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.
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.
ITEM 2.
ITEM 2. PROPERTIES.
The Company's principal facilities are as follows:
The Company believes that its facilities are generally in good condition.
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5.
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 ----------------------------- --------- -------- -------------------- ----------------------------- --------- -------- -------------------- First....................... $22.83 $17.17 -- ----------------------------- --------- -------- -------------------- Second...................... $25.30 $21.72 -- ----------------------------- --------- -------- -------------------- Third....................... $28.26 $18.09 -- ----------------------------- --------- -------- -------------------- Fourth...................... $27.04 $20.09 -- ----------------------------- --------- -------- --------------------
----------------------------- --------- -------- -------------------- ----------------------------- --------- -------- -------------------- 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.
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.
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:
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.
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.
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.
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.
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.
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
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
YOUNG INNOVATIONS, INC. AND SUBSIDIARIES
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:
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:
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:
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:
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:
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:
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:
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:
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:
Temporary differences that gave rise to deferred income tax assets and liabilities are as follows:
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:
19. QUARTERLY FINANCIAL DATA (UNAUDITED):
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.
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.
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.
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.
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.
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.
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.
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.
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,
10.13(i) Amendment to GER Consulting, Inc. Consulting Agreement dated May 14,
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