FIRST YEARS INC, 10-K405, 1999-03-31

FIRST YEARS INC
10-K405, 1999-03-31
MISCELLANEOUS PLASTICS PRODUCTS

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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, 1998; 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 $112,250,758, 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 26, 1999.

The number of shares of Registrant's Common Stock outstanding on December
31, 1998 was 10,440,014.
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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,
1998. The following sections of such definitive proxy statement are hereby
incorporated by reference into Items 10, 11, 12 and 13 of Part III of this Form
10-K: "Common Stock Ownership of Certain Beneficial Owners and Management;"
"Election of Directors;" "Executive Compensation" (other than the Board
Compensation Committee Report on Executive Compensation and the Performance
Chart); and "Compliance with Section 16(a) of the Securities Exchange Act of
1934."
<PAGE> 3

PART I

ITEM 1. BUSINESS

The First Years Inc. (the "Company") is a leading developer and worldwide
marketer of a broad line of products for infants and toddlers. Major channels
through which the Company sells its products include mass merchants,
supermarkets, drug stores, department stores, wholesale clubs, convenience
stores, specialty stores, mail-order catalogs and catalog showrooms.

The Company was incorporated in 1952 in Massachusetts under the name Kiddie
Products, Inc. The Company changed its name to The First Years Inc. in May,
1995, and is headquartered in Avon, Massachusetts.

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 300 items that
range in retail price from approximately $0.99 to $89.99, 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, breast-feeding accessories and feeding sets. 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, the Sure pacifier and the new All-In-One
highchair.

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 1998, the Company introduced the 3-in-1 Gym to Walker
which received three prestigious awards from independent panels of child
development experts.

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 Crisp &
Clear Plus 900MHz Nursery Monitor.

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 1998, the Company introduced
numerous additional items in this category including Pooh PlayPals and Pooh
Sports Bottles.

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., Simplicity(TM), Flowright(TM), All-In-One(TM), Sure(TM), Crisp & Clear
Plus(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 uses a diverse group of outside designers and developers. For the past 18
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 $3.3, $2.6 and $2.2 million on new product
development in 1998, 1997 and 1996, 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, Eckerd
Drugs, 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 42 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 1998, 1997 and 1996 were approximately
$16.7, $16.2 and $11.6 million, respectively, and accounted for approximately
12.6%, 13.5% and 12.5% of the Company's total net sales in 1998, 1997 and 1996,
respectively. (See "Notes to Financial Statements, Number 8.")

During 1998, Wal*Mart, Toys "R" Us, and Target accounted for approximately
29%, 17%, 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

Since 1996, the Company has entered into and renewed various agreements
which provide for the payment of royalties on certain of the Company's products
featuring licensed cartoon characters. The agreements have various terms and
require minimum royalty payments of $5,380,000 during the terms of these
agreements. A major licensing agreement which was to expire at the end of 1998
has been extended through March 31, 1999. Sales of products licensed under the
agreement amounted to 42% of the Company's total net sales for the year ended
December 31, 1998. Management is in the process of negotiating a renewal of this
agreement. While management expects the licensing agreement to be renewed,
non-renewal of this
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licensing agreement or, renewal on terms not favorable to the Company could have
a material adverse affect on the Company's business (see Exhibit 99 to this
Report, "Important Factors Regarding Forward-Looking Statements" and "Notes to
the Financial Statements," Numbers 6 and 8).

MANUFACTURING AND SOURCES OF SUPPLY

The Company does not own or operate its own manufacturing facilities. In
1998, 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 65% of all of its products sold in
1998 were manufactured in Asia, primarily in China. A large percentage of the
Company's furnishings and other large products were manufactured in 1998 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, 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 1998, the Company's largest supplier, which is based in the United
States, accounted for products that represented approximately 13% of its net
sales in 1998. Other than as described above, 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 1998.

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 Normal Trade Relations ("NTR") 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 NTR
trading status has been extended through July 3, 1999. Unless Congress takes
action to override this decision, China will continue to enjoy NTR 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.

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The Company, because of its substantial reliance on suppliers in foreign
countries, is required to order products further in advance of customer orders
than would generally be the case if such products were produced in the United
States. As a result, the Company is required to carry significant amounts of
inventory to meet rapid delivery requirements of customers and to assure itself
of continuous allotment of goods from suppliers.

WORKING CAPITAL ITEMS

See Item 7, "Management Discussion and Analysis of Financial Condition and
Results of Operation."

COMPETITION

The juvenile products industry is highly competitive and includes numerous
domestic and foreign competitors, some of which are substantially larger and
have greater financial and other resources than the Company. The Company
competes with a number of different competitors, depending on the product
category, and it competes against no single company across all product
categories. Its competition includes large, diversified health care product
companies, specialty infant products makers, toy makers and specialty health
care products companies. The Company competes principally on the basis of brand
name recognition and price/value relationship. In addition, the Company believes
that it competes favorably with respect to product quality, customer service and
breadth of product line.

DISTRIBUTION

The Company distributes its products in the United States from its 103,500
square foot warehouse facility in Avon, Massachusetts and from a public
warehouse in Fontana, California. The Company distributes its products in Canada
from a public warehouse in Toronto, Ontario. In Europe, the Company distributes
its products from a public warehouse in Ghent, Belgium. Warehouse services at
the various public warehouses are performed by warehouse operators unaffiliated
with the Company.

TRADEMARKS, PATENTS AND COPYRIGHTS

The Company's principal trademark THE FIRST YEARS and design, is registered
in the United States and in a number of foreign countries. The Company also uses
other trademarks for certain of its products and product categories, some of
which are registered in the United States and in various foreign countries.

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, 1998, the Company employed 148 full-time and 7 part-time
employees, of whom 6 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

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Protection Act, and the regulations promulgated thereunder (the "Acts"). The
Company's nursery monitors are subject to regulations of the Federal
Communications Commission. The Company's medical devices and drug products are
subject to the regulations of the Food and Drug Administration. The Acts enable
the Consumer Product Safety Commission (the "CPSC") to protect children from
hazardous toys and other articles. The CPSC has the authority to exclude from
the market certain consumer products which are found to be hazardous. The CPSC's
determination is subject to court review. The CPSC can require the repurchase by
the manufacturer of articles which are banned. The Federal Flammable Fabrics Act
enables the CPSC to regulate and enforce flammability standards for fabrics used
in consumer products. Similar laws exist in some states and cities and in
various international markets. The Company designs and tests its products to
ensure compliance with the various federal, state and international
requirements. Any recall of a product could have a material adverse effect on
the Company, depending on the particular product.

EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY

The names of the Company's Executive Officers and Directors and certain
information about them are set forth below. Officers have served in the capacity
indicated in the table below for at least five years, unless otherwise indicated
in the notes.

<TABLE>
<CAPTION>
OFFICER OR
DIRECTOR
NAME AGE POSITION SINCE
---- --- -------- ----------
<S> <C> <C> <C>
Ronald J. Sidman.......................... 52 President, Chairman of the Board of
Directors, and Chief Executive Officer 1975
Jerome M. Karp............................ 71 Vice Chairman of the Board of Directors 1969
Benjamin Peltz............................ 59 Director 1975
Evelyn Sidman............................. 85 Clerk and Director 1979
Fred T. Page.............................. 52 Director 1988
Kenneth R. Sidman......................... 53 Director 1998
Lewis M. Weston........................... 72 Director 1998
Walker J. Wallace......................... 54 Director 1999
John R. Beals............................. 44 Treasurer, Senior Vice President -- Finance
and Chief Financial Officer 1990
Wayne Shea................................ 44 Senior Vice President -- Worldwide Sales
and Merchandising 1991
Bruce Baron............................... 38 Senior Vice President -- Operations 1997
James N. Turner........................... 41 Senior Vice President -- Marketing and New
Product Development 1998
</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. Page has been the President -- Network Services of Southern New England
Telecommunications Corporation ("SNET"), a subsidiary of Southwestern Bell,
since January, 1994 and has been with SNET for over 5 years.

Kenneth R. Sidman has been Vice President, Business & Technology
Development, at Norton Performance Plastics Corp., Wayne, NJ, a subsidiary of
Compagnie de Saint-Gobain, since 1997. Mr. Sidman joined Norton Performance
Plastics Corp. in 1984 as Director, New Business Development, and from 1992 to
1997, was Vice President, Marketing & New Business Development.

Mr. Lewis M. Weston has been a Limited Partner of Goldman, Sachs & Co.,
since 1978. He has been with Goldman Sachs since 1951 and was made a General
Partner in 1967. He was Partner in charge of the Syndicate Department from 1969
to 1978, a period during which he was also active with the National Association
of Securities Dealers (NASD), serving three years as a member of the NASD's
Board of Governors. Currently, Mr. Weston is a board member of South East Asia
Venture Investment Company (SEAVIC) and SEAVIC, III, Singapore, and the Thai
Prime Fund, Singapore, as well as a member of the

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International Advisory Board of Banco Finantia, Lisbon, Portugal. He also serves
on the Investors Representative Committee of the China Dynamic Investment Fund.

Walker J. Wallace was with Proctor & Gamble for 30 years, from 1967 to
1997. He was made a Vice President of Proctor & Gamble in 1991 and served as
Vice President -- Worldwide Strategic Planning for various core product
categories (laundry and cleaning products, paper products, diapers) from 1993 to
1997. Mr. Wallace is on the Board of the Student Loan Funding Resources in
Cincinnati, Ohio.

Mr. Beals has been Senior Vice President -- Finance since March, 1998 and
Treasurer of the Company since January, 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 -- Operations since August, 1997.
Prior to that time, Mr. Baron was Vice President of Operations at Crabtree &
Evelyn from 1988 to July, 1997.

Mr. Turner has been Senior Vice President -- Marketing and New Product
Development since July, 1998. Prior to that time, from July, 1995 to June, 1998,
he was the Vice President -- Product Development of Tupperware Services and from
November, 1992 to June, 1995 he was Vice President -- Marketing of Tupperware
Asia Pacific.

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 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 1998 and 1997 as reported by Nasdaq and retroactively
adjusted to reflect the Company's 2-for-1 stock split effected on June 29, 1998.

1998

<TABLE>
<CAPTION>
QUARTER LOW HIGH
------- --- ----
<S> <C> <C>
First....................................................... $10 1/2 $18 1/8
Second...................................................... 15 1/4 20
Third....................................................... 12 19 1/2
Fourth...................................................... 9 18 1/4
</TABLE>

1997

<TABLE>
<CAPTION>
QUARTER LOW HIGH
------- --- ----
<S> <C> <C>
First....................................................... $ 7 3/4 $ 8 15/16
Second...................................................... 7 1/2 10 7/8
Third....................................................... 9 3/4 14 1/2
Fourth...................................................... 10 1/4 14 3/8
</TABLE>

(b) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS

<TABLE>
<CAPTION>
APPROXIMATE NUMBER
OF RECORD HOLDERS
TITLE OF CLASS (AS OF DECEMBER 31, 1998)
-------------- -------------------------
<S> <C>
Common Stock, $.10 Par Value 155
</TABLE>

In 1997 and 1998, the Company paid a cash dividend on its Common Stock of
$0.05 and $0.06 per share, respectively, which were paid on June 2, 1997 and
June 29, 1998, 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.

The Company's Board of Directors declared on May 8, 1998, a 2-for-1 stock
split effected in the form of a 100% stock dividend payable on June 29, 1998 to
holders of record on May 29, 1998.

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ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Net sales................. $132,716,379 $120,695,988 $93,110,361 $75,757,322 $53,233,109
Cost of products sold..... 80,737,193 71,185,634 55,463,255 45,108,546 29,498,457
Selling, general and
administrative
expenses................ 39,011,893 37,165,878 28,580,039 23,961,206 18,915,908
Interest expense.......... -- 27,709 358,637 186,338 24,575
Interest income........... 590,822 168,922 27,349 16,718 66,605
Offering expenses......... -- -- -- 310,457 --
Income before income
taxes................... 13,558,115 12,485,689 8,735,779 6,207,493 4,860,774
Provision for income
taxes................... 5,545,300 5,040,900 3,494,300 2,483,000 1,871,400
Net income................ 8,012,815 7,444,789 5,241,479 3,724,493 2,989,374
Basic earnings per
share**................. $0.78 $0.75 $0.55 $0.41 $0.33
Diluted earnings per
share**................. $0.75 $0.71 $0.53 $0.40 $0.33
Dividends paid per
share*.................. $0.06 $0.05 $0.05 $0.05 $0.05
Basic weighted average
number of shares
outstanding**........... 10,338,857 10,003,774 9,466,356 9,014,116 8,994,488
Diluted weighted average
number of shares
outstanding**........... 10,669,503 10,453,062 9,891,982 9,326,982 8,994,488
SELECTED BALANCE SHEET
DATA:
Total assets.............. $ 69,275,895 $ 60,571,561 $47,049,537 $41,712,080 $28,852,785
Long-term debt............ -- -- -- 100,001 233,334
Stockholders' equity...... 52,647,404 44,009,004 35,866,440 25,763,259 22,349,947
Stockholders' equity per
share**................. $4.93 $4.21 $3.63 $2.76 $2.49
</TABLE>

- ---------------

* Adjusted to reflect the two-for-one stock split effected on June 29, 1998 and
December 29, 1995, respectively.

** Adjusted to reflect the two-for-one stock split effected on June 29, 1998 and
December 29, 1995, respectively 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. Forward-looking statements involve risks, uncertainties or
other factors which may cause material differences in actual results or
performance. These factors include, but are not limited to, the ability to
introduce new products, dependence on licensed products, and the renewal of a
major license, reliance upon major customers and foreign suppliers, competitive
market pressures, changes in consumer preferences and in the retail industry,
risks related to year 2000 compliance and other factors, described more fully in
Exhibit 99 of this Annual Report for the year ended December 31, 1998.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

Net sales in 1998 were $132.8 million, an increase of $12.1 million, or
10.0%, as compared to $120.7 million in 1997. The increase was due to new
product introductions and expanded retail distribution in domestic and foreign
markets. An additional factor affecting sales was a charge of $3.0 million
relating to sales returns of certain products containing diisononyl phthalate
("DINP"), a plastic softener. As a percent of sales, net sales to foreign
markets decreased to 12.6% in 1998 from 13.5% in 1997 as sales increases in
Europe were partially offset by reduced sales in Latin America and the Pacific
Rim due to poor economic conditions. The Company currently believes economic
conditions in Latin America and the Pacific Rim may negatively affect sales
potential during the short to medium term but that in the long term substantial
opportunity exists. As a percentage of net sales, sales of licensed products
increased to 48.4% in 1998 from 43.1% in 1997. The Company derives a significant
portion of its sales from products under license. A major licensing agreement,
which was to expire at the end of 1998, has been extended through March 31,
1999. Sales of products licensed under the agreement amounted to 42% of the
Company's total net sales for the year ended December 31, 1998. Management is in
the process of negotiating a renewal of this agreement. While management expects
the licensing agreement to be renewed, non-renewal of this licensing agreement
or, renewal on terms not favorable to the Company could have a material adverse
affect on the Company's business. The Company also currently believes that the
growth in licensed products as a percent of total sales may begin to lessen as
demand for licensed products matures.

Cost of products sold in 1998 was $80.7 million, an increase of $9.5
million or 13.4%, as compared to $71.2 million in 1997. As a percentage of net
sales, cost of products sold in 1998 increased to 60.8% from 59.0% in the
comparable period of 1997. The increase was primarily due to a charge of $1.1
million relating to write-off of inventory of certain products containing DINP.
Without the charge related to DINP, cost of products sold would have remained
consistent at 58.9% in 1998 and 59.0% in 1997, respectively.

Selling general and administrative expenses in 1998 were $39.0 million, an
increase of $1.8 million, or 5.0%, as compared to $37.2 million of such expenses
in 1997. The increase was primarily due to costs related to increased sales
volume and payroll and payroll related costs. As a percentage of net sales,
selling, general, and administrative expenses decreased to 29.4% in 1998 from
30.8% in the comparable period of 1997. The decrease reflects a reduction in
advertising expenses in 1998 as well as the continued effective management of
selling, general, and administrative expenses.

Income tax expense as a percentage of pretax income increased to 40.9% in
1998 from 40.4% in 1997 as a portion of the Company's taxable income was taxed
at a higher statutory rate.

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 for possible contingencies to handle anticipated issues, if
any.

II-3
<PAGE> 12

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 as
well as customers to achieve Y2K compliance. The Company has substantially
completed its review of all IT related systems and currently believes it will be
Y2K compliant by the end of the third quarter of 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 currently expected to be
completed during the second quarter of 1999. Based on the review of responses
from third-party vendors, which has been substantially completed, the Company
currently expects to prioritize the corrective actions required, if any, and
commence the corrections phase of the project during the third quarter of 1999.

The Company has initiated the contingency planning phase of the Y2K
project. A committee, including members of senior management, has been formed to
evaluate the response from mission critical third parties regarding assurance of
their Y2K readiness. Additionally, the committee is evaluating general
operational issues that may be affected by Y2K problems not limited to direct
third party relationships and is in the process of incorporating all issues into
a formal contingency plan. The contingency plan development is progressing
according to the overall Y2K plan and is expected to be substantially complete
by the end of the second quarter of 1999.

The cost 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. 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 currently believes that the Year 2000 Issue
will not have a material adverse effect on its financial position or results of
operations. The Company believes that its most reasonably likely, worst case
scenario may involve non-compliant third parties, including failure of
suppliers, distributors, shipping carriers, utility companies and other similar
third parties to provide their services to the Company. 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, however, there can be no
assurance that the failure to ensure Year 2000 capability by a supplier,
customer, or another third party would not have a material adverse effect on the
Company.

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.

II-4
<PAGE> 13

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.

LIQUIDITY AND CAPITAL RESOURCES

Net working capital increased by $7.5 million to $45.5 million at December
31, 1998 from $38.0 million at December 31, 1997 primarily due to funds
generated from profitable operations and reductions in inventory. Cash increased
by $12.1 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 800,000 (post 1998 stock split) newly issued
shares and 2,400,000 (post 1998 stock split) 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 1998, the Company had no borrowings
under the line of credit. As of December 31, 1998 no balance was outstanding.

The Company paid a cash dividend of $0.06 and $0.05 per share of Common
Stock in June of 1998 and 1997, respectively.

The Company expects cash flow from operations and availability under the
Company's lines of credit to be sufficient to meet cash needs for working
capital expenditures for 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 1998, 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 $500,000 as of
December 31, 1998. At December 31, 1998, 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, 1998,
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." The adoption of SFAS No. 130 resulted
in no changes to the consolidated financial statements.

In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." As required, the company adopted SFAS
No. 131 in the fourth quarter of 1998.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will require recognition of all
derivatives as either assets or liabilities on the balance sheet at fair value.
The Company is currently evaluating the effect of implementing SFAS No. 133,
which will be effective for the year beginning January 1, 2000.

II-5
<PAGE> 14

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

See discussion in second paragraph of Item 7, "Inflation and Foreign
Currency Fluctuations", for required quantitative and qualitative disclosure
about primary exposure to market risk.

The foreign currencies to which the Company has the most significant
exchange rate exposure is the British pound. Based on a hypothetical ten percent
adverse movement in foreign currency exchange rates, the potential losses in
future earnings, fair value of risk-sensitive instruments, and cash flows are
immaterial, although the actual effects may differ materially from the
hypothetical analysis.

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-6
<PAGE> 15

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 1999 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 1999 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 1999 Annual Meeting of Stockholders.

III-1
<PAGE> 16

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, 1998 and 1997

Consolidated Statements of Income for the Years Ended December 31,
1998, 1997 and 1996

Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996

Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996

(a) 2. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996

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).
</TABLE>

IV-1
<PAGE> 17

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Management Contracts and Compensatory Plans

(10)(g) The First Years Inc. 1993 Equity Incentive Plan, as amended
through March 19, 1998 (filed as Exhibit (10)(g) on Form
10-K for the year ended December 31, 1997 and incorporated
herein by reference).
(10)(h) The First Years Inc. 1993 Stock Option Plan for Directors,
as amended through March 19, 1998 (filed as Exhibit (10)(h)
on Form 10-K for the year ended December 31, 1997 and
incorporated herein by reference).
(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
(filed as Exhibit (10)(l) on Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference).
(10)(m) First Amendment to Employment Agreement between The First
Years Inc. and Benjamin Peltz dated January 16, 1997 (filed
as Exhibit (10)(m) on Form 10-K for the year ended December
31, 1997 and incorporated herein by reference).
(10)(n) The First Years Inc., a Massachusetts Corporation, and
Affiliates -- 1998 Annual Incentive Plan, effective as of
January 1, 1998. IV-19
(10)(o) Agreement between The First Years Inc. and Wayne Shea dated
August 12, 1997 (filed as Exhibit (10)(o) on Form 10-K for
the year ended December 31, 1997 and incorporated herein by
reference).
(10)(p) Agreement between The First Years Inc. and Bruce Baron dated
July 10, 1997. IV-19
(10)(q) Agreement between The First Years Inc. and James N. Turner
dated June 15, 1998. IV-19
- -------------------------------------------------------------------------------

(21) List of Subsidiaries of the Registrant. IV-19
(23) Consent of Deloitte & Touche LLP dated March 31, 1999. IV-19
(27) Financial Data Schedule -- 12/31/98 IV-19
(99) Important Factors Regarding Forward-Looking Statements. IV-19
</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, 1998.

IV-2
<PAGE> 18

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 18, 1999

By: /s/ JOHN R. BEALS
..................................
JOHN R. BEALS, TREASURER AND
SENIOR VICE PRESIDENT --
FINANCE(CHIEF FINANCIAL OFFICER
AND CHIEF
ACCOUNTING OFFICER)

Date: March 18, 1999

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 18, 1999.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RONALD J. SIDMAN Chief Executive Officer Chairman of March 18, 1999
........................................ the Board of Directors and President
RONALD J. SIDMAN

/s/ JEROME M. KARP Vice Chairman of the Board of March 18, 1999
........................................ Directors
JEROME M. KARP

/s/ EVELYN SIDMAN Director March 18, 1999
........................................
EVELYN SIDMAN

/s/ BENJAMIN PELTZ Director March 18, 1999
........................................
BENJAMIN PELTZ

/s/ FRED T. PAGE Director March 18, 1999
........................................
FRED T. PAGE
</TABLE>

IV-3
<PAGE> 19

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, 1998 and
1997.................................................. IV-6
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997, and 1996..................... IV-7
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997, and 1996......... IV-8
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1997, and 1996............... IV-9
Notes to Consolidated Financial Statements............. IV-10-17
Financial Statement Schedule II -- Valuation and Qualifying
Accounts for the Years Ended December 31, 1998, 1997, and
1996...................................................... IV-18
</TABLE>

IV-4
<PAGE> 20

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, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 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 4, 1999 (March 29, 1999 as
to paragraph 3 of footnote 8)

IV-5
<PAGE> 21

THE FIRST YEARS INC.

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS

Current Assets:
Cash and cash equivalents (Notes 1 and 8).............. $19,776,897 $ 7,697,040
Accounts receivable (less allowance for doubtful
accounts of $270,000 and $185,000 in 1998 and 1997,
respectively) (Note 8)................................ 19,013,127 19,962,226
Inventories (Note 1)................................... 18,520,023 24,372,881
Prepaid expenses and other assets...................... 2,638,634 414,764
Deferred tax asset (Notes 1 and 3)..................... 1,424,500 1,279,000
----------- -----------
Total current assets.............................. 61,373,181 53,725,911
----------- -----------

Property, Plant, and Equipment (Note 1):
Land................................................... 167,266 167,266
Building............................................... 4,199,790 4,022,095
Machinery and molds.................................... 7,878,103 7,151,019
Furniture and equipment................................ 4,571,636 3,947,144
----------- -----------
Total............................................. 16,816,795 15,287,524
Less accumulated depreciation.......................... 8,914,081 8,441,874
----------- -----------
Property, plant, and equipment -- net............. 7,902,714 6,845,650
----------- -----------
Total Assets...................................... $69,275,895 $60,571,561
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable....................................... $ 9,400,966 $10,163,844
Accrued royalty expense (Note 6)....................... 2,130,027 2,051,721
Accrued payroll expenses............................... 1,200,966 1,143,063
Accrued selling expenses............................... 3,098,232 2,387,029
----------- -----------
Total current liabilities......................... 15,830,191 15,745,657
----------- -----------

Deferred Tax Liability (Notes 1 and 3)...................... 798,300 816,900
Commitments and Contingencies (Notes 5, 6 and 8)
Stockholders' Equity (Notes 4, 7, 9 and 10):
Common stock -- authorized, 15,000,000 shares; issued
10,461,408 and 10,176,000; outstanding, 10,440,014 and
10,169,182 as of December 31, 1998 and 1997,
respectively.............................................. 1,046,141 508,800
Paid-in-capital............................................. 7,472,398 6,534,308
Retained earnings........................................... 44,438,589 37,047,709
Less treasury stock at cost, 21,394 and 6,818 shares as of
December 31, 1998 and 1997, respectively.................. (309,724) (81,813)
----------- -----------
Total stockholders' equity........................ 52,647,404 44,009,004
----------- -----------
Total Liabilities and Stockholders' Equity........ $69,275,895 $60,571,561
=========== ===========
</TABLE>

See notes to consolidated financial statements.

IV-6
<PAGE> 22

THE FIRST YEARS INC.

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Sales (Notes 1, 6, 8 and 11).................. $132,716,379 $120,695,988 $93,110,361
Cost of Products Sold (Notes 1 and 11)............ 80,737,193 71,185,634 55,463,255
------------ ------------ -----------
Gross Profit...................................... 51,979,186 49,510,354 37,647,106
Selling, General, and Administrative Expenses
(Notes 1 and 7)................................. 39,011,893 37,165,878 28,580,039
------------ ------------ -----------
Operating Income.................................. 12,967,293 12,344,476 9,067,067

Other Income (Expense):
Interest expense............................. -- (27,709) (358,637)
Interest income.............................. 590,822 168,922 27,349
------------ ------------ -----------
Income Before Income Taxes........................ 13,558,115 12,485,689 8,735,779
Provision for Income Taxes (Notes 1 and 3)........ 5,545,300 5,040,900 3,494,300
------------ ------------ -----------
Net Income (Note 11).............................. $ 8,012,815 $ 7,444,789 $ 5,241,479
============ ============ ===========
Basic Earnings Per Share (Notes 1 and 9).......... $ 0.78 $ 0.75 $ 0.55
============ ============ ===========
Diluted Earnings Per Share (Notes 1 and 9)........ $ 0.75 $ 0.71 $ 0.53
============ ============ ===========
</TABLE>

See notes to consolidated financial statements.

IV-7
<PAGE> 23

THE FIRST YEARS INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
COMMON STOCK
-------------------- PAID-IN RETAINED TREASURY
SHARES PAR VALUE CAPITAL EARNINGS STOCK
------ --------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996......... 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)
Stock issued under stock
option plans (Note 7)..... 183,205 18,321 916,510 -- --
Tax benefit derived from
option compensation
deduction................. -- -- 540,600 -- --
Dividends paid.............. -- -- -- (621,935) --
Repurchase of 10,576 shares
for treasury.............. (10,576) -- -- -- (227,911)
Stock split, two-for-one
(Note 4).................. 5,182,794 519,020 (519,020) -- --
Net income.................. -- -- -- 8,012,815 --
---------- ---------- ---------- ----------- ---------
Balance, December 31, 1998....... 10,440,014 $1,046,141 $7,472,398 $44,438,589 $(309,724)
========== ========== ========== =========== =========
</TABLE>

See notes to consolidated financial statements.

IV-8
<PAGE> 24

THE FIRST YEARS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income............................................ $ 8,012,815 $ 7,444,789 $ 5,241,479
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation....................................... 1,415,525 1,397,078 1,228,790
Provision for doubtful accounts.................... 176,034 147,541 152,582
Loss on disposal of equipment...................... 548,469 617,693 37,699
Increase (decrease) arising from working capital
items:
Accounts receivable.............................. 773,065 (4,180,302) (1,890,417)
Inventories...................................... 5,852,858 (5,784,837) 421,740
Prepaid expenses and other assets................ (1,683,270) (39,447) 402,757
Accounts payable................................. (762,878) 3,652,730 344,167
Accrued royalty expense.......................... 78,306 1,203,050 314,870
Accrued payroll expenses......................... 57,903 55,761 (17,702)
Accrued selling expenses......................... 711,203 981,020 801,575
Change in deferred income taxes.................... (164,100) (287,700) 50,600
----------- ----------- -----------
Net cash provided by operating activities..... 15,015,930 5,207,376 7,088,140
----------- ----------- -----------
Cash Flows from Investing Activities
Purchase of property, plant, and equipment.............. (3,021,058) (1,814,698) (2,004,489)
----------- ----------- -----------
Cash Flows from Financing Activities:
Repayment of industrial revenue bonds................. -- (100,000) (133,334)
Net repayment from short-term borrowings.............. -- -- (6,200,000)
Dividends paid........................................ (621,935) (496,747) (453,557)
Net proceeds from public offering..................... -- -- 5,121,750
Purchase of treasury stock............................ (227,911) (81,813) --
Common stock issued under stock option plans.......... 934,831 818,335 193,509
----------- ----------- -----------
Net cash provided by (used for) financing
activities.................................. 84,985 139,775 (1,471,632)
----------- ----------- -----------
Increase in Cash and Cash Equivalents................... 12,079,857 3,532,453 3,612,019
Cash and Cash Equivalents, Beginning of Year............ 7,697,040 4,164,587 552,568
----------- ----------- -----------
Cash and Cash Equivalents, End of Year.................. $19,776,897 $ 7,697,040 $ 4,164,587
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest......................................... $ 0 $ 27,709 $ 358,637
=========== =========== ===========
Income taxes..................................... $ 7,584,400 $ 4,684,690 $ 3,087,700
=========== =========== ===========
Non-cash transactions:
Tax benefit of stock option exercises............ $ 540,600 $ 458,000 $ 0
=========== =========== ===========
</TABLE>

See notes to consolidated financial statements.

IV-9
<PAGE> 25

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 -- In 1997, the Company adopted SFAS No. 128 "Earnings
Per Share." All earnings per share amounts for all periods presented have been
restated to conform to the requirements of SFAS No. 128.

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. The primary estimates underlying the Company's
consolidated financial statements include allowances for doubtful accounts and
obsolete inventories and estimates related to the DINP charges (See footnote
11). Actual results could differ from those estimates.

Research and Development Costs -- Research and development costs are
expensed as incurred. During 1998, 1997, and 1996, research and development
costs approximated $3,320,000, $2,584,000, and $2,209,000, respectively.

Foreign Currency Translation -- The Company's functional currency is the
U.S. dollar. Accordingly, monetary assets and liabilities of the Company's
foreign operations are translated from the respective local currency to the U.S.
dollar using year-end exchange rates while nonmonetary items are translated at
historical rates. Income and expense accounts are translated at the average
rates in effect during the year. Accordingly, translation adjustments and
transaction gains and losses are recognized as income in the year of occurrence
and are recorded as a component of cost of sales.

Foreign Exchange Contracts -- The Company enters into forward exchange
contracts to minimize the impact of fluctuations in currency exchange rates on
future cash flows emanating from sales denominated in

IV-10
<PAGE> 26
THE FIRST YEARS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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."
The adoption of SFAS No. 130 resulted in no changes to the consolidated
financial statements.

In June 1997, the FSAB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." As required, the Company adopted SFAS
No. 131 in the fourth quarter of 1998 (See footnote 12).

2. DEBT

During 1998 and 1997, 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 the Company borrowed various amounts up
to $2,500,000 under the line. No short-term borrowings were incurred by the
Company during 1998. As of December 31, 1998 and 1997 no balance was
outstanding. The line of credit will expire on June 30, 1999.

3. INCOME TAXES

Components of the Company's net deferred tax asset at December 31 are as
follows:

Deferred tax assets:
Reserves not currently deductible............ $ 411,400 $ 266,900
Capitalized packaging costs not currently
deductible................................. 586,500 528,900
Capitalized inventory costs not currently
deductible................................. 393,700 432,800
Other........................................ 32,900 50,400
---------- ----------
1,424,500 1,279,000
---------- ----------

Deferred tax liabilities:
Excess tax depreciation over financial
reporting depreciation..................... 793,800 812,400
Other........................................ 4,500 4,500
---------- ----------
798,300 816,900
---------- ----------
Net deferred tax asset............................ $ 626,200 $ 462,100
========== ==========
</TABLE>

IV-11
<PAGE> 27
THE FIRST YEARS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

There was no valuation allowance for the years ended December 31, 1998 and
1997.

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Federal:
Current......................... $4,318,600 $4,157,200 $2,649,600
Deferred........................ (164,100) (287,700) 50,600
---------- ---------- ----------
Total federal.............. 4,154,500 3,869,500 2,700,200
State................................ 1,390,800 1,171,400 794,100
---------- ---------- ----------
Provision for income taxes........... $5,545,300 $5,040,900 $3,494,300
========== ========== ==========
</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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory rate.................................... 35.0% 34.0% 34.0%
State income taxes, net of federal income tax
benefit......................................... 6.5 6.4 6.0
Other............................................. (0.6) -- --
---- ---- ----
Effective tax rate................................ 40.9% 40.4% 40.0%
==== ==== ====
</TABLE>

4. COMMON STOCK

In May 1998, the Company's Board of Directors (the Board) declared a
two-for-one split of the Company's common stock. The 1998 stock split, effected
in the form of a stock dividend, was distributed on June 29, 1998 (to
stockholders of record on May 29, 1998). Earnings per share amounts shown in the
accompanying financial statements have been retroactively adjusted to reflect
the 1998 stock split.

5. COMMITMENTS AND CONTINGENCIES

Forward Exchange Contracts -- During 1998 and 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 future commitment under these contracts approximated
$494,000 and $2,500,000 as of December 31, 1998 and 1997, respectively. At
December 31, 1998 and 1997, the fair market value of the contracts approximated
their carrying amount.

Other Commitments -- At December 31, 1998 and 1997, letters of credit
outstanding aggregated approximately $33,000 and $125,000, 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.

As of July 1997, one of the above mentioned officers terminated employment
with the Company and pursuant to the terms of the employment agreement, the
Company is currently making noncompetition payments to him. Such payments under
the contract will be completed as of June 30, 1999.

IV-12
<PAGE> 28
THE FIRST YEARS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 1998 and 1997, 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 $1,363,000 and $1,398,000 for agreements
signed during 1998 and 1997, respectively. Future outstanding minimum royalty
commitments under all agreements amounted to $289,000 and $650,000 at December
31, 1998 and 1997, respectively. Royalty expense aggregated $8,311,000,
$6,356,000 and $3,197,000 in 1998, 1997 and 1996, 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 $566,000, $545,000, and $472,000 in 1998, 1997, and 1996,
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 2,680,000 shares
for issuance under the plans and 40,000 shares for another stock option plan
(all share amounts adjusted to reflect the two-for-one stock split effected on
June 29, 1998.) 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.

Under the plans, employees of the Company may purchase stock on the
exercise of their options through the delivery of existing shares of the
Company's common stock. The shares delivered to the Company by the employee must
have been outstanding for at least six months. The Company acquired 14,576 and
6,818 shares of its common stock for the years ended December 3, 1998 and 1997,
respectively, through the exercise of employee stock options.

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.

IV-13
<PAGE> 29
THE FIRST YEARS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of activity (all years adjusted to reflect the two-for-one stock
split effected on June 29, 1998) of stock options granted under the plans is as
follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE NUMBER OF
PRICE NUMBER OF OPTIONS
PER OPTIONS AVAILABLE
SHARE OUTSTANDING FOR GRANT
-------- ----------- ---------
<S> <C> <C> <C>
January 1, 1996............................................. $3.20 823,156 519,600

Granted................................................ 6.23 137,210 (137,210)
Canceled............................................... 4.10 (17,114) 17,114
Exercised.............................................. 2.86 (67,676) --
-------- ---------
December 31, 1996........................................... 3.69 875,576 399,504

Granted................................................ 9.16 194,140 (194,140)
Canceled............................................... 7.11 (56,610) 56,610
Exercised.............................................. 2.96 (278,040) --
-------- ---------
December 31, 1997........................................... 5.16 735,066 261,974

Authorized............................................. -- 1,340,000
Granted................................................ 14.51 258,029 (258,029)
Canceled............................................... 9.96 (13,131) 13,131
Exercised.............................................. 3.27 (285,408) --
-------- ---------
December 31, 1998........................................... $9.30 694,556 1,357,075
======== =========

Exercisable at December 31, 1996....................... $3.00 557,870
Exercisable at December 31, 1997....................... $3.66 465,712
Exercisable at December 31, 1998....................... $5.88 341,902
</TABLE>

The grant date fair value for options granted in 1998, 1997 and 1996 was
$7.43, $4.80 and $2.09, respectively.

The following table sets forth information regarding stock options
outstanding at December 31, 1998 under the Stock Option Plans as described
above:

<TABLE>
<CAPTION>
NUMBER AVERAGE
NUMBER WEIGHTED WEIGHTED CURRENTLY EXERCISE
OF OPTIONS RANGE OF AVERAGE AVERAGE EXERCISABLE PRICE FOR
OUTSTANDING EXERCISE EXERCISE REMAINING AT OPTIONS
AT 12/31/98 PRICES PRICE LIFE 12/31/98 EXERCISABLE
----------- --------------- -------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
51,612........................... $ 2.28 - $ 3.42 $ 2.49 1.32 51,612 $ 2.59
155,636........................... 3.42 - 5.13 4.64 2.96 155,636 4.67
85,515........................... 5.13 - 7.70 6.07 3.04 57,010 6.17
116,931........................... 7.70 - 11.55 8.47 8.23 54,977 8.77
264,862........................... 11.55 - 17.32 14.15 9.34 22,667 14.23
20,000........................... 17.32 - 25.99 17.75 9.58 -- --
- -------- ------ ---- ------- ------
694,556........................... $ 9.30 6.08 341,902 $ 7.25
- -------- ====== ==== ======= ======
- --------
</TABLE>

IV-14
<PAGE> 30
THE FIRST YEARS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 1998, 1997 and 1996 would have been as follows:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income............................ $7,233,876 $7,023,195 $5,038,337
Basic earnings per share.............. $ 0.70 $ 0.70 $ 0.53
Diluted earnings per share............ $ 0.68 $ 0.67 $ 0.51
</TABLE>

For purposes of the pro forma disclosures, the fair value of the options
granted under the Company's stock option plans during 1998, 1997 and 1996 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate................ 5.49% 6.41% 6.08%
Expected life of option grants......... 7.85 years 9.5 years 4.5 years
Expected volatility of underlying
stock................................ 38.40% 35.27% 32.87%
Expected dividend payment rate......... 0.85% 0.85% 0.85%
</TABLE>

The pro forma disclosures include the effects of options granted in 1998,
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 57% and 54% of the trade receivables outstanding
at December 31, 1998 and 1997, 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, 1998, 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 three largest customers. The Company's largest customer accounted
for sales of $42,622,000, $33,643,000, and $25,722,000 in 1998, 1997, and 1996,
respectively. The Company's second largest customer accounted for sales of
$24,413,000, $23,075,000, and $18,257,000 in 1998, 1997, and 1996, respectively.
The Company's third largest customer accounted for sales of $15,706,000,
$13,315,000 and 9,908,000 in 1998, 1997, and 1996. No other customer accounted
for 10% or more of the Company's sales. Export sales, primarily to Europe,
Canada, South America and the Pacific Rim, were approximately $16,735,000,
$16,250,000 and $11,564,000 in 1998, 1997, and 1996, respectively.

Reliance on Licensed Products -- The Company derives a significant portion
of its sales from products under license. A major licensing agreement (see Note
6), which was to expire at the end of 1998, has been extended through March 31,
1999. Sales of products licensed under the agreement amounted to 42% of the
Company's total net sales for year ended December 31, 1998. Management is in the
process of negotiating a renewal of this agreement. While management expects the
licensing agreement to be renewed, non-renewal of

IV-15
<PAGE> 31
THE FIRST YEARS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

this licensing agreement or, renewal on terms not favorable to the Company could
have a material adverse affect on the Company's business.

Reliance on Foreign Manufacturers -- The Company does not own or operate
its own manufacturing facilities. In 1998 and 1997, the Company derived
approximately 65% and 60%, 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 or disruptions in the normal supply channels resulting
form the Year 2000 Issue could cause a delay in manufacturing and a possible
loss of sales, which could 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Average shares outstanding.......................... 10,338,857 10,003,774 9,466,356
Effect of dilutive shares........................... 330,646 449,288 425,626
---------- ---------- ----------
Average diluted shares outstanding.................. 10,669,503 10,453,062 9,891,982
========== ========== ==========
Net Income.......................................... $8,012,815 $7,444,789 $5,241,479
========== ========== ==========
Basic earnings per share............................ $0.78 $0.75 $0.55
----- ----- -----
----- ----- -----
Diluted earnings per share.......................... $0.75 $0.71 $0.53
----- ----- -----
----- ----- -----
</TABLE>

As of December 31, 1998, options to purchase 1,964, 20,000, 56,290, 12,000,
and 40,000 shares of common stock at $15 15/16, $17 3/4, $15, $17 and $15 per
share, respectively 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 2008, were still outstanding at the end of
1998.

As of December 31, 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 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 12,000 shares of common stock
at $8 9/16 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.

10. OFFERING OF COMMON STOCK

During 1996, the Company entered into an agreement with a group of
underwriters to sell 3.2 million shares of common stock (the "shares"),
consisting of 800,000 newly issued shares and 2,400,000 shares of certain
selling stockholders. The closing of the sale was held on July 1, 1996 at which
time the Company issued 800,000 new shares and received the net proceeds of
$5,121,750. All shares have been adjusted to reflect the two-for-one stock split
effected on May 29, 1998.

11. DIISONONYL PHTHALATE ISSUE

During the fourth quarter of 1998, the Company incurred a charge relating
to sales returns and the write-off of inventory of certain products containing
diisononyl phthalate ("DINP"), a plastic softener. Although the results of a
study on DINP conducted by the U.S. Consumer Product Safety Commission resulted
in the Commission not recommending a ban on products containing DINP, some
retailers decided to return certain products containing this material.

IV-16
<PAGE> 32
THE FIRST YEARS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Net sales reflect a charge of $3,000,000 related to the sales returns of
certain DINP products. Accounts receivable have been reported net of the
$3,000,000 charge as customers are expected to take credits against outstanding
balances as of December 31, 1998. Cost of sales reflect a charge of $1,100,000
related to the write-off of inventory of certain products containing DINP.
Inventory has been reported net of the $1,100,000 charge. Net income for the
year ended December 31, 1998 reflects a total after-tax charge of $2,400,000
related to the DINP issue.

12. SEGMENT INFORMATION

During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." This statement establishes new
standards for the definition and disclosure of information pertaining to the
Company's business segments. SFAS No. 131 requires identification of segments
based upon a company's internal structure and reporting methodology.

The Company has identified one operating segment as it engages in a single
line of business developing and marketing one class of similar products for
infants and toddlers distributed through the same channels.

See footnote 8 for discussion of major customers and export sales.

* * * * * *

IV-17
<PAGE> 33

SCHEDULE II

THE FIRST YEARS INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<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:
1998.................................. $185,000 $ 261,034 $176,034(1) $ 270,000
======== ========== ======== ==========
1997.................................. $185,000 $ 147,541 $147,541(1) $ 185,000
======== ========== ======== ==========
1996.................................. $185,000 $ 152,582 $152,582(1) $ 185,000
======== ========== ======== ==========
Allowance for obsolete inventory:
1998.................................. $250,000 $ 0 $ 0 $ 250,000
======== ========== ======== ==========
1997.................................. $ 0 $ 250,000 $ 0 $ 250,000
======== ========== ======== ==========
Allowance for Diisononyl Phthalate product
returns:
1998.................................. $ 0 $3,000,000 $126,000 $2,874,000
======== ========== ======== ==========
</TABLE>

- ---------------
(1) Net accounts written off.

IV-18
<PAGE> 34

THE FIRST YEARS INC.

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
10(n) The First Years, a Massachusetts Corporation and Affiliates,
1998 Annual Incentive Plan effective as of January 1, 1998.
10(p) Agreement between The First Years Inc. and Bruce Baron dated
July 10, 1997.
10(q) Agreement between The First Years Inc. and James N. Turner
dated June 15, 1998.
21 List of Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche LLP dated March 31, 1999.
27 Financial Data Schedule -- 12/31/98
99 Important Factors Regarding Forward-Looking Statements
</TABLE>

<PAGE> 1
EXHIBIT 10(n)

THE FIRST YEARS INC.
A MASSACHUSETTS CORPORATION ,
AND AFFILIATES

1998 ANNUAL INCENTIVE PLAN

PLAN DESCRIPTION

EFFECTIVE DATE: JANUARY 1, 1998
ADOPTED: DECEMBER 3, 1998

<PAGE> 2
THE FIRST YEARS INC.
A MASSACHUSETTS CORPORATION,
AND AFFILIATES

1998 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.

* While a person is performing services in one of the following categories,
he or she shall not be entitled to participate in this Plan or receive Plan
benefits, notwithstanding anything else to the contrary:

- A temporary employee, i.e., a person who is classified by the Company
as employed on a temporary basis, regardless of how long the person
actually works for the Company.

- An Independent Contractor, i.e., a person who is classified by the
Company as an independent contractor, as evidenced by its failure to
withhold taxes from his

<PAGE> 3

or her compensation, even if the individual really is the Company's
common-law employee.

- A Leasing Agency's Employee, i.e, a person working for a Company
providing goods or services (including temporary employee services) to
the Company, whom the Company does not regard to be its common-law
employee, as evidenced by its failure to withhold taxes from his or
her compensation, even if the individual really is the Company's
common-law employee.

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.

* 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 in the
total discretion of the Compensation Committee, 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

<PAGE> 4

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-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 this restated Plan is January 1, 1998.

* The Plan will be administered by the Compensation Committee of the Board of
Directors.

<PAGE> 5

* 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.

<PAGE> 1
Exhibit 10 (p)

This Agreement is made as of the 10 day of July, 1997 (the "Effective Date") by
and between Bruce Baron ("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
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.

<PAGE> 2
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, an
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 12
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 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
6-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.

<PAGE> 3
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.

Termination without cause shall be deemed to include a termination of
employment by me by reason of (i) work relocation of more than 50 miles
from Avon, MA, (ii) material adverse reduction in employment
responsibilities or (iii) material adverse reduction in compensation and
benefits

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 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.

<PAGE> 4
(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 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/ Bruce Baron 7-10-97
------------------------------
Bruce Baron

Agreed to and accepted by

THE FIRST YEARS INC.

By: /s/ Ronald J. Sidman
------------------------------
Ronald J. Sidman
President, CEO and
Chairman of the Board

<PAGE> 1
Exhibit 10 (q)

This Agreement is made as of the 15 day of June, 1998 (the "Effective Date") by
and between James N. Turner ("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:

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.

(e) This Agreement is governed by the laws of the Commonwealth of
Massachusetts, without giving effect to conflict of laws provisions
thereof.

By: /s/ James N. Turner
------------------------------
James N. Turner

Agreed to and accepted by

THE FIRST YEARS INC.

By: /s/ Ronald J. Sidman
------------------------------
Ronald J. Sidman
President, CEO and
Chairman of the Board

<PAGE> 1
EXHIBIT (21)

-----------------------
List of Subsidiaries

of the Registrant
-----------------

The First Years Inc., a

Deleware corporation

<PAGE> 1

EXHIBIT 23

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statements No.
33-67880, No. 33-87196, No. 33-94888, and No. 333-60617 of The First Years Inc.
(the "Company") on Form S-8 of our report dated March 4, 1999 (March 29, 1999 as
to paragraph 3 of footnote 8), appearing in this Annual Report on Form 10-K of
The First Years Inc. for the year ended December 31, 1998.

DELOITTE & TOUCHE LLP

Boston, Massachusetts
March 31, 1999

<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 INNOVATION AND TIMELINES
OF PRODUCT INTRODUCTIONS

The growth of the Company has been, and will continue to be, dependent upon its
ability to create new innovative products and to introduce such new products to
the market in a timely fashion. There can be no assurance that the Company will
continue to generate new product ideas, that such products will be brought to
the market in a timely fashion, or that such new products will be well-received
by retailers or consumers. Timely product introductions are essential in the
juvenile products industry because the Company's orders are cancelable by
customers and, in some cases, subject to monetary penalties imposed by
customers, if agreed-upon delivery dates are not met. As a result, the inability
to introduce products in a timely fashion could have adverse impact on the
Company's sales and earnings. The continued growth of the Company will also
depend in part on the successful introduction of higher-priced products. There
can be no assurance that the Company will be able to successfully develop and
introduce such products.

In 1999, the Company expects to introduce certain mouthable products that have
not been made with the plastics softener disononyl phthalate, to replace the
phthalate-containing mouthable products which were returned by certain retailers
in the fourth quarter of 1998. There can be no assurance that the Company will
be able to identify alternative materials to produce phthalate-free mouthable
products that are safer; that such products will be well received by retailers
or consumers; or that there will be no delays in introducing such phthalate-free
mouthable products in 1999. The failure to do any of the foregoing, could have
an adverse impact on the Company's sales and earnings.

<PAGE> 2

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 in the USA and in various countries all
over the world. These licenses have fixed terms and limit the type of products
that may be sold under the license. A major licensing agreement, which was to
expire at the end of 1998, has been extended through March 31, 1999. Sales of
products licensed under the agreement amounted to 42% of the Company's total net
sales for the year ended December 31, 1998. Management is in the process of
negotiating a renewal of this agreement. While management expects the licensing
agreement to be renewed, non-renewal of this licensing agreement or, renewal on
terms not favorable to the Company could have a material adverse affect on the
Company's business.

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 preferences, such as consumers
abandoning traditional retailers, shopping on the internet, general economic
decline, or less favorable demographic trends related to childbirth, among other
factors, could have a material adverse effect on the Company's sales and
earnings.

DEPENDENCE UPON MAJOR CUSTOMERS AND MASS MERCHANDISERS

The Company's largest customer, Wal*Mart, accounted for approximately 29% of net
sales in 1998 and the three largest customers of the Company, Wal*Mart, Toys "R"
Us, and Target accounted for approximately 55% of net sales in 1998. A
significant reduction of purchases by any one of these customers could have a
material adverse effect on the Company's sales. There could also be a negative
effect on the Company's business if any significant customer becomes insolvent
or otherwise fails to pay its debts.

CHANGES IN THE RETAIL INDUSTRY

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. Also, changes in the
way retailers and particularly mass merchandisers do business, such as the
creation of competing private-label brands by such retailers, could result in
significant reduction of purchases of the Company's products by such retailers
and thereby have a materially adverse effect on the Company's sales and
earnings.

- 2 -
<PAGE> 3

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 and consumer
advertising resources substantially greater than those of the Company. Also, a
major technological breakthrough or marketing success by a competitor could
adversely affect the Company's competitive position. In addition, in countries
where the juvenile products market is mature, particularly in the USA, sales
growth is partly dependent on the Company's increasing its market share at the
expense of its competitors. 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. The
Company depends upon independent manufacturers to manufacture high-quality
products in a timely manner and relies upon the availability of sufficient
production capacity at its existing manufacturers or the ability to utilize
alternative sources of supply. A failure by one or more of the Company's
significant manufacturers to meet established criteria for pricing, product
quality or timeliness could negatively impact the Company's sales and
profitability. In addition, if the Company were to experience significant
shortages in raw materials or components used in its products, it could have a
negative effect on the Company's business, including increased cost or
difficulty in delivering products.

A substantial portion of the Company's products sold in 1998 was manufactured in
Asia. 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 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,

- 3 -
<PAGE> 4

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.

INVENTORY RISK

The juvenile products industry has relatively long lead times for design and
production of product and thus, the Company must commit to production tooling
and in some cases to production in advance of orders. If the Company fails to
accurately forecast consumer demand or if there are changes in consumer
preferences or market demand after the Company has made such production
commitments, the Company may encounter difficulty in filling customer orders or
in liquidating excess inventory, or may find that retailers are canceling orders
or returning product, all of which may have an adverse effect on the Company's
sales, its margins, profit, and brand image. In addition, the Company must pay
for certain tooling if it does not satisfy minimum production quantities.

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. In the fourth quarter of 1998, the Company
adopted a policy to introduce to the market phthalate-free versions of almost
all of its mouthable products in 1999. There can be no assurance that the
Company will be able to identify alternative materials to produce phthalate-free
mouthable products that are safer; that there will be no delays in introducing
such phthalate-free mouthable products in 1999; or that it will be able to
introduce phthalate-free mouthable products that are acceptable to retailers and
consumers in terms of price and quality.

- 4 -
<PAGE> 5

INTERNATIONAL SALES

The continued growth of the company will also depend in part on increasing its
international sales. The Company's international sales in 1998 accounted for
approximately 12.6% of the Company's total net sales. International sales are
subject to downturns in the economies and fluctuations in the currencies of
foreign countries, and changes in the economic conditions and buying power of
consumers in foreign markets, particularly in Asia, Russia, Latin and South
America. 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.

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, or to recommend the recall of products containing
chemicals or other materials deemed by the CPSC to be harmful to children and
infants. 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.

YEAR 2000 COMPLIANCE

The Company is dependent on its suppliers and distributors to implement changes
to their computer systems in order to become Year 2000 compliant. The Company is
also dependent on the infrastructure and the utility systems of the countries in
which its products are made and delivered to, to be operating normally in the
year 2000 and beyond. The Company may need to build up inventory in the U.S.A.
in 1999 and beyond because of the possible disruption in the normal operation of
the infrastructure of such countries. The failure of its suppliers,
distributors, utility companies, shipping carriers and other similar third
parties in the countries in which the Company's products are made or delivered
to be Year 2000 compliant could have a material adverse effect on the Company's
sales and earnings.

- 5 -
<PAGE> 6

BRAND RECOGNITION

A company's brand recognition is becoming increasingly important with consumers
of juvenile products. Some of the Company's competitors have more recognizable
brands than the Company. The Company intends to enhance its brand recognition,
but there can be no assurance that such endeavors will be successful. The
Company's inability to enhance its brand recognition could have a material
adverse impact on the Company's sales.

- 6 -

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<S> <C>
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