<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996; OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-7024
THE FIRST YEARS INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
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)
</TABLE>
508-588-1220
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.10 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
The aggregate market value of the Common Stock held by nonaffiliates of the
Company was $65,263,873. based on the price at which the stock was sold over the
counter on the Nasdaq National Market, as reported at the close of business on
February 28, 1997.
The number of shares of Registrant's Common Stock outstanding on December
31, 1996 was 4,948,980.
================================================================================
<PAGE> 2
DOCUMENTS INCORPORATED BY REFERENCE
The Company intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1996. The following sections of such definitive proxy statement are hereby
incorporated by reference into Items 10, 11, 12 and 13 of Part III of this Form
10-K: "Common Stock Ownership of Certain Beneficial Owners and Management;"
"Election of Directors;" "Executive Compensation" (other than the Board
Compensation Committee Report on Executive Compensation and the Performance
Chart); and "Compliance with Section 16(a) of the Securities Exchange Act of
1934."
<PAGE> 3
PART I
ITEM 1. BUSINESS
The First Years Inc. (the "Company") is a leading developer and worldwide
marketer of a broad line of products for infants and toddlers. Major channels
through which the Company sells its products include mass merchants,
supermarkets, drug stores, department stores, wholesale clubs, convenience
stores, specialty stores, mail-order catalogs and catalog showrooms.
The Company was incorporated in 1952 in Massachusetts under the name Kiddie
Products, Inc. The Company changed its name to The First Years Inc. in May,
1995, and is headquartered in Avon, Massachusetts.
Products
The Company's product line, which contains approximately 320 items that
range in retail price from approximately $0.99 to $69.99, is categorized and
color-coded into five distinct product categories as follows:
Feeding & Soothing. The Feeding & Soothing category is comprised of
bottles and accessories, nipples, pacifiers, teethers, bowls, drinking cups,
dishes, flatware, and breast-feeding accessories. This category includes the
TumbleMates line of training cups, bowls, plates and utensils, designed for
serving, storing and transporting drinks and snacks, and which features a system
of interchangeable cups and lids. This category also includes the Neats line of
stain-resistant bibs specially made with a 3M Scotchgard stain-release system.
Play & Discover. The Play & Discover category consists of an extensive
line of entertaining, skill-developing toys for infants and toddlers including
crib toys, floor toys, hand-held toys, and large play items. The Play & Discover
category includes the Company's Washables line of 100% washable, dishwasher-safe
toys and its Firstronics line of hand-held electronic toys for children under
three years of age. In 1996, the Firstronics line was expanded to include a new
line of sports-oriented toys called Sportstronics. In 1996, the Company also
introduced its first large play, stationary toy into this category with its
2-in-1 Playcenter, an infant activity center that converts to a toddler play
table.
Care & Safety. The Care & Safety category consists of a broad line of
fashion and grooming items, home safety products such as door and cabinet
latches, and products appropriate for the health and hygiene needs of infants,
such as digital thermometers. This category includes the Nurserytronics line of
electronic products designed especially for use in the nursery; a line of
machinewashable travel tote bags, child carriers and harnesses, marketed under
the PackMates name, and the Step-by-Step line of furnishings comprised of a bath
seat, booster seat, baby bather, step stool and toilet trainer that are
adjustable as a child grows.
First Gifts. The Company markets a variety of specially-designed gift bags
and gift sets, which combine the Company's most popular items as
attractively-packaged, ready-to-give gifts, or theme-related starter sets. Gift
sets include the Washables gift pack, the TumbleMates gift pack, newborn gift
bags and furnishings gift sets.
Winnie the Pooh. The Winnie the Pooh category consists of over 45 basic
products including teethers, rattles, bibs, bottles, bathing accessories and
gift sets featuring Winnie the Pooh characters. In 1996, the Company introduced
numerous additional items in this category including Pooh characters on cups,
hooded towels, bath puppets, teethers, and electronic musical toys.
------------------------
THE FIRST YEARS(R) Ideas Inspired by Parents(R), TumbleMates(R),
Firstronics(R), and Washables(R) are registered trademarks of The First Years
Inc. Neats(TM), PackMates(TM), Nurserytronics(TM), Step-by-Step(TM), and First
Gifts(TM) are trademarks of The First Years Inc. 3m(R) and SCOTCHGARD(R) are
registered trademarks of Minnesota Mining and Manufacturing Company, WINNIE THE
POOH(R) and POOH(R) are registered trademarks of Disney Enterprises, Inc.
I-1
<PAGE> 4
PRODUCT DESIGN, DEVELOPMENT AND MARKETING
The Company devotes substantial resources to product development. The
Company employs a staff of professionals engaged in the creation of new products
and also uses, from time to time, a diverse group of outside designers and
developers. For the past 16 years the Company's product line also has been
designed in consultation with Dr. T. Berry Brazelton, the well-known
pediatrician and authority on child development, and staff members of the Child
Development Unit at Children's Hospital in Boston, Massachusetts (the "CDU"), of
which Dr. Brazelton is founder and Director Emeritus.
The Company spent approximately $2.2, $1.8 and $1.5 million on new product
development in 1996, 1995 and 1994, respectively. Most of the Company's new
products are shown at the Juvenile Products Manufacturers Association Trade
Show, in Dallas, Texas in the fall of each year, and a variety of other national
and international toy and baby fairs.
SALES
The Company's products are sold nationally and internationally to a broad
spectrum of customers including mass merchants, national variety and drug
stores, supermarkets, wholesale clubs, convenience stores, toy specialty stores,
wholesale distributors, department stores, mail order catalogs and catalog
stores. The Company currently has customers in over 40 countries. Major
customers include Wal*Mart, Toys "R" Us, Target, Kmart, Kroger, Sears, and J.C.
Penney.
The Company's products are sold in the United States and Canada primarily
through the Company's thirteen-person internal sales staff and a network of 48
independent sales representatives. The Company's sales staff is responsible for
supervising and training the sales representatives. Such training is conducted
at the Company's headquarters and throughout the United States. In Central and
South America and the Pacific Rim, the Company's products are sold by its
internal sales staff which manages a network of foreign distributors and
independent sales representatives in such areas.
In Europe and the Middle East, the Company's products are sold by the
Company's internal staff at its sales office in Cirencester, England, which is
headed by the Director of European Sales. This staff manages a network of
foreign distributors and independent sales representatives. The Company's
international sales in 1996 and 1995 were approximately $11.6 and $7.7 million,
respectively, and accounted for approximately 12% and 10% of the Company's total
net sales in 1996 and 1995, respectively. (See "Notes to Financial Statements,
Number 8.")
During 1996, Wal*Mart, Toys "R" Us, and Target accounted for approximately
26%, 19%, and 10% of the Company's net sales, respectively. A significant
reduction in purchases by any of these customers could have a material adverse
effect on the Company's business.
Backlog is not a significant and material aspect of the Company's business.
Customers place orders on an as needed basis. As the Company's sales have
increased, the amount of unfilled orders at any time has not been indicative of
future results.
MERCHANDISING
To help retailers use their shelf space efficiently in marketing the
Company's products, the Company utilizes computerized planogram programs which
divide the space a retailer has allocated for the Company's products to create a
mix of the five product categories that is designed to maximize the retailer's
profitability.
In recent years, the Company expanded its promotional programs and created
a cross-merchandising program for its customers, by which ready-to-use display
panels and floor stand display units containing THE FIRST YEARS products are
placed next to related items in a customer's store (i.e., the Company's feeding
products are placed in a customer's baby food aisle) to encourage synergistic
and impulse buying by consumers. These display units are pre-pegged,
pre-stocked, easily re-stockable, and can be customized to the customer's needs.
I-2
<PAGE> 5
LICENSED CHARACTER PRODUCTS
In 1996, the Company renewed and entered into various agreements which
provide for the payment of royalties on certain of the Company's products
featuring licensed cartoon characters. The agreements have terms ranging from
one to three years and require minimum royalty payments of $4,682,000 during the
terms of these agreements. Sales of products under these license agreements
accounted for approximately 32% of the Company's total net sales in 1996.
MANUFACTURING AND SOURCES OF SUPPLY
The Company does not own or operate its own manufacturing facilities. In
1996, all of the Company's products were manufactured either using the Company's
custom tools (molds and dies) or to the Company's specifications by
approximately 25 manufacturers located in the United States, Canada, China,
Taiwan, Thailand, and Mexico. Approximately 55% of all of its products sold in
1996 were manufactured in Asia, primarily in China. A large percentage of the
Company's furnishings and other large products were manufactured in 1996 by
suppliers in the United States and Canada because of the significantly higher
shipping costs from the Far East.
Generally the Company uses one manufacturer to make each product from its
supplier base in Asia, Canada, and the United States. Due to the high cost of
developing duplicate tooling (predominantly molds and dies), most of the
Company's products are made using one set of tools; however, the Company has
developed duplicate tools for several of its key and high-volume products. The
Company believes it has alternative manufacturing sources available for all of
its products. Because it owns its tools, it could shift its sources of
manufacturing for any product to an alternative supplier.
In 1996, the Company was not dependent on any one supplier, although its
largest supplier, which is based in the United States, accounted for products
that represented approximately 20% of its net sales in 1996. In 1996
approximately 11% of the Company's products sold were manufactured by one
supplier located in China. The Company has not entered into long-term
contractual arrangements with any of its suppliers.
The principal raw materials used in the production and sale of the
Company's products are plastic, paperboard and cloth. Raw materials are
purchased by the manufacturers who deliver completed products to the Company.
Because the primary source used in manufactured plastic is petroleum, the cost
and availability of plastic for use in the Company's products varies to a great
extent with the price of petroleum. The inability of the Company's suppliers to
acquire sufficient plastic and paperboard at a reasonable price could have a
material adverse effect on the Company's profitability. The Company did not
experience any difficulties in obtaining materials in 1996.
The Company purchases its products from its suppliers primarily in the U.S.
dollar and the Hong Kong dollar which is currently pegged to the U.S. dollar.
Generally, the Company's suppliers ship the products on the basis of open credit
terms or upon the acceptance of products by the Company. In addition, some
suppliers require shipment against letters of credit.
Foreign manufacturing is subject to a number of risks including
transportation delays and interruptions, the imposition of tariffs, quotas, and
other import or export controls, currency fluctuations, misappropriation of
intellectual property, political and economic disruptions, and changes in
governmental policies. From time to time, the United States Congress has
attempted to impose additional restrictions on trade with China. Enactment of
legislation or the imposition of restrictive regulations conditioning or
revoking China's "most favored nation" ("MFN") trading status could have a
material adverse effect upon the Company's business because products originating
from China could be subjected to substantially higher rates of duty. China's MFN
trading status has been extended through July 3, 1997. Unless Congress takes
action to override this decision, China will continue to enjoy MFN treatment
during this period. The European Community (the "EC") has enacted a quota and
tariff system with respect to the importation into the EC of certain toy
products originating in China. The Company, therefore, continues to evaluate
alternative sources of supply outside of China.
I-3
<PAGE> 6
The Company, because of its substantial reliance on suppliers in foreign
countries, is required to order products further in advance of customer orders
than would generally be the case if such products were produced in the United
States. As a result, the Company is required to carry significant amounts of
inventory to meet rapid delivery requirements of customers and to assure itself
of continuous allotment of goods from suppliers.
WORKING CAPITAL ITEMS
See Item 7, "Management Discussion and Analysis of Financial Condition and
Results of Operation."
COMPETITION
The juvenile products industry is highly competitive and includes numerous
domestic and foreign competitors, some of which are substantially larger and
have greater financial and other resources than the Company. The Company
competes with a number of different competitors, depending on the product
category, and it competes against no single company across all product
categories. Its competition includes large, diversified health care product
companies, specialty infant products makers, toy makers and specialty health
care products companies. The Company competes principally on the basis of brand
name recognition and price/value relationship. In addition, the Company believes
that it competes favorably with respect to product quality, customer service and
breadth of product line.
DISTRIBUTION
The Company distributes its products in the United States from its 103,500
square foot warehouse facility in Avon, Massachusetts and from a public
warehouse in Fontana, California. The Company distributes its products in Canada
from a public warehouse in Toronto, Ontario. In Europe, the Company distributes
its products from a public warehouse in Ghent, Belgium. Warehouse services at
the various public warehouses are performed by warehouse operators unaffiliated
with the Company.
TRADEMARKS, PATENTS AND COPYRIGHTS
The Company's principal trademark, THE FIRST YEARS and design, is
registered in the United States and in a number of foreign countries. The
Company also uses other trademarks for certain of its products and product
categories, some of which are registered in the United States and in various
foreign countries. Applications are pending in the U.S. and various foreign
countries for registration of some of the Company's trademarks.
The Company also owns patents, design patents and design registrations, as
well as pending applications in the United States and certain foreign countries.
Although the Company believes such are important to its business, it does not
believe that any single patent, design patent, or design registration, including
any which may be issued on a pending application, is material to its business.
There can be no assurance that the Company's patents, design patents, or design
registrations, including those that may be issued on pending applications, will
offer any significant competitive advantage for the Company's products.
The Company also owns copyrights, some of which are registered in the
United States. The Company does not believe that any single copyright is
material to its business. There can be no assurance that the Company's
copyrights will offer any significant competitive advantage for the Company's
products.
EMPLOYEES
As of December 31, 1996, the Company employed 120 full-time and 2 part-time
employees, of whom 11 are executive officers, 52 are in sales, marketing and
product development, 39 are in materials, purchasing, quality control, data
processing, finance, administration and clerical, and 20 are in warehousing
positions. None of the Company's employees is represented by a union, and the
Company has not experienced any work stoppages. The Company believes that
relations with employees are good.
I-4
<PAGE> 7
GOVERNMENT REGULATIONS
The Company's products are subject to the provisions of the Federal
Consumer Product Safety Act, the Federal Hazardous Substances Act, as amended,
the Federal Flammable Fabrics Act, and the Child Safety Protection Act, and the
regulations promulgated thereunder (the "Acts"). The Company's nursery monitors
are subject to regulations of the Federal Communications Commission. The
Company's medical devices and drug products are subject to the regulations of
the Food and Drug Administration. The Acts enable the Consumer Product Safety
Commission (the "CPSC") to protect children from hazardous toys and other
articles. The CPSC has the authority to exclude from the market certain consumer
products which are found to be hazardous. The CPSC's determination is subject to
court review. The CPSC can require the repurchase by the manufacturer of
articles which are banned. The Federal Flammable Fabrics Act enables the CPSC to
regulate and enforce flammability standards for fabrics used in consumer
products. Similar laws exist in some states and cities and in various
international markets. The Company designs and tests its products to ensure
compliance with the various federal, state and international requirements. Any
recall of a product could have a material adverse effect on the Company,
depending on the particular product.
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The names of the Company's Executive Officers and Directors and certain
information about them are set forth below. Officers have served in the capacity
indicated in the table below for at least five years, unless otherwise indicated
in the notes.
<TABLE>
<CAPTION>
OFFICER OR
DIRECTOR
NAME AGE POSITION SINCE
- ---- --- -------- ----------
<S> <C> <C> <C>
Ronald J. Sidman................... 50 President, Chairman of the Board of
Directors, and Chief Executive Officer 1975
Jerome M. Karp..................... 69 Vice Chairman of the Board of Directors 1969
Benjamin Peltz*.................... 57 Treasurer, Senior Vice President --
Finance, and Director 1975
Evelyn Sidman...................... 83 Clerk and Director 1979
Fred T. Page....................... 50 Director 1988
Merton N. Alperin.................. 74 Director 1988
Joseph M. Connolly................. 56 Vice President -- Operations 1979
John N. Colantuone................. 59 Vice President -- Materials and Engineering 1982
Adrian E. Roche.................... 41 Vice President -- Worldwide Marketing 1992
John R. Beals*..................... 42 Controller and Assistant Treasurer 1990
Wayne Shea......................... 42 Vice President -- Worldwide Sales &
Merchandising 1991
Keith Ciampa....................... 32 Vice President -- Executive Accounts 1996
Mark H. Dall....................... 53 Vice President -- Information Services 1985
Clive R. Wooster................... 42 Vice President -- International
Sales/Europe 1997
</TABLE>
- ---------------
* Effective as of July 1, 1997, Mr. Peltz's position will be split in two. He
will continue to be the Treasurer of the Company. Mr. Beals will be promoted
to Vice President -- Finance, and Chief Financial Officer, and will remain as
Assistant Treasurer of the Company; and Mr. Stephen Lyons, currently the
Company's Assistant Controller since January, 1995, will be promoted to
Controller of the Company.
- ---------------
Mr. Sidman has served as President of the Company for over five years and
was elected to the offices of Chairman of the Board of Directors and Chief
Executive Officer on March 28, 1995.
Mr. Page was appointed President -- Network Services of Southern New
England Telecommunications Corporation ("SNET") in January of 1994, and has been
with SNET for over five years.
I-5
<PAGE> 8
Mr. Alperin, a Certified Public Accountant, has been a financial consultant
for over five years. He was the Chairman of the Board of Public Accountancy of
Massachusetts for the years 1979, 1982 and 1984.
Mr. Roche has been Vice President of Worldwide Marketing since January,
1995. From January, 1992 to December, 1994, Mr. Roche was Vice President of
European Sales of the Company. Prior to that time, from 1989 to 1991, Mr. Roche
held several managerial positions for Fisher-Price Kiddie Craft in the United
Kingdom, the last of which was Managing Director.
Mr. Shea has been Vice President of Worldwide Sales & Merchandising since
January, 1995. From July, 1991 to December, 1994, Mr. Shea was Vice President of
Service and Merchandising of the Company, and from January, 1985 to June, 1991,
Mr. Shea was Director of Merchandising of the Company.
Keith Ciampa, age 32, has been Vice President -- Executive Accounts since
June, 1996. From July, 1993 to May, 1996, Mr. Ciampa was Director of
Sales-Americas, and from January, 1992 to June 1993, he was Export Sales Manager
of the Company.
Mr. Clive R. Wooster, age 42, has been Vice President -- International
Sales/Europe since March 13, 1997. From October, 1994 to March 12, 1997, he was
Director of Sales/Europe; and from April, 1992 to September, 1994, he was the
General Manager of the Company's UK Sales Office.
ITEM 2. PROPERTIES
The Company owns its executive and administrative offices and principal
warehouse which are located in a building at One Kiddie Drive, Avon,
Massachusetts. The building contains approximately 124,000 square feet of space,
of which approximately 20,500 square feet are used for executive and
administrative offices and the balance, approximately 103,500 square feet is
utilized for warehousing. The Company also has sales offices in leased premises
in Mission Viejo, California, and in Cirencester, England.
The Company also uses public warehouses located in Fontana, California;
Toronto, Canada; and in Ghent, Belgium.
The Company believes that its properties (owned and leased) are in good
condition and adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings which have arisen in the
ordinary course of business. The Company believes that there are no claims or
litigation pending, the outcome of which could have a material adverse effect on
the Company's financial condition or operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Company.
I-6
<PAGE> 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(A) MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market. Below
is a summary of the actual high and low sales prices of the Company's Common
Stock for each quarter of 1995 and 1996 as reported by Nasdaq and as adjusted to
reflect the Company's 2-for-1 stock split effected on December 29, 1995.
1996
<TABLE>
<CAPTION>
QUARTER LOW HIGH
- ------- --- ----
<S> <C> <C>
First........................................................................ $ 9 3/4 $ 12 1/2
Second....................................................................... 11 3/4 18 1/2
Third........................................................................ 12 3/4 15
Fourth....................................................................... 14 17
</TABLE>
1995
<TABLE>
<CAPTION>
QUARTER LOW HIGH
- ------- --- ----
<S> <C> <C>
First........................................................................ $ 8 5/8 $ 12
Second....................................................................... 8 3/8 10 1/8
Third........................................................................ 9 3/8 11 3/4
Fourth....................................................................... 10 11 5/8
</TABLE>
(B) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
<TABLE>
<CAPTION>
APPROXIMATE NUMBER
OF RECORD HOLDERS
TITLE OF CLASS (AS OF DECEMBER 31, 1996)
- -------------- -------------------------
<S> <C>
Common Stock, $.10 Par Value 135
</TABLE>
(C) DIVIDEND POLICY
From 1991 to 1995, the Company paid a cash dividend on its Common Stock of
$0.085 per share in June of each year. In 1996, the Company increased its annual
cash dividend to $0.10 per share which was paid on June 1, 1996. The Company
currently expects that comparable cash dividends will continue to be paid in the
future. However, the declaration and payment of any such cash dividends in the
future will depend upon the Company's earnings, financial condition, capital
needs, and other factors deemed relevant by the Board of Directors. There can be
no assurance that the Company will continue to pay dividends in the future.
The Company's Board of Directors declared on December 6, 1995, a 2-for-1
stock split effected in the form of a stock dividend to holders of record on
December 18, 1995. The new stock certificates were mailed to stockholders on or
about December 29, 1995.
II-1
<PAGE> 10
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Net sales................... $93,110,361 $75,757,322 $53,233,109 $46,124,088 $45,267,323
Cost of products sold....... 55,463,255 45,108,546 29,498,457 26,653,704 23,645,594
Selling, general and
administrative expenses... 28,580,039 23,961,206 18,915,908 17,857,049 18,429,803
Severance-related
expenses.................. -- -- -- 373,000 --
Interest expense............ 358,637 186,338 24,575 28,912 31,961
Interest income............. 27,349 16,718 66,605 66,204 154,913
Offering expenses........... -- 310,457 -- -- --
Income before income
taxes..................... 8,735,779 6,207,493 4,860,774 1,277,627 3,314,878
Provision for income
taxes..................... 3,494,300 2,483,000 1,871,400 481,500 1,385,100
Net income.................. 5,241,479 3,724,493 2,989,374 796,127 1,929,778
Earnings per share*......... $1.06 $0.80 $0.66 $0.18 $0.43
Dividends paid per share*... $0.10 $0.09 $0.09 $0.09 $0.08
Weighted average number of
shares outstanding*....... 4,941,196 4,663,491 4,497,244 4,496,520 4,496,520
SELECTED BALANCE SHEET DATA:
Total assets................ $47,049,537 $41,712,080 $28,852,785 $24,532,714 $24,694,765
Long-term debt.............. -- 100,001 233,334 366,667 500,000
Stockholders' equity........ 35,866,440 25,763,259 22,349,947 19,719,720 19,305,797
Stockholders' equity per
share*.................... $7.26 $5.52 $4.97 $4.39 $4.29
</TABLE>
- ---------------
* Adjusted to reflect the two-for-one stock split effected on December 29, 1995.
II-2
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENT OF FORWARD LOOKING INFORMATION:
The Company may occasionally make forward-looking statements and estimates,
such as forecasts and projections of the Company's future performance or
statements of management's plans and objectives as discussed below. Actual
results could differ materially from those in such forward-looking statements.
Therefore, no assurances can be given that the results in such forward-looking
statements will be achieved.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales in 1996 were $93.1 million, an increase of $17.3 million or
22.9%, as compared to $75.8 million for the comparable period last year. The
increase was due to new product introductions and expanded retail distribution
in domestic and foreign markets.
As of a percentage of net sales, net sales to foreign markets increased to
12.5% in 1996 from 10.3% in 1995 resulting primarily from increases in Europe
and Canada. As a percentage of net sales, Winnie the Pooh products increased to
32% in 1996 from 20% in 1995. The Company does not expect the rate of increase
in net sales of Winnie the Pooh products as a percentage of net sales to
continue at the same pace as has occurred in the previous two years due to the
level of distribution achieved during that initial period. The Company expects
to initiate distribution of products featuring licensed Sesame Street characters
during the second quarter of 1997.
Cost of products sold in 1996 was $55.5 million, an increase of $10.4
million or 23.0%, as compared to $45.1 million for the comparable period last
year. As a percentage of sales, cost of products sold in 1996 and 1995 remained
constant at approximately 59.5%.
Selling, general, and administrative expenses in 1996 were $28.6 million,
an increase of $4.6 million or 19.3% as compared to $24.0 million over such
expenses in 1995. The increase resulted primarily from costs related to
increased sales volume, payroll and payroll related costs. As a percentage of
net sales, selling, general, and administrative expenses for the year of 1996
decreased to 30.7% from 31.6% in 1995. The decrease reflects the economies of
scale provided by higher volume of business.
Income tax expense as a percentage of pretax income was 40% in 1996 and
1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net sales in 1995 were $75.8 million, an increase of $22.6 million, or
42.3%, as compared to $53.2 million in 1994. The increase was due to new product
introductions and expanded retail distribution in domestic and foreign markets.
Net sales particularly benefited from the introduction of newly licensed Winnie
the Pooh products and the introduction of new products that have higher average
selling prices than products previously offered by the Company.
Cost of products sold in 1995 was $45.1 million, an increase of $15.6
million or 52.9%, as compared to $29.5 million in 1994. As a percentage of net
sales, cost of products sold in 1995 increased to 59.5% from 55.4% in the
comparable period of 1994. The increase was due to increased sales of
higher-priced, lower margin items, increased cost of products due to raw
material price increases, licensing fees, and air freight shipments from
overseas production facilities incurred primarily in the first three months of
the year.
Selling, general, and administrative expenses in 1995 were $24.0 million,
an increase of $5.1 million, or 26.7%, as compared to $18.9 million over such
expenses in 1994. The increase resulted primarily from costs related to
increased sales volume. As a percentage of net sales, selling, general, and
administrative expenses in 1995 decreased to 31.6% from 35.5% in 1994. The
decrease reflects the economies of scale provided by higher volume of business.
During 1995, the Company sought to issue additional shares of common stock
in order to increase its working capital and improve the liquidity of its
stock.. Due to uncertain market conditions affecting the retail sector and the
price of the Company's stock, the Company decided to postpone indefinitely the
public offering.
II-3
<PAGE> 12
As a result, the Company wrote-off offering expenses amounting to a pretax
charge of approximately $310,000 ($186,000 net of tax). The offering was
subsequently resumed and consummated in 1996 (see below).
Income tax expense as a percentage of pretax income increased to 40.0% in
1995 from 38.5% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital increased by $9.4 million from $20.2 million at
December 31, 1995 to $29.6 million at December 31, 1996 primarily due to a
secondary public offering of the Company's Common Stock which provided net
proceeds to the Company of $5.1 million and funds generated from profitable
operations. Accounts receivable increased by $1.7 million primarily as a result
of increased sales. Cash increased by $3.6 million primarily as a result of the
above mentioned secondary offering and profitable operations.
In 1996, the Company resumed and consummated a public offering of common
stock which had been postponed in 1995. The closing of the sale, consisting of
400,000 newly issued shares and 1,200,000 shares of certain selling stockholders
was held on July 1, 1996 at which time the Company issued the new shares and
received the net proceeds of $5,121,750. The proceeds of the newly issued shares
were used to pay certain indebtedness of the Company.
Unsecured lines of credit of $20 million which are subject to annual
renewal, are available from banks. Amounts outstanding under these lines are
payable upon demand by the banks. During 1996, the Company has borrowed various
amounts from time to time up to $9.9 million. As of December 31, 1996 no
balances were outstanding.
The Company paid a cash dividend of $0.10 and $0.085 per share of Common
Stock in June of 1996 and 1995, respectively.
The Company expects cash flow from operations and availability under the
Company's lines of credit to be sufficient to meet cash needs for working
capital expenditures for at least the next two years.
INFLATION AND FOREIGN CURRENCY FLUCTUATIONS
Inflation has not had a material effect on the Company's operating results
over the past three years.
The Company enters into forward exchange contracts to minimize the impact
of fluctuations in currency exchange rates on future cash flows emanating from
sales denominated in foreign currencies. The Company does not purchase such
contracts for trading purposes. During 1996, the Company entered into forward
exchange contracts with a bank whereby the Company is committed to deliver
foreign currency at predetermined rates. The contracts expire within one year.
The Company's commitment under these contracts approximated $6.0 million as of
December 31, 1996. At December 31, 1996, the exchange rates for such currencies
covered by the contracts approximated the predetermined rate included therein.
The Company routinely assesses the financial strength of the bank which is
counterparty to the forward exchange contracts. As of December 31, 1996,
management believes it had no significant exposure to credit risk relative to
such contracts.
II-4
<PAGE> 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
<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included in the Registrant's
definitive proxy statement for the 1997 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included in the Registrant's
definitive proxy statement for the 1997 Annual Meeting of Stockholders, except
that the sections in said definitive proxy statement entitled "Board
Compensation Committee Report on Executive Compensation" and the "Stock
Performance Chart" shall not be deemed incorporated herein by reference to this
10-K Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Registrant's
definitive proxy statement for the 1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is nothing to report relating to this Item.
III-1
<PAGE> 15
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14.(a) 1. FINANCIAL STATEMENTS
Independent Auditors' Report
Balance Sheets as of December 31, 1996 and 1995
Statements of Income for the Years Ended December 31, 1996, 1995 and
1994
Statements of Stockholders' Equity for the Years Ended December 31,
1996, 1995 and 1994
Statements of Cash Flows for the Years Ended December 31, 1996, 1995
and 1994
(a) 2. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
Other schedules are omitted because of the absence of conditions
under which they are required or because the required information is
given in the financial statements or notes thereto.
14.(a) 3. EXHIBITS
The following are either (i) filed herewith as exhibits to this 10-K Report
or (ii) have been filed as exhibits to filings under the Securities Act of 1933
or the Securities Exchange Act of 1934 and are incorporated herein by reference
as exhibits to this 10-K Report.
<TABLE>
<CAPTION>
PAGE
-------
<S> <C> <C>
(3)(i) Restated Articles of Organization as currently in effect (filed as
Exhibit (3.1) to Amendment No. 1 to Form S-1 Registration Statement filed
with the Commission on October 5, 1995 and incorporated herein by
reference).
(3)(ii) By-laws of the Company and any amendments thereto, as currently in effect
(filed as Exhibit 3(ii) on Form 10-K for the year ended December 31, 1994
and incorporated herein by reference.)
(10)(a) Security and Trust Agreement among Town of Avon, acting by and through
its Industrial Development Financing Authority, Kiddie Products, Inc.,
and State Street Bank and Trust Company relating to issuance of
industrial revenue bonds, dated as of October 1, 1982 (filed as Exhibit
10 (c) on Form 10-K for the year ended December 31, 1994 and incorporated
herein by reference).
(10)(b) Bond Purchase Agreement among Town of Avon, acting by and through its
Industrial Development Financing Authority, Kiddie Products, Inc., and
State Street Bank and Trust Company, dated as of October 1, 1982 (filed
as Exhibit 10 (d) on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
(10)(c) Loan Agreement between Town of Avon, acting by and through its Industrial
Development Financing Authority, and Kiddie Products, Inc., dated as of
October 1, 1982 (filed as Exhibit 10 (e) on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).
(10)(d) Put Agreement between State Street Bank and Trust Company and Kiddie
Products, Inc., dated as of October 1, 1982 (filed as Exhibit 10 (f) on
Form 10-K for the year ended December 31, 1994 and incorporated herein by
reference).
(10)(e) Agreement with Disney Enterprises, Inc. dated March 28, 1994 (filed as
Exhibit 10.11 on Form S-1 Registration Statement filed with the
Commission on September 15, 1995 and incorporated herein by reference).
(10)(f) Agreement with Disney Enterprises, Inc. dated December 3, 1996 (certain
portions of which are subject to a confidential treatment request). IV-17
(10)(g) Agreement with the Children's Television Workshop dated July 1, 1996
(certain portions of which are subject to a confidential treatment
request). IV-17
Management Contracts and Compensatory Plans
(10)(h) Kiddie Products, Inc. 1993 Equity Incentive Plan, as amended through
January 19, 1995 (filed as Exhibit 10 (g) on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference).
</TABLE>
IV-1
<PAGE> 16
<TABLE>
<CAPTION>
PAGE
-------
<S> <C> <C>
(10)(i) Kiddie Products, Inc. 1993 Stock Option Plan for Non-employee Directors,
as amended through January 19, 1995 (filed as Exhibit 10 (h) on Form 10-K
for the year ended December 31, 1994 and incorporated herein by
reference).
(10)(j) Agreement between Kiddie Products, Inc. and Jerome M. Karp dated August
8, 1994 (filed as Exhibit 10(c) to the Form 10-Q Report for the quarter
ended June 30, 1994, and incorporated herein by reference).
(10)(k) Employment Agrement between Kiddie Products, Inc. and Benjamin Peltz,
dated March 23, 1995 (filed as Exhibit 10(j) on Form 10-K for the year
ended December 31, 1994 and incorporated herein by reference).
(10)(l) Employment Agreement between Kiddie Products, Inc. and Ronald J. Sidman,
dated March 23, 1995 (filed as Exhibit 10(k) on Form 10-K for the year
ended December 31, 1994 and incorporated herein by reference).
(10)(m) The First Years Inc. 1995 Restated Annual Incentive Plan, effective as of
July 1, 1995 (filed as Exhibit 10.10 on Form S-1 Registration Statement
filed with the Commission on September 15, 1995 and incorporated herein
by reference.).
------------------------
(11) Statement re Computation of Per Share Earnings. IV-17
(23) Consent of Deloitte & Touche LLP dated March 28, 1997. IV-17
(27) Financial Data Schedule. IV-17
</TABLE>
14.(b) REPORT ON FORM 8-K
The Company did not file any reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended December 31, 1996.
IV-2
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE FIRST YEARS INC.
....................................
(Registrant)
By: /s/ RONALD J. SIDMAN
..................................
RONALD J. SIDMAN, CHIEF EXECUTIVE
OFFICER,
CHAIRMAN OF THE BOARD OF
DIRECTORS, AND PRESIDENT
Date: March 13, 1997
By: /s/ BENJAMIN PELTZ
..................................
BENJAMIN PELTZ, SENIOR VICE
PRESIDENT AND TREASURER
(CHIEF FINANCIAL OFFICER AND CHIEF
ACCOUNTING OFFICER)
Date: March 13, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 13, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ ---------------
<C> <S> <C>
/s/ RONALD J. SIDMAN Chief Executive Officer March 13, 1997
........................................ Chairman of the Board of
RONALD J. SIDMAN Directors and President
/s/ JEROME M. KARP Vice Chairman of the Board of March 13, 1997
........................................ Directors
JEROME M. KARP
/s/ EVELYN SIDMAN Director March 13, 1997
........................................
EVELYN SIDMAN
/s/ BENJAMIN PELTZ Director March 13, 1997
........................................
BENJAMIN PELTZ
/s/ MERTON N. ALPERIN Director March 13, 1997
........................................
MERTON N. ALPERIN
/s/ FRED T. PAGE Director March 13, 1997
........................................
FRED T. PAGE
</TABLE>
IV-3
<PAGE> 18
THE FIRST YEARS INC.
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report...................................................... IV-5
Financial Statements:
Balance Sheets as of December 31, 1996 and 1995.............................. IV-6
Statements of Income for the Years Ended December 31, 1996, 1995, and 1994... IV-7
Statements of Stockholders' Equity for the Years Ended December 31, 1996,
1995, and 1994.............................................................. IV-8
Statements of Cash Flows for the Years Ended December 31, 1996, 1995, and
1994........................................................................ IV-9
Notes to Financial Statements................................................ IV-10-15
Financial Statement Schedule II -- Valuation and Qualifying Accounts for the Years
Ended December 31, 1996, 1995, and 1994......................................... IV-16
</TABLE>
IV-4
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
The First Years Inc.
Avon, Massachusetts
We have audited the accompanying balance sheets of The First Years Inc. as
of December 31, 1996 and 1995, and the related statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. Our audits also included the financial statement
schedule listed in the accompanying index. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of The First Years Inc. as of December 31, 1996
and 1995, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 5, 1997
IV-5
<PAGE> 20
THE FIRST YEARS INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Notes 1 and 8).................... $ 4,164,587 $ 552,568
Accounts receivable (less allowance for doubtful accounts of
$185,000 in 1996 and 1995) (Note 8)......................... 15,929,465 14,191,630
Inventories (Note 1)......................................... 18,588,044 19,009,784
Prepaid expenses and other assets............................ 375,317 778,074
Deferred tax asset (Notes 1 and 3)........................... 946,400 872,300
----------- -----------
Total current assets.................................... 40,003,813 35,404,356
----------- -----------
Property, Plant, and Equipment (Note 1):
Land......................................................... 167,266 167,266
Building..................................................... 4,016,405 3,737,861
Machinery and molds.......................................... 7,329,240 6,481,504
Furniture and equipment...................................... 3,092,356 3,183,379
----------- -----------
Total................................................... 14,605,267 13,570,010
Less accumulated depreciation................................ 7,559,543 7,262,286
----------- -----------
Property, plant, and equipment -- net................... 7,045,724 6,307,724
----------- -----------
Total Assets............................................ $47,049,537 $41,712,080
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt (Note 2)................... $ 100,000 $ 133,333
Short-term borrowings (Note 2)............................... -- 6,200,000
Accounts payable............................................. 6,969,115 6,624,948
Accrued royalty expense (Note 6)............................. 848,671 533,801
Accrued payroll expenses..................................... 1,087,302 1,105,004
Accrued selling expenses..................................... 1,406,009 604,434
----------- -----------
Total current liabilities............................... 10,411,097 15,201,520
----------- -----------
Long-Term Debt -- Less portion due currently (Note 2)............. -- 100,001
Deferred Tax Liability (Notes 1 and 3)............................ 772,000 647,300
Commitments and Contingencies (Notes 5, 6 and 8)
Stockholders' Equity (Notes 4, 7 and 9):
Common stock -- authorized, 15,000,000 shares; issued,
4,948,980 and 4,515,142 as of December 31, 1996 and 1995.... 494,898 451,514
Paid-in-capital.............................................. 5,271,875 --
Retained earnings............................................ 30,099,667 25,311,745
----------- -----------
Total stockholders' equity.............................. 35,866,440 25,763,259
----------- -----------
Total Liabilities and Stockholders' Equity.............. $47,049,537 $41,712,080
=========== ===========
</TABLE>
See notes to financial statements.
IV-6
<PAGE> 21
THE FIRST YEARS INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales (Notes 1, 6 and 8)........................ $93,110,361 $75,757,322 $53,233,109
Cost of Products Sold (Note 1)...................... 55,463,255 45,108,546 29,498,457
----------- ----------- -----------
Gross Profit........................................ 37,647,106 30,648,776 23,734,652
Selling, General, and Administrative Expenses (Notes
1 and 7).......................................... 28,580,039 23,961,206 18,915,908
----------- ----------- -----------
Operating Income.................................... 9,067,067 6,687,570 4,818,744
Other Income (Expense):
Interest expense............................... (358,637) (186,338) (24,575)
Interest income................................ 27,349 16,718 66,605
Offering expenses (Note 9)..................... -- (310,457) --
----------- ----------- -----------
Income Before Income Taxes.......................... 8,735,779 6,207,493 4,860,774
Provision for Income Taxes (Notes 1 and 3).......... 3,494,300 2,483,000 1,871,400
----------- ----------- -----------
Net Income.......................................... $ 5,241,479 $ 3,724,493 $ 2,989,374
=========== =========== ===========
Earnings Per Share (Note 1)......................... $1.06 $0.80 $0.66
===== ===== =====
</TABLE>
See notes to financial statements.
IV-7
<PAGE> 22
THE FIRST YEARS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- PAID-IN RETAINED
SHARES PAR VALUE CAPITAL EARNINGS
--------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1994....................... 2,248,260 $ 224,826 $ 75,354 $19,419,540
Stock issued under stock option plans
(Note 7)................................ 2,170 217 22,840 --
Dividends paid............................ -- -- -- (382,204)
Net income................................ -- -- -- 2,989,374
--------- -------- ---------- -----------
Balance, December 31, 1994..................... 2,250,430 225,043 98,194 22,026,710
Stock issued under stock option plans
(Note 7)................................ 7,141 714 70,957 --
Dividends paid............................ -- -- -- (382,852)
Stock split, two-for-one (Note 4)......... 2,257,571 225,757 (169,151) (56,606)
Net income................................ -- -- -- 3,724,493
--------- -------- ---------- -----------
Balance, December 31, 1995..................... 4,515,142 451,514 -- 25,311,745
Stock issued under stock option plans
(Note 7)................................ 33,838 3,384 190,125 --
Dividends paid............................ -- -- -- (453,557)
Stock issued through public offering (Note
9)...................................... 400,000 40,000 5,081,750 --
Net income................................ -- -- -- 5,241,479
--------- -------- ---------- -----------
Balance, December 31, 1996..................... 4,948,980 $ 494,898 $5,271,875 $30,099,667
========= ======== ========== ===========
</TABLE>
See notes to financial statements.
IV-8
<PAGE> 23
THE FIRST YEARS INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income..................................... $ 5,241,479 $ 3,724,493 $ 2,989,374
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation.............................. 1,228,790 992,291 878,250
Provision for doubtful accounts........... 152,582 86,227 23,673
Loss on disposal of equipment............. 37,699 70,258 47,877
Increase (decrease) arising from working
capital items:
Accounts receivable.................. (1,890,417) (5,011,624) (2,077,176)
Inventories.......................... 421,740 (8,595,949) (2,184,385)
Prepaid expenses and other assets.... 402,757 (482,153) (53,315)
Accounts payable..................... 344,167 2,331,128 1,173,646
Accrued royalty expense.............. 314,870 533,801 --
Accrued payroll expenses............. (17,702) 322,114 730,508
Accrued selling expenses............. 801,575 348,273 (142,477)
Federal and state income taxes
payable............................ -- (218,500) (9,200)
Change in deferred income taxes........... 50,600 (185,300) 107,200
----------- ----------- -----------
Net cash (used for) provided by
operating activities.......... 7,088,140 (6,084,941) 1,483,975
----------- ----------- -----------
Cash Flows from Investing Activities --
Purchase of property, plant, and equipment..... (2,004,489) (1,447,018) (1,374,721)
----------- ----------- -----------
Cash Flows from Financing Activities:
Repayment of industrial revenue bonds.......... (133,334) (133,333) (133,333)
Net proceeds (repayment) from short-term
borrowings................................... (6,200,000) 6,200,000 --
Dividends paid................................. (453,557) (382,852) (382,204)
Net proceeds from public offering.............. 5,121,750 -- --
Common stock issued under stock option plans... 193,509 71,671 23,057
----------- ----------- -----------
Net cash provided by (used for)
financing activities.......... (1,471,632) 5,755,486 (492,480)
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents.... 3,612,019 (1,776,473) (383,226)
Cash and Cash Equivalents, Beginning of Year........ 552,568 2,329,041 2,712,267
----------- ----------- -----------
Cash and Cash Equivalents, End of Year.............. $ 4,164,587 $ 552,568 $ 2,329,041
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information --
Cash paid during the year for:
Interest.................................. $ 358,637 $ 186,338 $ 24,575
=========== =========== ===========
Income taxes.............................. $ 3,087,700 $ 3,269,100 $ 1,773,400
=========== =========== ===========
</TABLE>
See notes to financial statements.
IV-9
<PAGE> 24
THE FIRST YEARS INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business -- The First Years Inc. (the "Company") is a developer, marketer,
and distributor of certain basic accessory and related products for infants and
toddlers. The Company was founded and incorporated in 1952. Since its inception,
the Company has engaged in this single line of business, with one class of
similar products. The following is a summary of the Company's significant
accounting policies.
Revenue Recognition -- Revenue is recognized when products are shipped.
Cash Equivalents -- Highly liquid investments with a maturity of three
months or less when purchased have been classified as cash equivalents in the
accompanying financial statements. Such investments are carried at cost which
approximates market value.
Inventories -- Inventories are stated at the lower of cost (first-in,
first-out) or market. Inventories consist principally of finished goods,
unpackaged components, and supplies.
Property, Plant, and Equipment -- Property, plant, and equipment is stated
at cost. Depreciation is provided based on the estimated useful lives of the
various classes of assets (building, 15 to 40 years; machinery and molds, 5 to
10 years; furniture and equipment, 5 to 10 years) using the straight-line
method.
Income Taxes -- Deferred tax assets and liabilities are determined based on
the differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates.
Employee Stock-Based Compensation -- The Company uses the intrinsic
value-based method of Accounting Principles Board Opinion ("APB") No. 25 to
account for employee stock-based compensation plans.
Earnings Per Share -- Earnings per share are based on the weighted average
number of shares outstanding during each year (retroactively adjusted to reflect
the two-for-one stock split effected on December 29, 1995) and common equivalent
shares, consisting of the effect of stock options outstanding, if dilutive
(4,941,196, 4,663,491 and 4,497,244 shares in 1996, 1995, and 1994,
respectively) (see Note 7). Earnings per share assuming full dilution have not
been presented because the dilutive effect is immaterial.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Research and Development Costs -- Research and development costs are
expensed as incurred. During 1996, 1995, and 1994, research and development
costs approximated $2,209,000, $1,834,000, and $1,466,000, respectively.
Foreign Currency Translation -- The Company's functional currency is the
U.S. dollar. Accordingly, monetary assets and liabilities of the Company's
foreign operations are translated from the respective local currency to the U.S.
dollar using year-end exchange rates while nonmonetary items are translated at
historical rates. Income and expense accounts are translated at the average
rates in effect during the year. Accordingly, translation adjustments and
transaction gains and losses are recognized as income in the year of occurrence
and are recorded as a component of cost of sales.
Foreign Exchange Contracts -- The Company enters into forward exchange
contracts to minimize the impact of fluctuations in currency exchange rates on
future cash flows emanating from sales denominated in foreign currencies. The
Company does not purchase such contracts for trading purposes. Gains and losses
related to foreign exchange contracts which qualify as accounting hedges of firm
commitments are deferred and recognized in income when the hedged transaction
occurs. Gains and losses related to foreign exchange
IV-10
<PAGE> 25
THE FIRST YEARS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
contracts which do not qualify for hedge accounting are marked to market
currently and recognized as a foreign currency transaction gain or loss.
Fair Value of Financial Instruments -- The fair value of the Company's
assets and liabilities which constitute financial instruments as defined in
Statement of Financial Accounting Standards ("SFAS") No. 107 approximate their
recorded value.
Reclassifications -- Certain reclassifications were made to prior year
amounts in order to conform with the current year presentation.
2. DEBT
Long-term debt consists of unsecured industrial revenue bonds ("IRB"), with
interest payable quarterly at 65% of the prime rate (5.4% at December 31, 1996
and 5.5% at December 31, 1995) and principal payable in equal quarterly
installments of $33,333 through September 30, 1997.
Under the terms of the IRB agreement, the Company must comply with certain
covenants, none of which impose a significant limitation on the Company.
The Company has available unsecured lines of credit totaling $20,000,000
with two banks. Both lines are subject to annual renewal and require no
compensating balances. One line bears interest at the prime rate or the LIBOR
rate plus 1.75% and the other line at the prime rate less 0.25% or the LIBOR
rate plus 1.75%. During 1996 and 1995, the Company borrowed various amounts up
to $9,900,000 and $6,500,000, respectively, under the lines. As of December 31,
1996 and 1995 a balance of $0 and $6,200,000 remained outstanding. The average
interest rate on debt outstanding at December 31, 1995 was 7.9%. No other
short-term borrowings were incurred by the Company during 1996 or 1995.
3. INCOME TAXES
Components of the Company's net deferred tax asset at December 31 are as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Reserves not currently deductible.................. $119,000 $ 79,000
Capitalized packaging costs not currently
deductible....................................... 486,600 442,000
Capitalized inventory costs not currently
deductible....................................... 301,000 261,100
Other.............................................. 39,800 90,200
-------- --------
946,400 872,300
-------- --------
Deferred tax liabilities:
Excess tax depreciation over financial reporting
depreciation..................................... 767,500 642,800
Other.............................................. 4,500 4,500
-------- --------
772,000 647,300
-------- --------
Net deferred tax asset.................................. $174,400 $225,000
======== ========
</TABLE>
There was no valuation allowance for the years ended December 31, 1996 and
1995.
IV-11
<PAGE> 26
THE FIRST YEARS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Federal:
Current............................ $2,649,600 $2,104,000 $1,432,700
Deferred........................... 50,600 (185,300) 107,200
---------- ---------- ----------
Total federal................. 2,700,200 1,918,700 1,539,900
State................................... 794,100 564,300 331,500
---------- ---------- ----------
Provision for income taxes.............. $3,494,300 $2,483,000 $1,871,400
========== ========== ==========
</TABLE>
A reconciliation of the statutory federal income tax rate and the effective
tax rate as a percentage of pretax income is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory rate........................................... 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit.... 6.0 6.0 4.5
---- ---- ----
Effective tax rate....................................... 40.0% 40.0% 38.5%
==== ==== ====
</TABLE>
4. COMMON STOCK
In December 1995, the Company's Board of Directors (the "Board") declared a
two-for-one split of the Company's common stock. The stock split, effected in
the form of a stock dividend, was distributed on December 29, 1995 to
stockholders of record in 1995. Earnings per share amounts shown in the
accompanying financial statements have been adjusted to reflect the 1995 stock
split.
5. COMMITMENTS AND CONTINGENCIES
Foreign Exchange Contracts -- During 1996 and 1995, the Company entered
into forward exchange contracts with a bank whereby the Company is committed to
deliver foreign currency at predetermined rates. The contracts expire within one
year. The Company's future commitment under these contracts approximated
$6,000,000 and $4,500,000 as of December 31, 1996 and 1995, respectively. At
December 31, 1996 and 1995, the exchange rates for such currencies covered by
the contracts approximated the predetermined rates included therein.
Other Commitments -- At December 31, 1996 and 1995, letters of credit
outstanding aggregated approximately $644,000 and $1,925,000, respectively.
During 1994, the Company entered into an employment agreement with an
executive officer which provides for an annual salary of $100,000 through August
1999. On March 23, 1995, the Company entered into employment agreements with two
key senior executive officers which provide for aggregate annual base salaries
through March 2000 of $391,000, subject to any increases or decreases
established from time to time at the discretion of the Compensation Committee of
the Board and, in the event of termination, provide for noncompetition payments
for two years equal to their annual base salaries.
Contingencies -- The Company is involved in legal proceedings which have
arisen in the ordinary course of business. Management believes the outcome of
these proceedings will not have a material adverse impact on the Company's
financial condition or operating results.
6. ROYALTIES
During 1996 and 1995, the Company entered into various agreements which
provide for the payment of royalties on sales of certain character and patent
licensed products. The agreements have terms ranging from one to fifteen years
and require minimum royalty payments of $4,715,000 and $729,000 for agreements
signed during 1996 and
IV-12
<PAGE> 27
THE FIRST YEARS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1995, respectively. Future outstanding minimum royalty commitments under these
agreements amounted to $4,692,000 and $92,800 at December 31, 1996 and 1995,
respectively.
7. BENEFIT PLANS
Defined Contribution Plans -- The Company has a defined contribution
trusteed benefit plan covering eligible employees, requiring annual
contributions based upon certain percentages of salaries of employees. The
Company's policy is to fund pension expense as accrued. Pension expense
aggregated $472,000, $217,000, and $246,000 in 1996, 1995, and 1994,
respectively. The Company sponsors a 401(k) defined contribution plan covering
substantially all Company employees pursuant to which the Company is obligated
to match, up to specified amounts, employee contributions. Company contributions
to this plan were not material for the periods presented.
Stock Option Plans -- In May 1993, the Company's stockholders approved the
adoption of The First Years Inc. 1993 Equity Incentive Plan and The First Years
Inc. 1993 Stock Option Plan for Non-employee Directors (the "plans") which cover
employees and directors of the Company. The Board has reserved 670,000 shares
for issuance under the plans and 20,000 shares for another stock option plan
(all share amounts adjusted to reflect the two-for-one stock split effected on
December 29, 1995). The exercise price for the options granted may not be less
than the fair market value of the optioned stock at the date of grant, 110% of
fair market value in the case of options granted to a 10% stockholder.
Options granted must be exercised within the period prescribed by the
Committee; the options vest in accordance with the vesting provisions prescribed
at the time of grant.
A summary of activity (all years adjusted to reflect the two-for-one stock
split effected on December 29, 1995) of stock options granted under the plans is
as follows:
<TABLE>
<CAPTION>
WEIGHTED NUMBER OF
AVERAGE NUMBER OF OPTIONS
EXERCISE PRICE OPTIONS AVAILABLE
PER SHARE OUTSTANDING FOR GRANT
-------------- ----------- ---------
<S> <C> <C> <C>
January 1, 1994........................... $ 5.46 204,000 236,000
Authorized........................... -- 20,000
Granted.............................. 4.65 126,300 (126,300)
Canceled............................. 4.97 (20,828) 20,828
Exercised............................ 5.13 (4,340) --
------- --------
December 31, 1994......................... 5.16 305,132 150,528
Authorized........................... -- 230,000
Granted.............................. 9.14 128,920 (128,920)
Canceled............................. 5.61 (8,192) 8,192
Exercised............................ 5.02 (14,282) --
------- --------
December 31, 1995......................... 6.40 411,578 259,800
Granted.............................. 12.46 68,605 (68,605)
Canceled............................. 8.19 (8,557) 8,557
Exercised............................ 5.71 (33,838) --
------- --------
December 31, 1996......................... $ 7.37 437,788 199,752
======= ========
Exercisable at December 31, 1994..... $ 5.46 66,384
Exercisable at December 31, 1995..... $ 5.25 166,999
Exercisable at December 31, 1996..... $ 6.01 278,935
</TABLE>
The grant date fair value for options granted in 1996 and 1995 was $4.19
and $3.46, respectively.
IV-13
<PAGE> 28
THE FIRST YEARS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth information regarding stock options
outstanding at December 31, 1996 under the Stock Option Plans as described
above:
<TABLE>
<CAPTION>
NUMBER
OF AVERAGE
OPTIONS WEIGHTED WEIGHTED NUMBER EXERCISE
OUTSTANDING RANGE OF AVERAGE AVERAGE CURRENTLY PRICE FOR
AT EXERCISE EXERCISE REMAINING EXERCISABLE OPTIONS
12/31/96 PRICES PRICE LIFE AT 12/31/96 EXERCISABLE
- ------- --------------- -------- --------- ------------ -----------
<C> <S> <C> <C> <C> <C> <C>
253,673 .............. $ 4.56 - $ 6.84 $ 5.15 1.42 226,361 $5.31
117,175 .............. 6.85 - 10.26 9.14 3.08 52,574 9.34
60,940 .............. 10.27 - 15.39 12.01 4.01 -- --
6,000 .............. 15.40 - 17.13 17.13 4.42 -- --
- ------- --------------- ------- ----- ---- -----
437,788 .............. $ 4.56 - $17.13 $ 7.37 2.16 278,935 $6.01
======= =============== ======= ===== ==== =====
</TABLE>
PRO FORMA DISCLOSURES
As described in Note 1, the Company applies the intrinsic value method of
APB No. 25 and related Interpretations in accounting for its stock option plans.
Accordingly, no compensation cost has been recognized for its stock option
plans. Had compensation cost been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of FASB
Statement 123, the Company's net income and earnings per share for the years
ended December 31, 1996 and 1995 would have been as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net income...................................... $5,038,337 $3,625,525
Earnings per share.............................. $ 1.02 $ 0.78
</TABLE>
For purposes of the pro forma disclosures, the fair value of the options
granted under the Company's stock option plans during 1996 and 1995 was
estimated on the date of grant using the Binomial option pricing model. Key
assumptions used to apply this pricing model are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Risk free interest rate............................. 6.08% 7.01%
Expected life of option grants...................... 4.5 years 4.5 years
Expected volatility of underlying stock............. 32.87% 36.86%
Expected dividend payment rate...................... 0.85% 0.85%
</TABLE>
The pro forma disclosures only include the effects of options granted in
1996 and 1995.
8. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
Concentrations of Credit Risk -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
equivalents, trade receivables and forward exchange contracts (see Note 5). The
Company's cash equivalents consist of money market funds placed with major banks
and financial institutions. The Company's trade receivables principally include
amounts due from retailers who are geographically dispersed. The Company's three
largest customers accounted for 55% and 68% of the trade receivables outstanding
at December 31, 1996 and 1995, respectively. The Company routinely assesses the
financial strength of its customers and purchases credit insurance to limit its
potential exposure to trade receivable credit risks. The Company routinely
assesses the financial strength of the bank which is the counterparty to the
forward exchange contracts. As of December 31, 1996, management believes it had
no significant exposure to credit risks.
Major Customers and Export Sales -- The Company derived 10% or more of its
sales from its largest customer. Such amounts aggregated $25,722,000,
$21,966,000, and $14,256,000 in 1996, 1995, and 1994, respectively. The
Company's second largest customer accounted for sales of $18,257,000,
$16,500,000, and
IV-14
<PAGE> 29
THE FIRST YEARS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$12,118,000 in 1996, 1995, and 1994, respectively. The Company's third largest
customer accounted for sales of $9,908,000 in 1996. No other customer accounted
for 10% or more of the Company's sales. Export sales, primarily to Europe,
Canada, South America and the Pacific Rim, were approximately $11,564,000 and
$7,745,000 in 1996 and 1995, respectively.
Reliance on Foreign Manufacturers -- The Company does not own or operate
its own manufacturing facilities. In 1996 and 1995, the Company derived
approximately 55% and 46%, respectively, of its net sales from products
manufactured by others in the Far East, mainly in the Peoples Republic of China.
A change in suppliers could cause a delay in manufacturing and a possible loss
of sales, which would affect operating results adversely, depending on the
particular product.
9. OFFERING OF COMMON STOCK
During 1995, the Company initiated a public offering of shares of its
common stock to increase its working capital and improve liquidity of its common
stock. Due to uncertain market conditions affecting the retail sector and the
price of its stock, the Company decided to postpone the public offering. As a
result, the Company wrote off offering expenses amounting to $310,000 in
December 1995.
During 1996, the Company proceeded with the postponed offering of shares
and entered into an agreement with a group of underwriters to sell 1.6 million
shares of common stock ("the shares"), consisting of 400,000 newly issued shares
and 1,200,000 shares of certain selling stockholders. The closing of the sale
was held on July 1, 1996 at which time the Company issued 400,000 new shares and
received the net proceeds of $5,121,750.
* * * * * *
IV-15
<PAGE> 30
SCHEDULE II
THE FIRST YEARS INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
ADDITIONS
BALANCE, CHARGED
BEGINNING TO COSTS AND BALANCE
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS(1) END OF YEAR
- --------------------------------------------- --------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Valuations Accounts Deducted from Assets to
which they Apply --
Allowance for doubtful accounts:
1996............................... $185,000 $152,582 $152,582 $185,000
======== ======== ======== ========
1995............................... $185,000 $ 86,227 $ 86,227 $185,000
======== ======== ======== ========
1994............................... $185,000 $ 23,673 $ 23,673 $185,000
======== ======== ======== ========
</TABLE>
- ---------------
(1) Net accounts written off.
IV-16
<PAGE> 31
THE FIRST YEARS INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<C> <S>
10(f) Agreement with Disney Enterprises, Inc. dated December 3, 1996 (certain portions of
which are subject to a confidential treatment request).
10(g) Agreement with Children's Television Workshop dated July 1, 1996 (certain portions
of which are subject to a confidential treatment request).
11 Statement re Computation of Per Share Earnings
23 Consent of Deloitte & Touche LLP dated March 28, 1997.
27 Financial Data Schedule
</TABLE>
IV-17
<PAGE> 1
NOTE: The omitted portions of this document marked with an asterisk are subject
to a confidential treatment request and have been filed separately with the
Securities and Exchange Commission.
LICENSE AGREEMENT
-----------------
Date: December 3, 1996
Re: WINNIE THE POOH
This license agreement ("Agreement") is entered into by and between Disney
Enterprises, Inc. ("Disney"), with a principal place of business at 500 South
Buena Vista Street, Burbank, California 91521, and THE FIRST YEARS, INC.
("Licensee"), with its principal place of business at One Kiddie Drive, Avon, MA
02322-1171. Disney and Licensee agree as follows:
1. MEANING OF TERMS
----------------
A. "LICENSED MATERIAL" means the graphic representations of the following:
WINNIE THE POOH, CHRISTOPHER ROBIN, EEYORE, KANGA, ROO, RABBIT,
PIGLET, OWL, GOPHER, and TIGGER, all in the style as designed by
Disney.
B. "TRADEMARKS" means "WALT DISNEY", "DISNEY", and the representations of
Licensed Material included in Subparagraph 1.A. above.
C. "ARTICLES" means the items set forth on Schedule A, which is attached
hereto and incorporated herein by this reference, on or in connection with
which the Licensed Material and/or the Trademarks are reproduced or used,
and includes each and every stock keeping unit ("SKU") of each Article.
D. "MINIMUM PER ARTICLE ROYALTY" means for each Article identified herein
which is sold the sum indicated herein:
None.
E. "PRINCIPAL TERM" means the period commencing January 1, 1997, and
ending * .
F. "TERRITORY" means the United States, United States PX's wherever located,
and United States territories and possessions, excluding Puerto Rico, Guam,
Commonwealth of Northern Mariana Islands and Palau. However, if sales are
made to chain stores in the United States which have stores in Puerto Rico,
such chain stores may supply Articles to such stores in Puerto Rico.
G. "ROYALTIES" means a royalty in the amounts set forth below in Subparagraphs
1.G(1)(a), (b), and (c) and Royalties shall be further governed by the
provisions contained in Subparagraphs 1.G.(2)-(6):
<PAGE> 2
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 2
(1)(a)* percent ( * %) of Licensee's Net Invoiced Billings to authorized
Retailers and Wholesalers for Articles shipped by Licensee from a
location in the Territory for delivery to a customer located in the
Territory ("F.O.B. In Sales"); or
(b)* percent ( * %) of Licensee's Net Invoiced Billings to authorized
Retailers and Wholesalers when Licensee's customer located in the
Territory takes title to the Articles outside the Territory and/or
bears the risk of loss of Articles manufactured and shipped to the
customer from outside the Territory ("F.O.B. Out Sales"); or
(c) if a Minimum Per Article Royalty has been specified in Subparagraph
1.D. above, and it would result in a higher royalty to be paid for the
Articles, Licensee agrees to pay the higher royalty amount.
(2) The sums paid to Disney as Royalties on any sales to Licensee's
Affiliates shall be no less than the sums paid on sales to customers
not affiliated with Licensee.
(3) All sales of Articles shipped to a customer outside the Territory
pursuant to a distribution permission shall bear a Royalty at the rate
for F.O.B. Out Sales. However, sales of Articles to Disney's
Affiliates outside the Territory shall bear a Royalty at the rate for
F.O.B. In Sales.
(4) No Royalties are payable on the mere manufacture of Articles.
(5) The full Royalty percentage shall be payable on close-out or other
deep discount sales of Articles, including sales to employees.
(6) Royalties reported on sales of Articles which have been returned to
Licensee for credit or refund and on which a refund has been made or
credit memo issued may be credited against Royalties due. The credit
shall be taken in the Royalty Payment Period in which the refund is
given or credit memo issued. Unused credits may be carried forward,
but in no event shall Licensee be entitled to a refund of Royalties.
<PAGE> 3
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 3
H. "NET INVOICED BILLINGS" means the following:
(1) actual invoiced billings (i.e., sales quantity multiplied by
Licensee's selling price) for Articles sold, and all other receivables
of any kind whatsoever, received in payment for the Articles, whether
received by Licensee or any of Licensee's Affiliates, except as
provided in Subparagraph 1.H.(2), less "Allowable Deductions" as
hereinafter defined.
(2) The following are not part of Net Invoiced Billings: invoiced charges
for transportation of Articles within the Territory which are
separately identified on the sales invoice, and sales taxes.
I. "ALLOWABLE DEDUCTIONS" means the following:
(1) volume discounts, and other discounts from the invoice price (or
post-invoice credits) unilaterally imposed in the regular course of
business by Licensee's customers, so long as Licensee documents such
discounts (or credits) to Disney's satisfaction. In the event a
documented unilateral discount (or credit) is taken with respect to
combined sales of Articles and other products not licensed by Disney,
and Licensee cannot document the portion of the discount (or credit)
applicable to the Articles, Licensee may apply only a pro rata portion
of the discount (or credit) to the Articles. Unilateral discounts or
credits are never deductible if they represent items listed below in
Subparagraph 1.1.(2).
(2) The following are not Allowable Deductions, whether granted on sales
invoices or unilaterally imposed as discounts or as post-invoice
credits: cash discounts granted as terms of payment; early payment
discounts; allowances or discounts relating to advertising; mark down
allowances; new store allowances; defective goods allowances or
allowances taken by customers in lieu of returning goods; costs
incurred in manufacturing, importing, selling or advertising Articles;
freight costs incorporated in the selling price; and uncollectible
accounts.
J. "ROYALTY PAYMENT PERIOD" means each calendar quarterly period during the
Principal Term and during the sell-offperiod, if granted.
<PAGE> 4
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 4
K. "ADVANCE" means the following sum(s) payable by the following
date(s) as an advance on Royalties to accrue in the following
period(s):
None.
L. "GUARANTEE" means the following sum(s) which Licensee guarantees
to pay as minimum Royalties on Licensee's cumulative sales in the
following period(s):
*
M. "SAMPLES" means twelve (12) samples of each SKU of each Article, from
the first production run of each supplier of each SKU of each Article.
N. "PROMOTION COMMITMENT" means the following sum(s) which Licensee
agrees to spend in the following way(s):
Licensee hereby acknowledges Licensee's understanding that Disney is
implementing a common marketing and promotional fund (the "Common
Marketing Fund"), during the Principal Term, for purposes of
marketing and promoting the Licensed Material, the Trademarks,
and/or the brand(s), as Disney may deem appropriate in Disney's
absolute discretion. In order to implement the Common Marketing
Fund, Licensee shall be required, from time to time at Disney's
request, to provide a contribution(s) to the Common Marketing Fund,
the cumulative total of which shall not exceed * percent ( * %) of
Licensee's Net Invoiced Billings for Articles (such Net Invoiced
Billings to be estimated by Disney in a reasonable manner) during the
Principal Term, but in no event less than a cumulative total of *
percent ( * %) of the quotient of (the Guarantee divided by the
Royalty rate for F.O.B. In Sales). Within fifteen (15) days after each
request by Disney, Licensee shall pay to Disney the amount of the
contribution designated by Disney. Such contribution may be expended
by Disney and/or Disney's designees in the amount and in the manner
Disney deems most appropriate in order to market, promote, and
advertise the Licensed Material, the Trademarks, and/or the brand(s).
Licensee's contribution shall only be spent for the promotion of the
Licensed Material, the Trademarks, and/or the brand(s) licensed
hereunder. However, Disney does not ensure that Licensee will benefit
directly or pro-rata from the operation of the Common Marketing
<PAGE> 5
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 5
Fund. Licensee shall not be entitled to any audit rights with regard to the
Common Marketing Fund.
O. "MARKETING DATE" means the following date(s) by which the following
Article(s) shall be available for purchase by the public at the retail
outlets authorized pursuant to Subparagraph 2.A.:
By January 1, 1997, for all Articles.
P. "AFFILIATE" means, with regard to Licensee, any corporation or other entity
which directly or indirectly controls, is controlled by, or is under common
control with Licensee; with regard to Disney, "Affiliate" means any
corporation or other entity which directly or indirectly controls, is
controlled by, or is under common control with Disney. "Control" of an
entity shall mean possession, directly or indirectly, of power to direct or
cause the direction of management or policies of such entity, whether
through ownership of voting securities, by contract or otherwise.
Q. "LAWS" means any and all applicable laws, rules, regulations, voluntary
industry standards, association laws, codes or other obligations pertaining
to any of Licensee's activities under this Agreement, including but not
limited to those applicable to the manufacture, pricing, sale and/or
distribution of the Articles.
R. "RETAILER" means independent and chain retail outlets which have
storefronts and business licenses, and which customers walk into, not up
to; "WHOLESALER" means a seller of items to retailers, not consumers, and
includes the term "distributor". The following do not qualify as authorized
sales outlets for Articles under this Agreement under any circumstances:
swap meets, flea markets, street peddlers, unauthorized kiosks, and the
like.
2. RIGHTS GRANTED
--------------
A. In consideration for Licensee's promise to pay and Licensee's payment of
all Royalties, Advances and Guarantees required hereunder, Disney grants
Licensee the non-exclusive right, during the Principal Term, and only
within the Territory, to reproduce the Licensed Material only on or in
connection with the Articles, to use such Trademarks and uses thereof as
may be approved when each SKU of the Articles is approved and only on or
in connection with the Articles, and to manufacture, distribute for sale
and sell the Articles (other than by direct marketing methods, which
includes but is not limited to, computer on-line selling, direct mail and
door-to-door solicitation). Licensee will sell the Articles only to the
following Retailers in
<PAGE> 6
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 6
the Territory for resale to the public in the Territory, or to Wholesalers
in the Territory for resale only to the following Retailers: (1) mass
market Retailers (including such Retailers as Target, Toys R Us, WalMart
and KMart), and (2) drug chains; provided, however, that the Articles
identified in Schedule A as A.12, and B.1 through B.7 must be carded and
sold only to the infant accessory departments or the juvenile products
departments of such authorized Retailers. Licensee will not sell the
Articles to other Retailers, or to other Wholesalers. In addition, License
may not sell the Articles to Retailers selling merchandise on a duty-free
basis, or to Wholesalers for resale to such Retailers, unless such Retailer
or Wholesaler has a then-current license agreement with Disney or any of
Disney's Affiliates permitting it to make such duty-free sales. Licensee
may sell the Articles to authorized customers for resale through the
pre-approved mail order catalogs listed on the Catalog Schedule to this
Agreement. If there is a question as to whether a particular customer falls
within any of the categories specified above, Disney's determination shall
be binding.
B. Unless Disney consents in writing, Licensee shall not sell or otherwise
provide Articles for use as premiums (including those in
purchase-with-purchase promotions), promotions, give-aways, fund-raisers,
or entries in sweepstakes, or through unapproved direct marketing methods,
including but not limited to, home shopping television programs, or to
customers for inclusion in another product. If Licensee wishes to sell the
Articles to customers for resale through mail order catalogs other than
those listed on the Catalog Schedule hereto, Licensee must obtain Disney's
prior written consent in each instance. However, Licensee may solicit
orders by mail from those Wholesalers or Retailers authorized pursuant to
Subparagraph 2.A. above, and Licensee may sell to such authorized Retailers
which sell predominantly at retail, but which include the Articles in their
mail order catalogs, or otherwise sell Articles by direct marketing methods
as well as at retail.
C. The prohibition of computer on-line selling referenced in Subparagraph 2.A.
includes, but is not limited to, the display, promotion or offering of
Articles in or on any on-line venues, including but not limited to, any
catalog company's or Retailer's "Websites," "home pages," or any similar
venues, except as specifically permitted in the next two sentences. With
Disney's prior written permission, Articles approved by Disney may be
displayed and promoted on Disney-controlled Internet services, only within
the Territory. In addition, with Disney's prior written permission,
Articles approved by Disney may be displayed and promoted on Licensee's own
Website; however, Licensee must obtain Disney's prior written approval of
all creative and editorial elements of
<PAGE> 7
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 7
such promotional uses, in accordance with the provisions of Paragraph 7 of
this Agreement.
D. Unless Disney consents in writing, Licensee shall not give away or donate
Articles to Licensee's accounts or other persons for the purpose of
promoting sales of Articles, except for minor quantities or samples which
are not for onward distribution.
E. Nothing contained herein shall preclude Licensee from selling Articles to
Disney or to any of Disney's Affiliates, or to Licensee's or Disney's
employees, subject to the payment to Disney of Royalties on such sales.
F. Disney further grants Licensee the right to reproduce the Licensed Material
and to use the approved Trademarks, only within the Territory, during the
Principal Term, on containers, packaging and display material for the
Articles, and in advertising for the Articles.
G. Nothing contained in this Agreement shall be deemed to imply any
restriction on Licensee's freedom and that of Licensee's customers to sell
the Articles at such prices as Licensee or they shall determine.
H. Licensee recognizes and acknowledges the vital importance to Disney of the
characters and other proprietary material Disney owns and creates, and the
association of the Disney name with them. In order to prevent the
denigration of Disney's products and the value of their association with
the Disney name, and in order to ensure the dedication of Licensee's best
efforts to preserve and maintain that value, Licensee agrees that, during
the Principal Term and any extension hereof, Licensee will not manufacture
or distribute any merchandise embodying or bearing any artwork or other
representation which Disney determines, in Disney's reasonable discretion,
is confusingly similar to Disney's characters or other proprietary
material.
3. ADVANCE
-------
A. Licensee agrees to pay the Advance, which shall be on account of Royalties
to accrue during the Principal Term only, and only with respect to sales in
the Territory; provided, however, that if any part of the Advance is
specified hereinabove as applying to any period less than the Principal
Term, such part shall be on account of Royalties to accrue during such
lesser period only. If said Royalties should be less than the Advance, no
part of the Advance shall be repayable. .
<PAGE> 8
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 8
B. Royalties accruing during any sell-off period or extension of the Principal
Term shall not be offset against the Advance unless otherwise agreed in
writing. Royalties accruing during any extension of the Principal Term or
any other term shall be offset only against an advance paid with respect to
such extended term.
C. In no event shall Royalties accruing by reason of any sales to Disney or
any of Disney's Affiliates or by reason of sales outside the Territory
pursuant to a distribution permission be offset against the Advance or any
subsequent advance.
4. GUARANTEE
---------
A. Licensee shall, with Licensee's statement for each Royalty Payment Period
ending on a date indicated in Subparagraph 1.L. hereof defining
"Guarantee," or upon termination if the Agreement is terminated prior to
the end of the Principal Term, pay Disney the amount, if any, by which
cumulative Royalties paid with respect to sales in the Territory during any
period or periods covered by the Guarantee provision, or any Guarantee
provision contained in any agreement extending the term hereof, fall short
of the amount of the Guarantee for such period.
B. Advances applicable to Royalties due on sales in the period to which the
Guarantee relates apply towards meeting the Guarantee.
C. In no event shall Royalties paid with respect to sales to Disney or to any
of Disney's Affiliates, or with respect to sales outside the Territory
pursuant to a distribution permission, apply towards the meeting of the
Guarantee or any subsequent guarantee.
5. PRE-PRODUCTION APPROVALS
------------------------
A. As early as possible, and in any case before commercial production of any
Article, Licensee shall submit to Disney for Disney's review and written
approval (to utilize such materials in preparing a pre-production sample)
all concepts, all preliminary and proposed final artwork, and all three-
dimensional models which are to appear on or in any and all SKUs of the
Article. Thereafter, Licensee shall submit to Disney for Disney's written
approval a pre-production sample of each SKU of each Article. Disney shall
endeavor to respond to such requests within a reasonable time, but such
approvals should be sought as early as possible in case of delays. In
addition to the foregoing, as early as possible, and in any case no later
than sixty (60) days following written conceptual approval, Licensee shall
supply to Disney
<PAGE> 9
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 9
for Disney's use for internal purposes, a mock-up, prototype or
pre-production sample of each SKU of each Article on or in connection with
which the Licensed Material is used. Licensee acknowledges that Disney may
not approve concepts or artwork submitted near the end of the Principal
Term. Any pre-production approval Disney may give will not constitute or
imply a representation or belief by Disney that such materials comply with
any applicable Laws.
B. Approval or disapproval shall lie solely in Disney's discretion, and any
SKU of any Article not so approved in writing shall be deemed unlicensed
and shall not be manufactured or sold. If any unapproved SKU of any Article
is being sold, Disney may, together with other remedies available to
Disney, including but not limited to, immediate termination of this
Agreement, by written notice require such SKU of such Article to be
immediately withdrawn from the market. Any modification of any SKU of an
Article, including, but not limited to, change of materials, color, design
or size of the representation of Licensed Material must be submitted in
advance for Disney's written approval as if it were a new SKU of an
Article. Approval of any SKU of an Article which uses particular artwork
does not imply approval of such artwork for use with a different Article.
The fact that artwork has been taken from a Disney publication or a
previously approved Article does not mean that its use will necessarily be
approved in connection with an Article licensed hereunder.
C. If Licensee submits for approval artwork from an article or book
manufactured or published by another licensee of Disney's or of any of
Disney's Affiliates, Licensee must advise Disney in writing of the source
of such artwork. If Licensee fails to do so, any approval which Disney may
give for use by Licensee of such artwork may be withdrawn by giving
Licensee written notice thereof, and Licensee may be required by Disney not
to sell Articles using such artwork.
D. Licensee is responsible for the consistent quality and safety of the
Articles and their compliance with applicable Laws. Disney will not
unreasonably object to any change in the design of an Article or in the
materials used in the manufacture of the Article or in the process of
manufacturing the Articles which Licensee advises Disney in writing is
intended to make the Article safer or more durable.
E. If Disney has supplied Licensee with forms for use in applying for approval
of artwork, models, pre-production and production samples of Articles,
Licensee shall use such forms when submitting anything for Disney's
approval.
<PAGE> 10
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 10
6. APPROVAL OF PRODUCTION SAMPLES
------------------------------
A. Before shipping an Article to any customer, Licensee agrees to furnish to
Disney, from the first production run of each supplier of each of the
Articles, for Disney's approval of all aspects of the Article in question,
the number of Samples with packaging which is hereinabove set forth, which
shall conform to the approved artwork, three-dimensional models and
pre-production sample. Approval or disapproval of the artwork as it appears
on any SKU of the Article, as well as of the quality of the Article, shall
lie in Disney's sole discretion and may, among other things, be based on
unacceptable quality of the artwork or of the Article as manufactured. Any
SKU of any Article not so approved shall be deemed unlicensed, shall not be
sold and, unless otherwise agreed by Disney in writing, shall be destroyed.
Such destruction shall be attested to in a certificate signed by one of
Licensee's officers. Production samples of Articles for which Disney has
approved a pre-production sample shall be deemed approved, unless within
twenty (20) days of Disney's receipt of such production sample Disney
notifies Licensee to the contrary. Any approval of a production sample
attributable to Disney will not constitute or imply a representation or
belief by Disney that such production sample complies with any applicable
Laws.
B. Licensee agrees to make available at no charge such additional samples of
any or all SKUs of each Article as Disney may from time to time reasonably
request for the purpose of comparison with earlier samples, or for Disney's
anti-piracy efforts, or to test for compliance with applicable Laws, and to
permit Disney to inspect Licensee's manufacturing operations and testing
records (and those of Licensee's third-party manufacturers) for the
Articles.
C. Licensee acknowledges that Disney may disapprove any SKU of an Article or a
production run of any SKU of an Article because the quality is unacceptable
to Disney, and accordingly, Disney recommends that Licensee submit
production samples to Disney for approval before committing to a large
original production run or to purchase a large shipment from a new
supplier.
D. No modification of an approved production sample shall be made without
Disney's further prior written approval. All SKUs of Articles being sold
must conform in all respects to the approved production sample. It is
understood that if in Disney's reasonable judgment the quality of any SKU
of an Article originally approved has deteriorated in later production
runs, or if the SKU has otherwise been altered, Disney may, in addition to
other remedies available to Disney, by written notice require such SKU of
the Article to be immediately withdrawn from the market.
<PAGE> 11
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 11
E. The rights granted hereunder do not permit the sale of "seconds" or
"irregulars". All Articles not meeting the standard of approved samples
shall be destroyed or all Licensed Material and Trademarks shall be removed
or obliterated therefrom.
F. Licensee is responsible for the consistent quality and safety of the
Articles and their compliance with applicable Laws. Disney will not
unreasonably object to any change in the design of an Article or in the
materials used in the manufacture of the Article or in the process of
manufacturing the Articles which Licensee advises Disney in writing is
intended to make the Article safer or more durable.
G. Disney shall have the right, by written notice to Licensee, to require
modification of any SKU of any Article approved by Disney under this or any
previous agreement between the parties pertaining to Licensed Material.
Likewise, if the Principal Term of this Agreement is extended by mutual
agreement, Disney shall have the right, by written notice to Licensee, to
require modification of any SKU of any Article approved by Disney under
this Agreement. It is understood that there is no obligation upon either
party to extend the Agreement.
H. If Disney notifies Licensee of a required modification under Subparagraph
6.G. with respect to any SKU of a particular Article, such notification
shall advise Licensee of the nature of the changes required, and Licensee
shall not accept any order for any such Article until the subject SKU has
been resubmitted to Disney with such changes and Licensee has received
Disney's written approval of the Article as modified. However, Licensee
may continue to distribute Licensee's inventory of the previously approved
Articles until such inventory is exhausted (unless such Articles are
dangerously defective, as determined by Disney).
I. Upon Disney's request, Licensee agrees to give Disney written notice of the
first ship date for each Article.
J. If Disney has inadvertently approved a concept, pre-production sample, or
production sample of a product which is not included in the Articles under
this Agreement, or if Disney has inadvertently approved an Article using
artwork and/or trademarks not included in the Agreement, such approval may
be revoked at any time without any obligation whatsoever on Disney's part
to Licensee. Any such product as to which Disney's approval is revoked
shall be deemed unauthorized and shall not be distributed or sold by or for
Licensee.
<PAGE> 12
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 12
7. APPROVAL OF PACKAGING, PROMOTIONAL MATERIAL, AND ADVERTISING
A. All containers, packaging, display material, promotional material,
catalogs, and all advertising, including but not limited to, television
advertising and press releases, for Articles must be submitted to Disney
and receive Disney's written approval before use. To avoid unnecessary
expense if changes are required, Disney's approval thereof should be
procured when such is still in rough or storyboard format. Disney shall
endeavor to respond to requests for approval within a reasonable time.
Approval or disapproval shall lie in Disney's sole discretion, and the use
of unapproved containers, packaging, display material, promotional
material, catalogs or advertising is prohibited. Disney's approval of any
containers, packaging, display material, promotional material, catalogs or
advertising under this Agreement will not constitute or imply a
representation or belief by Disney that such materials comply with any
applicable Laws. Whenever Licensee prepares catalog sheets or other printed
matter containing illustrations of Articles, Licensee will furnish to
Disney five (5) copies thereof when they are published.
B. If Disney has supplied Licensee with forms for use in applying for approval
of materials referenced in this Paragraph 7, Licensee shall use such forms
when submitting anything for Disney's approval.
C. Disney has designed character artwork and/or a brand name logo(s) to be
used by all licensees in connection with the packaging of all merchandise
using the Licensed Material, and, if applicable, on hang tags and garment
labels for such merchandise. Disney will supply Licensee with reproduction
artwork thereof; and Licensee agrees to use such artwork and/or logo(s) on
the packaging of the Articles, and, if applicable, on hang tags and garment
labels, which Licensee will have printed and attached to each Article at
Licensee's cost. Disney recommends that Licensee source the hang tags and
garment labels from Disney's authorized manufacturer (if any) of pre-
approved hang tags and garment labels, the name of which will be provided
to Licensee upon request. However, Licensee may use another manufacturer
for the required hang tags and garment labels if the hang tags and garment
labels manufactured are of equivalent quality and are approved by Disney in
accordance with Disney's usual approval process.
8. ARTWORK
-------
Licensee shall pay Disney, within thirty (30) days of receiving an invoice
therefor, for Style Guides and for artwork done at Licensee's request by
Disney or third parties
<PAGE> 13
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 13
under contract to Disney in the development and creation of Articles,
display, packaging or promotional material (including any artwork which in
Disney's opinion is necessary to modify artwork initially prepared by
Licensee and submitted to Disney for approval, subject to Licensee's prior
written approval) at Disney's then prevailing commercial art rates.
Estimates of artwork charges are available upon request. While Licensee is
not obligated to utilize the services of Disney's Art Department, Licensee
is encouraged to do so in order to minimize delays which may occur if
outside artists do renditions of Licensed Material which Disney cannot
approve and to maximize the attractiveness of the Articles. Artwork will be
returned to Licensee by overnight courier, at Licensee's cost (unless other
arrangements are made).
9. PRINT, RADIO OR TV ADVERTISING
------------------------------
Licensee will obtain all approvals necessary in connection with print,
radio or television advertising, if any, which Disney may authorize.
Licensee represents and warrants that all advertising and promotional
materials shall comply with all applicable Laws. Disney's approval of copy
or storyboards for such advertising will not constitute or imply a
representation or belief by Disney that such copy or storyboards comply
with any applicable Laws. This Agreement does not grant Licensee any rights
to use the Licensed Material in animation. Licensee may not use any
animation or live action footage from the motion picture from which the
Licensed Material comes without Disney's prior written approval in each
instance. In the event Disney approves the use of film clips of the motion
picture from which the Licensed Material comes, for use in a television
commercial, Licensee shall be responsible for any re-use fees which may be
applicable, including SAG payments for talent. No reproduction of the
film clip footage shall be made except for inclusion, as approved by
Disney, in such commercial and there shall be no modifications of the film
clip footage. All film clip footage shall be returned to Disney immediately
after its inclusion in such commercial. Disney shall have the right to
prohibit Licensee from advertising the Articles by means of television
and/or billboards. Such right shall be exercised within Disney's absolute
discretion, including without limitation for reasons of overexposure of the
Licensed Material.
10. LICENSEE NAME AND ADDRESS ON ARTICLES
-------------------------------------
A. Licensee's name, trade name (or Licensee's trademark which Licensee
has advised Disney in writing that Licensee is using) and Licensee's
address (at least city and state) will appear on permanently affixed
labeling on each Article or, if the Article is sold to the public in
packaging or a container, printed on such packaging or a container so
that the public can identify the supplier of the Article. On soft
goods "permanently affixed" shall mean sewn on. RN numbers do not
constitute a sufficient label under this paragraph.
<PAGE> 14
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 14
B. Licensee shall advise Disney in writing of all trade names or
trademarks Licensee wishes to use on Articles being sold under this
license. Licensee may sell the Articles only under mutually agreed
upon trade names or trademarks.
11. COMPLIANCE WITH APPROVED SAMPLES AND APPLICABLE LAWS AND STANDARDS
------------------------------------------------------------------
A. Licensee covenants that each Article and component thereof distributed
hereunder shall be of good quality and free of defects in design,
materials and workmanship, and shall comply with all applicable Laws,
and such specifications, if any, as may have been specified in
connection with this Agreement (e.g., Disney's Apparel Performance
Specification Manual, if the Articles are items of apparel), and shall
conform to the Sample thereof approved by Disney.
B. Without limiting the foregoing, Licensee covenants on behalf of
Licensee's own company, and on behalf of all of Licensee's third-party
manufacturers and suppliers (collectively, "Manufacturers"), as
follows:
(1) Licensee and the Manufacturers agree not to use child labor in
the manufacturing, packaging or distribution of Disney
merchandise. The term "child" refers to a person younger than the
age for completing compulsory education, but in no case shall any
child younger than fourteen (14) years of age be employed in the
manufacturing, packaging or distribution of Disney merchandise.
(2) Licensee and the Manufacturers agree to provide employees with a
safe and healthy workplace in compliance with all applicable
Laws. Licensee and the Manufacturers agree to provide Disney with
all information Disney may request about manufacturing, packaging
and distribution facilities for the Articles.
(3) Licensee and the Manufacturers agree only to employ persons whose
presence is voluntary. Licensee and the Manufacturers agree not
to use prison labor, or to use corporal punishment or other forms
of mental or physical coercion as a form of discipline of
employees.
(4) Licensee and the Manufacturers agree to comply with all
applicable wage and hour Laws, including minimum wage, overtime,
and maximum hours Licensee and the Manufacturers agree to
utilize fair employment practices as defined by applicable Laws.
<PAGE> 15
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 15
(5) Licensee and the Manufacturers agree not to discriminate in
hiring and employment practices on grounds of race, religion,
national origin, political affiliation, sexual preference, or
gender.
(6) Licensee and the Manufacturers agree to comply with all
applicable environmental Laws.
(7) Licensee and the Manufacturers agree to comply with all
applicable Laws pertaining to the manufacture, pricing, sale and
distribution of the Articles.
(8) Licensee and the Manufacturers agree that Disney may engage in
activities such as unannounced on-site inspections of
manufacturing, packaging and distribution facilities in order to
monitor compliance with applicable Laws.
C. Both before and after Licensee puts Articles on the market, Licensee
shall follow reasonable and proper procedures for testing that
Articles comply with all applicable Laws, and shall permit Disney's
designees to inspect testing, manufacturing and quality control
records and procedures and to test the Articles for compliance.
Licensee agrees to promptly reimburse Disney for the reasonable costs
of such testing. Licensee shall also give due consideration to any
recommendations by Disney that Articles exceed the requirements of
applicable Laws. Articles not manufactured, packaged or distributed in
accordance with applicable Laws shall be deemed unapproved, even if
previously approved by Disney, and shall not be shipped unless and
until they have been brought into full compliance therewith.
12. DISNEY OWNERSHIP OF ALL RIGHTS IN LICENSED MATERIAL
---------------------------------------------------
Licensee acknowledges that the copyrights and all other proprietary rights
in and to Licensed Material are exclusively owned by and reserved to Disney
or its licensor. Licensee shall neither acquire nor assert copyright
ownership or any other proprietary rights in Licensed Material or in any
derivation, adaptation, variation or name thereof. Without limiting the
foregoing, Licensee hereby assigns to Disney all Licensee's worldwide
right, title and interest in the Licensed Material and in any material
objects consisting of or incorporating drawings, paintings, animation cels,
or sculptures of Licensed Material, or other derivations, adaptations,
compilations, collective works, variations or names of Licensed Material,
heretofore or hereafter created by or for Licensee or any of Licensee's
Affiliates. All such new materials shall be included in the definition of
"Licensed Material" under this Agreement. If any third party makes or has
made any contribution to the creation of any new materials which are
included in the definition of Licensed Material under this
<PAGE> 16
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 16
Paragraph 12, Licensee agrees to obtain from such party a full assignment
of rights so that the foregoing assignment by Licensee shall vest full
rights to such new materials in Disney. Licensee further covenants that any
such new materials created by Licensee or by any third party Licensee has
engaged are original to Licensee or such third party and do not violate the
rights of any other person or entity; this covenant regarding originality
shall not extend to any materials Disney supplies to Licensee, but does
apply to all materials Licensee or Licensee's third party contractors may
add thereto. The foregoing assignment to Disney of material objects shall
not include that portion of Licensee's displays, catalogs or promotional
material not containing Licensed Material, or the physical items
constituting the Articles, unless such items are in the shape of the
Licensed Material.
13. COPYRIGHT NOTICE
----------------
As a condition to the grant of rights hereunder, each Article and any other
matter containing Licensed Material shall bear a properly located
permanently affixed copyright notice in Disney's name (e.g., "(C) Disney"),
or such other notice as Disney specifies to Licensee in writing. Licensee
will comply with such instructions as to form, location and content of the
notice as Disney may give from time to time. Without limiting the
foregoing, Licensee agrees to include on the Article, or the packaging for
the Article, or the hang tag for the Article (if applicable), the following
language: Based on the "Winnie The Pooh" works, copyright A.A. Milne and
E.H. Shepard. Licensee will not, without Disney's prior written consent,
affix to any Article or any other matter containing Licensed Material a
copyright notice in any other name. If through inadvertence or otherwise
a copyright notice on any Article or other such matter should appear in
Licensee's name or the name of a third party, Licensee hereby agrees to
assign to Disney the copyright represented by any such copyright notice in
Licensee's name and, upon request, cause the execution and delivery to
Disney of whatever documents are necessary to convey to Disney that
copyright represented by any such copyright notice. If by inadvertence a
proper copyright notice is omitted from any Article or other matter
containing Licensed Material, Licensee agrees at Licensee's expense to use
all reasonable efforts to correct the omission on all such Articles or
other matter in process of manufacture or in distribution. Licensee agrees
to advise Disney promptly and in writing of the steps being taken to
correct any such omission and to make the corrections on existing Articles
which can be located.
14. NON-ASSOCIATION OF OTHER FANCIFUL CHARACTERS WITH LICENSED MATERIAL
-------------------------------------------------------------------
To preserve Disney's identification with Disney's characters and to avoid
confusion of the public, Licensee agrees not to associate other characters
or licensed properties with the Licensed Material or the Trademarks either
on the Articles or in their
<PAGE> 17
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 17
packaging, or, without Disney's written permission, on advertising,
promotional or display materials. If Licensee wishes to use a character
which constitutes Licensee's trademark on the Articles or their packaging,
or otherwise in connection with the Articles, Licensee agrees to obtain
Disney's prior written permission.
15. ACTIVE MARKETING OF ARTICLES
----------------------------
Licensee agrees to manufacture (or have manufactured for Licensee) and
offer for sale all the Articles and to exercise the rights granted herein.
Licensee agrees that by the Marketing Date applicable to a particular
Article or, if such a date is not specified in Subparagraph 1.O., by six
(6) months from the commencement of the Principal Term or the date of any
applicable amendment, shipments to customers of such Article will have
taken place in sufficient time that such Article shall be available for
purchase in commercial quantities by the public at the retail outlets
authorized pursuant to Subparagraph 2.A. In any case in which such sales
have not taken place or when the Article is not then and thereafter
available for purchase in commercial quantities by the public, Disney may
either invoke Disney's remedies under Paragraph 28, or withdraw such
Article from the list of Articles licensed in this Agreement without
obligation to Licensee other than to give Licensee written notice thereof.
16. PROMOTION COMMITMENT
--------------------
Licensee agrees to carry out the Promotion Commitment, if any, as defined
in Subparagraph 1.N.
17. TRADEMARK RIGHTS AND OBLIGATIONS
--------------------------------
A. All uses of the Trademarks by Licensee hereunder shall inure to
Disney's benefit. Licensee acknowledges that Disney or its licensor is
the exclusive owner of all the Trademarks, and of any trademark
incorporating all or any part of a Trademark or any Licensed Material,
and the trademark rights created by such uses. Without limiting the
foregoing, Licensee hereby assigns to Disney all the Trademarks, and
any trademark incorporating all or any part of a Trademark or any
Licensed Material, and the trademark rights created by such uses,
together with the goodwill attaching to that part of the business in
connection with which such Trademarks or trademarks are used. Licensee
agrees to execute and deliver to Disney such documents as Disney
requires to register Licensee as a Registered User or Permitted User
of the Trademarks or such trademarks and to follow Disney's
instructions for proper use thereof in order that protection and/or
registrations for the Trademarks and such trademarks may be obtained
or maintained.
<PAGE> 18
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 18
B. Licensee agrees not to use any Licensed Material or Trademarks, or any
trademark incorporating all or any part of a Trademark or of any
Licensed Material, on any business sign, business cards, stationery or
forms (except as licensed herein), or to use any Licensed Material or
Trademark as the name of Licensee's business or any division thereof,
unless otherwise agreed by Disney in writing.
C. Nothing contained herein shall prohibit Licensee from using Licensee's
own trademarks on the Articles or Licensee's copyright notice on the
Articles when the Articles contain independent material which is
Licensee's property. Nothing contained herein is intended to give
Disney any rights to, and Disney shall not use, any trademark,
copyright or patent used by Licensee in connection with the Articles
which is not derived or adapted from Licensed Material, Trademarks, or
other materials owned by Disney or its licensor.
18. REGISTRATIONS
-------------
Except with Disney's written consent, neither Licensee nor any of
Licensee's Affiliates will register or attempt in any country to register
copyrights in, or to register as a trademark, service mark, design patent
or industrial design, or business designation, any of the Licensed
Material, Trademarks or derivations or adaptations thereof, or any word,
symbol or design which is so similar thereto as to suggest association with
or sponsorship by Disney or any of Disney's Affiliates. In the event of
breach of the foregoing Licensee agrees, at Licensee's expense and at
Disney's request, immediately to terminate the unauthorized registration
activity and promptly to execute and deliver, or cause to be delivered, to
Disney such assignments and other documents as Disney may require to
transfer to Disney all rights to the registrations, patents or applications
involved.
19. UNLICENSED USE OF LICENSED MATERIALS
------------------------------------
A. Licensee agrees that Licensee will not use the Licensed Material, or
the Trademarks, or any other material the copyright to which is owned
or licensed by Disney in any way other than as herein authorized (or
as is authorized in any other written contract in effect between the
parties). In addition to any other remedy Disney may have, Licensee
agrees that all revenues from any use thereof on products other than
the Articles (unless authorized by Disney in writing), and all
revenues from the use of any other copyrighted material of Disney's or
its licensor's without written authorization, shall be immediately
payable to Disney.
B. Licensee agrees to give Disney prompt written notice of any unlicensed
use by third parties of Licensed Material or Trademarks, and that
Licensee will
<PAGE> 19
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 19
not, without Disney's written consent, bring or cause to be brought
any criminal prosecution, lawsuit or administrative action for
infringement, interference with or violation of any rights to Licensed
Material or Trademarks. Because of the need for and the high costs of
an effective anti-piracy enforcement program, Licensee agrees to
cooperate with Disney, and, if necessary, to be named by Disney as a
sole complainant or co-complaimant in any action against an infringer
of the Licensed Material or Trademarks and, notwithstanding any right
of Licensee to recover same, legal or otherwise, Licensee agrees to
pay to Disney, and hereby waives all claims to, all damages or other
monetary relief recovered in such action by reason of a judgment or
settlement whether or not such damages or other monetary relief, or
any part thereof, represent or are intended to represent injury
sustained by Licensee as a licensee hereunder; in any such action
against an infringer, Disney agrees to reimburse Licensee for
reasonable expenses incurred at Disney's request, including reasonable
attorney's fees if Disney has requested Licensee to retain separate
counsel.
20. STATEMENTS AND PAYMENTS OF ROYALTIES
------------------------------------
A. Licensee agrees to furnish to Disney by the 30th day after each
Royalty Payment Period full and accurate statements on statement forms
Disney designates for Licensee's use, showing all information
requested by such forms, including but not limited to, the quantities,
Net Invoiced Billings and applicable Royalty rate(s) of Articles
invoiced during the preceding Royalty Payment Period, and the
quantities and invoice value of Articles returned for credit or refund
in such period. At the same time Licensee will pay Disney all
Royalties due on billings shown by such statements. To the extent that
any Royalties are not paid, Licensee authorizes Disney to offset
Royalties due against any sums which Disney or any of Disney's
Affiliates may owe to Licensee or any of Licensee's Affiliates. No
deduction or withholding from Royalties payable to Disney shall be
made by reason of any tax. Any applicable tax on the manufacture,
distribution and sale of the Articles shall be borne by Licensee.
B. The statement forms Disney designates for Licensee's use may be
changed from time to time, and Licensee agrees to use the most current
form Disney provides to Licensee. Licensee agrees to fully comply with
all instructions supplied by Disney for completing such forms.
C. In addition to the other information requested by the statement forms,
Licensee's statement shall with respect to all Articles report
separately:
(1) F.O.B. In Sales;
<PAGE> 20
The First Years, Inc.
Wmnie The Pooh
Agreement dated December 3, 1996
Page 20
(2) F.O.B. Out Sales;
(3) sales of Articles outside the Territory pursuant to a
distribution permission (indicating the country involved);
(4) Licensee's sales of Articles to any of Disney's licensees or
Disney's Affiliates' licensees who are licensed to sell the
Articles, and who are reselling such Articles and paying Disney
royalties on such resales;
(5) sales of Articles to Disney or any of Disney's Affiliates;
(6) sales of Articles to Licensee's or Disney's employees;
(7) sales of Articles under any brand or program identified in
Subparagraph 1.B. hereinabove;
(8) sales of Articles to or for distribution through any mail order
catalogs approved under this Agreement.
D. Sales of items licensed under contracts with Disney other than this
Agreement shall not be reported on the same statement as sales of
Articles under this Agreement.
E. Licensee's statements and payments, including all Royalties and
Advances, shall be delivered to Wachovia South Metro Center, DEI
Account, P.O. Box 101947, Atlanta, Georgia 30392. A copy of each
statement must be sent to Disney at 500 South Buena Vista Street,
Burbank, California 91521-6771, to the attention of the Contract
Administrator, Consumer Products Division. If Licensee wishes to send
statements and payments by overnight courier, please use the following
address: Wachovia South Metro Center, DEI Account, 3585 Atlanta
Avenue, Hapeville, GA 30354, Attention Peggy Morris, Reference Lock
Box 101947.
21. CONFIDENTIALITY
---------------
Licensee agrees to keep the terms and conditions of this Agreement
confidential, and Licensee shall not disclose such terms and conditions to
any third party without obtaining Disney's prior written consent; provided,
however, that this Agreement may be disclosed on a need-to-know basis to
Licensee's attorneys and accountants who agree to be bound by this
confidentiality provision. In the event Licensee is required to disclose
this Agreement, or any part thereof, pursuant to any law, court
<PAGE> 21
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 21
order or process, the rules and regulations of any governmental department,
agency or authority (including, but not limited to, the Securities and
Exchange Commission) or any generally accepted accounting rules mandating
disclosure in Licensee's financial statements, Licensee agrees to give
Disney prior written notice and to use its best efforts to obtain
confidential treatment of this Agreement. Upon Disney's request, Licensee
agrees to incorporate Disney's comments into Licensee's request for
confidential treatment, provided such request and comments are received in
writing by Licensee within five (5) business days after Disney's receipt of
the notice referred to in the preceding sentence.
22. INTEREST
--------
Royalties or any other payments due to Disney hereunder which are received
alter the due date shall bear interest at the rate of 18% per annum from
the due date (or the maximum permissible by law if less than 18%).
23. AUDITS AND MAINTAINING RECORDS
------------------------------
A. Licensee agrees to keep accurate records of all transactions relating
to this Agreement and any prior agreement with Disney regarding the
Licensed Material, including, without limitation, shipments to
Licensee of Articles and components thereof, inventory records,
records of sales and shipments by Licensee, and records of returns,
and to preserve such records for the lesser of seven (7) years or two
(2) years after the expiration or termination of this Agreement.
B. Disney, or Disney's representatives, shall have the right from time to
time, during Licensee's normal business hours, but only for the
purpose of confirming Licensee's performance hereunder, to examine and
make extracts from all such records, including the general ledger,
invoices and any other records which Disney reasonably deems
appropriate to verify the accuracy of Licensee's statements or
Licensee's performance hereunder, including records of Licensee's
Affiliates if they are involved in activities which are the subject of
this Agreement. In particular, Licensee's invoices shall identify the
Articles separately from goods which are not licensed hereunder.
Licensee acknowledges that Disney may furnish Licensee with an audit
questionnaire, and Licensee agrees to fully and accurately complete
such questionnaire, and return it to Disney within the
designated-time. Disney's use of an audit questionnaire shall not
limit Disney's ability to conduct any on-site audit(s) as provided
above.
C. If in an audit of Licensee's records it is determined that there is a
short fall of five percent (5%) or more in Royalties reported for any
Royalty Payment
<PAGE> 22
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 22
Period, Licensee shall upon request from Disney reimburse Disney for
the full out-of-pocket costs of the audit, including the costs of
employee auditors calculated at $60 per hour per person for travel
time during normal working hours and actual working time.
D. If Licensee has failed to keep adequate records for one or more
Royalty Payment Periods, Disney will assume that the Royalties owed to
Disney for such Royalty Payment Period(s) are equal to a reasonable
amount, determined in Disney's absolute discretion, which may be up to
but will not exceed the highest Royalties owed to Disney in a Royalty
Payment Period for which Licensee has kept adequate records; if
Licensee has failed to keep adequate records for any Royalty Payment
Period, Disney will assume a reasonable amount of Royalties which
Licensee will owe to Disney, based on the records Licensee has kept
and other reasonable assumptions Disney deems appropriate.
24. MANUFACTURE OF ARTICLES BY THIRD PARTY MANUFACTURERS
----------------------------------------------------
A. If Licensee at any time desires to have Articles or components thereof
containing Licensed Material manufactured by a third party, whether
the third party is located within or outside the United States,
Licensee must, as a condition to the continuation of this Agreement,
notify Disney of the name and address of such manufacturer and the
Articles or components involved and obtain Disney's prior written
permission to do so. If Disney is prepared to grant permission, Disney
will do so if Licensee and each of Licensee's manufacturers and any
submanufacturers sign a Consent/Manufacturer's Agreement in a form
which Disney will furnish to Licensee and Disney receives all such
agreements properly signed.
(A SAMPLE OF SAID AGREEMENT FORM IS AVAILABLE ON REQUEST)
B. It is not Disney's policy to reveal the names of Licensee's suppliers
to third parties or to any Disney division involved with buying
products, except as may be necessary to enforce Disney's contract
rights or protect Disney's trademarks and copyrights.
C. If any such manufacturer utilizes Licensed Material or Trademarks for
any unauthorized purpose, Licensee shall cooperate fully in bringing
such utilization to an immediate halt. If, by reason of Licensee's not
having supplied the above mentioned agreements to Disney or not having
given Disney the name of any supplier, Disney makes any representation
or takes any action and is thereby subjected to any penalty or
expense, Licensee will
<PAGE> 23
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 23
fully compensate Disney for any cost or loss Disney sustains (in
addition to any other legal or equitable remedies available to Disney.
25. INDEMNITY
---------
A. Licensee shall indemnify Disney during and after the term hereof
against all claims, demands, suits, judgments, losses, liabilities
(including settlements entered into in good faith with Licensee's
consent, not to be unreasonably withheld) and expenses of any nature
(including reasonable attorneys' fees) arising out of Licensee's
activities under this Agreement, including but not limited to, any
actual or alleged: (1) negligent acts or omissions on Licensee's part,
(2) defect (whether obvious or hidden and whether or not present in
any Sample approved by Disney) in an Article, (3) personal injury, (4)
infringement of any rights of any other person by the manufacture,
sale, possession or use of Articles, (5) breach on Licensee's part of
any covenant contained in this Agreement, or (6) failure of the
Articles or by Licensee to comply with applicable Laws. The parties
indemnified hereunder shall include Disney Enterprises, Inc., its
licensor, and its and their parent, Affiliates and successors, and its
and their officers, directors, employees and agents. The indemnity
shall not apply to any claim or liability relating to any infringement
of the copyright of a third party caused by Licensee's utilization of
the Licensed Material and the Trademarks in accordance-with the
provisions hereof, unless such claim or liability arises out of
Licensee's failure to obtain the full assignment of rights referenced
in Paragraph 12.
B. Disney shall indemnify Licensee during and after the term hereof
against all claims, demands, suits, judgments, losses, liabilities
(including settlements entered into in good faith with Disney's
consent, not to be unreasonably withheld) and expenses of any nature
(including reasonable attorneys' fees) arising out of any claim that
Licensee's use of any representation of the Licensed Material or the
Trademarks approved in accordance with the provisions of this
Agreement infringes the copyright of any third party or infringes any
right granted by Disney to such third party, except for claims arising
out of Licensee's failure to obtain the full assignment of rights
referenced in Paragraph 12. Licensee shall not, in any case, be
entitled to recover for lost profits.
C. Additionally, if by reason of any claims referred to in Subparagraph
25.B., Licensee is precluded from selling any stock of Articles or
utilizing any materials in Licensee's possession or which come into
Licensee's possession by reason of any required recall, Disney shall
be obligated to purchase such Articles and materials from Licensee at
their out-of-pocket cost to Licensee,
<PAGE> 24
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 24
excluding overheads, but Disney shall have no other responsibility or
liability with respect to such Articles or materials.
D. Disney gives no warranty or indemnity with respect to any liability or
expense arising from any claim that use of the Licensed Material or
the Trademarks on or in connection with the Articles hereunder or any
packaging, advertising or promotional material infringes on any
trademark right of any third party or otherwise constitutes unfair
competition by reason of any prior rights acquired by such third
party, other than rights acquired from Disney. It is expressly agreed
that it is Licensee's responsibility to carry out such investigations
as Licensee may deem appropriate to establish that Articles,
packaging, and promotional and advertising material which are
manufactured or created hereunder, including any use made of the
Licensed Material and the Trademarks therewith, do not infringe such
right of any third party, and Disney shall not be liable to Licensee
if such infringement occurs.
E. Licensee and Disney agree to give each other prompt written notice of
any claim or suit which may arise under the indemnity provisions set
forth above. Without limiting the foregoing, Licensee agrees to give
Disney written notice of any product liability claim made or suit
filed with respect to any Article, any investigations or directives
regarding the Articles issued by the Consumer Product Safety
Commission ("CPSC") or other federal, state or local consumer safety
agency, and any notices sent by Licensee to, or received by Licensee
from, the CPSC or other consumer safety agency regarding the Articles
within fourteen (14) days of Licensee's receipt or promulgation of the
claim, suit, investigation, directive, or notice.
26. INSURANCE
---------
Licensee shall maintain in full force and effect at all times while this
Agreement is in effect and for three years thereafter commercial general
liability insurance on a per occurrence form, including broad form coverage
for contractual liability, property damage, products liability and personal
injury liability (including bodily injury and death), waiving subrogation,
with minimum limits of no less than two million dollars (US $2,000,000.00)
per occurrence, and naming as additional insureds those indemnified in
Paragraph 25 hereof. Licensee also agrees to maintain in full force and
effect at all times while this Agreement is in effect such Worker's
Compensation Insurance as is required by applicable law and Employer's
Liability Insurance with minimum limits of one million dollars (US
$1,000,000.00) per occurrence. All insurance shall be primary and not
contributory. Licensee shall deliver to Disney a certificate or
certificates of insurance evidencing satisfactory coverage and indicating
that Disney shall receive thirty (30) days unrestricted prior written
notice of cancellation, non-renewal or of any material change in coverage.
Licensee's insurance
<PAGE> 25
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 25
shall be carried by an insurer with a BEST Guide rating of B + VII or
better. Compliance herewith in no way limits Licensee's indemnity
obligations, except to the extent that Licensee's insurance company
actually pays Disney amounts which Licensee would otherwise pay Disney.
27. WITHDRAWAL OF LICENSED MATERIAL
-------------------------------
Licensee agrees that Disney may, without obligation to Licensee other than
to give Licensee written notice thereof, withdraw from the scope of this
Agreement any Licensed Material which by the Marketing Date or, if such a
date is not specified in Subparagraph 1.O., by six (6) months from the
commencement of the Principal Term or the date of any applicable amendment,
is not being used on or in connection with the Articles. Disney may also
withdraw any Licensed Material or Articles the use or sale of which under
this Agreement would infringe or reasonably be claimed to infringe the
rights of a third party, other than rights granted by Disney, in which case
Disney's obligations to Licensee shall be limited to the purchase at cost
of Articles and other materials utilizing such withdrawn Licensed Material
which cannot be sold or used. In the ease of any withdrawal under the
preceding sentence, the Advances and Guarantees shall be adjusted to
correspond to the time remaining in the Principal Term, or the number of
Articles remaining under the Agreement, at the date of withdrawal.
28. TERMINATION
-----------
Without prejudice to any other right or remedy available to Disney:
A. Disney shall have the right at any time to terminate this Agreement by
giving Licensee written notice thereof, if Licensee fails to
manufacture, sell and distribute the Articles, or to furnish
statements and pay Royalties as herein provided, or if Licensee
otherwise breaches the terms of this Agreement, and if any such
failure is not corrected within thirty (30) days (or, in the case of
non-payment of Royalties within fifteen (15) days) after Disney sends
Licensee written notice thereof.
B. Disney shall have the right at any time to terminate this Agreement
immediately by giving Licensee written notice thereof:
(1) if Licensee delivers to any customer without Disney's written
authorization merchandise containing representations of Licensed
Material or other material the copyright or other proprietary
rights to which are owned or licensed by Disney other than
Articles listed herein and approved in accordance with the
provisions hereof,
<PAGE> 26
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 26
(2) if Licensee delivers Articles outside the Territory or knowingly
sells Articles to a third party for delivery outside the
Territory, unless pursuant to a written distribution permission
or separate written license agreement with Disney or any of
Disney's Affiliates;
(3) if a breach occurs which is of the same nature, and which
violates the same provision of this Agreement, as a breach of
which Disney has previously given Licensee written notice;
(4) if Licensee breaches any material term of any other license
agreement between the parties, and Disney terminates such
agreement for cause;
(5) if Licensee shall make any assignment for the benefit of
creditors, or file a petition in bankruptcy, or is adjudged
bankrupt, or becomes insolvent, or is placed in the hands of a
receiver, or if the equivalent of any such proceedings or acts
occurs, though known by some other name or term;
(6) if Licensee is not permitted or is unable to operate Licensee's
business in the usual manner, or is not permitted or is unable to
provide Disney with assurance satisfactory to Disney that
Licensee will so operate Licensee's business, as debtor in
possession or its equivalent, or is not permitted, or is unable
to otherwise meet Licensee's obligations under this Agreement or
to provide Disney with assurance satisfactory to Disney that
Licensee will meet such obligations; and/or
(7) if Licensee breaches any covenant set forth in Paragraph 11 of
this Agreement.
29. RIGHTS AND OBLIGATIONS UPON EXPIRATION OR TERMINATION
-----------------------------------------------------
A. Upon the expiration or termination of this Agreement, all rights
herein granted to Licensee shall revert to Disney, any unpaid portion
of the Guarantee shall be immediately due and payable, and Disney
shall be entitled to retain all Royalties and other things of value
paid or delivered to Disney. Licensee agrees that the Articles shall
be manufactured during the Principal Term in quantities consistent
with anticipated demand therefor so as not to result in an excessive
inventory build-up immediately prior to the end of the Principal Term.
Licensee agrees that from the expiration or termination of this
Agreement Licensee shall neither manufacture nor have manufactured for
Licensee any Articles, that Licensee will deliver to Disney any and
all artwork
<PAGE> 27
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 27
(including Style Guides, animation cels and drawings) which may have
been used or created by Licensee in connection with this Agreement,
that Licensee will at Disney's option either sell to Disney at cost or
destroy or efface any molds, plates and other items used to reproduce
Licensed Material or Trademarks, and that, except as hereinafter
provided, Licensee will cease selling Articles. Any unauthorized
distribution of Articles after the expiration or termination of this
Agreement shall constitute copyright infringement.
B. If Licensee has any unsold Articles in inventory on the expiration or
termination date, Licensee shall provide Disney with a full statement
of the kinds and numbers of such unsold Articles. If such statement
has been provided to Disney and if Licensee has fully complied with
the terms of this Agreement, including the payment of all Royalties
due and the Guarantee, upon notice from Disney Licensee shall have the
right for a limited period of three (3) calendar months from such
expiration or earlier termination date to sell off and deliver such
Articles as authorized under Subparagraph 2.A. Licensee shall furnish
Disney statements covering such sales and pay Disney Royalties in
respect of such sales. Such Royalties shall not be applied against the
Advance or towards meeting the Guarantee. If the sell-off period is
extended by Disney to a date which is not a quarter end month,
Licensee's statement and Royalties for such sell-off period shall be
due thirty (30) days after the last day of the sell-off period.
C. In recognition of Disney's interest in maintaining a stable and viable
market for the Articles during and after the Principal Term and any
sell-off period, Licensee agrees to refrain from "dumping" the
Articles in the market during any sell-off period granted to Licensee.
"Dumping" shall mean the distribution of product at volume levels
significantly above Licensee's prior sales practices with respect to
the Articles, and at price levels so far below Licensee's prior sales
practices with respect to the Articles as to disparage the Articles;
provided, however, that nothing contained herein shall be deemed to
restrict Licensee's ability to set product prices at Licensee's
discretion.
D. Except as otherwise agreed by Disney in writing, any inventory of
Articles in Licensee's possession or control after the expiration or
termination hereof and of any sell-off period granted hereunder shall
be destroyed, or all Licensed Material and Trademarks removed or
obliterated therefrom.
E. If Disney supplies Licensee with forms regarding compliance with this
Paragraph 29, Licensee agrees to complete, execute and return such
forms to Disney expeditiously.
<PAGE> 28
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 28
F. Notwithstanding any provision to the contrary, in the case of
termination under Paragraph 28.B. (5) or (6), in order to protect the
value of the Articles and to avoid any disparagement of the Articles
which could occur as a result of the circumstances of termination,
Disney shall have the option, in Disney's absolute discretion, to
purchase any or all unsold Articles in Licensee's inventory on the
termination date at 20% over Licensee's cost of goods for such
Articles (not including overhead).
30. WAIVERS
-------
A waiver by either party at any time of a breach of any provision of this
Agreement shall not apply to any breach of any other provision of this
Agreement, or imply that a breach of the same provision at any other time
has been or will be waived, or that this Agreement has been in any way
amended, nor shall any failure by either party to object to conduct of the
other be deemed to waive such party's right to claim that a repetition of
such conduct is a breach hereof.
31. PURCHASE OF ARTICLES BY DISNEY
------------------------------
If Disney wishes to purchase Articles, Licensee agrees to sell such
Articles to Disney or any of Disney's Affiliates at as low a price as
Licensee charges for similar quantities sold to Licensee's regular
customers and to pay Disney Royalties on any such sales.
32. NON-ASSIGNABILITY
-----------------
A. Licensee shall not voluntarily or by operation of law assign,
sub-license, transfer, encumber or otherwise dispose of all or any
part of Licensee's interest in this Agreement without Disney's prior
written consent, to be granted or withheld in Disney's absolute
discretion. Any attempted assignment, sub-license, transfer,
encumbrance or other disposal without such consent shall be void and
shall constitute a material default and breach of this Agreement.
"Transfer" within the meaning of this Paragraph 32 shall include any
merger or consolidation involving Licensee or any directly or
indirectly controlling Affiliate(s) of Licensee ("Controlling
Affiliate"); any sale or transfer of all or substantially all of
Licensee's or its Controlling Affiliate(s)' assets; any transfer of
Licensee's rights hereunder to a division, business segment or other
entity different from the one specifically referenced on page 1 hereof
(or any sale or attempted sale of Articles under a trademark or trade
name of such division, business segment or other entity); any public
offering, or series of public offerings, whereby a cumulative total of
thirty-three and one-third percent (33 1/3%) or more of the voting
stock of Licensee or its Controlling Affiliate(s) is offered for
purchase; and any acquisition or series
<PAGE> 29
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 29
of acquisitions, by any person or entity, or group of related persons
or entities, of a cumulative total of thirty-three and one-third
percent (33-1/3%) or more of the voting stock of Licensee or its
Controlling Affiliate(s), or the right to vote such percentage (or, if
Licensee is a partnership, resulting in the transfer of thirty-three
and one-third percent (33-1/3%) or more of the profit and loss
participation in Licensee, or the occurrence of any of the foregoing
with respect to any general partner of Licensee).
B. Licensee agrees to provide Disney with at least two (2) weeks prior
written notice of any desired assignment of this Agreement or other
transfer as defined in Subparagraph 32.A. At the time Licensee gives
such notice, Licensee shall provide Disney with the information and
documentation necessary to evaluate the contemplated transaction.
Disney's consent (if given) to any assignment of this Agreement or
other transfer as defined in Subparagraph 32A. shall be subject to
such terms and conditions as Disney deems appropriate, including but
not limited to, payment of a transfer fee. The amount of the transfer
fee shall be determined by Disney based upon the circumstances of the
particular assignment or transfer, taking into account such factors as
the estimated value of the license being assigned or otherwise
transferred; the risk of business interruption or loss of quality,
production or control Disney may suffer as a result of the assignment
or other transfer; the identity, reputation, creditworthiness,
financial condition and business capabilities of the proposed assignee
or transferee; and Disney's internal costs related to the assignment
or other transfer; provided, however, in no event shall the transfer
fee be less than $ * . The foregoing transfer fee shall not
apply if this Agreement is assigned to one of Licensee's Affiliates
as part of a corporate reorganization exclusively among some or all
of the entities existing in Licensee's corporate structure when this
Agreement is signed; provided, however, that Licensee must give
Disney written notice of such assignment and a description of the
reorganization. The provisions of this Subparagraph 32.B. shall
supersede any conflicting provisions on this subject in any
merchandise license agreement previously entered into between the
parties for this Territory.
C. Notwithstanding Subparagraphs 32.A. and B., Licensee may, upon written
notice to Disney, unless Disney has objected within thirty (30) days
of receipt of such notice, sublicense Licensee's rights hereunder to
Licensee's Affiliates. Licensee hereby irrevocably and unconditiona!ly
guarantees that they will observe and perform all of Licensee's
obligations hereunder, including, without limitation, the provisions
governing approvals, and compliance with approved samples, applicable
Laws. and all other provisions hereof, and that they will otherwise
adhere strictly to all of the terms hereof and act in accordance with
Licensee's obligations hereunder. Any involvement of an
<PAGE> 30
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 30
Affiliate in the activities which are the subject of this Agreement
shall be deemed carried on pursuant to such a sublicense and thus
covered by such guarantee; however such involvement may be treated by
Disney as a breach of this Agreement, unless Licensee has notified
Disney of Licensee's intent to sublicense an Affiliate in each
instance, and Disney has failed to object within thirty (30) days of
receipt of such notice.
33. RELATIONSHIP
------------
This Agreement does not provide for a joint venture, partnership, agency or
employment relationship between the parties, or any other relationship than
that of licensor and licensee.
34. CONSTRUCTION
------------
The language of all parts of this Agreement shall in all cases be construed
as a whole, according to its fair meaning and not strictly for or against
any of the parties. Headings of paragraphs herein are for convenience of
reference only and are without substantive significance.
35. MODIFICATIONS OR EXTENSIONS OF THIS AGREEMENT
---------------------------------------------
Except as otherwise provided herein, this Agreement can only be extended or
modified by a writing signed by both parties; provided, however, that
certain modifications shall be effective if signed by the party to be
charged and communicated to the other party.
36. NOTICES
-------
All notices which either party is required or may desire to serve upon the
other party shall be in writing, addressed to the party to be served at the
address set forth on page 1 of this Agreement, and may be served personally
or by depositing the same addressed as herein provided (unless and until
otherwise notified), postage prepaid, in the United States mail. Such
notice shall be deemed served upon personal delivery or upon the date of
mailing; provided, however, that Disney shall be deemed to have been served
with a notice of a request for approval of materials under this Agreement
only upon Disney's actual receipt of the request and of any required
accompanying materials. Any notice sent to Disney hereunder shall be sent
to the attention of "Vice President, Licensing", unless Disney advises
Licensee in writing otherwise.
<PAGE> 31
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 31
37. MUSIC
-----
Music is not licensed hereunder. Any charges, fees or royalties payable for
music rights or any other rights not covered by this Agreement shall be
additional to the Royalties and covered by separate agreement.
38. PREVIOUS AGREEMENTS
-------------------
This Agreement, and any confidentiality agreement Licensee may have signed
pertaining to any of the Licensed Material, contains the entire agreement
between the parties concerning the subject matter hereof and supersedes any
pre-existing or contemporaneous agreement and any oral or written
communications between the parties.
39. CHOICE OF LAW AND FORUM
-----------------------
This Agreement shall be deemed to be entered into in California and shall
be governed and interpreted according to the laws of the State of
California. Any legal actions pertaining to this Agreement shall be
commenced within the State of California and within either Los Angeles or
Orange Counties.
40. EQUITABLE RELIEF
----------------
Licensee acknowledges that Disney will have no adequate remedy at law if
Licensee continues to manufacture, sell, advertise, promote or distribute
the Articles upon the expiration or termination of this Agreement. Licensee
acknowledges and agrees that, in addition to any and all other remedies
available to Disney, Disney shall have the right to have any such activity
by Licensee restrained by equitable relief, including, but not limited to,
a temporary restraining order, a preliminary injunction, a permanent
injunction, or such other alternative relief as may be appropriate, without
the necessity of Disney posting any bond.
41. GOODWILL
--------
Licensee acknowledges that the rights and powers retained by Disney
hereunder are necessary to protect Disney's or its licensor's copyrights
and property rights, and, specifically, to conserve Disney's and its
licensor's goodwill and good name, and the name "Disney", and therefore
Licensee agrees that Licensee will not allow the same to become involved in
matters which will, or could, detract from or impugn the public acceptance
and popularity thereof, or impair their legal status.
<PAGE> 32
The First Years, Inc.
Winnie The Pooh
Agreement dated December 3, 1996
Page 32
42. POWER TO SIGN
-------------
The parties warrant and represent that their respective representatives
signing this Agreement have full power and proper authority to sign this
Agreement and to bind the parties.
43. SURVIVAL OF OBLIGATIONS
-----------------------
The respective obligations of the parties under this Agreement, which by
their nature would continue beyond the termination, cancellation or
expiration of this Agreement, including but not limited to indemnification,
insurance, payment of Royalties, and Paragraph 29, shall survive
termination, cancellation or expiration of this Agreement.
Please sign below under the word "Agreed". When signed by both parties this
shall constitute an agreement between Disney and Licensee.
AGREED:
DISNEY ENTERPRISES, INC.
By: /s/ Nicole Kristmor
-----------------------------------------------
Title: Vice President, Licensing
--------------------------------------------
Date: 12/23/96
---------------------------------------------
THE FIRST YEARS, INC.
By: /s/ Ronald J. Sidman
-----------------------------------------------
Title: President
--------------------------------------------
<PAGE> 33
THE FIRST YEARS, INC.
WINNIE THE POOH
AGREEMENT DATED DECEMBER 3, 1996
SCHEDULE A
A. FEEDING AND SOOTHING ARTICLES:
1. Reusable and disposable bottles
2. Bibs
3. Cups
4. Pacifiers and attachers
5. Bowls
6. Dishes
7. Containers
8. Cool totes
9. Flatware
10. Placemats
11. Floormats
12. Teethers
13. Burp cloths
14. Toothbrushes
B. PLAY ARTICLES:
1. Handheld rattles (plastic and plush)
2. Suction toys
3. Blocks
4. Linking toys
5. Electronic handheld toys with rattle or squeaker function
6. Bath toys
7. Pull-down musical plush toys
8. Magnets
9. Foot rattles
C. CARE AND SAFETY ARTICLES:
1. Changing pads
2. Bouncy seats
3. Booster seats
4. Step stools
5. Front carriers
6. Back carriers
7. Handheld showers
8. Sponges
<PAGE> 34
THE FIRST YEARS, INC.
WINNIE THE POOH
AGREEMENT DATED DECEMBER 3, 1996
SCHEDULE A - CONTINUED
C. CARE AND SAFETY ARTICLES:
9. Hooded towels
10. Washcloths
11. Spout guards
12. Shampoo visors
13. Nursery organizers
14. Car organizers
15. Non-activity crib lights
16. Combs and brushes
17. Night lights
18. Car shades
19. Diaper pins
20. Nursery hampers
21. Scales
22. Light-up clip-ons
23. Tub thermometers
24. Tub Organizers
All of the Articles listed in A, B and C above may be sold separately or as part
as a set. Sets may include packaging appropriate for a gift set, or a card with
an instant gift; provided, however, that the packaging and cards may not be sold
separately.
<PAGE> 35
CATALOG SCHEDULE
(LIST OF PRE-APPROVED CATALOGS)
HOME FURNISHINGS
Mass
----
Domestications
Fingerhut
Lillian Vernon
One Step Ahead
The Right Start
This Catalog Schedule is subject to change. Disney reserves the right to add
catalogs to or delete catalogs from the Catalog Schedule without prior notice to
Licensee. Licensee agrees to cease selling Articles to a deleted catalog within
sixty (60) days after written notice of the deletion. Disney will consider new
catalogs requested by Licensee on a case-by-case basis.
6/15/96
<PAGE> 1
Note: The omitted portions of this document marked with an asterisk are subject
to a confidential treatment request and have been filed separately with
the Securities and Exchange Commission.
AGREEMENT made and dated as of JULY 1, 1996 by and between CHILDREN'S TELEVISION
WORKSHOP ("CTW"), a not-for-profit organization incorporated under the New York
State Education Law and having its principal office at One Lincoln Plaza, New
York, New York 10023, and THE FIRST YEARS INC. ("FIRST YEARS"), a corporation
organized and existing under the laws of Massachusetts and having its principal
office at One Kiddie Drive, Avon, Massachusetts 02322, who hereby agree as
follows:
1. PREAMBLE
CTW, the creator and producer of Sesame Street and foreign language variations
thereof, desires to license certain intangible intellectual property relating to
Sesame Street and, in pursuance of its educational purposes to authorize FIRST
YEARS to develop, manufacture, produce, distribute and sell educational and
entertaining products that are based on or derived from such intangible
intellectual property. FIRST YEARS desires to use the intangible intellectual
property associated with Sesame Street and owned or controlled by CTW, in
connection with the manufacture, distribution, sale, advertising and promotion
of merchandise.
2. DEFINITIONS
The following words and phrases when used in this agreement shall, unless
otherwise specifically provided, have the following meanings:
"ASSIGN" means any transfer of ownership of this Agreement or any of FIRST
YEARS' rights hereunder or the transfer of (i) ownership of all or substantially
all of FIRST YEARS' assets, stock or other indicia of ownership to any other
entity or (ii) beneficial ownership of twenty-five (25%) percent of the
outstanding, voting securities of FIRST YEARS other than by a public issuance of
common stock pursuant to a registration statement filed with the S.E.C.
"BOOK VALUE" means FIRST YEARS' actual cost minus all expensing,
depreciation and amortization taken with respect thereto.
"DERIVATIVE WORKS" means any translation, modification or other pictorial
or written matter based substantially on the Licensed Elements, including,
without limitation, all Materials as defined herein.
"FOB PRICE" means the entire mount received by FIRST YEARS for the sale of
Products manufactured outside the Territory sold F.O.B. the point of delivery
outside the Territory.
<PAGE> 2
"GROSS PROCEEDS" means the greater of FIRST YEARS' gross income from the
sale of Products hereunder and the gross income received from the sale of
Products by any entity which is directly or indirectly related to FIRST YEARS in
any way, less only credits for (i) actual returns received during the Term and
(II) lawful discounts and allowances not to exceed eight (8%) percent of FIRST
YEARS' gross income hereunder.
"JHP" means Jim Henson Productions, Inc.
"LICENSED ELEMENTS" means copyrighted or otherwise protected intangible
intellectual property owned or controlled by CTW, including, without limitation,
the characters, likenesses, logos, marks, names and materials (BUT NEVER
INCLUDING "KERMIT THE FROG") associated with Sesame Street set forth in Exhibit
I(A) hereto annexed and made a part hereof. "JHP Elements" means those Licensed
Elements owned by JHP, but controlled by CTW.
"MANUFACTURING COST" with respect to any Product (or any component thereof)
means FIRST YEARS' direct cost of material, labor and factory overhead
(including variations from standard cost, if applicable) for such Product (or
component thereof) plus FIRST YEARS' actual cost of shipping the same and shall
exclude all selling, distribution, general and administrative costs and
expenses.
"MASS MARKET CHANNELS" means those channels of distribution, through
wholesalers, distributors and retailers which result in the Products being
offered for sale in value-oriented retail stores, which in the normal course of
business usually sell product items in the same category as the Products and
catalog operations conducted by major retailers and such major juvenile mail
order catalogs such as Right Start as shall be mutually agreed upon.
"MATERIALS" means all artwork, graphics, photos, prints, films, silk
screens, mechanicals, designs, plans, diagrams, dummies, models, molds
(exclusively dedicated to the Products hereunder), plates, proofs, sketches and
all other similar technical or special materials whatsoever that were used
hereunder by FIRST YEARS and that contain any of the Licensed Elements.
"MID-TIER DEPARTMENT STORE CHANNELS" means those channels of distribution
through wholesalers, distributors and retailers which result in the Products
being offered for sale in moderately priced department stores such as J.C.
Penney, Sears, Kohl, etc.
"PRODUCT" or "PRODUCTS" means the specific product item or items (including
packaging), set forth in Item A of Exhibit I annexed hereto, and such other
product items as shall be mutually agreed upon in writing and added to such Item
A, in connection with which FIRST YEARS is licensed by CTW to use the Licensed
Elements.
-2-
<PAGE> 3
"ROYALTIES" means the proprietary royalty license fee payable to CTW for
the rights granted herein and also includes any advances against such Royalties
and the earnings of CTW guaranteed by FIRST YEARS, if any.
"TERM" means the term of this Agreement as defined in subparagraph 4 of
this Agreement and Item C of Exhibit I annexed hereto.
"TERRITORY" means only the countries or areas specified in Item B of
Exhibit I annexed hereto.
3. GRANT OF RIGHTS
(a) Subject to, and in accordance with the provisions of this Agreement,
CTW hereby grants a license to FIRST YEARS (but not its sublicensees) to create,
develop, manufacture and produce or have manufactured and produced and to
distribute and sell (but not as premiums or giveaways or in combination with or
as part of any other product, usage or service) the Product or Products
utilizing the Licensed Elements specified in Item A of Exhibit I annexed hereto
and hereby made a part hereof, solely through Mass Market Channels and Mid-Tier
Department Stores Channels in the Territory, during the Term hereof.
(b) FIRST YEARS is also licensed to use the Licensed Elements in connection
with the associated packaging, promotion and advertising of the Products.
(c) If FIRST YEARS (i) fails to offer any of the Products for sale on or
before the date set forth therefor in Item A, (ii) fails continuously to offer
such Product for sale for a period in excess of six (6) months, or (iii) sells
any Product, without CTW's prior written consent, at a price ten (10%) percent
or more below its average selling price for such Product at such level of
distribution (in which case CTW shall be entitled to its Royalty based on the
average Selling Price for such Products), such Product item shall cease to be a
Product hereunder and all rights therein shall automatically revert to CTW as
hereinafter provided. Additional product items may be added as Products
hereunder if and when mutually agreed upon in writing.
(d) FIRST YEARS has not acquired and shall not acquire any right, title or
interest in or to any of the Licensed Elements except for the limited right to
use the Licensed Elements as expressly permitted herein until termination or
expiration of the Term hereof.
4. TERM
The Term of this Agreement shall, subject to the provisions hereof, be as
set forth in Item C of Exhibit I hereto.
-3-
<PAGE> 4
5. ROYALTIES AND ACCOUNTINGS
(a) In consideration for the rights granted herein, FIRST YEARS shall pay
CTW, as non-refundable Royalties, a net sum equal to the applicable percent, as
specified in Item D of Exhibit I hereto, of the Gross Proceeds from all sales of
Products by FIRST YEARS hereunder in the Territory; provided, however, that the
Royalty payable to CTW in respect of Products manufactured outside the Territory
and sold FOB the manufacturing facility outside the Territory shall be one
hundred fifty (150%) percent of the otherwise applicable percentage rate set
forth in Item D of Exhibit I hereto, based on FIRST YEARS' FOB Price for such
Product or Products.
(b) All Royalties, with respect to all sales hereunder of Products in any
calendar quarter (whether during the Term or thereafter) shall be paid to CTW by
FIRST YEARS, no later than thirty (30) days after the end of such calendar
quarter and FIRST YEARS shall simultaneously deliver to CTW a royalty statement
(certified by an officer of FIRST YEARS as being correct and complete) for such
calendar quarter.
(c) (i) Each royalty statement shall include the following information,
on a country by country basis, substantially in the form annexed
hereto as Exhibit II: (i) the number of each Product sold by
FIRST YEARS, in both unit and monetary amounts, (ii) the sale
price of each such Product, (iii) total sales revenues therefrom,
(iv) total allowable credits, including returns, with respect
thereto, (v) FIRST YEARS' Gross Proceeds, (vi) the percent of the
Gross Proceeds due to CTW pursuant to subparagraph 5(a)
hereof, (vii) the net Royalties due CTW therefor, and any
adjustments made in such figures for preceding accounting periods
and (viii) whatever other items or information which may be
necessary for CTW in calculating the Royalties due to it under
this Agreement, and in calculating payments due from CTW to
others, as a result of such sales.
(ii) FIRST YEARS shall also furnish to CTW, on a country by country
basis, within thirty (30) days after the end of each month during
which it exercises any rights hereunder, a written estimate,
substantially in the form annexed hereto as Exhibit III, of its
sales and returns for the preceding month in both unit and
monetary amounts.
(d) If any Royalty payment shall be late, then FIRST YEARS shall pay
interest thereon from the due date to the date of payment at a rate equal to
five (5%) percent above the then current prime rate in effect at Morgan Guaranty
Trust Company, New York, New York.
(e) FIRST YEARS shall pay CTW, as a nonreturnable advance against all
Royalties payable from the sale of Products hereunder in the Territory, the net
sums set forth in Item E of
-4-
<PAGE> 5
Exhibit I hereto on the dates likewise set forth therein. Such advances shall be
deemed earned as of the date so specified in Item E.
(f) FIRST YEARS guarantees that, for each period specified in Item F of
Exhibit I as a guaranteed period, CTW shall have earned hereunder, solely with
respect to the Territory, the net sums set forth in Item F. If CTW's Royalties
for the specified guarantee period shall be less than the sum guaranteed for
such period, then FIRST YEARS shall, simultaneously with the final accounting
for such period, pay CTW the difference which sum when so paid shall be deemed
earned as of the end of the period in respect of which it is payable.
(g) All Royalties and other amounts payable to CTW in accordance with the
provisions of this Agreement are expressed as net sums payable promptly and in
full, in United States Dollars by check made payable to Children's Television
Workshop, P.O. Box 5587 GPO, New York, New York 10087-5587 or at such other
office or method as CTW may from time to time designate in writing.
(h) During each calendar year during which FIRST YEARS exercises any rights
hereunder relating to any Product as well as in the following twelve (12)
months, any certified public accountants, attorneys or other persons of CTW's
choice, reasonably acceptable to FIRST YEARS, which approval shall not be
unreasonably withheld, may at any time or times, on two-weeks', during regular
business hours, examine and copy FIRST YEARS' books of account, records,
vouchers, invoices and all other documents relating in whole or in part to the
subject matter of this Agreement in order to determine the correctness and
completeness of all payments made and statements delivered to CTW hereunder. If
any such examination reveals an error of 5% or more relating to under-reporting
of Royalties due CTW or or if any such examination is made because FIRST YEARS
has not timely delivered to CTW any required statement of account hereunder,
then it shall, at CTW's request, promptly pay CTW all reasonable costs of such
examination. FIRST YEARS shall keep, in accordance with generally accepted
accounting principles, throughout the Term and for at least eighteen (18) months
thereafter, proper, accurate, complete and auditable records and books of
account reflecting all dealings with Products and shall make all such entries
therein as may be necessary to enable all calculations referred to in
subparagraph 5(b) hereof to be readily verified.
(i) To the extent that either party hereto shall divulge to the other, or
in the course of its examination shall receive, confidential information,
then such party hereby agrees to maintain such information in confidence unless
and until such information shall become known in the industry.
-5-
<PAGE> 6
6. CREDITS AND INTELLECTUAL PROPERTY RIGHTS
(a) To the extent that Products and their associated packaging, promotion
and advertising materials incorporate any language, all such language shall be
solely in the language specified in Item B of Exhibit I. Each Product shall,
except as CTW otherwise requests or permits, bear in legible and irremovable
form the following statement, credits and other matter:
(i) "This Sesame Street product was produced by THE FIRST YEARS INC.
in cooperation with CHILDREN'S TELEVISION WORKSHOP" with the
names of FIRST YEARS and CTW in such statement to be equal in
size, type and prominence of display; and
(ii) subject to CTW's prior approval, all such statements, notices,
claims of right and other matter (including but not limited to
appropriate copyright and trademark notices) as may be required
to appear thereon under any applicable law, decision, regulation
or rule.
(b) FIRST YEARS shall:
(i) cause each Product and all promotional, publicity and advertising
material therefor, to be packaged, distributed and sold in full
compliance with the provisions of this Agreement and the
copyright laws of the United States of America and the Berne and
Universal Copyright Conventions;
(ii) during the Term and for as long thereafter as it exercises any
rights hereunder, not cause the copyright of any copyrightable
Product or advertising or promotional material to be maintained
in the name of FIRST YEARS;
(iii) require all third party contributors to acknowledge in writing
that (A) CTW is for all purposes the sole and exclusive author
and proprietor of all Derivative Works, (B) CTW has commissioned
such third party to create a work made for hire and (c) such
third party contributor waives any claim with respect to the
moral right which may be created as a result of the services
rendered by such person and assigns to CTW all right, title and
interest (including the copyright) in and to all Derivative Works
created by such contributor; and
(iv) promptly notify CTW of all infringements or violations of any
copyright, trademark or other right in or to any of the Licensed
Elements and shall consult with CTW with respect to how to
respond to each such infringement or violation. FIRST YEARS shall
cooperate with CTW in all litigation relating to this
-6-
<PAGE> 7
Agreement and shall execute, file and deliver whatever
documentation may be necessary or convenient in connection with
copyright and trademark matters.
(c) FIRST YEARS acknowledges and agrees that all the Licensed Elements have
acquired a secondary meaning in the mind of the purchasing public and that, to
the extent the law allows, it (i) will not attack the validity of the license or
rights granted hereunder to it, (ii) will not do anything, either by acting or
not acting, which might impair, violate or infringe any of the Licensed
Elements, (iii) will not claim adversely to CTW or anyone claiming through CTW
any right, title or interest in or to any of the Licensed Elements and (iv) has
not, directly or indirectly, used or registered (or applied for registration of)
and will not so use or register any item which in CTW's opinion is the same as
or confusingly similar to any of the Licensed Elements and will not use any of
the same as part of its name or the name of any other entity.
(d) Nothing contained in this Agreement shall give CTW any right, title or
interest in or to any of FIRST YEARS' logos, trademarks, tradenames, patents or
copyrighted material and all such right, title and interest and right to use,
shall remain solely with FIRST YEARS.
7. APPROVAL RIGHTS
(a) FIRST YEARS acknowledges that in order to ensure the preservation of
the intangible intellectual property licensed hereunder, and to ensure that the
appearance, quality, sale and distribution of each Product is consonant with
CTW's name and reputation for quality and with the goodwill associated with CTW
and the Licensed Elements, CTW retains the right to approve in advance, at each
stage of product development set forth in Appendix 13 annexed hereto, each
Product and the Materials, advertising, publicity and promotion used in
connection therewith.
(b) FIRST YEARS agrees not to release, market, distribute or sell any
Product (or any advertising, publicity or promotion related thereto) without
CTW's prior written approval. FIRST YEARS shall forward at its expense to CTW
all items as to which CTW has rights of approval hereunder, for the purpose of
facilitating such approval.
(c) CTW will notify FIRST YEARS of its approval or disapproval of any
submission within two (2) weeks after receipt of such submission. Any submission
not approved within such two week period shall be deemed disapproved. In
exercising its right to grant or withhold any approval, consent or permission
under this Agreement, CTW may take into consideration such pedagogic, safety,
aesthetic and other considerations as they in their sole discretion determine.
Failure by CTW at any point to grant approval shall not result in any liability
on its part to FIRST YEARS or others on account of such failure.
(d) FIRST YEARS shall, at its cost and expense, obtain all third party
clearances and approvals and shall bear all costs and have the sole
responsibility and obligation for all
-7-
<PAGE> 8
development, if any, including but not limited to, reuse fees, film, copyright
fees and the costs of production, packaging, advertising, warehousing,
distributing, selling, shipping, billing, collecting and the like with respect
to each Product and for compliance with all laws, decisions, rules and
regulations of all bodies and agencies having jurisdiction thereof. CTW shall
have no liability, responsibility or obligation in connection therewith.
(e) No approval by CTW of any Product, advertisement or promotion in
connection therewith shall imply or be deemed to imply that the Licensed
Elements are otherwise available for use by FIRST YEARS.
8. SAMPLES
(a) FIRST YEARS shall deliver to CTW at its address hereunder, at no cost
to CTW, and to JHP at 117 East 69th Street, New York, New York 10021, attention
Cheryl Henson, at no cost to JHP, promptly upon or before their initial shipment
to a customer, thirty-five (35 units of each Product and thereafter, if and when
requested by CTW, it shall deliver to CTW at no cost to CTW, up to twenty-four
(24) units of each Product. CTW shall also have the right to select, without any
payment therefor, for quality control purposes (it being agreed that CTW shall
have reasonable access to FIRST YEARS' facilities to audit such quality control,
on no less than two (2) weeks' written notice given to FIRST YEARS), up to ten
(10) units at a time of each Product hereunder.
(b) CTW shall also have the right to purchase from FIRST YEARS, at FIRST
YEARS' Manufacturing Cost or Purchase Price therefor, such number of units of
any Product as CTW may from time to time specify by notice to FIRST YEARS. Units
of Products so purchased by CTW may be used by CTW as it in its sole discretion
may determine, except that CTW may not resell such units to the general public,
directly or indirectly without FIRST YEARS' consent.
(c) No Royalties shall be payable by FIRST YEARS on Products delivered to
or purchased by CTW or JHP under this paragraph 8.
9. WARRANTIES AND INDEMNIFICATIONS
(a) FIRST YEARS specifically represents, warrants and agrees that:
(i) it is and shall remain free to enter into and fully perform this
Agreement in all respects and shall develop, manufacture,
produce, advertise, promote, distribute or sell Products only as
expressly permitted under this Agreement;
(ii) CTW would suffer irreparable harm if product items were
distributed or sold except as herein expressly permitted, and
that CTW, without limitation to any
-8-
<PAGE> 9
other rights, shall be entitled to injunctive relief to prevent
FIRST YEARS from distributing or selling Products except as
herein expressly permitted;
(iii) each unit of each Product distributed or sold hereunder shall
be, in all respects, clearly safe and fit for use by the persons
for whom such Product is intended to be used, free from all
defects in manufacturing and workmanship and shall not violate,
infringe upon or breach any rights of third parties. If requested
by CTW, FIRST YEARS will provide test results satisfactory to CTW
and otherwise cooperate with CTW's Quality Control Department to
assure CTW that each Product meets the safety standards
established by any governmental organization or bureau having
jurisdiction thereof. If FIRST YEARS learns of any defect in or
breach of warranty with respect to any Product (or unit or
component thereof), it shall promptly notify CTW thereof and take
all appropriate measures to remedy such defect as well as to
eliminate the same in all future units of the Product;
(iv) it shall, no less than once each year, furnish to CTW its
marketing plans including, without limitation, FIRST YEARS'
annual sales estimate for each Product on a quarter by quarter
basis for such year and its proposed advertising, promotion and
publicity in connection with the distribution and sale of
Products during such year;
(v) it shall not, during the final six (6) months of the Term hereof,
produce or have produced more Products than it can reasonably
foresee selling during the Term;
(vi) it shall, not less than thirty (30) days prior to the expiration
of the Term of this Agreement, provide CTW with a complete
schedule of all inventory of Products then on hand;
(vii) it shall not, during the Term or thereafter, without CTW's prior
consent, distribute or sell any items that utilize any of the
Licensed Elements or that are the same as, based upon or
variations of any Product newly created hereunder stemming in
whole or in part from any original idea or suggestion given to it
by CTW;
(viii) it shall not, without CTW's prior written consent, actively
solicit sales of any Product or Products outside of the Territory
nor, distribute or sell any Product or Products outside the
Territory or knowingly distribute or sell any Product or Products
for resale or other redistribution outside the Territory;
(ix) it shall use its best efforts, at its sole cost and expense,
promptly to register in all appropriate classes in the Territory
in the name and for the benefit of CTW all new trade and service
names and marks specifically developed and used for
-9-
<PAGE> 10
Products licensed hereunder by FIRST YEARS and shall keep CTW
currently advised as to the status of each such registration
(including the application therefor); and
(x) it shall, unless and until delivered to CTW, preserve, maintain
and safely store all Materials, including specifically, all
original artwork and film, during the full term hereof, and for
at least one hundred (100) days after receipt of the certificate
required to be furnished to CTW pursuant to subparagraph 10(b)
hereof; and
(xi) it shall maintain in full force and effect reasonably adequate
product liability insurance specifically covering all Products
sold or distributed hereunder by it as well as any liability on
its part or on the part of JHP or CTW (each of which shall be
included as an additional insured in such insurance, effective as
of April 15, 1997) with respect thereto. The insurance shall have
appropriate limits which, with respect to each year, shall be no
less than the amount set forth in Item G of Exhibit I annexed
hereto; it being understood and agreed that any insurance carded
by JHP or CTW shall be deemed excess insurance, not subject to
contribution; and
(xii) for as long as it has any rights under this Agreement, it shall
comply with all applicable federal and other rules and
regulations dealing with equal employment opportunity to the same
extent as if it were executing an agreement with the Federal
Government. FIRST YEARS also agrees that it shall take
affirmative action to ensure that applicants are employed, and
that employees are treated during employment, without regard to
race, creed, color, religion, sex, age, national origin, veteran
status or, unless relevant to the duties to be performed,
present or past physical or mental handicaps or disabilities, and
shall post in conspicuous places, available to employees and
applicants for employment, notices setting forth these
non-discrimination provisions and shall, in all solicitations or
advertisements for employees placed by or on behalf of it, state
that it is an Equal Opportunity Employer.
(b) CTW represents and warrants that it is and shall remain free to enter
into and fully perform this Agreement in all respects, and that CTW has all
rights to grant FIRST YEARS the license herein granted without infringing the
rights of any third party.
(c) FIRST YEARS and CTW shall at all times indemnify and hold harmless the
other from and against any and all claims, damages, liabilities and reasonable
costs and expenses (including but not limited to attorney's fees) within the
scope of the indemnitor's indemnity hereunder which are reduced to a final
adverse judgment, or are settled with the indemnitor's prior consent, growing
out of, based on or in connection with the performance of this Agreement by the
-10-
<PAGE> 11
indemnitor, or any breach or default by the indemnitor of its agreements,
covenants, representations, obligations or warranties herein; provided, however,
that the indemnitee shall give the indemnitor prompt notice of each and every
claim and litigation to which this indemnity applies and cooperate fully in the
defense of all such claims and litigation and may, at its cost and expense,
participate in the defense thereof. All references to CTW in this Subparagraph
9(c) shall, to the extent that any of JHP's rights are involved, include JHP.
10. TERMINATION
(a) CTW shall, in addition to its other rights, have the right, on notice
to FIRST YEARS given at any time on or after the initial occurrence of any of
the conditions specified in this subparagraph 10(a) to terminate the Agreement
in its entirety or with respect to any one or more countries or areas in the
Territory or with respect to any one or more Products hereunder if FIRST YEARS:
(i) without CTW's consent, Assigns this Agreement or any of its
rights hereunder in whole or in part;
(ii) becomes insolvent or subject to any bankruptcy, insolvency or
receivership proceeding of any nature which is not dismissed and
fails to assume this Agreement within one hundred and twenty
(120) days after the order granting relief;
(iii) for any reason does not distribute or sell Products of a quality
acceptable to CTW or in sufficient quantities to satisfy the
reasonably foreseeable demand of the purchasing public therefor;
or
(iv) is in breach or default under any of its obligations,
representations, warranties, or agreements hereunder (except its
obligation to pay any advance, guarantee, Proprietary Royalty
License Fees or any other sum due hereunder or to deliver any
statement of account) for a period of thirty (30) days after CTW
shall have given FIRST YEARS written notice of such breach or
default, and with respect to FIRST YEARS' obligation to pay any
advance, guarantee, Proprietary Royalty License Fees or any other
sum due hereunder to deliver a statement of account, for a period
often (10) days after CTW shall have given FIRST YEARS written
notice of such breach or default.
(b) Upon expiration or termination of the Term of the Agreement:
-11-
<PAGE> 12
(i) all monies at any time or times payable hereunder to CTW Shall
thereupon become due and payable in full to CTW and all rights
and licenses granted hereunder to FIRST YEARS shall immediately
and automatically revert to CTW;
(ii) FIRST YEARS shall furnish to CTW a certificate of its existing
inventory of Products listing all Products and all units and
components of Products in its possession or under its control,
their state of completion, their physical condition and location
and their Manufacturing Cost, or if the Products are imported,
the Purchase Price thereof and also listing all Materials, their
physical condition and location and their actual Book Value--it
being also agreed that CTW shall have the right, at its expense,
to conduct a physical inventory of all or any of said units,
components, Products and Materials and to inspect any and all
sites at which any of said units, components, Products and
Materials are stored;
(iii) Provided that it shall have fully performed all of its
obligations hereunder, FIRST YEARS shall have the non-exclusive
right to sell, in accordance with the provisions of this
Agreement, all unsold finished Products in its inventory on the
date of such termination, for the six month period immediately
following expiration of the Term. No Royalties earned by CTW for
the sale of Products in accordance with this division (iii) may
be applied in recoupment of any advances made to CTW hereunder
nor in reduction of the earnings of CTW guaranteed by FIRST
YEARS.
(iv) Subject to the provisions of division (iii) of this subparagraph
10(b), all right, title and interest in and to all said Products,
units, components and Materials, if any, shall automatically vest
in CTW for all purposes without restriction other than as
specifically provided in this Agreement; and
(v) CTW shall have the right to pay FIRST YEARS or otherwise credit
FIRST YEARS' account for all or any of said units, components or
Products, FIRST YEARS' actual Manufacturing Cost or the Purchase
Price for each such Product and, for all or any Materials (other
than artwork and film) FIRST YEARS' Book Value therefor. Upon
such payment or credit CTW shall become entitled to possession of
all Products and Materials so paid for, together with appropriate
title documents therefor. If CTW does not so pay for all
Products and Materials within ninety (90) days after expiration
of the Term or sell-off period, FIRST YEARS shall destroy all the
same not so paid for and furnish CTW with a certificate of such
destruction. CTW shall have the right to have a representative
selected by it witness such destruction.
-12-
<PAGE> 13
11. STRICT CONSTRUCTION
All licenses and rights granted herein to FIRST YEARS shall be strictly
construed and all licenses and rights not expressly granted hereunder are,
insofar as FIRST YEARS and those claiming through it are concerned, specifically
reserved and retained by CTW without any limitation or restriction and with full
right of user.
12. NOTICES
All communication required or permitted to be given under this Agreement
shall be in writing and, if delivered personally or sent to the following
address by prepaid telegram, cable, fax or registered or certified mail with
postage prepaid, shall be deemed to have been duly given as of the date of such
delivery or sending:
If to CTW, at:
Children's Television Workshop
One Lincoln Plaza
New York, New York 10023
to the attention of J. Baxter Urist, Senior Vice President, International
Television and Product Licensing Group and Joseph T. Diaz, Vice President, Legal
and Business Affairs, or such other address as CTW shall designate in writing.
If to FIRST YEARS, at:
THE FIRST YEARS INC.
One Kiddie Drive
Avon, Massachusetts 02025
to the attention of MR. ADRIAN ROCHE or such other person or address as FIRST
YEARS shall advise CTW in writing.
13. ENTIRE AGREEMENT
(a) This Agreement sets forth the entire agreement of the parties hereto
with respect to the subject matter hereof and shall be binding upon, and inure
to the benefit of, CTW's successors and assigns. This Agreement cannot be
modified, extended or terminated orally.
(b) No waiver by FIRST YEARS or CTW of any of the provisions of this
Agreement or of any breach or default hereunder shall be or be deemed to be a
further or continuing waiver of the
-13-
<PAGE> 14
same or of any other provisions or breach thereof or default hereunder. All
remedies, rights, obligations and agreements contained herein or available at
law or otherwise are cumulative.
(c) It is understood and agreed that FIRST YEARS does not, and shall not,
have the right to Assign this Agreement in whole or in part or any of its rights
hereunder to anyone except with CTW's prior consent. It is further understood
and agreed that if CTW does consent to any such Assignment, FIRST YEARS shall
nevertheless be, and remain, fully liable hereunder in all respects and that no
such assignee shall acquire any greater rights with respect to this Agreement
than FIRST YEARS.
(d) No signatory hereto shall by virtue of this Agreement or any action
with respect thereto be or be deemed to be an employee, employer, partner of, or
joint venturer with, any other signatory hereto in any manner whatsoever except
as specifically authorized in this Agreement or otherwise in writing.
(e) This Agreement, and all modifications or extensions thereof, shall be
governed in all respects by the law of the State of New York applicable to
contracts to be fully executed and performed therein. Any disputes arising under
this Agreement shall be subject solely to the jurisdiction of the state and/or
federal courts located within the State, City and County of New York and FIRST
YEARS hereby agrees to accept the jurisdiction of such courts over it in
connection with any such dispute. It is further understood and agreed by the
parties hereto that service of process by one party by personal delivery,
certified mail, return receipt requested or overnight courier addressed to the
other party at its last known address hereunder, shall be deemed good and
sufficient service for purposes of jurisdiction.
CHILDREN'S TELEVISION WORKSHOP THE FIRST YEARS INC.
By: /s/ J. Baxter Urist By: /s/ Ronald J. Sidman
------------------------ ----------------------
President
-14-
<PAGE> 15
EXHIBIT I
Attached To and Forming Part of That Certain Agreement Made and Dated as of JULY
1, 1996 by and between CHILDREN'S TELEVISION WORKSHOP and THE FIRST YEARS INC.
Item A. Products hereunder for which FIRST YEARS has been granted the
non-exclusive right to distribute and sell in the Territory shall consist solely
of the following product items listed in Appendix A annexed hereto and hereby
made a part hereof.
Such Products shall be offered for sale through FIRST YEARS' Mass Market
Channels no later than APRIL 15, 1997.
Item B. The word "Territory" as used in this Agreement, means the following
countries and areas only; and the only language or languages to be used by FIRST
YEARS on and for Products (and the associated packaging, promotion and
advertising for such Products) distributed or sold under this Agreement in any
country or area hereunder shall be the specific language or languages
respectively, set forth below in this Item B opposite each such country or area:
Country or Area Language
--------------- --------
UNITED STATES INCLUDING ITS TERRITORIES ENGLISH
AND POSSESSIONS AND U.S. MILITARY
INSTALLATIONS
Item C. The initial period of the Term shall, subject to the provisions of this
Agreement, commence as of JULY 1, 1996 and shall continue in full force and
effect until * .
Item D. The percent of Gross Proceeds that is payable by FIRST YEARS to CTW
pursuant to subparagraph 5(a) hereof with respect to each Product hereunder is
as follows:
* %
* % F.O.B. A LOCATION OUTSIDE THE TERRITORY
Item E. The nonreturnable advance to be paid by FIRST YEARS to CTW upon
execution of the Agreement pursuant to subparagraph 5(e) hereof is as follows:
$15,000.00 - PAYABLE UPON EXECUTION OF THE AGREEMENT, WHICH SHALL BE
DEEMED EARNED NO LATER THAN JUNE 30, 1997.
<PAGE> 16
Item F. The earnings of CTW guaranteed pursuant to subparagraph 5(f) hereof by
FIRST YEARS for each guaranteed period of the Term specified below are as
follows:
*
Item G. The product liability insurance which FIRST YEARS shall be required to
maintain in full force and effect pursuant to division (xi) of subparagraph 9
hereof shall have limits which, with respect to each year shall be at least
three million (U.S. $3,000,000) United States dollars for each occurrence and at
least ten million (U.S. $10,000,000) United States dollars in the aggregate and
shall not have a deductible exceeding ONE HUNDRED THOUSAND ($100,000) United
States dollars.
- ii-
<PAGE> 17
APPENDIX A
----------
Products hereunder for which FIRST YEARS has been granted the non-exclusive
right to distribute and sell in the Territory shall consist solely of the
following Infant Care Items:
(A) FEEDING AND SOOTHING ITEMS (D) HEALTHCARE ACCESSORIES
-------------------------- ----------------------
Reusable & Disposable Bottles Boo Boo Cold Pack
Cups Medicine Feeders
Pacifiers and attachers Thermometers
Bowls (non-melamine)
Dishes (non-melamine) (E) FURNISHINGS
Toddler Totes -----------
Flatware Step Stools
Snack Containers Toilet Trainers
Placemats Scales
Teethers Travel Cushion/Headrests
Splat Mat
Melamine Set (to Infant Buyers only)
Giftset Combinations
(B) PLAY & DISCOVER ITEMS
---------------------
Blister Carded Rattles
(C) CARE & SAFETY ITEMS
-------------------
Changing Pads
Handheld Shower
Sponges
Hooded Towels
Wash Mitts
Spout Guards
Shampoo Visors
Nursery Organizers
Tub Organizers
Car Organizers
Non-activity Crib Light
Comb & Brush Sets
Nightlights
Car Sunshades
Diaper Pins
Booties
<PAGE> 18
APPENDIX B
----------
GUIDELINES FOR PRODUCT DEVELOPMENT AND APPROVAL
-----------------------------------------------
I. CONCEPT
A. Present rough sketch of concept for CTW's approval.
B. Review CTW's design comments.
II. ROUGH ARTWORK
A. Submit pencil sketch with color indications for CTW's art direction.
B. Submit script for approval.
C. Modify sketch or script and re-submit, if requested.
III. FINAL ARTWORK
A. Present final illustration, sculpture or recording for approval.
B. Modify and re-submit, if requested.
IV. PRE-PRODUCTION SAMPLE
A. Submit pre-production sample and test reports, if any.
B. Proceed with production, if approved.
V. PACKAGING
Present all packaging designs and copy for approval.
VI. SAMPLES
Ship thirty-five (35) samples as per subparagraph 8(a) of the Agreement.
<PAGE> 19
EXHIBIT 1(A)
------------
SESAME STREET MUPPET CHARACTERS
-------------------------------
ALICE
BARKLEY
BERT
BETTY LOU
BIFF
BIG BIRD
COOKIE MONSTER
ELMO
ERNIE
GROVER
GRUNDGETTA
GUY SMILEY
HERRY MONSTER
HONKERS
HOOTS THE OWL
LITTLE BIRD
MUMFORD THE MAGICIAN
NATASHA
OSCAR THE GROUCH
PRAIRIE DAWN
ROXY MARIE
SHERLOCK HEMLOCK
SLIMEY THE WORM
SNUFFLEUPAGUS
SULLY
TELLY MONSTER
THE COUNT
TWIDDLEBUGS
ZOE
SESAME STREET SIGN
<PAGE> 20
EXHIBIT III
-----------
<TABLE>
Attention: J. Baxter Urist CHILDREN'S TELEVISION WORKSHOP Reporting Period:
Senior V.P., Products Group INTERNATIONAL MONTHLY SALES ESTIMATE REPORT ------------
Fax #: (212) 875-6123
LICENSEE:
--------------------------
COUNTRY:
---------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PRODUCT RETAIL PRODUCT GROSS UNIT NET WHOLESALE GROSS SALES NET SALES
STYLE# PRICE DESCRIPTION/TITLE UNITS RETURNS RETURNS PRICE (LOCAL CURRENCY) (LOCAL CURRENCY)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
TOTALS:
-----------------------------------------------------------------------------------------------------------
Signed: LESS ALLOWANCES (IF ANY)
-------------------- --------------------
Title: NET SALES (CURRENCY______)
-------------------- --------------------
Date: ROYALTY RATE %
-------------------- --------------------
NET ROYALTY DUE CTW
Page of --------------------
----- ----- ADVANCE OUTSTANDING (IF ANY)
--------------------
TOTAL DUE CTW (CURRENCY______)
--------------------
EXCHANGE RATE A/O ___________
--------------------
TOTAL DUE CTW U.S.$
--------------------
</TABLE>
<PAGE> 21
EXHIBIT II
----------
<TABLE>
Attention: J. Baxter Urist CHILDREN'S TELEVISION WORKSHOP Reporting Period:
Senior V.P., Products Group INTERNATIONAL SALES REPORT ------------
Fax #: (212) 875-6123
LICENSEE:
--------------------------
COUNTRY:
---------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PRODUCT RETAIL PRODUCT GROSS UNIT NET WHOLESALE GROSS SALES NET SALES
STYLE# PRICE DESCRIPTION/TITLE UNITS RETURNS RETURNS PRICE (LOCAL CURRENCY) (LOCAL CURRENCY)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
TOTALS:
-----------------------------------------------------------------------------------------------------------
Signed: LESS ALLOWANCES (IF ANY)
-------------------- --------------------
Title: NET SALES (CURRENCY______)
-------------------- --------------------
Date: ROYALTY RATE %
-------------------- --------------------
NET ROYALTY DUE CTW
Page of --------------------
----- ----- ADVANCE OUTSTANDING (IF ANY)
--------------------
TOTAL DUE CTW (CURRENCY______)
--------------------
EXCHANGE RATE A/O ___________
--------------------
TOTAL DUE CTW U.S.$
--------------------
</TABLE>
<PAGE> 1
EXHIBIT 11
THE FIRST YEARS INC.
PRIMARY NET INCOME PER SHARE AND
FULLY DILUTED NET INCOME PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Primary Net Income Per Share:
Net income available for common shares and common stock
equivalent shares............................................... $5,241,479 $3,724,493
========== ==========
Primary net income per share..................................... $ 1.06 $ 0.80
========== ==========
Shares Used in Computation:
Weighted average common shares outstanding....................... 4,733,178 4,507,058
Common stock equivalents -- options.............................. 208,018 156,433
---------- ----------
Total common stock and common stock equivalent dilutive shares........ 4,941,196 4,663,491
========== ==========
Fully Diluted Net Income Per Share:
Net income available for common shares and common stock
equivalent shares............................................... $5,241,479 $3,724,493
========== ==========
Fully diluted net income per share............................... $ 1.06 $ 0.80
========== ==========
Shares Used in Computation:
Weighted average common shares outstanding....................... 4,733,178 4,507,058
Common stock equivalents -- options.............................. 218,540 166,595
---------- ----------
Total common stock and common stock equivalent dilutive shares........ 4,951,718 4,673,653
========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-67880, No. 33-87196, and No. 33-94888 of the First Years Inc. (the "Company")
on Form S-8 of our report dated March 5, 1997, appearing in this Annual Report
on Form 10-K of The First Years Inc. for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 4,164,587
<SECURITIES> 0
<RECEIVABLES> 16,114,465
<ALLOWANCES> 185,000
<INVENTORY> 18,588,044
<CURRENT-ASSETS> 40,003,813
<PP&E> 14,605,267
<DEPRECIATION> 7,559,543
<TOTAL-ASSETS> 47,049,537
<CURRENT-LIABILITIES> 10,411,097
<BONDS> 0
0
0
<COMMON> 494,898
<OTHER-SE> 35,371,542
<TOTAL-LIABILITY-AND-EQUITY> 47,049,537
<SALES> 93,110,361
<TOTAL-REVENUES> 93,137,710
<CGS> 55,463,255
<TOTAL-COSTS> 84,043,294
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 358,637
<INCOME-PRETAX> 8,735,779
<INCOME-TAX> 3,494,300
<INCOME-CONTINUING> 5,241,479
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,241,479
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.06
</TABLE>
