<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For The Quarter Ended September 30, 2000
--------------------------------------------------------------------------------
Commission file number 0-7024
--------------------------------------------------------------------------------
THE FIRST YEARS INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2149581
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Kiddie Drive, Avon, Massachusetts 02322-1171
--------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(508) 588-1220
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
n/a
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
--- ---
The number of shares of Registrant's common stock outstanding on October 31,
2000 was 9,364,479.
<PAGE> 2
THE FIRST YEARS INC.
INDEX
PART I - FINANCIAL INFORMATION:
Condensed Consolidated Balance Sheets Page 1
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4 - 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 - 9
Quantitative and Qualitative Disclosure about
Market Risk 10
PART II - OTHER INFORMATION
Other information 11
SIGNATURES 12
EXHIBIT INDEX 13
<PAGE> 3
THE FIRST YEARS INC.
Condensed Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 18,105,098 $ 13,400,728
Accounts receivable, net 23,955,093 21,587,886
Inventories 16,485,300 20,352,845
Prepaid expenses and other assets 1,137,435 1,308,974
Deferred tax assets 1,908,100 1,675,000
------------ ------------
Total current assets 61,591,026 58,325,433
------------ ------------
PROPERTY, PLANT, AND EQUIPMENT:
Land 167,266 167,266
Building 5,234,358 5,154,845
Machinery and molds 7,296,614 7,536,378
Furniture and equipment 5,871,026 4,820,691
------------ ------------
Total 18,569,264 17,679,180
Less accumulated depreciation 8,913,447 8,090,757
------------ ------------
Property, plant, and equipment - net 9,655,817 9,588,423
------------ ------------
TOTAL ASSETS $ 71,246,843 $ 67,913,856
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 10,991,401 $ 10,443,308
Accrued royalty expense 946,623 1,792,475
Accrued selling expense 3,023,528 3,048,547
------------ ------------
Total current liabilities 14,961,552 15,284,330
------------ ------------
DEFERRED TAX LIABILITY 1,053,700 927,100
------------ ------------
STOCKHOLDERS' EQUITY
Common stock 1,067,027 1,057,033
Paid-in-capital 8,624,501 8,052,623
Retained earnings 59,480,807 52,907,819
Less treasury stock at cost, 1,305,794
and 954,094 shares as of September 30,
2000 and December 31, 1999, respectively (13,940,744) (10,315,049)
------------ ------------
Total stockholders' equity 55,231,591 51,702,426
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 71,246,843 $ 67,913,856
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
Page 1
<PAGE> 4
THE FIRST YEARS INC.
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 32,237,407 $ 31,794,094 $103,260,591 $103,594,089
COST OF PRODUCTS SOLD 19,122,631 17,682,789 60,962,020 59,945,118
------------ ------------ ------------ ------------
GROSS PROFIT 13,114,776 14,111,305 42,298,571 43,648,971
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 10,237,202 10,137,311 30,873,794 30,526,706
------------ ------------ ------------ ------------
OPERATING INCOME 2,877,574 3,973,994 11,424,777 13,122,265
OTHER INCOME:
INTEREST INCOME 215,200 124,798 511,510 417,459
------------ ------------ ------------ ------------
INCOME BEFORE INCOME
TAXES 3,092,774 4,098,792 11,936,287 13,539,724
PROVISION FOR INCOME
TAXES 1,252,600 1,660,000 4,790,000 5,483,600
------------ ------------ ------------ ------------
NET INCOME $ 1,840,174 $ 2,438,792 $ 7,146,287 $ 8,056,124
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 0.19 $ 0.24 $ 0.75 $ 0.78
============ ============ ============ ============
DILUTED EARNINGS PER
SHARE $ 0.19 $ 0.24 $ 0.74 $ 0.76
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
Page 2
<PAGE> 5
THE FIRST YEARS INC.
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,146,287 $ 8,056,124
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 1,538,204 1,403,128
Provision for doubtful accounts 29,208 76,712
Loss on disposal of equipment 271,962 452,271
Increase (decrease) arising from working capital items:
Accounts receivable (2,396,415) (3,467,874)
Inventories 3,867,545 (532,355)
Prepaid expenses and other expenses 171,539 2,162,079
Accounts payable and accrued expenses 610,393 (2,325,440)
Accrued royalties (845,852) (127,374)
Accrued selling expense (25,019) (863,449)
Deferred income taxes (106,500) 0
------------ ------------
Net cash provided by operating activities 10,261,352 4,833,822
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant, and
equipment (1,877,560) (3,802,357)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividend (573,299) (630,392)
Common stock issued under stock option
plans 519,572 378,077
Purchase of treasury stock (3,625,695) (6,668,727)
------------ ------------
Net cash used for financing activities (3,679,422) (6,921,042)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,704,370 (5,889,577)
------------ ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,400,728 19,776,897
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,105,098 $ 13,887,320
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes $ 3,599,735 $ 4,189,226
============ ============
Interest $ 0 $ 762
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Issuance of treasury shares $ 0 $ 94,575
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 3
<PAGE> 6
THE FIRST YEARS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Amounts in the accompanying balance sheet as of December 31, 1999 are
condensed from the Company's audited balance sheet as of that date. All
other condensed financial statements are unaudited but, in the opinion of
the Company, contain all normal recurring adjustments necessary to present
fairly the financial position as of September 30, 2000, and the results of
operations and cash flows for the periods ended September 30, 2000 and
1999. Certain reclassifications were made to prior year amounts in order to
conform to the current year presentation.
2. The Company has 50,000,000 authorized shares of $.10 par value common stock
with 9,364,479 and 9,616,235 shares issued and outstanding as of September
30, 2000 and December 31, 1999, respectively.
On May 4, 2000 the Board of Directors authorized a $0.06 per share annual
cash dividend which was paid on June 15, 2000 to holders of record at the
close of business on May 30, 2000.
During the first nine months of 2000, the Company purchased 351,700 shares
of the Company's common stock on the open market. The cost of the shares
amounted to $3,625,695 and are currently being held as treasury shares.
3. Computation of the Earnings Per Share ("EPS") in accordance with SFAS No.
128 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
WEIGHTED AVERAGE SHARES OUTSTANDING 9,497,607 10,204,475
EFFECT OF DILUTIVE SHARES 157,369 142,179
----------- -----------
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING 9,654,976 10,346,654
=========== ===========
NET INCOME $ 1,840,174 $ 2,438,792
=========== ===========
BASIC EARNINGS PER SHARE $ 0.19 $ 0.24
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.19 $ 0.24
=========== ===========
</TABLE>
Page 4
<PAGE> 7
THE FIRST YEARS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Con't)
3. Computation of Earnings Per Share (con't)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
WEIGHTED AVERAGE SHARES OUTSTANDING 9,573,960 10,353,059
EFFECT OF DILUTIVE SHARES 119,979 206,450
----------- -----------
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING 9,693,939 10,559,509
=========== ===========
NET INCOME $ 7,146,287 $ 8,056,124
=========== ===========
BASIC EARNINGS PER SHARE $ 0.75 $ 0.78
=========== ===========
DILUTED EARNINGS PER SHARE $ 0.74 $ 0.76
=========== ===========
</TABLE>
As of September 30, 2000, options to purchase 451,070 shares of common
stock were not included in the computations of diluted EPS because the
options' exercise price was greater than the average price of common
shares. The options, which expire in 2007 to 2009, had exercise prices
ranging from $13 1/2 to $17 per share.
As of September 30, 1999, options to purchase 510,295 shares of common
stock 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 to 2009 had exercise prices
ranging from $12 3/16 to $17 3/4 per share.
4. The results of operations for the nine month period ended September 30,
2000 and 1999 are not necessarily indicative of the results to be expected
for the full year.
5. During the first nine months of 2000 and 1999, the Company did not borrow
against its $10,000,000 unsecured line of credit established with a bank.
6. The Securities and Exchange Commission has issued Staff Accounting Bulletin
No. 101 (Revenue Recognition and Financial Statements) which will be
required to be implemented by the Company no later than the fourth quarter
of 2000. The Company is currently evaluating the impact, if any, that the
adoption of these new standards will have on its consolidated financial
statements.
Page 5
<PAGE> 8
THE FIRST YEARS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Con't)
7. In June 1998, the Financial Accounting Standards Board (FASB) issued FAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" as
amended in May 1999 by FAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 133 - An Amendment of FASB Statement No. 133." This Statement
establishes accounting and reporting standards for derivative instruments.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position, and measure those
instruments at fair value. The accounting for changes in the fair value of
a derivative (that is, gains and losses) will depend on the entity's
intended use of the derivative and its resulting designation (as defined in
the statement). FAS No. 133, as amended, will be effective for the Company
on January 1, 2001. The Company is currently in the process of evaluating
the impact FAS No. 133 will have on the Company and its consolidated
financial statements.
8. 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.
Net sales for the three months and nine months ended September 30, 1999
increased by $384,000 and cost of sales decreased by $629,000 for the same
period due to lower than expected sales returns and inventory write offs of
certain products containing DINP, for which a charge was previously
recorded in the fourth quarter of 1998. Net income for the three months and
the nine months ended September 30, 1999 reflect the total after-tax
increase of $603,000 related to the DINP issue.
9. The Company derives sales from products carrying The First Years brand as
well as products sold under licensing agreements. During the first nine
months of 2000 and 1999, products sold under the First Years brand amounted
to $68,110,000 and $62,714,000, respectively while sales derived from
products under license amounted to $35,151,000 and $40,880,000 in the first
nine months of 2000 and 1999, respectively. Additionally, sales to foreign
markets amounted to $11,221,000 and $11,053,000 during the first nine
months of 2000 and 1999, respectively.
Page 6
<PAGE> 9
The First Years Inc.
Part I, Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Statements in this Quarterly Report on Form 10-Q that are not strictly
historical are "forward looking" statements, as defined in the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
typically identified by the words: believe, expect, anticipate, intend, are
confident, estimate and similar expressions which by their nature refer to
future events. Actual future results may differ materially from those
anticipated depending on a variety of factors which include but are not limited
to continued growth in sales of The First Years Brand; a slowing in the decline
in the sale of licensed products, the success of new Disney character products,
continued success of market research identifying new product opportunities,
successful introduction of new products, continued product innovation, the
success of new enhancements to the Company's brand image, growth in
international sales, ability to attract and retain key personnel and growth in
sales and earnings. Information with respect to risk factors contained in
Exhibit 99 to the Company's Annual Report on Form 10-K, and its quarterly
reports on Form 10-Q as filed with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof.
Net sales for the first nine months of 2000 were $103.3 million, down slightly
from sales of $103.6 million for the comparable period last year. The decrease
was primarily due to the continued, although lessening, decline in the sale of
licensed products which was partially offset by increased demand for First Years
brand products over the corresponding nine month period of 1999. Additionally,
net sales for the nine month period of 1999 included an increase of $0.4 million
due to a reversal of a portion of a 1998 accrual for sales returns of certain
products containing diisononyl phthalate ("DINP"), a plastic softener, for which
a charge was previously recorded in the fourth quarter of 1998. As a percentage
of sales, sales of First Years brand products increased to 66.0% in the first
nine months of 2000 from 60.5% in the first nine months of 1999. Net sales to
foreign markets increased slightly to 10.9% in the first nine months of 2000
from 10.7% in the comparable period last year. The increased proportion of sales
in foreign markets reflects sales growth achieved in the Canadian and South
American markets which were partially offset by decreased sales in the European
and the Pacific Rim markets.
Cost of products sold for the first nine months of 2000 was $61.0 million, a
increase of $1.1 million or 1.8%, as compared to $59.9 million for the
comparable period last year. As a percentage of sales, cost of products sold for
the first nine months of 2000 increased to 59.0% from 57.9% in the comparable
period of 1999 due to lower than expected inventory write-offs in 1999 of
certain products containing DINP for which a charge was previously recorded in
the fourth quarter of 1998. Without the adjustment related to DINP in 1999, cost
of products sold in 2000, as a percent of sales, would have increased slightly
to 59.0% from 58.8% in the comparable period of 1999 due to normal business
fluctuations.
Page 7
<PAGE> 10
The First Years Inc.
Part I, Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (con't)
Selling, general, and administrative expenses for the first nine months of 2000
were $30.9 million, an increase of $0.4 million or 1.3%, as compared to $30.5
million of related expenses for the first nine months of 1999. The increase
resulted primarily from costs related to increased freight and payroll and
payroll related costs. As a percentage of net sales, selling, general, and
administrative expenses for the first nine months of 2000 increased to 29.9%
from 29.5% in the comparable period of 1999.
Income tax expense as a percentage of pretax income decreased to 40.1% in the
first nine months of 2000 as compared to 40.5% for the first nine months of
1999.
Net working capital increased by $3.6 million in the first nine months of 2000
to $46.6 million at September 30, 2000 from $43.0 million at December 31, 1999
primarily due to profitable operations. Accounts receivable increased by $2.4
million and inventories decreased by $3.9 million, both due to normal business
fluctuations during the first nine months of 2000. Cash increased by $4.7
million to $18.1 million at September 30, 2000 primarily due to profitable
operations and increased by the fluctuations in accounts receivable and
inventories.
On October 26, 2000 the Company announced that its Board of Directors has
approved an increase in the total dollar amount that can be used by the Company
to repurchase shares of common stock of the Company under the Company's
discretionary stock repurchase program. The total amount authorized by the Board
has been increased from $15 million to $20 million in the amount of stock the
Company may purchase under the program. As of September 30, 2000, the Company
has purchased 1,276,000 shares of the Company's common stock at a cost of $13.5
million.
An unsecured bank line of credit of $10.0 million is subject to annual renewal.
Amounts outstanding under this line are payable upon demand by the bank. During
the first nine months of 2000 and 1999, the Company incurred no borrowings under
the line and had no balances outstanding as of September 30, 2000 and 1999,
respectively. The Company did not incur any other short-term borrowings during
the first nine months of 2000 and 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
The Securities and Exchange Commission has issued Staff Accounting Bulletin No.
101 (Revenue Recognition and Financial Statements) which will be required to be
implemented by the Company no later than the fourth quarter of 2000. The Company
is currently evaluating the impact, if any, that the adoption of these new
standards will have on its consolidated financial statements.
Page 8
<PAGE> 11
The First Years Inc.
Part I, Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations (con't)
RECENT ACCOUNTING PRONOUNCEMENTS (con't)
In June 1998, the Financial Accounting Standards Board (FASB) issued FAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" as amended
in May 1999 by FAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133 - An
Amendment of FASB Statement No. 133." This Statement establishes accounting and
reporting standards for derivative instruments. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position, and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative ( that is, gains and losses) will
depend on the entity's intended use of the derivative and its resulting
designation ( as defined in the statement). FAS No. 133, as amended, will be
effective for the Company on January 1, 2001. The Company is currently in the
process of evaluating the impact FAS No. 133 will have on the Company and its
consolidated financial statements.
Page 9
<PAGE> 12
The First Years Inc.
Part I, Item 3.
Quantitative and Qualitative Disclosure about Market Risk
At September 30, 2000, the Company held foreign currency forward contracts
with a bank whereby the Company is committed to deliver foreign currency at
predetermined rates. The contracts expire within one year. The Company's
future commitment under these contracts totaled approximately $951,652 and
the fair market value of the contracts approximated their predetermined
rates included therein.
Also see the Company's disclosure regarding Market Risk in Item 7A of its
Annual Report on Form 10K filed with the Securities and Exchange
Commission.
Page 10
<PAGE> 13
THE FIRST YEARS INC.
PART II - OTHER INFORMATION
Items 1 through 5 - Not Applicable
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits - The following exhibits are filed as part of this Report:
Exhibit Description
------- -----------
3(i) Restated Articles of Organization of the
Registrant (filed as Exhibit (3.1) to
Amendment No. 1 to the Registrant's Form S-1
Registration Statement filed with the
Commission on October 5, 1995 [Reg. No. 33-
62673] and incorporated herein by reference).
3(ii) By-laws of the Registrant (filed as Exhibit
3(ii) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December
31, 1999 [File No. 0-7024] and incorporated
herein by reference).
10(w) Agreement with Disney Enterprises Inc.
dated August 1, 2000 relating to the
licensing of Winnie the Pooh, Disney
Classics and Disney Standard cartoon
Characters (certain portions of which
are subject to confidential treatment
request).
27 Financial Data Schedule
(b) No reports on Form 8-K have been filed during the past quarter covered
by this report.
Page 11
<PAGE> 14
THE FIRST YEARS INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE FIRST YEARS INC.
Registrant
Date 11/14/00 By: /s/ John R. Beals
--------------------------
John R. Beals, Senior Vice
President and Treasurer,
Duly Authorized Officer and
Principal Financial Officer
Page 12
<PAGE> 15
THE FIRST YEARS INC.
EXHIBIT INDEX
Exhibit Description Page
------- ----------- ----
3(i) Restated Articles of Organization of the
Registrant (filed as Exhibit (3.1) to
Amendment No. 1 to the Registrant's Form S-1
Registration Statement filed with the
Commission on October 5, 1995 [Reg. No. 33-
62673] and incorporated herein by reference).
3(ii) By-laws of the Registrant (filed as Exhibit
3(ii) to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December
31, 1999 [File No. 0-7024] and incorporated
herein by reference).
10(w) Agreement with Disney Enterprises Inc.
dated August 1, 2000 relating to the
licensing of Winnie the Pooh, Disney
Classics and Disney Standard cartoon
characters (certain portions of which
are subject to confidential treatment
request).
27 Financial Data Schedule
Page 13
