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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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, 2004
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 areacode: 314-344-0010
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section12(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No ___
On June 30, 2004, 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 $132.9
million. (For purposes of this calculation only, directors and executive
officers have been deemed affiliates.)
Number of shares outstanding of the Registrant's Common Stock at January 31,
2005:
9,041,996 shares of Common Stock, par value $.01 per share
Portions of the Registrant's definitive Proxy Statement to be filed for its
2005 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Report.
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FORWARD-LOOKING STATEMENTS
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 and 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:
- 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
- Changes in standard of care relating to dental health
- Compliance with laws
- Increased government regulation
- Concentration of suppliers - General economic conditions
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.
2
PART I
ITEM 1. BUSINESS (ALL ITEMS IN THOUSANDS).
GENERAL OVERVIEW
Young Innovations, Inc. and its subsidiaries ("the Company") develop,
manufacture, and market supplies and equipment used to facilitate the practice
of dentistry and to promote oral health. The Company's product offering includes
disposable and metal prophylaxis ("prophy") angles, prophy cups and brushes,
panoramic X-ray machines, dental handpieces (drills) and related components,
orthodontic toothbrushes, flavored examination gloves, children's toothbrushes,
moisture control products, infection control products, ultrasonic scaling and
endodontic systems, and obturation systems used in endodontic surgery (root
canal procedures). These products are primarily marketed to dental
professionals, principally dentists, endodontists, orthodontists, dental
hygienists and dental assistants.
The Company's manufacturing and distribution facilities are located in Missouri,
California, Indiana, Colorado, Tennessee, Texas and Canada.
The Company markets its products primarily in the U.S. 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 2004.
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.
BACKGROUND
The Company was founded as Young Dental 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
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 Dental established a strong
reputation and leading market position in disposable and metal prophy angles,
the core products utilized by the dentist in the typical biannual teeth
cleaning.
In 1995, following the acquisition of The Lorvic Corporation, the Company
incorporated as Young Innovations, Inc. in the state of Missouri. Since then,
Young has acquired a number of complementary businesses, and introduced a
variety of new products. Through these acquisitions and new product
introductions, the Company has expanded its preventive and infection control
product offerings, and entered a number of new product areas, including dental
diagnostic imaging, handpieces, home care products, and, most recently,
endodontics. The Company believes its continued commitment to providing
innovative products to meet the evolving needs of dental professionals has
earned it a reputation for quality, reliability and value.
RECENT DIVESTITURE
In December 2004, the Company completed the sale of the retail division of its
Plak Smacker subsidiary. The retail division, which has previously been reported
as a distinct operating segment, sold toothbrushes, children's toothpastes and
dental accessories to mass merchandisers under the Plak Smacker brand name. The
retail division had sales of $3,086, $3,594, and $5,071 for the years ended
December 31, 2004, 2003 and 2002, respectively. As a result of the disposition,
the Company has reclassified its historical and current year financial
statements to reflect the retail segment as discontinued operations. The net
income (loss) on discontinued operations was $797, ($85), and $264 for the
fiscal years ended December 31, 2004, 2003 and 2002, respectively. In 2004, the
Company also recognized a pre-tax gain on disposal, net of certain transaction
costs, of $1,156.
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BUSINESS STRATEGY
The key elements of the Company's strategy are:
o Developing New Products. Product development has been an important
part of the Company's growth strategy, and continues to play a
critical role in the pursuit of internal growth. The evolution of the
Company's product offering is driven by the needs of clinicians and
patients, which often require modifications to existing products
rather than new designs. The Company maintains an active dialogue with
practicing clinicians to identify product improvements that enhance
patient comfort and improve patient care, and/or improve practice
productivity.
o Improving Operating Efficiency. The Company strives to reduce costs
and rationalize expenses across its operations in an effort to
maximize profitability. In order to improve operating efficiency, the
Company seeks cost savings through manufacturing and process
improvements, administrative and marketing synergies, and facility
consolidation, where appropriate.
o Acquiring Complementary Products and Companies. The Company is
experienced in acquiring and integrating complementary products and
businesses. The Company continuously evaluates acquisition
opportunities, and will pursue opportunities that increase the breadth
of its product and service offerings and provide opportunities to
enhance the growth prospects and profitability of the overall business
through manufacturing and marketing synergies. The following table
provides a summary of our acquisition history.
SELECT ACQUISITIONS
- --------------------------------------- --------------------- ------------------------------------------------------
Company Name AcquisitionR Year Key Product Additions
- ------------ ----------------- ---------------------
The Lorvic Corporation 1995 Infection control products.
Denticator International, Inc. 1996 Popular-priced disposable prophy angles.
Panoramic Corporation 1998 Panoramic X-ray equipment and supplies.
Athena Technology, Inc. 1999 Dental handpieces and related components.
Plak Smacker, Inc. 2000 Home care products and flavored gloves.
Biotrol and Challenge 2001 Infection control products, prophy pastes and other
(subsidiaries of Pro-Dex, Inc.)
Obtura Corporation & 2003 Endodontic products.
Earth City Technologies, Inc.
- --------------------------------------- --------------------- ------------------------------------------------------
PRODUCTS
The Company's $79,201 in sales are derived from the manufacture and sale of the
following products. The Company has grouped these products by core function
within the dental office.
PREVENTIVE. The Company believes it is a leading supplier of preventive products
to the U.S. professional dental market. Preventive products include:
o Prophy Angles. The Company offers a broad line of prophy products. The
prophy angle, in combination with prophy paste, is used in the
typically biannual "teeth cleaning treatment" that helps remove plaque
and polishes teeth. The Company offers a variety of pre-assembled
Classic and Contra disposable prophy angles with cups or brushes
attached under both the Young Dental (premium-priced) and Denticator
(popular-priced) brand names, as well as through private-label
relationships. The Company believes it is the market leader in
disposable prophy angles, with its extensive line of prophy products
that suit the wide variety of customer needs and desires.
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The Company also offers metal prophy angles, which are sealed to help
prevent damage to the internal components of the angle and help it
withstand repeated sterilizations. The metal prophy angles are
marketed together with an assortment of cups and brushes specifically
designed to work together, which encourages recurring purchases of
these products.
o Prophy pastes. D-Lish, Festival and ProCare are certain brand names of
the Company's prophy pastes. Most pastes are available in a variety of
textures (grits) and flavors, though some are sold in powder form.
Important functional features of prophy paste include stain removal,
flavor and splatter control.
o Flourides. The Company sells a variety of flavors of fluorides in gel,
foam and rinse formulations. Fluorides are used to help prevent tooth
decay.
o Handpieces and components. Under the Athena Champion brand name, the
Company manufactures and markets low- and high-speed dental
handpieces. Handpieces are used for teeth-cleaning and during
restorative procedures, including removing decay during cavity
preparation procedures. The Company also provides repair and
maintenance services for handpieces.
INFECTION CONTROL. The Company markets a broad line of infection control
products to the dental practice. Infection control products include:
o Surface disinfectants. BIREX is one of the leading liquid surface
disinfectants in the U.S. Surface disinfectants are used to clean
surfaces in the dental operatory, such as a dental chair or
countertop, that may be contaminated with bioburden. BIREX is a
concentrated solution that is diluted with water prior to use, which
makes it easier to ship and store. In 2003, Biosept HTP, a
ready-to-use disinfectant, was introduced to meet the needs of
professionals who prefer this easy-to-use form of delivery.
o Evacuation system cleaners. The evacuation system is designed to
remove debris from the patient's mouth during a dental procedure.
Vacusol and newly introduced NeutraVac, the Company's evacuation
system cleaners, remove debris that collects in the evacuation line.
When used with the Company's atomizer, the solution is mixed with room
air and flows through the evacuation lines. Due to the unique
air/liquid solution, the stress on the vacuum pump used in the
evacuation system is minimized, which helps to extend pump life.
o Gloves and masks. The Company offers many types of gloves, including
latex, non-latex and powder-free gloves for dental professionals.
Flavored gloves, including bubble gum and grape, are often used by
pediatric dentists to help provide a more positive, enjoyable
experience for their younger patients. Masks are used as a barrier by
dental professionals.
o Ultrasonic cleaning systems. The Company, under the Healthsonics brand
name, manufactures and markets a line of ultrasonic cleaning systems
primarily used to clean and disinfect dental hand instruments. The
Company also sells a line of solutions and accessories that are used
in connection with these systems.
o Instrument disinfectants. The Company offers a full line of solutions
designed for disinfecting dental instruments, including BioCideG30,
Multicide Ultra and Biozyme LT. Certain of these cleaners may also be
used with ultrasonic cleaners.
DIAGNOSTIC. The Company believes it is a leading provider of panoramic dental
X-ray systems and supplies in the U.S., marketed under the Panoramic brand name.
The Company's diagnostic products include:
o Panoramic PC-1000 System. The PC-1000 is a fully equipped panoramic
X-ray machine which produces a high-quality image of the entire dental
arch. All teeth, the entire lower jaw, joints and a portion of the
sinuses are seen on one resulting X-ray film. A single exposure from
the PC-1000 lasts only 12 seconds, resulting in far less radiation
exposure when compared to a set of bite-wings or a full mouth series
taken with traditional intraoral X-ray machines. The PC-1000 is
shipped essentially fully assembled and is freestanding. As a result,
this machine requires only a few hours to install, which is much less
than most competitive products.
o Panoramic PC-1000/Laser-1000. This is the Company's cephalometric
offering. Cephalometric radiographs show 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
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other orthodontia. Oral surgeons use cephalometric X-rays to detect
pathology and also to determine bone and teeth alignment before and
after surgery.
o Digital. The Company's PC-1000 and PC-1000/Laser-1000 provide the
platform which produces the X-ray image. The Company offers both
direct and phosphor plate digital solutions for its X-ray machines
which can be purchased with a new panoramic X-ray machine or added to
a dentist's current panoramic machine.
o Supplies and Service. The Company offers its customers dental X-ray
supplies including film, film cassettes and intensifying screens,
processing chemicals, and darkroom supplies. The Company also offers
service on all of its systems through a network of more than 200
independent nationwide service technicians.
Panoramic X-ray systems can be a significant investment for a dentist. In
addition to outright purchasing and traditional financing options, the Company
established a rental program whereby dentists pay on a per-use basis for the
system (i.e., per X-ray image taken). The system is installed free of charge,
and the dentist pays a monthly fee based on usage. Rental customers have the
option to purchase their equipment at any time.
HOME CARE. The Company markets a line of products to dentists, pediatric
dentists and orthodontists that are prescribed, sold or given to patients for
use at home. The Company's home care products include:
o Home care kits. These kits are given to patients to encourage good
oral healthcare habits and contain products such as brushes, wax to
protect the inside of the cheek from irritation due to brackets, a
timer to monitor brushing time, and floss.
o Toothbrushes. The Company offers a broad line of toothbrushes for many
age groups, including infants, children, teens and adults. The Company
also markets an "all-in-one" brush for patients with braces. One end
of the brush is a standard toothbrush, while the other end features a
conical brush designed for access between brackets.
o Fluorides. The Company sells a variety of flavors of fluorides in gel,
foam and rinse formulations. Fluorides are used to help prevent the
development of tooth decay.
ENDODONTIC. The Company sells endodontic products under the Obtura and Spartan
brand names. Endodontics is the part of dentistry associated with the treatment
of tooth root, dental pulp and surrounding tissue. The most common therapy in
endodontics is the root canal procedure, which involves removing the organic
root canal tissue and subsequently filling the empty canal with gutta percha, a
rubber-like filling material. Endodontic procedures are performed by both
general dentists and specialists (endodontists). The Company's endodontic
products include:
o Obturation. The Obtura family of endodontic units, including the newly
introduced Obtura IIItm, are gun-type, heat-softened gutta percha
delivery systems. This unique dispensing unit allows the dentist to
deliver a consistent flow of warm gutta percha directly into the
canal, similar to extruding hot glue from a glue gun, facilitating the
canal-filling procedure. Additionally, the Obtura systems help
practitioners effectively seal the canal, which is an important
component of the root canal procedure.
o Ultrasonic systems. Under the Spartan brand name, ultrasonic units and
handpieces are marketed together with a variety of tips for different
clinical applications. BUCtm tips are used for, among other things,
gaining and refining access to the tooth root, while CPRtm tips are
more often used in retreatment cases. KiStm tips, used for
microsurgery, offer a rough diamond coating for improved cutting. The
Company believes that it holds a leading position in the domestic
market for ultrasonic systems and tips used in endodontic surgery and
retreatment. The Company also offers additional ultrasonic tips for
use in periodontal applications.
SALES AND MARKETING OF PROFESSIONAL PRODUCTS
The Company markets its preventive, infection control and certain home care
products to dental professionals worldwide primarily through a network of
non-exclusive relationships with dental product distributors. All major
distributors of dental products in North America sell the Company's products,
including Henry Schein, Inc. and Patterson Companies, Inc., which accounted for
16.2% and 13.7%, respectively, of the Company's sales in 2004. In addition to
marketing through distributors in the U.S., the Company sells products directly
to dental and dental hygiene schools, Veterans Administration healthcare
facilities, and U.S. military bases.
The Company actively supports its distributor relationships with Company sales
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personnel and independent sales representatives in the U.S., independent sales
representatives in Canada and Mexico, and sales representatives in countries
outside of North America. These sales representatives help teach the Company's
distributors about the quality, reliability and features of its products. The
Company also advertises its products through industry publications. 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 generate interest in its products by providing
information and marketing materials to influential lecturers and consultants in
the dental industry.
The Company's diagnostic, certain home care and endodontic products are marketed
in the U.S. and Canada directly to the end user, primarily by direct mail,
telemarketing, trade shows, and a limited amount of advertising in trade and
professional journals. The Company also sponsors seminars hosted by industry
thought leaders.
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.
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 $715,
$511, and $596 for 2004, 2003 and 2002, 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 home care
products, orthodontic kits and related supplies, and examination gloves.
Prophy and Related Products. The Company manufactures prophy and related
products in its Earth City, Missouri, and Brownsville, Texas facilities. The
primary processes involved in manufacturing the Company's prophy and related
products include precision metal turning and milling, rubber molding, plastic
injection molding, component parts assembly and finished goods packaging. In
these processes, the Company uses a variety of computer numerically controlled
(CNC) machining centers, injection molding machines and robotic assembly
machines, and continues to invest in new and more efficient equipment and
production lines. 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, and Liquid and Gel Flourides. The Company blends and mixes all of its
pastes and flourides at the Earth City, Missouri, and Brownsville, Texas
facilities. The Company owns equipment used to form and die-cut expanded
polyethylene foam and 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.
Handpieces and Components. The Company uses a variety of CNC 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 Original Equipment Manufacturers (OEMs). The Company assembles and
provides repair services for its handpieces, and offers repair services for a
number of other handpiece brands.
Infection Control Products. The Company manufactures and packages 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 primarily 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 and engineering documentation used
in the process. The Company manufactures its own X-ray generators, a critical
system component.
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Home Care Products. The Company sources most of its home care kit components,
toothbrushes, and examination gloves from manufacturers in Asia, principally
China, Thailand, India and Malaysia. Certain other toothbrush and toothpaste
products are sourced from domestic manufacturers.
Endodontic Products. Obturation and ultrasonic systems are manufactured at the
Company's facility in Fenton, Missouri. A variety of components and
subassemblies are sourced domestically.
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. The Company believes it is the market leader in disposable prophy
angles and liquid surface disinfectants used in the professional dental market
in the U.S. The Company also believes it is a leading provider of panoramic
X-ray systems and supplies in the U.S. With the acquisition of Obtura Spartan,
the Company believes it is a leader in systems designed for warm, vertical
condensation obturation, as well as a leader in the domestic market for
ultrasonic systems and tips used in endodontic surgery and retreatment.
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. The Company's
competitors include DENTSPLY International Inc.; Sybron Dental Specialties,
Inc.; Danaher Corporation; Oral-B Laboratories, a subsidiary of The Gillette
Company; StarDental, a division of DentalEZ Group; Sultan Dental Products;
Sultan Chemists, Inc.; Preventive Technologies, Inc.; John O. Butler Company;
Proctor and Gamble Co.; Colgate-Palmolive Co.; Eastman Kodak Company; and
Planmeca OY.
FDA REGULATION
The Company's products are subject to regulation by, among other governmental
entities, the U.S. Food and Drug Administration (FDA). To the extent the
products are marketed abroad, they are also subject to government regulation in
the various foreign countries in which the products are produced or sold. Some
of these regulatory requirements are more stringent than those applicable in the
United States. They also vary from country to country.
Medical Device Regulation. Pursuant to the Federal Food, Drug, and Cosmetic Act
("Act"), and the FDA's implementing regulations, FDA regulates the development,
manufacture, sale, and distribution of medical devices, including their
introduction into interstate commerce, as well as their testing, labeling,
packaging, marketing, distribution, recordkeeping and reporting. In general, if
a dental device is subject to FDA regulation, compliance with the FDA
requirements constitutes compliance with corresponding state regulations.
Medical devices are classified for FDA regulatory purposes as Class I, Class II
or Class III, depending on the degree of control necessary to assure an adequate
degree of safety. The Company's dental device products are classified as either
Class I or Class II devices. Class I devices are subject to "general controls,"
such as labeling, good manufacturing practices (GMP), and a prohibition against
adulteration and misbranding. Class II devices are subject to general and
"special controls," including premarket notification (510(k)), and other general
and device-specific requirements. All of the Company's dental device products
are subject to ongoing regulatory oversight by the FDA to ensure compliance
with, among other things, product labeling, GMP, the quality system regulation
(QSR), recordkeeping, and medical device (adverse reaction) reporting
requirements. The Company's facilities are further subject to periodic
inspection by the FDA, as well as state and local agencies. Failure to satisfy
FDA requirements can result in FDA enforcement actions, including product
seizure, injunction and/or criminal or civil proceedings. In the medical device
arena, the FDA may also request repair, replacement, or refund of the cost of
any medical device manufactured or distributed by the Company.
Drug Regulation. The Company also markets drug products, such as fluorides,
which are subject to regulation by the FDA and the counterpart agencies of the
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foreign countries where the products are sold. The FDA regulates the
development, manufacture, sale, and distribution of drugs, including their
introduction into interstate commerce as well as their testing, labeling,
packaging, marketing, distribution, recordkeeping and reporting. In general,
unless a drug product falls within an over-the-counter (OTC) monograph, is
generally recognized as safe, or is entitled to grandfather status, the drug
must be approved by FDA before it may be legally marketed. Failure to comply
with the FDA's drug regulatory requirements can result in issuance of an FDA
Form 483 Inspectional Observations, Warning Letter, or another enforcement
action or penalty.
FEDERAL INSECTICIDE, FUNGICIDE, AND RODENTICIDE ACT (FIFRA)
Certain of our infection prevention products are classified as pesticides and
are subject to regulation by the United States Environmental Protection Agency
(EPA) under FIFRA, and by various state agencies under the laws of those states.
Generally, under FIFRA and state law, no one may sell or distribute a pesticide
unless it is registered with the EPA and each state in which the product is
sold. Registrations must be renewed annually. Registration includes approval by
the EPA of the product's label, including its claims and directions for use,
which must be supported by data. EPA or states may at any time require
additional testing to determine whether a pesticide could cause adverse effects
on the environment, including people, and whether it is efficacious. The
pesticide laws also require registrants to report adverse effects associated
with their products to the EPA and the corresponding state agency. Failure to
pay annual registration fees or to provide necessary testing data, or new
information regarding adverse effects of product, as well as other conduct,
could result in fines and/or the cancellation of a pesticide registration.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
Our operations involve production processes and the use and handling of
materials that are subject to federal, state, and local environmental laws and
regulations relating to, among other things, solid and hazardous waste disposal,
air emissions, and waste water discharge. We are also required to comply with
federal and state laws and regulations relating to occupational health and
safety. If violations of any of these laws and regulations occur, or if toxic or
hazardous materials are released into the environment as a result of our
operations, the Company could be exposed to significant liability.
The Company believes it is in compliance in all material respects with respect
to the laws and regulations applicable to it and its operations.
OTHER
The Company maintains a credit agreement with a borrowing capacity of $50,000,
which expires in September 2007. There were no outstanding borrowings under this
agreement at December 31, 2004. The Company expects to fund working capital
requirements from a combination of available cash balances and internally
generated funds, and from the borrowing arrangement 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, 2004, the Company employed approximately 280 people, none of
whom were covered by collective bargaining agreements. The Company believes its
relations with its employees are good.
WEBSITE ACCESS TO COMPANY REPORTS AND CORPORATE GOVERNANCE MATERIALS
The Company makes available free of charge through our website, www.ydnt.com,
(1) its 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; and (2) the Audit Committee, Compensation Committee and
Nominating Committee charters and its Code of Ethics. The Company's website and
the information contained therein or incorporated therein are not intended to be
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incorporated into this Annual Report on Form 10-K.
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
---- --- --------- ----------------------------------------
George E. Richmond 71 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 52 Vice Chairman of the Board, Chief Chief Executive Officer since January 2002, and
Executive Officer and Director Vice Chairman since July 2004, President from
July 1998 to July 2004, and Director of the
Company since August 1997, Chief Operating
Officer of the Company from October 1997 until
May 2002.
Arthur L. Herbst, Jr. 41 President President since July 2004, Chief Operating
Officer from May 2002 until July 2004, Chief
Financial Officer from February 1999 until July
2004, and Director from November 1997 to July
2004.
Stephen T. Yaggy 32 Secretary Secretary since May 2003, General Manager of
Panoramic since May 2003, Corporate Controller
of the Company since June 1998.
Daniel E. Garrick 36 Vice President, Assistant Secretary Vice President and Assistant Secretary since
April 2001, President of Young Dental
Manufacturing since May 2003, Director of
Business Development of Young Innovations since
August 1999, Partner of Alta Management
Consulting from December 1998 to August 1999.
Daniel J. Tarullo 45 Vice President Vice President of Business Development since
July 2004, Director of Business Development
since September 2003, Vice President of Lanmark
Group, a healthcare marketing and advertising
agency, from 2001 to 2003, Vice President of
Ross/Brown from 2000 to 2001.
Christine R. Boehning 34 Vice President, Chief Financial Chief Financial Officer since July 2004, Vice
Officer President of Finance since May 2004, Vice
President of Investment Banking at Robert W.
Baird from August 1998 to January 2004.
10
ITEM 2. PROPERTIES.
The Company's principal facilities are as follows:
DESCRIPTION SQUARE FEET LOCATION OWNED/LEASED
------------------------------------- ------------ ---------------------- ---------------------------------
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, on month-to-month terms
Office and Manufacturing......... 16,000 Fenton, Missouri Leased, expires November 2008
Office and Manufacturing......... 12,000 Livermore, California Leased, expires July 2006
Office and Distribution.......... 33,000 Corona, California Owned
Distribution..................... 23,000 Morristown, Tennessee Leased on month-to-month terms
Office........................... 7,500 Algonquin, Illinois Leased, expires May 2007
Office........................... 2,500 Chicago, Illinois Leased, expires July 2008
The Company believes that its facilities are generally in good condition.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries from time to time are 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.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Prices and Dividends
The Common Stock trades on the Nasdaq National Market under the symbol of
"YDNT."
The following table sets forth the high and low prices of the Common Stock as
reported by the Nasdaq National Market during the last eight quarters.
--------------------------- ------------------ -------------------
MARKET PRICE CASH DIVIDENDS
------------ --------------
DECLARED
--------
--------------------------- ------------------ -------------------
Quarter High Low
------- ---- ---
--------------------------- --------- -------- -------------------
2003
--------------------------- --------- -------- -------------------
First..................... $23.99 $21.90 --
--------------------------- --------- -------- -------------------
Second.................... $28.46 $20.72 --
--------------------------- --------- -------- -------------------
Third..................... $32.75 $28.10 $0.03
--------------------------- --------- -------- -------------------
Fourth.................... $36.75 $29.86 $0.03
--------------------------- --------- -------- -------------------
--------------------------- --------- -------- -------------------
2004
--------------------------- --------- -------- -------------------
First..................... $38.86 $33.27 $0.04
--------------------------- --------- -------- -------------------
Second.................... $36.53 $25.25 $0.04
--------------------------- --------- -------- -------------------
Third..................... $33.10 $23.96 $0.04
--------------------------- --------- -------- -------------------
Fourth.................... $36.10 $29.77 $0.04
--------------------------- --------- -------- -------------------
--------------------------- --------- -------- -------------------
On January 31, 2005, there were approximately 159 holders of record of the
Company's Common Stock.
Payment of future cash dividends 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.
12
ISSUER PURCHASES OF EQUITY SECURITIES (1)
---------------------------------------------------------------------------------------
Total Number Maximum
of Shares Number of
Purchased as Shares that
Part of May Yet Be
Total Number Publicly Purchased
of Shares Average Price Announced Under the
Period Purchased Paid per Share Program Program
------------------------------------------------------------------------------------
October 2004 11 $33.09 11 489
------------------------------------------------------------------------------------
November 2004 29 $32.67 29 460
------------------------------------------------------------------------------------
December 2004 20 $31.24 20 440
------------------------------------------------------------------------------------
Total 2004 60 $32.28 60
------------------------------------------------------------------------------------
(1) The share repurchase program authorizing the purchase of up to 500 shares
was announced May 6, 2004, and will expire in July 2005.
13
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
----------------------
2004 2003(1) 2002(2) 2001(3) 2000(4)
---- -------- --------- -------- --------
INCOME STATEMENT DATA:
Net sales...................................... $ 79,201 $ 72,562 $ 67,147 $ 58,824 $ 48,737
Cost of goods sold............................. 35,851 32,129 30,025 26,397 22,025
--------- --------- --------- -------- --------
Gross profit.................................. 43,350 40,433 37,122 32,427 26,712
Selling, general and administrative expenses 22,219 19,025 18,562 16,943 13,284
--------- --------- --------- -------- --------
Income from continuing operations.............. 21,131 21,408 18,560 15,484 13,428
Interest expense (income) and other, net (144) (109) 286 225 108
--------- --------- --------- -------- --------
Income from continuing operations before
provision for income taxes................... 21,275 21,517 18,274 15,259 13,320
Provision for income taxes..................... 8,138 8,231 7,127 5,875 5,142
--------- --------- --------- -------- --------
Net income from continuing operations.......... 13,137 13,286 11,147 9,384 8,178
Net income from discontinued operations........ 797 (85) 264 161 127
--------- --------- --------- -------- --------
Net income..................................... $ 13,934 $ 13,201 $ 11,411 $ 9,545 $ 8,305
== ========= ========= ========= ======== ========
Basic earnings per share (5)................... $ 1.54 $ 1.46 $ 1.29 $ 0.99 $ 0.85
== ========= ========= ========= ======== ========
Basic earnings per share from continuing
operations................................. $ 1.45 $ 1.47 $ 1.26 $ 0.97 $ 0.84
== ========= ========= ========= ======== ========
Basic earnings per share from discontinued
operations................................. $ 0.09 $ (0.01) $ 0.03 $ 0.02 $ 0.01
== ========= ========= ========= ======== ========
Basic weighted average common shares
Outstanding (5)............................. 9,040 9,017 8,876 9,662 9,752
Diluted earnings per share (5)................. $ 1.48 $ 1.40 $ 1.22 $ 0.96 $ 0.84
== ========= ========= ========= ======== ========
Diluted earnings per share from continuing
operations................................. $ 1.40 $ 1.41 $ 1.19 $ 0.95 $ 0.83
== ========= ========= ========= ======== ========
Diluted earnings per share from discontinued
operations................................. $ 0.08 $ (0.01) $ 0.03 $ 0.01 $ 0.01
Diluted weighted average common shares
Outstanding (5)............................. 9,409 9,431 9,331 9,904 9,914
Cash dividends declared per common share $ 0.16 $ 0.06 n/a n/a n/a
== ========= =========
AS OF DECEMBER 31
2004 2003(1) 2002(2) 2001(3) 2000(4)
---- -------- --------- -------- --------
BALANCE SHEET DATA:
Working capital................... $ 19,428 $ 12,676 $ 12,645 $ 12,439 $ 11,578
Total assets...................... 109,829 101,484 84,988 83,605 69,592
Total debt (including current maturities) 0 2,852 4,304 16,984 592
Stockholders' equity.............. 95,137 82,963 67,670 55,885 60,487
- ----------
(1) On December 1, 2003, the Company acquired substantially all of the assets
of Obtura Corporation and Earth City Technologies (collectively "Obtura
Spartan"). The income statement data for the year ended December 31, 2003
include results of operations for Obtura Spartan from December 1, 2003
through December 31, 2003. The balance sheet data as of December 31, 2003
includes the Obtura Spartan acquisition.
14
(2) 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.
(3) 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.
(4) 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.
(5) 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 stockholders 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 (MD&A) OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (IN THOUSANDS).
GENERAL
Young Innovations, Inc. and subsidiaries ("the Company") develop, manufacture,
and market supplies and equipment used to facilitate the practice of dentistry
and to promote oral health. The Company's product offering includes disposable
and metal prophylaxis ("prophy") angles, prophy cups and brushes, panoramic
X-ray machines, dental handpieces (drills) and related components, orthodontic
toothbrushes, flavored examination gloves, children's toothbrushes, moisture
control products, infection control products, ultrasonic scaling and endodontic
systems, and obturation systems used in endodontic surgery (root canal
procedures). These products are primarily marketed to dental professionals,
principally dentists, endodontists, orthodontists, dental hygienists, and dental
assistants. The Company's manufacturing and distribution facilities are located
in Missouri, California, Indiana, Colorado, Tennessee, Texas and Canada.
The Company operates in one reporting segment, which is engaged in the
development and manufacture of a broad line of products marketed to dental
professionals, principally dentists, dental hygienists and dental assistants.
The Company markets its products primarily in the U.S. 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 2004.
In December 2004, the Company completed the sale of the retail division of its
Plak Smacker subsidiary. The retail division, which was previously reported as a
distinct reporting segment, sold toothbrushes, children's toothpastes and dental
accessories to mass merchandisers under the Plak Smacker brand name. As a result
of the disposition, we have reclassified our historical and current year
financial statements to reflect the retail segment as discontinued operations.
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 38% of its December 31, 2004
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,
15
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 on a
first-in, first-out (FIFO)basis. 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. Charges 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 at least
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.
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. 144.
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 cannot guarantee that costs will not be
incurred in excess of current estimates.
Assets and Liabilities Acquired in Business Combinations - The Company
periodically acquires businesses. All business acquisitions completed subsequent
to 2002 were accounted for under the provisions of SFAS No. 141, "Business
Combinations," which requires the use of the purchase method. All business
acquisitions completed in years prior to 2002 were accounted for under the
purchase method as set forth in APB No. 16, "Business Combinations." The
purchase method requires the Company to allocate the cost of an acquired
business to the assets acquired and liabilities assumed based on their estimated
fair values at the date of acquisition. The allocation of acquisition cost to
assets acquired includes the consideration of identifiable intangible assets.
The excess of the cost of an acquired business over the fair value of the assets
acquired and liabilities assumed is recognized as goodwill. The Company's
measurement of fair values and certain preacquisition contingencies may impact
the Company's cost allocation to assets acquired and liabilities assumed for a
period of up to one year following the date of an acquisition. The Company
utilizes a variety of information sources to determine the value of acquired
assets and liabilities. For larger acquisitions, third-party appraisers are
utilized to assist the Company in determining the fair value and useful lives of
identifiable intangibles, including the determination of intangible assets that
have an indefinite life. The valuation of the acquired assets and liabilities
and the useful lives assigned by the Company will impact the determination of
future operating performance of the Company.
16
RESULTS OF OPERATIONS (IN YEARS ENDED DECEMBER 31 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.
2004 2003 2002
--------- --------- ---------
Net sales............................................... 100.0% 100.0% 100.0%
Cost of goods sold...................................... 45.3 44.3 44.7
----- ----- -----
Gross profit............................................ 54.7 55.7 55.3
Selling, general and administrative expenses............ 28.1 26.2 27.6
----- ----- -----
Income from continuing operations....................... 26.6 29.5 27.7
Interest expense (income) and other, net................ (.2) (.2) .4
----- ----- -----
Income from continuing operations before provision
for income taxes................................... 26.8 29.7 27.3
Provision for income taxes.............................. 10.2 11.4 10.7
----- ----- -----
Net income from continuing operations................... 16.6 18.3 16.6
Net income from discontinued operations................. 1.0 (.1) .4
Net income.............................................. 17.6% 18.2% 17.0%
===== ===== =====
YEAR ENDED DECEMBER 31, 2004, COMPARED TO YEAR ENDED DECEMBER 31, 2003
Net Sales - Net sales from continuing operations for the year ended
December 31, 2004 were $79,201, up 9.1% or $6,639 from $72,562 in the prior
year. The increase was the result of incremental sales from acquired businesses
and growth in end-user demand for our products. Approximately $8,000 of this
growth is the result of the acquisition of Obtura Spartan on December 1, 2003.
The increase was offset by a reduction in second quarter sales resulting from
the restructuring of sales incentive programs to dealers.
Gross Profit - Gross profit increased $2,917, or 7.2%, from $40,433 in 2003
to $43,350 in 2004. Gross margin decreased from 55.7% in 2003 to 54.7% in 2004.
The decrease in gross margin was primarily the result of changes in product mix.
Selling, General and Administrative Expenses (SG&A) - SG&A expenses
increased $3,194, or 16.8%, to $22,219 in 2004 from $19,025 in 2003. The
increase in SG&A costs in 2004 is primarily attributable to incremental SG&A
expenses from acquired businesses. Additionally, increased personnel and related
costs necessary to comply with the new Sarbanes-Oxley legislation contributed to
the increase in 2004. These increases were partially offset by a reduction in
performance compensation expense and personnel costs resulting from
consolidation activities. As a percentage of net sales, SG&A expenses increased
to 28.1% in 2004 from 26.2% in 2003 as a result of the factors explained above.
Income from Operations - Income from operations in 2004 was $21,131
compared to $21,408 in 2003, a decrease of 1.3%. The decrease is a result of the
factors described above.
Provision for Income Taxes - During the year ended 2004, the Company's
provision for income taxes decreased to $8,138 versus $8,231 in 2003 as a result
of lower pre-tax income. The effective tax rate in 2004 and 2003 was 38.25%.
Discontinued Operations - The results of operations and gain from the sale
of our retail segment, which was sold in December 2004, are reflected as
discontinued operations. The 2004 results include sales of $3,086 and related
operating income of $1,292. This includes a pre-tax gain on the sale of $1,156,
net of certain transaction costs.
YEAR ENDED DECEMBER 31, 2003, COMPARED TO YEAR ENDED DECEMBER 31, 2002
Net Sales - Net sales from continuing operations increased $5,415, or 8.1%,
to $72,562 in 2003 from $67,147 in 2002. Approximately $650 of this growth was
the result of the acquisition of Obtura Spartan on December 1, 2003. Strong
response to promotional activity and solid end-user demand across product lines
contributed to the remaining growth in the sales of professional products for
the year.
17
Gross Profit - Gross profit increased $3,311, or 8.9%, to $40,433 in 2003
from $37,122 in 2002. Gross margin increased from 55.3% in 2002 to 55.7% in 2003
as a result of several factors including product mix, the realization of
productivity improvements in manufacturing, and acquisition integration
activities.
Selling, General and Administrative Expenses (SG&A) - SG&A expenses
increased $463, or 2.5%, to $19,025 in 2003 from $18,562 in 2002. The primary
increase in SG&A costs in 2003 related to increases in personnel costs
consistent with the growth of the Company. The increases were offset by
cost-containment measures which generated SG&A growth at a rate less than sales
growth. As a percentage of net sales, SG&A expenses decreased to 26.2% in 2003
from 27.6% in 2002 as a result of the factors explained above.
Income from Operations - Income from operations increased $2,848, or 15.3%,
to $21,408 in 2003 from $18,560 in 2002 as a result of the factors explained
above.
Provision for Income Taxes - Provision for income taxes increased $1,104 in
2003 to $8,231 from $7,127 for 2002 primarily as a result of higher pre-tax
income. The effective tax rate was 38.25% in 2003 compared to 39.0% in 2002.
This decrease in effective tax rate was the result of a reduction in expenses
that are not deductible for tax purposes.
Discontinued Operations - The results of operations of our retail segment,
which was sold in December 2004, are reflected as discontinued operations. The
2003 results include sales of $3,594 and related operating loss of $139.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF CASH
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 $12,531,
$16,441, and $16,258, for 2004, 2003 and 2002, respectively. The decrease in
operating cash flow in 2004 is primarily attributable to a build in inventory
related to facility consolidations and new product introductions and an increase
in notes receivable due to increased participation in an equipment financing
program, offset by a decrease in accounts receivable due to timing of sales, and
decreased compensation accruals and accruals related to the finalization of
Obtura Spartan purchase accounting.
The Company maintains a credit agreement with a borrowing capacity of $50,000,
which expires in September 2007. Borrowings under the agreement bear interest at
rates ranging from LIBOR + 1% to LIBOR + 2.25%, or Prime to Prime + .5%,
depending on the Company's level of indebtedness. Commitment fees for this
agreement range from .15% to .20% of the unused balance. The agreement is
unsecured and contains various financial and other covenants. As of December 31,
2004, the Company was in compliance with all of these covenants.
At December 31, 2004, there were no 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.
USES OF CASH
Consistent with historical spending, the Company's uses of cash primarily relate
to acquisition activity, capital expenditures, dividend distributions to
shareholders, and stock repurchases. Specific significant uses of cash over the
three years are as follows:
2004
Capital expenditures for property, plant and equipment were $5,577 in 2004.
Significant capital expenditures included the purchase of a new distribution
facility in California, office and meeting space in Illinois, and new tooling
and equipment for our manufacturing facilities. In February 2004, YI Ventures
LLC (a wholly owned subsidiary) acquired a small ultrasonic cleaning systems
product line. In the fourth quarter of 2004, the Company repurchased 60 shares
of its Common Stock from various stockholders for $1,924. Quarterly dividends of
$0.04 per share were paid March 15, June 15, September 15, and December 15,
2004,for a total payment of $1,476.
2003
Capital expenditures for property, plant and equipment were $2,122 in 2003.
Significant capital expenditures related to building improvements and new
18
tooling for product enhancements. In September 2003, YI Ventures LLC (a wholly
owned subsidiary) acquired a company which provides dental services. On December
1, 2003, the Company acquired substantially all of the assets of Obtura
Corporation and Earth City Technologies, Inc., collectively known as Obtura
Spartan. The Company originally paid $12,572 in cash, with money set aside in
escrow pending the settlement of any indemnification claims. Upon final
settlement in 2004, the purchase price was $12,347. Quarterly dividends of $0.03
per share were paid September 15 and December 15, 2003, for a total payment of
$547.
2002
Capital expenditures for property, plant and equipment were $2,660 in 2002. In
November and December 2002, the Company repurchased 81 shares of its Common
Stock from various stockholders for $1,709.
PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS LESS THAN BEYOND 5
--------- --------
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS YEARS
----- ------ --------- --------- -----
Capital Lease Obligations...................... $ -- $ -- $ -- -- --
Operating Leases (including buildings)......... 1,699 871 780 $ 48 --
Long-Term Debt................................. -- -- -- -- --
--------- -------- -------- --------- --------
Total .................................... $ 1,699 $ 871 $ 780 $ 48 --
--------- -------- -------- --------- --------
As of December 31, 2004 and 2003, management was aware of no relationships with
any other unconsolidated entities, financial partnerships, structured finance
entities, or special purpose entities which were established for the purpose of
facilitating off-balance-sheet arrangements or other contractually narrow or
limited purposes.
RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
In November 2004, the Financial Accounting Standards Board issued SFAS No. 151
"Inventory Costs -- An Amendment of ARB No. 43, Chapter 4." SFAS 151 clarifies
that abnormal amounts of idle facility expense, freight, handling costs and
spoilage should be expensed as incurred, and not included in overhead. Further,
SFAS 151 requires that allocation of fixed and production facilities overhead to
conversion costs should be based on normal capacity of the production
facilities. The provisions in SFAS 151 are effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The Company does not
believe that the adoption of SFAS 151 will have a significant effect on its
financial statements.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123(Revised), "Share-Based Payment." This statement replaces SFAS No. 123,
"Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS 123(R) requires companies to
apply a fair-value-based measurement method in accounting for share-based
payment transactions with employees and to record compensation cost for all
stock awards granted after the required effective date and to awards modified,
repurchased, or cancelled after that date. In addition, the Company is required
to record compensation expense (as previous awards continue to vest) for the
unvested portion of previously granted awards that remain outstanding at the
date of adoption. SFAS 123(R) will be effective for quarterly periods beginning
after June 15, 2005, which is the Company's third quarter ending September 30,
2005. The Company has not yet determined the impact that SFAS 123(R) will have
on its financial position and results of operations.
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 $31, $26, and
$115 of additional interest expense in the years ended December 31, 2004, 2003
and 2002, respectively.
19
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, more than 99%
are denominated in U.S. dollars, with the remaining amount 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.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Young Innovations, Inc.:
We have audited the accompanying consolidated balance sheets of Young
Innovations, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 2004. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. 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.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Young
Innovation's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 4, 2005, expressed an unqualified opinion on
management's assessment of, and the effective operation of, internal control
over financial reporting.
/s/ KPMG LLP
Chicago, IL
March 4, 2005
21
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Young Innovations, Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting. The Company's
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. Internal control
over financial reporting includes policies and procedures that:
o pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
o provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with accounting principles generally accepted in the United States of
America;
o provide reasonable assurance that receipts and expenditures of the
Company are being made in accordance with authorization of management
and directors of the Company; and
o provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of assets that could
have a material effect on the consolidated financial statements.
Internal control over financial reporting includes the controls themselves,
monitoring and testing, and actions taken to correct deficiencies as identified.
All internal control systems, no matter how well designed, have inherent
limitations, including the possibility that controls can be circumvented or
overridden, and misstatements due to error or fraud may occur and not be
detected. Therefore, even those systems determined to be effective can provide
only reasonable assurance with respect to financial statement preparation and
presentation. Further, conditions in our business change over time, and,
therefore, internal control effectiveness may vary over time.
The Company's management assessed the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004. In making this
assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control--Integrated
Framework. Management's assessment included an evaluation of the design of the
Company's internal control over financial reporting and testing of the
operational effectiveness of its internal control over financial reporting.
Based on this assessment, management believes that, as of December 31, 2004, the
Company's internal control over financial reporting is effective based on those
criteria.
The Company's independent registered public accounting firm, KPMG LLP, have
issued an attestation report on our assessment of the Company's internal control
over financial reporting. This report appears on the following page.
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Young Innovations, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting , that Young
Innovations, Inc. and subsidiaries maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Young Innovations, Inc. and
subsidiary's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Young Innovations, Inc. and
subsidiaries maintained effective internal control over financial reporting as
of December 31, 2004, is fairly stated, in all material respects, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also,
in our opinion, Young Innovations, Inc. and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Young Innovations, Inc. and subsidiaries as of December 31, 2004 and 2003, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2004,
and our report dated March 4, 2005 expressed an unqualified opinion on those
consolidated financial statements.
/s/KPMG LLP
Chicago, Illinois
March 4, 2005
23
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31
------------------------
2004 2003
---- ----
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 2,552 $ 938
Trade accounts receivable, net of allowance for doubtful accounts of $451 and $641, in
2004 and 2003, respectively........................................................... 9,976 11,212
Inventories............................................................................. 10,942 9,017
Other current assets.................................................................... 3,640 3,403
----- -----
Total current assets............................................................ 27,110 24,570
Property, plant and equipment, net......................................................... 22,137 19,240
Goodwill ................................................................................. 52,617 51,003
Other intangible assets.................................................................... 6,105 5,824
Other assets............................................................................... 1,860 847
---------- ----------
Total assets............................................................... $ 109,829 $ 101,484
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.................................................... $ -- $ 2,852
Accounts payable and accrued liabilities................................................ 7,639 9,042
Net liabilities for discontinued operations............................................ 43 --
---------- ----------
Total current liabilities....................................................... 7,682 11,894
Deferred income taxes...................................................................... 7,010 6,627
Stockholders' equity:
Common stock, voting, $.01 par value, 25,000 shares authorized 9,038 and 9,004 shares
issued and outstanding, net of treasury stock, in 2004 and 2003, respectively......... 90 90
Additional paid-in capital.............................................................. 29,033 28,367
Deferred stock compensation............................................................. (598) (935)
Retained earnings....................................................................... 83,884 71,426
Common stock in treasury, at cost 1,146 and 1,157 shares in 2004 and 2003, respectively.
(17,272) (15,985)
---------- ----------
Total stockholders' equity...................................................... 95,137 82,963
---------- ----------
Total liabilities and stockholders' equity................................. $ 109,829 $ 101,484
========== ==========
The accompanying notes are an integral part of these statements.
24
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31
---------------------------------
2004 2003 2002
---- ---- ----
Net sales .................................................. $ 79,201 $ 72,562 $ 67,147
Cost of goods sold .................................... 35,851 32,129 30,025
-------- -------- --------
Gross profit ............................................... 43,350 40,433 37,122
Selling, general and administrative expenses .......... 22,219 19,025 18,562
-------- -------- --------
Income from operations ..................................... 21,131 21,408 18,560
Interest expense, net ................................. 18 17 282
Other (income) expense, net ........................... (162) (126) 4
-------- -------- --------
Income before provision for income taxes ................... 21,275 21,517 18,274
Provision for income taxes ........................... 8,138 8,231 7,127
-------- -------- --------
Net income from continuing operations ...................... 13,137 13,286 11,147
Net income (loss) from discontinued operations ............. 797 (85) 264
-------- -------- --------
Net income ................................................. $ 13,934 $ 13,201 $ 11,411
======== ======== ========
Basic earnings per share ................................... $ 1.54 $ 1.46 $ 1.29
======== ======== ========
Basic earnings per share from continuing operations ... $ 1.45 $ 1.47 $ 1.26
======== ======== ========
Basic earnings per share from discontinued operations . $ 0.09 $ (0.01) $ 0.03
======== ======== ========
Diluted earnings per share ................................. $ 1.48 $ 1.40 $ 1.22
======== ======== ========
Diluted earnings per share from continuing operations . $ 1.40 $ 1.41 $ 1.19
======== ======== ========
Diluted earnings per share from discontinued operations $ 0.08 $ (0.01) $ 0.03
======== ======== ========
Basic weighted average shares outstanding .................. 9,040 9,017 8,876
======== ======== ========
Diluted weighted average shares outstanding ................ 9,409 9,431 9,331
======== ======== ========
The accompanying notes are an integral part of these statements.
25
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, 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 1,524
exercised.......... - 222 - - 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
Net income........... - - 13,201 - - 13,201 $13,201
Common stock - (65)
purchased.... 1 -- - (66)
Stock options 317 2,051
exercised.......... - - - 2,368
Amortization of
deferred stock
compensation - - - - 336 336
Cash dividends, (547)
($0.06 per share) - (547)
Comprehensive Income $13,201
=======
------ ---------- --------- -------- ----- --------
BALANCE, December
31, 2003........... 90 28,367 71,426 (15,985) (935) 82,963
Net income........... - - 13,934 - - 13,934 $13,934
Common stock - (1,924) - (1,924)
purchased........... -- -
Stock options - 666 637 1,303
exercised.......... - -
Amortization of
deferred stock
compensation....... - - - - 337 337
Cash dividends, (1,476) (1,476)
($0.16 per share) -
Comprehensive Income $13,934
=======
------ ---------- --------- -------- ----- --------
BALANCE, December 31, 2004
$ 90 $ 29,033 $ 83,884 $(17,272) $(598) $ 95,137
====== ========== ========= ========= ===== =========
The accompanying notes are an integral part of these statements.
26
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended December 31
----------------------------------
2004 2003 2002
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................... $ 13,934 $ 13,201 $ 11,411
-------- -------- --------
Adjustments to reconcile net income to net cash flows from operating
activities:
Gain from sale of discontinued operations, net of tax ........... (714) 0 0
Depreciation and amortization ................................... 3,166 2,625 2,536
Deferred income taxes ........................................... 383 1,723 545
Loss on disposal of property, plant and equipment ............... 113 35 148
Changes in assets and liabilities, net of effects of acquisitions
and divestitures
Trade accounts receivable ..................................... 1,388 (319) (105)
Inventories ................................................... (2,024) 322 (778)
Other current assets .......................................... (180) (720) (510)
Other assets .................................................. (1,340) (367) 671
Accounts payable and accrued liabilities ...................... (2,195) (59) 2,340
-------- -------- --------
Total adjustments .................................... (1,403) 3,240 4,847
-------- -------- --------
Net cash flows from operating activities .................... 12,531 16,441 16,258
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Payments) recoveries for acquisitions, net of cash acquired ........ (1,254) (13,178) 431
Proceeds from sale of discontinued operations ....................... 1,800 0 0
Purchases of property, plant and equipment .......................... (5,577) (2,122) (2,660)
-------- -------- --------
Net cash flows from investing activities .................... (5,031) (15,300) (2,229)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt .......................................... (12,420) (4,304) (57,028)
Borrowings on long-term debt ........................................ 9,568 2,852 44,348
Proceeds from stock options exercised ............................... 366 1,308 832
Purchases of treasury stock ......................................... (1,924) (66) (1,709)
Payment of cash dividend ............................................ (1,476) (547) --
-------- -------- --------
Net cash flows from financing activities .................... (5,886) (757) (13,557)
-------- -------- --------
Net increase in cash and cash equivalents .............................. 1,614 384 472
Cash and cash equivalents, beginning of period ......................... 938 554 82
-------- -------- --------
Cash and cash equivalents, end of period ............................... $ 2,552 $ 938 $ 554
======== ======== ========
The accompanying notes are an integral part of these statements
27
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION:
Young Innovations, Inc. and its subsidiaries ("the Company") develop,
manufacture, and market supplies and equipment used to facilitate the practice
of dentistry and to promote oral health. The Company's product offering includes
disposable and metal prophylaxis ("prophy") angles, prophy cups and brushes,
panoramic X-ray machines, dental handpieces (drills) and related components,
orthodontic toothbrushes, flavored examination gloves, children's toothbrushes,
moisture control products, infection control products, ultrasonic sealing and
endodontic systems, and obturation systems used in endodontic surgeries (root
canal procedures). The Company's manufacturing and distribution facilities are
located in Missouri, California, Indiana, Colorado, Tennessee, Texas and Canada.
Export sales were less than 10% of total net sales for 2004, 2003 and 2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Young Innovations,
Inc. 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.
SEGMENT INFORMATION
Prior to the divestiture of its retail division in December 2004, the Company
had two reporting segments, professional and retail, as defined by Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The professional segment sells products to
dentists, dental hygienists and dental assistants. The retail segment previously
sold products to consumers through mass merchandisers. The Company has
determined that there are no additional segments which meet the criteria of
reporting segments per SFAS 131.
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 net realizable value. Inventory values are based upon
standard costs which approximate historical costs, 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
28
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
EQUITY INVESTMENT
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 and included in other assets on the Consolidated
Balance Shets. 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 $10, $1, and $150 for 2004, 2003 and 2002, respectively. The asset
balance at December 31, 2004 for this investment is $280, of which approximately
$250 represents goodwill.
The Company purchases certain services from IAI at amounts less than would be
paid to unrelated parties. The amounts paid for these services totaled $244,
$198, and $458 in 2004, 2003 and 2002, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of FASB Statement No. 142, Goodwill
and Other Intangible Assets, as of January 1, 2002. Pursuant to Statement 142,
goodwill and intangible assets acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized, but instead
tested for impairment at least annually in accordance with the provisions of
Statement 142. Statement 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 FASB
Statement No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
Intangible assets primarily consist of trademarks, license agreements, core
technology, patents and patent applications, product formulas, and supplier and
customer relationships. Trademarks have been determined to have indefinite
useful lives, and therefore the carrying value is reviewed at least annually for
recoverability in accordance with the requirements of SFAS No. 142. Other
intangible assets are amortized on a straight-line basis over the estimated
useful lives of the assets, generally between 5 and 40 years, and tested for
impairment whenever conditions indicate that an asset may be impaired.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses and measures any impairments of long-lived assets in
accordance with the provisions of SFAS No. 144. 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. The Company has not incurred any material impairments
of long-lived assets during the years ended 2004, 2003 and 2002.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist principally of cash, accounts receivable, notes
receivable, accounts payable and debt. The estimated fair value of these
instruments approximates their carrying value. Due to the short term nature of
the notes receivable, book value approximates fair value.
REVENUE RECOGNITION
Revenue from the sale of products is recorded at the time title passes,
generally when the products are shipped, as the Company's 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
29
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, 2004 and 2003.
ADVERTISING COSTS
Advertising costs are expensed when incurred. Advertising costs were
approximately $2,347, $1,950, and $2,070 for 2004, 2003 and 2002, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed when incurred and totaled $715,
$511, and $596 for 2004, 2003 and 2002, 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 and notes receivable. In 2004, 2003 and 2002 interest income
totaled $76, $62, and $63, 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, which requires 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.
30
STOCK-BASED COMPENSATION
The Company adopted the 1997 Stock Option Plan ("the Plan") effective in
November 1997, and amended the Plan in 1999 and 2001. In accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company has elected to
apply APB Opinion No. 25, "Accounting for Stock Issued to Employees," 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, 2004 December 31, 2003 December 31, 2002
----------------- ----------------- -----------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ----- -------- -----
Net income.................................. $ 13,934 $ 13,267 $13,201 $ 11,919 $11,411 $10,265
Net income from continuing
operations......... 13,137 12,470 13,286 12,004 11,147 10,001
Net income (loss) from discontinued
operations....... 797 797 (85) (85) 264 264
Earnings per share:
Basic..................................... $ 1.54 $ 1.47 $ 1.46 $ 1.32 $ 1.29 $ 1.16
Basic earnings per share from continuing
operations...................... $ 1.45 $ 1.38 $ 1.47 $ 1.33 $ 1.26 $ 1.13
Basic earnings per share from discontinued
earnings............... $ 0.09 $ 0.09 $ (0.01) $ (0.01) $ 0.03 $ 0.03
Diluted................................... $ 1.48 $ 1.41 $ 1.40 $ 1.26 $ 1.22 $ 1.10
Diluted earnings per share from continuing
operations...................... $ 1.40 $ 1.33 $ 1.41 $ 1.27 $ 1.19 $ 1.07
Diluted earnings per share from discontinued
operations $ 0.08 $ 0.08 $ (0.01) $ (0.01) $ 0.03 $ 0.03
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 for 2001: (i) dividend yield of 0%; (ii) expected volatility of
43.7%; (iii) risk-free interest rate of 4.8%; and (iv) expected life of 8.0
years. The weighted average fair value of the options at the grant date was
$8.49 for 2001. The following weighted average assumptions were used for 2003:
(i) dividend yield of 0.37%; (ii) expected volatility of 32.3%; (iii) risk-free
interest rate of 4.5%; and (iv) expected life of 8.0 years. The weighted average
fair value of the options at the grant date was $14.22 for 2003. No options were
granted in 2002 or 2004.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash flows from operating activities include $6,545, $5,782, and $5,401 for the
payment of federal and state income taxes and $81, $83, and $376 for the payment
of interest during 2004, 2003 and 2002, respectively.
3. ACQUISITIONS:
During the first quarter of 2004, YI Ventures LLC (a wholly owned subsidiary)
acquired Healthsonics Corporation for $1,500. Healthsonics manufactures
ultrasonic cleaning systems. The acquisition resulted in the recognition of
approximately $1,500 of goodwill. The allocation of purchase price to goodwill
is preliminary and subject to adjustment in the future. The results of
operations for Healthsonics are included in the consolidated financial
statements since February 2004.
31
On December 1, 2003, the Company acquired substantially all of the assets and
assumed a portion of the liabilities of Obtura Corporation and Earth City
Technologies (collectively "Obtura Spartan"). The Company paid $12,572 in cash,
including transaction costs. Of the purchase price, $1,000 was set aside in an
escrow account pending the settlement of any indemnification claims. Upon final
settlement, the purchase price was $12,347. The settlement included the
acquisition of the seller's Obtura Spartan Canada operations in November 2004
for approximately $500. Upon the finalization of the settlement and purchase
accounting during the fourth quarter of 2004, the final purchase price
allocation was completed and goodwill was determined to be $8,166, including the
Canadian operations. The following table summarizes the adjustments made to the
preliminary purchase price allocation. Some management and administrative
terminations were completed and all accrued severance liabilities were paid
prior to December 31, 2004.
Preliminary Total Final
Allocation Adjustments Allocation
-----------------------------------------------
Purchase Price 12,572 (225) 12,347
-----------------------------------------------
Current assets 2,470 340 2,810
Property, plant and equipment 394 27 421
Intangible assets 3,588 250 3,838
Goodwill 8,089 77 8,166
Current liabilities assumed (1,769) (519) (2,288)
Accrued severance liabilities (200) (400) (600)
-----------------------------------------------
Net assets acquired 12,572 (225) 12,347
-----------------------------------------------
Of the $3,838 allocated to intangible assets, Years Ended $1,200 was assigned to
license arrangements and December 31 $591 was assigned to core technology, both
with 20-year useful lives. In addition, $250 was assigned to customer
relationships with a five-year useful life. The remaining $1,797 was assigned to
trademarks that are not subject to amortization. The results of operations for
Obtura Spartan are included in the consolidated financial statements since
December 1, 2003. George E. Richmond, the Company's Chairman, owned 20% of Earth
City Technologies at the time of the acquisition. The transaction was
unanimously approved by the independent directors of the Company.
4. DISCONTINUED OPERATIONS:
In December 2004, the Company completed the sale of the retail division of its
Plak Smacker subsidiary. The retail division, which has previously been reported
as a separate segment, sold toothbrushes, children's toothpaste and dental
accessories to mass merchandisers under the Plak Smacker brand name. The retail
operations are accounted for as discontinued operations and accordingly,
operating results and net assets are segregated in the accompanying Consolidated
Statements of Income and Consolidated Balance Sheets. The Company recorded a
pre-tax gain of $1,156 on the transaction, which is included in the consolidated
income statement caption "net income (loss) from discontinued operations." The
net current liabilities of this discontinued operation are primarily accounts
receivable and accounts payable. Results for discontinued operations are as
follows (in thousands):
2004 2003 2002
---- ---- ----
Net sales............................ $ 3,086 $ 3,594 $ 5,071
Income before income taxes........... 1,292 (139) 438
Provision for income taxes........... 495 (54) 174
Net income........................... 797 (85) 264
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
32
receivable. The Company's credit risk is concentrated among two distributors
accounting for 38% and 44% of accounts receivable at December 31, 2004 and 2003,
respectively.
The percentage of net sales made to major distributors of the Company's
continuing operations were as follows:
Years Ended
December 31
----------------------------
Distributor 2004 2003 2002
----------- ---- ---- ----
Henry Schein, Inc....................... 16.2% 22.0% 15.0%
Patterson Dental Company................ 13.7% 18.9% 16.2%
6. NOTES RECEIVABLE:
During the normal course of business, the Company issues notes in connection
with equipment purchases by customers. The equipment is used to secure the note.
Notes receivable consist of the following:
December 31
---------------------
2004 2003
---- ----
Notes receivable, short-term................... $ 1,764 $ 746
Notes receivable, long-term.................... 1,496 365
------- --------
Total notes receivable......................... $ 3,260 $ 1,111
======= =======
Notes receivable are included in other current assets and other assets in the
accompanying Consolidated Balance Sheets. The Company increased the financing
program during 2004, which lead to an increased notes receivable balance
compared to December 31, 2003. Notes bear interest at rates ranging from 0% to
12%, and have a weighted average maturity of 32 months. Interest income related
to the notes are included in the consolidated income statement caption "interest
expense (income), net."
7. INVENTORIES:
Inventories consist of the following:
December 31
---------------------
2004 2003
---- ----
Finished products........................... $ 6,489 $ 5,178
Work in process............................. 1,957 1,327
Raw materials and supplies.................. 2,496 2,512
--------- --------
Total inventories $ 10,942 $ 9,017
======== =======
33
8. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
December 31
-----------------------
2004 2003
---- ----
Land.................................................... $ 1,611 $ 1,086
Buildings and improvements.............................. 11,149 7,585
Machinery and equipment................................. 18,786 17,813
Equipment rented to others.............................. 5,952 6,011
Construction in progress................................ 997 1,199
-------- --------
$ 38,495 $ 33,694
Less - Accumulated depreciation......................... (16,358) (14,454)
-------- --------
Total property, plant and equipment, net..... $ 22,137 $ 19,240
======== =========
The machinery and equipment under capital lease and related accumulated
depreciation at December 31, 2003 was $384 and $319, respectively. The Company
no longer has the machinery and equipment under capital lease as of December 31,
2004. Depreciation expense was $2,603, $2,288, and $2,125 for 2004, 2003 and
2002, respectively.
9. OTHER ASSETS:
Other assets consist of the following:
December 31
----------------
2004 2003
---- ----
Investment in IAI.................................. $ 280 $ 376
Notes receivable, long-term ....................... 1,496 365
Other.............................................. 84 106
------ -------
Total other assets...................... $1,860 $ 847
====== ======
10. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill consists of the following:
December 31
----------------------
2004 2003
Goodwill.................................... $57,415 $ 55,801
Less - Accumulated amortization............. (4,798) (4,798)
--------- -----------
Total goodwill................... $ 52,617 $ 51,003
======== ========
Goodwill increased $1,614 during 2004. The primary reason for the increased
goodwill was the first quarter acquisition of Healthsonics corporation by YI
Ventures LLC (a wholly owned subsidiary) for $1,500. Healthsonics manufactures
and distributes ultrasonic equipment and solutions. The acquisition resulted in
the recognition of approximately $1,500 of goodwill. The remaining increase in
goodwill was the result of adjustments to the fair value estimates of the assets
and liabilities of Obtura Spartan, which was acquired on December 1, 2003, and
Midwest Laboratories, which was acquired on September 16, 2003. There have been
no changes in goodwill related to impairment losses or write-offs due to sales
of businesses during the years ended December 31, 2004 and 2003.
Other intangibles consist of the following:
34
AS OF DECEMBER 31, 2004
--------------------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
-------------- ----------- ------------
AMOUNT AMORTIZATION AMOUNT
------ ------------ ------
Amortized intangible assets
License agreements $ 1,200 $ 65 $ 1,135
Core technology 591 32 559
Patents 499 263 236
Product formulas 430 37 393
Customer relationships 250 0 250
Non-compete agreements 252 75 177
Supplier relationships 130 86 44
---------- --------- ------------
Total $ 3,352 $ 558 $ 2,794
Intangible assets not subject to
amortization
Trademarks $ 3,311 $ 3,311
---------- ------------
Total intangible assets $ 6,663 $ 558 $ 6,105
AS OF DECEMBER 31, 2003
GROSS CARRYING ACCUMULATED NET CARRYING
-------------- ----------- ------------
AMOUNT AMORTIZATION AMOUNT
------ ------------ ------
Amortized intangible assets
License agreements $ 1,200 $ 6 $ 1,194
Core technology 591 4 587
Patents 481 234 265
Product formulas 430 27 403
Supplier relationships 130 66 64
---------- --------- ------------
Total $ 2,832 $ 332 $ 2,513
Intangible assets not subject to
amortization
Trademarks $ 3,311 $ 3,311
---------- ------------
Total intangible assets $ 6,143 $ 332 $ 5,824
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, license agreements and core technology;
40 years for product formulations; and 5 years for supplier and customer
relationships. Non-compete agreements are amortized over the length of the
signed agreement. The weighted average life for amortizable intangible assets is
19 years. Aggregate amortization expense for the years ended December 31, 2004,
2003 and 2002 was $226, $73, and $81, respectively. Estimated amortization
expense for each of the next five years is as follows:
For the year ended 12/31/05 $ 250
For the year ended 12/31/06 215
For the year ended 12/31/07 200
For the year ended 12/31/08 200
For the year ended 12/31/09 200
35
11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
December 31
---------------------
2004 2003
---- ----
Accounts payable....................................................... $3,380 $ 2,690
Accrued salaries and bonuses........................................... 875 1,717
Accrued taxes.......................................................... 1,004 1,143
Accrued rebate payments................................................ 398 534
Accrued expenses and other ............................................ 1,982 2,958
----- -----
Total accounts payable and accrued liabilities.............. $ 7,639 $ 9,042
======= =======
12. CREDIT ARRANGEMENTS AND NOTES PAYABLE:
The Company has a credit arrangement that provides for an unsecured revolving
credit facility with an aggregate commitment of $50,000. Borrowings under the
arrangement bear interest at rates ranging from LIBOR +1% to LIBOR +2.25%, or
Prime to Prime +.5%, depending on the Company's level of indebtedness.
Commitment fees for this arrangement range from .15% to .20% of the unused
balance. The agreement is unsecured and contains various financial and other
covenants.
Long-term debt was as follows:
DECEMBER 31
2004 2003
---- ----
Revolving credit facility due 2007 with a weighted-average
interest rate of 3.28% at December 31, 2003 $ - $2,784
Capital Lease Obligations - 68
--------- -------
- 2,852
Less - current portion - 2,852
--------- -------
$ -- $ --
========= =======
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, 2004
and 2003, respectively, approximately $205 and $561 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, it is the opinion of management that the fair
value of the recourse provided is minimal and not material to the results of
operations or financial position of the Company.
13. COMMON STOCK:
During 2004, the Company repurchased 60 shares of its Common Stock from various
stockholders for $1,924. The purchases were financed through cash generated from
operations. The Company also reissued 87 shares of its Common Stock in
conjunction with stock option exercises for $366. In addition, the restrictions
on 24 previously issued shares of Common Stock lapsed during 2004 (see footnote
14).
During 2003, the Company repurchased 3 shares of its Common Stock from various
stockholders for $66. The purchases were financed through cash generated from
operations. The Company also reissued 210 shares of its Common Stock in
conjunction with stock option exercises for $1,308. In addition, the
restrictions on 24 previously issued shares of Common Stock lapsed during 2003
36
(see footnote 14).
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 held in treasury in conjunction with stock option exercises for $832. In
addition, the restrictions on 24 previously issued shares of Common Stock lapsed
during 2002 (see footnote 14).
14. 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, 2004, 1,529
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, 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
===
Outstanding, January 1, 2003..................... 896 $8.00 - $14.02 $11.77
Granted.......................................... 107 $32.74 $32.74
Exercised........................................ 209 $8.00 - $14.02 $9.92
Forfeited........................................ -- -- --
------
Outstanding, December 31, 2003................... 794 $8.00 - $32.74 $15.08
===
Exercisable at December 31, 2003................. 509 $8.00 - $32.74 $13.51
===
Outstanding, January 1, 2004..................... 794 $8.00 - $32.74 $15.08
Granted.......................................... - -- --
Exercised........................................ 87 $8.00 - $14.02 $11.61
Forfeited........................................ 58 $14.02 - $32.74 $19.48
------
Outstanding, December 31, 2004................... 649 $8.00 - $32.74 $15.15
===
Exercisable at December 31, 2004................. 558 $8.00 - $14.02 $15.03
===
The weighted average remaining contractual life of the options outstanding at
December 31, 2004 is 6.6 years. As of January 1, 2005, 608 shares were
exercisable with a range of exercise prices from $8.00 to $32.74 with a weighted
average price of $14.95.
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.
37
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 beginning in
October 2002. For the years ended December 31, 2004, 2003, and 2002, the Company
recorded $337, $336, and $337, respectively, of compensation expense related to
the restricted stock grants.
15. INCOME TAXES:
The components of the provision for income taxes are as follows:
Years Ended December 31
--------------------------------
2004 2003 2002
---- ---- ----
Current..................................................... $7,384 $ 7,047 $ 6,756
Deferred.................................................... 1,249 1,130 545
----- -------- ---------
Total provision for income taxes................. $ 8,633 $ 8,177 $ 7,301
======= ======= =======
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
--------------------------------------------
2004 2003 2002
---- ---- ----
Income from continuing operations before provision for income taxes $21,275 $21,517 $ 18,274
U.S. federal income tax rate................................ 35% 35% 35%
------- ------- --------
Computed income taxes............................ 7,446 7,531 6,396
Other....................................................... 73 82 211
------- ------- --------
Provision for federal income taxes on continuing operations 7,519 7,613 6,607
State income taxes from continuing operations, net of federal tax benefit 619 618 520
------- ------- --------
Provision for income taxes on continuing operations $ 8,138 $ 8,231 $ 7,127
Effective tax rate on continuing operations 38.25% 38.25% 39.00%
Provision for income taxes on discontinued operations 495 (54) 174
------- ------- --------
Total provision for income taxes............................ $ 8,633 $ 8,177 $ 7,301
======= ======= =======
38
Temporary differences that gave rise to deferred income tax assets and
liabilities are as follows:
December 31
--------------------
2004 2003
---- ----
Deferred income tax assets:
Trade accounts receivable....................... $ 171 $ 166
Inventories..................................... 297 264
Accrued liabilities............................. 171 440
Other........................................... 159 57
------- ---------
Total deferred income tax assets....... 798 927
------- --------
Deferred income tax liabilities:
Property, plant and equipment................... (2,641) (2,710)
Intangibles..................................... (4,369) (3,180)
Other........................................... - -
-------- ----------
Total deferred income tax liabilities.. (7,010) (5,890)
------- -------
Net deferred income tax liability................. $(6,212) $(4,963)
======== ========
Current deferred income tax assets of $798 and $927 are included in other
current assets as of December 31, 2004 and 2003, respectively.
16. 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 $1,679, $1,560, and $1,111
for 2004, 2003 and 2002, respectively, and gross profit from these sales was
$783, $775, and $522 for 2004, 2003 and 2002, respectively.
17. EMPLOYEE BENEFITS:
The Company has defined contribution 401(k) plans 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 $255, $317, and $307 for 2004, 2003 and 2002, respectively. The Company also
offers certain healthcare insurance benefits for substantially all employees.
18. RELATED-PARTY TRANSACTIONS:
During 2004 and 2003, the Company paid consulting fees of $54 and $100,
respectively, to a corporation which is wholly owned by George E. Richmond, the
Company's Chairman.
During 2004 and 2003, the Company paid fees of $88 and $31, respectively, to a
corporation which is wholly owned by George E. Richmond, the Company's Chairman,
for corporate use of an aircraft owned by that corporation.
The Company sold products to, and paid for services from, Earth City
Technologies, in which George E. Richmond, the Company's Chairman, had an equity
interest. Net sales to such corporation totaled $3 and $83 in 2003 and 2002,
respectively. Amounts paid for services totaled $0 and $1 in 2003 and 2002,
respectively. On December 1, 2003, the Company acquired substantially all the
assets and assumed a portion of the liabilities of Earth City Technologies (see
footnote 3).
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 was paid in full during 2003. Interest income of $10 related
to this note was recorded in 2003.
39
19. EARNINGS PER SHARE:
Basic earnings per share (Basic EPS) are 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
-----------------------------------------------
2004 2003 2002
---- ---- ----
Net income ............................................. $ 13,934 $ 13,201 $ 11,411
Net income from continuing operations .............. 13,137 13,286 11,147
Net income from discontinued operations ............ 797 (85) 264
Weighted average shares outstanding for basic earnings
per share ............................................... 9,040 9,017 8,876
Dilutive effect of stock options and restricted stock ... 369 414 455
Weighted average shares outstanding for diluted
earnings per share ...................................... 9,409 9,431 9,331
Basic earnings per share ................................ $ 1.54 $ 1.46 $ 1.29
Basic earnings per share from continuing operations. $ 1.45 $ 1.47 $ 1.26
Basic earnings per share from discontinued ......... $ 0.09 $ (0.01) $ 0.03
operations
Diluted earnings per share .............................. $ 1.48 $ 1.40 $ 1.22
Diluted earnings per share from continuing
operations .............................................. $ 1.40 $ 1.41 $ 1.19
Diluted earnings per share from discontinued
operations .............................................. $ 0.08 $ (0.01) $ 0.03
---------------------------------------------------------------------------------------------------------
20. QUARTERLY FINANCIAL DATA (UNAUDITED):
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. YEAR
-------- -------- -------- -------- ----
2004
- ----
Net sales $19,494 $16,738 $20,891 $22,078 $79,201
Gross profit 10,888 8,649 11,706 12,107 43,350
Net income from continuing operations 3,281 1,998 3,745 4,113 13,137
Net income from discontinued operations 16 35 48 698 797
Net income 3,297 2,033 3,793 4,811 13,934
Basic earnings per share $.37 $.22 $.42 $.53 $1.54
Basic earnings per share from continuing operations $.37 $.22 $.41 $.45 $1.45
Basic earnings per share from discontinued $.00 $.00 $.01 $.08 $.09
operations
Diluted earnings per share $.35 $.22 $.40 $.51 $1.48
Diluted earnings per share from continuing $.35 $.22 $.39 $.44 $1.40
operations
Diluted earnings per share from discontinued $.00 $.00 $.01 $.07 $.08
operations
40
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. YEAR
-------- -------- -------- -------- ----
2003
- ----
Net sales $16,771 $17,872 $18,148 $19,771 $72,562
Gross profit 9,188 10,116 10,264 10,865 40,433
Net income from continuing operations 2,934 3,300 3,297 3,755 13,286
Net income from discontinued operations (41) (40) 9 (13) (85)
Net income 2,893 3,260 3,306 3,742 13,201
Basic earnings per share $.32 $.36 $.37 $.41 $1.46
Basic earnings per share from continuing operations $.33 $.36 $.37 $.41 $1.47
Basic earnings per share from discontinued ($.01) $.00 $.00 $.00 ($.01)
operations
Diluted earnings per share $.31 $.35 $.35 $.39 $1.40
Diluted earnings per share from continuing $.32 $.35 $.35 $.39 $1.41
operations
Diluted earnings per share from discontinued ($.01) $.00 $.00 $.00 ($.01)
operations
21. COMMITMENTS AND CONTINGENCIES:
The Company leases certain office and warehouse space, manufacturing facilities,
automobiles, and equipment under non-cancelable operating leases. The total
rental expense for all operating leases was $1,001, $876, and $812 for 2004,
2003 and 2002, respectively. Rental commitments amount to: $871 for 2005, $528
for 2006, $252 for 2007, and $48 for 2008.
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.
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 accrual for warranty costs was $280 and $253 at December 31, 2004 and 2003,
respectively. There were no significant warranty costs during the year ended
December 31, 2004.
22. NEW ACCOUNTING STANDARDS:
In November 2004, the Financial Accounting Standards Board issued SFAS No. 151
"Inventory Costs -- An Amendment of ARB No. 43, Chapter 4." SFAS 151 clarifies
that abnormal amounts of idle facility expense, freight, handling costs and
spoilage should be expensed as incurred and not included in overhead. Further,
SFAS 151 requires that allocation of fixed and production facilities overhead to
conversion costs should be based on normal capacity of the production
facilities. The provisions in SFAS 151 are effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The Company does not
believe that the adoption of SFAS 151 will have a significant effect on its
financial statements.
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123(Revised), "Share-Based Payment." This statement replaces SFAS No. 123,
"Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS 123(R) requires companies to
apply a fair-value-based measurement method in accounting for share-based
payment transactions with employees, and to record compensation cost for all
stock awards granted after the required effective date and to awards modified,
repurchased, or cancelled after that date. In addition, the Company is required
to record compensation expense (as previous awards continue to vest) for the
unvested portion of previously granted awards that remain outstanding at the
date of adoption. SFAS 123(R) will be effective for quarterly periods beginning
after June 15, 2005, which is the Company's third quarter ending September 30,
2005. The Company has not yet determined the impact that SFAS 123(R) will have
on its financial position and results of operations.
41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Our Chief Executive Officer, President and Chief Financial Officer have
concluded, based on their evaluation as of the end of the period covered by this
report, that our disclosure controls and procedures are effective in all
material respects in ensuring 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 over financial reporting or in
other factors that could significantly affect these controls subsequent to the
date of the previously mentioned evaluation. See Item 8 for Management's Report
on Internal Control over Financial Reporting and the Report of Independent
Registered Public Accounting Firm regarding Internal Control over Financial
Reporting.
ITEM 9B. OTHER INFORMATION.
None.
42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Information concerning this item will be included under the captions
"Election of Directors" and "Section 16(a), Beneficial Ownership
Reporting Compliance" in the Company's definitive Proxy Statement
prepared in connection with the 2005 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.
(c) The Company has determined that Brian F. Bremer, Chairman of the Audit
Committee of the Board of Directors, and Marc R. Sarni, each members
of the Audit Committee of the Board of Directors, each qualify as an
"audit committee financial expert" as defined in Item (401(h)) of the
Regulation S-K, and that Messrs. Bremer and Sarni and Dr. Patrick J.
Ferrillo, also a member of the Audit Committee of the Board of
Directors, are "independent" as the term is used in Item 7(d)(3)(iv)
of Schedule 14A under the Securities Exchange Act of 1934, as amended.
(d) Code of Business Conduct
The Company has adopted a Code of Ethics applicable to all employees.
This code is applicable to Senior Financial Executives, including the
principle executive officer, principle financial officer and principal
accounting officer of the Company. The Company's Code of Ethics Policy
is available on the Company's website at www.ydnt.com under "Corporate
Governance." The Company intends to post on its website any amendments
to, or waivers from its Code of Ethics applicable to Senior Financial
Executives. The Company will provide shareholders with a copy of its
Code of Ethics upon written request directed to the Company's
Secretary at the Company's address.
ITEM 11. EXECUTIVE COMPENSATION.
Information concerning this item will be included under the captions "Executive
Compensation," "Compensation Committee Interlocks and Insider Participation,"
"Information Concerning the Board of Directors," and "Certain Relationships and
Related Party Transactions" in the Company's definitive Proxy Statement prepared
in connection with the 2005 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 AND
RELATED STOCKHOLDER MATTERS.
Information concerning this item will be included under the captions "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 2005 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 2005 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. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information concerning this item will be included under the caption "Independent
Auditors" in the Company's definitive Proxy Statement prepared in connection
with the 2005 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.
43
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements -- Reference is made to Item 8 hereof:
Consolidated Balance Sheets - December 31, 2004 and 2003
Consolidated Statements of Income - Years ended December 31, 2004,
2003, and 2002 Consolidated Statements of Stockholders' Equity - Years
ended December 31, 2004, 2003, and 2002 Consolidated Statements of Cash
Flows - Years ended December 31, 2004, 2003, and 2002 Notes to
Consolidated Financial Statements - December 31, 2004
(a)(2) Financial Statement Schedule -- The following financial statement
schedule of the Company is included for the years ended December 31, 2004, 2003,
and 2002:
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
4.5(l) Amendment No. 4 to the Credit Agreement dated May 11, 2004
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 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.
10.5(g) Employment Agreement dated April 1, 2002, by and between the
Registrant and George E. Richmond
10.8(e) Stock Repurchase Agreement dated November 9, 2001, by and between the
Registrant and George E. Richmond
10.9(e) Form of the Registrant's Restricted Stock Award Agreement with
schedule of grantees
10.10(g) Consulting Agreement dated April 1, 2002, by and between the
Registrant and GER Consulting, Inc.
10.11(g) Form of Indemnity Agreement entered into with each member of the
Registrant's Board of Directors
10.12(i) Amendment to George E. Richmond Employment Agreement dated May 14,
2002
10.13(i) Amendment to GER Consulting, Inc. Consulting Agreement dated May 14,
2002
44
10.14(j) Amendment to George E. Richmond Employment Agreement dated April 1,
2002, as amended
10.15(j) Amendment to GER Consulting, Inc. Consulting Agreement dated April 1,
2002, as amended
10.16(j) Amendment to Stock Repurchase Agreement dated November 9, 2001, by
and between the Registrant and George E. Richmond.
10.17(l) Form of Non-employee Director Stock Option
10.18(l) Form of Employee Stock Option
21(l) Subsidiaries of the Registrant
23.1(l) Consent of Independent Registered Public Accounting Firm
24 Power of Attorney (included on Signature page)
31.1(l) Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 302 of Sarbanes-Oxley Act of 2002
31.2(l) Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 302 of Sarbanes-Oxley Act of 2002
31.3(l) Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 302 of Sarbanes-Oxley Act of 2002
32.1(l) 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.
(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 as an Exhibit to Registrant's Report on Form 10-K filed March 26,
2003 and incorporated herein by reference.
(j) Filed as an Exhibit to Registrant's Report on Form 10-Q filed on May 8,
2003 and incorporated herein by reference.
(l) Filed herewith.
(b) Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are as
specified in Item 15(a)(3) herein.
(c) Financial Statement Schedules
The financial statement schedule filed as part of this Annual Report
on Form 10-K is as specified in Item 15(a)(2) herein.
45
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 4, 2005
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, Jr. 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 4, 2005
- ------------------------------
George E. Richmond
/s/ ALFRED E. BRENNAN, JR. Chief Executive Officer, March 4, 2005
- ------------------------------ Director (Principal
Alfred E. Brennan, Jr. Executive Officer)
/s/ ARTHUR L. HERBST, JR. President March 4, 2005
- ------------------------------
Arthur L. Herbst, Jr.
/s/ CHRISTINE R. BOEHNING Vice President and Chief March 4, 2005
- ------------------------------ Financial Officer
Christine R. Boehning
/s/ MARC R. SARNI Director March 4, 2005
- ------------------------------
Marc R. Sarni
/s/ DR. PATRICK J. FERRILLO Director March 4, 2005
- ------------------------------
Dr. Patrick J. Ferrillo
/s/ BRIAN F. BREMER Director March 4, 2005
- ------------------------------
Brian F. Bremer
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2003 and 2004
(IN THOUSANDS)
ADDITIONS
------------------------------------------
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF YEAR EXPENSES ACQUISITIONS DEDUCTIONS OF YEAR
------- -------- ------------ ---------- -------
Allowance for doubtful
Receivables
2002...................... 444 204 11 274 385
2003...................... 385 284 180 208 641
2004..................... 641 35 5 230 451