<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For The Quarter Ended September 30, 1996
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 02322-1171
(Address of principal executive offices)
(Zip Code)
(508) 588-1220
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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 12 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 .
--- ---
The number of shares of Registrant's common stock outstanding on October 31,
1996 was 4,938,236.
<PAGE> 2
THE FIRST YEARS INC.
INDEX
PART I - FINANCIAL INFORMATION:
Condensed Balance Sheets Page 1
Condensed Statements of Income 2
Condensed Statements of Cash Flows 3
Notes to Condensed Financial Statements 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
PART II - OTHER INFORMATION
Other information 6
SIGNATURES 6
EXHIBIT INDEX 7
<PAGE> 3
THE FIRST YEARS INC.
Condensed Balance Sheets
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,188,726 $ 552,568
Accounts receivable, net 15,852,403 14,191,630
Inventories 20,407,100 19,009,784
Prepaid insurance, taxes, etc. 254,781 778,074
Current deferred taxes 872,300 872,300
----------- -----------
Total current assets 38,575,310 35,404,356
----------- -----------
PROPERTY, PLANT, AND EQUIPMENT:
Land 167,266 167,266
Building 3,994,121 3,737,861
Machinery and molds 7,076,737 6,481,504
Furniture and equipment 3,038,379 3,183,379
----------- -----------
Total 14,276,503 13,570,010
Less accumulated depreciation 7,254,544 7,262,286
----------- -----------
Property, plant, and equipment-net 7,021,959 6,307,724
----------- -----------
TOTAL ASSETS $45,597,269 $41,712,080
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 133,333 $ 133,333
Short-term borrowings 1,300,000 6,200,000
Accounts payable and accrued expenses 8,983,976 8,868,187
Federal and state income taxes payable 41,300 0
----------- -----------
Total current liabilities 10,458,609 15,201,520
----------- -----------
LONG-TERM DEBT-Less portion due currently 0 100,001
----------- -----------
DEFERRED INCOME TAXES 647,300 647,300
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock 493,824 451,514
Paid-in capital 5,209,618 0
Retained earnings 28,787,918 25,311,745
----------- -----------
Total stockholders' equity 34,491,360 25,763,259
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $45,597,269 $41,712,080
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
Page 1
<PAGE> 4
THE FIRST YEARS INC.
Condensed Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 23,273,193 $ 19,628,352 $ 69,631,738 $ 55,506,878
COST OF PRODUCTS SOLD 13,629,185 11,757,707 41,588,698 32,731,171
------------ ------------ ------------ ------------
GROSS PROFIT 9,644,008 7,870,645 28,043,040 22,775,707
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 7,306,213 6,078,890 21,154,744 17,414,767
------------ ------------ ------------ ------------
OPERATING INCOME 2,337,795 1,791,755 6,888,296 5,360,940
OTHER INCOME (EXPENSES):
Interest expense (49,457) (51,879) (346,666) (100,122)
Interest income 5,125 1,922 8,000 13,488
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 2,293,463 1,741,798 6,549,630 5,274,306
PROVISION FOR INCOME TAXES 917,400 696,700 2,619,900 2,109,700
------------ ------------ ------------ ------------
NET INCOME $ 1,376,063 $ 1,045,098 $ 3,929,730 $ 3,164,606
============ ============ ============ ============
EARNINGS PER SHARE $ 0.27 $ 0.22 $ 0.81 $ 0.68
============ ============ ============ ============
AVERAGE NUMBER OF SHARES
OUTSTANDING 5,150,751 4,688,284 4,862,132 4,670,306
============ ============ ============ ============
CASH DIVIDENDS PAID PER SHARE $ 0.000 $ 0.000 $ 0.100 $ 0.085
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
Page 2
<PAGE> 5
THE FIRST YEARS INC.
Condensed Statements of Cash Flows for the
Nine Months Ended September 30,
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,929,730 $ 3,164,606
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Depreciation 918,186 747,201
Provision for doubtful accounts 95,595 73,009
Gain on disposal of equipment 22,881 (200)
Increase (decrease) arising from working
capital items:
Accounts receivable (1,756,368) (5,336,882)
Inventories (1,397,316) (4,713,665)
Prepaid insurance, taxes, etc 523,293 (237,953)
Accounts payable and accrued expenses 115,789 2,542,588
Federal and state income taxes - net 41,300 (93,800)
----------- -----------
Net cash provided by (used for)
operating activities 2,493,090 (3,855,096)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant,
and equipment (1,655,302) (821,412)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividend (453,557) (382,852)
Common stock issued under stock
option plans 130,178 60,033
Net proceeds from public offering 5,121,750 0
Proceeds from short-term borrowings 0 3,400,000
Repayment of short-term borrowings (4,900,000) 0
Repayment of industrial revenue bonds (100,001) (100,000)
----------- -----------
Net cash provided by (used for)
financing activities (201,630) 2,977,181
----------- -----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 636,158 (1,699,327)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 552,568 2,329,041
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,188,726 $ 629,714
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $ 346,666 $ 100,122
=========== ===========
Income taxes $ 2,196,300 $ 2,203,500
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
Page 3
<PAGE> 6
THE FIRST YEARS INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Amounts in the accompanying balance sheet as of December 31, 1995 are
condensed from the Company's audited balance sheet as of that date. All other
condensed financial statements are unaudited but, in the opinion of the
Company, contain all normal and recurring adjustments necessary to present
fairly the financial position as of September 30, 1996, and the results of
operations and cash flows for the periods ended September 30, 1996 and 1995.
2. The Company has 15,000,000 shares of $.10 par value common stock with
4,938,236 and 4,515,142 shares issued and outstanding as of September 30,
1996 and December 31, 1995, respectively.
On May 2, 1996 the Board of Directors authorized a $0.10 per share annual
cash dividend paid on June 3, 1996 to holders of record at the close of
business on May 21, 1996.
3. Earnings per share of common stock are computed on the basis of the average
number of shares and common share equivalents outstanding during each
quarter. Fully diluted and primary earnings per share were the same for the
nine months ended September 30, 1996 and 1995.
4. On June 25, 1996, the Company 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.
The proceeds of the shares was used to repay certain indebtedness of the
Company. Assuming the sale of approximately 400,000 shares as of January 1,
1996 and 1995, pro forma earnings per share would have been $0.27 and $0.22
for the three months ended September 30, 1996 and 1995, respectively, and
$0.80 and $0.65 for the nine months ended September 30, 1996 and 1995,
respectively.
5. The results of operations for the three and nine month periods ended
September 30, 1996 and 1995 are not necessarily indicative of the results to
be expected for the full year.
6. During 1996, the Company borrowed various amounts up to $9,900,000 under
unsecured lines of credit totaling $20,000,000 available from banks. As of
September 30, 1996 a balance of $1,300,000 remained outstanding which bears
interest at a weighted average rate of 7.38%. During 1995, the Company
borrowed various amounts up to $6,500,000 of which $3,400,000 remained
outstanding as of September 30, 1995. No other short-term borrowings were
incurred by the Company during the first nine months of 1996 or during 1995.
Page 4
<PAGE> 7
THE FIRST YEARS INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Net sales for the first nine months of 1996 were $69.6 million, an increase of
$14.1 million or 25.4%, as compared to $55.5 million for the comparable period
last year. The increase was due to new product introductions and expanded retail
distribution in domestic and foreign markets. Additionally, the Company did not
experience significant new product production delays in 1996 as it did in the
first three months of 1995.
Cost of products sold for the first nine months of 1996 was $41.6 million, an
increase of $8.9 million or 27.1%, as compared to $32.7 million for the
comparable period last year. As a percentage of sales, cost of products sold in
the first nine months of 1996 increased to 59.7% from 59.0% in the comparable
period of 1995. The increase was primarily due to increased sales of
higher-priced, lower-margined products and licensing fees.
Selling, general, and administrative expenses for the first nine months of 1996
were $21.2 million, an increase of $3.7 million or 21.5% as compared to $17.4
million over such expenses for the first nine months of 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 first nine months of 1996 decreased to 30.4%
from 31.4% for the comparable period 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% for the first nine
months of 1996 and 1995.
Net working capital increased by $7.9 million in the first nine months primarily
due to a public offering of the company's common stock which provided net
proceeds to the company of $5.1 million (see note 4 to the financial statements)
and funds generated from profitable operations. Accounts receivable increased by
$1.7 million primarily as a result of increased sales and inventories increased
by $1.4 to meet continued demand for the Company's products. Short-term
borrowings have decreased by $4.9 million primarily as a result of the above
mentioned secondary offering. Cash increased by $636,000 primarily resulting
from funds generated from operations partially offset by increases in accounts
receivable and inventories.
Unsecured bank lines of credit aggregating $20.0 million are subject to annual
renewal. Amounts outstanding under these lines are payable upon demand by the
banks. During the first nine months of 1996, the Company borrowed various
amounts up to $9.9 million of which $1.3 million remained outstanding as of
September 30, 1996. During the first nine months of 1995, the Company borrowed
various amounts up to $3.4 million of which $3.4 million remained outstanding as
of September 30, 1995. The Company did not incur any other short-term borrowings
during the first nine months of 1996 and 1995.
Page 5
<PAGE> 8
THE FIRST YEARS INC.
PART II - OTHER INFORMATION
Items 1 through 4 - Not Applicable
Item 5: Other Information
Statements of Forward Looking Information:
From time to time the Company may make forward-looking statements such as
forecasts, projections, and estimates of the Company's future performance or
financial results. These forward-looking statements may be contained in SEC
filings (such as 10-Q or 10K Reports), Annual Reports to Stockholders, press
releases, oral statements, among others made by the Company. Actual results
could differ materially from those set forth in the forward-looking
statements. Therefore, no assurances can be given that the results in such
forward-looking statements will be achieved. Important factors that could
cause actual results to differ include, among others, the continued timely
introduction of new products; a reliance on licensed products; a dependence
upon major customers; a highly competitive juvenile products industry; a
reliance on foreign manufacturers; the cost and availability of certain
materials; product liability risks; and the effect of government regulations,
all of which are more fully described in Exhibit 99 to this Report.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits - The following exhibits are filed as part of this report:
Exhibit Description
27 Financial Data Schedule
99 Important Factors Regarding Forward-
Looking Statements
(b) No reports on Form 8-K have been filed during the past quarter covered by
this report.
SIGNATURES
Pursuant to the requirements 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
Date 11/13/96 /s/ Benjamin Peltz
-------------- --------------------------------
Benjamin Peltz, Senior Vice
President and Treasurer, Duly
Authorized Officer and Principal
Financial Officer
Page 6
<PAGE> 9
THE FIRST YEARS INC.
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27 Financial Data Schedule
99 Important Factors Regarding Forward-Looking Statements
Page 7
<PAGE> 1
EXHIBIT 99
The following factors, among others, could cause results to differ materially
from those contained in forward-looking statements made in this Report, or in
other SEC filing, Annual Report to Stockholders, press releases, and oral
statements, among others, made by the Company from time to time.
New Product Introductions
The growth of the Company has been, and will continue to be, dependent upon its
ability to continue to introduce new products. There can be no assurance that
the Company will continue to maintain its present rate of growth, that it will
continue to generate new product ideas, or that new products will be
successfully introduced.
Reliance on Licensed Products
A substantial factor contributing to the growth in the Company's net sales in
1995 and in the first nine months of 1996 has been its licensing agreements with
The Walt Disney Companies to feature Winnie the Pooh characters an a variety of
its products in various countries. In addition, in October of 1996, the Company
entered into an agreement with the Children's Television Workshop ("CTW"), to
produce a line of juvenile accessories using CTW's Sesame Street characters.
The agreements expire at different intervals and there can be no assurance
that they will be renewed or that, if renewed, they will result in sales
increases in future periods.
Demand for the Company's Products
The continued success of the Company's business also depends in part on the
continued consumer demand for its juvenile products. Changes in consumer demand
due to general economic decline or to less favorable demographic trends related
to childbirth, among other factors, could have a material adverse effect an the
Company's business.
Dependence upon Major Customers
The two largest customers of the Company, Wal*Mart and Toys "R" Us, accounted
for approximately 28% and 21%, respectively, of net sales during 1995. A
significant reduction of purchases by these customers could have a material
adverse effect on the Company's business.
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. There can be no
assurance that the Company will be able to continue to compete effectively in
the Juvenile products market.
<PAGE> 2
Reliance on Foreign Manufacturers
The Company does not own or operate its own manufacturing facilities. in 1995,
the Company derived approximately 46% of its net sales from products
manufactured by others in the Far East, mainly in the Peoples' Republic of China
("China"). The Company has no long-term contracts with these manufacturing
sources. Foreign manufacturing is subject to a number of risks including
transportation delays and interruptions, quotas, and other import or export
controls, the imposition of tariffs, currency fluctuations, misappropriation of
intellectual property, political and economic disruptions, and changes in
governmental policies.
From time to time, the United States 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. President Clinton has extended China's MFN
trading status until July 3, 1997. The European Union (the "EU") has enacted a
quota and tariff system with respect to the importation into the EU of certain
products originating in China. Although the Company continues to evaluate
alternative sources of supply outside of China, there can be no assurance that
the Company will be able to develop alternative sources of supply in a timely
and cost-effective manner. Also, the Company, because of its substantial
reliance on suppliers in foreign countries, is required to order products
further in advance of customer orders than would generally be the case if such
products were produced in the United States. The risk of ordering products in
this manner is greater during the initial introduction of new products since it
is difficult to determine the demand for such products.
Cost and Availability of Certain Materials
Plastic and paperboard are significant cost components of the Company's products
and packaging. Because the primary resource used in manufacturing plastic is
petroleum, the cost and availability of plastic for use in the Company's
products varies to a great extent with the price of petroleum. The inability of
the Company's suppliers to acquire sufficient plastic or paperboard at
reasonable prices would adversely affect the Company's ability to maintain its
profit margins in the short term.
Product Liability Risks
The company's juvenile products are used for and by small children and infants.
The Company carries product liability insurance in amounts which management
deems adequate to cover risks associated with such use; however, there can be no
assurance that existing or future insurance coverage will be sufficient to cover
all product liability risks.
<PAGE> 3
Government Regulations
The Company's products are subject to the provisions of the Federal Consumer
Safety Act, the Federal Hazardous Substances Act, the Federal Flammable Fabrics
Act, and the Child Safety Protection Act (the "Acts") and the regulations
promulgated thereunder. The Acts authorize the Consumer Product Safety
Commission (the "CPSC") to protect the public from products which present a
substantial risk of injury. The CPSC can require the repurchase or recall by the
manufacturer of articles which are found to be defective and impose fines or
penalties on the manufacturer. Similar laws exist in some states and cities and
in other countries in which the Company markets its products. Any recall of its
products could have a material adverse effect on the Company, depending on the
particular product.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,188,726
<SECURITIES> 0
<RECEIVABLES> 16,037,403
<ALLOWANCES> 185,000
<INVENTORY> 20,407,100
<CURRENT-ASSETS> 38,575,310
<PP&E> 14,276,503
<DEPRECIATION> 7,254,544
<TOTAL-ASSETS> 45,597,269
<CURRENT-LIABILITIES> 10,458,609
<BONDS> 0
0
0
<COMMON> 493,824
<OTHER-SE> 33,997,536
<TOTAL-LIABILITY-AND-EQUITY> 45,597,269
<SALES> 69,631,738
<TOTAL-REVENUES> 69,639,738
<CGS> 41,588,698
<TOTAL-COSTS> 62,743,442
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 346,666
<INCOME-PRETAX> 6,549,630
<INCOME-TAX> 2,619,900
<INCOME-CONTINUING> 3,929,730
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,929,730
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.81
</TABLE>
