available an unsecured line of credit from a
second bank totaling $10,000,000. The line was subject to annual renewal and was
not renewed at the option of the Company.
The Company paid a cash dividend of $0.10 per share of Common Stock in June
of 1997 and 1996.
The Company expects cash flow from operations and availability under the
Company's lines of credit to be sufficient to meet cash needs for working
capital expenditures for the next two years.
INFLATION AND FOREIGN CURRENCY FLUCTUATIONS
Inflation has not had a material effect on the Company's operating results
over the past three years.
The Company enters into forward exchange contracts to minimize the impact
of fluctuations in currency exchange rates on future cash flows emanating from
sales denominated in foreign currencies. The Company does not purchase such
contracts for trading purposes. During 1997, the Company entered into forward
exchange contracts with a bank whereby the Company is committed to deliver
foreign currency at predetermined rates. The contracts expire within one year.
The Company's commitment under these contracts approximated $2.5 million as of
December 31, 1997. At December 31, 1997, the exchange rates for such currencies
covered by the contracts approximated the predetermined rates included therein.
The Company routinely assesses the financial strength of the bank which is
counterparty to the forward exchange contracts. As of December 31, 1997,
management believes it had no significant exposure to credit risk relative to
such contracts.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information". In February 1998, the FASB
issued SFAS No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits". These new standards will be effective in the Company's
fiscal year ending December 31, 1998. The Company has not determined the
effects, if any, that these standards will have on its consolidated financial
statements.
II-4
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements listed under Item 14.(a) 1. are included in Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There is nothing to report relating to this Item.
II-5
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included in the Registrant's
definitive proxy statement for the 1998 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included in the Registrant's
definitive proxy statement for the 1998 Annual Meeting of Stockholders, except
that the sections in said definitive proxy statement entitled "Board
Compensation Committee Report on Executive Compensation" and the "Stock
Performance Chart" shall not be deemed incorporated herein by reference to this
10-K Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Registrant's
definitive proxy statement for the 1998 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1997, the Company repurchased 3,409 shares of the Company's Common
Stock, $.10 per value, from Ronald J. Sidman, the President of the Company, for
$81,813 in connection with Mr. Sidman's delivery of such 3,409 shares as payment
for the exercise of stock options in 1997, in accordance with the provisions of
the Company's 1993 Equity Incentive Plan which has been approved by the
Company's stockholders.
III-1
15
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14.(a) 1. FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
(a) 2. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
Other schedules are omitted because of the absence of conditions
under which they are required or because the required information is
given in the financial statements or notes thereto.
14.(a) 3. EXHIBITS
The following are either (i) filed herewith as exhibits to this 10-K Report
or (ii) have been filed as exhibits to filings under the Securities Act of 1933
or the Securities Exchange Act of 1934 and are incorporated herein by reference
as exhibits to this 10-K Report.
PAGE
----
(3)(i) Restated Articles of Organization as currently in effect
(filed as Exhibit (3.1) to Amendment No. 1 to Form S-1
Registration Statement filed with the Commission on October
5, 1995 and incorporated herein by reference).
(3)(ii) By-laws of the Company and any amendments thereto, as
currently in effect (filed as Exhibit 3(ii) on Form 10-K for
the year ended December 31, 1994 and incorporated herein by
reference.)
(10)(a) Security and Trust Agreement among Town of Avon, acting by
and through its Industrial Development Financing Authority,
Kiddie Products, Inc., and State Street Bank and Trust
Company relating to issuance of industrial revenue bonds,
dated as of October 1, 1982 (filed as Exhibit 10 (c) on Form
10-K for the year ended December 31, 1994 and incorporated
herein by reference).
(10)(b) Bond Purchase Agreement among Town of Avon, acting by and
through its Industrial Development Financing Authority,
Kiddie Products, Inc., and State Street Bank and Trust
Company, dated as of October 1, 1982 (filed as Exhibit 10
(d) on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
(10)(c) Loan Agreement between Town of Avon, acting by and through
its Industrial Development Financing Authority, and Kiddie
Products, Inc., dated as of October 1, 1982 (filed as
Exhibit 10 (e) on Form 10-K for the year ended December 31,
1994 and incorporated herein by reference).
(10)(d) Put Agreement between State Street Bank and Trust Company
and Kiddie Products, Inc., dated as of October 1, 1982
(filed as Exhibit 10 (f) on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).
(10)(e) Agreement with Disney Enterprises, Inc. dated December 3,
1996 (filed as Exhibit (10)(f) on Form 10-K for the year
ended December 31, 1996 and incorporated herein by
reference; certain portions of such Agreement are subject to
confidential treatment).
(10)(f) Agreement with the Children's Television Workshop dated July
1, 1996 (filed as Exhibit (10)(g) on Form 10-K for the year
ended December 31, 1996 and incorporated herein by
reference; certain portions of such Agreement are subject to
confidential treatment).
Management Contracts and Compensatory Plans
(10)(g) The First Years Inc. 1993 Equity Incentive Plan, as amended
through March 19, 1998. IV-18
(10)(h) The First Years Inc. 1993 Stock Option Plan for Directors,
as amended through March 19, 1998. IV-18
IV-1
16
PAGE
----
(10)(i) Agreement between The First Years Inc. and Jerome M. Karp
dated August 8, 1994 (filed as Exhibit 10(c) to the Form
10-Q Report for the quarter ended June 30, 1994, and
incorporated herein by reference).
(10)(j) Employment Agreement between The First Years Inc. and
Benjamin Peltz, dated March 23, 1995 (filed as Exhibit 10(j)
on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
(10)(k) Employment Agreement between The First Years Inc. and Ronald
J. Sidman, dated March 23, 1995 (filed as Exhibit 10(k) on
Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
(10)(l) First Amendment to Employment Agreement between The First
Years Inc. and Ronald J. Sidman dated January 16, 1997. IV-18
(10)(m) First Amendment to Employment Agreement between The First
Years Inc. and Benjamin Peltz dated January 16, 1997. IV-18
(10)(n) The First Years Inc., a Massachusetts Corporation, and
Affiliates -- 1997 Annual Incentive Plan, effective as of
January 1, 1997. IV-18
(10)(o) Agreement between The First Years Inc. and Wayne Shea dated
August 12, 1997. IV-18
- -------------------------------------------------------------------------------
(21) List of Subsidiaries of the Registrant. IV-18
(23) Consent of Deloitte & Touche LLP dated March 27, 1998. IV-18
(27.1) Financial Data Schedule -- 12/31/97 IV-18
(27.2) Financial Data Schedule -- 12/31/96 -- Restated IV-18
(27.3) Financial Data Schedule -- 12/31/95 -- Restated IV-18
(99) Important Factors Regarding Forward-Looking Statements. IV-18
14.(b) REPORT ON FORM 8-K
The Company did not file any reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended December 31, 1997.
IV-2
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE FIRST YEARS INC.
....................................
(Registrant)
By: /s/ RONALD J. SIDMAN
...
RONALD J. SIDMAN, CHIEF EXECUTIVE
OFFICER,
CHAIRMAN OF THE BOARD OF
DIRECTORS, AND PRESIDENT
Date: March 19, 1998
By: /s/ JOHN R. BEALS
...
JOHN R. BEALS, TREASURER AND
SENIOR VICE PRESIDENT --
FINANCE(CHIEF FINANCIAL OFFICER
AND CHIEF
ACCOUNTING OFFICER)
Date: March 19, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 19, 1998.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RONALD J. SIDMAN Chief Executive Officer Chairman of March 19, 1998
........................................ the Board of Directors and President
RONALD J. SIDMAN
/s/ JEROME M. KARP Vice Chairman of the Board of March 19, 1998
........................................ Directors
JEROME M. KARP
/s/ EVELYN SIDMAN Director March 19, 1998
........................................
EVELYN SIDMAN
/s/ BENJAMIN PELTZ Director March 19, 1998
........................................
BENJAMIN PELTZ
/s/ MERTON N. ALPERIN Director March 19, 1998
........................................
MERTON N. ALPERIN
/s/ FRED T. PAGE Director March 19, 1998
........................................
FRED T. PAGE
IV-3
18
THE FIRST YEARS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
PAGE
----
Independent Auditors' Report................................ IV-5
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and
1996.................................................. IV-6
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996, and 1995..................... IV-7
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996, and 1995......... IV-8
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996, and 1995............... IV-9
Notes to Consolidated Financial Statements............. IV-10-16
Financial Statement Schedule II -- Valuation and Qualifying
Accounts for the Years Ended December 31, 1997, 1996, and
1995...................................................... IV-17
IV-4
19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The First Years Inc.
Avon, Massachusetts
We have audited the accompanying consolidated balance sheets of The First
Years Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the accompanying index. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of The First Years Inc. as of December 31, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 5, 1998
IV-5
20
THE FIRST YEARS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
---- ----
ASSETS
Current Assets:
Cash and cash equivalents (Notes 1 and 8).............. $ 7,697,040 $ 4,164,587
Accounts receivable (less allowance for doubtful
accounts of $185,000 in 1997 and 1996) (Note 8)....... 19,962,226 15,929,465
Inventories (Note 1)................................... 24,372,881 18,588,044
Prepaid expenses and other assets...................... 414,764 375,317
Deferred tax asset (Notes 1 and 3)..................... 1,279,000 946,400
----------- -----------
Total current assets.............................. 53,725,911 40,003,813
----------- -----------
Property, Plant, and Equipment (Note 1):
Land................................................... 167,266 167,266
Building............................................... 4,022,095 4,016,405
Machinery and molds.................................... 7,151,019 7,329,240
Furniture and equipment................................ 3,947,144 3,092,356
----------- -----------
Total............................................. 15,287,524 14,605,267
Less accumulated depreciation.......................... 8,441,874 7,559,543
----------- -----------
Property, plant, and equipment -- net............. 6,845,650 7,045,724
----------- -----------
Total Assets...................................... $60,571,561 $47,049,537
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt (Note 2)............. $ -- $ 100,000
Accounts payable....................................... 10,163,844 6,969,115
Accrued royalty expense (Note 6)....................... 2,051,721 848,671
Accrued payroll expenses............................... 1,143,063 1,087,302
Accrued selling expenses............................... 2,387,029 1,406,009
----------- -----------
Total current liabilities......................... 15,745,657 10,411,097
----------- -----------
Deferred Tax Liability (Notes 1 and 3)...................... 816,900 772,000
Commitments and Contingencies (Notes 5, 6 and 8)
Stockholders' Equity (Notes 4, 7, 9 and 10):
Common stock -- authorized, 15,000,000 shares; issued
5,088,000 and 4,948,980; outstanding, 5,084,591 and
4,948,980 as of December 31, 1997 and 1996,
respectively.......................................... 508,800 494,898
Paid-in-capital........................................ 6,534,308 5,271,875
Retained earnings...................................... 37,047,709 30,099,667
Less: 3,409 shares of treasury stock (at cost)......... (81,813) --
----------- -----------
Total stockholders' equity........................ 44,009,004 35,866,440
----------- -----------
Total Liabilities and Stockholders' Equity........ $60,571,561 $47,049,537
=========== ===========
See notes to consolidated financial statements.
IV-6
21
THE FIRST YEARS INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
Net Sales (Notes 1, 6 and 8)........................ $120,695,988 $93,110,361 $75,757,322
Cost of Products Sold (Note 1)...................... 71,185,634 55,463,255 45,108,546
------------ ----------- -----------
Gross Profit........................................ 49,510,354 37,647,106 30,648,776
Selling, General, and Administrative Expenses (Notes
1 and 7).......................................... 37,165,878 28,580,039 23,961,206
------------ ----------- -----------
Operating Income.................................... 12,344,476 9,067,067 6,687,570
Other Income (Expense):
Interest expense............................... (27,709) (358,637) (186,338)
Interest income................................ 168,922 27,349 16,718
Offering expenses (Note 10).................... -- -- (310,457)
------------ ----------- -----------
Income Before Income Taxes.......................... 12,485,689 8,735,779 6,207,493
Provision for Income Taxes (Notes 1 and 3).......... 5,040,900 3,494,300 2,483,000
------------ ----------- -----------
Net Income.......................................... $ 7,444,789 $ 5,241,479 $ 3,724,493
============ =========== ===========
Basic Earnings Per Share (Notes 1 and 9)............ $1.49 $1.11 $0.83
===== ===== =====
Diluted Earnings Per Share (Notes 1 and 9).......... $1.42 $1.06 $0.80
===== ===== =====
See notes to consolidated financial statements.
IV-7
22
THE FIRST YEARS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
COMMON STOCK
--------------------- PAID-IN RETAINED TREASURY
SHARES PAR VALUE CAPITAL EARNINGS STOCK
------ --------- ------- -------- --------
Balance, January 1, 1995............. 2,250,430 $225,043 $ 98,194 $22,026,710 $ --
Stock issued under stock option
plans (Note 7)................ 7,141 714 70,957 -- --
Dividends paid.................. -- -- -- (382,852) --
Stock split, two-for-one (Note
4)............................ 2,257,571 225,757 (169,151) (56,606) --
Net income...................... -- -- -- 3,724,493 --
--------- -------- ---------- ----------- --------
Balance, December 31, 1995........... 4,515,142 451,514 -- 25,311,745 --
Stock issued under stock option
plans (Note 7)................ 33,838 3,384 190,125 -- --
Dividends paid.................. -- -- -- (453,557) --
Stock issued through public
offering (Note 10)............ 400,000 40,000 5,081,750 -- --
Net income...................... -- -- -- 5,241,479 --
--------- -------- ---------- ----------- --------
Balance, December 31, 1996........... 4,948,980 494,898 5,271,875 30,099,667 --
Stock issued under stock option
plans (Note 7)................ 139,020 13,902 804,433 -- --
Tax benefit derived from option
compensation deduction........ -- -- 458,000 -- --
Dividends paid.................. -- -- -- (496,747) --
Repurchase of 3,409 shares for
treasury...................... (3,409) -- -- -- (81,813)
Net income...................... -- -- -- 7,444,789 --
--------- -------- ---------- ----------- --------
Balance, December 31, 1997........... 5,084,591 $508,800 $6,534,308 $37,047,709 $(81,813)
========= ======== ========== =========== ========
See notes to consolidated financial statements.
IV-8
23
THE FIRST YEARS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
---- ---- ----
Cash Flows from Operating Activities:
Net income..................................... $ 7,444,789 $ 5,241,479 $ 3,724,493
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation.............................. 1,397,078 1,228,790 992,291
Provision for doubtful accounts........... 147,541 152,582 86,227
Loss on disposal of equipment............. 617,693 37,699 70,258
Increase (decrease) arising from working
capital items:
Accounts receivable.................. (4,180,302) (1,890,417) (5,011,624)
Inventories.......................... (5,784,837) 421,740 (8,595,949)
Prepaid expenses and other assets.... (39,447) 402,757 (482,153)
Accounts payable..................... 3,035,130 344,167 2,331,128
Accrued royalty expense.............. 1,203,050 314,870 533,801
Accrued payroll expenses............. 55,761 (17,702) 322,114
Accrued selling expenses............. 981,020 801,575 348,273
Federal and state income taxes
Payable............................ 159,600 -- (218,500)
Change in deferred income taxes........... (287,700) 50,600 (185,300)
----------- ----------- -----------
Net cash provided by (used for)
operating activities.......... 4,749,376 7,088,140 (6,084,941)
----------- ----------- -----------
Cash Flows from Investing Activities --
Purchase of property, plant, and equipment..... (1,814,698) (2,004,489) (1,447,018)
----------- ----------- -----------
Cash Flows from Financing Activities:
Repayment of industrial revenue bonds.......... (100,000) (133,334) (133,333)
Net proceeds (repayment) from short-term
borrowings................................... -- (6,200,000) 6,200,000
Dividends paid................................. (496,747) (453,557) (382,852)
Net proceeds from public offering.............. -- 5,121,750 --
Purchase of treasury stock..................... (81,813) -- --
Common stock issued under stock option plans... 818,335 193,509 71,671
Tax benefit of stock option plans.............. 458,000 -- --
----------- ----------- -----------
Net cash provided by (used for)
financing activities.......... 597,775 (1,471,632) 5,755,486
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents.... 3,532,453 3,612,019 (1,776,473)
Cash and Cash Equivalents, Beginning of Year........ 4,164,587 552,568 2,329,041
----------- ----------- -----------
Cash and Cash Equivalents, End of Year.............. $ 7,697,040 $ 4,164,587 $ 552,568
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest.................................. $ 27,709 $ 358,637 $ 186,338
=========== =========== ===========
Income taxes.............................. $ 4,684,690 $ 3,087,700 $ 3,269,100
=========== =========== ===========
See notes to consolidated financial statements.
IV-9
24
THE FIRST YEARS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business -- The First Years Inc. (the "Company") is a developer, marketer,
and distributor of certain basic accessory and related products for infants and
toddlers. The Company was founded and incorporated in 1952. Since its inception,
the Company has engaged in this single line of business, with one class of
similar products. The following is a summary of the Company's significant
accounting policies.
Basis of Reporting -- The consolidated financial statements include the
accounts of all the Company's wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Revenue Recognition -- Revenue is recognized when products are shipped.
Cash Equivalents -- Highly liquid investments with a maturity of three
months or less when purchased have been classified as cash equivalents in the
accompanying financial statements. Such investments are carried at cost, which
approximates market value.
Inventories -- Inventories are stated at the lower of cost (first-in,
first-out) or market. Inventories consist principally of finished goods,
unpackaged components, and supplies.
Property, Plant, and Equipment -- Property, plant, and equipment is stated
at cost. Depreciation is provided based on the estimated useful lives of the
various classes of assets (building, 15 to 40 years; machinery and molds, 5 to
10 years; furniture and equipment, 5 to 10 years) using the straight-line
method.
Income Taxes -- Deferred tax assets and liabilities are determined based on
the differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates.
Employee Stock-Based Compensation -- The Company uses the intrinsic
value-based method of Accounting Principles Board Opinion ("APB") No. 25 to
account for employee stock-based compensation plans.
Earnings Per Share -- During the fourth quarter of fiscal 1997, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No.128 "Earnings
Per Share." SFAS No.128 replaced the presentation of primary earnings per share
with a basic earnings per share (which excludes dilution) and a diluted earnings
per share. Prior periods earnings per share have been restated to conform to the
new presentation. Basic earnings per share is calculated based on the weighted
average number of shares outstanding during each year. Diluted earnings per
share also includes potential shares, consisting of stock options outstanding,
if dilutive (Note 9).
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Research and Development Costs -- Research and development costs are
expensed as incurred. During 1997, 1996, and 1995, research and development
costs approximated $2,584,000, $2,209,000, and $1,834,000, respectively.
Foreign Currency Translation -- The Company's functional currency is the
U.S. dollar. Accordingly, monetary assets and liabilities of the Company's
foreign operations are translated from the respective local currency to the U.S.
dollar using year-end exchange rates while nonmonetary items are translated at
historical rates. Income and expense accounts are translated at the average
rates in effect during the year. Accordingly, translation adjustments and
transaction gains and losses are recognized as income in the year of occurrence
and are recorded as a component of cost of sales.
IV-10
25
Foreign Exchange Contracts -- The Company enters into forward exchange
contracts to minimize the impact of fluctuations in currency exchange rates on
future cash flows emanating from sales denominated in foreign currencies. The
Company does not purchase such contracts for trading purposes. Gains and losses
related to foreign exchange contracts which qualify as accounting hedges of firm
commitments are deferred and recognized in income when the hedged transaction
occurs. Gains and losses related to foreign exchange contracts which do not
qualify for hedge accounting are marked to market currently and recognized as a
foreign currency transaction gain or loss.
Fair Value of Financial Instruments -- The fair value of the Company's
assets and liabilities which constitute financial instruments as defined in SFAS
No. 107 approximate their recorded value.
Reclassifications -- Certain reclassifications were made to prior year
amounts in order to conform with the current year presentation.
New Accounting Pronouncements: -- In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information". In February 1998, the FASB issued SFAS No. 132 "Employers'
Disclosures about Pensions and Other Postretirement Benefits". These new
standards will be effective in the Company's fiscal year ending December 31,
1998. The Company has not determined the effects, if any, that these standards
will have on its consolidated financial statements.
2. DEBT
Long-term debt consisted of unsecured industrial revenue bonds ("IRB"),
with interest payable quarterly at 65% of the prime rate (5.4% at December 31,
1996) and principal payable in equal quarterly installments of $33,333 through
September 30, 1997. As of December 31, 1997 there was no debt outstanding.
During 1997 and 1996, the Company had available an unsecured line of credit
totaling $10,000,000 with one bank. The line is subject to annual renewal and
requires no compensating balances. The line bears interest at the prime rate or
the LIBOR rate plus 1.75%. During 1997 and 1996, the Company borrowed various
amounts up to $2,500,000 and $7,900,000, respectively, under the line. As of
December 31, 1997 and 1996 no balance was outstanding.
During 1996, the Company had available an unsecured line of credit from a
second bank totaling $10,000,000. The line was subject to annual renewal and was
not renewed at the option of the Company.
No other short-term borrowings were incurred by the Company during 1997.
3. INCOME TAXES
Components of the Company's net deferred tax asset at December 31 are as
follows:
1997 1996
---- ----
Deferred tax assets:
Reserves not currently deductible................. $ 266,900 $119,000
Capitalized packaging costs not currently
deductible...................................... 528,900 486,600
Capitalized inventory costs not currently
deductible...................................... 432,800 301,000
Other............................................. 50,400 39,800
---------- --------
1,279,000 946,400
---------- --------
Deferred tax liabilities:
Excess tax depreciation over financial reporting
depreciation.................................... 812,400 767,500
Other............................................. 4,500 4,500
---------- --------
816,900 772,000
---------- --------
Net deferred tax asset................................. $ 462,100 $174,400
========== ========
There was no valuation allowance for the years ended December 31, 1997 and
1996.
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26
The provision for income taxes consists of the following:
1997 1996 1995
---- ---- ----
Federal:
Current............................ $4,157,200 $2,649,600 $2,104,000
Deferred........................... (287,700) 50,600 (185,300)
---------- ---------- ----------
Total federal................. 3,869,500 2,700,200 1,918,700
State................................... 1,171,400 794,100 564,300
---------- ---------- ----------
Provision for income taxes.............. $5,040,900 $3,494,300 $2,483,000
========== ========== ==========
A reconciliation of the statutory federal income tax rate and the effective
tax rate as a percentage of pretax income is as follows:
1997 1996 1995
---- ---- ----
Statutory rate........................................... 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit.... 6.4 6.0 6.0
---- ---- ----
Effective tax rate....................................... 40.4% 40.0% 40.0%
==== ==== ====
4. COMMON STOCK
In December 1995, the Company's Board of Directors (the "Board") declared a
two-for-one split of the Company's common stock. The stock split, effected in
the form of a stock dividend, was distributed on December 29, 1995 to
stockholders of record in 1995. Earnings per share amounts shown in the
accompanying financial statements have been retroactively adjusted to reflect
the 1995 stock split.
5. COMMITMENTS AND CONTINGENCIES
Forward Exchange Contracts -- During 1997 and 1996, the Company entered
into forward exchange contracts with a bank whereby the Company is committed to
deliver foreign currency at predetermined rates. The contracts expire within one
year. The Company's future commitment under these contracts approximated
$2,500,000 and $6,000,000 as of December 31, 1997 and 1996, respectively. At
December 31, 1997 and 1996, the fair market value of the contracts approximated
their notional amount.
Other Commitments -- At December 31, 1997 and 1996, letters of credit
outstanding aggregated approximately $125,000 and $644,000, respectively.
During 1994, the Company entered into an employment agreement with an
executive officer which provides for an annual salary of $100,000 through August
1999. On March 23, 1995, the Company entered into employment agreements (as
amended on January 16, 1997) with two key senior executive officers which
provide for aggregate annual base salaries through March 2000 of $391,000,
subject to any increases or decreases established from time to time at the
discretion of the Compensation Committee of the Board and, in the event of
termination, provide for noncompetition payments for two years equal to their
annual base salaries.
Contingencies -- The Company is involved in legal proceedings which have
arisen in the ordinary course of business. Management believes the outcome of
these proceedings will not have a material adverse impact on the Company's
financial condition or operating results.
6. ROYALTIES
During 1997 and 1996, the Company entered into various agreements which
provide for the payment of royalties on sales of certain character and patent
licensed products. The agreements have terms ranging from one to fifteen years
and require minimum royalty payments of $1,398,000 and $4,715,000 for agreements
signed during 1997 and 1996, respectively. Future outstanding minimum royalty
commitments under these
IV-12
27
agreements amounted to $650,000 and $4,692,000 at December 31, 1997 and 1996,
respectively. Royalty expense aggregated $6,356,000, $3,197,000 and $1,472,000
in 1997, 1996 and 1995, respectively.
7. BENEFIT PLANS
Defined Contribution Plans -- The Company has a defined contribution
trusteed benefit plan covering eligible employees, requiring annual
contributions based upon certain percentages of salaries of employees. The
Company's policy is to fund pension expense as accrued. Pension expense
aggregated $545,000, $472,000, and $217,000 in 1997, 1996, and 1995,
respectively. The Company sponsors a 401(k) defined contribution plan covering
substantially all Company employees pursuant to which the Company is obligated
to match, up to specified amounts, employee contributions. Company contributions
to this plan were not material for the periods presented.
Stock Option Plans -- In May 1993, the Company's stockholders approved the
adoption of The First Years Inc. 1993 Equity Incentive Plan and The First Years
Inc. 1993 Stock Option Plan for Non-employee Directors (the "plans") which cover
employees and directors of the Company. The Board has reserved 670,000 shares
for issuance under the plans and 20,000 shares for another stock option plan
(all share amounts adjusted to reflect the two-for-one stock split effected on
December 29, 1995). The exercise price for the options granted may not be less
than the fair market value of the optioned stock at the date of grant, 110% of
fair market value in the case of options granted to a 10% stockholder.
Options granted must be exercised within the period prescribed by the
Committee; the options vest in accordance with the vesting provisions prescribed
at the time of grant.
A summary of activity (all years adjusted to reflect the two-for-one stock
split effected on December 29, 1995) of stock options granted under the plans is
as follows:
WEIGHTED NUMBER OF
AVERAGE NUMBER OF OPTIONS
EXERCISE PRICE OPTIONS AVAILABLE
PER SHARE OUTSTANDING FOR GRANT
-------------- ----------- ---------
January 1, 1995......................................... $ 5.16 305,132 150,528
Authorized......................................... -- 230,000
Granted............................................ 9.14 128,920 (128,920)
Canceled........................................... 5.61 (8,192) 8,192
Exercised.......................................... 5.02 (14,282) --
-------- --------
December 31, 1995....................................... 6.40 411,578 259,800
Granted............................................ 12.46 68,605 (68,605)
Canceled........................................... 8.19 (8,557) 8,557
Exercised.......................................... 5.71 (33,838) --
-------- --------
December 31, 1996....................................... 7.37 437,788 199,752
Granted............................................ 18.32 97,070 (97,070)
Canceled........................................... 14.22 (28,305) 28,305
Exercised.......................................... 5.91 (139,020) --
-------- --------
December 31, 1997....................................... $10.31 367,533 130,987
======== ========
Exercisable at December 31, 1995................... $ 5.25 166,999
Exercisable at December 31, 1996................... $ 6.01 278,935
Exercisable at December 31, 1997................... $ 7.31 232,856
The grant date fair value for options granted in 1997, 1996 and 1995 was
$9.60, $4.19 and $3.46, respectively.
IV-13
28
The following table sets forth information regarding stock options
outstanding at December 31, 1997 under the Stock Option Plans as described
above:
AVERAGE
NUMBER WEIGHTED WEIGHTED NUMBER EXERCISE
OF OPTIONS RANGE OF AVERAGE AVERAGE CURRENTLY PRICE FOR
OUTSTANDING EXERCISE EXERCISE REMAINING EXERCISABLE OPTIONS
AT 12/31/97 PRICES PRICE LIFE AT 12/31/97 EXERCISABLE
- ----------- -------- -------- --------- ----------- -----------
136,905 ............. $ 4.56 - $ 6.84 $ 5.28 1.68 136,905 $ 5.31
96,775 ............. 6.85 - 10.26 9.21 3.62 73,183 9.34
50,305 ............. 10.27 - 15.39 12.08 4.02 16,768 12.34
67,548 ............. 15.40 - 23.09 16.83 9.24 6,000 17.12
16,000 ............. 23.10 - 27.00 26.84 9.72 -- --
------- ------ ---- ------- ------
367,533 ............. $10.31 4.25 232,856 $ 8.47
======= ====== ==== ======= ======
PRO FORMA DISCLOSURES
As described in Note 1, the Company applies the intrinsic value method of
APB No. 25 and related Interpretations in accounting for its stock option plans.
Accordingly, no compensation cost has been recognized for its stock option
plans. Had compensation cost been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of FASB
Statement 123, the Company's net income and earnings per share for the years
ended December 31, 1997, 1996 and 1995 would have been as follows:
1997 1996 1995
---- ---- ----
Net income......................... $7,023,195 $5,038,337 $3,625,525
Basic earnings per share........... $ 1.40 $ 1.06 $ 0.80
Diluted earnings per share......... $ 1.34 $ 1.02 $ 0.78
For purposes of the pro forma disclosures, the fair value of the options
granted under the Company's stock option plans during 1997, 1996 and 1995 was
estimated on the date of grant using the Binomial option pricing model. Key
assumptions used to apply this pricing model are as follows:
1997 1996 1995
---- ---- ----
Risk free interest rate................. 6.41% 6.08% 7.01%
Expected life of option grants.......... 9.5 years 4.5 years 4.5 years
Expected volatility of underlying
stock................................. 35.27% 32.87% 36.86%
Expected dividend payment rate.......... 0.85% 0.85% 0.85%
The proforma disclosures only include the effects of options granted in
1997, 1996, and 1995.
8. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
Concentrations of Credit Risk -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
equivalents, trade receivables and forward exchange contracts (see Note 5). The
Company's cash equivalents consist of money market funds placed with major banks
and financial institutions. The Company's trade receivables principally include
amounts due from retailers who are geographically dispersed. The Company's three
largest customers accounted for 54% and 55% of the trade receivables outstanding
at December 31, 1997 and 1996, respectively. The Company routinely assesses the
financial strength of its customers and purchases credit insurance to limit its
potential exposure to trade receivable credit risks. The Company routinely
assesses the financial strength of the bank which is the counterparty to the
forward exchange contracts. As of December 31, 1997, management believes it had
no significant exposure to credit risks.
Major Customers and Export Sales -- The Company derived 10% or more of its
sales from its largest customer. Such amounts aggregated $33,643,000,
$25,722,000, and $21,966,000 in 1997, 1996, and 1995, respectively. The
Company's second largest customer accounted for sales of $23,075,000,
$18,257,000, and $16,500,000 in 1997, 1996, and 1995, respectively. The
Company's third largest customer accounted for sales of $13,315,000 and
9,908,000 in 1997 and 1996. No other customer accounted for 10% or more of the
IV-14
29
Company's sales. Export sales, primarily to Europe, Canada, South America and
the Pacific Rim, were approximately $16,250,000 and $11,564,000 in 1997 and
1996, respectively.
Reliance on Licensed Products -- The Company derives a significant portion
of its sales from products under license. A licensing agreement (see Note 6)
with a company will expire at the end of 1998. Sales of products licensed under
the agreement amounted to 40% of the Company's total net sales for year ended
December 31, 1997. Management is in the process of negotiating continuance of
this agreement.
Reliance on Foreign Manufacturers -- The Company does not own or operate
its own manufacturing facilities. In 1997 and 1996, the Company derived
approximately 60% and 55%, respectively, of its net sales from products
manufactured by others in the Far East, mainly in the Peoples Republic of China.
A change in suppliers could cause a delay in manufacturing and a possible loss
of sales, which would affect operating results adversely, depending on the
particular product.
9. COMPUTATION OF EARNINGS PER SHARE
Computation of the earnings per share ("EPS") in accordance with SFAS No.
128 are as follows:
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
FOR THE YEAR ENDED 1995:
Net income.................................................. $3,724,493
----------
BASIC EPS
Income available to common stockholders..................... 3,724,493 4,507,058 $0.83
=====
EFFECT OF DILUTIVE SECURITIES
Incentive stock options..................................... 156,433
---------- ---------
DILUTED EPS
Income available to common stockholders and assumed
conversions............................................... $3,724,493 4,663,491 $0.80
========== ========= =====
FOR THE YEAR ENDED 1996:
Net income.................................................. $5,241,479
----------
BASIC EPS
Income available to common stockholders..................... 5,241,479 4,733,178 $1.11
=====
EFFECT OF DILUTIVE SECURITIES
Incentive stock options..................................... 212,813
---------- ---------
DILUTED EPS
Income available to common stockholders and assumed
conversions............................................... $5,241,479 4,945,991 $1.06
========== ========= =====
FOR THE YEAR ENDED 1997:
Net income.................................................. $7,444,789
----------
BASIC EPS
Income available to common stockholders..................... 7,444,789 5,001,887 $1.49
=====
EFFECT OF DILUTIVE SECURITIES
Incentive stock options..................................... 224,644
---------- ---------
DILUTED EPS
Income available to common stockholders and assumed
conversions............................................... $7,444,789 5,226,531 $1.42
========== ========= =====
As of December 31, 1997, options to purchase 15,000 shares of common stock
at $27 per share were not included in the computation of diluted EPS because the
options' exercise price was greater than the average price of the common shares.
The options, which expire in 2007, were still outstanding at the end of 1997.
As of December 31, 1996, options to purchase 6,000 shares of common stock
at $17 1/8 per share were not included in the computation of diluted EPS because
the options' exercise price was greater than the average price of the common
shares. The options, which expire in 2001, were still outstanding at the end of
1996.
As of December 31, 1995, no options were anti-dilutive.
IV-15
30
10. OFFERING OF COMMON STOCK
During 1995, the Company initiated a public offering of shares of its
common stock to increase its working capital and improve liquidity of its common
stock. Due to uncertain market conditions affecting the retail sector and the
price of its stock, the Company decided to postpone indefinitely the public
offering. As a result, the Company wrote off offering expenses amounting to
$310,000 in December 1995.
During 1996, the Company proceeded with the postponed offering of shares
and entered into an agreement with a group of underwriters to sell 1.6 million
shares of common stock (the "shares"), consisting of 400,000 newly issued shares
and 1,200,000 shares of certain selling stockholders. The closing of the sale
was held on July 1, 1996 at which time the Company issued 400,000 new shares and
received the net proceeds of $5,121,750.
* * * * * *
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31
SCHEDULE II
THE FIRST YEARS INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
ADDITIONS
BALANCE, CHARGED
BEGINNING TO COSTS AND BALANCE
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS END OF YEAR
----------- --------- ------------ ---------- -----------
Valuations Accounts Deducted from Assets to
which they Apply --
Allowance for doubtful accounts:
1997............................... $185,000 $147,541 $147,541(1) $185,000
======== ======== ======== ========
1996............................... $185,000 $152,582 $152,582(1) $185,000
======== ======== ======== ========
1995............................... $185,000 $ 86,227 $ 86,227(1) $185,000
======== ======== ======== ========
Allowance for obsolete inventory:
1997............................... $ 0 $250,000 $ 0 $250,000
======== ======== ======== ========
- ---------------
(1) Net accounts written off.
IV-17
32
THE FIRST YEARS INC.
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10(g) The First Years Inc. 1993 Equity Incentive Plan as amended
through March 19, 1998.
10(h) The First Years Inc. 1993 Stock Option Plan for Directors as
amended through March 19, 1998.
10(l) First Amendment to the Employment Agreement between The
First Years Inc. and Ronald J. Sidman dated January 16,
1997.
10(m) First Amendment to the Employment Agreement between The
First Years Inc. and Benjamin Peltz dated January 16, 1997.
10(n) The First Years, a Massachusetts Corporation and Affiliates,
1997 Annual Incentive Plan effective as of January 1, 1997.
10(o) Agreement between The First Years Inc. and Wayne Shea dated
August 12, 1997.
21 List of Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche LLP dated March 27, 1998.
27.1 Financial Data Schedule -- 12/31/97
27.2 Financial Data Schedule -- 12/31/96 -- Restated
27.3 Financial Data Schedule -- 12/31/95 -- Restated
99 Important Factors Regarding Forward-Looking Statements
IV-18