<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997; OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-7024
THE FIRST YEARS INC.
(Exact Name of Registrant as Specified in its Charter)
<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 $110,256,811, based on the price at which the stock was sold over
the counter on the Nasdaq National Market, as reported at the close of business
on February 27, 1998.
The number of shares of Registrant's Common Stock outstanding on December
31, 1997 was 5,084,591.
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DOCUMENTS INCORPORATED BY REFERENCE
The Company intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1997. The following sections of such definitive proxy statement are hereby
incorporated by reference into Items 10, 11, 12 and 13 of Part III of this Form
10-K: "Common Stock Ownership of Certain Beneficial Owners and Management;"
"Election of Directors;" "Executive Compensation" (other than the Board
Compensation Committee Report on Executive Compensation and the Performance
Chart); and "Compliance with Section 16(a) of the Securities Exchange Act of
1934."
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PART I
ITEM 1. BUSINESS
The First Years Inc. (the "Company") is a leading developer and worldwide
marketer of a broad line of products for infants and toddlers. Major channels
through which the Company sells its products include mass merchants,
supermarkets, drug stores, department stores, wholesale clubs, convenience
stores, specialty stores, mail-order catalogs and catalog showrooms.
The Company was incorporated in 1952 in Massachusetts under the name Kiddie
Products, Inc. The Company changed its name to The First Years Inc. in May,
1995, and is headquartered in Avon, Massachusetts.
Except as expressly indicated or unless the context otherwise requires, as
used in this report, the "Company" means The First Years Inc. a Massachusetts
corporation, and its subsidiaries.
Products
The Company's product line, which contains approximately 320 items that
range in retail price from approximately $0.99 to $69.99, is categorized and
marketed into five distinct product categories as follows:
Feeding & Soothing. The Feeding & Soothing category is comprised of
bottles and accessories, nipples, pacifiers, teethers, bowls, drinking cups,
dishes, flatware, bibs and breast-feeding accessories. This category includes
the TumbleMates line of training cups, bowls, plates and utensils, designed for
serving, storing and transporting drinks and snacks, and which features a system
of interchangeable cups and lids. This category also includes the Simplicity
line of breast feeding accessories, the Flowright angled feeding system of
nipples and bottles and the Sure pacifier.
Play & Discover. The Play & Discover category consists of an extensive
line of entertaining, skill-developing toys for infants and toddlers including
crib toys, floor toys, hand-held toys, and large play items. The Play & Discover
category includes the Company's Washables line of 100% washable, dishwasher-safe
toys and its Firstronics line of hand-held electronic toys for children under
three years of age. In 1997, the Company introduced several higher priced items
intended for the gift giving market such as The Spinning Musical Plush and the
Jukebox Crib Mirror.
Care & Safety. The Care & Safety category consists of a broad line of
bathing and grooming accessories, home safety and monitoring products such as
door and cabinet latches, toilet-training products and products appropriate for
the health and hygiene needs of infants. This category includes the Comfortemp
instant underarm thermometer and the Booties to Grow line of infant footwear.
Winnie the Pooh. The Winnie the Pooh category consists of over 65 basic
products including teethers, rattles, bibs, bottles, bathing accessories and
gift sets featuring Winnie the Pooh characters. In 1997, the Company introduced
numerous additional items in this category including Pooh characters on cups,
bottles, teethers, books, electronic musical toys plus a bouncy seat with a
toybar.
Sesame Street. The Sesame Street category consists of over 30 basic
products including teethers, pacifiers, bottles, drinking cups, dishes,
flatware, healthcare products, car sun shade, hooded towels, rattles and a
toilet trainer.
------------------------
THE FIRST YEARS(R) Ideas Inspired by Parents(R), TumbleMates(R),
Firstronics(R), and Washables(R) are registered trademarks of The First Years
Inc., Nurserytronics(TM), Simplicity(TM), Flowright(TM), Sure(TM), Booties to
Grow(TM) and ComforTemp(TM) are trademarks of The First Years Inc. SESAME STREET
is a registered trademark of Children's Television Workshop, WINNIE THE POOH(R)
and POOH(R) are registered trademarks of Disney Enterprises, Inc.
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PRODUCT DESIGN, DEVELOPMENT AND MARKETING
The Company devotes substantial resources to product development. The
Company employs a staff of professionals engaged in the creation of new products
and also uses, from time to time, a diverse group of outside designers and
developers. For the past 17 years the Company's product line also has been
designed in consultation with Dr. T. Berry Brazelton, the well-known
pediatrician and authority on child development, and staff members of the Child
Development Unit at Children's Hospital in Boston, Massachusetts (the "CDU"), of
which Dr. Brazelton is founder and Director Emeritus.
The Company spent approximately $2.6, $2.2 and $1.8 million on new product
development in 1997, 1996 and 1995, respectively. Most of the Company's new
products are shown at the Juvenile Products Manufacturers Association Trade
Show, in Dallas, Texas in the fall of each year, and a variety of other national
and international toy and baby fairs.
SALES
The Company's products are sold nationally and internationally to a broad
spectrum of customers including mass merchants, national variety and drug
stores, supermarkets, wholesale clubs, convenience stores, toy specialty stores,
wholesale distributors, department stores, mail order catalogs and catalog
stores. The Company currently has customers in over 60 countries. Major
customers include Wal*Mart, Toys "R" Us, Target, Kmart, Kroger, Sears, Rite Aid,
Albertsons, and J.C. Penney.
The Company's products are sold in the United States and Canada primarily
through the Company's internal sales staff and a network of 43 independent sales
representatives. The Company's sales staff is responsible for supervising and
training the sales representatives. Such training is conducted at the Company's
headquarters and throughout the United States.
In August, 1997, the Company created a wholly-owned subsidiary, The First
Years Inc., a Delaware corporation ("TFY-Delaware"), to consolidate and more
efficiently handle the company's sales and distribution operations in the
western part of the United States. TFY-Delaware has sales offices in Missouri
and California, and is the Company's exclusive sales agent for certain states in
the western part of the United States.
In Europe and the Middle East, the Company's products are sold by the
Company's internal staff at its sales office in Cirencester, England, which is
headed by the Vice President -- International Sales/Europe. This staff manages a
network of foreign distributors and independent sales representatives. In
Central and South America and the Pacific Rim, the Company's products are sold
by its internal sales staff which manages a network of foreign distributors and
independent sales representatives in such areas.
The Company's international sales in 1997, 1996 and 1995 were approximately
$16.2, $11.6 and $7.7 million, respectively, and accounted for approximately
13.5%, 12.5% and 10% of the Company's total net sales in 1997, 1996 and 1995,
respectively. (See "Notes to Financial Statements, Number 8.")
During 1997, Wal*Mart, Toys "R" Us, and Target accounted for approximately
25%, 16%, and 11% of the Company's net sales, respectively. A significant
reduction in purchases by any of these customers could have a material adverse
effect on the Company's business.
Backlog is not a significant and material aspect of the Company's business.
Customers place orders on an as needed basis. As the Company's sales have
increased, the amount of unfilled orders at any time has not been indicative of
future results.
LICENSED CHARACTER PRODUCTS
In 1996 and 1997, the Company renewed and entered into various agreements
which provide for the payment of royalties on certain of the Company's products
featuring licensed cartoon characters. The agreements have terms ranging from
one to three years and require minimum royalty payments of $5,312,000 during the
terms of these agreements. A major licensing agreement will expire at the end of
1998; however the Company's management is in the process of negotiating
continuance of this agreement (see Exhibit 99 to this Report, "Important Factors
Regarding Forward-Looking Statements" and "Notes to the Financial Statements,"
Numbers 6 and 8).
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MANUFACTURING AND SOURCES OF SUPPLY
The Company does not own or operate its own manufacturing facilities. In
1997, all of the Company's products were manufactured either using the Company's
custom tools (molds and dies) or to the Company's specifications by
approximately 25 manufacturers located in the United States, Canada, China,
Taiwan, Thailand, and Mexico. Approximately 60% of all of its products sold in
1997 were manufactured in Asia, primarily in China. A large percentage of the
Company's furnishings and other large products were manufactured in 1997 by
suppliers in the United States and Canada because of the significantly higher
shipping costs from the Far East.
Generally the Company uses one manufacturer to make each product from its
supplier base in Asia, Canada, and the United States. Due to the high cost of
developing duplicate tooling (predominantly molds and dies), most of the
Company's products are made using one set of tools; however, the Company has
developed duplicate tools for several of its key and high-volume products. In
December, 1996, the Company entered into an agreement with Exergen Corporation
to jointly design and develop the Company's ComforTemp thermometer. The
ComforTemp is an instant underarm thermometer which uses an infrared
temperature-taking technology developed and patented by Exergen. The Company is
dependent on Exergen for Exergen's technology and proprietary components. The
Company introduced the Comfortemp to the market in 1997. There can be no
assurance that the Company will continue to obtain such proprietary components
from Exergen or that the ComforTemp thermometer, as a new product, will result
in substantial sales. The Company believes it has alternative manufacturing
sources available for all of its other products. Because it owns its tools, it
could shift its sources of manufacturing for such other products to an
alternative supplier.
In 1997, the Company's largest supplier, which is based in the United
States, accounted for products that represented approximately 15% of its net
sales in 1997. The Company has not entered into long-term contractual
arrangements with any of its suppliers.
The principal raw materials used in the production and sale of the
Company's products are plastic, paperboard and cloth. Raw materials are
purchased by the manufacturers who deliver completed products to the Company.
Because the primary source used in manufactured plastic is petroleum, the cost
and availability of plastic for use in the Company's products varies to a great
extent with the price of petroleum. The inability of the Company's suppliers to
acquire sufficient plastic and paperboard at a reasonable price could have a
material adverse effect on the Company's profitability. The Company did not
experience any difficulties in obtaining materials in 1997.
The Company purchases its products from its suppliers primarily in the U.S.
dollar and the Hong Kong dollar which is currently pegged to the U.S. dollar.
Generally, the Company's suppliers ship the products on the basis of open credit
terms or upon the acceptance of products by the Company.
Foreign manufacturing is subject to a number of risks including
transportation delays and interruptions, the imposition of tariffs, quotas, and
other import or export controls, currency fluctuations, misappropriation of
intellectual property, political and economic disruptions, and changes in
governmental policies. From time to time, the United States Congress has
attempted to impose additional restrictions on trade with China. Enactment of
legislation or the imposition of restrictive regulations conditioning or
revoking China's "most favored nation" ("MFN") trading status could have a
material adverse effect upon the Company's business because products originating
from China could be subjected to substantially higher rates of duty. China's MFN
trading status has been extended through July 2, 1998. Unless Congress takes
action to override this decision, China will continue to enjoy MFN treatment
during this period. The European Community (the "EC") has enacted a quota and
tariff system with respect to the importation into the EC of certain toy
products originating in China. The Company, therefore, continues to evaluate
alternative sources of supply outside of China.
The Company, because of its substantial reliance on suppliers in foreign
countries, is required to order products further in advance of customer orders
than would generally be the case if such products were produced in the United
States. As a result, the Company is required to carry significant amounts of
inventory
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to meet rapid delivery requirements of customers and to assure itself of
continuous allotment of goods from suppliers.
WORKING CAPITAL ITEMS
See Item 7, "Management Discussion and Analysis of Financial Condition and
Results of Operation."
COMPETITION
The juvenile products industry is highly competitive and includes numerous
domestic and foreign competitors, some of which are substantially larger and
have greater financial and other resources than the Company. The Company
competes with a number of different competitors, depending on the product
category, and it competes against no single company across all product
categories. Its competition includes large, diversified health care product
companies, specialty infant products makers, toy makers and specialty health
care products companies. The Company competes principally on the basis of brand
name recognition and price/value relationship. In addition, the Company believes
that it competes favorably with respect to product quality, customer service and
breadth of product line.
DISTRIBUTION
The Company distributes its products in the United States from its 103,500
square foot warehouse facility in Avon, Massachusetts and from a public
warehouse in Fontana, California. The Company distributes its products in Canada
from a public warehouse in Toronto, Ontario. In Europe, the Company distributes
its products from a public warehouse in Ghent, Belgium. Warehouse services at
the various public warehouses are performed by warehouse operators unaffiliated
with the Company.
TRADEMARKS, PATENTS AND COPYRIGHTS
The Company's principal trademark THE FIRST YEARS and design, is registered
in the United States and in a number of foreign countries. The Company also uses
other trademarks for certain of its products and product categories, some of
which are registered in the United States and in various foreign countries.
The Company, also owns patents, design patents and design registrations, as
well as pending applications in the United States and certain foreign countries.
Although the Company believes such are important to its business, it does not
believe that any single patent, design patent, or design registration, including
any which may be issued on a pending application, is material to its business.
There can be no assurance that such patents, design patents, or design
registrations, including those that may be issued on pending applications, will
offer any significant competitive advantage for the Company's products.
The Company, also owns copyrights, some of which are registered in the
United States. The Company does not believe that any single copyright is
material to its business. There can be no assurance that such copyrights will
offer any significant competitive advantage for the Company's products.
EMPLOYEES
As of December 31, 1997, the Company employed 128 full-time and 2 part-time
employees, of whom 4 are senior executive officers and all of the other
employees of the Company are in sales, marketing and product development, in
materials, purchasing, quality control, data processing, finance, administration
and clerical, and warehousing positions. None of the Company's employees is
represented by a union, and the Company has not experienced any work stoppages.
The Company believes that relations with employees are good.
GOVERNMENT REGULATIONS
The Company's products are subject to the provisions of the Federal
Consumer Product Safety Act, the Federal Hazardous Substances Act, as amended,
the Federal Flammable Fabrics Act, and the Child Safety Protection Act, and the
regulations promulgated thereunder (the "Acts"). The Company's nursery monitors
are subject to regulations of the Federal Communications Commission. The
Company's medical devices and drug products are subject to the regulations of
the Food and Drug Administration. The Acts enable the
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Consumer Product Safety Commission (the "CPSC") to protect children from
hazardous toys and other articles. The CPSC has the authority to exclude from
the market certain consumer products which are found to be hazardous. The CPSC's
determination is subject to court review. The CPSC can require the repurchase by
the manufacturer of articles which are banned. The Federal Flammable Fabrics Act
enables the CPSC to regulate and enforce flammability standards for fabrics used
in consumer products. Similar laws exist in some states and cities and in
various international markets. The Company designs and tests its products to
ensure compliance with the various federal, state and international
requirements. Any recall of a product could have a material adverse effect on
the Company, depending on the particular product.
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The names of the Company's Executive Officers and Directors and certain
information about them are set forth below. Officers have served in the capacity
indicated in the table below for at least five years, unless otherwise indicated
in the notes.
<TABLE>
<CAPTION>
OFFICER OR
DIRECTOR
NAME AGE POSITION SINCE
---- --- -------- ----------
<S> <C> <C> <C>
Ronald J. Sidman.......................... 51 President, Chairman of the Board of
Directors, and Chief Executive Officer 1975
Jerome M. Karp............................ 70 Vice Chairman of the Board of Directors 1969
Benjamin Peltz............................ 58 Director 1975
Evelyn Sidman............................. 84 Clerk and Director 1979
Fred T. Page.............................. 51 Director 1988
Merton N. Alperin......................... 75 Director 1988
John R. Beals............................. 43 Treasurer, Senior Vice President -- Finance
and Chief Financial Officer 1990
Wayne Shea................................ 43 Senior Vice President -- Worldwide Sales
and Merchandising 1991
Bruce Baron............................... 37 Senior Vice President -- Operations 1997
John N. Colantuone*....................... 60 Vice President -- Engineering and Product
Development 1982
</TABLE>
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Mr. Sidman has been the President of the Company since January 1989 and
Chairman of the Board of Directors and Chief Executive Officer since March 1995.
Mr. Peltz was the Treasurer of the Company from May, 1970 to January, 1998.
He was also the Senior Vice President -- Finance of the Company from January,
1980 until June 30, 1997 when he retired from the Company.
Mr. Page has been the President -- Network Services of Southern New England
Telecommunications Corporation ("SNET") since January, 1994 and has been with
SNET for over 5 years.
Mr. Alperin, a Certified Public Accountant, has been a financial consultant
for over five years. He was the Chairman of the Board of Public Accountancy of
Massachusetts for several years.
Mr. Beals was elected Senior Vice President -- Finance on March 19, 1998
and was elected the Treasurer of the Company on January 15, 1998. He has been
Chief Financial Officer of the Company since July, 1997. From July, 1997 to
March, 1998 he was Vice President -- Finance of the Company and from January,
1990 to June, 1997, he was the Assistant Treasurer and Controller of the
Company.
Mr. Shea has been Senior Vice President of Worldwide Sales & Merchandising
since July, 1997. From January, 1995 to June, 1997, Mr. Shea was Vice President
Worldwide Sales & Merchandising and from July, 1991 to December, 1994, Mr. Shea
was Vice President of Service and Merchandising of the Company.
Mr. Baron has been Senior Vice President since August, 1997. Prior to that
time, Mr. Baron was Vice President of Operations at Crabtree & Evelyn from 1988
to July, 1997.
*Mr. Colantuone will be retiring from the Company on April 3, 1998.
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ITEM 2. PROPERTIES
The Company owns its executive and administrative offices and principal
warehouse which are located in a building at One Kiddie Drive, Avon,
Massachusetts. The building contains approximately 124,000 square feet of space,
of which approximately 20,500 square feet are used for executive and
administrative offices and the balance, approximately 103,500 square feet is
utilized for warehousing. The Company also has sales offices in leased premises
in Cirencester, England. The Company's subsidiary, TFY-Delaware has sales
offices in leased premises in Missouri and Mission Viejo, California.
The Company also uses public warehouses located in Toronto, Canada;
Fontana, California; and in Ghent, Belgium.
The Company believes that its properties (owned and leased) are in good
condition and adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal proceedings which have arisen in the
ordinary course of business. The Company believes that there are no claims or
litigation pending, the outcome of which could have a material adverse effect on
the Company's financial condition or operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Company.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market. Below
is a summary of the actual high and low sales prices of the Company's Common
Stock for each quarter of 1997 and 1996 as reported by Nasdaq.
1997
<TABLE>
<CAPTION>
QUARTER LOW HIGH
------- --- ----
<S> <C> <C>
First....................................................... $15 1/2 $ 17 7/8
Second...................................................... 15 21 3/4
Third....................................................... 19 1/2 29
Fourth...................................................... 20 1/2 28 3/4
</TABLE>
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>
(b) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
<TABLE>
<CAPTION>
APPROXIMATE NUMBER
OF RECORD HOLDERS
TITLE OF CLASS (AS OF DECEMBER 31, 1997)
-------------- -------------------------
<S> <C>
Common Stock, $.10 Par Value 142
</TABLE>
(c) DIVIDEND POLICY
In 1996 and 1997, the Company paid a cash dividend on its Common Stock of
$0.10 per share which were paid on June 1, 1996 and June 2, 1997, respectively.
The Company currently expects that comparable cash dividends will continue to be
paid in the future. However, the declaration and payment of any such cash
dividends in the future will depend upon the Company's earnings, financial
condition, capital needs, and other factors deemed relevant by the Board of
Directors. There can be no assurance that the Company will continue to pay
dividends in the future.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Net sales.................. $120,695,988 $93,110,361 $75,757,322 $53,233,109 $46,124,088
Cost of products sold...... 71,185,634 55,463,255 45,108,546 29,498,457 26,653,704
Selling, general and
administrative
expenses................. 37,165,878 28,580,039 23,961,206 18,915,908 17,857,049
Severance-related
expenses................. -- -- -- -- 373,000
Interest expense........... 27,709 358,637 186,338 24,575 28,912
Interest income............ 168,922 27,349 16,718 66,605 66,204
Offering expenses.......... -- -- 310,457 -- --
Income before income
taxes.................... 12,485,689 8,735,779 6,207,493 4,860,774 1,277,627
Provision for income
taxes.................... 5,040,900 3,494,300 2,483,000 1,871,400 481,500
Net income................. 7,444,789 5,241,479 3,724,493 2,989,374 796,127
Basic earnings per
share**.................. $1.49 $1.11 $0.83 $0.66 $0.18
Diluted earnings per
share**.................. $1.42 $1.06 $0.80 $0.66 $0.18
Dividends paid per
share*................... $0.10 $0.10 $0.09 $0.09 $0.09
Basic weighted average
number of shares
outstanding**............ 5,001,887 4,733,178 4,507,058 4,497,244 4,496,520
Diluted weighted average
number of shares
outstanding**............ 5,226,531 4,945,991 4,663,491 4,497,244 4,496,520
SELECTED BALANCE SHEET
DATA:
Total assets............... $60,571,561 $47,049,537 $41,712,080 $28,852,785 $24,532,714
Long-term debt............. -- -- 100,001 233,334 366,667
Stockholders' equity....... 44,009,004 35,866,440 25,763,259 22,349,947 19,719,720
Stockholders' equity per
share**.................. $8.42 $7.25 $5.52 $4.97 $4.39
</TABLE>
- ---------------
* Adjusted to reflect the two-for-one stock split effected on December 29,
1995.
** Adjusted to reflect the two-for-one stock split effected on December 31, 1995
and restated to reflect adoption of Statement of Financial Accounting
Standard No. 128 in the fourth quarter of 1997.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENT OF FORWARD LOOKING INFORMATION:
Statements in this Report on Form 10-K that are not strictly historical are
"forward-looking" statements, as defined in the Private Securities Litigation
Reform Act of 1995. The actual results may differ from those projected in the
forward-looking statements due to risks and uncertainties that exist in the
Company's operations and business environment and in the development and
introduction of new products, described more fully in this Annual Report on Form
10-K for the year ended December 31, 1997, and Exhibit 99 of this Annual Report
for the year ended December 31, 1997, filed with the Securities and Exchange
Commission.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales in 1997 were $120.7 million, an increase of $27.6 million, or
29.6%, as compared to $93.1 million in 1996. The increase was due to new product
introductions, including the Sesame Street brand licensed from the Children's
Television Workshop, and expanded retail distribution in domestic and foreign
markets. As a percentage of net sales, net sales to foreign markets increased to
13.5% in 1997 from 12.5% in 1996 resulting primarily from increases in Europe,
the Pacific Rim and Canada. As a percentage of net sales, licensed products
increased to 43.1% in 1997 from 31.8% in 1996.
Cost of products sold in 1997 was $71.2 million, an increase of $15.7
million or 28.3%, as compared to $55.5 million in 1996. As a percentage of net
sales, cost of products sold in 1997 decreased to 59.0% from 59.6% in the
comparable period of 1996. The decrease was primarily due to reduced cost of
products resulting from manufacturing efficiencies and increased sales of higher
margin products.
Selling, general, and administrative expenses in 1997 were $37.2 million,
an increase of $8.6 million, or 30.0%, as compared to $28.6 million over such
expenses in 1996. The increase resulted primarily from costs related to
increased sales volume; payroll and payroll related costs, and integrated
marketing communication program expenses. As a percentage of net sales, selling,
general, and administrative expenses in 1997 and 1996 remained consistent at
30.8% and 30.7%, respectively.
Income tax expense as a percentage of pretax income increased to 40.4% in
1997 from 40.0% in 1996.
YEAR 2000 ISSUE
The inability of computers, software and other equipment to recognize and
properly process data containing a two digit year (i.e. 97) as opposed to a four
digit year (i.e. 1997) is commonly referred to as the Year 2000 Issue.
The Company is in the process of reviewing its computer systems to identify
those areas that could be affected by the "Year 2000" issue and is developing an
implementation plan to address the issue. The Company presently believes, with
modifications to existing software and converting to new software, the Year 2000
problem will not pose significant operational problems and is not anticipated to
be material to its financial position or results of operations in any given
year.
Additionally, the Company is in the process of initiating communications
with significant suppliers, customers and service vendors to determine the
extent of the Company's exposure if others fail to remedy their own Year 2000
issues. No guarantee can be made that systems of other companies on which the
Company relies upon will be converted on time or that a failure to convert would
not have a material effect on the Company.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales in 1996 were $93.1 million, an increase of $17.3 million or
22.9%, as compared to $75.8 million for the comparable period last year. The
increase was due to new product introductions and expanded retail distribution
in domestic and foreign markets. As a percentage of net sales, net sales to
foreign markets increased to 12.5% in 1996 from 10.3% in 1995 resulting
primarily from increases in Europe and Canada. As a percentage of net sales,
licensed products increased to 31.8% in 1996 from 19.5% in 1995.
II-3
<PAGE> 12
Cost of products sold in 1996 was $55.5 million, an increase of $10.4
million or 23.0%, as compared to $45.1 million for the comparable period last
year. As a percentage of sales, cost of products sold in 1996 and 1995 remained
constant at approximately 59.5%.
Selling, general, and administrative expenses in 1996 were $28.6 million,
an increase of $4.6 million or 19.3% as compared to $24.0 million over such
expenses in 1995. The increase resulted primarily from costs related to
increased sales volume, payroll and payroll related costs. As a percentage of
net sales, selling, general, and administrative expenses for the year of 1996
decreased to 30.7% from 31.6% in 1997. The decrease reflects the economies of
scale provided by higher volume of business.
Income tax expense as a percentage of pretax income was 40% in 1996 and
1995.
LIQUIDITY AND CAPITAL RESOURCES
Net working capital increased by $8.4 million to $38.0 million at December
31, 1997 from $29.6 million at December 31, 1996 primarily due to funds
generated from profitable operations. Accounts receivable increased by $4.0
million primarily as a result of increased sales. Inventory increased by $5.8
million to meet continued demand from the Company's products. Cash increased by
$3.5 million primarily as a result of profitable operations.
In 1996, the Company consummated a public offering of common stock. The
closing of the sale, consisting of 400,000 newly issued shares and 1,200,000
shares of certain selling stockholders was held on July 1, 1996 at which time
the Company issued the new shares and received the net proceeds of $5,121,750.
The proceeds of the newly issued shares were used to pay certain indebtedness of
the Company.
An unsecured line of credit of $10 million which is subject to annual
renewal, is available from a bank. Amounts outstanding under the line are
payable upon demand by the bank. During 1997, the Company has borrowed various
amounts from time to time up to $2.5 million. As of December 31, 1997 no balance
was outstanding.
During 1996, the Company had available an unsecured line of credit from a
second bank totaling $10,000,000. The line was subject to annual renewal and was
not renewed at the option of the Company.
The Company paid a cash dividend of $0.10 per share of Common Stock in June
of 1997 and 1996.
The Company expects cash flow from operations and availability under the
Company's lines of credit to be sufficient to meet cash needs for working
capital expenditures for the next two years.
INFLATION AND FOREIGN CURRENCY FLUCTUATIONS
Inflation has not had a material effect on the Company's operating results
over the past three years.
The Company enters into forward exchange contracts to minimize the impact
of fluctuations in currency exchange rates on future cash flows emanating from
sales denominated in foreign currencies. The Company does not purchase such
contracts for trading purposes. During 1997, the Company entered into forward
exchange contracts with a bank whereby the Company is committed to deliver
foreign currency at predetermined rates. The contracts expire within one year.
The Company's commitment under these contracts approximated $2.5 million as of
December 31, 1997. At December 31, 1997, the exchange rates for such currencies
covered by the contracts approximated the predetermined rates included therein.
The Company routinely assesses the financial strength of the bank which is
counterparty to the forward exchange contracts. As of December 31, 1997,
management believes it had no significant exposure to credit risk relative to
such contracts.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information". In February 1998, the FASB
issued SFAS No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits". These new standards will be effective in the Company's
fiscal year ending December 31, 1998. The Company has not determined the
effects, if any, that these standards will have on its consolidated financial
statements.
II-4
<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 1998 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included in the Registrant's
definitive proxy statement for the 1998 Annual Meeting of Stockholders, except
that the sections in said definitive proxy statement entitled "Board
Compensation Committee Report on Executive Compensation" and the "Stock
Performance Chart" shall not be deemed incorporated herein by reference to this
10-K Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Registrant's
definitive proxy statement for the 1998 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1997, the Company repurchased 3,409 shares of the Company's Common
Stock, $.10 per value, from Ronald J. Sidman, the President of the Company, for
$81,813 in connection with Mr. Sidman's delivery of such 3,409 shares as payment
for the exercise of stock options in 1997, in accordance with the provisions of
the Company's 1993 Equity Incentive Plan which has been approved by the
Company's stockholders.
III-1
<PAGE> 15
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14.(a) 1. FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995
(a) 2. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995
Other schedules are omitted because of the absence of conditions
under which they are required or because the required information is
given in the financial statements or notes thereto.
14.(a) 3. EXHIBITS
The following are either (i) filed herewith as exhibits to this 10-K Report
or (ii) have been filed as exhibits to filings under the Securities Act of 1933
or the Securities Exchange Act of 1934 and are incorporated herein by reference
as exhibits to this 10-K Report.
<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 December 3,
1996 (filed as Exhibit (10)(f) on Form 10-K for the year
ended December 31, 1996 and incorporated herein by
reference; certain portions of such Agreement are subject to
confidential treatment).
(10)(f) Agreement with the Children's Television Workshop dated July
1, 1996 (filed as Exhibit (10)(g) on Form 10-K for the year
ended December 31, 1996 and incorporated herein by
reference; certain portions of such Agreement are subject to
confidential treatment).
Management Contracts and Compensatory Plans
(10)(g) The First Years Inc. 1993 Equity Incentive Plan, as amended
through March 19, 1998. IV-18
(10)(h) The First Years Inc. 1993 Stock Option Plan for Directors,
as amended through March 19, 1998. IV-18
</TABLE>
IV-1
<PAGE> 16
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
(10)(i) Agreement between The First Years Inc. and Jerome M. Karp
dated August 8, 1994 (filed as Exhibit 10(c) to the Form
10-Q Report for the quarter ended June 30, 1994, and
incorporated herein by reference).
(10)(j) Employment Agreement between The First Years Inc. and
Benjamin Peltz, dated March 23, 1995 (filed as Exhibit 10(j)
on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
(10)(k) Employment Agreement between The First Years Inc. and Ronald
J. Sidman, dated March 23, 1995 (filed as Exhibit 10(k) on
Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference).
(10)(l) First Amendment to Employment Agreement between The First
Years Inc. and Ronald J. Sidman dated January 16, 1997. IV-18
(10)(m) First Amendment to Employment Agreement between The First
Years Inc. and Benjamin Peltz dated January 16, 1997. IV-18
(10)(n) The First Years Inc., a Massachusetts Corporation, and
Affiliates -- 1997 Annual Incentive Plan, effective as of
January 1, 1997. IV-18
(10)(o) Agreement between The First Years Inc. and Wayne Shea dated
August 12, 1997. IV-18
- -------------------------------------------------------------------------------
(21) List of Subsidiaries of the Registrant. IV-18
(23) Consent of Deloitte & Touche LLP dated March 27, 1998. IV-18
(27.1) Financial Data Schedule -- 12/31/97 IV-18
(27.2) Financial Data Schedule -- 12/31/96 -- Restated IV-18
(27.3) Financial Data Schedule -- 12/31/95 -- Restated IV-18
(99) Important Factors Regarding Forward-Looking Statements. IV-18
</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, 1997.
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 19, 1998
By: /s/ JOHN R. BEALS
...
JOHN R. BEALS, TREASURER AND
SENIOR VICE PRESIDENT --
FINANCE(CHIEF FINANCIAL OFFICER
AND CHIEF
ACCOUNTING OFFICER)
Date: March 19, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 19, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RONALD J. SIDMAN Chief Executive Officer Chairman of March 19, 1998
........................................ the Board of Directors and President
RONALD J. SIDMAN
/s/ JEROME M. KARP Vice Chairman of the Board of March 19, 1998
........................................ Directors
JEROME M. KARP
/s/ EVELYN SIDMAN Director March 19, 1998
........................................
EVELYN SIDMAN
/s/ BENJAMIN PELTZ Director March 19, 1998
........................................
BENJAMIN PELTZ
/s/ MERTON N. ALPERIN Director March 19, 1998
........................................
MERTON N. ALPERIN
/s/ FRED T. PAGE Director March 19, 1998
........................................
FRED T. PAGE
</TABLE>
IV-3
<PAGE> 18
THE FIRST YEARS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ IV-5
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and
1996.................................................. IV-6
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996, and 1995..................... IV-7
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996, and 1995......... IV-8
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996, and 1995............... IV-9
Notes to Consolidated Financial Statements............. IV-10-16
Financial Statement Schedule II -- Valuation and Qualifying
Accounts for the Years Ended December 31, 1997, 1996, and
1995...................................................... IV-17
</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 consolidated balance sheets of The First
Years Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the accompanying index. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of The First Years Inc. as of December 31, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 5, 1998
IV-5
<PAGE> 20
THE FIRST YEARS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Notes 1 and 8).............. $ 7,697,040 $ 4,164,587
Accounts receivable (less allowance for doubtful
accounts of $185,000 in 1997 and 1996) (Note 8)....... 19,962,226 15,929,465
Inventories (Note 1)................................... 24,372,881 18,588,044
Prepaid expenses and other assets...................... 414,764 375,317
Deferred tax asset (Notes 1 and 3)..................... 1,279,000 946,400
----------- -----------
Total current assets.............................. 53,725,911 40,003,813
----------- -----------
Property, Plant, and Equipment (Note 1):
Land................................................... 167,266 167,266
Building............................................... 4,022,095 4,016,405
Machinery and molds.................................... 7,151,019 7,329,240
Furniture and equipment................................ 3,947,144 3,092,356
----------- -----------
Total............................................. 15,287,524 14,605,267
Less accumulated depreciation.......................... 8,441,874 7,559,543
----------- -----------
Property, plant, and equipment -- net............. 6,845,650 7,045,724
----------- -----------
Total Assets...................................... $60,571,561 $47,049,537
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt (Note 2)............. $ -- $ 100,000
Accounts payable....................................... 10,163,844 6,969,115
Accrued royalty expense (Note 6)....................... 2,051,721 848,671
Accrued payroll expenses............................... 1,143,063 1,087,302
Accrued selling expenses............................... 2,387,029 1,406,009
----------- -----------
Total current liabilities......................... 15,745,657 10,411,097
----------- -----------
Deferred Tax Liability (Notes 1 and 3)...................... 816,900 772,000
Commitments and Contingencies (Notes 5, 6 and 8)
Stockholders' Equity (Notes 4, 7, 9 and 10):
Common stock -- authorized, 15,000,000 shares; issued
5,088,000 and 4,948,980; outstanding, 5,084,591 and
4,948,980 as of December 31, 1997 and 1996,
respectively.......................................... 508,800 494,898
Paid-in-capital........................................ 6,534,308 5,271,875
Retained earnings...................................... 37,047,709 30,099,667
Less: 3,409 shares of treasury stock (at cost)......... (81,813) --
----------- -----------
Total stockholders' equity........................ 44,009,004 35,866,440
----------- -----------
Total Liabilities and Stockholders' Equity........ $60,571,561 $47,049,537
=========== ===========
</TABLE>
See notes to consolidated financial statements.
IV-6
<PAGE> 21
THE FIRST YEARS INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Sales (Notes 1, 6 and 8)........................ $120,695,988 $93,110,361 $75,757,322
Cost of Products Sold (Note 1)...................... 71,185,634 55,463,255 45,108,546
------------ ----------- -----------
Gross Profit........................................ 49,510,354 37,647,106 30,648,776
Selling, General, and Administrative Expenses (Notes
1 and 7).......................................... 37,165,878 28,580,039 23,961,206
------------ ----------- -----------
Operating Income.................................... 12,344,476 9,067,067 6,687,570
Other Income (Expense):
Interest expense............................... (27,709) (358,637) (186,338)
Interest income................................ 168,922 27,349 16,718
Offering expenses (Note 10).................... -- -- (310,457)
------------ ----------- -----------
Income Before Income Taxes.......................... 12,485,689 8,735,779 6,207,493
Provision for Income Taxes (Notes 1 and 3).......... 5,040,900 3,494,300 2,483,000
------------ ----------- -----------
Net Income.......................................... $ 7,444,789 $ 5,241,479 $ 3,724,493
============ =========== ===========
Basic Earnings Per Share (Notes 1 and 9)............ $1.49 $1.11 $0.83
===== ===== =====
Diluted Earnings Per Share (Notes 1 and 9).......... $1.42 $1.06 $0.80
===== ===== =====
</TABLE>
See notes to consolidated financial statements.
IV-7
<PAGE> 22
THE FIRST YEARS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- PAID-IN RETAINED TREASURY
SHARES PAR VALUE CAPITAL EARNINGS STOCK
------ --------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995............. 2,250,430 $225,043 $ 98,194 $22,026,710 $ --
Stock issued under stock option
plans (Note 7)................ 7,141 714 70,957 -- --
Dividends paid.................. -- -- -- (382,852) --
Stock split, two-for-one (Note
4)............................ 2,257,571 225,757 (169,151) (56,606) --
Net income...................... -- -- -- 3,724,493 --
--------- -------- ---------- ----------- --------
Balance, December 31, 1995........... 4,515,142 451,514 -- 25,311,745 --
Stock issued under stock option
plans (Note 7)................ 33,838 3,384 190,125 -- --
Dividends paid.................. -- -- -- (453,557) --
Stock issued through public
offering (Note 10)............ 400,000 40,000 5,081,750 -- --
Net income...................... -- -- -- 5,241,479 --
--------- -------- ---------- ----------- --------
Balance, December 31, 1996........... 4,948,980 494,898 5,271,875 30,099,667 --
Stock issued under stock option
plans (Note 7)................ 139,020 13,902 804,433 -- --
Tax benefit derived from option
compensation deduction........ -- -- 458,000 -- --
Dividends paid.................. -- -- -- (496,747) --
Repurchase of 3,409 shares for
treasury...................... (3,409) -- -- -- (81,813)
Net income...................... -- -- -- 7,444,789 --
--------- -------- ---------- ----------- --------
Balance, December 31, 1997........... 5,084,591 $508,800 $6,534,308 $37,047,709 $(81,813)
========= ======== ========== =========== ========
</TABLE>
See notes to consolidated financial statements.
IV-8
<PAGE> 23
THE FIRST YEARS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income..................................... $ 7,444,789 $ 5,241,479 $ 3,724,493
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation.............................. 1,397,078 1,228,790 992,291
Provision for doubtful accounts........... 147,541 152,582 86,227
Loss on disposal of equipment............. 617,693 37,699 70,258
Increase (decrease) arising from working
capital items:
Accounts receivable.................. (4,180,302) (1,890,417) (5,011,624)
Inventories.......................... (5,784,837) 421,740 (8,595,949)
Prepaid expenses and other assets.... (39,447) 402,757 (482,153)
Accounts payable..................... 3,035,130 344,167 2,331,128
Accrued royalty expense.............. 1,203,050 314,870 533,801
Accrued payroll expenses............. 55,761 (17,702) 322,114
Accrued selling expenses............. 981,020 801,575 348,273
Federal and state income taxes
Payable............................ 159,600 -- (218,500)
Change in deferred income taxes........... (287,700) 50,600 (185,300)
----------- ----------- -----------
Net cash provided by (used for)
operating activities.......... 4,749,376 7,088,140 (6,084,941)
----------- ----------- -----------
Cash Flows from Investing Activities --
Purchase of property, plant, and equipment..... (1,814,698) (2,004,489) (1,447,018)
----------- ----------- -----------
Cash Flows from Financing Activities:
Repayment of industrial revenue bonds.......... (100,000) (133,334) (133,333)
Net proceeds (repayment) from short-term
borrowings................................... -- (6,200,000) 6,200,000
Dividends paid................................. (496,747) (453,557) (382,852)
Net proceeds from public offering.............. -- 5,121,750 --
Purchase of treasury stock..................... (81,813) -- --
Common stock issued under stock option plans... 818,335 193,509 71,671
Tax benefit of stock option plans.............. 458,000 -- --
----------- ----------- -----------
Net cash provided by (used for)
financing activities.......... 597,775 (1,471,632) 5,755,486
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents.... 3,532,453 3,612,019 (1,776,473)
Cash and Cash Equivalents, Beginning of Year........ 4,164,587 552,568 2,329,041
----------- ----------- -----------
Cash and Cash Equivalents, End of Year.............. $ 7,697,040 $ 4,164,587 $ 552,568
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest.................................. $ 27,709 $ 358,637 $ 186,338
=========== =========== ===========
Income taxes.............................. $ 4,684,690 $ 3,087,700 $ 3,269,100
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
IV-9
<PAGE> 24
THE FIRST YEARS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business -- The First Years Inc. (the "Company") is a developer, marketer,
and distributor of certain basic accessory and related products for infants and
toddlers. The Company was founded and incorporated in 1952. Since its inception,
the Company has engaged in this single line of business, with one class of
similar products. The following is a summary of the Company's significant
accounting policies.
Basis of Reporting -- The consolidated financial statements include the
accounts of all the Company's wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Revenue Recognition -- Revenue is recognized when products are shipped.
Cash Equivalents -- Highly liquid investments with a maturity of three
months or less when purchased have been classified as cash equivalents in the
accompanying financial statements. Such investments are carried at cost, which
approximates market value.
Inventories -- Inventories are stated at the lower of cost (first-in,
first-out) or market. Inventories consist principally of finished goods,
unpackaged components, and supplies.
Property, Plant, and Equipment -- Property, plant, and equipment is stated
at cost. Depreciation is provided based on the estimated useful lives of the
various classes of assets (building, 15 to 40 years; machinery and molds, 5 to
10 years; furniture and equipment, 5 to 10 years) using the straight-line
method.
Income Taxes -- Deferred tax assets and liabilities are determined based on
the differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates.
Employee Stock-Based Compensation -- The Company uses the intrinsic
value-based method of Accounting Principles Board Opinion ("APB") No. 25 to
account for employee stock-based compensation plans.
Earnings Per Share -- During the fourth quarter of fiscal 1997, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No.128 "Earnings
Per Share." SFAS No.128 replaced the presentation of primary earnings per share
with a basic earnings per share (which excludes dilution) and a diluted earnings
per share. Prior periods earnings per share have been restated to conform to the
new presentation. Basic earnings per share is calculated based on the weighted
average number of shares outstanding during each year. Diluted earnings per
share also includes potential shares, consisting of stock options outstanding,
if dilutive (Note 9).
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Research and Development Costs -- Research and development costs are
expensed as incurred. During 1997, 1996, and 1995, research and development
costs approximated $2,584,000, $2,209,000, and $1,834,000, respectively.
Foreign Currency Translation -- The Company's functional currency is the
U.S. dollar. Accordingly, monetary assets and liabilities of the Company's
foreign operations are translated from the respective local currency to the U.S.
dollar using year-end exchange rates while nonmonetary items are translated at
historical rates. Income and expense accounts are translated at the average
rates in effect during the year. Accordingly, translation adjustments and
transaction gains and losses are recognized as income in the year of occurrence
and are recorded as a component of cost of sales.
IV-10
<PAGE> 25
Foreign Exchange Contracts -- The Company enters into forward exchange
contracts to minimize the impact of fluctuations in currency exchange rates on
future cash flows emanating from sales denominated in foreign currencies. The
Company does not purchase such contracts for trading purposes. Gains and losses
related to foreign exchange contracts which qualify as accounting hedges of firm
commitments are deferred and recognized in income when the hedged transaction
occurs. Gains and losses related to foreign exchange contracts which do not
qualify for hedge accounting are marked to market currently and recognized as a
foreign currency transaction gain or loss.
Fair Value of Financial Instruments -- The fair value of the Company's
assets and liabilities which constitute financial instruments as defined in SFAS
No. 107 approximate their recorded value.
Reclassifications -- Certain reclassifications were made to prior year
amounts in order to conform with the current year presentation.
New Accounting Pronouncements: -- In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information". In February 1998, the FASB issued SFAS No. 132 "Employers'
Disclosures about Pensions and Other Postretirement Benefits". These new
standards will be effective in the Company's fiscal year ending December 31,
1998. The Company has not determined the effects, if any, that these standards
will have on its consolidated financial statements.
2. DEBT
Long-term debt consisted of unsecured industrial revenue bonds ("IRB"),
with interest payable quarterly at 65% of the prime rate (5.4% at December 31,
1996) and principal payable in equal quarterly installments of $33,333 through
September 30, 1997. As of December 31, 1997 there was no debt outstanding.
During 1997 and 1996, the Company had available an unsecured line of credit
totaling $10,000,000 with one bank. The line is subject to annual renewal and
requires no compensating balances. The line bears interest at the prime rate or
the LIBOR rate plus 1.75%. During 1997 and 1996, the Company borrowed various
amounts up to $2,500,000 and $7,900,000, respectively, under the line. As of
December 31, 1997 and 1996 no balance was outstanding.
During 1996, the Company had available an unsecured line of credit from a
second bank totaling $10,000,000. The line was subject to annual renewal and was
not renewed at the option of the Company.
No other short-term borrowings were incurred by the Company during 1997.
3. INCOME TAXES
Components of the Company's net deferred tax asset at December 31 are as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Reserves not currently deductible................. $ 266,900 $119,000
Capitalized packaging costs not currently
deductible...................................... 528,900 486,600
Capitalized inventory costs not currently
deductible...................................... 432,800 301,000
Other............................................. 50,400 39,800
---------- --------
1,279,000 946,400
---------- --------
Deferred tax liabilities:
Excess tax depreciation over financial reporting
depreciation.................................... 812,400 767,500
Other............................................. 4,500 4,500
---------- --------
816,900 772,000
---------- --------
Net deferred tax asset................................. $ 462,100 $174,400
========== ========
</TABLE>
There was no valuation allowance for the years ended December 31, 1997 and
1996.
IV-11
<PAGE> 26
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal:
Current............................ $4,157,200 $2,649,600 $2,104,000
Deferred........................... (287,700) 50,600 (185,300)
---------- ---------- ----------
Total federal................. 3,869,500 2,700,200 1,918,700
State................................... 1,171,400 794,100 564,300
---------- ---------- ----------
Provision for income taxes.............. $5,040,900 $3,494,300 $2,483,000
========== ========== ==========
</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>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate........................................... 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit.... 6.4 6.0 6.0
---- ---- ----
Effective tax rate....................................... 40.4% 40.0% 40.0%
==== ==== ====
</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 retroactively adjusted to reflect
the 1995 stock split.
5. COMMITMENTS AND CONTINGENCIES
Forward Exchange Contracts -- During 1997 and 1996, the Company entered
into forward exchange contracts with a bank whereby the Company is committed to
deliver foreign currency at predetermined rates. The contracts expire within one
year. The Company's future commitment under these contracts approximated
$2,500,000 and $6,000,000 as of December 31, 1997 and 1996, respectively. At
December 31, 1997 and 1996, the fair market value of the contracts approximated
their notional amount.
Other Commitments -- At December 31, 1997 and 1996, letters of credit
outstanding aggregated approximately $125,000 and $644,000, respectively.
During 1994, the Company entered into an employment agreement with an
executive officer which provides for an annual salary of $100,000 through August
1999. On March 23, 1995, the Company entered into employment agreements (as
amended on January 16, 1997) with two key senior executive officers which
provide for aggregate annual base salaries through March 2000 of $391,000,
subject to any increases or decreases established from time to time at the
discretion of the Compensation Committee of the Board and, in the event of
termination, provide for noncompetition payments for two years equal to their
annual base salaries.
Contingencies -- The Company is involved in legal proceedings which have
arisen in the ordinary course of business. Management believes the outcome of
these proceedings will not have a material adverse impact on the Company's
financial condition or operating results.
6. ROYALTIES
During 1997 and 1996, the Company entered into various agreements which
provide for the payment of royalties on sales of certain character and patent
licensed products. The agreements have terms ranging from one to fifteen years
and require minimum royalty payments of $1,398,000 and $4,715,000 for agreements
signed during 1997 and 1996, respectively. Future outstanding minimum royalty
commitments under these
IV-12
<PAGE> 27
agreements amounted to $650,000 and $4,692,000 at December 31, 1997 and 1996,
respectively. Royalty expense aggregated $6,356,000, $3,197,000 and $1,472,000
in 1997, 1996 and 1995, respectively.
7. BENEFIT PLANS
Defined Contribution Plans -- The Company has a defined contribution
trusteed benefit plan covering eligible employees, requiring annual
contributions based upon certain percentages of salaries of employees. The
Company's policy is to fund pension expense as accrued. Pension expense
aggregated $545,000, $472,000, and $217,000 in 1997, 1996, and 1995,
respectively. The Company sponsors a 401(k) defined contribution plan covering
substantially all Company employees pursuant to which the Company is obligated
to match, up to specified amounts, employee contributions. Company contributions
to this plan were not material for the periods presented.
Stock Option Plans -- In May 1993, the Company's stockholders approved the
adoption of The First Years Inc. 1993 Equity Incentive Plan and The First Years
Inc. 1993 Stock Option Plan for Non-employee Directors (the "plans") which cover
employees and directors of the Company. The Board has reserved 670,000 shares
for issuance under the plans and 20,000 shares for another stock option plan
(all share amounts adjusted to reflect the two-for-one stock split effected on
December 29, 1995). The exercise price for the options granted may not be less
than the fair market value of the optioned stock at the date of grant, 110% of
fair market value in the case of options granted to a 10% stockholder.
Options granted must be exercised within the period prescribed by the
Committee; the options vest in accordance with the vesting provisions prescribed
at the time of grant.
A summary of activity (all years adjusted to reflect the two-for-one stock
split effected on December 29, 1995) of stock options granted under the plans is
as follows:
<TABLE>
<CAPTION>
WEIGHTED NUMBER OF
AVERAGE NUMBER OF OPTIONS
EXERCISE PRICE OPTIONS AVAILABLE
PER SHARE OUTSTANDING FOR GRANT
-------------- ----------- ---------
<S> <C> <C> <C>
January 1, 1995......................................... $ 5.16 305,132 150,528
Authorized......................................... -- 230,000
Granted............................................ 9.14 128,920 (128,920)
Canceled........................................... 5.61 (8,192) 8,192
Exercised.......................................... 5.02 (14,282) --
-------- --------
December 31, 1995....................................... 6.40 411,578 259,800
Granted............................................ 12.46 68,605 (68,605)
Canceled........................................... 8.19 (8,557) 8,557
Exercised.......................................... 5.71 (33,838) --
-------- --------
December 31, 1996....................................... 7.37 437,788 199,752
Granted............................................ 18.32 97,070 (97,070)
Canceled........................................... 14.22 (28,305) 28,305
Exercised.......................................... 5.91 (139,020) --
-------- --------
December 31, 1997....................................... $10.31 367,533 130,987
======== ========
Exercisable at December 31, 1995................... $ 5.25 166,999
Exercisable at December 31, 1996................... $ 6.01 278,935
Exercisable at December 31, 1997................... $ 7.31 232,856
</TABLE>
The grant date fair value for options granted in 1997, 1996 and 1995 was
$9.60, $4.19 and $3.46, respectively.
IV-13
<PAGE> 28
The following table sets forth information regarding stock options
outstanding at December 31, 1997 under the Stock Option Plans as described
above:
<TABLE>
<CAPTION>
AVERAGE
NUMBER WEIGHTED WEIGHTED NUMBER EXERCISE
OF OPTIONS RANGE OF AVERAGE AVERAGE CURRENTLY PRICE FOR
OUTSTANDING EXERCISE EXERCISE REMAINING EXERCISABLE OPTIONS
AT 12/31/97 PRICES PRICE LIFE AT 12/31/97 EXERCISABLE
- ----------- -------- -------- --------- ----------- -----------
<C> <S> <C> <C> <C> <C> <C>
136,905 ............. $ 4.56 - $ 6.84 $ 5.28 1.68 136,905 $ 5.31
96,775 ............. 6.85 - 10.26 9.21 3.62 73,183 9.34
50,305 ............. 10.27 - 15.39 12.08 4.02 16,768 12.34
67,548 ............. 15.40 - 23.09 16.83 9.24 6,000 17.12
16,000 ............. 23.10 - 27.00 26.84 9.72 -- --
------- ------ ---- ------- ------
367,533 ............. $10.31 4.25 232,856 $ 8.47
======= ====== ==== ======= ======
</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, 1997, 1996 and 1995 would have been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income......................... $7,023,195 $5,038,337 $3,625,525
Basic earnings per share........... $ 1.40 $ 1.06 $ 0.80
Diluted earnings per share......... $ 1.34 $ 1.02 $ 0.78
</TABLE>
For purposes of the pro forma disclosures, the fair value of the options
granted under the Company's stock option plans during 1997, 1996 and 1995 was
estimated on the date of grant using the Binomial option pricing model. Key
assumptions used to apply this pricing model are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate................. 6.41% 6.08% 7.01%
Expected life of option grants.......... 9.5 years 4.5 years 4.5 years
Expected volatility of underlying
stock................................. 35.27% 32.87% 36.86%
Expected dividend payment rate.......... 0.85% 0.85% 0.85%
</TABLE>
The proforma disclosures only include the effects of options granted in
1997, 1996, and 1995.
8. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
Concentrations of Credit Risk -- Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
equivalents, trade receivables and forward exchange contracts (see Note 5). The
Company's cash equivalents consist of money market funds placed with major banks
and financial institutions. The Company's trade receivables principally include
amounts due from retailers who are geographically dispersed. The Company's three
largest customers accounted for 54% and 55% of the trade receivables outstanding
at December 31, 1997 and 1996, respectively. The Company routinely assesses the
financial strength of its customers and purchases credit insurance to limit its
potential exposure to trade receivable credit risks. The Company routinely
assesses the financial strength of the bank which is the counterparty to the
forward exchange contracts. As of December 31, 1997, management believes it had
no significant exposure to credit risks.
Major Customers and Export Sales -- The Company derived 10% or more of its
sales from its largest customer. Such amounts aggregated $33,643,000,
$25,722,000, and $21,966,000 in 1997, 1996, and 1995, respectively. The
Company's second largest customer accounted for sales of $23,075,000,
$18,257,000, and $16,500,000 in 1997, 1996, and 1995, respectively. The
Company's third largest customer accounted for sales of $13,315,000 and
9,908,000 in 1997 and 1996. No other customer accounted for 10% or more of the
IV-14
<PAGE> 29
Company's sales. Export sales, primarily to Europe, Canada, South America and
the Pacific Rim, were approximately $16,250,000 and $11,564,000 in 1997 and
1996, respectively.
Reliance on Licensed Products -- The Company derives a significant portion
of its sales from products under license. A licensing agreement (see Note 6)
with a company will expire at the end of 1998. Sales of products licensed under
the agreement amounted to 40% of the Company's total net sales for year ended
December 31, 1997. Management is in the process of negotiating continuance of
this agreement.
Reliance on Foreign Manufacturers -- The Company does not own or operate
its own manufacturing facilities. In 1997 and 1996, the Company derived
approximately 60% and 55%, respectively, of its net sales from products
manufactured by others in the Far East, mainly in the Peoples Republic of China.
A change in suppliers could cause a delay in manufacturing and a possible loss
of sales, which would affect operating results adversely, depending on the
particular product.
9. COMPUTATION OF EARNINGS PER SHARE
Computation of the earnings per share ("EPS") in accordance with SFAS No.
128 are as follows:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
FOR THE YEAR ENDED 1995:
Net income.................................................. $3,724,493
----------
BASIC EPS
Income available to common stockholders..................... 3,724,493 4,507,058 $0.83
=====
EFFECT OF DILUTIVE SECURITIES
Incentive stock options..................................... 156,433
---------- ---------
DILUTED EPS
Income available to common stockholders and assumed
conversions............................................... $3,724,493 4,663,491 $0.80
========== ========= =====
FOR THE YEAR ENDED 1996:
Net income.................................................. $5,241,479
----------
BASIC EPS
Income available to common stockholders..................... 5,241,479 4,733,178 $1.11
=====
EFFECT OF DILUTIVE SECURITIES
Incentive stock options..................................... 212,813
---------- ---------
DILUTED EPS
Income available to common stockholders and assumed
conversions............................................... $5,241,479 4,945,991 $1.06
========== ========= =====
FOR THE YEAR ENDED 1997:
Net income.................................................. $7,444,789
----------
BASIC EPS
Income available to common stockholders..................... 7,444,789 5,001,887 $1.49
=====
EFFECT OF DILUTIVE SECURITIES
Incentive stock options..................................... 224,644
---------- ---------
DILUTED EPS
Income available to common stockholders and assumed
conversions............................................... $7,444,789 5,226,531 $1.42
========== ========= =====
</TABLE>
As of December 31, 1997, options to purchase 15,000 shares of common stock
at $27 per share were not included in the computation of diluted EPS because the
options' exercise price was greater than the average price of the common shares.
The options, which expire in 2007, were still outstanding at the end of 1997.
As of December 31, 1996, options to purchase 6,000 shares of common stock
at $17 1/8 per share were not included in the computation of diluted EPS because
the options' exercise price was greater than the average price of the common
shares. The options, which expire in 2001, were still outstanding at the end of
1996.
As of December 31, 1995, no options were anti-dilutive.
IV-15
<PAGE> 30
10. OFFERING OF COMMON STOCK
During 1995, the Company initiated a public offering of shares of its
common stock to increase its working capital and improve liquidity of its common
stock. Due to uncertain market conditions affecting the retail sector and the
price of its stock, the Company decided to postpone indefinitely the public
offering. As a result, the Company wrote off offering expenses amounting to
$310,000 in December 1995.
During 1996, the Company proceeded with the postponed offering of shares
and entered into an agreement with a group of underwriters to sell 1.6 million
shares of common stock (the "shares"), consisting of 400,000 newly issued shares
and 1,200,000 shares of certain selling stockholders. The closing of the sale
was held on July 1, 1996 at which time the Company issued 400,000 new shares and
received the net proceeds of $5,121,750.
* * * * * *
IV-16
<PAGE> 31
SCHEDULE II
THE FIRST YEARS INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONS
BALANCE, CHARGED
BEGINNING TO COSTS AND BALANCE
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS END OF YEAR
----------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Valuations Accounts Deducted from Assets to
which they Apply --
Allowance for doubtful accounts:
1997............................... $185,000 $147,541 $147,541(1) $185,000
======== ======== ======== ========
1996............................... $185,000 $152,582 $152,582(1) $185,000
======== ======== ======== ========
1995............................... $185,000 $ 86,227 $ 86,227(1) $185,000
======== ======== ======== ========
Allowance for obsolete inventory:
1997............................... $ 0 $250,000 $ 0 $250,000
======== ======== ======== ========
</TABLE>
- ---------------
(1) Net accounts written off.
IV-17
<PAGE> 32
THE FIRST YEARS INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
10(g) The First Years Inc. 1993 Equity Incentive Plan as amended
through March 19, 1998.
10(h) The First Years Inc. 1993 Stock Option Plan for Directors as
amended through March 19, 1998.
10(l) First Amendment to the Employment Agreement between The
First Years Inc. and Ronald J. Sidman dated January 16,
1997.
10(m) First Amendment to the Employment Agreement between The
First Years Inc. and Benjamin Peltz dated January 16, 1997.
10(n) The First Years, a Massachusetts Corporation and Affiliates,
1997 Annual Incentive Plan effective as of January 1, 1997.
10(o) Agreement between The First Years Inc. and Wayne Shea dated
August 12, 1997.
21 List of Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche LLP dated March 27, 1998.
27.1 Financial Data Schedule -- 12/31/97
27.2 Financial Data Schedule -- 12/31/96 -- Restated
27.3 Financial Data Schedule -- 12/31/95 -- Restated
99 Important Factors Regarding Forward-Looking Statements
</TABLE>
IV-18
<PAGE> 1
Exhibit 10(g)
-------------
THE FIRST YEARS INC.
1993 EQUITY INCENTIVE PLAN
(AS AMENDED THROUGH MARCH 19, 1998)
1. PURPOSE
The purpose of this 1993 Equity Incentive Plan (the "Plan") is to advance
the interests of The First Years Inc. (the "Company"), formerly known as Kiddie
Products, Inc., by enhancing its ability to attract and retain employees and
other persons or entities who are in a position to make significant
contributions to the success of the Company and its subsidiaries through
ownership of shares of the Company's common stock ("Stock").
The Plan is intended to accomplish these goals by enabling the Company to
grant Awards in the form of Options, Stock Appreciation Rights, Restricted Stock
or Unrestricted Stock Awards, Deferred Stock Awards, Performance Awards, Loans
or Supplement Grants, or combinations thereof, all as more fully described
below.
2. ADMINISTRATION
Unless otherwise determined by the Board of Directors of the Company (the
"Board"), the Plan will be administered by a Committee of the Board designated
for such purpose (the "Committee"). The Committee shall consist of at least two
directors. A majority of the members of the Committee shall constitute a quorum,
and all determinations of the Committee shall be made by a majority of its
members. Any determination of the Committee under the Plan may be made without
notice or meeting of the Committee by a writing signed by a majority of the
Committee members. So long as the Stock is registered under the Securities
Exchange Act of 1934 (the "1934 Act"), all members of the Committee shall be
non-employee directors within the meaning of Rule 16b-3 under the 1934 Act. The
Committee will have authority, not inconsistent with the express provisions of
the Plan and in addition to other authority granted under the Plan, to (a) grant
Awards at such time or times as it may choose; (b) determine the size of each
Award, including the number of shares of Stock subject to the Award; (c)
determine the type or types of each Award; (d) determine the terms and
conditions of each Award; (e) waive compliance by a Participant (as defined
below) with any obligations to be performed by the Participant under an Award
and waive any term or condition of an Award; (f) amend or cancel an existing
Award in whole or in part (and if an award if canceled, grant another Award in
its place on such terms as the Board shall specify), except that the Board may
not, without the consent of the holder of an Award, take any action under this
clause with respect to such Award if such action would adversely affect the
rights of such holder; (g) prescribe the form or forms of instruments that are
required or deemed appropriate under the Plan, including any written notices and
elections required of Participants, and change
<PAGE> 2
such forms from time to time; (h) adopt, amend and rescind rules and regulations
for the administration of the Plan; and (i) interpret the Plan and decide any
questions and settle all controversies and disputes that may arise in connection
with the Plan. Such determinations and actions of the Board, and all other
determinations and actions of the Board made or taken under authority granted by
any provision of the Plan, will be conclusive and will bind all parties. Nothing
in this paragraph shall be construed as limiting the power of the Committee to
make adjustments under Section 7.3 or Section 8.6.
3. EFFECTIVE DATE AND TERM OF PLAN
The Plan will become effective on the date on which it is approved by the
stockholders of the Company. No Award may be granted under the Plan after ten
years following the date of stockholder approval, but Awards previously granted
may extend beyond that date.
4. SHARES SUBJECT TO THE PLAN
Subject to the adjustment as provided in Section 8.6 below, the aggregate
number of shares of Stock that may be delivered under the Plan will be
1,210,000. If any Award requiring exercise by the Participant for delivery of
Stock terminates without having been exercised in full, or if any Award payable
in Stock or cash is satisfied in cash rather than Stock, the number of shares of
Stock as to which such Award was not exercised or for which cash was substituted
will be available for future grants. If any Stock purchased on exercise of an
Option is paid for through the delivery of shares of Stock or if shares of Stock
are held back by the Company, or delivered to the Company, to satisfy a tax
withholding requirement on an Award, the number of shares of Stock delivered to
or held back by the Company shall be available for future grants.
The maximum number of shares for which Options and Stock Appreciation
Rights may be granted to any individual over the life of the Plan shall be
600,000, which limitation shall be construed and applied consistently with the
rules under Section 162(m) of the Internal Revenue Code.
Stock delivered under the Plan may be either authorized but unissued Stock
or previously issued Stock acquired by the Company and held in treasury. No
fractional shares of Stock will be delivered under the Plan.
5. ELIGIBILITY AND PARTICIPATION
Those eligible to receive Awards under the Plan ("Participants") will be
persons in the employ of the Company or any of its subsidiaries ("Employees")
and other persons or entities
-2-
<PAGE> 3
(including without limitation non-Employee directors of the Company or a
subsidiary of the Company) who, in the opinion of the Committee, are in a
position to make a significant contribution to the success of the Company or its
subsidiaries. A "subsidiary" for purposes of the Plan will be a corporation in
which the Company owns, directly or indirectly, stock possessing 50% or more of
the total combined voting power of all classes of stock.
6. TYPES OF AWARDS
6.1. OPTIONS
(a) NATURE OF OPTIONS. An Option is an Award entitling the recipient on
exercise thereof to purchase Stock at a specified exercise price.
Both "incentive stock options," as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") (any Option intended to qualify as
an incentive stock option being hereinafter referred to as an "ISO"), and
Options that are not incentive stock options, may be granted under the Plan.
ISOs shall be awarded only to Employees.
(b) EXERCISE PRICE. The exercise price of an Option will be determined by
the Board subject to the following:
(1) The exercise price of an ISO shall not be less than 100% (110% in
the case of an ISO granted to a ten-percent stockholder) of the fair market
value of the Stock subject to the Option, determined as of the time the
Option is granted. A "ten-percent stockholder" is any person who at the
time of grant owns, directly or indirectly, or is deemed to own by reason
of the attribution rules of section 424(d) of the Code, stock possessing
more than 10% of the total combined voting power of all classes of stock of
the Company or of any of its subsidiaries.
(2) In no case may the exercise price paid for Stock which is part of
an original issue of authorized Stock be less than the par value per share
of the Stock.
(3) The Committee may reduce the exercise price of an Option at any
time after the time of grant, but in the case of an Option originally
awarded as an ISO, only with the consent of the Participant.
(c) DURATION OF OPTIONS. The latest date on which an Option may be
exercised will be the tenth anniversary (fifth anniversary, in the case of an
ISO granted to a ten-percent stockholder) of the day immediately preceding the
date the Option was granted, or such earlier date as may have been specified by
the Committee at the time the Option was granted.
-3-
<PAGE> 4
(d) EXERCISE OF OPTIONS. Options granted under any single Award will become
exercisable at such time or times, and on such conditions, as the Committee may
specify. The Committee may at any time and from time to time accelerate the time
at which all or any part of the Option may be exercised.
Any exercise of an Option must be in writing, signed by the proper person
and delivered or mailed to the Company, accompanied by (1) any documents
required by the Committee and (2) payment in full in accordance with paragraph
(e) below for the number of shares for which the Option is exercised.
(e) PAYMENT FOR STOCK. Stock purchased on exercise of an Option must be
paid for as follows: (1) in cash or by check (acceptable to the Company in
accordance with guidelines established for this purpose), bank draft or money
order payable to the order of the Company or (2) if so permitted by the
instrument evidencing the Option (or in the case of an Option which is not an
ISO, by the Committee at or after grant of the Option), (i) through the delivery
of shares of Stock which have been outstanding for at least six months (unless
the Committee expressly approves a shorter period) and which have a fair market
value on the last business day preceding the date of exercise equal to the
exercise price, or (ii) by delivery of a promissory note of the Option holder to
the Company, payable on such terms as are specified by the Committee, or (iii)
by delivery of an unconditional and irrevocable undertaking by a broker to
deliver promptly to the Company sufficient funds to pay the exercise price, or
(iv) by any combination of the permissible forms of payment; PROVIDED, that if
the Stock delivered upon exercise of the Option is an original issue of
authorized Stock, at least so much of the exercise price as represents the par
value of such Stock must be paid other than by the Option holder's promissory
note or personal check.
(f) DISCRETIONARY PAYMENTS. If the market price of shares of Stock subject
to an Option (other than an Option which is in tandem with a Stock Appreciation
Right as described in Section 6.2 below) exceeds the exercise price of the
Option at the time of its exercise, the Committee may cancel the Option and
cause the Company to pay in cash or in shares of Common Stock (at a price per
share equal to the fair market value per share) to the person exercising the
Option an amount equal to the difference between the fair market value of the
Stock which would have been purchased pursuant to the exercise (determined on
the date the Option is canceled) and the aggregate exercise price which would
have been paid. The Committee may exercise its discretion to take such action
only if it has received a written request from the person exercising the Option,
but such a request will not be binding on the Committee.
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6.2. STOCK APPRECIATION RIGHTS.
(a) NATURE OF STOCK APPRECIATION RIGHTS. A Stock Appreciation Right is an
Award entitling the recipient on exercise of the Right to receive an amount, in
cash or Stock or a combination thereof (such form to be determined by the
Committee), determined in whole or in part by reference to appreciation in Stock
value.
In general, a Stock Appreciation Right entitles the Participant to receive,
with respect to each share of Stock as to which the Right is exercised, the
excess of the share's fair market value on the date of exercise over its fair
market value on the date the Right was granted. However, the Committee may
provide at the time of grant that the amount the recipient is entitled to
receive will be adjusted upward or downward under rules established by the
Committee to take into account the performance of the Stock in comparison with
the performance of other stocks or an index or indices of other stocks. The
Committee may also grant Stock Appreciation Rights providing that following a
change in control of the Company, as determined by the Committee, the holder of
such Right will be entitled to receive, with respect to each share of Stock
subject to the Right, an amount equal to the excess of a specified value (which
may include an average of values) for a share of Stock during a period preceding
such change in control over the fair market value of a share of Stock on the
date the Right was granted.
(b) GRANT OF STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be
granted in tandem with, or independently of, Options granted under the Plan. A
Stock Appreciation Right granted in tandem with an Option which is not an ISO
may be granted either at or after the time the Option is granted. A Stock
Appreciation Right granted in tandem with an ISO may be granted only at the time
the Option is granted.
(c) RULES APPLICABLE TO TANDEM AWARDS. When Stock Appreciation Rights are
granted in tandem with Options, the following will apply:
(1) The Stock Appreciation Right will be exercisable only at such time
or times, and to the extent, that the related Option is exercisable and
will be exercisable in accordance with the procedure required for exercise
of the related Option.
(2) The Stock Appreciation Right will terminate and no longer be
exercisable upon the termination or exercise of the related Option, except
that a Stock Appreciation Right granted with respect to less than the full
number of shares covered by an Option will not be reduced until the number
of shares as to which the related Option has been exercised or has
terminated exceeds the number of shares not covered by the Stock
Appreciation Right.
(3) The Option will terminate and no longer be exercisable upon the
exercise of the related Stock Appreciation Right.
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(4) The Stock Appreciation Right will be transferable only with the
related Option.
(5) A Stock Appreciation Right granted in tandem with an ISO may be
exercised only when the market price of the Stock subject to the Option
exceeds the exercise price of such option.
(d) EXERCISE OF INDEPENDENT STOCK APPRECIATION RIGHTS. A Stock Appreciation
Right not granted in tandem with an Option will become exercisable at such time
or times, and on such conditions, as the Committee may specify. The Committee
may at any time accelerate the time at which all or any part of the Right may be
exercised.
Any exercise of an independent Stock Appreciation Right must be in writing,
signed by the proper person and delivered or mailed to the Company, accompanied
by any other documents required by the Committee.
6.3. RESTRICTED AND UNRESTRICTED STOCK.
(a) NATURE OF RESTRICTED STOCK AWARD. A Restricted Stock Award entitles
the recipient to acquire, for a purchase price equal to par value, shares of
Stock subject to the restrictions described in paragraph (d) below ("Restricted
Stock").
(b) ACCEPTANCE OF AWARD. A Participant who is granted a Restricted
Stock Award will have no rights with respect to such Award unless the
Participant accepts the Award by written instrument delivered or mailed to the
Company accompanied by payment in full of the specified purchase price, if any,
of the shares covered by the Award. Payment may be by certified or bank check or
other instrument acceptable to the Committee.
(c) RIGHTS AS A STOCKHOLDER. A Participant who receives Restricted
Stock will have all the rights of a stockholder with respect to the Stock,
including voting and dividend rights, subject to the restrictions described in
paragraph (d) below and any other conditions imposed by the Committee at the
time of grant. Unless the Committee otherwise determines, certificates
evidencing shares of Restricted Stock will remain in the possession of the
Company until such shares are free of all restrictions under the Plan.
(d) RESTRICTIONS. Except as otherwise specifically provided by the
Plan, Restricted Stock may not be sold, assigned, transferred, pledged or
otherwise encumbered or disposed of, and if the Participant ceases to be an
Employee or otherwise suffers a Status Change (as defined at Section 7.2(a)
below) for any reason, must be offered to the Company for purchase for the
amount of cash paid for the Stock, or forfeited to the Company if no cash was
paid. These restrictions will lapse at such time or times, and on such
conditions, as the Committee may specify. The Committee may at any time
accelerate the time at which the restrictions on all or any part of the shares
will lapse.
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(e) NOTICE OF ELECTION. Any Participant making an election under
Section 83(b) of the Code with respect to Restricted Stock must provide a copy
thereof to the Company within 10 days of the filing of such election with the
Internal Revenue Service.
(f) OTHER AWARDS SETTLED WITH RESTRICTED STOCK. The Committee may, at
the time any Award described in this Section 6 is granted, provide that any or
all the Stock delivered pursuant to the Award will be Restricted Stock.
(g) UNRESTRICTED STOCK. The Committee may, in its sole discretion,
approve the sale to any Participant of shares of Stock free of restrictions
under the Plan for a price which is not less than the par value of the Stock.
6.4. DEFERRED STOCK.
A Deferred Stock Award entitles the recipient to receive shares of
Stock to be delivered in the future. Delivery of the Stock will take place at
such time or times, and on such conditions, as the Committee may specify. The
Committee may at any time accelerate the time at which delivery of all or any
part of the Stock will take place. At the time any Award described in this
Section 6 is granted, the Committee may provide that, at the time Stock would
otherwise be delivered pursuant to the Award, the Participant will instead
receive an instrument evidencing the Participant's right to future delivery of
Deferred Stock.
6.5. PERFORMANCE AWARDS; PERFORMANCE GOALS.
(a) NATURE OF PERFORMANCE AWARDS. A Performance Award entitles the
recipient to receive, without payment, an amount in cash or Stock or a
combination thereof (such form to be determined by the Committee) following the
attainment of Performance Goals. Performance Goals may be related to personal
performance, corporate performance, departmental performance or any other
category of performance deemed by the Committee to be important to the success
of the Company. The Committee will determine the Performance Goals, the period
or period during which performance is to be measured and all other terms and
conditions applicable to the Award.
(b) OTHER AWARDS SUBJECT TO PERFORMANCE CONDITION. The Committee may,
at the time any Award described in this Section 6 is granted, impose the
condition (in addition to any conditions specified or authorized in this Section
6 or any other provision of the Plan) that Performance Goals be met prior to the
Participant's realization of any payment or benefit under the Award.
6.6. LOANS AND SUPPLEMENTAL GRANTS.
(a) LOANS. The Company may make a loan to a Participant ("Loan"),
either on the date of or after the grant of any Award to the Participant. A
Loan may be made either in
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connection with the purchase of Stock under the Award or with the payment of any
Federal, state and local income tax with respect to income recognized as a
result of the Award. The Committee will have full authority to decide whether to
make a Loan and to determine the amount, terms and conditions of the Loan,
including the interest rate (which may be zero), whether the Loan is to be
secured or unsecured or with or without recourse against the borrower, the terms
on which the Loan is to be repaid and the conditions, if any, under which it may
be forgiven. However, no Loan may have a term (including extensions) exceeding
ten years in duration.
(b) SUPPLEMENTAL GRANTS. In connection with any Award, the Committee
may at the time such Award is made or at a later date, provide for and grant a
cash award to the Participant ("Supplemental Grant") not to exceed an amount
equal to (1) the amount of any federal, state and local income tax on ordinary
income for which the Participant may be liable with respect to the Award,
determined by assuming taxation at the highest marginal rate, plus (2) an
additional amount on a grossed-up basis intended to make the Participant whole
on an after-tax basis after discharging all the Participant's income tax
liabilities arising from all payments under this Section 6. Any payments under
this subsection (b) will be made at the time the Participant incurs Federal
income tax liability with respect to the Award.
7. EVENTS AFFECTING OUTSTANDING AWARDS
7.1. DEATH.
If a Participant dies, the following will apply:
(a) All Options and Stock Appreciation Rights held by the Participant
immediately prior to death, to the extent then exercisable, may be exercised by
the Participant's executor or administrator or the person or persons to whom the
Option or Right is transferred by will or the applicable laws of descent and
distribution, at any time within the one year period ending with the first
anniversary of the Participant's death (or such shorter or longer period as the
Committee may determine), and shall thereupon terminate. In no event, however,
shall an Option or Stock Appreciation Right remain exercisable beyond the latest
date on which it could have been exercised without regard to this Section 7.
Except as otherwise determined by the Committee, all Options and Stock
Appreciation Rights held by a Participant immediately prior to death that are
not then exercisable shall terminate at death.
(b) Except as otherwise determined by the Committee, all Restricted
Stock held by the Participant must be transferred to the Company (and, in the
event the certificates representing such Restricted Stock are held by the
Company, such Restricted Stock will be so transferred without any further action
by the Participant) in accordance with Section 6.3 above.
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(c) Any payment or benefit under a Deferred Stock Award, Performance
Award, or Supplemental Grant to which the Participant was not irrevocably
entitled prior to death will be forfeited and the Award canceled as of the time
of death, unless otherwise determined the Committee.
7.2. TERMINATION OF SERVICE (OTHER THAN BY DEATH).
If a Participant who is an Employee ceases to be an Employee for any
reason other than death, or if there is a termination (other than by reason of
death) of the consulting, service or similar relationship in respect of which a
non-Employee Participant was granted an Award hereunder (such termination of the
employment or other relationship being hereinafter referred to as a "Status
Change"), the following will apply:
(a) Except as otherwise determined by the Committee, all Options and
Stock Appreciation Rights held by the Participant that were not exercisable
immediately prior to the Status Change shall terminate at the time of the Status
Change. Any Options or Rights that were exercisable immediately prior to the
Status Change will continue to be exercisable for a period of three months (or
such longer period as the Committee may determine), and shall thereupon
terminate, unless the Award provides by its terms for immediate termination in
the event of a Status Change or unless the Status Change results from a
discharge for cause which in the opinion of the Committee casts such discredit
on the Participant as to justify immediate termination of the Award. In no
event, however, shall an Option or Stock Appreciation Right remain exercisable
beyond the latest date on which it could have been exercised without regard to
this Section 7. For purposes of this paragraph, in the case of a Participant who
is an Employee, a Status Change shall not be deemed to have resulted by reason
of (i) a sick leave or other bona fide leave of absence approved for purposes of
the Plan by the Committee, so long as the Employee's right to reemployment is
guaranteed either by statute or by contract, or (ii) a transfer of employment
between the Company and a subsidiary or between subsidiary, or to the employment
of a corporation (or a parent or subsidiary corporation of such corporation)
issuing or assuming an option in a transaction to which section 424(a) of the
Code applies.
(b) Except as otherwise determined by the Committee, all Restricted
Stock held by the Participant at the time of the Status Change must be
transferred to the Company (and, in the event the certificates representing such
Restricted Stock are held by the Company, such Restricted Stock will be so
transferred without any further action by the Participant) in accordance with
Section 6.3 above.
(c) Any payment or benefit under a Deferred Stock Award, Performance
Award, or Supplemental Grant to which the Participant was not irrevocably
entitled prior to the Status Change will be forfeited and the Award canceled as
of the date of such Status Change unless otherwise determined by the Committee.
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7.3. CERTAIN CORPORATE TRANSACTIONS.
In the event of a consolidation or merger in which the Company is not
the surviving corporation or which results in the acquisition of substantially
all the Company's outstanding Stock by a single person or entity or by a group
of persons and/or entities acting in concert, or in the event of the sale or
transfer of substantially all the Company's assets or a dissolution or
liquidation of the Company (a "covered transaction"), all outstanding Awards
will terminate as of the effective date of the covered transaction, and the
following rules shall apply:
(a) Subject to paragraphs (b) and (c) below, the Committee may in its
sole discretion, prior to the effective date of the covered transaction, (1)
make each outstanding Option and Stock Appreciation Right exercisable in full,
(2) remove the restrictions from each outstanding share of Restricted Stock, (3)
cause the Company to make any payment and provide any benefit under each
outstanding Deferred Stock Award, Performance Award, and Supplemental Grant
which would have been made or provided with the passage of time had the
transaction not occurred and the Participant not suffered a Status Change (or
died), and (4) forgive all or any portion of the principal of or interest on a
Loan.
(b) If an outstanding Award is subject to performance or other
conditions (other than conditions relating only to the passage of time and
continued employment) which will not have been satisfied at the time of the
covered transaction, the Committee may in its sole discretion remove such
conditions. If it does not do so, however, such Award will terminate as of the
date of the covered transaction notwithstanding paragraph (a) above.
(c) With respect to an outstanding Award held by a participant who,
following the covered transaction, will be employed by or otherwise providing
services to a corporation which is a surviving or acquiring corporation in such
transaction or an affiliate of such a corporation, the Committee may, in lieu of
the action described in paragraph (a) above, arrange to have such surviving or
acquiring corporation or affiliate grant to the Participant a replacement award
which, in the judgment of the Committee, is substantially equivalent to the
Award.
8. GENERAL PROVISIONS
8.1. DOCUMENTATION OF AWARDS.
Awards will be evidenced by such written instruments, if any, as may be
prescribed by the Committee from time to time. Such instruments may be in the
form of agreements to be executed by both the Participant and the Company, or
certificates, letters or similar instruments, which need not be executed by the
Participant but acceptance of which will evidence agreement to the terms
thereof.
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8.2. RIGHTS AS A STOCKHOLDER, DIVIDEND EQUIVALENTS.
Except as specifically provided by the Plan, the receipt of an Award
will not give a Participant rights as a stockholder; the participant will obtain
such rights, subject to any limitations imposed by the Plan or the instrument
evidencing the Award, upon actual receipt of Stock. However, the Committee may,
on such conditions as it deems appropriate, provide that a Participant will
receive a benefit in lieu of cash dividends that would have been payable on any
or all Stock subject to the Participant's Award had such Stock been outstanding.
Without limitation, the Committee may provide for payment to the Participant of
amounts representing such dividends, either currently or in the future, or for
the investment of such amounts on behalf of the Participant.
8.3. CONDITIONS ON DELIVERY OF STOCK.
The Company will not be obligated to deliver any shares of Stock
pursuant to the Plan or to remove restriction from shares previously delivered
under the Plan (a) until all conditions of the Award have been satisfied or
removed, (b) until, in the opinion of the Company's counsel, all applicable
federal and state laws and regulation have been complied with, (c) if the
outstanding Stock is at the time listed on any stock exchange, until the shares
to be delivered have been listed or authorized to be listed on such exchange
upon official notice of notice of issuance, and (d) until all other legal
matters in connection with the issuance and delivery of such shares have been
approved by the Company's counsel. If the sale of Stock has not been registered
under the Securities Act of 1933, as amended, the Company may require, as a
condition to exercise of the Award, such representations or agreements as
counsel for the Company may consider appropriate to avoid violation of such Act
and may require that the certificates evidencing such Stock bear an appropriate
legend restricting transfer.
If an Award is exercised by the Participant's legal representative, the
Company will be under no obligation to deliver Stock pursuant to such exercise
until the Company is satisfied as to the authority of such representative.
8.4. TAX WITHHOLDING.
The Company will withhold from any cash payment made pursuant to an
Award an amount sufficient to satisfy all federal, state and local withholding
tax requirements (the "withholding requirements").
In the case of an Award pursuant to which Stock may be delivered, the
Committee will have the right to require that the Participant or other
appropriate person remit to the Company an amount sufficient to satisfy the
withholding requirements, or make other arrangements satisfactory to the
Committee with regard to such requirements, prior to the delivery of any Stock.
If and to the extent that such withholding is required, the Committee may permit
the Participant or such other person to elect at such time and in such manner as
the Committee
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provides to have the Company hold back from the shares to be delivered, or to
deliver to the Company, Stock having a value calculated to satisfy the
withholding requirement. The Committee may make such share withholding mandatory
with respect to any Award at the time such Award is made to a Participant.
If at the time an ISO is exercised the Committee determines that the
Company could be liable for withholding requirements with respect to a
disposition of the Stock received upon exercise, the Committee may require as a
condition of exercise that the person exercising the ISO agree (a) to inform the
Company promptly of any disposition (within the meaning of section 424(c) of the
Code) of Stock received upon exercise, and (b) to give such security as the
Committee deems adequate to meet the potential liability of the Company for the
withholding requirements and to augment such security from time to time in any
amount reasonably deemed necessary by the Committee to preserve the adequacy of
such security.
8.5. NONTRANSFERABILITY OF AWARDS.
Except as otherwise specified by the Committee, no Award (other than an
Award in the form of an outright transfer of cash or Unrestricted Stock) may be
transferred other than by will or by the laws of descent and distribution, and
during an employee's lifetime an Award requiring exercise may be exercised only
by the Participant (or in the event of the Participant's incapacity, the person
or persons legally appointed to act on the Participant's behalf).
8.6. ADJUSTMENTS IN THE EVENT OF CERTAIN TRANSACTIONS.
(a) In the event of a stock dividend, stock split or combination of
shares, recapitalization or other change in the Company's capitalization, or
other distribution to common stockholders other than normal cash dividends,
after the effective date of the Plan, the Committee will make any appropriate
adjustments to the maximum number of shares that may be delivered under the Plan
under Section 4 above.
(b) In any event referred to in paragraph (a), the Committee will also
make any appropriate adjustments to the number and kind of shares of stock or
securities subject to Awards then outstanding or subsequently granted, any
exercise prices relating to Awards and any other provision of Awards affected by
such change. The Committee may also make such adjustments to take into account
material changes in law or in accounting practices or principles, mergers,
consolidations, acquisitions, dispositions or similar corporate transactions, or
any other event, if it is determined by the Committee that adjustments are
appropriate to avoid distortion in the operation of the Plan.
8.7. EMPLOYMENT RIGHTS, ETC.
Neither the adoption of the Plan nor the grant of Awards will confer
upon any person any right to continued retention by the Company or any
subsidiary as an Employee or
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otherwise, or affect in any way the right of the Company or subsidiary to
terminate an employment, service or similar relationship at any time. Except as
specifically provided by the Committee in any particular case, the loss of
existing or potential profit in Awards granted under the Plan will not
constitute an element of damages in the event of termination of an employment,
service or similar relationship even if the termination is in violation of an
obligation of the Company to the Participant.
8.8. DEFERRAL OF PAYMENTS.
The Committee may agree at any time, upon request of the Participant,
to defer the date on which any payment under an Award will be made.
8.9. PAST SERVICES AS CONSIDERATION.
Where a Participant purchases Stock under an Award for a price equal to
the par value of the Stock the Committee may determine that such price has been
satisfied by past services rendered by the Participant.
8.10. FORFEITURE PROVISIONS.
The Committee may establish provisions that require the Participant to
forfeit an Award, or the economic value of an Award, upon the occurrence of
certain events that it may specify, including breach by a Participant of
agreements with the Company.
9. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION
Neither adoption of the Plan nor the grant of Awards to a Participant
will affect the Company's right to grant to such Participant awards that are not
subject to the Plan, to issue to such Participant Stock as a bonus or otherwise,
or to adopt other plans or arrangements under which Stock may be issued to
Employees.
The Committee may at any time or times amend the Plan or any
outstanding Award for any purpose which may at the time be permitted by law, or
may at any time terminate the Plan as to any further grants of Awards, provided
that (except to the extent expressly required or permitted by the Plan) no such
amendment will, without the approval of the stockholders of the Company,
effectuate a change for which stockholder approval is required in order for the
Plan to continue to qualify for the award of ISOs under section 422 of the Code.
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Exhibit 10.h
------------
THE FIRST YEARS INC.
1993 STOCK OPTION PLAN FOR DIRECTORS
(as amended through March 19, 1998)
1. PURPOSE
The purpose of this 1993 Stock Option Plan for Directors (the "Plan") is to
advance the interests of The First Years Inc. (the "Company"), formerly Kiddie
Products, Inc., by enhancing the ability of the Company to attract and retain
directors who are in a position to make significant contributions to the success
of the Company and to reward directors for such contributions through ownership
of shares of the Company's common stock (the "Stock").
2. ADMINISTRATION
The Plan shall be administered by a committee (the "Committee") of the
Board of Directors (the "Board") of the Company designated by the Board for that
purpose. Unless and until a Committee is appointed the Plan shall be
administered by the entire Board, and references in the Plan to the "Committee"
shall be deemed references to the Board. The Committee shall have authority, not
inconsistent with the express provisions of the Plan, (a) to issue options
granted in accordance with the formula set forth in this Plan to such directors
as are eligible to receive options; (b) to prescribe the form or forms of
instruments evidencing options and any other instruments required under the Plan
and to change such forms from time to time; (c) to adopt, amend and rescind
rules and regulations for the administration of the Plan; and (d) to interpret
the Plan and to decide any questions and settle all controversies and disputes
that may arise in connection with the Plan. Such determinations of the Committee
shall be conclusive and shall bind all parties.
3. EFFECTIVE DATE AND TERM OF PLAN
The Plan shall become effective on the date on which the Plan is approved
by the Board of Directors of the Company, subject to approval by the
stockholders of the Company. No option shall be granted under the Plan after the
completion of ten years from the date on which the Plan was adopted by the
Board, but options previously granted may extend beyond that date.
<PAGE> 2
4. SHARES SUBJECT TO THE PLAN
(a) NUMBER OF SHARES. Subject to adjustment as provided in Section 4(c),
the aggregate number of shares of Stock that may be delivered upon the exercise
of options granted under the Plan shall be 130,000. If any option granted
under the Plan terminates without having been exercised in full, the number of
shares of Stock as to which such option was not exercised shall be available for
future grants within the limits set forth in this Section 4(a). If any Stock
purchased on exercise of an Option is paid for through the delivery of shares of
Stock or if shares of Stock are held back by the Company, or delivered to the
Company, to satisfy a tax withholding requirement on an Award, the number of
shares of Stock delivered to or held back by the Company shall be available for
future grants.
(b) SHARES TO BE DELIVERED. Shares delivered under the Plan shall be
authorized but unissued Stock or, if the Board so decides in its sole
discretion, previously issued Stock acquired by the Company and held in
treasury. No fractional shares of Stock shall be delivered under the Plan.
(c) CHANGES IN STOCK. In the event of a stock dividend, stock split or
combination of shares, recapitalization or other change in the Company's capital
stock, after the effective date of the Plan, the number and kind of shares of
stock or securities of the Company subject to options then outstanding or
subsequently granted under the Plan, the maximum number of shares or securities
that may be delivered under the Plan, the exercise price, and other relevant
provisions shall be appropriately adjusted by the Committee, whose determination
shall be binding on all persons.
5. ELIGIBILITY FOR OPTIONS
Directors eligible to receive options ("Eligible Directors") shall be those
directors of the Company who are not employees of the Company or of any
subsidiary of the Company; PROVIDED THAT the Committee may in its discretion
choose to designate as an Eligible Director, for some or all purposes of this
Plan, a director of a subsidiary of the Company, whether or not employed by the
Company or a subsidiary.
6. TERMS AND CONDITIONS OF OPTIONS
(a) NUMBER OF OPTIONS.
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Each Eligible Director, upon his or her election to the Board, shall be
awarded an option covering 10,000 shares of Stock, which will become fully
vested in three equal annual installments commencing on the first anniversary of
such election. On the date of each annual meeting, following the election of
directors, each Eligible Director who served on the Board for the entire
previous twelve months shall be awarded an option covering 3,000 shares of
Stock; each Eligible Director who did not serve on the Board for the entire
previous twelve months shall be awarded an option covering a pro-rated number of
shares of Stock equal to 250 multiplied by the number of months served on the
Board during the previous twelve months. The options awarded under this
paragraph (a)(i) shall be collectively referred to as the "Formula Options."
(ii) The Committee shall also have the authority under the Plan to award
options to purchase stock to Eligible Directors in such amounts and on such
terms not inconsistent with this Plan as it shall determine at the time of the
award. The options awarded under this paragraph (a)(ii) shall be collectively
referred to as the "Discretionary Options."
(b) EXERCISE PRICE. The exercise price of each option shall be 100% of the
fair market value per share of the Stock at the time the option is granted. In
no event, however, shall the option price be less, in the case of an original
issue of authorized stock, than par value per share. For purposes of this
paragraph, (A) the fair market value of a share of Stock on any date shall be
the Closing Price on such day or, if there was no Closing Price on such day, the
latest day prior thereto on which there was a Closing Price; and (B) the
"Closing Price" of the Stock on any business day will be the last sale price as
reported on the principal market on which the Stock is traded or, if no last
sale is reported, then the mean between the highest bid and lowest asked prices
on that day.
(c) DURATION OF OPTIONS. The latest date on which an option may be
exercised (the "Final Exercise Date") shall be the date which is ten years from
the date the option was granted.
(d) EXERCISE OF OPTIONS.
(1) Each Formula Option shall become exercisable to the full extent of all
shares covered thereby immediately upon the date of the grant;
provided, however, that the options covering 10,000 shares of Stock
awarded upon an Eligible Director's initial election shall become
exercisable in three equal annual installments commencing on the first
anniversary of such election.
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(2) Each Discretionary Option shall become exercisable at such time or
times as the Committee shall determine.
(3) Any exercise of an option shall be in writing, signed by the proper
person and delivered or mailed to the Company, accompanied by (i) any
documentation required by the Committee and (ii) payment in full for
the number of shares for which the option is exercised.
(4) The Committee shall withhold from the number of shares otherwise
issuable to the individual upon exercise a number of shares with a
fair market value equal to any federal, state, or local withholding
tax requirements due upon the exercise of the option.
(5) If an option is exercised by the executor or administrator of a
deceased director, or by the person or persons to whom the option has
been transferred by the director's will or the applicable laws of
descent and distribution, the Company shall be under no obligation to
deliver Stock pursuant to such exercise until the Company is satisfied
as to the authority of the person or persons exercising the option.
(e) PAYMENT FOR AND DELIVERY OF STOCK. Stock purchased under the Plan shall
be paid for as follows: (i) in cash or by check (acceptable to the Company in
accordance with guidelines established for this purpose), bank draft or money
order payable to the order of the Company, (ii) through the delivery of shares
of Stock (which, in the case of shares of Stock acquired from the Company, have
been outstanding for at least six months) having a fair market value on the last
business day preceding the date of exercise equal to the purchase price, (iii)
by delivery of an unconditional and irrevocable undertaking by a broker to
deliver promptly to the Company sufficient funds to pay the exercise price or
(iv) by any combination of the permissible forms of payment; PROVIDED, that if
the Stock delivered upon exercise of the option is an original issue of
authorized Stock, at least so much of the exercise price as represents the par
value of such Stock shall be paid other than with a personal check or promissory
note of the option holder.
An option holder shall not have the rights of a stockholder with regard to
awards under the Plan except as to Stock actually received by him or her under
the Plan.
The Company shall not be obligated to deliver any shares of Stock (a)
until, in the opinion of the Company's counsel, all applicable federal and state
laws and regulations have been complied with, and (b) if the outstanding Stock
is at the time listed on any stock exchange, until the shares to be delivered
have been listed or authorized to be listed on such exchange upon official
notice of issuance, and (c) until all other legal matters in
-4-
<PAGE> 5
connection with the issuance and delivery of such shares have been approved by
the Company's counsel. If the sale of Stock has not been registered under the
Securities Act of 1933, as amended, the Company may require, as a condition to
exercise of the option, such representations or agreements as counsel for the
Company may consider appropriate to avoid violation of such Act and may require
that the certificates evidencing such Stock bear an appropriate legend
restricting transfer.
(f) NONTRANSFERABILITY OF OPTIONS. Except as otherwise specified by the
Committee, no option may be transferred other than by will, by the laws of
descent and distribution, or to immediate family members as defined in Rule
16a-1(e) under the Securities Exchange Act of 1934, to a trust for the benefit
of immediate family members, or to partnerships and corporations whose sole
equity owners are immediate family members, and during a director's lifetime an
option may be exercised only by him or her, or by a valid transferee under this
Section 6(f).
(g) DEATH. Upon the death of any Eligible Director granted options under
this Plan, unless the Committee determines otherwise, all options not then
exercisable shall terminate. All options held by the director that are
exercisable immediately prior to death may be exercised by his or her executor
or administrator, or by the person or persons to whom the option is transferred
by will or the applicable laws of descent and distribution, at any time within
one year after the director's death (subject, however, to the limitations of
Section 6(c) regarding the maximum exercise period for such option). After
completion of that one-year period, such options shall terminate to the extent
not previously exercised.
(h) OTHER TERMINATION OF STATUS OF DIRECTOR. Except as the Committee may
otherwise specify, if a director's service with the Company terminates for any
reason other than death, all options held by the director that are not then
exercisable shall terminate. Options that are exercisable on the date of
termination shall continue to be exercisable for a period of one year (subject
to Section 6(c)). After completion of that one year period, such options shall
terminate to the extent not previously exercised, expired or terminated.
(i) MERGERS, ETC. In the event of a consolidation or merger in which the
Company is not the surviving corporation (other than a consolidation or merger
in which the holders of Stock of the Company acquire a majority of the voting
stock of the surviving corporation) or which results in the acquisition of
substantially all the Company's outstanding Stock by a single person or entity
or by a group of persons and/or entities acting in concert, or in the event of a
sale or transfer of substantially all of the Company's assets or a dissolution
or liquidation of the Company, all options hereunder will terminate; PROVIDED,
that 20 days prior to the effective date of any such
-5-
<PAGE> 6
merger, consolidation, sale, dissolution, or liquidation, all options
outstanding hereunder that are not otherwise exercisable shall become
immediately exercisable.
Notwithstanding the foregoing, in the event that a transaction covered by
this Section 6(i) is a merger or consolidation intended to qualify as a pooling
of interests for accounting purposes, then the acquiring or surviving
corporation shall assume, or otherwise provide replacement options for, all
options outstanding under this Plan, with such adjustments to the number of
shares covered by such option and the exercise price thereof as may be necessary
to reflect the exchange ratio provided for in the merger or consolidation. Such
substitute options shall otherwise be on terms and conditions substantially
equivalent to those set forth in this Plan, shall be immediately exercisable
and, except as to Eligible Directors who become directors of the acquiring or
surviving corporation, shall terminate on the 180th day following the
consummation of the merger or consolidation. Options held by Eligible Directors
who become directors of the acquiring or surviving corporation shall be
governed, mutatis mutandis, by the provisions of this Plan and the agreement
evidencing the option surrendered in substitution.
7. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT, TERMINATION AND
EFFECTIVENESS
Neither adoption of the Plan nor the grant of options to a director shall
affect the Company's right to grant to such director options that are not
subject to the Plan, to issue to such directors Stock as a bonus or otherwise,
or to adopt other plans or arrangements under which Stock may be issued to
directors.
The Committee may at any time terminate the Plan as to any further grants
of options. The Committee may at any time or times amend the Plan for any
purpose which may at the time by permitted by law.
-6-
<PAGE> 1
Exhibit 10(l)
FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT
This First Amendment to the Employment Agreement between The First Years Inc.
(the "Company") and Ronald J. Sidman ("Sidman"), dated March 23, 1995 (the
"Agreement") is made this 16th day of January, 1997.
In consideration of the mutual covenants hereinafter set forth, the parties
agree to amend the Agreement as fol1ows:
1. Paragraph 11 is deleted in its entirety and is replaced with the following
paragraph:
"SEVERANCE.
(a) If, at the expiration of this Agreement, the parties do not enter into
a new employment or severance agreement, or if Sidman's employment with the
Company is terminated during the Term by either party for any reason (other
than Death, Disability, or Cause as defined in this Agreement), then the
Company will continue to pay to Sidman his Base Salary and provide the
Benefits then in effect for twenty-four (24) months, reduced by the
amount, if any, that Sidman earns from other employment during such
24-month period, provided Sidman continues to comply with his obligations
under Paragraphs 7, 8, 9, and 10 of this Agreement during such 24-month
period. Sidman will not be entitled to receive any Annual Bonus for such
24-month period. Sidman will not be obligated to seek employment.
(b) If at the expiration of this Agreement, the parties do not enter into a
new employment or severance agreement, or if Sidman's employment with the
Company is terminated during the Term for any reason (other than for Death
or Cause as defined in this Agreement), the Company will continue to pay
the premiums for and provide coverage to Sidman under the same group
medical and dental plans as the Company provides to the Company's
executive officers, and the same medical reimbursement plan being provided
to Mr. Sidman and certain other senior executive officers as of the date of
this Amendment, until Mr. Sidman is eligible for and entitled to coverage
under Medicare; provided that the Company can amend, alter or change such
plans as long as such benefits to Sidman under such new plans are no less
than those commensurate with Sidman's position at the time of his
termination of employment; provided that to the extent such medical
benefits cannot be provided to Sidman under the terms of such plans or the
plans cannot be so amended in any manner not adverse to the Company, the
Company shall pay to Sidman, on an after-tax
<PAGE> 2
basis, an amount necessary for Sidman to acquire comparable benefits from
an independent insurance carrier; provided further, that the obligations of
the Company under this clause 11 (b) shall be terminated if, at any time
after the date of his termination of employment with the Company, Sidman is
employed by or is otherwise affiliated with a party that offers comparable
health benefits to Sidman; and provided he continues to comply with his
obligations under Paragraphs 7, 8, 9, and 10.
IN WITNESS WHEREOF, the parties have executed this First Amendment this
16th day of January, 1997.
THE FIRST YEARS INC.
By: /s/ Benjamin Peltz
--------------------------
Benjamin Peltz
Senior Vice President
and Treasurer
/s/ Ronald J. Sidman
--------------------------
Ronald J. Sidman
<PAGE> 1
EXHIBIT 10(m)
FIRST AMENDMENT TO
EMPLOYMENT AGREEMENT
This First Amendment to the Employment Agreement between The First Years Inc.
(the "Company") and Benjamin Peltz ("Peltz"), dated March 23, 1995 (the
"Agreement") is made this 16th day of January 1997.
In consideration of the mutual covenants hereinafter set forth, the parties
agree to amend the Agreement as follows:
1. Paragraph 11 is deleted in its entirety and is replaced with the following
paragraph:
"SEVERANCE.
(a) If, at the expiration of this Agreement, the parties do not enter into
a new employment or severance agreement, or if Peltz's employment with the
Company is terminated during the Term by either party for any reason (other
than Death, Disability, or Cause as defined in this Agreement), then the
Company will continue to pay Peltz his Base Salary and provide the Benefits
then in effect for twenty-four (24) months, reduced by the amount, if any,
that Peltz earns from other employment during such 24-month period,
provided Peltz continues to comply with his obligations under Paragraphs 7,
8, 9, and 10 of this Agreement during such 24-month period. Peltz will not
be entitled to receive any Annual Bonus for such 24-month period. Peltz
will not be obligated to seek employment.
(b) If at the expiration of this Agreement, the parties do not enter into a
new employment or severance agreement, or if Peltz's employment with the
Company is terminated during the Term for any reason (other than for Death
or Cause as defined in this Agreement), the Company will continue to pay
the premiums for and provide coverage to Peltz under the same group
medical and dental plans as the Company provides to the Company's
executive officers, and the same medical reimbursement plan being provided
to Mr. Peltz and certain other senior executive officers as of the date of
this Amendment, until Mr. Peltz is eligible for and entitled to coverage
under Medicare; provided that the Company can amend, alter or change such
plans as long as such benefits to Peltz under such new plans are no less
than those commensurate with Peltz's position at the time of his
termination of employment; provided that to the extent such medical
benefits cannot be provided to Peltz under the terms of such plans or the
plans
<PAGE> 2
cannot be so amended in any manner not adverse to the Company, the Company
shall pay to Peltz, on an after-tax basis, an amount necessary for Peltz to
acquire comparable benefits from an independent insurance carrier; provided
further, that the obligations of the Company under this clause 11 (b) shall
be terminated if, at any time after the date of his termination of
employment with the Company, Peltz is employed by or is otherwise
affiliated with a party that offers comparable health benefits to Peltz;
and provided he continues to comply with his obligations under Paragraphs
7, 8, 9, and 10.
IN WITNESS WHEREOF, the parties have executed this First Amendment this 16th day
of January, 1997.
THE FIRST YEARS INC.
By: /s/ Ronald J. Sidman
--------------------------------
Ronald J. Sidman, President
/s/ Benjamin Peltz
--------------------------------
Benjamin Peltz
<PAGE> 1
EXHIBIT 10(n)
THE FIRST YEARS INC.
A MASSACHUSETTS CORPORATION
AND AFFILIATES
1997 ANNUAL INCENTIVE PLAN
PLAN DESCRIPTION
Effective Date: January 1, 1997
Adopted: July 31, 1997
<PAGE> 2
THE FIRST YEARS INC.
A MASSACHUSETTS CORPORATION,
AND AFFILIATES
1997 ANNUAL INCENTIVE PLAN
PLAN OBJECTIVES
* The objectives of the plan are to:
-- Encourage salaried employees of the First Years Inc. and its
Affiliates (the "Company") to help improve the Company's performance;
-- Focus the attention of senior management and other executive officers
of the Company on the Company's operating results.
ELIGIBILITY
* Eligibility will initially include all full-time salaried employees of the
Company, if any, who are not covered by any other incentive compensation
plan (e.g., Incentive Plans for Sales-Americas and Sales-Europe Employees).
* Any employee joining the Company during the fiscal calendar year will be
eligible to participate in the incentive plan for that year.
* The President of the Company will be responsible for recommending changes
in eligibility to the Compensation Committee of the Board of Directors of
the Company (the "Compensation Committee") for review and approval.
PERFORMANCE MEASURES
* Performance under the Plan will be based on Company operating results.
* The Compensation Committee will establish performance targets based on the
Company's profitability for each fiscal year for various participants in
the Plan.
* Company performance will be measured on a fiscal calendar year basis.
However, quarterly or semi-annual performance targets may be established by
the Compensation Committee in its discretion as a basis for tracking
performance against the annual performance targets.
<PAGE> 3
* Quarterly or semi-annual targets will be arrived at from Company
projections for the applicable period.
* Any significant, unusual and/or non-recurring items, as determined by
Generally Accepted Accounting Principles, will be excluded from the profit
calculation in determining the Company's actual performance.
INCENTIVE AWARD POTENTIAL
* Each year, based upon the recommendations of senior management of the
Company, the Compensation Committee will establish the annual potential
awards for all senior and non-senior management and other salaried
employees.
* The Compensation Committee will also establish the annual potential
incentive awards for the Chief Executive Officer.
INCENTIVE AWARD OF PAYMENT
* The Compensation Committee in its discretion may determine to make payment
of advance awards on a quarterly or semi-annual basis to all participants
following the completion of such quarterly or semi-annual period and the
achievement of the performance goal for such quarterly or semi-annual
period ("advance awards").
* In the event that the Company does not meet its performance targets
established by the Compensation Committee for any fiscal year period,
employees will not be required to pay back to the Company any advance
awards which have been paid.
* Any portion of an annual award for a fiscal year period that has not been
paid by the Company via advance awards will be paid by the Company to
each participant by the end of the first quarter of the subsequent fiscal
year.
* For new employees joining the Company during the plan year, the annual
award will be prorated based on the number of days service with the
Company.
* Award payments to employees will be treated as ordinary income.
* Appropriate payroll deductions for taxes, Social Security, and so forth,
will be made as required.
* In the event an employee's employment is terminated (either voluntarily or
involuntarily), for any reason, prior to the end of a fiscal year period,
and the Compensation Committee has determined to make advance awards on a
quarterly or semi-
- 2 -
<PAGE> 4
annual basis, the employee will receive the advance awards for the prior
completed quarter or semi-annual period, if the Company has achieved the
performance goal for such quarterly or semi-annual period.
* The Compensation Committee, in its discretion, may determine to terminate
advance awards of annual awards at any time. In the event advance awards
are not made during a fiscal year, the Compensation Committee will have
complete discretion to determine if any portion of the annual award will be
paid to any employee whose employment is terminated for any reason prior to
the end of the fiscal year period.
PLAN ADMINISTRATION
* The Effective Date of the Restated Plan is January 1, 1997.
* The Plan will be administered by the Compensation Committee of the Board of
Directors.
* The Company and the Board of Directors reserve the right to amend or
terminate the Plan.
* Nothing contained in this document constitutes a contract for payment nor
does it constitute an employment contract between the Company and the
employee. The Company reserves the right to terminate an employee at any
time.
- 3 -
<PAGE> 1
EXHIBIT 10(o)
This Agreement is made as of the 12th day of August, 1997 (the "Effective Date")
by and between Wayne Shea ("I") and THE FIRST YEARS INC. (the "Company").
In consideration of my employment with the Company, its subsidiaries,
affiliates, successors, or assigns, and the compensation hereafter paid to me by
the Company, I agree as follows:
1. I recognize that during my employment with the Company I will receive,
develop, or otherwise acquire information which is of a confidential or
secret nature. Except as authorized in writing by the Company, I will not
disclose or use, directly or indirectly, during or after my employment with
the Company, any information of the Company which I obtain during the
course of my employment, including information relating to inventions,
products, product specifications, processes, procedures, machinery,
apparatus, prices, discounts, manufacturing costs, business affairs, future
business or product plans, ideas, technical data, the Company's customers,
sources of supply, planned advertising, promotion or marketing, or other
information which is of a secret or confidential nature, whether or not
acquired or developed by me. My obligation under this paragraph shall not
apply to information known by me prior to my employment with the Company,
information generally known in the Company's field of business, information
known to others hereafter without fault by me, or information disclosed to
me by a third party without restriction and without breach of obligation to
the Company.
2. I will communicate to the Company promptly and fully all discoveries,
improvements, and inventions (hereinafter called "inventions") and all
writings, drawings, and other works of authorship (hereinafter called
"works of authorship") made or conceived or created or authored by me
(either solely or jointly with others) during my employment and, as to
inventions, for six months thereafter which are along the lines of the
actual or anticipated business, work, or investigations of the Company or
which result from or are suggested by any work I may do for the Company;
and such inventions, whether patented or not, and works of authorship and
any copyrights therein, arising from my employment shall be and remain the
sole and exclusive property of the Company or its nominees.
3. I will, during my employment, keep and maintain adequate and current
written records of all such inventions and works of authorship, in the form
of notes, drafts, layouts, sketches, drawings, reports and the like
<PAGE> 2
relating thereto, which records shall be and remain the property of and
available to the Company at all times.
4. I will, during and after my employment with the Company, without charge to
the Company, but at its request and expense, assist the Company and its
nominees in every proper way to obtain and vest in it or them title to, and
to maintain and support the validity of, patents and copyrights on the
inventions and works of authorship referred to in paragraph 2, above, in
all countries by executing all necessary or desirable documents, including
applications for patents and copyrights, assignments thereof, assignments
of priority rights thereof and such other lawful documents as may be
requested, and I agree to do such other lawful acts as may be requested for
said purposes.
5. Upon the termination of my employment by the Company, I agree to deliver to
the Company all property of the Company, including all documents and things
evidencing or relating to the subject matter of this Agreement, and
including without limitation, the documents referred to in Paragraph 3
above.
6. During the course of my employment by the Company, and for a period of 18
months after the termination of my employment by the Company for any reason
whatsoever, I shall not engage or become interested, directly or
indirectly, as an employee, owner, consultant, officer, director or
partner, through stock ownership, investment of capital, lending of money
or property, rendering of services or otherwise, either alone or in
association with others, in the operation of any type of business or
enterprise competitive with the Company's business of developing,
marketing, and distributing products for infants, toddlers, and young
children (a "competitor company,") regardless of where such competitor
company sells its products or where such competitor company is located.
7. My holding (individually or otherwise) of any investment in any business or
enterprise other than the Company shall not be deemed to be a violation of
Paragraph 6 if such investment does not constitute over 5% of the
outstanding issue of such security, and I do not otherwise accept
employment with, act as a consultant to, become an officer, director, or
partner of, or otherwise become actively associated with the issuer of such
security.
8. I recognize, acknowledge and agree that the foregoing limitations of
Paragraphs 6 and 7 are reasonable and
<PAGE> 3
properly required for the adequate protection of the Company's business and
do not preclude me from pursuing my livelihood. However, if any such
limitation is found by any court of competent jurisdiction to be
unenforceable because it extends for too long a period of time or over too
great a range of activities or in too broad a geographic area, it shall be
interpreted to extend only over the maximum period of time, range of
activities or geographic area as to which it may be enforceable.
9. In further consideration of my services and the agreement not to compete
set forth in Paragraph 6, the Company agrees that in the event the Company
terminates my employment for any reason (other than in the event of my
death, Disability, or for Cause as defined in Paragraph 10 below) , then
the Company (1) will continue to pay me my base salary (then in effect) for
a twelve (12) month period (to be paid in twelve (12) equal monthly
installments), reduced by the amount, if any, that I earn from other
employment during such 12-month period; and (2) continue to provide the
benefits (then in effect for executive officers), provided I continue to
comply with my obligations under Paragraphs 1 through 7 during such
12-month period. Notwithstanding the foregoing, I will not participate in
the Company's Annual Incentive Plan, 1993 Equity Incentive Plan (or similar
cash-based or equity-based bonus plans then in effect for executive
officers), or Pension/401K Plans during such 12-month post-employment
period. Although I am not under any obligation to seek new employment, in
the event I do obtain new employment during such 12- month period, the
Company will cease providing the benefits on the day I obtain new
employment. In the event I leave the employ of the Company voluntarily, no
severance payments and/or benefits will be paid to me by the Company.
10. Termination for Cause for purposes of this Agreement shall be limited to
termination for: (i) My gross, willful, and deliberate failure to perform a
substantial portion of my duties hereunder for reasons other than
disability, which failure continues for more than sixty (60) days after the
Company gives written notice to me, setting forth in reasonable detail the
nature of such failure; or (ii) conviction of a felony by a court of
competent jurisdiction which is upheld upon appeal to a higher court, or
upon the lapse of an appeal period if no appeal is taken from such
conviction. Any termination for Cause shall be approved by the majority
vote of the members of the Company's Board of Directors.
Disability, for purposes of this Agreement, shall be limited to the
following situations: (1) If I suffer any illness, disability, or
incapacity which prevents me
<PAGE> 4
from substantially performing my duties, and such illness, disability or
incapacity shall be deemed by a duly-licensed physician (who may be my
personal physician) to be permanent; or (2) I am unable to substantially
perform my duties for a period of twelve (12) consecutive months by reason
of illness, disability, or incapacity, and the Board, by majority vote of
its members, determines that I am permanently disabled.
11. If I violate any provisions of this Agreement, then the time limitations
set forth in this Agreement shall be extended for a period of time equal to
the period of time during which such breach occurs and, in the event the
Company is required to seek relief from such breach before any court,
board, or other tribunal, then the time limitation shall be extended for a
period of time equal to the pendency of such proceedings, including all
appeals.
12. I acknowledge that any breach of this Agreement by me may give rise to
irreparable injury to the Company, which may not be adequately compensated
by damages. Moreover, I acknowledge that to the extent that any breach of
this Agreement by me may give rise to injury to the Company, which may be
adequately compensated by damages, such damages are difficult or impossible
to calculate. Accordingly, in the event of a breach or threatened breach of
Paragraphs 1 through 7 of this Agreement by me, the Company shall have, in
addition to any remedies it may have at law, the right to an injunction or
other equitable relief to prevent the violation of its rights hereunder.
13. (a) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of
this Agreement.
(b) This Agreement supersedes all previous agreements, written or oral,
between the Company and me relating to the subject matter of this
Agreement. This Agreement may not be modified, changed or discharged in
whole or in part, except by an agreement in writing signed by the Company
and me. This Agreement shall be binding upon me and my heirs and personal
representatives, and shall inure to the benefit of the Company and its
successors, assigns and nominees, provided that Paragraph 1 above shall be
binding upon such heirs and personal representatives only to the extent
that they obtain from me confidential information of the Company.
(c) No delay or omission by the Company in exercising any right under this
Agreement shall operate as a waiver of that or any other right. A waiver or
consent given
<PAGE> 5
by the Company on any one occasion is effective only in that instance and
shall not be construed as a bar to or waiver of any right on any other
occasion.
(d) I expressly consent to be bound by the provisions of this Agreement for
the benefit of the Company or any parent, subsidiary, or affiliate thereof,
without the necessity for any separate execution of this Agreement in favor
of such parent, subsidiary, or affiliate.
(e) This Agreement is governed by the laws of the Commonwealth of
Massachusetts, without giving effect to conflict of laws provisions
thereof.
By: /s/ Wayne Shea
--------------------------
Wayne Shea
Agreed to and accepted by
THE FIRST YEAR INC.
By: /s/ Rona1d J. Sidman
--------------------------
Rona1d J. Sidman
Title: President
-----------
<PAGE> 1
EXHIBIT (21)
--------------------------
List of Subsidiaries
of the Registrant
-----------------
The First Years Inc., a
Delaware corporation
<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, 1998, appearing in this Annual Report
on Form 10-K of The First Years Inc. for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 27, 1998
IV-19
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 41,712,080
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<CGS> 45,108,546
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<OTHER-EXPENSES> 310,457
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<INTEREST-EXPENSE> 186,338
<INCOME-PRETAX> 6,207,493
<INCOME-TAX> 2,483,000
<INCOME-CONTINUING> 3,724,493
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</TABLE>
<PAGE> 1
EXHIBIT 99
IMPORTANT FACTORS REGARDING
FORWARD-LOOKING STATEMENTS
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. These forward-looking statements, made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, may be contained in SEC filings, Annual Reports to
Stockholders, Press Releases and oral statements, among others, made by the
Company. 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. Important factors
that could cause the Company's actual results to differ from those contained in
such forward-looking statements include, among others, the factors mentioned
below.
NEW PRODUCT INTRODUCTIONS
The growth of the Company has been, and will continue to be, dependent upon its
ability to continue to introduce new products. There can be no assurance that
the Company will continue to maintain its present rate of growth, that it will
continue to generate new product ideas, or that new products will be
successfully introduced. In 1997, the Company introduced to the market its
comforTemp infra-red instant underarm thermometer. There can be no assurance
that such product will be well received by the market or generate substantial
sales.
RELIANCE ON LICENSED PRODUCTS
A substantial factor contributing to the growth in the Company's net sales in
the past few years has been its sale of products featuring cartoon characters
licensed from other parties, including the use of Winnie the Pooh characters
licensed from The Walt Disney Company, and Sesame Street characters licensed
from The Children's Television Workshop. These licenses have fixed terms and
limit the type of products that may be sold under the license. One major
license expires at the end of 1998. The Company's management is in the process
of negotiating the renewal of such license. There can be no assurance that such
license or any of the Company's other licenses will be renewed or will be
renewed on terms favorable to the Company, or that, if renewed, they will result
in sales increases in future periods.
<PAGE> 2
DEPENDENCE ON CONSUMER PREFERENCES
The continued success of the Company's business depends in part on the continued
consumer demand for its juvenile products and the Company's ability to
anticipate, gauge, and respond to changing consumer demands for juvenile
products in a timely manner. Changes in consumer demand due to
frequently-changing consumer tastes, general economic decline, or to less
favorable demographic trends related to childbirth, among other factors, could
have a material adverse effect on the Company's business. Moreover, the Company
could be materially adversely affected by conditions in the retail industry in
general, including consolidation and the resulting decline in the number of
retailers, and other cyclical economic factors.
DEPENDENCE UPON MAJOR CUSTOMERS
The three largest customers of the Company, Walmart, Toys "R" Us, and Target
accounted for approximately 52% of net sales during 1997. A significant
reduction of purchases by any one of these customers could have a material
adverse effect on the Company's business.
COMPETITION
Competition is intense in the juvenile product markets in which the Company
sells its products. The Company competes with a large number of other companies
both domestic and foreign, some of which have diversified product lines,
well-known brands and financial, distribution and marketing resources
substantially greater than those of the Company. There can be no assurance that
the Company will be able to continue to compete effectively in the juvenile
products market.
RELIANCE ON CONTRACT AND FOREIGN MANUFACTURERS
The Company does not own or operate its own manufacturing facilities. A number
of manufacturers located in the Far East, primarily in China, supply products
and product components to the Company. A substantial portion of all of its
products sold in 1997 were manufactured in the Far East. The Company is subject
to the usual risks of a business involving foreign suppliers, such as currency
fluctuations, government regulation of fund transfers, export and import duties,
trade limitations imposed by the United States or foreign governments, and
political and labor instability. In particular there are a number of
trade-related and other issues creating significant friction between the
governments of the United States and China, and the imposition of punitive
import duties on certain categories of Chinese products has been threatened in
the past and may be implemented in the future. Although the Company continues to
evaluate alternative sources of supply outside of China, there can be no
assurance that the Company will be able to
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<PAGE> 3
develop alternative sources of supply in a timely and cost-effective manner.
The Company has no long-term manufacturing agreements with its suppliers and
competes with other juvenile product companies, including companies that are
much larger than the Company, for access to production facilities. In December,
1996, the Company entered into an agreement with Exergen Corporation to jointly
design and develop the Company's ComforTemp thermometer. The Company is
dependent on Exergen for Exergen's technology and proprietary components. There
can be no assurance that the Company will continue to obtain such proprietary
components from Exergen.
The Company, because of its substantial reliance on suppliers in foreign
countries, is required to order products further in advance of customer orders
than would generally be the case if such products were produced in the United
States. The risk of ordering products in this manner is greater during the
initial introduction of new products since it is difficult to determine the
demand for such products.
COST AND AVAILABILITY OF CERTAIN MATERIALS
Plastic and paperboard are significant cost components of the Company's products
and packaging. Because the primary resource used in manufacturing plastic is
petroleum, the cost and availability of plastic for use in the Company's
products varies to a great extent with the price of petroleum. The inability of
the Company's suppliers to acquire sufficient plastic or paperboard at
reasonable prices would adversely affect the Company's ability to maintain its
profit margins in the short term.
INTERNATIONAL SALES
The Company's international sales in 1997 were approximately $16.2 million and
accounted for approximately 13.5% of the Company's total net sales in 1997.
There can be no assurance that the Company will be successful in expanding its
international sales operations.
PRODUCT LIABILITY RISKS
The Company's juvenile products are used for and by small children and infants.
The Company carries product liability insurance in amounts which management
deems adequate to cover risks associated with such use; however, there can be no
assurance that existing or future insurance coverage will be sufficient to cover
all product liability risks.
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<PAGE> 4
GOVERNMENT REGULATIONS
The Company's products are subject to the provisions of the Federal Consumer
Safety Act, the Federal Hazardous Substances Act, the Federal Flammable Fabrics
Act, and the Child Safety Protection Act (the "Acts") and the regulations
promulgated thereunder. The Acts authorize the Consumer Product Safety
Commission (the "CPSC") to protect the public from products which present a
substantial risk of injury. The CPSC can require the repurchase or recall by the
manufacturer of articles which are found to be defective and impose fines or
penalties on the manufacturer. Similar laws exist in some states and cities and
in other countries in which the Company markets its products. Any recall of its
products could have a material adverse effect on the Company, depending on the
particular product.
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