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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, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
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On June 30, 2003, the last business day of the registrant's most recently
completed second fiscal quarter, the aggregate market value of the Common Stock
beneficially held by non-affiliates of the Company was approximately $149.5
million (For purposes of this calculation only, directors and executive officers
have been deemed affiliates).
Number of shares outstanding of the Registrant's Common Stock at February 28,
2004:
9,036,752 shares of Common Stock, par value $.01 per share
Portions of the Registrant's definitive Proxy Statement to be filed for its
2004 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Report.
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FORWARD LOOKING STATEMENTS
This Annual Report (including, without limitation, Item 1 -- "Business" and Item
7 -- "Management's Discussion and Analysis of Financial Condition and Results of
Operations") includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act"), and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All statements other than statements of historical facts included herein
are "forward-looking statements." Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to be correct. Forward
looking statements include statements which are predictive in nature, which
depend upon or refer to future events or conditions and which include words such
as "expects", "anticipates", "intends", "plans", "believes", "estimates", or
similar expressions. These statements are not guaranties of future performance
and the Company makes no commitment to update or disclose any revisions to
forward-looking statements, or any facts, events or circumstances after the date
hereof that may bear upon forward-looking statements. Because such statements
involve risks and uncertainties, actual actions and strategies and the timing
and expected results thereof may differ materially from those expressed or
implied by such forward-looking statements. These risks and uncertainties
include, but are not limited to, those disclosed in this Annual Report and other
reports filed with the Securities and Exchange Commission.
Forward-looking statements involve risk, uncertainty, and their ultimate
validity is affected by a number of factors, both specific and general. Specific
risk factors may be noted along with the statement itself. However, other more
general risks and uncertainties which are inherent in any forward-looking
statement include, but are not necessarily limited to:
- Demand for the Company's products
- Relationships with strategic customers, suppliers and product
distributors
- Competition in each of the Company's product lines
- Dependence on and consolidation of distributors
- Successful integration of acquisitions
- Ability to manage the Company's growth
- Availability of acquisition candidates and the need for additional
capital
- Technological change resulting in product obsolescence; dependence on
new products
- Changes in standard of care relating to dental health
- Compliance with laws
- Increased government regulation
- Concentration of suppliers
- General economic conditions
This listing of factors is NOT intended to include ALL potential risk factors.
The Company makes no commitment to update these factors or to revise any
forward-looking statements for events or circumstances occurring after the
statement is issued.
At any time when the Company makes forward-looking statements, it desires to
take advantage of the "safe harbor" which is afforded such statements under the
Private Securities Litigation Reform Act of 1995.
PART I
ITEM 1. BUSINESS (ALL ITEMS IN THOUSANDS).
GENERAL OVERVIEW
Young Innovations, Inc. and its subsidiaries (the "Company") develop,
manufacture and market supplies and equipment used to facilitate the practice of
dentistry and to promote oral health. The Company's product offering includes
disposable and metal prophylaxis ("prophy") angles, prophy cups and brushes,
panoramic X-ray machines, dental handpieces (drills) and related components,
orthodontic toothbrushes, flavored examination gloves, children's toothbrushes,
children's toothpastes, moisture control products, infection control products,
and ultrasonic systems and obturation products used in endodontic surgery (root
canal procedures). The Company's manufacturing and distribution facilities are
located in Missouri, California, Indiana, Colorado, Tennessee and Texas.
The Company's two operating segments, Professional Dental and Retail, serve two
segments of the market for oral healthcare. The Professional Dental segment is
engaged in the development and manufacture of a broad line of products marketed
to dental professionals, principally dentists, dental hygienists and dental
assistants. The Retail segment develops and markets products sold to a variety
of retail outlets, including mass merchandisers, drug stores and supermarkets.
The Company markets its products primarily in the U.S. The Company also markets
its products in several international markets, including Canada, Europe, South
America, Central America, and the Pacific Rim. International sales represented
less than 10% of the Company's total net sales in 2003.
The Company is a Missouri corporation with its principal executive office
located at 13705 Shoreline Court East, Earth City, Missouri 63045, in the St.
Louis, Missouri metropolitan area; its telephone number is (314) 344-0010.
BACKGROUND
The Company was founded as Young Dental in the early 1900s. As one of many small
suppliers to the dental profession, Young Dental's strength was manufacturing
consistently reliable dental products. As dentistry evolved, Young Dental
employees worked with practicing dentists and academics to identify clinical
problems. Young Dental staff used their engineering and manufacturing expertise
to create solutions to those problems. Young Dental established a strong
reputation and leading market position in disposable and metal prophy angles,
the core products utilized by the dentist in the typical biannual teeth
cleaning.
In 1995, following the acquisition of The Lorvic Corporation, the Company
incorporated as Young Innovations, Inc. in the state of Missouri. Since then,
Young has acquired a number of complementary businesses, and introduced a
variety of new products. Through these acquisitions, the Company expanded its
preventive and infection control product offerings, and entered a number of new
product areas, including dental diagnostic imaging, handpieces, home care
products, and, most recently, endodontics. The Company believes its continued
commitment to providing innovative products to meet the evolving needs of dental
professionals has earned it a reputation for quality, reliability and value.
BUSINESS STRATEGY
The key elements of the Company's strategy are:
o Developing New Products. Product development has been an important
part of the Company's growth strategy and will continue to play a
critical role in the pursuit of internal growth. The evolution of the
Company's product offering is driven by the needs of clinicians and
patients, which often require modifications to existing products
rather than new designs. The Company maintains an active dialogue with
practicing clinicians to identify product improvements that (i)
enhance patient comfort and improve patient care, and/or (ii) improve
practice productivity.
o Improving Operating Efficiency. The Company strives to reduce costs
and rationalize expenses across all of its operations in an effort to
maximize profitability. In order to improve operating efficiency, the
Company seeks cost savings through manufacturing and process
improvements, administrative and marketing synergies and facility
consolidation, where appropriate.
o Acquiring Complementary Products and Companies. The Company is
experienced in acquiring and integrating complementary products and
businesses. The Company continuously evaluates acquisition
opportunities, and will pursue opportunities that (i) increase the
breadth of its product and service offering and (ii) provide
opportunities to enhance the growth prospects and profitability of the
overall business through manufacturing and marketing synergies. The
following table provides a summary of our acquisition history.
SELECT ACQUISITIONS
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Company Name Acquisition Year Key Product Additions
- ------------------------------ ---------------- -----------------------------------------------------
The Lorvic Corporation 1995 Infection control products.
Denticator International, Inc. 1996 Popular-priced disposable prophy angles.
Panoramic Corporation 1998 Panoramic X-ray equipment and supplies.
Athena Technology, Inc. 1999 Dental handpieces and related components.
Plak Smacker, Inc. 2000 Home care products and flavored gloves.
Biotrol and Challenge 2001 Infection control products, prophy pastes and other
(subsidiaries of Pro-Dex, Inc.) preventive products.
Obtura Corporation & 2003 Endodontic products.
Earth City Technologies, Inc.
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BUSINESS SEGMENTS
PROFESSIONAL DENTAL SEGMENT
The Company's core business is the manufacture and supply of products to dental
professionals, principally dentists and dental hygienists. Net sales for the
Professional Dental segment were $72,600, $67,100 and $58,800 for fiscal years
2003, 2002 and 2001 respectively.
The Professional Dental segment product portfolio is broad and includes the
following key product lines:
PREVENTIVE. The Company believes it is a leading supplier of preventive products
to the U.S. professional dental market. Preventive products include:
o Prophy Angles. The Company offers a broad line of prophy products. The
prophy angle, in combination with prophy paste, is used to help remove
plaque and polish teeth. The Company offers a variety of pre-assembled
Classic and Contra disposable prophy angles with cups or brushes
attached under both the Young Dental, premium-priced, and Denticator,
popular-priced, brand names, as well as through private label
relationships. The Company's Young Dental metal prophy angles are
sealed to help prevent damage to the internal components of the angle
and help it withstand repeated sterilizations. The metal prophy angles
are marketed together with an assortment of cups and brushes
specifically designed to work together, which encourages recurring
purchases of these products.
o Prophy pastes. D-Lish, Festival and ProCare are certain of the brand
names of the Company's prophy pastes. Most pastes are available in a
variety of textures (grits) and flavors, though some are sold in
powder form. Important functional features of prophy paste include
stain removal, flavor and splatter control.
o Flourides. The Company sells a variety of flavors of fluorides in gel,
foam and rinse formulations. Fluorides are used to help prevent the
development of tooth decay.
o Handpieces and components. Under the Athena Champion brand name, the
Company manufactures and markets low- and high-speed dental
handpieces. Handpieces are used for teeth-cleaning and during
restorative procedures, including removing decay during cavity
preparation procedures. The Company also provides repair and
maintenance services for handpieces.
INFECTION CONTROL. The Company markets a broad line of infection control
products to the dental practice. Infection control products include:
o Surface disinfectants. BIREX is one of the leading surface
disinfectants in the U.S. Surface disinfectants are used to clean
surfaces in the dental operatory that may be contaminated with
bioburden, such as a dental chair or countertop. BIREX is a
concentrated solution that is diluted with water prior to use, which
makes it easier to ship and store. In 2003, Biosept HTP, a
ready-to-use disinfectant, was introduced to meet the needs of
professionals who prefer this easy-to-use form of delivery.
o Evacuation system cleaners. The evacuation system is designed to
remove debris from the patient's mouth during a dental procedure.
Vacusol, the Company's evacuation system cleaner, removes debris that
collects in the evacuation line. When used with the Company's patented
atomizer, the Vacusol solution is mixed with room air and flows
through the evacuation lines. Due to the unique air/liquid solution,
the stress on the vacuum pump is minimized which helps to extend pump
life.
o Gloves and masks. The Company offers many types of gloves, including
latex, non-latex and powder-free gloves for dental professionals.
Flavored gloves, including bubble gum and grape, are often used by
pediatric dentists to help provide a more positive, enjoyable
experience for their younger patients. Masks are used as a barrier by
dental professionals.
o Instrument disinfectants. The Company offers a full line of solutions
designed for this purpose including BioCideG30, Multicide Ultra and
Biozyme LT. Certain of the cleaners may also be used with ultrasonic
cleaners.
DIAGNOSTIC. The Company is a leading provider of panoramic dental X-ray systems
and supplies in the U.S., marketed under the Panoramic brand name. The Company's
diagnostic products include:
o Panoramic PC-1000 System. The PC-1000 is a fully-equipped panoramic
X-ray machine which produces a high-quality image of the entire dental
arch. All teeth, the entire lower jaw, joints and a portion of the
sinuses are seen on one resulting X-ray film. A single exposure from
the PC-1000 lasts only 12 seconds, resulting in far less radiation
exposure when compared to the traditional intraoral X-ray machines.
The PC-1000 is shipped essentially fully assembled and is free
standing. As a result, this machine requires only a few hours to
install, which is much less than most competitive products.
o Panoramic PC-1000/Laser-1000. This is the Company's cephalometric
offering. Cephalometric radiographs show the exact relationship of
various anatomical reference points of the patient's anterior skull
profile. General dentists and orthodontists use these calculations to
locate and predict the movement of teeth in order to fit braces and
other orthodontia. Oral surgeons use cephalometric X-rays to detect
pathology and also to determine bone and teeth alignment before and
after surgery.
o Digital. The Company's PC1000 and PC1000/Laser-1000 provide the
platform which produces the X-ray image. The Company offers both
direct and phosphor plate digital solutions for both the PC-1000which
can be purchased with a new panoramic X-ray machine or added to a
dentist's current panoramic machine.
o Supplies and Service. The Company offers its customers dental X-ray
supplies including film, film cassettes and intensifying screens,
processing chemicals and darkroom supplies. The Company also offers
service on all of its systems through a network of over 200
independent nationwide service technicians.
Panoramic X-ray systems can be a significant investment for a dentist. In
addition to outright purchasing and traditional financing options, the Company
established a rental program whereby dentists pay on a per-use basis for the
system (i.e., per x-ray image taken). The system is installed free of charge and
the dentist pays a monthly fee based on usage. Rental customers have the option
to purchase their equipment at any time. [These unique methods of acquiring an
X-ray machine offer financial flexibility for practitioners as they can select
the financing option that best fits their practice needs.]
HOME CARE. Under the Plak Smacker brand name, the Company markets a line of
products to dentists, pediatric dentists and orthodontists that are prescribed,
sold or given to patients for use at home. The Company's home care products
include:
o Home care kits. These kits are given to patients to encourage good
oral healthcare habits and contain products such as brushes, wax to
protect the inside of the cheek from irritation due to brackets, a
timer to monitor brushing time and floss.
o Toothbrushes. The Company offers a broad line of toothbrushes for many
age groups including: infants, children, teens and adults. The Company
also markets an "all-in-one" brush for patients with braces. One end
of the brush is a standard toothbrush, while the other end features a
conical brush designed for access between brackets.
o Fluorides. Fluorides are available in various flavors and
formulations.
ENDODONTIC. The Company sells endodontic products under the Obtura and Spartan
brand names. Endodontics is the part of dentistry associated with the treatment
of the tooth root, dental pulp and surrounding tissue. The most common therapy
in endodontics is the root canal procedure, which involves removing the organic
root canal tissue and subsequently filling the empty canal with gutta percha, a
rubber-like filling material. Endodontic procedures are performed by both
general dentists and specialists (endodontists). The Company's endodontic
products include:
o Obturation. The Obtura IItm is the leading gun-type, heat-softened
gutta percha delivery system. This unique dispensing unit allows the
dentist to deliver a consistent flow of warm gutta percha directly
into the canal, similar to extruding hot glue from a glue gun,
facilitating the canal-filling procedure. Additionally, the Obtura
IItm system helps the practitioner effectively seal the canal, which
is an important component of the root canal procedure.
o Ultrasonic systems. Under the Spartan brand name, ultrasonic units and
handieces are marketed together with a variety of tips for different
clinical applications. BUCtm tips are used for, among other things,
gaining and refining access to the tooth root, while CPRtm tips are
more often used in retreatment cases. KiStm tips, used for
microsurgery, offer a rough diamond coating for improved cutting. The
Company believes that it holds a leading position in the domestic
market for ultrasonic system and tips used in endodontic surgery and
retreatment. The Company also offers additional ultrasonic tips for use
in periodontal applications.
SALES AND MARKETING OF PROFESSIONAL PRODUCTS
The Company markets its prophy, preventive, infection control and handpiece
products to dental professionals worldwide primarily through a network of
non-exclusive relationships with dental product distributors. All major
distributors of dental products in North America sell the Company's products,
including Henry Schein, Inc. and Patterson Dental Company, which accounted for
16.6%, and 14.7% respectively, of the Company's sales in 2003. In addition to
marketing through distributors in the U.S., the Company sells products directly
to dental and dental hygiene schools, Veterans Administration healthcare
facilities and U.S. military bases.
The Company actively supports its distributor relationships with Company sales
personnel and independent sales representatives in the U.S., independent sales
representatives in Canada and Mexico and sales representatives in countries
outside of North America. These sales representatives help train the Company's
distributors about the quality, reliability and features of its products. The
Company also advertises its products through industry publications. To
supplement its other marketing efforts, the Company provides product samples to
dental professionals and exhibits its products at industry trade shows. In
addition, the Company seeks to generate interest in its products by providing
information and marketing materials to influential lecturers and consultants in
the dental industry.
The Company's panoramic X-ray, home care and endodontic products are marketed in
the U.S. and Canada directly to the end user, primarily by direct mail,
telemarketing, trade shows and a limited amount of advertising in trade and
professional journals. The Company also sponsors seminars hosted by industry
thought leaders.
RETAIL SEGMENT
The Company markets its retail products to mass merchants under the Plak Smacker
brand name. The product line includes children's toothbrushes, single-use,
pre-pasted toothbrushes, children's toothpastes, toothbrush covers and other
related accessories. Net sales for the Retail segment were $3,600, $5,100 and
$4,800 for fiscal years 2003, 2002 and 2001 respectively.
PRODUCT DEVELOPMENT
The Company's engineers and chemists are focused on developing innovative
professional dental products and are actively involved in improving the
Company's manufacturing processes. Frequently, these products are designed and
developed in response to needs articulated to the Company by dental
professionals. For example, the Company designed a short prophy cup for its line
of prophy angles to allow for easier access to the back of the patient's mouth.
Many of the new products or product improvements developed by the Company are
patented. The Company has various patents and trademarks but does not consider
its business to be materially dependent upon any individual patent or trademark.
Research and development costs are expensed when incurred and totaled $511,
$596, and $516 for 2003, 2002 and 2001, respectively.
MANUFACTURING AND SUPPLY
The Company manufactures most of its products and product components other than
X-ray equipment, certain infection control products, children's homecare
products, orthodontic kits and related supplies, and flavored examination
gloves.
Prophy and Other Products. The Company uses a variety of computer numerically
controlled (CNC) machining centers, injection molding machines and robotic
assembly machines and continues to invest in new and more efficient equipment
and production lines. The primary processes involved in manufacturing the
Company's products consist of precision metal turning and milling, rubber
molding, plastic injection molding, component parts assembling and finished
goods packaging. The Company has a one-third interest in International Assembly
Inc. ("IAI"), a contract manufacturer located in Mexico that assembles a portion
of its disposable prophy angles.
Pastes, Liquids and Gels. The Company blends and mixes all of its pastes,
liquids and gels at the Louisville, Colorado, Earth City, Missouri, and
Brownsville, Texas, facilities. The Company owns equipment used to form and
die-cut expanded polyethylene foam and to die-cut extruded plastic into finished
products and equipment used to package its products in a variety of container
sizes, including prophy paste in unit-dose containers.
Handpieces and Components. The Company uses a variety of computer numerically
controlled (CNC) machines to manufacture a number of the components required to
produce its high-speed and low-speed handpieces. Certain other handpiece
component parts are sourced from a variety of OEMs. The Company assembles and
provides repair services for its handpieces, and offers repair services for a
number of other handpiece brands.
Infection Control Products. The Company manufactures a variety of infection
control products, sterilants and cleaners, at the Louisville, Colorado and Earth
City, Missouri facilities. Additionally, certain of the Company's infection
control products are sourced from domestic manufacturers.
X-Ray Equipment. X-ray equipment is manufactured and assembled by a contract
manufacturer at the Company's premises in Fort Wayne, Indiana. The contract
manufacturer supplies labor, purchases most components and performs
administrative and logistical functions associated with the production of the
machines. The Company owns all of the tooling, engineering documentation and
assembly fixtures used in the process. The Company manufactures its own X-ray
generators.
Home Care Products. The Company sources most of its orthodontic, children's
homecare products, and flavored examination gloves from manufacturers in Asia,
principally China, Thailand, India and Malaysia. Certain other toothbrush and
toothpaste products are sourced from domestic manufacturers.
Endodontic Products. Obturation and ultrasonic systems are manufactured at the
Company's facility in Fenton, Missouri. A variety of components and
subassemblies are sourced domestically.
Supply. The Company purchases a wide variety of raw materials, including bar
steel, brass, rubber and plastic resins from numerous suppliers. The majority of
the Company's purchases are commodities readily available at competitive prices.
The Company also purchases certain additional miscellaneous products from other
manufacturers for resale.
COMPETITION
The Company competes with manufacturers of both branded and private label dental
products. The Company believes it is the leading manufacturer of prophy angles
and surface disinfectants used in the professional dental market in the U.S. The
Company also believes it is a leading distributor of panoramic X-ray machines in
the U.S. With the acquisition of Obtura Spartan, the Company believes it is the
leader in systems designed for warm, vertical condensation obturation as well as
a leader in the domestic market for ultrasonic systems and tips used in
endodontic surgery and retreatment.
The markets for the Company's products are highly competitive. The Company
believes that the principal competitive factors in all of its markets are
product features, reliability, name recognition, established distribution
network, customer service and, to a lesser extent, price. The relative speed
with which the Company can develop, complete testing, obtain regulatory approval
and sell commercial quantities of new products is also an important competitive
factor. Some of the Company's competitors have greater financial, research,
manufacturing, and marketing resources than the Company and include DENTSPLY
International, Inc.; Sybron Dental Specialties, Inc.; Oral-B Laboratories;
StarDental, a division of DentalEZ Group; John O. Butler Company; KaVo America;
Proctor and Gamble Co.; Colgate-Palmolive Co.; and Planmeca OY.
FDA REGULATION
The Company's products are subject to regulation by, among other governmental
entities, the U.S. Food and Drug Administration ("FDA"). To the extent the
products are marketed abroad, they are also subject to government regulation in
the various foreign countries in which the products are produced or sold. Some
of these regulatory requirements are more stringent than those applicable in the
United States. They also vary from country to country.
Medical Device Regulation. Pursuant to the Federal Food, Drug, and Cosmetic Act
(Act), and FDA's implementing regulations, FDA regulates the development,
manufacture, sale, and distribution of medical devices, including their
introduction into interstate commerce as well as their testing, labeling,
packaging, marketing, distribution, recordkeeping and reporting. In general, if
a dental device is subject to FDA regulation, compliance with the FDA
requirements constitute compliance with corresponding state regulations. Medical
devices are classified for FDA regulatory purposes as Class I, Class II or Class
III, depending on the degree of control necessary to assure an adequate degree
of safety. The Company's dental device products are classified as either Class I
or Class II devices. Class I devices are subject to "general controls," such as
labeling, good manufacturing practices ("GMP"), and a prohibition against
adulteration and misbranding. Class II devices are subject to general and
"special controls," including premarket notification (510(k)), and other general
and device specific requirements. All of the Company's dental device products
are subject to ongoing regulatory oversight by FDA to ensure compliance with,
among other things, product labeling, GMP, the quality system regulation (QSR),
recordkeeping, and medical device (adverse reaction) reporting requirements. The
Company's facilities are further subject to periodic inspection by FDA as well
as state and local agencies. Failure to satisfy FDA requirements can result in
FDA enforcement actions, including product seizure, injunction and/or criminal
or civil proceedings. In the medical device arena, FDA may also request repair,
replacement or refund of the cost of any medical device manufactured or
distributed by the Company.
Drug Regulation. The Company also markets drug products, such as fluorides,
which are subject to regulation by the FDA and the counterpart agencies of the
foreign countries where the products are sold. FDA regulates the development,
manufacture, sale, and distribution of drugs, including their introduction into
interstate commerce as well as their testing, labeling, packaging, marketing,
distribution, recordkeeping and reporting. In general, unless a drug product
falls within an over-the-counter ("OTC") monograph, is generally recognized as
safe, or is entitled to grandfather status, the drug must be approved by FDA
before it may be legally marketed. Failure to comply with FDA's drug regulatory
requirements can result in issuance of a FDA Form 483 Inspectional Observations,
Warning Letter, or another enforcement action or penalty.
FEDERAL INSECTICIDE, FUNGICIDE AND RODENTICIDE ACT (FIFRA)
Certain of our infection prevention products are classified as pesticides and
are subject to regulation by the United States Environmental Protection Agency
("EPA") under FIFRA and by various state agencies under the laws of those
states. Generally, under FIFRA and state law, no one may sell or distribute a
pesticide unless it is registered with the EPA and each state in which the
product is sold. Registrations must be renewed annually. Registration includes
approval by the EPA of the product's label, including its claims and directions
for use, which must be supported by data. EPA or states may at any time require
additional testing to determine whether a pesticide could cause adverse effects
on the environment, including people, and whether it is efficacious. The
pesticide laws also require registrants to report adverse effects associated
with their products to the EPA and the corresponding state agency. Failure to
pay annual registration fees or provide necessary testing data, or new
information regarding adverse effects of product, as well as other conduct,
could result in fines and/or the cancellation of a pesticide registration.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
Our operations involve production processes and the use and handling of
materials that are subject to federal, state and local environmental laws and
regulations relating to, among other things, solid and hazardous waste disposal,
air emissions and waste water discharge. We are also required to comply with
federal and state laws and regulations relating to occupational health and
safety. If violations of any of these laws and regulations occurs or if toxic or
hazardous materials are released into the environment as a result of our
operations, the Company could be exposed to significant liability.
The Company believes it is in compliance in all material respects with respect
to the laws and regulations applicable to it and its operations.
OTHER
The Company has a credit arrangement that provides for a three-year, unsecured
revolving credit facility with an aggregate commitment of $40,000, of which
$2,852 was being used at December 31, 2003. The credit facility expires on
September 28, 2004. The Company currently believes it has the ability to renew
the credit facility on terms no less favorable than the current arrangement. The
Company expects to fund working capital requirements from a combination of
available cash balances, internally generated funds, and from the borrowing
arrangement mentioned above.
Some seasonality exists in the business driven by timing of price increases,
rebate incentives, tax incentives, and holiday buying patterns and promotions.
EMPLOYEES
As of December 31, 2003, the Company employed 294 people, none of whom were
covered by collective bargaining agreements. The Company believes its relations
with its employees are good.
WEBSITE ACCESS TO COMPANY REPORTS AND CORPORATE GOVERNANCE MATERIALS
The Company makes available free of charge through our website, www.ydnt.com,
(1) its annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with the Securities and
Exchange Commission and (2) the Audit Committee, Compensation Committee and
Nominating Committee charters and its Code of Ethics. The Company's internet
website and the information contained therein or incorporated therein are not
intended to be incorporated into this Annual Report on Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages and their positions with the
Company are set forth below. All officers serve at the pleasure of the board.
NAME AGE POSITION PRINCIPAL OCCUPATION DURING PAST 5 YEARS
---- --- --------- ----------------------------------------
George E. Richmond 70 Chairman of the Board and Director Chairman of the Board since 1997, Chief
Executive Officer from 1995 to 2002, Director of
the Company since its organization in 1995,
President of Young Dental Manufacturing Company
("Young Dental") (predecessor to the Company)
from 1961 until 1997.
Alfred E. Brennan 51 President, Chief Executive Officer President since July 1998, Chief Executive
and Director Officer since January 2002 and Director of the
Company since August 1997, Chief Operating Officer
of the Company from October 1997 until May 2002.
Arthur L. Herbst, Jr. 40 Executive Vice President, Chief Chief Operating Officer since May 2002, Chief
Operating Officer, Chief Financial Financial Officer since February 1999, Secretary
Officer, and Director since April 2000, Executive Vice President since
October 1998 and a Director of the Company since
November 1997.
Daniel E. Garrick 35 Vice President, Assistant Secretary Vice President and Assistant Secretary since
April 2001, President of Young Dental
Manufacturing since May 2003, Director of
Business Development of Young Innovations since
August 1999, Partner of Alta Management
Consulting from December 1998 to August 1999.
Sean T. O'Connor 35 Vice President Vice President since April 2001, Director of
Business Development of Young Innovations since
August 1999, Partner of Alta Management
Consulting from December 1998 to August 1999.
Stephen T. Yaggy 31 Secretary Secretary since May 2003, General Manager of
Panoramic since May 2003, Corporate Controller
of the Company since June 1998.
ITEM 2. PROPERTIES.
The Company's principal facilities are as follows:
DESCRIPTION SQUARE FEET LOCATION OWNED/LEASED
----------- ----------- -------- ------------
Corporate Headquarters
and Manufacturing............. 113,000 Earth City, Missouri Owned
Manufacturing.................... 12,000 Brownsville, Texas Owned
Office and Manufacturing......... 39,000 Fort Wayne, Indiana Owned
Office and Manufacturing......... 8,000 Fort Wayne, Indiana Leased, on month to month terms
Office and Manufacturing......... 27,000 Louisville, Colorado Leased, expires December 2004
Office and Manufacturing......... 16,000 Fenton, Missouri Leased, expires November 2008
Office and Distribution.......... 24,000 Riverside, California Leased, expires March 2004
Office and Distribution.......... 33,000 Corona, California Lease begins February 2004,
expires January 2010
Distribution..................... 23,000 Morristown, Tennessee Leased on month to month terms
Office........................... 5,000 Algonquin, Illinois Leased, expires March 2005
Office........................... 2,500 Chicago, Illinois Leased, expires July 2008
The Company believes that its facilities are generally in good condition.
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries from time to time are parties to various legal
proceedings arising in the normal course of business. Management believes that
none of these proceedings, if determined adversely, would have a material
adverse effect on the Company's financial position, results of operations or
liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Prices and Dividends
The Common Stock trades on the Nasdaq National Market under the symbol of
"YDNT."
On March 12, 2002, the Board of Directors declared a three-for-two stock split
of the Company's Common Stock in the form of a stock dividend payable on March
28, 2002 to shareholders of record as of the close of business on March 22,
2002. All share and per share numbers in this Report give effect to such stock
split.
The following table, as adjusted for the stock split, sets forth the high and
low prices of the Common Stock as reported by the Nasdaq National Market during
the last eight quarters.
----------------------------- ------------------ --------------------
MARKET PRICE CASH DIVIDENDS
DECLARED
----------------------------- ------------------ --------------------
Quarter High Low
----------------------------- --------- -------- --------------------
2002
----------------------------- --------- -------- --------------------
First....................... $22.83 $17.17 --
----------------------------- --------- -------- --------------------
Second...................... $25.30 $21.72 --
----------------------------- --------- -------- --------------------
Third....................... $28.26 $18.09 --
----------------------------- --------- -------- --------------------
Fourth...................... $27.04 $20.09 --
----------------------------- --------- -------- --------------------
----------------------------- --------- -------- --------------------
2003
----------------------------- --------- -------- --------------------
First....................... $23.99 $21.90 --
----------------------------- --------- -------- --------------------
Second...................... $28.46 $20.72 --
----------------------------- --------- -------- --------------------
Third....................... $32.75 $28.10 $0.03
----------------------------- --------- -------- --------------------
Fourth...................... $36.75 $29.86 $0.03
----------------------------- --------- -------- --------------------
----------------------------- --------- -------- --------------------
On February 28, 2004, there were approximately 40 holders of record of the
Company's Common Stock.
On July 22, 2003 the Company's Board of Directors declared a quarterly dividend
of $.03 per share, paid on September 15, 2003 to shareholders of record as of
August 15, 2003. On October 21, 2003 the Company's Board of Directors declared a
quarterly dividend of $.03 per share, which was paid on December 15, 2003 to
shareholders of record as of November 14, 2003. Payment of future cash dividends
will be at the discretion of the Company's Board of Directors and will be
dependent upon the earnings and financial condition of the Company and any other
factors deemed relevant by the Board of Directors and will be subject to any
applicable restrictions contained in the Company's then existing credit
arrangements.
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,
---------------------------------------------------------
2003(1) 2002(2) 2001(3) 2000(4) 1999(5)
-------- --------- -------- -------- --------
INCOME STATEMENT DATA:
Net sales............................. $ 76,156 $ 72,218 $ 63,659 $ 51,387 $ 42,712
Cost of goods sold.................... 34,916 33,787 30,017 24,000 18,825
-------- --------- -------- -------- --------
Gross profit.......................... 41,240 38,431 33,642 27,387 23,887
Selling, general and administrative expenses 19,971 19,433 17,897 13,754 12,195
-------- --------- -------- -------- --------
Income from operations................ 21,269 18,998 15,745 13,633 11,692
Interest expense (income) and other, net 109 (286) 225 108 (32)
-------- --------- -------- -------- --------
Income before provision for income taxes 21,378 18,712 15,520 13,525 11,724
Provision for income taxes............ 8,177 7,301 5,975 5,220 4,572
-------- --------- -------- -------- --------
Net income............................ $ 13,201 $ 11,411 $ 9,545 $ 8,305 $ 7,152
======== ======== ======== ======== ========
Basic earnings per share (6).......... $ 1.46 $ 1.29 $ 0.99 $ 0.85 $ 0.73
======== ======== ======== ======== ========
Basic weighted average common shares
Outstanding (6).................... 9,017 8,876 9,662 9,752 9,848
Diluted earnings per share (6)........ $ 1.40 $ 1.22 $ 0.96 $ 0.84 $ 0.72
======== ======== ======== ======== ========
Diluted weighted average common shares
Outstanding (6).................... 9,431 9,331 9,904 9,914 9,880
Cash dividends declared per common share $ 0.06 n/a n/a n/a n/a
AS OF DECEMBER 31,
-------------------------------------------------------
2003(1) 2002(2) 2001(3) 2000(4) 1999(5)
-------- --------- -------- -------- --------
BALANCE SHEET DATA:
Working capital................... $ 15,460 $ 12,645 $ 12,439 $ 11,578 $ 9,438
Total assets...................... 101,484 84,988 83,605 69,592 60,336
Total debt (including current maturities) 2,852 4,304 16,984 592 893
Stockholders' equity.............. 82,963 67,670 55,885 60,487 52,137
- ----------
(1) On December 1, 2003 the Company acquired substantially all of the assets of
Obtura Corporation and Earth City Technologies (collectively "Obtura
Spartan"). The income statement data for the year ended December 31, 2003
include results of operations for Obtura Spartan from December 1, 2003
through December 31, 2003. The balance sheet data as of December 31, 2003
include the Obtura Spartan acquisition.
(2) Weighted average common shares outstanding decreased from 2001 to 2002
primarily as a result of the Company's buyback of 1,050 shares from George
E. Richmond, its Chairman of the Board and then Chief Executive Officer, in
November 2001.
(3) On June 12, 2001 the Company acquired substantially all of the assets of
the Biotrol and Challenge subsidiaries of Pro-Dex, Inc. (collectively
"Biotrol"). The income statement data for the year ended December 31, 2001
include results of operations for Biotrol from June 12, 2001 through
December 31, 2001. The balance sheet data as of December 31, 2001 include
the Biotrol acquisition.
(4) On June 13, 2000 the Company acquired substantially all of the assets of
Plak Smacker. The income statement data for the year ended December 31,
2000 include results of operations for Plak Smacker from June 13, 2000
through December 31, 2000. The balance sheet data as of December 31, 2000
include the Plak Smacker acquisition.
(5) On April 2, 1999, the Company acquired Athena. The income statement data
for the year ended December 31, 1999 include results of operations for
Athena from April 2, 1999 through December 31, 1999. The balance sheet data
as of December 31, 1999 include the Athena acquisition.
(6) Earnings per share data and shares outstanding retroactively reflect the
impact of the three-for-two stock split of the Company's Common Stock in
the form of a stock dividend payable on March 28, 2002 to stockholders of
record as of the close of business on March 22, 2002. All share and per
share numbers give effect to such stock split.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (IN THOUSANDS).
GENERAL
Young Innovations, Inc. and subsidiaries (the "Company") develop, manufacture
and market supplies and equipment used to facilitate the practice of dentistry
and to promote oral health. The Company's product offering includes disposable
and metal prophylaxis ("prophy") angles, prophy cups and brushes, panoramic
X-ray machines, dental handpieces (drills) and related components, orthodontic
toothbrushes, flavored examination gloves, children's toothbrushes, children's
toothpastes, moisture control products, infection control products, and
ultrasonic systems and obturation products used in endodontic surgery (root
canal procedures). The Company's manufacturing and distribution facilities are
located in Missouri, California, Indiana, Colorado, Tennessee and Texas.
The Company's two operating segments, Professional Dental and Retail, serve two
segments of the market for oral healthcare. The Professional Dental segment is
engaged in the development and manufacture of a broad line of products marketed
to dental professionals, principally dentists, dental hygienists and dental
assistants. The Retail segment develops and markets products sold to a variety
of retail outlets, including mass merchandisers, drug stores and supermarkets.
The Company markets its products primarily in the U.S. The Company also markets
its products in several international markets, including Canada, Europe, South
America, Central America, and the Pacific Rim. International sales represented
less than 10% of the Company's total net sales in 2003.
CRITICAL ACCOUNTING POLICIES
In December 2001, the SEC requested that all registrants include in their MD&A
their most critical accounting policies, the judgments and uncertainties
affecting the application of those policies, and the likelihood that materially
different amounts would be reported under different conditions using different
assumptions. The SEC indicated that a "critical accounting policy" is one which
is both important to the portrayal of the company's financial condition and
results and requires management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. We believe that the following accounting
policies fit this definition:
Allowance for doubtful accounts - The Company has 44% of its December 31, 2003
accounts receivable balance with two large customers (see footnote 5 of the
financial statements set forth in Item 8) with the remaining balance among
numerous customers, some of which are international. Accounts receivable
balances are subject to credit risk. Management has reserved for expected credit
losses, sales returns and allowances, and discounts based upon past experience
as well as knowledge of current customer information. We believe that our
reserves are adequate. It is possible, however, that the accuracy of our
estimation process could be impacted by unforeseen circumstances. We
continuously review our reserve balance and refine the estimates to reflect any
changes in circumstances.
Inventory - The Company values inventory at the lower of cost or market on a
first-in, first-out basis. Inventory values are based upon standard costs which
approximate historical costs. Management regularly reviews inventory quantities
on hand and records a provision for excess or obsolete inventory based primarily
on estimated product demand and other knowledge related to the inventory. If
demand for the Company's products is significantly different than Management's
expectations, the reserve could be materially impacted. Changes to the reserves
are included in cost of goods sold.
Goodwill and other intangible assets - The Company adopted the provisions of
SFAS No. 142 effective January 1, 2002. Goodwill and other long-lived assets
with indefinite useful lives are reviewed by Management for impairment at least
annually or whenever events or changes in circumstances indicate the carrying
amount may not be recoverable. If indicators of impairment are present, the
determination of the amount of impairment would be based on Management's
judgment as to the future operating cash flows to be generated from the assets.
SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144.
Contingencies - The Company and its subsidiaries from time to time are subject
to various contingencies, including legal proceedings arising in the normal
course of business. Management, with the assistance of external legal counsel,
performs an analysis of current litigation and will record liabilities if a loss
is probable and can be reasonably estimated. The Company believes the reserve is
adequate, however it can not guarantee that costs will not be incurred in excess
of current estimates.
Assets and Liabilities Acquired in Business Combinations - The Company
periodically acquires businesses. All business acquisitions completed subsequent
to 2002 were accounted for under the provisions of SFAS No. 141, "Business
Combinations," which requires the use of the purchase method. All business
acquisitions completed in years prior to 2002 were accounted for under the
purchase method as set forth in APB No. 16, "Business Combinations." The
purchase method requires the Company to allocate the cost of an acquired
business to the assets acquired and liabilities assumed based on their estimated
fair values at the date of acquisition. The allocation of acquisition cost to
assets acquired includes the consideration of identifiable intangible assets.
The excess of the cost of an acquired business over the fair value of the assets
acquired and liabilities assumed is recognized as goodwill. The Company's
measurement of certain preacquisition contingencies may impact the Company's
cost allocation to assets acquired and liabilities assumed for a period of up to
one year following the date of an acquisition. The Company utilizes a variety of
information sources to determine the value of acquired assets and liabilities.
Third-party appraisers are utilized to assist the Company in determining the
fair value and useful lives of identifiable intangibles, including the
determination of intangible assets that have an indefinite life. The valuation
of the acquired assets and liabilities and the useful lives assigned by the
Company will impact the determination of future operating performance of the
Company.
RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth, for the periods indicated, certain items from
the Company's statements of income expressed as a percentage of net sales.
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001
------ ------ -------
Net sales.......................................... 100.0% 100.0% 100.0%
Cost of goods sold................................. 45.8 46.8 47.2
----- ----- -----
Gross profit....................................... 54.2 53.2 52.8
Selling, general and administrative expenses....... 26.2 26.9 28.1
----- ----- ------
Income from operations............................. 27.9 26.3 24.7
Interest expense and other, net.................... .1 .4 .3
----- ----- ------
Income before provision for income taxes........... 28.0 25.9 24.4
Provision for income taxes......................... 10.7 10.1 9.4
----- ----- ------
Net income......................................... 17.3% 15.8% 15.0%
===== ===== ======
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Net Sales - Net sales for the year ended December 31, 2003 were $76,156, up
5.5% from $72,218 in the prior year. Approximately $650 of this growth is the
result of the acquisition of Obtura Spartan on December 1, 2003.
Throughout the year, growth in professional products exceeded our expectations
and more than offset a decline in sales of retail products. Sales of
professional products increased 8.1% to $72,562 from the $67,147 reported in
2002. Strong response to promotional activity and solid end-user demand across
product lines contributed to growth in the sales of professional products for
the year.
Retail sales declined 29.1% to $3,594 compared to the $5,071 recorded in the
prior year. The decline was due to several factors, including high inventory
levels at one of the Company's major retail customers as a result of weak
consumer demand for a large holiday promotion at the end of 2002 and the
discontinuance of certain product lines at one of the Company's customers. While
sales of retail products are expected to maintain their historical volatility,
the performance of the Retail Segment is not expected to have a negative affect
on 2004 earnings.
Gross Profit - Gross profit for the year ended December 31, 2003 was
$41,240, or 54.2%, compared to $38,431, or 53.2%, in 2002. Gross margin
increased as a result of several factors including product mix, the realization
of productivity improvements in manufacturing, and acquisition integration
activities.
Selling, General, and Administrative Expenses ("SG&A") - SG&A expenses
increased $538, or 2.8%, to $19,971 in 2003 from $19,433 in 2002. The primary
increase in SG&A costs in 2003 related to increases in personnel costs
consistent with the growth of the Company. The increases were offset by cost
containment measures which generated SG&A growth at a rate less than sales
growth. As a percent of net sales, SG&A expenses decreased to 26.2% in 2003 from
26.9% in 2002 as a result of the factors explained above.
Income from Operations - Income from Operations in 2003 was $21,269
compared to $18,998 in 2002, an increase of 12.0%. The increase is a result of
the factors described above.
Provision for Income Taxes - During the year ended 2003, the Company's
provision for income taxes increased to $8,177 versus $7,301 in 2002 as a result
of higher pre-tax income. The effective tax rate in 2003 of 38.25% compared to
39.0% in 2002. This decrease in the effective rate was the result of a reduction
in expenses that are not deductible for tax purposes.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net Sales - Net sales increased $8,559, or 13.4%, to $72,218 in 2002 from
$63,659 in 2001. The increase was primarily attributable to the inclusion of
Biotrol sales for the full period ($4,205 of additional sales) as well as growth
in the Professional and Retail Segments.
Gross Profit - Gross profit increased $4,789, or 14.2%, to $38,431 in 2002
from $33,642 in 2001. Gross profit benefited from the acquisition of Biotrol and
from increased sales in the Professional and Retail Segments. Gross margin
increased to 53.2% of net sales in 2002 from 52.8% in 2001. This increase was
primarily a result of the full year inclusion of Biotrol and overall product
mix.
Selling, General, and Administrative Expenses ("SG&A") - SG&A expenses
increased $1,536, or 8.6%, to $19,433 in 2002 from $17,897 in 2001. The increase
was primarily a result of additional SG&A expenses related to the Biotrol
acquisition as well as increased spending in the Professional and Retail
segments. These administrative expenses were partially offset by the elimination
of the amortization of goodwill ($1,215 for 2001) starting in 2002 due to the
adoption of SFAS 142. As a percent of net sales, SG&A expenses decreased to
26.9% in 2002 from 28.1% in 2001 as a result of the factors explained above.
Income from Operations - Income from operations increased $3,253, or 20.7%,
to $18,998 in 2002 from $15,745 in 2001 as a result of the factors explained
above.
Provision for Income Taxes - Provision for income taxes increased $1,326 in
2002 to $7,301 from $5,975 for 2001 primarily as a result of higher pre-tax
income. The effective tax rate of 39.0% in 2002 compares to 38.5% in 2001,
reflecting the continued phase-in of the 35% federal tax rate, partially offset
by the elimination of goodwill amortization expense in accordance with SFAS 142.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF CASH
Historically, the Company has financed its operations primarily through cash
flow from operating activities and, to a lesser extent, through borrowings under
its credit facility. Net cash flow from operating activities was $ 16,371,
$16,258, and $14,142 for 2003, 2002 and 2001, respectively.
The Company maintains a credit agreement with a borrowing capacity of $40,000
which currently expires in September 2004. The Company expects this agreement to
be extended under similar terms. Borrowings under the agreement bear interest at
rates ranging from LIBOR + 1% to LIBOR + 2.25% or Prime to Prime + .5% depending
on the Company's level of indebtedness. Commitment fees for this agreement range
from .15% to .25% of the unused balance. The agreement is unsecured and contains
various financial and other covenants. As of December 31, 2003, the Company was
in compliance with all of these covenants.
At December 31, 2003, there were $2,784 in outstanding borrowings under this
agreement. Management believes through its operating cash flows as well as
borrowing capabilities, the Company has adequate liquidity and capital resources
to meet its needs on a short and long-term basis.
USES OF CASH
Consistent with historical spending, the Company's uses of cash primarily relate
to acquisition activity, capital expenditures, stock repurchases and dividend
distributions to shareholders. Specific significant uses of cash over the three
years are as follows:
2003
Capital expenditures for property, plant and equipment were $2,052 in 2003.
Significant capital expenditures related to building improvements and new
tooling for product enhancements. In September 2003, YI Ventures LLC (a
wholly-owned subsidiary) acquired a company which provides dental services. On
December 1, 2003 the Company acquired substantially all of the assets of Obtura
Corporation and Earth City Technologies, Inc., collectively known as Obtura
Spartan. The Company originally paid $12,572 in cash, with money set aside in
escrow pending the settlement of any indemnification claims. An additional
$2,000 may be earned by the sellers if additional profitability targets are
achieved over the next two years. Quarterly dividends of $0.03 per share were
paid September 15, 2003 and December 15, 2003, for a total payment of $548.
2002
Capital expenditures for property, plant and equipment were $2,660 in 2002. In
November and December 2002, the Company repurchased 81 shares of its Common
Stock from various stockholders for $1,709.
2001
Capital expenditures for property, plant and equipment were $6,983 in 2001.
Significant capital expenditures included $3,309 for additional manufacturing
and office space in Earth City, MO and Fort Wayne, IN, and $2,294 for additional
machinery and equipment. On June 12, 2001, the Company acquired substantially
all the assets of Biotrol. The Company originally paid $9,343 in cash, with
money set aside in escrow pending the settlement of any indemnification claims.
Upon final settlement, the purchase price was $8,912. On November 2, 2001, the
Company purchased 1,050 shares of its Common Stock from George E. Richmond, its
Chairman, for approximately $14,900.
Consistent with the Company's historical capital expenditures, future capital
expenditures are expected to include facility improvements, panoramic X-ray
machines for the Company's rental program, production machinery and information
systems.
PAYMENTS DUE BY PERIOD
CONTRACTUAL OBLIGATIONS ---------------------------------------------------------------------------
LESS THAN BEYOND 5
--------- --------
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS YEARS
----- ------ --------- --------- -----
Capital Lease Obligations...................... $ 68 $ 68 $ -- -- --
Operating Leases (including buildings)......... 2,605 789 1,414 $ 402 --
Long-Term Debt................................. 2,784 2,784 -- -- --
-------- ------- -------- ---------- -----------
Total .................................... $ 5,457 $ 3,641 $ 1,414 $ 402 --
--------- ------- -------- ---------- -----------
As of December 31, 2003 and 2002, management was aware of no relationships with
any other unconsolidated entities, financial partnerships, structured finance
entities, or special purpose entities which were established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." Under SFAS
No. 146, liabilities are recognized for exit and disposal costs only when a
liability is incurred, rather than at the date of an entity's commitment to an
exit plan. SFAS No. 146 is effective for exit or disposal activities initiated
after December 31, 2002. Adoption of SFAS No. 146 did not have a material impact
on the consolidated financial statements of the Company.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure." This
statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has included these
disclosures in the notes to the consolidated financial statements. SFAS No. 148
also provides for voluntary adoption of the fair value method for entities with
fiscal years ending after December 15, 2002. The Company has not made this
election.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this Interpretation are effective for financial statements of interim or annual
periods ending after December 31, 2002. The impact of the adoption of this
Interpretation was not material to the consolidated financial statements of the
Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from changes
in interest rates and changes in foreign exchange rates. From time to time, the
Company finances acquisitions, capital expenditures and its working capital
needs with borrowings under a revolving credit facility. Due to the variable
interest rate feature on the debt, the Company is exposed to interest rate risk.
Based on the Company's average debt balance, a theoretical 100 basis point
increase in interest rates would have resulted in approximately $26, $115 and
$81 of additional interest expense in the years ended December 31, 2003, 2002
and 2001, respectively.
Sales of the Company's products in a given foreign country can be affected by
fluctuations in the exchange rate. However, the Company sells less than 10% of
its products outside the United States. Of these foreign sales, approximately
97% are denominated in US dollars with the remaining approximately 3%
denominated in Canadian dollars. As a result, the Company does not feel that
foreign currency movements have a material impact on its financial statements.
The Company does not use derivatives to manage its interest rate or foreign
exchange rate risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Young Innovations, Inc.:
We have audited the accompanying consolidated balance sheets of Young
Innovations, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedule.
These consolidated financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and the financial
statement schedule based on our audits. The consolidated financial statements
and financial statement schedules of Young Innovations, Inc. and subsidiaries as
of December 31, 2001, and for the year then ended, were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on those consolidated financial statements and financial statement
schedules in their report dated February 4, 2002.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Young Innovations,
Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed above, the consolidated financial statements and the financial
statement schedule of Young Innovations, Inc. and subsidiaries as of December
31, 2001, and for the year then ended were audited by other auditors who have
ceased operations. As described in Note 9, these consolidated financial
statements have been revised to include the transitional disclosures required by
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, which was adopted by the Company as of January 1, 2002. In
our opinion, the disclosures for 2001 in Note 9 are appropriate. However, we
were not engaged to audit, review or apply any procedures to such disclosures
and, accordingly, we do not express an opinion or any other form of assurance on
the 2001 consolidated financial statements taken as a whole.
/s/ KPMG LLP
February 2, 2004
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Young Innovations, Inc.:
We have audited the accompanying consolidated balance sheets of Young
Innovations, Inc. (a Missouri corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Young Innovations,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 4, 2002 (except with respect to the matter discussed in Note 22, as to
which the date is March 22, 2002)
THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP,
WHICH HAS CEASED OPERATIONS, IN CONNECTION WITH YOUNG INNOVATIONS, INC.'S FILING
ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT
BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM
10-K. SEE EXHIBIT 23.2 FOR FURTHER DISCUSSION.
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31
-----------------------
2003 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 938 $ 554
Trade accounts receivable, net of allowance for doubtful accounts of $641
and $385, in 2003 and 2002, respectively.............................................. 11,212 10,010
Inventories............................................................................. 9,017 7,861
Other current assets.................................................................... 3,403 2,405
---------- ----------
Total current assets............................................................ 24,570 20,830
Property, plant and equipment, net......................................................... 19,240 18,962
Goodwill ................................................................................. 51,003 42,414
Other intangible assets.................................................................... 5,824 2,302
Other assets............................................................................... 847 480
--------- ----------
Total assets............................................................... $ 101,484 $ 84,988
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.................................................... $ 2,852 $ 75
Accounts payable and accrued liabilities................................................ 9,042 8,110
--------- ----------
Total current liabilities....................................................... 11,894 8,185
Long-term debt............................................................................. -- 4,229
Deferred income taxes...................................................................... 6,627 4,904
Stockholders' equity:
Common stock, voting, $.01 par value, 25,000 shares authorized 9,004 and 8,905 shares
issued and outstanding, net of treasury stock, in 2003 and 2002, respectively......... 90 89
Additional paid-in capital.............................................................. 28,367 28,050
Deferred stock compensation............................................................. (935) (1,271)
Retained earnings....................................................................... 71,426 58,772
Common stock in treasury, at cost, 1,157 and 1,338 shares in 2003 and 2002, respectively
(15,985) (17,970)
--------- ----------
Total stockholders' equity...................................................... 82,963 67,670
--------- ----------
Total liabilities and stockholders' equity................................. $ 101,484 $ 84,988
========= ========
The accompanying notes are an integral part of these statements.
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31
---------------------------------------------
2003 2002 2001
---- ---- ----
Net sales............................................................ $ 76,156 $ 72,218 $ 63,659
Cost of goods sold.............................................. 34,916 33,787 30,017
-------------- -------------- -------------
Gross profit......................................................... 41,240 38,431 33,642
Selling, general and administrative expenses.................... 19,971 19,433 17,897
-------------- -------------- -------------
Income from operations............................................... 21,269 18,998 15,745
Interest expense, net........................................... 17 282 148
Other expense (income), net..................................... (126) 4 77
-------------- -------------- -------------
Income before provision for income taxes............................. 21,378 18,712 15,520
Provision for income taxes..................................... 8,177 7,301 5,975
--------------- -------------- -------------
Net income $ 13,201 $ 11,411 $ 9,545
============= ============= =============
Basic earnings per share............................................. $ 1.46 $ 1.29 $ 0.99
======= ======== ========
Diluted earnings per share........................................... $ 1.40 $ 1.22 $ 0.96
======= ======== ========
Basic weighted average shares outstanding............................ 9,017 8,876 9,662
======= ======== ========
Diluted weighted average shares outstanding.......................... 9,431 9,331 9,904
======= ======== ========
The accompanying notes are an integral part of these statements.
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Additional Common
Common Paid-In Retained Stock in Deferred Stock Comprehensive
Stock Capital Earnings Treasury Compensation Total Income
----- ------- -------- -------- ------------ ----- ------
BALANCE, December 31, 2000
$ 98 $ 26,060 $ 37,816 $ (3,537) - $ 60,437
Net income........... - - 9,545 - - 9,545 $ 9,545
Common stock
purchased.......... (9) - - (14,908) - (14,917)
Stock options
exercised.......... - 86 - 660 - 746
Deferred stock
compensation....... - 1,682 - - $ (1,682) -
Amortization of deferred
stock compensation....
- - - - 74 74
Comprehensive Income $ 9,545
=======
--- -------- --------- -------- -------- --------
BALANCE, December 89
31, 2001........... 27,828 47,361 (17,785) (1,608) 55,885
Net income........... - - 11,411 - - 11,411 $11,411
Common stock
purchased.... - - (1,709) - (1,709)
Stock options 1,524
exercised.......... - 222 - - 1,746
Amortization of
deferred stock 337 337
compensation
Comprehensive income......
--- -------- --------- -------- -------- -------- $11,411
=======
BALANCE, December
31, 2002........... 89 28,050 58,772 (17,970) (1,271) 67,670
Net income........... - - 13,201 - - 13,201 $13,201
Common stock 1 - (65)
purchased.......... -- - (66)
Stock options 317 2,051
exercised.......... - - - 2,368
Amortization of
deferred stock $13,201
=======
compensation....... - - - - 336 336
Cash dividends, (547)
($0.06 per share) (547)
BALANCE, December 31, 2003
$ 90 28,367 $ 71,426 $(15,985) $ (935) $ 82,963
==== ======= ========= ======== ======== ========
The accompanying notes are an integral part of these statements.
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended December 31
--------------------------------------
2003 2002 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................. $ 13,201 $ 11,411 $ 9,545
--------- --------- ---------
Adjustments to reconcile net income to net cash flows from operating
activities-
Depreciation and amortization.......................................... 2,625 2,536 3,239
Deferred income taxes.................................................. 1,723 545 825
Loss (gain) on disposal of property, plant and equipment............... 35 148 -
Changes in assets and liabilities, net of effects of acquisitions
Trade accounts receivable............................................ (319) (105) 663
Inventories.......................................................... 322 (778) (56)
Other current assets................................................. (720) (510) (293)
Other assets......................................................... (367) 671 514
Accounts payable and accrued liabilities............................. (59) 2,340 (295)
--------- --------- ---------
Total adjustments 3,240 4,847 4,597
--------- --------- ---------
Net cash flows from operating activities........................... 16,441 16,258 14,142
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Payments) recoveries for acquisitions, net of cash acquired............... (13,178) 431 (9,298)
Purchases of property, plant and equipment................................. (2,087) (2,660) (6,983)
--------- --------- ---------
Net cash flows from investing activities........................... (15,265) (2,229) (16,281)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................................. (4,304) (57,028) (23,561)
Borrowings on long-term debt............................................... 2,852 44,348 39,953
Proceeds from stock options exercised ..................................... 1,308 832 746
Purchases of treasury stock................................................ (66) (1,709) (14,917)
Payment of cash dividend................................................... (547) -- --
--------- --------- ---------
Net cash flows from financing activities........................... (757) (13,557) 2,221
--------- --------- ---------
Net increase in cash and cash equivalents..................................... 384 472 82
Cash and cash equivalents, beginning of period................................ 554 82 --
--------- --------- ---------
Cash and cash equivalents, end of period...................................... $ 938 $ 554 $ 82
========= ========= =========
The accompanying notes are an integral part of these statements.
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION:
Young Innovations, Inc. and its subsidiaries (the "Company") develop,
manufacture and market supplies and equipment used to facilitate the practice of
dentistry and to promote oral health. The Company's product offering includes
disposable and metal prophylaxis ("prophy") angles, prophy cups and brushes,
panoramic X-ray machines, dental handpieces (drills) and related components,
orthodontic toothbrushes, flavored examination gloves, children's toothbrushes,
children's toothpastes, moisture control products, infection control products,
and ultrasonic systems and obturation products used in endodontic surgeries
(root canal procedures). The Company's manufacturing and distribution facilities
are located in Missouri, California, Indiana, Colorado, Tennessee and Texas.
Export sales were less than 10% of total net sales for 2003, 2002 and 2001.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Young Innovations,
Inc. and its direct and indirect wholly owned subsidiaries. All significant
intercompany accounts and transactions are eliminated in consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments with an initial
maturity of three months or less.
INVENTORIES
Inventories are stated at the lower of cost (which includes material, labor and
manufacturing overhead) or net realizable value. Inventory values are based upon
standard costs which approximate historical costs, determined by the first-in,
first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Expenditures for repairs and
maintenance are charged to expense as incurred, and additions and improvements
that significantly extend the lives of assets are capitalized. Upon disposition,
cost and accumulated depreciation are eliminated from the related accounts and
any gain or loss is reflected in the statements of income. The Company provides
depreciation using the straight-line method over the estimated useful lives of
respective classes of assets as follows:
Buildings and improvements.....................3 to 40 years
Machinery and equipment........................3 to 10 years
Equipment rented to others.....................4 to 15 years
OTHER ASSETS
On May 17, 1999, the Company acquired a one-third interest in International
Assembly, Inc., a Texas corporation (IAI). The Company paid approximately $1,050
in cash for this investment. The investment is being accounted for under the
equity method of accounting. Equity income (loss) is recorded using a
three-month lag. The Company's losses attributed to IAI are included in other
expense, net and totaled $1, $150, and $240 for 2003, 2002 and 2001,
respectively. The asset balance at December 31, 2003 for this investment is
$376, of which approximately $350 represents goodwill.
The Company purchases certain services from IAI at amounts less than would be
paid to unrelated parties. These services totaled $198, $458 and $830 in 2003,
2002 and 2001, respectively.
INTANGIBLE ASSETS
Intangible assets primarily consist of trademarks, license agreements, core
technology, patents and patent applications, product formulas and supplier
relationships. Trademarks have been determined to have indefinite useful lives
and therefore the carrying value is reviewed at least annually for
recoverability in accordance with the requirements of SFAS No. 142. Other
capitalized intangible costs are amortized on a straight-line basis over the
estimated useful lives of the assets, generally between 5 and 40 years, and
tested for impairment whenever conditions indicate that an asset may be
impaired.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses and measures any impairments of long lived assets in
accordance with the provisions of SFAS No. 144. If facts and circumstances
suggest that a long-lived asset may be impaired, the carrying value is reviewed.
If this review indicates that the carrying value of the asset will not be
recovered, as determined based on projected undiscounted cash flows related to
the asset over its remaining life, the carrying value of the asset is reduced to
its estimated fair value. The Company has not incurred any material impairments
of long-lived assets during the years ended 2003, 2002 and 2001.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist principally of cash, accounts receivable, notes
receivable, accounts payable and debt. The estimated fair value of these
instruments approximates their carrying value.
REVENUE RECOGNITION
Revenue from the sale of products is recorded at the time title passes,
generally when the products are shipped as our shipping terms are customarily
FOB shipping point. Revenue from the rental of equipment to others is recognized
on a month-to-month basis as the revenue is earned. The Company generally
warrants its products against defects and its most generous policy provides a
two-year parts and labor warranty on X-ray machines. The policy with respect to
sales returns generally provides that a customer may not return inventory except
at the Company's option with the exception of X-ray machines, which have a
90-day return policy. The Company owns X-ray equipment rented on a
month-to-month basis to customers. A liability for the removal costs of the
rented X-ray machines is capitalized and amortized over four years. A liability
for the removal costs of the purchased X-ray machines expected to be returned to
the Company is included in accounts payable and accrued liabilities at December
31, 2003 and 2002.
ADVERTISING COSTS
Advertising costs are expensed when incurred. Advertising costs were
approximately $1,950, $2,072 and $1,834 for 2003, 2002 and 2001, respectively.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed when incurred and totaled $511, $596
and $516 for 2003, 2002 and 2001, respectively.
INTEREST EXPENSE (INCOME), NET
Interest expense (income) includes interest paid related to borrowings on the
Company's credit facility, as well as offsetting interest income earned on
various investments. In 2003, 2002 and 2001, interest income totaled $62, $63,
and $96, respectively.
OTHER EXPENSE (INCOME), NET
Other expense (income) includes the Company's portion of losses from its
investment in IAI, rental income from leased space, sale of scrap, and other
miscellaneous income and expense items, all of which are not directly related to
the Company's primary business.
INCOME TAXES
The Company has accounted for income taxes under SFAS No. 109, which requires an
asset and liability approach to accounting and reporting for income taxes.
Deferred income taxes are provided for temporary differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities.
STOCK-BASED COMPENSATION
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to apply APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for the Plan. Accordingly,
no compensation cost has been recognized for the Plan. Had compensation costs
for the Plan been determined based upon the fair value of the options at the
grant date consistent with the methodology prescribed under SFAS No. 123, the
Company's net income and earnings per share would approximate the pro forma
amounts below:
Year Ended Year Ended Year Ended
December 31, 2003 December 31, 2002 December 31, 2001
------------------------------ --------------------------- -------------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- ----- -------- ----- -------- -----
Net income.................. $13,201 $11,919 $11,411 $10,265 $ 9,545 $ 8,630
Earnings per share:
Basic..................... $ 1.46 $ 1.32 $ 1.29 $ 1.16 $ 0.99 $ 0.89
Diluted................... $ 1.40 $ 1.26 $ 1.22 $ 1.10 $ 0.96 $ 0.87
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 2001: (i) dividend yield of 0%; (ii) expected volatility of
43.7%; (iii) risk free interest rate of 4.8%; and (iv) expected life of 8.0
years. The weighted average fair value of the options at the grant date was
$8.49 for 2001. No options were granted in 2002. The following weighted average
assumptions were used for 2003: (i) dividend yield of 0.37%; (ii) expected
volatility of 32.3%; (iii) risk free interest rate of 4.5%; and (iv) expected
life of 8.0 years. The weighted average fair value of the options at the grant
date was $14.22 for 2003.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash flows from operating activities include $5,782, $5,401, and $4,611 for the
payment of federal and state income taxes and $83, $376, and $188 for the
payment of interest during 2003, 2002 and 2001, respectively.
3. ACQUISITIONS:
On December 1, 2003 the Company acquired substantially all of the assets and
assumed a portion of the liabilities of Obtura Corporation and Earth City
Technologies (collectively "Obtura Spartan"). Obtura Spartan designs, develops
and manufactures products used in endodontic surgery, including root canal
procedures. The acquisition of Obtura Spartan enabled the Company to enter the
endodontic market. The Company paid approximately $12,572 in cash, including
transaction costs. Of the purchase price, $1,000 was set aside in an escrow
account pending the settlement of any indemnification claims pertaining to
certain liabilities assumed by the Company. An additional $2,000 may be paid by
the Company ("Earn-out Payments") if certain profitability targets are achieved
over the next two years. Amounts paid or received by the Company in future
periods, if any, in connection with escrow account settlement and Earn-out
Payments discussed above will be accounted for as an adjustment to purchase
price when the related contingencies are resolved. The acquisition was financed
principally with cash generated from operations and was accounted for as a
purchase transaction. Upon initial allocation of the purchase price at the time
of the acquisition, goodwill was determined to be $8,089. The following table
summarizes the estimated fair values of the assets acquired and liabilities
assumed at the date of acquisition. The Company is in the process of finalizing
the valuations related to certain assets acquired and liabilities assumed and
upon doing so will adjust the preliminary purchase price allocation if
necessary.
December 1, 2003
Current assets $ 2,470
Property, plant and equipment 394
Intangible assets 3,588
Goodwill 8,089
--------
Total assets acquired 14,541
Current liabilities assumed 1,969
--------
Net assets acquired $ 12,572
========
Of the $3,588 of acquired intangible assets, $1,200 was assigned to license
arrangements and $591 was assigned to core technology, both with 20 year useful
lives. The remaining $1,801 was assigned to trademarks that are not subject to
amortization. All $8,089 of goodwill was assigned to the professional segment.
The results of operations for Obtura Spartan are included in the consolidated
financial statements since December 1, 2003. George E. Richmond, the Company's
Chairman, owned 20% of Earth City Technologies at the time of the acquisition.
The transaction was unanimously approved by the independent directors of the
Company.
On June 12, 2001 the Company acquired substantially all of the assets and
assumed a portion of the liabilities of the Biotrol and Challenge subsidiaries
of Pro-Dex, Inc. (collectively "Biotrol"). The Company paid $9,343 in cash
including transaction costs, with money set aside in escrow pending the
settlement of any indemnification claims. Upon final settlement, the purchase
price was $8,867. The acquisition was financed with borrowings on the Company's
credit facility and cash generated from operations. The acquisition was
accounted for as a purchase transaction. Upon the finalization of the settlement
and purchase accounting, the final purchase price allocation was completed and
goodwill was determined to be $6,160. In accordance with SFAS 142, $2,060 of
separately identifiable intangible assets, including trademarks, product
formulations, and supplier relationships, were also recorded. The trademarks
have been determined to have indefinite lives. The remaining intangible assets
are being amortized over periods between 5 years and 40 years. The results of
operations for Biotrol are included in the consolidated financial statements
since June 12, 2001.
4. SEGMENT INFORMATION:
Segment information has been prepared in accordance with Statement of Financial
Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company has two operating segments
according to SFAS No. 131: professional and retail. The professional segment
sells products to dentists, dental hygienists and dental assistants. The retail
segment sells products to consumers through mass merchandisers. There is not a
significant portion of the Company's assets, interest costs, depreciation,
amortization or research and development costs allocated to the retail segment.
The table below is a summary of certain financial information relating to the
two segments:
2003 Professional Retail Consolidated
------------ ------ ------------
Net sales............................. $ 72,562 $ 3,594 $ 76,156
Income from operations................ $ 21,408 $ (139) $ 21,269
2002 Professional Retail Consolidated
------------ ------ ------------
Net sales............................. $ 67,147 $ 5,071 $ 72,218
Income from operations................ $ 18,560 $ 438 $ 18,998
2001 Professional Retail Consolidated
------------- ------- ------------
Net sales............................. $58,824 $ 4,835 $ 63,659
Income from operations................ $15,484 $ 261 $ 15,745
5. MAJOR CUSTOMERS AND CREDIT CONCENTRATION:
The Company generates trade accounts receivable in the normal course of
business. The Company grants credit to distributors and customers throughout the
world and generally does not require collateral to secure the accounts
receivable. The Company's credit risk is concentrated among two distributors
accounting for 44% and 42% of accounts receivable at December 31, 2003 and 2002,
respectively.
The percentage of net sales to major distributors to total net sales were as
follows:
Years Ended
December 31,
---------------------
Distributor 2003 2002 2001
----------- ---- ---- ----
Henry Schein, Inc......................... 16.6% 13.8% 14.6%
Patterson Dental Company.................. 14.7% 15.0% 13.3%
6. INVENTORIES:
Inventories consist of the following:
December 31,
---------------------
2003 2002
Finished products............................ $ 5,178 $ 4,931
Work in process.............................. 1,327 1,321
Raw materials and supplies................... 2,512 1,609
----- --------
Total inventories $ 9,017 $ 7,861
======= =======
7. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
December 31,
-----------------------
2003 2002
---- ----
Land......................................................... $ 1,086 $ 1,086
Buildings and improvements................................... 7,585 7,474
Machinery and equipment...................................... 17,813 17,250
Equipment rented to others................................... 6,011 5,852
Construction in progress..................................... 1,199 129
----- ---------
$ 33,694 $ 31,791
Less - Accumulated depreciation.............................. (14,453) (12,829)
-------- ----------
Total property, plant and equipment, net.......... $ 19,240 $ 18,962
======== ========
Machinery and equipment under capital lease and related accumulated depreciation
was $384 and $319, respectively, at December 31, 2003 and was $345 and $218,
respectively, at December 31, 2002. Depreciation expense was $2,288, $2,125 and
$1,922 for 2003, 2002 and 2001, respectively.
8. OTHER ASSETS:
Other assets consist of the following:
December 31,
-----------------
2003 2002
---- ----
Investment in IAI............................. $ 376 $ 377
Notes receivable, long-term .................. 364 -
Other......................................... 107 103
------- -------
Total other assets................. $ 847 $ 480
====== ======
Notes receivable relate to amounts due from customer purchases of capital
equipment financed by the Company.
9. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill consists of the following:
December 31,
-----------------------
2003 2002
---- ----
Goodwill.................................. $ 55,801 $ 47,212
Less - Accumulated amortization........... (4,798) (4,798)
--------- --------
Total goodwill................. $ 51,003 $ 42,414
======== ========
On December 1, 2003, the Company acquired Obtura Spartan (see footnote 3). The
acquisition resulted in additional goodwill of approximately $8,089. The
remaining $500 increase in goodwill was acquired through YI ventures. Intangible
assets other than goodwill of $3,588 related to Obtura Spartan were identified
in accordance with Statement of Financial Accounting Standards No. 141,
"Business Combinations." There have been no changes in goodwill related to
impairment losses or write-offs due to sale of businesses.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). In
accordance with SFAS 142, the Company no longer amortizes goodwill and
intangibles which have indefinite lives. Amortization of goodwill was $1,243 in
2001. Other intangible assets with finite lives continue to be amortized over
their useful lives.
SFAS 142 also requires that the Company assess goodwill and intangibles with
indefinite lives for impairment at least annually, based on the fair value of
the related reporting unit or intangible asset. The impairment test for goodwill
is a two-step process. The first step is to identify when a goodwill impairment
has occurred by comparing the fair value of a reporting unit with its carrying
amount, including goodwill. If the fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit is not considered impaired. If
the carrying amount of the reporting unit exceeds its fair value, the second
step of the goodwill test should be performed to measure the amount of the
impairment loss, if any. In this second step, the implied fair value of the
reporting unit's goodwill is compared with the carrying amount of the goodwill.
If the carrying amount of the reporting unit's goodwill exceeds the implied fair
value of that goodwill, an impairment loss should be recognized equivalent to
the excess amount which in no circumstances should exceed the carrying amount of
the goodwill.
In accordance with the transition rules of SFAS 142, the Company performed the
transitional impairment tests during the first half of 2002, as of January 1,
2002. Reporting units were established based on the Company's current reporting
structure. All existing goodwill and intangible assets were assigned to the
reporting units. All of the goodwill was allocated to the reporting units within
the professional segment. The Company engaged an independent valuation and
appraisal firm to assist with determining fair values based upon discounted
future estimated cash flows and other valuation techniques. Fair values of the
reporting units exceeded their respective book values. Thus no impairment was
identified as of January 1, 2002, and, therefore, Step 2 testing was deemed
unnecessary. During the fourth quarter of 2003, the Company performed its annual
impairment assessment as permitted based on certain criteria of SFAS 142. The
Company determined that there was no impairment of reporting units. On an
on-going basis, the Company will perform its annual impairment assessment in the
fourth quarter of each year.
Other intangibles consist of the following, which are all included in the
Professional Segment:
AS OF DECEMBER 31, 2003
---------------------------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
-------------- ----------- ------------
AMOUNT AMORTIZATION AMOUNT
------ ------------ ------
Amortized intangible assets
License agreements $ 1,200 $ 6 $ 1,194
Core technology 591 4 587
Patents 497 230 267
Product formulas 430 27 403
Supplier relationships 130 65 65
--------- ------- ------------
Total $ 2,848 $ 332 $ 2,516
Unamortized intangible assets
Trademarks $ 3,308 $ 3,308
--------- ------------
Total intangible assets $ 6,156 $ 332 $ 5,824
---------------------------------------------------------------
AS OF DECEMBER 31, 2002
---------------------------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
-------------- ----------- ------------
AMOUNT AMORTIZATION AMOUNT
------ ------------ ------
Amortized intangible assets
Patents $ 491 $ 204 $ 287
Product formulas 430 16 414
Supplier relationships 130 39 91
--------- ------- ------------
Total $ 1,051 $ 259 $ 792
Unamortized intangible assets
Trademarks $ 1,510 $ 1,510
--------- ------------
Total intangible assets $ 2,561 $ 259 $ 2,302
The costs of other intangible assets with finite lives are amortized over their
expected useful lives using the straight-line method. The amortization lives are
as follows: 20 years for license agreements and core technology, 18 to 20 years
for patents, 40 years for product formulations and 5 years for supplier
relationships. The weighted average life for amortizable intangible assets is 22
years. Aggregate amortization expense for the years ended December 31, 2003,
2002 and 2001 was $73, $81 and $26, respectively. Estimated amortization expense
for each of the next five years is as follows:
For the year ended 12/31/04 $ 152
For the year ended 12/31/05 152
For the year ended 12/31/06 139
For the year ended 12/31/07 126
For the year ended 12/31/08 126
SFAS No. 142 (effective January 1, 2002) does not require retroactive
restatement for all periods presented. However, presented below is a
reconciliation of the 2001 statement of income data previously reported to
reflect the impact related to the adoption of SFAS No. 142's provisions related
to goodwill amortization:
TWELVE MONTHS ENDED
-------------------
DECEMBER 31, 2001
-----------------
Reported net income $ 9,545
Add: amortization adjustment, net of
related tax 904
-------
Adjusted net income $10,449
=======
Reported basic earnings per share $0.99
Add: amortization adjustment $.09
-------
Adjusted basic earnings per share $ 1.08
======
Reported diluted earnings per share
$ 0.96
Add: amortization adjustment $.09
------
Adjusted diluted earnings per share
$ 1.05
======
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES CONSIST OF THE FOLLOWING:
December 31
---------------------
2003 2002
---- ----
Accounts payable....................................................... $ 2,690 $ 3,471
Accrued salaries and bonuses........................................... 1,717 1,465
Accruals related to Obtura Spartan acquistion.......................... 1,100 --
Accrued rebate payments................................................ 534 390
Accrued expenses and other ............................................ 3,001 2,784
-------- --------
Total accounts payable and accrued liabilities.............. $ 9,042 $ 8,110
======= =======
11. CREDIT ARRANGEMENTS AND NOTES PAYABLE:
The Company has a credit arrangement that provides for an unsecured revolving
credit facility with an aggregate commitment of $40,000. Borrowings under the
arrangement bear interest at rates ranging from LIBOR +1% to LIBOR +2.25% or
Prime to Prime +.5%, depending on the Company's level of indebtedness.
Commitment fees for this arrangement range from .15% to .25% of the unused
balance. The agreement is unsecured and contains various financial and other
covenants.
Long-term debt was as follows:
DECEMBER 31, DECEMBER 31,
2003 2002
---- ----
Revolving credit facility due 2004 with a weighted-average interest
rate of 3.28% at December 31, 2003 and 2.73% at December 31, 2002 $2,784 $ 4,161
Capital Lease Obligations 68 143
------ -------
2,852 4,304
Less - current portion 2,852 75
------ -------
$ -- $ 4,229
======= =======
In certain circumstances, the Company provides recourse for loans for equipment
purchases by customers. Certain banks require the Company to provide recourse to
finance equipment for new dentists and other customers with credit histories
which are not consistent with the banks' lending criteria. In the event that a
bank requires recourse on a given loan, the Company would assume the bank's
security interest in the equipment securing the loan. As of December 31, 2003
and 2002, respectively, approximately $561 and $649 of the equipment financed
with various lenders was subject to such recourse. Recourse on a given loan is
generally eliminated by the bank after one year, provided the bank has received
timely payments on that loan. Based on the Company's past experience with
respect to these arrangements, it is the opinion of management that the fair
value of the recourse provided is minimal and not material to the results of
operations or financial position of the Company.
12. COMMON STOCK:
During 2003, the Company repurchased 3 shares of its Common Stock from various
stockholders for $66. The purchases were financed through cash generated from
operations. The Company also reissued 210 shares of its Common Stock in
conjunction with stock option exercises for $1,308. In addition, the Company
issued 24 shares of Common Stock for restricted stock which vested during 2003
(see footnote 13).
During 2002, the Company repurchased 81 shares of its Common Stock from various
stockholders for $1,709. The purchases were financed through borrowings on the
Company's credit facility. The Company also reissued 187 shares of its Common
Stock held in treasury in conjunction with stock option exercises for $832. In
addition, the Company issued 24 shares of Common Stock for restricted stock
which vested during 2002 (see footnote 13).
During 2001, the Company repurchased 1,052 shares of its Common Stock for
$14,917. 1,050 of these shares were purchased from George Richmond, the
Company's Chairman (see footnote 17). The Company also reissued 119 shares of
its Common Stock held in treasury in conjunction with stock option exercises for
$746.
13. STOCK AWARDS:
STOCK OPTIONS
The Company adopted the 1997 Stock Option Plan (the Plan) effective in November
1997 and amended the Plan in 1999 and 2001. A total of 1,725 shares of Common
Stock are reserved for issuance under this plan which is administered by the
compensation committee of the Board of Directors (Compensation Committee).
Participants in the Plan will be those employees whom the Compensation Committee
may select from time to time and those nonemployee directors as the Company's
Board of Directors may select from time to time. As of December 31, 2003, 1,529
options had been granted.
A summary of the options outstanding and exercisable is as follows:
Weighted
Range of Average
Exercise Exercise
Shares Prices Price
------ ------ -----
Outstanding, January 1, 2001..................... 769 $8.00 - $11.67 $9.07
Granted.......................................... 488 $14.02 $14.02
Exercised........................................ 119 $8.00 - $11.33 $8.58
Forfeited........................................ 48 $8.00 - $11.33 $9.56
-----
Outstanding, December 31, 2001................... 1,090 $8.00 - $14.02 $11.31
=====
Exercisable at December 31, 2001................. 483 $8.00 - $11.67 $9.08
=====
Outstanding, January 1, 2002..................... 1,090 $8.00 - $14.02 $11.31
Granted.......................................... - - -
Exercised........................................ 187 $8.00 - $11.33 $9.19
Forfeited........................................ 7 $8.00 - $9.29 $9.26
-----
Outstanding, December 31, 2002................... 896 $8.00 - $14.02 $11.77
===
Exercisable at December 31, 2002................. 588 $8.00 - $14.02 $10.59
===
Outstanding, January 1, 2003..................... 896 $8.00 - $14.02 $11.77
Granted.......................................... 107 $32.74 $32.74
Exercised........................................ 209 $8.00 - $14.02 $9.92
Forfeited........................................ -- -- --
------
Outstanding, December 31, 2003................... 794 $8.00 - $32.74 $15.08
===
Exercisable at December 31, 2003................. 509 $8.00 - $32.74 $13.51
===
The weighted average remaining contractual life of the options outstanding at
December 31, 2003 is 7.5 years. As of January 1, 2004, 592 shares were
exercisable with a range of exercise prices from $8.00 - $32.74 with a weighted
average price of $13.58.
The Compensation Committee of the Board of Directors establishes vesting
schedules for each option issued under the Plan. Outstanding options generally
vest over four years. The exercise price has historically been equal to the fair
value of the Common Stock at the date of grant. All options expire 10 years from
the grant date.
RESTRICTED STOCK
Under the above Plan, restricted stock may be awarded or sold to participants
under terms and conditions established by the Compensation Committee. For
restricted stock grants, compensation expense is based upon the grant date
market price and is recorded over the vesting period. In October 2001, the
Company granted 120 shares of restricted stock to certain executive officers of
the Company. No monetary consideration was paid by the officers who received the
restricted stock. These shares vest 20% each year for five years beginning in
October 2002. For the years ended December 31, 2003, 2002, and 2001, the Company
recorded $336, $337, and $74, respectively, of compensation expense related to
the restricted stock grants.
14. INCOME TAXES:
The components of the provision for income taxes are as follows:
Years Ended December 31
-------------------------------
2003 2002 2001
---- ---- ----
Current..................................................... $ 7,047 $ 6,756 $ 5,149
Deferred.................................................... 1,130 545 826
------- ------- -------
Total provision for income taxes................. $ 8,177 $ 7,301 $ 5,975
======= ======= =======
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
--------------------------------
2003 2002 2001
---- ---- ----
Income before provision for income taxes.................... $21,378 $ 18,712 $ 15,520
U.S. federal income tax rate................................ 35% 35% 35%
------- -------- --------
Computed income taxes............................ 7,482 6,549 5,432
Goodwill amortization....................................... - - 143
Other....................................................... 82 211 (59)
------- -------- --------
Provision for federal income taxes............... 7,564 6,760 5,516
State income taxes, net of federal tax benefit.............. 613 541 459
------- -------- --------
Provision for income taxes....................... $ 8,177 $ 7,301 $ 5,975
======= ======= =======
Effective tax rate.......................................... 38.3% 39.0% 38.5%
======= ======= =======
Temporary differences that gave rise to deferred income tax assets and
liabilities are as follows:
December 31
---------------------
2003 2002
---- ----
Deferred income tax assets:
Trade accounts receivable............................................ $ 166 $ 145
Inventories.......................................................... 264 190
Accrued liabilities.................................................. 440 736
Other................................................................ 57 29
-------- -------
Total deferred income tax assets............................ 927 1,100
-------- -------
Deferred income tax liabilities:
Property, plant and equipment........................................ (2,710) (2,530)
Intangibles.......................................................... (3,180) (2,403)
Other................................................................ - -
-------- -------
Total deferred income tax liabilities....................... (5,890) (4,933)
-------- -------
Net deferred income tax liability...................................... $(4,963) $(3,833)
======== ========
Current deferred income tax assets of $870 and $1,071 are included in other
current assets as of December 31, 2003 and 2002, respectively.
15. SALES OF EQUIPMENT RENTED TO OTHERS:
Periodically, customers who rent X-ray equipment from the Company elect to
purchase the equipment. The Company recognizes revenue for the proceeds of such
sales and records as cost of goods sold the net book value of the equipment. Net
sales of equipment consistent with this practice were $1,560, $1,111, and $1,014
for 2003, 2002 and 2001, respectively, and gross profit from these sales was
$775, $522, and $555 for 2003, 2002 and 2001, respectively.
16. EMPLOYEE BENEFITS:
The Company has defined contribution 401(k) plans covering substantially all
full-time employees meeting service and age requirements. Contributions to the
Plan can be made by an employee through deferred compensation and through a
discretionary employer contribution. Compensation expense related to this plan
was $317, $307, and $258 for 2003, 2002 and 2001, respectively. The Company also
offers certain healthcare insurance benefits for substantially all employees.
17. RELATED-PARTY TRANSACTIONS:
During 2003 and 2002, the Company paid consulting fees of $100 and $75
respectively to a corporation which is wholly owned by a principal stockholder
of the Company.
In November 2001, the Company purchased 1,050 shares of its common stock from
George E. Richmond, its Chairman and then Chief Executive Officer, for
approximately $14,900.
The Company sells products to, and pays for services from, Earth City
Technologies, in which George E. Richmond, the Company's Chairman, has an equity
interest. Net sales to such corporation totaled $3, $83, and $70 in 2003, 2002
and 2001, respectively. Amounts paid for services totaled $0, $1, and $2 in
2003, 2002 and 2001, respectively. On December 1, 2003, the Company acquired
substantially all the assets and assumed a portion of the liabilities of Earth
City Technologies (see footnote 3).
In August 2000, the Company loaned an officer of the Company $500 in exchange
for a three-year unsecured promissory note at an interest rate of 6.27% payable
annually. The note was paid in full during 2003. The note was included in other
current assets on the balance sheet at December 31, 2002. Interest income of
$10, $31 and $31 related to this note was recorded in 2003, 2002 and 2001,
respectively.
18. EARNINGS PER SHARE:
Basic earnings per share (Basic EPS) are computed by dividing net income by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per share (Diluted EPS) include the dilutive effect of stock
options and restricted stock, if any, using the treasury stock method. The
following table sets forth the computation of basic and diluted earnings per
share:
Years Ended December 31
--------------------------------------------
2003 2002 2001
---- ---- ----
Net income....................................... $13,201 $11,411 $9,545
Weighted average shares outstanding for basic earnings
per share........................................ 9,017 8,876 9,662
Dilutive effect of stock options and restricted stock
414 455 242
Weighted average shares outstanding for diluted
earnings per share............................... 9,431 9,331 9,904
Basic earnings per share......................... $1.46 $ 1.29 $ .99
Diluted earnings per share....................... $1.40 $ 1.22 $ .96
- ----------------------------------------------------------------------------------------------------------
19. QUARTERLY FINANCIAL DATA (UNAUDITED):
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. YEAR
-------- -------- -------- -------- ----
2003
- ----
Net sales $17,743 $18,611 $19,044 $20,758 $76,156
Gross profit 9,332 10,315 10,494 $11,099 $41,240
Net income 2,893 3,260 3,308 $3,740 $13,201
Earnings per share - basic $.32 $.36 $.37 $.41 $1.46
Earnings per share - diluted $.31 $.35 $.35 $.39 $1.40
2002
- ----
Net sales $16,513 $17,935 $18,086 $19,684 $72,218
Gross profit 8,976 9,639 9,476 10,340 38,431
Net income 2,430 2,858 2,844 3,279 11,411
Earnings per share - basic $.28 $.32 $.32 $.37 $1.29
Earnings per share - diluted $.27 $.30 $.30 $.35 $1.22
20. COMMITMENTS AND CONTINGENCIES:
The Company leases certain office and warehouse space, manufacturing facilities,
automobiles, and equipment under non-cancelable operating leases. The total
rental expense for all operating leases was $876, $812, and $636 for 2003, 2002
and 2001, respectively. Rental commitments amount to: $707 for 2004, $439 for
2005, $445 for 2006, $451 for 2007, and $401 for 2008.
On May 24, 2001, Sultan Dental Products, Ltd. ("Sultan") filed a complaint in
the United States District Court for the Southern District of New York (which
was subsequently dismissed by the plaintiff and refiled in the United States
District Court for the District of New Jersey on October 16, 2001) asserting
that the Young disposable prophy angle infringes a patent that is exclusively
licensed to Sultan. The complaint sought a permanent injunction and unspecified
damages. In addition, on January 25, 2002, the Company filed a complaint in the
United States District Court for the Eastern District of Missouri asserting that
the manufacture of the Sultan disposable prophy angle infringes the Company's
U.S. Patent No. 5,749,728. The complaint sought a permanent injunction and
damages. On February 6, 2003, the Company and Sultan settled each case with
neither party paying a material amount.
The Company and its subsidiaries from time to time are also parties to various
legal proceedings arising in the normal course of business. Management believes
that none of these proceedings, if determined adversely, would have a material
adverse effect on the Company's financial position, results of operations or
liquidity.
The Company generally warrants its products against defects and its most
generous policy provides a two-year parts and labor warranty on X-ray machines.
The accrual for warranty costs was $178 and $184 at December 31, 2003 and 2002,
respectively. There were no significant warranty costs during the year ended
December 31, 2003.
21. NEW ACCOUNTING STANDARDS:
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure." This
statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has included these
disclosures in the notes to these consolidated financial statements. SFAS No.
148 provides for voluntary adoption of the fair value method for entities with
fiscal years ending after December 15, 2002. The Company has not made this
election.
In November 2002, the Financial Accounting Standards Board issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this Interpretation are effective for financial statements of interim or annual
periods ending after December 31, 2002. Adoption of FIN 45 did not have a
material impact on the consolidated financial statements of the Company.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On June 10, 2002, the Board of Directors, on the recommendation of the Audit
Committee, dismissed Arthur Andersen LLP and appointed KPMG LLP as the Company's
independent auditors. KPMG LLP completed their standard evaluation process on
June 24, 2002 and accepted engagement with the Company. Arthur Andersen LLP
served as the independent auditors for the Company and its predecessor from 1994
to 2002.
The report of Arthur Andersen LLP on the Company's financial statements for the
year ended December 31, 2001 did not contain any adverse opinion or disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope, or
accounting principles.
In connection with the audits of the Company's financial statements for the year
ended December 31, 2001 and through June 10, 2002, there were no disagreements
with Arthur Andersen LLP on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures which, if not
resolved to the satisfaction of Arthur Andersen LLP, would have caused the firm
to make reference to the matter in their reports.
ITEM 9A. CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Chief Financial Officer have concluded, based on
their evaluation as of the end of the period covered by this report, that our
disclosure controls and procedures are effective in all material respects in
ensuring that information required to be disclosed in the reports that we file
or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. There have been no significant changes in
our internal controls over financial reporting or in other factors that could
significantly affect these controls subsequent to the date of the previously
mentioned evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Information concerning this item will be included under the captions
"Election of Directors" and "Section 16(a), Beneficial Ownership
Reporting Compliance" in the Company's definitive Proxy Statement
prepared in connection with the 2004 Annual Meeting of Shareholders and
is incorporated herein by reference. Such proxy statement will be filed
with the Commission within 120 days after the close of the Company's
fiscal year.
(b) Reference is made to "Executive Officers of the Registrant" in Part I.
(c) The Company has determined that Richard P. Conerly, Chairman of the
Audit Committee of the Board of Directors, and Brian F. Bremer and Craig
LaBarge, each members of the Audit Committee of the Board of Directors,
each qualify as an "audit committee financial expert" as defined in Item
(401(h) of the Regulation S-K, and that Messrs. Conerly, Bremer and
LaBarge are "independent" as the term is used in Item 7(d)(3)(iv) of
Schedule 14A under the Securities Exchange Act of 1934, as amended.
(d) Code of Business Conduct
The Company has adopted a Code of Ethics applicable to all
employees. This code is applicable to Senior Financial Executives
including the principle executive officer, principle financial
officer and principal accounting officer of the Company. The
Company's Code of Ethics Policy is available on the Company's web
site at www.ydnt.com under "Corporate Governance." The Company
intends to post on its web site any amendments to, or waivers from
its Code of Ethics applicable to Senior Financial Executives. The
Company will provide shareholders with a copy of its Code of Ethics
upon written request directed to the Company's Secretary at the
Company's address.
ITEM 11. EXECUTIVE COMPENSATION.
Information concerning this item will be included under the captions "Executive
Compensation," "Compensation Committee Interlocks and Insider Participation,"
"Information Concerning the Board of Directors" and "Certain Relationships and
Related Party Transactions" in the Company's definitive Proxy Statement prepared
in connection with the 2004 Annual Meeting of Shareholders and is incorporated
herein by reference. Such proxy statement will be filed with the Commission
within 120 days after the close of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Information concerning this item will be included under the captions "Securities
Beneficially Owned by Management and Principal Shareholders" and "Equity
Compensation Plan Information" in the Company's definitive Proxy Statement
prepared in connection with the 2004 Annual Meeting of Shareholders and is
incorporated herein by reference. Such proxy statement will be filed with the
Commission within 120 days after the close of the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning this item will be included under the caption "Certain
Relationships and Related Party Transactions" in the Company's definitive Proxy
Statement prepared in connection with the 2004 Annual Meeting of Shareholders
and is incorporated herein by reference. Such proxy statement will be filed with
the Commission within 120 days after the close of the Company's fiscal year.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Information concerning this item will be included under the caption "Independent
Auditors" in the Company's definitive Proxy Statement prepared in connection
with the 2004 Annual Meeting of Shareholders and is incorporated herein by
reference. Such proxy statement will be filed with the Commission within 120
days after the close of the Company's fiscal year.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements -- Reference is made to Item 8 hereof:
Consolidated Balance Sheets - December 31, 2003 and 2002
Consolidated Statements of Income - Years ended December 31, 2003,
2002, and 2001
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 2003, 2002, and 2001
Consolidated Statements of Cash Flows - Years ended December 31,
2003, 2002, and 2001 Notes to
Consolidated Financial Statements - December 31, 2003
(a)(2) Financial Statement Schedule -- The following financial statement
schedule of the Company is included for the years ended December 31, 2003, 2002,
and 2001:
Schedule II Valuation and Qualifying Accounts.
All other financial statement schedules are omitted for the reason that they are
not required or are not applicable, or the required information is shown in the
financial statements or the notes thereto.
(a)(3) Exhibits -- See the Exhibit Index for the exhibits filed as a part of
or incorporated by reference into this report.
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
2.1(k) Agreement for Purchase and Sale of Assets by and among Young OS LLC,
Obtura Corporation and the Stockholders (as defined therein)
2.2(k) Agreement for Purchase and Sale of Assets by and among Young OS LLC,
Earth City Technologies, Inc. the Stockholders (as defined therein)
and the Beneficiary (as defined therein)
3.1(a) Articles of Incorporation of Registrant and Statement of Correction
3.2(e) Amended and Restated By-Laws of Registrant
4.1(c) Credit Facilities Agreement among Bank of America, N.A., the other
lenders listed therein and the Registrant dated March 20, 2001 (the
"Credit Agreement")
4.2(c) Amendment No. 1 to the Credit Agreement dated April 20, 2001
4.3(d) Amendment No. 2 to the Credit Agreement dated September 28, 2001
4.4(h) Amendment No. 3 to the Credit Agreement dated September 19, 2002
10.1(e) Amended and Restated 1997 Stock Option Plan of the Registrant
10.2(g) Employment Agreement dated June 12, 2002, by and between the
Registrant and Alfred E. Brennan, Jr.
10.3(g) Employment Agreement dated June 12, 2002, by and between the
Registrant and Arthur L. Herbst, Jr.
10.5(g) Employment Agreement dated April 1, 2002, by and between the
Registrant and George E. Richmond
10.8(e) Stock Repurchase Agreement dated November 9, 2001, by and between the
Registrant and George E. Richmond
10.9(e) Form of the Registrant's Restricted Stock Award Agreement with
schedule of grantees
10.10(g) Consulting Agreement dated April 1, 2002, by and between the
Registrant and GER Consulting, Inc.
10.11(g) Form of Indemnity Agreement entered into with each member of the
Registrant's Board of Directors
10.12(i) Amendment to George E. Richmond Employment Agreement dated May 14,
2002
10.13(i) Amendment to GER Consulting, Inc. Consulting Agreement dated May 14,
2002
10.14(j) Amendment to George E. Richmond Employment Agreement dated April 1,
2002, as amended
10.15(j) Amendment to GER Consulting Inc., Consulting Agreement dated April 1,
2002, as amended
10.16(j) Amendment to Stock Repurchase Agreement dated November 9, 2001, by
and between the Registrant and George E. Richmond.
16(f) Letter Regarding Change of Certifying Accountants
21(l) Subsidiaries of the Registrant
23.1(l) Consent of KPMG LLP
23.2(l) Information Regarding Consent of Arthur Andersen LLP
24 Power of Attorney (included on Signature page)
31.1(l) Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
31.2(l) Certification of Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
32(l) Certification pursuant to 18.U.S.C. Section 1350 as adopted pursuant
to Section 906 of Sarbanes-Oxley Act of 2002
- --------------------------------
(a) Filed as an Exhibit to Registrant's Registration Statement
No. 333-34971 on Form S-1 and incorporated herein by reference.
(b) Filed as an Exhibit to Registrant's Report on Form 10-K filed on
March 29, 2001 and incorporated herein by reference.
(c) Filed as an Exhibit to Registrant's Report on Form 10-Q filed on
August 14, 2001 and incorporated herein by reference.
(d) Filed as an Exhibit to Registrant's Report on Form 10-Q filed on
November 13, 2001 and incorporated herein by reference.
(e) Filed as an Exhibit to Registrant's Report on Form 10-K filed on
March 25, 2002 and incorporated herein by reference.
(f) Filed as an Exhibit to Registrant's Report on Form 8-K filed on
June 17, 2002 and incorporated herein by reference.
(g) Filed as an Exhibit to Registrant's Report on Form 10-Q filed on
August 14, 2002 and incorporated herein by reference.
(h) Filed as an Exhibit to Registrant's Report on Form 10-Q/A filed on
November 11, 2002 and incorporated herein by reference.
(i) Filed as an Exhibit to Registrant's Report on Form 10-K filed
March 26, 2003 and incorporated herein by reference.
(j) Filed as an Exhibit to Registrant's Report on Form 10-Q filed on
May 8, 2003 and incorporated herein by reference.
(k) Filed as an Exhibit to Registrant's Report on Form 8-K filed on
December 5, 2003 and incorporated herein by reference.
(l) Filed herewith.
(b) Reports on Form 8-K
A Form 8-K was filed on December 4, 2003, announcing the acquisition
of substantially all of the assets of Obtura Corporation and Earth City
Technologies, Inc. and attaching the acquisition agreements and the press
release announcing the transaction.
A Form 8-K was filed on October 21, 2003, attaching a press release
announcing third quarter 2003 earnings and declaring a quarterly dividend.
(c) Exhibits
The exhibits filed as part of this Annual Report on Form 10-K are as
specified in Item 15(a)(3) herein.
(d) Financial Statement Schedules
The financial statement schedule filed as part of this Annual Report
on Form 10-K is as specified in Item 15(a)(2) herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 11, 2004
YOUNG INNOVATIONS, INC.
By: /s/ Alfred E. Brennan, Jr.
------------------------------
Alfred E. Brennan Jr.
Each person whose signature appears below constitutes and appoints George E.
Richmond and Alfred E. Brennan, Jr. his true and lawful attorneys-in-fact and
agents, each acting alone, with full powers of substitution and re-substitution
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments to this report, and to file the same
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GEORGE E. RICHMOND Director March 11, 2004
- -------------------------
George E. Richmond
/s/ ALFRED E. BRENNAN JR. President, Chief Executive March 11, 2004
- ------------------------- Officer, Director (Principal
Alfred E. Brennan, Jr. Executive Officer)
/s/ ARTHUR L. HERBST, JR. Executive Vice President, Chief March 11, 2004
- ------------------------- Operating Officer, Chief
Arthur L. Herbst, Jr. Financial Officer, Secretary,
Director (Principal Financial
Officer and Principal Accounting
Officer)
/s/ RICHARD G. RICHMOND Director March 11, 2004
- -------------------------
Richard G. Richmond
/s/ RICHARD P. CONERLY Director March 11, 2004
- -------------------------
Richard P. Conerly
/s/ CONNIE H. DRISKO Director March 11, 2004
- -------------------------
Connie H. Drisko
/s/ JAMES R. O'BRIEN Director March 11, 2004
- -------------------------
James R. O'Brien
/s/ CRAIG E. LABARGE Director March 11, 2004
- -------------------------
Craig E. LaBarge
/s/ BRIAN F. BREMER Director March 11, 2004
- -------------------------
Brian F. Bremer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Young Innovations, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Young Innovations, Inc.
and subsidiaries included in this Form 10-K Annual Report and have issued our
report thereon dated February 4, 2002 (except with respect to the matter
discussed in Note 22, as to which the date is March 22, 2002). Our audits were
made for the purpose of forming an opinion on those statements taken as a whole.
Schedule II included in this Form 10-K Annual Report is the responsibility of
the Company's management and is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 4, 2002 (except with respect to the matter discussed in Note 22, as to
which the date is March 22, 2002)
THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP,
WHICH HAS CEASED OPERATIONS, IN CONNECTION WITH YOUNG INNOVATIONS, INC.'S FILING
ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001. THIS AUDIT REPORT HAS NOT
BEEN REISSUED BY ARTHUR ANDERSEN LLP IN CONNECTION WITH THIS FILING ON FORM
10-K. SEE EXHIBIT 23.2 FOR FURTHER DISCUSSION.
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2000, 2001, 2002, and 2003
(IN THOUSANDS)
ADDITIONS
------------------------------------------
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF YEAR EXPENSES ACQUISITIONS DEDUCTIONS OF YEAR
------- -------- ------------ ---------- -------
Allowance for doubtful
Receivables
2001..................... 220 51 255 82 444
2002..................... 444 204 11 274 385
2003..................... 385 284 180 208 641