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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 000-23213
YOUNG INNOVATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
MISSOURI 43-1718931
(State of Incorporation) (I.R.S. Employer Identification No.)
13705 SHORELINE COURT EAST, 63045
EARTH CITY, MISSOURI (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: 314-344-0010
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
(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 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
--- ---
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 amendment to this
Form 10-K [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
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On June 28, 2002, the last business day of the registrant's most recently
completed second fiscal quarter, the aggregate market value of the Common Stock
beneficially held by non-affiliates of the Company was approximately $103.7
million (For purposes hereof, directors and executive officers have been deemed
affiliates).
Number of shares outstanding of the Registrant's Common Stock at February 28,
2003:
8,941,793 shares of Common Stock, par value $.01 per share
ALL SHARE AND PER SHARE NUMBERS SET FORTH ABOVE GIVE EFFECT TO THE THREE-FOR-TWO
STOCK SPLIT EFFECTIVE ON MARCH 28, 2002 FOR HOLDERS OF RECORD AS OF THE CLOSE OF
BUSINESS ON MARCH 22, 2002.
Portions of the Registrant's definitive Proxy Statement to be filed for its
2003 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Report.
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FORWARD LOOKING STATMENT
This Annual Report (including, without limitation, Item 1 -- "Business" and Item
7 -- "Management's Discussion and Analysis of Financial Condition and Results of
Operations") includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements other than statements of historical facts included herein
are "forward-looking statements." Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to be correct. Forward
looking statements include statements which are predictive in nature, which
depend upon or refer to future events or conditions and which include words such
as "expects", "anticipates", "intends", "plans", "believes", "estimates", or
similar expressions. These statements are not guaranties of future performance
and the Company makes no commitment to update or disclose any revisions to
forward-looking statements, or any facts, events or circumstances after the date
hereof that may bear upon forward-looking statements. Because such statements
involve risks and uncertainties, actual actions and strategies and the timing
and expected results thereof may differ materially from those expressed or
implied by such forward-looking statements. These risks and uncertainties
include, but are not limited to, those disclosed in this Annual Report and other
reports filed with the Securities and Exchange Commission.
Forward-looking statements involve risk, uncertainty, and their ultimate
validity is affected by a number of factors, both specific and general. Specific
risk factors may be noted along with the statement itself. However, other more
general risks and uncertainties which are inherent in any forward-looking
statement include, but are not necessarily limited to changes in:
- Demand for the Company's products
- Relationships with strategic customers, suppliers and product
distributors
- Competition in each of the Company's product lines
- Dependence on and consolidation of distributors
- Successful integration of acquisitions
- Ability to manage the Company's growth
- Availability of acquisition candidates and the need for additional
capital
- Technological change resulting in product obsolescence; dependence on
new products
- Standard of care relating to dental health
- Government regulation
- Concentration of suppliers
- General economic conditions
- Operational capabilities due to natural disasters or other similar
unforeseen events
This listing of factors is NOT intended to include ALL potential risk factors.
The Company makes no commitment to update these factors or to revise any
forward-looking statements for events or circumstances occurring after the
statement is issued.
At any time when the Company makes forward-looking statements, it desires to
take advantage of the "safe harbor" which is afforded such statements under the
Private Securities Litigation Reform Act of 1995.
PART I
ITEM 1. BUSINESS.
Young Innovations, Inc. and subsidiaries (the "Company") develops, manufactures
and markets supplies and equipment used by dentists, dental hygienists, dental
assistants and consumers. The Company's product offering includes disposable and
metal prophy angles, prophy cups and brushes, panoramic X-ray machines, dental
handpieces (drills) and related components, orthodontic toothbrushes, flavored
examination gloves, children's toothbrushes, children's toothpastes, moisture
control products and infection control products. The Company's manufacturing and
distribution facilities are located in Missouri, California, Indiana, Colorado,
Tennessee and Texas.
Young Dental was founded in the early 1900s. As one of many small suppliers to
the dental profession, Young Dental's strength was manufacturing consistently
reliable dental products. As dentistry evolved, Young Dental's employees worked
with practicing dentists and academics to identify clinical problems. Young
Dental staff used their engineering and manufacturing expertise to create
solutions to those problems. Young Innovations was incorporated in July 1995
shortly after the acquisition of The Lorvic Corporation ("Lorvic") in May 1995
by Young Dental, which added a new line of infection control products as well as
chemical engineering and manufacturing expertise. In July 1996, the Company
acquired Denticator International, Inc. ("Denticator") and its line of popular
low-cost disposable prophylaxis angles to complement Young Dental's
premium-priced disposable angles. In February 1998, the Company acquired
Panoramic Corporation ("Panoramic"), a leading manufacturer and marketer of
X-ray equipment sold or rented to dental professionals in the United States. In
April 1999, the Company acquired Athena Technology, Inc. ("Athena"), which added
a line of dental handpieces and related components to the Company's product
lines. In June 2000, the Company acquired substantially all of the assets of
Plak Smacker, Inc, ("Plak Smacker"), which added a line of orthodontic
toothbrushes, children's toothbrushes, flavored examination gloves, and
children's toothpastes to the Company's product line. In June 2001, the Company
acquired substantially all of the assets of the Biotrol and Challenge
subsidiaries of Pro-Dex, Inc. (collectively, "Biotrol"), which significantly
strengthened the Company's infection control and preventive product offerings.
The Company believes that decades of providing innovative products to meet the
evolving needs of the dental profession have earned the Company a strong
reputation for quality, reliability and value.
The Company markets its products primarily in the United States. The Company
also markets its products in several international markets, including Canada,
Europe, South America, Central America and the Pacific Rim. International sales
represented less than 10% of the Company's total net sales in 2002.
The Company is a Missouri corporation with its principal executive office
located at 13705 Shoreline Court East, Earth City, Missouri 63045, in the St.
Louis, Missouri metropolitan area; its telephone number is (314) 344-0010.
WEBSITE ACCESS TO COMPANY REPORTS
The Company makes available free of charge through our website, www.ydnt.com,
it's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with the Securities and
Exchange Commission. The Company's internet website and the information
contained therein or incorporated therein are not intended to be incorporated
into this Annual Report on Form 10-K.
See Item 8. Financial Statements and Supplementary Data for financial
information about the professional dental and retail segments of the Company's
business.
RECENT DEVELOPMENTS
On March 12, 2002, the Board of Directors declared a three-for-two stock split
of the Company's Common Stock in the form of a stock dividend payable on March
28, 2002 to shareholders of record as of the close of business on March 22,
2002. All share and per share numbers in this Report give effect to such stock
split.
PRODUCTS
The Company markets disposable and metal prophy angles as well as prophy cups,
brushes and pastes (collectively, "Prophy Products"), fluorides, infection
control products, dental X-ray equipment, dental handpieces and related
components, orthodontic brushes and supplies, flavored examination gloves,
children's toothbrushes and toothpastes and other products.
Prophy Products. The Company believes it manufactures and sells the broadest
line of prophy products in the domestic professional dental products market. The
Company is able to achieve its substantial share of this market by providing
prophy products at both premium and popular prices. The Company generally prices
its Young branded prophy products at premium levels and its Denticator branded
prophy products at lower price levels. The Company's broad range of prophy
products enables it to be a single-source supplier to its distributors.
Prophy products consist of three components: 1) an angle which is attached to
and extends from a standard, low-speed dental handpiece, 2) a rubber cup or
brush which is attached to the angle and performs the cleaning function and 3)
an abrasive paste normally applied to the patient's teeth with the cup or brush.
During the prophylaxis process, the cup or brush is filled with abrasive paste,
which is applied to the teeth as the prophy cup rotates. The dental professional
polishes both the visible portion of the tooth and the subgingival portion
(below the gum line). The Company's prophy products include several
configurations of metal autoclavable prophy angles, single-use disposable
plastic prophy angles and several flavors and consistencies of pastes. Prophy
cups and brushes, which are paired with metal prophy angles, are sold as
single-use items. Disposable prophy angles are sold as assembled units with a
cup or brush already attached. The Company produces and markets a number of
different disposable prophy angles, including both traditional right angle and
contra angle configurations. Virtually all of the Company's metal prophy angles
are sealed against penetration of matter from patients' mouths (thus reducing
the risk of cross-contamination and damage to the prophy angle) and are designed
for easy maintenance. Because such metal prophy angles function optimally only
when used with the Company's cups and brushes, most dentists who purchase the
Company's metal prophy angles also purchase the Company's cups and brushes.
Other Preventive Products. The Company's other preventive products include
fluorides used in dental offices and at home to reduce cavities and tooth
sensitivity; applicators used by dental professionals to apply fluoride to
patients' teeth; and plaque disclosants, which are liquids or tablets that
identify the presence of plaque when applied to tooth surfaces.
Infection Control Products. The Company's line of infection control products
includes products such as surface disinfectants, cleaners, sterilizing
solutions, indicator tape and tabs used to verify the effectiveness of a
sterilizer, Nyclave wrap used to wrap instruments during sterilization so that
sterility is maintained until use, barrier products used to wrap operatory
knobs, handles and other devices that cannot be sterilized, and surgical milk
and instrument care products used to inhibit corrosion, remove rust and
lubricate hinged instruments in connection with the autoclave process
(sterilization through the use of steam).
X-Ray Equipment. The Company markets a line of dental X-ray equipment under
the Panoramic brand name. Panoramic's PC-1000 X-ray machine produces a high
quality image of the entire dental arch in one X-ray film. Panoramic X-rays
present an anatomical assessment of the entire oral cavity and surrounding
structures. The Company believes this allows a dentist to more accurately
diagnose and treat the patient, providing better overall care. Panoramic's
PC-1000/Laser 1000 cephalometric X-ray system allows analysis of the exact
relationship of various anatomical reference points of the patient's anterior
skull profile. General dentists and orthodontists use these calculations to
locate and predict the movement of teeth in order to fit braces and other
orthodontia. The device is used by oral surgeons to detect pathology and also to
determine bone and teeth alignment before and after surgery.
Handpieces and Components. The Company manufactures and markets a line of
high-speed and low-speed dental handpieces. The Company also offers high-speed
and low-speed handpiece repair services. High-speed handpieces, commonly
referred to as dental drills, are used in a variety of operative and restorative
dental procedures. Low-speed handpieces are used by dentists and dental
hygienists in the teeth cleaning, or prophylaxis procedure. Prophylaxis angles,
such as the disposable or autoclavable prophylaxis angles sold by the Company,
attach to a low-speed handpiece, which provides drive power for the angle.
Low-speed handpieces are also used in certain operative and restorative dental
procedures, though to a lesser extent than high-speed handpieces. The Company's
handpieces are sold under the Athena Champion brand name, as well as through
private label agreements with certain dental distributors.
Orthodontic and Children's Homecare Products. The Company markets a line of
orthodontic brushes, flavored examination gloves, children's toothbrushes and
toothpastes, and miscellaneous supplies.
Assisting and Other Products. The Company's assisting and other products
include disposable aspiration products used to remove blood, saliva and other
matter during dental procedures; cotton roll substitutes used to control saliva
and moisture during dental procedures; matrix bands used for tooth restorations;
rubber dam frames used to isolate teeth during dental procedures; and etching
gels and bonding prep used to condition tooth surfaces for bonding.
Private Label and Original Equipment Manufactured (OEM) Products. In
addition to branded products, the Company designs, develops and produces a
limited number of private label and OEM products for dental distributors and
other professional dental product manufacturers.
MARKETING AND DISTRIBUTION
The Company markets its prophy, preventive, infection control and handpiece
products to dental professionals worldwide primarily through a network of dental
product distributors. The Company actively supports its distributor
relationships with Company sales personnel and independent sales representatives
in the United States, independent sales representatives in Canada and Mexico and
sales representatives in countries outside of North America.
The Company also uses non-exclusive distributors to service markets in a number
of other countries. All major distributors of dental products in North America
sell the Company's products, including Henry Schein, Inc. and Patterson Dental
Company, which accounted for 13.8%, and 15.0% respectively, of the Company's
sales in 2002. The Company has no formal agreements with its distributors. They
generally purchase products from the Company by purchase order. The Company
believes these arrangements are customary in the industry. In addition to
marketing through distributors in the United States, the Company sells products
directly to dental and dental hygiene schools, Veterans Administration
healthcare facilities and United States military bases.
The Company expends considerable effort educating its distributors about the
quality, reliability and features of its products. The Company also advertises
its products through industry publications and direct mail. To supplement its
other marketing efforts, the Company provides product samples to dental
professionals and exhibits its products at industry trade shows. In addition,
the Company seeks to stimulate interest in its products by providing information
and marketing materials to influential lecturers and prominent experts and
consultants in the dental industry.
The Company's panoramic X-ray products are marketed in the United States and
Canada directly to the end user, primarily by direct mail, trade shows and a
limited amount of advertising in trade and professional journals. Panoramic also
utilizes distributors to market its products in a number of other countries.
The Company's orthodontic kits and related supplies and flavored examination
gloves are sold directly to orthodontists and dentists. Children's homecare
products are marketed directly to dental professionals and government programs,
as well as through retail mass merchandisers.
PRODUCT DEVELOPMENT
The Company's engineers and chemists are focused on developing innovative
professional dental products and are actively involved in improving the
Company's manufacturing processes. Frequently, these products are designed and
developed in response to needs articulated to the Company by dental
professionals. For example, the Company designed a short prophy cup for its line
of prophy angles to allow for easier access to the back of the patient's mouth.
Many of the new products or product improvements developed by the Company are
patented. The Company has various patents and trademarks but does not consider
its business to be materially dependent upon any individual patent or trademark.
Research and development costs are expensed when incurred and totaled $596, $516
and $602 for 2002, 2001 and 2000, respectively.
MANUFACTURING AND SUPPLY
The Company manufactures most of its products and product components other than
X-ray equipment, certain infection control products, children's homecare
products, orthodontic kits and related supplies, and flavored examination
gloves.
Prophy and Other Products. The Company uses a variety of computer
numerically controlled machining centers, injection molding machines and robotic
assembly machines and continues to invest in new and more efficient equipment
and production lines. The primary processes involved in manufacturing the
Company's products consist of precision metal turning and milling, rubber
molding, plastic injection molding, component parts assembling and finished
goods packaging. The Company has a one-third interest in International Assembly
Inc. ("IAI"), a contract manufacturer located in Mexico that assembles a portion
of its disposable prophy angles.
Pastes, Liquids and Gels. The Company blends and mixes all of its pastes,
liquids and gels at the Louisville, Colorado, Earth City, Missouri, and
Brownsville, Texas, facilities. The Company owns equipment used to form and
die-cut expanded polyethylene foam and to die-cut extruded plastic into finished
products and equipment used to package its products in a variety of container
sizes, including prophy paste in unit-dose containers.
Infection Control Products. The Company manufactures a variety of infection
control products, sterilants and cleaners, at the Louisville, Colorado and Earth
City, Missouri facilities. Additionally, certain of the Company's infection
control products are sourced from domestic manufacturers.
X-Ray Equipment. X-ray equipment is manufactured and assembled by a contract
manufacturer at the Company's premises in Fort Wayne, Indiana. The contract
manufacturer supplies labor, purchases most components and performs
administrative and logistical functions associated with the production of the
machines. The Company owns all of the tooling, engineering documentation and
assembly fixtures used in the process. The Company manufactures its own X-ray
generators.
Handpieces and Components. The Company uses a variety of computer
numerically controlled machines to manufacture a number of the components
required to produce its high-speed and low-speed handpieces. Certain other
handpiece component parts are sourced from a variety of OEMs. The Company
assembles and provides repair services for its handpieces, and offers repair
services for a number of other handpiece brands.
Orthodontic and Children's Homecare Products. The Company sources most of
its orthodontic, children's homecare products, and flavored examination gloves
from manufacturers in Asia, principally China and Malaysia. Certain other
toothbrush and toothpaste products are sourced from domestic manufacturers.
Supply. The Company purchases a wide variety of raw materials, including bar
steel, brass, rubber and plastic resins from numerous suppliers. The majority of
the Company's purchases are commodities readily available at competitive prices.
The Company also purchases certain additional miscellaneous products from other
manufacturers for resale.
COMPETITION
The Company competes with manufacturers of both branded and private label dental
products in its product offerings. The Company believes it is the leading
manufacturer of prophy angles and surface disinfectants used in the professional
dental market in the United States. The Company also believes it is the leading
distributor of panoramic X-ray machines in the United States.
The markets for the Company's products are highly competitive. The Company
believes that the principal competitive factors in all of its markets are
product features, reliability, name recognition, established distribution
network, customer service and, to a lesser extent, price. The relative speed
with which the Company can develop, complete testing, obtain regulatory approval
and sell commercial quantities of new products is also an important competitive
factor. Some of the Company's competitors have greater financial, research,
manufacturing and marketing resources than the Company and include DENTSPLY
International, Inc., Sybron Dental Specialties, Oral-B Laboratories, StarDental,
a division of DentalEZ Group, KaVo America, Proctor and Gamble Co.,
Colgate-Palmolive Co., and Planmeca OY.
OTHER
The Company has a credit arrangement that provides for a three-year, unsecured
revolving credit facility with an aggregate commitment of $40,000, of which
$4,161 was being used at December 31, 2002. The Company expects to fund working
capital requirements from a combination of available cash balances, internally
generated funds, and from the borrowing arrangements mentioned above.
Some seasonality exists in the business driven by timing of price increases,
rebate incentives, tax incentives, and holiday buying patterns and promotions.
EMPLOYEES
As of December 31, 2002, the Company employed 276 people, none of whom were
covered by collective bargaining agreements. The Company believes that its
relations with its employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages and their positions with the
Company are set forth below. All officers serve at the pleasure of the board.
NAME AGE POSITION PRINCIPAL OCCUPATION DURING PAST 5 YEARS
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George E. Richmond........ 69 Chairman of the Board and Director Chairman of the Board since 1997, Chief
Executive Officer from 1995 to 2002, Director of
the Company since its organization in 1995,
President of Young Dental Manufacturing Company
("Young Dental") (predecessor to the Company)
from 1961 until 1997.
Alfred E. Brennan......... 50 President, Chief Executive Officer President since July 1998, Chief Executive
and Director Officer since January 2002 and Director of the
Company since August 1997, Chief Operating
Officer of the Company from October 1997 until
May 2002.
Arthur L. Herbst, Jr. .... 39 Executive Vice President, Chief Chief Operating Officer since May 2002, Chief
Operating Officer, Chief Financial Financial Officer since February 1999, Secretary
Officer, Secretary and Director since April 2000, Executive Vice President since
October 1998 and a Director of the Company since
November 1997. Vice President and Portfolio
Manager with Roberts, Glore & Co, a registered
investment advisor, from September 1995 to
November 1998.
Eric J. Stetzel........... 46 Vice President Vice President since February 1999. President
of Young Acquisitions Company since February
1998. President of Panoramic Rental Corp. since
April 1998. President of Panoramic Corporation
from 1986 to February 1998.
Daniel E. Garrick......... 34 Vice President, Assistant Secretary Vice President and Assistant Secretary since
April 2001, Director of Business Development of
Young Innovations since August 1999, Partner of
Alta Management Consulting from December 1998 to
August 1999, variety of consulting positions
with Dewar Sloan, a management consulting
company, from July 1993 to November 1998.
Sean T. O'Connor......... 34 Vice President Vice President since April 2001, Director of
Business Development of Young Innovations since
August 1999, Partner of Alta Management
Consulting from December 1998 to August 1999,
variety of consulting positions with Dewar Sloan
from June 1994 to November 1998.
ITEM 2. PROPERTIES.
The Company's facilities are as follows:
DESCRIPTION SQUARE FEET LOCATION OWNED/LEASED
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Corporate Headquarters
and Manufacturing............. 113,000 Earth City, Missouri Owned
Manufacturing.................... 12,000 Brownsville, Texas Owned
Office and Manufacturing......... 39,000 Fort Wayne, Indiana Owned
Office and Manufacturing......... 8,000 Fort Wayne, Indiana Leased, on month to month terms
Office and Manufacturing......... 27,000 Louisville, Colorado Leased, expires December 2003
Office and Distribution.......... 24,000 Riverside, California Leased, expires March 2004
Distribution..................... 23,000 Morristown, Tennessee Leased on month to month terms
Office........................... 5,000 Algonquin, Illinois Leased, expires March 2005
Office........................... 2,000 Chicago, Illinois Leased, expires May 2003
The Company believes that its facilities are generally in good condition.
ITEM 3. LEGAL PROCEEDINGS.
On May 24, 2001, Sultan Dental Products, Ltd. ("Sultan") filed a complaint in
the United States District Court for the Southern District of New York (which
was subsequently dismissed by the plaintiff and refiled in the United States
District Court for the District of New Jersey on October 16, 2001) asserting
that the Young disposable prophy angle infringes a patent that is exclusively
licensed to Sultan. The complaint sought a permanent injunction and unspecified
damages. In addition, on January 25, 2002, the Company filed a complaint in the
United States District Court for the Eastern District of Missouri asserting that
the manufacture of the Sultan disposable prophy angle infringes the Company's
U.S. Patent No. 5,749,728. The complaint sought a permanent injunction and
damages. On February 6, 2003, the Company and Sultan settled each case with
neither party paying a material amount.
The Company and its subsidiaries from time to time are also parties to various
legal proceedings arising in the normal course of business. Management believes
that none of these proceedings, if determined adversely, would have a material
adverse effect on the Company's financial position, results of operations or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock trades on the Nasdaq National Market under the symbol of
"YDNT."
On March 12, 2002, the Board of Directors declared a three-for-two stock split
of the Company's Common Stock in the form of a stock dividend payable on March
28, 2002 to shareholders of record as of the close of business on March 22,
2002. All share and per share numbers in this Report give effect to such stock
split.
The following table, as adjusted for the stock split, sets forth the high and
low prices of the Common Stock as reported by the Nasdaq National Market during
the last eight quarters.
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Market Price
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Quarter High Low
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2001
First.................................... $13.83 $11.83
Second................................... $16.33 $12.00
Third.................................... $16.08 $12.00
Fourth................................... $17.83 $12.50
2002
First.................................... $22.83 $17.17
Second................................... $25.30 $21.72
Third.................................... $28.26 $18.09
Fourth................................... $27.04 $20.09
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On February 28, 2003, there were approximately 37 holders of record of the
Company's Common Stock.
The Company has not paid cash dividends on its Common Stock since its inception.
The Company currently intends to retain earnings for use in its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. Payment of cash dividends, if any, will be at the discretion of the
Company's Board of Directors and will be dependent upon the earnings and
financial condition of the Company and any other factors deemed relevant by the
Board of Directors and will be subject to any applicable restrictions contained
in the Company's then existing credit arrangements.
ITEM 6. SELECTED FINANCIAL DATA.
The following table presents selected financial data of the Company. This
historical data should be read in conjunction with the Consolidated Financial
Statements and the related notes thereto in Item 8 and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Item 7. All
amounts except per share data are expressed in thousands.
YEAR ENDED DECEMBER 31,
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2002(1) 2001(2) 2000(3) 1999(4) 1998(5)
-------- -------- -------- -------- --------
INCOME STATEMENT DATA:
Net sales ............................................ $ 72,218 $ 63,659 $ 51,387 $ 42,712 $ 36,595
Cost of goods sold ................................... 33,787 30,017 24,000 18,825 16,467
-------- -------- -------- -------- --------
Gross profit ......................................... 38,431 33,642 27,387 23,887 20,128
Selling, general and administrative expenses ........ 19,433 17,897 13,754 12,195 10,623
-------- -------- -------- -------- --------
Income from operations ............................... 18,998 15,745 13,633 11,692 9,505
Interest expense and other, net ...................... 286 225 108 (32) (326)
-------- -------- -------- -------- --------
Income before provision for income taxes ............. 18,712 15,520 13,525 11,724 9,831
Provision for income taxes ........................... 7,301 5,975 5,220 4,572 3,782
-------- -------- -------- -------- --------
Net income ........................................... $ 11,411 $ 9,545 $ 8,305 $ 7,152 $ 6,049
======== ======== ======== ======== ========
Basic earnings per share (6) ......................... $ 1.29 $ 0.99 $ 0.85 $ 0.73 $ 0.60
======== ======== ======== ======== ========
Basic weighted average common shares
Outstanding (6) ................................... 8,876 9,662 9,752 9,848 10,145
Diluted earnings per share (6) ....................... $ 1.22 $ 0.96 $ 0.84 $ 0.72 $ 0.59
======== ======== ======== ======== ========
Diluted weighted average common shares
Outstanding (6) ................................... 9,331 9,904 9,914 9,880 10,208
AS OF DECEMBER 31,
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2002 2001(2) 2000(3) 1999(4) 1998(5)
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital ........................................ $12,645 $12,439 $11,578 $ 9,438 $10,100
Total assets ........................................... 84,988 83,605 69,592 60,336 54,744
Total debt (including current maturities) .............. 4,304 16,984 592 893 --
Stockholders' equity ................................... 67,670 55,885 60,437 52,137 48,201
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(1) Weighted average common shares outstanding decreased from 2001 to 2002
primarily as a result of the Company's buyback of 1,050 shares from George
E. Richmond, its Chairman of the Board and then Chief Executive Officer, in
November 2001.
(2) On June 12, 2001 the Company acquired substantially all of the assets of
the Biotrol and Challenge subsidiaries of Pro-Dex, Inc. (collectively
"Biotrol"). The income statement data for the year ended December 31, 2001
include results of operations for Biotrol from June 12, 2001 through
December 31, 2001. The balance sheet data as of December 31, 2001 include
the Biotrol acquisition.
(3) On June 13, 2000 the Company acquired substantially all of the assets of
Plak Smacker. The income statement data for the year ended December 31,
2000 include results of operations for Plak Smacker from June 13, 2000
through December 31, 2000. The balance sheet data as of December 31, 2000
include the Plak Smacker acquisition.
(4) On April 2, 1999, the Company acquired Athena. The income statement data
for the year ended December 31, 1999 include results of operations for
Athena from April 2, 1999 through December 31, 1999. The balance sheet data
as of December 31, 1999 include the Athena acquisition.
(5) On February 27, 1998, the Company acquired substantially all of the assets
of Panoramic. The income statement data for the year ended December 31,
1998 include results of operations for Panoramic from February 27, 1998
through December 31, 1998. The balance sheet data as of December 31, 1998
include the Panoramic acquisition.
(6) Earnings per share data and shares outstanding retroactively reflect the
impact of the three-for-two stock split of the Company's Common Stock in
the form of a stock dividend payable on March 28, 2002 to shareholders of
record as of the close of business on March 22, 2002. All share and per
share numbers give effect to such stock split.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (IN THOUSANDS).
GENERAL
The Company develops, manufactures and markets supplies and equipment used by
dentists, dental hygienists, dental assistants and consumers. The Company's
product offering includes disposable and metal prophy angles, prophy cups and
brushes, panoramic X-ray machines, moisture control products, infection control
products, dental handpieces (drills) and related components, orthodontic
toothbrushes, flavored examination gloves, children's toothbrushes and
children's toothpastes. The Company believes it is the leading manufacturer and
distributor of prophy angles and cups (used in teeth cleaning and polishing
procedures) and dental surface disinfectants in the United States. The Company
also believes it is the leading distributor of panoramic X-ray equipment in the
United States.
The principal components of the Company's growth strategy are to continuously
improve its operating efficiencies, to develop new products and to complete
strategic acquisitions. In order to help fund the Company's strategy for growth,
the Company completed an initial public offering of 3,450 shares of its Common
Stock in November 1997, resulting in net proceeds of approximately $25,200. The
Company used the proceeds to repay debt incurred with previous acquisitions and
to fund future strategic acquisitions.
On February 27, 1998, the Company acquired the assets of Panoramic for $13,900
cash plus 94 shares of the Company's Common Stock and assumed approximately
$3,900 of Panoramic's liabilities, of which $2,600 was repaid at closing. On
April 2, 1999, the Company acquired the stock of Athena for $4,200 in cash plus
$232 in notes payable to the previous shareholders. On June 13, 2000 the Company
acquired the assets of Plak Smacker for approximately $7,100 in cash. On June
12, 2001 the Company acquired the assets of Biotrol for approximately $8,900 in
cash. The results of operations for these acquisitions are included in the
consolidated financial statements since the date of acquisition. The
acquisitions were accounted for as purchase transactions.
On March 12, 2002, the Board of Directors declared a three-for-two stock split
of the Company's Common Stock in the form of a stock dividend payable on March
28, 2002 to shareholders of record as of the close of business on March 22,
2002. All share and per share numbers in this Report give effect to such stock
split.
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that all registrants include in their MD&A
their most critical accounting policies, the judgments and uncertainties
affecting the application of those policies, and the likelihood that materially
different amounts would be reported under different conditions using different
assumptions. The SEC indicated that a "critical accounting policy" is one which
is both important to the portrayal of the company's financial condition and
results and requires management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. We believe that the following accounting
policies fit this definition:
Allowance for doubtful accounts - The Company has 42% of its December 31,
2002 accounts receivable balance with two large customers (see footnote 5 of the
financial statements set forth in Item 8) with the remaining balance among
numerous customers, some of which are international. Accounts receivable
balances are subject to credit risk. Management has reserved for expected credit
losses, sales returns and allowances, and discounts based upon past experience
as well as knowledge of current customer information. We believe that our
reserves are adequate. It is possible, however, that the accuracy of our
estimation process could be impacted by unforeseen circumstances. We
continuously review our reserve balance and refine the estimates to reflect any
changes in circumstances.
Inventory - The Company values inventory at the lower of cost or market.
Inventory values are based upon standard costs which approximate historical
costs. Management regularly reviews inventory quantities on hand and records a
provision for excess or obsolete inventory based primarily on estimated product
demand and other knowledge related to the inventory. If demand for the Company's
products is significantly different than Management's expectations, the reserve
could be materially impacted. Changes to the reserves are included in cost of
goods sold.
Goodwill and other intangible assets - The Company adopted the provisions of
SFAS No. 142 effective January 1, 2002. Goodwill and other long-lived assets
with indefinite useful lives are reviewed by Management for impairment annually
or whenever events or changes in circumstances indicate the carrying amount may
not be recoverable. If indicators of impairment are present, the determination
of the amount of impairment would be based on Management's judgment as to the
future operating cash flows to be generated from the assets throughout their
estimable useful lives. SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with SFAS No. 121.
Contingencies - The Company and its subsidiaries from time to time are
subject to various contingencies, including legal proceedings arising in the
normal course of business. Management, with the assistance of external legal
counsel, performs an analysis of current litigation and will record liabilities
if a loss is probable and can be reasonably estimated. The Company believes the
reserve is adequate, however it can not guarantee that costs will not be
incurred in excess of current estimates.
RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth, for the periods indicated, certain items from
the Company's statements of income expressed as a percentage of net sales.
YEAR ENDED DECEMBER 31,
---------------------------
2002 2001 2000
-------- ------- -------
Net sales.......................................... 100.0% 100.0% 100.0%
Cost of goods sold................................. 46.8 47.2 46.7
------ ------ ------
Gross profit....................................... 53.2 52.8 53.3
Selling, general and administrative expenses....... 26.9 28.1 26.8
------ ------ ------
Income from operations............................. 26.3 24.7 26.5
Interest expense and other, net.................... .4 .3 .2
------ ------ ------
Income before provision for income taxes........... 25.9 24.4 26.3
Provision for income taxes......................... 10.1 9.4 10.1
------ ------ ------
Net income......................................... 15.8% 15.0% 16.2%
====== ====== ======
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net Sales - Net sales increased $8,559, or 13.4%, to $72,218 in 2002 from
$63,659 in 2001. The increase was primarily attributable to the inclusion of
Biotrol sales for the full period ($4,205 of additional sales) as well as growth
in the Professional and Retail Segments.
Gross Profit - Gross profit increased $4,789, or 14.2%, to $38,431 in 2002
from $33,642 in 2001. Gross profit benefited from the acquisition of Biotrol and
from increased sales in the Professional and Retail Segments. Gross margin
increased to 53.2% of net sales in 2002 from 52.8% in 2001. This increase was
primarily a result of the full year inclusion of Biotrol and overall product
mix.
Selling, General, and Administrative Expenses ("SG&A") - SG&A expenses
increased $1,536 million, or 8.6%, to $19,433 in 2002 from $17,897 in 2001. The
increase was primarily a result of additional SG&A expenses related to the
Biotrol acquisition as well as increased spending in the Professional and Retail
segments. These administrative expenses are partially offset by the elimination
of the amortization of goodwill ($1,215 for 2001) starting in 2002 in accordance
with the adoption of SFAS 142. As a percent of net sales, SG&A expenses
decreased to 26.9% in 2002 from 28.1% in 2001 as a result of the factors
explained above.
Income from Operations - Income from operations increased $3,253, or 20.7%,
to $18,998 in 2002 from $15,745 in 2001 as a result of the factors explained
above.
Interest Expense (Income), net - Interest expense, net increased $134, or
90.5%, to $282 in 2002 from $148 in 2001. The increase was primarily
attributable to additional interest expense resulting from increased borrowings
on the Company's credit facility during the second half of 2001 that remained
outstanding for a majority of 2002. These borrowings related to the acquisition
of Biotrol in June 2001 and the repurchase of 1,050 shares of common stock in
November 2001.
Other Expense, net - Other expense, net decreased $73, to $4 in 2002 from
$77 in 2001. The decrease was primarily attributable to lower expense associated
with the Company's one-third interest in IAI as well as additional rental income
from leased space at the Company's Earth City facility.
Provision for Income Taxes - Provision for income taxes increased $1,326 in
2002 to $7,301 from $5,975 for 2001 primarily as a result of higher pre-tax
income. The effective tax rate of 39.0% in 2002 compares to 38.5% in 2001,
reflecting the continued phase-in of the 35% federal tax rate, partially offset
by the elimination of goodwill amortization expense in accordance with SFAS 142.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net Sales - Net sales increased $12,272, or 23.9%, to $63,659 in 2001 from
$51,387 in 2000. The increase was primarily attributable to the inclusion of a
partial year of Biotrol sales ($5,821 of additional sales) and a full year of
Plak Smacker sales ($7,161 of additional sales), as well as increased sales of
products in the Professional and Retail Segments, which were offset by the
discontinuation of sales of certain unprofitable and non-strategic products.
Gross Profit - Gross profit increased $6,255, or 22.8%, to $33,642 in 2001
from $27,387 in 2000. Gross profit was favorably impacted by the acquisition of
Biotrol and a full year of Plak Smacker. Gross margin decreased to 52.8% of net
sales in 2001 from 53.3% in 2000. This decrease was primarily attributable to
the full year inclusion of Plak Smacker sales, which typically earn lower gross
margins.
Selling, General, and Administrative Expenses ("SG&A") - SG&A expenses
increased $4,143, or 30.1%, to $17,897 in 2001 from $13,754 in 2000 primarily
due to the inclusion of expenses of Biotrol for a partial year and of Plak
Smacker for a full year. As a percent of net sales, SG&A expenses increased to
28.1% in 2001 from 26.8% in 2000 primarily due to higher SG&A spending at
Biotrol.
Income from Operations - Income from operations increased $2,112 or 15.5%,
to $15,745 in 2001 from $13,633 in 2000 as a result of the factors explained
above.
Interest Expense (Income), net - Interest expense, net increased $168 to
$148 in 2001 from ($20) in 2000. The increase was primarily attributable to
additional interest expense resulting from increased borrowings on the Company's
credit facility to fund the Biotrol acquisition as well as the repurchase of
1,050 shares of common stock in November 2001.
Other Expense, net - Other expense, net decreased $51 to $77 in 2001 from
$128 in 2000. The decrease was primarily attributable to additional rental
income from leased space at the Company's Earth City facility for the period.
Provision for Income Taxes - Provision for income taxes increased $755 in
2001 to $5,975 from $5,220 for 2000 primarily as a result of higher pre-tax
income. The effective tax rate of 38.5% in 2001 compares to 38.6% in 2000. The
2001 rate reflects savings resulting from federal and state tax planning offset
by the phase-in of the 35% federal tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations primarily through cash
flow from operating activities and, to a lesser extent, through borrowings under
its credit facility. Net cash flow from operating activities was $16,258,
$14,142, and $7,699 for 2002, 2001 and 2000, respectively. Capital expenditures
for property, plant and equipment were $2,660, $6,983, and $2,176 in 2002, 2001
and 2000, respectively. Capital expenditures in 2001 included $3,309 for
additional manufacturing and office space in Earth City, MO and Fort Wayne, IN,
and $2,294 for additional machinery and equipment. Consistent with the Company's
historical capital expenditures, future capital expenditures are expected to
include facility improvements, panoramic X-ray machines for the Company's rental
program, production machinery and information systems. Other significant uses of
cash over the three years are as follows:
In November and December 2002, the Company repurchased 81 shares of its common
stock from various stockholders for $1,709. The purchase was financed through
borrowings on the Company's credit facility.
On November 2, 2001, the Company purchased 1,050 shares of its common stock from
George E. Richmond, its Chairman for approximately $14,900. The purchase was
financed through borrowings on the Company's credit facility.
On June 12, 2001, the Company acquired substantially all the assets of Biotrol.
The Company originally paid $9,343 in cash, with money set aside in escrow
pending the settlement of any indemnification claims. Upon final settlement, the
purchase price was $8,912. The purchase price was financed with borrowings on
the Company's credit facility and with cash flows generated from operations.
On June 13, 2000, the Company acquired substantially all of the assets of Plak
Smacker for approximately $7,100 in cash. The purchase price was principally
financed with borrowings on the Company's credit facility and cash generated
from operations.
During March 2001, the Company entered into a one-year $20,000 credit
agreement. The agreement was amended in April and September 2001, to extend the
term to three-years and increase the borrowing capacity to $40,000. Borrowings
under the agreement bear interest at rates ranging from LIBOR + 1% to LIBOR +
2.25% or Prime to Prime + .5%. Commitment fees for this agreement range from
..15% to .25% of the unused balance. The agreement is unsecured and contains
various financial and other covenants. As of December 31, 2002, the Company was
in compliance with all of these covenants. During 2002, the Company borrowed
under the credit facility to finance the acquisition of Biotrol, the repurchase
of Common Stock, investments in facilities and equipment and for working capital
needs. At December 31, 2002, there were $4,161 in outstanding borrowings under
this agreement. Management believes through its operating cash flows as well as
borrowing capabilities, the Company has adequate liquidity and capital resources
to meet its needs on a short and long-term basis.
The Company has certain contractual obligations and / or commercial commitments.
The following table represents the aggregate maturities and expiration amounts
of various classes of obligations at December 31, 2002 (in thousands):
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------------
LESS THAN AFTER 5
--------- -------
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS YEARS
----- ------ --------- --------- -----
Capital Lease Obligations...................... $ 143 $ 75 $ 68 -- --
Operating Leases (including buildings)......... 915 615 288 $ 12 --
Long-Term Debt................................. 4,161 -- 4,161 -- --
-------- -------- -------- -------- ---------
Total Contractual Cash......................... $ 5,219 $ 690 $ 4,517 $ 12 --
--------- -------- -------- -------- ---------
RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." Under SFAS No. 143, the fair
value of a liability for an asset retirement obligation is required to be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. SFAS No. 143 was
implemented by the Company beginning January 1, 2002. Adoption of SFAS No. 143
did not have a material impact on the consolidated financial statements of the
Company.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144
addresses financial accounting and reporting for the impairment of long-lived
assets and for the long-lived assets to be disposed of and supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." SFAS No. 144 establishes a single accounting model
for long-lived assets to be disposed of by sale and resolves implementation
issues related to SFAS No. 121. SFAS No. 144 was implemented by the Company
beginning January 1, 2002. Adoption of SFAS No. 144 did not have a material
impact on the consolidated financial statements of the Company.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment to FASB Statement No.
13, and Technical Corrections." SFAS No. 145 addresses classification of
extinguishment of debt and requires accounting for lease modifications in the
same manner as sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. SFAS
No. 145 was implemented by the Company beginning January 1, 2002. Adoption of
SFAS No. 145 did not have a material impact on the consolidated financial
statements of the Company.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." Under SFAS
No. 146, liabilities are recognized for exit and disposal costs only when a
liability is incurred, rather than at the date of an entity's commitment to an
exit plan. SFAS No. 146 is effective for exit or disposal activities initiated
after December 31, 2002. Adoption of SFAS No. 146 did not have a material impact
on the consolidated financial statements of the Company.
In December 2002, the Financial Accounting Standards Board issued SFAS No.148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure." This
statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. FAS No. 148 provides for
voluntary adoption of the fair value method for entities with fiscal years
ending after December 15, 2002. The Company currently has not made this
election.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No.45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Other." This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this Interpretation are effective for financial statements of interim or annual
periods ending after December 31, 2002. Management does not believe the impact
of this Interpretation will be material to the consolidated financial statements
of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from changes
in interest rates and changes in foreign exchange rates. From time to time, the
Company finances acquisitions, capital expenditures and its working capital
needs with borrowings under a revolving credit facility. Due to the variable
interest rate feature on the debt, the Company is exposed to interest rate risk.
Based on the Company's average debt balance, a theoretical 100 basis point
increase in interest rates would have resulted in approximately $115 and $81 of
additional interest expense in the years ended December 31, 2002 and 2001,
respectively. In 2000, the Company did not carry significant borrowings under
its credit facility and thus interest rate risk would have been immaterial.
Sales of the Company's products in a given foreign country can be affected by
fluctuations in the exchange rate. However, the Company sells less than 10% of
its products outside the United States. Of these foreign sales, approximately
97% are denominated in US dollars with the remaining approximately 3%
denominated in Canadian dollars. As a result, the Company does not feel that
foreign currency movements have a material impact on its financial statements.
The Company does not use derivatives to manage its interest rate or foreign
exchange rate risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Young Innovations, Inc.:
We have audited the accompanying consolidated balance sheet of Young
Innovations, Inc. and subsidiaries as of December 31, 2002, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended. In connection with our audit of the consolidated financial
statements, we also have audited the financial statement schedule. These
consolidated financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule based on our audit. The consolidated financial statements and the
financial statement schedule of Young Innovations, Inc. and subsidiaries as of
December 31, 2001, and for each of the years in the two-year period then ended,
were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those consolidated financial statements and
financial statement schedule, before the revisions described in Note 9 to the
consolidated financial statements, in their reports dated February 4, 2002
(except for the information related to the stock split, discussed in Note 1, as
to which the date is March 22, 2002).
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Young Innovations,
Inc. and subsidiaries as of December 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed above, the consolidated financial statements and the financial
statement schedule of Young Innovations, Inc. and subsidiaries as of December
31, 2001, and for each of the years in the two-year period then ended were
audited by other auditors who have ceased operations. As described in Note 9,
these consolidated financial statements have been revised to include the
transitional disclosures required by Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company
as of January 1, 2002. In our opinion, the disclosures for 2001 and 2000 in Note
9 are appropriate. However, we were not engaged to audit, review or apply any
procedures to the 2001 and 2000 consolidated financial statements of Young
Innovations, Inc. and subsidiaries other than with respect to such disclosures
and, accordingly, we do not express an opinion or any other form of assurance on
the 2001 and 2000 consolidated financial statements taken as a whole.
/s/ KPMG LLP
St. Louis, Missouri
February 3, 2003
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Young Innovations, Inc.:
We have audited the accompanying consolidated balance sheets of Young
Innovations, Inc. (a Missouri corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Young Innovations,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 4, 2002 (except with respect to the matter discussed in Note 22, as to
which the date is March 22, 2002)
THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP,
WHICH HAS CEASED OPERATIONS, IN CONNECTION WITH YOUNG INNOVATIONS, INC.'S FILING
ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT
BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM
10-K. SEE EXHIBIT 23.2 FOR FURTHER DISCUSSION.
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31
------------------------
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 554 $ 82
Trade accounts receivable, net of allowance for doubtful accounts of $385
and $444, in 2002 and 2001, respectively.............................................. 10,010 9,916
Inventories............................................................................. 7,861 7,158
Other current assets.................................................................... 2,405 1,848
---------- ----------
Total current assets............................................................ 20,830 19,004
Property, plant and equipment, net......................................................... 18,962 18,759
Goodwill ................................................................................. 42,414 44,384
Other intangible assets.................................................................... 2,302 307
Other assets............................................................................... 480 1,151
---------- ----------
Total assets............................................................... $ 84,988 $ 83,605
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.................................................... $ 75 $ 141
Accounts payable and accrued liabilities................................................ 8,110 6,424
---------- ----------
Total current liabilities....................................................... 8,185 6,565
Long-term debt............................................................................. 4,229 16,843
Deferred income taxes...................................................................... 4,904 4,312
Stockholders' equity:
Common stock, voting, $.01 par value, 25,000 shares authorized, 8,905 and 8,921
shares issued and outstanding, net of treasury stock, in 2002 and 2001,
respectively.......................................................................... 89 89
Additional paid-in capital.............................................................. 28,050 27,828
Deferred stock compensation............................................................. (1,271) (1,608)
Retained earnings....................................................................... 58,772 47,361
Common stock in treasury, at cost, 1,338 and 1,418 shares in 2002 and 2001,
respectively (17,970) (17,785)
---------- ----------
Total stockholders' equity...................................................... 67,670 55,885
---------- ----------
Total liabilities and stockholders' equity................................. $ 84,988 $ 83,605
========== ==========
The accompanying notes are an integral part of these statements.
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31
--------------------------------------------
2002 2001 2000
---- ---- ----
Net sales............................................................ $ 72,218 $ 63,659 $ 51,387
Cost of goods sold.............................................. 33,787 30,017 24,000
------------- ------------- -------------
Gross profit......................................................... 38,431 33,642 27,387
Selling, general and administrative expenses.................... 19,433 17,897 13,754
------------- ------------- -------------
Income from operations............................................... 18,998 15,745 13,633
Interest expense (income), net.................................. 282 148 (20)
Other expense, net.............................................. 4 77 128
------------- ------------- -------------
Income before provision for income taxes............................. 18,712 15,520 13,525
Provision for income taxes..................................... 7,301 5,975 5,220
------------- ------------- -------------
Net income $ 11,411 $ 9,545 $ 8,305
============= ============= =============
Basic earnings per share............................................. $ 1.29 $ 0.99 $ 0.85
============= ============= =============
Diluted earnings per share........................................... $ 1.22 $ 0.96 $ 0.84
============= ============= =============
Basic weighted average shares outstanding............................ 8,876 9,662 9,752
======= ======== ========
Diluted weighted average shares outstanding.......................... 9,331 9,904 9,914
======= ======== ========
The accompanying notes are an integral part of these statements.
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Additional Common
Common Paid-In Retained Stock in Deferred Stock Comprehensive
Stock Capital Earnings Treasury Compensation Total Income
----- ------- -------- -------- ------------ ----- ------
BALANCE, December 31,
1999 $ 98 $ 26,050 $ 29,511 $ (3,522) - $ 52,137
Net income........... - - 8,305 - - 8,305 $ 8,305
Common stock
purchased........... - - - (104) - (104)
Stock options
exercised.......... - 10 - 89 - 99
Comprehensive income.
___ ______ _______ ________ _______ ________ $ 8,305
=======
BALANCE, December 31,
2000 98 26,060 37,816 (3,537) - 60,437
Net income........... - - 9,545 - - 9,545 $ 9,545
Common stock
purchased.... (9) - - (14,908) - (14,917)
Stock options
exercised.......... - 86 - 660 - 746
Deferred stock
compensation....... - 1,682 - - $ (1,682) -
Amortization of
deferred stock
compensation....... - - - - 74 74
-
Comprehensive income.
___ _______ _________ _________ ________ _________ $ 9,545
========
BALANCE, December 31,
2001 89 27,828 47,361 (17,785) (1,608) 55,885
Net income........... - - 11,411 - - 11,411 $ 11,411
Common stock
purchased........... - - - (1,709) - (1,709)
Stock options
exercised.......... - 222 - 1,524 - 1,746
Amortization of
deferred stock
compensation....... - - - - 337 337
Comprehensive income. - - - - - - $ 11,411
========
BALANCE, December 31,
2002 $ 89 $ 28,050 $ 58,772 $(17,970) $ (1,271) $ 67,670
==== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these statements.
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended December 31
---------------------------------
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................... $ 11,411 $ 9,545 $ 8,305
-------- -------- --------
Adjustments to reconcile net income to net cash flows from operating
activities-
Depreciation and amortization .................................. 2,536 3,239 2,694
Deferred income taxes .......................................... 545 825 884
Loss (gain) on disposal of property, plant and equipment ....... 148 -- (24)
Changes in assets and liabilities-
Trade accounts receivable .................................... (105) 663 (2,329)
Inventories .................................................. (778) (56) (1,098)
Other current assets ......................................... (510) (293) 887
Other assets ................................................. 671 514 (113)
Accounts payable and accrued liabilities ..................... 2,340 (295) (1,507)
-------- -------- --------
Total adjustments ................................... 4,847 4,597 (606)
-------- -------- --------
Net cash flows from operating activities ................... 16,258 14,142 7,699
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Recoveries (payments) for acquisitions, net of cash acquired ....... 431 (9,298) (7,088)
Purchases of property, plant and equipment ......................... (2,660) (6,983) (2,176)
Other investing activities ......................................... -- -- (464)
-------- -------- --------
Net cash flows from investing activities ................... (2,229) (16,281) (9,728)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt ......................................... (57,028) (23,561) (9,668)
Borrowings on long-term debt ....................................... 44,348 39,953 9,191
Proceeds from stock options exercised .............................. 832 746 99
Purchases of treasury stock ........................................ (1,709) (14,917) (104)
-------- -------- --------
Net cash flows from financing activities ................... (13,557) 2,221 (482)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .................. 472 82 (2,511)
Cash and cash equivalents, beginning of period ........................ 82 -- 2,511
-------- -------- --------
Cash and cash equivalents, end of period .............................. $ 554 $ 82 $ ---
======== ======== ========
The accompanying notes are an integral part of these statements.
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION:
Young Innovations, Inc. and subsidiaries (the "Company") develops, manufactures
and markets supplies and equipment used by dentists, dental hygienists, dental
assistants and consumers. The Company's product offering includes disposable and
metal prophy angles, prophy cups and brushes, panoramic X-ray machines, moisture
control products, infection control products, dental handpieces (drills) and
related components, orthodontic toothbrushes, flavored examination gloves,
children's toothbrushes, and children's toothpastes. The Company's manufacturing
and distribution facilities are located in Missouri, California, Indiana,
Colorado, Tennessee and Texas. Export sales were less than 10% of total net
sales for 2002, 2001 and 2000.
On March 12, 2002, the Board of Directors declared a three-for-two stock split
of the Company's Common Stock in the form of a stock dividend payable on March
28, 2002 to shareholders of record as of the close of business on March 22,
2002. All share and per share numbers in this Report give effect to such stock
split.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Young Innovations,
Inc. formed in July 1995 and its direct and indirect wholly owned subsidiaries.
All significant intercompany accounts and transactions are eliminated in
consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments with an initial
maturity of three months or less.
INVENTORIES
Inventories are stated at the lower of cost (which includes material, labor and
manufacturing overhead) or market. Cost is determined by the first-in, first-out
(FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Expenditures for repairs and
maintenance are charged to expense as incurred, and additions and improvements
that significantly extend the lives of assets are capitalized. Upon disposition,
cost and accumulated depreciation are eliminated from the related accounts and
any gain or loss is reflected in the statements of income. The Company provides
depreciation using the straight-line method over the estimated useful lives of
respective classes of assets as follows:
Buildings and improvements..............................3 to 40 years
Machinery and equipment.................................3 to 10 years
Equipment rented to others..............................4 to 15 years
OTHER ASSETS
On May 17, 1999, the Company acquired a one-third interest in International
Assembly, Inc., a Texas corporation (IAI). The Company paid approximately $1,050
in cash for this investment. The investment is being accounted for under the
equity method of accounting. Equity income (loss) is recorded using a
three-month lag. The Company's losses attributed to IAI are included in other
expense, net and totaled $150, $240, and $203 for 2002, 2001 and 2000,
respectively. The asset balance at December 31, 2002 for this investment is
$377, of which approximately $350 represents goodwill.
The Company purchases certain services from IAI at amounts less than would be
paid to unrelated parties. These services totaled $458, $830 and $632 in 2002,
2001 and 2000, respectively.
INTANGIBLE ASSETS
Intangible assets primarily consist of costs related to trademarks and patents
issued to the Company and patent applications. Trademarks have been determined
to have indefinite useful lives and therefore the carrying value is reviewed at
least annually for recoverability. Capitalized patent costs are amortized on a
straight-line basis over the estimated useful lives of the patents, generally 17
years. In addition, intangible assets include supplier relationships and product
formulas, which are amortized on a straight-line basis over their respective
estimated useful lives.
LONG-LIVED ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired, the
carrying value is reviewed. If this review indicates that the carrying value of
the asset will not be recovered, as determined based on projected undiscounted
cash flows related to the asset over its remaining life, the carrying value of
the asset is reduced to its estimated fair value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist principally of cash, accounts receivable, accounts
payable and debt. The estimated fair value of these instruments approximates
their carrying value.
REVENUE RECOGNITION
Revenue from the sale of products is recorded at the time title passes,
generally when the products are shipped as our shipping terms are customarily
FOB shipping point. Revenue from the rental of equipment to others is recognized
on a month-to-month basis as the revenue is earned. The Company generally
warrants its products against defects and its most generous policy provides a
two-year parts and labor warranty on X-ray machines. The policy with respect to
sales returns generally provides that a customer may not return inventory except
at the Company's option with the exception of X-ray machines, which have a
90-day return policy. The Company owns X-ray equipment rented on a
month-to-month basis to customers. A liability for the removal costs of the
rented X-ray machines is capitalized and amortized over four years. A liability
for the removal costs of the purchased X-ray machines expected to be returned to
the Company is included in accounts payable and accrued liabilities at December
31, 2002 and 2001.
ADVERTISING COSTS
Advertising costs are expensed when incurred. Advertising costs were
approximately $2,072, $1,834 and $1,667 for 2002, 2001 and 2000, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed when incurred and totaled $596, $516
and $602 for 2002, 2001 and 2000, respectively.
INTEREST EXPENSE (INCOME), NET
Interest expense (income) includes interest paid related to borrowings on the
Company's credit facility, as well as offsetting interest income earned on
various investments. In 2002, 2001 and 2000, interest income totaled $63, $96,
and $119, respectively.
OTHER EXPENSE (INCOME), NET
Other expense (income) includes the Company's portion of losses from its
investment in IAI, rental income from leased space, sale of scrap, and other
miscellaneous income and expense items, all of which are not directly related to
the Company's primary business.
INCOME TAXES
The Company has accounted for income taxes under SFAS No. 109, an asset and
liability approach to accounting and reporting for income taxes. Deferred income
taxes are provided for temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash flows from operating activities include $5,401, $4,611, and $4,020 for the
payment of federal and state income taxes and $376, $188, and $99 for the
payment of interest during 2002, 2001 and 2000, respectively.
3. ACQUISITIONS:
On June 12, 2001 the Company acquired substantially all of the assets and
assumed a portion of the liabilities of the Biotrol and Challenge subsidiaries
of Pro-Dex, Inc. (collectively "Biotrol"). The Company paid approximately $9,343
in cash including transaction costs, with money set aside in escrow pending the
settlement of any indemnification claims. Upon final settlement, the purchase
price was $8,867. The acquisition was financed with borrowings on the Company's
credit facility and cash generated from operations. The acquisition was
accounted for as a purchase transaction. Upon the finalization of the settlement
and purchase accounting during the second quarter of 2002, the final purchase
price allocation was completed and goodwill was determined to be $6,160. The
final purchase accounting adjustments included a write-off of $11 to accounts
receivable, a write-off of $184 to fixed assets, a write-off of $75 to inventory
and an increase to accrued liabilities of $261 with the offset to goodwill. In
accordance with SFAS 142, $2,060 of separately identifiable intangible assets,
including trademarks, product formulations, and supplier relationships, were
also recorded. The trademarks have been determined to have indefinite lives. The
remaining intangible assets are being amortized over a period between 5 years
and 40 years. The results of operations for Biotrol are included in the
consolidated financial statements since June 12, 2001.
On June 13, 2000 the Company acquired substantially all of the assets and
assumed a portion of the liabilities of Plak Smacker. The Company paid $7,053 in
cash. The acquisition was principally financed with borrowings on the Company's
credit facility and cash generated from operations. The acquisition was
accounted for as a purchase transaction. The purchase price was allocated based
upon estimates of fair value of assets and liabilities, resulting in goodwill of
$6,126. The results of operations for Plak Smacker are included in the
consolidated financial statements since June 13, 2000.
4. SEGMENT INFORMATION:
Segment information has been prepared in accordance with Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." In 2000, with the acquisition of Plak
Smacker, the Company has two operating segments according to SFAS No. 131:
professional and retail. The professional segment sells products to dentists,
dental hygienists and dental assistants. The retail segment sells products to
consumers through mass merchandisers. There are no significant determinable
assets or interest costs for the retail segment.
The table below is a summary of certain financial information relating to the
two segments:
2002 Professional Retail Consolidated
------------ ------ ------------
Net sales............................. $ 67,147 $ 5,071 $ 72,218
Income from operations................ $ 18,560 $ 438 $ 18,998
2001 Professional Retail Consolidated
------------ ------ ------------
Net sales............................. $58,824 $ 4,835 $ 63,659
Income from operations................ $15,484 $ 261 $ 15,745
2000 Professional Retail Consolidated
------------- ------- ------------
Net sales............................. $48,737 $ 2,650 $51,387
Income from operations................ $13,428 $ 205 $13,633
------- ------ -------
5. MAJOR CUSTOMERS AND CREDIT CONCENTRATION:
The Company generates trade accounts receivable in the normal course of
business. The Company grants credit to distributors and customers throughout the
world and generally does not require collateral to secure the accounts
receivable. The Company's credit risk is concentrated among two distributors
accounting for 42% and 35% of accounts receivable at December 31, 2002 and 2001,
respectively.
The percentage of net sales to major distributors to total net sales consist of
the following:
Years Ended
December 31
-------------------------
Distributor 2002 2001 2000
----------- ---- ---- ----
Henry Schein, Inc.......................... 13.8% 14.6% 17.0%
Patterson Dental Company................... 15.0 13.3 11.7
6. INVENTORIES:
Inventories consist of the following:
December 31
---------------------
2002 2001
---- ----
Finished products........................... $ 4,931 $ 3,340
Work in process............................. 1,321 2,030
Raw materials and supplies.................. 1,609 1,788
-------- --------
Total inventories $ 7,861 $ 7,158
======= =======
7. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
December 31
-----------------------
2002 2001
---- ----
Land.................................................... $ 1,086 $ 1,086
Buildings and improvements.............................. 7,474 7,448
Machinery and equipment................................. 17,250 15,350
Equipment rented to others.............................. 5,852 5,257
Construction in progress................................ 129 605
--------- ---------
31,791 29,746
Less - Accumulated depreciation......................... (12,829) (10,987)
---------- ----------
Total property, plant and equipment, net..... $ 18,962 $ 18,759
========= =========
Machinery and equipment under capital lease and related accumulated depreciation
was $345 and $218, respectively at December 31, 2002 and was $794 and $356,
respectively at December 31, 2001. Depreciation expense was $2,125, $1,922 and
$1,693 for 2002, 2001 and 2000, respectively.
8. OTHER ASSETS:
Other assets consist of the following:
December 31
-----------------
2002 2001
---- ----
Investment in IAI....................................... $ 377 $ 527
Notes receivable, long-term (see footnote 19)........... - 500
Other................................................... 103 124
------- -------
Total other assets........................... $ 480 $1,151
====== ======
9. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill consists of the following:
December 31
---------------------
2002 2001
---- ----
Goodwill................................................ $ 47,212 $ 49,182
Less- Accumulated amortization......................... (4,798) (4,798)
--------- ----------
Total goodwill............................... $ 42,414 $ 44,384
======== ========
Amortization of goodwill totaled $0, $1,243 and $1,001 for 2002, 2001 and 2000,
respectively.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). In
accordance with SFAS 142, the Company no longer amortizes goodwill and
intangibles which have indefinite lives. Other intangible assets with finite
lives continue to be amortized over their useful lives.
SFAS 142 also requires that the Company assess goodwill and intangibles with
indefinite lives for impairment at least annually, based on the fair value of
the related reporting unit or intangible asset. The impairment test for goodwill
is a two-step process. The first step is to identify when a goodwill impairment
has occurred by comparing the fair value of a reporting unit with its carrying
amount, including goodwill. If the fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit is not considered impaired. If
the carrying amount of the reporting unit exceeds its fair value, the second
step of the goodwill test should be performed to measure the amount of the
impairment loss, if any. In this second step, the implied fair value of the
reporting unit's goodwill is compared with the carrying amount of the goodwill.
If the carrying amount of the reporting unit's goodwill exceeds the implied fair
value of that goodwill, an impairment loss should be recognized equivalent to
the excess amount which in no circumstances should exceed the carrying amount of
the goodwill.
In accordance with the transition rules of SFAS 142, the Company performed the
transitional impairment tests during the first half of 2002, as of January 1,
2002. Reporting units were established based on the Company's current reporting
structure. All existing goodwill and intangible assets were assigned to the
reporting units. All of the goodwill was allocated to the reporting units within
the professional segment. The Company engaged an independent valuation and
appraisal firm to assist with determining fair values based upon discounted
future estimated cash flows and other valuation techniques. Fair values of the
reporting units exceeded their respective book values. Thus no impairment was
identified as of January 1, 2002, and, therefore, Step 2 testing was deemed
unnecessary. During the fourth quarter of 2002, the Company carried forward the
detailed determination of the fair value of the reporting units, as permitted
based on certain criteria of SFAS 142. The Company determined that there was no
impairment of reporting units. On an on-going basis, the Company will perform
its annual impairment assessment in the fourth quarter of each year.
With the finalization of the purchase accounting relating to the acquisition of
Biotrol (acquired June 12, 2001), intangible assets other than goodwill of
$2,060 were identified in accordance with Statement of Financial Accounting
Standards No. 141, Business Combinations. This as well as other purchase price
adjustments and finalization of the purchase accounting resulted in a reduction
in the net carrying value of goodwill from $44,384 at December 31, 2001 to
$42,414 at December 31, 2002. There have been no changes in goodwill related to
impairment losses or write-offs due to sale of businesses.
Other intangibles consist of the following, which are all included in the
Professional Segment:
AS OF DECEMBER 31, 2002
---------------------------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING AMOUNT
AMOUNT AMORTIZATION
Amortized intangible assets
Patents $ 491 $ 204 $ 287
Product formulas 430 16 414
Supplier relationships 130 39 91
---------------- ----------- ---------
Total $ 1,051 $ 259 $ 792
Unamortized intangible assets
Trademarks $ 1,510 $ 1,510
-------------- -------
Total $ 1,510 $ 1,510
-------------- -------
Total intangible assets $ 2,561 $ 259 $ 2,302
AS OF DECEMBER 31, 2001
---------------------------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING AMOUNT
AMOUNT AMORTIZATION
Amortized intangible assets
Patents $ 485 $ 178 $ 307
The costs of other intangible assets with finite lives are amortized over their
expected useful lives using the straight-line method. The amortization lives are
as follows: 18 to 20 years for patents, 40 years for product formulations and 5
years for supplier relationships. The weighted average life for amortizable
intangible assets is 26 years. Aggregate amortization expense for the twelve
months ended December 31, 2002, 2001 and 2000 was $81, $26 and $26,
respectively. Estimated amortization expense for each of the next five years is
as follows:
For the year ended 12/31/03 $ 62
For the year ended 12/31/04 62
For the year ended 12/31/05 62
For the year ended 12/31/06 49
For the year ended 12/31/07 36
SFAS No. 142 does not require retroactive restatement for all periods presented.
However, presented below is a reconciliation of the 2001 and 2000 statements of
income data previously reported to reflect the impact related to its adoption:
TWELVE MONTHS ENDED
----------------------------------------------------------
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- ----------------- -----------------
Reported net income $11,411 $ 9,545 $8,305
Add: amortization adjustment, net of - 904 791
------------ -------- ------
related tax
Adjusted net income $11,411 $10,449 $9,096
======= ======= ======
Reported basic earnings per share $1.29 $0.99 $0.85
Add: amortization adjustment - $.09 $.08
------------ -------- ------
rAdjusted basic earnings per share $1.29 $1.08 $.93
===== ===== ====
Reported diluted earnings per share $1.22 $0.96 $0.84
Add: amortization adjustment - $.09 $.08
------------ -------- ------
rAdjusted diluted earnings per share $1.22 $1.05 $.92
===== ===== ====
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES CONSIST OF THE FOLLOWING:
December 31
---------------------
2002 2001
Accounts payable....................................................... $ 3,471 $ 2,045
Accrued salaries and bonuses........................................... 1,465 1,391
Accrued expenses and other ............................................ 3,174 2,988
-------- --------
Total accounts payable and accrued liabilities.............. $ 8,110 $ 6,424
======= =======
11. CREDIT ARRANGEMENTS AND NOTES PAYABLE:
The Company has a credit arrangement that provides for a three-year, unsecured
revolving credit facility with an aggregate commitment of $40,000. Borrowings
under the arrangement bear interest at rates ranging from LIBOR +1% to LIBOR
+2.25% or Prime to Prime +.5%. Commitment fees for this arrangement range from
..15% to .25% of the unused balance. The agreement is unsecured and contains
various financial and other covenants.
Long-term debt was as follows:
DECEMBER 31, DECEMBER 31,
2002 2001
---- ----
Revolving credit facility due 2004 with a weighted-average interest
rate of 2.73% at December 31, 2002 and 2.98% at December 31, 2001 $ 4,161 $ 16,700
Capital Lease Obligations 143 284
------------ ------------
4,304 16,984
Less- current portion 75 141
------------ ------------
$ 4,229 $ 16,843
============ ============
Future maturities of the credit facility and capital lease obligations are as
follows:
2003.................................... $ 75
2004.................................... 4,229
---------
Total................................... $ 4,304
In certain circumstances, the Company provides recourse for loans for equipment
purchases by customers. Certain banks require the Company to provide recourse to
finance equipment for new dentists and other customers with credit histories
which are not consistent with the banks' lending criteria. In the event that a
bank requires recourse on a given loan, the Company would assume the bank's
security interest in the equipment securing the loan. As of December 31, 2002,
approximately $649 of the equipment financed with various lenders was subject to
such recourse. Recourse on a given loan is generally eliminated by the bank
after one year, provided the bank has received timely payments on that loan.
Based on the Company's past experience with respect to these arrangements, the
carrying amount of this obligation at December 31, 2002 was zero.
12. COMMON STOCK:
During 2002, the Company repurchased 81 shares of its common stock from various
stockholders for $1,709. The purchases were financed through borrowings on the
Company's credit facility. The Company also reissued 187 shares of its Common
Stock in conjunction with stock option exercises for $832. In addition, the
Company issued 24 shares of Common Stock for restricted stock which vested
during 2002 (see footnote 13).
During 2001, the Company repurchased 1,052 shares of its Common Stock for
$14,917. 1,050 of these shares were purchased from George Richmond, the
Company's Chairman (see footnote 19). The Company also reissued 119 shares of
its Common Stock in conjunction with stock option exercises for $746.
On March 12, 2002, the Board of Directors declared a three-for-two stock split
of the Company's Common Stock in the form of a stock dividend payable on March
28, 2002 to shareholders of record as of the close of business on March 22,
2002. All share and per share numbers in this Report give effect to such stock
split.
13. STOCK AWARDS:
STOCK OPTIONS
The Company adopted the 1997 Stock Option Plan (the Plan) effective in November
1997 and amended the Plan in 1999 and 2001. A total of 1,725 shares of Common
Stock are reserved for issuance under this plan which is administered by the
compensation committee of the Board of Directors (Compensation Committee).
Participants in the Plan will be those employees whom the Compensation Committee
may select from time to time and those nonemployee directors as the Company's
Board of Directors may select from time to time. As of December 31, 2002, 1,422
options had been granted.
A summary of the options outstanding and exercisable is as follows:
Weighted
Range of Average
Exercise Exercise
Shares Prices Price
------ -------------- ------
Outstanding, January 1, 2000..................... 788 $8.00 - $11.67 $9.05
Granted.......................................... - - -
Exercised........................................ 12 $8.00 - $10.00 $8.51
Forfeited........................................ 7 $8.00 - $10.00 $8.81
-----
Outstanding, December 31, 2000................... 769 $8.00 - $11.67 $9.07
=====
Exercisable at December 31, 2000................. 438 $8.00 - $11.67 $8.99
=====
Outstanding, January 1, 2001..................... 769 $8.00 - $11.67 $9.07
Granted.......................................... 488 $14.02 $14.02
Exercised........................................ 119 $8.00 - $11.33 $8.58
Forfeited........................................ 48 $8.00 - $11.33 $9.56
-----
Outstanding, December 31, 2001................... 1,090 $8.00 - $14.02 $11.31
=====
Exercisable at December 31, 2001................. 483 $8.00 - $11.67 $9.08
=====
Outstanding, January 1, 2002..................... 1,090 $8.00 - $14.02 $11.31
Granted.......................................... - - -
Exercised........................................ 187 $8.00 - $11.33 $9.19
Forfeited........................................ 7 $8.00 - $9.29 $9.26
Outstanding, December 31, 2002................... 896 $8.00 - $14.02 $11.77
===
Exercisable at December 31, 2002................. 588 $8.00 - $14.02 $10.59
===
The weighted average remaining contractual life of the options outstanding at
December 31, 2002 is 7.0 years. As of January 1, 2003, 697 shares were
exercisable with a range of exercise prices from $8.00 - $14.02 with a weighted
average price of $11.12.
The Compensation Committee of the Board of Directors establishes vesting
schedules for each option issued under the Plan. Outstanding options generally
vest over four years. The exercise price has historically been equal to the fair
value of the Common Stock at the date of grant. All options expire 10 years from
the grant date.
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company elected APB Opinion No. 25, "Accounting for Stock Issued to Employee,"
and related interpretations in accounting for the Plan. Accordingly, no
compensation cost has been recognized for the Plan. Had compensation costs for
the Plan been determined based upon the fair value of the options at the grant
date consistent with the methodology prescribed under SFAS No. 123, the
Company's net income and earnings per share would approximate the pro forma
amounts below:
Year Ended Year Ended Year Ended
December 31, 2002 December 31, 2001 December 31, 2000
------------------------------ --------------------------- -------------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ----- -------- -----
Unaudited Unaudited Unaudited
Net income.................. $11,411 $10,265 $9,545 $ 8,630 $8,305 $ 7,556
Earnings per share:
Basic..................... $ 1.29 $1.16 $ 0.99 $ 0.89 $ 0.85 $ 0.77
Diluted................... $ 1.22 $1.10 $ 0.96 $ 0.87 $ 0.84 $ 0.76
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: (i) dividend yield of 0%; (ii) expected volatility of 43.7% for
2001; (iii) risk free interest rate of 4.8% 2001; and (iv) expected life of 8.0
years for 2001. The weighted average fair value of the options at the grant date
was $8.49 for 2001. No options were granted in 2002 or 2000.
RESTRICTED STOCK
Under the above Plan, restricted stock may be awarded or sold to participants
under terms and conditions established by the Compensation Committee. For
restricted stock grants, compensation expense is based upon the grant date
market price and is recorded over the vesting period. In October 2001, the
Company granted 120 shares of restricted stock to certain executive officers of
the Company. No monetary consideration was paid by the officers who received the
restricted stock. These shares vest 20% each year for five years starting in
October 2002. For the years ended December 31, 2002 and 2001, the Company
recorded $337 and $74, respectively, of compensation expense related to the
restricted stock grants.
14. INCOME TAXES:
The components of the provision for income taxes are as follows:
Years Ended December 31
--------------------------------
2002 2001 2000
---- ---- ----
Current..................................................... $ 6,756 $ 5,149 $ 4,336
Deferred.................................................... 545 826 884
------- ------- -------
Total provision for income taxes................. $ 7,301 $ 5,975 $ 5,220
======= ======= =======
The income tax provisions are different from the amount computed by applying the
U.S. federal income tax rates to income before provision for income taxes. The
reasons for these differences are as follows:
Years Ended December 31
--------------------------------
2002 2001 2000
---- ---- ----
Income before provision for income taxes.................... $ 18,712 $ 15,520 $ 13,525
U.S. federal income tax rate................................ 35% 35% 34%
-------- -------- --------
Computed income taxes............................ 6,549 5,432 4,599
Goodwill amortization....................................... - 143 135
Other....................................................... 211 (59) 69
---------- --------------------
Provision for federal income taxes............... 6,760 5,516 4,803
State income taxes, net of federal tax benefit.............. 541 459 417
--------- --------- ---------
Provision for income taxes....................... $ 7,301 $ 5,975 $ 5,220
========= ========= =========
Effective tax rate.......................................... 39.0% 38.5% 38.6%
========= ========= =========
Temporary differences that gave rise to deferred income tax assets and
liabilities are as follows:
December 31
---------------------
2002 2001
---- ----
Deferred income tax assets:
Trade accounts receivable............................................ $ 145 $ 77
Inventories.......................................................... 190 100
Accrued liabilities.................................................. 736 847
Other................................................................ 29 -
-------- --------
Total deferred income tax assets............................ 1,100 1,024
-------- --------
Deferred income tax liabilities:
Property, plant and equipment........................................ (2,530) (1,937)
Intangibles.......................................................... (2,403) (1,648)
Other................................................................ - (727)
-------- --------
Total deferred income tax liabilities....................... (4,933) (4,312)
-------- --------
Net deferred income tax liability...................................... $(3,833) $(3,288)
======== =======
Current deferred income tax assets of $1,071 and $1,024 are included in other
current assets as of December 31, 2002 and 2001, respectively.
15. SALES OF EQUIPMENT RENTED TO OTHERS:
Periodically, customers who rent X-ray equipment from the Company elect to
purchase the equipment. The Company recognizes revenue for the proceeds of such
sales and records as cost of goods sold the net book value of the equipment. Net
sales of equipment consistent with this practice were $1,111, $1,014, and $1,434
for 2002, 2001 and 2000, respectively and gross profit from these sales was
$522, $555, and $712 for 2002, 2001 and 2000, respectively.
16. EMPLOYEE BENEFITS:
The Company has a defined contribution 401(k) plan covering substantially all
full-time employees meeting service and age requirements. Contributions to the
Plan can be made by an employee through deferred compensation and through a
discretionary employer contribution. Compensation expense related to this plan
was $307, $258, and $234 for 2002, 2001 and 2000, respectively. The Company also
offers certain healthcare insurance benefits for substantially all employees.
17. RELATED-PARTY TRANSACTIONS:
In October 2002, the Company purchased 8 shares of its common stock from certain
executive officers for approximately $187 in order to remit tax withholdings on
their vested restricted stock.
During 2002, the Company paid consulting fees of $75 to a corporation which is
wholly owned by a principal stockholder of the Company.
In November 2001, the Company purchased 1,050 shares of its common stock from
George E. Richmond, its Chairman and then Chief Executive Officer, for
approximately $14,900.
The Company sells products to, and pays for services from, a corporation in
which a principal stockholder of the Company has an equity interest. Net sales
to such corporation totaled $83, $70, and $77 in 2002, 2001 and 2000,
respectively. Amounts paid for services totaled $1, $2, and $3 in 2002, 2001 and
2000, respectively.
In August 2000, the Company loaned an officer of the Company $500 in exchange
for a three-year unsecured promissory note at an interest rate of 6.27% payable
annually. The note is included in other current assets on the balance sheet at
December 31, 2002 and in other assets on the balance sheet at December 31, 2001.
Interest income of $31 related to this note was recorded in 2002 and in 2001.
18. EARNINGS PER SHARE:
Basic earnings per share (Basic EPS) is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share (Diluted EPS) include the dilutive effect of stock
options and restricted stock, if any, using the treasury stock method. The
following table sets forth the computation of basic and diluted earnings per
share:
Years Ended December 31
-------------------------------------------
2002 2001 2000
---- ---- ----
Net income....................................... $11,411 $9,545 $8,305
Weighted average shares outstanding for basic earnings
per share........................................ 8,876 9,662 9,752
Dilutive effect of stock options and restricted
stock............................................ 455 242 162
Weighted average shares outstanding for diluted
earnings per share............................... 9,331 9,904 9,914
Basic earnings per share......................... $ 1.29 $ .99 $ .85
Diluted earnings per share....................... $ 1.22 $ .96 $ .84
- -----------------------------------------------------------------------------------------------------------
19. QUARTERLY FINANCIAL DATA (UNAUDITED):
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. YEAR
-------- -------- -------- -------- ----
2002
- ----
Net sales.............................................. $16,513 $17,935 $18,086 $19,684 $72,218
Gross profit........................................... 8,976 9,639 9,476 10,340 38,431
Net income............................................. 2,430 2,858 2,844 3,279 11,411
Earnings per share - basic............................. $.28 $.32 $.32 $.37 $1.29
Earnings per share - diluted........................... $.27 $.30 $.30 $.35 $1.22
2001
- ----
Net sales.............................................. $13,929 $15,022 $16,760 $17,948 $63,659
Gross profit........................................... 7,113 7,935 8,895 9,699 33,642
Net income............................................. 1,966 2,269 2,425 2,885 9,545
Earnings per share - basic............................. $.20 $.23 $.25 $.31 $.99
Earnings per share - diluted........................... $.20 $.23 $.24 $.30 $.96
20. COMMITMENTS AND CONTINGENCIES:
The Company leases certain office, warehouse, manufacturing facilities,
automobiles, and equipment under non-cancelable operating leases. The total
rental expense for all operating leases was $812, $636, and $324 for 2002, 2001
and 2000, respectively. Rental commitments amount to: $615 for 2003, $197 for
2004, $78 for 2005, $13 for 2006, and $12 for 2007.
On May 24, 2001, Sultan Dental Products, Ltd. ("Sultan") filed a complaint in
the United States District Court for the Southern District of New York (which
was subsequently dismissed by the plaintiff and refiled in the United States
District Court for the District of New Jersey on October 16, 2001) asserting
that the Young disposable prophy angle infringes a patent that is exclusively
licensed to Sultan. The complaint sought a permanent injunction and unspecified
damages. In addition, on January 25, 2002, the Company filed a complaint in the
United States District Court for the Eastern District of Missouri asserting that
the manufacture of the Sultan disposable prophy angle infringes the Company's
U.S. Patent No. 5,749,728. The complaint sought a permanent injunction and
damages. On February 6, 2003, the Company and Sultan settled each case with
neither party paying a material amount.
The Company and its subsidiaries from time to time are also parties to various
legal proceedings arising in the normal course of business. Management believes
that none of these proceedings, if determined adversely, would have a material
adverse effect on the Company's financial position, results of operations or
liquidity.
21. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." Under SFAS No. 143, the fair
value of a liability for an asset retirement obligation is required to be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. SFAS No. 143 was
implemented by the Company beginning January 1, 2002. Adoption of SFAS No. 143
did not have a material impact on the consolidated financial statements of the
Company.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144
addresses financial accounting and reporting for the impairment of long-lived
assets and for the long-lived assets to be disposed of and supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." SFAS No. 144 establishes a single accounting model
for long-lived assets to be disposed of by sale and resolves implementation
issues related to SFAS No. 121. SFAS No. 144 was implemented by the Company
beginning January 1, 2002. Adoption of SFAS No. 144 did not have a material
impact on the consolidated financial statements of the Company.
In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment to FASB Statement No.
13, and Technical Corrections." SFAS No. 145 addresses classification of
extinguishment of debt and requires accounting for lease modifications in the
same manner as sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. SFAS
No. 145 was implemented by the Company beginning January 1, 2002. Adoption of
SFAS No. 145 did not have a material impact on the consolidated financial
statements of the Company.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." Under SFAS
No. 146, liabilities are recognized for exit and disposal costs only when a
liability is incurred, rather than at the date of an entity's commitment to an
exit plan. SFAS No. 146 is effective for exit or disposal activities initiated
after December 31, 2002. Adoption of SFAS No. 146 did not have a material impact
on the consolidated financial statements of the Company.
In December 2002, the Financial Accounting Standards Board issued SFAS No.148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure." This
statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. FAS No. 148 provides for
voluntary adoption of the fair value method for entities with fiscal years
ending after December 15, 2002. The Company currently has not made this
election.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No.45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Other." This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this Interpretation are effective for financial statements of interim or annual
periods ending after December 31, 2002. Management does not believe the impact
of this Interpretation will be material to the consolidated financial statements
of the Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On June 17, 2002 the Company filed a Form 8-K. Under item 4, the Company
reported that its Board of Directors had appointed KPMG LLP to replace Arthur
Andersen LLP, who the Company dismissed on June 10, 2002 as independent public
accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Information concerning the Company's directors called for by this item
will be included in the Company's definitive Proxy Statement prepared in
connection with the 2003 Annual Meeting of Shareholders and is
incorporated herein by reference. Such proxy statement will be filed
with the Commission within 120 days after the close of the Company's
fiscal year.
(b) Reference is made to "Executive Officers of the Registrant" in Part I.
ITEM 11. EXECUTIVE COMPENSATION.
Information concerning this item will be included under the captions "Executive
Compensation" and "Option Grants" in the Company's definitive Proxy Statement
prepared in connection with the 2003 Annual Meeting of Shareholders and is
incorporated herein by reference. Such proxy statement will be filed with the
Commission within 120 days after the close of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information concerning this item will be included under the caption "Securities
Beneficially Owned by Management and Principal Shareholders" and "Equity
Compensation Plan Information" in the Company's definitive Proxy Statement
prepared in connection with the 2003 Annual Meeting of Shareholders and is
incorporated herein by reference. Such proxy statement will be filed with the
Commission within 120 days after the close of the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning this item will be included under the caption "Certain
Relationships and Related Party Transactions" in the Company's definitive Proxy
Statement prepared in connection with the 2003 Annual Meeting of Shareholders
and is incorporated herein by reference. Such proxy statement will be filed with
the Commission within 120 days after the close of the Company's fiscal year.
ITEM 14. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded, based on
their evaluation within 90 days of the filing of this report, that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission's
rules and forms. There have been no significant changes in our internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the previously mentioned evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements -- Reference is made to Item 8 hereof:
Consolidated Balance Sheets - December 31, 2002 and 2001
Consolidated Statements of Income - Years ended December 31, 2002,
2001, and 2000
Consolidated Statements of Stockholders' Equity - Years ended December
31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows - Years ended December 31,
2002, 2001, and 2000
Notes to Consolidated Financial Statements - December 31, 2002
(a)(2) Financial Statement Schedule -- The following financial statement
schedule of the Company is included for the years ended December 31, 2002, 2001,
and 2000:
Schedule II Valuation and Qualifying Accounts.
All other financial statement schedules are omitted for the reason that they are
not required or are not applicable, or the required information is shown in the
financial statements or the notes thereto.
(a)(3) Exhibits -- See the Exhibit Index for the exhibits filed as a part of
or incorporated by reference into this report.
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1(a) Articles of Incorporation of Registrant and Statement of Correction
3.2(e) Amended and Restated By-Laws of Registrant
4.1(c) Credit Facilities Agreement among Bank of America, N.A., the other
lenders listed therein and the Registrant dated March 20, 2001
(the "Credit Agreement")
4.2(c) Amendment No. 1 to the Credit Agreement dated April 20, 2001
4.3(d) Amendment No. 2 to the Credit Agreement dated September 28, 2001
4.4(h) Amendment No. 3 to the Credit Agreement dated September 19, 2002
10.1(e) Amended and Restated 1997 Stock Option Plan of the Registrant
10.2(g) Employment Agreement dated June 12, 2002, by and between Young the
Registrant and Alfred E. Brennan, Jr.
10.3(g) Employment Agreement dated June 12, 2002, by and between the
Registrant and Arthur L. Herbst, Jr.
10.4(g) Employment Agreement dated June 12, 2002, by and between the
Registrant and Eric J. Stetzel
10.5(b) Promissory Note dated August 7, 2000, in the amount of $500,000
payable by Alfred E. Brennan, Jr. to the Registrant
10.6(g) Employment Agreement dated April 1, 2002, by and between the
Registrant and George E. Richmond
10.7(b) Consulting Agreement dated January 8, 2001, by and between the
Registrant and Richard G. Richmond
10.8(e) Amendment to Richard G. Richmond Consulting Agreement dated November
19, 2001
10.9(e) Stock Repurchase Agreement dated November 9, 2001, by and between the
Registrant and George E. Richmond
10.10(e) Form of the Registrant's Restricted Stock Award Agreement with
schedule of grantees
10.11(g) Consulting Agreement dated April 1, 2002, by and between the
Registrant and GER Consulting, Inc.
10.12(g) Form of Indemnity Agreement entered into with each member of the
Registrant's Board of Directors
10.13(i) Amendment to George E. Richmond Employment Agreement dated May 14,
2002
10.14(i) Amendment to GER Consulting, Inc. Consulting Agreement dated May 14,
2002
16(f) Letter Regarding Change of Certifying Accountants
21(i) Subsidiaries of the Registrant
23.1(i) Consent of KPMG LLP
23.2(i) Information Regarding Consent of Arthur Andersen LLP
24 Power of Attorney (included on Signature page)
99.1(i) Certification pursuant to 18.U.S.C. Section 1350 as adopted pursuant
to Section 906 of Sarbanes-Oxley Act of 2002
- --------------------------------
(a) Filed as an Exhibit to Registrant's Registration Statement
No. 333-34971 on Form S-1 and incorporated herein by reference.
(b) Filed as an Exhibit to Registrant's Report on Form 10-K filed on
March 29, 2001 and incorporated herein by reference.
(c) Filed as an Exhibit to Registrant's Report on Form 10-Q filed on
August 14, 2001 and incorporated herein by reference.
(d) Filed as an Exhibit to Registrant's Report on Form 10-Q filed on
November 13, 2001 and incorporated herein by reference.
(e) Filed as an Exhibit to Registrant's Report on Form 10-K filed on
March 25, 2002 and incorporated herein by reference.
(f) Filed as an Exhibit to Registrant's Report on Form 8-K filed on June
17, 2002 and incorporated herein by reference.
(g) Filed as an Exhibit to Registrant's Report on Form 10-Q filed on
August 14, 2002 and incorporated herein by reference.
(h) Filed as an Exhibit to Registrant's Report on Form 10-Q/A filed on
November 11, 2002 and incorporated herein by reference.
(i) Filed herewith.
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.
Dated: March 19, 2003
YOUNG INNOVATIONS, INC.
By: /s/ Alfred E. Brennan, Jr.
--------------------------
Alfred E. Brennan, Jr.
Each person whose signature appears below constitutes and appoints George E.
Richmond and Alfred E. Brennan his true and lawful attorneys-in-fact and agents,
each acting alone, with full powers of substitution and re-substitution for him
or her and in his or her name, place and stead, in any and all capacities, to
sign any and all amendments to this report, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
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 and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GEORGE E. RICHMOND Director March 19, 2003
George E. Richmond
/s/ ALFRED E. BRENNAN, JR. President, Chief Executive March 19, 2003
Alfred E. Brennan, Jr. Officer, Director (Principal
Executive Officer)
/s/ ARTHUR L. HERBST, JR. Executive Vice President, Chief March 19, 2003
Arthur L. Herbst, Jr. Operating Officer, Chief
Financial Officer, Secretary,
Director (Principal Financial
Officer and Principal Accounting Officer)
/s/ RICHARD G. RICHMOND Director March 19, 2003
Richard G. Richmond
/s/ RICHARD P. CONERLY Director March 19, 2003
Richard P. Conerly
/s/ CONNIE H. DRISKO Director March 19, 2003
Connie H. Drisko
/s/ JAMES R. O'BRIEN Director March 19, 2003
James R. O'Brien
/s/ CRAIG E. LABARGE Director March 19, 2003
Craig E. LaBarge
/s/ BRIAN F. BREMER Director March 19, 2003
Brian F. Bremer
CERTIFICATIONS
--------------
I, Alfred E. Brennan, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Young Innovations,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in the Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: March 19, 2003
/s/ Alfred E. Brennan, Jr.
---------------------------
Alfred E. Brennan, Jr.
CERTIFICATIONS, CONT.
---------------------
I, Arthur L. Herbst, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Young Innovations, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
the Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Dated: March 19, 2003
/s/ Arthur L. Herbst, Jr.
--------------------------
Arthur L. Herbst, Jr.
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1(a) Articles of Incorporation of Registrant and Statement of Correction
3.2(e) Amended and Restated By-Laws of Registrant
4.1(c) Credit Facilities Agreement among Bank of America, N.A., the other
lenders listed therein and the Registrant dated March 20, 2001
(the "Credit Agreement")
4.2(c) Amendment No. 1 to the Credit Agreement dated April 20, 2001
4.3(d) Amendment No. 2 to the Credit Agreement dated September 28, 2001
4.4(h) Amendment No. 3 to the Credit Agreement dated September 19, 2002
10.1(e) Amended and Restated 1997 Stock Option Plan of the Registrant
10.2(g) Employment Agreement dated June 12, 2002, by and between Young the
Registrant and Alfred E. Brennan, Jr.
10.3(g) Employment Agreement dated June 12, 2002, by and between the
Registrant and Arthur L. Herbst, Jr.
10.4(g) Employment Agreement dated June 12, 2002, by and between the
Registrant and Eric J. Stetzel
10.5(b) Promissory Note dated August 7, 2000, in the amount of $500,000
payable by Alfred E. Brennan, Jr. to the Registrant
10.6(g) Employment Agreement dated April 1, 2002, by and between the
Registrant and George E. Richmond
10.7(b) Consulting Agreement dated January 8, 2001, by and between the
Registrant and Richard G. Richmond
10.8(e) Amendment to Richard G. Richmond Consulting Agreement dated November
19, 2001
10.9(e) Stock Repurchase Agreement dated November 9, 2001, by and between the
Registrant and George E. Richmond
10.10(e) Form of the Registrant's Restricted Stock Award Agreement with
schedule of grantees
10.11(g) Consulting Agreement dated April 1, 2002, by and between the
Registrant and GER Consulting, Inc.
10.12(g) Form of Indemnity Agreement entered into with each member of the
Registrant's Board of Directors
10.13(i) Amendment to George E. Richmond Employment Agreement dated May 14,
2002
10.14(i) Amendment to GER Consulting, Inc. Consulting Agreement dated May 14,
2002
16(f) Letter Regarding Change of Certifying Accountants
21(i) Subsidiaries of the Registrant
23.1(i) Consent of KPMG LLP
23.2(i) Information Regarding Consent of Arthur Andersen LLP
25 Power of Attorney (included on Signature page)
99.1(i) Certification pursuant to 18.U.S.C. Section 1350 as adopted pursuant
to Section 906 of Sarbanes-Oxley Act of 2002
- --------------------------------
(a) Filed as an Exhibit to Registrant's Registration Statement
No. 333-34971 on Form S-1 and incorporated herein by reference.
(b) Filed as an Exhibit to Registrant's Report on Form 10-K filed on
March 29, 2001 and incorporated herein by reference.
(c) Filed as an Exhibit to Registrant's Report on Form 10-Q filed on
August 14, 2001 and incorporated herein by reference.
(d) Filed as an Exhibit to Registrant's Report on Form 10-Q filed on
November 13, 2001 and incorporated herein by reference.
(e) Filed as an Exhibit to Registrant's Report on Form 10-K filed on
March 25, 2002 and incorporated herein by reference.
(f) Filed as an Exhibit to Registrant's Report on Form 8-K filed on
June 17, 2002 and incorporated herein by reference.
(g) Filed as an Exhibit to Registrant's Report on Form 10-Q filed on
August 14, 2002 and incorporated herein by reference.
(h) Filed as an Exhibit to Registrant's Report on Form 10-Q/A filed on
November 11, 2002 and incorporated herein by reference.
(i) Filed herewith.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Young Innovations, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Young Innovations, Inc.
and subsidiaries included in this Form 10-K Annual Report and have issued our
report thereon dated February 4, 2002 (except with respect to the matter
discussed in Note 22, as to which the date is March 22, 2002). Our audits were
made for the purpose of forming an opinion on those statements taken as a whole.
Schedule II included in this Form 10-K Annual Report is the responsibility of
the Company's management and is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 4, 2002 (except with respect to the matter discussed in Note 22, as to
which the date is March 22, 2002)
THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP,
WHICH HAS CEASED OPERATIONS, IN CONNECTION WITH YOUNG INNOVATIONS, INC.'S FILING
ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT
BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM
10-K. SEE EXHIBIT 23.2 FOR FURTHER DISCUSSION.
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2000, 2001, and 2002
(IN THOUSANDS)
ADDITIONS
-------------------------
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF YEAR EXPENSES ACQUISITIONS DEDUCTIONS OF YEAR
------- -------- ------------ ---------- -------
Allowance for doubtful
Receivables
2000...................... 228 (25) 100 83 220
2001...................... 220 51 255 82 444
2002...................... 444 204 11 274 385