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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 000-23213
YOUNG INNOVATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
MISSOURI 43-1718931
(State of Incorporation) (I.R.S. Employer
Identification No.)
13705 SHORELINE COURT EAST, 63045
EARTH CITY, MISSOURI (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: 314-344-0010
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant on February 27, 1998 (based on the closing sale
price of $17 of the Registrant's Common Stock, as reported on the Nasdaq
National Market on such date) was approximately $47,454,429.
Number of shares outstanding of the Registrant's Common Stock at February
27, 1998:
6,772,796 shares of Common Stock , par value $.01 per share
Portions of the Registrant's definitive Proxy Statement to be filed for its
1998 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Report.
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PART I
This Form 10-K (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. Factors that have affected, and in the future could affect, the
Company's actual results and could cause such results during fiscal 1998 and
beyond to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company include, but are not limited to,
the effect of economic and market conditions, opportunities for acquisitions and
the Company's ability to effectively integrate acquired companies, the impact of
managed care in dentistry, the impact of the consolidation of dental dealers,
pricing practices of other professional dental products manufacturers,
disruptions in the Company's computer systems or telephone systems, possible
increases in shipping rates or interruptions in shipping services.
ITEM 1. BUSINESS.
The Company is a leading designer, manufacturer and marketer of single-use
supplies, autoclavable instruments and other products used by dental
professionals, primarily in preventive dentistry and infection control. The
Company has a leading market share in certain segments of the preventive
dentistry market which it believes is due to its longstanding reputation for
high quality, innovative and reliable products and widespread name recognition
and ability to leverage its Young, Denticator and Panoramic brands.
The Company was incorporated in July 1995 to serve as the parent
corporation for Young Dental Manufacturing Company ("Young Dental"), founded at
the turn of the century, and The Lorvic Corporation ("Lorvic"), founded in 1953;
Lorvic was acquired by Young Dental in May 1995. Denticator was acquired by the
Company in July 1996. In February 1998, the Company, through a wholly-owned
subsidiary, acquired the assets and business and assumed certain liabilities of
Panoramic Corporation ("Panoramic"). Panoramic is a designer, developer,
manufacturer and marketer of X-ray equipment sold or rented to dental
professionals in the United States, Europe and Japan. The Company is a Missouri
corporation with its principal executive office located at 13705 Shoreline Court
East, Earth City, Missouri 63045, located in the St. Louis, Missouri
metropolitan area; its telephone number is (314) 344-0010.
In the early 1990's, responding to concerns of cross-contamination
resulting from multiple-use products, Young Dental developed a number of plastic
disposable prophy angles designed for single-use and broadened its existing line
of sealed metal angles designed to prevent the intake of blood, saliva and other
matter. Young Dental introduced the industry's first contra disposable prophy
angle in early 1995 and eight other new products or product extensions from 1993
through 1996. The Company has and intends to continue to expand its presence in
several international markets, including Europe, South America, Central America
and the Pacific Rim. International sales represented approximately 4.4% of the
Company's total net sales in 1997.
PRODUCTS
The Company primarily markets disposable and metal prophy angles, cups and
brushes (collectively, "Prophy Products"), complementary preventive products,
including pastes, fluorides and fluoride applicators, as well as aspiration and
infection control products and dental X-ray equipment.
Prophy Products. The Company believes it manufactures and sells the
broadest line of Prophy Products in the domestic professional dental products
market. The Company is able to achieve its substantial share of the Prophy
Product market by providing Prophy Products at both premium and popular prices.
The Company generally prices its Young branded Prophy Products at premium levels
and its Denticator branded Prophy Products at popular price levels. The
Company's broad range of Prophy Products enables it to be a single-source
supplier to its distributors.
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The Company's Prophy Products include several configurations of sealed
metal autoclavable prophy angles and several disposable plastic prophy angles
designed for single-use. Prophy Products consist of two components: an angle
which is attached to and extends from a standard, low-speed dental handpiece and
a rubber cup or brush which is attached to the angle and performs the cleaning
function. During the prophylaxis process, the cup or brush is filled with
abrasive paste, which is applied to the teeth as the prophy cup rotates. The
dental professional polishes both the visible portion of the tooth and the
subgingival portion (below the gum line). The prophy angle may be a disposable
or a reusable instrument; prophy cups and brushes are sold as single-use items.
Disposable prophy angles are sold as assembled units with a cup or brush already
attached. The Company produces and markets a number of different disposable
prophy angles, including both traditional right angle and contra angle
configurations. Virtually all of the Company's metal prophy angles are sealed
against penetration of matter from patients' mouths (thus reducing the risk of
cross-contamination and damage to the prophy angle) and are designed for ease of
maintenance. Because such metal prophy angles function correctly and are
warranted only when used with the Company's cups and brushes, most dentists who
purchase the Company's metal prophy angles also purchase the Company's cups and
brushes.
Other Preventive Products. The Company's other preventive products include
polishing pastes and powders, which are abrasive agents used for cleaning and
polishing teeth; fluorides used in dental offices and at home to reduce cavities
and tooth sensitivity; applicators used by dental professionals to apply
fluoride to patients' teeth; and plaque disclosants, which are liquids or
tablets that identify the presence of plaque when applied to tooth surfaces. The
Company markets certain of its pastes, including fluoride products, in
single-use containers, the demand for which has grown in response to infection
control concerns.
Infection Control Products. The Company's line of infection control
products includes products such as indicator tape and tabs used to verify the
effectiveness of a sterilizer; Nyclave wrap used to wrap instruments during
sterilization so that sterility is maintained until use; barrier products used
to wrap operatory knobs, handles and other devices that cannot be sterilized;
and surgical milk and instrument care products used to inhibit corrosion, remove
rust and lubricate hinged instruments in connection with the autoclave process.
Autoclaving is the sterilization of instruments and equipment through the use of
steam.
X-Ray Products. The Company's February 1998 acquisition of Panoramic added
a line of dental X-ray equipment to the Company's product offerings. Panoramic's
PC 1000 X-ray machine produces a high quality image of the entire dental arch in
one X-ray film. Panoramic's Laser 1000 cephalometric X-ray system allows
analysis of the exact relationship of various anatomical reference points of the
patient's anterior skull profile. General dentists and orthodontists use these
calculations to locate and predict the movement of teeth in order to fit braces
and other orthodontia. The device is used by oral surgeons to detect pathology
and also to determine bone and teeth alignment before and after surgery.
Assisting and Other Products. The Company's assisting and other products
include disposable aspiration products used to remove blood, saliva and other
matter during dental procedures; cotton roll substitutes used to control saliva
and moisture during dental procedures; matrix bands used for tooth restorations;
rubber dam frames used to isolate teeth during dental procedures; and etching
gels and bonding prep used to condition tooth surfaces for bonding.
Private Label and OEM Products. In addition to branded products, the
Company designs, develops and produces a limited number of proprietary private
label and OEM products under contracts with dental distributors and other
professional dental product manufacturers where the Company is able to use its
expertise and excess manufacturing capacity.
MARKETING AND DISTRIBUTION
The Company markets its full line of products to dental professionals
worldwide using a network of medical and dental product distributors. The
Company actively supports its distributor relationships with Company sales
personnel in the United States, independent sales representatives in Canada and
exclusive sales representatives in 11 countries outside of North America. The
Company also uses non-exclusive distributors to service markets in a number of
other countries. All major distributors of dental products in North America sell
the Company's products, including Henry Schein, Inc., Patterson Dental Company,
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Sullivan Dental Products, Inc. and H. Meer Dental Supply Company, Inc. of which
Schein, Patterson and Sullivan, respectively, accounted for 17.6%, 16.9% and
9.6% of the Company's sales in 1997. The Company has no formal agreements with
its distributors which generally purchase products from the Company by purchase
order. The Company believes these arrangements are customary in the industry.
The Company's product development, manufacturing and marketing capabilities and
its relationships with distributors allow the Company to provide a broad range
of high quality, innovative and reliable products to dental professionals.
Additionally, these capabilities and relationships enable the Company to quickly
and efficiently offer new products or product extensions to its existing
customer base and new markets. In addition to marketing through distributors in
the United States, the Company sells products directly to dental and dental
hygiene schools, Veterans Administration healthcare facilities and United States
military bases.
The Company's products are sold and marketed by Company employees in the
United States and by independent sales representatives in Canada. The Company
also supports its marketing activities to smaller distributors through use of
the Company's inside sales personnel. Until July 1997, the Company used
independent non-exclusive sales representatives and a small number of Company
employees for its marketing and sales efforts in the United States. In an effort
to more efficiently market its products, the Company decided to switch from
independent sales representatives to Company employees who exclusively focus on
selling the Company's products.
The Company expends considerable effort educating its distributors about
the quality, reliability and features of its products. The Company also
advertises its products through industry publications and direct mail. To
supplement its other marketing efforts, the Company provides product samples to
dental professionals and exhibits its products at industry trade shows. In
addition, the Company seeks to stimulate interest in its products by providing
information and marketing materials to influential lecturers and prominent
experts and consultants in the dental industry.
Panoramic markets its products in the United States and Canada directly to
the end user, primarily by direct mail, trade shows and a limited amount of
advertising in trade and professional journals.
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 the contra disposable prophy
angle to improve the ease with which dental professionals can reach and clean
patients' teeth. The Company believes that the contra disposable prophy angle
reduces the risk of carpal tunnel syndrome by reducing the flexion of dental
hygienists' wrists during prophy procedures. Additionally, many of the new
products or product improvements developed by the Company are patented.
All of Young Dental's disposable prophy angles have been developed since
1990. In June 1997, Young Dental introduced its new Junior Cup, a short
prophylaxis cup designed to reach surfaces in small mouths that are difficult to
reach with the Company's conventionally sized cups. In June 1997, Denticator
introduced the Universal Disposable Angle which was designed to compete with a
number of popular priced branded and private label disposable prophy angles
manufactured by the Company's competitors.
In addition to its Prophy Product development efforts, the Company actively
seeks to introduce new and innovative products in other segments of the
professional dental product market.
MANUFACTURING AND SUPPLY
The Company manufactures virtually all of its products other than X-ray
equipment. The consolidation of the Company's two St. Louis facilities into the
expanded Earth City facility, which was substantially completed in December
1996, provides the Company with sufficient manufacturing capacity for
anticipated growth in the foreseeable future. The Company contracted for the
assembly of a substantial portion of its disposable prophy angles in Mexico
during 1997 due to its cost effectiveness.
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Prophy and Other Products. The Company uses a variety of state-of-the-art
computer numerically controlled machining centers, injection molding machines
and robotic assembly machines and continues to invest in new and more efficient
equipment and production lines. The primary processes involved in manufacturing
the Company's products consist of precision metal turning and milling, rubber
molding, plastic injection molding, component parts assembling and finished
goods packaging.
Pastes, Liquids and Gels. Lorvic blends and mixes all of its pastes,
liquids and gels at the Earth City facility. The Company owns equipment used to
form and dye-cut expanded polyethylene foam and to dye-cut extruded plastic into
finished products and equipment used to package its products in a variety of
container sizes, including prophy paste in unit-dose containers.
X-Ray Equipment. Panoramic's X-ray equipment is manufactured and assembled
by a contract manufacturer at Panoramic'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. Panoramic owns all of the tooling, engineering documentation and
assembly fixtures used in the process. Panoramic manufacturers its own X-ray
generators.
Total Quality Management. The Company has implemented production process
control techniques to ensure continuing process capability designed to increase
product quality and reduce scrap. The Company pursues quality throughout all
levels of the organization to maximize its ability to meet the goals and needs
of its customers. Employees receive extensive training in implementing proactive
solutions to improve the quality system, ensuring a higher quality product.
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 of its products from
other manufacturers for resale.
COMPETITION
The Company competes with manufacturers of both branded and private label
dental products in each of the markets it serves. According to Strategic Dental
Marketing, Inc., an independent market research firm, the Company had the
largest domestic market share of distributor sales in Prophy Products during
1996 and 1997.
Dental professionals place major importance on the proven reliability of
the Company's products and are generally not price-sensitive. The Company
believes that Young Dental and Lorvic compete on the basis of the quality and
reliability of their products as well as their reputations. As a result, Young
Dental and Lorvic typically charge premium prices for their products. By
contrast, Denticator's and Panoramic's products are targeted to more
price-sensitive dental service providers. Panoramic competes with seven
competitors, six of which are foreign manufacturers.
The markets for the Company's products are highly competitive. The Company
believes that the principal competitive factors in all of its markets are
product features, reliability, name recognition, established distribution
network, customer service and, to a lesser extent, price. The relative speed
with which the Company can develop, complete testing, obtain regulatory approval
and sell commercial quantities of new products is also an important competitive
factor. Some of the Company's competitors have greater financial, research,
manufacturing and marketing resources than the Company and include DENTSPLY
International, Inc., Oral-B Laboratories, a subsidiary of The Gillette Company,
and Allegheny Teledyne Incorporated and, in the case of Panoramic, Gendex, a
division of DENTSPLY International, Inc., Siemens Dental Products, and Planmeca
OY.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 173 people,
none of whom were covered by collective bargaining agreements. The Company
believes that its relations with its employees are good.
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ITEM 2. PROPERTIES.
The Company's facilities are as follows:
DESCRIPTION SQUARE FEET LOCATION OWNED/LEASED
----------- ----------- -------- ------------
Corporate Headquarters 54,000 Earth City, Missouri Owned
and Manufacturing...........................
Manufacturing............................. 12,000 Brownsville, Texas Owned
Manufacturing............................. 21,000 Sacramento, California Lease expires December
31, 2001; the Company
has an option to
purchase the property
Office and Manufacturing...................... 28,000 Fort Wayne, Indiana Owned
The Company believes that its facilities are generally in good condition
and are adequate for its operations for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
On May 30, 1997, two former employees of Young Dental and a corporation
formed by them (the "Adverse Parties") filed a Petition against Young Dental in
the Circuit Court for the City of St. Louis, Missouri (the "Current Action").
The Current Action results from an action brought in 1993 by Young Dental
against the Adverse Parties in the Federal District Court for the Eastern
District of Missouri (the "Prior Action"), alleging, among other things, patent
infringement and misappropriation of trade secrets. The Prior Action was
resolved in favor of the Adverse Parties. In the Current Action, consisting of
three counts alleging malicious prosecution and three counts alleging abuse of
process related to the Prior Action, the Adverse Parties seek actual damages in
unspecified amounts in excess of $25,000 and, in a separate count, seek punitive
damages. The Adverse Parties also seek to recover their attorneys' fees incurred
in the Prior Action, which they claim exceed $750,000. While the Current Action,
which is scheduled for trial late in 1998, is still in the discovery stage, the
Company believes it has adequate defenses to each of plaintiffs' claims and
intends to defend the Current Action vigorously.
The Internal Revenue Service (the "IRS") examined Lorvic's federal income
tax returns for the years ended March 31, 1992 through 1995 and proposed
deficiencies in federal income taxes for those years in an aggregate amount of
$766,000 due to classification of certain intangible assets. Lorvic filed
petitions with the United States Tax Court contesting these proposed
deficiencies and the matter was tried in January 1998. The parties are currently
briefing their positions, and the Company anticipates a decision from the Tax
Court within the next year. In accordance with the stock purchase agreement
pursuant to which the Company acquired Lorvic in May 1995, the previous
stockholders of Lorvic are responsible for the settlement of this matter to the
extent of $700,000 held in an escrow fund, together with earnings thereon, plus
an additional $200,000 to cover any interest and penalties related to such
matters. While there can be no such assurance, the Company believes the escrowed
amounts will be sufficient to satisfy these deficiencies in full for all
affected years if required.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock began trading on the Nasdaq National Market on November 5,
1997 under the symbol of "YDNT". The following table sets forth the high and low
closing prices of the Common Stock as reported by the Nasdaq National Market.
MARKET PRICE
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QUARTER HIGH LOW
------- ---- ---
1997
Fourth......................................... $18 $13
On February 27, 1998, there were approximately 33 holders of record of the
Company's Common Stock.
The Company has not paid cash dividends on its Common Stock since its
inception. The Company currently intends to retain earnings for use in its
business and, therefore, does not anticipate paying any cash dividends in the
foreseeable future. Payment of cash dividends, if any, will be at the discretion
of the Company's Board of Directors and will be dependent upon the earnings and
financial condition of the Company and any other factors deemed relevant by the
Board of Directors and will be subject to any applicable restrictions contained
in the Company's then existing credit arrangements.
The Company completed its initial public offering of 2,300,000 shares of
its common stock on November 10, 1997, and the net proceeds to the Company,
after deducting the underwriting discount and offering expenses, were $25.2
million. The sale of such shares was made pursuant to a Registration Statement
on Form S-1 (File No. 333-34971) which was declared effective on November 4,
1997. The Company used $13.2 million of the proceeds to repay borrowings under
the Revolving Credit and Term Loan Agreement dated July 22, 1996 between the
Company and NationsBank, N.A., and the balance of $12.0 million to provide a
portion of the $13.6 million used by the Company to purchase the assets of
Panoramic and repay Panoramic's indebtedness.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table presents selected financial data of the Company. This
historical data should be read in conjunction with the Consolidated Financial
Statements and the related notes thereto in Item 8 and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Item 7. All
amounts except per share data are expressed in thousands.
YEAR ENDED DECEMBER 31
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1993 1994 1995 1996(1) 1997
---- ---- ---- ------- ----
INCOME STATEMENT DATA:
Net sales........................................ $11,604 $12,036 $17,496 $21,580 $24,986
Cost of goods sold............................... 5,609 5,457 7,379 9,470 10,129
------- ------- ------- ------- -------
Gross profit..................................... 5,995 6,579 10,117 12,110 14,857
Selling, general and administrative expenses..... 2,825 3,063 4,494 5,790 7,333
------- ------- ------- ------- -------
Income from operations........................... 3,170 3,516 5,623 6,320 7,524
Interest expense and other, net.................. 297 65 421 1,097 876
------- ------- ------- ------- -------
Income before provision for income taxes......... 2,873 3,451 5,202 5,223 6,648
Provision for income taxes....................... 700 1,270 2,044 1,955 2,538
------- ------- ------- ------- -------
Net income....................................... $ 2,173 $ 2,181 $ 3,158 $ 3,268 $ 4,110
======= ======= ======= ======= =======
Basic earnings per share......................... $ 0.49 $ 0.71 $ 0.74 $ 0.86
======= ======= ======= =======
Basic weighted average common shares
outstanding................................... 4,450 4,450 4,450 4,444 4,775
Diluted earnings per share....................... $ 0.49 $ 0.71 $ 0.74 $ 0.86
======= ======= ======= =======
Diluted weighted average common shares
outstanding................................... 4,450 4,450 4,450 4,444 4,782
Pro forma net income(2).......................... $ 1,805
=======
Pro forma earnings per share(2).................. $ 0.41
=======
AS OF DECEMBER 31,
---------------------------------------------
1993 1994 1995 1996(1) 1997
---- ---- ---- ------- ----
BALANCE SHEET DATA:
Working capital (deficit).......................... $ (580) $1,559 $(3,111) $(5,772) $16,375
Total assets....................................... 8,545 7,711 22,107 32,481 45,429
Total debt (including current maturities).......... 4,223 472 10,773 16,406 --
Stockholders' equity............................... 3,207 5,253 7,121 10,311 41,208
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(1) On July 22, 1996, the Company acquired Denticator. The income statement data
for the year ended December 31, 1996, include results of operations for
Denticator from July 22, 1996, through December 31, 1996. The balance sheet
data as of December 31, 1996, include Denticator as of that date.
(2) Until February 28, 1993, Young Dental had elected to be treated as an S
Corporation for income tax purposes. Effective March 1, 1993, Young Dental
terminated its S Corporation status and became a taxable entity. Assuming
Young Dental was a C Corporation, the estimated additional pro forma
provision for income taxes was $368,000 for 1993, assuming an income tax
rate of 37.0%.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Through its Young Dental and recently acquired Lorvic and Denticator
brands, the Company provides one of the broadest lines of supplies and
instruments to the preventive dentistry and infection control segments of the
professional dental products market.
The Company's growth in net sales has been driven by three principal
factors: (i) the successful introduction of a line of highly reliable disposable
prophy angles; (ii) the increase in its market share of metal prophy angles,
cups and brushes; and (iii) the acquisitions of Lorvic and Denticator. The
Company has also benefited from growth in private label arrangements with
certain of its key distributors and from increased
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market share resulting from product promotional activities, such as price
promotions organized around industry conventions, volume purchase rebate
programs and national promotions targeted to dental professionals. Typically,
the Company's national promotions provide for a free product for each purchase
of a designated number of products. During such national promotions, customers
tend to increase their purchases, thus increasing their inventories and reducing
their purchases in subsequent quarters. While the Company infrequently conducts
national promotions, it conducted such a promotion in the first quarter of 1997
which increased net sales in that quarter by approximately $600,000 and
decreased net sales in the second quarter of 1997 by approximately $300,000, in
each case as compared to normalized levels. The national promotion may also
impact comparisons with comparable future quarters. In addition, the Company
offers annual rebate programs in which a portion of the purchase price of
products is rebated to customers who meet certain annual volume purchase levels.
In order to qualify for these rebate programs, customers tend to increase
purchases in the fourth quarter. The Company pays rebates for the prior year in
the first quarter of the subsequent year.
A principal component of the Company's growth strategy is to expand through
strategic acquisitions. In May 1995, the Company acquired the common stock of
Lorvic for approximately $13.4 million. Lorvic provided the Company with lines
of aspiration, infection control and preventive dental products that directly
complement its strong position in Prophy Products. The Company borrowed $13.5
million to fund the Lorvic acquisition. In July 1996, the Company acquired the
assets and liabilities of Denticator for $7.6 million in cash and an obligation
to provide approximately $900,000 of Company products deliverable to Bio Dental
Technologies Corp. over approximately a 24 month period following the
acquisition. As of December 31, 1997, approximately $133,000 of these products
remained to be delivered within the next 12 months. Denticator's line of popular
priced disposable prophy angles enabled the Company to extend its line of Prophy
Products, which the Company believes is the broadest Prophy Product offering
available, and significantly increase its share of the domestic Prophy Product
market. The Company borrowed $16.5 million to fund the Denticator acquisition
and to repay debt incurred in connection with the Lorvic acquisition. Lorvic's
and Denticator's results of operations are included since the acquisition dates.
The acquisitions were accounted for using the purchase method of accounting,
resulting in goodwill of $11.6 million and $7.6 million, respectively, which are
being amortized over 40 years from the dates of the respective acquisitions.
In February 1998, the Company acquired the net assets of Panoramic for $11
million in cash plus 62,500 shares of the Company's common stock and assumed
approximately $3.7 million of Panoramic's liabilities, of which $2.6 million was
repaid at closing. The Panoramic acquisition adds to the Company's product
offerings a line of dental x-ray equipment sold or rented to dental
professionals in the United States, Europe and Japan.
The Company completed its initial public offering of 2.3 million shares of
its common stock in November 1997, and the net proceeds to the Company, after
deducting the underwriting discount and offering expenses, were $25.2 million.
The Company used $13.2 million of the proceeds to repay the debt incurred to
fund the Denticator acquisition and repay debt incurred in connection with the
Lorvic acquisition and the balance of $12.0 million to provide a portion of the
$13.6 million used by the Company to purchase the assets of Panoramic and repay
Panoramic's indebtedness.
The most significant components of the Company's cost of goods sold are
manufacturing overhead and material purchases. Due to the high level of
automation of the Company's manufacturing processes, it has been able to
maintain a relatively low level of direct labor, as a percentage of net sales.
Additionally, the Company maintains low direct labor costs by contracting for
the assembly of a substantial portion of its disposable prophy angles with third
party maquiladora operations located in Mexico. Prior to its acquisition by the
Company, Lorvic's gross margin was higher than Young Dental's while Denticator's
gross margin was lower than Young Dental's primarily as a result of Denticator
outsourcing its injection molding needs. To further improve its gross margin,
the Company initiated manufacturing activities at Denticator in April 1997 by
acquiring injection molding equipment for the production of Denticator's
disposable prophy angles.
The Company's selling, general and administrative expenses ("SG&A") consist
of selling and marketing expenses, research and development expenses,
administrative expenses and goodwill amortization, among other expenses. Given
the Company's recent conversion in the United States from independent sales
representatives to Company employees, a greater percentage of selling expenses
will be fixed in the future as
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compared with the variable expense associated with its independent sales
representative organization. The Company believes this conversion will result in
reduced selling expense as a percent of net sales and enable it to have more
focused sales coverage of its domestic customers. Goodwill amortization also
represents and will represent an increasing component of selling, general and
administrative expenses as a result of the Company's use of purchase accounting
for the Lorvic, Denticator and Panoramic acquisitions. Additionally, as part of
an employment agreement with Denticator's President and Chief Executive Officer,
the Company agreed, subject to his continued employment, to deliver shares of
Common Stock of the Company having a value, in the aggregate, of $800,000 on
July 22, 1998. The Company is amortizing the value of this deferred compensation
by $100,000 per quarter, with the final amortization to occur in the third
quarter of 1998. During 1995, litigation expense of $688,000 associated with the
Company's patent infringement lawsuit also represented a meaningful component of
selling, general and administrative expense.
Other expenses include gain and loss on disposition of fixed assets, sale
of scrap and other miscellaneous income and expense items, all of which are not
directly related to the Company's principal business activities. In 1996, other
expenses included approximately $322,000 of deferred offering costs expensed as
a result of the Company withdrawing its registration statement in 1996 with
respect to its proposed public offering in 1995.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's statement of income expressed as a percentage of net sales.
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
---- ---- ----
Net sales................................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 42.2 43.9 40.5
----- ----- -----
Gross Profit................................................ 57.8 56.1 59.5
Selling, general and administrative expenses................ 25.7 26.8 29.4
----- ----- -----
Income from operations...................................... 32.1 29.3 30.1
Interest expense and other, net............................. 2.4 5.1 3.5
----- ----- -----
Income before income taxes.................................. 29.7 24.2 26.6
Provision for income taxes.................................. 11.7 9.1 10.2
----- ----- -----
Net income.................................................. 18.0% 15.1% 16.4%
===== ===== =====
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales. Net sales increased $3.4 million, or 15.8%, to $25.0 million in
1997 from $21.6 million in 1996. Sales of prophy products represented
approximately $3.0 million of the increase in net sales which was primarily
attributable to the Denticator acquisition. Sales of the Company's disposable
prophy angle products contributed approximately $2.7 million of the increase
with the remainder primarily attributable to increases in sales of prophy cups
and metal prophy angles. Additionally, sales of polishing pastes and powders
contributed approximately $111,000 and disclosing products contributed
approximately $124,000 to the increase.
Gross Profit. Gross profit increased $2.8 million, or 22.7%, to $14.9
million in 1997 from $12.1 million in 1996. Gross margin increased to 59.5% of
net sales in 1997 from 56.1% in 1996. Gross profit benefited from increased
sales by Denticator, which represented approximately $2.0 million of such
increase. The Company's gross margin improved as a result of: (i) Denticator
initiating injection molding operations in April 1997; (ii) Young Dental
manufacturing its disposable prophy angle components with no outside vendor
support; (iii) consolidating the three Missouri facilities into one Missouri
facility; and (iv) improving production processes through increased automation
of vulcanizing processes and increased in-process inspections which resulted in
significantly improved yields.
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11
Selling, General, and Administrative Expenses. SG&A expenses increased $1.5
million, or 26.6%, to $7.3 million in 1997 from $5.8 million in 1996. As a
percent of net sales, SG&A expenses increased to 29.4% in 1997 from 26.8% in
1996. Denticator added $944,000 to 1997 SG&A as a result of its inclusion for
the full period of 1997. Approximately $225,000 of the increase attributable to
Denticator related to a deferred stock compensation agreement with its President
and Chief Executive Officer, which will end in July 1998 and approximately
$100,000 of the increase related to amortization of goodwill from the
acquisition of Denticator. The Company also incurred additional expenses of
$316,000 related to a first quarter 1997 national disposable prophy angle
promotion to dental professionals. In addition, the Company added certain key
personnel and staff during 1997 in preparation for its initial public offering
as well as re-positioned an executive officer so that his compensation is
expensed as an SG&A item.
Income from Operations. Income from operations increased $1.2 million or
19.1%, to $7.5 million in 1997 from $6.3 million in 1996.
Interest Expense. Interest expense increased $42,000 to $1.0 million in
1997 from $974,000 in 1996. The increase was due to the additional debt incurred
to fund the acquisition of Denticator in July 1996. The debt was retired in
November 1997 from proceeds of the initial public offering.
Other Expense (Income). Other expense (income) decreased $263,000 to
$(140,000) in 1997 from $123,000 in 1996 primarily due to inclusion in 1996 of a
write-off of deferred initial public offering costs expensed as a result of the
Company withdrawing its registration statement in 1996 with respect to its
proposed public offering in 1995.
Provisions for Income Taxes. Provision for income taxes increased $583,000
for 1997 to $2.5 million from $2.0 million for 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales. Net sales increased $4.1 million, or 23.3%, to $21.6 million in
1996 from $17.5 million in 1995. Disposable prophy angle sales increased 30.4%,
or approximately $2.8 million, with the Denticator disposable prophy angle line
contributing approximately $2.4 million from the date of the acquisition. The
Company's contra disposable prophy angle, which was introduced in 1995,
continued to penetrate the disposable prophy angle market, increasing
approximately $500,000 in 1996. The increase in sales of the contra disposable
prophy angles partially offset slight decreases in sales of the Company's
traditional disposable prophy angle lines, prophy cups and metal prophy angles.
Aspiration and infection control products increased net sales by approximately
$623,000 and $384,000, respectively, in 1996 as compared to 1995.
Gross Profit. Gross profit increased $2.0 million, or 19.7%, to $12.1
million in 1996 from $10.1 million in 1995. Gross margin decreased to 56.1% of
net sales in 1996 from 57.8% in 1995. Gross margin was negatively impacted by
lost production and inefficiencies during a major addition and renovation of the
Company's Earth City facility which consolidated two other St. Louis facilities.
The Denticator acquisition added approximately $1.2 million to gross profit, but
at a lower gross margin than Young branded disposable prophy angles. The
$800,000 balance of the increase in gross profit was primarily attributable to
the full year inclusion of Lorvic and an increase in sales of the contra
disposable prophy angle line.
Selling, General and Administrative Expenses. SG&A expenses increased $1.3
million, or 28.8%, to $5.8 million in 1996 from $4.5 million in 1995. As a
percent of net sales, SG&A expenses increased to 26.8% in 1996 from 25.7% in
1995. The increase was primarily attributable to the addition of Denticator
which added $1.2 million to SG&A for 1996, including a one-time $290,000 signing
bonus and $176,000 of deferred stock compensation expense to Denticator's
President and Chief Executive Officer. SG&A also increased due to additional (i)
amortization expense of $185,000 resulting from goodwill associated with the
partial year inclusion of Denticator and full year inclusion of Lorvic; (ii)
research and development expenses of $226,000 due to staff additions and
increased product development projects; (iii) dealer rebate programs of
$105,000; (iv) product sampling expenses of $77,000; and (v) commissions to
independent sales representatives of $71,000 due to higher sales. These
increases were offset by a $673,000 reduction in legal expenses in 1996 as
compared to 1995 when the Company's patent infringement lawsuit was being
litigated.
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Income from Operations. Income from operations increased $697,000, or
12.4%, to $6.3 million in 1996 from $5.6 million in 1995.
Interest Expense. Interest expense increased $233,000 to $974,000 in 1996
from $741,000 in 1995. The increase was due to the additional debt borrowed to
fund the acquisition of Denticator in July 1996 and the full year inclusion of
interest expense from the acquisition of Lorvic which was acquired in May 1995.
Other Expense. Other expense for 1996 included $322,000 from charges
related to inclusion of a write-off of deferred initial public offering costs.
Provision for Income Taxes. Provision for income taxes decreased $89,000 in
1996 to $2.0 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through cash flow from
operating activities and, to a lesser extent, through borrowings under its
credit facilities. Net cash flow from operating activities was $4.5 million for
each of 1997 and 1996. Net cash flow from operating activities in 1996 was $4.5
million, compared to $3.5 million in 1995.
Capital expenditures for property, plant and equipment were $714,000 in
1997, compared to $3.2 million in 1996 and $992,000 in 1995. In 1996, capital
expenditures increased significantly as compared to 1995 primarily as a result
of the expansion of the Earth City facility which consolidated two other St.
Louis facilities to that location. The Company estimates capital expenditures
for 1998 will aggregate approximately $800,000. Consistent with the Company's
historical capital expenditures, future capital expenditures are expected to
include injection molding equipment, computer numeric controlled equipment and
upgrades to production machinery and data processing.
On November 10, 1997, the Company used a portion of the $25.2 million net
proceeds from its initial public offering to repay the $13.2 million balance
outstanding under its Revolving Credit and Term Loan Agreement. The Company used
the $12 million balance of such net proceeds to provide a portion of the $13.6
million used by the Company to buy assets and repay debt of Panoramic. In
February 1998, the Company's lending bank provided a one-year commitment,
subject to final documentation and the absence of any material adverse change in
the Company, to provide the Company with a line of credit for up to $15 million
on an unsecured basis. Borrowings under the line would bear interest at the
90-day LIBOR rate plus 100 basis points.
On May 30, 1997, two former employees of Young Dental and a corporation
formed by them (the "Adverse Parties") filed a Petition against Young Dental in
the Circuit Court for the City of St. Louis, Missouri (the "Current Action").
The Current Action results from an action brought in 1993 by Young Dental
against the Adverse Parties in the Federal District Court for the Eastern
District of Missouri (the "Prior Action"), alleging, among other things, patent
infringement and misappropriation of trade secrets. The Prior Action was
resolved in favor of the Adverse Parties. In the Current Action, consisting of
three counts alleging malicious prosecution and three counts alleging abuse of
process related to the Prior Action, the Adverse Parties seek actual damages in
unspecified amounts in excess of $25,000 and, in a separate count, seek punitive
damages. The Adverse Parties also seek to recover their attorneys' fees incurred
in the Prior Action, which they claim exceed $750,000. While the Current Action,
which is scheduled for trial late in 1998, is still in the discovery stage, the
Company believes it has adequate defenses to each of plaintiffs' claims and
intends to defend the Current Action vigorously.
The IRS examined Lorvic's federal income tax returns for the years ended
March 31, 1992 through 1995 and proposed deficiencies in federal income taxes
for those years in an aggregate amount of $766,000 due to classification of
certain intangible assets. Lorvic filed petitions with the United States Tax
Court contesting these proposed deficiencies and the matter was tried in January
1998. The parties are briefing their positions, and the Company anticipates a
decision from the Tax Court within the next year. In accordance with the stock
purchase agreement pursuant to which the Company acquired Lorvic in May 1995,
the previous stockholders of Lorvic are responsible for the settlement of this
matter to the extent of $700,000 held in an escrow fund, together with earnings
thereon, plus an additional $200,000 to cover any interest and penalties related
to such
12
13
matters. While there can be no such assurance, the Company believes the escrowed
amounts will be sufficient to satisfy these deficiencies in full for all
affected years if required.
Anticipated internal cash flows and borrowings under the Company's
anticipated line of credit facility are expected to provide sufficient liquidity
for working capital needs, capital expenditures and potential acquisitions
through 1998.
RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes
standards for reporting and displaying comprehensive income and its components.
The Company will adopt the provisions of SFAS 130 in the quarter ending March
31, 1998. The adoption of SFAS 130 is not expected to have a material effect on
the Company's financial position or results of operations.
YEAR 2000 ISSUE
Many computer systems are currently based on storing two digits to identify
the year of a transaction (for example, "97" for 1997), rather than a full four
digits, and are not programmed to consider the start of a new century.
Significant processing inaccuracies and even inoperability could result in the
year 2000 and thereafter. The Company's principal computer systems are currently
capable of processing the year 2000, or are in the process of being upgraded or
replaced by systems that are similarly capable. The Company does not expect that
the costs of addressing the "Year 2000" issue will have a material impact on the
Company's financial position or results of operations. The Company is currently
surveying its suppliers and customers relative to the "Year 2000" issue to
assess the degree to which, if any, the Company's purchases and sales may be
impacted.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Report contain certain
forward-looking statements that are based on the beliefs of the Company's
management, as well as assumptions made by, and information currently available
to, the Company's management. Such statements include those regarding
successfully implementing and continuing the Company's business strategies and
growth strategies. 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, and the Company's future results, performance or achievements could
differ materially from those expressed in, or implied by, any such
forward-looking statements. Factors that could cause or contribute to such
material differences include, but are not limited to, the effect of economic and
market conditions, opportunities for acquisitions and the Company's ability to
effectively integrate acquired companies, the impact of managed care in
dentistry, the impact of the consolidation of dental dealers, pricing practices
of other professional dental products manufacturers, disruptions in the
Company's computer systems or telephone systems, possible increases in shipping
rates or interruptions in shipping services.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Young Innovations, Inc.:
We have audited the accompanying consolidated balance sheets of Young
Innovations, Inc. (a Missouri corporation) and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Young Innovations, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 4, 1998 (except with respect to
the matter discussed in Note 21, as
to which the date is February 27, 1998)
14
15
YOUNG INNOVATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31
------------------
1997 1996
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $12,761 $ 98
Trade accounts receivable, net of allowance for doubtful
accounts of $80 and $54, respectively.................. 2,774 3,207
Inventories............................................... 2,239 1,733
Other current assets...................................... 1,316 860
------- -------
Total current assets................................... 19,090 5,898
------- -------
PROPERTY, PLANT AND EQUIPMENT............................... 7,441 7,082
------- -------
MARKETABLE SECURITIES....................................... 100 204
------- -------
OTHER ASSETS................................................ 656 680
------- -------
INTANGIBLE ASSETS........................................... 18,142 18,617
------- -------
Total assets........................................... $45,429 $32,481
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit.................................. $ -- $ 5,270
Current maturities of long-term debt...................... -- 3,617
Accounts payable and accrued liabilities.................. 2,715 2,783
------- -------
Total current liabilities.............................. 2,715 11,670
------- -------
LONG-TERM DEBT.............................................. -- 7,519
------- -------
NONCURRENT LIABILITIES...................................... 456 631
------- -------
DEFERRED INCOME TAXES....................................... 1,050 729
------- -------
PUTTABLE COMMON STOCK, -0- and 200,076 shares issued and
outstanding in 1997 and 1996, respectively................ -- 1,621
------- -------
STOCKHOLDERS' EQUITY:
Common stock, voting, $.01 par value, 25,000,000 shares
authorized, 6,710,296 and 4,208,300 shares issued and
outstanding in 1997 and 1996, respectively............. 67 42
Additional paid-in capital................................ 25,131 --
Unrealized gain on marketable securities, net of tax...... 9 12
Retained earnings......................................... 16,310 10,581
Common stock in treasury, at cost, 39,914 and 41,834
shares................................................. (309) (324)
------- -------
Total stockholders' equity............................. 41,208 10,311
------- -------
Total liabilities and stockholders' equity............. $45,429 $32,481
======= =======
The accompanying notes are an integral part of these statements.
15
16
YOUNG INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31
--------------------------------------
1997 1996 1995
---- ---- ----
NET SALES.................................................. $ 24,986 $ 21,580 $ 17,496
COST OF GOODS SOLD......................................... 10,129 9,470 7,379
---------- ---------- ----------
Gross profit.......................................... 14,857 12,110 10,117
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............... 7,333 5,790 4,494
---------- ---------- ----------
Income from operations................................ 7,524 6,320 5,623
---------- ---------- ----------
OTHER EXPENSE (INCOME):
Interest expense......................................... 1,016 974 741
Other (income) expense, net.............................. (140) 123 (320)
---------- ---------- ----------
876 1,097 421
---------- ---------- ----------
Income before provision for income taxes.............. 6,648 5,223 5,202
PROVISION FOR INCOME TAXES................................. 2,538 1,955 2,044
---------- ---------- ----------
Net income............................................ $ 4,110 $ 3,268 $ 3,158
========== ========== ==========
BASIC EARNINGS PER SHARE................................... $ .86 $ .74 $ .71
========== ========== ==========
DILUTED EARNINGS PER SHARE................................. $ .86 $ .74 $ .71
========== ========== ==========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING.................. 4,775,491 4,444,003 4,450,210
========== ========== ==========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING................ 4,782,484 4,444,003 4,450,210
========== ========== ==========
The accompanying notes are an integral part of these statements.
16
17
YOUNG INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
UNREALIZED
ADDITIONAL GAIN ON COMMON
COMMON PAID-IN MARKETABLE RETAINED STOCK IN
STOCK CAPITAL SECURITIES EARNINGS TREASURY TOTAL
------ ---------- ---------- -------- -------- -----
BALANCE, December 31, 1994........... $42 $ -- $ 24 $ 5,187 $ -- $ 5,253
Net income......................... -- -- -- 3,158 -- 3,158
Change in unrealized gain (loss) on
marketable securities, net of
tax............................. -- -- (1) -- -- (1)
Increase in value of puttable
common stock.................... -- -- -- (1,289) -- (1,289)
--- ------- ---- ------- ----- -------
BALANCE, December 31, 1995........... 42 -- 23 7,056 -- 7,121
Net income......................... -- -- -- 3,268 -- 3,268
Change in unrealized gain (loss) on
marketable securities, net of
tax............................. -- -- (11) -- -- (11)
Common stock redeemed.............. -- -- -- -- (329) (329)
Common stock in treasury,
reissued........................ -- -- -- -- 5 5
Change in shares and value of
puttable common stock........... -- -- -- 257 -- 257
--- ------- ---- ------- ----- -------
BALANCE, December 31, 1996........... 42 -- 12 10,581 (324) 10,311
Net income......................... -- -- -- 4,110 -- 4,110
Common stock in treasury,
reissued........................ -- -- -- -- 15 15
Cancellation of puttable common
stock........................... 2 -- -- 1,619 -- 1,621
Shares issued in public offering... 23 25,131 -- -- -- 25,154
Change in unrealized gain (loss) on
marketable securities, net of
tax............................. -- -- (3) -- -- (3)
--- ------- ---- ------- ----- -------
BALANCE, December 31, 1997........... $67 $25,131 $ 9 $16,310 $(309) $41,208
=== ======= ==== ======= ===== =======
The accompanying notes are an integral part of these statements.
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YOUNG INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED
DECEMBER 31
-------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 4,110 $ 3,268 $ 3,158
-------- ------- --------
Adjustments to reconcile net income to cash flows from
operating activities --
Depreciation and amortization.......................... 1,280 779 1,083
Deferred income taxes.................................. 43 279 (242)
Gain on sale of equipment.............................. (5) (219) (242)
Changes in assets and liabilities --
Trade accounts receivable............................ 433 (511) (159)
Inventories.......................................... (447) 196 (227)
Other current assets................................. (117) (327) 252
Other assets......................................... 24 445 (334)
Accounts payable and accrued liabilities............. (854) 563 221
-------- ------- --------
Total adjustments................................. 357 1,205 352
-------- ------- --------
Net cash flows from operating activities.......... 4,467 4,473 3,510
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired........... -- (7,566) (13,372)
Purchases of property, plant and equipment................ (714) (3,152) (992)
Proceeds from sale of property, plant and equipment....... 33 802 253
Proceeds from sale of marketable securities............... 104 204 --
Payments on notes receivable.............................. 10 18 14
-------- ------- --------
Net cash flows from investing activities.......... (567) (9,694) (14,097)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Initial Public Offering..................... 25,154 -- --
Borrowings from long-term debt............................ -- 12,000 9,000
Payments of long-term debt................................ (11,136) (8,978) (1,399)
Change in revolving line of credit........................ (5,270) 2,570 2,700
Redeemed common stock..................................... -- (329) --
Reissuance of common stock in treasury.................... 15 5 --
-------- ------- --------
Net cash flows from financing activities.......... 8,763 5,268 10,301
-------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 12,663 47 (286)
CASH AND CASH EQUIVALENTS, beginning of period.............. 98 51 337
-------- ------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 12,761 $ 98 $ 51
======== ======= ========
The accompanying notes are an integral part of these statements.
18
19
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. DESCRIPTION OF BUSINESS:
Young Innovations, Inc. and its subsidiaries (the Company) designs,
manufactures and markets single-use supplies, autoclavable instruments and other
products used by dental professionals, primarily in preventive dentistry and
infection control. The Company manufactures and markets metal and disposable
prophy angles, cups and brushes that are integral components used in the
cleaning and polishing of teeth by dental professionals. The Company's
manufacturing facilities are located in Missouri, California and Texas. The
Company markets its products to dental professionals worldwide through a network
of medical and dental product distributors. Export sales were less than 10% of
total net sales for 1997, 1996 and 1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Young
Innovations, Inc. formed in July 1995 and its direct and indirect wholly owned
subsidiaries, Young Dental Manufacturing Company, Lorvic Holdings, Inc., The
Lorvic Corporation, Young Dental International, Inc. and Denticator
International, Inc. (Denticator). Lorvic Holdings, Inc. and The Lorvic
Corporation, collectively referred to as Lorvic, are included since their
acquisition on May 5, 1995. Young Dental International, Inc., a Foreign Sales
Corporation, is included since its inception on February 1, 1996, and Denticator
is included since its acquisition on July 22, 1996. All significant intercompany
accounts and transactions are eliminated in consolidation. The Company operates
one business segment.
The preparation of these financial statements required the use of certain
estimates by management in determining the Company's assets, liabilities,
revenues and expenses. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments with an
initial maturity of three months or less.
INVENTORIES
Inventories are stated at the lower of cost (which includes material, labor
and manufacturing overhead) or market. Cost is determined by the first-in,
first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Expenditures for repairs
and maintenance are charged to expense as incurred, and additions and
improvements that significantly extend the lives of assets are capitalized. Upon
disposition, cost and accumulated depreciation are eliminated from the related
accounts and any gain or loss is reflected in other income or expense. The
Company provides depreciation using the straight-line method over the estimated
useful lives of the assets ranging from five to thirty-nine years. Effective
October 1, 1995, the Company changed the estimated useful lives of certain
equipment that had the effect of reducing depreciation expense by approximately
$132 for 1995.
MARKETABLE SECURITIES
Marketable securities are reflected at fair value with the corresponding
impact included as a component of stockholders' equity designated "unrealized
gain on marketable securities, net of tax." As of December 31,
19
20
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 and 1996, there were no unrealized losses on any individual security. As of
December 31, 1997, the marketable securities have a contractual maturity in
2019.
OTHER ASSETS
Other assets include costs related to patents issued to the Company and
pending patent applications. Capitalized patent costs are amortized on a
straight-line basis over the estimated useful lives of the patents, generally 17
years.
INTANGIBLE ASSETS
Intangible assets are stated at cost less accumulated amortization.
Amortization is determined using the straight-line method over 40 years.
LONG-LIVED ASSETS
If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If this review indicates that the carrying value
of the asset will not be recovered, as determined based on projected
undiscounted cash flows related to the asset over its remaining life, the
carrying value of the asset is reduced to its estimated fair value.
ADVERTISING COSTS
Advertising costs are expensed when incurred.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed when incurred and totaled $566
for 1997, $597 for 1996 and $352 for 1995.
REVENUE RECOGNITION
Revenue from the sale of products is recorded at the time of passage of
title, generally when the products are shipped.
OTHER EXPENSE (INCOME)
Other expense (income) includes gain and loss on disposition of fixed
assets, sale of scrap, and other miscellaneous income and expense items, all of
which are not directly related to the Company's primary business. In 1997, 1996
and 1995, net gains on the sale of equipment and other fixed assets totaled $5,
$219 and $242, respectively. Other 1996 expenses include approximately $322 of
deferred offering costs expensed as a result of the Company withdrawing its
registration statement in 1996 with respect to its efforts to go public in 1995.
INCOME TAXES
The Company has accounted for income taxes under SFAS No. 109, an asset and
liability approach to accounting and reporting for income taxes. Deferred income
taxes are provided for temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
20
21
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
Cash flows from operating activities include $2,142, $1,898 and $1,851 for
the payment of federal and state income taxes and $1,116, $931 and $741 for the
payment of interest during 1997, 1996 and 1995, respectively.
3. ACQUISITIONS:
On July 22, 1996, the Company acquired the assets and liabilities of
Denticator from BioDental Technologies Corp. (BioDental) and an individual. The
purchase price was financed principally through bank debt. The acquisition of
Denticator was accounted for as a purchase transaction. The purchase price was
allocated based upon estimates of fair value. The excess of purchase price over
the fair value of net assets acquired was $7,575 and is being amortized over 40
years. The final purchase price allocation is as follows:
Trade accounts receivable................................... $ 422
Inventories................................................. 481
Other current assets........................................ 97
Property, plant and equipment............................... 210
Other assets................................................ 57
Intangible assets (goodwill)................................ 7,575
Current liabilities......................................... (1,249)
Noncurrent liability........................................ (27)
-------
Payments, net of cash acquired.............................. $ 7,566
=======
The results of operations for Denticator are included in the consolidated
financial statements since July 22, 1996.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and Denticator as if the
acquisition had occurred at the beginning of 1996, with pro forma adjustments to
give effect to amortization of goodwill, interest expense on acquisition debt
and certain other adjustments, together with related income tax effects. The
unaudited pro forma information does not purport to be indicative of the results
of operations had these transactions been completed as of the assumed dates or
which may be obtained in the future.
YEAR
ENDED
DECEMBER 31,
1996
------------
(UNAUDITED)
Net sales................................................... $24,568
Net income.................................................. 3,260
Basic earnings per share.................................... .73
On May 5, 1995, the Company acquired the common stock of Lorvic. The
purchase price of the common stock was financed through bank debt.
In accordance with the Lorvic stock purchase agreement, the Company paid
part of the purchase price to various escrow funds totaling $2,350. The
representations and warranties made by the former stockholders of Lorvic for
which the general contingencies escrow fund was established survived until May
5, 1997. The income tax contingencies amount of $900 will survive until the
dispute described in Note 19 is resolved and
21
22
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the remaining $500 will survive until the applicable limitation periods have
elapsed. The escrow funds are maintained for the following matters:
AS OF
----------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
Income tax contingencies.............................. $1,400 $1,400
General contingencies................................. -- 525
------ ------
Total amounts in escrow............................. $1,400 $1,925
====== ======
The acquisition of Lorvic was accounted for as a purchase transaction. The
purchase price was allocated based upon estimates of fair value. The excess of
purchase price over the fair value of net assets acquired was $11,581 and is
being amortized over 40 years. The final purchase price allocation is as
follows:
Trade accounts receivable................................... $ 679
Inventories................................................. 457
Other current assets........................................ 219
Property, plant and equipment............................... 911
Other assets................................................ 450
Intangible assets (goodwill)................................ 11,581
Current liabilities......................................... (239)
Noncurrent liability........................................ (450)
Deferred income taxes....................................... (236)
-------
Payments, net of cash acquired............................ $13,372
=======
The results of operations for Lorvic are included in the consolidated
financial statements since May 5, 1995.
4. CONCENTRATIONS OF CUSTOMERS:
The Company generates trade accounts receivable in the normal course of
business. The Company grants credit to distributors throughout the world and
generally does not require collateral to secure the accounts receivable. The
Company's credit risk is concentrated among three distributors accounting for
50% and 45% of accounts receivable as of December 31, 1997 and 1996,
respectively.
5. INVENTORIES:
Inventories consist of the following:
DECEMBER 31
---------------------
1997 1996
---- ----
Finished products......................................... $ 824 $ 515
Work in process........................................... 975 711
Raw materials and supplies................................ 543 550
------ ------
2,342 1,776
Reserve for obsolete and excess inventories............... (103) (43)
------ ------
Total inventories.................................... $2,239 $1,733
====== ======
22
23
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
DECEMBER 31
---------------------
1997 1996
---- ----
Land..................................................... $ 348 $ 348
Buildings and improvements............................... 3,572 3,365
Machinery and equipment.................................. 9,223 8,266
------- -------
13,143 11,979
Less -- Accumulated depreciation......................... (5,702) (4,897)
------- -------
Total property, plant and equipment, net............ $ 7,441 $ 7,082
======= =======
7. OTHER ASSETS:
Other assets consist of the following:
DECEMBER 31
------------------
1997 1996
---- ----
Escrow receivable........................................... $450 $450
Patents..................................................... 151 110
Other....................................................... 55 120
---- ----
Total other assets.......................................... $656 $680
==== ====
8. INTANGIBLE ASSETS:
Intangible assets consist of the following:
DECEMBER 31
--------------------
1997 1996
---- ----
Goodwill.................................................. $19,172 $19,172
Less-Accumulated amortization............................. (1,030) (555)
------- -------
Total intangible assets.............................. $18,142 $18,617
======= =======
Amortization of goodwill totaled $475, $368 and $187 for 1997, 1996 and
1995, respectively.
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
DECEMBER 31
------------------
1997 1996
---- ----
Payable to BioDental........................................ $ 133 $ 660
Accounts payable............................................ 357 599
Accrued salaries and bonuses................................ 814 722
Accrued expenses and other.................................. 835 602
Bank overdraft.............................................. -- 200
Stock compensation liability................................ 576 --
------ ------
Total accounts payable and accrued liabilities......... $2,715 $2,783
====== ======
23
24
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. LONG-TERM DEBT:
On July 22, 1996, under the terms of a Revolving Credit and Term Loan
Agreement (Loan Agreement) with a bank, the Company borrowed $16,500 to acquire
Denticator and to pay off other existing debt. The Loan Agreement consisted of a
term loan of $12,000 and a revolving line of credit with a maximum borrowing
capacity of $6,500. On April 1, 1997, the Loan Agreement was amended to increase
the revolving line of credit capacity to $7,000. Borrowings bore interest at
prime minus .5%, were payable monthly and were collateralized by all assets of
the Company, stock of its subsidiaries and a pledge of stock by its majority
stockholder.
As discussed in Note 12, the Company retired its outstanding indebtedness
on November 5, 1997, using the proceeds from the sale of common stock. As such,
no long-term debt was outstanding at December 31, 1997.
While borrowings were outstanding, the Company was limited under the terms
of the Loan Agreement in its ability to make loans and investments, incur
additional debt, pay dividends and sell significant assets, among other things,
without the consent of the bank.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
At December 31, 1996, the carrying amounts of the Company's borrowings
under its revolving credit agreement, borrowings under its term loan agreements
and other long-term debt approximated fair values since the interest rates were
based on current market rates.
12. COMMON STOCK:
The Company completed an initial public offering of 2,300,000 shares of its
common stock on November 10, 1997, and the net proceeds to the Company, after
deducting the underwriting discount and offering expenses, were $25,154. The
sale of such shares was made pursuant to a Registration Statement on Form S-1
which was declared effective on November 4, 1997. The Company used $13,180 of
the proceeds to repay borrowings under the Loan Agreement and invested the
remaining proceeds in cash equivalents.
13. STOCK OPTIONS:
The Company adopted the 1997 Stock Option Plan (the Plan) effective as of
November 4, 1997. A total of 350,000 shares of Common Stock are reserved for
issuance under this plan which shall be 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.
24
25
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the options outstanding and exercisable at December 31, 1997
is as follows:
WEIGHTED
RANGE OF AVERAGE
EXERCISE EXERCISE
SHARES PRICES PRICE
------ -------- --------
Outstanding, beginning of year............ -- -- --
Granted................................... 235,800 $12.00 - $13.50 $12.03
Exercised................................. -- -- --
Forfeited................................. 1,200 $12.00 $12.00
Outstanding, end of year.................. 234,600 $12.00 - $13.50 $12.03
Exercisable at end of year................ 30,000 $12.00 - $13.50 $12.25
The exercise price was equal to the fair value of the common stock at the
date of grant. Options granted to the Company's nonemployee Directors are
immediately exercisable. Each of the other options first become exercisable as
to 25% of the shares subject to the options on January 1, 1999, and becomes
exercisable as to an additional 25% on January 1 of each year from 2000 to 2002
except for options granted to one executive officer whose options are
immediately exercisable as to 25% of the shares subject to option and becomes
exercisable as to an additional 25% on January 1 of each year from 1999 to 2001.
All options expire 10 years from the grant date.
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company elected APB Opinion No. 25, "Accounting for Stock Issued to
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
DECEMBER 31, 1997
------------------
AS PRO
REPORTED FORMA
-------- -----
Net income.................................................. $4,110 $3,890
Earnings per share:
Basic..................................................... $ .86 $ .81
Diluted................................................... $ .86 $ .81
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions: (i) dividend yield of 0%; (ii) expected volatility of 70.0%; (iii)
risk free interest rate of 6.0%; and (iv) expected life of 8 years. The weighted
average fair value of the options at the grant date was $9.03.
14. EARNINGS PER SHARE:
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, Earnings per Share. Basic earnings per share (Basic EPS) is
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share (Diluted
EPS) include the dilutive effect of stock options, if any, using the treasury
stock method. For 1996 and 1995, there were no stock options outstanding. For
1997, the weighted average shares outstanding during the period of
25
26
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4,775,491, used for Basic EPS, was increased by the dilutive impact of stock
options of 6,993, for a total of 4,782,484 shares used for Diluted EPS.
As discussed in Note 12, the Company retired substantially all of its
outstanding indebtedness using the net proceeds from the sale of common stock.
Assuming the Company's revolving line of credit and long-term borrowings were
retired as of January 1, 1997, supplementary earnings per share would be $.80
for the year ended December 31, 1997, reflecting the elimination of interest
expense, net of income taxes, of $628 for 1997. Supplementary earnings per share
assumes 4,775,491 weighted average shares outstanding for 1997 plus 1,150,000
shares, representing those shares of common stock sold at the initial public
offering price, the application of the net proceeds therefrom sufficient to
retire $12,400 of average outstanding borrowings for 1997.
15. INCOME TAXES:
The components of the provision for income taxes are as follows:
YEARS ENDED
DECEMBER 31
--------------------------
1997 1996 1995
---- ---- ----
Current............................................... $2,495 $1,676 $2,286
Deferred.............................................. 43 279 (242)
------ ------ ------
Total provision for income taxes.................... $2,538 $1,955 $2,044
====== ====== ======
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
------------------------------
1997 1996 1995
---- ---- ----
Income before provision for income taxes.................... $6,648 $5,223 $5,202
U.S. federal income tax rate................................ 34% 34% 34%
------ ------ ------
Computed income taxes.................................. 2,260 1,776 1,769
Goodwill amortization....................................... 97 97 58
Other....................................................... 14 (19) 78
------ ------ ------
Provision for federal income taxes..................... 2,371 1,854 1,905
State income taxes, net of federal tax benefit.............. 167 101 139
------ ------ ------
Provision for income taxes............................. $2,538 $1,955 $2,044
====== ====== ======
Effective tax rate.......................................... 38% 37% 39%
====== ====== ======
26
27
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Temporary differences that gave rise to deferred income tax assets and
liabilities are as follows:
DECEMBER 31
---------------
1997 1996
---- ----
Deferred income tax assets:
Trade accounts receivable................................. $ 28 $ 20
Inventories............................................... 38 33
Accrued liabilities....................................... 412 186
------- -----
Total deferred income tax assets 478 239
------- -----
Deferred income tax liabilities:
Property, plant and equipment............................. (742) (669)
Intangibles............................................... (129) (50)
Other..................................................... (140) (10)
------- -----
Total deferred income tax liabilities.................. (1,011) (729)
------- -----
Net deferred income tax liability $ (533) $(490)
======= =====
Current deferred income tax assets of $517 and $239 are included in other
current assets as of December 31, 1997 and 1996, respectively.
16. MAJOR CUSTOMERS:
The percentage of net sales to major distributors to total net sales
consist of the following:
YEARS ENDED
DECEMBER 31
------------------------
DISTRIBUTOR 1997 1996 1995
----------- ---- ---- ----
Henry Schein, Inc........................................... 17.6% 19.1% 17.8%
Patterson Dental Company.................................... 16.9 17.9 15.1
Sullivan Dental Products, Inc............................... 9.6 7.7 8.4
17. EMPLOYEE BENEFITS:
The Company has a nonqualified bonus plan under which 5% of base
compensation is paid annually to full-time employees in Missouri and Texas who
are at least 25 years of age and have at least three years of service with the
Company. Compensation expense related to this plan totaled $125, $106 and $80 in
1997, 1996 and 1995, respectively. The Company also has a nonqualified profit
sharing plan for its employees in Missouri and Texas. Compensation expense
related to this plan was $189, $190 and $192 in 1997, 1996 and 1995,
respectively, and is based on the overall profitability of the Company
(excluding Denticator). Denticator has a nonqualified profit sharing plan for
certain employees in California. Compensation expense related to this plan was
$87 and $59 in 1997 and 1996, respectively.
18. RELATED-PARTY TRANSACTIONS:
The Company leases a portion of its office space to, pays for services from
and loans funds to, a corporation in which two stockholders have an equity
interest. Rental and other income from such corporation totaled $13 in 1997, $15
in 1996, $17 in 1995. As of December 31, 1997 and 1996, the Company had an
unsecured note receivable of $48 and $58, respectively, from such corporation.
The Company paid an aggregate of $12, $10 and $14 for services provided by such
corporation in 1997, 1996 and 1995, respectively.
27
28
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company sells products to, and pays for services from, a corporation in
which a stockholder has an equity interest. Net sales to such corporation
totaled $98 in 1997, $34 in 1996 and $15 in 1995. Amounts paid for services
totaled $9 in 1997, $41 in 1996 and $38 in 1995.
In connection with the acquisition of Denticator, an employment agreement
(the Agreement) with Denticator's President and Chief Executive Officer was
executed. The Agreement provides for a base annual salary of $120 and delivery
of shares of common stock. If the individual is employed by the Company on July
22, 1998, the Company will deliver common stock in the number of shares equal to
$800 divided by the last reported sale price. The employment agreement also
provides the right to require the Company to repurchase up to 40% of the stock
by providing 10 days advance written notice before receipt. The employee has
agreed not to compete with the Company for a period of two years after
expiration or termination of the employment agreement. The Company is accruing
$800 evenly over the two year period and recorded $400 and $176 of compensation
expense for 1997 and 1996, respectively.
In April 1997, Denticator purchased the assets of Hot Plastics
Technologies, Inc. ("HPT"), a company that had provided injection molding
services for Denticator. The President and Chief Executive Officer of Denticator
owned 75% of the stock of HPT. The sole consideration paid by Denticator for the
acquisition was the assumption of HPT's liabilities, which aggregated $606 and
included a note payable to the President and Chief Executive Officer of
Denticator of $104. The terms of the acquisition were negotiated for Denticator
by the Chief Executive Officer of the Company. The Company paid HPT an aggregate
of $213 for injection molding services between January 1, 1997, and the date of
HPT's acquisition by Denticator.
19. CONTINGENCIES:
On May 30, 1997, two former employees of Young Dental and a corporation
formed by them (the "Adverse Parties") filed a Petition against Young Dental in
the Circuit Court for the City of St. Louis, Missouri (the "Current Action").
The Current Action results from an action brought in 1993 by Young Dental
against the Adverse Parties in the Federal District Court for the Eastern
District of Missouri (the "Prior Action"), alleging, among other things, patent
infringement and misappropriation of trade secrets. The Prior Action was
resolved in favor of the Adverse Parties. In the Current Action, consisting of
three counts alleging malicious prosecution and three counts alleging abuse of
process related to the Prior Action, the Adverse Parties seek actual damages in
unspecified amounts in excess of $25 and, in a separate count, seek punitive
damages. The Adverse Parties also seek to recover their attorneys' fees incurred
in the Prior Action, which they claim exceed $750. While the Current Action,
which is scheduled for trial late in 1998, is still in the discovery stage,
based upon the advice of legal counsel, the Company believes it has adequate
defenses to each of plaintiffs' claims and intends to defend the Current Action
vigorously.
The Internal Revenue Service (the "IRS") examined Lorvic's federal income
tax returns for the years ended March 31, 1992 through 1995, and proposed
deficiencies in federal income taxes for those years in an aggregate amount of
$766 due to the classification of certain intangible assets. Lorvic filed
petitions with the United States Tax Court contesting these proposed
deficiencies and the matter was tried in January 1998. The parties are currently
briefing their positions, and the Company anticipates a decision from the Tax
Court within the next year. In accordance with the stock purchase agreement
pursuant to which the Company acquired Lorvic in May 1995, the previous
stockholders of Lorvic are responsible for the settlement of this matter to the
extent of $700 held in an escrow fund, together with earnings thereon, plus an
additional $200 to cover any interest and penalties related to such matters.
While there can be no such assurance, the Company believes the escrowed amounts
will be sufficient to satisfy these deficiencies in full for all affected years
if required.
In the opinion of management, the ultimate outcome of these claims and
lawsuit will not have a material adverse effect on the financial position or
results of operations of the Company.
28
29
YOUNG INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. ACCOUNTING STANDARD NOT IMPLEMENTED:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which establishes standards for reporting and displaying comprehensive
income and its components. The Company will adopt the provisions of SFAS 130 in
the quarter ending March 31, 1998. The adoption of SFAS 130 is not expected to
have a material effect on the Company's financial position or results of
operations.
21. SUBSEQUENT EVENT:
On February 27, 1998, the Company acquired the net assets of Panoramic
Corporation ("Panoramic") in Fort Wayne, Indiana. Panoramic is a designer,
developer, manufacturer and marketer of X-ray equipment sold or rented to dental
professionals in the United States, Europe and Japan. The Company paid
approximately $11,000 in cash plus 62,500 shares of its common stock and assumed
approximately $3,700 in liabilities, including approximately $2,600 of
Panoramic's bank debt which was repaid at closing.
29
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information concerning the Company's directors and executive officers
called for by this item will be included in the Company's definitive Proxy
Statement prepared in connection with the 1998 Annual Meeting of Stockholders
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information concerning the compensation of the Company's executives called
for by this item will be included in the Company's definitive Proxy Statement
prepared in connection with the 1998 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information concerning security ownership of certain beneficial owners and
management called for by this item will be included in the Company's definitive
Proxy Statement prepared in connection with the 1998 Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning certain relationships and related transactions
called for by this item will be included in the Company's definitive Proxy
Statement prepared in connection with the 1998 Annual Meeting of Stockholders
and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements -- Reference is made to Item 8 hereof.
(a)(2) Financial Statement Schedule -- The following financial statement
schedule of the Company is included for the years ended December 31, 1995, 1996
and 1997:
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.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December
31, 1997.
30
31
SIGNATURES
Pursuant to the requirements of Section 13 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 23, 1998
YOUNG INNOVATIONS, INC.
By: /s/ GEORGE E. RICHMOND
------------------------------------
George E. Richmond
President and Chief Executive
Officer
Each person whose signature appears below constitutes and appoints George
E. Richmond and Michael W. Eggleston 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 President, Chief Executive March 23, 1998
- ----------------------------------------------------- Officer, Director (Principal
George E. Richmond Executive Officer)
/s/ ALFRED E. BRENNAN Senior Vice President, Chief March 23, 1998
- ----------------------------------------------------- Operating Officer, Director
Alfred E. Brennan
/s/ MICHAEL W. EGGLESTON Vice President, Treasurer, March 23, 1998
- ----------------------------------------------------- Chief Financial Officer,
Michael W. Eggleston Director (Principal Financial
Officer and Principal
Accounting Officer)
/s/ RICHARD G. RICHMOND Secretary and Director March 23, 1998
- -----------------------------------------------------
Richard G. Richmond
/s/ RICHARD P. CONERLY Director March 23, 1998
- -----------------------------------------------------
Richard P. Conerly
/s/ CONNIE H. DRISKO Director March 23, 1998
- -----------------------------------------------------
Connie H. Drisko
/s/ ARTHUR L. HERBST, JR. Director March 23, 1998
- -----------------------------------------------------
Arthur L. Herbst, Jr.
/s/ CRAIG E. LABARGE Director March 23, 1998
- -----------------------------------------------------
Craig E. LaBarge
31
32
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1* Articles of Incorporation of Registrant and Statement of Correction
3.2* By-Laws of Registrant
10.1* Escrow Agreement dated May 4, 1995 among Young Dental Manufacturing
Company, Chemical Venture Capital Associates, P. Jeffrey Leck, John
F. Kirtley, Richard C. Nemanick, Lorvic Holdings, Inc. and Boatmen's
Trust Company
10.2* Contingent Payment Agreement dated as of May 4, 1995, by and between
Young Dental Manufacturing Company, The Richard C. Nemanick Trust
and Boatmen's Trust Company
10.3* Young Dental Manufacturing Company Pension Bonus Plan dated as of
April 12, 1983
10.4* Young Dental Manufacturing Company Profit Sharing Plan dated as of
January 1, 1987
10.5* Asset Purchase Agreement dated July 22, 1996, among Denticator
International, Inc., BioDental Technologies Corp., Jose L. Mendoza and
Young Innovations, Inc.
10.6* Employment and Non-Competition Agreement dated July 22, 1996, by
and between Denticator International, Inc. and Jose L. Mendoza
10.7* 1997 Stock Option Plan of the Registrant
10.8* Employment Agreement dated October 8, 1997, by and between Young
Innovations, Inc. and Alfred E. Brennan
10.9** Asset Purchase and Sale Agreement dated February 16, 1998 between
Registrant and Panoramic Corporation
21 Subsidiaries of the Registrant
24 Power of Attorney (included on Signature page)
27 Financial Data Schedule
- -----------------
* Filed as an Exhibit to Registrant's Registration Statement No. 333-34971 on
Form S-1 and incorporated herein by reference.
** Filed as an Exhibit to Registrant's Current Report on Form 8-K filed on
March 11, 1998 and incorporated herein by reference.
33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Young Innovations, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Young Innovations, Inc. and
subsidiaries included in the Young Innovations, Inc. Form 10-K Annual Report and
have issued our report thereon dated February 4, 1998 (except with respect to
the matter discussed in Note 21, as to which the date is February 27, 1998). Our
audits were made for the purpose of forming an opinion on those statements taken
as a whole. Schedule II included in this Form 10-K Annual Report is the
responsibility of the Company's management and is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
St. Louis, Missouri
February 4, 1998
34
YOUNG INNOVATIONS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
ADDITIONS
--------------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF YEAR EXPENSES ACQUISITIONS DEDUCTIONS OF YEAR
---------- ---------- ------------ ---------- -------
Allowance for doubtful receivables
1995...................................... $25 $-- $ 7 -- $ 32
1996...................................... 32 22 -- -- 54
1997...................................... 54 26 -- -- 80
Reserve for obsolete and excess inventories
1995...................................... $20 $20 $-- -- $ 40
1996...................................... 40 -- 3 -- 43
1997...................................... 43 60 -- -- 103
2