<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For The Quarter Ended September 30, 1998
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Commission file number 0-7024
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THE FIRST YEARS INC.
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(Exact name of registrant as specified in its charter)
Massachusetts 04-2149581
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Kiddie Drive, Avon, Massachusetts 02322-1171
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(Address of principal executive offices)
(Zip Code)
(508) 588-1220
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of Registrant's common stock outstanding on October 31,
1998 was 10,415,012.
<PAGE> 2
THE FIRST YEARS INC.
INDEX
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PART I - FINANCIAL INFORMATION: Page
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4 - 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 8
PART II - OTHER INFORMATION
Other information 9
SIGNATURES 10
EXHIBIT INDEX 11
<PAGE> 3
<TABLE>
<CAPTION>
THE FIRST YEARS INC.
Condensed Consolidated Balance Sheets
ASSETS
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 19,684,018 $ 7,697,040
Accounts receivable, net 21,826,632 19,962,226
Inventories 19,321,600 24,372,881
Prepaid expenses and other assets 433,721 414,764
Deferred tax assets 1,279,000 1,279,000
------------ ------------
Total current assets 62,544,971 53,725,911
------------ ------------
PROPERTY, PLANT, AND EQUIPMENT:
Land 167,266 167,266
Building 4,042,304 4,022,095
Machinery and molds 7,163,181 7,151,019
Furniture and equipment 4,523,203 3,947,144
------------ ------------
Total 15,895,954 15,287,524
Less accumulated depreciation 9,362,970 8,441,874
------------ ------------
Property, plant, and equipment - net 6,532,984 6,845,650
------------ ------------
TOTAL ASSETS $ 69,077,955 $ 60,571,561
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,271,731 $ 10,004,244
Accrued royalty expense 2,062,546 2,051,721
Accrued payroll expenses 1,277,034 1,143,063
Accrued selling expenses 3,013,424 2,387,029
Federal and state income taxes payable 310,200 159,600
------------ ------------
Total current liabilities 15,934,935 15,745,657
------------ ------------
DEFERRED TAX LIABILITY 816,900 816,900
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock 1,043,641 508,800
Paid-In capital 7,359,598 6,534,308
Retained earnings 44,232,605 37,047,709
Less: 21,394 shares of
treasury stock (at cost) (309,724) (81,813)
------------ ------------
Total stockholders' equity 52,326,120 44,009,004
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 69,077,955 $ 60,571,561
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 1
<PAGE> 4
<TABLE>
<CAPTION>
THE FIRST YEARS INC.
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $32,735,238 $27,878,092 $103,219,645 $88,397,388
COST OF PRODUCTS SOLD 18,951,345 16,249,011 61,038,625 52,247,703
----------- ----------- ------------ -----------
GROSS PROFIT 13,783,893 11,629,081 42,181,020 36,149,685
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 9,241,221 8,701,661 29,451,127 26,988,068
----------- ----------- ------------ -----------
OPERATING INCOME 4,542,672 2,927,420 12,729,893 9,161,617
OTHER INCOME (EXPENSES):
Interest expense -- (542) (850) (26,241)
Interest income 188,259 67,025 391,588 89,091
----------- ----------- ------------ -----------
INCOME BEFORE INCOME TAXES 4,730,931 2,993,903 13,120,631 9,224,467
PROVISION FOR INCOME TAXES 1,916,000 1,190,100 5,313,800 3,744,600
----------- ----------- ------------ -----------
NET INCOME $ 2,814,931 $ 1,803,803 $ 7,806,831 $ 5,479,867
=========== =========== ============ ===========
BASIC EARNINGS PER SHARE $0.27 $0.18 $0.76 $0.55
===== ===== ===== =====
DILUTED EARNINGS PER SHARE $0.26 $0.17 $0.73 $0.53
===== ===== ===== =====
CASH DIVIDENDS PAID PER SHARE $0.00 $0.00 $0.06 $0.05
===== ===== ===== =====
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 2
<PAGE> 5
<TABLE>
<CAPTION>
THE FIRST YEARS INC.
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997
(Unaudited)
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,806,831 $ 5,479,867
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Depreciation 1,260,768 1,143,226
Provision for doubtful accounts 115,000 245,359
Loss on disposal of equipment 476,067 --
Increase (decrease) arising from working capital items:
Accounts receivable (1,979,406) (1,625,806)
Inventories 5,051,281 (1,202,056)
Prepaid expenses and other assets (18,957) (511,621)
Accounts payable and accrued expenses (732,513) 2,682,866
Accrued royalties 10,825 574,662
Accrued payroll expense 133,971 195,969
Accrued selling expenses 626,395 278,931
Federal and state income taxes - net 150,600 --
------------ ------------
Net cash provided by
operating activities 12,900,862 7,261,397
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant,
and equipment (1,424,169) (1,293,024)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash Dividend (621,935) (496,747)
Common stock issued under stock
option plans 625,820 633,272
Tax benefit of stock option compensation 506,400 400,000
Repayment of industrial revenue bonds -- (100,000)
------------ ------------
Net cash provided by financing
activities 510,285 436,525
------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 11,986,978 6,404,898
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 7,697,040 4,164,587
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,684,018 $ 10,569,485
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 850 $ 26,241
============ ============
Income taxes $ 4,656,800 $ 3,738,100
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Issuance of treasury stock $ 227,911 $ --
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 3
<PAGE> 6
THE FIRST YEARS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Amounts in the accompanying balance sheet as of December 31, 1997 are
condensed from the Company's audited balance sheet as of that date. All
other condensed financial statements are unaudited but, in the opinion of
the Company, contain all normal and recurring adjustments necessary to
present fairly the financial position as of September 30, 1998, and the
results of operations and cash flows for the periods ended September 30,
1998 and 1997.
2. The Company has 30,000,000 authorized shares of $.10 par value common stock
with 10,415,012 and 10,169,182 shares issued and outstanding as of
September 30, 1998 and December 31, 1997, respectively.
On May 8, 1998 the Board of Directors authorized a two-for-one stock split
effected in the form of 100% stock dividend paid to stockholders of record
on May 29, 1998. Accordingly, all per share and stock option data presented
in these financial statements have been restated to reflect the split. The
par value for the new shares issued amounted to $519,020 and was
transferred from paid-in capital. Distribution of the new shares was paid
on June 29, 1998
Additionally, on May 8, 1998 the Board of Directors authorized a $0.06 per
share annual cash dividend paid on June 29, 1998 to holders of record at
the close of business on May 29, 1998.
3. Computation of the Earnings Per Share ("EPS") in accordance with SFAS No.
128 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
AVERAGE SHARES OUTSTANDING 10,391,816 10,035,606 10,306,828 9,958,262
EFFECT OF DILUTIVE SHARES 305,155 478,852 352,809 448,796
----------- ----------- ----------- -----------
AVERAGE DILUTED
SHARES OUTSTANDING 10,696,971 10,514,458 10,659,637 10,407,058
=========== =========== =========== ===========
NET INCOME $ 2,814,931 $ 1,803,803 $ 7,806,831 $ 5,479,867
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE $0.27 $0.18 $0.76 $0.55
===== ===== ===== =====
DILUTED EARNINGS PER SHARE $0.26 $0.17 $0.73 $0.53
===== ===== ===== =====
</TABLE>
Page 4
<PAGE> 7
THE FIRST YEARS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Con't)
3. Computation of Earnings Per Share (con't)
As of September 30, 1998, options to purchase 1,964, 20,000 and 12,000
shares of common stock at $15 15/16, $17 3/4 and $17 per share,
respectively were not included in the computation of diluted EPS because
the option's exercise price was greater than the average price of the
common shares. The options, which expire in 2008 were still outstanding at
September 30, 1998.
As of September 30, 1997, options to purchase 30,000 shares of common stock
at $13 1/2 per share, were not included in the computation of diluted EPS
because the option's exercise price was greater than the average price of
the common shares. The options, which expire in 2007, were still
outstanding at September 30, 1998.
4. The results of operations for the nine month period ended September 30,
1998 and 1997 are not necessarily indicative of the results to be expected
for the full year.
5. During the first nine months of 1998, the Company did not borrow against
its unsecured line of credit totaling $10,000,000 available from a bank.
During 1997, the Company borrowed various amounts up to $2,500,000 of which
there was no balance outstanding as of September 30, 1997.
6. Statements of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" became effective for the Company during the quarter
ended March 31, 1998. Adoption of SFAS No. 130 did not have a material
impact on the consolidated financial statements.
The Financial Accounting Standards Board recently issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" and
SFAS No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits." These new standards will be effective in the
Company's fiscal year ended December 31, 1998. SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" will be effective for the
Company's fiscal year ended December 31, 2000. The Company has not
determined the effects, if any, that these standards will have on its
consolidated financial statements.
Page 5
<PAGE> 8
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Statements in this Report on Form 10-Q 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 in the
development and introduction of new products, described more fully in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997,
and Exhibit 99 of the Annual Report on Form 10K for the year ended December
31,1997, filed with the Securities and Exchange Commission.
Net sales for the first nine months of 1998 were $103.2 million, an
increase of $14.8 million or 16.8%, as compared to $88.4 million for the
comparable period last year. The increase was due to new product
introductions fueling expanded retail distribution in domestic markets,
particularly in the discount, food and pharmacy channels of distribution.
Cost of products sold for the first nine months of 1998 was $61.0 million,
an increase of $8.8 million or 16.8%, as compared to $52.2 million for the
comparable period last year. As a percentage of sales, cost of products
sold in the first nine months of 1998 and 1997 remained constant at 59.1%.
Selling, general, and administrative expenses for the first nine months of
1998 were $29.5 million, an increase of $2.5 million or 9.1%, as compared
to $27.0 million over such expenses for the first nine months of 1997. The
increase resulted primarily from costs related to increased sales volume;
payroll and payroll related costs, and product development expenses. As a
percentage of net sales, selling, general, and administrative expenses for
the first nine months of 1998 decreased to 28.5% from 30.5% in the
comparable period of 1997. The decrease reflects the continued effective
management of selling, general, and administrative costs as well as the
timing of certain marketing expenses.
Income tax expense as a percentage of pretax income remained consistent at
40.5% for the first nine months of 1998 and 1997.
Net working capital increased by $8.6 million in the first nine months
mainly due to profitable operations. Accounts receivable increased by $1.8
million as a result of increased sales and inventories decreased by $5.1
due to normal business fluctuations as well as the continued effective
management of inventory. Cash increased by $12.0 million primarily
resulting from funds generated from operations and the decrease in
inventories.
Page 6
<PAGE> 9
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Con't)
The Company announced that its Board of Directors approved a discretionary
stock repurchase program whereby the Company may spend up to $10 million
dollars for the repurchase of shares of its Common Stock, in the open
market or in private transactions, from time to time, subject to prevailing
market conditions. The Company had 10,415,012 shares of Common Stock issued
and outstanding as of September 30, 1998, net of treasury shares.
An unsecured bank line of credit of $10.0 million is subject to annual
renewal. Amounts outstanding under this line are payable upon demand by the
bank. During the first nine months of 1998, the Company incurred no
borrowings under the line and had no balances outstanding as of September
30, 1998. During the first nine months of 1997, the Company borrowed
various amounts up to $2.5 million of which no balance remained outstanding
as of September 30, 1997.
The Company did not incur any other short-term borrowings during the first
nine months of 1998 and 1997.
YEAR 2000 Issue
The "Year 2000 Issue" (Y2K) relates to problems that may result from the
incorrect processing of information using dates or date sensitive data by
computers and other machines utilizing embedded microprocessors. The
problem is attributable to the computer or software recognizing the year as
a two digit number "00" as opposed to the Year "2000". As Year 2000
approaches, uncertainty relating to these Y2K issues must be addressed in
order to correct the problem or properly plan contingencies to handle
anticipated issues, if any.
The Company started addressing the Y2K issue in 1996 and has been following
a plan, in phases, to identify, inventory, prioritize and correct all known
Y2K issues. The project plan incorporates the various phases and will
evaluate both information technology (IT) related hardware and software as
well as non-IT issues such as facilities operations and product related
technology. The project will also attempt to obtain assurance from mission
critical vendors (banks, transfer agents, manufacturing suppliers,
utilities and other suppliers of critical services to the Company.) about
their Y2K readiness and develop contingency plans for issues that may arise
from the failure of those vendors to achieve Y2K compliance. The Company
has substantially completed its review of all IT related systems and
believes it will be Y2K compliant by mid 1999. The Company is currently in
the identification and inventory phase of the review of non-IT systems and
mission critical third party relationships which is expected to be
completed by the end of the first quarter of 1999. Based on the review of
responses from third-party vendors, the Company will prioritize the
corrective actions required, if any, and commence the correction phase of
the project by the end of the second quarter of 1999. The Company expects
to begin contingency planning in the fourth quarter of 1998 and to complete
such plans by the end of the second quarter of 1999.
Page 7
<PAGE> 10
Management's Discussion and Analysis of Financial Condition and
Results of Operations (Con't)
YEAR 2000 Issue (con't)
The costs to address the Y2K Issue has not been and is not expected to be
material to the Company's financial position or have a material impact on
operating results, however, there can be no assurance that the failure to
ensure Year 2000 capability by a supplier or another third party would not have
a material adverse effect on the Company. Since 1996 the Company has incurred
expenses of approximately $100,000 to address the Y2K issue and anticipates
incurring an additional $100,000 related to the Y2K issue. Anticipated
additional costs do not consider costs, if any, related to the failure of third
party relationships to become "Year 2000" compliant. All expenses incurred to
date have been recognized as expense in the Company's consolidated financial
statements in the period incurred. Costs, if any, related to the correction of
Y2K issues caused by a third party's failure to be Y2K compliant would be
expensed as incurred.
Based on the Y2K assessment information obtained and corrections implemented to
date, the Company believes that the Year 2000 Issue will not have a material
adverse effect on its financial position or results of operations. The Company
is currently inventorying results of a vendor compliance survey which will
facilitate the risk assessment and contingency planning phase of non-IT related
issues which will include planning for worst case scenarios.
Page 8
<PAGE> 11
THE FIRST YEARS INC.
PART II - OTHER INFORMATION
Items 1 through 5 - Not Applicable
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits - The following exhibits are filed as part of
this Report:
Exhibit Description
------- -----------
27 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the past quarter
covered by this report.
Item 7A: Quantitative and Qualitative Disclosure about Market Risk
At September 30, 1998, the Company held foreign currency forward 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 totaled approximately $740,000 and
the fair market value of the contracts approximated their notional amount.
Page 9
<PAGE> 12
THE FIRST YEARS INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE FIRST YEARS INC.
--------------------
Registrant
Date 11/13/98 /s/ John R. Beals
------------------ ----------------------------
John R. Beals, Senior Vice
President and Treasurer,
Duly Authorized Officer and
Principal Financial Officer
Page 10
<PAGE> 13
THE FIRST YEARS INC.
EXHIBIT INDEX
Exhibit Description Page
------- ----------- ----
27 Financial Data Schedule 12
Page 11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 19,684,018
<SECURITIES> 0
<RECEIVABLES> 22,126,632
<ALLOWANCES> 300,000
<INVENTORY> 19,321,600
<CURRENT-ASSETS> 62,544,971
<PP&E> 15,895,954
<DEPRECIATION> 9,362,970
<TOTAL-ASSETS> 69,077,955
<CURRENT-LIABILITIES> 15,934,935
<BONDS> 0
0
0
<COMMON> 1,043,641
<OTHER-SE> 51,282,479
<TOTAL-LIABILITY-AND-EQUITY> 69,077,955
<SALES> 103,219,645
<TOTAL-REVENUES> 103,611,233
<CGS> 61,038,625
<TOTAL-COSTS> 90,489,752
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 850
<INCOME-PRETAX> 13,120,631
<INCOME-TAX> 5,313,800
<INCOME-CONTINUING> 7,806,831
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,806,831
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.73
</TABLE>
